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Section 1: 10-Q (10-Q)

Document
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019
OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to __________________.
 
Commission File No. 0-13660
 
Seacoast Banking Corporation of Florida
(Exact Name of Registrant as Specified in its Charter)
 
Florida
 
59-2260678
(State or Other Jurisdiction of
Incorporation or Organization
 
(I.R.S. Employer
Identification No.)
815 COLORADO AVENUE, STUART FL
 
34994
(Address of Principal Executive Offices)
 
(Zip Code)
(772) 287-4000
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated
Accelerated
Non-Accelerated
Small Reporting
Filer x
Filer ¨
Filer ¨
Company ¨
 
 
 
 
 
 
 
Emerging Growth
 
 
 
Company ¨
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:  
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
SBCF
Nasdaq Global Select Market

Common Stock, $0.10 Par Value – 51,413,988 shares as of March 31, 2019
 
 
 



INDEX
 
SEACOAST BANKING CORPORATION OF FLORIDA
 
 
 
PAGE #
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
 
Three Months Ended March 31,
(In thousands, except per share data)
2019
 
2018
Interest and fees on loans
$
62,287

 
$
45,257

Interest and dividends on securities
9,270

 
9,604

Interest on interest bearing deposits and other investments
918

 
616

Total Interest Income
72,475

 
55,477

 
 
 
 
Interest on deposits
3,873

 
1,538

Interest on time certificates
4,959

 
2,179

Interest on borrowed money
2,869

 
1,998

Total Interest Expense
11,701

 
5,715

 
 
 
 
Net Interest Income
60,774

 
49,762

 
 
 
 
Provision for loan losses
1,397

 
1,085

 
 
 
 
Net Interest Income after Provision for Loan Losses
59,377

 
48,677

 
 
 
 
Noninterest income
 
 
 
Other income
12,845

 
12,398

Securities losses, net
(9
)
 
(102
)
Total Noninterest Income (Note I)
12,836

 
12,296

 
 
 
 
Total Noninterest Expenses (Note I)
43,099

 
37,164

Income Before Income Taxes
29,114

 
23,809

 
 
 
 
Provision for income taxes
6,409

 
5,782

Net Income
$
22,705

 
$
18,027

 
 
 
 
Share Data
 
 
 
Net income per share of common stock
 
 
 
Diluted
$
0.44

 
$
0.38

Basic
0.44

 
0.38

Average common shares outstanding
 
 
 
Diluted
52,039

 
47,688

Basic
51,359

 
46,952

 See notes to unaudited condensed consolidated financial statements.
 



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SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended March 31,
(In thousands)
2019
 
2018
Net Income
$
22,705

 
$
18,027

Other comprehensive income (loss):
 
 
 
Unrealized gains (losses) on securities available for sale
12,676

 
(11,022
)
Reclassification of unrealized losses on securities transferred to available for sale upon adoption of new accounting pronouncement
(730
)
 

Amortization of unrealized losses on securities transferred to held to maturity, net
71

 
115

Reclassification adjustment for losses included in net income
87

 

(Provision) benefit for income taxes
(3,261
)
 
2,898

Total other comprehensive income (loss)
8,843

 
(8,009
)
Comprehensive Income
$
31,548


$
10,018

  See notes to unaudited condensed consolidated financial statements.

 



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SEACOAST BANKING CORPORTATION OF FLORIDA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
March 31, 2019
 
December 31, 2018
Assets
 

 
 

Cash and due from banks
$
98,270

 
$
92,242

Interest bearing deposits with other banks
105,741

 
23,709

Total cash and cash equivalents
204,011

 
115,951

 
 
 
 
Time deposits with other banks
8,174

 
8,243

 
 
 
 
Debt securities:
 
 
 
Securities available for sale (at fair value)
877,549

 
865,831

Securities held to maturity (fair value $291,340 at March 31, 2019 and $349,895 at December 31, 2018)
295,485

 
357,949

Total debt securities
1,173,034

 
1,223,780

 
 
 
 
Loans held for sale (at fair value)
13,900

 
11,873

 
 
 
 
Loans
4,828,441

 
4,825,214

Less: Allowance for loan losses
(32,822
)
 
(32,423
)
Loans, net of allowance for loan losses
4,795,619

 
4,792,791

 
 
 
 
