Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries (the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report.
The emphasis of this discussion will be on the
three
months ended
March 31, 2019
compared to the
three
months ended
March 31, 2018
for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of
March 31, 2019
compared to
December 31,
2018
.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.
For purposes of the following discussion, the words the “Company”, “we”, “us”, and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.
Special Cautionary Notice Regarding Forward-Looking Statements
Certain statements made or incorporated by reference herein which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”) or its wholly-owned banking subsidiary, Seacoast National Bank ("Seacoast Bank") to be materially different from those set forth in the forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may”, “will”, “anticipate”, “assume”, “should”, “support”, “indicate”, “would”, “believe”, “contemplate”, “expect”, “estimate”, “continue”, “further”, “plan”, “point to”, “project”, “could”, “intend”, “target” or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation.
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•
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the effects of current and future economic, business and market conditions in the United States generally or in the communities we serve;
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changes in governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
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legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;
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changes in accounting policies, rules and practices and applications or determinations made thereunder, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “Commission” or “SEC”), and the Public Company Accounting Oversight Board (the “PCAOB”);
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the risks of changes in interest rates on the levels, composition and costs of deposits, including the risk of losing customer checking and savings account deposits as customers pursue other, high-yield investments, which could increase our funding costs;
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the risks of changes in interest rates on loan demand, and the values and liquidity of loan collateral, debt securities, and interest sensitive assets and liabilities;
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changes in borrower credit risks and payment behaviors;
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changes in the availability and cost of credit and capital in the financial markets;
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changes in the prices, values and sales volumes of residential and commercial real estate in the United States and in the communities we serve, which could impact write-downs of assets, our ability to liquidate non-performing assets, realized losses on the disposition of non-performing assets and increased credit losses;
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our ability to comply with any requirements imposed on us or our banking subsidiary, Seacoast Bank by regulators and the potential negative consequences that may result;
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the effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally could require us to change certain business practices, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses;
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our concentration in commercial real estate loans;
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the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit conditions, including changes in borrowers’ credit risks and payment behaviors from those used in our loan portfolio stress test;
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the effects of competition from a wide variety of local, regional, national and other traditional and non-traditional providers of financial, investment and insurance services;
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the failure of assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates;
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the impact on the valuation of our investments due to market volatility or counterparty payment risk;
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statutory and regulatory restrictions on our ability to pay dividends to our shareholders;
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any applicable regulatory limits on Seacoast Bank’s ability to pay dividends to us;
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increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;
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the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;
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our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets;
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changes in technology or products that may be more difficult, costly, or less effective than anticipated;
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our ability to identify and address increased cybersecurity risks, including data security breaches, malware, "denial of service" attacks, "hacking", and identity theft, a failure of which could result in potential business disruptions or financial losses;
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inability of our risk management framework to manage risks associated with our business such as credit risk and operational risk, including third party vendors and other service providers;
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dependence on key suppliers or vendors to obtain equipment or services for our business on acceptable terms;
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reduction in or the termination of our ability to use the mobile-based platform that is critical to our business growth strategy, including a failure in or breach of our operational or security systems or those of its third party service providers;
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the effects of war or other conflicts, acts of terrorism, natural disasters or other catastrophic events that may affect general economic conditions;
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unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
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our ability to maintain adequate internal controls over financial reporting;
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potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;
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the risks that our deferred tax assets could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated and sales of our capital stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes; and
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other factors and risks described under “Risk Factors” herein and in any of our subsequent reports filed with the SEC and available on its website at www.sec.gov.
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All written or oral forward-looking statements that are made by us or are attributable to us are expressly qualified in their entirety by this cautionary notice. We assume no obligation to update, revise or correct any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.
First Quarter 2019
Vision 2020 Update
We remain confident in our ability to achieve our Vision 2020 targets announced in 2017.
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Vision 2020 Targets
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Return on Tangible Assets
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1.30% +
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Return on Tangible Common Equity
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16% +
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Efficiency Ratio
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Below 50%
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First Quarter Operating Highlights
Modernizing How We Sell
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In the first quarter, we completed a pilot program for automated fulfillment of small business loan products. The pilot was limited to a select group of products, and offers auto-decisioning and digitized onboarding. Once fully implemented, this technology will significantly reduce the cost to originate small business loans to current customers, while maintaining our strict credit underwriting culture.
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Lowering Our Cost to Serve
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We consolidated one banking center location in the first quarter in alignment with our Vision 2020 objective of reducing our footprint to meet the evolving needs of our customers. We expect a six-month payback period, and recorded $0.2 million in associated expenses. We have two additional banking center consolidations planned in 2019. We expect negligible customer impact given the proximity to other banking centers and increased usage of digital channels by these customers.
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At quarter end, average deposits per banking center exceeded $112 million, up from $96 million in the first quarter of 2018.
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During the second quarter of 2019, our continued focus on efficiency and streamlining operations will result in a reduction of approximately 50 full time equivalent employees. While the Company will incur severance charges of approximately $1.5 million, this in combination with other expense initiatives, including two more banking center closures will result in $10 million in pre-tax expense reductions annually.
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Driving Improvements in How Our Business Operates
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Late in 2018, we launched a large-scale initiative to implement a fully digital loan origination platform across all business banking units. This follows the successful rollout of our fully digital mortgage banking origination platform. This investment will provide financial returns through a significant improvement in efficiency and banker productivity in 2020 and beyond.
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Scaling and Evolving Our Culture
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We continue to invest in business bankers. In the first quarter we on-boarded 10 new business bankers in order to fully support the strong markets we serve and to advance our growth and operating leverage objectives. We have a robust pipeline of talent as we enter the second quarter and will continue to opportunistically add top-tier bankers in both the South Florida and Tampa markets.
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In the first quarter of 2019, Seacoast Bank’s 401(k) plan was recognized as a Best in Class 401(k) Plan for 2019 by PLANSPONSOR magazine. Associate participation in the 401(k) plan and Seacoast's contribution match differentiates us from industry peers.
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Results of Operations
Earnings Overview
First
Quarter
2019
Results
We remain confident in our ability to achieve our Vision 2020 targets announced at our Investor Day in early 2017. These include a return on tangible assets of 1.30%+, a return on tangible common equity of 16%+, and an efficiency ratio below 50%. For the
first
quarter of
2019
, Seacoast reported net income of
$22.7 million
, or
$0.44
per average common diluted share, compared to
$16.0 million
, or
$0.31
, for the prior quarter and
$18.0 million
, or
$0.38
, for the
first
quarter of
2018
. Adjusted net income
1
(a non-GAAP measure) for the first quarter of
2019
totaled
$24.2 million
, or
$0.47
, per average common diluted share, compared to
$23.9 million
, or
$0.47
, for the prior quarter and
$19.3 million
, or
$0.40
, for the
first
quarter of
2018
.
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First
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Fourth
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First
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Quarter
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Quarter
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Quarter
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2019
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2018
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2018
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Return on average tangible assets
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1.48
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%
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1.05
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%
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1.34
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%
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Return on average tangible shareholders' equity
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14.86
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10.94
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14.41
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Efficiency ratio
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56.55
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65.76
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57.80
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Adjusted return on average tangible assets
1
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1.50
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%
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1.49
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%
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1.38
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%
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Adjusted return on average tangible shareholders' equity
1
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15.11
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15.44
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14.82
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Adjusted efficiency ratio
1
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55.81
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54.19
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57.05
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1
Non-GAAP measure. See the reconciliation of net income to adjusted net income.
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For the
three
months ended
March 31, 2019
, our adjusted return on average tangible assets
1
and adjusted return on average tangible shareholders' equity
1
improved when compared to the same period in the prior year. This improvement is the result of higher adjusted net income
1
in the current year to date period, partially offset by higher tangible assets and higher tangible shareholders' equity. The improvement in the adjusted efficiency ratio
1
reflects our disciplined expense control and focus on increasing revenue.
Net Interest Income and Margin
Net interest income (on a fully taxable equivalent basis) for the quarter totaled
$60.9 million
, increasing
$0.8 million
or
1%
during the
first
quarter of
2019
compared to prior quarter, and was
$11.0 million
or
22%
higher than
first
quarter of
2018
. Net interest margin was
4.02%
in the
first
quarter
2019
, compared to
4.00%
in the
fourth
quarter
2018
and
3.80%
in the
first
quarter
2018
. The net interest margin continues to benefit from positive remixing of interest earning assets as well as actions taken to reduce reliance on wholesale Federal Home Loan Bank advances and migrate funding towards lower rate deposit balances during the quarter.
Loan growth, balance sheet mix and increases in benchmark interest rates have been the primary forces affecting net interest income and net interest margin results. Acquisitions have further accelerated these trends. Organic loan growth of $299.8 million, or 8%, since
March 31, 2018
, plus the addition of
$631.5 million
in loans from the
First Green
merger contributed to the net interest income improvement year over year for the
first
quarter ended
March 31, 2019
. Net interest income for
2019
should continue to benefit from the impact of the
First Green
acquisition completed on October 19, 2018.
The following table details the trend for net interest income and margin results (on a tax equivalent basis, a non-GAAP measure), the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified:
1
Non-GAAP measure. See the reconciliation of net income to adjusted net income.
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(In thousands, except ratios)
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Net Interest
Income
1
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Net Interest
Margin
1
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Yield on
Earning Assets
1
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Rate on Interest
Bearing Liabilities
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First quarter 2019
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$
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60,861
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4.02
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%
|
|
4.79
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%
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1.13
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%
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Fourth quarter 2018
|
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60,100
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|
4.00
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%
|
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4.67
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%
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|
0.97
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%
|
First quarter 2018
|
|
49,853
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3.80
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%
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|
4.23
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%
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|
0.62
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%
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1
On tax equivalent basis, a non-GAAP measure. See the reconciliation of net interest income to net interest income on a tax equivalent basis.
