SEACOAST BANKING CORP OF FLORIDA - FORM 10-Q - November 6, 2018

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EX-32.2 - EXHIBIT 32.2 - SEACOAST BANKING CORP OF FLORIDAsbcr20180930ex322.htm
EX-32.1 - EXHIBIT 32.1 - SEACOAST BANKING CORP OF FLORIDAsbcr20180930ex321.htm
EX-31.2 - EXHIBIT 31.2 - SEACOAST BANKING CORP OF FLORIDAsbcr20180930ex312.htm
EX-31.1 - EXHIBIT 31.1 - SEACOAST BANKING CORP OF FLORIDAsbcr20180930ex311.htm
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large Accelerated
Accelerated
Non-Accelerated
Small Reporting
Filer x
Filer ¨
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 ý
 
Common Stock, $0.10 Par Value – 47,269,692 shares as of September 30, 2018
 
 
 


INDEX
 
SEACOAST BANKING CORPORATION OF FLORIDA
 
 
 
PAGE #
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands, except share data)
September 30, 2018
 
December 31, 2017
ASSETS
 

 
 

Cash and due from banks
$
101,920

 
$
104,039

Interest bearing deposits with other banks
3,174

 
5,465

Total cash and cash equivalents
105,094

 
109,504

 
 
 
 
Time deposits with other banks
9,813

 
12,553

 
 
 
 
Debt securities:
 
 
 
Available for sale (at fair value)
923,206

 
949,460

Held to maturity (fair value: $353,919 at September 30, 2018 and $414,470 at December 31, 2017)
367,387

 
416,863

Total debt securities
1,290,593

 
1,366,323

 
 
 
 
Loans held for sale (at fair value)
16,172

 
24,306

 
 
 
 
Loans
4,059,323

 
3,817,377

Less: Allowance for loan losses
(33,865
)
 
(27,122
)
Loans, net of allowance for loan losses
4,025,458

 
3,790,255

 
 
 
 
Bank premises and equipment, net
63,531

 
66,883

Other real estate owned
4,715

 
7,640

Goodwill
148,555

 
147,578

Other intangible assets, net
16,508

 
19,099

Bank owned life insurance
122,561

 
123,981

Net deferred tax assets
25,822

 
25,417

Other assets
102,112

 
116,590

TOTAL ASSETS
$
5,930,934

 
$
5,810,129

 
 
 
 
LIABILITIES
 
 
 
Deposits
$
4,643,510

 
$
4,592,720

Securities sold under agreements to repurchase
189,035

 
216,094

Federal Home Loan Bank (FHLB) borrowings
261,000

 
211,000

Subordinated debt
70,734

 
70,521

Other liabilities
33,824

 
30,130

TOTAL LIABILITIES
5,198,103

 
5,120,465

 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 47,402,935 and outstanding 47,269,692 shares at September 30, 2018, and authorized 60,000,000, issued 47,032,259 and outstanding 46,917,735 shares at December 31, 2017
4,727

 
4,693

Other shareholders' equity
728,104

 
684,971

TOTAL SHAREHOLDERS' EQUITY
732,831

 
689,664

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
5,930,934

 
$
5,810,129

See notes to condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except share data)
2018
 
2017
 
2018
 
2017
Interest and fees on loans
$
48,713

 
$
40,403

 
$
140,489

 
$
110,503

Interest and dividends on securities
9,807

 
9,012

 
29,016

 
25,971

Interest on interest bearing deposits and other investments
634

 
664

 
1,835

 
1,778

TOTAL INTEREST INCOME
59,154

 
50,079

 
171,340

 
138,252

 
 
 
 
 
 
 
 
Interest on deposits
2,097

 
930

 
5,623

 
2,408

Interest on time certificates
2,975

 
1,266

 
7,783

 
2,646

Interest on borrowed money
2,520

 
2,134

 
6,403

 
5,128

TOTAL INTEREST EXPENSE
7,592

 
4,330

 
19,809

 
10,182

 
 
 
 
 
 
 
 
NET INTEREST INCOME
51,562

 
45,749

 
151,531

 
128,070

 
 
 
 
 
 
 
 
Provision for loan losses
5,774

 
680

 
9,388

 
3,385

 
 
 
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
45,788

 
45,069

 
142,143

 
124,685

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Other income
12,339

 
11,481

 
37,506

 
31,853

Securities losses, net
(48
)
 
(47
)
 
(198
)
 
(26
)
TOTAL NONINTEREST INCOME (Note H)
12,291

 
11,434

 
37,308

 
31,827

 
 
 
 
 
 
 
 
TOTAL NONINTEREST EXPENSES (Note H)
37,399

 
34,361

 
112,809

 
110,732

INCOME BEFORE INCOME TAXES
20,680

 
22,142

 
66,642

 
45,780

 
 
 
 
 
 
 
 
Provision for income taxes
4,358

 
7,926

 
15,329

 
15,962

NET INCOME
$
16,322

 
$
14,216

 
$
51,313

 
$
29,818

 
 
 
 
 
 
 
 
SHARE DATA
 
 
 
 
 
 
 
Net income per share - diluted
0.34

 
0.32

 
1.07

 
0.70

Net income per share - basic
0.35

 
0.33

 
1.09

 
0.72

Cash dividends declared
—

 
—

 
—

 
—

Average shares outstanding - diluted
48,029,330

 
43,792,108

 
47,903,093

 
42,298,136

Average shares outstanding - basic
47,205,383

 
43,151,248

 
47,108,302

 
41,626,356

 
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 September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
NET INCOME
$
16,322

 
$
14,216

 
$
51,313

 
$
29,818

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (losses) gains on securities available for sale
(3,548
)
 
1,149

 
(20,564
)
 
9,920

Amortization of unrealized losses on securities transferred to held to maturity, net
108

 
122

 
442

 
365

Reclassification adjustment for gains included in net income
—

 
47

 
—

 
26

Income tax effect on other comprehensive (loss) income
919

 
(503
)
 
5,358

 
(3,964
)
Total other comprehensive (loss) income
(2,521
)
 
815

 
(14,764
)
 
6,347

COMPREHENSIVE INCOME
$
13,801


$
15,031

 
$
36,549

 
$
36,165

 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 



5

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
 
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
51,313

 
$
29,818

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
4,691

 
3,961

Amortization of premiums and discounts on securities, net
2,567

 
2,864

Other amortization and accretion, net
185

 
(346
)
Stock based compensation
5,603

 
3,787

Origination of loans designated for sale
(225,929
)
 
(164,878
)
Sale of loans designated for sale
239,316

 
161,587

Provision for loan losses
9,388

 
3,385

Deferred income taxes
5,675

 
15,077

    Losses on sale of securities
—

 
26

Gains on sale of loans
(7,752
)
 
(5,160
)
Gains on sale and write-downs of other real estate owned
(12
)
 
(657
)
Losses on disposition of fixed assets
216

 
1,973

Changes in operating assets and liabilities, net of effects from acquired companies:
 
 
 
Net decrease (increase) in other assets
17,281

 
(419
)
Net increase (decrease) in other liabilities
3,644

 
(2,575
)
Net cash provided by operating activities
106,186

 
48,443

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Maturities and repayments of debt securities available for sale
107,728

 
176,978

Maturities and repayments of debt securities held to maturity
48,945

 
64,984

    Proceeds from sale of debt securities available for sale
—

 
7,525

Purchases of debt securities available for sale
(104,650
)
 
(223,805
)
Purchases of debt securities held to maturity
—

 
(67,563
)
Maturities of time deposits with other banks
2,740

 
2,682

Net new loans and principal repayments
(225,570
)
 
(277,142
)
Purchase of loans held for investment
(19,541
)
 
(55,352
)
Proceeds from the sale of portfolio loans
—

 
74,211

Proceeds from the sale of other real estate owned
9,260

 
5,123

Proceeds from sale of FHLB and Federal Reserve Bank Stock
28,751

 
29,984

Purchase of FHLB and Federal Reserve Bank Stock
(33,681
)
 
(32,398
)
Purchase of VISA Class B stock
—

 
(6,180
)
Redemption of bank owned life insurance
4,232

 
—

Purchase of bank owned life insurance
—

 
(30,000
)
Net cash from bank acquisition
—

 
30,225

Additions to bank premises and equipment
(3,557
)
 
(4,247
)
Net cash used in investing activities
(185,343
)
 
(304,975
)
 
See notes to condensed consolidated financial statements.
 

6



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

 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Net increase in deposits
$
50,790

 
$
304,005

Net decrease in federal funds purchased and repurchase agreements
(27,059
)
 
(62,049
)
Net increase (decrease) in FHLB borrowings
50,000

 
(26,000
)
Issuance of common stock, net of related expense
—

 
55,641

Stock based employee benefit plans
1,016

 
569

Dividends paid
—

 
—

Net cash provided by financing activities
74,747

 
272,166

Net increase (decrease) in cash and cash equivalents
(4,410
)
 
15,634

Cash and cash equivalents at beginning of period
109,504

 
109,644

Cash and cash equivalents at end of period
$
105,094

 
$
125,278

 
 
 
 
Supplemental disclosure of non cash investing activities:
 
 
 
Transfers from loans to other real estate owned
4,271

 
448

Transfers from bank premises to other real estate owned
2,052

 
1,212

Transfers from loans held for investment to loans held for sale
—

 
5,664


 
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
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of Seacoast Banking Corporation of Florida and its subsidiaries (the "Company") 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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, 2017. Certain prior period amounts have been reclassified to conform to the current period presentation.
 
Adoption of new accounting pronouncements
 
On January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers,” and all the related amendments (collectively, “ASC 606”) using the modified retrospective approach applied to all contracts in place at that date. Adoption had no material impact on the Company’s consolidated financial statements including no change to the amount or timing of revenue recognized for contracts within the scope of the new standard. Activity in the scope of the new standard includes:
 
•
Service Charges on Deposits: Seacoast National Bank ("Seacoast Bank") offers a variety of deposit-related services to its customers through several delivery channels including branch offices, ATMs, telephone, mobile, and internet banking. Transaction-based fees are recognized when services, each of which represents a performance obligation, are satisfied. Service fees may be assessed monthly, quarterly, or annually; however, the account agreements to which these fees relate can be cancelled at any time by Seacoast and/or the customer. Therefore, the contract term is considered a single day (a day-to-day contract).

•
Trust Fees: The Company earns trust fees from fiduciary services provided to trust customers which include custody of assets, recordkeeping, collection and distribution of funds. Fees are earned over time and accrued monthly as the Company provides services, and are generally assessed based on the market value of the trust assets under management at a particular date or over a particular period.

•
Brokerage Commissions and Fees: The Company earns commissions and fees from investment brokerage services provided to its customers through an arrangement with a third-party service provider. Commissions received from the third-party service provider are recorded monthly and are based upon customer activity. Fees are earned over time and accrued monthly as services are provided. The Company acts as an agent in this arrangement and therefore presents the brokerage commissions and fees net of related costs.

•
Interchange Income: Fees earned on card transactions depend upon the volume of activity, as well as the fees permitted by the payment network. Such fees are recognized by the Company upon fulfilling its performance obligation to approve the card transaction.

On January 1, 2018, we adopted ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Upon adoption, we reclassified $0.1 million of accumulated unrealized loss pertaining to an equity investment previously classified as available for sale from Accumulated Other Comprehensive Income to Retained Earnings.
 
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. 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.

8

Note B – Recently Issued Accounting Standards, Not Yet Adopted
 
The following provides a brief description of accounting standards that have been issued but are not yet adopted that could have a material effect on the Company's financial statements:
 
ASU 2016-02, Leases (Topic 842)
Description
In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases at the commencement date:
1.
A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.
2.
A right-of-use specified asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. In July 2018, the FASB issued ASU 2018-11, which provides an additional optional transition method. The additional transition method allows entities to initially apply the new lease standard at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which the entity adopts the new lease standard would continue to be in accordance with current GAAP (Topic 840), including disclosures.


Date of Adoption
This amendment is effective for public business entities for reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted.  
Effect on the Consolidated Financial Statements
The Company is in the process of evaluating its existing leases, which are primarily operating leases of branch properties and equipment, to determine the amounts to be recognized as right-of-use assets and lease liabilities.  The Company will adopt the new standard effective January 1, 2019. The effect of adoption on the Company’s consolidated statements of income is not expected to be material.


 
ASU 2016-13, Financial Instruments –Credit Losses (Topic 326)
Description
In June 2016, the FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments.



 
Date of Adoption
This amendment is effective for public business entities for reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods after December 15, 2018, including interim reporting periods within that period.
Effect on the Consolidated Financial Statements
The Company’s transition oversight committee is in the process of evaluating and implementing changes to credit loss estimation models and related processes. Updates to business processes and the documentation of accounting policy decisions are ongoing. The Company may recognize an increase in the allowance for loan losses upon adoption, recorded as a one-time effect cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined. The Company will adopt this accounting standard effective January 1, 2020.


 

9

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Description
In January 2017, the FASB amended the existing guidance to simplify the goodwill impairment measurement test by eliminating Step 2. The amendment requires the Company to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value. Additionally, an entity should consider the tax effects from any tax deductible goodwill on the carrying amount when measuring the impairment loss.
Date of Adoption
This amendment is effective for public business entities for reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted on annual goodwill impairment tests performed after January 1, 2017.
Effect on the Consolidated Financial Statements
The impact to the Company's consolidated financial statements from the adoption of this pronouncement is not expected to be material.
 
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased callable Debt Securities
Description
In March 2017, the FASB issued guidance which requires 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 approach under which a cumulative adjustment will be made to retained earnings as of the beginning of the period in which it is adopted.
Date of Adoption
The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those periods.
Effect on the Consolidated Financial Statements
The impact to the Company's consolidated financial statements from the adoption of this pronouncement is not expected to be material.
 
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
Description
In August 2017, the FASB provided guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments also simplify the application of the hedge accounting guidance.
Date of Adoption
The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those periods.
Effect on the Consolidated Financial Statements
The impact to the Company's consolidated financial statements from the adoption of this pronouncement is not expected to be material.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
Description
On August 28, 2018, the FASB issued ASU 2018-13, which changes the disclosure requirements on fair value measurements in Topic 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements. The ASU modifies or removes certain existing disclosures, and adds certain new disclosures.
Date of Adoption
The amendments are effective for public business entities for annual periods beginning after December 15, 2019, including interim periods within those periods. Early adoption is permitted for any eliminated or modified disclosure upon issuance of the ASU.
Effect on the Consolidated Financial Statements
The impact to the Company's consolidated financial statements from the adoption of this pronouncement is not expected to be material.

Note C – Earnings per Share
 
For the three and nine months ended September 30, 2018, options to purchase 481,000 and 412,000 shares, respectively, were antidilutive and not included in the computation of diluted earnings per share, compared to 274,000 and 191,000, respectively, for the three and nine months ended September 30, 2017. The dilutive impact of restricted stock and stock options is calculated under the treasury method.

10

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
(Dollars in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Basic earnings per share
 
 
 
 
 
 
 
Net income
$
16,322

 
$
14,216

 
$
51,313

 
$
29,818

Average common stock outstanding
47,205,383

 
43,151,248

 
47,108,302

 
41,626,356

Net income per share
$
0.35

 
$
0.33

 
$
1.09

 
$
0.72

 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
 
 
Net income
$
16,322

 
$
14,216

 
$
51,313

 
$
29,818

Average common stock outstanding
47,205,383

 
43,151,248

 
47,108,302

 
41,626,356

Add: Dilutive effect of employee restricted stock and stock options
823,947

 
640,860

 
794,791

 
671,780

Average diluted stock outstanding
48,029,330

 
43,792,108

 
47,903,093

 
42,298,136

Net income per share
$
0.34

 
$
0.32

 
$
1.07

 
$
0.70

 
On February 21, 2017, the Company completed a public offering of 2,702,500 shares of common stock, generating net proceeds to the Company of $55.7 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.

Note D – Securities
 
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity at September 30, 2018 and December 31, 2017(1) are summarized as follows:
 
 
September 30, 2018
(In thousands)
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
Debt securities available for sale
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. Government Entities
$
7,486

 
$
114

 
$
(57
)
 
$
7,543

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
597,689

 
153

 
(24,660
)
 
573,182

Private mortgage-backed securities and collateralized mortgage obligations
75,485

 
925

 
(318
)
 
76,092

Collateralized loan obligations
223,419

 
137

 
(566
)
 
222,990

Obligations of state and political subdivisions
43,951

 
261

 
(813
)
 
43,399

Totals
$
948,030

 
$
1,590


$
(26,414
)

$
923,206

 
 
 
 
 
 
 
 
Debt securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
$
313,667

 
$
—

 
$
(13,557
)
 
$
300,110

Private mortgage-backed securities and collateralized mortgage obligations
21,720

 
181

 
(131
)
 
21,770

Collateralized loan obligations
32,000

 
58

 
(19
)
 
32,039

Totals
$
367,387


$
239


$
(13,707
)

$
353,919

 

11

 
December 31, 2017
(In thousands)
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
Debt securities available for sale
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. Government Entities
$
9,475

 
$
274

 
$
(5
)
 
$
9,744

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
560,396

 
1,163

 
(8,034
)
 
553,525

Private mortgage-backed securities and collateralized mortgage obligations
75,152

 
1,154

 
(285
)
 
76,021

Collateralized loan obligations
263,579

 
798

 
(68
)
 
264,309

Obligations of state and political subdivisions
45,118

 
813

 
(70
)
 
45,861

Totals
$
953,720

 
$
4,202

 
$
(8,462
)
 
$
949,460

 
 
 
 
 
 
 
 
Debt securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
$
353,541

 
$
802

 
$
(4,159
)
 
$
350,184

Private mortgage-backed securities and collateralized mortgage obligations
22,799

 
714

 
(53
)
 
23,460

Collateralized loan obligations
40,523

 
303

 
—

 
40,826

Totals
$
416,863

 
$
1,819

 
$
(4,212
)
 
$
414,470

(1) December 31, 2017 balances in the tables above reflect certain reclassifications between categories.  

