Results of Operations
First Quarter 2020 Results
For the first quarter of 2020, the Company reported net income of $0.7 million, or $0.01 per average common diluted share, compared to $27.2 million, or $0.52, for the prior quarter and $22.7 million, or $0.44, for the first quarter of 2019. Adjusted net income1 for the first quarter of 2020 totaled $5.5 million, or $0.10 per average common diluted share, compared to $26.8 million, or $0.52, for the prior quarter and $24.2 million, or $0.47, for the first quarter of 2019.
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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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2020
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2019
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2019
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Return on average tangible assets
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0.11
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%
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1.66
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%
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1.48
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%
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Return on average tangible shareholders' equity
|
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0.95
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|
|
14.95
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|
14.86
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Efficiency ratio
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59.85
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48.36
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56.55
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Adjusted return on average tangible assets1
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0.32
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%
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1.57
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%
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1.50
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%
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Adjusted return on average tangible shareholders' equity1
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2.86
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14.19
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15.11
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Adjusted efficiency ratio1
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53.61
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47.52
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55.81
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1Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
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For the three months ended March 31, 2020, the Company's return on average tangible assets and return on average tangible shareholders' equity reflect the effects of $4.6 million in merger related expenses from the acquisition of FBPB, and provision for credit losses on loans of $29.5 million, primarily attributed to the recent downturn in economic conditions and the uncertainty of the forecasted future economic environment. Results for the second quarter of 2020, and likely for the remainder of the year 2020, will be significantly impacted by the COVID-19 pandemic and its effect on the Company's markets and its customers.
Net Interest Income and Margin
Net interest income (on a fully taxable equivalent basis)1 for the first quarter of 2020 totaled $63.3 million, increasing $1.4 million, or 2%, during the quarter compared to the fourth quarter of 2019, and increasing $2.4 million, or 4%, compared to the first quarter of 2019. Net interest margin was 3.93% in the first quarter 2020, compared to 3.84% in the fourth quarter 2019 and 4.02% in the first quarter of 2019. For the first quarter of 2020, the yield on loans increased 1 basis point and the yield on securities increased 13 basis points compared to the fourth quarter of 2019, primarily due to early payoffs in both portfolios. The impact on net interest margin from accretion of purchase discounts on acquired loans was 27 basis points in the first quarter of 2020 compared to 21 basis points in the fourth quarter of 2019 and 26 basis points in the first quarter of 2019. The Federal Reserve reduced the overnight rates in the first quarter of 2020 by 150 basis points in response to the economic risks associated with COVID-19, in addition to the 75 basis points in rate reductions in the second half of 2019. Additionally, the 10-year treasury rate fell by approximately 120 basis points in the first quarter, resulting in lower new earning asset yields and further declines in the Company's variable rate earning asset portfolios. Cost of deposits declined to 57 basis points during the quarter, compared to 61 basis points in the fourth quarter of 2019 and 67 basis points in the first quarter of 2019.
The following table details the trend for net interest income and margin results (on a tax equivalent basis)1, the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified:
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(In thousands, except ratios)
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Net Interest
Income1
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Net Interest
Margin1
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Yield on
Earning Assets1
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Rate on Interest
Bearing Liabilities
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First quarter 2020
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$
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63,291
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3.93
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%
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4.54
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%
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0.90
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%
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Fourth quarter 2019
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61,846
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3.84
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%
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4.49
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%
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0.98
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%
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First quarter 2019
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60,861
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4.02
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%
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|
4.79
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%
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|
1.13
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%
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1On tax equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
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Total average loans increased $111.0 million, or 2%, for the first quarter of 2020 compared to the fourth quarter of 2019, and increased $376.2 million, or 8%, from the first quarter of 2019.
1Non-GAAP measure. - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
35
Average loans as a percentage of average earning assets totaled 81% for the first quarter of 2020, 80% for the fourth quarter of 2019 and 79% for the first quarter of 2019. Loan production was affected in the first quarter of 2020 by the suspension of business activity across many industries in response to COVID-19. The Company intentionally slowed origination activity as the potential impact of the pandemic on general economic conditions became apparent. Seacoast began accepting applications from customers on Friday, April 3 for the Paycheck Protection Program established by the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). Seacoast has processed over 3,700 loans for its customers under this program, totaling over $530 million with an average loan size of $143,000. These loans mature in two years with an automatic six month payment deferral. Customers can apply for forgiveness providing the proceeds are used for qualifying expenses. There is significant uncertainty about the expected life of these loans, including how many borrowers will seek and qualify for forgiveness. As a result, the impact on loan yields to future periods cannot currently be determined with certainty, and estimates will be periodically updated as more information becomes available.
Loan production is detailed in the following table for the periods specified:
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First
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Fourth
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First
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Quarter
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Quarter
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Quarter
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(In thousands)
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2020
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2019
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2019
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Commercial pipeline at period end
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$
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171,125
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$
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277,788
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$
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193,651
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Commercial loan originations
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183,330
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304,343
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186,003
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Residential pipeline-saleable at period end
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75,226
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18,995
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25,939
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Residential loans-sold
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62,865
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61,821
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32,558
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Residential pipeline-portfolio at period end
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11,779
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19,107
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19,346
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Residential loans-retained1
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25,776
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163,260
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49,645
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Consumer pipeline at period end
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29,123
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23,311
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51,258
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Consumer originations
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51,516
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57,659
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41,576
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1Includes wholesale loan purchases of $99.0 million in the fourth quarter of 2019.
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Commercial originations during the first quarter of 2020 were $183.3 million, a decrease of $121.0 million, or 40%, compared to the fourth quarter of 2019 and a decrease of $2.7 million, or 1%, compared to the first quarter of 2019. These amounts include Small Business Administration ("SBA") loan originations of $5.6 million in the first quarter of 2020, a decrease of $6.6 million, or 54%, from the fourth quarter of 2019 and a decrease of $12.2 million, or 68% from the first quarter of 2019. In April 2020, the SBA opened access to the Paycheck Protection Program. Seacoast has since processed over 3,700 loans for customers under this program, totaling over $530 million.
The commercial pipeline was down 38% to $171.1 million at the end of the quarter, resulting from the intentional slowing of production due to deteriorating economic conditions associated with COVID-19. Given the uncertain outlook, the Company is focused on serving current strong relationships, with liquidity, strong balance sheets and debt service coverage ratios that can support significant stress.
Closed residential loan production for the first quarter of 2020 was $88.6 million, a decrease of $37.4 million, or 30%, from the fourth quarter of 2019, excluding the purchase in the fourth quarter of 2019 of $99.0 million from the wholesale market, and an increase of $6.4 million, or 8%, from the first quarter of 2019. Residential loan production in the first quarter of 2020 reflects a continued vibrant refinance market; however, despite the low rate environment, it is unclear whether high levels of refinancing will continue through the remainder of the year.
Consumer originations totaled $51.5 million during the first quarter of 2020, a decrease of $6.1 million, or 11%, from the fourth quarter of 2019 and an increase of $9.9 million, or 24%, from the first quarter of 2019.
Average debt securities decreased $28.3 million, or 2.4%, for the first quarter 2020 compared to the fourth quarter 2019, and were $40.7 million, or 3%, lower from the first quarter of 2019.
In the first quarter of 2020, the cost of average interest-bearing liabilities contracted 8 basis points to 0.90% from 0.98%, reflecting decreases in underlying market rates. The low overall cost of our funding reflects the Company’s successful core deposit focus that produced strong growth in customer relationships over the past several years. Noninterest bearing demand deposits at
March 31, 2020 represent 29% of total deposits compared to 28% at December 31, 2019. The cost of average total deposits (including noninterest bearing demand deposits) in the first quarter of 2020 was 0.57% compared to 0.61% in the fourth quarter of 2019 and 0.67% in the first quarter of 2019.
Customer relationship funding is detailed in the following table for the periods specified:
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Customer Relationship Funding
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March 31,
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December 31,
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September 30,
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June 30,
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March 31,
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(In thousands, except ratios)
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2020
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2019
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2019
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2019
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2019
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Noninterest demand
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$
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1,703,628
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$
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1,590,493
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$
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1,652,927
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$
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1,669,804
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$
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1,676,009
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Interest-bearing demand
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1,234,193
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1,181,732
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1,115,455
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1,124,519
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1,100,477
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Money market
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1,124,378
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1,108,363
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1,158,862
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1,172,971
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1,192,070
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Savings
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554,836
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519,152
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528,214
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519,732
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508,320
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Time certificates of deposit
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1,270,464
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1,185,013
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1,217,683
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1,054,183
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1,128,702
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Total deposits
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$
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5,887,499
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$
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5,584,753
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$
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5,673,141
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|
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$
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5,541,209
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$
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5,605,578
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Customer sweep accounts
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$
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64,723
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$
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86,121
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|
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$
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70,414
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|
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$
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82,015
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$
|
148,005
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Noninterest demand deposits as % of total deposits
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|
29
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%
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28
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%
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29
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%
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|
30
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%
|
|
30
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%
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The Company’s focus on convenience, with high quality customer service, expanded digital offerings and distribution channels provides stable, low cost core deposit funding. Over the past several years, the Company has strengthened its retail deposit franchise using new strategies and product offerings, while maintaining a focus on growing customer relationships. Seacoast believes that digital product offerings are central to core deposit growth and have proved to be of meaningful value to its customers in this environment. During the first quarter of 2020, average transaction deposits (noninterest and interest bearing demand) increased $156.9 million, or 6%, compared to the same period in 2019. Along with new and acquired relationships, deposit programs and digital sales have improved the Company's market share and deepened relationships with existing customers.
