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EX-32.2 - EXHIBIT 32.2 - SEACOAST BANKING CORP OF FLORIDAv471635_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SEACOAST BANKING CORP OF FLORIDAv471635_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SEACOAST BANKING CORP OF FLORIDAv471635_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SEACOAST BANKING CORP OF FLORIDAv471635_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 June 30, 2017

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 – 43,458,973 shares as of June 30, 2017

 

  

 

 

INDEX

 

SEACOAST BANKING CORPORATION OF FLORIDA

 

 

      PAGE #
Part I FINANCIAL INFORMATION    
       
Item 1. Financial Statements (Unaudited)    
       
  Condensed consolidated balance sheets – June 30, 2017 and December 31, 2016  

3

       
  Condensed consolidated statements of income – Three months and six months ended June 30, 2017 and 2016   4
       
  Condensed consolidated statements of comprehensive income – Three months and six months ended June 30, 2017 and 2016  

5

       
  Consolidated statements of cash flows – Six months ended June 30, 2017 and 2016  

6-7

       
  Notes to condensed consolidated financial statements   8-40
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

41-75

       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   76
       
Item 4. Controls and Procedures   77
       
Part II OTHER INFORMATION    
       
Item 1. Legal Proceedings   78
Item 1A. Risk Factors   78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   78
Item 3. Defaults upon Senior Securities   79
Item 4. Mine Safety Disclosures   79
Item 5. Other Information   79
Item 6. Exhibits   79
       
SIGNATURES   81

 

 2

 

 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   June 30,   December 31, 
(Dollars in thousands, except share amounts)  2017   2016 
ASSETS          
Cash and due from banks  $88,133   $82,520 
Interest bearing deposits with other banks   20,064    27,124 
Total cash and cash equivalents   108,197    109,644 
           
Time deposits with other banks   16,426    0 
           
Securities:          
Available for sale (at fair value)   1,016,744    950,503 
Held to maturity (fair value: $397,357 at June 30, 2017, and $369,881 at December 31, 2016)   397,096    372,498 
Total Securities   1,413,840    1,323,001 
           
Loans held for sale (at fair value)   22,262    15,332 
           
Loans   3,330,075    2,879,536 
Less: Allowance for loan losses   (26,000)   (23,400)
NET LOANS   3,304,075    2,856,136 
           
Bank premises and equipment, net   56,765    58,684 
Other real estate owned   8,497    9,949 
Goodwill   101,739    64,649 
Other intangible assets, net   16,941    14,572 
Bank owned life insurance   88,003    84,580 
Net deferred income taxes   52,195    60,818 
Other assets   92,355    83,567 
TOTAL ASSETS  $5,281,295   $4,680,932 
           
LIABILITIES          
Deposits  $3,975,458   $3,523,245 
Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days   167,558    204,202 
Federal Home Loan Bank (FHLB) borrowings   395,000    415,000 
Subordinated debt   70,381    70,241 
Other liabilities   95,521    32,847 
TOTAL LIABILITIES   4,703,918    4,245,535 
           
SHAREHOLDERS' EQUITY          
Common stock, par value $0.10 per share, authorized 60,000,000 shares, issued 43,550,182 and outstanding 43,458,973 shares at June 30, 2017 and issued 38,090,568 and outstanding 38,021,835 shares at December 31, 2016   4,339    3,802 
Other shareholders' equity   573,038    431,595 
TOTAL SHAREHOLDERS' EQUITY   577,377    435,397 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $5,281,295   $4,680,932 

 

See notes to condensed consolidated financial statements.

 3

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(Dollars in thousands, except per share data)  2017   2016   2017   2016 
Interest and fees on loans  $38,209   $29,244   $70,100   $55,278 
Interest and dividends on securities   8,585    6,902    16,959    12,749 
Interest on interest bearing deposits and other investments   604    433    1,114    723 
TOTAL INTEREST INCOME   47,398    36,579    88,173    68,750 
                     
Interest on deposits   1,668    1,238    2,858    2,155 
Interest on borrowed money   1,574    848    2,994    1,880 
TOTAL INTEREST EXPENSE   3,242    2,086    5,852    4,035 
                     
NET INTEREST INCOME   44,156    34,493    82,321    64,715 
                     
Provision for loan losses   1,401    662    2,705    861 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   42,755    33,831    79,616    63,854 
                     
Noninterest income                    
Other income   10,467    9,111    20,372    17,741 
Securities gains, net (includes net gains (losses) of $23 and ($19) in other comprehensive income reclassifications for the three months ended June 30, 2017 and 2016, respectively, and net gains of $23 and $28 for the six months ended June 30, 2017 and 2016, respectively)   21    47    21    136 
TOTAL NONINTEREST INCOME   10,488    9,158    20,393    17,877 
                     
TOTAL NONINTEREST EXPENSES   41,625    34,808    76,371    67,149 
                     
INCOME BEFORE INCOME TAXES   11,618    8,181    23,638    14,582 
                     
Provision for income taxes (includes $9 and $(7) in income tax provision (benefit) from reclassification items for the three months ended June 30, 2017 and 2016, respectively, and $9 and $11 in income tax provision for the six months ended June 30, 2017 and 2016, respectively).   3,942    2,849    8,036    5,284 
NET INCOME  $7,676   $5,332   $15,602   $9,298 
                     
PER SHARE COMMON STOCK:                    
Net income diluted  $0.18   $0.14   $0.38   $0.25 
 Net income basic   0.18   0.14   0.38   0.26 
 Cash dividends declared   0.00    0.00    0.00    0.00 
Average shares outstanding-diluted   43,556,285    38,141,550    41,538,769    36,797,259 
Average shares outstanding-basic   42,841,152    37,470,071    40,851,273    36,159,473 

 

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   Six Months Ended 
   June 30,   June 30, 
(Dollars in thousands)  2017   2016   2017   2016 
NET INCOME  $7,676   $5,332   $15,602   $9,298 
Other comprehensive income:                    
Unrealized gains on securities available for sale   5,601    8,953    8,776    16,597 
Amortization of unrealized losses on securities transferred to held to maturity, net   122    122    244    244 
Reclassification adjustment for gains included in net income   (21)   (47)   (21)   (136)
Income tax effect on other comprehensive income   (2,199)   (3,485)   (3,467)   (6,362)
COMPREHENSIVE INCOME  $11,179   $10,875   $21,134   $19,641 

 

See notes to condensed consolidated financial statements.

 

 5

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Six Months Ended 
   June 30, 
(Dollars in thousands)  2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $15,602   $9,298 
Adjustments to reconcile net income to net cash provided
by operating activities:
          
Depreciation   2,677    2,235 
Amortization of premiums and discounts on securities, net   1,838    2,385 
Other amortization and accretion, net   (429)   (1,110)
Stock based compensation   2,540    1,807 
Origination of loans designated for sale   (117,379)   (83,207)
Sale of loans designated for sale   113,527    88,760 
Provision for loan losses   2,705    861 
Deferred income taxes   7,338    4,886 
Gains on sale of securities   (21)   (136)
Gains on sale of loans   (3,078)   (2,502)
Gains on sale of other real estate owned   (212)   (252)
Losses and writedowns on disposition of fixed assets   2,316    1,937 
Changes in operating assets and liabilities, net of effects from acquired companies:          
Net decrease (increase) in other assets   1,347    (3,877)
Net (decrease) increase in other liabilities   (2,634)   5,105 
Net cash provided by operating activities   26,137    26,190 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Maturity of securities available for sale   125,115    59,151 
Maturity of securities held to maturity   42,883    15,584 
Proceeds from sale of securities available for sale   3,820    12,211 
Purchases of securities available for sale   (142,062)   (149,969)
Purchases of securities held to maturity   (49,963)   (213,766)
Maturity of time deposits with other banks    847    0 
Net new loans and principal repayments   (198,080)   (129,832)
Proceeds from the sale of other real estate owned   3,324    4,207 
Proceeds from sale of FHLB and Federal Reserve Bank stock   14,832    1,700 
Purchase of FHLB and Federal Reserve Stock   (15,012)   (9,297)
Purchase of VISA Class B stock   (6,180)   0 
Net cash from bank acquisition   30,233    260,471 
Additions to bank premises and equipment   (2,979)   (3,309)
Net cash used in investing activities   (193,222)   (152,849)

 

See notes to condensed consolidated financial statements.

 

 6

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Six Months Ended 
   June 30, 
(Dollars in thousands)  2017   2016 
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits  $166,863   $5,421 
Net increase (decrease) in federal funds purchased and repurchase agreements   (36,644)   11,382 
Net increase (decrease) in FHLB borrowings   (20,000)   151,000 
Early redemption of FHLB borrowings   0    (50,000)
Issuance of common stock, net of related expense   55,641    0 
Stock based employee benefit plans   (222)   (409)
Dividends paid   0    0 
Net cash provided by financing activities   165,638    117,394 
Net decrease in cash and cash equivalents   (1,447)   (9,265)
Cash and cash equivalents at beginning of period   109,644    136,067 
Cash and cash equivalents at end of period  $108,197   $126,802 
           
Supplemental disclosure of non cash investing activities:          
Transfers from loans to other real estate owned  $448   $2,806 
Transfers from bank premises to other real estate owned   1,212    3,175 
Purchase of securities on trade date   63,926    1,198 

 

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 six-month period ended June 30 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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, 2016.

 

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, and the valuation of deferred tax assets. Actual results could differ from those estimates.

 

NOTE B — RECENTLY ISSUED ACCOUNTING STANDARDS, Not adopted as of June 30, 2017

 

The following provides a brief description of accounting standards that have been issued but are not yet adopted that could affect the Company's financial statements:

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, clarifying when changes to the terms of share-based awards, such as value, vesting conditions or classification of the awards, should be accounted for as modifications. All the disclosures about modifications that are required today would need to be made, along with disclosing any change (or no change) in compensation expense. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this standard is being evaluated as to its effect on the Company’s operating results and financial condition.

 

In March 2017, the FASB issued ASU 2017-08, requiring entities to amortize premiums on certain purchased callable debt securities to their earliest call date. The accounting for purchased callable debt securities held at a discount did not change. Amortizing the premium to the earliest call date generally aligns interest income recognition with the economics of instruments. This guidance requires a modified retrospective transition under which a cumulative adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This guidance is effective for fiscal years beginning after December 15, 2018. Adoption of this standard is being evaluated as to its effect on the Company’s operating results or financial condition.

 

 8

 

 

In January 2017, the FASB issued ASU 2017-04, eliminating Step 2 from the goodwill impairment test. Under the amendments to the guidance, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, however, should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The guidance is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method. Early adoption is permitted. Adoption of this standard is being evaluated as to its effect on the Company’s operating results or financial condition.

 

In August and November 2016, the FASB issued final guidance via ASU 2016-15 and ASU 2016-18, which address classification of certain cash receipts and cash payments, including changes in restricted cash, in the statement of cash flows. 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. The Company is evaluating the impact of ASU 2016-15 and 2016-18 on the Company’s statement of cash flows which will generally be applied retrospectively for fiscal years beginning after December 15, 2017.

 

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 assessing current loan loss estimation models and processes to determine the need for changes as part of its evaluation of the impact of this new accounting guidance. Adoption is required January 1, 2020, with early adoption permitted on January 1, 2019.

 

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 its consolidated financial statements. Effective date for implementation of the guidance is for annual periods after December 15, 2018.

 

In February 2016, the FASB amended existing guidance related to the recognition of lease assets and lease liabilities on the balance sheet and disclosures of key information about leasing arrangements, under ASU 2016-02. The guidance requires 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 its consolidated financial statements. The amended accounting guidance is applicable to periods after December 15, 2018 and interim periods within that year.

 

 9

 

 

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: a) requires 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, and 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 May 2014, the FASB issued ASU 2014-09, “Revenue Recognition – Revenue from Contracts with Customers.” 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 control 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. Revenue associated with loans and securities is not in the scope of the new guidance, and based the Company’s evaluation to date we do not expect the adoption to have a significant impact on the Company’s operating results or financial condition. The Company plans to adopt the new guidance on January 1, 2018.

 

NOTE C — BASIC AND DILUTED EARNINGS PER COMMON SHARE

 

For each of the three month periods ended June 30, 2017 and 2016, options to purchase 59,000 shares and 127,000 shares, respectively, were antidilutive and accordingly were excluded in determining diluted earnings per share.

