UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________.
Commission File No. 0-13660
Seacoast Banking Corporation of Florida
(Exact Name of Registrant as Specified in its Charter)
Florida | 59-2260678 | |
(State or Other Jurisdiction of Incorporation or Organization |
(I.R.S. Employer Identification No.) |
815 COLORADO AVENUE, STUART FL | 34994 | |
(Address of Principal Executive Offices) | (Zip Code) |
(772) 287-4000 |
(Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated | Accelerated | Non-Accelerated | Small Reporting |
Filer ¨ | Filer x | Filer ¨ | Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Common Stock, $0.10 Par Value – 38,025,020 shares as of September 30, 2016
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I | FINANCIAL INFORMATION | PAGE # |
Item 1. | Financial Statements (Unaudited) | |
Condensed consolidated balance sheets – September 30, 2016 and December 31, 2015 |
3 | |
4 | ||
5 | ||
Consolidated statements of cash flows – Nine months ended September 30, 2016 and 2015 |
6-7 | |
Notes to condensed consolidated financial statements | 8-33 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34-62 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 63 |
Item 4. | Controls and Procedures | 64 |
Part II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 65 |
Item 1A. | Risk Factors | 65 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 65 |
Item 3. | Defaults upon Senior Securities | 66 |
Item 4. | Mine Safety Disclosures | 66 |
Item 5. | Other Information | 66 |
Item 6. | Exhibits | 67 |
SIGNATURES | 68 |
2 |
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
September 30, | December 31, | |||||||
(Dollars in thousands, except share amounts) | 2016 | 2015 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 89,777 | $ | 81,216 | ||||
Interest bearing deposits with other banks | 77,606 | 54,851 | ||||||
Total cash and cash equivalents | 167,383 | 136,067 | ||||||
Securities: | ||||||||
Available for sale (at fair value) | 866,613 | 790,766 | ||||||
Held for investment (fair value: $397,264 at September 30, | ||||||||
2016, and $202,813 at December 31, 2015) | 392,138 | 203,525 | ||||||
Total Securities | 1,258,751 | 994,291 | ||||||
Loans held for sale (at fair value) | 20,143 | 23,998 | ||||||
Loans | 2,769,338 | 2,156,330 | ||||||
Less: Allowance for loan losses | (22,684 | ) | (19,128 | ) | ||||
NET LOANS | 2,746,654 | 2,137,202 | ||||||
Bank premises and equipment, net | 59,035 | 54,579 | ||||||
Other real estate owned | 12,734 | 7,039 | ||||||
Goodwill | 64,649 | 25,211 | ||||||
Other intangible assets, net | 15,291 | 8,594 | ||||||
Bank owned life insurance | 44,044 | 43,579 | ||||||
Net deferred income taxes | 58,848 | 60,274 | ||||||
Other assets | 66,402 | 43,946 | ||||||
$ | 4,513,934 | $ | 3,534,780 | |||||
LIABILITIES | ||||||||
Deposits | $ | 3,510,493 | $ | 2,844,387 | ||||
Federal funds purchased and securities sold under | ||||||||
agreements to repurchase, maturing within 30 days | 167,693 | 172,005 | ||||||
Federal Home Loan Bank (FHLB) borrowings | 305,000 | 50,000 | ||||||
Subordinated debt | 70,171 | 69,961 | ||||||
Other liabilities | 25,058 | 44,974 | ||||||
4,078,415 | 3,181,327 | |||||||
SHAREHOLDERS' EQUITY | ||||||||
Common stock, par value $0.10 per share, authorized | ||||||||
60,000,000 shares, issued 38,068,701 and | ||||||||
outstanding 38,025,020 shares at September 30, | ||||||||
2016 and issued 34,356,892 and outstanding | ||||||||
34,351,409 shares at December 31, 2015 | 3,799 | 3,435 | ||||||
Other shareholders' equity | 431,720 | 350,018 | ||||||
TOTAL SHAREHOLDERS' EQUITY | 435,519 | 353,453 | ||||||
$ | 4,513,934 | $ | 3,534,780 |
See notes to condensed consolidated financial statements.
3 |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Interest and fees on loans | $ | 31,932 | $ | 25,276 | $ | 87,210 | $ | 69,285 | ||||||||
Interest and dividends on securities | 7,253 | 5,298 | 20,002 | 15,470 | ||||||||||||
Interest on interest bearing deposits and other | ||||||||||||||||
investments | 429 | 249 | 1,152 | 747 | ||||||||||||
TOTAL INTEREST INCOME | 39,614 | 30,823 | 108,364 | 85,502 | ||||||||||||
Interest on deposits | 1,292 | 857 | 3,447 | 2,450 | ||||||||||||
Interest on borrowed money | 874 | 955 | 2,754 | 2,665 | ||||||||||||
TOTAL INTEREST EXPENSE | 2,166 | 1,812 | 6,201 | 5,115 | ||||||||||||
NET INTEREST INCOME | 37,448 | 29,011 | 102,163 | 80,387 | ||||||||||||
Provision for loan losses | 550 | 987 | 1,411 | 2,275 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 36,898 | 28,024 | 100,752 | 78,112 | ||||||||||||
Noninterest income | ||||||||||||||||
Noninterest income, excluding securities gains | 9,764 | 8,082 | 27,505 | 24,236 | ||||||||||||
Securities gains, net (includes net losses of $(648) and $(494) in other | ||||||||||||||||
comprehensive income reclassifications for the three months ended | ||||||||||||||||
September 30, 2016 and 2015 respectively, and net losses of $(620) | ||||||||||||||||
and $(325) for the nine months ended September 30, 2016 and 2015, | ||||||||||||||||
respectively.) | 225 | 160 | 361 | 160 | ||||||||||||
TOTAL NONINTEREST INCOME (see NOTE H) | 9,989 | 8,242 | 27,866 | 24,396 | ||||||||||||
TOTAL NONINTEREST EXPENSE (see NOTE H) | 33,435 | 29,127 | 100,584 | 76,601 | ||||||||||||
INCOME BEFORE INCOME TAXES | 13,452 | 7,139 | 28,034 | 25,907 | ||||||||||||
Provision for income taxes (includes $(250) and $(191) in income tax | ||||||||||||||||
benefit from reclassification items for the three months ended | ||||||||||||||||
September 30, 2016 and 2015, respectively, and $(239) and $(125) | ||||||||||||||||
in income tax benefit for the nine months ended September 30, | ||||||||||||||||
2016 and 2015, respectively.) | 4,319 | 2,698 | 9,603 | 9,802 | ||||||||||||
NET INCOME | $ | 9,133 | $ | 4,441 | $ | 18,431 | $ | 16,105 | ||||||||
PER SHARE COMMON STOCK: | ||||||||||||||||
Net income diluted | $ | 0.24 | $ | 0.13 | $ | 0.49 | $ | 0.48 | ||||||||
Net income basic | 0.24 | 0.13 | 0.50 | 0.48 | ||||||||||||
Cash dividends declared | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
Average shares outstanding - diluted | 38,169,863 | 34,193,540 | 37,258,133 | 33,524,718 | ||||||||||||
Average shares outstanding - basic | 37,549,804 | 33,907,178 | 36,626,290 | 33,286,933 |
See notes to condensed consolidated financial statements.
4 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
NET INCOME | $ | 9,133 | $ | 4,441 | $ | 18,431 | $ | 16,105 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gains (losses) on securities available for sale | (1,020 | ) | 1,757 | 16,096 | 4,223 | |||||||||||
Amortization of unrealized losses on securities transferred to held | ||||||||||||||||
for investment, net | (122 | ) | (123 | ) | (365 | ) | (416 | ) | ||||||||
Reclassification adjustment for losses (gains) included in net income | 648 | 494 | 620 | 325 | ||||||||||||
Provision for income taxes | 195 | (822 | ) | (6,307 | ) | (1,595 | ) | |||||||||
COMPREHENSIVE INCOME | $ | 8,834 | $ | 5,747 | $ | 28,475 | $ | 18,642 |
See notes to condensed consolidated financial statements.
5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Nine Months Ended | ||||||||
September 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Cash flows from operating activities | ||||||||
Interest received | $ | 108,041 | $ | 85,115 | ||||
Fees and commissions received | 26,761 | 23,833 | ||||||
Interest paid | (5,693 | ) | (5,091 | ) | ||||
Cash paid to suppliers and employees | (86,824 | ) | (71,573 | ) | ||||
Origination of loans designated held for sale | (132,482 | ) | (159,662 | ) | ||||
Sale of loans designated held for sale | 136,337 | 155,002 | ||||||
Net change in other assets | (5,274 | ) | (578 | ) | ||||
Net cash provided by operating activities | 40,866 | 27,046 | ||||||
Cash flows from investing activities | ||||||||
Maturity of securities available for sale | 93,538 | 93,830 | ||||||
Maturity of securities held for investment | 29,582 | 23,115 | ||||||
Proceeds from sale of securities available for sale | 39,408 | 60,314 | ||||||
Purchases of securities available for sale | (159,576 | ) | (87,468 | ) | ||||
Purchases of securities held for investment | (218,654 | ) | (24,366 | ) | ||||
Net new loans and principal repayments | (280,915 | ) | (172,858 | ) | ||||
Proceeds from the sale of other real estate owned | 4,987 | 4,688 | ||||||
Proceeds from sale of Federal Home Loan Bank | ||||||||
(FHLB) and Federal Reserve Bank stock | 1,700 | 7,427 | ||||||
Purchase of FHLB and Federal Reserve Stock | (16,213 | ) | (6,798 | ) | ||||
Net cash from bank acquisition | 235,546 | 32,927 | ||||||
Additions to bank premises and equipment | (5,099 | ) | (8,466 | ) | ||||
Net cash (used in) provided by investing activities | (275,696 | ) | (77,655 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in deposits | 14,598 | 137,307 | ||||||
Net decrease in federal funds purchased and | ||||||||
repurchase agreements | (4,312 | ) | (6,690 | ) | ||||
Net increase (decrease) in FHLB borrowings | 255,000 | (80,000 | ) | |||||
Stock based employee benefit plans | 860 | 94 | ||||||
Dividends paid | 0 | 0 | ||||||
Net cash provided by financing activities | 266,146 | 50,711 | ||||||
Net decrease in cash and cash equivalents | 31,316 | 102 | ||||||
Cash and cash equivalents at beginning of period | 136,067 | 100,539 | ||||||
Cash and cash equivalents at end of period | $ | 167,383 | $ | 100,641 |
See notes to condensed consolidated financial statements.
