FIRST QUARTER 2014
The following discussion and analysis is designed to provide a better understanding of the significant factors related to the Company's results of operations and financial condition. Such discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related notes included in this report. For purposes of the following discussion, the words the "Company," "we," "us," and "our" refer to the combined entities of
Seacoast Banking Corporation of Floridaand its direct and indirect wholly owned subsidiaries. STRATEGIC OVERVIEW
A number of significant milestones marking both quantitative and qualitative improvements in our business were attained in 2013, better positioning the Company to increase net income to common shareholders in 2014, and prospectively. These included:
• the recapture of the
• a successful raise of
• the termination of the Bank's formal agreement with the
Comptroller of the Currency ("OCC"), and
• the redemption of the Company's
Stock originally issued to the
Asset Relief Program. In addition, through ongoing investments in loan production personnel, digital technology and the effects of asset quality improvements and expense management, the Company has proactively positioned its business for growth. We believe our targeted plan to grow our customer and commercial franchise is the best way to build shareholder value, and we expect to supplement this growth through strategic acquisition opportunities from time to time. Through our new Accelerate offices, the Company continues to focus on reaching customers in unique ways, creating a path to achieve higher customer satisfaction. The Accelerate offices provide our customers with talented, results-oriented staff, specializing in loans to the smaller business market segment. From their tenure and market experience, our bankers are familiar with the multitude of challenges the small business customer faces. Seacoast intends to build customer relationships with depth that surpass traditional commercial lending, and open opportunities into other areas in which we provide services. Our customer growth strategy has included investments in digital delivery and products that we believe have contributed to increasing core customer funding. As of
March 31, 2014, over 47% of our online customers have adopted our mobile product offerings, and the total number of services utilized by our retail customers increased to an average of 3.4 per household, primarily due to an increase in debit card activation, direct deposit and mobile banking users. We are concentrating on building a more integrated distribution system which will allow us to reduce our fixed costs as we further invest in technology designed to better serve our customers. 26 A persistent emphasis on expense reduction resulted in the successful implementation of first quarter 2014 cost savings totaling $1.4 millionannually. These savings were the result of negotiations with our current vendors for competitive pricing, changes in organizational structure, and the termination of the regulatory agreement and its requirements. Our focus remains on building our customer franchise, increasing loan production, while investing in resources to support revenue growth. Additional cost savings initiatives, forecast at $1.9 millionannually, have been identified and are currently being implemented during the second quarter of 2014. Cost savings identified continue to be reinvested in marketing, digital services and data analytics, with an annual investment of approximately $860,000reinvested in the first quarter of 2014, and an additional annual investment of $460,000expected to occur during the remainder of 2014, to support sustained efforts in these areas. ACQUISiTION A definitive agreement and plan of merger was signed with The BANKshares, Inc.("BANKshares") on April 24, 2014, which, following the closing, will result in Seacoast being the sixth largest Floridabased bank in the Orlandoarea, up from number 31 currently. The acquisition not only provides a larger footprint in this significant and important Floridamarket, but it also enhances and increases the number of opportunities to differentiate our bank by its commitment to community involvement and the local economy while increasing economies of scale by leveraging expense management and increasing revenue growth. BANKsharesis headquartered in Winter Park, Floridaand following the closing will add approximately $674 millionin assets, $506 millionin deposits, and $374 millionin loans, along with twelve branch locations positioned throughout central Florida. The all-stock transaction provides that BANKshares'shareholders will receive 0.4975 shares of Seacoast common stock. Based on Seacoast's closing price on April 23, 2014, the transaction would be valued at approximately $76 million, with the closing expected to occur in the fourth quarter 2014. BANKshareswas, founded in 1989, and has successfully executed a relationship based business strategy resulting in a core deposit base and overall funding costs lower than its peers. At March 31, 2014, BANKsharesdeposit base included over 80 percent core deposit accounts, with 39 percent of total deposits in noninterest bearing demand deposits. BANKsharesfocus on small business and commercial relationships is highly complementary to our prior year investments in our business banking channel. BANKsharesaverage commercial loan balance is approximately $254,000with over 1,250 customers, and produced a yield on total loans of 5.77 percent. For the year ended December 31, 2013, BANKsharesreported net income of $3.0 millionand for the three months ended March 31, 2014, reported net income of $0.7 million. BANKsharesratio of tangible common equity to total assets was 8.2 percent at the end of the first quarter 2014. Consolidated cost reductions to be realized over 2014 and into 2015 are estimated at $5.5 million, and result in accretion to earnings per share of approximately 7 and 13 percent in 2014 and 2015, respectively. 27 EARNINGS OVERVIEW
Our net interest income increased
$221,000during the first quarter of 2014 compared to the same period in 2013 but our net interest margin was 8 basis points lower, principally due to lower spreads earned due to the Federal Reserve's quantitative easing negatively impacting the interest margin. Our focus has been and will continue to be to improve our deposit mix by increasing low cost deposits and adding to our loan balances to offset compressed interest rate spreads expected to continue over the reminder of 2014 and into 2015. Improved credit and asset quality measures permitted a benefit of $735,000to be recorded for loan losses for the first quarter 2014, versus a $953,000provision a year ago (see "Provision for Loan Losses" and "Allowance for Loan Losses"). Noninterest income (excluding securities gains) decreased in the first quarter of 2014, by $373,000, the primary cause being lower mortgage banking fees of $453,000(see "Noninterest Income"), but noninterest expenses were $176,000lower compared to 2013's first quarter expenditures (see "Noninterest Expenses"). As anticipated, the Company is reporting better results for the first quarter of 2014. Net income for the three months ended March 31, 2014of $2,299,000, compared to net income of $2,044,000for the first quarter of 2013, and to net income $1,850,000for the fourth quarter of 2013. Net income available to common shareholders (after preferred dividends and accretion of preferred stock discount) for first quarter 2014 totals $2,299,000or $0.09per average common diluted share, compared to last year's first and fourth quarter's net income of $1,107,000or $0.06per average common diluted share and $588,000or $0.03
per average common diluted share. CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management, after consultation with the Company's Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:
• the allowance and the provision for loan losses;
• fair value measurements;
• other than temporary impairment of securities;
• realization of deferred tax assets; and
• contingent liabilities.
The following is a discussion of the critical accounting policies intended to facilitate a reader's understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported
financial information. 28
Allowance and Provision for Loan Losses
The information contained on pages 36-37 and 42-52 related to the "Provision for Loan Losses", "Loan Portfolio", "Allowance for Loan Losses" and "Nonperforming Assets" is intended to describe the known trends, events and uncertainties which could materially affect the Company's accounting estimates related to our allowance for loan losses. Fair Value Measurements All impaired loans 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. If an updated assessment is deemed necessary and an internal valuation cannot be made, an external "As Is" appraisal will be obtained. A specific reserve is established and/or the loan is written down to the current "As Is" appraisal value.
Collateral dependent impaired loans are loans that are solely dependent on the liquidation of the collateral for repayment which includes repayment from the proceeds from the sale of the collateral, cash flow from the continued operation of the collateral, or both. All OREO and repossessed assets ("REPO") are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or project assumptions. When necessary, the "As Is" appraisal is adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessment market value, comparative sales and/or an internal valuation is performed. If an updated assessment is deemed necessary, and an internal valuation cannot be made, an external 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.
"As Is" values are used to measure fair market value on impaired loans, OREO and REPOs.
