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SBCF > SEC Filings for SBCF > Form 10-Q on 14-Nov-2013All Recent SEC Filings




Quarterly Report



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


While recent years have been difficult for the U.S. economy and for the financial services industry, the Company has been proactively positioning its business for growth by focusing on improving credit quality, de-risking the overall loan portfolio, disposing of problem assets, increasing loan production and growing core deposits. Property values in our markets began to stabilize in 2012 and are improved in 2013, and we expect lower credit costs and costs related to foreclosure activities prospectively. As consumer confidence improves and economic conditions are more robust we also expect improved new loan demand from credit worthy borrowers. We continue to believe our targeted plan to grow our customer and commercial franchise is the best way to build shareholder value going forward.

Our net interest income increased $877,000 during the third quarter of 2013 compared to the same period in 2012 and our net interest margin was 8 basis points higher, principally due to our ability to migrate nonperforming loans to performing status, which was partially offset by lower spreads earned due to the Federal Reserve's quantitative easing program's negative impact on the interest margin. During the third quarter of 2013, a recovery of interest on nonaccrual loans of $505,000 provided 10 basis points of improvement to the interest margin. Noninterest income (excluding securities gains) also increased in the third quarter of 2013, by $408,000, a result of growth in key activities such as fees earned from increased households and deposit relationships and from wealth management services. These successes are a direct result of improved tactical execution and our improved condition supporting better growth for both consumer and commercial relationships.

During the last two quarters of 2012, management began implementing a combination of actions, including branch office consolidations, revenue enhancements, further acceleration of growth initiatives and a variety of cost-saving opportunities. A decision to accelerate problem loan liquidation activities during the first half of 2012 was part of this larger review initiated to support earnings growth in 2013 and we took this action in part to take advantage of improving market conditions. As anticipated, the Company is reporting better results for the first, second and third quarters of 2013. Net income for the three months ended September 30, 2013 of $45,141,000, compared to net income of $2,044,000 and $2,954,000 for the first and second quarters of 2013, respectively, and to net income $447,000 for the third quarter of 2012. The results for the third quarter of 2013 include an income tax benefit of $41,642,000 that includes the reversal of the valuation allowance on our net deferred tax assets. Net income available to common shareholders (after preferred dividends and accretion of preferred stock discount) for

third quarter 2013 totals $44,204,000 or $0.46 per average common diluted share, compared to first and second quarter 2013's net income of $1,107,000 or $0.01 per average common diluted share and $2,017,000 or $0.02 per average common diluted share, and a net loss available to common shareholders of $490,000 or $0.01 per average common diluted share in last year's third quarter.

Implementation of our plan to reduce core operating expenses by approximately $4.9 million annually is currently on target for 2013. Approximately $3.3 million of the annual reduction was implemented at year-end 2012 and fully impacted the first, second and third quarters of 2013. Core operating expenses, excluding losses on other real estate owned ("OREO") and asset disposition costs, were $1,122,000, $1,123,000 and $1,292,000 lower for the first, second and third quarters of 2013, respectively, compared to a year ago. Noncore credit related expenses for the first, second and third quarters of 2013, primarily losses on OREO and asset disposition costs, were $1.6 million, $0.6 million and $0.5 million lower, respectively, and in line with our predicted decline of approximately $2.8 million for the total year 2013. For 2012, noncore credit related costs peaked in the first quarter of 2012, and declined in each subsequent quarter during 2012. In addition, the Company's loan loss provisioning was lower by $1.4 million and $5.9 million for the first and second quarters of 2013, respectively, and $0.3 million higher in the third quarter of 2013, when compared to 2012's provisioning. Lower provisioning was supported by the decline in nonperforming loans and net charge-offs.

Four of five new loan production offices in the Orlando and Palm Beach markets are open, two late in the first quarter of 2013 and two during the second quarter of 2013, with one more opening planned early in the fourth quarter of 2013. These locations are expected to support an acceleration of our loan production in 2013 and 2014, and have been offset by reductions to expense from the consolidation of four full service banking offices, with those closings completed in December 2012 and January 2013. We anticipate the additional investments in locations will increase our lending capacity in our commercial and business banking lines and expand growth initiatives related to our mortgage business. The Company has committed approximately $1.9 million for property and equipment to be depreciated over useful lives ranging from 5 to 10 years.