Bank premises and equipment, net
70,412

 
71,024

Other real estate owned
11,921

 
12,802

Goodwill
205,260

 
204,753

Other intangible assets, net
23,959

 
25,977

Bank owned life insurance
124,306

 
123,394

Net deferred tax assets
24,647

 
28,954

Other assets
128,146

 
128,117

Total Assets
$
6,783,389

 
$
6,747,659

 
 
 
 
Liabilities
 
 
 
Deposits
$
5,605,578

 
$
5,177,240

Securities sold under agreements to repurchase, maturing within 30 days
148,005

 
214,323

Federal Home Loan Bank (FHLB) borrowings
3,000

 
380,000

Subordinated debt
70,874

 
70,804

Other liabilities
59,508

 
41,025

Total Liabilities
5,886,965

 
5,883,392

 
 
 
 
Shareholders' Equity
 
 
 
Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 51,621,160 and outstanding 51,413,988 shares at March 31, 2019, and authorized 120,000,000, issued 51,514,734 and outstanding 51,361,079 shares at December 31, 2018
5,141

 
5,136

Other shareholders' equity
891,283

 
859,131

Total Shareholders' Equity
896,424

 
864,267

Total Liabilities and Shareholders' Equity
$
6,783,389

 
$
6,747,659

 See notes to unaudited condensed consolidated financial statements.


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SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Three Months Ended March 31,
(In thousands)
2019
 
2018
Cash Flows from Operating Activities
 

 
 

Net income
$
22,705

 
$
18,027

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
1,669

 
1,568

Amortization of premiums and discounts on securities, net
625

 
742

Amortization of operating lease right-of-use assets
1,025

 

Other amortization and accretion, net
(810
)
 
(406
)
Stock based compensation
2,129

 
1,454

Origination of loans designated for sale
(54,034
)
 
(78,156
)
Sale of loans designated for sale
54,813

 
83,459

Provision for loan losses
1,397

 
1,085

Deferred income taxes
1,216

 
4,707

    Losses on sale of securities
87

 

Gains on sale of loans
(1,819
)
 
(1,884
)
Gains on sale and write-downs of other real estate owned
(187
)
 
1

Losses on disposition of fixed assets
(208
)
 
(4
)
Changes in operating assets and liabilities, net of effects from acquired companies:
 
 
 
Net decrease in other assets
2,069

 
2,234

Net decrease in other liabilities
(10,594
)
 
(273
)
Net cash provided by operating activities
20,083

 
32,554

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Maturities and repayments of debt securities available for sale
18,261

 
27,296

Maturities and repayments of debt securities held to maturity
8,830

 
16,085

    Proceeds from sale of debt securities available for sale
35,048

 

Purchases of debt securities available for sale

 
(72,311
)
Maturities of time deposits with other banks
69

 

Net new loans and principal repayments
(3,141
)
 
(84,063
)
Proceeds from sale of other real estate owned
1,572

 
3,300

Proceeds from sale of FHLB and Federal Reserve Bank Stock
22,057

 
10,540

Purchase of FHLB and Federal Reserve Bank Stock
(9,749
)
 
(13,027
)
Proceeds from sale of Visa Class B stock

 
21,333

Redemption of bank owned life insurance
12,378

 
4,232

Additions to bank premises and equipment
(849
)
 
(1,288
)
Net cash provided by (used in) investing activities
84,476

 
(87,903
)
 See notes to unaudited condensed consolidated financial statements.

 

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SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 
Three Months Ended March 31,
(In thousands)
2019
 
2018
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
428,338

 
$
126,823

Net decrease in federal funds purchased and repurchase agreements
(66,318
)
 
(42,845
)
Net decrease in FHLB borrowings
(377,000
)
 
(3,000
)
Stock based employee benefit plans
(1,519
)
 
726

Dividends paid

 

Net cash (used in) provided by financing activities
(16,499
)
 
81,704

Net increase in cash and cash equivalents
88,060

 
26,355

Cash and cash equivalents at beginning of period
115,951

 
109,504

Cash and cash equivalents at end of period
$
204,011

 
$
135,859

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
11,422

 
$
5,533

Cash paid during the period for taxes

 
1,200

Initial recognition of operating lease right-of-use assets
29,077

 

Initial recognition of operating lease liabilities
33,403

 

 
 
 
 
Supplemental disclosure of non cash investing activities:
 
 
 
Transfer of debt securities from held to maturity to available for sale
$
52,796

 
$

Transfers from loans to other real estate owned
430

 
3,919

Transfers from bank premises to other real estate owned

 
2,030

See notes to unaudited condensed consolidated financial statements.
 