March 31, 2014, outstanding securities designated as available for sale totaled $658,512,000. The fair value of the available for sale portfolio at March 31, 2014was less than historical amortized cost, producing net unrealized losses of $12,539,000that 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 2014. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio. 29 As of March 31, 2014, the Company's available for sale investment securities, except for approximately $6.2 millionof securities issued by states and their political subdivisions generally are traded in liquid markets. U.S. Treasury and U.S. Governmentagency obligations totaled $509.5 million, or 77.4 percent of the total available for sale portfolio. The remainder of the portfolio consists of private label securities, most secured by collateral originated in 2005 or prior years with low loan to values, and current FICO scores above 700. Generally these securities have credit support exceeding 5%. The collateral underlying these mortgage investments are primarily 30- and 15-year fixed rate, 5/1 and 10/1 adjustable rate mortgage loans. Historically, the mortgage loans serving as collateral for those investments have had minimal foreclosures and losses. During the second and third quarters of 2013, the Company invested $32.2 millionin uncapped 3-month Liborfloating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase loans as assets that provide a steady stream of income and possible capital appreciation. The primary collateral for the securities is first lien senior secured corporate debt. The Company has purchased senior tranches rated AAA or AA and performed stress tests, which indicated that the senior subordination levels are sufficient and no principal loss is forecast, verifying the independent credit and investment grade rating. Our investments are reviewed quarterly for other than temporary impairment ("OTTI"). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities. Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company's other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity. The Company also held stock in the Federal Home Loan Bank of Atlanta("FHLB") totaling $4.3 millionas of March 31, 2014, $0.6 millionless than year-end 2013's balance. The Company accounts for its FHLB stock based on the industry guidance in ASC 942, Financial Services-Depositoryand Lending, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We evaluated our holdings in FHLB stock at March 31, 2014and believe our holdings in the stock are ultimately recoverable at par. We do not have operational or liquidity needs that would require redemption of the FHLB stock in the foreseeable future and, therefore, have determined that the stock is not other-than-temporarily impaired.
Realization of Deferred Tax Assets
March 31, 2014, the Company had net deferred tax assets ("DTA") of $63.7 million. Although realization is not assured, management believes that realization of the carrying value of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASC 740 Income Taxes. In comparison, at March 31, 2013the Company had net DTA of $18.2 million. 30
Lower credit costs and increased earnings before taxes for 2013 resulted in the Company's conclusion that recovery of its net deferred tax assets was more likely than not from future earnings and therefore the deferred tax valuation allowance of
$44.8 millionwas entirely reversed at September 30, 2013. The most important factors that supported this conclusion were:
• Income before tax ("IBT") had increased over the past five quarters as
credit costs improved,
• Credit costs improved and overall credit risk was reduced to a level which
decreased the impact on future taxable earnings,
• Credit processes, policies and governance had been improved and enhanced,
• IBT results for the third quarter of 2013 and for the nine months ended
no improvement in economic conditions which recovered the net operating
loss carry-forwards before expiration,
• Since 2008 the Company made steady improvements in asset quality, loan
growth, core deposit business and personal accounts, noninterest income
and maintained strong capital ratios throughout the challenging economic
loss, and • The OCC, Seacoast National's primary regulator, terminated its formal
agreement in 2013. Contingent Liabilities The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these 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, 2014and 2013, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant. 31 RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income (on a fully taxable equivalent basis) for the first quarter of 2014 totaled $16,277,000, decreasing from 2013's fourth quarter by $59,000or 0.4 percent, and higher than first quarter 2013's result by $222,000or 1.4 percent. The year over year improvement results from increases in net loans and investment securities compared to a year ago. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters. Net interest income for the third quarter 2013 was higher, due to a recovery of interest on nonaccrual loans of $505,000. Net Interest Net Interest Income Margin (Dollars in thousands) (tax equivalent) (tax equivalent) First quarter 2013 $ 16,055 3.15 % Second quarter 2013 16,172 3.12 Third quarter 2013 16,872 3.25 Fourth quarter 2013 16,336 3.08 First quarter 2014 16,277 3.07 Fully taxable equivalent net interest income is a common term and measure used in the banking industry but is not a term used under generally accepted accounting principles ("GAAP"). We believe that these presentations of tax-equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors' understanding of the Company's business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered an alternative to GAAP. The following information is provided to reconcile GAAP measures and tax equivalent net interest income and net interest margin on a tax equivalent basis. First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter (Dollars in thousands 2014 2013 2013 2013 2013 Nontaxable interest income $ 106 $ 112 $ 107 $ 108 $ 105Tax Rate 35 % 35 % 35 % 35 % 35 % Net interest income (TE) $ 16,277 $ 16,336 $ 16,872 $ 16,172 $ 16,055
Total net interest income (not TE) 16,221 16,277 16,815 16,114 16,000 Net interest margin (TE) 3.07 % 3.08 % 3.25 % 3.12 % 3.15 % Net interest margin (not TE) 3.06 3.06 3.24
The level of nonaccrual loans, changes in the earning assets mix, and the Federal Reserve's policies lowering interest rates have been primary forces affecting net interest income and net interest margin results.
The earning asset mix changed year over year impacting net interest income. For the first quarter of 2014, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 60.8 percent, compared to 60.3 percent a year ago. Average securities as a percentage of average earning assets decreased from 31.3 percent a year ago to 30.4 percent during the first quarter of 2014 and interest bearing deposits and other investments increased to 8.7 percent in 2014 from 8.4 percent in 2013. While average total loans as a percentage of earning assets increased nominally, the mix of loans was generally improved, with volumes related to commercial and commercial real estate representing 48.5 percent of total loans at
March 31, 2014(compared to 46.4 percent at March 31, 2013), and lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) representing 48.0 percent of total loans at March 31, 2014(versus 50.0 percent at March 31, 2013) (see "Loan Portfolio"). The yield on earning assets for the first quarter of 2014 was 3.31 percent, 12 basis points lower than 2013's first quarter, a reflection of the lower interest rate environment and earning asset mix. The following table details the yield on earning assets (on a tax equivalent basis) for the past five quarters: First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter 2014 2013 2013 2013 2013 Yield 3.31 % 3.33 % 3.52 % 3.39 % 3.43 %
The yield on loans decreased 28 basis points to 4.29 percent over the last twelve months with nonaccrual loans totaling