There were no sales of securities during the three and nine month periods ended September 30, 2018. Proceeds from sales of securities during the three month period ended September 30, 2017 were $3.7 million, with gross gains of $15,000 and gross losses of $62,000. Proceeds from sales of securities during the nine month period ended September 30, 2017 were $7.5 million with gross gains of $36,000 and gross losses of $62,000. Included in “Securities (losses)/gains, net” for the three and nine month periods ended September 30, 2018, is $0.1 million and $0.2 million,respectively, representing the decline in the value of an investment in shares of a mutual fund that invests primarily in CRA-qualified debt securities.

At September 30, 2018, debt securities with a fair value of $162.4 million were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Debt securities with a fair value of $189.0 million were pledged as collateral for repurchase agreements.
 
The amortized cost and fair value of debt securities available for sale and held to maturity at September 30, 2018, 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
(In thousands)

Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$
—

 
$
—

 
$
13,832

 
$
13,781

Due after one year through five years
—

 
—

 
79,637

 
79,582

Due after five years through ten years
32,000

 
32,039

 
177,911

 
177,196

Due after ten years
—

 
—

 
3,476

 
3,373

 
32,000

 
32,039

 
274,856

 
273,932

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
313,667

 
300,110

 
597,689

 
573,182

Private mortgage-backed securities and collateralized mortgage obligations
21,720

 
21,770

 
75,485

 
76,092

   Totals
$
367,387

 
$
353,919

 
$
948,030

 
$
923,206

 

12

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the fair value of debt securities with unrealized losses and the period of time for which these losses were outstanding at September 30, 2018 and December 31, 2017, respectively.
 
 
September 30, 2018
 
Less than 12 months
 
12 months or longer
 
Total
(In thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury securities and obligations of U.S. Government Entities
$
7,543

 
$
(57
)
 
$
—

 
$
—

 
$
7,543

 
$
(57
)
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
456,356

 
(15,703
)
 
416,936

 
(22,514
)
 
873,292

 
(38,217
)
Private mortgage-backed securities and collateralized mortgage obligations
84,026

 
(251
)
 
13,836

 
(197
)
 
97,862

 
(448
)
Collateralized loan obligations
255,030

 
(585
)
 
—

 
—

 
255,030

 
(585
)
Obligations of state and political subdivisions
40,136

 
(672
)
 
3,262

 
(142
)
 
43,398

 
(814
)
   Totals
$
843,091

 
$
(17,268
)
 
$
434,034

 
$
(22,853
)
 
$
1,277,125

 
$
(40,121
)
 
December 31, 2017
 
Less than 12 months
 
12 months or longer
 
Total
(In thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury securities and obligations of U.S. Government Entities
$
1,107

 
$
(5
)
 
$
—

 
$
—

 
$
1,107

 
$
(5
)
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
304,723

 
(2,047
)
 
413,725

 
(10,146
)
 
718,448

 
(12,193
)
Private mortgage-backed securities and collateralized mortgage obligations
—

 
—

 
20,744

 
(338
)
 
20,744

 
(338
)
Collateralized loan obligations
14,933

 
(68
)
 
—

 
—

 
14,933

 
(68
)
Obligations of state and political subdivisions
5,414

 
(14
)
 
5,864

 
(56
)
 
11,278

 
(70
)
   Totals
$
326,177

 
$
(2,134
)
 
$
440,333

 
$
(10,540
)
 
$
766,510

 
$
(12,674
)
 
The two tables above include debt 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 September 30, 2018, the unamortized balance was $0.8 million. The fair value of those securities in an unrealized loss position for less than twelve months at September 30, 2018 and December 31, 2017 was $53.6 million and $22.9 million, respectively, with unrealized losses of $1.5 million and $0.2 million, respectively. The fair value of those securities in an unrealized loss position for 12 months or more at September 30, 2018 and December 31, 2017 was $14.7 million and $15.3 million, respectively, with unrealized losses of $0.9 million and $0.4 million, respectively.
 
At September 30, 2018, the Company had $38.2 million of unrealized losses on mortgage-backed securities and collateralized mortgage obligations of government sponsored entities having a fair value of $873.3 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these debt securities are guaranteed by U.S. government-sponsored entities. Based on our assessment of these mitigating factors, management believes that the unrealized losses on these holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
 
At September 30, 2018, $0.4 million of the unrealized losses pertained to private label debt securities secured by seasoned collateral with a fair value of $97.9 million. Management attributes the loss 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 adjustable rate mortgage loans with low loan to values, improving subordination, and historically have had minimal foreclosures and losses.

13

Based on its assessment of these factors, management believes that the unrealized losses on these 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 September 30, 2018, the Company had unrealized losses of $0.6 million on collateralized loan obligations with a fair value of $255.0 million. Management expects to recover the entire amortized cost basis of these securities.

At September 30, 2018, the Company had unrealized losses of $0.8 million on obligations of state and political subdivisions with a fair value of $43.4 million. Management expects to recover the entire amortized cost basis of these securities.
 
As of September 30, 2018, the Company does not intend to sell debt securities that are in an unrealized loss position and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at September 30, 2018.
 
Included in other assets is Federal Home Loan Bank and Federal Reserve Bank stock which has a par value as of September 30, 2018 and December 31, 2017 of $37.5 million and $32.5 million, respectively. At September 30, 2018, the Company had not identified events or changes in circumstances which may have a significant adverse effect on the fair value of these investments. Also included in other assets is a $6.1 million investment in a mutual fund carried at fair value.
 
The Company holds 11,330 shares of Visa Class B stock which, following resolution of pending litigation, will be converted to Visa Class A shares. Under the current conversion ratio that became effective June 28, 2018, the Company expects to receive 1.6298 shares of Class A stock for each share of Class B stock, for a total of 18,465 shares of Visa Class A stock. Our ownership of these shares is related to prior ownership in Visa’s network while Visa operated as a cooperative. The shares are recorded on our financial records at zero basis.

Note E – Loans
 
Information pertaining to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) is as follows:
 
 
September 30, 2018
(In thousands)
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
$
289,449

 
$
129

 
$
86,679

 
$
376,257

Commercial real estate
1,357,721

 
10,838

 
358,140

 
1,726,699

Residential real estate
994,575

 
1,356

 
156,709

 
1,152,640

Commercial and financial
554,627

 
728

 
55,600

 
610,955

Consumer
187,199

 
—

 
5,573

 
192,772

   Totals (1)
$
3,383,571

 
$
13,051

 
$
662,701

 
$
4,059,323

 
 
December 31, 2017
(In thousands)
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
$
215,315

 
$
1,121

 
$
126,689

 
$
343,125

Commercial real estate
1,170,618

 
9,776

 
459,598

 
1,639,992

Residential real estate
845,420

 
5,626

 
187,764

 
1,038,810

Commercial and financial
512,430

 
894

 
92,690

 
606,014

Consumer
178,826

 
—

 
10,610

 
189,436

   Totals (1)
$
2,922,609

 
$
17,417

 
$
877,351

 
$
3,817,377

 
(1) Net loan balances as of September 30, 2018 and December 31, 2017 include deferred costs of $15.9 million and $12.9 million for each period, respectively.
 

14

The following tables present the contractual delinquency of the recorded investment by class of loans as of:
 
 
September 30, 2018
(In thousands)
Current
 
Accruing
30-59 Days
Past Due
 
Accruing
60-89 Days
Past Due
 
Accruing
Greater
Than
90 Days
 
Nonaccrual
 
Total
Financing
Receivables
Portfolio Loans
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
$
289,234

 
$
—

 
$
—

 
$
—

 
$
215

 
$
289,449

Commercial real estate
1,345,174

 
3,173

 
—

 
—

 
9,374

 
1,357,721

Residential real estate
984,874

 
1,202

 
104

 
—

 
8,395

 
994,575

Commercial and financial
548,861

 
2,050

 
2,521

 
359

 
836

 
554,627

Consumer
185,902

 
1,119

 
—

 
—

 
178

 
187,199

 Totals
3,354,045

 
7,544

 
2,625

 
359

 
18,998

 
3,383,571

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Unimpaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
86,679

 
—

 
—

 
—

 
—

 
86,679

Commercial real estate
355,541

 
1,181

 
—

 
696

 
722

 
358,140

Residential real estate
151,125

 
1,705

 
124

 
—

 
3,755

 
156,709

Commercial and financial
50,427

 
4,011

 
733

 
—

 
429

 
55,600

Consumer
5,568

 
5

 
—

 
—

 
—

 
5,573

 Totals
649,340

 
6,902

 
857

 
696

 
4,906

 
662,701

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Credit Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
129

 
—

 
—

 
—

 
—

 
129

Commercial real estate
9,427

 
—

 
—

 
—

 
1,411

 
10,838

Residential real estate
552

 
—

 
—

 
—

 
804

 
1,356

Commercial and financial
707

 
—

 
—

 
—

 
21

 
728

Consumer
—

 
—

 
—

 
—

 
—

 
—

 Totals
10,815

 
—

 
—

 
—

 
2,236

 
13,051

 
 
 
 
 
 
 
 
 
 
 
 
   Totals
$
4,014,200

 
$
14,446

 
$
3,482

 
$
1,055

 
$
26,140

 
$
4,059,323

 

15

 
December 31, 2017
(In thousands)
Current
 
Accruing
30-59 Days
Past Due
 
Accruing
60-89 Days
Past Due
 
Accruing
Greater
Than
90 Days
 
Nonaccrual
 
Total
Financing
Receivables
Portfolio Loans
 

 
 

 
 
 
 

 
 

 
 

Construction and land development
$
215,077

 
$
—

 
$
—

 
$
—

 
$
238

 
$
215,315

Commercial real estate
1,165,738

 
2,605

 
585

 
—

 
1,690

 
1,170,618

Residential real estate
836,117

 
812

 
75

 
—

 
8,416

 
845,420

Commercial and financial
507,501

 
2,776

 
26

 
—

 
2,127

 
512,430

Consumer
178,676

 
52

 
—

 
—

 
98

 
178,826

 Totals
2,903,109

 
6,245

 
686

 
—

 
12,569

 
2,922,609

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Unimpaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
126,655

 
34

 
—

 
—

 
—

 
126,689

Commercial real estate
457,899

 
979

 
—

 
—

 
720

 
459,598

Residential real estate
186,549

 
128

 
87

 
—

 
1,000

 
187,764

Commercial and financial
92,315

 
54

 
—

 
—

 
321

 
92,690

Consumer
10,610

 
—

 
—

 
—

 
—

 
10,610

 Totals
874,028

 
1,195

 
87

 
—

 
2,041

 
877,351

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Credit Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
1,121

 
—

 
—

 
—

 
—

 
1,121

Commercial real estate
9,352

 
—

 
—

 
—

 
424

 
9,776

Residential real estate
544

 
642

 
—

 
—

 
4,440

 
5,626

Commercial and financial
844

 
—

 
—

 
—

 
50

 
894

Consumer
—

 
—

 
—

 
—

 
—

 
—

 Totals
11,861

 
642

 
—

 
—

 
4,914

 
17,417

 
 
 
 
 
 
 
 
 
 
 
 
   Totals
$
3,788,998

 
$
8,082

 
$
773

 
$
—

 
$
19,524

 
$
3,817,377

 
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.
 
Loans that are not problem or potential problem loans are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager. The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of September 30, 2018 and December 31, 2017:
 

16

 
September 30, 2018
(In thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and land development
$
364,903

 
$
6,036

 
$
5,318

 
$
—

 
$
376,257

Commercial real estate
1,673,457

 
24,328

 
28,914

 
—

 
1,726,699

Residential real estate
1,126,238

 
2,985

 
23,417

 
—

 
1,152,640

Commercial and financial
602,973

 
1,895

 
6,030

 
57

 
610,955

Consumer
189,223

 
2,900

 
649

 
—

 
192,772

   Totals
$
3,956,794

 
$
38,144

 
$
64,328

 
$
57

 
$
4,059,323

 
 
December 31, 2017
(In thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and land development
$
328,127

 
$
10,414

 
$
4,584

 
$
—

 
$
343,125

Commercial real estate
1,586,932

 
29,273

 
23,787

 
—

 
1,639,992

Residential real estate
1,023,925

 
4,621

 
10,203

 
61

 
1,038,810

Commercial and financial
593,689

 
3,237

 
8,838

 
250

 
606,014

Consumer
189,354

 
—

 
82

 
—

 
189,436

   Totals
$
3,722,027

 
$
47,545

 
$
47,494

 
$
311

 
$
3,817,377

 
PCI 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 at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference.
 
The table below summarizes the changes in accretable yield on PCI loans for the periods ended:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Beginning balance
$
3,189

 
$
3,265

 
$
3,699

 
$
3,807

Additions
—

 
—

 
—

 
—

Deletions
—

 
—

 
(43
)
 
(10
)
Accretion
(284
)
 
(357
)
 
(989
)
 
(1,173
)
Reclassification from non-accretable difference
—

 
407

 
238

 
691

Ending balance
$
2,905

 
$
3,315

 
$
2,905

 
$
3,315

 
Troubled Debt Restructured Loans
 
The Company’s Troubled Debt Restructuring (“TDR”) concessions granted to certain borrowers generally do not include forgiveness of principal balances, but may include interest rate reductions, an extension of the amortization period and/or converting the loan to interest only for a limited period of time. 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 impaired and the allowance for loan losses is determined in accordance with Company policy.
 





17

The following table presents loans that were modified during the nine months ended:
(In thousands)
Number
of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Specific
Reserve
Recorded
 
Valuation
Allowance
Recorded
September 30, 2018
 

 
 

 
 

 
 

 
 

Commercial and financial
1

 
$
98

 
$
—

 
$
—

 
$
—

  Totals
1

 
$
98

 
$
—

 
$
—

 
$
—

September 30, 2017
 
 
 
 
 
 
 
 
 
Construction and land development
1

 
$
52

 
$
46

 
$
6

 
$
6

Residential real estate
1

 
15

 
15

 
—

 
—

Totals
2

 
$
67

 
$
61

 
$
6

 
$
6

 
During the three months ended September 30, 2018, there were no payment defaults on loans modified to a TDR within the previous twelve months. During the nine months ended September 30, 2018, there was one payment default on a loan of $0.1 million that had been modified to a TDR within the previous twelve months, compared to none during the three months ended September 30, 2017 and one during the nine months ended September 30, 2017. 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 a specific allowance for loan loss is assigned in accordance with the Company’s policy.
 
Impaired Loans
 
Loans are considered impaired if they are 90 days or more past due, in nonaccrual status, or are TDRs. As of September 30, 2018 and December 31, 2017, the Company’s recorded investment in impaired loans, excluding PCI loans, the unpaid principal balance and related valuation allowance was as follows:
 
 
September 30, 2018
(In thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Valuation
Allowance
Impaired Loans with No Related Allowance Recorded:
 

 
 

 
 

Construction and land development
$
202

 
$
479

 
$
—

Commercial real estate
2,896

 
4,161

 
—

Residential real estate
13,698

 
18,313

 
—

Commercial and financial
—

 
—

 
—

Consumer
54

 
92

 
—

Impaired Loans with an Allowance Recorded:
 
 
 
 
 
Construction and land development
210

 
224

 
23

Commercial real estate
12,898

 
13,025

 
3,591

Residential real estate
6,106

 
6,252

 
869

Commercial and financial
1,629

 
1,608

 
1,483

Consumer
392

 
399

 
172

Total Impaired Loans
 
 
 
 
 
Construction and land development
412

 
703

 
23

Commercial real estate
15,794

 
17,186

 
3,591

Residential real estate
19,804

 
24,565

 
869

Commercial and financial
1,629

 
1,608

 
1,483

Consumer
446

 
491

 
172

       Totals
$
38,085

 
$
44,553

 
$
6,138

 

18

 
December 31, 2017
(In thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Valuation
Allowance
Impaired Loans with No Related Allowance Recorded:
 

 
 

 
 

Construction and land development
$
223

 
$
510

 
$
—

Commercial real estate
3,475

 
4,873

 
—

Residential real estate
10,272

 
15,063

 
—

Commercial and financial
19

 
29

 
—

Consumer
105

 
180

 
—

Impaired Loans with an Allowance Recorded:
 
 
 
 
 
Construction and land development
251

 
264

 
23

Commercial real estate
4,780

 
4,780

 
195

Residential real estate
8,448

 
8,651

 
1,091

Commercial and financial
2,436

 
883

 
1,050

Consumer
282

 
286

 
43

Total Impaired Loans
 
 
 
 
 
Construction and land development
474

 
774

 
23

Commercial real estate
8,255

 
9,653

 
195

Residential real estate
18,720

 
23,714

 
1,091

Commercial and financial
2,455

 
912

 
1,050

Consumer
387

 
466

 
43

       Totals
$
30,291

 
$
35,519

 
$
2,402

 
Impaired loans also include TDRs where concessions have been granted to borrowers who have experienced financial difficulty. At September 30, 2018 and at December 31, 2017, accruing TDRs totaled $13.8 million and $15.6 million, respectively.
 