6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Nine Months Ended | ||||||||
September 30, | ||||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Reconciliation of net income to cash provided by | ||||||||
operating activities | ||||||||
Net income | $ | 18,431 | $ | 16,105 | ||||
Adjustments to reconcile net income to net cash provided | ||||||||
by operating activities: | ||||||||
Depreciation | 3,774 | 2,722 | ||||||
Amortization of premiums and discounts on securities, net | 6,381 | 3,061 | ||||||
Other amortization and accretion, net | (1,862 | ) | (1,895 | ) | ||||
Change in loans held for sale, net | 3,855 | (4,660 | ) | |||||
Provision for loan losses | 1,411 | 2,275 | ||||||
Gain on sale of securities | (361 | ) | (160 | ) | ||||
Gain on sale of loans | (935 | ) | (658 | ) | ||||
Losses (gains) on sale and write-downs of other real estate owned | (348 | ) | 397 | |||||
Losses on disposition of fixed assets | 2,440 | 120 | ||||||
Change in interest receivable | (2,866 | ) | (527 | ) | ||||
Change in interest payable | 297 | 24 | ||||||
Change in prepaid expenses | (889 | ) | (1,097 | ) | ||||
Change in accrued taxes | 10,184 | 10,326 | ||||||
Change in other assets | (5,274 | ) | (578 | ) | ||||
Change in other liabilities | 6,628 | 1,591 | ||||||
Net cash provided by operating activities | $ | 40,866 | $ | 27,046 | ||||
Supplemental disclosure of non cash investing activities: | ||||||||
Fair value adjustment to securities | $ | 15,985 | $ | 3,711 | ||||
Transfer from loans to other real estate owned | 2,996 | 4,937 | ||||||
Transfer from bank premises to other real estate owned | 7,708 | 0 | ||||||
Securities principal recorded as a receivable | 647 | 96 |
See notes to condensed consolidated financial statements.
7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Seacoast Banking Corporation of Florida and Subsidiaries
NOTE A — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
Use of Estimates
The preparation of these condensed consolidated financial statements required the use of certain estimates by management in determining the Company’s assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, fair value of other real estate owned, the fair value of acquired assets and assumed liabilities, and the valuation of deferred tax assets. Actual results could differ from those estimates.
Early Adoption of Accounting Standard Update
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-09 for “Compensation—Stock Compensation, Improvements to Employee Share Based Payments Accounting.” The guidance alters the manner in which companies account for share based payments to employees. Entities are required to immediately recognize income tax effects of awards in the income statement when the awards vest or are settled. Additional paid-in capital pools are eliminated. The Company early adopted ASU 2016-09 during the three months ended September 30, 2016. As a result of the adoption, the Company recognized a $418,000 tax benefit in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016, which added $0.01 to diluted and basic earnings per share for the three and nine month periods ended September 30, 2016. In addition, the Company presented excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method. The Company also made an accounting policy election to account for forfeitures utilizing estimates for expected forfeiture rates. This policy election did not have a material impact on the Company’s consolidated financial statements. Adoption of all other changes did not have an impact on our consolidated financial statements.
8 |
NOTE B — RECENTLY ISSUED ACCOUNTING STANDARDS, Not adopted as of September 30, 2016
The FASB issued ASU 2014-09. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective on January 1, 2018, with early adoption permitted January 1, 2017. The Company is currently assessing the impact of adoption of ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01 for “Recognition and Measurement of Financial Assets and Liabilities”. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The update requires: a) equity investments (except those accounted for under the equity method of accounting) to be measured at fair value and recognized in net income, b) simplifies impairment assessments of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and if impaired requires measurement of the investment at fair value, c) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value d) requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, e) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The ASU is effective for fiscal years beginning after December 15, 2017, and must be adopted on a modified retrospective basis, including interim periods within those fiscal years. The adoption of ASU 2016-01 is being evaluated for its impact on the Company’s operating results and financial condition.
In February 2016, the FASB amended existing guidance related to the recognition of lease assets and lease liabilities on the balance sheet and disclosures on key information about leasing arrangements, under ASU 2016-02. It will be necessary for all parties to classify leases to determine how to recognize lease-related revenue and expense. The amendment requires lessees to put most leases on their balance sheet and record expenses to the income statement. Changes in the guidance eliminate real estate centric provisions for sale-leaseback transactions, including initial direct costs and lease execution costs for all entities. For lessors, the new FASB standard modifies classification criteria and accounting for sales type and direct financing leases. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. The amended accounting is applicable to periods after December 15, 2018 and interim periods within that year.
In March 2016, under ASU 2016-04, “Liabilities – Extinguishments of Liabilities, Breakage for Certain Prepaid Stored-Value Products” the FASB intends for entities to recognize liabilities for the sale of prepaid stored value products redeemable for goods, services, or cash. This guidance aligns recognition of breakage for these liabilities in a way consistent with how gift card breakage will be recognized. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Effective date for implementation is for annual periods after December 15, 2018.
9 |
In June 2016, the FASB issued ASU 2016-13 for “Measurement of Credit Losses on Financial Instruments” to replace the incurred loss impairment methodology with a current expected credit loss methodology for financial instruments measured at amortized cost and other commitments to extend credit. Expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability of cash flows, including information about past events, current conditions, and supportable forecasts. The resultant allowance for credit losses reflects the portion of the amortized cost basis that the entity does not expect to collect. Additional quantitative and qualitative disclosures are required upon adoption. The Company is evaluating the impact of the ASU. Adoption is required January 1, 2020, with early adoption permitted January 1, 2019.
In August 2016, The FASB issued final guidance via ASU 2016-15 for “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” The guidance may change how an entity classifies certain cash receipts and cash payments on its statement of cash flows, the purpose being to reduce diversity in practice. This ASU addresses the classification of cash flows for (a) debt prepayment or extinguishment costs, (b) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (c) contingent consideration payments made after a business combination, (d) proceeds from the settlement of insurance claims, (e) proceeds from the settlement of corporate owned life insurance, including bank owned life insurance, (f) distributions received from equity method investees, and (g) beneficial interests in securitization transactions. The guidance clarifies how the predominance principle should be applied. Entities should apply guidance in Accounting Standards Codification (ASC) 230. If not addressed, an entity should separately identify source or use and classify the receipt or payment based on the nature of the cash flow. Classification will depend on the predominant source of use. The Company is evaluating the impact of ASU 2016-15 which will generally be applied retrospectively for fiscal years beginning after December 15, 2017.
NOTE C — BASIC AND DILUTED EARNINGS PER COMMON SHARE
For each of the periods ended September 30, 2016 and 2015, options to purchase 189,000 shares and 282,000 shares, respectively, were antidilutive and accordingly were excluded in determining diluted earnings per share.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Basic: | ||||||||||||||||
Income available to common shareholders | $ | 9,133 | $ | 4,441 | $ | 18,431 | $ | 16,105 | ||||||||
Average basic shares outstanding | 37,549,804 | 33,907,178 | 36,626,290 | 33,286,933 | ||||||||||||
Basic earnings per share | $ | 0.24 | $ | 0.13 | $ | 0.50 | $ | 0.48 | ||||||||
Diluted: | ||||||||||||||||
Income available to common shareholders plus | ||||||||||||||||
assumed conversions | $ | 9,133 | $ | 4,441 | $ | 18,431 | $ | 16,105 | ||||||||
Average basic shares outstanding | 37,549,804 | 33,907,178 | 36,626,290 | 33,286,933 | ||||||||||||
Restricted stock and stock options | 620,059 | 286,362 | 631,843 | 237,785 | ||||||||||||
Average diluted shares outstanding | 38,169,863 | 34,193,540 | 37,258,133 | 33,524,718 | ||||||||||||
Diluted earnings per share | $ | 0.24 | $ | 0.13 | $ | 0.49 | $ | 0.48 |
NOTE D — SECURITIES
The amortized cost and fair value of securities available for sale and held for investment at September 30, 2016 and December 31, 2015 are summarized as follows:
10 |
September 30, 2016 | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
SECURITIES AVAILABLE FOR SALE | ||||||||||||||||
U.S. Treasury securities and obligations | ||||||||||||||||
of U.S. Government Sponsored Entities | $ | 12,485 | $ | 333 | $ | 0 | $ | 12,818 | ||||||||
Mortgage-backed securities of U.S. | ||||||||||||||||
Government Sponsored Entities | 165,802 | 3,268 | (96 | ) | 168,974 | |||||||||||
Collateralized mortgage obligations of | ||||||||||||||||
U.S. Government Sponsored Entities | 251,419 | 2,043 | (979 | ) | 252,483 | |||||||||||
Private mortgage backed securities | 32,720 | 0 | (688 | ) | 32,032 | |||||||||||
Private collateralized mortgage obligations | 73,371 | 617 | (860 | ) | 73,128 | |||||||||||
Collateralized loan obligations | 124,663 | 437 | (676 | ) | 124,424 | |||||||||||
Obligations of state and political subdivisions | 61,798 | 2,688 | (52 | ) | 64,434 | |||||||||||
Corporate and other debt securities | 75,552 | 1,125 | (39 | ) | 76,638 | |||||||||||
Commercial mortgage backed securities | 60,624 | 1,301 | (243 | ) | 61,682 | |||||||||||
$ | 858,434 | $ | 11,812 | $ | (3,633 | ) | $ | 866,613 | ||||||||
SECURITIES HELD FOR INVESTMENT | ||||||||||||||||
Mortgage-backed securities of | ||||||||||||||||
U.S. Government Sponsored Entities | $ | 183,507 | $ | 4,306 | $ | 0 | $ | 187,813 | ||||||||
Collateralized mortgage obligations of | ||||||||||||||||
U.S. Government Sponsored Entities | 160,377 | 1,618 | (405 | ) | 161,590 | |||||||||||
Collateralized loan obligations | 41,494 | 183 | (465 | ) | 41,212 | |||||||||||
Private collateralized mortgage obligations | 6,760 | 1 | (112 | ) | 6,649 | |||||||||||
$ | 392,138 | $ | 6,108 | $ | (982 | ) | $ | 397,264 |
December 31, 2015 | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
SECURITIES AVAILABLE FOR SALE | ||||||||||||||||
U.S. Treasury securities and obligations | ||||||||||||||||
of U.S. Government Sponsored Entities | $ | 3,833 | $ | 78 | $ | 0 | $ | 3,911 | ||||||||
Mortgage-backed securities of U.S. | ||||||||||||||||
Government Sponsored Entities | 192,224 | 847 | (1,322 | ) | 191,749 | |||||||||||
Collateralized mortgage obligations of | ||||||||||||||||
U.S. Government Sponsored Entities | 242,620 | 470 | (4,900 | ) | 238,190 | |||||||||||
Private mortgage backed securities | 32,558 | 0 | (766 | ) | 31,792 | |||||||||||
Private collateralized mortgage obligations | 77,965 | 700 | (708 | ) | 77,957 | |||||||||||
Collateralized loan obligations | 124,477 | 0 | (1,894 | ) | 122,583 | |||||||||||
Obligations of state and political subdivisions | 39,119 | 882 | (110 | ) | 39,891 | |||||||||||
Corporate and other debt securities | 44,652 | 37 | (416 | ) | 44,273 | |||||||||||
Commercial mortgage backed securities | 41,127 | 13 | (720 | ) | 40,420 | |||||||||||
$ | 798,575 | $ | 3,027 | $ | (10,836 | ) | $ | 790,766 | ||||||||
SECURITIES HELD FOR INVESTMENT | ||||||||||||||||
Mortgage-backed securities of | ||||||||||||||||
U.S. Government Sponsored Entities | $ | 64,993 | $ | 574 | $ | (16 | ) | $ | 65,551 | |||||||
Collateralized mortgage obligations of | ||||||||||||||||
U.S. Government Sponsored Entities | 89,265 | 581 | (406 | ) | 89,440 | |||||||||||
Collateralized loan obligations | 41,300 | 0 | (1,360 | ) | 39,940 | |||||||||||
Private collateralized mortgage obligations | 7,967 | 0 | (85 | ) | 7,882 | |||||||||||
$ | 203,525 | $ | 1,155 | $ | (1,867 | ) | $ | 202,813 |
11 |
Proceeds from sales of securities during the nine month period ended September 30, 2016 were $39.4 million, with gross gains of $448,000 and gross losses of $87,000. Proceeds from sales of securities during the nine month period ended September 30, 2015 were $60.3 million, with gross gains of $632,000 and gross losses of $472,000.