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SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)


 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
(In thousands)
 
Shares
 
Amount
 
Capital
 
Earnings
 
Stock
 
Income (Loss), Net
 
Total
Balance at December 31, 2017
 
46,918

 
$
4,693

 
$
661,632

 
$
29,913

 
$
(2,359
)
 
$
(4,216
)
 
$
689,663

Comprehensive income
 

 

 

 
18,027

 

 
(8,009
)
 
10,018

Reclassification of unrealized losses on equity investment upon adoption of new accounting pronouncement
 

 

 

 
(115
)
 

 
115

 

Stock based compensation expense
 

 

 
1,455

 

 

 

 
1,455

Common stock issued for stock based employee benefit plans
 
3

 

 
(2
)
 

 
80

 

 
78

Common stock issued for stock options
 
62

 
5

 
642

 

 

 

 
647

Three months ended March 31, 2018
 
65

 
5

 
2,095

 
17,912

 
80

 
(7,894
)
 
12,198

Balance at March 31, 2018
 
46,983

 
$
4,698

 
$
663,727

 
$
47,825

 
$
(2,279
)
 
$
(12,110
)
 
$
701,861

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
(In thousands)
 
Shares
 
Amount
 
Capital
 
Earnings
 
Stock
 
Income (Loss), Net
 
Total
Balance at December 31, 2018
 
51,361

 
$
5,136

 
$
778,501

 
$
97,074

 
$
(3,384
)
 
$
(13,060
)
 
$
864,267

Comprehensive income
 

 

 

 
22,705

 

 
8,843

 
31,548

Stock based compensation expense
 

 

 
2,129

 

 

 

 
2,129

Common stock issued for stock based employee benefit plans
 
49

 
5

 
(14
)
 

 
(1,575
)
 

 
(1,584
)
Common stock issued for stock options
 
4

 

 
64

 

 

 

 
64

Three months ended March 31, 2019
 
53

 
5

 
2,179

 
22,705

 
(1,575
)
 
8,843

 
32,157

Balance at March 31, 2019
 
51,414

 
$
5,141

 
$
780,680

 
$
119,779

 
$
(4,959
)
 
$
(4,217
)
 
$
896,424


 See notes to unaudited condensed consolidated financial statements.



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SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Note A – Basis of Presentation
 
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of Seacoast Banking Corporation of Florida and its subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period presentation.

Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
Adoption of new accounting pronouncements: On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases”, and all the related amendments (collectively, Accounting Standards Codification “ASC” Topic 842) through a cumulative-effect adjustment.

The new guidance requires a lessee to recognize at the transition date right-of-use assets ("ROUA") and lease liabilities for all operating leases. Upon adoption, the Company recognized ROUAs of $29 million and lease liabilities of $33 million. Operating lease liabilities are measured based on the present value of lease payments over the lease term. At the transition date, ROUA was determined by adjusting lease liabilities for the carrying balances of deferred rent under ASC Topic 840 Leases, cease-use liabilities under ASC Topic 420 Exit or Disposal Cost Obligations, and assets and liabilities recognized under ASC Topic 805 Business Combinations for acquired operating leases, which aggregated to $4 million.

We determine if an arrangement is a lease at the inception of a lease. ROUAs represent our right to use the underlying asset and lease liabilities represent our obligation to make lease payments for the lease term. Operating lease ROUAs and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the appropriate term and information available at commencement date in determining the present value of lease payments. The lease term may include options to extend the lease when it is reasonably certain that we will exercise that option. ROUAs and operating lease liabilities are reported in Other Assets and Other Liabilities, respectively, in the Consolidated Balance Sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company elected certain practical expedients offered by the FASB for all classes of leased assets. As a result, the Company has not reassessed whether existing contracts are or contain leases, nor has the Company reassessed the classification of existing leases. The Company elected not to separate lease and non-lease components and instead accounts for them as a single lease component. The Company also elected to exclude short-term leases from the recognition of right-of-use assets and lease liabilities. Therefore, if the lease term is equal to or less than twelve months (including the renewal options that we are reasonably certain to exercise) and we are not reasonably certain to exercise any available purchase options in the lease, we do not apply the new lease accounting guidance for those leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.
On January 1, 2019, we adopted ASU 2017-12 “Derivatives and Hedging" (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Upon adoption, we reclassified certain debt securities from held to maturity to available for sale. The following table summarizes the impact:

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January 1, 2019
(In thousands)
 
Amortized Cost
 
Net Unrealized Gain (Loss) Reflected in OCI
 
Fair Value
Private mortgage-backed securities and collateralized mortgage obligations
 
$
21,526

 
$
147

 
$
21,673

Collateralized loan obligations
 
32,000

 
(877
)
 
31,123

Totals
 
$
53,526

 
$
(730
)
 
$
52,796

Use of Estimates: The preparation of these condensed consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, acquisition accounting and purchased loans, intangible assets and impairment testing, other fair value adjustments, other than temporary impairment of securities, income taxes and realization of deferred tax assets and contingent liabilities.