Average impaired loans for the three months ended September 30, 2018 and 2017 were $38.1 million and $30.3 million, respectively. Average impaired loans for the nine months ended September 30, 2018 and 2017 were $34.5 million and $31.2 million, respectively. The impaired loans were 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 interest 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 in principal. For the three months ended September 30, 2018 and 2017, the Company recorded interest income on impaired loans of $0.5 million and $0.4 million, respectively. For the nine months ended September 30, 2018, and 2017, the Company recorded interest income on impaired loans of $1.4 million and $1.1 million, respectively.
 
For impaired loans whose impairment is measured based on the present value of expected future cash flows, interest income represents the change in present value attributable to the passage of time, and totaled $36,000 and $169,000, respectively, for the three months ended September 30, 2018 and 2017 and $157,000 and $282,000, respectively, for the nine months ended September 30, 2018 and 2017.

Note F – Allowance for Loan Losses
 
Activity in the allowance for loan losses for the three month and nine month periods ended September 30, 2018 and 2017 is summarized as follows:
 

19

 
Three Months Ended September 30, 2018
(In thousands)
Beginning
Balance
 
Provision
for Loan
Losses
 
Charge-
Offs
 
Recoveries
 
TDR
Allowance
Adjustments
 
Ending
Balance
Construction & land development
$
2,287

 
$
(221
)
 
$
—

 
$
3

 
$
—

 
$
2,069

Commercial real estate
9,126

 
4,191

 
(1
)
 
18

 
(16
)
 
13,318

Residential real estate
8,850

 
(1,279
)
 
(6
)
 
99

 
(19
)
 
7,645

Commercial and financial
7,102

 
1,739

 
(842
)
 
163

 
—

 
8,162

Consumer
1,559

 
1,344

 
(296
)
 
65

 
(1
)
 
2,671

Totals
$
28,924


$
5,774


$
(1,145
)

$
348


$
(36
)

$
33,865

 
 
Three Months Ended September 30, 2017
(In thousands)
Beginning
Balance
 
Provision
for Loan
Losses
 
Charge-
Offs
 
Recoveries
 
TDR
Allowance
Adjustments
 
Ending
Balance
Construction & land development
$
1,574

 
$
(690
)
 
$
—

 
$
728

 
$
—

 
$
1,612

Commercial real estate
9,923

 
62

 
(239
)
 
175

 
(15
)
 
9,906

Residential real estate
7,423

 
116

 
(296
)
 
39

 
(148
)
 
7,134

Commercial and financial
5,460

 
834

 
(333
)
 
28

 
—

 
5,989

Consumer
1,620

 
358

 
(442
)
 
61

 
(6
)
 
1,591

Totals
$
26,000


$
680


$
(1,310
)

$
1,031


$
(169
)

$
26,232

 
 
Nine Months Ended September 30, 2018
(In thousands)
Beginning Balance
 
Provision for Loan Losses
 
Charge- Offs
 
Recoveries
 
TDR Allowance Adjustments
 
Ending Balance
Construction & land development
$
1,642

 
$
414

 
$
—

 
$
13

 
$
—

 
$
2,069

Commercial real estate
9,285

 
3,826

 
(15
)
 
268

 
(46
)
 
13,318

Residential real estate
7,131

 
(78
)
 
(33
)
 
733

 
(108
)
 
7,645

Commercial and financial
7,297

 
3,639

 
(2,985
)
 
211

 
—

 
8,162

Consumer
1,767

 
1,587

 
(931
)
 
251

 
(3
)
 
2,671

Totals
$
27,122

 
$
9,388

 
$
(3,964
)
 
$
1,476

 
$
(157
)
 
$
33,865

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
(In thousands)
Beginning Balance
 
Provision for Loan Losses
 
Charge- Offs
 
Recoveries
 
TDR Allowance Adjustments
 
Ending Balance
Construction & land development
$
1,219

 
$
(496
)
 
$
—

 
$
891

 
$
(2
)
 
$
1,612

Commercial real estate
9,273

 
410

 
(341
)
 
613

 
(49
)
 
9,906

Residential real estate
7,483

 
90

 
(482
)
 
266

 
(223
)
 
7,134

Commercial and financial
3,636

 
3,036

 
(837
)
 
154

 
—

 
5,989

Consumer
1,789

 
345

 
(756
)
 
221

 
(8
)
 
1,591

Totals
$
23,400

 
$
3,385

 
$
(2,416
)
 
$
2,145

 
$
(282
)
 
$
26,232

 
 
 
 
 
 
 
 
 
 
 
 

The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio, excluding PCI loans, and related allowance at September 30, 2018 and December 31, 2017 is shown in the following tables:
 

20

 
September 30, 2018
 
Individually Evaluated for Impairment
 
Collectively Evaluated for Impairment
 
Total
(In thousands)
Recorded
Investment
 
Associated
Allowance
 
Recorded
Investment
 
Associated
Allowance
 
Recorded
Investment
 
Associated
Allowance
Construction & land development
$
412

 
$
23

 
$
375,716

 
$
2,046

 
$
376,128

 
$
2,069

Commercial real estate
15,794

 
3,591

 
1,699,743

 
9,727

 
1,715,537

 
13,318

Residential real estate
19,804

 
869

 
1,131,519

 
6,776

 
1,151,323

 
7,645

Commercial and financial
1,629

 
1,483

 
608,598

 
6,679

 
610,227

 
8,162

Consumer
446

 
172

 
192,611

 
2,499

 
193,057

 
2,671

Totals
$
38,085


$
6,138


$
4,008,187


$
27,727


$
4,046,272


$
33,865

 
December 31, 2017
 
Individually Evaluated for Impairment
 
Collectively Evaluated for Impairment
 
 Total
(In thousands)
Recorded
Investment
 
Associated
Allowance
 
Recorded
Investment
 
Associated
Allowance
 
Recorded
Investment
 
Associated
Allowance
Construction & land development
$
474

 
$
23

 
$
341,530

 
$
1,619

 
$
342,004

 
$
1,642

Commercial real estate
8,255

 
195

 
1,621,960

 
9,090

 
1,630,215

 
9,285

Residential real estate
18,720

 
1,091

 
1,014,465

 
6,040

 
1,033,185

 
7,131

Commercial and financial
2,455

 
1,050

 
602,666

 
6,247

 
605,121

 
7,297

Consumer
387

 
43

 
189,049

 
1,724

 
189,436

 
1,767

Totals
$
30,291


$
2,402


$
3,769,670


$
24,720


$
3,799,961


$
27,122

 
Loans collectively evaluated for impairment reported at September 30, 2018 included acquired loans that are not PCI loans. At September 30, 2018, the remaining fair value adjustments for loans acquired was approximately $13.4 million, or approximately 2.0% of the outstanding aggregate PUL balances. At December 31, 2017, the remaining fair value adjustments for loans acquired was approximately $19.4 million, or 2.2% of the outstanding aggregate PUL balances. These amounts represent the fair value discount of each PUL and 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 September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
PCI Loans Individually Evaluated for Impairment
(In thousands)
Recorded Investment
 
Associated Allowance
 
Recorded Investment
 
Associated Allowance
Construction & land development
$
129

 
$
—

 
$
1,121

 
$
—

Commercial real estate
10,838

 
—

 
9,776

 
—

Residential real estate
1,356

 
—

 
5,626

 
—

Commercial and financial
728

 
—

 
894

 
—

Consumer
—

 
—

 
—

 
—

Totals
$
13,051


$
—


$
17,417


$
—


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. Company securities sold under agreements to repurchase and securities pledged were as follows by collateral type and maturity as of: 

21

(In thousands)
September 30, 2018
 
December 31, 2017
Fair-Value of Pledged Securities - overnight and continuous
 
 
 
Mortgage-backed securities and collateralized mortgage
 
 
 
obligations of U.S. Government Sponsored Entities
$
189,035

 
$
216,094



Note H – Noninterest Income and Expense
 
Detail of noninterest income and expenses for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Noninterest income
 

 
 

 
 
 
 
Service charges on deposit accounts
$
2,833

 
$
2,626

 
$
8,179

 
$
7,483

Trust fees
1,083

 
967

 
3,143

 
2,764

Mortgage banking fees
1,135

 
2,138

 
3,873

 
4,962

Brokerage commissions and fees
444

 
351

 
1,264

 
1,079

Marine finance fees
194

 
137

 
1,213

 
597

Interchange income
3,119

 
2,582

 
9,137

 
7,747

BOLI income
1,078

 
836

 
3,200

 
2,326

Other income
2,453

 
1,844

 
7,497

 
4,895

 
12,339

 
11,481

 
37,506

 
31,853

  Securities losses, net
(48
)
 
(47
)
 
(198
)
 
(26
)
 Totals
$
12,291

 
$
11,434

 
$
37,308

 
$
31,827

 
 
 
 
 
 
 
 
Noninterest expense
 
 
 
 
 
 
 
Salaries and wages
$
17,129

 
$
15,627

 
$
48,939

 
$
49,371

Employee benefits
3,205

 
2,917

 
9,320

 
8,920

Outsourced data processing costs
3,493

 
3,231

 
10,565

 
9,956

Telephone/data lines
624

 
573

 
1,879

 
1,753

Occupancy
3,214

 
2,447

 
9,647

 
10,025

Furniture and equipment
1,367

 
1,191

 
4,292

 
4,261

Marketing
1,139

 
1,298

 
3,735

 
3,294

Legal and professional fees
2,019

 
2,560

 
6,293

 
7,968

FDIC assessments
431

 
548

 
1,624

 
1,768

Amortization of intangibles
1,004

 
839

 
2,997

 
2,397

Net (gain)/loss and disposition expense on other real estate owned
(136
)
 
(297
)
 
461

 
(293
)
Other
3,910

 
3,427

 
13,057

 
11,312

   Total
$
37,399

 
$
34,361

 
$
112,809

 
$
110,732


Note I – Equity Capital
 
The Company is well capitalized and at September 30, 2018, the Company and the Company’s principal banking subsidiary, Seacoast Bank, exceeded 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.



22

 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 September 30, 2018 and December 31, 2017 included:
(In thousands)
Fair Value
Measurements
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
September 30, 2018
 

 
 

 
 

 
 

Available for sale debt securities (1)
$
923,206

 
$
99

 
$
923,107

 
$
—

Loans held for sale (2)
16,172

 
—

 
16,172

 
—

Loans (3)
7,268

 
—

 
2,255

 
5,013

Other real estate owned (4)
4,715

 
—

 
64

 
4,651

Equity securities (5)
6,145

 
6,145

 
—

 
—

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Available for sale debt securities (1)(5)
$
949,460

 
$
100

 
$
949,360

 
$
—

Loans held for sale (2)
24,306

 
—

 
24,306

 
—

Loans (3)
4,192

 
—

 
3,454

 
738

Other real estate owned (4)
7,640

 
—

 
60

 
7,580

Equity securities (5)
6,344

 
6,344

 
—

 
—

(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.
(5) Prior to adoption of ASU 2016-1 on January 1, 2018, an investment in shares of a mutual fund that invests primarily in CRA-qualified debt securities was classified as an available for sale security. Beginning in 2018, this security is reported at fair value in Other Assets. Fair value is determined based on market quotations.
 
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 September 30, 2018 and December 31, 2017. The aggregate fair value and contractual balance of loans held for sale as of September 30, 2018 and December 31, 2017 is as follows:
 
(In thousands)
September 30, 2018
 
December 31, 2017
Aggregate fair value
$
16,172

 
$
24,306

Contractual balance
15,722

 
23,627

Excess
450

 
679

 
Loans: Level 2 loans consist of impaired real estate loans which are collateral dependent. Fair value is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans, appraised values or internal evaluations are based

23

on the comparative sales approach. Level 3 loans consist of commercial and commercial real estate impaired loans. For these loans evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At September 30, 2018, the capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.6%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these impaired loans is considered level 3 in the fair value hierarchy. Impaired loans measured at fair value total $7.3 million with a specific reserve of $6.1 million at September 30, 2018, compared to $4.2 million with a specific reserve of $2.4 million at December 31, 2017.
 
Other real estate owned: 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. There were no such transfers during the nine months ended September 30, 2018 and 2017.
 
For loans classified as level 3, the changes included additions of $8.2 million related to loans that became impaired during 2018, offset by paydowns and chargeoffs of $3.9 million for the nine months ended September 30, 2018.
 
For OREO classified as level 3 during the nine months ended September 30, 2018, changes included the addition of foreclosed loans of $0.3 million and migrated branches taken out of service of $2.0 million offset by reductions primarily consisting of sales of $5.3 million.
 
The carrying amount and fair value of the Company’s other financial instruments that are not measured at fair value on a recurring basis in the balance sheet as of September 30, 2018 and December 31, 2017 is as follows:
 
(In thousands)
Carrying Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
September 30, 2018
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
Debt securities held to maturity (1)
$
367,387

 
$
—

 
$
353,919

 
$
—

Time deposits with other banks
9,813

 
—

 
—

 
9,715

Loans, net
4,018,190

 
—

 
—

 
3,982,029

Financial Liabilities
 
 
 
 
 
 
 
Deposit liabilities
4,643,510

 
—

 
—

 
4,638,270

Federal Home Loan Bank (FHLB) borrowings
261,000

 
—

 
—

 
261,036

Subordinated debt
70,734

 
—

 
61,716

 
—

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
Debt securities held to maturity (1)
$
416,863

 
$
—

 
$
414,470

 
$
—

Time deposits with other banks
12,553

 
—

 
—

 
12,493

Loans, net
3,786,063

 
—

 
—

 
3,760,754

Financial Liabilities
 
 
 
 
 
 
 
Deposit liabilities
4,592,720

 
—

 
—

 
4,588,515

Federal Home Loan Bank (FHLB) borrowings
211,000

 
—

 
—

 
211,000

Subordinated debt
70,521

 
—

 
61,530

 
—


24

(1) See Note D for further detail 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, and securities sold under agreements to repurchase, maturing within 30 days.
 
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at September 30, 2018 and December 31, 2017:

Debt securities: U.S. Treasury debt securities are reported at fair value utilizing Level 1 inputs. Other debt securities are reported at fair value utilizing Level 2 inputs. 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 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.
 
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 as well as performing and nonperforming categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated life including prepayment considerations, using estimated market discount rates that reflect the risks inherent in the loan. Prior to adoption of ASU 2016-1 on January 1, 2018, the estimated fair value of the loan portfolio utilized an “entrance price” approach. Beginning in 2018, the fair value approach considers market-driven variables including credit related factors and reflects an “exit price” as defined in ASC 820.

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 GulfShore Bancshares, Inc.
 
On April 7, 2017, the Company completed its acquisition of GulfShore Bancshares, Inc. ("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. This acquisition added $358 million in total assets, $251 million in loans and $285 million in deposits to Seacoast.
 
As a result of this acquisition, the Company expects to enhance its presence in the Tampa, Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.
 
The Company acquired 100% of the outstanding common stock of 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).
 

25

(In thousands, except per share data)
 
April 7, 2017
Shares exchanged for cash
 
$
8,034

 
 
 
Number of GulfShore Bancshares, Inc. common shares outstanding
 
5,464

Per share exchange ratio
 
0.4807

Number of shares of common stock issued
 
2,627

Multiplied by common stock price per share on April 7, 2017
 
$
23.94

Value of common stock issued
 
62,883

 
 
 
Total purchase price
 
$
70,917

 
The acquisition was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $37.1 million for this acquisition that is nondeductible for tax purposes. Determining fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and deferred taxes, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.
 
(In thousands)
Initially Reported
April 7, 2017
 
Measurement
Period
Adjustments
 
As Adjusted
April 7, 2017
Assets:
 

 
 

 
 

Cash
$
55,540

 
$
—

 
$
55,540

Investment securities
316

 
—

 
316

Loans, net
250,876

 
—

 
250,876

Fixed assets
1,307

 
—

 
1,307

Other real estate owned
13

 
—

 
13

Core deposit intangibles
3,927

 
—

 
3,927

Goodwill
37,098

 
—

 
37,098

Other assets
8,572

 
—

 
8,572

   Totals
$
357,649


—


$
357,649

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Deposits
$
285,350

 
$
—

 
$
285,350

Other liabilities
1,382

 
—

 
1,382

   Totals
$
286,732


—


$
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

 
103,905

Construction/development/land
 
13,175

 
11,653

Commercial loans
 
32,137

 
32,247

Consumer and other loans
 
3,554

 
3,473

Purchased credit-impaired
 
—

 
—

Total acquired loans
 
$
256,876

 
$
250,876

 

26

No loans acquired were specifically identified with credit deficiency factors, pursuant to ASC Topic 310-30. The factors we considered to identify loans as PCI loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as TDR, graded “special mention” or “substandard.”
 
Loans without specifically identified credit deficiency factors are referred to as 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. 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.
 
Acquisition of NorthStar Banking Corporation
 
On October 20, 2017, the Company completed its acquisition of NorthStar Banking Corporation (“NSBC”). Simultaneously, upon completion of the merger of NSBC with and into the Company, NSBC’s wholly owned subsidiary bank, NorthStar Bank (“NorthStar”), was merged with and into Seacoast Bank. NorthStar, headquartered in Tampa, Florida, operated three branches in Tampa. This acquisition added $216 million in total assets, $137 million in loans and $182 million in deposits to Seacoast.
 