In 2014, approximately $158.8 million of investment securities available for sale were transferred into held for investment. The unrealized holding losses at the date of transfer totaled $3.1 million. For the securities transferred into the held for investment category from available for sale, unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of these securities as an adjustment of yield in a manner consistent with the amortization of a discount. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount. At September 30, 2016, the remaining unrealized holding losses totaled $1.9 million.
Securities at September 30, 2016 with a carrying and fair value of $161.0 were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Securities with both a carrying value and fair value of $167.7 million were pledged as collateral for repurchase agreements.
The amortized cost and fair value of securities at September 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because prepayments of the underlying collateral for these securities may occur, due to the right to call or repay obligations with or without call or prepayment penalties.
Held for Investment | Available for Sale | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Value | Cost | Value | ||||||||||||
Due in less than one year | $ | 0 | $ | 0 | $ | 7,760 | $ | 7,934 | ||||||||
Due after one year through | ||||||||||||||||
five years | 0 | 0 | 83,490 | 84,017 | ||||||||||||
Due after five years | ||||||||||||||||
through ten years | 41,494 | 41,212 | 139,005 | 140,811 | ||||||||||||
Due after ten years | 0 | 0 | 33,131 | 34,422 | ||||||||||||
41,494 | 41,212 | 263,386 | 267,184 | |||||||||||||
Mortgage-backed | ||||||||||||||||
securities of U.S. Government | ||||||||||||||||
Sponsored Entities | 183,507 | 187,813 | 165,802 | 168,974 | ||||||||||||
Collateralized mortgage | ||||||||||||||||
obligations of U.S. Government | ||||||||||||||||
Sponsored Entities | 160,377 | 161,590 | 251,419 | 252,483 | ||||||||||||
Private mortgage backed securities | 0 | 0 | 32,720 | 32,032 | ||||||||||||
Private collateralized mortgage | ||||||||||||||||
obligations | 6,760 | 6,649 | 73,371 | 73,128 | ||||||||||||
Other debt securities | 0 | 0 | 11,112 | 11,130 | ||||||||||||
Commercial mortgage | ||||||||||||||||
backed securities | 0 | 0 | 60,624 | 61,682 | ||||||||||||
$ | 392,138 | $ | 397,264 | $ | 858,434 | $ | 866,613 |
The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at September 30, 2016 and December 31, 2015, respectively.
12 |
September 30, 2016 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Mortgage-backed securities of | ||||||||||||||||||||||||
U.S. Government Sponsored Entities | $ | 5,241 | $ | (9 | ) | $ | 5,735 | $ | (87 | ) | $ | 10,976 | $ | (96 | ) | |||||||||
Collateralized mortgage obligations of | ||||||||||||||||||||||||
U.S. Government Sponsored Entities | 96,741 | (492 | ) | 72,794 | (892 | ) | 169,535 | (1,384 | ) | |||||||||||||||
Private mortgage backed securities | 15,007 | (520 | ) | 17,025 | (168 | ) | 32,032 | (688 | ) | |||||||||||||||
Private collateralized mortgage obligations | 3,588 | (141 | ) | 43,918 | (831 | ) | 47,506 | (972 | ) | |||||||||||||||
Collateralized loan obligations | 0 | 0 | 51,460 | (1,141 | ) | 51,460 | (1,141 | ) | ||||||||||||||||
Obligations of state and political subdivisions | 3,692 | (52 | ) | 0 | 0 | 3,692 | (52 | ) | ||||||||||||||||
Corporate and other debt securities | 8,192 | (35 | ) | 1,996 | (4 | ) | 10,188 | (39 | ) | |||||||||||||||
Commercial mortgage backed securities | 2,951 | (10 | ) | 11,810 | (233 | ) | 14,761 | (243 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 135,412 | $ | (1,259 | ) | $ | 204,738 | $ | (3,356 | ) | $ | 340,150 | $ | (4,615 | ) |
December 31, 2015 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Mortgage-backed securities of | ||||||||||||||||||||||||
U.S. Government Sponsored Entities | $ | 112,236 | $ | (1,082 | ) | $ | 14,508 | $ | (256 | ) | $ | 126,744 | $ | (1,338 | ) | |||||||||
Collateralized mortgage obligations of | ||||||||||||||||||||||||
U.S. Government Sponsored Entities | 97,512 | (973 | ) | 147,266 | (4,333 | ) | 244,778 | (5,306 | ) | |||||||||||||||
Private mortgage backed securities | 31,792 | (766 | ) | 0 | 0 | 31,792 | (766 | ) | ||||||||||||||||
Private collateralized mortgage obligations | 19,939 | (321 | ) | 31,533 | (472 | ) | 51,472 | (793 | ) | |||||||||||||||
Collateralized loan obligations | 101,601 | (1,642 | ) | 60,922 | (1,612 | ) | 162,523 | (3,254 | ) | |||||||||||||||
Obligations of state and political subdivisions | 11,570 | (110 | ) | 0 | 0 | 11,570 | (110 | ) | ||||||||||||||||
Corporate and other debt securities | 31,342 | (416 | ) | 0 | 0 | 31,342 | (416 | ) | ||||||||||||||||
Commercial mortgage backed securities | 37,838 | (720 | ) | 0 | 0 | 37,838 | (720 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 443,830 | $ | (6,030 | ) | $ | 254,229 | $ | (6,673 | ) | $ | 698,059 | $ | (12,703 | ) |
The tables above include securities held for investment that were transferred from available for sale into held for investment during 2014. Those securities had unrealized losses of $3.1 million at the date of transfer. None of these securities had a fair value with an unrealized loss for less than twelve months at September 30, 2016. At December 31, 2015, the fair value of those securities in an unrealized loss position for less than twelve months was $38.9 million, and the unrealized losses on those securities in an unrealized loss position for less than twelve months was $0.4 million. None of these securities were in an unrealized loss position for more than twelve months at September 30, 2016 and December 31, 2015, respectively.
At September 30, 2016, private label securities with a fair value of $79.5 million secured by collateral originated in 2005 and prior were in an unrealized loss position. Their unrealized loss position of approximately $1.7 million is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgage loans with low loan to values, subordination and all historically have had minimal foreclosures. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
13 |
At September 30, 2016, the Company also had $1.5 million of unrealized losses on collateralized mortgage obligations and mortgage backed securities of government sponsored entities having a fair value of $180.5 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
At September 30, 2016, the Company also had $1.1 million of unrealized losses on collateralized loan obligations having a fair value of $51.5 million that were attributable to a combination of factors, including relative changes in interest rates, spreads and interest movements since the time of purchase. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
At September 30, 2016, $28.7 million of remaining securities categories had unrealized losses of $0.3 million. Management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not change in credit quality.
As of September 30, 2016, management does not intend to sell securities that are in unrealized loss positions and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at September 30, 2016.
Included in other assets is $30.9 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At September 30, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the carrying value of the $30.9 million of cost method investment securities.
The Company also holds 11,330 shares of Visa Class B stock, which following resolution of Visa litigation will be converted to Visa Class A shares (the conversion rate was 1.6483 shares of Class A stock for each share of Class B stock) for a total of 18,675 shares of Visa Class A stock with a value of $1.5 million. Our ownership is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at a zero basis.
NOTE E — LOANS
Information relating to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) is summarized as follows:
September 30, 2016 | Portfolio Loans | PCI Loans | PUL's | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Construction and land development | $ | 129,239 | $ | 114 | $ | 24,548 | $ | 153,901 | ||||||||
Commercial real estate | 947,612 | 11,281 | 334,619 | 1,293,512 | ||||||||||||
Residential real estate | 772,579 | 685 | 60,149 | 833,413 | ||||||||||||
Commercial and financial | 278,065 | 977 | 63,459 | 342,501 | ||||||||||||
Consumer | 144,291 | 0 | 1,231 | 145,522 | ||||||||||||
Other loans | 489 | 0 | 0 | 489 | ||||||||||||
NET LOAN BALANCES (1) | $ | 2,272,275 | $ | 13,057 | $ | 484,006 | $ | 2,769,338 |
December 31, 2015 | Portfolio Loans | PCI Loans | PUL's | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Construction and land development | $ | 97,629 | $ | 114 | $ | 11,044 | $ | 108,787 | ||||||||
Commercial real estate | 776,875 | 9,990 | 222,513 | 1,009,378 | ||||||||||||
Residential real estate | 678,131 | 922 | 44,732 | 723,785 | ||||||||||||
Commercial and financial | 188,013 | 1,083 | 39,421 | 228,517 | ||||||||||||
Consumer | 82,717 | 0 | 2,639 | 85,356 | ||||||||||||
Other loans | 507 | 0 | 0 | 507 | ||||||||||||
NET LOAN BALANCES (1) | $ | 1,823,872 | $ | 12,109 | $ | 320,349 | $ | 2,156,330 |
(1) Net loan balances as of September 30, 2016 and December 31, 2015 include deferred fee/costs (net) and fair value adjustments on acquired loans, aggregating to $12.4 million and $7.7 million for each period, respectively.
Purchased Loans - PCI loans are accounted for pursuant to ASC Topic 310-30. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference.
We have applied ASC Topic 310-20 accounting treatment to PULs. The unamortized fair value mark established at acquisition on the loans has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans.
The table below summarize the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of PCI loans during the three and nine month periods ended September 30, 2016 and 2015. Contractually required principal and interest payments have been adjusted for estimated prepayments.