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For the
three
months ended
March 31, 2019
, a steepening of the Treasury yield curve and higher short term rates, including add-on rates for new loan production, contributed to the
22
basis point improvement in net interest margin, compared to the
first
three
months of
2018
. Our loan and debt securities yields were
48
and
30
basis points higher, respectively, and our yield on federal funds sold and other investments was
36
basis points lower, compared to results for the
three
months ended
March 31, 2018
. The impact on net interest margin from accretion of purchase discounts on acquired loans was 26 basis points in the
first
quarter of
2019
. Partially offsetting, the rate for interest bearing funding was higher by
51
basis points, when comparing the same
three
-month periods for
2019
and
2018
.
Total average loans increased
$966.7 million
, or
25%
, for
first
quarter
2019
compared to
first
quarter
2018
, and increased
$227.4 million
, or
5%
, from the fourth quarter of
2018
. Average debt securities decreased
$181.0 million
, or
13%
, for
first
quarter
2019
year over year and were
$44.0 million
, or
3%
, lower from the
fourth
quarter of
2018
.
Average loans as a percentage of average earning assets totaled
79%
during the
first
quarter of
2019
, compared to
77%
during the
fourth
quarter of
2018
and
73%
a year ago. As average total loans as a percentage of earning assets increased, the mix of loans has remained fairly stable, with volumes related to commercial real estate representing
49%
of total loans at
March 31, 2019
and
December 31, 2018
and 47% at
March 31, 2018
(see “Loan Portfolio”).
Loan production is detailed in the following table for the periods specified:
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First
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Fourth
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First
|
|
|
Quarter
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|
Quarter
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|
Quarter
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(In thousands)
|
|
2019
|
|
2018
|
|
2018
|
Commercial pipeline
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$
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177,318
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$
|
164,064
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$
|
122,743
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|
Commercial loans closed
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|
109,076
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|
159,388
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|
122,064
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Residential pipeline
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|
45,284
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|
|
43,655
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|
|
70,755
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Residential loans retained
|
|
49,645
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|
73,201
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|
|
79,053
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Residential loans sold
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|
32,558
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|
31,525
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|
49,687
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Consumer and small business pipeline
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|
67,591
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53,453
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50,361
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Consumer and small business originations
|
|
118,503
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|
114,195
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|
98,381
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|
Consumer and small business originations reached
$118.5 million
during the
first
quarter of
2019
and commercial loans closed totaled
$109.1 million
for the
first
quarter of
2019
. The increase in consumer and small business loan originations is attributable, in part, to our commitment to serving small businesses and the expansion of our Small Business Administration ("SBA") program. Closed residential loans during the
first
quarter for
2019
totaled
$82.2 million
.
Pipelines (loans in underwriting and approval or approved and not yet closed) remained strong at
$177.3 million
in commercial,
$45.3 million
in mortgage, and
$67.6 million
(a new peak) in consumer and small business at
March 31, 2019
. Commercial pipelines increased
$13.3 million
over
December 31, 2018
, and were
$54.6 million
or
44%
higher compared to
March 31, 2018
. Residential pipelines increased
$1.6 million
from
December 31, 2018
, and were lower by
$25.5 million
or
36%
, compared to
March 31, 2018
. The consumer and small business pipeline increased from
December 31, 2018
by
$14.1 million
or
26%
, and increased from
March 31, 2018
by
$17.2 million
or
34%
.
Loan production remains strong, supported by customer analytics and expansion of the banking teams. During the first quarter of 2019, we hired 10 business bankers in Tampa and Ft. Lauderdale, augmenting the 10 business bankers hired in the fourth quarter of
2018
. The addition of lending personnel from the
First Green
acquisition is providing growth as well.
Customer relationship funding is detailed in the following table for the periods specified:
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Customer Relationship Funding
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March 31,
|
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December 31,
|
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September 30,
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June 30,
|
|
March 31,
|
(In thousands, except ratios)
|
|
2019
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
Noninterest demand
|
|
$
|
1,676,009
|
|
|
$
|
1,569,602
|
|
|
$
|
1,488,689
|
|
|
$
|
1,463,652
|
|
|
$
|
1,488,261
|
|
Interest-bearing demand
|
|
1,100,477
|
|
|
1,014,032
|
|
|
912,891
|
|
|
976,281
|
|
|
1,015,054
|
|
Money market
|
|
1,192,070
|
|
|
1,173,950
|
|
|
1,036,940
|
|
|
1,023,170
|
|
|
1,035,531
|
|
Savings
|
|
508,320
|
|
|
493,807
|
|
|
451,958
|
|
|
444,736
|
|
|
437,878
|
|
Time certificates of deposit
|
|
1,128,702
|
|
|
925,849
|
|
|
753,032
|
|
|
789,601
|
|
|
742,819
|
|
Total deposits
|
|
$
|
5,605,578
|
|
|
$
|
5,177,240
|
|
|
$
|
4,643,510
|
|
|
$
|
4,697,440
|
|
|
$
|
4,719,543
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer sweep accounts
|
|
$
|
148,005
|
|
|
$
|
214,323
|
|
|
$
|
189,035
|
|
|
$
|
200,050
|
|
|
$
|
173,249
|
|
|
|
|
|
|
|
|
|
|
|
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Noninterest demand deposits as % of total deposits
|
|
29.9
|
%
|
|
30.3
|
%
|
|
32.1
|
%
|
|
31.2
|
%
|
|
31.5
|
%
|
Seacoast's weighted average rate paid on total deposits (including noninterest demand deposits) was
0.67%
for the three months ended March 31, 2019, and, despite an increase of 13 basis points from the fourth quarter of 2018 and 34 basis points from the
three
months ended
March 31, 2018
, we believe reflects the significant value of the deposit franchise.
Short-term borrowings were entirely comprised of sweep repurchase agreements with Seacoast Bank customers at
March 31, 2019
and
2018
. No federal funds purchased were utilized at
March 31, 2019
or
2018
. The average rate on customer repurchase accounts was
1.21%
for the
three
months ended
March 31, 2019
, compared to
0.63%
for the same period during
2018
.
FHLB borrowings totaled
$3.0 million
at
March 31, 2019
, with an average rate of
2.53%
paid during the
three
months ended
March 31, 2019
. FHLB borrowings averaged $227.4 million for the first quarter of
2019
, declining
$49.0 million
, or
18%
, compared to the
three
months ended
March 31, 2018
. For
2019
, average subordinated debt of
$70.8 million
related to trust preferred securities issued by subsidiary trusts of the Company carried an average cost of
5.14%
.
The following table details average balances, net interest income and margin results (on a tax equivalent basis) for the periods presented:
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|
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|
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|
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|
|
Average Balances, Interest Income and Expenses, Yields and Rates
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2018
|
|
|
First Quarter
|
|
Fourth Quarter
|
|
First Quarter
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(In thousands, except ratios)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
1,186,374
|
|
|
$
|
9,119
|
|
|
3.07
|
%
|
|
$
|
1,227,648
|
|
|
$
|
9,528
|
|
|
3.10
|
%
|
|
$
|
1,361,277
|
|
|
$
|
9,361
|
|
|
2.75
|
%
|
|
Nontaxable
|
|
26,561
|
|
|
190
|
|
|
2.86
|
|
|
29,255
|
|
|
252
|
|
|
3.45
|
|
|
32,640
|
|
|
307
|
|
|
3.76
|
|
|
Total Securities
|
|
1,212,935
|
|
|
9,309
|
|
|
3.07
|
|
|
1,256,903
|
|
|
9,780
|
|
|
3.11
|
|
|
1,393,917
|
|
|
9,668
|
|
|
2.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other investments
|
|
91,136
|
|
|
918
|
|
|
4.09
|
|
|
87,146
|
|
|
835
|
|
|
3.80
|
|
|
56,173
|
|
|
616
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
4,839,046
|
|
|
62,335
|
|
|
5.22
|
|
|
4,611,691
|
|
|
59,559
|
|
|
5.12
|
|
|
3,872,369
|
|
|
45,284
|
|
|
4.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
|
6,143,117
|
|
|
72,562
|
|
|
4.79
|
|
|
5,955,740
|
|
|
70,174
|
|
|
4.67
|
|
|
5,322,459
|
|
|
55,568
|
|
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(32,966
|
)
|
|
|
|
|
|
(33,864
|
)
|
|
|
|
|
|
(27,469
|
)
|
|
|
|
|
|
Cash and due from banks
|
|
99,940
|
|
|
|
|
|
|
124,299
|
|
|
|
|
|
|
113,899
|
|
|
|
|
|
|
Premises and equipment
|
|
70,938
|
|
|
|
|
|
|
75,120
|
|
|
|
|
|
|
65,932
|
|
|
|
|
|
|
Intangible assets
|
|
230,066
|
|
|
|
|
|
|
213,713
|
|
|
|
|
|
|
167,136
|
|
|
|
|
|
|
Bank owned life insurance
|
|
123,708
|
|
|
|
|
|
|
132,495
|
|
|
|
|
|
|
122,268
|
|
|
|
|
|
|
Other assets
|
|
136,175
|
|
|
|
|
|
|
122,367
|
|
|
|
|
|
|
87,463
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,770,978
|
|
|
|
|
|
|
$
|
6,589,870
|
|
|
|
|
|
|
$
|
5,851,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
1,029,726
|
|
|
$
|
839
|
|
|
0.33
|
%
|
|
$
|
974,711
|
|
|
$
|
515
|
|
|
0.21
|
%
|
|
$
|
1,001,672
|
|
|
$
|
450
|
|
|
0.18
|
%
|
|
Savings
|
|
500,347
|
|
|
477
|
|
|
0.39
|
|
|
509,434
|
|
|
418
|
|
|
0.33
|
|
|
435,433
|
|
|
104
|
|
|
0.10
|
|
|
Money market
|
|
1,158,939
|
|
|
2,557
|
|
|
0.89
|
|
|
1,161,599
|
|
|
2,207
|
|
|
0.75
|
|
|
976,498
|
|
|
984
|
|
|
0.41
|
|
|
Time deposits
|
|
1,042,346
|
|
|
4,959
|
|
|
1.93
|
|
|
899,153
|
|
|
3,901
|
|
|
1.72
|
|
|
776,807
|
|
|
2,179
|
|
|
1.14
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
185,032
|
|
|
550
|
|
|
1.21
|
|
|
242,963
|
|
|
732
|
|
|
1.20
|
|
|
175,982
|
|
|
274
|
|
|
0.63
|
|
|
Federal Home Loan Bank borrowings
|
|
227,378
|
|
|
1,421
|
|
|
2.53
|
|
|
240,799
|
|
|
1,468
|
|
|
2.42
|
|
|
276,389
|
|
|
1,030
|
|
|
1.51
|
|
|
Other borrowings
|
|
70,836
|
|
|
898
|
|
|
5.14
|
|
|
70,764
|
|
|
833
|
|
|
4.67
|
|
|
70,550
|
|
|
694
|
|
|
3.99
|
|
|
Total Interest-Bearing Liabilities
|
|
4,214,604
|
|
|
11,701
|
|
|
1.13
|
|
|
4,099,423
|
|
|
10,074
|
|
|
0.97
|
|
|
3,713,331
|
|
|
5,715
|
|
|
0.62
|
|
|
Noninterest demand
|
|
1,612,548
|
|
|
|
|
|
|
1,628,842
|
|
|
|
|
|
|
1,413,967
|
|
|
|
|
|
|
Other liabilities
|
|
64,262
|
|
|
|
|
|
|
33,846
|
|
|
|
|
|
|
29,150
|
|
|
|
|
|
|
Total Liabilities
|
|
5,891,414
|
|
|
|
|
|
|
5,762,111
|
|
|
|
|
|
|
5,156,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
879,564
|
|
|
|
|
|
|
827,759
|
|
|
|
|
|
|
695,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity
|
|
$
|
6,770,978
|
|
|
|
|
|
|
$
|
6,589,870
|
|
|
|
|
|
|
$
|
5,851,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of deposits
|
|
|
|
|
|
0.67
|
%
|
|
|
|
|
|
0.54
|
%
|
|
|
|
|
|
0.33
|
%
|
|
Interest expense as a % of earning assets
|
|
|
|
|
|
0.77
|
%
|
|
|
|
|
|
0.67
|
%
|
|
|
|
|
|
0.44
|
%
|
|
Net interest income as a % of earning assets
|
|
|
|
$
|
60,861
|
|
|
4.02
|
%
|
|
|
|
$
|
60,100
|
|
|
4.00
|
%
|
|
|
|
$
|
49,853
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
On a fully taxable equivalent basis, a non-GAAP measure, as defined (see non-GAAP measure below). All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.
