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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
For the quarterly period ended June 30, 2012
For the transition period from to .
Commission File No. 0-13660
Seacoast Banking Corporation of Florida
(Exact Name of Registrant as Specified in its Charter)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Common Stock, $.10 Par Value 94,779,981 shares as of June 30, 2012
SEACOAST BANKING CORPORATION OF FLORIDA
Seacoast Banking Corporation of Florida and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
See notes to condensed consolidated financial statements.
Seacoast Banking Corporation of Florida and Subsidiaries
See notes to condensed consolidated financial statements.
Seacoast Banking Corporation of Florida and Subsidiaries
See notes to condensed consolidated financial statements.
Seacoast Banking Corporation of Florida and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
See notes to condensed consolidated financial statements.
SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
NOTE A BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2011.
Use of Estimates
The preparation of these condensed consolidated financial statements required the use of certain estimates by management in determining the Companys assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
Specific areas, among others, requiring the application of managements estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, other real estate owned, and the valuation of deferred tax valuation allowance. Actual results could differ from those estimates.
NOTE B RECENT ACCOUNTING STANDARDS
Future Application of Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. This project began as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS. However, as the Boards were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no impact on the Companys Consolidated Financial Statements.
NOTE C BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Equivalent shares of 527,000 and 1,125,000 related to stock options, stock settled appreciation rights and warrants for each of the periods ended June 30, 2012 and 2011, respectively, were excluded from the computation of diluted EPS because they would have been anti-dilutive.
NOTE D FAIR VALUE INSTRUMENTS MEASURED AT FAIR VALUE
In certain circumstances, fair value enables the Company to more accurately align its financial performance with the market value of actively traded or hedged assets and liabilities. Fair values enable a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as, to more accurately portray the active and dynamic management of a companys balance sheet. ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. Under ASC 820, fair value measurements for items measured at fair value at June 30, 2012 and 2011 included:
When appraisals are used to determine fair value and the appraisals are based on a market approach, the related loans fair value is classified as Level 2 input. The fair value of loans based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, is classified as Level 3 inputs.
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Companys monthly and/or quarter valuation process.
During the six months ended June 30, 2012 and 2011 there were no transfers between level 1 and level 2 assets carried at fair value.
For loans classified as level 3, transfers in totaled $18.5 million for the first six months of 2012. For 2012, transfers out consisted of charge-offs of $4.6 million, and foreclosures migrating to other real estate owned (OREO) and other reductions (including principal payments) totaled $1.7 million. No sales were recorded.
Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reporting periods, significantly impact the Companys provision for loan losses.
For OREO classified as level 3 during the first six months of 2012, transfers out totaled $15.9 million, consisting of valuation write-downs of $2.1 million and sales of $13.8 million, and transfers in consisted of foreclosed loans totaling $2.9 million.
The following table shows the carrying value and fair value of the Companys financial assets and financial liabilities as of June 30, 2012 and 2011:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at June 30, 2012 and 2011:
Cash and cash equivalents: The carrying amount was used as a reasonable estimate of fair value.
Securities: U.S. Treasury securities are reported at fair value utilizing level 1 inputs. Other securities classified as available for sale are reported at fair value utilizing level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and a bonds terms and conditions, among other things.
The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are hard to value or that have complicated structure. The Companys entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third party sources or derived using internal models.
Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.
Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers.
Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.
Borrowings: The fair value of floating rate borrowings is the amount payable on demand at the reporting date. The fair value of fixed rate borrowings is estimated using the rates currently offered for borrowings of similar remaining maturities.
Subordinated debt: The fair value of the floating rate subordinated debt is estimated using discounted cash flow analysis and the Companys current incremental borrowing rate for similar instruments.
NOTE E IMPAIRED LOANS AND VALUATION ALLOWANCE FOR LOAN LOSSES
During the six months ending June 30, 2012, the total of newly identified TDRs was $8.4 million, of which $0.1 million were accruing construction and land development loans, $3.8 million were accruing residential real estate mortgages, $0.6 million were accruing commercial real estate loans, and $0.1 million were accruing consumer loans. Loans modified but where full collection under the modified terms is doubtful are classified as nonaccrual loans from the date of modification and are therefore excluded from the tables below.
The Companys TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.
When a loan is modified as a TDR, there is not a direct, material impact on the loans within the consolidated Balance Sheet, as principal balances are generally not forgiven. All loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.
The following table presents loans that were modified within the six months ended June 30, 2012:
Accruing loans that were restructured within the twelve months preceding June 30, 2012 and defaulted during the six months ended June 30, 2012 is presented in the table below. The Company considers a loan to have defaulted when it becomes 60 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company's policy.
As of June 30, 2012 and December 31, 2011, the Companys recorded investments in impaired loans and the related valuation allowances were as follows:
For the six months ended June 30, 2012 and 2011, the Companys average recorded investments in impaired loans and related interest income were as follows:
Impaired loans also include loans that have been modified in troubled debt restructurings (TDRs) where concessions to borrowers who experienced financial difficulties have been granted. At June 30, 2012 and December 31, 2011, accruing TDRs totaled $54.8 million and $71.6 million, respectively.
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal. For the six months ended June 30, 2012 and 2011, the Company recorded $1,709,000 and $1,688,000, respectively, in interest income on impaired loans.
Transactions in the allowance for loan losses for the three and six-month periods ended June 30, 2012 are summarized as follows:
Transactions in the allowance for loan losses for the three and six-month periods ended June 30, 2011 are summarized as follows:
The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Companys loan portfolio and related allowance as of June 30, 2012 and 2011 is shown in the following tables:
NOTE F: CONTINGENCIES
The Company and its subsidiaries, because of the nature of their businesses, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Companys consolidated financial condition, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.
NOTE G: EQUITY CAPITAL
In June 2012, the Company purchased a warrant for 589,625 shares of its common stock from the U.S. Treasury for $55,000.
The Company is well capitalized for bank regulatory purposes. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth under Capital Resources in this Report. At June 30, 2012, the Companys principal subsidiary, Seacoast National Bank, or Seacoast National, met the risk-based capital and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.
Seacoast National has agreed to maintain a Tier 1 capital (to adjusted average assets) ratio of at least 8.50% and a total risk-based capital ratio of at least 12.00% with its primary regulator, the Office of the Comptroller of the Currency (OCC). The agreement with the OCC as to minimum capital ratios does not change the Banks status as well-capitalized for bank regulatory purposes.