14 |
Three Months Ended September 30, 2016 | Reclassifications from | |||||||||||||||||||||||
June
30, 2016 | Additions | Deletions | Accretion | nonaccretable difference | September
30, 2016 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Contractually required principal and interest | $ | 24,576 | $ | 0 | $ | (376 | ) | $ | 0 | $ | 0 | $ | 24,200 | |||||||||||
Nonaccretable difference | (6,250 | ) | 0 | (711 | ) | 0 | 0 | (6,961 | ) | |||||||||||||||
Cash flows expected to be collected | 18,326 | 0 | (1,087 | ) | 0 | 0 | 17,239 | |||||||||||||||||
Accretable yield | (4,674 | ) | 0 | 113 | 379 | 0 | (4,182 | ) | ||||||||||||||||
Carrying value of acquired loans | 13,652 | $ | 0 | $ | (974 | ) | $ | 379 | $ | 0 | 13,057 | |||||||||||||
Allowance for loan losses | 0 | 0 | ||||||||||||||||||||||
Carrying value less allowance for loan losses | $ | 13,652 | $ | 13,057 | ||||||||||||||||||||
Nine Months Ended September 30, 2016 | Reclassifications from | |||||||||||||||||||||||
December
31, 2015 | Additions | Deletions | Accretion | nonaccretable difference | September
30, 2016 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Contractually required principal and interest | $ | 19,966 | $ | 9,148 | $ | (4,914 | ) | $ | 0 | $ | 0 | $ | 24,200 | |||||||||||
Nonaccretable difference | (5,247 | ) | (4,109 | ) | 2,395 | 0 | 0 | (6,961 | ) | |||||||||||||||
Cash flows expected to be collected | 14,719 | 5,039 | (2,519 | ) | 0 | 0 | 17,239 | |||||||||||||||||
Accretable yield | (2,610 | ) | (1,831 | ) | (1,158 | ) | 1,417 | 0 | (4,182 | ) | ||||||||||||||
Carrying value of acquired loans | 12,109 | $ | 3,208 | $ | (3,677 | ) | $ | 1,417 | $ | 0 | 13,057 | |||||||||||||
Allowance for loan losses | 0 | 0 | ||||||||||||||||||||||
Carrying value less allowance for loan losses | $ | 12,109 | $ | 13,057 | ||||||||||||||||||||
Three Months Ended September 30, 2015 | Reclassifications from | |||||||||||||||||||||||
June
30, 2015 | Additions | Deletions | Accretion | nonaccretable difference | September
30, 2015 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Contractually required principal and interest | $ | 11,564 | $ | 12,552 | $ | (609 | ) | $ | 0 | $ | 0 | $ | 23,507 | |||||||||||
Nonaccretable difference | (3,901 | ) | (4,249 | ) | (1,656 | ) | 0 | 152 | (9,654 | ) | ||||||||||||||
Cash flows expected to be collected | 7,663 | 8,303 | (2,265 | ) | 0 | 152 | 13,853 | |||||||||||||||||
Accretable yield | (1,101 | ) | (702 | ) | 610 | 165 | (152 | ) | (1,180 | ) | ||||||||||||||
Carrying value of acquired loans | 6,562 | $ | 7,601 | $ | (1,655 | ) | $ | 165 | $ | 0 | 12,673 | |||||||||||||
Allowance for loan losses | (212 | ) | (49 | ) | ||||||||||||||||||||
Carrying value less allowance for loan losses | $ | 6,350 | $ | 12,624 | ||||||||||||||||||||
Nine Months Ended September 30, 2015 | Reclassifications from | |||||||||||||||||||||||
December 31, 2014 | Additions | Deletions | Accretion | nonaccretable difference | September
30, 2015 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Contractually required principal and interest | $ | 14,831 | $ | 12,552 | $ | (3,876 | ) | $ | 0 | $ | 0 | $ | 23,507 | |||||||||||
Nonaccretable difference | (5,825 | ) | (4,249 | ) | 7 | 0 | 413 | (9,654 | ) | |||||||||||||||
Cash flows expected to be collected | 9,006 | 8,303 | (3,869 | ) | 0 | 413 | 13,853 | |||||||||||||||||
Accretable yield | (1,192 | ) | (702 | ) | 758 | 369 | (413 | ) | (1,180 | ) | ||||||||||||||
Carrying value of acquired loans | 7,814 | $ | 7,601 | $ | (3,111 | ) | $ | 369 | $ | 0 | 12,673 | |||||||||||||
Allowance for loan losses | (64 | ) | (49 | ) | ||||||||||||||||||||
Carrying value less allowance for loan losses | $ | 7,750 | $ | 12,624 |
15 |
The following tables present the contractual delinquency of the recorded investment in past due loans by class of loans as of September 30, 2016 and December 31, 2015:
Accruing | ||||||||||||||||||||||||
Accruing | Accruing | Greater | Total | |||||||||||||||||||||
September 30, 2016 | 30-59 Days | 60-89 Days | Than | Financing | ||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | 90 Days | Nonaccrual | Current | Receivables | ||||||||||||||||||
Portfolio Loans | ||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 229 | $ | 129,010 | $ | 129,239 | ||||||||||||
Commercial real estate | 2,270 | 1,257 | 0 | 1,296 | 942,789 | 947,612 | ||||||||||||||||||
Residential real estate | 574 | 361 | 0 | 8,730 | 762,914 | 772,579 | ||||||||||||||||||
Commercial and financial | 399 | 0 | 0 | 137 | 277,529 | 278,065 | ||||||||||||||||||
Consumer | 66 | 0 | 0 | 169 | 144,056 | 144,291 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 489 | 489 | ||||||||||||||||||
Total | 3,309 | 1,618 | 0 | 10,561 | 2,256,787 | $ | 2,272,275 | |||||||||||||||||
Purchased Unimpaired Loans | ||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 34 | $ | 24,514 | $ | 24,548 | ||||||||||||
Commercial real estate | 148 | 0 | 0 | 2,008 | 332,463 | 334,619 | ||||||||||||||||||
Residential real estate | 0 | 0 | 0 | 1,271 | 58,878 | 60,149 | ||||||||||||||||||
Commercial and financial | 333 | 352 | 0 | 209 | 62,565 | 63,459 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 1,231 | 1,231 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 481 | 352 | 0 | 3,522 | 479,651 | $ | 484,006 | |||||||||||||||||
Purchased Credit Impaired Loans | ||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 114 | $ | 114 | ||||||||||||
Commercial real estate | 0 | 0 | 0 | 4,354 | 6,927 | 11,281 | ||||||||||||||||||
Residential real estate | 182 | 0 | 0 | 0 | 503 | 685 | ||||||||||||||||||
Commercial and financial | 0 | 0 | 0 | 0 | 977 | 977 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 182 | 0 | 0 | 4,354 | 8,521 | $ | 13,057 | |||||||||||||||||
Total Loans | $ | 3,972 | $ | 1,970 | $ | 0 | $ | 18,437 | $ | 2,744,959 | $ | 2,769,338 |
16 |
Accruing | ||||||||||||||||||||||||
Accruing | Accruing | Greater | Total | |||||||||||||||||||||
December 31, 2015 | 30-59 Days | 60-89 Days | Than | Financing | ||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | 90 Days | Nonaccrual | Current | Receivables | ||||||||||||||||||
Portfolio Loans | ||||||||||||||||||||||||
Construction and land development | $ | 665 | $ | 0 | $ | 0 | $ | 269 | $ | 96,695 | $ | 97,629 | ||||||||||||
Commercial real estate | 810 | 0 | 0 | 2,301 | 773,764 | 776,875 | ||||||||||||||||||
Residential real estate | 141 | 0 | 0 | 9,941 | 668,049 | 678,131 | ||||||||||||||||||
Commercial and financial | 59 | 0 | 0 | 0 | 187,954 | 188,013 | ||||||||||||||||||
Consumer | 430 | 0 | 0 | 247 | 82,040 | 82,717 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 507 | 507 | ||||||||||||||||||
Total | $ | 2,105 | $ | 0 | $ | 0 | $ | 12,758 | $ | 1,809,009 | $ | 1,823,872 | ||||||||||||
Purchased Unimpaired Loans | ||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 40 | $ | 11,004 | $ | 11,044 | ||||||||||||
Commercial real estate | 179 | 0 | 0 | 2,294 | 220,040 | 222,513 | ||||||||||||||||||
Residential real estate | 66 | 0 | 0 | 0 | 44,666 | 44,732 | ||||||||||||||||||
Commercial and financial | 39 | 0 | 0 | 130 | 39,252 | 39,421 | ||||||||||||||||||
Consumer | 39 | 0 | 0 | 0 | 2,600 | 2,639 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | $ | 323 | $ | 0 | $ | 0 | $ | 2,464 | $ | 317,562 | $ | 320,349 | ||||||||||||
Purchased Impaired Loans | ||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 114 | $ | 114 | ||||||||||||
Commercial real estate | 132 | 0 | 0 | 1,816 | 8,042 | 9,990 | ||||||||||||||||||
Residential real estate | 0 | 0 | 0 | 348 | 574 | 922 | ||||||||||||||||||
Commercial and financial | 0 | 0 | 0 | 0 | 1,083 | 1,083 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | $ | 132 | $ | 0 | $ | 0 | $ | 2,164 | $ | 9,813 | $ | 12,109 | ||||||||||||
Total Loans | $ | 2,560 | $ | 0 | $ | 0 | $ | 17,386 | $ | 2,136,384 | $ | 2,156,330 |
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful” and these loans are monitored on an ongoing basis. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The principal balance of loans classified as doubtful are generally charged off. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.
Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager. The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of September 30, 2016 and December 31, 2015:
17 |
September 30, 2016 | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
& Land | Commercial | Residential | and | Consumer | ||||||||||||||||||||
(Dollars in thousands) | Development | Real Estate | Real Estate | Financial | Loans | Total | ||||||||||||||||||
Pass | $ | 141,629 | $ | 1,257,999 | $ | 805,997 | $ | 336,238 | $ | 144,253 | $ | 2,686,116 | ||||||||||||
Special mention | 5,893 | 8,335 | 1,762 | 3,824 | 1,129 | 20,943 | ||||||||||||||||||
Substandard | 5,550 | 13,429 | 3,398 | 2,093 | 100 | 24,570 | ||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Nonaccrual | 263 | 7,658 | 10,001 | 346 | 169 | 18,437 | ||||||||||||||||||
Pass-Troubled debt restructures | 47 | 5,031 | 363 | 0 | 44 | 5,485 | ||||||||||||||||||
Troubled debt restructures | 519 | 1,060 | 11,892 | 0 | 316 | 13,787 | ||||||||||||||||||
$ | 153,901 | $ | 1,293,512 | $ | 833,413 | $ | 342,501 | $ | 146,011 | $ | 2,769,338 |
December 31, 2015 | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
& Land | Commercial | Residential | and | Consumer | ||||||||||||||||||||
(Dollars in thousands) | Development | Real Estate | Real Estate | Financial | Loans | Total | ||||||||||||||||||
Pass | $ | 100,186 | $ | 973,942 | $ | 697,907 | $ | 226,391 | $ | 83,786 | $ | 2,082,212 | ||||||||||||
Special mention | 3,377 | 12,599 | 629 | 1,209 | 1,392 | 19,206 | ||||||||||||||||||
Substandard | 4,242 | 9,278 | 3,197 | 769 | 70 | 17,556 | ||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Nonaccrual | 309 | 6,410 | 10,290 | 130 | 247 | 17,386 | ||||||||||||||||||
Pass-Troubled debt restructures | 58 | 5,893 | 0 | 18 | 0 | 5,969 | ||||||||||||||||||
Troubled debt restructures | 615 | 1,256 | 11,762 | 0 | 368 | 14,001 | ||||||||||||||||||
$ | 108,787 | $ | 1,009,378 | $ | 723,785 | $ | 228,517 | $ | 85,863 | $ | 2,156,330 |
NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
During the nine months ending September 30, 2016 and 2015, the total of newly identified Troubled Debt Restructurings (“TDRs”) totaled $1.7 million and $2.0 million, respectively.
The Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. When a loan is modified as a TDR, there is not a direct, material impact on the loans within the consolidated balance sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.
The following table presents loans that were modified within the nine months ending September 30, 2016:
Pre- | Post- | |||||||||||||||||||
Modification | Modification | |||||||||||||||||||
Number | Outstanding | Outstanding | Specific | Valuation | ||||||||||||||||
of | Recorded | Recorded | Reserve | Allowance | ||||||||||||||||
(Dollars in thousands) | Contracts | Investment | Investment | Recorded | Recorded | |||||||||||||||
Residential real estate | 6 | $ | 1,660 | $ | 1,489 | $ | 0 | $ | 171 | |||||||||||
6 | $ | 1,660 | $ | 1,489 | $ | 0 | $ | 171 |
18 |
The following table presents loans that were modified within the nine months ending September 30, 2015:
Pre- | Post- | |||||||||||||||||||
Modification | Modification | |||||||||||||||||||
Number | Outstanding | Outstanding | Specific | Valuation | ||||||||||||||||
of | Recorded | Recorded | Reserve | Allowance | ||||||||||||||||
(Dollars in thousands) | Contracts | Investment | Investment | Recorded | Recorded | |||||||||||||||
Residential real estae | 1 | $ | 26 | $ | 25 | $ | 0 | $ | 1 | |||||||||||
Commercial real estate | 3 | 1,881 | 1,787 | 0 | 94 | |||||||||||||||
Consumer | 4 | 48 | 45 | 0 | 3 | |||||||||||||||
8 | $ | 1,955 | $ | 1,857 | $ | 0 | $ | 98 |
No accruing loans that were restructured within the twelve months preceding September 30, 2016 defaulted during the nine months ended September 30, 2016, and no loans restructured within the twelve months preceding September 30, 2015 defaulted during the twelve months ended September 30, 2015. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company’s policy.
As of September 30, 2016 and December 31, 2015, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:
September 30, 2016 | ||||||||||||
Unpaid | Related | |||||||||||
Recorded | Principal | Valuation | ||||||||||
(Dollars in thousands) | Investment | Balance | Allowance | |||||||||
Impaired Loans with No Related Allowance Recorded: | ||||||||||||
Construction and land development | $ | 211 | $ | 297 | $ | 0 | ||||||
Commercial real estate | 1,421 | 2,889 | 0 | |||||||||
Residential real estate | 9,258 | 13,609 | 0 | |||||||||
Commercial and financial | 19 | 19 | 0 | |||||||||
Consumer | 136 | 229 | 0 | |||||||||
Impaired Loans with an Allowance Recorded: | ||||||||||||
Construction and land development | 585 | 595 | 42 | |||||||||
Commercial real estate | 5,966 | 5,966 | 346 | |||||||||
Residential real estate | 11,727 | 12,025 | 1,608 | |||||||||
Commercial and financial | 0 | 0 | 0 | |||||||||
Consumer | 392 | 392 | 49 | |||||||||
Total: | ||||||||||||
Construction and land development | 796 | 892 | 42 | |||||||||
Commercial real estate | 7,387 | 8,855 | 346 | |||||||||
Residential real estate | 20,985 | 25,634 | 1,608 | |||||||||
Commercial and financial | 19 | 19 | 0 | |||||||||
Consumer | 528 | 621 | 49 | |||||||||
$ | 29,715 | $ | 36,021 | $ | 2,045 |
December 31, 2015 | ||||||||||||
Unpaid | Related | |||||||||||
Recorded | Principal | Valuation | ||||||||||
(Dollars in thousands) | Investment | Balance | Allowance | |||||||||
Impaired Loans with No Related Allowance Recorded: | ||||||||||||
Construction and land development | $ | 107 | $ | 255 | $ | 0 | ||||||
Commercial real estate | 2,363 | 3,911 | 0 | |||||||||
Residential real estate | 9,256 | 13,707 | 0 | |||||||||
Commercial and financial | 17 | 17 | 0 | |||||||||
Consumer | 264 | 349 | 0 | |||||||||
Impaired Loans with an Allowance Recorded: | ||||||||||||
Construction and land development | 835 | 870 | 84 | |||||||||
Commercial real estate | 7,087 | 7,087 | 429 | |||||||||
Residential real estate | 12,447 | 12,803 | 1,964 | |||||||||
Commercial and financial | 0 | 0 | 0 | |||||||||
Consumer | 351 | 351 | 40 | |||||||||
Total: | ||||||||||||
Construction and land development | 942 | 1,125 | 84 | |||||||||
Commercial real estate | 9,450 | 10,998 | 429 | |||||||||
Residential real estate | 21,703 | 26,510 | 1,964 | |||||||||
Commercial and financial | 17 | 17 | 0 | |||||||||
Consumer | 615 | 700 | 40 | |||||||||
$ | 32,727 | $ | 39,350 | $ | 2,517 |
19 |
For the three months ended September 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
(Dollars in thousands) | Investment | Recognized | Investment | Recognized | ||||||||||||
Impaired Loans with No Related Allowance | ||||||||||||||||
Recorded: | ||||||||||||||||
Construction & land development | $ | 208 | $ | 3 | $ | 1,216 | $ | 2 | ||||||||
Commercial real estate | 1,437 | 31 | 3,138 | 7 | ||||||||||||
Residential real estate | 9,346 | 138 | 9,700 | 35 | ||||||||||||
Commercial and financial | 16 | 0 | 83 | 0 | ||||||||||||
Consumer | 157 | 3 | 152 | 0 | ||||||||||||
Impaired Loans with an Allowance Recorded: | ||||||||||||||||
Construction & land development | 609 | 7 | 1,070 | 23 | ||||||||||||
Commercial real estate | 6,565 | 64 | 6,638 | 78 | ||||||||||||
Residential real estate | 12,038 | 102 | 14,762 | 89 | ||||||||||||
Commercial and financial | 0 | 0 | 0 | 0 | ||||||||||||
Consumer | 383 | 4 | 490 | 7 | ||||||||||||
Total: | ||||||||||||||||
Construction & land development | 817 | 10 | 2,286 | 25 | ||||||||||||
Commercial real estate | 8,002 | 95 | 9,776 | 85 | ||||||||||||
Residential real estate | 21,384 | 240 | 24,462 | 124 | ||||||||||||
Commercial and financial | 16 | 0 | 83 | 0 | ||||||||||||
Consumer | 540 | 7 | 642 | 7 | ||||||||||||
$ | 30,759 | $ | 352 | $ | 37,249 | $ | 241 |
For the nine months ended September 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
(Dollars in thousands) | Investment | Recognized | Investment | Recognized | ||||||||||||
Impaired Loans with No Related Allowance | ||||||||||||||||
Recorded: | ||||||||||||||||
Construction & land development | $ | 188 | $ | 11 | $ | 1,632 | $ | 7 | ||||||||
Commercial real estate | 1,854 | 97 | 3,012 | 13 | ||||||||||||
Residential real estate | 9,444 | 406 | 10,745 | 103 | ||||||||||||
Commercial and financial | 16 | 0 | 106 | 1 | ||||||||||||
Consumer | 193 | 10 | 126 | 0 | ||||||||||||
Impaired Loans with an Allowance Recorded: | ||||||||||||||||
Construction & land development | 671 | 20 | 912 | 39 | ||||||||||||
Commercial real estate | 6,835 | 193 | 7,312 | 223 | ||||||||||||
Residential real estate | 12,098 | 322 | 15,658 | 270 | ||||||||||||
Commercial and financial | 0 | 0 | 0 | 0 | ||||||||||||
Consumer | 363 | 14 | 507 | 17 | ||||||||||||
Total: | ||||||||||||||||
Construction & land development | 859 | 31 | 2,544 | 46 | ||||||||||||
Commercial real estate | 8,689 | 290 | 10,324 | 236 | ||||||||||||
Residential real estate | 21,542 | 728 | 26,403 | 373 | ||||||||||||
Commercial and financial | 16 | 0 | 106 | 1 | ||||||||||||
Consumer | 556 | 24 | 633 | 17 | ||||||||||||
$ | 31,662 | $ | 1,073 | $ | 40,010 | $ | 673 |
20 |
Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted. At September 30, 2016 and at December 31, 2015, accruing TDRs totaled $19.3 million and $20.0 million, respectively.
The impaired loans are measured for impairment based on the value of underlying collateral or the present value of expected future cash flows discounted at the loan’s effective rate. The valuation allowance is included in the allowance for loan losses.
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal.
Nonaccrual loans and accruing loans past due 90 days or more (excluding purchased loans) totaled $10.6 million and $0, respectively, at September 30, 2016, and $12.8 million and $0 at December 31, 2015, respectively. Purchased nonaccrual and accruing loans past due 90 days or more were $7.9 million and $0 at September 30, 2016, and $4.6 million and $0 at December 31, 2015.