$26.2 millionor 2.0 percent of total loans at March 31, 2014(versus $35.2 millionor 2.9 percent of total loans at March 31, 2013. The yield on investment securities improved, increasing 13 basis points year over year to 2.11 percent for the first quarter of 2014, reflecting reduced prepayments of principal from refinancing activities on mortgage backed securities held in the portfolio and higher add-on rates for recent purchases. Also, the yield on interest bearing deposits and other investments was slightly higher at 0.58 percent for first quarter 2014, up 4 basis points compared to a year earlier. Average earning assets for the first quarter of 2014 increased $82.5 millionor 4.0 percent compared to 2013's first quarter balance. Average loan balances for 2014 increased $60.1 millionor 4.8 percent to $1,307.8 million, average investment securities increased $6.8 millionor 1.1 percent to $654.7 million, and average interest bearing deposits and other investments increased $15.5 millionor 9.0 percent to $188.0 million. Commercial and commercial real estate loan production for the first three months of 2014 totaled approximately $37 million, compared to production for all of 2013 and 2012 of $200 millionand $111 million, respectively. Improvements in commercial production have resulted from a focused program to target small business segments less impacted by the lingering effects of the recession. Our strategy has been to focus on hiring commercial lenders for the larger metropolitan markets in which the Company competes, principally Orlandoand Palm Beach. With commercial production improving during 2013 and 2014, period-end total loans outstanding have increased by $88.7 millionor 7.2 percent since March 31, 2013. At March 31, 2014the Company's total commercial and commercial real estate loan pipeline was $30 million, versus $63 million, $47 million, $55 millionand $28 millionat the end of first, second, third and fourth quarters of 2013, respectively. 33 Closed residential mortgage loan production for the first quarter of 2014 totaled $40 million, of which $19 millionwas sold servicing-released. In comparison, closed residential mortgage loan production for the first, second, third and fourth quarters of 2013 totaled $56 million, $80 million, $62 millionand $53 million, respectively, of which $33 million, $49 million, $32 millionand $26 millionwas sold servicing-released. Applications for residential mortgages totaled $75 millionduring the first three months of 2014, compared to $378 millionfor all of 2013. Much of our loan production has been focused on residential home mortgages, which continued during most of 2013, with existing home sales and home mortgage loan refinancing activity in the Company's markets remaining fairly stable, and some demand for new home construction emerging. Higher interest rates in the fourth quarter of 2013 and into 2014 dampened residential loan production, and 2013's overall production is expected to be more difficult to match in 2014. During the first three months of 2014, proceeds from the sales of securities totaled $4.1 million(including net gains of $17,000). In comparison, proceeds from the sales of securities totaled $11.8 millionfor the first three months of 2013 (including net gains of $25,000). Securities purchases in 2014 and 2013 have been conducted principally to reinvest funds from maturities and principal repayments, as well as to reinvest excess funds (in an interest bearing deposit) at the Federal Reserve Bank, and the proceeds from sales. During the first three months of 2014, maturities (principally pay-downs of $23.2 million) totaled $23.6 millionand securities portfolio purchases totaled $41.1 million. In comparison, for the three months ended March 31, 2013maturities totaled $45.2 millionand securities portfolio purchases totaled $50.3 million. The cost of average interest-bearing liabilities in the first quarter of 2014 was 2 basis points lower than fourth quarter 2013 and was 5 basis points lower than for the first quarter of 2013, reflecting the lower interest rate environment and improved deposit mix. The following table details the cost of average interest bearing liabilities for the past five quarters: First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter 2014 2013 2013 2013 2013 Rate 0.33 % 0.35 % 0.36 % 0.36 % 0.38 % The Company's retail core deposit focus produced strong growth in core deposit customer relationships when compared to prior year's results. Lower rates paid on interest bearing deposits during 2014 (and last several quarters) reduced the overall cost of total deposits to 0.11 percent for the first quarter of 2014, 6 basis points lower than the same quarter a year ago. A significant component favorably affecting the Company's net interest margin, the average balances of lower cost interest bearing deposits (NOW, savings and money market) totaled 79.3 percent of total average interest bearing deposits during the first quarter of 2014, an improvement compared to the average of 76.0 percent a year ago. While interest rates are predicted to remain low through 2014, prospective reductions in interest bearing deposit costs will be more challenging to produce due to more limited re-pricing opportunities. During the first quarter of 2014, the average rate for lower cost interest bearing deposits of 0.08 percent was nominally lower, by 1 basis point from the first quarter 2013. CD rates paid were lower, averaging 0.61 percent for the first quarter 2014, an 8 basis point decrease compared to 2013's first quarter. Average CDs (the highest cost component of interest bearing deposits) were 20.6 percent of interest bearing deposits for 2014's first quarter, compared to 24.0 percent for the first quarter of 2013. 34
Average deposits totaled
$1,786.7 millionduring the first quarter of 2014, and were $53.7 millionhigher compared to the first quarter of 2013, even with the reduction of time deposits occurring. Average aggregate amounts for NOW, savings and money market balances increased $48.2 millionor 4.9 percent to $1,035.4 millionfor 2014 compared to the first quarter of 2013, average noninterest bearing deposits increased $47.3 millionor 10.9 percent to $481.0 millionfor 2014 compared to 2013, and average CDs decreased by $41.7 millionor 13.4 percent to $270.2 millionover the same period. With the low interest rate environment and lower CD rate offerings available, customers have been more complacent and are leaving more funds in lower cost average balances in savings and other liquid deposit products that pay no interest or a lower interest rate. Average short-term borrowings have been principally comprised of sweep repurchase agreements with customers of Seacoast National, which decreased $4.9 millionto $155.7 millionor 3.1 percent for the first quarter of 2014 as compared to 2013 for the same period. With balances typically peaking during the fourth and first quarters each year, public fund clients with larger balances have the most significant influence on average sweep repurchase agreement balances outstanding during the year. Prospectively, we expect our net interest margin to grow as our lending initiatives produce improved results and our problem loan liquidation activities are concluded. We are positioned for stronger earnings performance with a more typical yield curve and as excess liquidity is deployed into higher earning assets. Our focus on achieving increased household growth year over year should produce future organic revenue growth, as the long term value of core household relationships are revealed, as more products are sold and fees earned, and as normalized interest rates return as the economy improves. PROVISION FOR LOAN LOSSES Management determines the provision for loan losses charged to operations by continually analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge-offs, and by estimating losses inherent in its portfolio. While the Company's policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management's judgment as to the adequacy of the provision and allowance for loan losses necessarily approximate and imprecise (see "Nonperforming Assets" and "Allowance for Loan Losses"). The provision for loan losses is the result of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under FASB Accounting Standards Codification ("ASC") 310, Receivables as well as, an analysis of homogeneous loan pools not individually evaluated as prescribed under ASC 450, Contingencies. Based on the improvements in nonaccrual loans and potential problem loans since year end 2013 and year over year for the first quarter of 2014 we recorded a negative provision for loan losses of $0.7 million, which compared to provisioning for loan losses in the first, second, third and fourth quarters of 2013 totaling $1.0 million, $0.6 million, $1.2 millionand $0.5 million, respectively. Net recoveries for the first quarter of 2014 of $0.1 million, compared to net charge-offs of $1.5 million, $2.0 million, $0.8 million, and $0.8 millionin the first, second, third and fourth quarters of 2013, respectively. Net recoveries represented 0.04 percent of average total loans for the first three months of 2014, versus net charge-offs of 0.41 percent of average total loans for all of 2013. Delinquency trends remain low and show continued stability (see "Nonperforming Assets"). 35 Note F to the financial statements (titled "Impaired Loans and Allowance for Loan Losses") provides additional information concerning the Company's allowance and provisioning for loan losses. NONINTEREST INCOME Noninterest income, excluding securities gains or losses, totaled $5,558,000for the first quarter of 2014, $373,000or 6.3 percent lower than 2013's first quarter and $408,000or 6.8 percent below the fourth quarter 2013. Noninterest income accounted for 25.5 percent of total revenue (net interest income plus noninterest income, excluding securities gains or losses) during the first quarter of 2014, compared to 27.0 percent a year ago.
