XNAS:SBCF Seacoast Banking Corporation Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File No. 0-13660

 

 

Seacoast Banking Corporation of Florida

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida   59-2260678
(State or Other Jurisdiction of Incorporation or Organization   (I.R.S. Employer Identification No.)
815 COLORADO AVENUE, STUART FL   34994
(Address of Principal Executive Offices)   (Zip Code)

(772) 287-4000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Common Stock, $.10 Par Value – 94,779,981 shares as of June 30, 2012

 

 

 


Table of Contents

INDEX

SEACOAST BANKING CORPORATION OF FLORIDA

 

Part I    FINANCIAL INFORMATION      PAGE 
Item 1.    Financial Statements (Unaudited)   
   Condensed consolidated balance sheets – June 30, 2012 and December 31, 2011      3-4   
   Condensed consolidated statements of income – Three months and six months ended June 30, 2012 and 2011      5   
   Condensed consolidated statements of comprehensive income – Three and six months ended June 30, 2012 and 2011      6   
   Condensed consolidated statements of cash flows – Six months ended June 30, 2012 and 2011      7-8   
   Notes to condensed consolidated financial statements      9-27   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      28-58   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      59   
Item 4.    Controls and Procedures      60   
Part II    OTHER INFORMATION   
Item 1.    Legal Proceedings      61   
Item 1A.    Risk Factors      61   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      61   
Item 3.    Defaults upon Senior Securities      61   
Item 4.    Submission of Matters to a Vote of Security Holders      62   
Item 5.    Other Information      63   
Item 6.    Exhibits      64   

SIGNATURES

     65   

 

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Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

(Dollars in thousands, except share amounts)

   June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from banks

   $ 29,333      $ 41,136   

Interest bearing deposits with other banks

     190,302        125,945   
  

 

 

   

 

 

 

Total cash and cash equivalents

     219,635        167,081   

Securities:

    

Available for sale (at fair value)

     562,691        648,362   

Held for investment (fair values: $17,799 at June 30, 2012 and $20,487 at December 31, 2011)

     17,122        19,977   
  

 

 

   

 

 

 

TOTAL SECURITIES

     579,813        668,339   

Loans held for sale

     11,186        6,795   

Loans

     1,221,354        1,208,074   

Less: Allowance for loan losses

     (24,635     (25,565
  

 

 

   

 

 

 

NET LOANS

     1,196,719        1,182,509   

Bank premises and equipment, net

     35,044        34,227   

Other real estate owned

     7,219        20,946   

Other intangible assets

     1,892        2,289   

Other assets

     55,006        55,189   
  

 

 

   

 

 

 
   $ 2,106,514      $ 2,137,375   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 1,689,584      $ 1,718,741   

Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days

     139,489        136,252   

Borrowed funds

     50,000        50,000   

Subordinated debt

     53,610        53,610   

Other liabilities

     8,378        8,695   
  

 

 

   

 

 

 
     1,941,061        1,967,298   

 

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Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

(Dollars in thousands, except share amounts)

   June 30,
2012
     December 31,
2011
 

SHAREHOLDERS’ EQUITY

     

Preferred stock, authorized 4,000,000 shares, par value $0.10 per share, issued and outstanding 2,000 shares of Series A

     48,121         47,497   

Warrant for purchase of 589,625 shares of common stock at $6.36 per share

     0         3,123   

Common stock, par value $0.10 per share, authorized 300,000,000 shares, issued 94,797,536 and outstanding 94,779,981 shares at June 30, 2012 and issued 94,693,002 and outstanding 94,686,801 shares at December 31, 2011

     9,477         9,469   

Other shareholders’ equity

     107,855         109,988   
  

 

 

    

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     165,453         170,077   
  

 

 

    

 

 

 
   $ 2,106,514       $ 2,137,375   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands, except per share data)

   2012     2011      2012     2011  

Interest and fees on loans

   $ 14,707      $ 15,476       $ 29,481      $ 31,689   

Interest and dividends on securities

     3,332        4,613         7,691        8,336   

Interest on interest bearing deposits and other investments

     267        198         484        431   
  

 

 

   

 

 

    

 

 

   

 

 

 

TOTAL INTEREST INCOME

     18,306        20,287         37,656        40,456   

Interest on deposits

     1,551        2,950         3,500        5,890   

Interest on borrowed money

     748        796         1,507        1,569   
  

 

 

   

 

 

    

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

     2,299        3,746         5,007        7,459   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

     16,007        16,541         32,649        32,997   

Provision for loan losses

     6,455        902         8,760        1,542   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     9,552        15,639         23,889        31,455   

Noninterest income

         

Other income

     5,219        4,547         10,156        8,756   

Securities gains, net

     3,615        0         6,989        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

TOTAL NONINTEREST INCOME

     8,834        4,547         17,145        8,756   

TOTAL NONINTEREST EXPENSES

     20,721        19,073         42,431        38,740   
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     (2,335     1,113         (1,397     1,471   

Provision for income taxes

     0        0         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

     (2,335     1,113         (1,397     1,471   

Preferred stock dividends and accretion of preferred stock discount

     937        937         1,874        1,874   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

   $ (3,272   $ 176       $ (3,271   $ (403
  

 

 

   

 

 

    

 

 

   

 

 

 

PER SHARE COMMON STOCK:

         

