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 ("Seacoast" or the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast National Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report.
The emphasis of this discussion will be on the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2020 compared to December 31, 2019.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.
For purposes of the following discussion, the words “Seacoast" or the "Company” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.
Special Cautionary Notice Regarding Forward-Looking Statements
Certain statements made or incorporated by reference herein which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are “forward-looking statements” within the meaning, and protections, of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, and intentions about future performance, and involve known and unknown risks, uncertainties and other factors, any of which may be impacted by the COVID-19 pandemic and related effects on the U.S. economy, which may be beyond the Company's control, and which may cause the actual results, performance or achievements of Seacoast or its wholly-owned banking subsidiary, Seacoast Bank, to be materially different from those set forth in the forward-looking statements.
All statements other than statements of historical fact could be forward-looking statements. You can identify these forward-looking statements through the use of words such as "may," "will," "anticipate," "assume," "should," "support," "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "further," "plan," "point to," "project," "could," "intend," "target" or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
•the effects of future economic and market conditions, including seasonality;
•adverse effects (economic and otherwise) due to the COVID-19 pandemic on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects;
•government or regulatory responses to the COVID-19 pandemic;
•governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve ("Federal Reserve"), as well as legislative, tax and regulatory changes;
•changes in accounting policies, rules and practices, including the impact of the adoption of CECL;
•the risks of changes in interest rates on the level and composition of deposits, loan demand, liquidity and the values of loan collateral, securities, and interest rate sensitive assets and liabilities;
•interest rate risks, sensitivities and the shape of the yield curve; uncertainty related to the impact of LIBOR calculations on securities, loans and debt;
•changes in borrower credit risks and payment behaviors, including the ability for borrowers under deferred payment programs to return to making full payments; changes in the availability and cost of credit and capital in the financial markets;
•changes in the prices, values and sales volumes of residential and commercial real estate; the Company's ability to comply with any regulatory requirements;
•the effects of problems encountered by other financial institutions that adversely affect Seacoast or the banking industry;
•Seacoast's concentration in commercial real estate loans;
•the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit conditions;
•the impact on the valuation of Seacoast's investments due to market volatility or counterparty payment risk;
•statutory and regulatory dividend restrictions;
•increases in regulatory capital requirements for banking organizations generally;
•the risks of mergers, acquisitions and divestitures, including Seacoast's ability to continue to identify acquisition targets and successfully acquire desirable financial institutions;
•changes in technology or products that may be more difficult, costly, or less effective than anticipated;
•the Company's ability to identify and address increased cybersecurity risks, including data security breaches, credential stuffing, malware, “denial-of-service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage to our systems, increased costs, losses, or adverse effects to our reputation, including heightened cyber risk as a result of increased remote working by our associates;
•inability of Seacoast's risk management framework to manage risks associated with the business;
•dependence on key suppliers or vendors to obtain equipment or services for the business on acceptable terms;
•reduction in or the termination of Seacoast's ability to use the mobile-based platform that is critical to the Company's business growth strategy;
•the effects of war or other conflicts, acts of terrorism, natural disasters, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions;
•unexpected outcomes of, and the costs associated with, existing or new litigation involving the Company, including as a result of its participation in the PPP program;
•Seacoast's ability to maintain adequate internal controls over financial reporting; potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;
•the risks that deferred tax assets could be reduced if estimates of future taxable income from operations and tax planning strategies are less than currently estimated and sales of capital stock could trigger a reduction in the amount of net operating loss carryforwards that the Company may be able to utilize for income tax purposes;
•the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, non-bank financial technology providers, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the Company's market areas and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;
•the failure of assumptions underlying the establishment of reserves for possible credit losses;
•the risks relating to the recently completed mergers including, without limitation: unexpected transaction costs, including the costs of integrating operations; the risks that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies, including as the result of revenues being lower than expected;
•the risk of deposit and customer attrition;
•any changes in deposit mix;
•unexpected operating and other costs, which may differ or change from expectations;
•the risks of customer and employee loss and business disruptions, including, without limitation, the results of difficulties in maintaining relationships with employees;
•the inability to grow the customer and employee base;
•increased competitive pressures and solicitations of customers by competitors;
•the difficulties and risks inherent with entering new markets; and
•other factors and risks described under “Risk Factors” herein and in any of the Company's subsequent reports filed with the SEC and available on its website at www.sec.gov.
All written or oral forward-looking statements that are made or are attributable to Seacoast are expressly qualified in their entirety by this cautionary notice. The Company assumes no obligation to update, revise or correct any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.
Third Quarter 2020
Acquisition of Fourth Street Banking Company
In August 2020, Seacoast completed the acquisition of Fourth Street Banking Company (“Fourth Street”) and its wholly-owned subsidiary Freedom Bank, which added $303 million in loans and $330 million in deposits. The acquisition supports Seacoast’s growing presence in the attractive St. Petersburg, Florida market. Freedom Bank operated two branches in St. Petersburg, which have been converted to Seacoast branches. Consolidation activities and related expenses are mostly complete.
Impact of Paycheck Protection Program Loans on Comparability Amongst Periods
Fees earned by Seacoast to originate Paycheck Protection Program ("PPP") loans, net of loan-specific costs, totaled $17.2 million, and are deferred and recognized as an adjustment to yield over time. At the end of the second quarter of 2020, Seacoast expected that the PPP forgiveness process would begin quickly, with a significant proportion of loans forgiven within nine months of origination. By the end of the third quarter of 2020, the U.S. Small Business Administration (“SBA”) had not processed any forgiveness applications, changes to various procedures and forms continued, and additional changes to the program are still being considered by Congress. As a result of the SBA loan forgiveness delays and increased uncertainty of the timing of the loan forgiveness, the Company changed from the accelerated fee recognition schedule used in the second quarter of 2020, and began recognizing fees on a schedule aligned with the full contractual maturity of the loans in the third quarter of 2020. This resulted in only $0.2 million in PPP fees recognized in the third quarter of 2020 compared to $4.0 million in the second quarter of 2020. The uncertainty in the SBA's forgiveness process may result in significant variability of fee recognition in future periods. This is solely a timing issue and does not affect the $17.2 million total fee income Seacoast will recognize as these loans are forgiven or mature. If the contractual term, rather than an accelerated term, had been used to recognize fees since the inception of the PPP program, PPP fee income in each of the second and third quarters of 2020 would have been $2.1 million. The Company expects to recognize approximately $2.1 million in each of the next six quarters if no early forgiveness occurs, although actual early forgiveness events may create variability in timing.
Third Quarter 2020 Results
For the third quarter of 2020, the Company reported net income of $22.6 million, or $0.42 per average diluted share, compared to $25.1 million, or $0.47, for the second quarter of 2020 and $25.6 million, or $0.49, for the third quarter of 2019. For the nine months ended September 30, 2020, net income totaled $48.4 million, or $0.91 per average diluted share, compared to $71.6 million, or $1.38 for the nine months ended September 30, 2019. Adjusted net income1 for the third quarter of 2020 totaled $27.3 million, or $0.50 per average diluted share, compared to $25.5 million, or $0.48, for the second quarter of 2020 and $27.7 million, or $0.53, for the third quarter of 2019. For the nine months ended September 30, 2020, adjusted net income1 totaled $58.3 million, or $1.09 per average diluted share, compared to $77.8 million, or $1.50, for the nine months ended September 30, 2019.
1Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
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Third
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Second
|
|
Third
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|
Nine Months Ended
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|
|
Quarter
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|
Quarter
|
|
Quarter
|
|
September 30,
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|
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2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Return on average tangible assets
|
|
1.20
|
%
|
|
1.37
|
%
|
|
1.61
|
%
|
|
0.93
|
%
|
|
1.53
|
%
|
Return on average tangible shareholders' equity
|
|
11.35
|
|
|
13.47
|
|
|
14.73
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|
|
8.71
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|
|
14.63
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|
Efficiency ratio
|
|
61.65
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|
|
50.11
|
|
|
48.62
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|
|
57.15
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|
|
52.85
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|
Adjusted return on average tangible assets1
|
|
1.38
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%
|
|
1.33
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%
|
|
1.67
|
%
|
|
1.04
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%
|
|
1.59
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%
|
Adjusted return on average tangible shareholders' equity1
|
|
13.06
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|
|
13.09
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|
|
15.30
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|
|
9.80
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|
|
15.20
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|
Adjusted efficiency ratio1
|
|
54.82
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|
|
49.60
|
|
|
48.96
|
|
|
52.64
|
|
|
52.05
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|
1Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
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For the three months ended September 30, 2020, the Company's results reflect the impact of $4.3 million in merger-related expenses primarily related to the acquisition of Freedom Bank, and $0.5 million in costs relating to the simultaneous consolidation of a legacy branch in St. Petersburg. Results for the three months ended September 30, 2020 were also affected by the change in the timing of recognition of PPP loan fees. The second quarter of 2020 benefited from higher loan production driven by the PPP program, which resulted in higher deferrals of related salary expenses. During the nine months ended September 30, 2020, merger related charges totaled $9.1 million, including costs to acquire both First Bank of the Palm Beaches ("FBPB") in March 2020 and Freedom Bank in August 2020.
Net Interest Income and Margin
Net interest income (on a fully taxable equivalent basis)2 for the third quarter of 2020 totaled $63.6 million, decreasing $3.8 million, or 6%, compared to the second quarter of 2020, and increasing $2.6 million, or 4%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, net interest income (on a fully tax equivalent basis)1 totaled $194.3 million, an increase of $12.2 million, or 7%, compared to the nine months ended September 30, 2019. Net interest margin was 3.40% in the third quarter 2020, compared to 3.70% in the second quarter 2020 and 3.89% in the third quarter of 2019. The decrease in the third quarter of 2020 was the result of the decrease in fees recognized on PPP loans. Excluding the impact of PPP loans and accretion of purchase discount on acquired loans, net interest margin decreased four basis points in the third quarter of 2020. Contributing to the four basis point decline, the yield on loans declined nine basis points, reflecting higher paydowns and refinancings, and the yield on securities declined 56 basis points, affected by rate resets and faster prepayments, as well as additional investments of excess liquidity into securities. These declines were partially offset by lower cost of deposits, which decreased seven basis points to 24 basis points during the quarter, compared to 31 basis points in the second quarter of 2020 and 73 basis points in the third quarter of 2019. Lower cost of deposits reflects lower market rates, and a favorable shift in product mix to include a higher proportion of noninterest bearing demand deposits to total deposits. We expect the cost of deposits to further decline in the fourth quarter of 2020.
For the nine months ended September 30, 2020, net interest margin was 3.67%, a decrease of 28 basis points compared to the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the cost of deposits was 36 basis points, compared to 72 basis points for the nine months ended September 30, 2019. Decreases in net interest margin and the cost of deposits reflect the impact of the 150 basis point decrease in the fed funds rate in March 2020, which has since driven contractions in both the yields on interest-bearing assets and the cost of interest-bearing liabilities. In addition, PPP loan balances have yielded an average 2.60% during the nine months ended September 30, 2020, which has negatively affected the total loan yield.
2Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
The following table details the trend for net interest income and margin results (on a tax equivalent basis)1, the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified:
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(In thousands, except ratios)
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|
Net Interest
Income1
|
|
Net Interest
Margin1
|
|
Yield on
Earning Assets1
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|
Rate on Interest
Bearing Liabilities
|
Third quarter 2020
|
|
$
|
63,621
|
|
|
3.40
|
%
|
|
3.65
|
%
|
|
0.40
|
%
|
Second quarter 2020
|
|
67,388
|
|
|
3.70
|
%
|
|
4.03
|
%
|
|
0.51
|
%
|
Third quarter 2019
|
|
61,027
|
|
|
3.89
|
%
|
|
4.65
|
%
|
|
1.13
|
%
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
194,300
|
|
|
3.67
|
%
|
|
4.05
|
%
|
|
0.59
|
%
|
Nine Months Ended September 30, 2019
|
|
182,107
|
|
|
3.95
|
%
|
|
4.72
|
%
|
|
1.14
|
%
|
1On tax equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
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Total average loans increased $132.3 million, or 2%, for the third quarter of 2020 compared to the second quarter of 2020, and increased $914.9 million, or 18%, from the third quarter of 2019. The increase from the prior quarter includes the impact of $303.4 million in loans acquired from Freedom Bank in the third quarter of 2020. The increase from prior year reflects the Company's participation in the PPP program and the impact of the acquisitions of FBPB and Freedom Bank.
Average loans as a percentage of average earning assets totaled 79% for the third quarter of 2020, 78% for the second quarter of 2020 and 79% for the third quarter of 2019.
Loan production is detailed in the following table for the periods specified:
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|
|
|
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|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
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(In thousands)
|
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Commercial pipeline at period end
|
|
$
|
256,191
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|
|
$
|
117,042
|
|
|
$
|
396,422
|
|
|
$
|
256,191
|
|
|
$
|
396,422
|
|
Commercial loan originations
|
|
88,245
|
|
|
106,857
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|
|
325,407
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|
|
378,432
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|
|
749,467
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|
|
|
|
|
|
|
|
|
|
|
|
Residential pipeline - saleable at period end
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|
149,896
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|
|
94,666
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|
|
35,136
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|
|
149,896
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|
|
35,136
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|
Residential loans-sold
|
|
162,468
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|
|
122,459
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|
|
80,758
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|
|
347,792
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|
|
174,707
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|
|
|
|
|
|
|
|
|
|
|
|
Residential pipeline - portfolio at period end
|
|
33,374
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|
|
13,199
|
|
|
43,378
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|
|
33,374
|
|
|
43,378
|
|
Residential loans-retained
|
|
25,404
|
|
|
23,539
|
|
|
22,365
|
|
|
74,719
|
|
|
123,765
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|
|
|
|
|
|
|
|
|
|
|
|
Consumer pipeline at period end
|
|
17,094
|
|
|
30,647
|
|
|
29,635
|
|
|
17,094
|
|
|
29,635
|
|
Consumer originations
|
|
62,293
|
|
|
57,956
|
|
|
59,933
|
|
|
171,765
|
|
|
156,889
|
|
|
|
|
|
|
|
|
|
|
|
|
PPP originations
|
|
8,276
|
|
|
590,718
|
|
|
—
|
|
|
598,994
|
|
|
—
|
|
|
|
|
|
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|
Commercial originations during the third quarter of 2020 were $88.2 million, a decrease of $18.6 million, or 17%, compared to the second quarter of 2020 and a decrease of $237.2 million, or 73%, compared to the third quarter of 2019. Commercial loan origination activity in the third quarter of 2020 reflects the continued adherence to underwriting guidelines in the current economic environment, lesser pipeline-building activities during the periods of government imposed shutdowns earlier in 2020, and lower demand for credit facilities from business customers.