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Note B – Recently Issued Accounting Standards, Not Yet Adopted

 The following provides a brief description of accounting standards that have been issued but are not yet adopted that could have a material effect on the Company's financial statements:
ASU 2016-13, Financial Instruments –Credit Losses (Topic 326)
Description
In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees and other similar instruments).
Date of Adoption
This amendment is effective for public business entities for reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods after December 15, 2018, including interim reporting periods within that period.
Effect on the Consolidated Financial Statements
The Company's transition oversight committee is in the process of validating the credit loss estimation models and related processes. Updates to business processes and the documentation of accounting policy decisions are ongoing. The Company may recognize an increase in the allowance for credit losses upon adoption, recorded as a one-time cumulative adjustment to retained earnings. However, the magnitude of the impact on the Company's consolidated financial statements has not yet been determined. The Company will adopt this accounting standard effective January 1, 2020.
ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Description
In January 2017, the FASB amended the existing guidance to simplify the goodwill impairment measurement test by eliminating Step 2. The amendment requires the Company to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value. Additionally, an entity should consider the tax effects from any tax deductible goodwill on the carrying amount when measuring the impairment loss.
Date of Adoption
This amendment is effective for public business entities for reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted on annual goodwill impairment tests performed after January 1, 2017.
Effect on the Consolidated Financial Statements
The impact to the consolidated financial statements from the adoption of this pronouncement is not expected to be material.

Note C – Earnings per Share
 
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period.

For the three months ended March 31, 2019, options to purchase 487,000 shares were antidilutive and accordingly were excluded in the computation of diluted earnings per share, compared to 274,000 shares for the three months ended March 31, 2018.
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2019
 
2018
Basic earnings per share
 
 
 
Net income
$
22,705

 
$
18,027

Average common shares outstanding
51,359

 
46,952

Net income per share
$
0.44

 
$
0.38

 
 
 
 
Diluted earnings per share
 
 
 
Net income
$
22,705

 
$
18,027

Average common shares outstanding
51,359

 
46,952

Add: Dilutive effect of employee restricted stock and stock options
680

 
736

Average diluted shares outstanding
52,039

 
47,688

Net income per share
$
0.44

 
$
0.38


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Note D – Securities
 
The amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity at March 31, 2019 and December 31, 2018 are summarized as follows:
 
 
March 31, 2019
(In thousands)
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
Debt securities available for sale
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. Government Sponsored Entities
$
6,296

 
$
105

 
$
(4
)
 
$
6,397

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
528,404

 
1,777

 
(6,228
)
 
523,953

Private mortgage-backed securities and collateralized mortgage obligations
67,206

 
968

 
(239
)
 
67,935

Collateralized loan obligations
243,546

 
2

 
(1,809
)
 
241,739

Obligations of state and political subdivisions
37,105

 
621

 
(201
)
 
37,525

Totals
$
882,557

 
$
3,473


$
(8,481
)

$
877,549

 
 
 
 
 
 
 
 
Debt securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities of U.S. Government Sponsored Entities
$
295,485

 
$
356

 
$
(4,501
)
 
$
291,340

Totals
$
295,485


$
356


$
(4,501
)

$
291,340

 
 
December 31, 2018
(In thousands)
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
Debt securities available for sale
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. Government Sponsored Entities
$
7,200

 
$
106

 
$
(6
)
 
$
7,300

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
567,753

 
300

 
(14,047
)
 
554,006

Private mortgage-backed securities and collateralized mortgage obligations
55,569

 
560

 
(401
)
 
55,728

Collateralized loan obligations
212,807

 
1

 
(3,442
)
 
209,366

Obligations of state and political subdivisions
39,543

 
339

 
(451
)
 
39,431

Totals
$
882,872

 
$
1,306

 
$
(18,347
)
 
$
865,831

 
 
 
 
 
 
 
 
Debt securities held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities of U.S. Government Sponsored Entities
$
304,423

 
$

 
$
(7,324
)
 
$
297,099

Private mortgage-backed securities and collateralized mortgage obligations
21,526

 
277

 
(130
)
 
21,673

Collateralized loan obligations
32,000

 

 
(877
)
 
31,123

Totals
$
357,949

 
$
277

 
$
(8,331
)
 
$
349,895


Proceeds from sales of securities during the three months ended March 31, 2019 were $35.0 million, with gross gains of $0.2 million and gross losses of $0.3 million, which are included in "Securities losses, net" for the three months ended March 31, 2019.