As a result of this acquisition, the Company expects to further enhance its presence in the Tampa, Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.
 
The Company acquired 100% of the outstanding common stock of NSBC. Under the terms of the definitive agreement, NSBC shareholders received, for each share of NSBC common stock, the combination of $2.40 in cash and 0.5605 shares of Seacoast common stock (based on Seacoast’s closing price of $24.92 per share on October 20, 2017).
(In thousands, except per share data)
 
October 20, 2017
Shares exchanged for cash
 
$
4,701

 
 
 
Number of NorthStar Banking Corporation common shares outstanding
 
1,958

Per share exchange ratio
 
0.5605

Number of shares of common stock issued
 
1,098

Multiplied by common stock price per share on October 20, 2017
 
$
24.92

Value of common stock issued
 
27,353

Cash paid for NorthStar Banking Corporation vested stock options
 
801

 
 
 
Total purchase price
 
$
32,855

 
The acquisition was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $12.3 million for this acquisition that is nondeductible for tax purposes. Determining fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and deferred taxes, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.
 

27

(In thousands)    
Initially Reported
October 20, 2017
 
Measurement
Period
Adjustments
 
As Adjusted
October 20, 2017
Assets:
 

 
 

 
 

Cash
$
5,485

 
$
—

 
$
5,485

Investment securities
56,123

 
—

 
56,123

Loans, net
136,832

 
—

 
136,832

Fixed assets
2,637

 
—

 
2,637

Core deposit intangibles
1,275

 
—

 
1,275

Goodwill
12,404

 
(99
)
 
12,305

Other assets
1,522

 
99

 
1,621

   Totals
$
216,278

 
$
—

 
$
216,278

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Deposits
$
182,443

 
$
—

 
$
182,443

Other liabilities
980

 
—

 
980

  Totals
$
183,423

 
$
—

 
$
183,423

 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.
 
 
 
October 20, 2017
(In thousands)
 
Book Balance
 
Fair Value
Loans:
 
 

 
 

Single family residential real estate
 
$
15,111

 
$
15,096

Commercial real estate
 
73,139

 
69,554

Construction/development/land
 
11,706

 
10,390

Commercial loans
 
31,200

 
30,854

Consumer and other loans
 
6,761

 
6,645

Purchased Credit Impaired
 
5,527

 
4,293

Total acquired loans
 
$
143,444

 
$
136,832

  
For the loans acquired we first segregated all acquired loans with specifically identified credit deficiency factors. The factors we considered to identify loans as PCI loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as 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 October 20, 2017 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

(In thousands)
 
October 20, 2017
Contractually required principal and interest
 
$
5,596

Non-accretable difference
 
(689
)
Cash flows expected to be collected
 
4,907

Accretable yield
 
(614
)
Total purchased credit-impaired loan acquired
 
$
4,293

 
Loans without specifically identified credit deficiency factors are referred to as 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

28

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. 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.
 
Acquisition of Palm Beach Community Bank
 
On November 3, 2017, the Company completed its acquisition of Palm Beach Community Bank (“PBCB”). PBCB was merged with and into Seacoast Bank. This acquisition added $357 million in total assets, $270 million in loans and $269 million in deposits to Seacoast. PBCB, headquartered in West Palm Beach, Florida, operated four branches in West Palm Beach.
 
As a result of this acquisition, the Company expects to enhance its presence in the Palm Beach, Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.
 
The Company acquired 100% of the outstanding common stock of PBCB. Under the terms of the definitive agreement, PBCB shareholders received, for each share of PBCB common stock, the combination of $6.26 in cash and 0.9240 shares of Seacoast common stock (based on Seacoast’s closing price of $24.31 per share on November 3, 2017).
 
(In thousands, except per share data)
 
November 3, 2017
Shares exchanged for cash
 
$
15,694

 
 
 
Number of Palm Beach Community Bank common shares outstanding
 
2,507

Per share exchange ratio
 
0.9240

Number of shares of common stock issued
 
2,316

Multiplied by common stock price per share on November 3, 2017
 
$
24.31

Value of common stock issued
 
56,312

Total purchase price
 
$
72,006

 
The acquisition was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $34.8 million for this acquisition that is nondeductible for tax purposes. Determining fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and deferred taxes, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.
 
(In thousands)
Initially Reported
November 3, 2017
 
Measurement
Period
Adjustments
 
As Adjusted
November 3, 2017
Assets:
 

 
 

 
 

Cash
$
9,301

 
$
—

 
$
9,301

Investment securities
22,098

 
—

 
22,098

Loans, net
272,090

 
(1,772
)
 
270,318

Fixed assets
7,641

 
—

 
7,641

Core deposit intangibles
2,523

 
—

 
2,523

Goodwill
33,428

 
1,323

 
34,751

Other assets
9,909

 
449

 
10,358

   Totals
$
356,990

 
$
—

 
$
356,990

Liabilities:
 
 
 
 
 
Deposits
$
268,633

 
$
—

 
$
268,633

Other liabilities
16,351

 
—

 
16,351

   Totals
$
284,984

 
$
—

 
$
284,984

 

29

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.
 
 
 
As Adjusted
November 3, 2017
(In thousands)
 
Book Balance
 
Fair Value
Loans:
 
 

 
 

Single family residential real estate
 
$
30,153

 
$
30,990

Commercial real estate
 
134,705

 
132,089

Construction/development/land
 
69,686

 
67,425

Commercial loans
 
36,076

 
35,876

Consumer and other loans
 
179

 
172

Purchased Credit Impaired
 
4,768

 
3,766

Total acquired loans
 
$
275,567

 
$
270,318

 
For the loans acquired we first segregated all acquired loans with specifically identified credit deficiency factors. The factors we considered to identify loans as PCI loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as 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 November 3, 2017 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.
(In thousands)
 
November 3, 2017
Contractually required principal and interest
 
$
4,768

Non-accretable difference
 
(1,002
)
Cash flows expected to be collected
 
3,766

Accretable yield
 
—

Total purchased credit-impaired loan acquired
 
$
3,766

 
Loans without specifically identified credit deficiency factors are referred to as 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. 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.
 
Pro-Forma Information
 
Pro-forma data for the three and nine months ended September 30, 2017 as if the acquisitions of GulfShore, NSBC and PBCB occurred at the beginning of 2017 is as follows:
 

30

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
 
2017
 
2017
Net interest income
 
$
51,115

 
$
146,668

Net income
 
16,321

 
37,149

EPS - basic
 
0.35

 
0.81

EPS - diluted
 
0.35

 
0.80


Acquisition of First Green Bancorp, Inc.

On October 19, 2018, the Company completed its acquisition of First Green Bancorp, Inc ("First Green"). Simultaneously, upon completion of the merger of First Green with and into the Company, First Green's wholly owned subsidiary bank, First Green Bank, was merged with and into Seacoast Bank. Prior to the acquisition , First Green operated seven branches in the Orlando, Daytona, and Fort Lauderdale markets. The Company acquired 100% of the outstanding common stock of First Green. Under the terms of the definitive agreement, each share of First Green common stock was converted into the right to receive 0.7324 shares of Seacoast common stock.

(In thousands, except per share data)
 
October 19, 2018
Number of First Green common shares outstanding
 
5,462

Per share exchange ratio
 
0.7324

Number of shares of Seacoast common stock issued
 
4,000

Multiplied by common stock price per share on October 19, 2018
 
$
26.87

Value of common stock issued
 
107,486

Cash paid for First Green stock options
 
6,558

Total purchase price
 
$
114,044


The acquisition of First Green will be accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company's assessment of the fair value of assets acquired and liabilities assumed as of the acquisition date is incomplete at the time of this filing; therefore, certain disclosures have been omitted. The Company expects to recognize goodwill in this transaction, which is expected to be nondeductible for tax purposes.







31

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 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.

The emphasis of this discussion will be on the three months and nine months ended September 30, 2018 compared to the three months and nine months ended September 30, 2017 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2018 compared to December 31, 2017.

This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.

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.

Special Cautionary Notice Regarding Forward-Looking Statements
 
Certain statements made or incorporated by reference herein which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”) to be materially different from those set forth in the forward-looking statements.
 
All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “further,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
 
•
the effects of current and future economic, business and market conditions in the United States generally or in the communities we serve;
•
changes in governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
•
legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;
•
changes in accounting policies, rules and practices and applications or determinations made thereunder, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “Commission” or “SEC”), and the Public Company Accounting Oversight Board (the “PCAOB”);
•
the risks of changes in interest rates on the levels, composition and costs of deposits, including the risk of losing customer checking and savings account deposits as customers pursue other, high-yield investments, which could increase our funding costs;
•
the risks of changes in interest rates on loan demand, and the values and liquidity of loan collateral, debt securities, and interest sensitive assets and liabilities;
•
changes in borrower credit risks and payment behaviors;
•
changes in the availability and cost of credit and capital in the financial markets;
•
changes in the prices, values and sales volumes of residential and commercial real estate in the United States and in the communities we serve, which could impact write-downs of assets, our ability to liquidate non-performing assets, realized losses on the disposition of non-performing assets and increased credit losses;
•
our ability to comply with any requirements imposed on us or on our banking subsidiary, Seacoast National Bank (“Seacoast Bank”) by regulators and the potential negative consequences that may result;

32

•
the effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally could require us to change certain business practices, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses;
•
our concentration in commercial real estate loans;
•
the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress test;
•
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
•
the failure of assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates;
•
the impact on the valuation of our investments due to market volatility or counterparty payment risk;
•
statutory and regulatory restrictions on our ability to pay dividends to our shareholders;
•
any applicable regulatory limits on Seacoast Bank’s ability to pay dividends to us;
•
increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;
•
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;
•
our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets;
•
changes in technology or products that may be more difficult, costly, or less effective than anticipated;
•
our ability to identify and address increased cybersecurity risks, including data security breaches, malware, "denial of service" attacks, "hacking", and identity theft, a failure of which could result in potential business disruptions or financial losses;
•
inability of our risk management framework to manage risks associated with our business such as credit risk and operational risk, including third party vendors and other service providers;
•
dependence on key suppliers or vendors to obtain equipment or services for our business on acceptable terms:
•
the effects of the failure of any component of our business infrastructure provided by a third party could disrupt our business, result in the disclosure of and/or misuse of confidential information or proprietary information, increase our costs, negatively affect our reputation, and cause losses;
•
the inability of internal controls and procedures to prevent, detect or mitigate any material errors or fraudulent acts;
•
reduction in or the termination of our ability to use the mobile-based platform that is critical to our business growth strategy, including a failure in or breach of our operational or security systems or those of our third party service providers;
•
the effects of war or other conflicts, acts of terrorism, natural disasters or other catastrophic events that may affect general economic conditions;
•
unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
•
the risks that our deferred tax assets could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, or adjustments to our preliminary estimates of the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on certain tax attributes including our deferred tax assets, and sales of our capital stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes; and
•
other factors and risks described under “Risk Factors” herein and in any of our subsequent reports filed with the SEC and available on its website at www.sec.gov.

All written or oral forward-looking statements that are made by us or are attributable to us are expressly qualified in their entirety by this cautionary notice. We assume no obligation to update, revise or correct any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.

THIRD QUARTER 2018
 
Results of Operations
  
Earnings Overview
 
Third quarter 2018 and year to date results
 
We remain focused in our ability to achieve our vision 2020 targets announced at our Investor Day in early 2017. These include a return on tangible assets of 1.30%+, a return on tangible common equity of 16%+, and an efficiency ratio below 50%. For the third quarter of 2018, Seacoast reported net income of $16.3 million, or $0.34 per average common diluted share, compared to $17.0 million or $0.35 for the prior quarter and $14.2 million or $0.32 for the third quarter of 2017. For the nine months ended September 30, 2018, net income was $51.3 million or $1.07 per average common diluted share, compared to $29.8 million or $0.70 for the nine month

33

s ended September 30, 2017. Adjusted net income1 (a non-GAAP measure) totaled $17.6 million, or $0.37 per average common diluted share, compared to $18.3 million or $0.38 for the prior quarter and $15.1 million or $0.35 for the third quarter of 2017. For the nine months ended September 30, 2018, adjusted net income1 totaled $55.2 million or $1.15 per average common diluted share, compared to $38.1 million or $0.90 for the nine months ended September 30, 2017.

1Non-GAAP measure. See the reconciliation of net income to adjusted net income.

 
 
 
Third
 
Second
 
Third
 
Nine Months Ended
 
 
Quarter
 
Quarter
 
Quarter
 
September 30,
 
 
2018
 
2018
 
2017
 
2018
 
2017
Return on average tangible assets
 
1.18
%
 
1.24
%
 
1.12
%
 
1.25
%
 
0.85
%
Return on average tangible shareholders' equity
 
12.0

 
13.1

 
12.5

 
13.1

 
9.6

Efficiency ratio
 
57.0

 
58.4

 
58.9

 
57.7

 
67.7

 
 
 
 
 
 
 
 
 
 
 
Adjusted return on average tangible assets1
 
1.22
%
 
1.28
%
 
1.16
%
 
1.29
%
 
1.03
%
Adjusted return on average tangible shareholders' equity1
 
12.4

 
13.5

 
12.8

 
13.5

 
11.7

Adjusted efficiency ratio1
 
56.3

 
57.3

 
57.7

 
56.9

 
61.0

1Non-GAAP measure. See the reconciliation of net income to adjusted net income and noninterest expenses to adjusted noninterest expenses.

For the nine months ended September 30, 2018, our adjusted return on average tangible assets1 and adjusted return on average tangible shareholders' equity1 were improved when compared to the same period in the prior year. This improvement is the result of higher adjusted net income1 in the current year to date period, partially offset by higher tangible assets and higher tangible shareholders' equity. The improvement in the adjusted efficiency ratio1 reflects our disciplined expense control and the preliminary results of projects underway to streamline and automate operational functions.
    
Net Interest Income and Margin
 
Net interest income for the quarter totaled $51.6 million, increasing $1.4 million or 3% during the third quarter of 2018 compared to second quarter 2018, and was $5.8 million or 13% higher than third quarter 2017. For the nine months ended September 30, 2018, net interest income totaled $151.5 million, an increase of $23.5 million or 18% compared to the nine months ended September 30, 2017. Net interest margin was 3.82% in the third quarter 2018, compared to 3.77% for second quarter 2018 and 3.74% in the prior year’s third quarter. Loan growth, balance sheet mix and increases in benchmark interest rates have been the primary forces affecting net interest income and net interest margin results. Acquisitions have further accelerated these trends. Organic loan growth of $267 million or 8% since September 30, 2017, the addition of $137 million in loans from the NorthStar merger and $270 million from the PBCB merger, all contributed to the net interest income improvement year over year for the third quarter and nine months ended September 30, 2018. Net interest income for 2018 should continue to benefit from the impact of the acquisitions completed in fourth quarter 2017 and the First Green acquisition completed on October 19, 2018.
 
The following table details the trend for net interest income and margin results (on a tax equivalent basis, a non-GAAP measure), the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified:

(In thousands, except ratios)
 
Net Interest
Income1
 
Net Interest
Margin1
 
Yield on
Earning Assets1 
 
Rate on Interest
Bearing Liabilities
Third quarter 2018
 
$
51,709

 
3.82
%
 
4.38
%
 
0.82
%
Second quarter 2018
 
50,294

 
3.77
%
 
4.25
%
 
0.71
%
Third quarter 2017
 
45,903

 
3.74
%
 
4.10
%
 
0.51
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
151,856

 
3.79
%
 
4.29
%
 
0.72
%
Nine Months Ended September 30, 2017
 
128,600

 
3.74
%
 
4.04
%
 
0.42
%
1On tax equivalent basis, a non-GAAP measure.
 

34

For the nine months ended September 30, 2018, a steepening of the Treasury yield curve and higher short term rates, including add-on rates for new loan production, contributed to the 5 basis point improvement in net interest margin, compared to the first nine months of 2017. Our loan and debt securities yields were 15 and 22 basis points higher, respectively, and our yield on federal funds sold and other investments was 124 basis points higher, compared to results for the nine months ended September 30, 2017. Partially offsetting, the rate for interest bearing funding was higher by 30 basis points, when comparing the same nine-month periods for 2018 and 2017.
 
Total average loans increased $601.2 million or 18% for third quarter 2018 compared to third quarter 2017, and increased $60.1 million or 2% from second quarter 2018. Average debt securities decreased $66.3 million or 5% for third quarter 2018 year over year and were $40.2 million or 3% lower from 2018’s second quarter. For the nine months ended September 30, 2018, average loans were $744.2 million or 23% higher and debt securities increased $28.7 million or 2%, respectively, compared to the nine months ended September 30, 2017.
 
Average loans as a percentage of average earning assets totaled 74.6% during the third quarter of 2018, compared to 73.7% during the second quarter of 2018 and 70.0% 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 47.5% of total loans at September 30, 2018, compared to 47.9% at December 31, 2017 and 47.3% at September 30, 2017 (see “Loan Portfolio”).