|
Taxable Equivalent Measure
Fully taxable equivalent net interest income and net interest margin is a common term and measure used in the banking industry but is not a term used under GAAP. We believe that these presentations of tax equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors’ understanding of the Company’s business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered as an alternative to GAAP. The following information is provided to reconcile GAAP measures and tax equivalent net interest income and net interest margin on a tax equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands, except ratios)
|
|
2019
|
|
2018
|
|
2018
|
Nontaxable interest income adjustment
|
|
$
|
87
|
|
|
$
|
116
|
|
|
$
|
91
|
|
Tax Rate
|
|
21
|
%
|
|
21
|
%
|
|
21
|
%
|
Net interest income (TE)
|
|
$
|
60,861
|
|
|
$
|
60,100
|
|
|
$
|
49,853
|
|
Total net interest income (not TE)
|
|
60,774
|
|
|
59,984
|
|
|
49,762
|
|
Net interest margin (TE)
|
|
4.02
|
%
|
|
4.00
|
%
|
|
3.80
|
%
|
Net interest margin (not TE)
|
|
4.01
|
|
|
3.99
|
|
|
3.79
|
|
TE = Tax Equivalent
|
|
|
|
|
|
|
Noninterest Income
Noninterest income totaled
$12.8 million
for the
first
quarter of
2019
, an increase of
$0.1 million
, or
1%
, compared to the
fourth
quarter of
2018
and an increase of
$0.5 million
, or
4%
, from the
first
quarter of
2018
. Organic and acquisition-related growth were primary factors contributing to growth in noninterest income. For the
three
months ended
March 31, 2019
, noninterest income accounted for
17%
of total revenue (net interest income plus noninterest income), compared to
20%
for the
three
months ended
March 31, 2018
.
Compared to the
fourth
quarter of
2018
, service charges on deposit results were lower by
$0.3 million
, impacted by fewer business days in the
first
quarter of
2019
, but mortgage banking fees were higher and entirely offsetting, the result of a successful introduction of new saleable residential mortgage products and a focus on generating saleable volume. SBA and marine-related fees improved modestly from the
fourth
quarter of
2018
, the result of higher volumes in both units, and interchange income increased
$0.2 million
sequentially. Interchange income is dependent upon business volumes transacted, as well as the fees permitted by Visa
®
and MasterCard
®
. Wealth-related fees (trust and brokerage income) were down modestly, the result of lower equity valuations, and other income declined primarily due to the prior quarter benefiting from a $0.3 million bank owned life insurance ("BOLI") payout. The decline in BOLI-related income from the
fourth
quarter of
2018
was the result of the cancellation of low yielding policies acquired in the First Green acquisition. Finally, securities losses for the
first
quarter of
2019
were lower by
$0.4 million
from the
fourth
quarter of
2018
.
Noninterest income for the
first
quarter of
2019
, compared to the
fourth
quarter of
2018
and the
first
quarter of
2018
is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands)
|
|
2019
|
|
2018
|
|
2018
|
Service charges on deposit accounts
|
|
$
|
2,697
|
|
|
$
|
3,019
|
|
|
$
|
2,672
|
|
Trust fees
|
|
1,017
|
|
|
1,040
|
|
|
1,021
|
|
Mortgage banking fees
|
|
1,115
|
|
|
809
|
|
|
1,402
|
|
Brokerage commissions and fees
|
|
436
|
|
|
468
|
|
|
359
|
|
Marine finance fees
|
|
362
|
|
|
185
|
|
|
573
|
|
Interchange income
|
|
3,401
|
|
|
3,198
|
|
|
2,942
|
|
BOLI income
|
|
915
|
|
|
1,091
|
|
|
1,056
|
|
SBA gains
|
|
636
|
|
|
519
|
|
|
734
|
|
Other income
|
|
2,266
|
|
|
2,810
|
|
|
1,639
|
|
|
|
12,845
|
|
|
13,139
|
|
|
12,398
|
|
Securities losses, net
|
|
(9
|
)
|
|
(425
|
)
|
|
(102
|
)
|
Total
|
|
$
|
12,836
|
|
|
$
|
12,714
|
|
|
$
|
12,296
|
|
Year over year, results for the
three
months ended
March 31, 2019
compared to the three months ended
March 31, 2018
reflect growth in deposits and increased customer engagement. Service charges on deposits and interchange income increased by
9%
, on a combined basis. This increase reflects continued strength in new customer acquisition and cross sell, and benefits from acquisition activity. Overdraft fees totaling
$1.5 million
for
2019
represented
55%
of total service charges on deposit, the same percentage as a year ago.
Wealth management, including brokerage commissions and fees, and trust fees, continued to grow during the
first
quarter of
2019
, increasing
5%
from first quarter
2018
. While trust fees were level year over year, brokerage commissions and fees were
21%
higher for the
three
months ended
March 31, 2019
, compared to the three months ended
March 31, 2018
. This increase is the result of a growing sales and support team, industry leading products including digital tools, and the benefit of direct referrals from the branches and lending network. We expect wealth management revenues to continue to grow over time.
Mortgage production was lower during the
three
months ended
March 31, 2019
compared to
2018
(see “Loan Portfolio”), with mortgage banking activity generating fees of
$1.1 million
for the
first
quarter of
2019
as compared to
$1.4 million
for the
first
quarter of
2018
. Fee income opportunities were more limited. However, as mentioned previously, the introduction of new saleable residential mortgage products and a focus on generating saleable volume should create income growth prospectively.
Marine lending originations sold were lower for the
first
quarter
2019
, decreasing
37%
for the
first
quarter of
2019
compared to the same period in
2018
. Fee income for marine vessel financing was impacted by a larger portion of originations being retained. In addition to our principal marine lending office in Ft. Lauderdale, Florida, we continue to use third party independent contractors in Texas and on the west coast of the United States to assist in generating marine loans.
BOLI and Small Business Administration ("SBA") income totaled
$0.9 million
and
$0.6 million
, respectively, for the
first
quarter of
2019
, slightly lower from a year ago, but representing 7% and 5% of overall noninterest income, respectively. Other income was
38%
higher year over year for the
three
months ended
March 31, 2019
, increasing
$0.6 million
year over year compared to first quarter
2018
. Additional income of $0.2 million was distributed from Community Reinvestment Act ("CRA") investments and a general increase in other fee categories also occurred.
Noninterest Expenses
Seacoast management expects its efficiency ratios to improve in
2019
. The Company expects its digital servicing capabilities and technology to support better, more efficient channel integration allowing consumers to choose their path of convenience to satisfy their banking needs. Acquisition activity added to noninterest expenses with acquisition related costs for
First Green
in the
fourth
quarter of
2018
of approximately
$8.0 million
, and an additional
$0.3 million
during the
first
quarter of
2019
. The Company consolidated five branches in conjunction with the acquisition of
First Green
, in alignment with our Vision 2020 objective of reducing our footprint to meet the evolving demands of our customers. We consolidated one additional banking center during the first quarter
2019
and recorded $0.2 million in associated expenses, and plan on consolidating two more banking centers in
2019
. Our investments in
2018
launched a number of new enhancements, resulting in even greater digital access for our customers, and providing improvements in productivity for our customers in their daily lives. In the second quarter of
2019
,
our continued focus on efficiency and streamlining operations will result in a reduction of approximately 50 full time equivalent employees. While the Company will incur severance charges of approximately $1.5 million, this in combination with other expense initiatives, including the two additional banking center closures planned in
2019
, should result in approximately $10 million in pretax expense reductions annually. We expect greater operating leverage in 2020 and beyond.