Net income (loss) diluted

   $ (0.03   $ 0.00       $ (0.03   $ 0.00   

Net income (loss) basic

     (0.03     0.00         (0.03     0.00   

Cash dividends declared

     0.00        0.00         0.00        0.00   

Average shares outstanding - diluted

     94,452,317        93,492,169         94,423,611        93,475,523   

Average shares outstanding - basic

     93,667,231        93,492,169         93,642,680        93,475,523   

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands)

   2012     2011      2012     2011  

NET INCOME (LOSS)

   $ (2,335   $ 1,113       $ (1,397   $ 1,471   

Other comprehensive income, net of tax:

         

Unrealized gains (losses) on securities available for sale

     (2,598     4,165         (2,309     3,182   
  

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ (4,933   $ 5,278       $ (3,706   $ 4,653   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

      Six Months Ended
June 30,
 

(Dollars in thousands)

   2012     2011  

Cash flows from operating activities

    

Interest received

   $ 40,143      $ 40,622   

Fees and commissions received

     10,105        8,837   

Interest paid

     (5,471     (7,001

Cash paid to suppliers and employees

     (36,229     (30,694

Origination of loans held for sale

     (80,588     (67,572

Proceeds from loans held for sale

     76,197        75,333   

Net change in other assets

     (67     667   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,090        20,192   

Cash flows from investing activities

    

Maturity of securities available for sale

     59,538        59,551   

Maturity of securities held for investment

     3,241        2,639   

Proceeds from sale of securities available for sale

     226,839        2,155   

Purchase of securities available for sale

     (197,847     (223,114

Purchase of securities held for investment

     (500     (1,526

Net new loans and principal repayments

     (26,983     15,818   

Proceeds from the sale of other real estate owned

     13,584        30,284   

Proceeds from sale of Federal Home Loan Bank and Federal Reserve Bank stock

     132        960   

Purchase of Federal Home Loan Bank and Federal Reserve Bank stock

     (60     0   

Additions to bank premises and equipment

     (2,333     (368
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     75,611        (113,601

Cash flows from financing activities

    

Net increase (decrease) in deposits

     (29,153     44,242   

Net increase in federal funds purchased and repurchase agreements

     3,237        4,614   

Purchase of stock warrants, net of related expenses

     (81     0   

Stock based employee benefit plans

     100        39   

Dividends paid

     (1,250     0   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (27,147     48,895   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     52,554        (44,514

Cash and cash equivalents at beginning of period

     167,081        211,405   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 219,635      $ 166,891   
  

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

      Six Months Ended
June 30,
 

(Dollars in thousands)

   2012     2011  

Reconciliation of net income to cash provided by operating activities

    

Net income

   $ (1,397   $ 1,471   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     1,338        1,466   

Amortization of premiums and discounts on securities, net

     2,128        1,116   

Other amortization and accretion, net

     81        (412

Change in loans held for sale, net

     (4,391     7,761   

Provision for loan losses

     8,760        1,542   

Gain on sale of securities

     (6,989     0   

Gain on sale of loans

     (217     (93

Losses on sale and write-downs of other real estate owned

     2,830        1,651   

Losses on dispositions of fixed assets

     177        55   

Change in interest receivable

     676        (114

Change in interest payable

     (463     458   

Change in prepaid expenses

     1,119        1,986   

Change in accrued taxes

     146        273   

Change in other assets

     (67     667   

Change in other liabilities

     359        2,365   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 4,090      $ 20,192   
  

 

 

   

 

 

 

Supplemental disclosure of non cash investing activities:

    

Fair value adjustment to securities

   $ (3,761   $ 5,182   

Transfer from loans to other real estate owned

     4,879        30,369   

Purchase of securities on trade date

     0        10,438   

Securities principal receivable recorded in other assets

     1,985        0   

Transfer of other real estate owned sold to other assets

     1,923        0   

See notes to condensed consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 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 Company’s 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 Company’s assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, 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 Company’s Consolidated Financial Statements.

 

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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.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands, except per share data)

   2012     2011      2012     2011  

Basic:

         

Net income (loss) available to common shareholders

   $ (3,272   $ 176       $ (3,271   $ (403

Average basic shares outstanding

     93,667,231        93,492,169         93,642,680        93,475,523   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic income (loss) EPS

   $ (0.03   $ 0.00       $ (0.03   $ 0.00   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted:

         

Net income (loss) available to common shareholders

   $ (3,272   $ 176       $ (3,271   $ (403

Average basic shares outstanding

     93,667,231        93,492,169         93,642,680        93,475,523   

Employee restricted stock

     785,086        0         780,931        0   

Average diluted shares outstanding

     94,452,317        93,492,169         94,423,611        93,475,523   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted income (loss) EPS

   $ (0.03   $ 0.00       $ (0.03   $ 0.00   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 company’s 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:

 

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Table of Contents

 

(Dollars in thousands)

   Fair Value
Measurements
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

June 30, 2012

           

Available for sale securities (3)

   $ 562,691       $ 1,714       $ 560,977       $ 0   

Loans available for sale

     11,186         0         11,186         0   

Loans (1)

     34,468         0         12,802         21,666   

Other real estate owned (2)

     7,219         0         1,783         5,436   

June 30, 2011

           

Available for sale securities (3)

   $ 611,231       $ 4,224       $ 607,007       $ 0   

Loans available for sale

     4,758         0         4,758         0   

Loans (1)

     32,124         0         10,873         21,251   

Other real estate owned (2)

     25,877         0         2,553         23,324   

 

(1) See Note E. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310.
(2) Fair value is measured on a nonrecurring basis in accordance with ASC 360.
(3) See Note H for further detail of fair value of individual investment categories.