Growth in core deposits has also provided low funding costs. The Company’s deposit mix remains favorable, with 79% of average deposit balances comprised of savings, money market, and demand deposits at March 31, 2020. Seacoast's average cost of deposits, including non interest bearing demand deposits, decreased to 0.57% at March 31, 2020 compared to 0.61% at December 31, 2019, congruent with decreases in the Fed funds rate beginning in the third quarter of 2019 and will continue to benefit in the current low rate environment. Brokered CDs totaled $597.7 million at March 31, 2020, with an average rate of 1.34%. Maturities of these CDs are laddered, with a weighted average maturity of 90 days as of March 31, 2020. The relatively short duration of the brokered CDs allows management to advantageously reprice its funding, taking advantage of the current lower rate environment.
Short-term borrowings, principally comprised of sweep repurchase agreements with customers, decreased $114.0 million, or 62%, year-over-year to an average balance of $71.1 million. The decrease reflects a shift in customer balances into interest bearing deposits. The average rate on customer sweep repurchase accounts was 0.95% for the three months ended March 31, 2020, compared to 1.21% for the same period during 2019. The remaining balances in this product offering will continue to be valuable to customers, although at lower amounts. No federal funds purchased were utilized at March 31, 2020 or 2019.
For the three months ended March 31, 2020, FHLB borrowings averaged $250.0 million, increasing $22.6 million, or 10%, compared to the same period during 2019. The average rate on FHLB borrowings for the three months ended March 31, 2020 was 1.56% compared to 2.53% for the three months ended March 31, 2019. The mix of brokered deposits and FHLB advances continues to be managed to obtain the most advantageous rates.
For the three months ended March 31, 2020, subordinated debt averaged $71.1 million, an increase of $0.3 million compared to the same period during 2019. The average rate on subordinated debt for the three months ended March 31, 2020 was 4.08%, compared to 5.14% for the three months ended March 31, 2019. The subordinated debt relates to trust preferred securities issued by subsidiary trusts of the Company.
The following tables detail average balances, net interest income and margin results (on a tax equivalent basis) for the periods presented:
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Average Balances, Interest Income and Expenses, Yields and Rates1
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2020
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2019
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First Quarter
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Fourth Quarter
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First Quarter
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Average
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Yield/
|
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Average
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|
|
|
Yield/
|
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Average
|
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|
|
Yield/
|
(In thousands, except ratios)
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
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Interest
|
|
Rate
|
Assets
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Earning assets:
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Securities:
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Taxable
|
$
|
1,152,473
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|
|
$
|
8,696
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|
|
3.02
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%
|
|
$
|
1,179,843
|
|
|
$
|
8,500
|
|
|
2.88
|
%
|
|
$
|
1,186,374
|
|
|
$
|
9,119
|
|
|
3.07
|
%
|
Nontaxable
|
19,740
|
|
|
152
|
|
|
3.09
|
|
|
20,709
|
|
|
162
|
|
|
3.13
|
|
|
26,561
|
|
|
190
|
|
|
2.86
|
|
Total Securities
|
1,172,213
|
|
|
8,848
|
|
|
3.02
|
|
|
1,200,552
|
|
|
8,662
|
|
|
2.89
|
|
|
1,212,935
|
|
|
9,309
|
|
|
3.07
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|
|
|
|
|
|
|
|
|
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|
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Federal funds sold and other investments
|
87,924
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|
|
734
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|
|
3.36
|
|
|
84,961
|
|
|
788
|
|
|
3.68
|
|
|
91,136
|
|
|
918
|
|
|
4.09
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|
|
|
|
|
|
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|
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Loans, net
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5,215,234
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|
|
63,524
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|
|
4.90
|
|
|
5,104,272
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|
|
62,922
|
|
|
4.89
|
|
|
4,839,046
|
|
|
62,335
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
6,475,371
|
|
|
73,106
|
|
|
4.54
|
|
|
6,389,785
|
|
|
72,372
|
|
|
4.49
|
|
|
6,143,117
|
|
|
72,562
|
|
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
(56,931
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)
|
|
|
|
|
|
(34,072
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)
|
|
|
|
|
|
(32,966
|
)
|
|
|
|
|
Cash and due from banks
|
90,084
|
|
|
|
|
|
|
99,008
|
|
|
|
|
|
|
99,940
|
|
|
|
|
|
Premises and equipment
|
67,585
|
|
|
|
|
|
|
67,485
|
|
|
|
|
|
|
70,938
|
|
|
|
|
|
Intangible assets
|
226,712
|
|
|
|
|
|
|
226,060
|
|
|
|
|
|
|
230,066
|
|
|
|
|
|
Bank owned life insurance
|
126,492
|
|
|
|
|
|
|
125,597
|
|
|
|
|
|
|
123,708
|
|
|
|
|
|
Other assets
|
126,230
|
|
|
|
|
|
|
122,351
|
|
|
|
|
|
|
136,175
|
|
|
|
|
|
Total Assets
|
$
|
7,055,543
|
|
|
|
|
|
|
$
|
6,996,214
|
|
|
|
|
|
|
$
|
6,770,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
$
|
1,173,930
|
|
|
$
|
834
|
|
|
0.29
|
%
|
|
$
|
1,190,681
|
|
|
$
|
983
|
|
|
0.33
|
%
|
|
$
|
1,029,726
|
|
|
$
|
839
|
|
|
0.33
|
%
|
Savings
|
526,727
|
|
|
348
|
|
|
0.27
|
|
|
528,771
|
|
|
422
|
|
|
0.32
|
|
|
500,347
|
|
|
477
|
|
|
0.39
|
|
Money market
|
1,128,757
|
|
|
2,008
|
|
|
0.72
|
|
|
1,148,453
|
|
|
2,184
|
|
|
0.75
|
|
|
1,158,939
|
|
|
2,557
|
|
|
0.89
|
|
Time deposits
|
1,151,750
|
|
|
4,768
|
|
|
1.67
|
|
|
1,078,297
|
|
|
5,084
|
|
|
1.87
|
|
|
1,042,346
|
|
|
4,959
|
|
|
1.93
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
71,065
|
|
|
167
|
|
|
0.95
|
|
|
73,693
|
|
|
226
|
|
|
1.22
|
|
|
185,032
|
|
|
550
|
|
|
1.21
|
|
Federal Home Loan Bank borrowings
|
250,022
|
|
|
968
|
|
|
1.56
|
|
|
181,134
|
|
|
845
|
|
|
1.85
|
|
|
227,378
|
|
|
1,421
|
|
|
2.53
|
|
Other borrowings
|
71,114
|
|
|
722
|
|
|
4.08
|
|
|
71,045
|
|
|
782
|
|
|
4.37
|
|
|
70,836
|
|
|
898
|
|
|
5.14
|
|
Total Interest-Bearing Liabilities
|
4,373,365
|
|
|
9,815
|
|
|
0.90
|
|
|
4,272,074
|
|
|
10,526
|
|
|
0.98
|
|
|
4,214,604
|
|
|
11,701
|
|
|
1.13
|
|
Noninterest demand
|
1,625,215
|
|
|
|
|
|
|
1,680,734
|
|
|
|
|
|
|
1,612,548
|
|
|
|
|
|
Other liabilities
|
62,970
|
|
|
|
|
|
|
67,206
|
|
|
|
|
|
|
64,262
|
|
|
|
|
|
Total Liabilities
|
6,061,550
|
|
|
|
|
|
|
6,020,014
|
|
|
|
|
|
|
5,891,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
993,993
|
|
|
|
|
|
|
976,200
|
|
|
|
|
|
|
879,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity
|
$
|
7,055,543
|
|
|
|
|
|
|
$
|
6,996,214
|
|
|
|
|
|
|
$
|
6,770,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of deposits
|
|
|
|
|
0.57
|
%
|
|
|
|
|
|
0.61
|
%
|
|
|
|
|
|
0.67
|
%
|
Interest expense as a % of earning assets
|
|
|
|
|
0.61
|
%
|
|
|
|
|
|
0.65
|
%
|
|
|
|
|
|
0.77
|
%
|
Net interest income as a % of earning assets
|
|
|
$
|
63,291
|
|
|
3.93
|
%
|
|
|
|
$
|
61,846
|
|
|
3.84
|
%
|
|
|
|
$
|
60,861
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.
|
Noninterest Income
Noninterest income totaled $14.7 million for the first quarter of 2020, a decrease of $1.7 million, or 10%, compared to the fourth quarter of 2019 and an increase of $1.9 million, or 14%, from the first quarter of 2019. For the three months ended March 31, 2020, noninterest income accounted for 19% of total revenue (excluding securities gains and losses), compared to 17% for the three months ended March 31, 2019.
Noninterest income for the first quarter of 2020 compared to the fourth and first quarters of 2019 is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands)
|
2020
|
|
2019
|
|
2019
|
Service charges on deposit accounts
|
$
|
2,825
|
|
|
$
|
2,960
|
|
|
$
|
2,697
|
|
Interchange income
|
3,246
|
|
|
3,387
|
|
|
3,401
|
|
Wealth management income
|
1,867
|
|
|
1,579
|
|
|
1,453
|
|
Mortgage banking fees
|
2,208
|
|
|
1,514
|
|
|
1,115
|
|
Marine finance fees
|
146
|
|
|
338
|
|
|
362
|
|
SBA gains
|
139
|
|
|
576
|
|
|
636
|
|
BOLI income
|
886
|
|
|
904
|
|
|
915
|
|
Other income
|
3,352
|
|
|
2,579
|
|
|
2,266
|
|
|
14,669
|
|
|
13,837
|
|
|
12,845
|
|
Securities gains (losses), net
|
19
|
|
|
2,539
|
|
|
(9
|
)
|
Total
|
$
|
14,688
|
|
|
$
|
16,376
|
|
|
$
|
12,836
|
|
Service charges on deposits were $2.8 million in the first quarter of 2020, a decrease of $0.1 million, or 5%, compared to the prior quarter and an increase of $0.1 million, or 5%, compared to the prior year. Overdraft fees represent 53% of total service charges on deposits in the first quarter of 2020.