For the
first
quarter of
2019
, our efficiency ratio, defined as noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties divided by net operating revenue (net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains), was
56.55%
compared to
65.76%
for the
fourth
quarter of
2018
and
57.80%
for the
first
quarter of
2018
. Adjusted noninterest expense (a non-GAAP measure, see table below for a reconciliation to noninterest expense, the most comparable GAAP number) was
$41.1 million
for the
first
quarter of
2019
, compared to
$39.5 million
for the
fourth
quarter of
2018
and
$35.5 million
for the
first
quarter of
2018
. The adjusted efficiency ratio
1
year over year improved, declining from
57.05%
for the
first
quarter
2018
to
55.81%
for the
first
quarter of
2019
.
1
Non-GAAP measure. See the reconciliation of net income to adjusted net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands, except ratios)
|
|
2019
|
|
2018
|
|
2018
|
Noninterest expense, as reported
|
|
$
|
43,099
|
|
|
$
|
49,464
|
|
|
$
|
37,164
|
|
|
|
|
|
|
|
|
Merger related charges
|
|
(335
|
)
|
|
(8,034
|
)
|
|
(470
|
)
|
Amortization of intangibles
|
|
(1,458
|
)
|
|
(1,303
|
)
|
|
(989
|
)
|
Branch reductions and other expense initiatives
1
|
|
(208
|
)
|
|
(587
|
)
|
|
—
|
|
Foreclosed property expense and net gain/(loss)on sale
|
|
40
|
|
|
—
|
|
|
(192
|
)
|
Total adjustments
|
|
(1,961
|
)
|
|
(9,924
|
)
|
|
(1,651
|
)
|
|
|
|
|
|
|
|
Adjusted noninterest expense
2
|
|
$
|
41,138
|
|
|
$
|
39,540
|
|
|
$
|
35,513
|
|
|
|
|
|
|
|
|
Adjusted efficiency ratio
2,3
|
|
55.81
|
%
|
|
54.19
|
%
|
|
57.05
|
%
|
1
Includes severance payments, contract termination costs, disposition of branch premises and fixed assets, and other costs to accomplish branch consolidation and other expense reduction strategies.
|
2
Non-GAAP measure.
|
3
Efficiency ratio is defined as (noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties) divided
by the net operating revenue (net interest on a fully tax equivalent basis plus noninterest income excluding securities gains).
|
Noninterest expenses for the
first
quarter of
2019
totaled
$43.1 million
, decreasing
$6.4 million
, or
13%
, compared to the
fourth
quarter of
2018
, and increasing
$5.9 million
, or
16%
, from the
first
quarter of
2018
. Noninterest expenses for the
first
quarter of
2019
, as compared to the
fourth
quarter of
2018
and the
first
quarter of
2018
are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands)
|
|
2019
|
|
2018
|
|
2018
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
18,506
|
|
|
$
|
22,172
|
|
|
$
|
15,381
|
|
Employee benefits
|
|
4,206
|
|
|
3,625
|
|
|
3,081
|
|
Outsourced data processing costs
|
|
3,845
|
|
|
5,809
|
|
|
3,679
|
|
Telephone/data lines
|
|
811
|
|
|
602
|
|
|
612
|
|
Occupancy
|
|
3,807
|
|
|
3,747
|
|
|
3,117
|
|
Furniture and equipment
|
|
1,757
|
|
|
2,452
|
|
|
1,457
|
|
Marketing
|
|
1,132
|
|
|
1,350
|
|
|
1,252
|
|
Legal and professional fees
|
|
2,847
|
|
|
3,668
|
|
|
1,973
|
|
FDIC assessments
|
|
488
|
|
|
571
|
|
|
598
|
|
Amortization of intangibles
|
|
1,458
|
|
|
1,303
|
|
|
989
|
|
Foreclosed property expense and net (gain)/loss on sale
|
|
(40
|
)
|
|
—
|
|
|
192
|
|
Other
|
|
4,282
|
|
|
4,165
|
|
|
4,833
|
|
Total
|
|
$
|
43,099
|
|
|
$
|
49,464
|
|
|
$
|
37,164
|
|
Salaries and wages totaled
$18.5 million
for the
first
quarter of
2019
,
$22.2 million
for the
fourth
quarter of
2018
, and
$15.4 million
for the
first
quarter of
2018
. Salaries and wages were
$3.1 million
higher year over year, when compared to the
three
months ended
March 31, 2018
. Base salaries were the primary cause, increasing
$2.6 million
, or
19%
, with
902
full-time equivalent employees at
March 31, 2019
, compared to
814
at
March 31, 2018
. Improved revenue generation and lending production, among other factors, resulted in commissions, cash and stock incentives (aggregated) that were
$0.2 million
higher year over year. Severance costs also increased by
$0.1 million
year over year, and deferred loan origination costs (a contra expense) decreased by
$0.2 million
, due to lower loan production in the first quarter of
2019
, compared to the
first
quarter of
2018
.
During the
first
quarter
2019
, employee benefits costs (group health insurance, defined contribution plan, payroll taxes, and unemployment compensation) increased
$0.6 million
, or
16%
, compared to the
fourth
quarter of
2018
, and increased
$1.1 million
, or
37%
, compared to the
first
quarter of
2018
. These costs reflect the higher staffing (and base salary cost) discussed above. Payroll taxes typically peak during first quarter each year, and were $0.6 million and
$0.5 million
greater than expenditures in the fourth and
first
quarter of
2018
, respectively. Our self-funded health care plan, totaling
$1.7 million
for the
first
quarter of
2019
, was
$0.5 million
higher than a year ago for
first
quarter.
Seacoast Bank utilizes third parties for its core data processing systems and outsourced data processing costs are directly related to the number of transactions processed. Outsourced data processing costs totaled
$3.8 million
,
$5.8 million
and
$3.7 million
for the
first
quarter
2019
,
fourth
quarter
2018
and
first
quarter
2018
, respectively. Data processing costs included one-time charges for conversion activity related to our acquisition in the
fourth
quarter of
2018
. We continue to improve and enhance our mobile and other digital products and services through our core data processor, which may increase our outsourced data processing costs as customers adopt improvements and products and as the Company's business volumes grow.
Telephone and data line expenditures, including electronic communications with customers and between branch locations and personnel, as well as our third party data processors, increased
$0.2 million
during the
first
quarter of
2019
, when compared to the
fourth
quarter of
2018
and the
first
quarter of
2018
, or
35%
and
33%
, respectively. Additional activity for acquired First Green branches and locations closed, as well as additional customers from the acquisition, were the primary contributors to the increases in telephone and data line expenses.
Total occupancy, furniture and equipment expenses for the
three
months ended
March 31, 2019
decreased $0.6 million, or 10%, from the
fourth
quarter of
2018
, and increased
$1.0 million
, or
22%
, compared to the
three
months ended
March 31, 2018
. Asset write-offs related to branch closures was a primary contributor, with write-offs adding
$0.2 million
and $0.8 million, respectively, to expenses for the
three
months ended
March 31, 2019
and December 31, 2018. We believe branches are still valuable to our customers for more complex transactions, but simple tasks, such as depositing and withdrawing funds, are rapidly migrating to the digital world. We anticipate that branch consolidations will continue for the Company and the banking industry in general. Lease expense was higher for the first quarter of
2019
by approximately
$0.3 million
, primarily attributed to additional branches acquired from First Green. In addition, at
March 31, 2019
, the Company's operations center lease expired and all personnel occupying this space moved to an adjacent main campus building currently owned, with an annual lease savings of $0.4 million,
prospectively. Depreciation, repairs and maintenance, and other furniture and equipment expenditures were higher compared to a year ago, increasing
$0.1 million
,
$0.2 million
and
$0.2 million
, respectively during the first quarter of
2019
when compared to the first quarter of
2018
.
For the
first
quarter of
2019
,
fourth
quarter of
2018
and
first
quarter of
2018
, marketing expenses (including sales promotion costs, ad agency production and printing costs, digital, newspaper, TV and radio advertising, and other public relations costs) totaled
$1.1 million
,
$1.4 million
and
$1.3 million
, respectively. Incremental use of marketing activities to connect and solidify customer acquisition and corporate brand awareness within the Orlando and new Tampa footprint contributed to the higher expenditures in the fourth quarter of
2018
.
Legal and professional fees for the
first
quarter of
2019
,
fourth
quarter of
2018
and
first
quarter of
2018
totaled
$2.8 million
,
$3.7 million
, and
$2.0 million
, respectively, peaking in the fourth quarter of 2018 when First Green was acquired.
Growth in total assets (both organic and through acquisitions) increased the basis for calculating our Federal Deposit Insurance Corporation ("FDIC") premiums. FICO bonds, issued by the U.S. government to create and support the Resolution Trust Corporation ("RTC"), formed during the savings and loan crisis of the early 1990's, have also been included in quarterly assessments to date, but have been repaid, reducing the assessment for Seacoast by almost $0.2 million annually on a prospective basis. Also, the FDIC's reserves hit 1.36% recently, near a reserve balance of 1.38%, at which time further relief for banks under $10 billion in assets has been mandated by statute in the form of small bank credit awards to be applied to offset quarterly FDIC premium assessments prospectively. The Company's subsidiary bank has approximately $1.6 million of these credit awards that the bank should be able to apply against premiums charged, once the FDIC achieves its 1.38% reserve. FDIC assessments were
$0.5 million
,
$0.6 million
and
$0.6 million
for the
first
quarter of
2019
,
fourth
quarter of
2018
and
first
quarter of
2018
, respectively.
For the
three
months ended
March 31, 2019
and December 31, 2018, foreclosed property expense and net losses on the sale of OREO properties were nominal, compared to
$0.2 million
for the first quarter of
2018
(see “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).
Other expense totaled
$4.3 million
,
$4.2 million
and
$4.8 million
for the
first
quarter of
2019
, the
fourth
quarter of
2018
and
first
quarter of
2018
, respectively, and decreased
11%
for the
three
months ended
March 31, 2019
, compared to the
three
months ended
March 31, 2018
. Primary contributors to the
$0.5 million
decrease year over year were marine lending fees (down $0.1 million compared to a year ago), losses and charge-offs related to robbery, fraud, and other losses (down $0.1 million), and miscellaneous loan costs (down $0.3 million).