When appraisals are used to determine fair value and the appraisals are based on a market approach, the related loan’s 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 Company’s 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 Company’s provision for loan losses.

 

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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 Company’s financial assets and financial liabilities as of June 30, 2012 and 2011:

 

     June 30, 2012      June 30, 2011  

(Dollars in thousands)

   Carrying
Value
     Fair Value      Carrying
Value
     Fair Value  

Financial Assets

           

Cash and cash equivalents

   $ 219,635       $ 219,635       $ 166,891       $ 166,891   

Securities

     579,813         580,490         636,390         636,610   

Loans, net

     1,196,719         1,226,509         1,157,714         1,161,725   

Loans held for sale

     11,186         11,186         4,758         4,758   

Financial Liabilities

           

Deposit liabilities

     1,689,584         1,691,984         1,681,461         1,687,501   

Borrowings

     189,489         195,123         152,827         156,852   

Subordinated debt

     53,610         32,166         53,610         17,200   

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 bond’s terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are hard to value or that have complicated structure. The Company’s 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.

 

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Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, 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 Company’s 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 Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.

When a loan is modified as a TDR, there is not a direct, material impact on the loans within the consolidated Balance Sheet, as principal balances are generally not forgiven. 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:

 

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Table of Contents
June 30, 2012           Pre-      Post-                

(Dollars in thousands)

Troubled Debt Restructurings Modified

   Number
of
Contracts
     Modification
Outstanding
Recorded
Investment
     Modification
Outstanding
Recorded
Investment
     Specific
Reserve
Recorded
     Valuation
Allowance
Recorded
 

Construction and land development

     1       $ 70       $ 63       $ 0       $ 7   

Residential real estate

     18         3,842         3,604         0         238   

Commercial real estate

     1         616         616         0         0   

Commercial and financial

     0         0         0         0         0   

Consumer

     2         75         72         0         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     22       $ 4,603       $ 4,355       $ 0       $ 248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

     2012  

(Dollars in thousands)

Troubled Debt Restructurings Defaulted

   Number of
Contracts
    Recorded
Investment
 

Construction and land development

     2      $ 93   

Residential real estate

     2        530   

Commercial real estate

     1        225   

Commercial and financial

     0        0   

Consumer

     0        0   
  

 

 

   

 

 

 
     5      $ 848   
  

 

 

   

 

 

 

 

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Table of Contents

 

As of June 30, 2012 and December 31, 2011, the Company’s recorded investments in impaired loans and the related valuation allowances were as follows:

 

     June 30, 2012  

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Valuation
Allowance
 

Impaired Loans with No Related Allowance Recorded:

        

Construction and land development

   $ 1,468       $ 1,953       $ 0   

Commercial real estate

     10,140         14,639         0   

Residential real estate

     15,726         20,821         0   

Commercial and financial

     6         6         0   

Consumer

     431         481         0   

Impaired Loans with an Allowance Recorded:

        

Construction and land development

     3,403         3,479         449   

Commercial real estate

     45,038         48,996         4,615   

Residential real estate

     26,493         26,932         4,099   

Commercial and financial

     34         229         1   

Consumer

     585         598         109   

Total:

        

Construction and land development

     4,871         5,432         449   

Commercial real estate

     55,178         63,635         4,615   

Residential real estate

     42,219         47,753         4,099   

Commercial and financial

     40         235         1   

Consumer

     1,016         1,079         109   
  

 

 

    

 

 

    

 

 

 
   $ 103,324       $ 118,134       $ 9,273   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2011  

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Valuation
Allowance
 

Impaired Loans with No Related Allowance Recorded:

        

Construction and land development

   $ 1,616       $ 2,431       $ 0   

Commercial real estate

     19,101         22,219         0   

Residential real estate

     9,128         13,442         0   

Commercial and financial

     16         16         0   

Consumer

     481         523         0   

Impaired Loans with an Allowance Recorded:

        

Construction and land development

     3,777         4,131         375   

Commercial real estate

     39,199         39,824         3,385   

Residential real estate

     26,140         26,940         3,099   

Commercial and financial

     101         101         8   

Consumer

     578         584         112   

Total:

        

Construction and land development

     5,393         6,562         375   

Commercial real estate

     58,300         62,043         3,385   

Residential real estate

     35,268         40,382         3,099   

Commercial and financial

     117         117         8   

Consumer

     1,059         1,107         112   
  

 

 

    

 

 

    

 

 

 
   $ 100,137       $ 110,211       $ 6,979   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

For the six months ended June 30, 2012 and 2011, the Company’s average recorded investments in impaired loans and related interest income were as follows:

 

     Six Months Ended
June 30, 2012
     Six Months Ended
June 30, 2011
 

(Dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired Loans with No Related Allowance

           

Recorded:

           