Noninterest income for the first quarter of 2014, compared to fourth quarter 2013 and the first quarter of 2013, is detailed as follows:
First Fourth First Quarter Quarter Quarter (Dollars in thousands) 2014 2013 2013 Service charges on deposits
$ 1,507 $ 1,778 $ 1,551Trust income 671 693 676 Mortgage banking fees 661 728 1,114 Brokerage commissions and fees 379 461 425 Marine finance fees 254 215 272 Interchange income 1,403 1,394 1,264 Other deposit-based EFT fees 98 80 98 Other income 585 617 531 Total $ 5,558 $ 5,966 $ 5,931For the first quarter of 2014, revenues from the Company's wealth management services businesses (trust and brokerage) decreased by $51,000or 4.6 percent year over year versus first quarter 2013. Included in the $51,000decrease from a year ago, trust revenue was lower by $5,000or 0.7 percent and brokerage commissions and fees decreased by $46,000or 10.8 percent. Economic uncertainty is the primary issue affecting clients of the Company's wealth management services. Lower inter vivos, estate fees were the primary cause for the overall reduction in trust revenue versus first quarter 2013. The $46,000overall decline in brokerage commissions and fees for 2014 included a decrease of $50,000in annuity income. 36 Service charges on deposits for the first quarter of 2014 were $44,000or 2.8 percent lower year over year versus 2013's result. During the first quarter of 2014, overdraft fees decreased $127,000or 11.9 percent year over year and represented approximately 63 percent of total service charges on deposits, lower than the average of 67 percent for all of 2013. The regulators continue to review the banking industry's practices around overdraft programs and additional regulation could further reduce fee income for the Company's overdraft services. Remaining service charges on deposits increased $83,000or 17.3 percent to $563,000for first quarter 2014, compared to the first quarter a year ago. Service charge increases in 2014 reflect our growing base of core deposit relationships over the past twelve months, and our emphasis to provide products meeting the needs of each customer that generate appropriate fees for the services offered. For the first quarter of 2014, fees from the non-recourse sale of marine loans totaled $254,000, slightly lower by $18,000, compared to first quarter 2013. The Seacoast Marine Divisionoriginated $23 millionin loans during the first three months of 2014, of which 66 percent was sold, with the remaining $6 millionplaced in the loan portfolio. In comparison, originations totaled $15 millionduring the first quarter of 2013, of which 100 percent were sold. The Seacoast Marine Divisionis headquartered in Ft. Lauderdale, Floridawith lending professionals in Florida, California, Washingtonand Oregon. Greater usage of check or debit cards over the past several years by core deposit customers and an increased cardholder base has increased our interchange income. For the first quarter of 2014, interchange income increased $139,000or 11.0 percent compared to first quarter 2013. Other deposit-based electronic funds transfer ("EFT") income was equivalent to a year ago for the first quarter. Interchange revenue is dependent upon business volumes transacted, as well as the fees permitted by VISA® and MasterCard®. The Company originates residential mortgage loans in its markets, with loans processed by commissioned employees of Seacoast National. Many of these mortgage loans are referred by the Company's branch personnel. Mortgage banking fees in the first quarter of 2014 decreased $453,000or 40.7 percent from 2013's first quarter result. Mortgage banking revenue as a component of overall noninterest income was 11.9 percent for 2014, compared to 17.2 percent for all of 2013. Mortgage revenues are dependent upon favorable interest rates, as well as good overall economic conditions, including the volume of home sales. Residential real estate sales and activity in our markets improved during 2013, with transactions increasing, prices firming and affordability improving. However, during the fourth quarter of 2013 and into 2014, the volume of transactions has been dampened by higher interest rates. The Company was the number one originator of home purchase mortgages in Martin, St. Lucieand Indian Rivercounties during 2013 and the first two months of 2014, based on the data available to date. NONINTEREST EXPENSES The Company's overhead ratio was in the low to mid 60's in years prior to the recession. Lower earnings and cyclical credit costs in 2012, 2011 and 2010 resulted in this ratio increasing to 94.6 percent, 90.1 percent, and 104.6 percent, respectively. For 2013, this ratio was 82.9 percent. For the first three months of 2014, the overhead ratio was 84.3 percent and total noninterest expenses were $176,000or 0.9 percent lower versus the first three months a year ago, totaling $18,783,000. 37 During the first quarter of 2014, annual cost reductions totaling $1.4 millionwere implemented, and resulted in severance expense of $212,000. Offsetting the cost reductions were continued investments in our digital delivery channels along with our new Accelerate business offices, combined with increased advertising and promotion. We have identified additional legacy cost reductions of $1.9 millionto be implemented in April 2014, realigning our expense structure to focus on growth initiatives and improvements in the customer experience. Additional severance expense of approximately $200,000is expected to partially offset this expense management initiative. Cost savings identified will continue to be reinvested in marketing, digital services and data analytics. During the first quarter of 2014, annual investments of approximately $860,000were reinvested in digital technologies, acquiring data analytics and marketing personnel. An additional annual investment of $460,000is to be reinvested over the remainder of 2014 to support sustained efforts in these areas. Salaries and wages totaling $7,624,000were $154,000or 2.1 percent higher for the first quarter of 2014 compared to first quarter 2013. Compared to the first quarter of 2013, base salaries were $599,000or 8.7 percent higher, reflecting additional commercial relationship managers and credit support personnel added over the past twelve months, and, as previously mentioned, severance payments of $212,000were recorded, up by $180,000compared to the first three months of 2013. Close to offsetting, commission payments for 2014 related to revenue generation from wealth management and lending production decreased $138,000or 22.4 percent, cash and stock incentives were $196,000or 62.8 percent lower, and loan origination costs deferred (a contra expense) were $283,000higher during the first quarter of 2014, comparing favorably to 2013 first quarter's expense. In the first quarter of 2014, employee benefits costs decreased by $41,000or 1.8 percent to $2,182,000from a year ago. Costs for our self-funded health care plan were lower by $155,000in 2014, compared to the first quarter a year ago, due to lower claims and utilization. Matching 401K contributions associated with employee salary deferrals were returned to levels pre-recession, and were $95,000higher during the first quarter of 2014 compared to the first quarter of 2013. Higher payroll taxes of $62,000were partially offset by lower unemployment compensation costs during the first quarter of 2014, versus a
year ago. Outsourced data processing costs totaled
$1,695,000for the first quarter of 2014, an increase of $197,000or 13.2 percent from a year ago. Seacoast National utilizes third parties for its core data processing systems. Outsourced data processing costs can be expected to increase as the Company's business volumes grow. During the first quarter of 2014, an increase in core data processing costs of $133,000or 12.4 percent and in interchange processing of $67,000(reflecting strategies to encourage card usage through reward methodologies) were the primary cause for the overall increase in total data processing costs versus 2013's first quarter costs. We are anticipating improvements and enhancements related to mobile remote deposit capture, and other digital products and services through our core data processor during 2014, which will increase our outsourced data processing costs as customers adopt the new digital products. 38
Total occupancy, furniture and equipment expenses for the first quarter of 2014 increased
$93,000or 4.0 percent (on an aggregate basis) to $2,409,000year over year versus 2013's expense. Depreciation on leasehold improvements and newly acquired furniture and equipment was $92,000higher for the first quarter of 2014, the primary cause being the five new Accelerate Business locations opened in our Orlandoand Palm Beachmarkets during the latter half of 2013. For the first quarter of 2014, marketing expenses, including sales promotion costs, ad agency production and printing costs, newspaper and radio advertising, and other public relations costs associated with the Company's efforts to market products and services, increased by $364,000or 81.1 percent to $813,000, when compared to the first quarter of 2013. Marketing expenses reflect a focused campaign in our markets targeting the customers of competing financial institutions and promoting our brand. Direct mail activities and media costs for television and radio advertising, were higher during the first quarter of 2014 versus a year ago, increasing $157,000and $178,000, respectively. Media costs reflect seasonal advertising promoting our "Good Idea and Uncommon" campaign that focused on the Seacoast brand. Direct mail materials included $61,000focused on driving demand deposit and core customer funding, resulting in the addition of 623 new demand deposit households in the first quarter 2014, an increase of 352 households compared to prior year's first quarter result. From our first quarter cyclical marketing expenditures, we expect continued momentum in customer acquisition with less spend requirement moving forward over 2014. Legal and professional fees were higher, increasing by $145,000or 18.2 percent from first quarter a year ago to $941,000. First quarter 2014 legal fees were $66,000lower year over year, reflecting the decline in problem assets. Regulatory exam fees were $45,000lower as well, a result of the bank's improved condition. More than offsetting, other professional fees were higher year over year for the first quarter, increasing $144,000, with higher external audit
and information security fees.
FDICassessments were lower, totaling $386,000for the first quarter of 2014, compared to $717,000for the first quarter of 2013 and also reflects the bank's improved regulatory exam results. Net losses on other real estate owned (OREO) and repossessed assets, and asset disposition expenses associated with the management of OREO and repossessed assets (aggregated) totaled $181,000for the first quarter of 2014. In comparison, these costs totaled $857,000, $604,000, $388,000and $180,000for the first, second, third and fourth quarters of 2013, respectively. OREO balances have declined by $4.5 millionsince March 31, 2013, and total $6.4 millionat March 31, 2014. Of the $181,000total for first quarter 2014, asset disposition costs summed to $128,000and losses on OREO and repossessed assets totaled $53,000. The Company expects these costs to continue to remain lower prospectively, as property values are improving. CAPITAL RESOURCES
The Company's equity capital at
March 31, 2014has increased $61.7 millionto $228.4 millionsince March 31, 2013, and the ratio of shareholders' equity to period end total assets was 9.86 percent at March 31, 2014, compared with 7.57 percent at March 31, 2013, and 8.75 percent at December 31, 2013. During 2013, the reversal of the deferred tax valuation allowance increased net income and total shareholders' equity, and the Company also received $47.0 million(net of costs) in proceeds from its $75 millioncommon stock issuance, with an additional $25.0 millionremitted from CapGen Capitalon January 13, 2014following regulatory approval. Proceeds from the capital raise were used to redeem 2,000 shares of outstanding Series A Preferred Stock (at par) totaling $50 millionon December 31, 2013, with remaining funds retained for general corporate purposes. Net income available to common shareholders in 2014 and beyond is expected to increase as a result of the elimination of the preferred dividend. 39 Seacoast's management uses certain "non-GAAP" financial measures in its analysis of the Company's capital adequacy. Seacoast's 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. The Company's capital position remains strong, meeting the general definition of "well capitalized", with a total risk-based capital ratio of 18.74 percent at March 31, 2014, higher than March 31, 2013's ratio of 18.26 percent and December 31, 2013's ratio of 16.88 percent. Reinvestment of cash and cash equivalent assets with a zero percent risk weight into securities and loans with higher risk weightings was the primary cause for risk-weighted assets increasing, thereby lowering the tier 1 and total risk-based capital ratio
year over year.