Loan production is detailed in the following table for the periods specified:
 
 
Third
 
Second
 
Third
 
Nine Months Ended
 
 
Quarter
 
Quarter
 
Quarter
 
September 30,
(In thousands)
 
2018
 
2018
 
2017
 
2018
 
2017
Commercial pipeline
 
$
196,512

 
$
194,928

 
$
155,355

 
$
196,512

 
$
155,355

Commercial loans closed
 
130,989

 
140,437

 
146,121

 
393,490

 
350,887

 
 
 
 
 
 
 
 
 
 
 
Residential pipeline
 
$
58,928

 
$
63,714

 
$
63,960

 
$
58,928

 
$
63,960

Residential loans retained
 
78,663

 
75,036

 
73,611

 
232,752

 
237,027

Residential loans sold
 
55,848

 
52,175

 
103,841

 
157,710

 
189,675

 
 
 
 
 
 
 
 
 
 
 
Consumer and small business pipeline
 
$
59,715

 
$
52,915

 
$
47,002

 
$
59,715

 
$
47,002

Consumer and small business originations
 
125,920

 
104,910

 
86,954

 
329,211

 
274,358

 
Consumer and small business originations reached $126 million during the third quarter of 2018 and $329 million year to date for 2018, and commercial loans closed totaled $131 million for the third quarter of 2018 and $393 million year to date for 2018. The increase in consumer and small business loan originations is attributable, in part, to our commitment to serving small businesses and the expansion of our Small Business Administration ("SBA") program. Closed residential loans during the quarter and year to date for 2018 totaled $135 million and $390 million, respectively, reflecting continued strong performance. A $19.5 million fixed rate residential loan pool, with a weighted average yield of 4.15% and average FICO score of 775, was acquired during the third quarter of 2018 and included in residential loans retained.
 
Pipelines (loans in underwriting and approval or approved and not yet closed) remained strong at $197 million in commercial, $59 million in mortgage, and $60 million (a new peak) in consumer and small business at September 30, 2018. Commercial pipelines increased $2 million over June 30, 2018, and were $41 million or 26% higher compared to September 30, 2017. Mortgage pipelines decreased $5 million or 8%, compared to both June 30, 2018 and September 30, 2017. The consumer and small business pipeline increased from June 30, 2018 by $7 million or 13%, and increased from September 30, 2017 by $13 million or 27%.
 
Loan production remains strong, supported by analytics and expansion of the banking teams, particularly in Tampa, Orlando and South Florida MSAs. In the third quarter of 2018, we added senior leadership in Tampa with the hiring of the former President & CEO of SunTrust for the Tampa MSA. Also, the planned addition of lending personnel from the First Green acquisition is expected to provide growth in the Orlando and South Florida MSAs.
 
Customer relationship funding is detailed in the following table for the periods specified:

35

Customer Relationship Funding
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
(In thousands, except ratios)
 
2018
 
2018
 
2018
 
2017
 
2017
Noninterest demand
 
$
1,488,689

 
$
1,463,652

 
$
1,488,261

 
1,400,227

 
$
1,284,118

Interest-bearing demand
 
912,891

 
976,281

 
1,015,054

 
1,050,755

 
935,097

Money market
 
1,036,940

 
1,023,170

 
1,035,531

 
931,458

 
870,788

Savings
 
451,958

 
444,736

 
437,878

 
434,346

 
379,499

Time certificates of deposit
 
753,032

 
789,601

 
742,819

 
775,934

 
643,098

Total deposits
 
$
4,643,510

 
$
4,697,440

 
4,719,543

 
4,592,720

 
$
4,112,600

 
 
 
 
 
 
 
 
 
 
 
Customer sweep accounts
 
$
189,035

 
$
200,050

 
173,249

 
216,094

 
$
142,153

 
 
 
 
 
 
 
 
 
 
 
Total core customer funding1
 
$
4,079,513

 
$
4,107,889

 
4,149,973

 
4,032,880

 
$
3,611,655

 
 
 
 
 
 
 
 
 
 
 
Noninterest demand deposits as % of total deposits
 
32.1
%
 
31.2
%
 
31.5
%
 
30.5
%
 
31.2
%
(1)Total deposits and customer sweep accounts, excluding time certificates of deposit
 
The Company’s balance sheet continues to be primarily core deposit funded. Core customer funding increased to $4.1 billion at September 30, 2018, a 1% increase from December 31, 2017 and a 13% increase from September 30, 2017. Excluding acquisitions, core customer funding increased by $202 million, or 6%, from one year ago. Seacoast’s weighted average rate paid on total deposits (including noninterest demand deposits) remains low at 0.38% for the nine months ended September 30, 2018, and, despite an increase of 16 basis points from the nine months ended September 30, 2017, we believe reflects the significant value of the deposit franchise.
 
Short-term borrowings were entirely comprised of sweep repurchase agreements with Seacoast Bank customers at September 30, 2018 and 2017. No federal funds purchased were utilized at September 30, 2018 or 2017. The average rate on customer repurchase accounts was 0.77% for the nine months ended September 30, 2018, compared to 0.42% for the same period during 2017.
 
FHLB borrowings totaled $261.0 million at September 30, 2018, with an average rate of 1.83% paid during the nine months ended September 30, 2018 . FHLB borrowings averaged $219.7 million for 2018, declining $177.0 million or 44.6%, compared to the nine months ended September 30, 2017. For 2018, average subordinated debt of $70.6 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 4.42%.
 
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”).
 

















36

The following tables detail average balances, net interest income and margin results (on a tax equivalent basis) for the periods presented:  
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, YIELDS AND RATES1 
SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
 
 
2018
 
 
 
2017
 
 
 
 
 
Third Quarter
 
Second Quarter
 
Third Quarter
 
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
(In thousands, except ratios)
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
$
1,284,774

 
$
9,582

 
2.98

%
$
1,324,280

 
$
9,389

 
2.84

%
$
1,356,276

 
$
8,823

 
2.60

%
Nontaxable
 
31,411

 
283

 
3.60

 
32,055

 
273

 
3.41

 
26,256

 
290

 
4.42

 
Total Securities
 
1,316,185

 
9,865

 
3.00

 
1,356,335

 
9,662

 
2.85

 
1,382,532

 
9,113

 
2.64

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and other investments
 
51,255

 
634

 
4.91

 
49,387

 
585

 
4.75

 
76,773

 
664

 
3.43

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net
 
4,008,527

 
48,802

 
4.83

 
3,948,460

 
46,549

 
4.73

 
3,407,376

 
40,456

 
4.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Earning Assets
 
5,375,967

 
59,301

 
4.38

 
5,354,182

 
56,796

 
4.25

 
4,866,681

 
50,233

 
4.10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(29,259
)
 
 
 
 
 
(29,234
)
 
 
 
 
 
(26,299
)
 
 
 
 
 
Cash and due from banks
 
110,929

 
 
 
 
 
110,549

 
 
 
 
 
99,864

 
 
 
 
 
Premises and equipment
 
63,771

 
 
 
 
 
64,445

 
 
 
 
 
57,023

 
 
 
 
 
Intangible assets
 
165,534

 
 
 
 
 
166,393

 
 
 
 
 
118,364

 
 
 
 
 
Bank owned life insurance
 
121,952

 
 
 
 
 
121,008

 
 
 
 
 
95,759

 
 
 
 
 
Other assets
 
94,433

 
 
 
 
 
90,692

 
 
 
 
 
104,727

 
 
 
 
 
Total Assets
 
$
5,903,327

 
 
 
 
 
$
5,878,035

 
 
 
 
 
$
5,316,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
939,527

 
$
426

 
0.18

%
$
996,929

 
$
492

 
0.20

%
$
927,278

 
$
273

 
0.12

%
Savings
 
444,935

 
170

 
0.15

 
439,691

 
118

 
0.11

 
377,729

 
52

 
0.05

 
Money market
 
1,031,960

 
1,501

 
0.58

 
1,027,705

 
1,378

 
0.54

 
870,166

 
605

 
0.28

 
Time deposits
 
779,608

 
2,975

 
1.51

 
790,404

 
2,629

 
1.33

 
548,092

 
1,266

 
0.92

 
Federal funds purchased and securities sold under agreements to repurchase
 
204,097

 
463

 
0.90

 
179,540

 
334

 
0.75

 
165,160

 
204

 
0.49

 
Federal Home Loan Bank borrowings
 
222,315

 
1,228

 
2.19

 
160,846

 
741

 
1.85

 
439,755

 
1,293

 
1.17

 
Other borrowings
 
70,694

 
829

 
4.65

 
70,623

 
810

 
4.60

 
70,409

 
637

 
3.59

 
Total Interest-Bearing Liabilities
 
3,693,136

 
7,592

 
0.82

 
3,665,738

 
6,502

 
0.71

 
3,398,589

 
4,330

 
0.51

 
Noninterest demand
 
1,451,751

 
 
 
 
 
1,473,331

 
 
 
 
 
1,276,779

 
 
 
 
 
Other liabilities
 
30,150

 
 
 
 
 
29,292

 
 
 
 
 
52,832

 
 
 
 
 
Total Liabilities
 
5,175,037

 
 
 
 
 
5,168,361

 
 
 
 
 
4,728,200

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
728,290

 
 
 
 
 
709,674

 
 
 
 
 
587,919

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 


 
 
 
 
 
Total Liabilities & Equity
 
$
5,903,327

 
 
 
 
 
$
5,878,035

 
 
 
 
 
$
5,316,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of deposits
 
 
 
 
 
0.43

%
 
 
 
 
0.39

%
 
 
 
 
0.22

%
Interest expense as a % of earning assets
 
 
 
 
 
0.56

%
 
 
 
 
0.49

%
 
 
 
 
0.35

%
Net interest income as a % of earning assets
 
 
 
$
51,709

 
3.82

%
 
 
$
50,294

 
3.77

%
 
 
$
45,903

 
3.74

%
1On a fully taxable equivalent basis, a non-GAAP measure, as defined (see Non-GAAP measure below). All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.


37

 
 
 
 
2018
 
 
 
 
 
2017
 
 
 
 
 
Year to Date
 
Year to Date
 
 
 
Average
 
 
 
Yield/
 
Average
 
 
 
Yield/
 
(In thousands, except ratios)
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
$
1,323,164

 
$
28,332

 
2.85

%
$
1,299,128

 
$
25,289

 
2.60

%
Nontaxable
 
32,031

 
863

 
3.59

 
27,388

 
1,047

 
5.10

 
Total Securities
 
1,355,195

 
29,195

 
2.87

 
1,326,516

 
26,336

 
2.65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and other investments
 
52,253

 
1,835

 
4.70

 
68,766

 
1,778

 
3.46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net
 
3,943,617

 
140,635

 
4.77

 
3,199,408

 
110,668

 
4.62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Earning Assets
 
5,351,065

 
171,665

 
4.29

 
4,594,690

 
138,782

 
4.04

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(28,660
)
 
 
 
 
 
(25,211
)
 
 
 
 
 
Cash and due from banks
 
111,781

 
 
 
 
 
101,858

 
 
 
 
 
Premises and equipment
 
64,708

 
 
 
 
 
58,401

 
 
 
 
 
Intangible assets
 
166,348

 
 
 
 
 
104,079

 
 
 
 
 
Bank owned life insurance
 
121,742

 
 
 
 
 
89,401

 
 
 
 
 
Other assets
 
90,888

 
 
 
 
 
111,661

 
 
 
 
 
Total Assets
 
$
5,877,872

 
 
 
 
 
$
5,034,879

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
979,148

 
$
1,368

 
0.19

%
$
904,175

 
$
698

 
0.10

%
Savings
 
440,054

 
392

 
0.12

 
370,145

 
147

 
0.05

 
Money market
 
1,012,259

 
3,863

 
0.51

 
847,705

 
1,563

 
0.25

 
Time deposits
 
782,283

 
7,783

 
1.33

 
443,416

 
2,646

 
0.80

 
Federal funds purchased and securities sold under agreements to repurchase
 
186,643

 
1,071

 
0.77

 
173,601

 
551

 
0.42

 
Federal Home Loan Bank borrowings
 
219,652

 
2,999

 
1.83

 
396,610

 
2,775

 
0.94

 
Other borrowings
 
70,623

 
2,333

 
4.42

 
70,342

 
1,802

 
3.43

 
Total Interest-Bearing Liabilities
 
3,690,662

 
19,809

 
0.72

 
3,205,994

 
10,182

 
0.42

 
Noninterest demand
 
1,446,488

 
 
 
 
 
1,248,290

 
 
 
 
 
Other liabilities
 
29,533

 
 
 
 
 
39,414

 
 
 
 
 
Total Liabilities
 
5,166,683

 
 
 
 
 
4,493,698

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
711,189

 
 
 
 
 
541,181

 
 
 
 
 
Total Liabilities & Equity
 
$
5,877,872

 
 
 
 
 
$
5,034,879

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of deposits
 
 
 
 
 
0.38

%
 
 
 
 
0.22

%
Interest expense as a % of earning assets
 
 
 
 
 
0.49

%
 
 
 
 
0.30

%
Net interest income as a % of earning assets
 
 
 
$
151,856

 
3.79

%
 
 
$
128,600

 
3.74

%
(1) On a fully taxable equivalent basis, a non-GAAP measure, as defined (see Non-GAAP measure below). All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.
    
Taxable Equivalent Measure

Fully taxable equivalent net interest income and net interest margin is a common term and measure used in the banking industry but is not a term used under GAAP. We believe that these presentations of tax equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors’ understanding of the Company’s business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial

38

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

 
 
Third

Second

Third

Nine Months Ended
 
 
 
Quarter
 
Quarter
 
Quarter

September 30,
 
(In thousands, except ratios)
 
2018
 
2018
 
2017
 
2018
 
2017
 
Nontaxable interest income adjustment
 
$
147

 
$
87

 
$
154

 
$
325

 
$
529

 
Tax Rate
 
21

%
21

%
35

%
21

%
35

%
Net interest income (TE)
 
$
51,709

 
$
50,294

 
$
45,903

 
$
151,856

 
$
128,600

 
Total net interest income (not TE)
 
51,562

 
50,207

 
45,749

 
151,531

 
128,070

 
Net interest margin (TE)
 
3.82

%
3.77

%
3.74

%
3.79

%
3.74

%
Net interest margin (not TE)
 
3.81

 
3.76

 
3.73

 
3.79

 
3.73

 
 TE = Tax Equivalent
 
Noninterest Income
 
Noninterest income totaled $12.3 million for the third quarter of 2018, a decrease of $0.4 million or 3% compared to the second quarter of 2018 and an increase of $0.9 million or 7% from the third quarter of 2017. For the nine months ended September 30, 2018, noninterest income totaled $37.3 million, 17% higher than the nine months ended September 30, 2017. Results for the nine months reflect growth in deposits and increased customer engagement, resulting in revenue improvement in nearly every category. Only mortgage banking fees were lower during the nine months, by $1.1 million, with the prior year benefiting from a larger portfolio sale of $57.9 million that added $0.8 million to mortgage banking fees in the third quarter of 2017. For the nine months ended September 30, 2018, noninterest income (excluding securities losses) accounted for 19.8% of total revenue (net interest income plus noninterest income, excluding securities losses), compared to 19.9% for the nine months ended September 30, 2017.
 
Noninterest income for the third and second quarters of 2018, compared to the third quarter of 2017, and for the nine months ended September 30, 2018 and 2017 is detailed as follows:
 
 
 
Third
 
Second
 
Third
 
Nine months ended
 
 
Quarter
 
Quarter
 
Quarter
 
September 30,
(In thousands)
 
2018
 
2018
 
2017
 
2018
 
2017
Service charges on deposit accounts
 
$
2,833

 
$
2,674

 
$
2,626

 
$
8,179

 
$
7,483

Trust fees
 
1,083

 
1,039

 
967

 
3,143

 
2,764

Mortgage banking fees
 
1,135

 
1,336

 
2,138

 
3,873

 
4,962

Brokerage commissions and fees
 
444

 
461

 
351

 
1,264

 
1,079

Marine finance fees
 
194

 
446

 
137

 
1,213

 
597

Interchange income
 
3,119

 
3,076

 
2,582

 
9,137

 
7,747

BOLI income
 
1,078

 
1,066

 
836

 
3,200

 
2,326

Other income
 
2,453

 
2,671

 
1,844

 
7,497

 
4,895

 
 
12,339

 
12,769

 
11,481

 
37,506

 
31,853

Securities gains (losses), net
 
(48
)
 
(48
)
 
(47
)
 
(198
)
 
(26
)
Total
 
$
12,291

 
$
12,721

 
$
11,434

 
$
37,308

 
$
31,827

 
For the third quarter of 2018 and nine months ended September 30, 2018, most categories of service fee income showed year over year growth. Service charges on deposit accounts increased 9.3% and interchange income improved 17.9% for the nine months ended September 30, 2018, compared to prior year. These increases reflect continued strength in deepening relationships with new and existing customers and benefits from acquisition activity. Overdraft fees represented 54% of total service charges on deposits during the nine months ended September 30, 2018, versus 57% for all of 2017. The increase in interchange revenue reflects higher business volumes transacted.
 

39

Wealth management, including brokerage commissions and fees, and trust fees, continued to rise during the third quarter of 2018, increasing 1.8% from second quarter 2018, and for the nine months ended September 30, 2018, increased 14.7% compared to the same period in 2017. Trust fees increased 13.7% and brokerage commissions and fees were 17.1% higher for the nine months, year over year. This increase is the result of a growing sales and support team, industry leading products including digital tools, and the benefit of direct referrals from the branches and lending network. Our Wealth Management team added almost $100 million in new assets under management during the nine months ended September 30, 2018, and we expect wealth management revenues to continue to grow over time.