NOTE H: SECURITIES
The amortized cost and fair value of securities available for sale and held for investment at June 30, 2012 and December 31, 2011 are summarized as follows:
Proceeds from sales of securities during the six month period ended June 30, 2012 were $226,839,000 with gross gains of $6,989,000 and gross losses of $0. No sales of securities occurred during the six month period ended June 30, 2011.
Securities with a carrying value of $75,732,000 and fair value of $75,762,000 at June 30, 2012 were pledged as collateral for United States Treasury deposits, and other public and trust deposits. Securities with a carrying value and fair value of $162,765,000 were pledged as collateral for repurchase agreements.
The amortized cost and fair value of securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at June 30, 2012 and December 31, 2011, respectively.
Approximately $0.9 million of $2.2 million of the unrealized losses at June 30, 2012 pertain to private label securities secured by collateral originated in 2005 and prior. Their fair value is $44.0 million as of June 30, 2012 and is attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for investment securities in general. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgages loans with low loan to values, subordination and historically have had minimal foreclosures and losses. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
At June 30, 2012, the Company also had $1.4 million of unrealized losses on mortgage-backed securities of government sponsored entities having a fair value of $177.5 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for investment securities in general. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
As of June 30, 2012, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its investment securities that have losses. Therefore, management does not consider any investment to be other-than-temporarily impaired at June 30, 2012.
Included in other assets was $11.9 million at June 30, 2012 of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At June 30, 2012, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $11.9 million of cost method investment securities.
NOTE I: INCOME TAXES
The Company has recorded net deferred tax assets (DTA) of $18.3 million at June 30, 2012. Although realization is not assured, management believes that realization of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASU 740 Income Taxes. Should the economy show improvement, the Companys credit losses moderate prospectively, and the Company generates increased taxable income, increased reliance on managements forecast of future taxable earnings could result in realization of additional future tax benefits from the net operating loss carryforwards. At June 30, 2012 the Company has approximately $45.4 million in its deferred tax valuation allowance allocated to its deferred tax assets, primarily net operating loss carryforwards.
Information relating to loans as of June 30, 2012 and December 31, 2011 is summarized as follows:
The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2012 and December 31, 2011:
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Companys risk rating system, the Company classifies problem and potential problem loans as Special Mention, Substandard, and Doubtful and these loans are monitored on an ongoing basis. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as substandard may require a specific allowance, but generally does not exceed 30% of the principal balance. Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans classified as doubtful generally have specific allowances in excess of 30% of the principal balance. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve managements close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.
Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager. The following table presents the risk category of loans by class of loans based on the most recent analysis performed as of June 30, 2012 and December 31, 2011:
SECOND QUARTER 2012
The following discussion and analysis is designed to provide a better understanding of the significant factors related to the Companys results of operations and financial condition. Such discussion and analysis should be read in conjunction with the Companys Condensed Consolidated Financial Statements and the related notes included in this report. For purposes of the following discussion, the words the Company, we, us, and our refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.
During 2011 and into 2012, we made good progress pursuing our strategic plan, even though there were significant headwinds from the operating and interest rate environment. We believe our targeted plan to grow our customer and commercial franchise is the best way to build shareholder value going forward. Specifically, revenue grew and net interest income increased as a result of increased loan production and deposit growth. Noninterest income also increased as a result of growth in key activities such as mortgage banking gains, and fees earned from increased households and business deposit relationships. These successes were a direct result of implementing the strategic plan adopted by our board of directors three years ago. In 2011 and the first half of 2012, improved tactical execution and our improved condition supported better growth for both consumer household and commercial relationships.
During the second quarter of 2012, we completed all of the previously announced sales related to foreclosed property, and market conditions permitted the negotiation and closing of additional foreclosed property sales during the quarter. In addition, we took write downs and added specific reserves for loans, which could be potentially resolved over the reminder of 2012. The provisioning for loan losses of $6.5 million for the second quarter of 2012 was higher, compared to $2.3 million for the first quarter of 2012 and $0.9 million a year ago. The allowance for loan losses to loans outstanding ratio at June 30, 2012 was 2.02 percent compared to 2.63 percent a year earlier.
The Company reported a net loss of $2,335,000 for the second quarter of 2012, compared to net income of $938,000 for the first quarter of 2012 and $1,113,000 for the second quarter a year ago. A net loss available to common shareholders (after preferred dividends and accretion of preferred stock discount) for the second quarter of 2012 totaled $3,272,000 or $0.03 per average common diluted share, and compared to gains in 2012 for the first quarter of $1,000 or $0.00 per average common diluted share, and income of $176,000 or $0.00 per average common diluted share for the second quarter of 2011. Our performance for the second quarter of 2012 reflects our determination to tackle risk exposures while planning for growth prospectively. The decision to accelerate our problem loan liquidation activities was part of a larger review initiated during the quarter to support earnings growth in 2013. Management is evaluating a combination of additional actions, including office consolidations, revenue enhancements, acceleration of growth initiatives and a variety of cost-saving opportunities.
The net interest margin decreased 16 basis points during the second quarter of 2012 from the first quarter of 2012, and was lower by 19 basis points from the second quarter 2011s margin. In the first and second quarters of 2012, a portion of the securities portfolio was sold to reduce interest rate and price risk, and this also reduced net interest income compared to prior periods. Higher cash liquidity, and lower loan and investment security yields have been partially offset by improved loan quality. The Company has continued to benefit from lower rates paid for interest bearing liabilities. The Company has improved its acquisition, retention and mix of deposits and this has resulted in lower funding costs. The average cost of interest bearing liabilities was 0.59 percent for the second quarter of 2012, compared to 0.68 percent for the first quarter of 2012, and was 36 basis points lower compared to the second quarter of 2011. Securities as a percentage of average earning assets decreased and other investments (an interest bearing deposit at the Federal Reserve Bank) increased during the second quarter of 2012, compared to the first quarter of 2012 and second quarter of 2011, with securities sales transacted during 2012 to convert unrealized gains and reduce interest rate risk. The yield on earning assets decreased by 24 basis points during the second quarter of 2012, compared to the first quarter of 2012, and was 28 basis points lower than for the second quarter of 2011. Loan demand has been better during the first and second quarters of 2012 but is expected to continue to be challenging, and may impede improvement to the yield on earning assets. Prospectively, our focus will be on continuing to improve our deposit mix and adding to our loan balances.