Activity in the allowance for loan losses (excluding PCI loans) for the three-month period ended and nine-month period ended September 30, 2016 is summarized as follows:
Allowance for Loan Losses for the Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
Provision | ||||||||||||||||||||||||
Beginning | for Loan | Charge- | Net | Ending | ||||||||||||||||||||
(Dollars in thousands) | Balance | Losses | Offs | Recoveries | Recoveries | Balance | ||||||||||||||||||
Construction & land development | $ | 1,160 | $ | 48 | $ | 0 | $ | 25 | $ | 25 | $ | 1,233 | ||||||||||||
Commercial real estate | 7,192 | 1,450 | (78 | ) | 169 | 91 | 8,733 | |||||||||||||||||
Residential real estate | 8,299 | (662 | ) | 0 | 272 | 272 | 7,909 | |||||||||||||||||
Commercial and financial | 2,591 | (550 | ) | (283 | ) | 1,278 | 995 | 3,036 | ||||||||||||||||
Consumer | 1,483 | 264 | (18 | ) | 44 | 26 | 1,773 | |||||||||||||||||
$ | 20,725 | $ | 550 | $ | (379 | ) | $ | 1,788 | $ | 1,409 | $ | 22,684 | ||||||||||||
Allowance for Loan Losses for the Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Provision | Net | |||||||||||||||||||||||
Beginning | for Loan | Charge- | (Charge-Offs) | Ending | ||||||||||||||||||||
(Dollars in thousands) | Balance | Losses | Offs | Recoveries | Recoveries | Balance | ||||||||||||||||||
Construction & land development | $ | 1,151 | $ | (132 | ) | $ | 0 | $ | 214 | $ | 214 | $ | 1,233 | |||||||||||
Commercial real estate | 6,756 | 1,960 | (254 | ) | 271 | 17 | 8,733 | |||||||||||||||||
Residential real estate | 8,057 | (672 | ) | (145 | ) | 669 | 524 | 7,909 | ||||||||||||||||
Commercial and financial | 2,042 | (403 | ) | (376 | ) | 1,773 | 1,397 | 3,036 | ||||||||||||||||
Consumer | 1,122 | 658 | (98 | ) | 91 | (7 | ) | 1,773 | ||||||||||||||||
$ | 19,128 | $ | 1,411 | $ | (873 | ) | $ | 3,018 | $ | 2,145 | $ | 22,684 |
21 |
Activity in the allowance for loan losses (excluding PCI loans) for the three-month period and nine-month period ended September 30, 2015 is summarized as follows:
Allowance for Loan Losses for the Three Months Ended September 30, 2015 | ||||||||||||||||||||||||
Provision | Net | |||||||||||||||||||||||
Beginning | for Loan | Charge- | (Charge-Offs) | Ending | ||||||||||||||||||||
(Dollars in thousands) | Balance | Losses | Offs | Recoveries | Recoveries | Balance | ||||||||||||||||||
Construction & land development | $ | 887 | $ | 891 | $ | (859 | ) | $ | 109 | $ | (750 | ) | $ | 1,028 | ||||||||||
Commercial real estate | 5,278 | 925 | (128 | ) | 315 | 187 | 6,390 | |||||||||||||||||
Residential real estate | 9,686 | (686 | ) | (193 | ) | 359 | 166 | 9,166 | ||||||||||||||||
Commercial and financial | 945 | 193 | (160 | ) | 107 | (53 | ) | 1,085 | ||||||||||||||||
Consumer | 1,783 | (173 | ) | (22 | ) | 22 | 0 | 1,610 | ||||||||||||||||
$ | 18,579 | $ | 1,150 | $ | (1,362 | ) | $ | 912 | $ | (450 | ) | $ | 19,279 | |||||||||||
Allowance for Loan Losses for the Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||
Provision | Net | |||||||||||||||||||||||
Beginning | for Loan | Charge- | (Charge-Offs) | Ending | ||||||||||||||||||||
(Dollars in thousands) | Balance | Losses | Offs | Recoveries | Recoveries | Balance | ||||||||||||||||||
Construction & land development | $ | 722 | $ | 910 | $ | (925 | ) | $ | 321 | $ | (604 | ) | $ | 1,028 | ||||||||||
Commercial real estate | 4,528 | 1,690 | (430 | ) | 602 | 172 | 6,390 | |||||||||||||||||
Residential real estate | 9,784 | (1,235 | ) | (515 | ) | 1,132 | 617 | 9,166 | ||||||||||||||||
Commercial and financial | 1,179 | (245 | ) | (284 | ) | 435 | 151 | 1,085 | ||||||||||||||||
Consumer | 794 | 1,020 | (276 | ) | 72 | (204 | ) | 1,610 | ||||||||||||||||
$ | 17,007 | $ | 2,140 | $ | (2,430 | ) | $ | 2,562 | $ | 132 | $ | 19,279 |
The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio (excluding PCI loans) and related allowance at September 30, 2016 and December 31, 2015 is shown in the following tables:
At September 30, 2016 | ||||||||||||||||||||||||
Individually Evaluated for | Collectively Evaluated for | |||||||||||||||||||||||
Impairment | Impairment | Total | ||||||||||||||||||||||
Carrying | Associated | Carrying | Associated | Carrying | Associated | |||||||||||||||||||
(Dollars in thousands) | Value | Allowance | Value | Allowance | Value | Allowance | ||||||||||||||||||
Construction & land development | $ | 796 | $ | 42 | $ | 152,991 | $ | 1,191 | $ | 153,787 | $ | 1,233 | ||||||||||||
Commercial real estate | 7,387 | 346 | 1,274,844 | 8,387 | 1,282,231 | 8,733 | ||||||||||||||||||
Residential real estate | 20,985 | 1,608 | 811,743 | 6,301 | 832,728 | 7,909 | ||||||||||||||||||
Commercial and financial | 19 | 0 | 341,505 | 3,036 | 341,524 | 3,036 | ||||||||||||||||||
Consumer | 528 | 49 | 145,483 | 1,724 | 146,011 | 1,773 | ||||||||||||||||||
$ | 29,715 | $ | 2,045 | $ | 2,726,566 | $ | 20,639 | $ | 2,756,281 | $ | 22,684 |
At December 31, 2015 | ||||||||||||||||||||||||
Individually Evaluated for | Collectively Evaluated for | |||||||||||||||||||||||
Impairment | Impairment | Total | ||||||||||||||||||||||
Carrying | Associated | Carrying | Associated | Carrying | Associated | |||||||||||||||||||
(Dollars in thousands) | Value | Allowance | Value | Allowance | Value | Allowance | ||||||||||||||||||
Construction & land development | $ | 942 | $ | 84 | $ | 107,731 | $ | 1,067 | $ | 108,673 | $ | 1,151 | ||||||||||||
Commercial real estate | 9,450 | 429 | 989,938 | 6,327 | 999,388 | 6,756 | ||||||||||||||||||
Residential real estate | 21,703 | 1,964 | 701,160 | 6,093 | 722,863 | 8,057 | ||||||||||||||||||
Commercial and financial | 17 | 0 | 227,417 | 2,042 | 227,434 | 2,042 | ||||||||||||||||||
Consumer | 615 | 40 | 85,248 | 1,082 | 85,863 | 1,122 | ||||||||||||||||||
$ | 32,727 | $ | 2,517 | $ | 2,111,494 | $ | 16,611 | $ | 2,144,221 | $ | 19,128 |
22 |
Loans collectively evaluated for impairment at December 31, 2015 included loans acquired from BANKshares on October 1, 2014 and Grand Bankshares on July 17, 2015 that are not PCI loans, and loans at September 30, 2016 included loans acquired from Floridian and BMO Harris as well that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment represents the total fair value discount of each PUL, is accreted into interest income over the remaining lives of the related loans on a level yield basis, and remained adequate at September 30, 2016.
The table below summarizes PCI loans that were individually evaluated for impairment based on expected cash flows at September 30, 2016 and December 31, 2015:
PCI Loans Individually Evaluated for Impairment | ||||||||||||||||
September 30, 2016 | December 31, 2015 | |||||||||||||||
Carrying | Associated | Carrying | Associated | |||||||||||||
(Dollars in thousands) | Value | Allowance | Value | Allowance | ||||||||||||
Construction & land development | $ | 114 | $ | 0 | $ | 114 | $ | 0 | ||||||||
Commercial real estate | 11,281 | 0 | 9,990 | 0 | ||||||||||||
Residential real estate | 685 | 0 | 922 | 0 | ||||||||||||
Commercial and financial | 977 | 0 | 1,083 | 0 | ||||||||||||
Consumer | 0 | 0 | 0 | 0 | ||||||||||||
$ | 13,057 | $ | 0 | $ | 12,109 | $ | 0 |
NOTE G — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are accounted for as secured borrowings. For securities sold under agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of collateral pledged. At September 30, 2016 and December 31, 2015, Company securities pledged were as follows by collateral type and maturity:
(Dollars in thousands) | Overnight and Continuous Maturity | |||||||
Fair Value | September 30, | December 31, | ||||||
2016 | 2015 | |||||||
Mortgage backed securities and collateralized mortgage | ||||||||
obligations of U.S. Government Sponsored Entities | $ | 167,693 | $ | 172,005 |
NOTE H – NONINTEREST INCOME AND EXPENSE
Details of noninterest income and expense follow:
Three Months Ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges on deposit accounts | $ | 2,698 | $ | 2,217 | $ | 7,057 | $ | 6,334 | ||||||||
Trust fees | 820 | 781 | 2,464 | 2,341 | ||||||||||||
Mortgage banking fees | 1,885 | 1,177 | 4,248 | 3,297 | ||||||||||||
Brokerage commissions and fees | 463 | 604 | 1,564 | 1,621 | ||||||||||||
Marine finance fees | 138 | 258 | 558 | 947 | ||||||||||||
Interchange income | 2,306 | 1,925 | 6,893 | 5,695 | ||||||||||||
Other deposit based EFT fees | 109 | 88 | 352 | 298 | ||||||||||||
BOLI income | 382 | 366 | 1,602 | 1,030 | ||||||||||||
Gain on participated income | 0 | 0 | 0 | 725 | ||||||||||||
Other | 963 | 666 | 2,767 | 1,948 | ||||||||||||
9,764 | 8,082 | 27,505 | 24,236 | |||||||||||||
Securities gains, net | 225 | 160 | 361 | 160 | ||||||||||||
TOTAL NONINTEREST INCOME | $ | 9,989 | $ | 8,242 | $ | 27,866 | $ | 24,396 |
23 |
Three Months Ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and wages | $ | 14,337 | $ | 11,850 | $ | 41,620 | $ | 29,940 | ||||||||
Employee benefits | 2,425 | 2,430 | 7,428 | 7,386 | ||||||||||||
Outsourced data processing costs | 3,198 | 3,277 | 10,440 | 7,695 | ||||||||||||
Telephone / data lines | 539 | 446 | 1,606 | 1,385 | ||||||||||||
Occupancy | 3,675 | 2,396 | 10,292 | 6,430 | ||||||||||||
Furniture and equipment | 1,228 | 883 | 3,509 | 2,434 | ||||||||||||
Marketing | 780 | 1,099 | 2,786 | 3,300 | ||||||||||||
Legal and professional fees | 2,213 | 2,189 | 7,226 | 5,442 | ||||||||||||
FDIC assessments | 517 | 552 | 1,704 | 1,661 | ||||||||||||
Amortization of intangibles | 728 | 397 | 1,767 | 1,027 | ||||||||||||
Asset dispositions expense | 219 | 77 | 469 | 393 | ||||||||||||
Net loss on other real estate owned and repossessed assets | (96 | ) | 262 | (348 | ) | 396 | ||||||||||
Early redemption cost for FHLB advances | 0 | 0 | 1,777 | 0 | ||||||||||||
Other | 3,672 | 3,269 | 10,308 | 9,112 | ||||||||||||
TOTAL NONINTEREST EXPENSE | $ | 33,435 | $ | 29,127 | $ | 100,584 | $ | 76,601 |
NOTE I — EQUITY CAPITAL
The Company is well capitalized and at September 30, 2016, the Company and the Company’s principal banking subsidiary, Seacoast National Bank, or “Seacoast Bank”, met the common equity Tier 1 capital ratio (CET1) regulatory threshold of 6.5% for well-capitalized institutions under the Basel III standardized transition approach, as well as risk-based and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.