 

 10

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(Dollars in thousands, except per share data)  2017   2016   2017   2016 
Basic:                    
Income available to common shareholders  $7,676   $5,332   $15,602   $9,298 
Average basic shares outstanding   42,841,152    37,470,071    40,851,273    36,159,473 
Basic earnings per share  $0.18   $0.14   $0.38   $0.26 
                     
Diluted:                    
Income available to common shareholders  $7,676   $5,332   $15,602   $9,298 
Average basic shares outstanding   42,841,152    37,470,071    40,851,273    36,159,473 
Restricted stock and stock options   715,133    671,479    687,496    637,786 
Average diluted shares outstanding   43,556,285    38,141,550    41,538,769    36,797,259 
Diluted earnings per share  $0.18   $0.14   $0.38   $0.25 

 

The diluted impact of restricted stock and stock options is calculated under the treasury method.

 

 11

 

 

NOTE D — SECURITIES

 

The amortized cost, unrealized gains and losses, and fair value of securities available for sale and held to maturity at June 30, 2017 and December 31, 2016 are summarized as follows:

 

   June 30, 2017 
   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  $10,907   $300   $0   $11,207 
Mortgage backed securities of U.S. Government Sponsored Entities   291,482    1,250    (2,632)   290,100 
Collateralized mortgage obligations of U.S. Government Sponsored Entities   217,634    614    (3,951)   214,297 
Commercial mortgage backed securities of U.S. Government Sponsored Entities   22,304    506    (9)   22,801 
Private mortgage backed securities   32,860    864    (92)   33,632 
Private collateralized mortgage obligations   55,828    616    (488)   55,956 
Collateralized loan obligations   222,725    455    (41)   223,139 
Obligations of state and political subdivisions   62,847    938    (385)   63,400 
Corporate and other debt securities   70,930    676    (168)   71,438 
Private commercial mortgage backed securities   30,780    189    (195)   30,774 
   $1,018,297   $6,408   $(7,961)  $1,016,744 
                     
SECURITIES HELD TO MATURITY                    
Mortgage backed securities of U.S. Government Sponsored Entities  $183,877   $1,413   $(959)  $184,331 
Collateralized mortgage obligations of U.S. Government Sponsored Entities   135,596    461    (1,564)   134,493 
Commercial mortgage backed securities of U.S. Government Sponsored Entities   17,420    585    0    18,005 
Collateralized loan obligations   54,325    378    0    54,703 
Private collateralized mortgage obligations   5,878    8    (61)   5,825 
   $397,096   $2,845   $(2,584)  $397,357 

 

 12

 

 

   December 31, 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  $12,073   $255   $0   $12,328 
Mortgage backed securities of U.S. Government Sponsored Entities   287,726    585    (4,823)   283,488 
Collateralized mortgage obligations of U.S. Government Sponsored Entities   238,805    314    (5,065)   234,054 
Commercial mortgage backed securities of U.S. Government Sponsored Entities   22,351    222    (28)   22,545 
Private mortgage backed securities   32,780    0    (791)   31,989 
Private collateralized mortgage obligations   67,542    563    (816)   67,289 
Collateralized loan obligations   124,716    838    (665)   124,889 
Obligations of state and political subdivisions   63,161    622    (895)   62,888 
Corporate and other debt securities   74,121    257    (517)   73,861 
Private commercial mortgage backed securities   37,534    111    (473)   37,172 
   $960,809   $3,767   $(14,073)  $950,503 
                     
SECURITIES HELD TO MATURITY                    
Mortgage backed securities of U.S. Government Sponsored Entities  $159,941   $704   $(1,243)  $159,402 
Collateralized mortgage obligations of U.S. Government Sponsored Entities   147,208    386    (2,630)   144,964 
Commercial mortgage backed securities of U.S. Government Sponsored Entities   17,375    233    (74)   17,534 
Collateralized loan obligations   41,547    430    (314)   41,663 
Private collateralized mortgage obligations   6,427    0    (109)   6,318 
   $372,498   $1,753   $(4,370)  $369,881 

 

Proceeds from sales of securities during the three and six month period ended June 30, 2017 were $3.8 million, with gross gains of $21,000 and no gross losses. Proceeds from sales of securities during the three month period ended June 30, 2016 were $1.7 million, with gross gains of $47,000 and no gross losses. Proceeds from sales of securities during the six month period ended June 30, 2016 were $12.1 million, with gross gains of $147,000 and gross losses of $11,000.

 

In 2014, approximately $158.8 million of investment securities available for sale were transferred into held to maturity. The unrealized holding losses at the date of transfer totaled $3.1 million. The unrealized holding losses at the date of the transfer are 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 other comprehensive income will offset the effect on interest income of the amortization of the discount. At June 30, 2017, the remaining unrealized holding losses totaled $1.6 million.

 

 13

 

 

Securities at June 30, 2017 with a fair value of $183.3 million were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Securities with a fair value of $167.6 million were pledged as collateral for repurchase agreements at June 30, 2017.

 

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2017, 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. Securities not due at a single maturity date are shown separately.

 

   Held to Maturity   Available for Sale 
   Amortized   Fair   Amortized   Fair 
(Dollars in thousands)  Cost   Value   Cost   Value 
Due in less than one year  $0   $0   $10,076   $10,318 
Due after one year through five years   3,600    3,600    85,126    85,641 
Due after five years through ten years   50,725    51,103    233,030    234,071 
Due after ten years   0    0    28,636    28,605 
    54,325    54,703    356,868    358,635 
Mortgage backed securities of U.S. Government Sponsored Entities   183,877    184,331    291,482    290,100 
Collateralized mortgage obligations of  U.S. Government Sponsored Entities   135,596    134,493    217,634    214,297 
Commercial mortgage backed securities of U.S. Government Sponsored Entities   17,420    18,005    22,304    22,801 
Private mortgage backed securities   0    0    32,860    33,632 
Private collateralized mortgage obligations   5,878    5,825    55,828    55,956 
Other debt securities   0    0    10,541    10,549 
Private commercial mortgage backed securities   0    0    30,780    30,774 
   $397,096   $397,357   $1,018,297   $1,016,744 

 

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 flow analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and the period of time for which these losses were outstanding at June 30, 2017 and December 31, 2016, respectively.

 

 14

 

 

   June 30, 2017 
   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  $205,658   $(2,975)  $48,199   $(616)  $253,857   $(3,591)
Collateralized mortgage obligations of U.S. Government Sponsored Entities   87,147    (1,438)   168,324    (4,077)   255,471    (5,515)
Commercial mortgage backed securities of U.S. Government Sponsored Entities   3,119    (9)   0    0    3,119    (9)
Private mortgage backed securities   0    0    6,864    (153)   6,864    (153)
Private collateralized mortgage obligations   0    0    26,129    (488)   26,129    (488)
Collateralized loan obligations   9,966    (34)   9,973    (7)   19,939    (41)
Obligations of state and political subdivisions   15,716    (287)   2,916    (98)   18,632    (385)
Corporate and other debt securities   12,873    (164)   2,388    (4)   15,261    (168)
Private commercial mortgage backed securities   11,126    (185)   1,965    (10)   13,091    (195)
Total temporarily impaired securities  $345,605   $(5,092)  $266,758   $(5,453)  $612,363   $(10,545)

 

   December 31, 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  $327,759   $(5,991)  $5,387   $(75)  $333,146   $(6,066)
Collateralized mortgage obligations of U.S. Government Sponsored Entities   234,175    (5,599)   58,912    (2,096)   293,087    (7,695)
Commercial mortgage backed securities of U.S. Government Sponsored Entities   7,934    (102)   0    0    7,934    (102)
Private mortgage backed securities   0    0    36,848    (900)   36,848    (900)
Private collateralized mortgage obligations   1,460    0    38,417    (816)   39,877    (816)
Collateralized loan obligations   8,152    (41)   51,694    (938)   59,846    (979)
Obligations of state and political subdivisions   39,321    (895)   0    0    39,321    (895)
Corporate and other debt securities   33,008    (517)   0    0    33,008    (517)
Private commercial mortgage backed securities   12,667    (306)   7,139    (167)   19,806    (473)
Total temporarily impaired securities  $664,476   $(13,451)  $198,397   $(4,992)  $862,873   $(18,443)

 

The two tables above include securities held to maturity that were transferred from available for sale into held to maturity during 2014. Those securities had unrealized losses of $3.1 million at the date of transfer, and at June 30, 2017, the unamortized balance was $1.6 million. The fair value of those securities in an unrealized loss position for less than twelve months at June 30, 2017 and December 31, 2016 was $7.4 million and $22.8 million, respectively. The unrealized losses on those securities in an unrealized loss position for less than twelve months at June 30, 2017 and December 31, 2016 was $0.1 million and $0.4 million, respectively. The fair value of those securities in an unrealized loss position for more than twelve months at June 30, 2017 and December 31, 2016 was $7.4 million and none, respectively. The unrealized losses on those securities in an unrealized loss position for more than twelve months at June 30, 2017 and December 31, 2016 was $0.1 million and none, respectively.

 

 15

 

 

At June 30, 2017, unrealized losses on mortgage backed securities, collateralized mortgage obligations and commercial mortgage backed securities of U.S. government sponsored entities having a fair value of $512.4 million totaled $9.1 million, which was 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 rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

At June 30, 2017, private label securities secured by seasoned residential collateral with a fair value of $33.0 million had approximately $0.6 million in unrealized losses. This was 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 historically have had minimal foreclosures and losses. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

At June 30, 2017, remaining securities categories had unrealized losses of $0.7 million and summed to a fair value of $66.9 million. Management believes that unrealized losses on these remaining debt security holdings are a function of changes in investment spreads and interest movements and not change in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

As of June 30, 2017, 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 June 30, 2017.

 

Included in other assets is $36.4 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At June 30, 2017, the Company had not identified events or changes in circumstances which may have a significant adverse effect on the ability to redeem these holdings.

 

The Company also holds 211,330 shares of Visa Class B stock which, following resolution of Visa litigation, will be converted to Visa Class A shares (the conversion rate is 1.6483 shares of Class A stock for each share of Class B stock) for a total of 348,335 shares of Visa Class A stock. Our holdings are related to prior ownership in Visa’s network while Visa operated as a cooperative (11,330 shares), and by acquisition via auctions (200,000 shares) for $6.2 million conducted by the FDIC during the first quarter of 2017. These holdings are reported in other assets in the Consolidated Balance Sheets at the Company’s cost of $6.2 million.