Noninterest income (excluding securities gains) totaled $4.9 million and $5.2 million for the first and second quarters of 2012, respectively, compared to $4.5 million for the second quarter of 2011. Mortgage banking revenues increased $393,000 compared to the second quarter of 2011 with improved stability in home prices, increased service release premiums and improved transaction flow resulting in higher income. While service charges on deposits were $59,000 lower when compared to second quarter 2011 (entirely in overdraft fees), improved results in interchange income, greater by $159,000 for the second quarter of 2012, were complemented by revenue from wealth management services, up $122,000 over prior year. Interchange income and other charges and fees are derived from customer relationships, which have increased as a result of more accounts and households as a result of the retail deposit growth strategy. Marine finance fees were $105,000 lower than in the second quarter of 2011.
Noninterest expenses decreased by $1.0 million versus first quarter 2012s result and were $1.6 million higher when compared to the second quarter of 2011. The largest decrease from the first quarter of 2012 was primarily in assets dispositions expense and losses on other real estate owned and repossessed assets, decreasing by $1.3 million on an aggregate basis. Overhead related to salaries and wages, the largest component of overall overhead, were $380,000 higher compared to the first quarter of 2012 and were $901,000 higher versus second quarter 2011s result. While base salaries increased $310,000 or 5.1 percent, a larger portion of the rise in salaries and wages was related to commissions and incentives, up $394,000 or 49.8 percent compared to second quarter 2011, principally related to increased revenue. Increasing as well year over year were employee benefits, up $479,000 or 33.3 percent and principally due to higher healthcare costs.
CRITICAL ACCOUNTING ESTIMATES
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. Management, after consultation with the Companys Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
The following is a discussion of the critical accounting policies intended to facilitate a readers understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information.
Allowance and Provision for Loan Losses
The information contained on pages 35-37 and 42-50 related to the Provision for Loan Losses, Loan Portfolio, Allowance for Loan Losses and Nonperforming Assets is intended to describe the known trends, events and uncertainties which could materially affect the Companys accounting estimates related to our allowance for loan losses.
Fair Value and Other than Temporary Impairment of Securities Classified as Available for Sale
At June 30, 2012, outstanding securities designated as available for sale totaled $562,691,000. The fair value of the available for sale portfolio at June 30, 2012 was more than historical amortized cost, producing net unrealized gains of $4,755,000 that have been included in other comprehensive income (loss) as a component of shareholders equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2012 and 2011. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions. 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.
The credit quality of the Companys securities holdings are primarily investment grade. As of June 30, 2012, the Companys available for sale investment securities, except for approximately $0.9 million of securities issued by states and their political subdivisions, generally are traded in liquid markets. U.S. Treasury and U.S. Government agency obligations totaled $488.9 million, or 86.9 percent of the total available for sale portfolio. The remainder of the portfolio consists of private label securities secured by collateral originated in 2005 or prior with low loan to values, and current FICO scores above 700. Generally these securities have credit support exceeding 5%. The collateral underlying these mortgage investments are primarily 30- and 15-year fixed rate, 5/1 and 10/1 adjustable rate mortgage loans. Historically, the mortgage loans serving as collateral for those investments have had minimal foreclosures and losses.
Our investments are reviewed quarterly for other than temporary impairment (OTTI). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Companys other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.
The Company also held stock in the Federal Home Loan Bank of Atlanta (FHLB) totaling $5.5 million as of June 30, 2012, nominally lower from year-end 2011. The Company accounts for its FHLB stock based on the industry guidance in ASC 942, Financial ServicesDepository and Lending, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We evaluated our holdings in FHLB stock at June 30, 2012 and believe our holdings in the stock are ultimately recoverable at par. We do not have operational or liquidity needs that would require redemption of the FHLB stock in the foreseeable future and, therefore, have determined that the stock is not other-than-temporarily impaired.
Realization of Deferred Tax Assets
At June 30, 2012, the Company had net deferred tax assets (DTA) of $18.3 million. Although realization is not assured, management believes that realization of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASC 740 Income Taxes. In comparison, at June 30, 2011 the Company had net DTAs of $16.9 million.
As a result of the losses incurred in 2008, 2009, and 2010 the Company was and is in a three-year cumulative pretax loss position. The Company has recorded deferred tax valuation allowances for its DTAs, primarily net operating loss (NOL) carryforwards totaling approximately $45.4 million at June 30, 2012. Should the economy show improvement and the Companys credit losses continue to moderate prospectively as the Company continues to generate taxable income, increased reliance on managements forecast of future taxable earnings could result in realization of additional future tax benefits from the net operating loss carryforwards. We believe our future taxable income will ultimately allow for the recovery of the NOL, and the realization of its DTA, at the earliest late this year and more likely sometime in 2013.
The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these
assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At June 30, 2012 and 2011, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income (on a fully taxable equivalent basis) for the second quarter of 2012 totaled $16,052,000, decreasing from 2012s first quarter by $637,000 or 3.8 percent, and lower than second quarter 2011s result by $544,000 or 3.3 percent. Lower asset yields as a result of the Federal Reserves actions to lower interest rates and the restructuring of the investment portfolio to lower pricing risks, reduced first and second quarter 2012s net interest income. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters:
Fully taxable equivalent net interest income is a common term and measure used in the banking industry but is not a term used under generally accepted accounting principles (GAAP). We believe that these presentations of tax-equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors understanding of the Companys business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered an alternative to GAAP. The following information is provided to reconcile GAAP measures and tax equivalent net interest income and net interest margin on a tax equivalent basis.
The earning asset mix changed year over year impacting net interest income. For the second quarter of 2012, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 60.5 percent, compared to 61.7 percent a year ago. Average securities as a percentage of average earning assets decreased from 30.0 percent a year ago to 27.3 percent during the second quarter of 2012 and interest bearing deposits and other investments increased to 12.2 percent in 2012 from 8.3 percent in 2011. The net interest margin continues to be negatively impacted by higher levels of overnight liquidity. In addition to average total loans decreasing as a percentage of earning assets, the mix of loans changed, with volumes related to commercial real estate representing 42.3 percent of total loans at June 30, 2012 (compared to 45.4 percent at June 30, 2011). Our reduced exposure to commercial construction and land development loans on residential and commercial properties was unchanged, totaling $23.1 million at June 30, 2012 and June 30, 2011. Lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) represented 49.0 percent of total loans at June 30, 2012 (versus 46.2 percent at June 30, 2011) (see Loan Portfolio).