The commercial pipeline increased $139.1 million, or 119%, to $256.2 million at September 30, 2020 compared to June 30, 2020. The Company has continued to maintain its disciplined credit culture, focusing only on relationships with strong balance sheets that can support significant stress.
The Company originates residential mortgage loans identified for sale to investors in the secondary market. The Company uses rate locks with investors at the time of application, thereby eliminating interest rate risk. Saleable loan production has continued to increase, reflecting a robust residential refinance market and strength in the Florida housing market. Residential loans
originated for sale in the secondary market were $162.5 million in the third quarter of 2020, compared to $122.5 million in the second quarter of 2020 and $80.8 million in the third quarter of 2019, an increase of 33% and 101%, respectively. The residential lending team has adapted quickly to heightened demand and has increased service levels to homebuyers, refinance customers, and local real estate professionals to generate substantial growth. Residential saleable pipelines were $149.9 million as of September 30, 2020, compared to $94.7 million as of June 30, 2020, an increase of 58%.
Residential loan production retained in the portfolio for the third quarter of 2020 was $25.4 million compared to $23.5 million in the second quarter of 2020 and $22.4 million in the third quarter of 2019, an increase of 8% and 13%, respectively. The pipeline of residential loans intended to be retained in the portfolio was $33.4 million as of September 30, 2020, compared to $13.2 million as of June 30, 2020, an increase of 153%.
Consumer originations totaled $62.3 million during the third quarter of 2020, an increase of $4.3 million, or 7%, from the second quarter of 2020 and an increase of $2.4 million, or 4%, from the third quarter of 2019. The consumer pipeline was $17.1 million as of September 30, 2020, compared to $30.6 million as of June 30, 2020, a decrease of 44%. The decrease was primarily the result of lower demand for home equity lines of credit, as customers are using first mortgage refinancing as an economically beneficial alternative.
Seacoast has assisted borrowers with more than 5,500 loans originated through the PPP program and, when combined with PPP loans acquired from Freedom Bank, outstanding balances totaled $638.8 million at September 30, 2020. Under the terms of the SBA's program, principal and interest on PPP loans may be forgiven provided the borrower uses the funds in a manner consistent with the program's guidelines. As of September 30, 2020, the SBA had not processed any forgiveness applications. Significant uncertainty remains about when and if borrowers will seek and qualify for forgiveness, and therefore uncertainty remains about the life of these loans.
Average debt securities increased $190.7 million, or 16.5%, for the third quarter 2020 compared to the second quarter 2020, and were $153.1 million, or 13%, higher compared to the third quarter of 2019. Increases from the second quarter of 2020 reflect the impact of purchases of $387.6 million, partially offset by maturities of $96.7 million. Purchases in the third quarter 2020 were primarily government-sponsored mortgage-backed securities, with an average yield of 1.31%.
The cost of average interest-bearing liabilities contracted 11 basis points in the three months ended September 30, 2020 to 40 basis points from 51 basis points, reflecting the impact of higher deposit balances and decreases in underlying market rates. The Company continues to benefit from a low-cost deposit franchise. During the third quarter of 2020, the Company acquired $330 million in deposits from Freedom Bank, including $141.3 million in noninterest bearing demand deposits. Noninterest bearing demand deposits at September 30, 2020 represented 35% of total deposits compared to 34% at June 30, 2020. The cost of average total deposits (including noninterest bearing demand deposits) in the third quarter of 2020 was 0.24% compared to 0.31% in the second quarter of 2020 and 0.73% in the third quarter of 2019.
Customer relationship funding is detailed in the following table for the periods specified:
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationship Funding
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
(In thousands, except ratios)
|
|
2020
|
|
2020
|
|
2020
|
|
2019
|
|
2019
|
Noninterest demand
|
|
$
|
2,400,744
|
|
|
$
|
2,267,435
|
|
|
$
|
1,703,628
|
|
|
$
|
1,590,493
|
|
|
$
|
1,652,927
|
|
Interest-bearing demand
|
|
1,385,445
|
|
|
1,368,146
|
|
|
1,234,193
|
|
|
1,181,732
|
|
|
1,115,455
|
|
Money market
|
|
1,457,078
|
|
|
1,232,892
|
|
|
1,124,378
|
|
|
1,108,363
|
|
|
1,158,862
|
|
Savings
|
|
655,072
|
|
|
619,251
|
|
|
554,836
|
|
|
519,152
|
|
|
528,214
|
|
Time certificates of deposit
|
|
1,016,504
|
|
|
1,179,059
|
|
|
1,270,464
|
|
|
1,185,013
|
|
|
1,217,683
|
|
Total deposits
|
|
$
|
6,914,843
|
|
|
$
|
6,666,783
|
|
|
$
|
5,887,499
|
|
|
$
|
5,584,753
|
|
|
$
|
5,673,141
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer sweep accounts
|
|
$
|
89,508
|
|
|
$
|
92,125
|
|
|
$
|
64,723
|
|
|
$
|
86,121
|
|
|
$
|
70,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest demand deposits as % of total deposits
|
|
35
|
%
|
|
34
|
%
|
|
29
|
%
|
|
28
|
%
|
|
29
|
%
|
The Company’s focus on convenience, with high-quality customer service, expanded digital offerings and distribution channels provides stable, low-cost core deposit funding. Over the past several years, the Company has strengthened its retail deposit franchise using new strategies and product offerings, while maintaining a focus on growing customer relationships. Seacoast believes that digital product offerings are central to core deposit growth and have proved to be of meaningful value to its customers in this environment. Seacoast's call center and retail associates continue to lead the market in availability and customer service standards, with the call center far out-performing large bank call center wait times and service level standards. The impacts of PPP and individual stimulus payments, as well as the acquisition of FBPB in the first quarter of 2020 and Freedom Bank in the third quarter of 2020, have all contributed to higher deposit balances. The Company has also seen a continued shift toward mobile engagement as customers recognize the ease of access and security features of mobile engagement. At September 30, 2020, registered mobile devices had increased 14% compared to September 30, 2019, while online users increased 13% in the same time period. Growth is coming from both consumer and business customers utilizing the convenience of mobile and online channels. During the third quarter of 2020, average transaction deposits (noninterest and interest bearing demand) increased $248.9 million, or 7%, compared to the second quarter of 2020 and increased $901.8 million, or 33%, compared to the third quarter of 2019. Along with new and acquired relationships, deposit programs and digital sales have improved the Company's market share and deepened relationships with existing customers.
The Company’s deposit mix remains favorable, with 84% of average deposit balances comprised of savings, money market, and demand deposits for the nine months ended September 30, 2020. Seacoast's average cost of deposits, including noninterest bearing demand deposits, decreased to 0.36% for the nine months ended September 30, 2020 compared to 0.72% for the nine months ended September 30, 2019, reflecting the lower rates after the Federal Reserve actions beginning in the third quarter of 2019 and shifts in deposit mix with a higher proportion of low cost deposits. Brokered CDs totaled $381.0 million at September 30, 2020, with an average rate of 1.09%. CD maturities are laddered, with $147.2 million maturing in the fourth quarter of 2020.
Short-term borrowings, principally comprised of sweep repurchase agreements with customers, decreased $38.3 million, or 33%, to an average balance of $78.8 million for the nine months ended September 30, 2020 compared to an average balance of $117.1 million for the nine months ended September 30, 2019. The decrease reflects a shift into interest-bearing deposits attributed to an expansion of deposit product offerings with similar characteristics to sweep repurchase products. The average rate on customer sweep repurchase accounts was 0.41% for the nine months ended September 30, 2020, compared to 1.38% for the same period during 2019. No federal funds purchased were utilized at September 30, 2020 or September 30, 2019.
FHLB borrowings averaged $180.9 million for the nine months ended September 30, 2020, increasing $65.6 million, or 57%, compared to the same period in 2019. The average rate on FHLB borrowings for the nine months ended September 30, 2020 was 1.08% compared to 2.51% for the nine months ended September 30, 2019. FHLB borrowings outstanding were $35.0 million at September 30, 2020, with an average rate of 0.72%, maturing in 2023.
For the nine months ended September 30, 2020, subordinated debt averaged $71.2 million, an increase of $0.3 million compared to the same period during 2019. The average rate on subordinated debt for the nine months ended September 30, 2020 was 3.28%, compared to 4.87% for the nine months ended September 30, 2019. The subordinated debt relates to trust preferred securities issued by subsidiary trusts of the Company.
The following tables detail average balances, net interest income and margin results (on a tax equivalent basis) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances, Interest Income and Expenses, Yields and Rates1
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Third Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
(In thousands, except ratios)
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
1,322,160
|
|
|
$
|
6,972
|
|
|
2.11
|
%
|
|
$
|
1,135,698
|
|
|
$
|
7,573
|
|
|
2.67
|
%
|
|
$
|
1,171,393
|
|
|
$
|
8,802
|
|
|
3.01
|
%
|
Nontaxable
|
23,570
|
|
|
157
|
|
|
2.67
|
|
|
19,347
|
|
|
152
|
|
|
3.14
|
|
|
21,194
|
|
|
164
|
|
|
3.09
|
|
Total Securities
|
1,345,730
|
|
|
7,129
|
|
|
2.12
|
|
|
1,155,045
|
|
|
7,725
|
|
|
2.68
|
|
|
1,192,587
|
|
|
8,966
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other investments
|
239,511
|
|
|
556
|
|
|
0.92
|
|
|
433,626
|
|
|
684
|
|
|
0.63
|
|
|
84,705
|
|
|
800
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans excluding PPP loans
|
5,242,776
|
|
|
58,854
|
|
|
4.47
|
|
|
5,304,381
|
|
|
59,861
|
|
|
4.54
|
|
|
4,945,953
|
|
|
63,138
|
|
|
5.06
|
|
PPP Loans
|
618,088
|
|
|
1,719
|
|
|
1.11
|
|
|
424,171
|
|
|
5,068
|
|
|
4.81
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Loans
|
5,860,864
|
|
|
60,573
|
|
|
4.11
|
|
|
5,728,552
|
|
|
64,929
|
|
|
4.56
|
|
|
4,945,953
|
|
|
63,138
|
|
|
5.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
7,446,105
|
|
|
68,258
|
|
|
3.65
|
|
|
7,317,223
|
|
|
73,338
|
|
|
4.03
|
|
|
6,223,245
|
|
|
72,904
|
|
|
4.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
(92,151)
|
|
|
|
|
|
|
(84,965)
|
|
|
|
|
|
|
(33,997)
|
|
|
|
|
|
Cash and due from banks
|
138,749
|
|
|
|
|
|
|
103,919
|
|
|
|
|
|
|
88,539
|
|
|
|
|
|
Premises and equipment
|
72,572
|
|
|
|
|
|
|
71,173
|
|
|
|
|
|
|
68,301
|
|
|
|
|
|
Intangible assets
|
228,801
|
|
|
|
|
|
|
230,871
|
|
|
|
|
|
|
227,389
|
|
|
|
|
|
Bank owned life insurance
|
129,156
|
|
|
|
|
|
|
127,386
|
|
|
|
|
|
|
125,249
|
|
|
|
|
|
Other assets
|
163,658
|
|
|
|
|
|
|
147,395
|
|
|
|
|
|
|
121,850
|
|
|
|
|
|
Total Assets
|
$
|
8,086,890
|
|
|
|
|
|
|
$
|
7,913,002
|
|
|
|
|
|
|
$
|
6,820,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
$
|
1,364,947
|
|
|
$
|
330
|
|
|
0.10
|
%
|
|
$
|
1,298,639
|
|
|
$
|
297
|
|
|
0.09
|
%
|
|
$
|
1,116,434
|
|
|
$
|
1,053
|
|
|
0.37
|
%
|
Savings
|
648,319
|
|
|
170
|
|
|
0.10
|
|
|
591,040
|
|
|
165
|
|
|
0.11
|
|
|
522,831
|
|
|
531
|
|
|
0.40
|
|
Money market
|
1,328,931
|
|
|
799
|
|
|
0.24
|
|
|
1,193,969
|
|
|
741
|
|
|
0.25
|
|
|
1,173,042
|
|
|
2,750
|
|
|
0.93
|
|
Time deposits
|
1,051,316
|
|
|
2,673
|
|
|
1.01
|
|
|
1,293,766
|
|
|
3,820
|
|
|
1.19
|
|
|
1,159,272
|
|
|
6,009
|
|
|
2.06
|
|
Short term borrowings
|
90,357
|
|
|
40
|
|
|
0.18
|
|
|
74,717
|
|
|
34
|
|
|
0.18
|
|
|
75,785
|
|
|
300
|
|
|
1.57
|
|
Federal funds purchased and Federal Home Loan Bank borrowings
|
93,913
|
|
|
181
|
|
|
0.77
|
|
|
199,698
|
|
|
312
|
|
|
0.63
|
|
|
68,804
|
|
|
414
|
|
|
2.39
|
|
Other borrowings
|
71,258
|
|
|
444
|
|
|
2.48
|
|
|
71,185
|
|
|
581
|
|
|
3.28
|
|
|
70,969
|
|
|
820
|
|
|
4.58
|
|
Total Interest-Bearing Liabilities
|
4,649,041
|
|
|
4,637
|
|
|
0.40
|
|
|
4,723,014
|
|
|
5,950
|
|
|
0.51
|
|
|
4,187,137
|
|
|
11,877
|
|
|
1.13
|
|
Noninterest demand
|
2,279,584
|
|
|
|
|
|
|
2,097,038
|
|
|
|
|
|
|
1,626,269
|
|
|
|
|
|
Other liabilities
|
96,457
|
|
|
|
|
|
|
79,855
|
|
|
|
|
|
|
60,500
|
|
|
|
|
|
Total Liabilities
|
7,025,082
|
|
|
|
|
|
|
6,899,907
|
|
|
|
|
|
|
5,873,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
1,061,807
|
|
|
|
|
|
|
1,013,095
|
|
|
|
|
|
|
946,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity
|
$
|
8,086,890
|
|
|
|
|
|
|
$
|
7,913,002
|
|
|
|
|
|
|
$
|
6,820,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of deposits
|
|
|
|
|
0.24
|
%
|
|
|
|
|
|
0.31
|
%
|
|
|
|
|
|
0.73
|
%
|
Interest expense as a % of earning assets
|
|
|
|
|
0.25
|
%
|
|
|
|
|
|
0.33
|
%
|
|
|
|
|
|
0.76
|
%
|
Net interest income as a % of earning assets
|
|
|
$
|
63,621
|
|
|
3.40
|
%
|
|
|
|
$
|
67,388
|
|
|
3.70
|
%
|
|
|
|
$
|
61,027
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.