Wealth management income, including trust fees and brokerage commissions and fees, was a record $1.9 million in the first quarter of 2020, increasing $0.3 million, or 18%, from the fourth quarter of 2019 and $0.4 million, or 28%, from the first quarter of 2019. These increases are the result of continued growth in assets under management, a growing sales and support team, industry leading products including digital tools, and the benefit of direct referrals from the Company's team of bankers.
Mortgage banking fees increased by $0.7 million, or 46%, to a record $2.2 million in the first quarter of 2020 compared to the prior quarter, and increased $1.1 million, or 98%, compared to the first quarter of 2019. These increases reflect the combination of increased refinance activity due to lower long-term rates and a greater focus on generating saleable volume.
Marine finance fees were $0.1 million, a decrease $0.2 million, or 57%, from the prior quarter and a decrease of $0.2 million, or 60%, from the prior year, driven by changes in volume.
Interchange income totaled $3.2 million for the three months ended March 31, 2020, a decrease of $0.1 million, or 4%, compared to the three months ended December 31, 2019, and a decrease of $0.2 million, or 5%, compared to the three months ended March 31, 2019. The first quarter of 2020 was impacted by the COVID-19 pandemic and its effect on consumer consumption late in the quarter. The Company believes that interchange income could continue to be negatively impacted by lower spending volume in future periods.
Bank owned life insurance ("BOLI") income totaled $0.9 million for the first quarter of 2020, in line with the prior quarter and prior year results.
SBA income totaled $0.1 million for the first quarter of 2020, a decrease of $0.4 million, or 76%, compared to the prior quarter and a decrease of $0.5 million, or 78%, compared to the prior year, the result of lower production of saleable SBA loans.
Other income was $3.4 million in the first quarter of 2020, an increase of $0.8 million, or 30%, quarter-over-quarter and an increase of $1.1 million, or 48%, year-over-year. Increases reflect higher revenue from SBIC investments in the first quarter of 2020.
Securities losses for the first quarter of 2020 totaled $0.1 million, resulting from the sale of $27.8 million of debt securities with an average yield of 2.44%. Securities gains totaled $2.6 million for the fourth quarter of 2019 and securities losses totaled $0.1 million for the first quarter of 2019. Changes in the value of a CRA-qualified mutual fund investment are also included in this line item and represented gains of $0.1 million in the first quarter of 2020, none in the fourth quarter of 2019 and gains of $0.1 million in the first quarter of 2019.
Noninterest Expenses
The Company has improved its efficiency ratio over time through continued focus on expense discipline as well as more efficient channel integration, allowing consumers and businesses to choose their path of convenience to satisfy their banking needs. Noninterest expenses in the first quarter of 2020 were impacted by typical seasonal trends and the Company continues to focus on streamlining operations. Seacoast has reduced its footprint by 20% since 2017 through successful bank acquisitions and the repositioning of the banking center network in strategic growth markets to meet the evolving needs of its customers. At March 31, 2020, deposits per banking center were $118 million, up from $112 million at March 31, 2019.
For the first quarter of 2020, the efficiency ratio, defined as noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties divided by net operating revenue (net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses), was 59.85% compared to 48.36% for the fourth quarter of 2019 and 56.55% for the first quarter of 2019. Adjusted noninterest expense1 was $41.5 million for the first quarter of 2020, compared to $36.0 million for the fourth quarter of 2019 and $41.1 million for the first quarter of 2019. The adjusted efficiency ratio1 year-over-year improved, declining from 55.81% for the first quarter 2019 to 53.61% for the first quarter of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands, except ratios)
|
|
2020
|
|
2019
|
|
2019
|
Noninterest expense, as reported
|
|
$
|
47,798
|
|
|
$
|
38,057
|
|
|
$
|
43,099
|
|
|
|
|
|
|
|
|
Merger related charges
|
|
(4,553
|
)
|
|
(634
|
)
|
|
(335
|
)
|
Amortization of intangibles
|
|
(1,456
|
)
|
|
(1,456
|
)
|
|
(1,458
|
)
|
Business continuity expenses
|
|
(307
|
)
|
|
—
|
|
|
—
|
|
Branch reductions and other expense initiatives
|
|
—
|
|
|
—
|
|
|
(208
|
)
|
Adjusted noninterest expense1
|
|
$
|
41,482
|
|
|
$
|
35,967
|
|
|
$
|
41,098
|
|
|
|
|
|
|
|
|
Foreclosed property expense and net gain/(loss) on sale
|
|
315
|
|
|
(3
|
)
|
|
40
|
|
|
|
|
|
|
|
|
Net adjusted noninterest expense1
|
|
$
|
41,797
|
|
|
$
|
35,964
|
|
|
$
|
41,138
|
|
|
|
|
|
|
|
|
Efficiency Ratio
|
|
59.85
|
%
|
|
48.36
|
%
|
|
56.55
|
%
|
Adjusted efficiency ratio1,2
|
|
53.61
|
|
|
47.52
|
|
|
55.81
|
|
1Non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
|
2Adjusted efficiency ratio is defined as noninterest expense, including adjustment to noninterest expense divided by aggregated tax equivalent net interest income and noninterest income, including adjustments to revenue
|
Noninterest expenses for the first quarter of 2020 totaled $47.8 million, an increase of $9.7 million, or 26%, compared to the fourth quarter of 2020, and an increase of $4.7 million, or 11%, from the first quarter of 2019. Noninterest expenses for the first quarter of 2020, as compared to the fourth and first quarters of 2019 are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands)
|
|
2020
|
|
2019
|
|
2019
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
23,698
|
|
|
$
|
17,263
|
|
|
$
|
18,506
|
|
Employee benefits
|
|
4,255
|
|
|
3,323
|
|
|
4,206
|
|
Outsourced data processing costs
|
|
4,633
|
|
|
3,645
|
|
|
3,845
|
|
Telephone/data lines
|
|
714
|
|
|
651
|
|
|
811
|
|
Occupancy
|
|
3,353
|
|
|
3,368
|
|
|
3,807
|
|
Furniture and equipment
|
|
1,623
|
|
|
1,416
|
|
|
1,757
|
|
Marketing
|
|
1,278
|
|
|
885
|
|
|
1,132
|
|
Legal and professional fees
|
|
3,363
|
|
|
2,025
|
|
|
2,847
|
|
FDIC assessments
|
|
—
|
|
|
—
|
|
|
488
|
|
Amortization of intangibles
|
|
1,456
|
|
|
1,456
|
|
|
1,458
|
|
Foreclosed property expense and net (gain)/loss on sale
|
|
(315
|
)
|
|
3
|
|
|
(40
|
)
|
Other
|
|
3,740
|
|
|
4,022
|
|
|
4,282
|
|
Total
|
|
$
|
47,798
|
|
|
$
|
38,057
|
|
|
$
|
43,099
|
|
Salaries and wages totaled $23.7 million for the first quarter of 2020, $17.3 million for the fourth quarter of 2019, and $18.5 million for the first quarter of 2019. The first quarter of 2020 included $2.2 million in acquisition-related charges, and $0.3 million in bonuses to retail associates for keeping critical functions operating at full capacity through the initial stages of the Company's response to the COVID-19 pandemic. The remaining increase was the result of recruiting seasoned bankers and the impact of fewer loan originations on the deferred loan origination costs.
During the first quarter 2020, employee benefit costs, which include costs associated with group health insurance, 401(k) plan, payroll taxes, and unemployment compensation, were $4.3 million, an increase of $0.9 million, or 28%, compared to the prior quarter and flat year-over-year. Increases from the fourth quarter of 2019 are primarily the result of a return of payroll taxes and 401(k) contribution expenses and the reactivation of incentive accruals, all in line with prior years' seasonality.
The Company utilizes third parties for its core data processing systems. The data processing costs are directly related to the number of transactions processed and the negotiated rates associated with those transactions. Outsourced data processing costs totaled $4.6 million, $3.6 million and $3.8 million for the first quarter 2020, fourth quarter 2019 and first quarter 2019, respectively. Of the $1.0 million increase quarter-over-quarter, $0.8 million was acquisition related. The Company continues to improve and enhance mobile and other digital products and services through key third parties. This may increase outsourced data processing costs as customers adopt improvements and products and as business volumes grow.
Telephone and data line expenditures, including electronic communications with customers and between branch and customer support locations and personnel, as well as with third party data processors, was $0.7 million, an increase of $0.1 million, or 10%, during the first quarter of 2020 when compared to the fourth quarter of 2019 and a decrease of $0.1 million, or 12%, when compared to the first quarter of 2019.
Total occupancy, furniture and equipment expenses for the first quarter of 2020 increased $0.2 million, or 4%, from the fourth quarter of 2019, and decreased compared to the first quarter of 2019 by $0.6 million, or 11%. Lease expenses for the three months ended March 31, 2020 were flat quarter-over-quarter despite the additional branches acquired from FBPB and decreased $0.1 million, or 5% year-over-year due to the expiration of the Company's operations center lease a year ago. Depreciation and other furniture and equipment expenditures were flat quarter-over-quarter, and each decreased by $0.2 million when compared to the prior year. The Company believes branches are still valuable to customers for more complex transactions, but simple tasks, such as depositing and withdrawing funds, are rapidly migrating to the digital world. Management anticipates that branch consolidations will continue for the Company and the banking industry in general.