The yield on loans decreased 28 basis points to 4.81 percent over the last twelve months with nonaccrual loans totaling $48.5 million or 3.97 percent of total loans at June 30, 2012 (versus $46.2 million or 3.88 percent of total loans at June 30, 2011). The yield on investment securities was lower, decreasing 70 basis points year over year to 2.41 percent for the second quarter of 2012, due primarily to securities sold to reduce interest rate risk and reinvestment at lower yields. The yield on interest bearing deposits and other investments was nearly unchanged at 0.43 percent for second quarter 2012 compared to a year earlier. Although we are seeing heightened competition among lenders in the Companys markets for quality borrowers, particularly in the form of pricing pressure, we remain focused on offsetting pricing pressures with deposit product offerings and other fee opportunities from the entire relationship.
Average earning assets for the second quarter of 2012 increased $54.7 million or 2.8 percent compared to 2011s second quarter. Average loan balances for 2012 increased $9.9 million or 0.9 percent to $1,231.2 million and average interest bearing deposits and other investments increased $85.1 million or 51.9 percent to $248.9 million, while average investment securities decreased $40.2 million or 6.8 percent to $554.6 million. Remaining proceeds from the sale of securities during 2012 are likely to be deployed to lending activities or additional investment securities purchases.
Commercial and commercial real estate loan production for the first six months of 2012 totaled approximately $31 million, compared to production for all of 2011 and 2010 of $63 million and $10 million, respectively. Improvements in commercial production resulted from a focused program to target small business segments less impacted by the lingering effects of the recession. Commercial production has improved, with period-end total loans outstanding increasing by $32.4 million or 2.7 percent since June 30, 2011. In comparison, loans decreased by $111.7 million or 8.6 percent at June 30, 2011 year over year. Our strategy has been to focus on hiring commercial lenders for the larger metropolitan markets in which the Company competes, principally Orlando and Palm Beach. At June 30, 2012 the Companys total commercial and commercial real estate loan pipeline was $30 million, versus $36 million at December 31, 2011 and $60 million at June 30, 2011.
The Company has expanded its residential mortgage loan originations and continues to seek to expand loans to small businesses in 2012. However, as consumers and businesses seek to reduce their borrowings, and the economy remains weak, opportunities to lend is market share driven.
Closed residential mortgage loan production for the first and second quarters of 2012 totaled $48 million and $66 million, respectively, of which $20 million and $26 million was sold servicing-released. In comparison, closed residential mortgage loan production for the first and second quarters of 2011 totaled $32 million and $50 million, respectively, of which $13 million and $18 million was sold servicing-released. Applications for residential mortgages totaled $95 million during the second quarter of 2012, compared to $60 million during the second quarter in 2011. Much of our loan production has been focused on residential home mortgages, which has continued to show signs of strengthening here in our markets and across Florida. Existing home sales and home mortgage loan refinancing activity in the Companys markets have increased, but demand for new home construction is expected to remain soft. Inventory levels for existing homes in many markets is now at a three- or four-month supply, some of the lowest levels the Company has seen since pre-recession.
The cost of average interest-bearing liabilities in the second quarter of 2012 decreased 9 basis points to 0.59 percent from first quarter 2012 and was 36 basis points lower than for the second quarter of 2011, reflecting the lower interest rate environment and improved deposit mix. The following table details the cost of average interest bearing liabilities for the past five quarters:
During 2012, the Companys retail core deposit focus has continued to produce strong growth in core deposit customer relationships when compared to prior year results. The improved deposit mix and lower rates paid on interest bearing deposits during the second quarter of 2012 (and last several quarters) reduced the overall cost of total deposits to 0.37 percent for the second quarter of 2012, 33 basis points lower than the same quarter a year ago. A significant component favorably affecting the Companys net interest margin, the average balances of lower cost interest bearing deposits (NOW, savings and money market) totaled 69.2 percent of total average interest bearing deposits for the second quarter of 2012, an improvement compared to the average of 61.1 percent a year ago. The average rate for lower cost interest bearing deposits for 2012 was 0.18 percent, down by 13 basis points from 2011s second quarter rate. Certificate of deposit (CD) rates paid were also lower for the second quarter of 2012, averaging 1.12 percent,
a 62 basis point decrease compared to the second quarter a year ago. Average CDs (the highest cost component of interest bearing deposits) were 30.8 percent of interest bearing deposits for the second quarter of 2012, compared to 38.9 percent for 2011 with ending balances down to 28.8 percent for CDs as of June 30, 2012.
Average deposits totaled $1,706.3 million during the second quarter of 2012, and were $9.2 million higher compared to second quarter 2011, even with a planned reduction of single service time deposit customers occurring. Average aggregate amounts for NOW, savings and money market balances increased $76.6 million or 9.2 percent to $912.0 million for 2012 compared to the second quarter of 2011, average noninterest bearing deposits increased $57.2 million or 17.3 percent to $388.0 million for 2012 compared to 2011, and average CDs decreased by $124.6 million or 23.5 percent to $406.3 million over the same period. With the low interest rate environment and lower CD rate offerings available, customers have been more complacent and are leaving more funds in lower cost average balances in savings and other liquid deposit products that pay no interest or a lower interest rate.
Average short-term borrowings have been principally comprised of sweep repurchase agreements with customers of Seacoast National, which increased $41.4 million to $146.5 million or 39.4 percent for the second quarter in 2012 as compared to 2011 for the same period. With balances typically peaking during the fourth and first quarters each year, public fund clients with larger balances have the most significant influence on average sweep repurchase agreement balances outstanding during the year. Other borrowings are comprised of subordinated debt of $53.6 million related to trust preferred securities issued by trusts organized by the Company, and advances from the FHLB of $50.0 million. No changes have occurred to other borrowings since year-end 2009.
We expect our net interest margin to grow as our lending initiatives produce improved results and our problem loan liquidation activities are concluded. We are positioned for stronger earnings performance with a more typical yield curve and as excess liquidity is deployed into higher earning assets. The focus the last three years on achieving increased household growth year over year should produce future organic revenue growth, as the long term value of core household relationships are revealed, as more products are sold and fees earned, and as normalized interest rates return as the economy improves.