|
|
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|
|
|
|
|
|
|
|
Average Balances, Interest Income and Expenses, Yields and Rates1
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Year to Date
|
|
Year to Date
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
(In thousands, except ratios)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
1,203,877
|
|
|
$
|
23,241
|
|
|
2.57
|
%
|
|
$
|
1,175,831
|
|
|
$
|
26,854
|
|
|
3.05
|
%
|
Nontaxable
|
|
20,895
|
|
|
461
|
|
|
2.94
|
|
|
23,935
|
|
|
533
|
|
|
2.97
|
|
Total Securities
|
|
1,224,772
|
|
|
23,702
|
|
|
2.58
|
|
|
1,199,766
|
|
|
27,387
|
|
|
3.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other investments
|
|
253,635
|
|
|
1,974
|
|
|
1.04
|
|
|
89,084
|
|
|
2,591
|
|
|
3.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans excluding PPP loans
|
|
5,254,089
|
|
|
182,239
|
|
|
4.63
|
|
|
4,875,975
|
|
|
187,808
|
|
|
5.15
|
|
PPP Loans
|
|
348,407
|
|
|
6,787
|
|
|
2.60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Loans
|
|
5,602,496
|
|
|
189,026
|
|
|
4.51
|
|
|
4,875,975
|
|
|
187,808
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
|
7,080,903
|
|
|
214,702
|
|
|
4.05
|
|
|
6,164,825
|
|
|
217,786
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(78,067)
|
|
|
|
|
|
|
(33,260)
|
|
|
|
|
|
Cash and due from banks
|
|
111,019
|
|
|
|
|
|
|
93,171
|
|
|
|
|
|
Premises and equipment
|
|
70,451
|
|
|
|
|
|
|
69,700
|
|
|
|
|
|
Intangible assets
|
|
228,795
|
|
|
|
|
|
|
228,710
|
|
|
|
|
|
Bank owned life insurance
|
|
127,683
|
|
|
|
|
|
|
124,535
|
|
|
|
|
|
Other assets
|
|
145,827
|
|
|
|
|
|
|
128,016
|
|
|
|
|
|
Total Assets
|
|
$
|
7,686,611
|
|
|
|
|
|
|
$
|
6,775,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
1,279,485
|
|
|
$
|
1,461
|
|
|
0.15
|
%
|
|
$
|
1,088,605
|
|
|
$
|
3,042
|
|
|
0.37
|
%
|
Savings
|
|
588,913
|
|
|
683
|
|
|
0.15
|
|
|
512,399
|
|
|
1,593
|
|
|
0.42
|
|
Money market
|
|
1,217,627
|
|
|
3,548
|
|
|
0.39
|
|
|
1,170,494
|
|
|
8,397
|
|
|
0.96
|
|
Time deposits
|
|
1,165,194
|
|
|
11,261
|
|
|
1.29
|
|
|
1,097,308
|
|
|
16,692
|
|
|
2.03
|
|
Short term borrowings
|
|
78,755
|
|
|
241
|
|
|
0.41
|
|
|
117,077
|
|
|
1,206
|
|
|
1.38
|
|
Federal funds purchased and Federal Home Loan Bank borrowings
|
|
180,893
|
|
|
1,460
|
|
|
1.08
|
|
|
115,337
|
|
|
2,164
|
|
|
2.51
|
|
Other borrowings
|
|
71,186
|
|
|
1,748
|
|
|
3.28
|
|
|
70,903
|
|
|
2,585
|
|
|
4.87
|
|
Total Interest-Bearing Liabilities
|
|
4,582,053
|
|
|
20,402
|
|
|
0.59
|
|
|
4,172,123
|
|
|
35,679
|
|
|
1.14
|
|
Noninterest demand
|
|
2,001,630
|
|
|
|
|
|
|
1,628,634
|
|
|
|
|
|
Other liabilities
|
|
79,821
|
|
|
|
|
|
|
62,123
|
|
|
|
|
|
Total Liabilities
|
|
6,663,504
|
|
|
|
|
|
|
5,862,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
1,023,107
|
|
|
|
|
|
|
912,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity
|
|
$
|
7,686,611
|
|
|
|
|
|
|
$
|
6,775,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of deposits
|
|
|
|
|
|
0.36
|
%
|
|
|
|
|
|
0.72
|
%
|
Interest expense as a % of earning assets
|
|
|
|
|
|
0.38
|
%
|
|
|
|
|
|
0.77
|
%
|
Net interest income as a % of earning assets
|
|
|
|
$
|
194,300
|
|
|
3.67
|
%
|
|
|
|
$
|
182,107
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.
|
Noninterest Income
Noninterest income totaled $16.9 million for the third quarter of 2020, an increase of $1.9 million, or 13%, compared to the second quarter of 2020 and an increase of $3.0 million, or 22%, from the third quarter of 2019. Noninterest income totaled $46.6 million for the nine months ended September 30, 2020, an increase of 6.3 million, or 16%, compared to the nine months ended September 30, 2019.
Noninterest income is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service charges on deposit accounts
|
$
|
2,242
|
|
|
$
|
1,939
|
|
|
$
|
2,978
|
|
|
$
|
7,006
|
|
|
$
|
8,569
|
|
Interchange income
|
3,682
|
|
|
3,187
|
|
|
3,206
|
|
|
10,115
|
|
|
10,012
|
|
Wealth management income
|
1,972
|
|
|
1,719
|
|
|
1,632
|
|
|
5,558
|
|
|
4,773
|
|
Mortgage banking fees
|
5,283
|
|
|
3,559
|
|
|
2,127
|
|
|
11,050
|
|
|
4,976
|
|
Marine finance fees
|
242
|
|
|
157
|
|
|
152
|
|
|
545
|
|
|
715
|
|
SBA gains
|
252
|
|
|
181
|
|
|
569
|
|
|
572
|
|
|
1,896
|
|
BOLI income
|
899
|
|
|
887
|
|
|
928
|
|
|
2,672
|
|
|
2,770
|
|
Other income
|
2,370
|
|
|
2,147
|
|
|
3,198
|
|
|
7,869
|
|
|
7,967
|
|
|
16,942
|
|
|
13,776
|
|
|
14,790
|
|
|
45,387
|
|
|
41,678
|
|
Securities gains (losses), net
|
4
|
|
|
1,230
|
|
|
(847)
|
|
|
1,253
|
|
|
(1,322)
|
|
Total
|
$
|
16,946
|
|
|
$
|
15,006
|
|
|
$
|
13,943
|
|
|
$
|
46,640
|
|
|
$
|
40,356
|
|
Service charges on deposits were $2.2 million in the third quarter of 2020, an increase of $0.3 million, or 16%, compared to the second quarter of 2020 and a decrease of $0.7 million, or 25%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, service charges on deposits totaled $7.0 million, a decrease of $1.6 million, or 18%, compared to the nine months ended September 30, 2019. Government actions in response to the pandemic, particularly in the second quarter of 2020, including the PPP program and individual stimulus payments, combined with lower overall consumer spending levels, have resulted in higher average deposit balances for both business and consumer customers. Higher average account balances have resulted in lower service charges in the second and third quarters of 2020 compared to 2019. Overdraft fees represent 44% of total service charges on deposits for the nine months ended September 30, 2020.
Interchange income totaled $3.7 million for the three months ended September 30, 2020, an increase of $0.5 million, or 16%, compared to the three months ended June 30, 2020, and an increase of $0.5 million, or 15%, compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, interchange income totaled $10.1 million, an increase of $0.1 million, or 1%, compared to the nine months ended September 30, 2019. The third quarter of 2020 benefited from recent growth in business banking customers and targeted marketing efforts.
Wealth management income, including trust fees and brokerage commissions and fees, was a record $2.0 million in the third quarter of 2020, increasing $0.3 million, or 15%, from the second quarter of 2020 and increasing $0.3 million, or 21% compared to the third quarter of 2019. For the nine months ended September 30, 2020, wealth management income totaled $5.6 million, an increase of $0.8 million, or 16%, compared to the nine months ended September 30, 2019. Increases reflect the strategic focus of growing the wealth management business. Assets under management reached $793 million at September 30, 2020, an increase of 31% compared to the prior year. As a result, the Company expects wealth management income to continue to grow in future periods.
Mortgage banking fees increased by $1.7 million, or 48%, to $5.3 million in the third quarter of 2020 compared to the second quarter of 2020, and increased $3.2 million, or 148%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, mortgage banking fees totaled $11.1 million, an increase of $6.1 million, or 122%, compared to the nine months ended September 30, 2019 as Seacoast continues to capitalize on the robust residential refinance market and strength in the Florida housing market. Seacoast's mortgage team has adapted quickly to the heightened demand by increasing customer service level standards with realtors, refinance customers, and new home buyers, resulting in stronger performance than competitors.
Marine finance fees were $0.2 million, an increase of $0.1 million, or 54%, compared to the second quarter of 2020 and an increase of $0.1 million, or 59%, compared to the prior year quarter. For the nine months ended September 30, 2020, marine finance fees totaled $0.5 million, a decrease of $0.2 million, or 24%, compared to the nine months ended September 30, 2019.
SBA income totaled $0.3 million, an increase of $0.1 million, or 39%, compared to the second quarter of 2020 and a decrease of $0.3 million, or 56%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, SBA income totaled $0.6 million, a decrease of $1.3 million, or 70%, compared to the nine months ended September 30, 2019. The decrease for the nine months ended September 30, 2020 reflects lower production of saleable SBA loans outside of the PPP program.
Bank owned life insurance ("BOLI") income totaled $0.9 million for the third quarter of 2020, in line with the second quarter of 2020 and prior year results. For the nine months ended September 30, 2020, BOLI income totaled $2.7 million, a decrease of $0.1 million, or 4%, compared to the nine months ended September 30, 2019.
Other income was $2.4 million in the third quarter of 2020, an increase of $0.2 million, or 10%, quarter-over-quarter and a decrease of $0.8 million, or 26%, year-over-year. The increase from the prior quarter reflects higher income on SBIC investments, partially offset by lower loan swap fees. The decrease from the prior year quarter reflects a $1.0 million BOLI death benefit recorded in the third quarter of 2019, offset by higher SBIC investment income in the third quarter of 2020. For the nine months ended September 30, 2020, other income totaled $7.9 million, a decrease of $0.1 million, or 1%, compared to the nine months ended September 30, 2019. Higher income from SBIC investments in the nine months ended September 30, 2020 was more than offset by the BOLI death benefit recorded in the comparable 2019 period.
Securities gains in the third quarter of 2020 were nominal compared to gains of $1.2 million in the second quarter of 2020 and losses on securities sales of $0.8 million in the third quarter of 2019. Securities gains during the nine months ended September 30, 2020 totaled $1.3 million, compared to losses of $1.3 million in the nine months ended September 30, 2019.
Noninterest Expenses
The Company has demonstrated its commitment to efficiency through disciplined, proactive management of its cost structure. Noninterest expenses in the third quarter of 2020 included acquisition-related expenses of $4.3 million and expenses related to branch consolidation of $0.5 million. The second quarter of 2020 benefited from the impact of higher loan production driven by the PPP program, resulting in higher deferrals of salary-related expenses. These factors contributed to an overall increase in noninterest expense in the third quarter of 2020 compared to the second quarter of 2020. Seacoast has reduced its branch count by 20% since 2017 through successful bank acquisitions and the repositioning of the banking center network in strategic growth markets to meet the evolving needs of its customers. Further consolidation activity is expected in 2021. At September 30, 2020, deposits per banking center were $135.6 million, up from $118.2 million at September 30, 2019. Adjusted noninterest expense3 as a percent of average tangible assets was 2.24% for the third quarter of 2020 compared to 2.11% for the second quarter of 2020 and 2.21% for the third quarter of 2019. For the nine months ended September 30, 2020, adjusted noninterest expense1 as a percent of average tangible assets was 2.26% compared to 2.37% for the nine months ended September 30, 2019.
For the third quarter of 2020, the efficiency ratio, defined as noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties divided by net operating revenue (net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses), was 61.65% compared to 50.11% for the second quarter of 2020 and 48.62% for the third quarter of 2019. The efficiency ratio in the second quarter of 2020 benefited from the impact of higher PPP fee accretion and the impact of higher loan production driven by the PPP program, resulting in higher deferrals of salary-related expenses. Additionally, the provision for unfunded lending-related commitments totaled $0.8 million in the third quarter of 2020, compared to $0.2 million in the second quarter of 2020 and none in the third quarter of 2019. For the nine months ended September 30, 2020, the efficiency ratio was 57.15% compared to 52.85% for the nine months ended September 30, 2019. The increase in efficiency ratio for the nine months ended September 30, 2020 reflects the impact of an increase in merger-related expenses of $8.7 million and an increase of $1.0 million in provision for unfunded lending-related commitments, partially offset by lower branch reduction expenses of $1.4 million.
The adjusted efficiency ratio1 increased from 49.60% in the second quarter of 2020 to 54.82% in the third quarter of 2020. The increase is the result of lower net interest income from the change in PPP accretion and higher expenses primarily associated with PPP salary deferrals in the second quarter of 2020, offset by higher noninterest income. For the nine months ended September 30, 2020, the adjusted efficiency ratio1 increased to 52.64% from 52.05% for the nine months ended September 30, 2019.
3Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands, except ratios)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Noninterest expense, as reported
|
$
|
51,674
|
|
|
$
|
42,399
|
|
|
$
|
38,583
|
|
|
$
|
141,871
|
|
|
$
|
122,682
|
|
|
|
|
|
|
|
|
|
|
|
Merger related charges
|
(4,281)
|
|
|
(240)
|
|
|
—
|
|
|
(9,074)
|
|
|
(335)
|
|
Amortization of intangibles
|
(1,497)
|
|
|
(1,483)
|
|
|
(1,456)
|
|
|
(4,436)
|
|
|
(4,370)
|
|
Business continuity expenses
|
—
|
|
|
—
|
|
|
(95)
|
|
|
(307)
|
|
|
(95)
|
|
Branch reductions and other expense initiatives
|
(464)
|
|
|
—
|
|
|
(121)
|
|
|
(464)
|
|
|
(1,846)
|
|
Adjusted noninterest expense1
|
$
|
45,432
|
|
|
$
|
40,676
|
|
|
$
|
36,911
|
|
|
$
|
127,590
|
|
|
$
|
116,036
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed property expense and net (loss)/gain on sale
|
(512)
|
|
|
(245)
|
|
|
(262)
|
|
|
(442)
|
|
|
(48)
|
|
Provision for credit losses on unfunded commitments
|
(756)
|
|
|
(178)
|
|
|
—
|
|
|
(980)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Net adjusted noninterest expense1
|
$
|
44,164
|
|
|
$
|
40,253
|
|
|
$
|
36,649
|
|
|
$
|
126,168
|
|
|
$
|
115,988
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
61.65
|
%
|
|
50.11
|
%
|
|
48.62
|
%
|
|
57.15
|
%
|
|
52.85
|
%
|
Adjusted efficiency ratio1,2
|
54.82
|
|
|
49.60
|
|
|
48.96
|
|
|
52.64
|
|
|
52.05
|
|
Adjusted noninterest expense as a percent of average tangible assets1,2
|
2.24
|
|
|
2.11
|
|
|
2.21
|
|
|
2.26
|
|
|
2.37
|
|
1Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
|
2Adjusted efficiency ratio is defined as noninterest expense, including adjustments to noninterest expense divided by aggregated tax equivalent net interest income and noninterest income, including adjustments to revenue.
|
Noninterest expense for the third quarter of 2020 totaled $51.7 million, an increase of $9.3 million, or 22%, compared to the second quarter of 2020, and an increase of $13.1 million, or 34%, from the third quarter of 2019. For the nine months ended September 30, 2020, noninterest expense totaled $141.9 million, an increase of $19.2 million, or 16%, compared to the nine months ended September 30, 2019. Noninterest expenses are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
$
|
23,125
|
|
|
$
|
20,226
|
|
|
$
|
18,640
|
|
|
$
|
67,049
|
|
|
$
|
56,566
|
|
Employee benefits
|
3,995
|
|
|
3,379
|
|
|
2,973
|
|
|
11,629
|
|
|
10,374
|
|
Outsourced data processing costs
|
6,128
|
|
|
4,059
|
|
|
3,711
|
|
|
14,820
|
|
|
11,432
|
|
Telephone/data lines
|
705
|
|
|
791
|
|
|
603
|
|
|
2,210
|
|
|
2,307
|
|
Occupancy
|
3,858
|
|
|
3,385
|
|
|
3,368
|
|
|
10,596
|
|
|
10,916
|
|
Furniture and equipment
|
1,576
|
|
|
1,358
|
|
|
1,528
|
|
|
4,557
|
|
|
4,829
|
|
Marketing
|
1,513
|
|
|
997
|
|
|
933
|
|
|
3,788
|
|
|
3,276
|
|
Legal and professional fees
|
3,018
|
|
|
2,277
|
|
|
1,648
|
|
|
8,658
|
|
|
6,528
|
|
FDIC assessments
|
474
|
|
|
266
|
|
|
56
|
|
|
740
|
|
|
881
|
|
Amortization of intangibles
|
1,497
|
|
|
1,483
|
|
|
1,456
|
|
|
4,436
|
|
|
4,370
|
|
Foreclosed property expense and net loss on sale
|
512
|
|
|
245
|
|
|
262
|
|
|
442
|
|
|
48
|
|
Provision for credit losses on unfunded commitments
|
756
|
|
|
178
|
|
|
—
|
|
|
980
|
|
|
—
|
|
Other
|
4,517
|
|
|
3,755
|
|
|
3,405
|
|
|
11,966
|
|
|
11,155
|
|
Total
|
$
|
51,674
|
|
|
$
|
42,399
|
|
|
$
|
38,583
|
|
|
$
|
141,871
|
|
|
$
|
122,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages totaled $23.1 million for the third quarter of 2020, $20.2 million for the second quarter of 2020, and $18.6 million for the third quarter of 2019, an increase of 14% and 24%, respectively. Expenses increased $2.9 million in the third quarter of 2020, reflecting lower expenses in the second quarter of 2020 of $2.9 million resulting from deferral of salary costs on higher PPP loan production. The third quarter of 2020 also included $0.6 million in costs associated with the Freedom Bank acquisition and higher residential commission expenses resulting from increased mortgage production volume, offset by lower temporary staffing costs associated with the customer support center. For the nine months ended September 30, 2020, salaries and wages totaled $67.0 million, an increase of $10.5 million, or 19%, compared to the nine months ended September 30, 2019. The increase includes merger-related expenses of $3.1 million in the 2020 period, higher residential commission expenses resulting from increased mortgage production volume, bonuses and incentives paid in support of PPP loan production and to branch employees, and the addition of temporary staff to support the pandemic operating environment.
During the third quarter 2020, employee benefit costs, which include costs associated with the Company's self-funded health insurance benefits, 401(k) plan, payroll taxes, and unemployment compensation, were $4.0 million, an increase of $0.6 million, or 18%, compared to the second quarter of 2020 and an increase of $1.0 million, or 34%, compared to the third quarter of 2019. The increase in the third quarter of 2020 reflects higher health insurance claims, likely the result of routine medical appointments having been postponed in the second quarter due to COVID-19 lockdowns. For the nine months ended September 30, 2020, employee benefit costs totaled $11.6 million, an increase of $1.3 million, or 12%, compared to the nine months ended September 30, 2019. Increases for the nine months ended September 30, 2020 reflect the impact of additional employees added through the FBPB and Freedom Bank acquisitions.
The Company utilizes third parties for its core data processing systems. Ongoing data processing costs are directly related to the number of transactions processed and the negotiated rates associated with those transactions. The Company also incurs acquisition-related costs for data migration and contract terminations. Outsourced data processing costs totaled $6.1 million, $4.1 million and $3.7 million for the third quarter 2020, second quarter 2020 and third quarter 2019, respectively. Of the $2.1 million increase quarter-over-quarter, $1.9 million was the result of acquisition-related costs associated with data conversion. For the nine months ended September 30, 2020, data processing costs totaled $14.8 million, an increase of $3.4 million, or 30%, compared to the nine months ended September 30, 2019. Increases in the 2020 period include $2.7 million of acquisition-related costs and higher lending-related costs to support the administration of the PPP program. The Company continues to improve and enhance mobile and other digital products and services through key third parties. This may increase outsourced data processing costs as customers adopt improvements and products and as business volumes grow.
Telephone and data line expenditures, including electronic communications with customers and between branch and customer support locations and personnel, as well as with third-party data processors, were $0.7 million, a decrease of $0.1 million, or 11%, during the third quarter of 2020 when compared to the second quarter of 2020 and an increase of $0.1 million, or 17%, when compared to the third quarter of 2019. For the nine months ended September 30, 2020, telephone and data line expenditures totaled $2.2 million, a decrease of $0.1 million, or 4%, compared to the nine months ended September 30, 2019.
Total occupancy, furniture and equipment expenses for the third quarter of 2020 increased $0.7 million, or 15%, from the second quarter of 2020, and increased $0.5 million, or 11% compared to the third quarter of 2019. The increases resulted from merger-related costs, and expenses incurred in connection with the consolidation of the legacy St. Petersburg branch in the third quarter of 2020. For the nine months ended September 30, 2020, occupancy, furniture and equipment totaled $15.2 million, a decrease of $0.6 million, or 4%, compared to the nine months ended September 30, 2019. The decrease in the nine-month period reflects the benefit of consolidating three banking center locations in 2019. Seacoast has reduced its branch count by 20% since 2017 through successful bank acquisitions and the repositioning of the banking center network in strategic growth markets to meet the evolving needs of its customers. The Company believes branches are still valuable to customers for more complex transactions, but simple tasks, such as depositing and withdrawing funds, are rapidly migrating to the digital world. Management anticipates that branch consolidations will continue for the Company and the banking industry in general.
Marketing expenses for the third quarter of 2020 totaled $1.5 million, an increase of $0.5 million, or 52%, compared to the second quarter of 2020 and an increase of $0.6 million, or 62%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, marketing expenses totaled $3.8 million, an increase of $0.5 million, or 16%, compared to the nine months ended September 30, 2019. Higher expenses in the third quarter of 2020 reflect increased investment to capture the opportunity presented by dissatisfied business customers affected by unsatisfactory PPP execution by national banks.
Legal and professional fees for the third quarter of 2020 were $3.0 million, an increase of $0.7 million, or 33%, compared to the second quarter of 2020 and an increase of $1.4 million, or 83%, compared to the third quarter of 2019. The Company incurred $1.3 million in acquisition-related expenses in the third quarter of 2020, compared to $0.2 million in the second quarter of 2020. For the nine months ended September 30, 2020, legal and professional fees totaled $8.7 million, an increase of $2.1 million, or 33%, compared to the nine months ended September 30, 2019, attributed to acquisition-related expenses incurred in 2020, partially offset by higher project-related expenses incurred in the first half of 2019.
The Company utilized the remainder of previously issued FDIC small bank assessment credits to offset a portion of the assessment in the second quarter of 2020. Assessment expense in the third quarter of 2020 returned to the standard level, and is expected to be $0.5 million in the fourth quarter of 2020. For the nine months ended September 30, 2020, FDIC assessment expenses totaled $0.7 million, a decrease of $0.1 million, or 16%, compared to the nine months ended September 30, 2019, reflecting the benefit of credits applied in the 2020 period.
During the third quarter of 2020, the Company incurred expenses related to the sale of foreclosed assets, net of gains on sales, of $0.5 million compared to $0.2 million in the second quarter of 2020 (see “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality” for more discussion).
The provision for credit losses on unfunded lending commitments totaled $0.8 million in the third quarter of 2020, compared to $0.2 million in the second quarter of 2020 and none in the third quarter of 2019. Since adopting the CECL standard on January 1, 2020, the Company maintains an allowance for credit losses on lending-related commitments that are not unconditionally cancellable which reflects the company's estimate of lifetime losses. During the third quarter of 2020, the increase is primarily related to loan commitments acquired from Freedom Bank.
Other expense totaled $4.5 million, $3.8 million and $3.4 million for the third quarter of 2020, the second quarter of 2020 and the third quarter of 2019, respectively. For the nine months ended September 30, 2020, other expenses totaled $12.0 million, an increase of $0.8 million, or 7%, compared to the nine months ended September 30, 2019. Increases in 2020 included higher mortgage loan production-related expenses associated with higher volume, and costs related to the administration of the PPP program.
Income Taxes
For the third quarter of 2020, the Company recorded tax expense of $7.0 million compared to $7.2 million in the second quarter of 2020 and $8.5 million in the third quarter of 2019. In September 2019, the State of Florida announced a reduction in the corporate income tax rate from 5.5% to 4.458% for the years 2019, 2020 and 2021. This change resulted in additional income tax expense of $1.1 million in the third quarter of 2019 upon the write down of deferred tax assets affected by the change, offset by a $0.4 million benefit upon adjusting the year-to-date provision to the new statutory tax rate. For the nine months ended September 30, 2020, tax expenses totaled $14.0 million, a decrease of $7.7 million, or 36%, compared to the nine months ended September 30, 2019. Tax impacts related to stock-based compensation were nominal in each period.
Explanation of Certain Unaudited Non-GAAP Financial Measures
This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The financial highlights provide reconciliations between GAAP and adjusted financial measures including net income, fully taxable equivalent net interest income, noninterest income, noninterest expense, tax adjustments, net interest margin and other financial ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might define or calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.