Construction & land development

   $ 1,569       $ 2       $ 3,191       $ 7   

Commercial real estate

     12,167         155         23,702         214   

Residential real estate

     10,145         137         8,912         22   

Commercial and financial

     11         0         1,536         0   

Consumer

     486         1         342         1   

Impaired Loans with an Allowance Recorded:

           

Construction & land development

     3,750         64         23,748         76   

Commercial real estate

     43,870         902         44,345         915   

Residential real estate

     27,648         429         27,408         436   

Commercial and financial

     39         8         203         2   

Consumer

     619         11         809         15   

Total:

           

Construction & land development

     5,319         66         26,939         83   

Commercial real estate

     56,037         1,057         68,047         1,129   

Residential real estate

     37,793         566         36,320         458   

Commercial and financial

     50         8         1,739         2   

Consumer

     1,105         12         1,151         16   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 100,304       $ 1,709       $ 134,196       $ 1,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

 

Transactions in the allowance for loan losses for the three and six-month periods ended June 30, 2012 are summarized as follows:

 

     Allowance for Loan Losses for the Three Months Ended June 30, 2012  

(Dollars in thousands)

   Beginning
Balance
     Provision
for Loan
Losses
    Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Ending
Balance
 

Construction & land development

   $ 1,509       $ 24      $ (249   $ 71       $ (178   $ 1,355   

Commercial real estate

     10,911         4,415        (3,444     95         (3,349     11,977   

Residential real estate

     10,826         2,042        (2,770     214         (2,556     10,312   

Commercial and financial

     417         72        (194     34         (160     329   

Consumer

     792         (98     (41     9         (32     662   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 24,455       $ 6,455      $ (6,698   $ 423       $ (6,275   $ 24,635   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses for the Six Months Ended June 30, 2012  

(Dollars in thousands)

   Beginning
Balance
     Provision
for Loan
Losses
    Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Ending
Balance
 

Construction & land development

   $ 1,883       $ (135   $ (479   $ 86       $ (393   $ 1,355   

Commercial real estate

     11,477         6,060        (5,731     171         (5,560     11,977   

Residential real estate

     10,966         2,906        (3,824     264         (3,560     10,312   

Commercial and financial

     402         150        (291     68         (223     329   

Consumer

     837         (221     (54     100         46        662   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 25,565       $ 8,760      $ (10,379   $ 689       $ (9,690   $ 24,635   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Transactions in the allowance for loan losses for the three and six-month periods ended June 30, 2011 are summarized as follows:

 

     Allowance for Loan Losses for the Three Months Ended June 30, 2011  

(Dollars in thousands)

   Beginning
Balance
     Provision
for Loan
Losses
    Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Ending
Balance
 

Construction & land development

   $ 4,112       $ (244   $ (1,848   $ 11       $ (1,837   $ 2,031   

Commercial real estate

     16,767         153        (676     7         (669     16,251   

Residential real estate

     11,530         1,403        (1,631     73         (1,558     11,375   

Commercial and financial

     739         (212     0        45         45        572   

Consumer

     1,205         (198     (22     17         (5     1,002   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 34,353       $ 902      $ (4,177   $ 153       $ (4,024   $ 31,231   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses for the Six Months Ended June 30, 2011  

(Dollars in thousands)

   Beginning
Balance
     Provision
for Loan
Losses
    Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Ending
Balance
 

Construction & land development

   $ 7,214       $ (1,802   $ (3,698   $ 317       $ (3,381   $ 2,031   

Commercial real estate

     18,563         (1,073     (1,257     18         (1,239     16,251   

Residential real estate

     10,102         4,678        (3,554     149         (3,405     11,375   

Commercial and financial

     480         (40     0        132         132        572   

Consumer

     1,385         (221     (204     42         (162     1,002   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 37,744       $ 1,542      $ (8,713   $ 658       $ (8,055   $ 31,231   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio and related allowance as of June 30, 2012 and 2011 is shown in the following tables:

 

                                                                                                                 
      At June 30, 2012  
      Individually Evaluated  for
Impairment
     Collectively Evaluated  for
Impairment
     Total  

(Dollars in thousands)

   Carrying
Value
     Associated
Allowance
     Carrying
Value
     Associated
Allowance
     Carrying
Value
     Associated
Allowance
 

Construction & land development

   $ 4,871       $ 449       $ 52,357       $ 906       $ 57,228       $ 1,355   

Commercial real estate

     55,178         4,615         438,438         7,362         493,616         11,977   

Residential real estate

     42,219         4,099         521,716         6,213         563,935         10,312   

Commercial and financial

     40         1         56,180         328         56,220         329   

Consumer

     1,016         109         49,339         553         50,355         662   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 103,324       $ 9,273       $ 1,118,030       $ 15,362       $ 1,221,354       $ 24,635   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
      At June 30, 2011  
      Individually Evaluated  for
Impairment
     Collectively Evaluated  for
Impairment
     Total  

(Dollars in thousands)

   Carrying
Value
     Associated
Allowance
     Carrying
Value
     Associated
Allowance
     Carrying
Value
     Associated
Allowance
 

Construction & land development

   $ 5,738       $ 464       $ 43,455       $ 1,567       $ 49,193       $ 2,031   

Commercial real estate

     64,245         7,316         452,690         8,935         516,935         16,251   

Residential real estate

     35,218         3,690         487,844         7,685         523,062         11,375   

Commercial and financial

     111         10         47,901         562         48,012         572   

Consumer

     1,091         102         50,652         900         51,743         1,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 106,403       $ 11,582       $ 1,082,542       $ 19,649       $ 1,188,945       $ 31,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Company’s consolidated financial condition, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.