PROVISION FOR LOAN LOSSES
Management determines the provision for loan losses charged to operations by continually analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge-offs, and by estimating losses inherent in its portfolio. While the Companys policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make managements judgment as to the adequacy of the provision and allowance for loan losses necessarily approximate and imprecise (see Nonperforming Assets and Allowance for Loan Losses).
The provision for loan losses is the result of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under FASB Accounting Standards Codification (ASC) 310, Receivables as well
as, an analysis of homogeneous loan pools not individually evaluated as prescribed under ASC 450, Contingencies. For the first and second quarters of 2012 we recorded higher provisioning for loan losses of $2.3 million and $6.5 million, respectively, which compared to provisioning in the first, second, third and fourth quarters of 2011 of $0.6 million, $0.9 million, $0.0 million and $0.4 million, respectively. Net charge-offs for the first and second quarters of 2012 totaled $3.4 million and $6.3 million, respectively, somewhat higher for the second quarter of 2012 compared to the last four quarters that averaged $3.4 million. Net charge-offs represented 1.59 percent of average total loans for the first six months of 2012, versus 1.16 percent of average total loans for all of 2011. Delinquency trends remain low and show continued stability (see Nonperforming Assets). We expect to have provisioning next quarter, but we do not believe it will be nearly what it was for the second quarter of 2012.
Note E to the financial statements (titled Impaired Loans and Valuation Allowance for Loan Losses) provides certain information concerning the Companys allowance and provisioning for loan losses.
Total commercial real estate (CRE) loan concentrations declined 4.3 percent from $540.0 million at June 30, 2011 to $516.7 million at June 30, 2012. Under regulatory guidelines for commercial real estate concentrations, Seacoast Nationals total commercial real estate loans (as defined in the guidance) represented 172 percent of total risk based capital at June 30, 2012, substantively under the 300 percent limit designated by regulators.
The Companys residential construction and land development loan concentrations have been reduced to $10.6 million or 0.9 percent of total loans at June 30, 2012 (see Loan Portfolio).
The Companys other loan portfolios related to residential real estate are amortizing 1-4 family mortgage loans. The Company has never offered sub-prime, Alt A, Option ARM or any negative amortizing residential loans, programs or products, although it has originated and holds residential mortgage loans from borrowers with original or current FICO credit scores that are currently less than prime FICO credit scores. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations.
The Company selectively adds residential mortgage loans to its portfolio, primarily loans with adjustable rates. Home equity loans (amortizing loans for home improvements with maturities of 10 to 15 years) totaled $58.3 million and home equity lines totaled $50.8 million at June 30, 2012, compared to $63.1 million and $56.9 million at June 30, 2011. Each borrowers credit was fully documented as part of the Companys underwriting of home equity lines. The Company never promoted home equity lines greater than 80 percent of value or used credit scoring solely as the underwriting criteria. Therefore this portfolio of loans, primarily to customers with other relationships to Seacoast National, has performed better than portfolios of our peers. Net charge-
offs for the six months ended June 30, 2012 totaled $626,000 for home equity lines, compared to $683,000 for all of 2011, and home equity lines past due 90 days or more and nonaccrual lines (aggregated) were $2,215,000 and $1,415,000 at June 30, 2012 and 2011, respectively.
Noninterest income, excluding gains or losses from securities, totaled $5,219,000 for the second quarter of 2012, $672,000 or 14.8 percent higher than for 2011s second quarter and $282,000 or 5.7 percent higher than the first quarter 2012. Noninterest income accounted for 24.6 percent of total revenue (net interest income plus noninterest income, excluding securities gains or losses) in the second quarter of 2012, compared to 21.6 percent a year ago.
Noninterest income for the second and first quarters of 2012, and the second quarter of 2011, is detailed as follows:
For the second quarter of 2012, revenues from the Companys wealth management services businesses (trust and brokerage) increased year over year, by $122,000 or 16.5 percent, and were higher than the first quarter of 2012 by $55,000 or 6.8 percent. Included in the $122,000 increase, trust revenue was higher by $47,000 or 9.1 percent and brokerage commissions and fees were higher by $75,000 or 33.6 percent. For the six months ended June 30, 2012, income from the Companys wealth management services increased $86,000 or 5.4 percent to $1,669,000. Economic uncertainty is the primary issue affecting clients of the Companys wealth management services.
Service charges on deposits for the second quarter of 2012 were $59,000 or 3.8 percent lower year over year versus 2011s second quarter result, but were $26,000 or 1.8 percent higher when compared to first quarter 2012. Overdraft fees declined $58,000 or 5.0 percent year over year and represented approximately 74 percent of total service charges on deposits for the second quarter of 2012, slightly lower than the average of 76 percent for all of 2011 and the second quarter of 2011. The regulators continue to review the banking industrys practices around overdraft programs and additional regulation could further reduce fee income for the Companys overdraft services. Year-to-date service charges on deposits for 2012 decreased $40,000 or 1.3 percent year over year to $2,948,000.
For the second quarter of 2012, fees from the non-recourse sale of marine loans totaled $244,000, a decrease of $105,000 or 30.1 percent compared to second quarter 2011, and compared to first quarter 2012 were lower as well, by $86,000. Over the first six months, approximately $6.2 million of 2012s overall production of $39.8 million has been placed in the loan portfolio, the remainder sold. Production levels have been significantly lower since the end of 2008 and are reflective of the general economic downturn. Lower attendance at boat shows by consumers, manufacturers, and marine retailers over the past couple years has resulted in lower marine sales and loan volumes. The Seacoast Marine Division is headquartered in Ft. Lauderdale, Florida with lending professionals in Florida, California, Washington and Oregon.
Greater usage of check or debit cards over the past several years by core deposit customers and an increased cardholder base has increased our interchange income. For second quarter 2012, interchange income increased $159,000 or 16.0 percent from second quarter 2011, and was $83,000 or 7.7 percent higher than first quarter 2012. Other deposit-based electronic funds transfer (EFT) income increased by $5,000 or 6.3 percent from second quarter 2011 and compared to first quarter 2012. For 2012, year-to-date interchange income and other deposit based EFT income were higher year over year by $339,000 or 18.0 percent and $14,000 or 8.3 percent, respectively, and totaled $2,225,000 and $183,000, respectively.