Income Taxes
For the
three
months ended
March 31, 2019
and
2018
, provision for income taxes totaled
$6.4 million
and
$5.8 million
, respectively. The Company’s overall effective tax rate decreased to
22.0%
for the first
three
months of
2019
from 24.3% for the first
three
months a year ago. Additionally, discrete benefits related to share-based compensation provided a tax benefit of $0.6 million for the
three
months ended
March 31, 2019
, compared to $0.2 million for the
three
months ended
March 31, 2018
. Offsetting this tax benefit in 2018 for the first quarter was a $0.2 million write down of deferred tax assets arising from measurement period adjustments on a 2017 bank acquisition.
Management believes all of the future tax benefits of the Company’s deferred tax assets can be realized and no valuation allowance is required.
Explanation of Certain Unaudited Non-GAAP Financial Measures
This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”), including adjusted net income, tax equivalent net interest income and margin, and adjusted noninterest expense and efficiency ratios. The most directly comparable GAAP measures are net income, net interest income, net interest margin, noninterest expense, and efficiency ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP. The following table provides reconciliation between GAAP net income and adjusted net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands, except per share data)
|
|
2019
|
|
2018
|
|
2018
|
Net income, as reported:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,705
|
|
|
$
|
15,962
|
|
|
$
|
18,027
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.31
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
Adjusted net income:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,705
|
|
|
$
|
15,962
|
|
|
$
|
18,027
|
|
Security losses, net
|
|
9
|
|
|
425
|
|
|
102
|
|
BOLI benefits on death (included in other income)
|
|
—
|
|
|
(280
|
)
|
|
—
|
|
Total adjustments to revenue
|
|
9
|
|
|
145
|
|
|
102
|
|
|
|
|
|
|
|
|
Merger related charges
|
|
(335
|
)
|
|
(8,034
|
)
|
|
(470
|
)
|
Amortization of intangibles
|
|
(1,458
|
)
|
|
(1,303
|
)
|
|
(989
|
)
|
Branch reductions and other expense initiatives
1
|
|
(208
|
)
|
|
(587
|
)
|
|
—
|
|
Total adjustments to noninterest expenses
|
|
(2,001
|
)
|
|
(9,924
|
)
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
Effective tax rate on adjustments
|
|
510
|
|
|
2,623
|
|
|
538
|
|
Taxes and tax penalties on acquisition-related BOLI redemption
|
|
—
|
|
|
(485
|
)
|
|
—
|
|
Tax effect of change in corporate tax rate
|
|
—
|
|
|
—
|
|
|
(248
|
)
|
Adjusted net income
|
|
$
|
24,205
|
|
|
$
|
23,893
|
|
|
$
|
19,298
|
|
|
|
|
|
|
|
|
Adjusted diluted earnings per share
|
|
$
|
0.47
|
|
|
$
|
0.47
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
Average Assets
|
|
$
|
6,770,978
|
|
|
$
|
6,589,870
|
|
|
$
|
5,851,688
|
|
Less average goodwill and intangible assets
|
|
(230,066
|
)
|
|
(213,713
|
)
|
|
(167,136
|
)
|
Average Tangible Assets
|
|
$
|
6,540,912
|
|
|
$
|
6,376,157
|
|
|
$
|
5,684,552
|
|
|
|
|
|
|
|
|
Return on Average Assets (ROA)
|
|
1.36
|
%
|
|
0.96
|
%
|
|
1.25
|
%
|
Impact of removing average intangible assets and related amortization
|
|
0.12
|
|
|
0.09
|
|
|
0.09
|
|
Return on Average Tangible Assets (ROTA)
|
|
1.48
|
|
|
1.05
|
|
|
1.34
|
|
Impact of other adjustments for Adjusted Net Income
|
|
0.02
|
|
|
0.44
|
|
|
0.04
|
|
Adjusted Return on Average Tangible Assets
|
|
1.50
|
|
|
1.49
|
|
|
1.38
|
|
|
|
|
|
|
|
|
Average Shareholders' Equity
|
|
$
|
879,564
|
|
|
$
|
827,759
|
|
|
$
|
695,240
|
|
Less average goodwill and intangible assets
|
|
(230,066
|
)
|
|
(213,713
|
)
|
|
(167,136
|
)
|
Average Tangible Equity
|
|
$
|
649,498
|
|
|
$
|
614,046
|
|
|
$
|
528,104
|
|
|
|
|
|
|
|
|
Return on Average Shareholders' Equity
|
|
10.47
|
%
|
|
7.65
|
%
|
|
10.52
|
%
|
Impact of removing average intangible assets and related amortization
|
|
4.39
|
|
|
3.29
|
|
|
3.89
|
|
Return on Average Tangible Common Equity (ROTCE)
|
|
14.86
|
|
|
10.94
|
|
|
14.41
|
|
Impact of other adjustments for Adjusted Net Income
|
|
0.25
|
|
|
4.50
|
|
|
0.41
|
|
Adjusted Return on Average Tangible Common Equity
|
|
15.11
|
|
|
15.44
|
|
|
14.82
|
|
1
Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect our branch consolidation and other expense reduction strategies.
|
Financial Condition
Total assets increased $
35.7
million, or
0.5%
, from
December 31, 2018
, benefiting from new relationships derived through our unique combination of customer analytics, marketing automation, and experienced bankers in growing urban markets.
Securities
Information related to maturities, carrying values and fair value of the Company’s debt securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements, primarily the result of sales during the quarter of low-yielding securities.
At
March 31, 2019
, the Company had
$877.5 million
in debt securities available for sale, and
$295.5 million
in debt securities held to maturity. The Company's total debt securities portfolio decreased
$50.7 million
, or
4%
, from
December 31, 2018
. In connection with the adoption of ASU 2017-12 in January 2019, the Company elected to transfer securities with an aggregate amortized cost basis of $53.5 million and fair value of $52.8 million from the held-to-maturity designation to available-for-sale.
There were no debt security purchases for the
three
months ended
March 31, 2019
and $27.1 million in maturities (primarily paydowns of $26.1 million) over the same period. For
2018
, there were no debt security purchases during the
fourth
quarter and purchases of $72.3 million in the
first
quarter, and principal pay-downs for the fourth and first quarters of
2018
were similar in size, equal to $42.9 million and $43.3 million, respectively.
During the
three
months ended
March 31, 2019
, $35.0 million of certain low yielding debt securities were sold, which resulted in a loss of $0.1 million. Proceeds from the sale of securities during the fourth quarter of 2018 of $64.4 million included net losses of $0.5 million. In comparison, there were no sales of debt securities transacted in the
first
quarter of
2018
.
Debt securities are generally acquired which return principal monthly. The modified duration of the investment portfolio at
March 31, 2019
was 3.7 years, compared to
4.8
years at
December 31, 2018
.
At
March 31, 2019
, available for sale debt securities had gross unrealized losses of
$8.5 million
and gross unrealized gains of
$3.5 million
, compared to gross unrealized losses of
$18.3 million
and gross unrealized gains of
$1.3 million
at
December 31, 2018
. All of the debt securities with unrealized losses are reviewed for other-than-temporary impairment at least quarterly. As a result of these reviews it was determined that the debt securities with unrealized losses are not other than temporarily impaired and the Company has the intent and ability to retain these debt securities until recovery over the periods presented (see additional discussion under “Other Fair Value Measurements” and “Other than Temporary Impairment of Securities” in “Critical Accounting Policies and Estimates”).
Company management considers the overall quality of the debt securities portfolio to be high. The Company has no exposure to debt securities with subprime collateral. The Company does not have an investment position in trust preferred securities.
The credit quality of the Company’s securities holdings are all investment grade. As of
March 31, 2019
, the Company’s investment securities, except for
$37.5 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
$825.8 million
, or
70%
of the total portfolio. The portfolio also includes
$67.9 million
in private label securities, most secured by residential real estate collateral originated in 2005 or prior years 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. The Company also has invested
$241.7 million
in uncapped 3-month LIBOR floating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase 1st lien sub-investment grade corporate loans while providing support to senior tranche investors. As of
March 31, 2019
, the Company held 84% in AAA/AA tranches and 16% in A rated tranches with average credit support of 31% and 19%, respectively. The Company performs routine evaluations on these securities to assess both structure and collateral.
Loan Portfolio
Total loans (net of unearned income and excluding the allowance for loan losses) were
$4.8 billion
at
March 31, 2019
,
$3.2 million
more than at
December 31, 2018
. For the first quarter of
2019
,
$109.1 million
in commercial and commercial real estate loans were originated compared to $159.4 million during the fourth quarter of 2018. Our loan pipeline for commercial and commercial real estate loans totaled
$177.3 million
at
March 31, 2019
. The Company also closed
$82.2 million
in residential loans during the first quarter of
2019
. For comparison, residential loans totaling $104.7 million were closed during the fourth quarter of
2018
. This is consistent with the Residential Lending team's focus away from portfolio construction lending. The residential mortgage pipeline at
March 31, 2019
totaled
$45.3 million
. Consumer and small business originations totaled
$118.5 million
since year end
2018
,
higher by $4.3 million compared to the
three
months ended December 31, 2018, and the pipeline for these loans at
March 31, 2019
was
$67.6 million
, a record high. The
First Green
acquisition during the fourth quarter of
2018
contributed
$631.5 million
in loans. Success in commercial lending through continued investment in our business bankers has increased loan growth. We hired 10 business bankers in Fort Lauderdale and Tampa during the first three months of 2019, augmenting the 10 business bankers hired in the fourth quarter of 2018. Adding new, seasoned, commercial loan officers where market opportunities arise should enhance growth opportunities and provide talent enhancements.
We believe that achieving our loan growth objectives, together with the prudent management of credit risk will provide us with the potential to make further, meaningful improvements to our earnings in
2019
and into
2020
.
Our strong growth is accompanied by sound risk management procedures. Our lending policies contain numerous guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the dollar amount (size) of loans. Our exposure to commercial real estate lending is significantly below regulatory limits (see “Loan Concentrations”).