Mortgage production was higher during the nine months ended September 30, 2018 compared to 2017’s first nine months (see “Loan Portfolio”), and the amount of loans sold from that production was also higher, but spreads were narrower. The sale of $57.9 million of seasoned conforming mortgages during the third quarter of 2017 generated $0.8 million in incremental gains, and contributed to the overall decrease in mortgage banking revenue of $1.1 million or 21.9% for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Originated residential mortgage loans are processed by commissioned employees of Seacoast, with many mortgage loans referred by the Company’s branch personnel.
 
Marine finance revenue was higher for 2018, increasing 41.6% and 103.2%, respectively, for the third quarter of 2018 and nine months ended September 30, 2018, compared to the same periods in 2017. Continued demand for marine vessel financing and a larger portion of originations being sold were primary contributors to the improvement. In addition to our principal office in Ft. Lauderdale, Florida, we continue to use third party independent contractors in Texas and on the west coast of the United States to assist in generating marine loans.
 
BOLI income was significantly higher for the third quarter of 2018, up 28.9% year over year, and up 37.6% for the nine months ended September 30, 2018, primarily the result of additions during 2017. At September 30, 2018, the average balance increased 36.2% compared to the nine months ended September 30, 2017.
 
Other income was 53.2% higher year over year for the nine months ended September 30, 2018. Of the increase of $2.6 million, continued progress by our Small Business Administration (“SBA”) lending group generated incremental fees of $2.0 million for 2018 year to date, and additional income of $0.4 million was distributed from Community Reinvestment Act ("CRA") investments. A general increase in other fee categories also occurred, including wire transfer fees, check cashing fees, and other miscellaneous fees.
 
Noninterest Expenses
 
Noninterest expenses for the third quarter of 2018 totaled $37.4 million, increasing $3.0 million or 8.8% compared to third quarter 2017, and were $2.1 million or 1.9% higher for the nine months ended September 30, 2018, compared to 2017. Noninterest expenses for the third and second quarters of 2018, compared to third quarter 2017, and the nine months ended September 30, 2018 and 2017, is detailed as follows:
 

40

 
 
Third
 
Second
 
Third
 
Nine Months Ended
 
 
Quarter

Quarter

Quarter
 
September 30,
(In thousands, except ratios)
 
2018
 
2018
 
2017
 
2018
 
2017
Noninterest expense
 
 

 
 

 
 

 
 
 
 
Salaries and wages
 
$
17,129

 
$
16,429

 
$
15,627

 
$
48,939

 
$
49,371

Employee benefits
 
3,205

 
3,034

 
2,917

 
9,320

 
8,920

Outsourced data processing costs
 
3,493

 
3,393

 
3,231

 
10,565

 
9,956

Telephone/data lines
 
624

 
643

 
573

 
1,879

 
1,753

Occupancy
 
3,214

 
3,316

 
2,447

 
9,647

 
10,025

Furniture and equipment
 
1,367

 
1,468

 
1,191

 
4,292

 
4,261

Marketing
 
1,139

 
1,344

 
1,298

 
3,735

 
3,294

Legal and professional fees
 
2,019

 
2,301

 
2,560

 
6,293

 
7,968

FDIC assessments
 
431

 
595

 
548

 
1,624

 
1,768

Amortization of intangibles
 
1,004

 
1,004

 
839

 
2,997

 
2,397

Foreclosed property expense and net (gain)/loss on sale
 
(136
)
 
405

 
(297
)
 
461

 
(293
)
Other
 
3,910

 
4,314

 
3,427

 
13,057

 
11,312

TOTAL
 
$
37,399

 
$
38,246

 
$
34,361

 
$
112,809

 
$
110,732

 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio1
 
57.0
%
 
58.4
%
 
58.9
%
 
57.7
%
 
67.7
%
1Efficiency ratio is defined as (noninterest expense less foreclosed property expense and amortization of intangibles) divided by net operating revenue (net interest income on a fully tax equivalent basis plus noninterest income excluding securities gains)

For 2018, salaries and wages totaled $15.4 million for the first quarter, $16.4 million for the second quarter, $17.1 million for the third quarter, and aggregated to$48.9 million for the nine months ended September 30, 2018. Salaries and wages were $0.4 million lower year over year, compared to the nine months ended September 30, 2017. The increase in salaries and wages for third quarter 2018 compared to second quarter 2018 was the result of continued investments in talent, including the hiring of a new senior leadership position, a Market President and Head of Commercial Lending for the Tampa market. We believe the Tampa, Florida market offers a significant opportunity for growth. During the second quarter 2018, we also acquired two commercial banking team leaders, four commercial bankers, and made investments in talent to support scaling the organization prudently. We also granted 191,000 restricted shares during the second quarter of 2018, along with performance awards for up to an additional 356,000 shares upon meeting certain performance criteria.  All were granted deep into the organization, with the goal of providing meaningful value to our associates for achieving our target objectives. Base salaries were $5.0 million or 13% higher for the first nine months of 2018 compared to a year ago, reflecting our investment in talent and the full impact of additional personnel retained as part of the 2017 acquisitions of GulfShore, NorthStar and PBCB. Improved revenue generation and lending production, and expectations for performance results in 2018, among other factors, resulted in commissions, sales and equity award expense (aggregated) that were $2.1 million higher for the nine months ended September 30, 2018, compared to the first nine months of 2017. Severance costs and cash incentives decreased $1.9 million and $2.9 million, respectively, compared to the nine months ended September 30, 2017, reflecting the impact of merger activities and executive realignment a year ago. Deferred loan origination costs (a contra expense), increased $2.8 million year over year, reflecting a greater number of loans produced during the first nine months of 2018, versus 2017.
 
Seacoast Bank utilizes third parties for its core data processing systems and outsourced data processing costs are directly related to the number of transactions processed. Outsourced data processing costs totaled $3.7 million, $3.4 million and $3.5 million for the first, second and third quarters of 2018, respectively, totaling $10.6 million for the nine months ended September 30, 2018, an increase of $0.6 million or 6.1% from the first nine months of 2017. The primary cause for the increase year over year was software licensing and maintenance costs aggregating to $0.7 million.
  
Total occupancy, furniture and equipment expenses for the first, second and third quarters of 2018 totaled $4.6 million, $4.8 million and $4.6 million, respectively, and were $13.9 million for the nine months ended September 30, 2018. These costs were $0.3 million lower compared to the nine months ended September 30, 2017. Asset write-offs related to branch closures were a primary contributor to the reduction in expense, and were $1.8 million lower for the nine months ended September 30, 2018, compared to a year ago. We believe branches are still valuable to our customers for more complex transactions, but simple tasks, such as depositing and withdrawing funds, are rapidly migrating to the digital world. Our goal at the beginning of 2017 was to close 20% of our locations over the next 24 to 36 months. During 2018 we consolidated two office locations in the first quarter, and none in the second and third quarters, compared to five locations for the nine months ended September 30, 2017. Partially offsetting were lease payments

41

and depreciation expense, each higher by $0.7 million, respectively, for the first nine months of 2018 compared to the first nine months of 2017. Upon acquiring First Green in October 2018, we consolidated five banking locations in alignment with our Vision 2020 objective of reducing our footprint.
 
For the first, second and third quarters of 2018, marketing expenses (including sales promotion costs, ad agency production and printing costs, digital, newspaper, TV and radio advertising, and other public relations costs) totaled $1.3 million, $1.3 million and $1.1 million, respectively, and aggregated to $3.7 million for the nine months ended September 30, 2018, increasing by $0.4 million or 13.4% compared to prior year. Costs associated with direct mail, corporate sponsorships, and local market corporate events were the largest contributors to the $0.6 million increase, and were incurred to solidify customer acquisition and corporate brand awareness.
 
Legal and professional fees for the first, second and third quarters of 2018 were $2.0 million, $2.3 million, and $2.0 million, respectively, and aggregated to $6.3 million for the nine months ended September 30, 2018, a decrease of $1.7 million or 21% compared to the prior year.
 
For the nine months ended September 30, 2018, foreclosed property expense and net losses on the sale of OREO properties totaled $0.5 million compared to a gain in the prior period of $0.3 million (see “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).
 
Other expense totaled $4.8 million, $4.3 million and $3.9 million for the first, second and third quarters of 2018, respectively, and increased $1.7 million or 15.4% for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Primary contributors to the $1.7 million increase were SBA and marine lending fees (up $0.4 million compared to a year ago), losses and charge-offs related to robbery (up $0.2 million), loan servicing costs (up $0.3 million), director fees (up $0.2 million), and other higher expenses related to the growth of the business.
 
 
 
Third
 
Second
 
Third
 
Nine Months Ended
 
 
Quarter

Quarter

Quarter
 
September 30,
(In thousands, except ratios)
 
2018
 
2018
 
2017
 
2018
 
2017
Noninterest expense, as reported
 
$
37,399

 
$
38,246

 
$
34,361

 
$
112,809

 
$
110,732

 
 
 
 
 
 
 
 
 
 
 
Merger related charges
 
482

 
695

 
491

 
1,647

 
6,105

Amortization of intangibles
 
1,004

 
1,004

 
839

 
2,997

 
2,397

Business continuity expenses - Hurricane Irma
 
—

 
—

 
352

 
—

 
352

Branch reductions and other expense initiatives1
 
—

 
—

 
(127
)
 
—

 
4,321

Total adjustments
 
1,486

 
1,699

 
1,555

 
4,644

 
13,175

 
 
 
 
 
 
 
 
 
 
 
Adjusted noninterest expense2
 
$
35,913


$
36,547


$
32,806

 
$
108,165

 
$
97,557

 
 
 
 
 
 
 
 
 
 
 
Adjusted efficiency ratio 2,3
 
56.3
%
 
57.3
%
 
57.7
%
 
56.9
%
 
61.0
%
1Includes severance payments, contract termination costs, disposition of branch premises and fixed assets, and other costs to accomplish branch consolidation and other expense reduction strategies.
2Non-GAAP measure.
3Efficiency ratio is defined as (noninterest expense less foreclosed property expense and amortization of intangibles) divided
by the net operating revenue (net interest on a fully tax equivalent basis plus noninterest income excluding securities gains).

Merger related charges were lower for 2018, totaling $0.5 million and $1.6 million for the third quarter and nine months ended September 30, 2018, respectively, compared to $0.5 million for the third quarter and $6.1 million for the nine months ended September 30, 2017, with most expenditures associated with either the First Green or GulfShore acquisitions in each year. In addition, branch consolidation and other expense initiatives for the nine months ended September 30, 2017 totaled $4.3 million, including costs in the first quarter of 2017 related to a realignment of the executive team structure and expenses associated with a reduction in workforce initiative. Business continuity expenses related to Hurricane Irma were also incremental in 2017, adding $0.4 million. Adjusted noninterest expense2 (a non-GAAP measure, see table below for a reconciliation to noninterest expense, the most comparable GAAP number) was $35.9 million and $108.2 million for the third quarter and nine months ended September 30, 2018, respectively, decreasing $0.6 million or 1.7% compared to the second quarter of 2018, increasing $3.1 million or 9.5% compared to the prior year’s third quarter, and was $10.6 million or 10.9% higher for the nine months ended September 30, 2018, compared to prior year.


42

Seacoast management expects its efficiency ratios to continue to improve. The Company anticipates that the improvements to its processes and tools for commercial banking, investment in talent and tools for our enterprise risk management and technology functions, and further upgrades to our analytics and digital marketing capabilities, will help scale our organization appropriately, and will continue to deliver sustainable earnings growth prospectively. In the third quarter of 2018 we launched a large-scale initiative to implement a fully digital loan origination platform across all business units. This follows our successful roll-out of our fully digital mortgage banking origination platform. Our expense control initiative launched at the end of the second quarter of 2018, designed to reduce overhead and become more streamlined in our approach, will continue into 2019. We are targeting $7 million in expense reductions in 2019 which will be reinvested in expanding bankers in Tampa and South Florida, installation of the fully digital platform, and development of digital direct fulfillment for small business lending. These investments will support growth and greater operating leverage into 2020.

Income Taxes
 
The Tax Reform Act, enacted by the U.S. Congress and signed by the President of the United States near the end of December 2017, had a significant impact on our deferred tax position and provision for taxes at year-end 2017. The new legislation resulted in additional provisioning of $8.6 million during the fourth quarter of 2017 to reflect the decline in value of net deferred tax assets.
 
For the nine months ended September 30, 2018 and 2017, provision for income taxes totaled $15.3 million and $16.0 million, respectively. The Company’s overall effective tax rate decreased to 23.0% for the first nine months of 2018 from 34.9% for the first nine months a year ago, reflecting the benefit of a lower federal rate the legislation provides, offset by a $248,000 write down of deferred tax assets arising from measurement period adjustments on a 2017 bank acquisition recorded in the first quarter of 2018. Additionally, discrete benefits related to share-based compensation provided a tax benefit of $732,000 for the nine months ended September 30, 2018, compared to $702,000 for the nine months September 30, 2017.
 
Management believes all of the future tax benefits of the Company’s deferred tax assets can be realized and no valuation allowance is required.
 
Explanation of Certain Unaudited Non-GAAP Financial Measures
 
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.
 
The following table provides reconciliation between GAAP net income and adjusted net income.

43

 
 
Third
 
Second
 
Third
 
Nine Months Ended
 
 
Quarter
 
Quarter
 
Quarter
 
September 30,
(In thousands except per share data)
 
2018
 
2018
 
2017
 
2018
 
2017
Net income, as reported:
 
 

 
 

 
 

 
 

 
 

Net income
 
$
16,322

 
$
16,964

 
$
14,216

 
$
51,313

 
$
29,818

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.34

 
$
0.35

 
$
0.32

 
$
1.07

 
$
0.70

 
 
 
 
 
 
 
 
 
 
 
Adjusted net income:
 
 

 
 

 
 

 
 

 
 

Net income
 
$
16,322

 
$
16,964

 
$
14,216

 
$
51,313

 
$
29,818

Security losses, net
 
48

 
48

 
47

 
198

 
26

Total adjustments to revenue
 
48

 
48

 
47

 
198

 
26

 
 
 
 
 
 
 
 
 
 
 
Merger related charges
 
482

 
695

 
491

 
1,647

 
6,105

Amortization of intangibles
 
1,004

 
1,004

 
839

 
2,997

 
2,397

Business continuity expenses - Hurricane Irma
 
—

 
—

 
352

 
—

 
352

Branch reductions and other expense initiatives1
 
—

 
—

 
(127
)
 
—

 
4,321

Total adjustments to noninterest expenses
 
1,486

 
1,699

 
1,555

 
4,644

 
13,175

 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on adjustments
 
(230
)
 
(443
)
 
(673
)
 
(1,211
)
 
(4,939
)
Effect of change in corporate tax rate
 
—

 
—

 
—

 
248

 
—

Adjusted net income
 
$
17,626

 
$
18,268

 
$
15,145

 
$
55,192

 
$
38,080

 
 
 
 
 
 
 
 
 
 
 
Adjusted diluted earnings per share
 
$
0.37

 
$
0.38

 
$
0.35

 
$
1.15

 
$
0.90

 
1 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.

Financial Condition
 
Total assets increased $120.8 million or 2.1% from December 31, 2017, benefiting from new relationships derived through our recent acquisitions of NorthStar in October 2017 and PBCB in November of 2017, along with organic growth.
 
Securities
 
Information related to maturities, carrying values and fair value of the Company’s debt securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements.
 
At September 30, 2018, the Company had $923.2 million in debt securities available for sale, and $367.4 million in debt securities held to maturity. The Company's total debt securities portfolio decreased $75.7 million or 5.5% from December 31, 2017. Given the current interest rate environment, the securities portfolio is being used as a liquidity source to fund loan growth. Debt security purchases for the nine months ended September 30, 2018 aggregated to $105 million, and were less than maturities (principally pay-downs) over the same period. Debt security purchases during the first, second, third and fourth quarters of 2017 totaled $43 million, $213 million, $35 million and $220 million, respectively. Securities acquired from GulfShore in the second quarter of 2017 were nominal, and securities acquired from NorthStar and PBCB aggregated to $78.2 million. Funding for investments in 2017 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 the nine months ended September 30, 2018, no sales of debt securities were transacted. During the nine months ended September 30, 2017, sales of securities resulted in proceeds of $7.5 million (including net losses of $26,000). Management believes the securities sold had minimal opportunity to further increase in value.
 

44

Debt securities are generally acquired which return principal monthly. During 2018, maturities (primarily comprised of pay-downs) totaled $158 million. During the nine months ended September 30, 2017, maturities (primarily pay-downs) totaled $240 million. Securities that are fixed rate comprise 62% of the total debt securities portfolio, with remaining securities in the portfolio adjustable rate, or 38% of the total portfolio. The modified duration of the investment portfolio at September 30, 2018 was 3.6 years, compared to 4.4 years at December 31, 2017.
 
At September 30, 2018, available for sale debt securities had gross unrealized losses of $26.4 million and gross unrealized gains of $1.6 million, compared to gross unrealized losses of $8.5 million and gross unrealized gains of $4.2 million at December 31, 2017. All of the debt 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 debt securities with unrealized losses are not other than temporarily impaired and the Company has the intent and ability to retain these debt 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 debt securities portfolio to be high. The Company has no exposure to debt securities with subprime collateral. The Company does not have an investment position in trust preferred securities. The credit quality of the Company’s debt securities holdings are primarily investment grade.
 