NOTE J — CONTINGENCIES
The Company and its subsidiaries, because of the nature of their businesses, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Company’s consolidated financial condition, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.
NOTE K — FAIR VALUE
Under ASC 820, fair value measurements for items measured at fair value on a recurring and nonrecurring basis at September 30, 2016 and December 31, 2015 included:
24 |
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | Measurements | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
At September 30, 2016: | ||||||||||||||||
Available for sale securities (1) | $ | 866,613 | $ | 100 | $ | 866,513 | $ | 0 | ||||||||
Loans held for sale (2) | 20,143 | 0 | 20,143 | 0 | ||||||||||||
Loans (3) | 4,704 | 0 | 3,805 | 899 | ||||||||||||
Other real estate owned (4) | 12,734 | 0 | 662 | 12,072 | ||||||||||||
At December 31, 2015: | ||||||||||||||||
Available for sale securities (1) | $ | 790,766 | $ | 225 | $ | 790,541 | $ | 0 | ||||||||
Loans held for sale (2) | 23,998 | 0 | 23,998 | 0 | ||||||||||||
Loans (3) | 7,511 | 0 | 6,052 | 1,459 | ||||||||||||
Other real estate owned (4) | 7,039 | 0 | 598 | 6,441 |
___________________________
(1) | See Note D for further detail of fair value of individual investment categories. |
(2) | Recurring fair value basis determined using observable market data. |
(3) | See Note F. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310. |
(4) | Fair value is measured on a nonrecurring basis in accordance with ASC 360. |
The fair value of impaired real estate loans which are collateral dependent is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans, appraised values or internal evaluation are based on the comparative sales approach. These impaired loans are considered level 2 in the fair value hierarchy. For commercial and commercial real estate impaired loans, evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At September 30, 2016 the range of capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.9%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these impaired loans is considered level 3 in the fair value hierarchy. Impaired loans measured at fair value total $4.7 million with a specific reserve of $2.5 million at September 30, 2016, compared to $7.5 million with a specific reserve of $2.9 million at December 31, 2015.
Fair value of available for sale securities are determined using valuation techniques for individual investments as described in Note D.
When appraisals are used to determine fair value and the appraisals are based on a market approach, the fair value of other real estate owned (“OREO”) is classified as a level 2 input. When the fair value of OREO is based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, the fair value of OREO is classified as Level 3.
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Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarter-end valuation process.
During the first nine months ended September 30, 2016, there were no transfers between level 1 and level 2 assets carried at fair value.
For loans classified as level 3 the transfers in totaled $0.3 million for the first nine months of 2016, consisting of loans that became impaired during 2016. Transfers out consisted of charge-offs of $0.1 million, and loan foreclosures migrating to OREO and other reductions (including principal payments) totaling $0.7 million.
Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reported periods, significantly impact the Company’s provision for loan losses.
For OREO classified as level 3 during the first nine months of 2016, foreclosed loans transferred in totaled $2.9 million and migrated bank branches taken out of service totaled $7.7 million. Transfers out summed to $4.9 million, consisting entirely of sales.
The carrying amount and fair value of the Company’s other significant financial instruments that are not measured at fair value on a recurring basis in the balance sheet as of September 30, 2016 and December 31, 2015 is as follows:
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Carrying | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | Amount | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
At September 30, 2016: | ||||||||||||||||
Financial Assets | ||||||||||||||||
Securities held to maturity (1) | $ | 392,138 | $ | 0 | $ | 397,264 | $ | 0 | ||||||||
Loans, net | 2,741,950 | 0 | 0 | 2,743,652 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Deposit liabilities | 3,510,493 | 0 | 0 | 3,512,632 | ||||||||||||
Subordinated debt | 70,171 | 0 | 52,785 | 0 | ||||||||||||
At December 31, 2015: | ||||||||||||||||
Financial Assets | ||||||||||||||||
Securities held to maturity (1) | $ | 203,525 | $ | 0 | $ | 202,813 | $ | 0 | ||||||||
Loans, net | 2,129,691 | 0 | 0 | 2,147,024 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Deposit liabilities | 2,844,387 | 0 | 0 | 2,843,800 | ||||||||||||
FHLB advances, maturing in 2017 (2) | 50,000 | 0 | 51,788 | 0 | ||||||||||||
Subordinated debt | 69,961 | 0 | 52,785 | 0 |
(1) See Note D for further detail of fair value of individual investment categories.
(2) Redemption in April 2016 and no longer outstanding
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The short maturity of Seacoast’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, interest bearing deposits with other banks, federal funds purchased and securities sold under agreement to repurchase, maturing within 30 days.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at September 30, 2016 and December 31, 2015:
Securities: U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities are reported at fair value utilizing Level 2 inputs. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have a complicated structure. The Company’s portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. The fair value of collateralized loan obligations are determined from broker quotes. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.
Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.
Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Company’s policy on loans held for investment. None of the loans are 90 days or more past due or on nonaccrual as of September 30, 2016 and December 31, 2015.
At September 30, 2016 and December 31, 2015, the aggregate fair value, contractual balance (including accrued interest) and gains or losses was as follows:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2016 | 2015 | ||||||
Aggregate fair value | $ | 20,143 | $ | 23,998 | ||||
Contractual balance | 19,604 | 23,384 | ||||||
Gains (losses) | 539 | 614 |
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Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.
Borrowings: The fair value of floating rate borrowings is the amount payable on demand at the reporting date. The fair value of fixed rate borrowings is estimated using the rates currently offered for borrowings of similar remaining maturities.
Subordinated debt: The fair value of the floating rate subordinated debt was based on independent third party analysis, that included discounted cash flow analysis, assessments of the Company’s current incremental borrowing rate for similar instruments, and market quotes for similar debt.
NOTE L — BUSINESS COMBINATIONS
Acquisition of Grand Bankshares, Inc.
On July 17, 2015, the Company completed its acquisition of Grand Bankshares, Inc. (“Grand”) whereby Grand was merged with and into the Company. Grand’s subsidiary bank, Grand Bank & Trust of Florida (“GB”) was simultaneously merged with and into Seacoast National Bank. The Company acquired 100% of the outstanding common and preferred stock of Grand. The total purchase price was $18.7 million.
With the acquisition, the Company further solidified its market share in the attractive Palm Beach market, expanding its customer base and leveraging operating costs through economies of scale, enhancing its fee income and positively affecting its net interest income operating results. The acquisition contributed $188.4 million in total deposits and $111.3 million in total loans to our balance sheet.
The acquisition of Grand constitutes a business combination and was accounted for under ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are final and are no longer subject to change as the one year period post-closing of the acquisition date when measurement period adjustments were allowed has expired.
No goodwill was recognized for this whole bank acquisition that resulted in a bargain purchase gain of $416,000 recorded to income in the fourth quarter of 2015 due to a measurement period adjustment. In addition, a $2.6 million core deposit intangible (“CDI”) was recorded.
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Acquisition of Floridian Financial Group, Inc.
On March 11, 2016, the Company completed its acquisition of Floridian Financial Group, Inc. (“Floridian”), the parent company of Floridian Bank. Simultaneously, upon completion of the merger, Floridian’s wholly owned subsidiary bank, Floridian Bank, was merged with and into Seacoast National Bank. Floridian, headquartered in Lake Mary, Florida, operated 10 branches in Orlando and Daytona Beach, of which several will consolidate with Seacoast locations. This acquisition added approximately $417 million in total assets, $337 million in deposits, and $267 million in loans to Seacoast. As a result of this acquisition the Company expects to further solidify its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.
The Company acquired 100% of the outstanding common stock of Floridian. Under the terms of the definitive agreement, Floridian
shareholders received, at their election, (i) the combination of $4.29 in cash and 0.5291 shares of Seacoast common stock, (ii)
$12.25 in cash, or (iii) 0.8140 shares of Seacoast common stock, subject to a customary proration mechanism so that the aggregate
consideration mix equals 35% cash and 65% Seacoast shares (based on Seacoast’s closing price of $15.47 per share on March
11, 2016).
This transaction closed on March 11, 2016.
March 11, 2016 | ||||
Shares exchanged for cash | $ | 26,699,000 | ||
Number of Floridian Financial Group, Inc. common shares outstanding | 6,222,119 | |||
Per share exchange ratio | 0.5289 | |||
Number of shares of common stock issued | 3,291,066 | |||
Multiplied by common stock price per share on March 11, 2016 | $ | 15.47 | ||
Value of common stock issued | 50,912,791 | |||
Total purchase price | $ | 77,611,791 |
The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.
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Measurement | ||||||||||||
Initial Report | Period | As Adjusted | ||||||||||
Date of acquisition | March 11, 2016 | Adjustments | March 11, 2016 | |||||||||
(in thousands) | ||||||||||||
Assets: | ||||||||||||
Cash | $ | 28,243 | $ | 0 | $ | 28,243 | ||||||
Investment securities | 66,912 | 95 | 67,007 | |||||||||
Loans, net | 268,249 | (2,112 | ) | 266,137 | ||||||||
Fixed assets | 7,801 | (628 | ) | 7,173 | ||||||||
Core deposit intangibles | 3,375 | 0 | 3,375 | |||||||||
Goodwill | 29,985 | 1,647 | 31,632 | |||||||||
Other assets | 12,879 | 998 | 13,877 | |||||||||
$ | 417,444 | $ | 0 | $ | 417,444 | |||||||
Liabilities: | ||||||||||||
Deposits | $ | 337,341 | $ | 0 | $ | 337,341 | ||||||
Other liabilities | 2,492 | 0 | 2,492 | |||||||||
$ | 339,833 | $ | 0 | $ | 339,833 |
The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.
March 11, 2016 | ||||||||
(Dollars in thousands) | Book Balance | Fair Value | ||||||
Loans: | ||||||||
Single family residential real estate | $ | 38,304 | $ | 37,367 | ||||
Commercial real estate | 172,531 | 167,105 | ||||||
Construction/development/land | 20,546 | 18,108 | ||||||
Commercial loans | 39,070 | 37,804 | ||||||
Consumer and other loans | 3,385 | 3,110 | ||||||
Purchased credit-impaired | 6,186 | 2,643 | ||||||
Total acquired loans | $ | 280,022 | $ | 266,137 |
For the loans acquired we first segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we considered to identify loans as Purchase Credit Impaired (“PCI”) loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard.” These loans were then evaluated to determine estimated fair values as of the acquisition date. As required by generally accepted accounting principles, we are accounting for these loans pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of March 11, 2016 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.
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(Dollars in thousands) | March 11, 2016 | |||
Contractually required principal and interest | $ | 8,031 | ||
Non-accretable difference | (4,820 | ) | ||
Cash flows expected to be collected | 3,211 | |||
Accretable yield | (568 | ) | ||
Total purchased credit-impaired loan acquired | $ | 2,643 |
Second, loans without specifically identified credit deficiency factors are referred to as Purchased Unimpaired Loans (“PULs”) for disclosure purposes. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the economic environment both nationally and locally as well as the real estate market particularly in Florida. We have applied ASC Topic 310-20 accounting treatment to the PULs.