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Also included in “Securities losses, net” for the three months ended March 31, 2019 is an increase of $0.1 million, representing the change in the value of an investment in shares of a mutual fund that invests primarily in CRA-qualified debt securities.

There were no sales of securities during the three month period ended March 31, 2018. Included in “Securities losses, net” for the three month period ended March 31, 2018, is a $0.1 million decline in the value of the CRA-qualified mutual fund investment.

On January 1, 2019, the Company adopted ASU 2017-12 and subsequently transferred held to maturity debt securities with an amortized cost basis of $53.5 million to available for sale. Those securities had unrealized losses of $0.7 million that was recorded in other comprehensive income on the date of transfer.

At March 31, 2019, debt securities with a fair value of $122.3 million were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Debt securities with a fair value of $148.0 million were pledged as collateral for repurchase agreements.
 
The amortized cost and fair value of debt securities held to maturity and available for sale at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because prepayments of the underlying collateral for these securities may occur, due to the right to call or repay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
 
Held to Maturity
 
Available for Sale
(In thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$

 
$

 
$
11,288

 
$
11,268

Due after one year through five years

 

 
102,835

 
102,588

Due after five years through ten years

 

 
169,369

 
168,212

Due after ten years

 

 
3,455

 
3,593

 

 

 
286,947

 
285,661

Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
295,485

 
291,340

 
528,404

 
523,953

Private mortgage-backed securities and collateralized mortgage obligations

 

 
67,206

 
67,935

   Totals
$
295,485

 
$
291,340

 
$
882,557

 
$
877,549

 
The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the fair value of debt securities with unrealized losses and the period of time for which these losses were outstanding at March 31, 2019 and December 31, 2018, respectively.
 
 
March 31, 2019
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(In thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities
$

 

 
$
545

 
$
(4
)
 
$
545

 
$
(4
)
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
80,889

 
(512
)
 
496,722

 
(10,217
)
 
577,611

 
(10,729
)
Private mortgage-backed securities and collateralized mortgage obligations
20,061

 
(230
)
 
2,038

 
(9
)
 
22,099

 
(239
)
Collateralized loan obligations
238,777

 
(1,809
)
 

 

 
238,777

 
(1,809
)
Obligations of state and political subdivisions

 

 
12,966

 
(201
)
 
12,966

 
(201
)
   Totals
$
339,727

 
$
(2,551
)
 
$
512,271

 
$
(10,431
)
 
$
851,998

 
$
(12,982
)

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December 31, 2018
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(In thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities
$
99

 
$
(1
)
 
$
642

 
$
(5
)
 
$
741

 
$
(6
)
Mortgage-backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities
200,184

 
(2,235
)
 
623,420

 
(19,136
)
 
823,604

 
(21,371
)
Private mortgage-backed securities and collateralized mortgage obligations
20,071

 
(344
)
 
12,739

 
(187
)
 
32,810

 
(531
)
Collateralized loan obligations
238,894

 
(4,319
)
 

 

 
238,894

 
(4,319
)
Obligations of state and political subdivisions
19,175

 
(241
)
 
9,553

 
(210
)
 
28,728

 
(451
)
   Totals
$
478,423

 
$
(7,140
)
 
$
646,354

 
$
(19,538
)
 
$
1,124,777

 
$
(26,678
)
 
The two tables above include debt securities held to maturity that were transferred from available for sale into held to maturity during 2014. Those securities had unrealized losses of $3.1 million at the date of transfer, and at March 31, 2019, the unamortized balance was $0.6 million.
 
At March 31, 2019, the Company had $10.7 million of unrealized losses on mortgage-backed securities and collateralized mortgage obligations of government sponsored entities having a fair value of $577.6 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on the assessment of these mitigating factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.
 
At March 31, 2019, the Company had unrealized losses of $1.8 million on collateralized loan obligations with a fair value of $238.8 million. The collateral for these securities is first lien senior secured corporate debt. The Company holds senior tranches rated credit A or higher. Management expects to recover the entire amortized cost basis of these securities.