Loan Portfolio
 
Total loans (net of unearned income and excluding the allowance for loan losses) were $4.1 billion at September 30, 2018, $241.9 million or 6.3% more than at December 31, 2017. During 2018, loan growth has continued across all business lines. For 2018, $393.5 million in commercial and commercial real estate loans were originated compared to $350.9 million for the nine months ended September 30, 2017. Our loan pipeline for commercial and commercial real estate loans totaled $196.5 million at September 30, 2018, a record high. The Company also closed $390 million in residential loans during 2018, including a $19.5 million residential loan pool acquired during the third quarter of 2018. In comparison, residential loans totaling $426.7 million were closed for the first nine months of 2017. The residential mortgage pipeline at September 30, 2018 totaled $58.9 million, versus $48.8 million at December 31, 2017. Consumer and small business originations have totaled $329.2 million since year end 2017, higher by $54.9 million compared to the nine months ended September 30, 2017, and the pipeline for these loans was $59.7 million compared to $38.8 million at December 31, 2017.

The NorthStar and PBCB acquisitions during 2017 contributed $136.8 million and $270.3 million in loans, respectively. During the third quarter of 2018, a $19.5 million pool of whole loan fixed rate mortgages with a weighted average yield of 4.15% and average FICO score of 775 was acquired and added to the portfolio. During the first quarter of 2017, a $43 million pool of whole loan adjustable rate mortgages with a weighted average yield of 3.20% and average FICO score of 751 was acquired and added to the portfolio. Also in 2017, the Company sold two seasoned mortgage portfolio pools summing to $86.4 million ($58.0 million in the third quarter of 2017 and $28.4 million in the fourth quarter of 2017). The mortgage pools sold were believed to have reached their peak in market value. Success in commercial lending through our Accelerate commercial banking model has increased loan growth. Analytics and digital marketing have further fueled loan growth in the consumer and small business channels.

The Company expects the First Green acquisition on October 19, 2018 to amplify loan growth during the fourth quarter of 2018, and enhance opportunities for all types of lending in 2019. We will continue to expand our business banking teams, adding new, seasoned, commercial loan officers where market opportunities arise, and improving service through electronic and digital means. We believe that achieving our loan growth objectives, together with the prudent management of credit risk will provide us with the potential to make further, meaningful improvements to our earnings in the final quarter of 2018, and into 2019.
 
Our strong growth is accompanied by sound risk management procedures. Our lending policies contain numerous guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the dollar amount (size) of loans. Our exposure to commercial real estate lending is significantly below regulatory limits (see “Loan Concentrations”).
 
The following tables detail loan portfolio composition at September 30, 2018 and December 31, 2017 for portfolio loans, purchased credit impaired loans (“PCI”) and purchased unimpaired loans (“PUL”) as defined in Note E-Loans. 


45

 
 
September 30, 2018
(In thousands)
 
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
 
$
289,449

 
$
129

 
$
86,679

 
$
376,257

Commercial real estate 1
 
1,357,721

 
10,838

 
358,140

 
1,726,699

Residential real estate
 
994,575

 
1,356

 
156,709

 
1,152,640

Commercial and financial
 
554,627

 
728

 
55,600

 
610,955

Consumer
 
187,199

 
—

 
5,573

 
192,772

NET LOAN BALANCES 2
 
$
3,383,571

 
$
13,051

 
$
662,701

 
$
4,059,323

 
 
 
December 31, 2017
(In thousands)
 
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
 
$
215,315

 
$
1,121

 
$
126,689

 
$
343,125

Commercial real estate 1
 
1,170,618

 
9,776

 
459,598

 
1,639,992

Residential real estate
 
845,420

 
5,626

 
187,764

 
1,038,810

Commercial and financial
 
512,430

 
894

 
92,690

 
606,014

Consumer
 
178,826

 
—

 
10,610

 
189,436

NET LOAN BALANCES 2
 
$
2,922,609

 
$
17,417

 
$
877,351

 
$
3,817,377

1Commercial real estate includes owner-occupied balances of $829.4 million and $791.4 million for September 30, 2018 and December 31, 2017, respectively.
2Net loan balances at September 30, 2018 and December 31, 2017 include deferred costs of $15.9 million and $12.9 million, respectively.
 
Commercial real estate loans were higher by $86.7 million totaling $1.7 billion at September 30, 2018, compared to December 31, 2017. Owner occupied loans represent $829.4 million or 70.9% of the commercial real estate portfolio. Office building loans of $542.7 million or 31.4% of commercial real estate mortgages comprise our largest concentration, with a substantial portion owner-occupied. Portfolio composition also includes lending for retail trade, industrial, health care, churches and educational facilities, recreation, multifamily, lodging, agriculture, convenience stores, marinas, and other types of real estate.
 
The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at September 30, 2018 aggregated to $190.6 million (versus $169.7 million at December 31, 2017), of which $142.7 million was funded. The Company’s 92 commercial and commercial real estate relationships in excess of $5 million totaled $883.4 million, of which $712.5 million was funded at September 30, 2018 (compared to 89 relationships of $803.5 million at December 31, 2017, of which $684.2 million was funded).
 
Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately $1.4 billion and $347.9 million, respectively, at September 30, 2018, compared to $1.2 billion and $410.0 million, respectively, at December 31, 2017.
 
Reflecting the impact of organic loan growth and the NorthStar and PBCB loan acquisitions, commercial and financial loans (“C&I”) outstanding at September 30, 2018 increased to $611.0 million, up from $606.0 million at December 31, 2017. 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 $113.8 million or 11.0% to $1.15 billion as of September 30, 2018, compared to the balance outstanding at December 31, 2017. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At September 30, 2018, approximately $534 million or 46% of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages). Fixed rate mortgages totaled approximately $300 million (26% of the residential mortgage portfolio) at September 30, 2018, of which 15- and 30-year mortgages totaled $24 million and $237 million, respectively. Remaining fixed rate balances were comprised of home improvement loans totaling $112 million, most with maturities of 10 years or less and home

46

equity lines of credit, primarily floating rates, totaling $246 million at September 30, 2018. In comparison, loans secured by residential properties having fixed rates totaled $247 million at December 31, 2017, with 15- and 30-year fixed rate residential mortgages totaling $22 million and $173 million, respectively, and home equity mortgages and lines of credit totaling $123 million and $233 million, respectively.
 
The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes) which increased $3.3 million or 0.0% from December 31, 2017 to total $192.8 million (versus $189.4 million at December 31, 2017). Of the $3.3 million increase, automobile and truck loans, marine loans, and other consumer loans increased $0.6 million, $0.2 million and $0.6 million, respectively.
 
At September 30, 2018, the Company had unfunded commitments to make loans of $865 million, compared to $808 million at December 31, 2017.
 
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. Outstanding balances for commercial and commercial real estate (“CRE”) loan relationships greater than $10 million totaled $360.0 million and represented 9% of the total portfolio at September 30, 2018.
 
Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of total risk based capital, were stable at 59% and 199%, respectively, at September 30, 2018. Regulatory guidance suggests limits of 100% and 300%, respectively. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines 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 September 30, 2018 totaled $30.9 million, and were comprised of $19.0 million of nonaccrual portfolio loans, $7.1 million of nonaccrual purchased loans, $0.4 million of non-acquired other real estate owned (“OREO”), $1.2 million of acquired OREO and $3.1 million of branches out of service. Nonaccrual portfolio loans increased $6.6 million compared to December 31, 2017, primarily the result of a transfer of a single credit to nonaccrual status in the second quarter of 2018. NPAs increased from $27.2 million recorded as of December 31, 2017 (comprised of $12.6 million of nonaccrual portfolio loans, $7.0 million of nonaccrual purchased loans, $2.2 million of non-acquired OREO, $1.6 million of acquired OREO, and $3.8 million of branches out of service). At September 30, 2018, approximately 94% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At September 30, 2018, nonaccrual loans were written down by approximately $7.1 million or 21% of the original loan balance (including specific impairment reserves). Since December 31, 2017, OREO amounts related to branches taken out of service that are actively being marketed decreased $0.7 million and OREO for foreclosed properties decreased $2.3 million. During the nine months ended September 30, 2018, a single residence valued at $3.8 million (added to acquired OREO during the first quarter of 2018) was subsequently sold in the third quarter of 2018.
 
Nonperforming loans to total loans outstanding at September 30, 2018 increased to 0.64% from 0.51% at December 31, 2017.
 
The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.
 
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 $13.8 million at September 30, 2018, compared to $15.6 million at December 31, 2017. Accruing TDRs are excluded from our nonperforming asset ratios. The table below set forth details related to nonaccrual and accruing restructured loans.
 

47

September 30, 2018
 
Nonaccrual Loans
 
Accruing
Restructured
(In thousands)
 
NonCurrent
 
Performing
 
Total
 
Loans
Construction & land development
 
 

 
 

 
 

 
 

Residential
 
$
—

 
$
—

 
$
—

 
$
—

Commercial
 
67

 
—

 
67

 
18

Individuals
 
—

 
147

 
147

 
180

 
 
67

 
147

 
214

 
198

Residential real estate mortgages
 
5,524

 
7,430

 
12,954

 
7,624

Commercial real estate mortgages
 
2,039

 
9,469

 
11,508

 
5,707

Real estate loans
 
7,630

 
17,046

 
24,676

 
13,529

Commercial and financial
 
1,261

 
25

 
1,286

 
—

Consumer
 
102

 
76

 
178

 
268

 
 
$
8,993

 
$
17,147

 
$
26,140

 
$
13,797

 
At September 30, 2018 and December 31, 2017, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:
 
 
 
September 30, 2018
 
December 31, 2017
(In thousands)
 
Number
 
Amount
 
Number
 
Amount
Rate reduction
 
59

 
$
11,146

 
71

 
$
12,843

Maturity extended with change in terms
 
47

 
5,266

 
51

 
5,803

Chapter 7 bankruptcies
 
23

 
1,437

 
28

 
1,812

Not elsewhere classified
 
10

 
1,035

 
11

 
1,190

 
 
139

 
$
18,884

 
161

 
$
21,648

 
There were no new TDRs identified during the third quarter. Year to date for 2018, there was one newly identified TDR totaling $0.1 million, compared to $0.1 million for all of 2017. 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 September 30, 2018 defaulted during the twelve months ended September 30, 2018, or for 2017. A restructured loan is considered in default when it becomes 90 days or more past due under the modified terms, has been transferred to nonaccrual status, or has been transferred to OREO.
 
At September 30, 2018, loans (excluding PCI) totaling $38.1 million were considered impaired (comprised of total nonaccrual, loans 90 days or more past due, and TDRs) and $6.1 million of the allowance for loan losses was allocated for potential losses on these loans, compared to $30.3 million and $2.4 million, respectively, at December 31, 2017.
 
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 $105.1 million on a consolidated basis at September 30, 2018, compared to $109.5 million at December 31, 2017.
 
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.
 

48

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 when managing risk.
 
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 debt 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 program.
 
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, debt 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 debt securities not pledged to secure public deposits or trust funds. At September 30, 2018, Seacoast Bank had available unsecured lines of $130 million and lines of credit under current lendable collateral value, which are subject to change, of $1.064 billion. Seacoast had $511 million of United States Treasury and Government agency debt securities and mortgage backed debt securities not pledged and available for use under repurchase agreements, and had an additional $591 million in residential and commercial real estate loans available as collateral. In comparison, at December 31, 2017, the Company had available unsecured lines of $95 million and lines of credit of $1.006 billion, and had $455 million of Treasury and Government agency debt securities and mortgage backed debt securities not pledged and available for use under repurchase agreements, as well as an additional $593 million in residential and commercial real estate loans available as collateral.
 
The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding. During the nine months ended September 30, 2018, $295.0 million of brokered certificates of deposit (“CDs”) at an average rate of 1.49% matured, and the Company acquired $275.0 million in brokered CDs at a weighted average rate of 1.96%. Of the $275.0 million acquired, $85.0 million matured in the second quarter of 2018, $140.0 million matures in the fourth quarter of 2018, and $50.0 million matures in the first quarter of 2019. Total brokered CDs at September 30, 2018 totaled $192.2 million, compared to $217.4 million at December 31, 2017.
 
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 September 30, 2018, Seacoast Bank can distribute dividends to the Company of approximately $88 million. At September 30, 2018, the Company had cash and cash equivalents at the parent of approximately $48.0 million, compared to $34.4 million at December 31, 2017. The increase includes $21.3 million in cash received in January 2018 from the sale of Visa Class B stock that was recorded in December 2017, offset primarily by taxes associated with the sale.
 
Deposits and Borrowings
 
The Company’s balance sheet continues to be primarily core funded.
 
Total deposits increased $50.8 million or 1.1% to $4.64 billion at September 30, 2018, compared to December 31, 2017. At September 30, 2018, total deposits excluding brokered CDs grew $76.0 million or 1.7% from year-end 2017.
 
Since December 31, 2017, noninterest bearing demand deposits increased $88.5 million or 6.3% to $1.49 billion, interest bearing deposits (interest bearing demand, savings and money markets deposits) decreased $14.8 million or 0.6% to $2.40 billion, and CDs decreased $22.9 million or 3.0% to $753.0 million. Noninterest demand deposits represent 32% of deposits, compared to 30% at December 31, 2017. Core deposit growth reflects our success in growing households both organically and through acquisitions.
 
Brokered CDs are the primary contributor to the decrease in CDs since December 31, 2017, lower by $25.2 million or 11.6%. An intentional decrease in higher cost time deposits was recorded over the two years prior to the 2016 and 2017 acquisitions, and was more than offset by increases in low cost or no cost deposits.
 
Customer repurchase agreements totaled $189.0 million at September 30, 2018, decreasing $27.1 million or 12.5% from December 31, 2017. 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.
 

49

No unsecured federal funds purchased were outstanding at September 30, 2018.

At September 30, 2018 and December 31, 2017, borrowings were comprised of subordinated debt of $70.7 million and $70.5 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of $261.0 million and $211.0 million, respectively. At September 30, 2018, our FHLB borrowings were all maturing within 30 days, with the exception of maturities of $3.0 million in April 2019 and $60.0 million in June 2019. The weighted average rate for FHLB funds during the nine months ended September 30, 2018 and 2017 was 1.83% and 0.94%, respectively, and compared to 0.99% for the year ended December 31, 2017. Secured FHLB borrowings are an integral tool in liquidity management for the Company.
 
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 subordinated debt for each trust totaled $20.6 million (aggregating to $41.2 million) and the 2007 subordinated debt totaled $12.4 million. As part of the October 1, 2014, BANKshares acquisition, 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, 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 $4.6 million lower than face value at September 30, 2018. 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 4.42% and 3.43% for the nine months ended September 30, 2018 and 2017, respectively, and compared to 3.47% for the year ended December 31, 2017.
 
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. 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. 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.
 
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. Loan commitments were $865 million at September 30, 2018 and $808 million at December 31, 2017.
 
Capital Resources
 
The Company’s equity capital at September 30, 2018 increased $43.2 million from December 31, 2017 to $732.8 million.
 
The ratio of shareholders’ equity to period end total assets was 12.36% and 11.87% at September 30, 2018 and December 31, 2017, respectively. The ratio of tangible shareholders’ equity to tangible assets was 9.85% and 9.27% at September 30, 2018 and December 31, 2017, respectively. Equity has increased as a result of earnings retained by the Company.

Activity in shareholders’ equity for the nine months ended September 30, 2018 and 2017 follows:

50

(In thousands)
 
2018
 
2017
Beginning balance at December 31, 2017 and 2016
 
$
689,664

 
$
435,397

Net income
 
51,313

 
29,818

Issuance of stock via common stock offering on February 21, 2017
 
—

 
55,660

Issuance of stock pursuant to acquisition of GulfShore
 
—

 
62,882

Stock compensation (net of Treasury shares acquired)
 
6,503

 
4,337

Change in other comprehensive income
 
(14,649
)
 
6,347

Ending balance at September 30, 2018 and 2017
 
$
732,831

 
$
594,441

 
Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast’s management use of risk-based capital ratios in its analysis of Company’s capital adequacy are “non-GAAP” financial measures. Seacoast management uses these 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 – Shareholders’ Equity”).
September 30, 2018:
 
Seacoast (Consolidated)
 
Seacoast
Bank
 
Minimum to be Well- Capitalized1
Common equity Tier 1 ratio (CET1)
 
13.19%
 
13.65%
 
6.5%
Tier 1 capital ratio
 
14.80%
 
13.65%
 
8.0%
Total risk-based capital ratio
 
15.57%
 
14.42%
 
10.0%
Tier 1 leverage ratio
 
11.33%
 
10.45%
 
5.0%

1 For subsidiary bank only
 
The Company’s total risk-based capital ratio was 15.57% at September 30, 2018, an increase from December 31, 2017’s ratio of 14.24%. Higher earnings have been a primary contributor. At September 30, 2018, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 10.45%, compared to 9.72% at December 31, 2017, reflecting earnings during the first quarter.
 
Accumulated other comprehensive income declined $14.6 million during the nine months ended September 30, 2018 from December 31, 2017, reflecting the impact of higher interest rates on available for sale securities.
 
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 $88 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.
 
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

51

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 $70.7 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.

Critical Accounting Policies and Estimates
 
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
 
•
the allowance and the provision for loan losses;
•
acquisition accounting and purchased loans;
•
intangible assets and impairment testing;
•
other fair value adjustments;
•
other than temporary impairment of debt securities;
•
realization of deferred tax assets; and
•
contingent liabilities.

The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information.
 