For the first quarter of 2020, fourth quarter of 2019 and first quarter of 2019, marketing expenses totaled $1.3 million, $0.9 million and $1.1 million, respectively. First quarter increases included $0.1 million in acquisition related expenses and 2020 deposit promotions.
Legal and professional fees for the first quarter of 2020, fourth quarter of 2019 and first quarter of 2019 totaled $3.4 million, $2.0 million, and $2.8 million, respectively, inclusive of $1.1 million in merger related expenses in the first quarter of 2020. Significant projects in the first quarter of 2019 in risk management and lending operations contributed to higher professional fees in the 2019 three-month period.
During the third quarter of 2019, the FDIC announced the achievement of their target deposit insurance reserve ratio, resulting in the Company's ability to apply previously awarded credits to deposit insurance assessments. This resulted in no FDIC assessment expenses for the first quarter of 2020 or for the fourth quarter of 2019. The Company has remaining credits of $0.2 million, which will be applied to future assessments if the FDIC’s reserve ratio remains above the target threshold.
For the first quarter of 2020, gains on sales of OREO offset write-downs and expenses on foreclosed properties, resulting in a net gain of $0.3 million. (see “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).
Other expense totaled $3.7 million, $4.0 million and $4.3 million for the first quarter of 2020, the fourth quarter of 2019 and the first quarter of 2019, respectively. Primary contributors to the decreases were varied, including decreases in education-related costs, dues to organizations, overnight delivery service fees, correspondent clearing, travel charges, stationery, printing and supplies, and other expenditure reductions resulting from the Company's continued focus on efficiency and streamlining operations.
Income Taxes
For the first quarter of 2020, the Company recorded a tax benefit of $0.2 million compared to tax expenses of $8.1 million in the fourth quarter of 2019 and $6.4 million in the first quarter of 2019. Tax benefits related to stock-based compensation totaled $0.3 million in the first quarter of 2020, compared to $0.1 million in the fourth quarter of 2019 and $0.6 million in the first quarter of 2019. 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”). The financial highlights provide reconciliations between GAAP and adjusted financial measures including net income, fully taxable equivalent net interest income, noninterest income, noninterest expense, tax adjustments, net interest margin and other financial ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might define or calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Reconciliation to GAAP
|
|
|
|
|
|
|
First
|
|
Fourth
|
|
First
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
(In thousands, except per share data)
|
2020
|
|
2019
|
|
2019
|
Net income, as reported:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
709
|
|
|
$
|
27,176
|
|
|
$
|
22,705
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
0.01
|
|
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
Adjusted net income:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
709
|
|
|
$
|
27,176
|
|
|
$
|
22,705
|
|
Securities (gains) losses, net
|
(19
|
)
|
|
(2,539
|
)
|
|
9
|
|
Total adjustments to revenue
|
(19
|
)
|
|
(2,539
|
)
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related charges
|
(4,553
|
)
|
|
(634
|
)
|
|
(335
|
)
|
Amortization of intangibles
|
(1,456
|
)
|
|
(1,456
|
)
|
|
(1,458
|
)
|
Business continuity expenses
|
(307
|
)
|
|
—
|
|
|
—
|
|
Branch reductions and other expense initiatives1
|
—
|
|
|
—
|
|
|
(208
|
)
|
Total adjustments to noninterest expense
|
(6,316
|
)
|
|
(2,090
|
)
|
|
(2,001
|
)
|
|
|
|
|
|
|
Tax effect of adjustments
|
1,544
|
|
|
(110
|
)
|
|
510
|
|
Adjusted net income
|
$
|
5,462
|
|
|
$
|
26,837
|
|
|
$
|
24,205
|
|
|
|
|
|
|
|
Adjusted diluted earnings per share
|
$
|
0.10
|
|
|
$
|
0.52
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
Average Assets
|
$
|
7,055,543
|
|
|
$
|
6,996,214
|
|
|
$
|
6,770,978
|
|
Less average goodwill and intangible assets
|
(226,712
|
)
|
|
(226,060
|
)
|
|
(230,066
|
)
|
Average Tangible Assets
|
$
|
6,828,831
|
|
|
$
|
6,770,154
|
|
|
$
|
6,540,912
|
|
|
|
|
|
|
|
Return on Average Assets (ROA)
|
0.04
|
%
|
|
1.54
|
%
|
|
1.36
|
%
|
Impact of removing average intangible assets and related amortization
|
0.07
|
|
|
0.12
|
|
|
0.12
|
|
Return on Average Tangible Assets (ROTA)
|
0.11
|
|
|
1.66
|
|
|
1.48
|
|
Impact of other adjustments for Adjusted Net Income
|
0.21
|
|
|
(0.09
|
)
|
|
0.02
|
|
Adjusted Return on Average Tangible Assets
|
0.32
|
|
|
1.57
|
|
|
1.50
|
|
|
|
|
|
|
|
Average Shareholders' Equity
|
$
|
993,993
|
|
|
$
|
976,200
|
|
|
$
|
879,564
|
|
Less average goodwill and intangible assets
|
(226,712
|
)
|
|
(226,060
|
)
|
|
(230,066
|
)
|
Average Tangible Equity
|
$
|
767,281
|
|
|
$
|
750,140
|
|
|
$
|
649,498
|
|
|
|
|
|
|
|
Return on Average Shareholders' Equity
|
0.29
|
%
|
|
11.04
|
%
|
|
10.47
|
%
|
Impact of removing average intangible assets and related amortization
|
0.66
|
|
|
3.91
|
|
|
4.39
|
|
Return on Average Tangible Common Equity (ROTCE)
|
0.95
|
|
|
14.95
|
|
|
14.86
|
|
Impact of other adjustments for Adjusted Net Income
|
1.91
|
|
|
(0.76
|
)
|
|
0.25
|
|
Adjusted Return on Average Tangible Common Equity
|
2.86
|
|
|
14.19
|
|
|
15.11
|
|
|
|
|
|
|
|
Loan interest income excluding accretion on acquired loans2
|
$
|
59,237
|
|
|
$
|
59,515
|
|
|
$
|
58,397
|
|
Accretion on acquired loans
|
4,287
|
|
|
3,407
|
|
|
3,938
|
|
Loan Interest Income2
|
$
|
63,524
|
|
|
$
|
62,922
|
|
|
$
|
62,335
|
|
|
|
|
|
|
|
Yield on loans excluding accretion on acquired loans2
|
4.57
|
%
|
|
4.63
|
%
|
|
4.89
|
%
|
Impact of accretion on acquired loans
|
0.33
|
|
|
0.26
|
|
|
0.33
|
|
Yield on Loans2
|
4.90
|
|
|
4.89
|
|
|
5.22
|
|
|
|
|
|
|
|
Net interest income excluding accretion on acquired loans2
|
$
|
59,004
|
|
|
$
|
58,439
|
|
|
$
|
56,923
|
|
Accretion on acquired loans
|
4,287
|
|
|
3,407
|
|
|
3,938
|
|
Net Interest Income2
|
$
|
63,291
|
|
|
$
|
61,846
|
|
|
$
|
60,861
|
|
|
|
|
|
|
|
Net interest margin excluding accretion on acquired loans2
|
3.66
|
%
|
|
3.63
|
%
|
|
3.76
|
%
|
Impact of accretion on acquired loans
|
0.27
|
|
|
0.21
|
|
|
0.26
|
|
Net Interest Margin2
|
3.93
|
|
|
3.84
|
|
|
4.02
|
|
|
|
|
|
|
|
Loan interest income excluding tax equivalent adjustment
|
$
|
63,440
|
|
|
$
|
62,867
|
|
|
$
|
62,287
|
|
Tax equivalent adjustment to loans
|
84
|
|
|
55
|
|
|
48
|
|
Loan Interest Income2
|
$
|
63,524
|
|
|
$
|
62,922
|
|
|
$
|
62,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities interest income excluding tax equivalent adjustment
|
$
|
8,817
|
|
|
$
|
8,630
|
|
|
$
|
9,270
|
|
Tax equivalent adjustment to securities
|
31
|
|
|
32
|
|
|
39
|
|
Securities Interest Income2
|
$
|
8,848
|
|
|
$
|
8,662
|
|
|
$
|
9,309
|
|
|
|
|
|
|
|
Net interest income excluding tax equivalent adjustments
|
$
|
63,176
|
|
|
$
|
61,759
|
|
|
$
|
60,774
|
|
Tax equivalent adjustments to loans
|
84
|
|
|
55
|
|
|
48
|
|
Tax equivalent adjustments to securities
|
31
|
|
|
32
|
|
|
39
|
|
Net Interest Income2
|
$
|
63,291
|
|
|
$
|
61,846
|
|
|
$
|
60,861
|
|
1Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect the Company's branch consolidation and other expense reduction strategies.
|
2On a fully taxable equivalent basis. All yields and rates have been computed using amortized cost.
|
Financial Condition
Total assets increased $244.4 million, or 3%, from December 31, 2019, benefiting from the first quarter acquisition of FBPB and new relationships derived through the Company's unique combination of customer analytics, marketing automation and experienced bankers in growing 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.
At March 31, 2020, the Company had $910.3 million in debt securities available-for-sale and $252.4 million in debt securities held-to-maturity. The Company's total debt securities portfolio decreased $45.5 million, or 4%, from December 31, 2019.
During the three months ended March 31, 2020, there were $74.2 million of debt security purchases and $63.5 million in paydowns and maturities. For the three months ended March 31, 2020, proceeds from the sale of securities totaled $27.8 million, with net losses of $0.1 million. For the three months ended March 31, 2019, there were no debt security purchases and aggregated maturities and principal paydowns totaled $27.1 million. Proceeds from sales of securities during the three months ended March 31, 2019 totaled $35.0 million, with net losses of $0.1 million.