NOTE 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 Company’s 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 Bank’s status as “well-capitalized” for bank regulatory purposes.

 

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Table of Contents

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:

 

     June 30, 2012  

(Dollars in thousands)

   Gross
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

SECURITIES AVAILABLE FOR SALE

          

U.S. Treasury securities and obligations of U.S. Government Sponsored Entities

   $ 1,699       $ 15       $ 0      $ 1,714   

Mortgage-backed securities of U.S. Government Sponsored Entities

     175,307         3,576         (343     178,540   

Collateralized mortgage obligations of U.S. Government Sponsored Entities

     306,900         2,630         (894     308,636   

Private collateralized mortgage obligations

     73,183         568         (857     72,894   

Obligations of state and political subdivisions

     847         60         0        907   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 557,936       $ 6,849       $ (2,094   $ 562,691   
  

 

 

    

 

 

    

 

 

   

 

 

 

SECURITIES HELD FOR INVESTMENT

          

Collateralized mortgage obligations of U.S. Government Sponsored Entities

   $ 7,393       $ 0       $ (144   $ 7,249   

Private collateralized mortgage obligations

     1,569         43         0        1,612   

Obligations of state and political subdivisions

     6,660         726         (3     7,383   

Other

     1,500         55         0        1,555   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 17,122       $ 824       $ (147   $ 17,799   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     December 31, 2011  

(Dollars in thousands)

   Gross
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

SECURITIES AVAILABLE FOR SALE

          

U.S. Treasury securities and obligations of U.S. Government Sponsored Entities

   $ 1,699       $ 25       $ 0      $ 1,724   

Mortgage-backed securities of U.S. Government Sponsored Entities

     135,665         2,819         (37     138,447   

Collateralized mortgage obligations of U.S. Government Sponsored Entities

     428,139         9,111         (316     436,934   

Private collateralized mortgage obligations

     73,247         330         (3,487     70,090   

Obligations of state and political subdivisions

     1,097         70         0        1,167   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 639,847       $ 12,355       $ (3,840   $ 648,362   
  

 

 

    

 

 

    

 

 

   

 

 

 

SECURITIES HELD FOR INVESTMENT

          

Collateralized mortgage obligations of U.S. Government Sponsored Entities

   $ 10,475       $ 0       $ (136   $ 10,339   

Private collateralized mortgage obligations

     1,840         40         0        1,880   

Obligations of state and political subdivisions

     6,662         570         0        7,232   

Other

     1,000         36         0        1,036   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 19,977       $ 646       $ (136   $ 20,487   
  

 

 

    

 

 

    

 

 

   

 

 

 

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.

 

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Table of Contents

 

     Held for Investment      Available for Sale  

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in less than one year

   $ 0       $ 0       $ 1,699       $ 1,714   

Due after one year through five years

     376         381         441         475   

Due after five years through ten years

     1,254         1,358         406         432   

Due after ten years

     5,030         5,644         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,660         7,383         2,546         2,621   

Mortgage-backed securities of Government Sponsored Entities

     0         0         175,307         178,540   

Collateralized mortgage obligations of Government Sponsored Entities

     7,393         7,249         306,900         308,636   

Private collateralized mortgage obligations

     1,569         1,612         73,183         72,894   

No contractual maturity

     1,500         1,555         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,122       $ 17,799       $ 557,936       $ 562,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

     June 30, 2012  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Mortgage-backed securities of U.S. Government Sponsored Entities

   $ 45,484       $ (343   $ 0       $ 0      $ 45,484       $ (343

Collateralized mortgage obligations of U.S. Government Sponsored Entities

     132,055         (1,038     0         0        132,055         (1,038

Private collateralized mortgage obligations

     9,768         (166     34,217         (691     43,985         (857

Obligations of state and political subdivisions

     430         (3     0         0        430         (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 187,737       $ (1,550   $ 34,217       $ (691   $ 221,954       $ (2,241
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

23


Table of Contents
      December 31, 2011  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Mortgage-backed securities of U.S. Government Sponsored Entities

   $ 18,800       $ (37   $ 0       $ 0      $ 18,800       $ (37

Collateralized mortgage obligations of U.S. Government Sponsored Entities

     59,913         (452     0         0        59,913         (452

Private collateralized mortgage obligations

     32,615         (2,001     27,282         (1,486     59,897         (3,487
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 111,328       $ (2,490   $ 27,282       $ (1,486   $ 138,610       $ (3,976
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

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Table of Contents

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 Company’s credit losses moderate prospectively, and the Company generates increased taxable income, increased reliance on management’s 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.

NOTE J—LOANS

 

Information relating to loans as of June 30, 2012 and December 31, 2011 is summarized as follows:

 

(Dollars in thousands)

   June 30,
2012
     December 31
2011
 

Construction and land development

   $ 57,228       $ 49,184   

Commercial real estate

     493,616         508,353   

Residential real estate

     563,935         546,246   

Commercial and financial

     56,220         53,105   

Consumer

     50,133         50,611   

Other loans

     222         575   
  

 

 

    

 

 

 

Total

   $ 1,221,354       $ 1,208,074   
  

 

 

    

 

 

 

 

(1) Net loan balances as of June 30, 2012 and December 31, 2011 are net of deferred costs of $1,771,000 and $1,632,000, respectively.