 

 16

 

 

NOTE E — LOANS

 

Information relating to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) as of June 30, 2017 and December 31, 2016 is summarized as follows:

 

June 30, 2017  Portfolio Loans   PCI Loans   PUL's   Total 
   (In thousands) 
Construction and land development  $181,334   $113   $49,127   $230,574 
Commercial real estate   1,098,634    11,463    353,971    1,464,068 
Residential real estate   874,753    702    115,689    991,144 
Commercial and financial   393,213    854    71,071    465,138 
Consumer   174,376    0    4,219    178,595 
Other loans   556    0    0    556 
NET LOAN BALANCES (1)  $2,722,866   $13,132   $594,077   $3,330,075 

 

December 31, 2016  Portfolio Loans   PCI Loans   PUL's   Total 
   (In thousands) 
Construction and land development  $137,480   $114   $22,522   $160,116 
Commercial real estate   1,041,915    11,257    304,420    1,357,592 
Residential real estate   784,290    684    51,813    836,787 
Commercial and financial   308,731    941    60,917    370,589 
Consumer   152,927    0    1,018    153,945 
Other loans   507    0    0    507 
NET LOAN BALANCES (1)  $2,425,850   $12,996   $440,690   $2,879,536 

 

(1) Net loan balances as of June 30, 2017 and December 31, 2016 include deferred costs of $10.6 million for each period presented, 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 table below summarizes the changes in accretable yield for PCI loans during the three and six month periods ended June 30, 2017 and 2016, respectively:

 

 17

 

 

Activity during the three months ended June 30, 2017

 

   March 31,
2017
   Additions   Deletions   Accretion   Reclassifications from
nonaccretable
difference
   June 30, 2017 
   (In thousands) 
Accretable yield  $3,510    0    (10)   (451)   216   $3,265 
Recorded investment of acquired loans  $12,982                       $13,132 
Allowance for loan losses   0                        0 
Recorded investment less allowance for loan losses  $12,982                       $13,132 

 

Activity during the six months ended June 30, 2017

 

   December 31,
2016
   Additions   Deletions   Accretion   Reclassifications from
nonaccretable
difference
   June 30, 2017 
   (In thousands) 
Accretable yield  $3,807    0    (10)   (816)   284   $3,265 
Recorded investment of acquired loans  $12,996                       $13,132 
Allowance for loan losses   0                        0 
Recorded investment less allowance for loan losses  $12,996                       $13,132 

 

Activity during the three months ended June 30, 2016

 

   March 31,
2016
   Additions   Deletions   Accretion   Reclassifications from
nonaccretable
difference
   June 30, 2016 
   (In thousands) 
Accretable yield  $3,143    1,215    1,086    (770)   0   $4,674 
Recorded investment of acquired loans  $16,531                       $13,652 
Allowance for loan losses   0                        0 
Recorded investment less allowance for loan losses  $16,531                       $13,652 

 

Activity during the six months ended June 30, 2016

 

   December 31,
2015
   Additions   Deletions   Accretion   Reclassifications from
nonaccretable
difference
   June 30, 2016 
   (In thousands) 
Accretable yield  $2,610    1,831    1,271    (1,038)   0   $4,674 
Recorded investment of acquired loans  $12,109                       $13,652 
Allowance for loan losses   0                        0 
Recorded investment less allowance for loan losses  $12,109                       $13,652 

 

 18

 

 

The following tables present the contractual delinquency of the recorded investment in past due loans by class of loans as of June 30, 2017 and December 31, 2016:

 

           Accruing             
   Accruing   Accruing   Greater           Total 
June 30, 2017  30-59 Days   60-89 Days   Than           Financing 
(In thousands)  Past Due   Past Due   90 Days   Nonaccrual   Current   Receivables 
                         
Portfolio Loans                              
Construction and land development  $273   $0   $0   $544   $180,517   $181,334 
Commercial real estate   0    0    0    1,209    1,097,425    1,098,634 
Residential real estate   68    65    0    8,655    865,965    874,753 
Commercial and financial   125    0    0    0    393,088    393,213 
Consumer   97    14    0    133    174,132    174,376 
Other   0    0    0    0    556    556 
Total   563    79    0    10,541    2,711,683    2,722,866 
                               
Purchased Unimpaired Loans                              
Construction and land development   0    0    0    125    49,002    49,127 
Commercial real estate   437    0    0    743    352,791    353,971 
Residential real estate   0    0    194    1,462    114,033    115,689 
Commercial and financial   514    0    0    347    70,210    71,071 
Consumer   0    0    0    0    4,219    4,219 
Other   0    0    0    0    0    0 
Total   951    0    194    2,677    590,255    594,077 
                               
Purchased Credit Impaired Loans                              
Construction and land development   0    0    0    0    113    113 
Commercial real estate   0    0    0    3,761    7,702    11,463 
Residential real estate   189    0    0    0    513    702 
Commercial and financial   0    0    0    0    854    854 
Consumer   0    0    0    0    0    0 
Other   0    0    0    0    0    0 
Total   189    0    0    3,761    9,182    13,132 
                               
Total Loans  $1,703   $79   $194   $16,979   $3,311,120   $3,330,075 

 

 19

 

 

           Accruing             
   Accruing   Accruing   Greater           Total 
December 31, 2016  30-59 Days   60-89 Days   Than           Financing 
(In thousands)  Past Due   Past Due   90 Days   Nonaccrual   Current   Receivables 
                         
Portfolio Loans                              
Construction and land development  $0   $0   $0   $438   $137,042   $137,480 
Commercial real estate   78    171    0    1,784    1,039,882    1,041,915 
Residential real estate   1,570    261    0    8,582    773,877    784,290 
Commercial and financial   30    0    0    49    308,652    308,731 
Consumer   29    59    0    170    152,669    152,927 
Other   0    0    0    0    507    507 
Total   1,707    491    0    11,023    2,412,629    2,425,850 
                               
Purchased Unimpaired Loans                              
Construction and land development   0    0    0    32    22,490    22,522 
Commercial real estate   345    485    0    1,272    302,318    304,420 
Residential real estate   153    0    0    1,262    50,398    51,813 
Commercial and financial   39    328    0    197    60,353    60,917 
Consumer   37    0    0    0    981    1,018 
Other   0    0    0    0    0    0 
Total   574    813    0    2,763    436,540    440,690 
                               
Purchased Impaired Loans                              
Construction and land development   0    0    0    0    114    114 
Commercial real estate   0    0    0    4,285    6,972    11,257 
Residential real estate   0    185    0    0    499    684 
Commercial and financial   0    0    0    0    941    941 
Consumer   0    0    0    0    0    0 
Other   0    0    0    0    0    0 
Total   0    185    0    4,285    8,526    12,996 
                               
Total Loans  $2,281   $1,489   $0   $18,071   $2,857,695   $2,879,536 

 

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. Loans that do not currently expose the Company to sufficient risk to warrant classification in the Substandard or Doubtful categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. 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 Substandard may require a specific allowance. 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 on loans classified as Doubtful is generally charged off. Risk ratings are updated any time the situation warrants.

 

 20

 

 

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 June 30, 2017 and December 31, 2016:

 

June 30, 2017    
   Construction           Commercial         
   & Land   Commercial   Residential   and   Consumer     
(In thousands)  Development   Real Estate   Real Estate   Financial   Loans   Total 
Pass  $216,965   $1,426,634   $965,708   $453,838   $177,470   $3,240,615 
Special mention   8,048    12,562    1,705    6,715    1,032    30,062 
Substandard   4,631    13,364    3,274    3,981    168    25,418 
Doubtful*   0    0    0    60    0    60 
Nonaccrual   669    5,713    10,117    347    133    16,979 
Pass-Troubled debt restructures   37    4,909    0    0    0    4,946 
Troubled debt restructures   224    886    10,340    197    348    11,995 
   $230,574   $1,464,068   $991,144   $465,138   $179,151   $3,330,075 

 

* Comprised of a single loan that paid off in July 2017.

 

December 31, 2016    
   Construction           Commercial         
   & Land   Commercial   Residential   and   Consumer     
(In thousands)  Development   Real Estate   Real Estate   Financial   Loans   Total 
Pass  $148,563   $1,319,696   $811,576   $364,241   $153,730   $2,797,806 
Special mention   5,037    17,184    1,780    3,949    67    28,017 
Substandard   5,497    7,438    2,709    2,153    134    17,931 
Doubtful   0    0    0    0    0    0 
Nonaccrual   470    7,341    9,844    246    170    18,071 
Pass-Troubled debt restructures   44    4,988    358    0    44    5,434 
Troubled debt restructures   505    945    10,520    0    307    12,277 
   $160,116   $1,357,592   $836,787   $370,589   $154,452   $2,879,536 

 

NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The Company’s Troubled Debt Restructuring (“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. 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 six months ending June 30, 2017:

 

       Pre-   Post-     
       Modification   Modification     
   Number   Outstanding   Outstanding   Valuation 
   of   Recorded   Recorded   Allowance 
(Dollars in thousands)  Contracts   Investment   Investment   Recorded 
Construction and land development   1   $52   $46   $6 
Residential real estate   1    15    15    0 
    2   $67   $61   $6 

 

 21

 

 

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

 

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

 

For the six months ended June 30, 2017 and 2016, there were no payment defaults on loans that had been modified to a TDR within the previous twelve months. 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 June 30, 2017 and December 31, 2016, the Company’s recorded investment in impaired loans (excluding PCI loans), the unpaid principal balance, and the related valuation allowance were as follows:

 

   June 30, 2017 
       Unpaid   Related 
   Recorded   Principal   Valuation 
(Dollars in thousands)  Investment   Balance   Allowance 
Impaired Loans with No Related Allowance Recorded:               
Construction and land development  $577   $879   $0 
Commercial real estate   2,791    4,134    0 
Residential real estate   10,099    14,607    0 
Commercial and financial   352    361    0 
Consumer   127    200    0 
Impaired Loans with an Allowance Recorded:               
Construction and land development   355    367    145 
Commercial real estate   4,964    4,970    244 
Residential real estate   10,360    10,566    1,255 
Commercial and financial   406    197    209 
Consumer   355    355    58 
Total:               
Construction and land development   932    1,246    145 
Commercial real estate   7,755    9,104    244 
Residential real estate   20,459    25,173    1,255 
Commercial and financial   758    558    209 
Consumer   482    555    58 
   $30,386   $36,636   $1,911 

 

 22

 

 

   December 31, 2016 
       Unpaid   Related 
   Recorded   Principal   Valuation 
(Dollars in thousands)  Investment   Balance   Allowance 
Impaired Loans with No Related Allowance Recorded:               
Construction and land development  $226   $321   $0 
Commercial real estate   3,267    4,813    0 
Residential real estate   9,706    14,136    0 
Commercial and financial   199    206    0 
Consumer   0    0    0 
Impaired Loans with an Allowance Recorded:               
Construction and land development   51    51    0 
Commercial real estate   6,937    6,949    395 
Residential real estate   12,332    12,681    2,059 
Commercial and financial   0    0    0 
Consumer   0    0    0 
Total:               
Construction and land development   277    372    0 
Commercial real estate   10,204    11,762    395 
Residential real estate   22,038    26,817    2,059 
Commercial and financial   199    206    0 
Consumer   0    0    0 
   $32,718   $39,157   $2,454 

 

 23

 

 

For the three months ended June 30, 2017 and 2016, the Company’s average recorded investments in impaired loans (excluding PCI loans) and related interest income were as follows:

 

   Three Months Ended   Three Months Ended 
   June 30, 2017   June 30, 2016 
   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  $538   $11   $214   $0 
Commercial real estate   2,521    40    1,860    2 
Residential real estate   9,831    159    9,587    37 
Commercial and financial   155    6    16    0 
Consumer   154    3    183    1 
Impaired Loans with an Allowance Recorded:                    
Construction & land development   279    2    634    6 
Commercial real estate   5,745    39    6,906    73 
Residential real estate   11,173    84    11,993    100 
Commercial and financial   371    3    0    0 
Consumer   311    7    356    5 
Total:                    
Construction & land development   817    13    848    6 
Commercial real estate   8,266    79    8,766    75 
Residential real estate   21,004    243    21,580    137 
Commercial and financial   526    9    16    0 
Consumer   465    10    539    6 
   $31,078   $354   $31,749   $224 

 

 24

 

 

For the six months ended June 30, 2017 and 2016, the Company’s average recorded investments in impaired loans (excluding PCI loans) and related interest income were as follows:

 

   Six Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016 
   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  $431   $22   $179   $0 
Commercial real estate   2,747    79    2,063    5 
Residential real estate   9,767    297    9,493    71 
Commercial and financial   153    7    16    0 
Consumer   105    7    212    1 
Impaired Loans with an Allowance Recorded:                    
Construction & land development   197    5    702    13 
Commercial real estate   6,207    108    6,970    147 
Residential real estate   11,627    197    12,128    185 
Commercial and financial   244    7    0    0 
Consumer   204    10    353    9 
Total:                    
Construction & land development   628    27    881    13 
Commercial real estate   8,954    187    9,033    152 
Residential real estate   21,394    494    21,621    256 
Commercial and financial   397    14    16    0 
Consumer   309    17    565    10 
   $31,682   $739   $32,116   $431 

 

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 June 30, 2017 and at December 31, 2016, accruing TDRs totaled $16.9 million and $17.7 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.

 

For impaired loans whose impairment is measured based on the present value of expected future cash flows, a total of $125,000 and $95,000, respectively, was included in interest income for the six months ended June 30, 2017 and 2016, respectively, and represents the change in present value attributable to the passage of time.

 

Nonaccrual loans and accruing loans past due 90 days or more (excluding purchased loans) totaled $10.5 million and $0, respectively, at June 30, 2017, and $11.0 million and $0, respectively, at December 31, 2016. Purchased nonaccrual and accruing loans past due 90 days or more were $6.4 million and $0.2 million, respectively, at June 30, 2017, and $7.0 million and $0, respectively, at December 31, 2016.