Debt securities generally return principal and interest monthly. The modified duration of the investment portfolio at March 31, 2020 was 3.3 years, compared to 3.5 years at December 31, 2019.
At March 31, 2020, available-for-sale debt securities had gross unrealized losses of $22.2 million and gross unrealized gains of $28.5 million, compared to gross unrealized losses of $2.7 million and gross unrealized gains of $8.8 million at December 31, 2019.
The credit quality of the Company’s securities holdings are primarily investment grade. U.S. Treasuries, obligations of U.S. government agencies and obligations of U.S. government sponsored entities totaled $897.2 million, or 77%, of the total portfolio.
The portfolio includes $50.6 million in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are 28 positions totaling $30.5 million ($28.5 million fair value) in private label mortgage-backed residential securities, primarily originated in 2005 or prior years with low loan to value ("LTV"), current FICO scores above 700, and weighted average credit support of 20%. The collateral underlying these mortgage investments include both fixed-rate and adjustable-rate mortgage loans. Five positions in non-guaranteed agency commercial securities total $22.3 million ($22.1 million fair value). These securities have weighted average LTVs in the mid-60s and average credit support of 11%. The collateral underlying these mortgages are primarily pooled multifamily loans.
The Company also has invested $205.2 million ($185.7 million fair value) in uncapped 3-month LIBOR floating rate collateralized loan obligations ("CLOs"). CLOs are special purpose vehicles, and the Company’s holdings purchase nearly all first lien broadly syndicated corporate loans across a diversified band of industries while providing support to senior tranche investors. As of March 31, 2020, the Company held 29 total positions, of which 23 positions totaling $180.2 million ($164.6 million fair value), or 88%, are in AAA/AA tranches, and 6 positions totaling $25.0 million ($21.1 million fair value), or 12%, are in A rated tranches with average credit support of 31% and 18%, respectively. The Company utilizes credit models with assumptions of loan level defaults, recoveries, and prepayments for each CLO security. The results of this analysis did not indicate expected credit losses.
Held-to-maturity securities consist solely of mortgage-backed securities guaranteed by government agencies.
At March 31, 2020, the Company has determined that all debt securities in an unrealized loss position are the result of both broad investment type spreads and the current rate environment. Management believes that each investment will recover any price depreciations over its holding period as the debt securities move to maturity and there is the intent and ability to hold these investments to maturity if necessary. Therefore, at March 31, 2020, no allowance for credit losses has been recorded.
Loan Portfolio
Loans, net of unearned income and excluding the allowance for credit losses, were $5.3 billion at March 31, 2020, $118.8 million more than at December 31, 2019. For the three months ended March 31, 2020, $183.3 million in commercial and commercial real estate loans were originated compared to $186.0 million for the three months ended March 31, 2019, a decrease of $2.7 million, or 1%. The loan pipeline for commercial and commercial real estate loans totaled $171.1 million at March 31, 2020. Consumer originations totaled $51.5 million at March 31, 2020, higher by $9.9 million, or 24%, compared to the three months ended March 31, 2019, and the pipeline for these loans at March 31, 2020 was $29.1 million.
The Company closed $88.6 million in residential loans during the first quarter of 2020, compared to $126.0 million closed during the fourth quarter of 2019. Saleable volumes were higher for the first quarter of 2020, representing 71% of production versus 49% of production during the fourth quarter of 2019. The saleable residential mortgage pipeline at March 31, 2020 totaled $75.2 million while the retained pipeline decreased to $11.8 million.
Continued loan growth is accompanied by sound risk management procedures. Lending policies contain guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the principal amount of loans. The Company's exposure to commercial real estate lending remains below regulatory limits (see “Loan Concentrations”).
The following tables detail loan portfolio composition at March 31, 2020 for portfolio loans, purchased credit deteriorated (“PCD”) and loans purchased which are not considered purchased credit deteriorated (“Non PCD”) as defined in Note E-Loans; and at December 31, 2019 for portfolio loans, purchased credit impaired loans ("PCI") and purchased unimpaired loans("PUL").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(In thousands)
|
Portfolio Loans
|
|
Acquired Non PCD Loans
|
|
PCD Loans
|
|
Total
|
Construction and land development
|
$
|
257,481
|
|
|
$
|
34,934
|
|
|
$
|
2,990
|
|
|
$
|
295,405
|
|
Commercial real estate - owner occupied
|
824,836
|
|
|
230,517
|
|
|
27,540
|
|
|
1,082,893
|
|
Commercial real estate - non owner occupied
|
1,058,841
|
|
|
310,417
|
|
|
11,838
|
|
|
1,381,096
|
|
Residential real estate
|
1,315,664
|
|
|
233,169
|
|
|
10,921
|
|
|
1,559,754
|
|
Commercial and financial
|
721,380
|
|
|
73,134
|
|
|
1,524
|
|
|
796,038
|
|
Consumer
|
195,176
|
|
|
6,478
|
|
|
368
|
|
|
202,022
|
|
Net Loan Balances
|
$
|
4,373,378
|
|
|
$
|
888,649
|
|
|
$
|
55,181
|
|
|
$
|
5,317,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In thousands)
|
Portfolio Loans
|
|
PULs
|
|
PCI Loans
|
|
Total
|
Construction and land development
|
$
|
281,335
|
|
|
$
|
43,618
|
|
|
$
|
160
|
|
|
$
|
325,113
|
|
Commercial real estate1
|
1,834,811
|
|
|
533,943
|
|
|
10,217
|
|
|
2,378,971
|
|
Residential real estate
|
1,304,305
|
|
|
201,848
|
|
|
1,710
|
|
|
1,507,863
|
|
Commercial and financial
|
697,301
|
|
|
80,372
|
|
|
579
|
|
|
778,252
|
|
Consumer
|
200,166
|
|
|
8,039
|
|
|
—
|
|
|
208,205
|
|
Net Loan Balances
|
$
|
4,317,918
|
|
|
$
|
867,820
|
|
|
$
|
12,666
|
|
|
$
|
5,198,404
|
|
1Commercial real estate includes owner-occupied balances of $1.0 billion for December 31, 2019.
|
The amortized cost basis of portfolio loans as of March 31, 2020 and December 31, 2019 includes net deferred costs of $20.9 million and $19.9 million, respectively. At March 31, 2020, the remaining fair value adjustments on acquired loans was $32.9 million, or 3.4% of the outstanding acquired loan balances, which consisted of $1.0 million on PCD loans and $31.9 million on acquired non-PCD loans. At December 31, 2019, the remaining fair value adjustments for PUL loans was $34.9 million, or 3.8%
of the acquired loan balances. These amounts are accreted into interest income over the remaining lives of the related loans on a level yield basis.
Commercial real estate ("CRE") loans, inclusive of owner-occupied commercial real estate, increased by $85.0 million, totaling $2.5 billion at March 31, 2020 compared to December 31, 2019. Owner-occupied commercial real estate loans represent $1.1 billion, or 44%, of the commercial real estate portfolio.
The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at March 31, 2020 aggregated to $272.0 million, of which $182.6 million was funded compared to $268.9 million at December 31, 2019, of which $179.0 million was funded. The Company had 127 commercial and commercial real estate relationships in excess of $5 million totaling $1.2 billion, of which $1.1 billion was funded at March 31, 2020 compared to 120 relationships totaling $1.2 billion at December 31, 2019, of which $1.0 billion was funded.
Fixed-rate and adjustable-rate loans secured by commercial real estate, excluding construction loans, totaled approximately $2.0 billion and $435.9 million, respectively, at March 31, 2020, compared to $2.0 billion and $418.8 million, respectively, at December 31, 2019.
The following table details commercial real estate and construction and land development loans outstanding by collateral type at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Commercial Real Estate
|
|
Construction and Land Development
|
|
Total
|
|
% of Total Loans
|
Office Building
|
$
|
694,678
|
|
|
$
|
6,278
|
|
|
$
|
700,956
|
|
|
13%
|
Retail
|
455,032
|
|
|
16,296
|
|
|
471,328
|
|
|
9%
|
Industrial & Warehouse
|
356,182
|
|
|
16,104
|
|
|
372,286
|
|
|
7%
|
Other Commercial Property
|
241,142
|
|
|
—
|
|
|
241,142
|
|
|
5%
|
Apartment Building / Condominium
|
189,441
|
|
|
29,704
|
|
|
219,145
|
|
|
4%
|
Health Care
|
187,419
|
|
|
18,267
|
|
|
205,686
|
|
|
4%
|
Hotel / Motel
|
115,240
|
|
|
—
|
|
|
115,240
|
|
|
2%
|
1-4 Family Residence - Individual Borrowers
|
—
|
|
|
89,544
|
|
|
89,544
|
|
|
2%
|
Vacant Lot
|
—
|
|
|
77,317
|
|
|
77,317
|
|
|
1%
|
Convenience Store
|
56,704
|
|
|
—
|
|
|
56,704
|
|
|
1%
|
Restaurant
|
44,954
|
|
|
495
|
|
|
45,449
|
|
|
1%
|
1-4 Family Residence - Spec Home
|
4,140
|
|
|
39,628
|
|
|
43,768
|
|
|
1%
|
Church
|
25,563
|
|
|
—
|
|
|
25,563
|
|
|
—%
|
Agriculture
|
22,251
|
|
|
—
|
|
|
22,251
|
|
|
—%
|
School / Education
|
20,919
|
|
|
546
|
|
|
21,465
|
|
|
—%
|
Manufacturing Building
|
18,850
|
|
|
—
|
|
|
18,850
|
|
|
—%
|
Recreational Property
|
10,549
|
|
|
—
|
|
|
10,549
|
|
|
—%
|
Other
|
20,925
|
|
|
1,226
|
|
|
22,151
|
|
|
—%
|
Total
|
$
|
2,463,989
|
|
|
$
|
295,405
|
|
|
$
|
2,759,394
|
|
|
52%
|
The largest collateral type in the CRE and construction portfolios, when aggregated, is office buildings, representing only 13% of the portfolio. The average loan size in the office building category is $573 thousand and the average loan to value ("LTV") is 59%. 60% of this category is classified as owner occupied. This primarily includes medical, accounting, engineering, health care, veterinarians and other like type professionals. The remaining 40% of the office building category is stabilized income-producing investment properties.