 

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:

 

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Table of Contents
                                                                                               
     June 30, 2012  

(Dollars in thousands)

   Accruing
30-59 Days
Past Due
     Accruing
60-89 Days
Past Due
     Accruing
Greater
Than

90 Days
     Nonaccrual      Current      Total
Financing
Receivables
 

Construction & land development

   $ 143       $ 0       $ 0       $ 2,086       $ 54,999       $ 57,228   

Commercial real estate

     3,587         634         0         25,305         464,090         493,616   

Residential real estate

     1,726         335         0         20,446         541,428         563,935   

Commercial and financial

     7         0         0         40         56,173         56,220   

Consumer

     47         6         0         605         49,475         50,133   

Other

     0         0         0         0         222         222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,510       $ 975       $ —         $ 48,482       $ 1,166,387       $ 1,221,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                               
     December 31, 2011  

(Dollars in thousands)

   Accruing
30-59 Days
Past Due
     Accruing
60-89 Days
Past Due
     Accruing
Greater
Than

90 Days
     Nonaccrual      Current      Total
Financing
Receivables
 

Construction & land development

   $ 6       $ 215       $ 0       $ 2,227       $ 46,736       $ 49,184   

Commercial real estate

     836         0         0         13,120         494,397         508,353   

Residential real estate

     2,979         607         0         12,555         530,105         546,246   

Commercial and financial

     80         0         0         16         53,009         53,105   

Consumer

     246         74         0         608         49,683         50,611   

Other

     0         0         0         0         575         575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,147       $ 896       $ 0       $ 28,526       $ 1,174,505       $ 1,208,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful” and these loans are monitored on an ongoing basis. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as 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 management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.

Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager.  The following 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:

 

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Table of Contents
     June 30, 2012  

(Dollars in thousands)

   Construction
& Land
Development
     Commercial
Real Estate
     Residential
Real Estate
     Commercial
and
Financial
     Consumer
Loans
     Total  

Pass

   $ 50,121       $ 379,429       $ 520,701       $ 55,159       $ 48,637       $ 1,054,047   

Special mention

     2,236         36,572         939         823         420         40,990   

Substandard

     0         22,437         76         198         282         22,993   

Doubtful

     0         0         0         0         0         0   

Nonaccrual

     2,086         25,305         20,446         40         605         48,482   

Troubled debt restructures

     2,785         29,873         21,773         0         411         54,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 57,228       $ 493,616       $ 563,935       $ 56,220       $ 50,355       $ 1,221,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  

(Dollars in thousands)

   Construction
& Land
Development
     Commercial
Real Estate
     Residential
Real Estate
     Commercial
and
Financial
     Consumer
Loans
     Total  

Pass

   $ 42,899       $ 387,161       $ 505,316       $ 51,375       $ 49,299       $ 1,036,050   

Special mention

     802         57,334         5,529         1,445         523         65,633   

Substandard

     90         5,558         133         168         305         6,254   

Doubtful

     0         0         0         0         0         0   

Nonaccrual

     2,227         13,120         12,555         16         608         28,526   

Troubled debt restructures

     3,166         45,180         22,713         101         451         71,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,184       $ 508,353       $ 546,246       $ 53,105       $ 51,186       $ 1,208,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

SECOND QUARTER 2012

The following discussion and analysis is designed to provide a better understanding of the significant factors related to the Company’s results of operations and financial condition. Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report. For purposes of the following discussion, the words the “Company,” “we,” “us,” and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.

EARNINGS OVERVIEW

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.

 

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Table of Contents

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 2011’s 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.

 

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Table of Contents

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 2012’s 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 2011’s 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 Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:

 

   

the allowance and the provision for loan losses;

 

   

the fair value and other than temporary impairment of securities;

 

   

realization of deferred tax assets; and

 

   

contingent liabilities.

The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information.

 

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Table of Contents

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 Company’s 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 Company’s securities holdings are primarily investment grade. As of June 30, 2012, the Company’s 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.

 

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Table of Contents

Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company’s other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.

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 Services—Depository 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 Company’s credit losses continue to moderate prospectively as the Company continues to generate taxable income, increased reliance on management’s 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.

Contingent Liabilities

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

 

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Table of Contents

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 2012’s first quarter by $637,000 or 3.8 percent, and lower than second quarter 2011’s result by $544,000 or 3.3 percent. Lower asset yields as a result of the Federal Reserve’s actions to lower interest rates and the restructuring of the investment portfolio to lower pricing risks, reduced first and second quarter 2012’s net interest income. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters:

 

(Dollars in thousands)

   Net Interest
Income

(tax  equivalent)
     Net Interest
Margin
(tax equivalent)
 

Second quarter 2011

   $ 16,596         3.36

Third quarter 2011

     16,925         3.44   

Fourth quarter 2011

     17,020         3.42   

First quarter 2012

     16,689         3.33   

Second quarter 2012

     16,052         3.17   

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 Company’s 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.