The following tables detail loan portfolio composition at
March 31, 2019
and
December 31, 2018
for portfolio loans, purchased credit impaired loans (“PCI”) and purchased unimpaired loans (“PUL”) as defined in Note E-Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(In thousands)
|
|
Portfolio Loans
|
|
PCI Loans
|
|
PULs
|
|
Total
|
Construction and land development
|
|
$
|
308,846
|
|
|
$
|
153
|
|
|
$
|
108,566
|
|
|
$
|
417,565
|
|
Commercial real estate
1
|
|
1,478,955
|
|
|
10,393
|
|
|
673,069
|
|
|
2,162,417
|
|
Residential real estate
|
|
1,077,523
|
|
|
2,575
|
|
|
249,068
|
|
|
1,329,166
|
|
Commercial and financial
|
|
606,179
|
|
|
667
|
|
|
106,033
|
|
|
712,879
|
|
Consumer
|
|
195,719
|
|
|
—
|
|
|
10,695
|
|
|
206,414
|
|
Net Loan Balances
2
|
|
$
|
3,667,222
|
|
|
$
|
13,788
|
|
|
$
|
1,147,431
|
|
|
$
|
4,828,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(In thousands)
|
|
Portfolio Loans
|
|
PCI Loans
|
|
PULs
|
|
Total
|
Construction and land development
|
|
$
|
301,473
|
|
|
$
|
151
|
|
|
$
|
141,944
|
|
|
$
|
443,568
|
|
Commercial real estate
1
|
|
1,437,989
|
|
|
10,828
|
|
|
683,249
|
|
|
2,132,066
|
|
Residential real estate
|
|
1,055,525
|
|
|
2,718
|
|
|
266,134
|
|
|
1,324,377
|
|
Commercial and financial
|
|
603,057
|
|
|
737
|
|
|
118,528
|
|
|
722,322
|
|
Consumer
|
|
190,207
|
|
|
—
|
|
|
12,674
|
|
|
202,881
|
|
Net Loan Balances
2
|
|
$
|
3,588,251
|
|
|
$
|
14,434
|
|
|
$
|
1,222,529
|
|
|
$
|
4,825,214
|
|
1
Commercial real estate includes owner-occupied balances of $989.2 million and $970.2 million for March 31, 2019 and December 31, 2018, respectively.
|
2
Net loan balances at March 31, 2019 and December 31, 2018 include deferred costs of $17.8 million and $16.9 million, respectively.
|
Commercial real estate loans were higher by
$30.4 million
totaling
$2.2 billion
at
March 31, 2019
, compared to
December 31, 2018
. Owner occupied loans represent
$989.2 million
or
46%
of the commercial real estate portfolio. Office building loans of $652.2 million or 30% of commercial real estate mortgages comprise our largest concentration, with a substantial portion owner-occupied. Portfolio composition also includes lending for retail trade, industrial, health care, churches and educational facilities, recreation, multifamily, lodging, agriculture, convenience stores, marinas, and other types of real estate.
The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at
March 31, 2019
aggregated to $220.5 million (versus $218.6 million at
December 31, 2018
), of which $154.1 million was funded. The Company’s 127 commercial and commercial real estate relationships in excess of $5 million totaled $1.2 billion, of which $1.0 billion was funded at
March 31, 2019
(compared to 128 relationships of $1.3 billion at
December 31, 2018
, of which $1.0 billion was funded).
Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately $1.6 billion and $525.9 million, respectively, at
March 31, 2019
, compared to $1.6 billion and $533.4 million, respectively, at
December 31, 2018
.
Reflecting more muted production during the quarter, commercial and financial loans (“C&I”) outstanding at
March 31, 2019
decreased to
$712.9 million
, down from
$722.3 million
at
December 31, 2018
. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Company’s lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small- to medium-sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.
Residential mortgage loans increased
$4.8 million
to
$1.3 billion
as of
March 31, 2019
, compared to
December 31, 2018
. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At
March 31, 2019
, approximately $611.3 million or 46% of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages). Fixed rate mortgages totaled approximately $379.4 million (29% of the residential mortgage portfolio) at
March 31, 2019
, of which 15- and 30-year mortgages totaled $34.9 million and $291.8 million, respectively. Remaining fixed rate balances were comprised of home improvement loans totaling $128.0 million, most with maturities of 10 years or less, and home equity lines of credit, primarily floating rates, totaling $263.1 million at
March 31, 2019
. In comparison, loans secured by residential properties having fixed rates totaled $370.2 million at
December 31, 2018
, with 15- and 30-year fixed rate residential mortgages totaling $32.1 million and $276.5 million, respectively, and home equity mortgages and lines of credit totaling $135.8 million and $261.9 million, respectively.
The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes) which increased
$3.5 million
, or
2%
, from
December 31, 2018
to total
$206.4 million
(versus $201.7 million at
December 31, 2018
). Of the
$3.5 million
increase, automobile and truck loans, and marine loans, increased $1.2 million and $3.5 million, respectively, while other consumer loans declined $1.2 million.
At
March 31, 2019
, the Company had unfunded commitments to make loans of
$992.4 million,
compared to
$982.7 million
at
December 31, 2018
.
Loan Concentrations
The Company has developed guardrails to manage loan types that are most impacted by stressed market conditions in order to achieve lower levels of credit loss volatility in the future. Outstanding balances for commercial and commercial real estate (“CRE”) loan relationships greater than $10 million totaled $465.4 million and represented 10% of the total portfolio at
March 31, 2019
compared to $502.1 million or 10% at year-end
2018
.
Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of total risk based capital, were stable at 57% and 216%, respectively, at
March 31, 2019
. Regulatory guidance suggests limits of 100% and 300%, respectively. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e., loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts, or “REITs”, and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner occupied CRE are generally excluded.
Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality
Nonperforming assets (“NPAs”) at
March 31, 2019
totaled
$34.3 million
, and were comprised of
$15.4 million
of nonaccrual portfolio loans,
$7.0 million
of nonaccrual purchased loans,
$0.8 million
of non-acquired other real estate owned (“OREO”),
$1.7 million
of acquired OREO and
$9.4 million
of branches taken out of service. Compared to December 31, 2018, nonaccrual purchased loans decreased $3.7 million and acquired OREO declined $1.3 million, primarily the result of a payoff of a single $3.0 million acquired residential real estate loan and the sale of a single commercial real estate OREO acquired from First Green. Overall, NPAs decreased $5.0 million, or 13%, from
$39.3 million
recorded as of
December 31, 2018
. At
March 31, 2019
, approximately 83% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At
March 31, 2019
, nonaccrual loans were written down by approximately $7.1 million or 24% of the original loan balance (including specific impairment reserves). Since
December 31, 2018
, OREO amounts related to branches taken out of service that are actively being marketed, the largest component of OREO totaling $9.4 million, did not change.
Nonperforming loans to total loans outstanding at
March 31, 2019
decreased to
0.46%
from
0.55%
at
December 31, 2018
. Nonperforming assets to total assets at
March 31, 2019
decreased to 0.51% from 0.58% at
December 31, 2018
.
The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.
The Company pursues loan restructurings in selected cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. Troubled debt restructurings ("TDRs") have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing restructured loans totaled
$14.9 million
at
March 31, 2019
, compared to
$13.3 million
at
December 31, 2018
. Accruing TDRs are excluded from our nonperforming asset ratios. The table below set forth details related to nonaccrual and accruing restructured loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Nonaccrual Loans
|
|
Accruing
Restructured Loans
|
(In thousands)
|
|
Non-Current
|
|
Performing
|
|
Total
|
|
Construction & land development
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Individuals
|
|
—
|
|
|
42
|
|
|
42
|
|
|
160
|
|
|
|
—
|
|
|
42
|
|
|
42
|
|
|
171
|
|
Residential real estate mortgages
|
|
2,723
|
|
|
8,041
|
|
|
10,764
|
|
|
6,774
|
|
Commercial real estate mortgages
|
|
6,266
|
|
|
1,437
|
|
|
7,703
|
|
|
7,432
|
|
Real estate loans
|
|
8,989
|
|
|
9,520
|
|
|
18,509
|
|
|
14,377
|
|
Commercial and financial
|
|
2,608
|
|
|
1,170
|
|
|
3,778
|
|
|
180
|
|
Consumer
|
|
56
|
|
|
70
|
|
|
126
|
|
|
300
|
|
|
|
$
|
11,653
|
|
|
$
|
10,760
|
|
|
$
|
22,413
|
|
|
$
|
14,857
|
|
At
March 31, 2019
and
December 31, 2018
, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
(In thousands)
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
Rate reduction
|
|
55
|
|
|
$
|
12,387
|
|
|
56
|
|
|
$
|
10,739
|
|
Maturity extended with change in terms
|
|
44
|
|
|
4,530
|
|
|
48
|
|
|
5,083
|
|
Chapter 7 bankruptcies
|
|
22
|
|
|
1,218
|
|
|
22
|
|
|
1,275
|
|
Not elsewhere classified
|
|
9
|
|
|
763
|
|
|
11
|
|
|
966
|
|
|
|
130
|
|
|
$
|
18,898
|
|
|
137
|
|
|
$
|
18,063
|
|
During the
three
months ended
March 31, 2019
,
two
loans were modified in a TDR totaling
$2.0 million
, compared to $0.2 million for all of
2018
. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. No accruing loans that were restructured within the twelve months preceding
March 31, 2019
defaulted during the twelve months ended
March 31, 2019
. A restructured loan is considered in default when it becomes 90 days or more past due under the modified terms, has been transferred to nonaccrual status, or has been transferred to OREO.
At
March 31, 2019
, loans (excluding PCI) totaling
$35.4 million
were considered impaired (comprised of total nonaccrual, loans 90 days or more past due, and TDRs) and
$2.4 million
of the allowance for loan losses was allocated for potential losses on these loans, compared to
$36.7 million
and
$2.7 million
, respectively, at
December 31, 2018
.
In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed
on nonaccrual. Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above.
Cash and Cash Equivalents and Liquidity Risk Management
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.
Funding sources include primarily customer-based core deposits, collateral-backed borrowings, cash flows from operations, cash flows from our loan and investment portfolios and asset sales (primarily secondary marketing for residential real estate mortgages and marine financings). Cash flows from operations are a significant component of liquidity risk management and we consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk.
The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding.
Deposits are a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. We routinely use debt securities and loans as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody program.