The second-largest category is retail, representing 9% of total loans. The average loan size in the retail category is $1.3 million and the average LTV is 54%. Loans collateralized by hotels/motels represent only $115 million with an average loan size of $3.3 million and an average LTV of 55%. Restaurant exposure is limited, only $45 million, and is distributed amongst quick serve and full-service restaurants, with an average loan size of $755 thousand and LTV of 56%.
Commercial and financial loans outstanding were $796.0 million at March 31, 2020 and $778.3 million at December 31, 2019. The Company's primary customers for commercial and financial loans are small to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing companies. Such businesses are smaller and subject to the risks of lending to small- to medium-sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.
The following table details the commercial and financial loans outstanding by industry type at March 31, 2020:
|
|
|
|
|
|
|
($ in thousands)
|
Commercial and Financial
|
|
% of Total Loans
|
Management Companies1
|
$
|
160,033
|
|
|
3%
|
Professional, Scientific, Technical & Other Services
|
92,961
|
|
|
2
|
Construction
|
89,300
|
|
|
2
|
Finance & Insurance
|
78,807
|
|
|
2
|
Real Estate Rental & Leasing
|
73,360
|
|
|
1
|
Health Care & Social Assistance
|
59,900
|
|
|
1
|
Manufacturing
|
41,007
|
|
|
1
|
Wholesale Trade
|
39,393
|
|
|
1
|
Transportation & Warehousing
|
38,071
|
|
|
1
|
Retail Trade
|
29,573
|
|
|
1
|
Educational Services
|
17,644
|
|
|
—
|
Administrative & Support
|
16,412
|
|
|
—
|
Accommodation & Food Services
|
16,392
|
|
|
—
|
Public Administration
|
13,677
|
|
|
—
|
Agriculture
|
13,550
|
|
|
—
|
Other Industries
|
15,958
|
|
|
—
|
Total
|
$
|
796,038
|
|
|
15%
|
1Primarily corporate aircraft and marine vessels associated with high net worth individuals
|
Residential mortgage loans increased $51.9 million to $1.6 billion as of March 31, 2020, compared to December 31, 2019. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At March 31, 2020, approximately $586.9 million, or 38%, of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans, which includes hybrid adjustable-rate mortgages. Fixed-rate mortgages totaled approximately $664.0 million, or 43%, at March 31, 2020, of which 15- and 30-year mortgages totaled $44.0 million and $385.1 million, respectively. Remaining fixed-rate balances were comprised of home improvement loans totaling $234.8 million, most with maturities of 10 years or less. Home equity lines of credit ("HELOCs"), primarily floating rates, totaled $308.9 million at March 31, 2020. In comparison, loans secured by residential properties having fixed rates totaled $659.4 million at December 31, 2019, with 15- and 30-year fixed-rate residential mortgages totaling $43.5 million and $372.0 million, respectively, and home equity mortgages and HELOCs totaling $243.8 million and $292.1 million, respectively. Borrowers in the residential mortgage portfolio have an average credit score of 778. Specifically for HELOCs, borrowers have an average credit score of 771. The average LTV of our HELOC portfolio is 59% with 40% of the portfolio being in first lien position.
The Company also provides consumer loans, which include installment loans, auto loans, marine loans, and other consumer loans, which decreased $6.2 million, or 3%, to total $202.0 million compared to $208.2 million at December 31, 2019. Of the $6.2 million decrease, auto loans decreased $0.3 million, marine loans increased $0.2 million and other consumer loans decreased $5.7 million. Borrowers in the consumer portfolio have an average credit score of 756.
In response to the impact of the COVID-19 pandemic on its borrowers, the Company is actively working with its customers to accommodate requests for short term payment deferrals to help them better manage through the financial implications of this period. As of April 30, 2020, approximately 2,500 borrowers with $1.0 billion in outstanding balances were participating in a payment deferral plan. The average length of payment deferrals was four months. Interest and fees will continue to accrue on these loans during the deferral period. If economic conditions further deteriorate, these borrowers may be unable to resume scheduled payments, which may result in reversal of accrued interest, further modification of terms and additional necessary provisions for credit losses.
At March 31, 2020, the Company had unfunded loan commitments of $1.1 billion compared to $1.0 billion at December 31, 2019.
Loan Concentrations
The Company has developed guardrails to manage loan types that are most impacted by stressed market conditions in order to minimize credit loss volatility in the future. Outstanding balances for commercial and CRE loan relationships greater than $10 million totaled $703.9 million and represented 13% of the total portfolio at March 31, 2020 compared to $680.2 million, or 13%, at year-end 2019.
Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital declined to 35% and 193%, respectively, at March 31, 2020, compared to 40% and 204%, respectively, at December 31, 2019. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 32% and 181%, respectively, of total consolidated risk based capital. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e., loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts (“REITs”) and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner-occupied CRE are generally excluded.
Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality
Nonperforming assets (“NPAs”) at March 31, 2020 totaled $40.2 million, and were comprised of $17.9 million of nonaccrual portfolio loans, $7.7 million of nonaccrual purchased loans, $10.7 million of non-acquired other real estate owned (“OREO”), $0.4 million of acquired OREO and $3.6 million of branches taken out of service. Compared to December 31, 2019, nonaccrual purchased loans increased $1.7 million, spread across several loans, while acquired OREO remained flat. The increase in non-acquired OREO of $5.5 million from December 31, 2019 includes additions of a single multifamily property for $4.5 million and a single residential property for $1.1 million offset by sales of $0.1 million. The decrease in OREO for bank branches of $3.2 million reflects the sale of a single branch property. Overall, NPAs increased $0.9 million, or 2%, from $39.3 million recorded as of December 31, 2019. At March 31, 2020, approximately 65% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At March 31, 2020, nonaccrual loans were written down by approximately $3.1 million, or 6%, of the original loan balance (including specific impairment reserves).
Nonperforming loans to total loans outstanding at March 31, 2020 decreased to 0.48% from 0.52% at December 31, 2019. Nonperforming assets to total assets at March 31, 2020 remained at 0.55%, consistent with December 31, 2019.
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 $10.8 million at March 31, 2020 compared to $11.1 million at December 31, 2019. Accruing TDRs are excluded from the nonperforming asset ratios.
In March 2020, regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID–19. The agencies confirmed with the staff of the FASB that short–term modifications made on a good faith basis in response to the COVID–19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short–term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant and were made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID–19 national emergency. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In March 2020, the Company processed short-term payment deferrals on loans totaling approximately $512 million to borrowers who were
current on payments prior to deferral. None of these payment deferrals have have been classified as TDRs, and are therefore not included in the table below.
The table below sets forth details related to nonaccrual and accruing restructured loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Nonaccrual Loans
|
|
Accruing
Restructured Loans
|
(In thousands)
|
|
Non-Current
|
|
Performing
|
|
Total
|
|
Construction & land development
|
|
$
|
573
|
|
|
$
|
33
|
|
|
$
|
606
|
|
|
$
|
121
|
|
Commercial real estate - owner occupied
|
|
1,909
|
|
|
955
|
|
|
2,864
|
|
|
110
|
|
Commercial real estate - non owner occupied
|
|
2,050
|
|
|
2,225
|
|
|
4,275
|
|
|
4,519
|
|
Residential real estate
|
|
1,723
|
|
|
7,121
|
|
|
8,844
|
|
|
5,860
|
|
Commercial and financial
|
|
6,713
|
|
|
1,703
|
|
|
8,416
|
|
|
26
|
|
Consumer
|
|
501
|
|
|
76
|
|
|
577
|
|
|
197
|
|
Total
|
|
$
|
13,469
|
|
|
$
|
12,113
|
|
|
$
|
25,582
|
|
|
$
|
10,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Nonaccrual Loans
|
|
Accruing
Restructured Loans
|
(In thousands)
|
|
Non-Current
|
|
Performing
|
|
Total
|
|
Construction & land development
|
|
$
|
4,902
|
|
|
$
|
35
|
|
|
$
|
4,937
|
|
|
$
|
131
|
|
Commercial real estate
|
|
3,800
|
|
|
2,720
|
|
|
6,520
|
|
|
4,666
|
|
Residential real estate
|
|
2,552
|
|
|
6,928
|
|
|
9,480
|
|
|
6,027
|
|
Commercial and financial
|
|
4,674
|
|
|
1,234
|
|
|
5,908
|
|
|
27
|
|
Consumer
|
|
38
|
|
|
72
|
|
|
110
|
|
|
249
|
|
Total
|
|
$
|
15,966
|
|
|
$
|
10,989
|
|
|
$
|
26,955
|
|
|
$
|
11,100
|
|
At March 31, 2020 and December 31, 2019, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(In thousands)
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
Rate reduction
|
|
53
|
|
|
$
|
12,230
|
|
|
56
|
|
|
$
|
10,739
|
|
Maturity extended with change in terms
|
|
41
|
|
|
3,859
|
|
|
48
|
|
|
5,083
|
|
Chapter 7 bankruptcies
|
|
18
|
|
|
2,241
|
|
|
22
|
|
|
1,275
|
|
Not elsewhere classified
|
|
10
|
|
|
693
|
|
|
11
|
|
|
966
|
|
Total
|
|
122
|
|
|
$
|
19,023
|
|
|
137
|
|
|
$
|
18,063
|
|
During the three months ended March 31, 2020, five loans totaling $0.5 million were modified to a TDR, compared to two loans totaling $2.0 million for the three months ended March 31, 2019. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. There were three defaults totaling $1.4 million of loans to a single borrower modified within the twelve months preceding March 31, 2020. 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.