 

33


Table of Contents

(Dollars in thousands

   Second
Quarter
2012
    First
Quarter
2012
    Fourth
Quarter
2011
    Third
Quarter
2011
    Second
Quarter
2011
 

Non-taxable interest income

   $ 85      $ 92      $ 87      $ 109      $ 109   

Tax Rate

     35     35     35     35     35

Net interest income (TE)

   $ 16,052      $ 16,689      $ 17,020      $ 16,925      $ 16,596   

Total net interest income (not TE)

     16,007        16,642        16,974        16,868        16,541   

Net interest margin (TE)

     3.17     3.33     3.42     3.44     3.36

Net interest margin (not TE)

     3.16        3.32        3.41        3.43        3.35   

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 Company’s 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 2011’s 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.

 

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Table of Contents

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 Company’s 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 Company’s 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:

 

     Second
Quarter
    First
Quarter
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
 
     2012     2012     2011     2011     2011  

Rate

     0.59     0.68     0.77     0.87     0.95

During 2012, the Company’s 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 Company’s 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 2011’s second quarter rate. Certificate of deposit (“CD”) rates paid were also lower for the second quarter of 2012, averaging 1.12 percent,

 

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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 Company’s policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses 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

 

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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 Company’s 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 National’s 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 Company’s 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 Company’s 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 borrower’s credit was fully documented as part of the Company’s 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

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 2011’s 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.

 

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Noninterest income for the second and first quarters of 2012, and the second quarter of 2011, is detailed as follows:

 

     Second
Quarter
     First
Quarter
     Second
Quarter
 

(Dollars in thousands)

   2012      2011      2011  

Service charges on deposits

   $ 1,487       $ 1,461       $ 1,546   

Trust income

     564         573         517   

Mortgage banking fees

     902         623         509   

Brokerage commissions and fees

     298         234         223   

Marine finance fees

     244         330         349   

Debit card income

     1,154         1,071         995   

Other deposit-based EFT fees

     84         99         79   

Other income

     486         546         329   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,219       $ 4,937       $ 4,547   
  

 

 

    

 

 

    

 

 

 

For the second quarter of 2012, revenues from the Company’s 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 Company’s wealth management services increased $86,000 or 5.4 percent to $1,669,000. Economic uncertainty is the primary issue affecting clients of the Company’s 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 2011’s 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 industry’s practices around overdraft programs and additional regulation could further reduce fee income for the Company’s 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 2012’s 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.

 

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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 Company’s branch personnel. Mortgage banking fees in the second quarter of 2012 increased $393,000 or 77.2 percent from 2011’s 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.

NONINTEREST EXPENSES

The Company’s overhead ratio was in the low to mid 60’s 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 2011’s 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

 

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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 Company’s 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 Company’s 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.

 

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The FDIC assessment for the first and second quarters of 2012 totaled $706,000 and $707,000, respectively, compared to first and second quarter 2011’s assessments of $959,000 and $688,000. As of April 1, 2011, the FDIC’s 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 Company’s assessments under the FDIC’s 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.

CAPITAL RESOURCES

The Company’s 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. Seacoast’s management uses certain “non-GAAP” financial measures in its analysis of the Company’s capital adequacy. Seacoast’s 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 Company’s 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, 2011’s 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 Company’s 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.

 

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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 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.

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:

 

     Seacoast
(Consolidated)
    Seacoast
National
    Minimum to be
Well Capitalized*
 

June 30, 2012:

      

Tier 1 capital ratio

     17.17     16.46     6

Total risk-based capital ratio

     18.43     17.72     10

Tier 1 leverage ratio

     9.79     9.38     5

 

* For subsidiary bank only

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.

FINANCIAL CONDITION

Total assets increased $23,651,000 or 1.1 percent from June 30, 2011 to $2,106,514,000 at June 30, 2012.

 

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LOAN PORTFOLIO

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:

 

(Dollars in thousands)

   June 30,
2012
     December 31
2011
     June 30,
2011
 

Construction and land development

   $ 57,228       $ 49,184       $ 49,193   

Commercial real estate

     493,616         508,353         516,935   

Residential real estate

     563,935         546,246         523,062   

Commercial and financial

     56,220         53,105         48,012   

Consumer

     50,133         50,611         51,351   

Other loans

     222         575         392   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,221,354       $ 1,208,074       $ 1,188,945   
  

 

 

    

 

 

    

 

 

 

 

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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:

 

     June 30,  
     2012      2011  
(In millions)    Funded      Unfunded      Total      Funded      Unfunded      Total  

Construction and land development *

                 

Residential:

                 

Condominiums

   $ 0.0       $ 0.0       $ 0.0       $ 0.0       $ 0.0       $ 0.0   

Town homes

     0.0         0.0         0.0         0.0         0.0         0.0   

Single family residences

     0.0         0.0         0.0         0.0         0.0         0.0   

Single family land and lots

     5.9         0.0         5.9         6.5         0.0         6.5   

Multifamily

     4.7         0.0         4.7         5.7         0.0         5.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     10.6         0.0         10.6         12.2         0.0         12.2   

Commercial:

                 