At March 31, 2019, the Company does not intend to sell debt securities that are in an unrealized loss position and it is not more than likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at March 31, 2019.
  
Included in other assets at March 31, 2019 is $30.9 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. The Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of these cost method investment securities. Also included in other assets is a $6.3 million investment in a mutual fund carried at fair value.
  
The Company holds 11,330 shares of Visa Class B stock, which following resolution of Visa litigation will be converted to Visa Class A shares. Under the current conversion ratio that became effective June 28, 2018, the Company would receive 1.6298 shares of Class A stock for each share of Class B stock for a total of 18,466 shares of Visa Class A stock. Our ownership of Visa stock is related to prior ownership in Visa's network, while Visa operated as a cooperative. This ownership is recorded on our financial records at zero basis.

Note E – Loans
 
Information pertaining to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) is as follows:
 

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March 31, 2019
(In thousands)
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
$
308,846

 
$
153

 
$
108,566

 
$
417,565

Commercial real estate
1,478,955

 
10,393

 
673,069

 
2,162,417

Residential real estate
1,077,523

 
2,575

 
249,068

 
1,329,166

Commercial and financial
606,179

 
667

 
106,033

 
712,879

Consumer
195,719

 

 
10,695

 
206,414

   Totals1
$
3,667,222

 
$
13,788

 
$
1,147,431

 
$
4,828,441

 
 
December 31, 2018
(In thousands)
Portfolio Loans
 
PCI Loans
 
PULs
 
Total
Construction and land development
$
301,473

 
$
151

 
$
141,944

 
$
443,568

Commercial real estate
1,437,989

 
10,828

 
683,249

 
2,132,066

Residential real estate
1,055,525

 
2,718

 
266,134

 
1,324,377

Commercial and financial
603,057

 
737

 
118,528

 
722,322

Consumer
190,207

 

 
12,674

 
202,881

   Totals1
$
3,588,251

 
$
14,434

 
$
1,222,529

 
$
4,825,214

 
 
 
 
 
 
 
 
1Net loan balances as of March 31, 2019 and December 31, 2018 include deferred costs of $17.8 million and $16.9 million for each period, respectively.

 
 The following tables present the contractual delinquency of the recorded investment by class of loans as of:

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March 31, 2019
(In thousands)
Current
 
Accruing
30-59 Days
Past Due
 
Accruing
60-89 Days
Past Due
 
Accruing
Greater
Than
90 Days
 
Nonaccrual
 
Total
Financing
Receivables
Portfolio Loans
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
$
308,819

 
$

 
$

 
$

 
$
27

 
$
308,846

Commercial real estate
1,471,607

 
1,016

 
709

 
255

 
5,368

 
1,478,955

Residential real estate
1,068,869

 
612

 
65

 

 
7,977

 
1,077,523

Commercial and financial
599,068

 
3,724

 
1,350

 
81

 
1,956

 
606,179

Consumer
194,672

 
529

 
423

 

 
95

 
195,719

 Total Portfolio Loans
3,643,035

 
5,881

 
2,547

 
336

 
15,423

 
3,667,222

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Unimpaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
108,566

 

 

 

 

 
108,566

Commercial real estate
671,195

 
536

 

 

 
1,338

 
673,069

Residential real estate
246,583

 
1,288

 

 
428

 
769

 
249,068

Commercial and financial
104,229

 

 

 

 
1,804

 
106,033

Consumer
10,664

 

 

 

 
31

 
10,695

 Total PULs
1,141,237

 
1,824

 

 
428

 
3,942

 
1,147,431

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Credit Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
138

 

 

 

 
15

 
153

Commercial real estate
9,395

 

 

 

 
998

 
10,393

Residential real estate
558

 

 

 

 
2,017

 
2,575

Commercial and financial
649

 

 

 

 
18

 
667

Consumer

 

 

 

 

 

 Total PCI Loans
10,740

 

 

 

 
3,048

 
13,788

 
 
 
 
 
 
 
 
 
 
 
 
   Total Loans
$
4,795,012

 
$
7,705

 
$
2,547

 
$
764

 
$
22,413

 
$
4,828,441

 

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Table of Contents


 
December 31, 2018
(In thousands)
Current
 
Accruing
30-59 Days
Past Due
 
Accruing
60-89 Days
Past Due
 
Accruing
Greater
Than
90 Days
 
Nonaccrual
 
Total
Financing
Receivables
Portfolio Loans
 

 
 

 
 