In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed on nonaccrual. Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above.
Allowance for Credit Losses on Loans
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses. The new guidance replaced the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposure such as loan commitments, standby letters of credit, financial guarantees and other similar instruments.
Management estimates the allowance using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.
Upon adoption of the new model, the initial adjustment to the allowance for credit losses was an increase of $21.2 million, bringing the ratio of allowance to total loans from 0.68% at December 31, 2019 to 1.08% at January 1, 2020. The increase was attributed to the new requirement to estimate losses over the full remaining expected life of the loans, and to the impact of the new guidance on the Company's acquired loan portfolio. The economic forecast scenario as of January 1, 2020 projected a stable macroeconomic environment over the three year forecast period.
The following table presents the activity in the allowance for credit losses on loans by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
(In thousands)
|
Beginning
Balance
|
|
Impact of Adoption of ASC 326
|
|
Initial Impact on Allowance of PCD Loans Acquired During the Period
|
|
Provision
for Credit
Losses
|
|
Charge-
Offs
|
|
Recoveries
|
|
TDR
Allowance
Adjustments
|
|
Ending
Balance
|
Construction & land development
|
$
|
1,842
|
|
|
$
|
1,479
|
|
|
$
|
48
|
|
|
$
|
1,248
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
4,646
|
|
Commercial real estate - owner occupied
|
5,361
|
|
|
80
|
|
|
207
|
|
|
(264
|
)
|
|
(44
|
)
|
|
—
|
|
|
(13
|
)
|
|
5,327
|
|
Commercial real estate - non owner occupied
|
7,863
|
|
|
9,341
|
|
|
140
|
|
|
18,283
|
|
|
(12
|
)
|
|
28
|
|
|
—
|
|
|
35,643
|
|
Residential real estate
|
7,667
|
|
|
5,787
|
|
|
97
|
|
|
6,260
|
|
|
(18
|
)
|
|
116
|
|
|
(10
|
)
|
|
19,899
|
|
Commercial and financial
|
9,716
|
|
|
3,677
|
|
|
11
|
|
|
2,746
|
|
|
(1,100
|
)
|
|
420
|
|
|
—
|
|
|
15,470
|
|
Consumer
|
2,705
|
|
|
862
|
|
|
13
|
|
|
1,240
|
|
|
(473
|
)
|
|
80
|
|
|
(1
|
)
|
|
4,426
|
|
Totals
|
$
|
35,154
|
|
|
$
|
21,226
|
|
|
$
|
516
|
|
|
$
|
29,513
|
|
|
$
|
(1,647
|
)
|
|
$
|
673
|
|
|
$
|
(24
|
)
|
|
$
|
85,411
|
|
The following table presents the ratio of the allowance for credit losses on loans to total loans by segment as of :
|
|
|
|
|
|
|
|
December 31, 2019
|
|
January 1, 2020
|
|
March 31, 2020
|
Construction & land development
|
0.57%
|
|
1.02%
|
|
1.57%
|
Commercial real estate - owner occupied
|
0.52%
|
|
0.53%
|
|
0.49%
|
Commercial real estate - non owner occupied
|
0.59%
|
|
1.28%
|
|
2.59%
|
Residential real estate
|
0.51%
|
|
0.89%
|
|
1.28%
|
Commercial and financial
|
1.25%
|
|
1.72%
|
|
1.94%
|
Consumer
|
1.30%
|
|
1.71%
|
|
2.19%
|
Totals
|
0.68%
|
|
1.08%
|
|
1.61%
|
The allowance for credit losses on loans was $85.4 million at March 31, 2020, an increase of $50.3 million compared to December 31, 2019. In addition to the $21.2 million impact of the initial adoption of ASC Topic 326, increases in the allowance included $0.5 million assigned to PCD loans acquired from FBPB during the period, and the provision for credit losses which reflects the deterioration of the current and forecasted macroeconomic environment during the first quarter of 2020, and includes
coverage of new non-PCD loans acquired from FBPB. Net charge-offs for the first quarter of 2020 were $1.0 million, or 0.07% of average loans and, for the four most recent quarters, averaged 0.16% of outstanding loans.
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, 2020, the Company had $1.6 billion in loans secured by residential real estate and $2.5 billion in loans secured by commercial real estate, representing 29% and 46% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida.
With the emergence of the COVID-19 pandemic late in the first quarter of 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on collectability is not currently known, and it is possible that additional provisions for credit losses could be needed in future periods.
Cash and Cash Equivalents and Liquidity Risk Management
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.
Funding sources include primarily customer-based deposits, collateral-backed borrowings, brokered deposits, cash flows from operations, cash flows from the loan and investment portfolios and asset sales, primarily secondary marketing for residential real estate mortgages and marine loans. Cash flows from operations are a significant component of liquidity risk management and the Company considers both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk.
Deposits are a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. The Company routinely uses debt securities and loans as collateral for secured borrowings. In the event of severe market disruptions, the Company has access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody program.
The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding. However, the Company began strategically increasing brokered deposits to supplement the liquidity position, given the unknown impact of COVID-19 on business and economic conditions. Brokered certificates of deposits ("CDs") at March 31, 2020 were $597.7 million, an increase of $124.9 million, or 26% , from December 31, 2019.
Cash and cash equivalents, including interest bearing deposits, totaled $314.9 million on a consolidated basis at March 31, 2020, compared to $124.5 million at December 31, 2019. Higher cash and cash equivalent balances at March 31, 2020 reflect favorable deposit growth as well as proceeds from the sales of available-for-sale debt securities.
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, 2020, the Company had available unsecured lines of $160.0 million and secured lines of credit, which are subject to change, of $1.2 billion. In addition, the Company had $851.5 million of debt securities and $830.0 million in residential and commercial real estate loans available as collateral. In comparison, at December 31, 2019, the Company had available unsecured lines of $130.0 million and secured lines of credit of $1.1 billion, and $924.2 million of debt securities and $830.0 million in residential and commercial real estate loans available as collateral. Starting in mid-April 2020, the Federal Reserve is offering term funding with a fixed rate of 35 basis points on pledged Payroll Protection Program loans. The Company expects to utilize this program.
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 2020, Seacoast Bank distributed $5.6 million to the Company and, at March 31, 2020, is eligible to distribute dividends to the Company of approximately $149.3 million without prior regulatory approval. At March 31, 2020, the Company had cash and cash equivalents at the parent of approximately $50.8 million compared to $53.0 million at December 31, 2019.
Deposits and Borrowings
The Company’s balance sheet continues to be primarily funded by core deposits.
Total deposits increased $302.7 million, or 5%, to $5.9 billion at March 31, 2020, compared to December 31, 2019. At March 31, 2020, total deposits excluding brokered CDs grew $177.9 million, or 3%, from year-end 2019.
Since December 31, 2019, interest bearing deposits (interest bearing demand, savings and money market deposits) increased $104.2 million, or 4%, to $2.9 billion, and CDs (excluding broker CDs) decreased $39.4 million, or 6%, to $0.7 billion. Noninterest demand deposits were higher by $113.1 million, or 7%, compared to year-end 2019, totaling $1.7 billion. Noninterest demand deposits represented 29% of total deposits at March 31, 2020 and 28% at December 31, 2019.
During the three months ended March 31, 2020, $842.5 million of brokered CDs at an average rate of 1.68% matured, and the Company acquired $1.0 billion in brokered CDs at a weighted average rate of 1.47%. Total brokered CDs at March 31, 2020 totaled $597.7 million compared to $472.9 million at December 31, 2019. The maturity of the brokered CDs is laddered with a weighted average maturity of 90 days at March 31, 2020.
Customer repurchase agreements totaled $64.7 million at March 31, 2020, decreasing $21.4 million, or 25%, from December 31, 2019. Repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance.
No unsecured federal funds purchased were outstanding at March 31, 2020.
At March 31, 2020 and December 31, 2019, borrowings were comprised of subordinated debt of $71.2 million and $71.1 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of $265.0 million and $315.0 million, respectively. At March 31, 2020, the $265.0 million in FHLB borrowings had a weighted average maturity of 60 days. The weighted average rate for FHLB funds during the three months ended March 31, 2020 and 2019 was 1.56% and 2.53%, respectively, and compared to 2.28% for the year ended December 31, 2019. 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 in connection with bank acquisitions in previous years. The acquired junior subordinated debentures (in accordance with ASC Topic 805 Business Combinations) were recorded at fair value, which collectively is $3.9 million lower than face value at March 31, 2020. This amount is being amortized into interest expense over the acquired subordinated debts’ remaining term to maturity. All trust preferred securities are guaranteed by the Company on a junior subordinated basis.
The weighted average interest rate of outstanding subordinated debt related to trust preferred securities was 4.08% and 5.14% for the three months ended March 31, 2020 and 2019, respectively, and compared to 4.75% for the year ended December 31, 2019.
Off-Balance Sheet Transactions
In the normal course of business, the Company may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.
Lending commitments include unfunded loan commitments and standby and commercial letters of credit. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement. During the current economic uncertainty created by the COVID-19 pandemic, borrowers may be more dependent upon lending commitments than they have been in the past, and more likely to draw on the commitments.