 

 25

 

 

Activity in the allowance for loan losses (excluding PCI loans) for the three month and six month periods ended June 30, 2017 is summarized as follows:

 

   Allowance for Loan Losses for the Three Months Ended June 30, 2017 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $1,352   $128   $0   $94   $94   $1,574 
Commercial real estate   9,861    (167)   (102)   331    229    9,923 
Residential real estate   7,064    324    (64)   99    35    7,423 
Commercial and financial   4,635    1,193    (447)   79    (368)   5,460 
Consumer   1,650    (77)   (55)   102    47    1,620 
   $24,562   $1,401   $(668)  $705   $37   $26,000 

 

   Allowance for Loan Losses for the Six Months Ended June 30, 2017 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $1,219   $192   $0   $163   $163   $1,574 
Commercial real estate   9,273    313    (102)   439    337    9,923 
Residential real estate   7,483    (100)   (187)   227    40    7,423 
Commercial and financial   3,636    2,314    (616)   126    (490)   5,460 
Consumer   1,789    (14)   (314)   159    (155)   1,620 
   $23,400   $2,705   $(1,219)  $1,114   $(105)  $26,000 

 

Activity in the allowance for loan losses (excluding PCI loans) for the three month and six month periods ended June 30, 2016 is summarized as follows:

 

   Allowance for Loan Losses for the Three Months Ended June 30, 2016 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $1,285   $(239)  $0   $114   $114   $1,160 
Commercial real estate   6,677    495    (3)   23    20    7,192 
Residential real estate   8,512    (420)   (28)   235    207    8,299 
Commercial and financial   1,991    566    (38)   72    34    2,591 
Consumer   1,259    260    (53)   17    (36)   1,483 
   $19,724   $662   $(122)  $461   $339   $20,725 

 

   Allowance for Loan Losses for the Six Months Ended June 30, 2016 
       Provision           Net     
   Beginning   for Loan   Charge-       Charge-   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Offs   Balance 
Construction & land development  $1,151   $(180)  $0   $189   $189   $1,160 
Commercial real estate   6,756    510    (176)   102    (74)   7,192 
Residential real estate   8,057    (10)   (145)   397    252    8,299 
Commercial and financial   2,042    147    (93)   495    402    2,591 
Consumer   1,122    394    (80)   47    (33)   1,483 
   $19,128   $861   $(494)  $1,230   $736   $20,725 

 

 26

 

 

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 June 30, 2017 and December 31, 2016 is shown in the following tables:

 

   At June 30, 2017 
   Individually Evaluated for   Collectively Evaluated for         
   Impairment   Impairment   Total 
   Recorded   Associated   Recorded   Associated   Recorded   Associated 
(Dollars in thousands)  Investment   Allowance   Investment   Allowance   Investment   Allowance 
Construction & land development  $932   $145   $229,529   $1,429   $230,461   $1,574 
Commercial real estate   7,755    244    1,444,850    9,679    1,452,605    9,923 
Residential real estate   20,459    1,255    969,983    6,168    990,442    7,423 
Commercial and financial   758    209    463,526    5,251    464,284    5,460 
Consumer   482    58    178,669    1,562    179,151    1,620 
   $30,386   $1,911   $3,286,557   $24,089   $3,316,943   $26,000 

 

   At December 31, 2016 
   Individually Evaluated for   Collectively Evaluated for         
   Impairment   Impairment   Total 
   Recorded   Associated   Recorded   Associated   Recorded   Associated 
(Dollars in thousands)  Investment   Allowance   Investment   Allowance   Investment   Allowance 
Construction & land development  $277   $0   $159,839   $1,219   $160,116   $1,219 
Commercial real estate   10,204    395    1,335,832    8,878    1,346,036    9,273 
Residential real estate   22,038    2,059    814,250    5,424    836,288    7,483 
Commercial and financial   199    0    369,449    3,636    369,648    3,636 
Consumer   0    0    154,452    1,789    154,452    1,789 
   $32,718   $2,454   $2,833,822   $20,946   $2,866,540   $23,400 

 

Loans collectively evaluated for impairment included loans acquired in connection with the acquisition of GulfShore Bancshares, Inc. (“GulfShore”) on April 7, 2017, Floridian Financial Group, Inc. (“Floridian”) on March 11, 2016, certain branches from BMO Harris Bank, N.A. (“BMO”) on June 3, 2016, Grand Bankshares, Inc. (“Grand”) on July 17, 2015, and The BANKshares, Inc. on October 1, 2014 that are not PCI loans. At June 30, 2017, the remaining fair value adjustments for loans acquired was approximately $15.5 million, or approximately 2.54% of the outstanding aggregate PUL balances. At December 31, 2016, the remaining fair value adjustments for loans acquired was approximately $13.7 million, or approximately 3.11% of the outstanding aggregate PUL balances. These amounts, representing the remaining fair value discount of each PUL, are accreted into interest income over the remaining lives of the related loans on a level yield basis.

 

The table below summarizes PCI loans that were individually evaluated for impairment based on expected cash flows at June 30, 2017 and December 31, 2016:

 

 27

 

 

   PCI Loans Individually Evaluated for Impairment 
   June 30, 2017   December 31, 2016 
   Recorded   Associated   Recorded   Associated 
(Dollars in thousands)  Investment   Allowance   Investment   Allowance 
Construction & land development  $113   $0   $114   $0 
Commercial real estate   11,463    0    11,257    0 
Residential real estate   702    0    684    0 
Commercial and financial   854    0    941    0 
Consumer   0    0    0    0 
   $13,132   $0   $12,996   $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 is obligated to provide additional collateral in the event of a significant decline in fair value of collateral pledged. At June 30, 2017 and December 31, 2016, Company securities sold under agreements to repurchase and securities pledged were as follows by collateral type and maturity:

 

(Dollars in thousands)  Overnight and Continuous Maturity 
   June 30,   December 31, 
   2017   2016 
Mortgage backed securities and collateralized mortgage  obligations of U.S. Government Sponsored Entities  $167,558   $204,202 

 

 28

 

 

NOTE H – NONINTEREST INCOME AND EXPENSES

 

Detail of noninterest income and expenses as of the three and six months ended June 30, 2017 and 2016 follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(In thousands)  2017   2016   2017   2016 
Noninterest income                    
Service charges on deposits  $2,435   $2,230   $4,857   $4,359 
Trust income   917    838    1,797    1,644 
Mortgage banking fees   1,272    1,364    2,824    2,363 
Brokerage commissions and fees   351    470    728    1,101 
Marine finance fees   326    279    460    420 
Interchange income   2,671    2,370    5,165    4,587 
Other deposit-based EFT fees   114    116    254    243 
BOLI income   757    379    1,490    1,220 
Other income   1,624    1,065    2,797    1,804 
    10,467    9,111    20,372    17,741 
Securities gains, net   21    47    21    136 
TOTAL  $10,488   $9,158   $20,393   $17,877 
                     
Noninterest expense                    
Salaries and wages  $18,375   $13,884   $33,744   $27,283 
Employee benefits   2,935    2,521    6,003    5,003 
Outsourced data processing costs   3,456    2,803    6,725    7,242 
Telephone/data lines   648    539    1,180    1,067 
Occupancy   4,421    3,645    7,578    6,617 
Furniture and equipment   1,679    1,283    3,070    2,281 
Marketing   1,074    957    1,996    2,006 
Legal and professional fees   3,276    2,656    5,408    5,013 
FDIC assessments   650    643    1,220    1,187 
Amortization of intangibles   839    593    1,558    1,039 
Asset disposition expense   136    160    189    250 
Net loss (gain) on other real estate owned and repossessed assets   161    (201)   (185)   (252)
Early redemption cost for Federal Home Loan Bank borrowings   0    1,777    0    1,777 
Other   3,975    3,548    7,885    6,636 
TOTAL  $41,625   $34,808   $76,371   $67,149 

 

NOTE I — EQUITY CAPITAL

 

On February 21, 2017, the Company completed a public offering of 2,702,500 shares of common stock, generating net proceeds of $55.6 million. In addition, CapGen Capital Group III LP (“CapGen”), in conjunction with the Company’s offering, sold 6,210,000 shares of the Company’s common stock, with no net proceeds to the Company.

 

The Company is well capitalized and at June 30, 2017, 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.

 

 29

 

 

NOTE J — CONTINGENCIES

 

The Company and its subsidiaries, because of the nature of their businesses, are at all times subject to 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 material 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 June 30, 2017 and December 31, 2016 included:

 

       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 June 30, 2017:                    
Available for sale securities (1)  $1,016,744   $100   $1,016,644   $0 
Loans held for sale (2)   22,262    0    22,262    0 
Loans (3)   10,710    0    10,304    406 
Other real estate owned (4)   8,497    0    0    8,497 
                     
At December 31, 2016:                    
Available for sale securities (1)  $950,503   $100   $950,403   $0 
Loans held for sale (2)   15,332    0    15,332    0 
Loans (3)   4,120    0    3,170    950 
Other real estate owned (4)   9,949    0    0    9,949 

____________

(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.

 

 30

 

 

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 June 30, 2017, the capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.8%. 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 totaled $10.7 million with a specific reserve of $0.6 million at June 30, 2017, compared to $4.1 million with a specific reserve of $0.4 million at December 31, 2016.

 

Fair value of available for sale securities is 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.

 

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 six months ended June 30, 2017, there were no transfers between levels of the fair value hierarchy.

 

For loans classified as level 3, the additions totaled $0.1 million for the first six months of 2017, consisting of loans that became impaired during 2017. Reductions consisted primarily of principal payments and totaled $0.6 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 six months of 2017, foreclosed loans added $0.4 million and migrated branches taken out of service added $1.2 million. Reductions summed to $3.1 million and consisted almost entirely of sales of $2.9 million.

 

 31

 

 

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 June 30, 2017 and December 31, 2016 is as follows:

 

       Markets for   Other   Significant 
       Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
(Dollars in thousands)  Amount   (Level 1)   (Level 2)   (Level 3) 
At June 30, 2017:                    
Financial Assets                    
Securities held to maturity (1)  $397,096   $0   $397,357   $0 
Time deposits with other banks   16,426    0    0    16,386 
Loans, net   3,293,365    0    0    3,277,109 
Financial Liabilities                    
Deposit liabilities   3,975,458    0    0    3,973,456 
Subordinated debt   70,381    0    55,017    0 
                     
At December 31, 2016:                    
Financial Assets                    
Securities held to maturity (1)  $372,498   $0   $369,881   $0 
Loans, net   2,852,016    0    0    2,840,993 
Financial Liabilities                    
Deposit liabilities   3,523,245    0    0    3,523,322 
Subordinated debt   70,241    0    54,908    0 

 

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

 

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 due from banks, interest bearing deposits with other banks, federal funds purchased, and securities sold under agreement to repurchase, maturing within 30 days, and FHLB borrowings.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at June 30, 2017 and December 31, 2016:

 

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 factors.

 

The Company reviews the prices supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The fair value of collateralized loan obligations is 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.

 

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Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial or mortgage. 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 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 the Company’s policy on loans held for investment. None of the loans are 90 days or more past due or on nonaccrual as of June 30, 2017 and December 31, 2016, respectively. Loans held for sale were as follows at June 30, 2017 and December 31, 2016:

 

   June 30,   December 31, 
(Dollars in thousands)  2017   2016 
Aggregate fair value           $22,262   $15,332 
Contractual balance            21,640    14,904 
Gains (losses)            622    428 

 

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.

 

NOTE L — BUSINESS COMBINATIONS

 

Acquisition of Floridian Financial Group, Inc.

 

On March 11, 2016, the Company completed its acquisition of 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 Bank. Floridian, headquartered in Lake Mary, Florida, operated 10 branches in Orlando and Daytona Beach, of which several were consolidated with Seacoast locations. This acquisition added approximately $417 million in total assets, $337 million in deposits, and $266 million in loans to Seacoast.

 

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 equaled 35% cash and 65% Seacoast shares (based on Seacoast’s closing price of $15.47 per share on March 11, 2016).

 

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The following table represents the purchase price paid to Floridian shareholders in connection with the acquisition:

 

   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 acquisition was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill was calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Loans that were nonaccrual and all loan relationships identified as impaired as of the acquisition date were considered by management to be credit impaired and were accounted for pursuant to ASC Topic 310-30.