 
 

 
 

 
 

Construction and land development
$
301,348

 
$
97

 
$

 
$

 
$
28

 
$
301,473

Commercial real estate
1,427,413

 
3,852

 
97

 
141

 
6,486

 
1,437,989

Residential real estate
1,044,375

 
2,524

 
525

 
295

 
7,806

 
1,055,525

Commercial and financial
594,930

 
5,186

 
1,661

 

 
1,280

 
603,057

Consumer
189,061

 
637

 
326

 

 
183

 
190,207

 Total Portfolio Loans
3,557,127

 
12,296

 
2,609

 
436

 
15,783

 
3,588,251

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Unimpaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
140,013

 
1,931

 

 

 

 
141,944

Commercial real estate
680,060

 
1,846

 

 

 
1,343

 
683,249

Residential real estate
260,781

 
1,523

 

 
90

 
3,740

 
266,134

Commercial and financial
116,173

 
342

 

 

 
2,013

 
118,528

Consumer
12,643

 

 
31

 

 

 
12,674

 Total PULs
1,209,670

 
5,642

 
31

 
90

 
7,096

 
1,222,529

 
 
 
 
 
 
 
 
 
 
 
 
Purchased Credit Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
135

 

 

 

 
16

 
151

Commercial real estate
8,403

 
1,034

 

 

 
1,391

 
10,828

Residential real estate
556

 

 

 

 
2,162

 
2,718

Commercial and financial
74

 
635

 

 

 
28

 
737

Consumer

 

 

 

 

 

 Total PCI Loans
9,168

 
1,669

 

 

 
3,597

 
14,434

 
 
 
 
 
 
 
 
 
 
 
 
   Total Loans
$
4,775,965

 
$
19,607

 
$
2,640

 
$
526

 
$
26,476

 
$
4,825,214

 
The Company's Credit Risk Management also utilizes an internal asset classification system as a means of identifying problem and potential problem loans. The following classifications are used to categorize loans under the internal classification system:

Pass: Loans that are not problem loans or potential problem loans are considered to be pass-rated.
Special Mention: Loans that do not currently expose the Company to sufficient risk to warrant classification in the Substandard or Doubtful categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.
Substandard: Loans with the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans that have all the weaknesses inherent in those classified Substandard with the added characteristic that the weakness present makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The principal balance of loans classified as doubtful are likely to be charged off.

Risk ratings on commercial lending facilities are re-evaluated during the annual review process at a minimum, based on the size of the aggregate exposure, and/or when there is a credit action of the existing credit exposure. The following tables present the risk category of loans by class based on the most recent analysis performed as of:
 

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Table of Contents


 
March 31, 2019
(In thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and land development
$
406,010

 
$
11,262

 
$
293

 
$

 
$
417,565

Commercial real estate
2,080,415

 
57,732

 
24,270

 

 
2,162,417

Residential real estate
1,304,847

 
3,953

 
20,366

 

 
1,329,166

Commercial and financial
696,837

 
9,013

 
7,029

 

 
712,879

Consumer
202,187

 
3,150

 
1,077

 

 
206,414

   Totals
$
4,690,296

 
$
85,110

 
$
53,035

 
$

 
$
4,828,441

 
 
December 31, 2018
(In thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Construction and land development
$
428,044

 
$
10,429

 
$
5,095

 
$

 
$
443,568

Commercial real estate
2,063,589

 
41,429

 
27,048

 

 
2,132,066

Residential real estate
1,296,634

 
3,654

 
24,089

 

 
1,324,377

Commercial and financial
707,663

 
8,387

 
6,247

 
25

 
722,322

Consumer
198,367

 
3,397

 
1,117

 

 
202,881

   Totals
$
4,694,297

 
$
67,296

 
$
63,596

 
$
25

 
$
4,825,214

 
PCI Loans
 
PCI loans are accounted for pursuant to ASC Topic 310-30. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference.
 
The table below summarizes the changes in accretable yield on PCI loans for the periods ended:
 
 
Three Months Ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
2,924

 
$
3,699

Additions

 

Deletions

 
(43
)
Accretion
(776
)
 
(443
)
Reclassification from non-accretable difference
460

 
339

Ending balance
$
2,608

 
$
3,552

 
Troubled Debt Restructured Loans
 
The Company’s Troubled Debt Restructuring (“TDR”) concessions granted to certain borrowers generally do not include forgiveness of principal balances, but may include interest rate reductions, an extension of the amortization period and/or converting the loan to interest only for a limited period of time. 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 restructured agreements. Most loans prior to modification were classified as impaired and the allowance for loan losses is determined in accordance with Company policy.
 