The Company's capital is expected to continue to increase with positive earnings. The board and management continue to review the Company's potential capital management options. As earnings and asset quality continue to improve, we believe that more financing options will emerge for the Company, particularly when dividends can be prudently paid to the Company by its subsidiary Bank. Under our capital raise, the Company plans to redeem the Series A Preferred stock of $50 million that was sold at auction by the U.S. Treasury to investors on April 3, 2012, ending the Company's participation in the Treasury's Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP"). Dividend payments on the Series A Preferred stock are set to increase from 5 percent to 9 percent, beginning in 2014. The replacement of this capital improves our capital structure, and associated cost, prospectively.


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.

Allowance and Provision for Loan Losses

The information contained on pages 37-38 and 44-54 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. If the "As Is" appraisal does not appropriately reflect the current fair market value, in the Company's opinion, a specific reserve is established and/or the loan is written down to the current fair market value.

Collateral dependent impaired loans are loans that are solely dependent on the liquidation of the collateral for repayment. 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.

At September 30, 2013, outstanding securities designated as available for sale totaled $650,445,000. The fair value of the available for sale portfolio at September 30, 2013 was less than historical amortized cost, producing net unrealized losses of $11,417,000 that have been included in other comprehensive income as a component of shareholders' equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2013. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio.

The credit quality of the Company's securities holdings are primarily investment grade. As of September 30, 2013, the Company's available for sale investment securities, except for approximately $6.9 million of securities issued by states and their political subdivisions generally are traded in liquid markets. U.S. Treasury and U.S. Government agency obligations totaled $510.7 million, or 78.5 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, and adjustable rate mortgage loans. Historically, the mortgage loans serving as collateral for those investments have had minimal foreclosures and losses. In addition, during the second and third quarters of 2013, the Company invested $32.3 million in uncapped 3-month Libor floating 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 rating.

Other Than Temporary Impairment of Securities

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 $4.9 million as of September 30, 2013, $0.7 million less than year-end 2012's balance. The Company accounts for its FHLB stock based on the industry guidance in ASC 942, Financial Services-Depository and Lending, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We evaluated our holdings in FHLB stock at September 30, 2013 and believe our holdings in the stock are ultimately recoverable at par. We do not have operational or liquidity needs that would require redemption of the FHLB stock in the foreseeable future and, therefore, have determined that the stock is not other-than-temporarily impaired.

Realization of Deferred Tax Assets

At September 30, 2013, the Company had net deferred tax assets ("DTA") of $65.9 million. Although 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 September 30, 2012 the Company had a net DTA of $17.2 million.

As a result of the losses incurred in 2010 and 2012, the Company had a three-year cumulative pretax loss until the current quarter. At September 30, 2013, the total has converted to a three-year cumulative pretax income of $4.7 million. Lower credit costs and increasing revenues for 2013, and increased reliance on management's forecast of future taxable earnings, resulted in the Company's conclusion that its deferred tax valuation allowance of $44.8 million was no longer needed. The most important factors that support this conclusion are:

1. Income before tax (IBT) has increased over the past 5 quarters as credit costs have improved.

2. Credit costs have improved and overall credit risk has been reduced to a level which will decrease the impact on future taxable earnings.

3. Credit processes, policies and governance have been improved and enhanced.

4. Income before tax results for the third quarter 2013 and for the nine months ended September 30, 2013 indicates an annualized steady state income before tax of $13-$16 million per year, assuming a normalized loan loss provision and no improvement in economic conditions which recovers the net operating loss carryforwards before expiration.

5. Since 2008 the Company has 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 environment.

6. At September 30, 2013 the Company no longer has a three year cumulative loss.

7. The OCC, the subsidiary bank's primary regulator terminated its formal agreement.

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 September 30, 2013 and 2012, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.



Net interest income (on a fully taxable equivalent basis) for the third quarter of 2013 totaled $16,872,000, increasing from 2013's second quarter by $700,000 or 4.3 percent, and higher than third quarter 2012's result by $877,000 or 5.5 percent. Lower asset yields as a result of the Federal Reserve's actions to lower interest rates and the restructuring of the investment portfolio to lower pricing risks in 2012 were more than offset by improving loan volumes and a recovery of interest on nonaccrual loans of $505,000, increasing third quarter 2013's net interest income, year over year. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters:

                                     Net Interest           Net Interest
                                        Income                 Margin
         (Dollars in thousands)    (tax equivalent)       (tax equivalent)
         Third quarter 2012       $           15,995                   3.17 %
         Fourth quarter 2012                  16,254                   3.22
         First quarter 2013                   16,055                   3.15
         Second quarter 2013                  16,172                   3.12
         Third quarter 2013                   16,872                   3.25

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.