The Company believes the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. In determining the valuation amount, a third party analyzed the deposits based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.
The Company recognized goodwill of $32 million for this acquisition that is nondeductible for tax purposes. The acquisition of Floridian constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. For Floridian, fair values as presented for securities, loans, fixed assets, and certain other assets and liabilities are necessarily considered preliminary.
The operating results of the Company for the three months and nine months ended September 30 2016 include the operating results of the acquired assets and assumed liabilities since the date of acquisition of March 11, 2016. Results for the three-month period ended September 30, 2016 includes Floridian for the full quarter. Pro-forma data for the three months ended 2015 and nine months ending September 30, 2016 and 2015 listed in the table below present pro-forma information as if the acquisition occurred at the beginning of 2015.
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Three Months | ||||||||||||
Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(Dollars in thousands, except per share amounts) | 2015 | 2016 | 2015 | |||||||||
Net interest income | $ | 32,145 | $ | 104,921 | $ | 89,851 | ||||||
Net income available to common shareholders | 4,805 | 21,440 | 17,462 | |||||||||
EPS - basic | 0.13 | 0.58 | 0.48 | |||||||||
EPS - diluted | 0.13 | 0.57 | 0.47 |
Acquisition of BMO Harris Central Florida Offices, Deposits and Loans
On June 3, 2016, Seacoast National assumed approximately $314 million in deposits related to business and consumer banking customers at a deposit premium of 3.0% of the deposit balances, $63 million in business loans at a loan premium of 0.5%, and fourteen branches of BMO Harris Bank N.A. (“BMO”), located in the Orlando Metropolitan Statistical Area (“MSA”). As a result of this acquisition the Company expects to further improve its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.
The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and bank premises and leases related to the fourteen branches acquired, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.
Measurement | ||||||||||||
Period | As Adjusted | |||||||||||
Date of acquisition | June 3, 2016 | Adjustments | June 3, 2016 | |||||||||
(in thousands) | ||||||||||||
Assets: | ||||||||||||
Cash from BMO (net of payable to BMO Harris) | $ | 234,094 | $ | 0 | $ | 234,094 | ||||||
Loans, net | 62,671 | 0 | 62,671 | |||||||||
Fixed assets | 3,715 | 0 | 3,715 | |||||||||
Core deposit intangibles | 5,223 | (135 | ) | 5,088 | ||||||||
Goodwill | 7,645 | 163 | 7,808 | |||||||||
Other assets | 952 | (28 | ) | 924 | ||||||||
$ | 314,300 | $ | 0 | $ | 314,300 | |||||||
Liabilities: | ||||||||||||
Deposits | $ | 314,248 | $ | 0 | $ | 314,248 | ||||||
Other liabilities | 52 | 0 | 52 | |||||||||
$ | 314,300 | $ | 0 | $ | 314,300 |
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The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.
June 3, 2016 | ||||||||
(Dollars in thousands) | Book Balance | Fair Value | ||||||
Loans: | ||||||||
Commercial real estate | $ | 31,564 | $ | 31,200 | ||||
Commercial loans | 32,479 | 31,471 | ||||||
Purchased credit-impaired | 0 | 0 | ||||||
Total acquired loans | $ | 64,043 | $ | 62,671 |
At June 3, 2016, no loans acquired from BMO Harris were specifically identified with a credit deficiency factor(s). The factors we consider to identify loans as PCI loans are acquired loans that were nonaccrual, 60 days or more past due, designated as TDR, graded “special mention” or “substandard.” PULs were evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the economic environment both nationally and locally as well as the real estate market particularly in Florida. We have applied ASC Topic 310-20 accounting treatment to the PULs.
The Company believes the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. In determining the valuation amount, a third party analyzed the deposits based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.
The Company recognized intangibles (including goodwill) of $13 million for this acquisition that is deductible for tax purposes over a 15-year period. The acquisition of BMO Harris’s Orlando banking operations by Seacoast National constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. With the closing of the BMO Harris transaction near the end of the second quarter 2016 reporting period, fair values as presented for loans, fixed assets, deposits, and certain other assets and liabilities are necessarily considered preliminary.
NOTE M — SUBSEQUENT EVENT
On November 4, 2016, the Company entered into a definitive agreement to acquire GulfShore Bancshares, Inc. (“GulfShore”), the parent company of GulfShore Bank (the “Gulfshore Bank”). Seacoast expects that GulfShore Bank will be merged with and into Seacoast National Bank. The acquisition of GulfShore Bank, a full-service community bank serving the Tampa area since 2007, will add approximately $332 million in assets, $279 million in deposits and $253 million in loans. GulfShore Bank, which operates three branches – two in Tampa and one in St. Petersburg – has 55% of total deposits in transaction accounts.
Under the terms of the definitive agreement, GulfShore common shareholders will receive a combination of 0.4807 shares of Seacoast common stock and $1.47 in cash for each share they own, representing a consideration mix of 85% Seacoast common shares and 15% cash (based on Seacoast’s ten-day average closing price of $17.33 per share as of November 2, 2016). This values GulfShore’s shares at $9.80 per share, for a total transaction value of approximately $54.8 million.
Directors of both Seacoast and GulfShore approved the acquisition. The transaction is expected to close in the first quarter of 2017, subject to approval by GulfShore’s shareholders, receipt of regulatory approvals and other customary closing conditions.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries (the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report. For purposes of the following discussion, the words the “Company,” “we,” “us,” and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.
THIRD QUARTER 2016
Strategic Overview
Results demonstrate the impact of our digital transformation strategy, successful integration of acquisitions, and disciplined loan growth. Seacoast continues to execute on its plan to grow our core business organically, innovating to build our franchise and improve efficiency, and grow through mergers and acquisitions. We believe that these investments better position us to increase net income and build value for shareholders. Evidence of the success of our strategy includes:
improved earnings through cost reductions including branch consolidations, a substantial portion of cost savings coming from the integration of BMO Harris offices during the third quarter of 2016 and Floridian during the second quarter of 2016;
growth in revenue, excluding securities gains. The third quarter of 2016 revenues grew 27% compared to prior year levels driven by organic growth and acquisition activity, while adjusted noninterest expense (1) grew 18%, providing 9% operating leverage;
continued implementation of our digital strategy, which is enabling us to add new households, both organically and in our recently acquired banks; driving cross sells of services and transforming our business model and reducing overhead. During the third quarter of 2016, after adding 14 BMO Harris locations to our six Floridian locations and eight existing branches, and based on data analytics, we successfully grew revenues while we have reshaped our branch network; ten full-service offices were taken out of service during the third quarter of 2016;
ongoing customer satisfaction, reflected by continued success in deepening relationships with existing customers; the number of consumer loans and deposit accounts sold to existing customers increased at an annualized rate of 77% and 54 %, respectively, from prior year levels; check deposits made outside the branch grew to 35% in the third quarter of 2016, up from 27% in the same period a year ago.
Our success in Orlando and Palm Beach counties, where we acquired BankFirst on October 1, 2014 and Grand on July 17, 2015, continues with household growth remaining strong and cross sell statistics outpacing growth in Seacoast legacy markets. Seacoast has welcomed new customers from Floridian and BMO Harris’ Orlando banking operations. With the BMO Harris acquisition in early June, we further solidified Seacoast’s status in Orlando propelling Seacoast to a top-10 position in this market.
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Seacoast reported net income of $9.1 million during the third quarter of 2016, a $4.7 million or 106% increase from the third quarter of 2015, and an increase of $3.8 million or 71% compared to the second quarter of 2016. Third quarter return on average assets (ROA) increased 31 basis points linked quarter to 0.82%, return on average equity increased 329 basis points to 8.44% from the second quarter of 2016. Third quarter 2016 results include $2.6 million in costs related to consolidation of branches acquired through the BMO Harris acquisition and other nonrecurring items. Diluted earnings per share (EPS) were $0.24, up 71% from $0.14 in the second quarter of 2016, and up 85% from $0.13 in the third quarter of 2015. Net income for the first nine months of 2016 was $18.4 million compared to $16.1 million for the first nine months of 2015. Diluted EPS was $0.49 compared to $0.48 in the same period of 2015.
Adjusted net income, a non-GAAP measure (see page 45, “Explanation of Certain Non-GAAP Financial Measures” in “Results of Operations”), totaled $10.6 million, a $4.4 million or 70% increase year over year and an increase of $1.8 million, or 21% (not annualized) from the second quarter of 2016. Adjusted diluted EPS, a non-GAAP measure (see page 45, “Explanation of Certain Non-GAAP Financial Measures” in “Results of Operations”), was $0.28 for the third quarter of 2016, a $0.05 or 22% increase from the second quarter of 2016 and a gain of $0.10 or 56% from the third quarter a year ago. Adjusted net income, a non-GAAP measure (see page 45, “Explanation of Certain Non-GAAP Financial Measures” in “Results of Operations”), for the first nine months of 2016 increased $7.8 million to $26.1 million and adjusted diluted EPS, a non-GAAP measure (see page 45, “Explanation of Certain Non-GAAP Financial Measures” under “Results of Operations”), grew 27% to $0.70, compared on the same basis to a year ago.
Seacoast management affirms its goal of an adjusted diluted EPS target (a non-GAAP measure---see page 45, “Explanation of Certain Non-GAAP Financial Measures” in “Results of Operations”) of $1.00 for 2016.
Financial Condition
Total assets increased $1.136 billion or 33.6% from September 30, 2015 to $4.514 billion at September 30, 2016. The acquisitions of Grand and Floridian, and acquired loans (and branches) from BMO Harris’s Orlando operation, along with organic growth, drove this balance sheet success.
Loan Portfolio
Total loans (net of unearned income and excluding the allowance for loan losses) were $2.769 billion at September 30, 2016, $669.9 million or 31.9% more than at September 30, 2015, and $613.0 million or 28.4% more than at December 31, 2015. The Floridian acquisition on March 11, 2016, and loans acquired from BMO Harris on June 3, 2016, contributed $276 million and $64 million in loans, respectively. Growth of $27 million was from purchases (net of sales of seasoned portfolio loans) for the three months ended September 30, 2016, and included marine and residential mortgage loans; these loans have been included in portfolio loans.
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The following tables detail loan portfolio composition at September 30, 2016, December 31, 2015 and September 30, 2015:
September 30, 2016 | Portfolio Loans | PCI Loans | PUL's | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Construction and land development | $ | 129,239 | $ | 114 | $ | 24,548 | $ | 153,901 | ||||||||
Commercial real estate | 947,612 | 11,281 | 334,619 | 1,293,512 | ||||||||||||
Residential real estate | 772,579 | 685 | 60,149 | 833,413 | ||||||||||||
Commercial and financial | 278,065 |