 

       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 

 

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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 
(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 Purchased Credit Impaired (“PCI”) loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as Troubled 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.

 

(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 

 

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, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

 

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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 required 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.

 

Acquisition of BMO Harris Central Florida Offices, Deposits and Loans

 

On June 3, 2016, Seacoast Bank 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, located in the Orlando Metropolitan Statistical Area (“MSA”).

 

The fair values listed are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. 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.

 

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       Measurement     
   Initial Report   Period   As Adjusted 
Date of acquisition  June 3, 2016   Adjustments   June 3, 2016 
       (in thousands)     
Assets:               
Cash from BMO (net of payable)  $234,094   $0   $234,094 
Loans, net   62,671    0    62,671 
Fixed assets   3,715    0    3,715 
Core deposit intangibles   5,223    (135)   5,088 
Goodwill   7,645    163    7,808 
Other assets   952    (28)   924 
   $314,300   $0   $314,300 
                
Liabilities:               
Deposits  $314,248   $0   $314,248 
Other liabilities   52    0    52 
   $314,300   $0   $314,300 

 

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.

 

   June 3, 2016 
(In thousands)  Book Balance   Fair Value 
Loans:          
Commercial real estate  $31,564   $31,200 
Commercial loans   32,479    31,471 
Purchased credit-impaired   0    0 
Total acquired loans  $64,043   $62,671 

 

At June 3, 2016, no loans acquired from BMO Harris were specifically identified with a credit deficiency factor(s). The factors we consider to identify loans as PCI loans are acquired loans that were nonaccrual, 60 days or more past due, designated as TDR, graded “special mention” or “substandard.” PULs were 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 intangibles (including goodwill) of approximately $13 million for this acquisition that are deductible for tax purposes over a 15-year period. The acquisition of BMO’s Orlando banking operations by Seacoast Bank 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.

 

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Acquisition of GulfShore Bancshares, Inc.

 

On April 7, 2017, the Company completed its acquisition of GulfShore, the parent company of GulfShore Bank. Simultaneously, upon completion of the merger, GulfShore’s wholly owned subsidiary bank, GulfShore Bank, was merged with and into Seacoast Bank. GulfShore, headquartered in Tampa, Florida, operated 3 branches in Tampa and St. Petersburg, of which all have been retained as Seacoast locations.


The Company acquired 100% of the outstanding common stock of GulfShore. Under the terms of the definitive agreement, GulfShore shareholders received, for each share of GulfShore common stock, the combination of $1.47 in cash and 0.4807 shares of Seacoast common stock (based on Seacoast’s closing price of $23.94 per share on April 7, 2017).

 

   April 7, 2017 
Shares exchanged for cash  $8,033,999 
      
Number of GulfShore Bancshares, Inc. common shares outstanding   5,464,308 
Per share exchange ratio   0.4807 
Number of shares of common stock issued   2,626,693 
Multiplied by common stock price per share on April 7, 2017  $23.94 
Value of common stock issued   62,883,030 
      
Total purchase price  $70,917,029 

 

Merger related charges summed to $4.3 million for the second quarter of 2017, primarily impacting salaries and wages, outsourced data processing costs, and legal and professional fees. All of these costs were expensed in the second quarter of 2017.

 

The acquisition was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill was calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. 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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   Initial Report 
Date of acquisition  April 7, 2017 
     
Assets:     
Cash, interest bearing deposits and time deposits with other banks  $55,540 
Investment securities   316 
Loans, net   250,884 
Fixed assets   1,307 
Other real estate owned   13 
Core deposit intangibles   3,927 
Goodwill   37,090 
Other assets   8,572 
   $357,649 
      
Liabilities:     
Deposits  $285,350 
Other liabilities   1,382 
   $286,732 

 

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.

 

   April 7, 2017 
(In thousands)  Book Balance   Fair Value 
Loans:          
Single family residential real estate  $101,281   $99,598 
Commercial real estate   106,729    103,908 
Construction/development/land   13,175    11,653 
Commercial loans   32,137    32,252 
Consumer and other loans   3,554    3,473 
Purchased credit-impaired   0    0 
Total acquired loans  $256,876   $250,884 

 

No loans acquired were specifically identified with credit deficiency factor(s), pursuant to ASC Topic 310-30. The factors we considered to identify loans as Purchased Credit Impaired (“PCI”) loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as Troubled Debt Restructured (“TDR”), graded “special mention” or “substandard.”

 

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, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

 

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The Company recognized goodwill of $37 million for this acquisition that is nondeductible for tax purposes. The acquisition of GulfShore constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value required 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 GulfShore, fair values as presented for securities, loans, fixed assets, other real estate owned, and certain other assets and liabilities are necessarily considered preliminary.

 

Operating results of the Company for the three months ended June 30, 2017 include the operation of the acquired assets and assumed liabilities since the date of acquisition of April 7, 2017. Pro-forma data for the three months ended June 30, 2016 and six months ended June 30, 2017 and 2016 listed in the table below present pro-forma information as if the acquisition occurred at the beginning of 2016.

 

   Three Months Ended  

Six Months Ended

 
   June 30,   June 30, 
(In thousands, except per share amounts)  2016   2017   2016 
             
Net interest income  $36,720   $84,935   $69,201 
Net income   5,877    16,384    10,566 
EPS - basic   0.15    0.39    0.27 
EPS - diluted   0.14    0.39    0.27 

 

Proposed Acquisition of Palm Beach Community Bank

 

On May 4, 2017, the Company announced that it had entered into an agreement and plan of merger with Palm Beach Community Bank, a Florida Bank (“PBCB”). The agreement provides that PBCB will merge with and into Seacoast Bank. PBCB operates four branches in West Palm Beach, Florida with deposits of approximately $281 million and loans of $290 million. This acquisition is anticipated to close in the fourth quarter of 2017, subject to the receipt of approvals from regulatory authorities, the approval of PBCB shareholders and the satisfaction of other closing conditions.

 

Proposed Acquisition of NorthStar Bank

 

On May 18, 2017, the Company announced that it had entered into an agreement and plan of merger with NorthStar Banking Corporation (“NSBC”) the holding company for NorthStar Bank, a Florida Bank (“NorthStar”). The agreement provides that NorthStar will merge with and into Seacoast Bank. NorthStar operates three branches in Tampa, Florida with deposits of approximately $168 million and loans of $137 million. This acquisition is anticipated to close in the fourth quarter of 2017, subject to the receipt of approvals from regulatory authorities, the approval of NSBC shareholders and the satisfaction of other conditions.

 

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

 

The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries (the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast National Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report. For purposes of the following discussion, the words the “Company,” “we,” “us,” and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.

 

SECOND QUARTER 2017

 

Strategic Overview

 

Results demonstrate the impact of our digital transformation strategy, successful integration of acquisitions, and disciplined loan growth. Seacoast continues to execute on its plan to grow our core business organically, innovating to build our franchise and increase efficiency, and grow through mergers and acquisitions. We believe that these investments better position us to increase net income to common shareholders today and prospectively.

 

Second Quarter and Year-to-Date 2017 Strategic Highlights

 

Modernizing How We Sell

 

·The Company reached another significant milestone, surpassing 100,000 households during the quarter.

 

·We had a record number of deposit accounts opened outside of the branch this quarter, with 13% of all deposit accounts being opened through non-branch channels including our website and 24/7 call center.

 

·On May 4, 2017, we announced the expansion of our presence in the South Florida market through our agreement to acquire Palm Beach Community Bank (“PBCB”). This proposed acquisition will build upon our previous investment, the acquisition of Grand, also located in Palm Beach, completed in July 2015. On May 18, 2017, we signed an agreement to acquire NorthStar Banking Corporation, the holding company for NorthStar Bank (“NorthStar”), headquartered in Tampa, Florida. The proposed addition of NorthStar will deepen our presence in the Tampa market and build on our acquisition of GulfShore, also located in Tampa, completed on April 7, 2017.

 

·Consumer and small business loans originated in digital channels or by our call center grew 25% over first quarter 2017 and by 9% year-over-year. These are the fastest growing channels and reflect customers seeking the high level of convenience across our banking platform.

 

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Lowering Our Cost to Serve

 

·Mobile penetration increased to 32% of eligible primary consumer checking customers from 28% in June of last year. 

 

·39% of checks are now deposited outside the branch network, compared to 33% in June of last year.

 

·In the first half of 2017, we consolidated five banking center locations. Costs associated with closures in the second quarter were $1.9 million, and the associated benefits are expected to be more fully realized in the second half of the year.

 

·Customer adoption of more convenient digital channels continues to grow. In June 2017, our non-teller transactions made up 50% of our total transaction volume, up from 41% two years ago. We expect this shift in customer preference to continue to accelerate, requiring continued focus on building a digitally integrated business model.

 

Driving Improvements in How Our Business Operates

 

·We recognized savings in the quarter due to the successful renegotiation of our agreement with a key technology and digital services provider. The agreement expands digital banking capabilities, improves service level agreements and increases our ability to scale.

 

·In the first quarter 2017, by opening a second call center in Orlando, we expanded our ability to support growth and our customers’ ever-increasing utilization of our 24/7 service model. This contributed to an increase in expenses in the current quarter by approximately $200,000, while providing us with access to a larger talent pool and helping strengthen our business continuity plan.

 

·During the first half of 2017, we have invested to upgrade core infrastructure and relocate our primary data center to a hardened facility dedicated to providing resilient infrastructure services.

 

Scaling and Evolving Our Culture

 

·Earlier this year Associates participated in our annual engagement survey, which measures items such as job satisfaction and commitment to our customers. Key scores in the survey rose across the board, surpassing the 90th percentile norm for employee engagement.

 

·We welcomed 36 associates from GulfShore in April 2017. We continue to grow our talent base in this highly attractive market. Joseph Caballero, former CEO of GulfShore, will lead Seacoast’s efforts in Tampa accepting a role as Tampa market executive. Joe brings significant experience operating in the Tampa MSA, with over 25 years’ experience in banking and middle market lending.

 

·Julie Kleffel, EVP and head of community banking was named an Orlando Business Journal 2017 Business Executive of the Year. She was recognized as part of the publication's annual Women Who Mean Business awards in April.

 

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Second quarter 2017 results and guidance for 2017

 

·For the second quarter of 2017, Seacoast reported net income of $7.7 million or $0.18 per average common diluted share, compared to $7.9 million or $0.20 per average common diluted share for the first quarter 2017, and $5.3 million or $0.14 per average common diluted share in the second quarter last year. For the six months ended June 30, 2017, net income was $15.6 million compared to $9.3 million for six months ended June 30, 2016. Adjusted net income1 totaled $12.7 million or $0.29 per average common diluted share for the second quarter of 2017, compared to adjusted net income of $10.3 million or $0.26 per average common diluted share for the first quarter of 2017, and adjusted net income of $9.2 million or $0.24 per average common diluted share a year ago. For the six months ended June 30, 2017, adjusted net income1 was $22.9 million compared to $16.2 million for the six months ended June 30, 2016.

 

·Our merger with GulfShore Bank in Tampa, Florida in April 2017, and expected mergers with PBCB in West Palm Beach, Florida in the fourth quarter 2017 and NorthStar in Tampa, Florida in the fourth quarter 2017, together with organic and acquisition-related revenue growth momentum and cost reductions, is expected to drive earnings improvement over the balance of 2017 and into 2018.

 

·Seacoast management maintains its established goal of achieving adjusted diluted earnings per share1 of $1.28 to $1.32 for 2017.

 

1Non-GAAP measure, see “Explanation of Certain Non-GAAP Financial Measures”.

 

Financial Condition

 

Total assets increased $900 million or 20.5% from June 30, 2016 to $5.28 billion at June 30, 2017, driven by the acquisition of GulfShore in April of 2017, along with organic growth.