The Company and Seacoast National are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast National and its other subsidiaries, and the Company's primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. With the lifting of regulatory agreements during the third quarter of 2013, prior OCC approval is no longer required for any payments of dividends from Seacoast National to the Company which are not in excess of regulatory limits.
The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast National or us, respectively. Under the Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organization's financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. 40 Although the Company previously had cash dividends on our outstanding common stock suspended by the Federal Reserve, the Company is no longer required to consult with the Federal Reserve or seek approval before making dividend payments.
Seacoast Seacoast Minimum to be (Consolidated) National Well Capitalized*
March 31, 2014: Tier 1 capital ratio 17.49 % 15.56 % 6 %
Total risk-based capital ratio 18.74 % 16.81 %
10 % Tier 1 leverage ratio 10.64 % 9.46 % 5 % * For subsidiary bank only Changes in rules under new Basel III guidelines take effect on
January 1, 2015, and they will affect risk based capital calculations. The Company has taken a prospective look at its ratios, finding that our ratios remain strong under
these new guidelines. FINANCIAL CONDITION
Total assets increased
Total loans (net of unearned income) were
$1,312,456,000at March 31, 2014, $88,646,000or 7.2 percent more than at March 31, 2013, and $8,249,000or 0.6 percent more than at December 31, 2013. Loan production of $353 millionwas retained in the loan portfolio during the twelve months ended March 31, 2014. The Company continues to look for opportunities to invest excess liquidity and believes the best current use is to fund loan growth. Additional commercial relationship managers hired over the past twelve months have increased loan growth, and will continue to do so prospectively. The following table details loan portfolio composition at March 31, 2014, December 31, 2013and March 31, 2013: 41 March 31, December 31 March 31, (Dollars in thousands) 2014 2013 2013 Construction and land development $ 67,197 $ 67,450 $ 59,626Commercial real estate 528,444 520,382 481,468 Residential real estate 592,583 592,746 574,523 Commercial and financial 79,401 78,636 64,752 Consumer 44,601 44,713 43,248 Other loans 230 280 193 NET LOAN BALANCES $ 1,312,456 $ 1,304,207 $ 1,223,810
The Company defines commercial real estate in accordance with the guidance on "Concentrations in Commercial Real Estate Lending" (the "Guidance") issued by the federal bank regulatory agencies in 2006. As shown in the loan table below, construction and land development loans (excluding loans to individuals) increased
$7.3to $29.5 millionfrom March 31, 2013. Construction and land development loans to individuals for personal residences were slightly higher year over year, increasing $0.3 millionor
0.8 percent from
March 31, 2013. 42 March 31, 2014 2013 (In millions) Funded Unfunded Total Funded Unfunded Total Construction and land development Residential: Town homes 0.5 1.0 1.5 0.0 0.0 0.0 Single family residences 1.8 11.2 13.0 0.0 0.0 0.0 Single family land and lots 4.7 0.0 4.7 4.9 0.0 4.9 Multifamily 3.6 0.0 3.6 3.9 0.0 3.9 10.6 12.2 22.8 8.8 0.0 8.8 Commercial: Office buildings 0.0 0.0 0.0 1.1 1.4 2.5 Retail trade 2.9 1.1 4.0 0.0 0.0 0.0 Land 4.4 0.6 5.0 7.8 0.0 7.8 Healthcare 7.1 1.6 8.7 3.3 7.4 10.7 Churches and educational facilities 1.1 0.0 1.1 1.2 3.2 4.4 Lodging 3.4 3.1 6.5 0.0 0.0 0.0 18.9 6.4 25.3 13.4 12.0 25.4 Total residential and commercial 29.5 18.6 48.1 22.2 12.0 34.2 Individuals: Lot loans 13.3 0.0 13.3 16.6 0.0 16.6 Construction 24.4 13.8 38.2 20.8 15.3 36.1 37.7 13.8 51.5 37.4 15.3 52.7 Total $ 67.2 $ 32.4 $ 99.6 $ 59.6 $ 27.3 $ 86.9Commercial real estate mortgages were higher by $47.0 millionor 9.8 percent to $528.4 millionat March 31, 2014, compared to March 31, 2013. The Company's ten largest commercial real estate funded and unfunded loan relationships at March 31, 2014aggregated to $104.7 million(versus $111.9 milliona year ago) and for the 29 commercial real estate relationships in excess of $5 millionthe aggregate funded and unfunded totaled $220.3 million(compared to 22 relationships of $186.1 milliona year ago). 43 Commercial real estate mortgage loans, excluding construction and development loans, were comprised of the following loan types at March 31, 2014and 2013: March 31, 2014 2013 (In millions) Funded Unfunded Total Funded Unfunded Total Office buildings $ 120.0 $ 2.8 $ 122.8 $ 112.5 $ 2.3 $ 114.8Retail trade 142.0 1.6 143.6 122.2 0.0 122.2 Industrial 76.7 0.6 77.3 73.4 0.3 73.7 Healthcare 44.1 1.0 45.1 39.4 1.1 40.5 Churches and educational facilities 26.9 0.0 26.9 26.9 0.0 26.9 Recreation 2.4 0.1 2.5 2.6 0.1 2.7 Multifamily 17.2 0.0 17.2 8.5 0.0 8.5 Mobile home parks 1.8 0.0 1.8 2.0 0.0 2.0 Lodging 16.9 0.0 16.9 18.0 0.0 18.0 Restaurant 3.7 0.0 3.7 3.6 0.0 3.6 Agriculture 4.7 1.2 5.9 5.9 1.2 7.1 Convenience stores 22.0 0.9 22.9 20.2 0.0 20.2 Marina 20.6 0.0 20.6 21.1 0.0 21.1 Other 29.4 0.1 29.5 25.1 0.0 25.1 Total $ 528.4 $ 8.3 $ 536.7 $ 481.4 $ 5.0 $ 486.4
Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately
Residential mortgage lending is an important segment of the Company's lending activities. The Company has never offered sub-prime, Alt A, Option ARM or any negative amortizing residential loans, programs or products, although we have originated and hold residential mortgage loans from borrowers with original or current FICO credit scores that are less than "prime." Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. The Company selectively adds residential mortgage loans to its portfolio, primarily loans with adjustable rates. The Company's asset mitigation staff handles all foreclosure actions together with outside legal counsel. Exposure to market interest rate volatility with respect to long-term fixed rate mortgage loans held for investment is managed by attempting to match maturities and re-pricing opportunities and through loan sales of most fixed rate product. For the first quarter of 2014, closed residential mortgage loan production totaled
$40 million, of which $19 millionof fixed rate loans were sold servicing released while adjustable products were added to the portfolio. In comparison, closed residential mortgage loan production totaled $56 million, $80 million, $62 millionand $53 millionduring the first, second, third and fourth quarters of 2013, respectively, with $33 million, $49 million, $32 millionand $34 millionsold servicing released. Adjustable rate residential real estate mortgages were higher at March 31, 2014, by $26.7 millionor 7.3 percent, and fixed rate residential real estate mortgages were lower, by $8.4 millionor 8.6 percent, compared to a year ago. At March 31, 2014, approximately $393 millionor 66 percent of the Company's residential mortgage balances were adjustable, compared to $366 millionor 64 percent at March 31, 2013. Loans secured by residential properties having fixed rates totaled approximately $90 millionat March 31, 2014, of which 15- and 30-year mortgages totaled approximately $21 millionand $69 million, respectively. The remaining fixed rate balances were comprised of home improvement loans, most with maturities of 10 years or less, that decreased $0.7 millionor 1.1 percent since March 31, 2013. In comparison, loans secured by residential properties having fixed rates totaled approximately $98 millionat March 31, 2013, with 15- and 30-year fixed rate residential mortgages totaling approximately $24 millionand $74 million, respectively. The Company also has a small home equity line portfolio totaling approximately $50 millionat March 31, 2014, slightly higher than the $49 millionthat was outstanding at March 31, 2013. 44 Reflecting the impact on lending during an improving economy, commercial loans increased $14.6 millionor 22.6 percent year over year and totaled $79.4 millionat March 31, 2014, compared to $64.8 milliona year ago. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Company's lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small to medium sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows. The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes, and indirect loans through dealers to finance automobiles) which increased $1.4 millionor 3.1 percent year over year and totaled $44.6 million(versus $43.2 milliona year ago). In addition, real estate construction loans to individuals secured by residential properties totaled $24.4 million(versus $20.8 milliona year ago), and residential lot loans to individuals which totaled $13.3 million(versus $16.6 milliona year ago).