                                           Third         Second        First         Fourth        Third
                                          Quarter       Quarter       Quarter       Quarter       Quarter
(Dollars in thousands                       2013          2013          2013          2012          2012
Nontaxable interest income                $    107      $    108      $    105      $     87      $     82
Tax Rate                                        35 %          35 %          35 %          35 %          35 %
Net interest income (TE)                  $ 16,872      $ 16,172      $ 16,055      $ 16,254      $ 15,995
Total net interest income (not TE)          16,815        16,114        16,000        16,208        15,952
Net interest margin (TE)                      3.25 %        3.12 %        3.15 %        3.22 %        3.17 %
Net interest margin (not TE)                  3.24          3.11          3.14          3.21          3.16

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 third quarter of 2013, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 62.1 percent, compared to 61.0 percent a year ago. Average securities as a percentage of average earning assets increased from 28.6 percent a year ago to 32.4 percent during the third quarter of 2013 and interest bearing deposits and other investments decreased to 5.5 percent in 2013 from 10.4 percent in 2012, reflecting the reinvestment of $226.8 million of proceeds from securities sales transacted during the first and second quarters of 2012. While average total loans as a percentage of earning assets was slightly higher, the mix of loans was generally unchanged, with volumes related to commercial real estate representing 41.8 percent of total loans at September 30, 2013 (compared to 41.1 percent at September 30, 2012) and lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) representing 48.8 percent of total loans at September 30, 2013 (versus 49.7 percent at September 30, 2012) (see "Loan Portfolio").

The yield on earning assets for the third quarter of 2013 was 3.52 percent, 2 basis points lower than 2012's third 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:

                     Third         Second         First         Fourth         Third
                    Quarter       Quarter        Quarter       Quarter        Quarter
                     2013           2013          2013           2012          2012
           Yield        3.52 %        3.39 %         3.43 %        3.53 %         3.54 %

The yield on loans decreased 9 basis points to 4.59 percent over the last twelve months with nonaccrual loans totaling $28.7 million or 2.3 percent of total loans at September 30, 2013 (versus $44.5 million or 3.7 percent of total loans at September 30, 2012). The yield on loans benefited from a $505,000 recovery of interest on nonaccrual loans that enhanced third quarter 2013's yield by 16 basis points. The yield on investment securities was lower, decreasing 29 basis points year over year to 1.95 percent for the third quarter of 2013, due to securities sold

during the first six months of 2012 to reduce interest rate risk and reinvestment at lower yields and lower add-on rates as the result of Fed actions during the last half of 2012. The yield on interest bearing deposits and other investments was slightly higher at 0.67 percent for third quarter 2013, up 21 basis points compared to a year earlier.

Average earning assets for the third quarter of 2013 increased $50.8 million or 2.5 percent compared to 2012's third quarter balance. Average loan balances for 2013 increased $55.1 million or 4.5 percent to $1,278.4 million, average investment securities increased $91.4 million or 15.9 percent to $665.7 million, and average interest bearing deposits and other investments decreased $95.7 million or 45.7 percent to $113.8 million.

Commercial and commercial real estate loan production for the first nine months of 2013 totaled approximately $138 million, compared to production for all of 2012 and 2011 of $109 million and $63 million, respectively. Improvements in commercial production resulted from a focused program to target small business segments less impacted by the lingering effects of the recession. Our strategy has been to focus on hiring commercial lenders for the larger metropolitan markets in which the Company competes, principally Orlando and Palm Beach. While commercial production improved and period-end total loans outstanding have increased by $62.0 million or 5.2 percent since September 30, 2012, we expect a more significant growth from new commercial lender pipelines and loan closings prospectively. At September 30, 2013 the Company's total commercial and commercial real estate loan pipeline was $55 million, versus $47 million at June 30, 2013 and $63 million at March 31, 2013. The Company has expanded its residential mortgage loan originations and seeks to expand loans to small businesses in 2013. Opportunities to lend to consumers and business have been market share driven.

Closed residential mortgage loan production for the first, second and third quarters of 2013 totaled $56 million, $80 million and $62 million, respectively, of which $33 million, $49 million and $32 million was sold servicing-released. In comparison, closed residential mortgage loan production for the first, second, third and fourth quarters of 2012 totaled $48 million, $66 million, $63 million and $72 million, respectively, of which $20 million, $26 million, $34 million and $39 million was sold servicing-released. Applications for . . .

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