Office buildings

     0.0         0.0         0.0         0.0         0.4         0.4   

Retail trade

     0.0         0.0         0.0         0.0         0.0         0.0   

Land

     10.7         0.0         10.7         10.3         0.0         10.3   

Industrial

     0.0         0.0         0.0         0.0         0.0         0.0   

Healthcare

     0.0         0.0         0.0         0.0         0.0         0.0   

Churches and educational facilities

     0.3         0.0         0.3         0.0         0.0         0.0   

Lodging

     0.0         0.0         0.0         0.0         0.0         0.0   

Convenience stores

     1.4         0.0         1.4         0.6         0.0         0.6   

Marina

     0.0         0.0         0.0         0.0         0.0         0.0   

Other

     0.0         0.0         0.0         0.0         0.0         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     12.4         0.0         12.4         10.9         0.4         11.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential and commercial construction and land development

     23.0         0.0         23.0         23.1         0.4         23.5   

Individuals:

                 

Lot loans

     17.6         0.0         17.6         19.4         0.0         19.4   

Construction

     16.6         17.6         34.2         6.7         11.2         17.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     34.2         17.6         51.8         26.1         11.2         37.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57.2       $ 17.6       $ 74.8       $ 49.2       $ 11.6       $ 60.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Reassessment of collateral assigned to a particular loan over time may result in amounts being reassigned to a more appropriate loan type representing the loan’s intended purpose, and for comparison purposes prior period amounts have been restated to reflect the change.

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.

 

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Commercial real estate mortgage loans, excluding construction and development loans, were comprised of the following loan types at June 30, 2012 and 2011:

 

     June 30,  
     2012      2011  

(In millions)

   Funded      Unfunded      Total      Funded      Unfunded      Total  

Office buildings

   $ 113.4       $ 0.9       $ 114.3       $ 120.0       $ 0.8       $ 120.8   

Retail trade

     128.5         0.0         128.5         149.6         0.0         149.6   

Industrial

     72.0         0.1         72.1         68.5         0.1         68.6   

Healthcare

     42.0         1.5         43.5         26.3         0.9         27.2   

Churches and educational facilities

     26.7         0.0         26.7         28.2         0.0         28.2   

Recreation

     3.1         0.0         3.1         2.8         0.0         2.8   

Multifamily

     8.3         0.0         8.3         16.8         0.0         16.8   

Mobile home parks

     2.1         0.0         2.1         2.4         0.0         2.4   

Lodging

     19.3         0.0         19.3         20.0         0.0         20.0   

Restaurant

     4.7         0.0         4.7         4.3         0.0         4.3   

Agriculture

     7.4         1.3         8.7         9.2         1.2         10.4   

Convenience stores

     15.4         0.0         15.4         20.0         0.0         20.0   

Marina

     21.5         0.0         21.5         21.5         0.0         21.5   

Other

     29.3         0.2         29.5         27.3         0.3         27.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 493.7       $ 4.0       $ 497.7       $ 516.9       $ 3.3       $ 520.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Company’s 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 Company’s 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 Company’s 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.

 

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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 Company’s lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small to medium sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.

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.

Loan Concentrations

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 Company’s 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)

 

     June 30,      December 31,  

(Dollars in thousands)

   2012      2011      2010      2009      2008      2007  

Performing

   $ 73,375       $ 84,610       $ 112,469       $ 145,797       $ 374,241       $ 592,408   

Performing TDR*

     10,623         25,494         28,286         31,152         0         0   

Nonaccrual

     11,179         0         20,913         28,525         14,873         5,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95,177       $ 110,104       $ 161,668       $ 205,474       $ 389,114       $ 597,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Top 10 Customer Loan Relationships

   $ 123,388       $ 128,739       $ 151,503       $ 173,162       $ 228,800       $ 266,702   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* TDR = Troubled debt restructures

 

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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 National’s loan portfolio in these categories (as defined in the guidance) have improved.

 

     June 30,     December 31,  
     2012     2011     2010     2009     2008     2007  

Construction and land development loans to total risk based capital

     27     22     39     81     206     265

CRE loans to total risk based capital

     172     174     218     274     389     390

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,

 

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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 National’s 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 Company’s allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at 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 Company’s 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 Company’s 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 Company’s policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, management’s judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the 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.

 

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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

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:

 

New Nonperforming Loans

(Dollars in thousands)

   2012      2011      2010  

First quarter

   $ 20,207       $ 11,349       $ 11,895   

Second quarter

     17,291         19,874         22,560   

Third quarter

        4,137         8,151   

Fourth quarter

        4,349         9,990   

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

 

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to avoid foreclosure. TDRs are part of the Company’s 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.

 

     Nonaccrual Loans      Accruing  

June 30, 2012

(Dollars in thousands)

   Non-
Current
     Per-
forming
     Total      Restructured
Loans
 

Construction & land development

           

Residential

   $ 660       $ 393       $ 1,053       $ 2,194   

Commercial

     0         32         32         0   

Individuals

     377         624         1,001         591   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,037         1,049         2,086         2,785   

Residential real estate mortgages

     9,720         10,726         20,446         21,773   

Commercial real estate mortgages

     2,957         22,348         25,305         29,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans

     13,714         34,123         47,837         54,431   

Commercial and financial

     0         40         40         0   

Consumer

     46         559         605         411   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,760       $ 34,722       $ 48,482       $ 54,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012 and 2011, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:

 

     2012      2011  

(Dollars in thousands)

   Number      Amount      Number      Amount  

Rate reduction

     114       $ 27,020         91       $ 24,175   

Maturity extended with change in terms

     104         38,608         113         45,850   

Forgiveness of principal

     1         2,193         2         2,434