The Company originates residential mortgage loans in its markets, with loans processed by commissioned employees of Seacoast National. Many of these mortgage loans are referred by the Companys branch personnel. Mortgage banking fees in the second quarter of 2012 increased $393,000 or 77.2 percent from 2011s second quarter result, and were $279,000 or 44.8 percent higher compared to the first quarter of 2012. For the six months ended June 30, 2012, mortgage banking fees increased $621,000 or 68.7 percent to $1,525,000, compared to prior year. Mortgage revenues are dependent upon favorable interest rates, as well as good overall economic conditions, including the volume of home sales. Residential real estate sales and activity in our markets improved over the past year, with transactions increasing, prices firming and affordability improving. As a result, the Company experienced more mortgage loan origination opportunities in markets it serves during the past year and this is expected to continue during 2012. The Company was the number one originator of home purchase mortgages in Martin, St. Lucie and Indian River counties during 2011. The Company has only had to repurchase or settle on 6 sold mortgage loans ever and believes that its processes and controls make it unlikely that it will have any material exposure in the future.
Other income for second quarter 2012 increased $157,000 or 47.7 percent compared to the second quarter a year ago, and from first quarter 2012 was $60,000 or 11.0 percent lower. Included in the increase for 2012 compared to second quarter 2011 was merchant income, which was $131,000 higher than a year ago and reflecting better volumes and additional incentive payments for surpassing sales thresholds over the last twelve months.
The Companys overhead ratio was in the low to mid 60s in years prior to the recession. Lower earnings and cyclical credit costs in 2011, 2010, and 2009 resulted in this ratio increasing to 90.1 percent, 104.6 percent, and 86.7 percent, respectively. For the first six months of 2012, the overhead ratio was 98.0 percent and total noninterest expenses were $3,691,000 or 9.5 percent higher versus a year ago, totaling $42,431,000. When compared to second quarter 2011, total noninterest expenses for second quarter 2012 increased by $1,648,000 or 8.6 percent to $20,721,000, and compared to first quarter 2012 expenses were lower by $989,000 or 4.6 percent.
Interest spreads available on new volumes are less attractive today than they were even six to eight months ago, and that has led the Company to believe it is necessary to accelerate activities related to office consolidations and other ways to adjust its cost structure. Management is presently in the middle of that review, and will report more on strategies to reduce overhead in the third quarter of 2012.
The primary cause for the increase in 2012 over 2011s second quarter was higher salaries and wages and employee benefits, up by $901,000 or 13.8 percent and $479,000 or 33.3 percent, respectively. Higher commission and incentive payments on revenues generated from lending
production of $394,000 or 49.8 percent were included in the increase for salaries and wages for 2012, compared to second quarter 2011. Base salaries and wages were also higher by $310,000 or 5.1 percent, reflecting additional commercial relationship managers hired during the past twelve months and staff added to the compliance and risk management departments. Severance payments for positions eliminated during the past quarter totaled $138,000, contributing another $125,000 to the increase compared to a year ago.
The Company recognized higher costs during the second quarter of 2012 for its self-funded health care plan compared to second quarter 2011, with an increase of $309,000 in expenditures resulting from a few large claims and higher utilization. Also contributing to the increase for employee benefits was an increase of 1 percent in the Company match for employee salary deferrals, resulting in an $115,000 increase in 401K plan costs year over year. The state of Florida continues to increase unemployment compensation rates to replenish funding pools for disbursements, adding to costs as well. Consistent with quarterly results, employee benefit costs were $889,000 or 29.3 percent higher for the first six months of 2012, compared to a year ago. The Company has met with its self-funded plan provider and discussed possible impacts of U.S. Health Care Reform and determined that no immediate or material financial statement impacts are apparent.
Outsourced data processing costs totaled $1,834,000 for the second quarter of 2012, an increase of $135,000 or 7.9 percent from first quarter a year ago, and year-to-date outsourced data processing costs for 2012 increased $334,000 or 10.4 percent. Seacoast National utilizes third parties for its core data processing systems. Outsourced data processing costs are directly related to the number of transactions processed. Core data processing, interchange processing costs and other electronic funds transfer related costs were $83,000, $32,000 and $36,000 higher for second quarter 2012, versus a year ago for the second quarter. Partially offsetting this increase, software licensing and maintenance contracts (aggregated) were $15,000 lower for 2012. Outsourced data processing costs can be expected to increase as the Companys business volumes grow and new products such as bill pay, internet banking, etc. become more popular.
For the second quarter of 2012, marketing expenses, including sales promotion costs, ad agency production and printing costs, newspaper and radio advertising, and other public relations costs associated with the Companys efforts to market products and services, increased nominally (by $10,000) to $677,000 when compared to the second quarter of 2011. Year-to-date, marketing is $184,000 or 13.0 percent higher than a year ago. Marketing expenses for 2012 and all of 2011 reflect a focused campaign in our markets targeting the customers of competing financial institutions and promoting our brand. Media costs (newspaper, television and radio advertising), sales promotions, direct mail activities and donations (and sponsorships) have been ramped up the most during 2012 versus a year ago.
Legal and professional fees increased by $52,000 or 3.3 percent to $1,637,000 for the second quarter of 2012, compared to a year ago, and were $71,000 or 2.1 percent higher for the first half of 2012 compared to 2011. Legal fees were $162,000 lower for the second quarter of 2012 year over year, and were $381,000 lower compared to the first quarter of 2012. Included in legal fees for the first quarter of 2012 were fees of approximately $235,000 for the U.S. Treasury auction of our Series A Preferred Stock. Remaining legal fees are primarily due to costs related to problem assets. For the second quarter of 2012, professional fees were up $206,000 year over year and $210,000 versus first quarter 2012, and include amounts paid for the Company outsourcing most internal audit activities.
The FDIC assessment for the first and second quarters of 2012 totaled $706,000 and $707,000, respectively, compared to first and second quarter 2011s assessments of $959,000 and $688,000. As of April 1, 2011, the FDICs calculation of assessments changed, utilizing total assets less Tier 1 risk-based capital as a base for calculation, versus average total deposits. Applicable premium rates have been adjusted for the change in the base, with specific adjusting risk factors deemed important by the FDIC utilized in the determination of applicable premium rates. The Companys assessments under the FDICs new methodology are lower.
Net losses on other real estate owned (OREO) and repossessed assets, and asset disposition expenses associated with the management of OREO and repossessed assets (aggregated) totaled $2,486,000 and $1,158,000 for the first and second quarters of 2012, respectively. OREO balances declined by 72.1 percent compared to last year and by 53.5 percent compared to first quarter 2012 and total approximately $7 million at June 30, 2012. Of the $1,158,000 total for the second quarter of 2012, asset disposition costs summed to $368,000 and net losses on OREO and repossessed assets totaled $790,000.