Reconciliation of Non-GAAP Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands, except per share data)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income, as reported:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
22,628
|
|
|
$
|
25,080
|
|
|
$
|
25,605
|
|
|
$
|
48,417
|
|
|
$
|
71,563
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
0.42
|
|
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.91
|
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
$
|
16,946
|
|
|
$
|
15,006
|
|
|
$
|
13,943
|
|
|
$
|
46,640
|
|
|
$
|
40,356
|
|
Securities (gains) losses, net
|
(4)
|
|
|
(1,230)
|
|
|
847
|
|
|
(1,253)
|
|
|
1,322
|
|
BOLI benefits on death (included in other income)
|
—
|
|
|
—
|
|
|
(956)
|
|
|
—
|
|
|
(956)
|
|
Total adjustments to noninterest income
|
(4)
|
|
|
(1,230)
|
|
|
(109)
|
|
|
(1,253)
|
|
|
366
|
|
Total Adjusted Noninterest Income
|
$
|
16,942
|
|
|
$
|
13,776
|
|
|
$
|
13,834
|
|
|
$
|
45,387
|
|
|
$
|
40,722
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
51,674
|
|
|
$
|
42,399
|
|
|
$
|
38,583
|
|
|
$
|
141,871
|
|
|
$
|
122,682
|
|
Merger related charges
|
(4,281)
|
|
|
(240)
|
|
|
—
|
|
|
(9,074)
|
|
|
(335)
|
|
Amortization of intangibles
|
(1,497)
|
|
|
(1,483)
|
|
|
(1,456)
|
|
|
(4,436)
|
|
|
(4,370)
|
|
Business continuity expenses
|
—
|
|
|
—
|
|
|
(95)
|
|
|
(307)
|
|
|
(95)
|
|
Branch reductions and other expense initiatives1
|
(464)
|
|
|
—
|
|
|
(121)
|
|
|
(464)
|
|
|
(1,846)
|
|
Total adjustments to noninterest expense
|
(6,242)
|
|
|
(1,723.00)
|
|
|
(1,672)
|
|
|
(14,281)
|
|
|
(6,646)
|
|
Total Adjusted Noninterest Expense
|
$
|
45,432
|
|
|
$
|
40,676
|
|
|
$
|
36,911
|
|
|
$
|
127,590
|
|
|
$
|
116,036
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
$
|
6,992
|
|
|
$
|
7,188
|
|
|
$
|
8,452
|
|
|
$
|
14,025
|
|
|
$
|
21,770
|
|
Tax effect of adjustments
|
1,530
|
|
|
121
|
|
|
572
|
|
|
3,195
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in corporate tax rate on deferred tax assets
|
—
|
|
|
—
|
|
|
(1,135)
|
|
|
—
|
|
|
(1,135)
|
|
Total adjustments to income taxes
|
1,530
|
|
|
121
|
|
|
(563)
|
|
|
3,195
|
|
|
821
|
|
Adjusted income taxes
|
8,522
|
|
|
7,309
|
|
|
7,889
|
|
|
17,220
|
|
|
22,591
|
|
Adjusted net income
|
$
|
27,336
|
|
|
$
|
25,452
|
|
|
$
|
27,731
|
|
|
$
|
58,250
|
|
|
$
|
77,754
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share, as reported
|
$
|
0.42
|
|
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.91
|
|
|
$
|
1.38
|
|
Adjusted diluted earnings per share
|
0.50
|
|
|
0.48
|
|
|
0.53
|
|
|
1.09
|
|
|
1.50
|
|
Average diluted shares outstanding
|
54,301
|
|
|
53,308
|
|
|
51,935
|
|
|
53,325
|
|
|
51,996
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Noninterest Expense
|
$
|
45,432
|
|
|
$
|
40,676
|
|
|
$
|
36,911
|
|
|
$
|
127,590
|
|
|
$
|
116,036
|
|
Foreclosed property expense and net (loss) gain on sale
|
(512)
|
|
|
(245)
|
|
|
(262)
|
|
|
(442)
|
|
|
(48)
|
|
Provision for unfunded commitments
|
(756)
|
|
|
(178)
|
|
|
—
|
|
|
(980)
|
|
|
—
|
|
Net Adjusted Noninterest Expense
|
$
|
44,164
|
|
|
$
|
40,253
|
|
|
$
|
36,649
|
|
|
$
|
126,168
|
|
|
$
|
115,988
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
80,449
|
|
|
$
|
82,278
|
|
|
$
|
74,891
|
|
|
$
|
240,592
|
|
|
$
|
222,214
|
|
Total adjustments to revenue
|
(4)
|
|
|
(1,230)
|
|
|
(109)
|
|
|
(1,253)
|
|
|
366
|
|
Impact of FTE adjustment
|
118
|
|
|
116
|
|
|
79
|
|
|
348
|
|
|
249
|
|
Adjusted revenue on a fully tax equivalent basis
|
$
|
80,563
|
|
|
$
|
81,164
|
|
|
$
|
74,861
|
|
|
$
|
239,687
|
|
|
$
|
222,829
|
|
Adjusted Efficiency Ratio
|
54.82
|
%
|
|
49.60
|
%
|
|
48.96
|
%
|
|
52.64
|
%
|
|
52.05
|
%
|
Net Adjusted Noninterest Expense as a Percent of Average Tangible Assets2
|
2.24
|
%
|
|
2.11
|
%
|
|
2.21
|
%
|
|
2.26
|
%
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
$
|
63,503
|
|
|
$
|
67,272
|
|
|
$
|
60,948
|
|
|
$
|
193,952
|
|
|
$
|
181,858
|
|
Impact of FTE adjustment
|
118
|
|
|
116
|
|
|
79
|
|
|
348
|
|
|
249
|
|
Net interest income including FTE adjustment
|
63,621
|
|
|
67,388
|
|
|
61,027
|
|
|
194,300
|
|
|
182,107
|
|
Noninterest income
|
16,946
|
|
|
15,006
|
|
|
13,943
|
|
|
46,640
|
|
|
40,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands, except per share data)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Noninterest expense
|
51,674
|
|
|
42,399
|
|
|
38,583
|
|
|
141,871
|
|
|
122,682
|
|
Pre-Tax Pre-Provision Earnings
|
28,893
|
|
|
39,995
|
|
|
36,387
|
|
|
99,069
|
|
|
99,781
|
|
Adjustments to noninterest income
|
(4)
|
|
|
(1,230)
|
|
|
(109)
|
|
|
(1,253)
|
|
|
366
|
|
Adjustments to noninterest expense
|
(7,510)
|
|
|
(2,146)
|
|
|
(1,934)
|
|
|
(15,703)
|
|
|
(6,694)
|
|
Adjusted Pre-Tax Pre-Provision Earnings
|
$
|
36,399
|
|
|
$
|
40,911
|
|
|
$
|
38,212
|
|
|
$
|
113,519
|
|
|
$
|
106,841
|
|
|
|
|
|
|
|
|
|
|
|
Average Assets
|
$
|
8,086,890
|
|
|
$
|
7,913,002
|
|
|
$
|
6,820,576
|
|
|
$
|
7,686,611
|
|
|
$
|
6,775,697
|
|
Less average goodwill and intangible assets
|
(228,801)
|
|
|
(230,871)
|
|
|
(227,389)
|
|
|
(228,795)
|
|
|
(228,710)
|
|
Average Tangible Assets
|
$
|
7,858,089
|
|
|
$
|
7,682,131
|
|
|
$
|
6,593,187
|
|
|
$
|
7,457,816
|
|
|
$
|
6,546,987
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets (ROA)
|
1.11
|
%
|
|
1.27
|
%
|
|
1.49
|
%
|
|
0.84
|
%
|
|
1.41
|
%
|
Impact of removing average intangible assets and related amortization
|
0.09
|
|
|
0.10
|
|
|
0.12
|
|
|
0.09
|
|
|
0.12
|
|
Return on Average Tangible Assets (ROTA)
|
1.20
|
|
|
1.37
|
|
|
1.61
|
|
|
0.93
|
|
|
1.53
|
|
Impact of other adjustments for Adjusted Net Income
|
0.18
|
|
|
(0.04)
|
|
|
0.06
|
|
|
0.11
|
|
|
0.06
|
|
Adjusted Return on Average Tangible Assets
|
1.38
|
%
|
|
1.33
|
%
|
|
1.67
|
%
|
|
1.04
|
%
|
|
1.59
|
%
|
|
|
|
|
|
|
|
|
Average Shareholders' Equity
|
$
|
1,061,807
|
|
|
$
|
1,013,095
|
|
|
$
|
946,670
|
|
|
$
|
1,023,107
|
|
|
$
|
912,817
|
|
Less average goodwill and intangible assets
|
(228,801)
|
|
|
(230,871)
|
|
|
(227,389)
|
|
|
(228,795)
|
|
|
(228,710)
|
|
Average Tangible Equity
|
$
|
833,006
|
|
|
$
|
782,224
|
|
|
$
|
719,281
|
|
|
$
|
794,312
|
|
|
$
|
684,107
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Shareholders' Equity
|
8.48
|
%
|
|
9.96
|
%
|
|
10.73
|
%
|
|
6.32
|
%
|
|
10.48
|
%
|
Impact of removing average intangible assets and related amortization
|
2.87
|
|
|
3.51
|
|
|
4.00
|
|
|
2.39
|
|
|
4.15
|
|
Return on Average Tangible Common Equity (ROTCE)
|
11.35
|
|
|
13.47
|
|
|
14.73
|
|
|
8.71
|
|
|
14.63
|
|
Impact of other adjustments for Adjusted Net Income
|
1.71
|
|
|
(0.38)
|
|
|
0.57
|
|
|
1.09
|
|
|
0.57
|
|
Adjusted Return on Average Tangible Common Equity
|
13.06
|
%
|
|
13.09
|
%
|
|
15.30
|
%
|
|
9.80
|
%
|
|
15.20
|
%
|
|
|
|
|
|
|
|
|
|
|
Loan Interest Income2
|
$
|
60,573
|
|
|
$
|
64,929
|
|
|
$
|
63,138
|
|
|
$
|
189,026
|
|
|
$
|
187,808
|
|
Accretion on acquired loans
|
(3,254)
|
|
|
(2,988)
|
|
|
(3,859)
|
|
|
(10,529)
|
|
|
(11,963)
|
|
Interest and fees on PPP loans
|
(1,719)
|
|
|
(5,068)
|
|
|
—
|
|
|
(6,787)
|
|
|
—
|
|
Loan interest income excluding PPP and accretion on acquired loans2
|
$
|
55,600
|
|
|
$
|
56,873
|
|
|
$
|
59,279
|
|
|
$
|
171,710
|
|
|
$
|
175,845
|
|
|
|
|
|
|
|
|
|
|
|
Yield on Loans2
|
4.11
|
%
|
|
4.56
|
%
|
|
5.06
|
%
|
|
4.51
|
%
|
|
5.15
|
%
|
|
|
|
|
|
|
|
|
|
|
Impact of accretion on acquired loans
|
(0.22)
|
|
|
(0.21)
|
|
|
(0.30)
|
|
|
(0.25)
|
|
|
(0.33)
|
|
Impact of PPP
|
0.33
|
|
|
(0.04)
|
|
|
—
|
|
|
0.11
|
|
|
—
|
|
Yield on loans excluding PPP and accretion on acquired loans2
|
4.22
|
%
|
|
4.31
|
%
|
|
4.76
|
%
|
|
4.37
|
%
|
|
4.82
|
%
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income2
|
$
|
63,621
|
|
|
$
|
67,388
|
|
|
$
|
61,027
|
|
|
$
|
194,300
|
|
|
$
|
182,107
|
|
Accretion on acquired loans
|
(3,254)
|
|
|
(2,988)
|
|
|
(3,859)
|
|
|
(10,529)
|
|
|
(11,963)
|
|
Interest and fees on PPP
|
(1,719)
|
|
|
(5,068)
|
|
|
—
|
|
|
(6,787)
|
|
|
—
|
|
Net interest income excluding PPP and accretion on acquired loans2
|
$
|
58,648
|
|
|
$
|
59,332
|
|
|
$
|
57,168
|
|
|
$
|
176,984
|
|
|
$
|
170,144
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin2
|
3.40
|
%
|
|
3.70
|
%
|
|
3.89
|
%
|
|
3.67
|
%
|
|
3.95
|
%
|
Impact of accretion on acquired loans
|
(0.17)
|
|
|
(0.16)
|
|
|
(0.25)
|
|
|
(0.20)
|
|
|
(0.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
Second
|
|
Third
|
|
Nine Months Ended
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
September 30,
|
(In thousands, except per share data)
|
2020
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Impact of PPP
|
0.19
|
|
|
(0.08)
|
|
|
—
|
|
|
0.04
|
|
|
—
|
|
Net interest margin excluding PPP and accretion on acquired loans2
|
3.42
|
%
|
|
3.46
|
%
|
|
3.64
|
%
|
|
3.51
|
%
|
|
3.69
|
%
|
|
|
|
|
|
|
|
|
|
|
Loan Interest Income2
|
$
|
60,573
|
|
|
$
|
64,929
|
|
|
$
|
63,138
|
|
|
$
|
189,026
|
|
|
$
|
187,808
|
|
Tax equivalent adjustment to loans
|
(86)
|
|
|
(85)
|
|
|
(46)
|
|
|
(255)
|
|
|
(141)
|
|
Loan interest income excluding tax equivalent adjustment
|
$
|
60,487
|
|
|
$
|
64,844
|
|
|
$
|
63,092
|
|
|
$
|
188,771
|
|
|
$
|
187,667
|
|
|
|
|
|
|
|
|
|
|
|
Securities Interest Income2
|
$
|
7,129
|
|
|
$
|
7,725
|
|
|
$
|
8,966
|
|
|
$
|
23,702
|
|
|
$
|
27,387
|
|
Tax equivalent adjustment to securities
|
(32)
|
|
|
(31)
|
|
|
(33)
|
|
|
(93)
|
|
|
(108)
|
|
Securities interest income excluding tax equivalent adjustment
|
$
|
7,097
|
|
|
$
|
7,694
|
|
|
$
|
8,933
|
|
|
$
|
23,609
|
|
|
$
|
27,279
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income2
|
$
|
63,621
|
|
|
$
|
67,388
|
|
|
$
|
61,027
|
|
|
$
|
194,300
|
|
|
$
|
182,107
|
|
Tax equivalent adjustments to loans
|
(86)
|
|
|
(85)
|
|
|
(46)
|
|
|
(255)
|
|
|
(141)
|
|
Tax equivalent adjustments to securities
|
(32)
|
|
|
(31)
|
|
|
(33)
|
|
|
(93)
|
|
|
(108)
|
|
Net interest income excluding tax equivalent adjustments
|
$
|
63,503
|
|
|
$
|
67,272
|
|
|
$
|
60,948
|
|
|
$
|
193,952
|
|
|
$
|
181,858
|
|
|
|
|
|
|
|
|
|
|
|
1Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect the Company's branch consolidation and other expense reduction strategies.
|
2On a fully taxable equivalent basis. All yields and rates have been computed using amortized cost.
|
Financial Condition
Total assets increased $1.2 billion at September 30, 2020, or 17%, from December 31, 2019, reflecting the impact of the PPP loans program, higher deposit balances, and the impact of the FBPB and Freedom Bank acquisitions completed in 2020.
Securities
Information related to maturities, carrying values and fair value of the Company’s debt securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements.
At September 30, 2020, the Company had $1.3 billion in debt securities available-for-sale and $207.4 million in debt securities held-to-maturity. The Company's total debt securities portfolio increased $286.0 million or 24%, from December 31, 2019.
During the nine months ended September 30, 2020, there were $626.7 million of debt security purchases and $237.1 million in paydowns and maturities. For the nine months ended September 30, 2020, proceeds from the sale of securities totaled $96.7 million, with net gains of $1.1 million. For the nine months ended September 30, 2019, there were $164.5 million debt security purchases and aggregated maturities and principal paydowns totaled $98.3 million. Proceeds from sales of securities during the nine months ended September 30, 2019 totaled $122.9 million, with net losses of $1.5 million.
Debt securities generally return principal and interest monthly. The modified duration of the investment portfolio at September 30, 2020 was 3.3 years, compared to 3.5 years at December 31, 2019.
At September 30, 2020, available-for-sale debt securities had gross unrealized losses of $3.7 million and gross unrealized gains of $28.6 million, compared to gross unrealized losses of $2.7 million and gross unrealized gains of $8.8 million at December 31, 2019.
The credit quality of the Company’s securities holdings are primarily investment grade. U.S. Treasuries, obligations of U.S. government agencies and obligations of U.S. government sponsored entities totaled $1.2 billion, or 77%, of the total portfolio.
The portfolio includes $100.8 million in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are $74.0 million, with a fair value of $74.4 million, in private label mortgage-backed residential securities with weighted average credit support of 27%. The collateral underlying these mortgage investments
includes both fixed-rate and adjustable-rate mortgage loans. Non-guaranteed agency commercial securities total $25.0 million, with a fair value of $26.4 million. These securities have weighted average credit support of 11%. The collateral underlying these mortgages are primarily pooled multifamily loans.
The Company also has invested $203.8 million, with a fair value of $201.4 million, in uncapped 3-month LIBOR floating rate collateralized loan obligations ("CLOs"). CLOs are special purpose vehicles, and the Company’s holdings purchase nearly all first lien broadly syndicated corporate loans across a diversified band of industries while providing support to senior tranche investors. As of September 30, 2020, , the Company held 27 total positions, all of which were in AAA/AA tranches with average credit support of 31%. The Company utilizes credit models with assumptions of loan level defaults, recoveries, and prepayments for each CLO security. The results of this analysis did not indicate expected credit losses.
Held-to-maturity securities consist solely of mortgage-backed securities guaranteed by government agencies.
At September 30, 2020, the Company has determined that all debt securities in an unrealized loss position are the result of both broad investment type spreads and the current rate environment. Management believes that each investment will recover any price depreciations over its holding period as the debt securities move to maturity and there is the intent and ability to hold these investments to maturity if necessary. Therefore, at September 30, 2020, no allowance for credit losses has been recorded.
Loan Portfolio
Loans, net of unearned income and excluding the allowance for credit losses, were $5.9 billion at September 30, 2020, $659.6 million more than at December 31, 2019, an increase of 13%. The increase reflects the additions of loans through the acquisition of FBPB in the first quarter of 2020 and of Freedom Bank in the third quarter of 2020, and loans originated under the SBA's Paycheck Protection Program.
For the nine months ended September 30, 2020, the Company originated $378.4 million in commercial and commercial real estate loans were originated compared to $749.5 million for the nine months ended September 30, 2019, a decrease of $371.0 million, or 50%. The loan pipeline for commercial and commercial real estate loans totaled $256.2 million at September 30, 2020. Commercial originations decreased during the third quarter of 2020 as a result of a continued approach on new credits given an uncertain economic outlook associated with the COVID-19 pandemic. The Company will continue to serve current strong relationships that meet strict credit underwriting guidelines, with liquidity and balance sheets that can support significant stress.
The Company closed $74.7 million in residential loans retained in the portfolio during the nine months ended September 30, 2020, compared to $123.8 million closed during the nine months ended September 30, 2019, an increase of 40%. Saleable volumes were higher for the nine months ended September 30, 2020, representing 82% of production versus 59% of production during the nine months ended September 30, 2019. The saleable residential mortgage pipeline at September 30, 2020 totaled $149.9 million while the retained pipeline decreased to $33.4 million as of September 30, 2020. The residential lending team has adapted quickly to heightened demand and has increased service levels to homebuyers, refinance customers, and local real estate professionals. As a result, the Company has recognized substantial growth in market share.
Consumer originations totaled $171.8 million for the nine months ended September 30, 2020, higher by $14.9 million, or 9%, compared to the nine months ended September 30, 2019, and the pipeline for these loans at September 30, 2020 was $17.1 million.
The Company remains committed to sound risk management procedures. Lending policies contain guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the principal amount of loans. The Company's exposure to commercial real estate lending remains below regulatory limits (see “Loan Concentrations”).
The following tables detail loan portfolio composition at September 30, 2020 for portfolio loans, purchased credit deteriorated (“PCD”) and loans purchased which are not considered purchased credit deteriorated (“Non-PCD”) as defined in Note E-Loans; and at December 31, 2019 for portfolio loans, purchased credit impaired loans ("PCI") and purchased unimpaired loans("PUL").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In thousands)
|
Portfolio Loans
|
|
Acquired Non-PCD Loans
|
|
PCD Loans
|
|
Total
|
Construction and land development
|
$
|
246,312
|
|
|
$
|
30,720
|
|
|
$
|
3,578
|
|
|
$
|
280,610
|
|
Commercial real estate - owner-occupied
|
817,547
|
|
|
267,223
|
|
|
40,690
|
|
|
1,125,460
|
|
Commercial real estate - non owner-occupied
|
1,014,993
|
|
|
348,085
|
|
|
31,386
|
|
|
1,394,464
|
|
Residential real estate
|
1,182,558
|
|
|
201,221
|
|
|
9,617
|
|
|
1,393,396
|
|
Commercial and financial
|
711,358
|
|
|
105,327
|
|
|
16,398
|
|
|
833,083
|
|
Consumer
|
184,608
|
|
|
7,306
|
|
|
302
|
|
|
192,216
|
|
Paycheck Protection Program
|
584,577
|
|
|
54,223
|
|
|
—
|
|
|
638,800
|
|
Totals
|
$
|
4,741,953
|
|
|
$
|
1,014,105
|
|
|
$
|
101,971
|
|
|
$
|
5,858,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In thousands)
|
Portfolio Loans
|
|
PULs
|
|
PCI Loans
|
|
Total
|
Construction and land development
|
$
|
281,335
|
|
|
$
|
43,618
|
|
|
$
|
160
|
|
|
$
|
325,113
|
|
Commercial real estate1
|
1,834,811
|
|
|
533,943
|
|
|
10,217
|
|
|
2,378,971
|
|
Residential real estate
|
1,304,305
|
|
|
201,848
|
|
|
1,710
|
|
|
1,507,863
|
|
Commercial and financial
|
697,301
|
|
|
80,372
|
|
|
579
|
|
|
778,252
|
|
Consumer
|
200,166
|
|
|
8,039
|
|
|
—
|
|
|
208,205
|
|
Totals
|
$
|
4,317,918
|
|
|
$
|
867,820
|
|
|
$
|
12,666
|
|
|
$
|
5,198,404
|
|
1Commercial real estate includes owner-occupied balances of $1.0 billion for December 31, 2019.
|
The amortized cost basis at September 30, 2020 included net deferred costs of $21.8 million on non-PPP portfolio loans and net deferred fees of $13.1 million on PPP loans. At December 31, 2019, the amortized cost basis included net deferred costs of $19.9 million. At September 30, 2020, the remaining fair value adjustments on acquired loans was $34.6 million, or 3.0% of the outstanding acquired loan balances. At December 31, 2019, the remaining fair value adjustments for acquired loans was $34.9 million, or 3.8% of the acquired loan balances. These amounts are accreted into interest income over the remaining lives of the related loans on a level yield basis.
Commercial real estate ("CRE") loans, inclusive of owner-occupied commercial real estate, increased by $141.0 million, or 6%, in the nine months ended September 30, 2020, totaling $2.5 billion at September 30, 2020 compared to $2.4 billion at December 31, 2019. Owner-occupied commercial real estate loans represent $1.1 billion, or 45%, of the commercial real estate portfolio.
Fixed-rate and adjustable-rate loans secured by commercial real estate, excluding construction loans, totaled approximately $2.0 billion and $492.1 million, respectively, at September 30, 2020, compared to $2.0 billion and $418.8 million, respectively, at December 31, 2019.
The CARES Act, which was signed into law on March 27, 2020, encourages financial institutions to practice prudent efforts to work with borrowers financially impacted by the COVID-19 pandemic by providing an option for financial institutions to exclude from TDR consideration certain loan modifications that might otherwise be categorized as TDRs under ASC 310-40. This option is available for modifications that are deemed to be COVID-related, where the borrower was not more than 30 days past due on December 31, 2019, and the modification is executed between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. Federal banking regulators issued similar guidance that also allows lenders to conclude that short-term modifications for borrowers affected by the COVID-19 pandemic should not be considered TDRs if the borrower was current at the time of modification.
At September 30, 2020, Seacoast had $702.7 million of loans on payment deferral, none of which have been classified as TDRs. 97% of these loans are scheduled to return to regular payments in the fourth quarter of 2020. Interest and fees have
continued to accrue on these loans during the deferral period. If economic conditions deteriorate further, these borrowers may be unable to resume scheduled payments, which may result in reversal of accrued interest, further modification of terms and additional necessary provisions for credit losses. As of September 30, 2020, the Company had $15.4 million in accrued interest associated with loans in short-term payment deferral status, against which the Company established a valuation allowance of $0.4 million for potentially uncollectable accrued interest.
The following table presents loans, excluding PPP loans, at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Loans with Deferrals
|
|
Total Loans including Loans with Deferrals
|
|
% of Loans with Deferrals
|
Construction and land development
|
$
|
9,359
|
|
|
$
|
280,610
|
|
|
3%
|
Commercial real estate - owner-occupied
|
204,710
|
|
|
1,125,460
|
|
|
18
|
Commercial real estate - non owner-occupied
|
344,573
|
|
|
1,394,464
|
|
|
25
|
Residential real estate
|
75,885
|
|
|
1,393,396
|
|
|
5
|
Commercial and financial
|
61,308
|
|
|
833,083
|
|
|
7
|
Consumer
|
6,815
|
|
|
192,216
|
|
|
4
|
|
|
|
|
|
|
Totals
|
$
|
702,650
|
|
|
$
|
5,219,229
|
|
|
13%
|
The following table details commercial real estate and construction and land development loans outstanding by collateral type at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Total
|
|
|
% of Total Loans
|
|
|
Deferred Loans
|
|
|
|
% of Category Deferred
|
Office Building
|
$
|
727,518
|
|
|
|
$
|
12,465
|
|
|
|
$
|
739,983
|
|
|
|
13%
|
|
|
$
|
134,654
|
|
|
|
|
18%
|
Retail
|
444,395
|
|
|
|
21,093
|
|
|
|
465,488
|
|
|
|
8
|
|
|
147,214
|
|
|
|
|
32
|
Industrial & Warehouse
|
366,175
|
|
|
|
6,266
|
|
|
|
372,441
|
|
|
|
6
|
|
|
47,160
|
|
|
|
|
13
|
Other Commercial Property
|
249,619
|
|
|
|
25
|
|
|
|
249,644
|
|
|
|
4
|
|
|
43,211
|
|
|
|
|
17
|
Healthcare
|
203,546
|
|
|
|
21,321
|
|
|
|
224,867
|
|
|
|
4
|
|
|
27,797
|
|
|
|
|
12
|
Apartment Building / Condominium
|
165,855
|
|
|
|
30,164
|
|
|
|
196,019
|
|
|
|
3
|
|
|
15,315
|
|
|
|
|
8
|
Hotel / Motel
|
132,571
|
|
|
|
2,866
|
|
|
|
135,437
|
|
|
|
2
|
|
|
86,230
|
|
|
|
|
64
|
Vacant Lot
|
2,661
|
|
|
|
76,171
|
|
|
|
78,832
|
|
|
|
1
|
|
|
6,255
|
|
|
|
|
8
|
1-4 Family Residence - Individual Borrowers
|
—
|
|
|
|
63,083
|
|
|
|
63,083
|
|
|
|
1
|
|
|
—
|
|
|
|
|
—
|
Convenience Store
|
55,523
|
|
|
|
—
|
|
|
|
55,523
|
|
|
|
1
|
|
|
14,754
|
|
|
|
|
27
|
Restaurant
|
46,460
|
|
|
|
1,796
|
|
|
|
48,256
|
|
|
|
1
|
|
|
18,727
|
|
|
|
|
39
|
Church
|
29,720
|
|
|
|
—
|
|
|
|
29,720
|
|
|
|
1
|
|
|
4,771
|
|
|
|
|
16
|
1-4 Family Residence - Spec Home
|
—
|
|
|
|
26,624
|
|
|
|
26,624
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
School / Education
|
21,749
|
|
|
|
3,093
|
|
|
|
24,842
|
|
|
|
—
|
|
|
6,085
|
|
|
|
|
24
|
Agriculture
|
20,726
|
|
|
|
—
|
|
|
|
20,726
|
|
|
|
—
|
|
|
321
|
|
|
|
|
2
|
Manufacturing Building
|
18,312
|
|
|
|
—
|
|
|
|
18,312
|
|
|
|
—
|
|
|
59
|
|
|
|
|
—
|
1-4 Family Residence - Builder Lines
|
22
|
|
|
|
15,643
|
|
|
|
15,665
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
Recreational Property
|
14,964
|
|
|
|
—
|
|
|
|
14,964
|
|
|
|
—
|
|
|
5,852
|
|
|
|
|
39
|
Other Properties
|
20,108
|
|
|
|
—
|
|
|
|
20,108
|
|
|
|
—
|
|
|
237
|
|
|
|
|
1
|
Total
|
$
|
2,519,924
|
|
|
|
$
|
280,610
|
|
|
|
$
|
2,800,534
|
|
|
|
48%
|
|
|
$
|
558,642
|
|
|
|
|
20%
|
The largest collateral type in the CRE and construction portfolios, when aggregated, is office buildings, representing 13% of the portfolio. The average loan size in the office building category is $578 thousand, the average loan to value ("LTV") is 53%, and 57% of this category is classified as owner-occupied. This primarily includes medical, accounting, engineering, health care, veterinarians and other similar professionals. 41% of the office building category is stabilized income-producing investment properties.
The second-largest category is retail, representing 8% of total loans. The average loan size in the retail category is $1.3 million and the average LTV is 46%. Loans collateralized by hotels/motels represent $135 million with an average loan size of $3.4 million and an average LTV of 52%. Restaurant exposure is limited at $48 million in loans, and is distributed among quick serve and full-service restaurants, with an average loan size of $761 thousand and LTV of 52%.
Commercial and financial loans outstanding were $833.1 million at September 30, 2020 and $778.3 million at December 31, 2019, an increase of 7.0%. The Company's primary customers for commercial and financial loans are small to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing companies. Such businesses are smaller and subject to the risks of lending to small- to medium-sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.
The following table details the commercial and financial loans outstanding by industry type at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Commercial and Financial
|
|
% of Total Loans
|
|
Deferred Loans
|
|
% of Category
|
Management Companies1
|
$
|
186,298
|
|
|
3%
|
|
$
|
5,114
|
|
|
3%
|
Professional, Scientific, Technical & Other Services
|
97,176
|
|
|
2
|
|
3,330
|
|
|
3
|
Real Estate Rental & Leasing
|
83,729
|
|
|
1
|
|
6,359
|
|
|
8
|
Construction
|
76,190
|
|
|
1
|
|
2,556
|
|
|
3
|
Finance & Insurance
|
61,915
|
|
|
1
|
|
272
|
|
|
—
|
Healthcare & Social Assistance
|
61,509
|
|
|
1
|
|
9,651
|
|
|
16
|
Transportation & Warehousing
|
45,582
|
|
|
1
|
|
7,132
|
|
|
16
|
Manufacturing
|
45,565
|
|
|
1
|
|
3,121
|
|
|
7
|
Wholesale Trade
|
36,940
|
|
|
1
|
|
12,337
|
|
|
33
|
Retail Trade
|
24,256
|
|
|
—
|
|
2,248
|
|
|
9
|
Education
|
20,458
|
|
|
—
|
|
—
|
|
|
—
|
Accommodation & Food Services
|
17,839
|
|
|
—
|
|
3,329
|
|
|
19
|
Administrative Support
|
13,441
|
|
|
—
|
|
635
|
|
|
5
|
Public Administration
|
13,131
|
|
|
—
|
|
—
|
|
|
—
|
Agriculture
|
11,159
|
|
|
—
|
|
—
|
|
|
—
|
Other Industries
|
37,895
|
|
|
1
|
|
5,224
|
|
|
14
|
Total
|
$
|
833,083
|
|
|
14%
|
|
$
|
61,308
|
|
|
7%
|
1Primarily corporate aircraft and marine vessels associated with high net worth individuals.
|
|
|
Residential real estate loans decreased $114.5 million, or 8%, to $1.4 billion as of September 30, 2020, compared to December 31, 2019. Substantially all residential mortgage originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At September 30, 2020, approximately $486.6 million, or 35%, of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans, which includes hybrid adjustable-rate mortgages. Fixed-rate mortgages totaled approximately $577.0 million, or 41%, at September 30, 2020, of which 15- and 30-year mortgages totaled $41.1 million and $357.5 million, respectively. Remaining fixed-rate balances were comprised of home improvement loans totaling $178.3 million, most with maturities of 10 years or less. Home equity lines of credit ("HELOCs"), primarily floating rates, totaled $329.8 million at September 30, 2020. In comparison, loans secured by residential properties having fixed rates totaled $659.4 million at December 31, 2019, with 15- and 30-year fixed-rate residential mortgages totaling $43.5 million and $372.0 million, respectively, and home equity mortgages and HELOCs totaling $243.8 million and $292.1 million, respectively. Borrowers in the residential real estate portfolio have an average credit score of 755. Specifically for HELOCs, borrowers have an average credit score of 750. The average LTV of our HELOC portfolio is 59% with 46% of the portfolio being in first lien position.