Loan Concentrations The Company has reduced exposure to loan types that were most impacted by stressed market conditions during the recession. In addition the Company reduced its exposure to larger balance loan relationships (including multiple loans to a single borrower or borrower group). Commercial loan relationships greater than
$10 millionwere reduced by $142.1 millionto $63.4 millionat March 31, 2014compared with year-end 2009.
Commercial Relationships Greater than
March 31, December 31, (Dollars in thousands) 2014 2013 2012 2011 2010 2009 Performing
$ 63,365 $ 64,224 $ 77,321 $ 84,610 $ 112,469 $ 145,797Performing TDR* 0 0 10,431 25,494 28,286 31,152 Nonaccrual 0 0 0 0 20,913 28,525 Total $ 63,365 $ 64,224 $ 87,752 $ 110,104 $ 161,668 $ 205,474Top 10 Customer Loan Relationships $ 104,793 $ 104,145 $ 115,506 $ 128,739 $ 151,503 $ 173,162
*TDR = Troubled debt restructures
Commercial loan relationships greater than
$10 millionas a percent of tier 1 capital and the allowance for loan losses totaled 24.6 percent at March 31, 2014, compared with 27.9 percent at year-end 2013, 37.5 percent at year-end 2012, 45.8 percent at year-end 2011, 66.5 percent at year-end 2010, and 85.9 percent at year-end 2009. Concentrations in total construction and development loans and total commercial real estate (CRE) loans have also been substantially reduced. As shown in the table below, under regulatory guidance for construction and land development and commercial real estate loan concentrations as a percentage of total risk based capital, Seacoast National's loan portfolio in these categories (as defined in the guidance) have improved. March 31, December 31, 2014 2013 2012 2011 2010 2009 Construction and land development loans to total risk based capital 29 % 30 % 28 % 22 % 39 % 81 % CRE loans to total risk based capital 173 % 172 % 164 % 174 % 218 % 274 % ALLOWANCE FOR LOAN LOSSES Management continuously monitors the quality of the loan portfolio and maintains an allowance for loan losses it believes sufficient to absorb probable losses inherent in the loan portfolio. The allowance for loan losses declined to a total of $19,472,000or 1.48 percent of total loans at March 31, 2014consistent with the reduced credit risk and net charge-offs. This amount is $2,068,000less than at March 31, 2013and $596,000less than at December 31, 2013. The allowance for loan losses ("ALLL") framework has two basic elements: specific allowances for loans individually evaluated for impairment, and a formula-based component for pools of homogeneous loans within the portfolio that have similar risk characteristics, which are not individually evaluated. The first element of the ALLL analysis involves the estimation of allowance specific to individually evaluated impaired loans, including accruing and nonaccruing restructured commercial and consumer loans. In this process, a specific allowance is established for impaired loans based on an analysis of the most probable sources of repayment, including discounted cash flows, liquidation of collateral, or the market value of the loan itself. It is the Company's policy to charge off any portion of the loan deemed a loss. Restructured consumer loans are also evaluated in this element of the estimate. As of March 31, 2014, the specific allowance related to impaired loans individually evaluated totaled $4.4 million, compared to $6.7 millionas of March 31, 2013. The second element of the ALLL analysis, the general allowance for homogeneous loan pools not individually evaluated, is determined by applying allowance factors to pools of loans within the portfolio that have similar risk characteristics. The general allowance factors are determined using a baseline factor that is developed from an analysis of historical net charge-off experience and qualitative factors designed and intended to measure expected losses. These baseline factors are developed and applied to the various loan pools. Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the historical loss. These influences may include elements such as changes in concentration risk, macroeconomic conditions, and/or recent observable asset quality trends. 46
In addition, our analyses of the adequacy of the allowance for loan losses also takes into account qualitative factors such as credit quality, loan concentrations, internal controls, audit results, staff turnover, local market conditions and loan growth.
The Company's independent
Credit Administration Departmentassigns all loss factors to the individual internal risk ratings based on an estimate of the risk using a variety of tools and information. Its estimate includes consideration of the level of unemployment which is incorporated into the overall allowance. In addition, the portfolio is segregated into a graded loan portfolio, residential, installment, home equity, and unsecured signature lines, and loss factors are calculated for each portfolio. The loss factors assigned to the graded loan portfolio are based on the historical migration of actual losses by grade over 4, 8, 12, 16, 20 and 24 quarter intervals. Minimum and maximum average historical loss rates over one to five years are referenced in setting the loss factors by grade within the graded portfolio. Management uses historical loss factors as its starting point, and qualitative elements are considered to capture trends within each portion of the graded portfolio. The direction and expectations of past dues, charge-offs, nonaccruals, classified loans, portfolio mix, market conditions, and risk management controls are considered in setting loss factors for the graded portfolio. The loan loss migration indicates that the minimum and maximum average loss rates and median loss rates over the past many quarters have been declining. Also, the level of criticized and classified loans has been declining as a result of a combination of upgrades, loan payoff and loan sales, which are reducing the risk profile of the loan portfolio. Additionally, the risk profile has declined given the shift in complexion of the graded portfolio, particularly a reduced level of commercial real estate loan concentrations. Residential and consumer (installment, secured lines, and unsecured lines) are analyzed differently as risk ratings, or grades, are not assigned to individual loans. Residential and consumer loan losses are tracked by pool. Management examines the historical losses over one to five years in its determination of the appropriate loss factor for vintages of loans currently in the portfolio and not the vintages that produced the significant losses in prior years. These loss factors are then adjusted by qualitative factors determined by management to reflect potential probable losses inherent in each loan pool. Qualitative factors may include various loan or property types, loan to value, concentrations and economic and environmental factors. Residential loans that become 90 days past due are placed on nonaccrual and a specific allowance is made for any loan that becomes 120 days past due. Residential loans are subsequently written down if they become 180 days past due and such write-downs are supported by a current appraisal, consistent with current banking regulations. Our charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due compared to the regulatory loss criteria of 120 days. Secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type, in compliance with Federal Financial Institution Examination Councilguidelines. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in the legal process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates 47
Management continually evaluates the allowance for loan losses methodology seeking to refine and enhance this process as appropriate. As a result, it is likely that the methodology will continue to evolve over time.