During the three months ended March 31, 2019, two loans were modified in a TDR totaling $2.0 million. There were no loans modified in a TDR during the three months ended March 31, 2018. No accruing loans that were restructured within the twelve months preceding March 31, 2019 defaulted during the twelve months ended March 31, 2019.The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status,

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Table of Contents


or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and a specific allowance for loan loss is assigned in accordance with the Company’s policy.
 
Impaired Loans
 
Loans are considered impaired if they are 90 days or more past due, in nonaccrual status, or are TDRs. As of March 31, 2019 and December 31, 2018, the Company’s recorded investment in impaired loans, excluding PCI loans, the unpaid principal balance and related valuation allowance was as follows:
 
 
March 31, 2019
(In thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Valuation
Allowance
Impaired Loans with No Related Allowance Recorded:
 

 
 

 
 

Construction and land development
$
15

 
$
221

 
$

Commercial real estate
5,136

 
6,406

 

Residential real estate
10,294

 
14,873

 

Commercial and financial
2,036

 
3,103

 

Consumer
146

 
158

 

Impaired Loans with an Allowance Recorded:
 
 
 
 
 
Construction and land development
183

 
197

 
20

Commercial real estate
9,624

 
12,791

 
353

Residential real estate
5,688

 
5,820

 
577

Commercial and financial
2,024

 
2,020

 
1,329

Consumer
256

 
268

 
91

Total Impaired Loans
 
 
 
 
 
Construction and land development
198

 
418

 
20

Commercial real estate
14,760

 
19,197

 
353

Residential real estate
15,982

 
20,693

 
577

Commercial and financial
4,060

 
5,123

 
1,329

Consumer
402

 
426

 
91

       Totals
$
35,402

 
$
45,857

 
$
2,370

 

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Table of Contents


 
December 31, 2018
(In thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Valuation
Allowance
Impaired Loans with No Related Allowance Recorded:
 

 
 

 
 

Construction and land development
$
15

 
$
229

 
$

Commercial real estate
3,852

 
5,138

 

Residential real estate
13,510

 
18,111

 

Commercial and financial
1,191

 
1,414

 

Consumer
280

 
291

 

Impaired Loans with an Allowance Recorded:
 
 
 
 
 
Construction and land development
196

 
211

 
22

Commercial real estate
9,786

 
12,967

 
369

Residential real estate
5,537

 
5,664

 
805

Commercial and financial
2,131

 
2,309

 
1,498

Consumer
202

 
211

 
34

Total Impaired Loans
 
 
 
 
 
Construction and land development
211

 
440

 
22

Commercial real estate
13,638

 
18,105

 
369

Residential real estate
19,047

 
23,775

 
805

Commercial and financial
3,322

 
3,723

 
1,498

Consumer
482

 
502

 
34

       Totals
$
36,700

 
$
46,545

 
$
2,728

 
Impaired loans also include TDRs where concessions have been granted to borrowers who have experienced financial difficulty. At March 31, 2019 and at December 31, 2018, accruing TDRs totaled $14.9 million and $13.3 million, respectively.
 
Average impaired loans for the three months ended March 31, 2019 and 2018 were $36.3 million and $31.1 million, respectively. The impaired loans were measured for impairment based on the value of underlying collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. The valuation allowance is included in the allowance for loan losses.
 
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions in principal. For the three months ended March 31, 2019, and 2018, the Company recorded interest income on impaired loans of $0.4 million and $0.4 million, respectively.
 
For impaired loans whose impairment is measured based on the present value of expected future cash flows, interest income represents the change in present value attributable to the passage of time, and totaled $35,000 and $88,000, for the three months ended March 31, 2019 and 2018, respectively.

Note F – Allowance for Loan Losses
 
Activity in the allowance for loan losses for the three month periods ended March 31, 2019 and 2018 is summarized as follows:
 

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Table of Contents


 
Three Months Ended March 31, 2019
(In thousands)
Beginning
Balance
 
Provision
for Loan
Losses
 
Charge-
Offs
 
Recoveries
 
TDR
Allowance
Adjustments
 
Ending
Balance
Construction & land development
$
2,233

 
$
83

 
$

 
$
4

 
$

 
$
2,320

Commercial real estate
11,112

 
625

 
(16
)
 
47

 
(15
)
 
11,753

Residential real estate
7,775