Cash and cash equivalents (including interest bearing deposits), totaled
$204.0 million
on a consolidated basis at
March 31, 2019
, compared to
$116.0 million
at
December 31, 2018
. Higher cash and cash equivalent balances at
March 31, 2019
reflect seasonality as deposits typically peak in the first quarter, as well as proceeds from the sales of available for sale debt securities, proceeds from the redemption of First Green bank owned life insurance policies redeemed in the fourth quarter of 2018 and settled in the first quarter of 2019, and additional funds held in anticipation of brokered certificates of deposit ("CDs") maturing during the first week of April 2019.
Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity, both anticipated and unanticipated, are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, debt securities available for sale and interest-bearing deposits. The Company is also able to provide short term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency debt securities not pledged to secure public deposits or trust funds. At
March 31, 2019
, Seacoast Bank had available unsecured lines of $130.0 million and lines of credit under current lendable collateral value, which are subject to change, of $1.4 billion. Seacoast had $473.9 million of United States Treasury and Government agency debt securities and mortgage backed debt securities not pledged and available for use under repurchase agreements, and had an additional $1.0 billion in residential and commercial real estate loans available as collateral. In comparison, at
December 31, 2018
, Seacoast Bank had available unsecured lines of $130.0 million and lines of credit of $781.7 million, and had $665.7 million of Treasury and Government agency debt securities and mortgage backed debt securities not pledged and available for use under repurchase agreements, as well as an additional $869.8 million in residential and commercial real estate loans available as collateral.
The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses and to service the Company’s debt. During the first quarter of 2019, Seacoast Bank distributed $3.3 million to the Company and, at
March 31, 2019
, is eligible to distribute dividends to the Company of approximately $124.0 million without prior approval. At
March 31, 2019
, the Company had cash and cash equivalents at the parent of approximately $41.6 million, compared to $40.3 million at
December 31, 2018
.
Deposits and Borrowings
The Company’s balance sheet continues to be primarily funded by core deposits.
Total deposits increased
$428.3 million
, or
8%
, to
$5.6 billion
at
March 31, 2019
, compared to
December 31, 2018
. At
March 31, 2019
, total deposits excluding brokered CDs grew $281.1 million, or 6%, from year-end
2018
.
Since
December 31, 2018
, interest bearing deposits (interest bearing demand, savings and money market deposits) increased
$119.1 million
or
4%
to
$2.8 billion
, and CDs (excluding broker CDs) increased $55.6 million or 8%
to $760.9 million. Noninterest demand deposits were higher by $106.4 million or 7% compared to year-end
2018
, totaling $1.7 billion. Noninterest demand
deposits represented
30%
of total deposits at March 31, 2019 and
December 31, 2018
. Core deposit growth reflects our success in growing households through our unique capabilities in customer analytics and marketing automation.
During the
three
months ended
March 31, 2019
, $134.1 million of brokered CDs at an average rate of 2.19% matured, and the Company acquired
$281.3 million
in brokered CDs at a weighted average rate of 2.31%. Of the
$281.3 million
acquired, $231.3 million matures in the second quarter of 2019 and $50.0 million matures in the fourth quarter of 2019. Total brokered CDs at
March 31, 2019
totaled
$367.8 million
compared to
$220.6 million
at
December 31, 2018
.
Customer repurchase agreements totaled
$148.0 million
at
March 31, 2019
, decreasing
$66.3 million
or
31%
from
December 31, 2018
. Repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance.
No unsecured federal funds purchased were outstanding at
March 31, 2019
.
At
March 31, 2019
and
December 31, 2018
, borrowings were comprised of subordinated debt of
$70.9 million
and
$70.8 million
, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of
$3.0 million
and
$380.0 million
, respectively. At
March 31, 2019
, the remaining
$3.0 million
of FHLB borrowings matures in April 2019. The weighted average rate for FHLB funds during the
three
months ended
March 31, 2019
and
2018
was
2.53%
and
1.51%
, respectively, and compared to 1.99% for the year ended
December 31, 2018
. Secured FHLB borrowings are an integral tool in liquidity management for the Company.
The Company issued subordinated debt in conjunction with its wholly owned trust subsidiaries, SBCF Capital Trust I and SBCF Statutory Trust II that were formed in 2005. In 2007, the Company issued additional subordinated debt for its wholly owned trust subsidiary, SBCF Statutory Trust III. The 2005 subordinated debt for each trust totaled $20.6 million (aggregating to $41.2 million) and the 2007 subordinated debt totaled $12.4 million. As part of the October 1, 2014 The BANKshares Inc. acquisition, the Company inherited three junior subordinated debentures totaling $5.2 million, $4.1 million, and $5.2 million, respectively. Also, as part of the Grand acquisition, the Company inherited an additional junior subordinated debenture totaling $7.2 million. The acquired junior subordinated debentures (in accordance with ASC Topic 805
Business Combinations
) were recorded at fair value, which collectively is $4.4 million lower than face value at
March 31, 2019
. This amount is being amortized into interest expense over the acquired subordinated debts’ remaining term to maturity. All trust preferred securities are guaranteed by the Company on a junior subordinated basis.
Under Basel III and Federal Reserve rules, qualified trust preferred securities and other restricted capital elements can be included as Tier 1 capital, within limitations. The Company believes that its trust preferred securities qualify under these capital rules. The weighted average interest rate of our outstanding subordinated debt related to trust preferred securities was
5.14%
and
3.99%
for the
three
months ended
March 31, 2019
and
2018
, respectively, and compared to 4.48% for the year ended
December 31, 2018
.
Off-Balance Sheet Transactions
In the normal course of business, we may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.
Lending commitments include unfunded loan commitments and standby and commercial letters of credit. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement.
For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. Loan commitments were $992.4 million at
March 31, 2019
and
$982.7 million
at
December 31, 2018
.
Capital Resources
The Company’s equity capital at
March 31, 2019
increased
$32.2 million
from
December 31, 2018
to
$896.4 million
.
The ratio of shareholders’ equity to period end total assets was
13.21%
and
12.81%
at
March 31, 2019
and
December 31, 2018
, respectively. The ratio of tangible shareholders’ equity to tangible assets was
10.18%
and
9.72%
at
March 31, 2019
and
December 31, 2018
, respectively. Equity has increased as a result of earnings retained by the Company.
Activity in shareholders’ equity for the
three
months ended
March 31, 2019
and
2018
follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Beginning balance at December 31, 2018 and 2017
|
|
$
|
864,267
|
|
|
$
|
689,664
|
|
Net income
|
|
22,705
|
|
|
18,027
|
|
Stock compensation (net of Treasury shares acquired)
|
|
609
|
|
|
2,064
|
|
Change in other comprehensive income
|
|
8,843
|
|
|
(7,894
|
)
|
Ending balance at March 31, 2019 and 2018
|
|
$
|
896,424
|
|
|
$
|
701,861
|
|
Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast management's use of risk-based capital ratios in its analysis of the Company’s capital adequacy are “non-GAAP” financial measures. Seacoast management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies (see “Note J – Equity Capital”).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Seacoast (Consolidated)
|
|
Seacoast
Bank
|
|
Minimum to be Well- Capitalized
1
|
Total Risk-Based Capital Ratio
|
|
15.00
|
%
|
|
14.14
|
%
|
|
10.0
|
%
|
Tier 1 Capital Ratio
|
|
14.36
|
%
|
|
13.50
|
%
|
|
8.0
|
%
|
Common Equity Tier 1 Ratio (CET1)
|
|
12.98
|
%
|
|
13.50
|
%
|
|
6.5
|
%
|
Leverage Ratio
|
|
11.28
|
%
|
|
10.60
|
%
|
|
5.0
|
%
|
1
For subsidiary bank only
|
|
|
|
|
|
|
The Company’s total risk-based capital ratio was
15.00%
at
March 31, 2019
, an increase from
December 31, 2018
’s ratio of 14.43%. Higher earnings have been a primary contributor. At
March 31, 2019
, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was
10.60%
, well above the minimum to be well capitalized under regulatory guidelines.
Accumulated other comprehensive income increased
$8.8 million
during the
three
months ended
March 31, 2019
from
December 31, 2018
, primarily reflecting the impact of lower interest rates on available for sale securities.
The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $124.0 million of dividends to the Company.
The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. The board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with
its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from our acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all
$70.9 million
of trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company’s tangible common shareholders’ equity to calculate Tier 1 capital.
The Company’s capital is expected to continue to increase with positive earnings.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
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|
•
|
the allowance and the provision for loan losses;
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|
|
•
|
acquisition accounting and purchased loans;
|
|
|
•
|
intangible assets and impairment testing;
|
|
|
•
|
other fair value adjustments;
|
|
|
•
|
other than temporary impairment of debt securities;
|
|
|
•
|
realization of deferred tax assets; and
|
|
|
•
|
contingent liabilities.
|
The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information. For more information regarding management’s judgments relating to significant accounting policies and recent accounting pronouncements (see “Note A-Significant Accounting Policies” to the Company’s consolidated financial statements).
Allowance and Provision for Loan Losses – Critical Accounting Policies and Estimates
Management determines the allowance for loan losses by continuously analyzing and monitoring delinquencies, nonperforming loan levels and the outstanding balances for each loan category, as well as the amount of net charge-offs, for estimating losses inherent in its portfolio. While the Company’s policies and procedures used to estimate the allowance for loan losses are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses approximate and imprecise (see “Nonperforming Assets”).
The provision for loan losses is the result of a detailed analysis estimating for probable loan losses. The analysis includes the evaluation of impaired and purchased credit impaired loans as prescribed under FASB Accounting Standards Codification (“ASC”) Topic 310,
Receivables
as well as an analysis of homogeneous loan pools not individually evaluated as prescribed under ASC 450,
Contingencies
. The provision for loan losses for the
first
quarter of 2019 was $1.4 million, which compared to $
1.1
million for the
first
quarter of 2018. The Company incurred net charge-offs during the
first
quarter of 2019 of $1.0 million, and net charge-offs were near zero for the first quarter of 2018. Net charge-offs for the first quarter of 2019 were 0.08% of average loans, and for the four most recent quarters averaged 0.16% of outstanding loans. Delinquency trends remain low, with nonperforming loans decreasing $4.1 million during the quarter ended
March 31, 2019
(see section titled “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).