For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. Loan commitments were $1.1 billion at March 31, 2020 and $1.0 billion at December 31, 2019.
Capital Resources
The Company’s equity capital at March 31, 2020 increased $6.1 million from December 31, 2019 to $991.8 million. Changes in equity are primarily attributed to a $21.0 million increase from the issuance of stock pursuant to the FBPB acquisition partially offset by a $16.9 million decrease from the adoption of CECL.
The ratio of shareholders’ equity to period end total assets was 13.49% and 13.87% at March 31, 2020 and December 31, 2019, respectively. The ratio of tangible shareholders’ equity to tangible assets was 10.68% and 11.05% at March 31, 2020 and December 31, 2019, respectively.
Activity in shareholders’ equity for the three months ended March 31, 2020 and 2019 follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
Beginning balance at December 31, 2019 and 2018
|
$
|
985,639
|
|
|
$
|
864,267
|
|
Net income
|
709
|
|
|
22,705
|
|
Cumulative change in accounting principle upon adoption of new accounting pronouncement
|
(16,876
|
)
|
|
—
|
|
Issuance of stock pursuant to acquisition of First Bank of the Palm Beaches
|
21,031
|
|
|
—
|
|
Stock compensation, net of Treasury shares acquired
|
990
|
|
|
609
|
|
Change in other comprehensive income
|
294
|
|
|
8,843
|
|
Ending balance at March 31, 2020 and 2019
|
$
|
991,787
|
|
|
$
|
896,424
|
|
Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast management's use of risk-based capital ratios in its analysis of the Company’s capital adequacy are “non-GAAP” financial measures. Seacoast management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies (see “Note I – Equity Capital”).
|
|
|
|
|
|
|
March 31, 2020
|
Seacoast (Consolidated)
|
|
Seacoast
Bank
|
|
Minimum to be Well- Capitalized1
|
Total Risk-Based Capital Ratio
|
16.62%
|
|
15.63%
|
|
10.00%
|
Tier 1 Capital Ratio
|
15.57%
|
|
14.58%
|
|
8.00%
|
Common Equity Tier 1 Ratio (CET1)
|
14.27%
|
|
14.58%
|
|
6.50%
|
Leverage Ratio
|
12.19%
|
|
11.67%
|
|
5.00%
|
1For subsidiary bank only
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The Company’s total risk-based capital ratio was 16.62% at March 31, 2020, an increase from December 31, 2019’s ratio of 15.71%. During the first quarter of 2020, the Company adopted interagency guidance which delays the impact of CECL adoption on capital for two years followed by a three year phase-in period. At March 31, 2020, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 11.67%, well above the minimum to be well capitalized under regulatory guidelines.
The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $149.3 million of dividends to the Company.
The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. The board of directors of a bank holding company must consider different factors to ensure that its dividend level, if any, is prudent relative to the organization’s financial position and is not based on overly optimistic earnings
scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all $71.2 million of trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company’s tangible common shareholders’ equity to calculate Tier 1 capital.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. The Company has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
•the allowance and the provision for credit losses on loans;
•acquisition accounting and purchased loans;
•intangible assets and impairment testing;
•other fair value adjustments;
•credit losses on AFS debt securities, and;
•contingent liabilities.
The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to the Company that could have a material effect on reported financial information. For more information regarding management’s judgments relating to significant accounting policies and recent accounting pronouncements, see “Note A-Significant Accounting Policies” to the Company’s consolidated financial statements.
Allowance and Provision for Credit Losses on Loans– Critical Accounting Policies and Estimates
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology.
For loans, management estimates the allowance for credit losses using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.
The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has developed an allowance model based on an analysis of probability of default ("PD") and loss given default ("LGD") to determine an expected loss by loan segment. PD's and LGD's are developed by analyzing the average historical loss migration of loans to default.
The allowance estimation process also applies an economic forecast scenario over a three year forecast period. The forecast may utilize one scenario or a composite of scenarios based on management's judgment and expectations around the current and future macroeconomic outlook. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. For portfolio segments with a weighted average life longer than three years, the Company reverts to longer term historical loss experience, adjusted for prepayments, to estimate losses over the remaining life of the loans within each segment.
Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model. These influences may include elements such as changes in concentration, macroeconomic conditions, recent observable asset quality trends, staff turnover, regional market conditions, employment levels and loan growth. Based upon management's assessments of these factors, the Company may apply qualitative adjustments to the allowance.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The contractual term of a loan excludes expected extensions, renewals, and modification unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and not unconditionally cancellable by the Company.
A loan for which which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring ("TDR"). The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit losses is determining by discounting the expected future cash flows at the original interest rate of the loan.
It is the Company's practice to ensure that the charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due, compared to the regulatory loss criteria of 120 days. In compliance with Federal Financial Institution Examination Council guidelines, secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed against interest income. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.
Note F to the financial statements (titled “Allowance for Credit Losses”) summarizes the Company’s allocation of the allowance for credit losses on loans by loan segment and provides detail regarding charge-offs and recoveries for each loan segment and the composition of the loan portfolio at March 31, 2020 and December 31, 2019.
Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates
The Company accounts for acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurement. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. Loans are identified as purchased credit deteriorated (“PCD”) when they have experienced more-than-insignificant deterioration in credit quality since origination. An allowance for expected credit losses on PCD loans is recorded at the date of acquisition through an adjustment to the loans’ amortized cost basis. In contrast, expected credit losses on loans not considered PCD are recognized in net income at the date of acquisition.
Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.
Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates
Intangible assets consist of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships. Core deposit intangibles are amortized on a straight-line basis, and are evaluated for indications of potential impairment at least annually. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. The Company performed an annual impairment test of goodwill, as required by ASC Topic 350, Intangibles—Goodwill and Other, in the fourth quarter of 2019. Seacoast conducted the test internally, documenting the impairment test results, and concluded that no impairment occurred.
In connection with the emergence of COVID-19 as a global pandemic during the 2020 first quarter, financial markets reported significant declines and subsequent volatility, as did the Company's share price. As a result, management performed a qualitative assessment to determine whether a triggering event had occurred that would indicate goodwill impairment at March 31, 2020. Having assessed the totality of events and circumstances at the measurement date, management determined that the short-lived decline in share price was not a triggering event and that a full goodwill test was not warranted. In the event of a sustained decline in share price or further deterioration in the macroeconomic outlook, continued assessments of the Company's goodwill balance will likely be required in future periods. Any impairment charge would not affect the Company’s regulatory capital ratios, tangible common equity ratio or liquidity position.
Other Fair Value Measurements – Critical Accounting Policies and Estimates
“As Is” values are used to measure fair market value on impaired loans, OREO and repossessed assets. All impaired loans, OREO and repossessed assets are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions. When necessary, the “As Is” appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral dependent impaired loans are loans where repayment is solely dependent on the liquidation of the collateral or operation of the collateral for repayment. If an updated assessment is deemed necessary and an internal valuation cannot be made, an external “As Is” appraisal will be requested. Upon receipt of the “As Is” appraisal a charge-off is recognized for the difference between the loan amount and its current fair market value.
The fair value of the available-for-sale portfolio at March 31, 2020 was greater than historical amortized cost, producing net unrealized gains of $6.3 million that have been included in other comprehensive income as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2020 and 2019. The fair value of each security available-for-sale was obtained from independent pricing sources utilized by many financial institutions or from dealer quotes. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available-for-sale portfolio.
Credit Losses on AFS Debt Securities – Critical Accounting Policies and Estimates
As part of the adoption of ASC Topic 326, the Company replaced the other than temporary impairment model with an approach that requires credit losses to be presented as an allowance, rather than as a direct write-down, when management does not intend to sell or believes they will not be required to sell before recovery.
Seacoast analyzes AFS debt securities quarterly for credit losses. The analysis is performed on an individual security basis for all securities where fair value has declined below amortized cost. Fair value is based upon pricing obtained from third party pricing services. Based on internal review procedures and the fair values provided by the pricing services, the Company believes that the fair values provided by the pricing services are consistent with the principles of ASC Topic 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
The Company utilizes both quantitative and qualitative assessments to determine if a security has a credit loss. Quantitative assessments are based on a discounted cash flow method. Qualitative assessments consider a range of factors including: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms.
For AFS debt securities where a credit loss has been identified, the Company records this loss through an allowance for credit losses. This allowance is limited to the amount that the security's amortized cost exceeds its fair value. If the fair value of the security increases in subsequent periods or changes in factors used within the credit loss assessments result in a change in the estimated credit loss, the Company would reflect the change by decreasing the allowance for credit losses.
Contingent Liabilities – Critical Accounting Policies and Estimates
Seacoast is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of the Company's business activities. These proceedings include actions brought against the Company and/or its subsidiaries with respect to transactions in which the Company and/or its subsidiaries acted as a lender, a financial adviser, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or its advisers may learn of additional information that can affect the assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At March 31, 2020 and December 31, 2019, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.
Interest Rate Sensitivity
Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility.
Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's Asset and Liability Management Committee ("ALCO") uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to instantaneous changes in market rates of 100 basis point increases up to 200 basis points of change on net interest income and is monitored on a quarterly basis.These simulations do not include the impact of accretion from purchased loans.
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, 2020, holding all other changes in the balance sheet static. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.
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Change in Interest Rates
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% Change in Projected Baseline Net Interest Income
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1-12 months
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13-24 months
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+2.00%
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5.99%
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6.88%
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+1.00%
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2.69%
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2.70%
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Current
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0.00%
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0.00%
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The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 17.9% at March 31, 2020. This result includes assumptions for core deposit re-pricing validated for the Company by an independent third party consulting group.
The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile.
Effects of Inflation and Changing Prices
The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.