Our Loan Review unit is independent, and performs loan reviews and evaluates a representative sample of credit extensions after the fact for appropriate individual internal risk ratings. Loan Review has the authority to change internal risk ratings and is responsible for assessing the adequacy of credit underwriting. This unit reports directly to the Directors' Credit Risk Committee of Seacoast National's board of directors. Net recoveries for the first quarter of 2014 totaled
$139,000, compared to net charges-offs of $1,517,000for the same period in 2013. Note F to the financial statements (titled "Impaired Loans and Allowance for Loan Losses") summarizes the Company's allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at March 31, 2014and 2013. Although there is no assurance that we will not have elevated charge-offs in the future, we believe that we have significantly reduced the risks in our loan portfolio and that with stabilizing market conditions, future charge-offs should continue to decline. The allowance as a percentage of loans outstanding was 1.48 percent at March 31, 2014, compared to 1.76 percent at March 31, 2013. The allowance for loan losses represents management's estimate of an amount adequate in relation to the risk of losses inherent in the loan portfolio. The reduced level of impaired loans and lower classified loans (including special mention and substandard grades) contributed to a lower risk of loss and the lower allowance for loan losses as of March 31, 2014. The risk profile of the loan portfolio has been reduced by implementing a program to reduce the level of credit risk in the portfolio by strengthening credit management methodologies and implementing a low risk "back-to-basics" strategic plan for loan growth. New loan production has shifted to adjustable rate residential real estate loans, owner-occupied commercial real estate, small business loans for professionals and businesses, and consumer lending. Strategies, processes and controls are in place to ensure that new production is well underwritten and maintains a focus on smaller, diversified and lower-risk lending. Aided by initiatives embodied in new loan programs and continued aggressive collection actions, the portfolio mix has changed dramatically and has become more diversified. The improved mix is most evident by reductions in income producing commercial real estate and construction and land development loans over the last several years. Prospectively, we anticipate that the allowance will continue to decline as a percentage of loans outstanding as we continue to see improvement in our credit quality, with some offset to this perspective for more normal loan growth as business activity and the economy improve. 48
Concentrations of credit risk, discussed under the caption "Loan Portfolio" of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. The Company's most significant concentration of credit is a portfolio of loans secured by real estate. At
March 31, 2014, the Company had $1.188 billionin loans secured by real estate, representing 90.5 percent of total loans, the volume up slightly from $1.116 billionbut slightly lower as a percent of total loans (versus 91.1 percent) at March 31, 2013. In addition, the Company is subject to a geographic concentration of credit because it only operates in central and southeastern Florida.
While it is the Company's policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, management's judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, which is undertaken both to ascertain whether there are probable losses that must be charged off and to assess the risk characteristics of the portfolio in aggregate. This review considers the judgments of management, and also those of bank regulatory agencies that review the loan portfolio as part of their regular examination process. Our bank regulators have generally agreed with our credit assessment however the regulators could seek additional provisions to our allowance for loan losses, which would reduce our earnings. NONPERFORMING ASSETS Nonperforming assets ("NPAs") at
March 31, 2014totaled $32,589,000and were comprised of $26,220,000of nonaccrual loans and $6,369,000of other real estate owned ("OREO"), compared to $46,058,000at March 31, 2013(comprised of $35,208,000in nonaccrual loans and $10,850,000of OREO). At March 31, 2014, approximately 98.2 percent of nonaccrual loans were secured with real estate, the remainder principally by marine vessels. See the tables below for details about nonaccrual loans. At March 31, 2014, nonaccrual loans have been written down by approximately $8.4 millionor 26.2 percent of the original loan balance (including specific impairment reserves). As anticipated, the Company closed a number of OREO sales during the last twelve months that reduced OREO outstanding. OREO has declined $4.5 millionor 41.3 percent since March 31, 2013. This is reflective of our improving credit quality. 49 The table below shows the nonperforming loan inflows by quarter for 2014, 2013 and 2012: New Nonperforming Loans (Dollars in thousands) 2014 2013 2012 First quarter $ 1,651 $ 2,868 $ 20,207Second quarter 2,949 17,291 Third quarter 2,019 14,521 Fourth quarter 2,167 6,891 During the three months ended March 31, 2014, $1.7 millionin loans were moved to nonperforming, compared to $10.0 millionfor all of 2013. Most of these loans are collateralized by real estate. NPAs are subject to changes in the economy, both nationally and locally, changes in monetary and fiscal policies, changes in borrowers' payment behaviors and changes in conditions affecting various borrowers from Seacoast National. Based on lower classified assets and impaired loan balances as of March 31, 2014, management believes that prospective inflows to nonaccrual loans will continue to decline. The Company pursues loan restructurings in selected cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. TDRs are part of the 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. We are optimistic that some of these credits will rehabilitate and be upgraded versus migrating to nonperforming or OREO prospectively. Accruing restructured loans totaled $24.5 millionat March 31, 2014compared to $41.2 millionat March 31, 2013, with $13.9 millionof the decline in accruing TDR commercial real estate mortgages. The tables below set forth details related to nonaccrual and restructured loans. Nonaccrual Loans Accruing March 31, 2014 Non- Per- Restructured (Dollars in thousands) Current forming Total Loans Construction & land development Residential $ 403 $ 43 $ 446 $ 2,028Commercial 380 - 380 0 Individuals 12 392 404 218 795 435 1,230 2,246 Residential real estate mortgages 2,050 18,554 20,604 14,523 Commercial real estate mortgages 2,230 1,681 3,911 7,233 Real estate loans 5,075 20,670 25,745 24,002 Commercial and financial 0 11 11 152 Consumer 0 464 464 383 $ 5,075 $ 21,145 $ 26,220 $ 24,53750
2014 2013 (Dollars in thousands) Number Amount Number Amount Rate reduction 109
$ 18,371124 $ 25,128Maturity extended with change in terms 78 10,402 87 22,582 Forgiveness of principal 1 1,688 1 1,938 Chapter 7 bankruptcies 53 2,691 62 3,233 Not elsewhere classified 9 5,324 10 5,070 250 $ 38,476284 $ 57,951During the first quarter of 2014, newly identified TDRs totaled $0.4 million, compared to $10.2 millionfor all of 2013. During 2013, newly identified TDRs trended lower, with $4.4 million, $4.1 million, $1.7 millionand $0.5 millionrecorded in the first, second, third and fourth quarters of 2013, respectively. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. No accruing loans that were restructured within the twelve months preceding March 31, 2014defaulted during the three months ended March 31, 2014, compared to $72,000for the first three months of 2013. A restructured loan is considered in default when it becomes 60 days or more past due under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned.
In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed on nonaccrual. Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above. CASH AND CASH EQUIVALENTS Total cash and cash equivalents increased
$27.2 millionduring the first three months of 2014 as a result of the receipt of $24.6 millionfor the issuance of common stock, aggregate deposit and repurchase agreement increases of $18.6 million, and $5.8 millionin net cash provided from operations. Partially offsetting, and decreasing cash and cash equivalents, net maturities, sales and purchases of securities utilized $13.4 millionand new loans net of principal repayments totaled $9.2 million. SECURITIES
March 31, 2014, the Company had no trading securities or securities held for investment, and had $658,512,000in securities available for sale (100 percent of the total portfolio). The Company's total securities portfolio increased slightly, by $9.3 millionor 1.4 percent from March 31, 2013. 51
As part of the Company's interest rate risk management process, an average duration for the securities portfolio is targeted. In addition, securities are acquired which return principal monthly that can be reinvested. Agency and private label mortgage backed securities and collateralized mortgage obligations comprise
$619,951,000of total securities, approximately 94.1 percent of the portfolio. Remaining securities are largely comprised of U.S. Treasury, U.S. Governmentagency securities and tax-exempt bonds issued by states, counties and municipalities. The effective duration of the investment portfolio at March 31, 2014was 4.1 years, compared to a year ago when the duration was 3.2 years. The increase in duration resulted from a steeper yield curve as interest rates increased approximately 80 to 100 basis points for 5 and 10 year maturities in 2013. The Company's investments do not extend beyond an average duration of 5.0 years if interest rates increase in the future. Management believes the effective average duration of the portfolio will decline to 3.0 years over 2014 if the yield
curve remains unchanged. At
March 31, 2014, available for sale securities had gross losses of $16,233,000and gross gains of $3,694,000, compared to gross losses of $20,003,000and gross gains of $3,156,000at December 31, 2013. All of the securities with unrealized losses are reviewed for other-than-temporary impairment at least quarterly. As a result of these reviews during the first quarter of 2014 and all four quarters of 2013, it was determined that none of the securities with unrealized losses were not other than temporarily impaired and the Company has the intent and ability to retain these securities until recovery over the periods presented (see additional discussion under "Critical Accounting Estimates-Fair Value Measurements"). Company management considers the overall quality of the securities portfolio to be high. The Company has no exposure to securities with subprime collateral. The Company holds no interests in trust preferred securities. DEPOSITS AND BORROWINGS The Company's balance sheet continues to be primarily core funded. The Company continues to utilize a focused retail and commercial deposit growth strategy that has successfully generated core deposit relationships and increased services per household. Total deposits increased $57,631,000, or 3.3 percent, to $1,819,795,000at March 31, 2014compared to one year earlier. Declining single service time deposits have been more than offset by increasing low cost or no cost deposits. Since March 31, 2013, interest bearing deposits (NOW, savings and money markets deposits) increased $42,934,000or 4.3 percent to $1,044,276,000, noninterest bearing demand deposits increased $60,781,000or 13.4 percent to $513,925,000, and CDs decreased $46,084,000or 15.0 percent to $261,594,000. Securities sold under repurchase agreements decreased over the past twelve months by $5,542,000or 3.4 percent to $156,136,000at March 31, 2014. Repurchase agreements are offered by Seacoast National to select customers who wish to sweep excess balances on a daily basis for investment purposes. Funds from local government entities comprise a significant amount of the outstanding balance, with safety a major concern for these customers. At March 31, 2014, the number of sweep repurchase accounts was 119, compared to 146 a year ago. 52
March 31, 2014, other borrowings were comprised of subordinated debt of $53.6 millionrelated to trust preferred securities issued by trusts organized by the Company, and advances from the Federal Home Loan Bank("FHLB") of $50.0 million. The FHLB advances mature in 2017. For 2014 and 2013, the weighted average cost of our FHLB advances was 3.22 percent, unchanged. The Company has two wholly owned trust subsidiaries, SBCF Capital Trust Iand SBCF Statutory Trust II that were both formed in 2005. In 2007, the Company formed an additional wholly owned trust subsidiary, SBCF Statutory Trust III. The 2005 trusts each issued $20.0 million(totaling $40.0 million) of trust preferred securities and the 2007 trust issued an additional $12.0 millionin trust preferred securities. 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 as Tier 1 capital up to 25 percent of core capital, net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules (including Basel III) and expects that it will be able to treat all $52.0 millionof trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company's tangible common shareholders' equity to calculate Tier 1 capital. The weighted average interest rate of our outstanding subordinated debt related to trust preferred securities was 1.72 percent during the first three months of 2014, compared to 1.74 percent for all of 2013.