Management continuously monitors the quality of the Company’s loan portfolio and maintains an allowance for loan losses it believes is sufficient to absorb probable losses incurred in the loan portfolio. The allowance for loan losses increased $4.7 million, or 17%, to $32.8 million at
March 31, 2019
, compared to $28.1 million at March 31, 2018. The allowance for loan and lease losses (“ALLL”) framework has four basic elements: (1) specific allowances for loans individually evaluated for impairment; (2) general allowances for pools of homogeneous non-purchased loans (“portfolio loans”) within the portfolio that have similar risk characteristics, which are not individually evaluated; (3) specific allowances for purchased impaired loans which are individually evaluated based on the loan's expected principal and interest cash flows; and (4) general allowances for purchased unimpaired pools of homogeneous loans that have similar risk characteristics. The aggregate of these four components results in our total ALLL.
The first component of the ALLL analysis involves the estimation of an allowance specific to individually evaluated impaired portfolio loans, including accruing and non-accruing restructured commercial and consumer loans. In this process, a specific allowance is established for impaired loans based on an analysis of the most probable sources of repayment, including discounted cash flows, liquidation or operation of the collateral, or the market value of the loan itself. It is the Company’s policy to charge off any portion of the loan deemed uncollectible. Restructured consumer loans are also evaluated and included in this element of the estimate. As of
March 31, 2019
, the specific allowance related to impaired portfolio loans individually evaluated totaled $
2.4
million, and compared to $
2.7
million at March 31, 2018. Residential loans that become 90 days past due are placed on nonaccrual and a specific allowance is made for any loan that becomes 120 days past due. Residential loans are subsequently written down if they become 180 days past due and such write-downs are supported by a current appraisal, consistent with current banking regulations.
The second component of the ALLL analysis, the general allowance for homogeneous portfolio loan pools not individually evaluated, is determined by applying factors to pools of loans within the portfolio that have similar risk characteristics. The general allowance is determined by applying a migration model to portfolio segments that allows us to observe performance over time, and to separately analyze sub-segments based in vintage, risk rating, and origination tactics. Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the historical loss experience. These influences may include elements such as changes in concentration, macroeconomic conditions, and/or recent observable asset quality trends. Our analysis of the adequacy of the allowance for loan losses also takes into account qualitative factors such as credit quality, loan concentrations, internal controls, audit results, staff turnover, local market conditions, employment levels and loan growth.
The third component consists of amounts reserved for purchased credit-impaired ("PCI") loans. On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio.
The final component consists of amounts reserved for purchased unimpaired loans ("PUL"). Loans collectively evaluated for impairment reported at
March 31, 2019
include loans acquired from acquisitions that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. Fair value discount amounts are accreted into income over the remaining lives of the related loans on a level yield basis.
The allowance as a percentage of portfolio loans outstanding (excluding PCI and PUL loans) was 0.89% at
March 31, 2019
, no change compared to
December 31, 2018
. The risk profile of the loan portfolio reflects adherence to credit management methodologies to execute a low risk strategic plan for loan growth. New loan production is focused on residential real estate loans, owner-occupied commercial real estate, small business loans for professionals and businesses, as well as consumer lending. Strategies, processes and controls are in place to ensure that new production is well underwritten and maintains a focus on smaller, diversified and lower-risk lending.
Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. At
March 31, 2019
, the Company had
$1.3 billion
in loans secured by residential real estate and
$2.2 billion
in loans secured by commercial real estate,
representing 28% and 45% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it only operates in Florida.
It is the practice of the Company to ensure that its charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due, compared to the regulatory loss criteria of 120 days. In compliance with Federal Financial Institution Examination Council guidelines, secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.
While it is the Company’s policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, management’s judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the ALLL and the size of the ALLL in comparison to a group of peer companies identified by the regulatory agencies.
Management has established a transition oversight committee responsible for implementing the allowance guidance set forth under
ASU 2016-13,
Financial Instruments –Credit Losses (Topic 326).
Development of accounting policies and business processes is currently underway and will be established in time for the Company to adopt the new guidance on January 1, 2020. The Company may recognize an increase in the allowance for credit losses upon adoption, recorded as a one-time cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined.
Note F to the financial statements (titled “Allowance for Loan Losses”) summarizes the Company’s allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at
March 31, 2019
and
December 31, 2018
.
Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates
The Company accounts for its acquisitions under ASC Topic 805,
Business Combinations
, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820,
Fair Value Measurement
. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
Over the life of the PCI loans acquired, the Company continues to estimate cash flows expected to be collected. The Company evaluates at each balance sheet date whether the present value of the acquired loans using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.
Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates
Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. Core deposit intangibles are amortized on a straight-line basis, and are evaluated for indications of potential impairment at least annually. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We performed an annual impairment test of goodwill as required by ASC Topic 350,
Intangibles—Goodwill and Other,
in the fourth quarter of
2018
. Seacoast conducted the test internally, documenting the impairment
test results, and concluded that no impairment occurred. Goodwill was not recorded for the Grand acquisition (on July 17, 2015) that resulted in a bargain purchase gain; however a core deposit intangible was recorded.
Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.
Other Fair Value Measurements – Critical Accounting Policies and Estimates
“As Is” values are used to measure fair market value on impaired loans, OREO and repossessed assets. All impaired loans, OREO and repossessed assets are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions. When necessary, the “As Is” appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral dependent impaired loans are loans where repayment is solely dependent on the liquidation of the collateral or operation of the collateral for repayment. If an updated assessment is deemed necessary and an internal valuation cannot be made, an external “As Is” appraisal will be requested. Upon receipt of the “As Is” appraisal a charge-off is recognized for the difference between the loan amount and its current fair market value.
The fair value of the available for sale securities portfolio at
March 31, 2019
was less than historical amortized cost, producing net unrealized losses of $5.0 million that have been included in other comprehensive income (loss) as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during
2019
and
2018
. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions or from dealer quotes. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio.
During 2014, management identified $158.8 million of investment securities available for sale and transferred them to held for investment. The unrealized holding losses at the date of transfer totaled
$3.1 million
. For the securities that were transferred into the held for investment category from the available for sale category, the unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of a discount. At
March 31, 2019
, the remaining unamortized amount of these losses was
$0.6 million
. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount. Management believes the securities transferred are a core banking asset that they now intend to hold until maturity, and if interest rates were to increase before maturity, the fair values would be impacted more significantly and therefore are not consistent with the characteristics of an available for sale investment.
The Company also holds 11,330 shares of Visa Class B stock, which following resolution of Visa's litigation will be converted to Visa Class A shares. Under the current conversion rate that became effective June 28, 2018, the Company expects to receive 1.6298 shares of Class A stock for each share of Class B stock, for a total of 18,465 shares of Visa Class A stock. Our ownership of Visa stock is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at a zero basis. Also included in other assets is a
$6.3 million
investment in a CRA related mutual fund carried at fair value.
Other Than Temporary Impairment of Debt Securities – Critical Accounting Policies and Estimates
Seacoast reviews investments quarterly for other than temporary impairment (“OTTI”). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC Topic 820,
Fair Value Measurement
. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
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.
Income Taxes and Realization of Deferred Taxes – Critical Accounting Policies and Estimates
Seacoast is subject to income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local jurisdictions. These laws can be complex and subject to interpretation. Seacoast makes assumptions about how these laws should be applied when determining the provision for income tax expense, including assumptions around the timing of when certain items may be deemed taxable.
Seacoast’s provision for income taxes is comprised of current and deferred taxes. Deferred taxes represent the difference in measurement of assets and liabilities for financial reporting purposes compared to income tax return purposes. Deferred tax assets may also be recognized in connection with certain net operating losses (NOLs) and tax credits. Deferred tax assets are recognized if, based upon management’s judgment, it is more likely than not the benefits of the deferred tax assets will be realized.
At
March 31, 2019
, the Company had net deferred tax assets ("DTA") of
$24.6 million
. Although realization is not assured, management believes that realization of the carrying value of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASC Topic 740
Income Taxes
. In comparison, at
December 31, 2018
the Company had a net DTA of $
29.0
million.
Factors that support this conclusion:
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•
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Income before tax ("IBT") has steadily increased as a result of organic growth, and the 2016 Floridian and BMO, 2017 GulfShore, NorthStar and PBCB, and 2018 First Green acquisitions will further assist in achieving management’s forecast of future earnings which recovers the remaining state net operating loss carry-forwards well before expiration;
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|
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•
|
The Company has utilized all of its federal net operating loss carry-forwards, with the exception of those inherited in the acquisitions to which section 382 limitations apply;
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•
|
Credit costs and overall credit risk have been stable which decreases their impact on future taxable earnings;
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•
|
Growth rates for loans are at levels adequately supported by loan officers and support staff;
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|
•
|
We believe new loan production credit quality and concentrations are well managed; and
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|
|
•
|
Current economic growth forecasts for Florida and the Company’s markets are supportive.
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Contingent Liabilities – Critical Accounting Policies and Estimates
The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial adviser, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisers may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At
March 31, 2019
, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.
Interest Rate Sensitivity
Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility.
Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's Asset and Liability Management Committee ("ALCO") uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to instantaneous changes in market rates of 100 basis point increases up to 200 basis points of change or a 100 basis point decrease on net interest income and is monitored on a quarterly basis.
The following table presents the ALCO simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12 and 24 month periods beginning on January 1, 2019, holding all other changes in the balance sheet
static. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.
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% Change in Projected Baseline Net Interest Income
|
Change in Interest Rates
|
|
1-12 months
|
|
13-24 months
|
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+2.00%
|
|
5.65
|
%
|
|
7.48
|
%
|
+1.00%
|
|
2.91
|
%
|
|
3.92
|
%
|
Current
|
|
0.00
|
%
|
|
0.00
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%
|
-1.00%
|
|
-2.69
|
%
|
|
-4.16
|
%
|
The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 24.5% at
March 31, 2019
. This result includes assumptions for core deposit re-pricing validated for the Company by an independent third party consulting group.
The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile.
Effects of Inflation and Changing Prices
The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.