The Company also provides consumer loans, which include installment loans, auto loans, marine loans, and other consumer loans, which decreased $16.0 million, or 8%, to total $192.2 million compared to $208.2 million at December 31, 2019. Borrowers in the consumer portfolio have an average credit score of 745.
At September 30, 2020, the Company had unfunded loan commitments of $1.6 billion compared to $1.0 billion at December 31, 2019.
Loan Concentrations
The Company has developed prudent guardrails to manage loan types that are most impacted by stressed market conditions in order to minimize credit risk concentration to capital. Outstanding balances for commercial and CRE loan relationships greater than $10 million totaled $779.0 million and represented 13% of the total portfolio at September 30, 2020 compared to $680.2 million, or 13%, at year-end 2019.
The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at September 30, 2020 aggregated to $265.6 million, of which $193.4 million was funded compared to $268.9 million at December 31, 2019, of which $179.0 million was funded. The Company had 140 commercial and commercial real estate relationships in excess of $5 million totaling $1.4 billion, of which $1.2 billion was funded at September 30, 2020 compared to 120 relationships totaling $1.2 billion at December 31, 2019, of which $1.0 billion was funded.
Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital declined to 30% and 176%, respectively, at September 30, 2020, compared to 40% and 204%, respectively, at December 31, 2019. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 28% and 165%, respectively, of total consolidated risk based capital. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e., loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts (“REITs”) and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner-occupied CRE are generally excluded. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida.
Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality
Nonperforming assets (“NPAs”) at September 30, 2020 totaled $52.8 million, and were comprised of $36.9 million of nonaccrual loans, $12.3 million of other real estate owned (“OREO”), and $3.6 million of branches and other properties used in bank operations taken out of service. Compared to December 31, 2019, nonaccrual loans increased $9.9 million, spread across several loans. The increase in OREO of $6.8 million from December 31, 2019 includes the addition of one multifamily construction property for $6.5 million and one residential property for $0.9 million offset by sales of $0.6 million. The decrease in OREO for bank branches of $3.3 million reflects the sale of a single branch property and a $1.3 million operations building acquired and subsequently sold in 2020. Overall, NPAs increased $13.4 million, or 34%, from $39.3 million recorded as of December 31, 2019. At September 30, 2020, approximately 80% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At September 30, 2020, nonaccrual loans were written down by approximately $9.7 million, or 14% of the original loan balance (including specific impairment reserves).
Nonperforming loans to total loans outstanding at September 30, 2020 increased to 0.63% from 0.52% at December 31, 2019. Nonperforming assets to total assets at September 30, 2020 increased to 0.64% from 0.55% at December 31, 2019.
The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.
The Company pursues loan restructurings in select cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. Troubled debt restructurings ("TDRs") have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing restructured loans totaled $10.2 million
at September 30, 2020 compared to $11.1 million at December 31, 2019. Accruing TDRs are excluded from the nonperforming asset ratios.
Beginning in March 2020, in response to the economic downturn resulting from the COVID-19 pandemic, the Company has offered short-term payment deferrals to affected borrowers. As of September 30, 2020, pandemic-related deferrals totaled $702.7 million and are not considered TDRs. If economic conditions deteriorate further, these borrowers may be unable to resume scheduled payments, which may result in further modification of terms and the potential for classification as a TDR in future periods.
The table below sets forth details related to nonaccrual and accruing restructured loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Nonaccrual Loans
|
|
Accruing
Restructured Loans
|
(In thousands)
|
|
Non-Current
|
|
Performing
|
|
Total
|
|
Construction and land development
|
|
$
|
573
|
|
|
$
|
31
|
|
|
$
|
604
|
|
|
$
|
118
|
|
Commercial real estate - owner-occupied
|
|
1,147
|
|
|
2,355
|
|
|
3,502
|
|
|
109
|
|
Commercial real estate - non owner-occupied
|
|
2,034
|
|
|
6,188
|
|
|
8,222
|
|
|
4,445
|
|
Residential real estate
|
|
8,147
|
|
|
9,016
|
|
|
17,163
|
|
|
5,246
|
|
Commercial and financial
|
|
3,903
|
|
|
3,134
|
|
|
7,037
|
|
|
26
|
|
Consumer
|
|
340
|
|
|
29
|
|
|
369
|
|
|
246
|
|
Total
|
|
$
|
16,144
|
|
|
$
|
20,753
|
|
|
$
|
36,897
|
|
|
$
|
10,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Nonaccrual Loans
|
|
Accruing
Restructured Loans
|
(In thousands)
|
|
Non-Current
|
|
Performing
|
|
Total
|
|
Construction and land development
|
|
$
|
4,902
|
|
|
$
|
35
|
|
|
$
|
4,937
|
|
|
$
|
131
|
|
Commercial real estate
|
|
3,800
|
|
|
2,720
|
|
|
6,520
|
|
|
4,666
|
|
Residential real estate
|
|
2,552
|
|
|
6,928
|
|
|
9,480
|
|
|
6,027
|
|
Commercial and financial
|
|
4,674
|
|
|
1,234
|
|
|
5,908
|
|
|
27
|
|
Consumer
|
|
38
|
|
|
72
|
|
|
110
|
|
|
249
|
|
Total
|
|
$
|
15,966
|
|
|
$
|
10,989
|
|
|
$
|
26,955
|
|
|
$
|
11,100
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2020 and December 31, 2019, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In thousands)
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
Rate reduction
|
|
40
|
|
|
$
|
9,239
|
|
|
56
|
|
|
$
|
10,739
|
|
Maturity extended with change in terms
|
|
40
|
|
|
4,119
|
|
|
48
|
|
|
5,083
|
|
Chapter 7 bankruptcies
|
|
13
|
|
|
437
|
|
|
22
|
|
|
1,275
|
|
Not elsewhere classified
|
|
20
|
|
|
2,648
|
|
|
11
|
|
|
966
|
|
Total
|
|
113
|
|
|
$
|
16,443
|
|
|
137
|
|
|
$
|
18,063
|
|
During the three months ended September 30, 2020, one loan was modified to a TDR totaling $41,000, compared to three loans totaling $1.6 million for the three months ended September 30, 2019. During the nine months ended September 30, 2020, eight loans totaling $0.6 million were modified to a TDR, compared to seven loans totaling $4.0 million for the nine months ended September 30, 2019. 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. During the nine months ended September 30, 2020, there were four defaults totaling $1.4 million that had been modified within the preceding twelve months. During the nine months ended September 30, 2019, there were three defaults on loans totaling $2.1 million to a single borrower that had been modified to a TDR within the
preceding twelve months. A restructured loan is considered in default when it becomes 90 days or more past due under the modified terms, has been transferred to nonaccrual status, has been charged off or has been transferred to OREO.
In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed on nonaccrual. Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above.
Allowance for Credit Losses on Loans
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses. The new guidance replaced the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposure such as loan commitments, standby letters of credit, financial guarantees and other similar instruments.
Management estimates the allowance using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.
Upon adoption of the new model, the initial adjustment to the allowance for credit losses was an increase of $21.2 million, bringing the ratio of allowance to total loans from 0.68% at December 31, 2019 to 1.08% at January 1, 2020. The increase was attributed to the new requirement to estimate losses over the full remaining expected life of the loans and to the impact of the new guidance on the Company's acquired loan portfolio. The economic forecast scenario as of January 1, 2020 projected a stable macroeconomic environment over the three year forecast period. In addition to the $21.2 million impact of the initial adoption of ASC Topic 326, increases in the allowance during the first and second quarters of 2020 reflected the deterioration of the current and forecasted macroeconomic environment with the onset of the COVID-19 pandemic.
During the third quarter of 2020, the Company recorded a reversal of provision of $1.2 million resulting from the significant change in the economic outlook and a slowing in loan origination activity. Additionally and offsetting, a provision of $0.4 million was recorded to reserve for the potential that a portion of accrued interest will not be collected. This reserve was recorded as an offset to the accrued interest receivable balance in Other Assets. No allowance has been assigned to PPP loans, which are guaranteed by the U.S. government. Net charge-offs for the third quarter of 2020 were $1.7 million, or 0.12% of average loans and, for the four most recent quarters, averaged 0.14% of outstanding loans. Excluding PPP loans, the ratio of allowance to total loans increased to 1.80% at September 30, 2020 from 1.76% at June 30, 2020. Uncertainty related to market conditions and the economic outlook will likely continue through the end of 2020 as the ongoing effects of the pandemic and the potential for additional government assistance programs remain unknown.
The following tables present the activity in the allowance for credit losses on loans by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
(In thousands)
|
Beginning
Balance
|
|
|
|
Initial Impact on Allowance of PCD Loans Acquired During the Period
|
|
Provision
for Credit
Losses1
|
|
Charge-
Offs
|
|
Recoveries
|
|
TDR
Allowance
Adjustments
|
|
Ending
Balance
|
Construction and land development
|
$
|
7,161
|
|
|
|
|
$
|
39
|
|
|
$
|
475
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
7,701
|
|
Commercial real estate - owner-occupied
|
5,562
|
|
|
|
|
954
|
|
|
689
|
|
|
—
|
|
|
26
|
|
|
(12)
|
|
|
7,219
|
|
Commercial real estate - non owner-occupied
|
38,992
|
|
|
|
|
2,096
|
|
|
(7,050)
|
|
|
(25)
|
|
|
5
|
|
|
—
|
|
|
34,018
|
|
Residential real estate
|
20,453
|
|
|
|
|
27
|
|
|
(3,196)
|
|
|
(19)
|
|
|
65
|
|
|
(5)
|
|
|
17,325
|
|
Commercial and financial
|
15,514
|
|
|
|
|
2,632
|
|
|
8,081
|
|
|
(1,776)
|
|
|
203
|
|
|
—
|
|
|
24,654
|
|
Consumer
|
3,568
|
|
|
|
|
15
|
|
|
(244)
|
|
|
(355)
|
|
|
114
|
|
|
(2)
|
|
|
3,096
|
|
Paycheck Protection Program
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Totals
|
$
|
91,250
|
|
|
|
|
$
|
5,763
|
|
|
$
|
(1,245)
|
|
|
$
|
(2,175)
|
|
|
$
|
439
|
|
|
$
|
(19)
|
|
|
$
|
94,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Excludes $0.4 million provision for credit losses on accrued interest receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
(In thousands)
|
Beginning Balance
|
|
Impact of Adoption of ASC 326
|
|
Initial Impact on Allowance of PCD Loans Acquired During the Period
|
|
Provision for Credit Losses1
|
|
Charge- Offs
|
|
Recoveries
|
|
TDR Allowance Adjustments
|
|
Ending Balance
|
Construction and land development
|
$
|
1,842
|
|
|
$
|
1,479
|
|
|
$
|
87
|
|
|
$
|
4,202
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
(1)
|
|
|
$
|
7,701
|
|
Commercial real estate - owner-occupied
|
5,361
|
|
|
80
|
|
|
1,161
|
|
|
655
|
|
|
(45)
|
|
|
44
|
|
|
(37)
|
|
|
7,219
|
|
Commercial real estate - non owner-occupied
|
7,863
|
|
|
9,341
|
|
|
2,236
|
|
|
14,578
|
|
|
(37)
|
|
|
37
|
|
|
—
|
|
|
34,018
|
|
Residential real estate
|
7,667
|
|
|
5,787
|
|
|
124
|
|
|
3,638
|
|
|
(150)
|
|
|
283
|
|
|
(24)
|
|
|
17,325
|
|
Commercial and financial
|
9,716
|
|
|
3,677
|
|
|
2,643
|
|
|
12,144
|
|
|
(4,642)
|
|
|
1,116
|
|
|
—
|
|
|
24,654
|
|
Consumer
|
2,705
|
|
|
862
|
|
|
28
|
|
|
662
|
|
|
(1,442)
|
|
|
284
|
|
|
(3)
|
|
|
3,096
|
|
Paycheck Protection Program
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Totals
|
$
|
35,154
|
|
|
$
|
21,226
|
|
|
$
|
6,279
|
|
|
$
|
35,879
|
|
|
$
|
(6,316)
|
|
|
$
|
1,856
|
|
|
$
|
(65)
|
|
|
$
|
94,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Excludes $0.4 million provision for credit losses on accrued interest receivable
|
Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. At September 30, 2020, the Company had $1.4 billion in loans secured by residential real estate and $2.5 billion in loans secured by commercial real estate, representing 24% and 43% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida.
With the emergence of the COVID-19 pandemic late in the first quarter of 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on expected losses on loans is difficult to estimate with precision, and it is possible that additional provisions for credit losses could be needed in future periods.
Cash and Cash Equivalents and Liquidity Risk Management
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.
Funding sources include primarily customer-based deposits, collateral-backed borrowings, brokered deposits, cash flows from operations, cash flows from the loan and investment portfolios and asset sales, primarily secondary marketing for residential real estate mortgages and marine loans. Cash flows from operations are a significant component of liquidity risk management and the Company considers both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk.
Deposits are a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. The Company routinely uses debt securities and loans as collateral for secured borrowings. In the event of severe market disruptions, the Company has access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody program.
The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding. The Company strategically increased brokered deposits in the first quarter of 2020 to supplement its liquidity position, given the unknown impact of the COVID-19 pandemic on business and economic conditions. Brokered certificates of deposits ("CDs") at September 30, 2020 were $381.0 million, an increase of $91.8 million, or 19%, from December 31, 2019. CD maturities are laddered, with $147.2 million maturing in the fourth quarter of 2020.
Cash and cash equivalents, including interest bearing deposits, totaled $309.6 million on a consolidated basis at September 30, 2020, compared to $124.5 million at December 31, 2019, an increase of 149%. Higher cash and cash equivalent balances at September 30, 2020 reflect favorable deposit growth, including PPP loan funds and government stimulus payments received by our customers and generally lower consumer spending levels in 2020.
Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity, both anticipated and unanticipated, are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, debt securities available-for-sale and interest-bearing deposits. The Company is also able to provide short term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency debt securities not pledged to secure public deposits or trust funds. At September 30, 2020, the Company had available unsecured lines of credit of $135.0 million and secured lines of credit, which are subject to change, of $1.7 billion. In addition, the Company had $1.2 billion of debt securities and $646.1 million in residential and commercial real estate loans available as collateral. In comparison, at December 31, 2019, the Company had available unsecured lines of $130.0 million and secured lines of credit of $1.1 billion, and $924.2 million of debt securities and $830.0 million in residential and commercial real estate loans available as collateral. In April 2020, the Federal Reserve offered term funding with a fixed rate of 35 basis points on pledged Paycheck Protection Program loans. The Company initially expected to utilize this program, however, as the Bank's deposits increased significantly due to PPP loans being funded directly into bank deposit accounts and reduced spending due to the COVID-19 pandemic combined with the Bank's relatively low cost of deposits, utilization became unnecessary.
The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses and to service the Company’s debt. During the third quarter of 2020, Seacoast Bank distributed $5.2 million to the Company and, at September 30, 2020, is eligible to distribute dividends to the Company of approximately $192.8 million without prior regulatory approval. Total dividends of $11.0 million have been distributed to the Company in 2020. At September 30, 2020, the Company had cash and cash equivalents at the parent of approximately $59.4 million compared to $53.0 million at December 31, 2019.
Deposits and Borrowings
The Company’s balance sheet continues to be primarily funded by core deposits.
Total deposits increased $1.3 billion, or 24%, to $6.9 billion at September 30, 2020, compared to $5.6 billion at December 31, 2019. The acquisition of FBPB in the first quarter of 2020 added $173.7 million in deposits and the acquisition of Freedom Bank in the third quarter of 2020 added $329.7 million in deposits. The remaining increase was partially attributed to PPP borrowers' loan proceeds that remain in deposit accounts at September 30, 2020, as well as higher balances resulting from decreased customer spending due to the COVID-19 pandemic.
Since December 31, 2019, interest bearing deposits (interest bearing demand, savings and money market deposits) increased $688.3 million, or 25%, to $3.5 billion, and CDs (excluding brokered CDs) decreased $76.7 million, or 11%, to $635.5 million. Noninterest demand deposits were higher by $810.3 million, or 51%, compared to year-end 2019, totaling $2.4 billion. Noninterest demand deposits represented 35% of total deposits at September 30, 2020 and 28% at December 31, 2019.
During the nine months ended September 30, 2020, $1.6 billion of brokered CDs at an average rate of 1.36% matured. Brokered CDs at September 30, 2020 totaled $381.0 million compared to $472.9 million at December 31, 2019. CD maturities are laddered, with $147.2 million maturing in the fourth quarter of 2020.
Customer repurchase agreements totaled $89.5 million at September 30, 2020, increasing $3.4 million, or 4%, from December 31, 2019. Repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance.
No unsecured federal funds purchased were outstanding at September 30, 2020.
At September 30, 2020 and December 31, 2019, borrowings were comprised of subordinated debt of $71.3 million and $71.1 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of $35.0 million and $315.0 million, respectively. The weighted average rate for FHLB funds during the nine months ended September 30, 2020 and 2019 was 1.08% and 2.51%, respectively, and compared to 2.28% for the year ended December 31, 2019. FHLB borrowings outstanding as of September 30, 2020 bear interest at 0.72% and mature in 2023. Secured FHLB borrowings are an integral tool in liquidity management for the Company.
The Company has issued subordinated debt in conjunction with its wholly owned trust subsidiaries in connection with bank acquisitions in previous years. The acquired junior subordinated debentures (in accordance with ASC Topic 805 Business Combinations) were recorded at fair value, which collectively is $4.0 million lower than face value at September 30, 2020. This amount is being amortized into interest expense over the acquired subordinated debts’ remaining term to maturity. All trust preferred securities are guaranteed by the Company on a junior subordinated basis.
The weighted average interest rate of outstanding subordinated debt related to trust preferred securities was 3.28% and 4.87% for the nine months ended September 30, 2020 and 2019, respectively, and compared to 4.75% for the year ended December 31, 2019.
Off-Balance Sheet Transactions
In the normal course of business, the Company may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.
Lending commitments include unfunded loan commitments and standby and commercial letters of credit. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement.
For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. Loan commitments were $1.6 billion at September 30, 2020 and $1.0 billion at December 31, 2019.
During the current economic uncertainty created by the COVID-19 pandemic, borrowers may be more dependent upon lending commitments than they have been in the past, and more likely to draw on the commitments, though no material increase in utilization has occurred through September 30, 2020. The Company has a reserve for potential credit losses on unfunded lending-related commitments of $3.0 million recorded in Other Liabilities.
Capital Resources
The Company’s equity capital at September 30, 2020 increased $112.7 million, or 11%, from December 31, 2019 to $1.1 billion. Changes in equity included increases from net income of $48.4 million, the issuance of stock pursuant to the FBPB and Freedom Bank acquisitions of $62.2 million, and an increase in accumulated other comprehensive income of $14.8 million primarily attributed to the increase in market value of available-for-sale debt securities. These increases were partially offset by a $16.9 million decrease from the adoption of CECL.
The ratio of shareholders’ equity to period end total assets was 13.25% and 13.87% at September 30, 2020 and December 31, 2019, respectively. The ratio of tangible shareholders’ equity to tangible assets was 10.67% and 11.05% at September 30, 2020 and December 31, 2019, respectively. The decrease was due to growth in the balance sheet, the result of bank acquisitions, PPP loans and associated liquidity.
Activity in shareholders’ equity for the nine months ended September 30, 2020 and 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
Beginning balance at December 31, 2019 and 2018
|
$
|
985,639
|
|
|
$
|
864,267
|
|
Net income
|
48,417
|
|
|
71,563
|
|
Cumulative change in accounting principle upon adoption of new accounting pronouncement
|
(16,876)
|
|
|
—
|
|
Issuance of stock pursuant to acquisitions
|
62,152
|
|
|
—
|
|
Stock compensation, net of Treasury shares acquired
|
4,251
|
|
|
3,477
|
|
Change in other comprehensive income
|
14,758
|
|
|
23,371
|
|
Ending balance at September 30, 2020 and 2019
|
$
|
1,098,341
|
|
|
$
|
962,678
|
|
Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast management's use of risk-based capital ratios in its analysis of the Company’s capital adequacy are “non-GAAP” financial measures. Seacoast management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies (see “Note I – Equity Capital”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Seacoast (Consolidated)
|
|
Seacoast
Bank
|
|
Minimum to be Well- Capitalized1
|
Total Risk-Based Capital Ratio
|
17.98%
|
|
16.84%
|
|
10.00%
|
Tier 1 Capital Ratio
|
16.88%
|
|
15.74%
|
|
8.00%
|
Common Equity Tier 1 Ratio (CET1)
|
15.60%
|
|
15.74%
|
|
6.50%
|
Leverage Ratio
|
11.97%
|
|
11.16%
|
|
5.00%
|
1For subsidiary bank only.
|
|
|
|
|
|
The Company’s total risk-based capital ratio was 17.98% at September 30, 2020, an increase from December 31, 2019’s ratio of 15.71%. During the first quarter of 2020, the Company adopted interagency guidance which delays the impact of CECL adoption on capital for two years followed by a three year phase-in period. At September 30, 2020, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 11.16%, well above the minimum to be well capitalized under regulatory guidelines.
The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $192.8 million of dividends to the Company.
The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking
practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. The board of directors of a bank holding company must consider different factors to ensure that its dividend level, if any, is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all $71.3 million of trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company’s tangible common shareholders’ equity to calculate Tier 1 capital.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. The Company has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
•the allowance and the provision for credit losses on loans;
•acquisition accounting and purchased loans;
•intangible assets and impairment testing;
•other fair value adjustments;
•credit losses on AFS debt securities, and;
•contingent liabilities.
The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to the Company that could have a material effect on reported financial information. For more information regarding management’s judgments relating to significant accounting policies and recent accounting pronouncements, see “Note A-Significant Accounting Policies” to the Company’s consolidated financial statements.
Allowance and Provision for Credit Losses on Loans– Critical Accounting Policies and Estimates
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology.
For loans, management estimates the allowance for credit losses using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.
The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has developed an allowance model based on an analysis of probability of default ("PD") and loss given default ("LGD") to determine an expected loss by loan segment. PDs and LGDs are developed by analyzing the average historical loss migration of loans to default.
The allowance estimation process also applies an economic forecast scenario over a three year forecast period. The forecast may utilize one scenario or a composite of scenarios based on management's judgment and expectations around the current and future macroeconomic outlook. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. For portfolio segments with a weighted average life longer than three years, the Company reverts to longer term historical loss experience, adjusted for prepayments, to estimate losses over the remaining life of the loans within each segment.
Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model. These influences may include elements such as changes in concentration, macroeconomic conditions, recent observable asset quality trends, staff turnover, regional market conditions, employment levels and loan growth. Based upon management's assessments of these factors, the Company may apply qualitative adjustments to the allowance.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The contractual term of a loan excludes expected extensions, renewals, and modification unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and not unconditionally cancellable by the Company.
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring ("TDR"). The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit losses is determining by discounting the expected future cash flows at the original interest rate of the loan.
It is the Company's practice to ensure that the charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due, compared to the regulatory loss criteria of 120 days. In compliance with Federal Financial Institution Examination Council guidelines, secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed against interest income. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.
Note F to the financial statements (titled “Allowance for Credit Losses”) summarizes the Company’s allocation of the allowance for credit losses on loans by loan segment and provides detail regarding charge-offs and recoveries for each loan segment and the composition of the loan portfolio at September 30, 2020 and December 31, 2019.
Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates
The Company accounts for acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurement. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. Loans are identified as purchased credit deteriorated (“PCD”) when they have experienced more-than-insignificant deterioration in credit quality since origination. An allowance for
expected credit losses on PCD loans is recorded at the date of acquisition through an adjustment to the loans’ amortized cost basis. In contrast, expected credit losses on loans not considered PCD are recognized in net income at the date of acquisition.
Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.
Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates
Intangible assets consist of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships. Core deposit intangibles are amortized on a straight-line basis, and are evaluated for indications of potential impairment at least annually. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. The Company performed an annual impairment test of goodwill, as required by ASC Topic 350, Intangibles—Goodwill and Other, in the fourth quarter of 2019. Seacoast conducted the test internally, documenting the impairment test results, and concluded that no impairment occurred.
As a result of recent volatility in the financial markets and overall decline in bank stock valuations since the onset of the COVID-19 pandemic, management performed a qualitative assessment to determine whether a triggering event had occurred that would indicate goodwill impairment. At September 30, 2020, the Company determined that no triggering event had occurred which would require a full interim goodwill impairment test. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods. Any impairment charge would not affect the Company’s regulatory capital ratios, tangible common equity ratio or liquidity position.
Other Fair Value Measurements – Critical Accounting Policies and Estimates
“As Is” values are used to measure fair market value on impaired loans, OREO and repossessed assets. All impaired loans, OREO and repossessed assets are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions. When necessary, the “As Is” appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral dependent impaired loans are loans where repayment is solely dependent on the liquidation of the collateral or operation of the collateral for repayment. If an updated assessment is deemed necessary and an internal valuation cannot be made, an external “As Is” appraisal will be requested. Upon receipt of the “As Is” appraisal a charge-off is recognized for the difference between the loan amount and its current fair market value.
The fair value of the available-for-sale portfolio at September 30, 2020 was greater than historical amortized cost, resulting in net unrealized gains of $25.0 million that have been included in accumulated other comprehensive income as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2020 or 2019. The fair value of each security available-for-sale was obtained from independent pricing sources utilized by many financial institutions or from dealer quotes. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available-for-sale portfolio.
Credit Losses on AFS Debt Securities – Critical Accounting Policies and Estimates
As part of the adoption of ASC Topic 326, the Company replaced the other than temporary impairment model with an approach that requires credit losses to be presented as an allowance, rather than as a direct write-down, when management does not intend to sell or believes they will not be required to sell before recovery.
Seacoast analyzes AFS debt securities quarterly for credit losses. The analysis is performed on an individual security basis for all securities where fair value has declined below amortized cost. Fair value is based upon pricing obtained from third party pricing services. Based on internal review procedures and the fair values provided by the pricing services, the Company believes that the fair values provided by the pricing services are consistent with the principles of ASC Topic 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities,
prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
The Company utilizes both quantitative and qualitative assessments to determine if a security has a credit loss. Quantitative assessments are based on a discounted cash flow method. Qualitative assessments consider a range of factors including: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms.
For AFS debt securities where a credit loss has been identified, the Company records this loss through an allowance for credit losses. This allowance is limited to the amount that the security's amortized cost exceeds its fair value. If the fair value of the security increases in subsequent periods or changes in factors used within the credit loss assessments result in a change in the estimated credit loss, the Company would reflect the change by decreasing the allowance for credit losses.
Contingent Liabilities – Critical Accounting Policies and Estimates
Seacoast is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of the Company's business activities. These proceedings include actions brought against the Company and/or its subsidiaries with respect to transactions in which the Company and/or its subsidiaries acted as a lender, a financial adviser, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or its advisers may learn of additional information that can affect the assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At September 30, 2020 and December 31, 2019, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.
Interest Rate Sensitivity
Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility.
Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's Asset and Liability Management Committee ("ALCO") uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to instantaneous changes in market rates of 100 basis point increases up to 200 basis points of change on net interest income and is monitored on a quarterly basis.
The following table presents the ALCO simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12 and 24 month periods beginning on October 1, 2020, holding all other changes in the balance sheet static. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.
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% Change in Projected Baseline Net
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Change in Interest Rates
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Interest Income
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1-12 months
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13-24 months
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+2.00%
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9.25%
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15.22%
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+1.00%
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4.78%
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8.06%
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Current
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0.00%
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0.00%
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-1.00%
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(6.24)%
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(11.67)%
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The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 29.2% at September 30, 2020. This result includes assumptions for core deposit re-pricing validated for the Company by an independent third party consulting group.
The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile.
Effects of Inflation and Changing Prices
The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.