OFF-BALANCE SHEET TRANSACTIONS
In the normal course of business, we may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.
Lending commitments include unfunded loan commitments and standby and commercial letters of credit. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement. Loan commitments to customers are made in the normal course of our commercial and retail lending businesses. 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. 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. Loan commitments were
$144 millionat March 31, 2014and $146 millionat March 31, 2013. 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. 53
Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's most recent
Asset and Liability Management Committee("ALCO") model simulation indicates net interest income would increase 7.4 percent if interest rates are shocked 200 basis points up over the next 12 months and 4.1 percent if interest rates are shocked up 100 basis points. This compares with the Company's first quarter 2013 model simulation, which indicated net interest income would increase 4.6 percent if interest rates are shocked 200 basis points up over the next 12 months and 2.7 percent if interest rates are shocked up 100 basis points. Recent regulatory guidance has placed more emphasis on rate shocks. 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 11.6 percent at March 31, 2014. 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. LIQUIDITY 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 primarily include customer-based core deposits, collateral-backed borrowings, cash flows from operations, and asset securitizations and sales.
Cash flows from operations are a significant component of liquidity risk management and we consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments. Deposits are also 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, safety and competitive forces. We routinely use securities and loans as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the FHLB and the Federal Reserve Bank of
Atlantaunder its borrower-in-custody program. 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, securities held 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 securities not pledged to secure public deposits or trust funds. At March 31, 2014, Seacoast National had available unsecured lines of $49 millionand lines of credit under current lendable collateral value, which are subject to change, of $579 million. Seacoast National had $365 millionof United States Treasury and Government agency securities, mortgage backed securities and collateral lending obligations not pledged and available for use under repurchase agreements, and had an additional $170 millionin residential and commercial real estate loans available as collateral. In comparison, at March 31, 2013, the Company had available unsecured lines of $30 millionand lines of credit of $507 million, and had $381 millionof Treasury and Government agency securities, mortgage backed securities and collateral lending obligations not pledged and available for use under repurchase agreements, as well as an additional $175 millionin residential and commercial real estate loans available as collateral. 54
Liquidity, as measured in the form of cash and cash equivalents (including interest bearing deposits), totaled
$218,778,000on a consolidated basis at March 31, 2014as compared to $227,071,000at March 31, 2013. The composition of cash and cash equivalents has changed from a year ago. Over the past twelve months, cash and due from banks increased $10,002,000to $44,984,000and interest bearing deposits decreased to $173,794,000from $192,069,000. The interest bearing deposits are maintained in Seacoast National's account at the Federal Reserve Bank of Atlanta. Cash and cash equivalents vary with seasonal deposit movements and are generally higher in the winter than in the summer, and vary with the level of principal repayments and investment activity occurring in Seacoast National's securities and loan portfolios. Our intent has been to reinvest excess liquidity into our loan and securities portfolios, as market opportunities and conditions meet expectations.
The Company does not rely on and is not dependent on off-balance sheet financing or wholesale funding.
The Company is a legal entity separate and distinct from Seacoast National and its other subsidiaries. Various legal limitations, including Section 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W, restrict Seacoast National from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company has traditionally relied upon dividends from Seacoast National and securities offerings to provide funds to pay the Company's expenses, to service the Company's debt and to pay dividends upon Company common stock and preferred stock. During the third quarter of 2013, formal regulatory agreements with the OCC were removed, thereby allowing Seacoast National to pay dividends to the Company without prior OCC approval. At
March 31, 2014, the Company had cash and cash equivalents at the parent of approximately $26.1 million, compared to $1.7 millionat December 31, 2013. Remaining funds of $25 millionfrom CapGen Capitalfor the fourth quarter 2013 common stock offering were received on January 13, 2014, after regulatory approval of CapGen's investment. These funds were the primary contributor to the increase in the parent's cash and cash equivalents, compared to year-end 2013.
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. 55 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.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Various of the statements made herein under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Quantitative and Qualitative Disclosures about Market Risk", "Risk Factors" and elsewhere, are "forward-looking statements" within the meaning and protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of Seacoast to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "will," "anticipate," "assume," "should," "support", "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "further", "point to," "project," "could," "intend" or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
• the effects of future economic and market conditions, including seasonality;
• governmental monetary and fiscal policies, as well as legislative, tax and
• legislative and regulatory changes, including changes in banking, securities
and tax laws and regulations and their application by our regulators, and
changes in the scope and cost of
FDICinsurance and other coverage;
• changes in accounting policies, rules and practices;
• the risks of changes in interest rates on the level and composition of
deposits, loan demand, liquidity and the values of loan collateral, securities,
and interest sensitive assets and liabilities; interest rate risks, sensitivities and the shape of the yield curve;
• the effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities brokerage
firms, insurance companies, money market and other mutual funds and other
financial institutions operating in our market areas and elsewhere, including
institutions operating regionally, nationally and internationally, together
with such competitors offering banking products and services by mail, telephone, computer and the Internet; 56
• the failure of assumptions underlying the establishment of reserves for
possible loan losses;
• the risks of mergers and acquisitions, include, without limitation, unexpected
transaction costs, including the costs of integrating operations; the risks
that the businesses will not be integrated successfully or that such
integration may be more difficult, time-consuming or costly than expected;
• the potential failure to fully or timely realize expected revenues and revenue
synergies, including as the result of revenues following the merger being lower
• the risk of deposit and customer attrition; any changes in deposit mix;
unexpected operating and other costs, which may differ or change from expectations;
• the risks of customer and employee loss and business disruption, including,
without limitation, as the result of difficulties in maintaining relationships
with employees; increased competitive pressures and solicitations of customers
by competitors; as well as the difficulties and risks inherent with entering
new markets; and
• other risks and uncertainties described herein and in our annual report on Form
10-K for the year ended
Exchange Commission, or "SEC", reports and filings. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.