Other noninterest expenses increased $486,000 or 24.0 percent to $2,510,000 for the second quarter of 2012 when comparing to the same period in 2011, and were higher compared to the first quarter of 2012 by $146,000 or 6.2 percent. Favorably affecting the second quarter of 2011, was the reversal of an accrual of $184,000 for a cash settlement with a brokerage client based on a favorable outcome. Other increases year over year from second quarter 2011 were a loss on the repurchase of a residential loan previously sold in the secondary market (of $166,000) and an accrual regarding a pending settlement of litigation. Other noninterest expenses for the six months ended June 30, 2012 were $687,000 or 16.4 percent higher than in 2011 for the same period.
The Companys equity capital at June 30, 2012 totaled $165.5 million and the ratio of shareholders equity to period end total assets was 7.85 percent, compared with 8.22 percent at June 30, 2011, and 7.96 percent at December 31, 2011. Seacoasts management uses certain non-GAAP financial measures in its analysis of the Companys capital adequacy. Seacoasts management uses this measure to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. This capital measure is not necessarily comparable to similar capital measures that may be presented by other companies.
The Companys capital position remains strong, meeting the general definition of well capitalized, with a total risk-based capital ratio of 18.43 percent at June 30, 2012, compared with June 30, 2011s ratio of 18.92 percent and compared with 18.77 percent at December 31, 2011.
The Company and Seacoast National 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 National and its other subsidiaries, and the Companys primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Prior OCC approval presently is required for any payments of dividends from Seacoast National 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 National or us, respectively. Under a recently adopted Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organizations 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 companys 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.
Since May 19, 2009, based on discussions with the Federal Reserve and a review of recently adopted Federal Reserve policies related to dividends and other distributions, cash dividends on our outstanding common stock have been suspended (and continue to be suspended at this time). The Company has paid and is current on all dividends and interest payments on its Series A Preferred Stock and trust preferred securities. The Company is required to continue to consult with the Federal Reserve and will seek approval each quarter before making payments.
At June 30, 2012, the capital ratios for the Company and its subsidiary, Seacoast National, were as follows:
Changes in rules affecting risk based capital calculations have been proposed and the Company has taken a prospective look at its ratios, finding that our ratios remain quite strong in spite of the proposed adjustments.
Total assets increased $23,651,000 or 1.1 percent from June 30, 2011 to $2,106,514,000 at June 30, 2012.
Total loans (net of unearned income) were $1,221,354,000 at June 30, 2012, $32,409,000 or 2.7 percent more than at June 30, 2011, and $13,280,000 or 1.1 percent more than at December 31, 2011. A total of $244 million of new loans was produced and added to the loan portfolio during the twelve months ended June 30, 2012. The Company continues to look for opportunities to invest excess liquidity and believes the best current use is to fund loan growth. We expect to add some additional commercial relationship managers over the balance of 2012 which will further help in increasing loan growth in 2013, prospectively. The following table details loan portfolio composition at June 30, 2012, December 31, 2011 and June 30, 2011:
Construction and land development loans, including loans secured by commercial real estate, were comprised of the following types of loans at June 30, 2012 and 2011:
Commercial real estate mortgages were lower by $23.3 million or 4.5 percent to $493.6 million at June 30, 2012, compared to June 30, 2011 as a result of the sale of a $24 million commercial land loan in 2011.
Commercial real estate mortgage loans, excluding construction and development loans, were comprised of the following loan types at June 30, 2012 and 2011:
Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately $314 million and $180 million, respectively, at June 30, 2012, compared to $331 million and $186 million, respectively, a year ago.
Residential mortgage lending is an important segment of the Companys lending activities. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. The Company selectively adds residential mortgage loans to its portfolio, primarily loans with adjustable rates. The Companys asset mitigation staff handle all foreclosure actions together with outside legal counsel and have never had foreclosure documentation or processes questioned by any party involved in the transaction.
Exposure to market interest rate volatility with respect to long-term fixed rate mortgage loans held for investment is managed by attempting to match maturities and re-pricing opportunities and through loan sales of most fixed rate product. For the first and second quarters of 2012, closed residential mortgage loan production totaled $48 million and $66 million, respectively, of which $20 million and $26 million of fixed rate loans were sold servicing released while adjustable products were added to the portfolio.
At June 30, 2012, approximately $359 million or 64 percent of the Companys residential mortgage balances were adjustable, compared to $314 million or 60 percent at June 30, 2011. Loans secured by residential properties having fixed rates totaled approximately $95 million at June 30, 2012, of which 15- and 30-year mortgages totaled approximately $24 million and $71 million, respectively. Remaining fixed rate balances were comprised of home improvement loans, most with maturities of 10 years or less. In comparison, loans secured by residential properties having fixed rates totaled approximately $89 million at June 30, 2011, with 15- and 30-year fixed rate residential mortgages totaling approximately $27 million and $62 million, respectively. The Company also has a small home equity line portfolio totaling approximately $51 million at June 30, 2012, slightly lower than the $57 million that was outstanding at June 30, 2011.
Perhaps reflecting the impact on lending of an economy beginning to heal, commercial loans increased $8.2 million or 17.1 percent year over year and totaled $56.2 million at June 30, 2012, compared to $48.0 million a year ago. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Companys lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small to medium sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.
The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes, and indirect loans through dealers to finance automobiles) which decreased $1.1 million or 2.1 percent year over year and totaled $50.2 million (versus $51.3 million a year ago). In addition, real estate construction loans to individuals secured by residential properties totaled $16.6 million (versus $6.7 million a year ago), and residential lot loans to individuals which totaled $17.6 million (versus $19.4 million a year ago).
At June 30, 2012, the Company had commitments to make loans of $117 million, compared to $97 million at June 30, 2011.
Over the past five years, the Company has been pursuing an aggressive program to reduce exposure to loan types that have been most impacted by stressed market conditions in order to achieve lower levels of credit loss volatility. The program included aggressive collection efforts, loan sales and early stage loss mitigation strategies focused on the Companys largest loans. Successful execution of this program has significantly reduced our exposure to larger balance loan relationships (including multiple loans to a single borrower or borrower group). Commercial loan relationships greater than $10 million were reduced by $502.4 million to $95.2 million at June 30, 2012 compared with year-end 2007.