 

Loan Portfolio

 

Total loans (net of unearned income and excluding the allowance for loan losses) were $3.33 billion at June 30, 2017, $714.0 million or 27.3% more than at June 30, 2016, and $450.5 million or 15.6% more than at December 31, 2016. The GulfShore acquisition on April 7, 2017 contributed $250.9 million in loans. Also, during the last six months of 2016 and first quarter of 2017, we purchased five separate mortgage loan pools aggregating to $106.5 million, and a marine loan pool of $16.0 million (a total of $122.5 million in loans purchased), and sold two seasoned mortgage portfolio pools (summing to $70.6 million). Loan pools acquired have a weighted average yield of 3.4%, with $122.5 million adjustable rate, and contain borrowers with an average FICO score above 740. An $11.0 million Small Business Administration (“SBA”) loan pool acquired in the second quarter of 2017 has a weighted average yield of 3.0% and is zero risk weighted for capital calculations. Success in commercial lending through our legacy franchise and through our Accelerate banking model has increased loan growth. Analytics and digital marketing have further fueled loan growth in the consumer and small business channels.

 

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The following tables detail loan portfolio composition at June 30, 2017, December 31, 2016 and June 30, 2016 for portfolio loans, purchase credit impaired loans (“PCI”) and purchased unimpaired loans (“PUL”) as defined in Note E-Loans.

 

June 30, 2017  Portfolio Loans   PCI Loans   PUL's   Total 
   (In thousands) 
Construction and land development  $181,334   $113   $49,127   $230,574 
Commercial real estate   1,098,634    11,463    353,971    1,464,068 
Residential real estate   874,753    702    115,689    991,144 
Commercial and financial   393,213    854    71,071    465,138 
Consumer   174,376    0    4,219    178,595 
Other loans   556    0    0    556 
NET LOAN BALANCES (1)  $2,722,866   $13,132   $594,077   $3,330,075 

 

December 31, 2016  Portfolio Loans   PCI Loans   PUL's   Total 
   (In thousands) 
Construction and land development  $137,480   $114   $22,522   $160,116 
Commercial real estate   1,041,915    11,257    304,420    1,357,592 
Residential real estate   784,290    684    51,813    836,787 
Commercial and financial   308,731    941    60,917    370,589 
Consumer   152,927    0    1,018    153,945 
Other loans   507    0    0    507 
NET LOAN BALANCES (1)  $2,425,850   $12,996   $440,690   $2,879,536 

 

June 30, 2016  Portfolio Loans   PCI Loans   PUL's   Total 
   (In thousands) 
Construction and land development  $115,789   $114   $26,484   $142,387 
Commercial real estate   849,537    11,836    378,135    1,239,508 
Residential real estate   723,297    688    70,336    794,321 
Commercial and financial   245,821    1,014    76,631    323,466 
Consumer   112,580    0    2,933    115,513 
Other loans   857    0    0    857 
NET LOAN BALANCES (1)  $2,047,881   $13,652   $554,519   $2,616,052 

 

(1)Net loan balances at June 30, 2017, December 31, 2016 and June 30, 2016 are net of deferred costs of $10.6 million, $10.6 million, and $9.7 million, respectively.

 

Note: Commercial real estate includes owner-occupied balances of $654.8 million, $623.8 million, and $590.1 million, for June 30, 2017, December 31, 2016 and June 30, 2016, respectively.

 

Commercial real estate mortgages increased $224.6 million or 18.1% to $1.46 billion at June 30, 2017, compared to June 30, 2016, a result of improving loan production and loans acquired in the GulfShore merger. Office building loans of $400.7 million or 27.4% of commercial real estate mortgages comprise our largest concentration, with a substantial portion owner-occupied. Portfolio composition also includes lending for retail trade, industrial, healthcare, churches and educational facilities, recreation, multifamily, mobile home parks, lodging, restaurants, agriculture, convenience stores, marinas, and other types of real estate.

 

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The Company’s ten largest commercial real estate funded and unfunded loan relationships at June 30, 2017 aggregated to $153.4 million (versus $126.9 million at June 30, 2016), of which $146.9 million was funded. The Company’s 73 commercial real estate relationships in excess of $5 million totaled $612.2 million, of which $548.7 million was funded at June 30, 2017 (compared to 59 relationships of $473.3 million at June 30, 2016, of which $413.2 million was funded).

 

Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately $1.112 billion and $352 million, respectively, at June 30, 2017, compared to $908 million and $332 million, respectively, at June 30, 2016.

 

Reflecting the impact of organic loan growth and the GulfShore loan acquisition, commercial and financial loans (“C&I”) outstanding at June 30, 2017 increased to $465.1 million, up 43.8% from $323.5 million at June 30, 2016. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Company’s lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small to medium sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.

 

Residential mortgage loans increased $196.8 million or 24.8% from June 30, 2016 to $991.2 million as of June 30, 2017. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. During the first quarter of 2017, a $43 million pool of whole loan adjustable rate mortgages with a weighted average yield of 3.2% and average FICO score of 751 was acquired and added to the portfolio. At June 30, 2017, approximately $489 million or 49% of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages). Fixed rate mortgages totaled approximately $292 million (29% of the residential mortgage portfolio) at June 30, 2017, of which 15- and 30-year mortgages totaled $22 million and $178 million, respectively. Remaining fixed rate balances were comprised of home improvement loans totaling $92 million, most with maturities of 10 years or less and home equity lines of credit, primarily floating rates, totaling $210 million at June 30, 2017. In comparison, loans secured by residential properties having fixed rates totaled $126 million at June 30, 2016, with 15- and 30-year fixed rate residential mortgages totaling $25 million and $101 million, respectively, and home equity mortgages and lines of credit totaled $84 million and $144 million, respectively.

 

The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes) which increased $63.1 million or 54.6% year over year and totaled $178.6 million (versus $115.5 million at June 30, 2016). Of the $63.1 million increase, $23.5 million was in marine loans, $3.0 million in automobile and truck loans, and $36.6 million in other consumer loans. Marine loans at June 30, 2017 included $12.2 million in purchased loan pools acquired during the third quarter of 2016.

 

At June 30, 2017, the Company had unfunded commitments to make loans of $684 million, compared to $504 million at June 30, 2016.

 

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Loan Concentrations

 

The Company has developed guardrails to manage loan types that are most impacted by stressed market conditions in order to achieve lower levels of credit loss volatility in the future. Commercial and commercial real estate loan relationships greater than $10 million totaled $231.0 million and represented 7% of the total portfolio at June 30, 2017, compared to $161.7 million or 13% at year-end 2010.

 

Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and commercial real estate loan concentrations as a percentage of total risk based capital, were stable at 49% and 217%, respectively, at June 30, 2017. Regulatory guidance suggests limits of 100% and 300%, respectively.

 

The Company defines commercial real estate in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006, which defines commercial real estate (“CRE”) loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e. loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts, or “REITs”, and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner occupied CRE are generally excluded.

 

Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality

 

Nonperforming assets (“NPAs”) at June 30, 2017 totaled $25.7 million, and were comprised of $10.5 million of nonaccrual portfolio loans, $6.6 million of nonaccrual and accruing past due 90 days or more purchased loans, $1.8 million of non-acquired other real estate owned (“OREO”), $1.7 million of acquired OREO and $5.1 million of branches out of service. NPAs increased from $24.0 million recorded as of June 30, 2016 (comprised of $10.9 million of nonaccrual portfolio loans, $4.4 million of nonaccrual purchased loans, $3.8 million of non-acquired OREO, $1.6 million of acquired OREO, and $3.3 million of branches out of service). At June 30, 2017, approximately 97% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At June 30, 2017, nonaccrual loans were written down by approximately $3.2 million or 16% of the original loan balance (including specific impairment reserves). During the twelve months ended June 30, 2017, OREO amounts related to branches taken out of service that are actively being marketed increased $1.8 million while OREO for foreclosed properties remained level.

 

The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.

 

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The Company pursues loan restructurings in selected cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. TDRs have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing restructured loans totaled $16.9 million at June 30, 2017 compared to $20.3 million at June 30, 2016. Accruing TDRs are excluded from our nonperforming asset ratios. The tables below set forth details related to nonaccrual and accruing restructured loans.

 

       Accruing 
June 30,2017  Nonaccrual Loans   Restructured 
(Dollars in thousands)  NonCurrent   Performing   Total   Loans 
Construction & land development                    
Residential  $125   $283   $408   $0 
Commercial   80    0    80    37 
Individuals   0    181    181    225 
    205    464    669    262 
Residential real estate mortgages   1,798    8,319    10,117    10,339 
Commercial real estate mortgages   4,937    776    5,713    5,795 
Real estate loans   6,940    9,559    16,499    16,396 
Commercial and financial   304    43    347    197 
Consumer   21    112    133    348 
   $7,265   $9,714   $16,979   $16,941 

 

At June 30, 2017 and 2016, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:

 

   2017   2016 
(Dollars in thousands)  Number   Amount   Number   Amount 
Rate reduction   74   $13,684    86   $15,122 
Maturity extended with change in terms   53    6,360    61    8,085 
Chapter 7 bankruptcies   31    2,055    41    2,515 
Not elsewhere classified   12    1,293    14    1,674 
    170   $23,392    202   $27,396 

 

During the first six months of 2017, newly identified TDRs totaled $67,000, compared to $2.0 million for all of 2016. 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. No accruing loans that were restructured within the twelve months preceding June 30, 2017 defaulted during the twelve months ended June 30, 2017, or for 2016. A restructured loan is considered in default when it becomes 60 days or more past due under the modified terms, has been transferred to nonaccrual status, or has been transferred to OREO.

 

At June 30, 2017, loans (excluding PCI) totaling $30.4 million were considered impaired (comprised of total nonaccrual, loans 90 days or more past due, and TDRs) and $1.9 million of the allowance for loan losses was allocated for potential losses on these loans, compared to $31.3 million and $2.3 million, respectively, at June 30, 2016.

 

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In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance.  Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed on nonaccrual.  Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above.

 

Cash and Cash Equivalents and Liquidity Risk Management

 

Cash and cash equivalents (including interest bearing deposits), totaled $108.2 million on a consolidated basis at June 30, 2017, compared to $126.8 million at June 30, 2016 and $109.6 million at December 31, 2016. The issuance of common stock during the first quarter of 2017 was a primary contributor to the increase in cash and cash equivalents from year-end 2016.

 

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.

 

Funding sources primarily include customer-based core deposits, collateral-backed borrowings, cash flows from operations, cash flows from our loan and investment portfolios and asset sales (primarily secondary marketing for residential real estate mortgages and marine financings). Cash flows from operations are a significant component of liquidity risk management and we consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments.

 

Deposits are also a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. We routinely use securities and loans as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody.

 

Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity, both anticipated and unanticipated, are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, securities held for sale and interest-bearing deposits. The Company is also able to provide short term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency securities not pledged to secure public deposits or trust funds. At June 30, 2017, Seacoast Bank had available unsecured lines of $75 million and lines of credit under current lendable collateral value, which are subject to change, of $806 million. Seacoast Bank had $374 million of United States Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements, and had an additional $469 million in residential and commercial real estate loans available as collateral. In comparison, at June 30, 2016, the Company had available unsecured lines of $50 million and lines of credit of $869 million, and had $813 million of Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements, as well as an additional $359 million in residential and commercial real estate loans available as collateral.

 

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The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding. During the first and second quarters of 2017, the Company acquired an additional $57.9 million and $82.3 million of brokered certificates of deposit (“CDs”), respectively, at a rate of 1.18% and 1.27% respectively, all maturing within 12 months. Brokered CDs at June 30, 2017 totaled $149.3 million.

 

The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses and to service the Company’s debt. At June 30, 2017, Seacoast Bank was able to distribute dividends to the Company of approximately $61 million. At June 30, 2017, the Company had cash and cash equivalents at the parent of approximately $54.6 million, compared to $15.0 million at June 30, 2016, with the increase directly related to the capital raise completed on February 21, 2017.

 

Securities

 

Information related to maturities, carrying values and fair value of the Company’s securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements.

 

At June 30, 2017, the Company had no trading securities, $1.02 billion in securities available for sale, and $397.1 million in securities held to maturity. The Company's total securities portfolio increased $88.7 million or 6.7% from June 30, 2016. During the first quarter of 2016, securities totaling $66.9 million were added from the acquisition of Floridian. Security purchases during the first and second quarter of 2016 of $258.3 million were primarily to utilize anticipated cash to be received by Seacoast from the acquisition of BMO branches, with an increase of $203.4 million in securities held to maturity during the second quarter (almost a doubling from the first quarter of 2016). Security purchases during the third quarter of 2016 were more limited, totaling only $13 million, and totaled $130 million in the fourth quarter of 2016, $43 million in the first quarter of 2017 and $213 million in the second quarter of 2017. Securities acquired from GulfShore in the second quarter of 2017 were nominal. These efforts were primary to the overall increase in the securities portfolio during 2016 and 2017. Funding for investments was derived from liquidity, both legacy and that acquired in mergers, and increases in funding from our core customer deposit base and FHLB borrowings.

 

During 2017, sales of securities resulted in proceeds of $3.8 million (including net gains of $21,000). In comparison, proceeds from the sales of securities totaled $12.1 million (including net gains of $136,000) for the six months ended June 30, 2016. Management believes the securities sold had minimal opportunity to further increase in value.

 

Securities are generally acquired which return principal monthly. The modified duration of the investment portfolio at June 30, 2017 was 4.3 years, compared to 4.4 years at June 30, 2016. Securities that are fixed rate comprise 65% of the total investment portfolio, with remaining securities in the portfolio adjustable rate, or 35% of the total portfolio.

 

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At June 30, 2017, available for sale securities had gross unrealized losses of $8.0 million and gross unrealized gains of $6.4 million, compared to gross unrealized losses of $4.7 million and gross unrealized gains of $13.5 million at June 30, 2016. All of the securities with unrealized losses are reviewed for other-than-temporary impairment at least quarterly. As a result of these reviews it was determined that the securities with unrealized losses are not other than temporarily impaired and the Company has the intent and ability to retain these securities until recovery over the periods presented (see additional discussion under “Other Fair Value Measurements” and “Other than Temporary Impairment of Securities” in “Critical Accounting Policies and Estimates”).

 

Company management considers the overall quality of the securities portfolio to be high. The Company has no exposure to securities with subprime collateral. The Company does not have an investment position in trust preferred securities.

 

Deposits and Borrowings

 

The Company’s balance sheet continues to be primarily core funded.

 

Total deposits increased $474.1 million or 13.5% to $3.98 billion at June 30, 2017, compared to June 30, 2016. Excluding the GulfShore acquisition and addition of $140.2 million in brokered CDs, total deposits increased $48.6 million or 1.4% from June 30, 2016. Also, at June 30, 2017, total deposits excluding Gulfshore deposits and the $140.2 million of brokered CDs grew $26.6 million or 0.1% (not annualized) from year-end 2016. Deposit growth since year-end 2016 was impacted by seasonal declines in public fund balances, which decreased by $83.3 million during the first six months of 2017.

 

Since June 30, 2016, interest bearing deposits (interest bearing demand, savings and money markets deposits) increased $204.6 million or 10.4% to $2.17 billion, noninterest bearing demand deposits increased $161.7 million or 14.1% to $1.31 billion, and CDs increased $107.9 million or 27.9% to $494.2 million. Excluding acquired deposits, noninterest demand deposits were $91.9 million or 8.0% higher from June 30, 2016, and represent 32.9% deposits, compared to 32.8% at June 30, 2016. Core deposit growth reflects our success in growing households both organically and through acquisitions.

 

Additions to CDs and the increase in CDs at June 30, 2017 year over year have come primarily through the GulfShore acquisition in April 2017 and brokered CDs acquired during 2017. An intentional decrease in higher cost time deposits was recorded over the two years prior to the 2016 BMO branch acquisition, and was more than offset by increases in low cost or no cost deposits.

 

Customer repurchase agreements totaled $167.6 million at June 30, 2017, decreasing $15.8 million or 8.6% from June 30, 2016. The repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance.

 

No unsecured federal funds purchased were outstanding at June 30, 2017 or 2016.

 

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At June 30, 2017 and 2016, borrowings were comprised of subordinated debt of $70.4 million and $70.1 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of $395.0 million and $151.0 million, respectively. At June 30, 2017, our FHLB borrowings were all maturing within 30 days, and the rate for FHLB funds during the second quarter of 2017 was 0.97%. At December 31, 2016, FHLB borrowings totaled $415.0 million, and were similarly short-term and maturing within 30 days. Secured FHLB borrowings are an integral tool in liquidity management for the Company. In the second quarter of 2016, borrowings from the FHLB were comprised of two advances outstanding since 2007 that had a weighted average cost of 3.22% and were scheduled to mature in late 2017. The two FHLB advances were redeemed during April 2016.

 

The Company has two wholly owned trust subsidiaries, SBCF Capital Trust I and SBCF Statutory Trust II that were both formed in 2005. In 2007, the Company formed an additional wholly owned trust subsidiary, SBCF Statutory Trust III. The 2005 trusts each issued $20.0 million (totaling $40.0 million) of trust preferred securities and the 2007 trust issued an additional $12.0 million in trust preferred securities. As part of the BANKshares acquisition in 2014, the Company inherited three junior subordinated debentures totaling $5.2 million, $4.1 million, and $5.2 million, respectively. Also, as part of the Grand acquisition in 2015, the Company inherited an additional junior subordinated debenture totaling $7.2 million. The acquired junior subordinated debentures (in accordance with ASU 805 Business Combinations) were recorded at fair value, which collectively is $4.9 million lower than face value at June 30, 2017. This amount is being amortized into interest expense over the acquired subordinated debts’ remaining term to maturity. All trust preferred securities are guaranteed by the Company on a junior subordinated basis.

 

Under Basel III and Federal Reserve rules, qualified trust preferred securities and other restricted capital elements can be included as Tier 1 capital, within limitations. The Company believes that its trust preferred securities qualify under these capital rules. The weighted average interest rate of our outstanding subordinated debt related to trust preferred securities was 3.42% for the second quarter of 2017, compared to 2.89% for the second quarter ended June 30, 2016.

 

Off-Balance Sheet Transactions

 

In the normal course of business, we may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.

 

Lending commitments include unfunded loan commitments and standby and commercial letters of credit. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement.

 

Loan commitments to customers are made in the normal course of our commercial and retail lending businesses. For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. Loan commitments were $684 million at June 30, 2017 and $504 million at June 30, 2016.

 

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Capital Resources

 

The Company’s equity capital at June 30, 2017 increased $151.9 million from June 30, 2016 to $577.4 million, and increased $142.0 million from December 31, 2016. On February 21, 2017, the Company closed on an offering of 8,912,500 shares of common stock, consisting of 2,702,500 shares sold by the Company and 6,210,000 shares sold by one of its shareholders. Seacoast received proceeds (net of expenses) of $55.6 million from the issuance of the 2,702,500 shares of its common stock. The Company intends to use the net proceeds from the offering for general corporate purposes, including potential future acquisitions and to support organic growth. Seacoast did not receive any proceeds from the sale of its shareholder’s shares (see “Note I – Shareholders’ Equity”).

 

The Company also issued 2,626,693 common shares in regards to the acquisition of GulfShore that was consummated on April 7, 2017 (see Note L – Business Combinations”). This transaction increased shareholders’ equity $62.9 million, as the Company issued shares of common stock as consideration for the merger.

 

The ratio of shareholders’ equity to period end total assets was 10.93% and 9.71% at June 30, 2017 and 2016, respectively. Equity has also increased as a result of earnings retained by the Company. During 2016, the ratio of shareholders’ equity to total assets declined, as the Company successfully grew assets at a faster pace than equity over the period.

 

Activity in shareholders’ equity for the six months ended June 30, 2017 and 2016 follows:

 

(Dollars in thousands)  2017   2016 
Beginning balance at December 31, 2016 and 2015  $435,397   $353,453 
Net income   15,602    9,298 
Capital raise, net of costs (February 21, 2017)   55,640    0 
Issuance of stock pursuant to acquisition of GulfShore   62,882    0 
Issuance of stock pursuant to acquisition of Floridian   0    50,913 
Stock compensation (net of Treasury shares acquired)   2,324    1,422 
Other comprehensive income   5,532    10,343 
Ending balance at June 30, 2017 and 2016  $577,377   $425,429 

 

Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast’s management uses risk-based capital measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies (see “Note I – Equity Capital”).

 

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   Seacoast   Seacoast   Minimum to be 
June 30, 2017:  (Consolidated)   Bank   Well Capitalized* 
             
Common equity Tier 1 ratio (CET1)   12.10%   12.14%   6.5%
Tier 1 capital ratio   13.86%   12.14%   8.0%
Total risk-based capital ratio   14.56%   12.85%   10.0%
Tier 1 leverage ratio   10.35%   9.06%   5.0%

 

 

* For subsidiary bank only

 

The Company’s total risk-based capital ratio was 14.56% at June 30, 2017, a decrease from March 31, 2017 ratio of 14.95%, and an increase from June 30, 2016’s ratio of 13.45%. Ongoing reinvestment of liquidity into securities and loans with higher risk weightings and the addition of GulfShore’s loans with higher risk weightings were causes for decreases in Tier 1 and total risk-based capital ratios since March 31, 2017. The capital raise during 2017 was the primary cause of these ratios improving, compared to prior year at June 30, 2016.

 

The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $61.0 million of dividends to the Company.

 

The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. Under a recently adopted Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

 

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The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from our acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all $70.4 million of trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company’s tangible common shareholders’ equity to calculate Tier 1 capital.

 

The Company’s capital is expected to continue to increase with positive earnings.

 

Results of Operations

 

Earnings Overview

 

The Company has steadily improved results over the past three years and into 2017. Net income was $7.7 million, or $0.18 per average common diluted share, compared to $7.9 million or $0.20 for the prior quarter and $5.3 million or $0.14 for the second quarter of 2016. For the six months ended June 30, 2017, net income was $15.6 million compared to $9.3 million for six months ended June 30, 2016. Adjusted net income1 was $12.7 million, or $0.29 per average common diluted share, compared to $10.3 million or $0.26 for the prior quarter and $9.2 million or $0.24 for the second quarter of 2016. For the six months ended June 30, 2017, adjusted net income1 was $22.9 million compared to $16.2 million for the six months ended June 30, 2016.

 

Data analytics and technology-assisted operational improvement are helping us build efficiencies across our organization and drive process automation. We believe that our success in increasing net income is the result of our success in significantly growing our businesses and balance sheet, while attaining operating efficiency. We believe our improved earnings also reflect the success we have had in identifying and incorporating acquisitions, including our recent acquisition of GulfShore on April 7, 2017, providing three offices in Tampa, Florida (see “Note L – Business Combinations).

 

Net revenues for the quarter ended June 30, 2017 were $54.6 million, an increase of $6.6 million or 14% compared to the prior quarter, and an increase of $11.0 million or 25% from the second quarter of 2016. For the six months ended June 30, 2017, net revenues were $102.7 million, an increase of $20.1 million or 24% compared to the six months ended June 30, 2016. Adjusted revenues1 were $54.6 million, an increase of $6.6 million, or 14%, from the prior quarter and an increase of $11.0 million, or 25% from the second quarter of 2016. For the six months ended June 30, 2017, adjusted revenues1 were $102.7 million, an increase of $20.7 million or 25% compared to the six months ended June 30, 2016.

 

1Non-GAAP measure, see “Explanation of Certain Non-GAAP Financial Measures”

 

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Notable Items Affecting Second Quarter 2017 Results

 

As Seacoast continues to scale, certain items, many of which were introduced last quarter, aggregated to $8.2 million in noninterest expense in the second quarter of 2017.

 

·We completed the acquisition of GulfShore on April 7, 2017, expanding the Seacoast footprint to the Tampa market. GulfShore and other merger and acquisition-related charges totaled $5.1 million2, including $3.0 million of compensation-related expense. We added 36 full-time equivalent (“FTE”) associates to our overall headcount to service the Tampa market. These additions were partially offset by strategic headcount reductions in other areas.

 

·We continued execution of our branch reduction strategy, completing five branch closures in the first half of this year. Expenses associated with the four previously announced branch closures, and one additional closure in the second quarter, totaled $1.9 million2.

 

·During the first quarter 2017, the Company onboarded a commercial lending team focused on specialized equipment lending for lower middle market companies. The second quarter 2017 noninterest expense reflects the full $571,000 impact of this team on noninterest expense.

 

·During the second quarter of 2017, we recorded incentive expense totaling $247,000 for one-time signing bonuses associated with investments in technology and audit talent as we scale our organization for growth.

 

·We opened a second call center in Orlando during the quarter, expanding our ability to support growth and our customers’ ever-increasing utilization of our 24/7 service model. This contributed to an increase in expenses in the second quarter of approximately $200,000.

 

·For the second quarter of 2017, net loss on other real estate owned and repossessed assets increased $507,000 compared to the first quarter of 2017, with a $346,000 net gain in the first quarter of 2017, and losses of $161,000 in the second quarter of 2017.

 

2Excluded from the calculation of Adjusted Noninterest Expense, a Non-GAAP measure. See “Explanation of Certain Non-GAAP Financial Measures.”

 

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Explanation of Certain Non-GAAP Financial Measures

 

The following table provides a reconcilement of GAAP to non-GAAP measures indicated.

 

   Quarters   Year to Date 
   Second   First   Fourth   Third   Second   June 30, 
(Dollars in thousands except per share data)  2017   2017   2016   2016   2016   2017   2016 
                             
Net income, as reported:                                   
Net income  $7,676   $7,926   $10,771   $9,133   $5,332   $15,602   $9,298 
                                    
Diluted earnings per share  $0.18   $0.20   $0.28   $0.24   $0.14   $0.38   $0.25 
                                    
Adjusted net income1 :                                   
Net income  $7,676   $7,926   $10,771   $9,133   $5,332   $15,602   $9,298 
                                    
BOLI income (benefits upon death)   0    0    0    0    0    0    (464)
Security gains   (21)   0    (7)   (225)   (47)   (21)   (136)
 Total adjustments to revenue   (21)   0    (7)   (225)   (47)   (21)   (600)
                                    
Merger related charges   5,081    533    561    1,698    2,447    5,614    6,768 
Amortization of intangibles   839    719    719    728    593    1,558    1,039 
Branch reductions and other expense initiatives*   1,876    2,572    163    894    1,587    4,448    2,300 
Early redemption cost for FHLB advances   0    0    0    0    1,777    0    1,777 
 Total adjustments to noninterest expenses   7,796    3,824    1,443    3,320    6,404    11,620    11,884 
                                    
Effective tax rate on adjustments   (2,786)   (1,480)   (404)   (1,168)   (2,532)   (4,266)   (4,377)
                                    
Adjusted net income1  $12,665   $10,270   $11,803   $11,060   $9,157   $22,935   $16,205 
                                    
Adjusted diluted earnings per share 1  $0.29   $0.26   $0.31   $0.29   $0.24   $0.55   $0.44 

 

(1) Non-GAAP measure

 

* Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect our branch consolidation and other expense reduction strategies.

 

This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”), including adjusted net income, tax equivalent net interest income and margin, and adjusted noninterest expense and efficiency ratios. The most directly comparable GAAP measures are net income, net interest income, net interest margin, noninterest expense, and efficiency ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.

 

Effective in the first quarter of 2017, adjusted net income and adjusted noninterest expense exclude the effect of amortization of acquisition-related intangibles. Prior periods have been revised to conform to the current period presentation.

 

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Net Interest Income and Margin

 

Net interest income for the quarter totaled $44.2 million, increasing $6.0 million or 16% during the second quarter of 2017 compared to first quarter 2017’s result, and was $9.7 million or 28% higher than second quarter 2016. Net interest margin was 3.84% in the second quarter 2017, compared to 3.63% for first quarter 2017 and 3.63% for prior year’s second quarter. The second quarter of 2017 benefited from accretion of $1.5 million associated with early payoffs on securities, and acquired loans. Loan growth, balance sheet mix and yield/cost management have been the primary forces affecting net interest income and net interest margin results. Acquisitions have further accelerated these trends. Organic loan growth of $463 million or 17.7% since June 30, 2016, and the addition of loans of $251 million from the GulfShore purchase, all contributed to the net interest income improvement year over year for the second quarter. Net interest income for 2017 will continue to benefit from the full year impact of acquisitions completed in 2016, as well as from the GulfShore acquisition.

 

The following table details the trend for net interest income and margin results (on a tax equivalent basis) (1), the yield on earning assets and the rate paid on interest bearing liabilities for the past five quarters:

 

   Net Interest   Net Interest   Yield on   Rate on Interest 
(Dollars in thousands)  Income (1)   Margin (1)   Earning Assets (1)   Bearing Liabilities 
Second quarter 2016  $34,801    3.63%   3.85%   0.31%
Third quarter 2016   37,735    3.69    3.90    0.30 
Fourth quarter 2016   37,628    3.56    3.78    0.31 
First quarter 2017   38,377    3.63    3.88    0.35 
Second quarter 2017   44,320    3.84    4.12    0.41 

 

(1) On tax equivalent basis, a non-GAAP measure. See “Non-GAAP Measures regarding Net Interest Income and Margin.”

 

The 21 basis point increase in margin for second quarter 2017 compared to first quarter 2017 was due to a steepening of the Treasury yield curve, higher short term rates, and a higher yield on the securities and loan portfolios. Net interest margin benefited from accretion on early payoffs of securities and acquired loans totaling 13 basis points. The yield on securities and on loans was higher by 9 basis points and 26 basis points, respectively, for the second quarter of 2017 compared to the first quarter of 2017.

 

Prospectively, we anticipate a net interest margin in the low- to mid-3.70’s and a yield on loans near 4.60%, assuming interest rates remain flat.

 

Total average loans increased $734.3 million or 29% for second quarter 2017 compared to 2016’s second quarter, and increased $348.1 million or 12% from first quarter 2017 (non-annualized). Our average investment securities also increased $75.6 million or 6% for second quarter 2017 year over year and were lower by $18.0 million or 1% (non-annualized) from 2017’s first quarter.

 

Average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 70.6% during the second quarter of 2017, compared to 65.7% a year ago. As average total loans as a percentage of earning assets increased, the mix of loans has remained fairly stable, with volumes related to commercial real estate representing 48.1% of total loans at June 30, 2017 (compared to 50.7% at June 30, 2016)(see “Loan Portfolio”).

 

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Loan production is detailed in the following table for the last five quarters:

 

   Quarters 
   Second   First   Fourth   Third   Second 
(Dollars in thousands)  2017   2017   2016   2016   2016 
                     
Commercial pipeline  $146,355   $122,703   $88,814   $119,394   $113,261 
Commercial loans closed   110,171    94,595    144,975    109,078    111,133 
                          
Residential pipeline  $71,667   $78,323   $72,604   $79,379   $66,083 
Residential loans retained   85,111    78,305    74,745    68,748    64,003 
Residential loans sold   45,990    39,844    81,141    79,151    39,499 
                          
Consumer and small business pipeline  $49,724   $44,499   $45,936   $41,428   $38,569 
Consumer and small business originations   97,858    89,546    83,484    87,815    79,786 

 

Consumer and small business originations reached $98 million during the second quarter of 2017 and commercial loans closed totaled $110 million. Closed residential loans retained during the quarter totaled $85 million, reflecting continued strong performance. During the quarter, the Company purchased a Small Business Administration (“SBA”) loan pool, totaling $11.0 million.

 

Pipelines (loans in underwriting and approval or approved and not yet closed) remained strong at $146 million in commercial, $72 million in mortgage, and $50 million in consumer and small business. Commercial pipelines increased $23.7 million or 19%, over first quarter 2017 and $33.1 million or 29%, compared to June 30, 2016. Mortgage pipelines were $6.7 million or 8% lower, compared to first quarter 2017, but increased $5.6 million or 8%, from June 30, 2016. Consumer and small business pipelines increased from first quarter by $5.2 million or 12%, and increased from June 30, 2016 by $11.2 million or 29%.

 

We believe the addition of a new commercial team, focused on specialized equipment financing, and the GulfShore team into our lending business in the second quarter of 2017 will supply an additional opportunity to further grow our balance sheet prospectively.

 

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Customer relationship funding is detailed in the following table for the last five quarters:

 

Customer Relationship Funding  Quarters 
   Second   First   Fourth   Third   Second 
(Dollars in thousands)  2017   2017   2016   2016   2016 
                     
Noninterest demand  $1,308,458   $1,225,124   $1,148,309   $1,168,542   $1,146,792 
Interest-bearing demand   934,861    870,457    873,727    776,480    776,388 
Money market   861,119    821,606    802,697    858,931    860,930 
Savings   376,825    363,140    346,662    340,899    330,928 
Time certificates of deposit   494,195    398,318    351,850    365,641    386,278 
Total deposits  $3,975,458   $3,678,645   $3,523,245   $3,510,493   $3,501,316 
                          
Customer sweep accounts  $167,558   $183,107   $204,202   $167,693   $183,387 
                          
Total core customer funding (1)  $3,648,821   $3,463,434   $3,375,597   $3,312,345   $3,298,425 
                          
Noninterest demand deposit mix   32.9%   33.3%   32.6%   33.3%   32.8%

 

 

(1) Total deposits and customer sweep accounts, excluding time certificates of deposit

 

Deposit growth reflects our success in growing households both organically and through acquisitions. The Company’s balance sheet continues to be primarily core deposit funded. Core customer funding increased to $3.649 billion at June 30, 2017, a 5% increase from March 31, 2017 and an 11% increase from June 30, 2016. Excluding acquisitions, core customer funding increased by $75 million, or 2%, from one year ago, noninterest bearing deposits increased 8% and total deposits increased 1%. Seacoast’s overall cost of deposits is 0.17%, higher than first quarter 2017 by 4 basis points and compared to 0.10% in prior year’s second quarter. Prospectively, total deposits are expected to increase 6% on an annualized basis. 

 

Short-term borrowings were entirely comprised of sweep repurchase agreements with Seacoast Bank customers at June 30, 2017 and 2016. No federal funds purchased were utilized at June 30, 2017 or 2016. The average yield on customer repurchase accounts was 0.45% for the second quarter 2017.

 

FHLB borrowings, maturing in 30 days or less, totaled $395.0 million at June 30, 2017, with an average rate of 0.97% paid during the quarter. Advances from the FHLB of $50.0 million at a fixed rate of 3.22% scheduled to mature in late 2017 were redeemed early in April 2016, with an early redemption fee of $1.8 million incurred in second quarter a year ago. FHLB borrowings averaged $323.8 million for the second quarter of 2017, up from $171.0 million for the second quarter 2016.

 

For the second quarter 2017, average subordinated debt of $70.3 million related to trust preferred securities issued by subsidiary trusts of the Company (including subordinated debt for Grand and BANKshares assumed on July 17, 2015 and October 1, 2014, respectively) carried an average cost of 3.42%.

 

We have a positive interest rate gap and our net interest margin should benefit from rising interest rates. Further increases in interest rates are likely, and the Company’s asset sensitivity is further enhanced by its low cost deposit portfolio (see “Interest Rate Sensitivity”).

 

 59

 

 

The following table details average balances, net interest income and margin results (on a tax equivalent basis) (1) for the second quarter of 2017, the first quarter of 2017, and the second quarter of 2016.

 

<
   2017   2016 
   Second Quarter   First Quarter   Second Quarter 
   Average       Yield/   Average       Yield/   Average       Yield/ 
(Dollars in thousands)  Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate 
Assets                                    
Earning assets:                                             
Securities:                                             
Taxable  $1,261,017   $8,379    2.66%  $1,279,246   $8,087    2.53%  $1,185,022   $6,603    2.23%
Nontaxable   28,092    316    4.50    27,833    441    6.34    28,445    459    6.45 
Total Securities   1,289,109    8,695    2.70    1,307,079    8,528    2.61    1,213,468    7,062    2.33 
                                              
Federal funds sold and other investments   72,535    604    3.34    56,771    510    3.64    110,636    433    1.57 
                                              
Loans, net   3,266,812    38,263    4.70    2,918,665    31,949    4.44    2,532,533    29,392    4.67 
                                              
Total Earning Assets   4,628,456    47,562    4.12    4,282,515    40,987    3.88    3,856,637    36,887    3.85 
                                              
Allowance for loan losses   (25,276)             (24,036)             (20,185)          
Cash and due from banks   99,974              105,803              92,159           
Premises and equipment   59,415              58,783              63,149           
Intangible assets   114,563              78,878              69,449           
Bank owned life insurance   87,514              84,811              43,542           
Other assets   117,355              112,991              102,049