Allowance and Provision for Loan Losses – Critical Accounting Policies and Estimates
 
Management determines the provision for loan losses by continuously analyzing and monitoring delinquencies, nonperforming loans levels and the outstanding balances for each loan category, as well as the amount of net charge-offs, for estimating losses inherent in its portfolio. While the Company’s policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses approximate and imprecise (see “Nonperforming Assets”).
 
The provision for loan losses is the result of a detailed analysis estimating for probable loan losses. The analysis includes the evaluation of impaired and purchased credit impaired loans as prescribed under FASB Accounting Standards Codification (“ASC”) 310, Receivables as well as an analysis of homogeneous loan pools not individually evaluated as prescribed under ASC 450, Contingencies. For the nine months ended September 30, 2018 and 2017, the Company recorded provision for loan losses of $9.4 million and $3.4 million, respectively. The provision for loan losses for the third quarter of 2018 was $5.8 million, compared to $2.5 million for the second quarter of 2018, and compared to $0.7 million for the third quarter of 2017. A $3.1 million increase in provision during the third quarter of 2018 for a single impaired commercial real estate loan, originated in 2007, and discussed last quarter upon the loan moving to nonaccrual status, as well as the effects of portfolio growth, were primary causes for the increase in provision for the third quarter of 2018, compared to prior quarters. Net charge-offs during the third quarter and second quarters of 2018 summed to $0.8 million and $1.7 million, respectively, and were near zero for the first quarter of 2018. Net charge-offs for the four most recent quarters averaged 0.10% of outstanding loans. Delinquency trends remain low, with nonperforming loans decreasing $0.1 million during the quarter ended September 30, 2018 (see section titled “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).
 
Management continuously monitors the quality of the Company’s loan portfolio and maintains an allowance for loan losses it believes is sufficient to absorb probable losses incurred in the loan portfolio. The allowance for loan losses increased $6.8 million to $33.9 million at September 30, 2018, compared to $27.1 million at December 31, 2017. The allowance for loan and lease losses

52

(“ALLL”) framework has four basic elements: (1) specific allowances for loans individually evaluated for impairment; (2) general allowances for pools of homogeneous non-purchased loans (“portfolio loans”) within the portfolio that have similar risk characteristics, which are not individually evaluated; (3) specific allowances for purchased impaired loans which are individually evaluated based on the loans expected principal and interest cash flows; and (4) general allowances for purchased unimpaired pools of homogeneous loans that have similar risk characteristics. The aggregate of these four components results in our total ALLL.
 
The first component of the ALLL analysis involves the estimation of an allowance specific to individually evaluated impaired portfolio loans, including accruing and non-accruing restructured commercial and consumer loans. In this process, a specific allowance is established for impaired loans based on an analysis of the most probable sources of repayment, including discounted cash flows, liquidation or operation of the collateral, or the market value of the loan itself. It is the Company’s policy to charge off any portion of the loan deemed uncollectable. Restructured consumer loans are also evaluated and included in this element of the estimate. As of September 30, 2018, the specific allowance related to impaired portfolio loans individually evaluated totaled $6.1 million, including $3.4 million for the single commercial real estate loan discussed previously, and compared to $2.4 million at December 31, 2017. Residential loans that become 90 days past due are placed on nonaccrual and a specific allowance is made for any loan that becomes 120 days past due. Residential loans are subsequently written down if they become 180 days past due and such write-downs are supported by a current appraisal, consistent with current banking regulations.
 
The second component of the ALLL analysis, the general allowance for homogeneous portfolio loan pools not individually evaluated, is determined by applying factors to pools of loans within the portfolio that have similar risk characteristics. The general allowance is determined by applying a migration model to portfolio segments that allows us to observe performance over time, and to separately analyze sub-segments based on vintage, risk rating, and origination tactics. Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the historical loss experience. These influences may include elements such as changes in concentration, macroeconomic conditions, and/or recent observable asset quality trends. Our analysis of the adequacy of the allowance for loan losses also takes into account qualitative factors such as credit quality, loan concentrations, internal controls, audit results, staff turnover, local market conditions, employment levels and loan growth.

The third component consists of amounts reserved for purchased credit-impaired loans (PCI). On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio.
 
The final component consists of amounts reserved for purchased unimpaired loans (PUL). Loans collectively evaluated for impairment reported at September 30, 2018 include loans acquired from PBCB on November 3, 2017, NorthStar on October 20, 2017, GulfShore on April 7, 2017, BMO Harris on June 3, 2016, Floridian Bank on March 11, 2016, Grand Bank on July 17, 2015 and BANKshares on October 1, 2014 that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. These fair value discount amounts are accreted into income over the remaining lives of the related loans on a level yield basis.
   
The allowance as a percentage of portfolio loans outstanding (excluding PCI and PUL loans) was 0.98% at September 30, 2018, compared to 0.90% at December 31, 2017. The risk profile of the loan portfolio reflects adherence to credit management methodologies to execute a low risk strategic plan for loan growth. New loan production is focused on adjustable rate residential real estate loans, owner-occupied commercial real estate, small business loans for professionals and businesses, as well as consumer lending. Strategies, processes and controls are in place to ensure that new production is well underwritten and maintains a focus on smaller, diversified and lower-risk lending.
 
Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. At September 30, 2018, the Company had $1.328 billion in loans secured by residential real estate and $1.927 billion in loans secured by commercial real

53

estate, representing 32.7% and 47.5% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in central and southeastern Florida.
 
It is the practice of the Company to ensure that its charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due, compared to the regulatory loss criteria of 120 days. In compliance with Federal Financial Institution Examination Council guidelines, secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.
 
While it is the Company’s policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, management’s judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the ALLL and the size of the ALLL in comparison to a group of peer companies identified by the regulatory agencies. Management will consistently evaluate the ALLL methodology and seek to refine and enhance this process as appropriate. As a result, it is likely that the methodology will continue to evolve over time.
 
Note F to the financial statements (titled “Allowance for Loan Losses”) summarizes the Company’s allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at September 30, 2018 and December 31, 2017.
 
Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates
 
The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
 
Over the life of the PCI loans acquired, the Company continues to estimate cash flows expected to be collected. The Company evaluates at each balance sheet date whether the present value of the acquired loans using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.
 
Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates
 
Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. Core deposit intangibles are amortized on a straight-line basis, and are evaluated for indications of potential impairment at least annually. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We performed an annual impairment test of goodwill as required by FASB ASC 350, Intangibles—Goodwill and Other, in the fourth quarter of 2017. Seacoast conducted the test internally, documenting the impairment test results, and concluded that no impairment occurred. Goodwill was not recorded for the Grand acquisition (on July 17, 2015) that resulted in a bargain purchase gain; however a core deposit intangible was recorded.
 
Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

54

 
Other Fair Value Measurements – Critical Accounting Policies and Estimates
 
“As Is” values are used to measure fair market value on impaired loans, OREO and repossessed assets. All impaired loans, OREO and repossessed assets are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions.  When necessary, the “As Is” appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral dependent impaired loans are loans that are solely dependent on the liquidation of the collateral or operation of the collateral for repayment.  If an updated assessment is deemed necessary and an internal valuation cannot be made, an external “As Is” appraisal will be requested. Upon receipt of the “As Is” appraisal a charge-off is recognized for the difference between the loan amount and its current fair market value.
 
The fair value of the available for sale securities portfolio at September 30, 2018 was less than historical amortized cost, producing net unrealized losses of $24.8 million that have been included in other comprehensive income (loss) as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2018 and 2017. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions or from dealer quotes. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio.
 
During 2014, management identified $158.8 million of investment securities available for sale and transferred them to held for investment. The unrealized holding losses at the date of transfer totaled $3.1 million. For the securities that were transferred into the held for investment category from the available for sale category, the unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of a discount. At September 30, 2018, the remaining unamortized amount of these losses was $0.8 million. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount. Management believes the securities transferred are a core banking asset that they now intend to hold until maturity, and if interest rates were to increase before maturity, the fair values would be impacted more significantly and therefore are not consistent with the characteristics of an available for sale investment.
 
Seacoast Bank also holds 11,330 shares of Visa Class B stock, which following resolution of Visa's pending litigation will be converted to Visa Class A shares. Under the current conversion rate that became effective June 28, 2018, the Company expects to receive 1.6298 shares of Class A stock for each share of Class B stock, for a total of 18,465 shares of Visa Class A stock. Our ownership is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at a zero basis. Also included in other assets is a $6.1 million investment in a mutual fund carried at fair value.
 
Other Than Temporary Impairment of Securities – Critical Accounting Policies and Estimates
 
Seacoast reviews investments quarterly for other than temporary impairment (“OTTI”). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
 
Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company’s other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.
 

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Income Taxes and Realization of Deferred Tax Assets – Critical Accounting Policies and Estimates
 
Seacoast is subject to income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local jurisdictions. These laws can be complex and subject to interpretation. Seacoast makes assumptions about how these laws should be applied when determining the provision for income tax expense, including assumptions around the timing of when certain items may be deemed taxable.
 
Seacoast’s provision for income taxes is comprised of current and deferred taxes. Deferred taxes represent the difference in measurement of assets and liabilities for financial reporting purposes compared to income tax return purposes. Deferred tax assets may also be recognized in connection with certain net operating losses (NOLs) and tax credits. Deferred tax assets are recognized if, based upon management’s judgment, it is more likely than not the benefits of the deferred tax assets will be realized.
 
At September 30, 2018, the Company had net tax assets of $25.8 million, including net deferred tax assets (“DTA”) of $25.3 million and current receivable of $0.5 million. Although realization is not assured, management believes that realization of the carrying value of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASC 740 Income Taxes. In comparison, at December 31, 2017 the Company had a net DTA of $25.4 million.
 
Factors that support this conclusion:
 
•
Income before tax has steadily increased as a result of organic growth, and the 2015 Grand, 2016 Floridian and BMO, and 2017 GulfShore, NorthStar and PBCB acquisitions should further assist in achieving management’s forecast of future earnings which recovers the net operating loss carry-forwards well before expiration;
•
Credit costs and overall credit risk has been stable which decreases their impact on future taxable earnings;
•
Growth rates for loans are at levels adequately supported by loan officers and support staff;
•
We believe new loan production credit quality and concentrations are well managed; and
•
Current economic growth forecasts for Florida and the Company’s markets are supportive.

Contingent Liabilities – Critical Accounting Policies and Estimates
 
The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At September 30, 2018, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.

Interest Rate Sensitivity
 
Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility.
 
Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company’s third quarter 2018 Asset and Liability Management Committee (“ALCO”) model simulation indicates net interest income would increase 7.5% if interest rates increased 200 basis points in a parallel fashion over the next 12 months and 3.9% if interest rates increased 100 basis points in a parallel fashion over the next 12 months, and improve 13.3% and 7.0%, respectively, on a 13 to 24 month basis. This compares with the Company’s third quarter 2017 model simulation, which indicated net interest income would increase 7.1% if interest rates were increased 200 basis points in a parallel fashion over the next 12 months and 3.7% if interest rates increased 100 basis points, and improve 12.5% and 6.5%, respectively, on a 13 to 24 month basis. These simulations do not include the impact of accretion from purchased credit impaired, or unimpaired loans.
 
The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 22.2% at September 30, 2018. This result includes assumptions for core deposit re-pricing validated for the Company by an independent third party consulting group.
 

56

The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile.

Effects of Inflation and Changing Prices
 
The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation.
 
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See Management’s discussion and analysis “Interest Rate Sensitivity.”
 
Market risk refers to potential losses arising from changes in interest rates, and other relevant market rates or prices.
 
Interest rate risk, defined as the exposure of net interest income and Economic Value of Equity, or “EVE,” to adverse movements in interest rates, is the Company’s primary market risk, and mainly arises from the structure of the balance sheet (non-trading activities). The Company is also exposed to market risk in its investing activities. The Company’s Asset/Liability Committee, or “ALCO,” meets regularly and is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by the Company’s Board of Directors. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board. These limits reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons.
 
The Company also performs valuation analyses, which are used for evaluating levels of risk present in the balance sheet that might not be taken into account in the net interest income simulation analyses. Whereas net interest income simulation highlights exposures over a relatively short time horizon, valuation analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows, the net result of which is the EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risks and options risks embedded in the balance sheet. In contrast to the net interest income simulation, which assumes interest rates will change over a period of time, EVE uses instantaneous changes in rates.
 
EVE values only the current balance sheet, and does not incorporate the growth assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected changes in balances and pricing of the indeterminate life deposit portfolios. Core deposits are a more significant funding source for the Company, making the lives attached to core deposits more important to the accuracy of our modeling of EVE. The Company periodically reassesses its assumptions regarding the indeterminate lives of core deposits utilizing an independent third party resource to assist. With lower interest rates over a prolonged period, the average lives of core deposits have trended higher and favorably impacted our model estimates of EVE for higher rates. Based on our third quarter 2018 modeling, an instantaneous 100 basis point increase in rates is estimated to increase the EVE 6.4% versus the EVE in a stable rate environment, while a 200 basis point increase in rates is estimated to increase the EVE 12.9%.
 
While an instantaneous and severe shift in interest rates is used in this analysis to provide an estimate of exposure under an extremely adverse scenario, a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon, i.e., the next fiscal year. Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, change in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

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Item 4. CONTROLS AND PROCEDURES
 
The Company’s management, with the participation of its chief executive officer and chief financial officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of September 30, 2018 and concluded that those disclosure controls and procedures are effective. There have been no changes to the Company’s internal control over financial reporting that have occurred during the third quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
While the Company believes that its existing disclosure controls and procedures have been effective to accomplish these objectives, the Company intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.

Part II OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The Company and its subsidiaries, because of the nature of their business, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Company’s consolidated financial position, or operating results or cash flows.
 
Item 1A. Risk Factors
 
In addition to the other information set forth in this report, you should consider the factors discussed in “Part I, Item 1A. Risk Factors” in our report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition and prospective results. The risks described in this report, in our Form 10-K or our other SEC filings are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes with respect to the risk factors disclosed in our Annual Report on form 10-K for the year ended December 31, 2017.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer purchases of equity securities during the first nine months of 2018, entirely related to equity incentive plan activity, were as follows:

58

Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as part of Public
Announced Plan*
 
Maximum
Number of
Shares that May
yet be Purchased
Under the Plan
1/1/18 to 1/31/18
 
117

 
$
25.21

 
292,173

 
122,827

2/1/18 to 2/28/18
 
139

 
25.86

 
292,312

 
122,688

3/1/18 to 3/31/18
 
226

 
26.63

 
292,538

 
122,462

Total - 1st Quarter
 
482

 
25.90

 
292,538

 
122,462

4/1/18 to 4/30/18
 
26,163

 
26.47

 
318,701

 
96,299

5/1/18 to 5/31/18
 
—

 
—

 
318,701

 
96,299

6/1/18 to 6/30/18
 
111

 
31.54

 
318,812

 
96,188

Total - 2nd Quarter
 
26,274

 
26.49

 
318,812

 
96,188

7/1/18 to 7/31/18
 
2,763


31.58


321,575


93,425

8/1/18 to 8/31/18
 
—


—


321,575


93,425

9/1/18 to 9/30/18
 
—


—


321,575


93,425

Total - 3rd Quarter
 
2,763


31.58


321,575


93,425

Year to Date 2018
 
29,519

 
$
26.96

 
321,575

 
93,425

 
  *The plan to purchase equity securities totaling 165,000 was approved on September 18, 2001, with no expiration date. An additional 250,000 shares was added to the plan and approved on May 20, 2014.
 
Item 3. Defaults upon Senior Securities
 
None
 
Item 4. Mine Safety Disclosures
 
None
 
Item 5. Other Information
 
None

 

59

Item 6. Exhibits
 
 
 
 
 
Exhibit 3.1.1 Amended and Restated Articles of Incorporation  Incorporated herein by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed May 10, 2006.

 
 
 
Exhibit 3.1.2 Articles of Amendment to the Amended and Restated Articles of Incorporation  Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K, filed December 23, 2008.
 
 
 
Exhibit 3.1.3 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.4 to the Company's Form S-1, filed June 22, 2009.

 
 
 
Exhibit 3.1.4 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company's Form 8-K, filed July 20, 2009.

 
 
 
Exhibit 3.1.5 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K, filed December 3, 2009.
 
 
 
Exhibit 3.1.6 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K/A, filed July 14, 2010.
 
 
 
Exhibit 3.1.7 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K, filed June 25, 2010.
 
 
 
Exhibit 3.1.8 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K, filed June 1, 2011.
 
 
 
Exhibit 3.1.9 Articles of Amendment to the Amended and Restated Articles of Incorporation  Incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K, filed December 13, 2013.
 
 
 
Exhibit 3.1.10 Articles of Amendment to the Amended and Restated Articles of Incorporation Incorporated herein by reference from Exhibit 3.1 to the Company's Form 8K, filed May 30, 2018.
 
 
 
Exhibit 3.2 Amended and Restated By-laws of the Company  Incorporated herein by reference from Exhibit 3.2 to the Company’s Form 8-K, filed December 21, 2007.
 

60

 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 101
The following materials from Seacoast Banking Corporation of Florida’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Notes to Condensed Consolidated Financial Statements.



61

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
SEACOAST BANKING CORPORATION OF FLORIDA
 
November 6, 2018
/s/ Dennis S. Hudson, III
 
DENNIS S. HUDSON, III
 
Chairman & Chief Executive Officer
 
November 6, 2018
/s/ Charles M. Shaffer
 
CHARLES M. SHAFFER
 
Executive Vice President & Chief Financial Officer

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SEACOAST BANKING CORP OF FLORIDA Reports