Commercial Relationships Greater than $10 Million (dollars in thousands)
Commercial loan relationships greater than $10 million as a percent of tier 1 capital and the allowance for loan losses totaled 40.9 percent at June 30, 2012, compared with 45.8 percent at year-end 2011, 66.5 percent at year-end 2010, 85.9 percent at year-end 2009, 162.1 percent at the end of 2008 and 258.1 percent at the end of 2007.
Concentrations in total construction and development loans and total commercial real estate (CRE) loans have also been substantially reduced. As shown in the table below, under regulatory guidance for construction and land development and commercial real estate loan concentrations as a percentage of total risk based capital, Seacoast Nationals loan portfolio in these categories (as defined in the guidance) have improved.
ALLOWANCE FOR LOAN LOSSES
Management continuously monitors the quality of the loan portfolio and maintains an allowance for loan losses it believes sufficient to absorb probable losses inherent in the loan portfolio. The allowance for loan losses declined to a total of $24,635,000 or 2.02 percent of total loans at June 30, 2012. This amount represents $6,596,000 less than at June 30, 2011 and $930,000 less than at December 31, 2011. The allowance for loan losses framework has two basic elements: specific allowances for loans individually evaluated for impairment, and a formula-based component for pools of homogeneous loans within the portfolio that have similar risk characteristics, which are not individually evaluated. The reduced concentrations, level of nonperforming loans and lower net charge-offs all contributed to a lower risk of loss and the lower allowance for loan losses as of June 30, 2012.
As of June 30, 2012, the specific allowance related to impaired loans individually evaluated totaled $9.3 million, compared to $11.6 million as of June 30, 2011.
Our 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. 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, in compliance with Federal Financial Institution Examination Council guidelines. 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 the legal process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally,
new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.
Management continually evaluates the allowance for loan losses methodology seeking to refine and enhance this process as appropriate, and it is likely that the methodology will continue to evolve over time.
Our Loan Review unit is independent, and performs loan reviews and evaluates a representative sample of credit extensions after the fact for appropriate individual internal risk ratings. Loan Review has the authority to change internal risk ratings and is responsible for assessing the adequacy of credit underwriting. This unit reports directly to the Directors Loan Committee of Seacoast Nationals board of directors.
During the first and second quarters of 2012, net charge-offs totaled $3,415,000 and $6,275,000, respectively, compared to net charge-offs during the first, second, third and fourth quarters of 2011 of $4,031,000, $4,024,000, $2,830,000 and $3,268,000, respectively. Note E to the financial statements (titled Impaired Loans and Valuation Allowance for Loan Losses) summarizes the Companys allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at June 30, 2012. Although there is no assurance that we will not have elevated charge-offs in the future, we believe that we have significantly reduced the risks in our loan portfolio and that with stabilizing market conditions, future charge-offs should decline.
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. The Companys most significant concentration of credit is a portfolio of loans secured by real estate. At June 30, 2012, the Company had $1.115 billion in loans secured by real estate, representing 91.3 percent of total loans, compared to $1.089 billion, representing 91.6 percent at June 30, 2011. In addition, the Company is subject to a geographic concentration of credit because it only operates in central and southeastern Florida. The Companys exposure to construction and land development credits is secured by project assets and personal guarantees and totals $57.2 million at June 30, 2012, up from $49.2 million at June 30, 2011. The Company considers exposure to this industry group, together with an assessment of current trends and expected future financial performance in our evaluation of the adequacy of the allowance for loan losses.
Most emerging problems in the loan portfolio have been in income producing commercial real estate loans where economic conditions continue to strain rental factors, and as rental rates are adjusted down we are reevaluating cash flow and workout strategies. These assets continue to have good cash flow that permits resolution more quickly, as compared to land loans.
While it is the Companys policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, managements judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, which is undertaken both to ascertain whether there are probable losses that must be charged off and to assess the risk characteristics of the portfolio in aggregate. This review considers the judgments of management, and also those of bank regulatory agencies that review the loan portfolio as part of their regular examination process. Our bank regulators have generally agreed with our credit assessment however the regulators could seek additional provisions to our allowance for loan losses, which will reduce our earnings.
Nonperforming assets (NPAs) at June 30, 2012 totaled $55,701,000 and are comprised of $48,482,000 of nonaccrual loans and $7,219,000 of other real estate owned (OREO), compared to $72,042,000 at June 30, 2011 (comprised of $46,165,000 in nonaccrual loans and $25,877,000 of OREO). At June 30, 2012, approximately 98.7 percent of nonaccrual loans were secured with real estate, the remainder principally by marine vessels. See the table below for details about nonaccrual loans. At June 30, 2012, nonaccrual loans have been written down by approximately $18.7 million or 30.7 percent of the original loan balance (including specific impairment reserves). NPAs are subject to changes in the economy, both nationally and locally, changes in monetary and fiscal policies, changes in borrowers payment behaviors and changes in conditions affecting various borrowers from Seacoast National.
As anticipated, the Company closed a number of OREO sales (contracted late in the first quarter of 2012) during the second quarter of 2012, reducing OREO outstanding by $8.3 million or 53.5 percent. Compared to June 30, 2011, OREO was $18.7 million or 72.1 percent lower. This represents the lowest level of OREO since 2008.
As previously disclosed, during the first quarter of 2012 the Company had a $14.4 million performing trouble debt restructure (TDR) commercial real estate loan participation migrate to nonaccrual when the lead bank informed us that they may not renew the loan when it matures in November 2012, but instead will proceed with foreclosure. During the second quarter of 2012, over fifty loans were moved to nonaccrual with an average balance of $326,000, and 98 percent of the loans collateralized by real estate. The table below shows the nonperforming inflows by quarter for 2012, 2011 and 2010:
The Company pursues loan restructurings in selected cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort
to avoid foreclosure. TDRs are part of the Companys loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs be classified as nonaccrual loans until (under certain circumstances) performance can be verified, which usually requires six months of performance under the restructured loan terms. We are optimistic that some of these credits will rehabilitate and be upgraded in the coming year versus migrating to nonperforming or OREO prospectively. Accruing restructured loans totaled $54.8 million at June 30, 2012 compared to $60.2 million at June 30, 2011.
At June 30, 2012 and 2011, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification: