Item 1A. Risk Factors
In addition to the other information set forth in this report, you should consider the factors described below, as well as the risk factors and uncertainties discussed in our other public filings with the SEC under the caption “Risk Factors” in evaluating us and our business and making or continuing an investment in our stock. The material risks and uncertainties that management believes affect us are described below. The risks contained in this Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially
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adversely affect our business, financial condition or future results. The trading price of our securities could decline due to the materialization of any of these risks, and our shareholders may lose all or part of their investment. This Form 10-K also contains forward-looking statements that may not be realized as a result of certain factors, including, but not limited to, the risks described herein and in our other public filings with the SEC. Please refer to the section in this Form 10-K entitled “Special Cautionary Notice Regarding Forward-Looking Statements” for additional information regarding forward-looking statements.
COVID-19 Pandemic-Related Risks
The COVID-19 pandemic has and will continue to adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic is and is likely to continue creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of the COVID-19 pandemic and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of the COVID-19 pandemic are rapidly evolving and not fully known, the COVID-19 pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress, recession or depression, they could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, and human capital, as described in more detail below.
Credit Risk. Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers' businesses. Concern about the spread of the COVID-19 pandemic has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancies, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of the COVID-19 pandemic result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of the COVID-19 pandemic on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure.
In an effort to support our communities during the COVID-19 pandemic, we participated in the Paycheck Protection Program (“PPP”) under the CARES Act whereby loans to small businesses are originated. These loans require forbearance of loan payments for a specified time and also limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, if the terms of the program change, or if the SBA determines there is a deficiency in the manner in which any PPP loans were originated, funded or serviced by the Company, we may be subject to repayment risk as well as the heightened risk of holding these loans at unfavorable interest rates as compared to loans to customers that we would have otherwise extended credit.
Beginning in the first quarter of 2020, under the guidance of the CARES Act and banking regulators, we offered deferrals of principal and interest payments to certain borrowers financially affected by the COVID-19 pandemic. Some of these borrowers may not be able to return to regular payments at the end of the deferral period, and we may arrange additional deferrals or other types of modifications with these borrowers to accommodate their economic hardship. This may result in higher delinquencies and greater charge-offs in future periods, which would adversely affect our financial condition, including capital and liquidity, or results of operations. In the event our allowance for credit losses is insufficient to cover such losses, our earnings, capital and liquidity could be adversely affected.
Strategic Risk. Our financial condition and results of operations may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental and nongovernmental authorities to economic instability. The COVID-19 pandemic has significantly increased economic and demand uncertainty, which may impact our ability to effect our strategic priorities, including strategies relating to organic growth and bank
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acquisitions, and has led to severe disruptions and volatility in the global capital markets. Furthermore, many of the governmental actions in response to the COVID-19 pandemic have been directed toward curtailing household and business activity to contain the COVID-19 pandemic. These actions have been rapidly changing. For example, in many of our markets, local governments acted to temporarily close or restrict the operations of most businesses, and these restrictions could recur if there are future increases in the spread of the virus.
Operational Risk. Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to the COVID-19 pandemic, we have modified our business practices with a portion of our employees working remotely to ensure that our operations continue uninterrupted as much as possible. Nonetheless, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
Interest Rate Risk. Our net interest income, lending activities, deposits and profitability are and are likely to continue to be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of the COVID-19 pandemic on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices will likely cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates, or a prolonged period of low interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
We typically continue to recognize interest income on loans with payment accommodations. If it is later determined that the borrower will be unable to make all payments due, the loan may be classified as nonaccrual, and interest accrued but not collected will be reversed against interest income, which would negatively affect net interest income in the period of reversal.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent and long-term impact of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future developments will be highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic. The uncertain future development of this crisis has and could continue to materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
Regulatory and Litigation Risk. Federal, state and local governments have mandated or encouraged financial services companies to make accommodations to borrowers and other customers financially affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. Furthermore, since the inception of the PPP, several banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. In addition, some banks have received negative media attention associated with PPP loans. The Company and the Bank are exposed to similar litigation risk and negative media attention risk, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or
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reputational damage caused by PPP-related litigation or negative media attention could have a material adverse impact on our business, financial condition and results of operations.
The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Bank to rely on borrower certifications, and they may take more aggressive actions against the Bank for alleged violations of the provisions governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition.
Credit Risk
Lending goals may not be attainable.
Future demand for additional lending is unclear and uncertain, and opportunities to make loans may be more limited and/or involve risks or terms that we likely would not find acceptable or in our shareholders’ best interest. A failure to meet our lending goals could adversely affect our results of operations, and financial condition, liquidity and capital.
Deterioration in the real estate markets, including the secondary market for residential mortgage loans, can adversely affect us.
A correction in residential real estate market prices or reduced levels of home sales, could result in lower single family home values, adversely affecting the liquidity and value of collateral securing commercial loans for residential land acquisition, construction and development, as well as residential mortgage loans and residential property collateral securing loans that we hold, mortgage loan originations and gains on the sale of mortgage loans. Declining real estate prices cause higher delinquencies and losses on certain mortgage loans, generally, and particularly on second lien mortgages and home equity lines of credit. Significant ongoing disruptions in the secondary market for residential mortgage loans can limit the market for and liquidity of most residential mortgage loans other than conforming Fannie Mae and Freddie Mac loans. Deteriorating trends could occur, including declines in real estate values, home sales volumes, financial stress on borrowers as a result of job losses or other factors. These could have adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which would adversely affect our financial condition, including capital and liquidity, or results of operations. In the event our allowance for credit losses on loans is insufficient to cover such losses, our earnings, capital and liquidity could be adversely affected.
Our real estate portfolios are exposed if weakness in the Florida housing market or general economy arises.
Florida has historically experienced deeper recessions and more dramatic slowdowns in economic activity than other states and a decline in real estate values in Florida can be significantly larger than the national average. Declines in home prices and the volume of home sales in Florida, along with the reduced availability of certain types of mortgage credit, can result in increases in delinquencies and losses in our portfolios of home equity lines and loans, and commercial loans related to residential real estate acquisition, construction and development. Declines in home prices coupled with high or increased unemployment levels or increased interest rates can cause losses which adversely affect our earnings and financial condition, including our capital and liquidity.
We are subject to lending concentration risk.
Our loan portfolio contains several industry and collateral concentrations including, but not limited to, commercial and residential real estate. Due to the exposure in these concentrations, disruptions in markets, economic conditions, including those resulting from the global response to the COVID-19 pandemic, changes in laws or regulations or other events could cause a significant impact on the ability of borrowers to repay and may have a material adverse effect on our business, financial condition and results of operations.
A substantial portion of our loan portfolio is secured by real estate. In weak economies, or in areas where real estate market conditions are distressed, we may experience a higher than normal level of nonperforming real estate loans. The collateral value of the portfolio and the revenue stream from those loans could come under stress, and additional provisions for the allowance for credit losses could be necessitated. Our ability to dispose of foreclosed real estate at prices at or above the respective carrying values could also be impaired, causing additional losses.
Commercial real estate (“CRE”) is cyclical and poses risks of loss to us due to our concentration levels and risk of the asset, especially during a difficult economy, including the current stressed economy. As of December 31, 2020, 45% of our loan
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portfolio was comprised of CRE loans. The banking regulators continue to give CRE lending greater scrutiny, and banks with higher levels of CRE loans are expected to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures.
Seacoast Bank has a CRE concentration risk management program and monitors its exposure to CRE; however, there can be no assurance that the program will be effective in managing our concentration in CRE.
Nonperforming assets could result in an increase in our provision for credit losses on loans, which could adversely affect our results of operations and financial condition.
At December 31, 2020, our nonaccrual loans totaled $36.1 million, or 0.6% of the loan portfolio and our nonperforming assets (which includes nonaccrual loans) were $48.9 million, or 0.6%, of assets. In addition, we had approximately $10.1 million in accruing loans that were 30 days or more delinquent at December 31, 2020. Our nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our income, and increasing our loan administration costs. When the only source of repayment expected is the underlying collateral, we are required to mark the related loan to the then fair market value of the collateral, if less than the recorded amount of our investment, which may result in a loss. These loans and OREO also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. We may incur additional losses relating to an increase in nonperforming loans. If economic conditions and market factors negatively and/or disproportionately affect some of our larger loans, then we could see a sharp increase in our total net charge-offs and our provision for credit losses on loans. Any increase in our nonperforming assets and related increases in our provision for losses on loans could negatively affect our business and could have a material adverse effect on our capital, financial condition and results of operations.
Decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our personnel, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience increases in nonperforming loans in the future, or that nonperforming assets will not result in losses in the future.
Our allowance for credit losses on loans may prove inadequate or we may be adversely affected by credit risk exposures.
Our business depends on the creditworthiness of our customers. We review our allowance for credit losses on loans for adequacy, at a minimum quarterly, considering economic conditions and trends, reasonable and supportable forecasts, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. The determination of the appropriate level of the allowance for credit losses involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. We cannot be certain that our allowance will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, or borrowers repaying their loans. Generally speaking, the credit quality of our borrowers can deteriorate as a result of economic downturns in our markets. If the credit quality of our customer base or their debt service behavior materially decreases, if the risk profile of a market, industry or group of customers declines or weakness in the real estate markets and other economics were to arise, or if our allowance for credit losses on loans is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. In addition, bank regulatory agencies periodically review our allowance and may require an increase in the provision for credit losses or the recognition of loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for credit losses on loans, we will need additional provisions to increase the allowance, which would result in a decrease in net income and capital, and could have a material adverse effect on our financial condition and results of operations.
Interest Rate Risk
We must effectively manage our interest rate risk. The impact of changing interest rates on our results is difficult to predict and changes in interest rates may impact our performance in ways we cannot predict.
Our profitability is largely dependent on our net interest income, which is the difference between the interest income paid to us on our loans and investments and the interest we pay to third parties such as our depositors, lenders and debt holders. Changes in interest rates can impact our profits and the fair values of certain of our assets and liabilities. Prolonged periods of unusually low interest rates may have an incrementally adverse effect on our earnings by reducing yields on loans and other earning assets over time. Increases in market interest rates may reduce our customers’ desire to borrow money from us or adversely affect
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their ability to repay their outstanding loans by increasing their debt service obligations through the periodic reset of adjustable interest rate loans. If our borrowers’ ability to pay their loans is impaired by increasing interest payment obligations, our level of nonperforming assets would increase, producing an adverse effect on operating results. Increases in interest rates can have a material impact on the volume of mortgage originations and re-financings, adversely affecting the profitability of our mortgage finance business. Interest rate risk can also result from mismatches between the dollar amounts of re-pricing or maturing assets and liabilities and from mismatches in the timing and rates at which our assets and liabilities re-price. We actively monitor and manage the balances of our maturing and re-pricing assets and liabilities to reduce the adverse impact of changes in interest rates, but there can be no assurance that we will be able to avoid material adverse effects on our net interest margin in all market conditions.
There can be no assurance that we will not be materially adversely affected in the future if economic activity increases and interest rates rise, which may result in our interest expense increasing, and our net interest margin decreasing, if we must offer interest on commercial demand deposits to attract or retain customer deposits.
The Federal Reserve has implemented significant economic strategies that have impacted interest rates, inflation, asset values, and the shape of the yield curve, over which the Company has no control and which the Company may not be able to adequately anticipate.
In recent years, in response to the recession in 2008 and the following uneven recovery, the Federal Reserve implemented a series of domestic monetary initiatives. Several of these have emphasized so-called quantitative easing strategies, the most recent of which ended during 2014. Since then the Federal Reserve raised rates nine times during 2015-2018, and reduced rates five times during 2019-2020. Further rate changes reportedly are dependent on the Federal Reserve’s assessment of economic data as it becomes available. The Company cannot predict the nature or timing of future changes in monetary, economic, or other policies or the effect that they may have on the Company's business activities, financial condition and results of operations.
Our cost of funds may increase as a result of general economic conditions, FDIC insurance assessments, interest rates and competitive pressures.
We have traditionally obtained funds through local deposits and thus we have a base of lower cost transaction deposits. Generally, we believe local deposits are a cheaper and more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected if, and to the extent, we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.
The expected discontinuation of the London Interbank Offered Rate (“LIBOR”), and the identification and use of alternative replacement reference rates, could adversely affect our revenue, expenses, and the value of the Company's financial instruments, and may subject the Company to litigation risk.
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, the Intercontinental Exchange Benchmark Administration, which is the administrator of LIBOR, announced its intention to cease the publication of most U.S. dollar (“USD”) LIBOR settings immediately following the LIBOR publication on June 30, 2023, extending the previously indicated timeline for the discontinuation of the widely used one-month, three-month, and other USD LIBOR benchmarks.
In the United States, the Alternative Reference Rate Committee (“ARRC”), a group of market participants including large U.S. financial institutions, assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference interest rates to replace LIBOR. The Secured Overnight Finance Rate (“SOFR”) has emerged as the ARRC's preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR is anticipated to be gradual over the coming years. The consequences of these developments with respect to LIBOR cannot be entirely predicted, and these reforms may cause benchmark rates to perform differently than in the past or have other consequences, which could adversely affect the value of our floating rate obligations, loans, derivatives, and other financial instruments tied to LIBOR rates.
The Company has formed a LIBOR transition steering committee that is responsible for overseeing the execution of the Company's enterprise-wide LIBOR transition program, and for evaluating and mitigating the risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review of the financial products, agreements, contracts
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and business processes that may use LIBOR as a reference rate, and the development and execution of a strategy to transition away from LIBOR, with appropriate consideration of the potential financial, customer, counterparty, regulatory and legal impacts.
As of December 31, 2020, the Company has identified approximately $400 million in loans for which the repricing index is tied to LIBOR. The Company's swap agreements and other derivatives are governed by the International Swap Dealers Association (“ISDA”). ISDA has developed fallback language for swap agreements and has established a protocol to allow counterparties to modify legacy trades to include the new fallback language. The Company also invests in securities and has issued subordinated debt tied to LIBOR. The Company continues to monitor regulatory and legislative activity with regard to these products to identify any necessary actions and facilitate the transition to alternative reference rates.
The market transition away from LIBOR to an alternative reference rate is complex. We may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers or counterparties over the appropriateness or comparability to LIBOR of the replacement reference rates. The replacement reference rates could also result in a reduction in our interest income. We may also receive inquiries and other actions from regulators about the Company's preparation and readiness for the replacement of LIBOR with alternative reference rates.
Liquidity Risk
Liquidity risks could affect operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include customer deposits, federal funds purchases, securities sold under repurchase agreements, and short- and long-term debt. We are also members of the Federal Home Loan Bank of Atlanta (the “FHLB”) and the Federal Reserve Bank of Atlanta, where we can obtain advances collateralized with eligible assets. We maintain a portfolio of securities that can be used as a secondary source of liquidity. Other sources of liquidity available to us or Seacoast Bank include the acquisition of additional deposits, the issuance and sale of debt securities, and the issuance and sale of preferred or common securities in public or private transactions.
Our access to funding sources in amounts adequate or on terms which are acceptable to us could be impaired by other factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. In addition, our access to deposits may be affected by the liquidity and/or cash flow needs of depositors. Although we have historically been able to replace maturing deposits and FHLB advances as necessary, we might not be able to replace such funds in the future and can lose a relatively inexpensive source of funds and increase our funding costs if, among other things, customers move funds out of bank deposits and into alternative investments, such as the stock market, that may be perceived as providing superior expected returns. We may be required to seek additional regulatory capital through capital raises at terms that may be very dilutive to existing shareholders.
Our ability to borrow could also be impaired by factors that are not specific to us, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay interest on our trust preferred securities or reinstate dividends.
We are a legal entity separate and distinct from Seacoast Bank and our other subsidiaries. Our primary source of cash, other than securities offerings, is dividends from Seacoast Bank. These dividends are the principal source of funds to pay dividends on our common stock, interest on our trust preferred securities and interest and principal on our debt. Various laws and regulations limit the amount of dividends that Seacoast Bank may pay us, as further described in “Supervision and Regulation - Payment of Dividends.” Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive dividends from our subsidiaries could have a material adverse effect on our liquidity and on our ability to pay dividends on common stock. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make payments on our trust preferred securities or reinstate dividend payments to our common shareholders.
Business and Strategic Risks
Our future success is dependent on our ability to compete effectively in highly competitive markets.
We operate in markets throughout the State of Florida, each with unique characteristics and opportunities. Our future growth and success will depend on our ability to compete effectively in these and other potential markets. We compete for loans,
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deposits and other financial services in geographic markets with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and insurance brokerage firms. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. Larger competitors may be able to price loans and deposits more aggressively than we can, and have broader customer and geographic bases to draw upon.
Consumers may decide not to use banks to complete their financial transactions, which could adversely affect our net income.
Technology and other changes now allow parties to complete financial transactions without banks. For example, consumers can pay bills, transfer funds directly and obtain loans without banks. This process could result in the loss of interest and fee income, as well as the loss of customer deposits and the income generated from those deposits.
Non-bank financial technology providers invest substantial resources in developing and designing new technology, particularly digital and mobile technology, and are beginning to offer more traditional banking products either directly or through bank partnerships. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies. Increased competition may negatively affect our earnings by creating pressure to lower prices or credit standards on our products and services requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of our clients to do business with us.
In addition, the widespread adoption of new technologies, including internet banking services, mobile banking services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our internet banking and mobile banking channel strategies in addition to remote connectivity solutions. We might not be successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers.
Further, we may experience a decrease in customer deposits if customers perceive alternative investments, such as the stock market, as providing superior expected returns. When customers move money out of bank deposits in favor of alternative investments, we may lose a relatively inexpensive source of funds, and be forced to rely more heavily on borrowings and other sources of funding to fund our business and meet withdrawal demands, thereby increasing our funding costs and adversely affecting our net interest margin.
Hurricanes or other adverse weather events, as well as climate change, could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business and results of operations.
Our market areas in Florida are susceptible to hurricanes, tropical storms and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where we operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes will affect our operations or the economies in our current or future market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business and results of operations may be adversely affected by these and other negative effects of future hurricanes, tropical storms, related flooding and wind damage and other similar weather events. As a result of the potential for such weather events, many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in our markets. Climate change may be increasing the nature, severity, and frequency of adverse weather conditions, making the impact from these types of natural disasters on us or customers worse.
Further, concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Investors, consumers and businesses also may change their behavior on their own as a result of these concerns. The state of Florida could be disproportionately impacted by long-term climate changes. We and our customers may face cost increases, asset value reductions (which could impact customer creditworthiness), operating process changes, changes in demand for products and services, and the like resulting from new laws, regulations, and changing consumer and investor preferences regarding our, or other companies', response to climate change. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies,
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may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Changes in accounting rules applicable to banks could adversely affect our financial condition and results of operations.
From time to time, the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of our prior period financial statements.
On January 1, 2020, we implemented FASB’s Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments - Credit Losses. This guidance replaced the existing “incurred loss” methodology for financial assets measured at amortized cost, and introduced requirements to estimate current expected credit losses (“CECL”). Under the incurred loss methodology, credit losses were recognized only when the losses were probable or had been incurred; under CECL, companies are required to recognize the full amount of expected credit losses for the lifetime of the financial assets, based on historical experience, current conditions and reasonable and supportable forecasts. This change requires earlier recognition of credit losses that are deemed expected but not yet probable, and we expect will result in higher reserves for credit losses and higher volatility in the quarterly provision for credit losses.
The CECL model also impacts the accounting for bank acquisition activity by requiring the recognition of expected credit losses on acquired loans at the date of acquisition, in addition to the purchase discount, if any. With the exception of purchased loans with credit deterioration (“PCD”), this day-one recognition of the allowance for credit losses is recorded with an offset to net income. For PCD loans, the initial estimate of expected credit losses is recognized as an adjustment to the amortized cost basis of the loan at acquisition (i.e., a balance sheet gross-up).
The anti-takeover provisions in our Articles of Incorporation and under Florida law may make it more difficult for takeover attempts that have not been approved by our board of directors.
Florida law and our Articles of Incorporation include anti-takeover provisions, such as provisions that encourage persons seeking to acquire control of us to consult with our board of directors, and which enable the board of directors to negotiate and give consideration on behalf of us and our shareholders and other constituencies to the merits of any offer made. Such provisions, as well as super-majority voting and quorum requirements, and a staggered board of directors, may make any takeover attempts and other acquisitions of interests in us, by means of a tender offer, open market purchase, a proxy fight or otherwise, that have not been approved by our board of directors more difficult and more expensive. These provisions may discourage possible business combinations that a majority of our shareholders may believe to be desirable and beneficial. As a result, our board of directors may decide not to pursue transactions that would otherwise be in the best interests of holders of our common stock.
Operational Risk
The implementation of other new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services within existing lines of business in the future. There are substantial risks and uncertainties associated with these efforts. In developing and marketing new lines of business and/or new products and services, we undergo a process to assess the risks of the initiative, and invest significant time and resources to build internal controls, policies and procedures to mitigate those risks, including hiring experienced management to oversee the implementation of the initiative. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could require the establishment of new key and other controls and have a significant impact on our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Employee misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of our customers are of critical importance. Our employees could engage in fraudulent, illegal, wrongful or suspicious activities, and/or activities resulting in consumer harm that adversely affects our customers and/or our business. The precautions we take to
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detect and prevent such misconduct may not always be effective, such misconduct may result in regulatory sanctions and/or penalties, serious harm to our reputation, financial condition, customer relationships or the ability to attract new customers. In addition, improper use or disclosure of confidential information by our employees, even if inadvertent, could result in serious harm to our reputation, financial condition and current and future business relationships. The precautions we take to detect and prevent such misconduct may not always be effective.
We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees.
When we originate loans, we rely heavily upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal, title information and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation.
If we fail to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could have a material adverse effect on our business, results of operations and financial condition. In addition, current and potential shareholders could lose confidence in our financial reporting, which could harm the trading price of our common stock.
Management regularly monitors, reviews and updates our disclosure controls and procedures, including our internal control over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the controls will be effective. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Failure to achieve and maintain an effective internal control environment could prevent us from accurately reporting our financial results, preventing or detecting fraud or providing timely and reliable financial information pursuant to our reporting obligations, which could result in a material weakness in our internal controls over financial reporting and the restatement of previously filed financial statements and could have a material adverse effect on our business, financial condition and results of operations. Further, ineffective internal controls could cause our investors to lose confidence in our financial information, which could affect the trading price of our common stock.
Our operations rely on external vendors.
We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations, particularly in the areas of operations, treasury management systems, information technology and security, exposing us to the risk that these vendors will not perform as required by our agreements. An external vendor’s failure to perform in accordance with our agreement could be disruptive to our operations, which could have a material adverse impact on our business, financial condition and results of operations. Our regulators also impose requirements on us with respect to monitoring and implementing adequate controls and procedures in connection with our third party vendors.
From time to time, we may decide to retain new vendors for new or existing products and services. Transition to these new vendors may not proceed as anticipated and could negatively impact our customers or our ability to conduct business, which, in turn, could have an adverse effect on our business, results of operations and financial condition. To mitigate this risk, the Company has an established process to oversee vendor relationships.
We must effectively manage our information systems risk.
We rely heavily on our communications and information systems to conduct our business. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products, services and methods of delivery. Our ability to compete successfully depends in part upon our ability to use technology to provide products and services that will satisfy customer demands. We have and will continue to make technology investments to achieve process improvements and increase efficiency. Many of the Company’s competitors invest substantially greater resources in technological improvements than we do. We may not be able to effectively select, develop or implement new technology-driven products and services or be successful in marketing these products and services to our customers, which may negatively affect our business, results of operations or financial condition.
Disruptions to our information systems or security breaches could adversely affect our business and reputation.
Our communications and information systems remain vulnerable to unexpected disruptions and failures. Any failure or interruption of these systems could impair our ability to serve our customers and to operate our business and could damage our
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reputation, result in a loss of business, subject us to additional regulatory scrutiny or enforcement or expose us to civil litigation and possible financial liability. While we have developed extensive recovery plans, we cannot assure that those plans will be effective to prevent adverse effects upon us and our customers resulting from system failures. While we maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems, we cannot assure that this policy would be sufficient to cover all related financial losses and damages should we experience any one or more of our or a third party’s systems failing or experiencing a cyber-attack.
We collect and store sensitive data, including personally identifiable information of our customers and employees as well as sensitive information related to our operations. Our collection of such Company and customer data is subject to extensive regulation and oversight. Computer break-ins of our systems or our customers’ systems, thefts of data and other breaches and criminal activity may result in significant costs to respond, liability for customer losses if we are at fault, damage to our customer relationships, regulatory scrutiny and enforcement and loss of future business opportunities due to reputational damage. Although we, with the help of third-party service providers, will continue to implement security technology and establish operational procedures to protect sensitive data, there can be no assurance that these measures will be effective. We advise and provide training to our customers regarding protection of their systems, but there is no assurance that our advice and training will be appropriately acted upon by our customers or effective to prevent losses. In some cases we may elect to contribute to the cost of responding to cybercrime against our customers, even when we are not at fault, in order to maintain valuable customer relationships.
In our ordinary course of business, we rely on electronic communications and information systems to conduct our businesses and to store sensitive data, including financial information regarding our customers. The integrity of information systems of financial institutions are under significant threat from cyber-attacks by third parties, including through coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes. We employ an in-depth, layered, lines of defense approach that leverages people, processes and technology to manage and maintain cyber security and other information security controls.
Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and attackers respond rapidly to changes in defensive measures, and there is no assurance that our response to any cyber-attack or system interruption, breach or failure will be fully effective to mitigate and remediate the issues resulting from such an event, including the costs, reputational harm and litigation challenges that we may face as a result. Cyber security risks may also occur with our third-party service providers, and may interfere with their ability to fulfill their contractual obligations to us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of operations. We offer our clients the ability to bank remotely and provide other technology based products and services, which services include the secure transmission of confidential information over the Internet and other remote channels. To the extent that our clients' systems are not secure or are otherwise compromised, our network could be vulnerable to unauthorized access, malicious software, phishing schemes and other security breaches. To the extent that our activities or the activities of our clients or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. While to date we have not experienced a significant compromise, significant data loss or material financial losses related to cyber security attacks, our systems and those of our clients and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. We may suffer material financial losses related to these risks in the future or we may be subject to liability for compromises to our client or third-party service provider systems. Any such losses or liabilities could adversely affect our financial condition or results of operations, and could expose us to reputation risk, the loss of client business, increased operational costs, as well as additional regulatory scrutiny, possible litigation, and related financial liability. These risks also include possible business interruption, including the inability to access critical information and systems. In addition, as the domestic and foreign regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
Compliance Risk
We operate in a heavily regulated environment. Regulatory compliance burdens and associated costs can affect our business, including our reputation, the value of our securities, and the results of our operations..
We and our subsidiaries are regulated by several regulators, including, but not limited to, the Federal Reserve, the OCC, the FDIC, the CFPB, the Small Business Administration, the SEC and NASDAQ. Our success is affected by state and federal regulations affecting banks and bank holding companies, the securities markets and banking, securities and insurance regulators. Banking regulations are primarily intended to protect consumers and depositors, not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes, the effects of which cannot be predicted. These changes, if adopted, could require us to maintain more capital, liquidity and risk controls which
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could adversely affect our growth, profitability and financial condition. Any such changes in law can impact the profitability of our business activities, require changes to our operating policies and procedures, or otherwise adversely impact our business.
Further, we expect to continue to spend significant amounts of time and money on compliance with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Accounting Oversight Board and NASDAQ. Our failure to track and comply with the various rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the value of our securities.
Additionally, the CFPB has issued mortgage-related rules required under the Dodd-Frank Act addressing borrower ability-to-repay and qualified mortgage standards. The CFPB has also issued rules for loan originators related to compensation, licensing requirements, administration capabilities and restrictions on pursuance of delinquent borrowers. These rules could have a negative effect on the financial performance of Seacoast Bank's mortgage lending operations such as limiting the volume of mortgage originations and sales into the secondary market, increased compliance burden and impairing Seacoast Bank's ability to proceed against certain delinquent borrowers with timely and effective collection efforts.
Pursuant to Section 165 of the Dodd-Frank Act, banks with greater than $10 billion in total consolidated assets are subject to certain additional regulatory requirements, including limits on the debit card interchange fees that such banks may collect, changes in the manner in which assessments for FDIC deposit insurance are calculated, and providing the authority to the CFPB to supervise and examine such banks. If Seacoast Bank grows to exceed $10 billion in total assets, we would be subject to additional federal regulations, which could materially and adversely affect our business. Additionally, compliance with the Dodd-Frank Act's requirements may necessitate that we hire to contract with additional compliance or other personnel, design and implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, growth opportunities, or an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our compliance with regulatory requirements, would be adversely affected.
Both we and Seacoast Bank must meet regulatory capital requirements and maintain sufficient liquidity and our regulators may modify and adjust such requirements in the future. Our ability to raise additional capital, when and if needed in the future, will depend on conditions in the capital markets, general economic conditions and a number of other factors, including investor perceptions regarding the banking industry and the market, governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Although the Company currently complies with all capital requirements, we may be subject to more stringent regulatory capital ratio requirements in the future and we may need additional capital in order to meet those requirements. Our failure to remain “well capitalized” for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition, generally. Under FDIC rules, if Seacoast Bank ceases to be a “well capitalized” institution for bank regulatory purposes, its ability to accept brokered deposits and the interest rates that it pays may both be restricted.
Federal banking agencies periodically conduct examinations of our business, including for compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect us.
The Federal Reserve and the OCC periodically conduct examinations of our business and Seacoast Bank’s business, including for compliance with laws and regulations, and Seacoast Bank also may be subject to future regulatory examinations by the CFPB as discussed in the “Supervision and Regulation” section above. If, as a result of an examination, the Federal Reserve, the OCC and/or the CFPB were to determine that the financial condition, capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of any of our or Seacoast Bank’s operations had become unsatisfactory, or that we or our management were in violation of any law, regulation or guideline in effect from time to time, the regulators may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our
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capital, to restrict our growth, to change the composition of our concentrations in portfolio or balance sheet assets, to assess civil monetary penalties against our officers or directors or to remove officers and directors.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
FDIC insurance premiums we pay may change and be significantly higher in the future. Market developments may significantly deplete the insurance fund of the FDIC and reduce the ratio of reserves to insured deposits, thereby making it requisite upon the FDIC to charge higher premiums prospectively. Additionally, if we grow to more than $10 billion in total assets, the method that the FDIC uses to determine the amount of our deposit insurance premium will change. Any increases in our assessment rate, future special assessments, or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects or results of operations.
Tax law changes and interpretations may have a negative impact on our earnings.
The enactment of the Tax Reform Act, has had, and is expected to continue to have, far reaching and significant effects on us, our customers and the U.S. economy. Further, U.S. tax authorities may at any time clarify and/or modify legislation, administration or judicial changes or interpretations the income tax treatment of corporations. Such changes could adversely affect us, either directly or as a result of the effects on our customers. While lower income tax rates should result in improved net income performance over prospective periods, the extent of the benefit will be influenced by the competitive environment and other factors.
As of December 31, 2020, we had net deferred tax assets (“DTAs”) of $23.6 million, based on management’s estimation of the likelihood of those DTAs being realized. These and future DTAs may be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support the amounts recorded.
Management expects to realize the $23.6 million in net DTAs well in advance of the statutory carryforward period, based on its forecast of future taxable income. We consider positive and negative evidence, including the impact of reversals of existing taxable temporary differences, tax planning strategies and projected earnings within the statutory tax loss carryover period. This process requires significant judgment by management about matters that are by nature uncertain. If we were to conclude that significant portions of our DTAs were not more likely than not to be realized (due to operating results or other factors), a requirement to establish a valuation allowance could adversely affect our financial position and results of operations.
The amount of net operating loss carry-forwards and certain other tax attributes realizable annually for income tax purposes may be reduced by an offering and/or other sales of our capital securities, including transactions in the open market by five percent or greater shareholders, if an ownership change is deemed to occur under Section 382 of the Internal Revenue Code (“Section 382”). The determination of whether an ownership change has occurred under Section 382 is highly fact-specific and can occur through one or more acquisitions of capital stock (including open market trading) if the result of such acquisitions is that the percentage of our outstanding common stock held by shareholders or groups of shareholders owning at least 5% of our common stock at the time of such acquisition, as determined under Section 382, is more than 50 percentage points higher than the lowest percentage of our outstanding common stock owned by such shareholders or groups of shareholders within the prior
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three-year period. Management does not believe any stock offerings, issuances, or reverse stock split have had any negative implications for the Company under Section 382 to date.
Merger-Related Risks
Future acquisition and expansion activities may disrupt our business, dilute existing shareholders and adversely affect our operating results.
We periodically evaluate potential acquisitions and expansion opportunities. To the extent we grow through acquisition, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or businesses, as well as other geographic and product expansion activities, involve various risks including:
•risks of unknown or contingent liabilities;
•unanticipated costs and delays;
•risks that acquired new businesses do not perform consistent with our growth and profitability expectations;
•risks of entering new market or product areas where we have limited experience;
•risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures;
•exposure to potential asset quality issues with acquired institutions;
•difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and start-up delays and costs of other expansion activities;
•potential disruptions to our business;
•possible loss of key employees and customers of acquired institutions;
•potential short-term decrease in profitability;
•inaccurate estimates of value assigned to acquired assets; and
•diversion of our management’s time and attention from our existing operations and businesses.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we anticipate continuing to evaluate merger and acquisition opportunities presented to us in our core markets and beyond. The number of financial institutions headquartered in Florida, the Southeastern United States, and across the country continues to decline through merger and other activity. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition, as the number of appropriate merger targets decreases, could increase prices for potential acquisitions which could reduce our potential returns, and reduce the attractiveness of these opportunities to us. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance, including with respect to anti-money laundering (“AML”) obligations, consumer protection laws and CRA obligations and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.
Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively, or if we fail to successfully integrate our acquisitions or to realize the anticipated benefits of them.
We intend to continue to pursue an organic growth strategy for our business while also regularly evaluating potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions of financial institutions, branch acquisitions and other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful. While we have substantial experience in successfully integrating institutions we have acquired, we may encounter difficulties during integration, such as the loss of key employees, the
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disruption of operations and businesses, loan and deposit attrition, customer loss and revenue loss, possible inconsistencies in standards, control procedures and policies, and unexpected issues with expected branch closures costs, operations, personnel, technology and credit, all of which could divert resources from regular banking operations. Achieving the anticipated benefits of these mergers is subject to a number of uncertainties, including whether we integrate these institutions in an efficient and effective manner, governmental actions affecting the financial industry generally, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in a reduction in the price of our shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management's time an energy and could materially and adversely affect our business, financial condition and results of operations.
There are risks associated with our growth strategy. To the extent that we grow through acquisitions, there can be no assurance that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks or branches into us, the risk of loss of customers and/or employees of the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations, may require investment in integration and in development and enhancement of additional operational and reporting processes and controls and may subject us to additional regulatory scrutiny.
Our growth initiatives may also require us to recruit and retain experienced personnel to assist in such initiatives. Accordingly, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
If we do not successfully execute our acquisition growth plan, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased, that conclusion may result in an impairment charge to goodwill or other tangible or intangible assets, which would adversely affect our results of operations. While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.
Additionally, we may pursue divestitures of non-strategic branches or other assets. Such divestitures involve various risks, including the risks of not being able to timely or fully replace liquidity previously provided by deposits which may be transferred as part of a divestiture, which could adversely affect our financial condition and results of operations.
General Risk Factors
Shares of our common stock are not insured deposits and may lose value.
Shares of our common stock are not savings accounts, deposits or other obligations of any depository institution and are not insured or guaranteed by the FDIC or any other governmental agency or instrumentality, any other deposit insurance fund or by any other public or private entity, and are subject to investment risk, including the possible loss of principal.
Any future economic downturn could have a material adverse effect on our capital, financial condition, results of operations, and future growth.
Management continually monitors market conditions and economic factors throughout our footprint. If conditions were to worsen nationally, regionally or locally, then we could see a sharp increase in our total net charge-offs and also be required to significantly increase our allowance for credit losses. Furthermore, the demand for loans and our other products and services could decline. An increase in our non-performing assets and related increases in our provision for credit losses, coupled with a potential decrease in the demand for loans and our other products and services, could negatively affect our business and could have a material adverse effect on our capital, financial condition, results of operations and future growth. Our customers may also be adversely impacted by changes in regulatory, trade (including tariffs) and tax policies and laws, all of which could reduce demand for loans and adversely impact our borrowers' ability to repay our loans. In addition, international economic uncertainty could also impact the U.S. financial markets by potentially suppressing stock prices, including ours, and adding it to overall market volatility, which could adversely affect our business. The effects of any economic downturn could continue for many years after the downturn is considered to have ended.
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A reduction in consumer confidence could negatively impact our results of operations and financial condition.
Significant market volatility driven in part by concerns relating to, among other things, actions by the U.S. Congress or imposed through Executive Order by the President of the United States, as well as global political actions or events, including natural disasters, health emergencies or pandemics, could adversely affect the U.S. or global economies, with direct or indirect impacts on the Company and our business. Results could include reduced consumer and business confidence, credit deterioration, diminished capital markets activity, and actions by the Federal Reserve Board impacting interest rates or other U.S. monetary policy.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Seacoast maintains its corporate headquarters in a 68,000 square foot, three story building at 815 Colorado Avenue in Stuart, Florida. The building is owned by Seacoast Bank.
Seacoast Bank owns or leases all of the buildings in which its business operates. At December 31, 2020, Seacoast Bank had 51 branch offices, stand-alone commercial lending offices, and its main office located in Florida. For additional information regarding properties, please refer to Notes H and L of the Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
The Company and its subsidiaries are subject, in the ordinary course, to litigation incidental to the businesses in which they are engaged. Management presently believes that none of the legal proceedings to which they are a party are likely to have a material effect on the Company's consolidated financial position, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Holders of the Company's common stock are entitled to one vote per share on all matters presented to shareholders for their vote, as provided in our Articles of Incorporation, as amended.
The Company's common stock is traded under the symbol “SBCF” on the NASDAQ Global Select Market (“NASDAQ”). As of January 31, 2021, there were 55,249,870 shares of the Company's common stock outstanding, held by approximately 2,350 record holders.
Dividends from Seacoast Bank are the Company's primary source of funds to pay dividends to its shareholders. Under the National Bank Act, national banks may in any calendar year, without the approval of the OCC, pay dividends to the extent of net profits for that year, plus retained net profits for the preceding two years (less any required transfers to surplus). The need for Seacoast Bank to maintain adequate capital also limits dividends that may be paid to the Company.
Additional information regarding restrictions on the ability of Seacoast Bank to pay dividends to the Company is contained in Note C of the Notes to Consolidated Financial Statements. See “Item 1. Business- Payment of Dividends” of this Form 10-K for information with respect to the regulatory restrictions on dividends.
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Securities Authorized for Issuance Under Equity Compensation Plans
See the information included under Part III, Item 12, which is incorporated in response to this item by reference.
Repurchase of Common Stock
On December 17, 2020, the Company's Board of Directors authorized the Company to repurchase up to $100 million of its shares of outstanding common stock. Under the share repurchase program, which will expire on December 31, 2021, repurchases will be made, if at all, in accordance with applicable securities laws and may be made from time to time in the open market, by block purchase or by negotiated transactions. The amount and timing of repurchases, if any, will be based on a variety of factors, including share acquisition price, regulatory limitations, market conditions and other factors. The program does not obligate the Company to purchase any of its shares, and may be terminated or amended by the Board of Directors at any time prior to its expiration date. As of December 31, 2020, no shares of the Company's common stock had been repurchased under the program.
Item 6. Selected Financial Data
The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries (“Seacoast” or the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast National Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related notes included in this report.
The emphasis of this discussion will be on the years ended December 31, 2020 and 2019. Additional information about the Company’s financial condition and results of operations in 2018 and changes in the Company’s financial condition and results of operations from 2018 to 2019 may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the “Special Cautionary Notice Regarding Forward-Looking Statements” for additional information regarding forward-looking statements.
For purposes of the following discussion, the words “Seacoast,” or the “Company,” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.
Overview – Strategy and Results
Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”), a financial holding company, registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), is one of the largest community banks in Florida, with $8.3 billion in assets and $6.9 billion in deposits as of December 31, 2020. Its principal subsidiary is Seacoast National Bank (“Seacoast Bank”), a wholly owned national banking association. The Company provides integrated financial services including commercial and retail banking, wealth management, and mortgage services to customers through advanced banking solutions, and Seacoast Bank's network of 51 traditional branches and commercial banking centers. Seacoast operates primarily in Florida, with concentrations in the state's fastest growing markets, each with unique characteristics and opportunities. The Company's offices stretch from the southeast, including Fort Lauderdale, Boca Raton and Palm Beach, north along the east coast to the Daytona area, into Orlando and Central Florida and the adjacent Tampa market, and west to Okeechobee and surrounding counties.
The Company delivers integrated banking services, combining traditional retail locations with online and mobile technology and a convenient telephone banking center. Seacoast has built a fully integrated distribution platform across all channels to provide customers with the ability to choose their path of convenience to satisfy their banking needs, allowing the Company an opportunity to reach customers through a variety of sales channels. The Company believes its digital delivery and products are contributing to the franchise's growth.
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Seacoast is executing a balanced growth strategy, combining organic growth with strategic acquisitions in Florida's most attractive growing markets. In Orlando, Seacoast is now the largest Florida-based bank and a top-10 bank in the Orlando market overall. In other key markets, including Palm Beach County, Fort Lauderdale, and Tampa, the Company has enhanced its footprint with ten acquisitions since 2014, generating continued expansion and strengthening market share, increasing the customer base and lowering operating costs through economies of scale.
The Company's acquisition strategy has not only increased customer households and been accretive to earnings, but has also opened markets and Seacoast's customer base. The table below summarizes acquisition activity in recent years:
First Bank of the Palm Beaches West Palm Beach 2020 147 174
Palm Beach Community Bank West Palm Beach 2017 270 269
GulfShore Bank/ GulfShore BancShares, Inc. Tampa- St. Petersburg 2017 251 285
Orlando banking operations of BMO Harris Bank, N.A. Orlando 2016 63 314
Floridian Bank/ Floridian Financial Group, Inc. Orlando 2016 266 337
BankFirst/ The BANKshares, Inc. Orlando 2014 365 516
2020 Acquisitions
In March 2020, Seacoast acquired First Bank of the Palm Beaches (“FBPB”), which increased the Company’s market share in the attractive Palm Beach market. FBPB operated two branches, which were converted to Seacoast branches, with deposits of $174 million and loans of $147 million at the time of acquisition.
In August 2020, Seacoast completed the acquisition of Fourth Street Banking Company (“Fourth Street”) and its wholly-owned subsidiary Freedom Bank, which added $303 million in loans and $330 million in deposits. The acquisition supports Seacoast’s growing presence in the attractive St. Petersburg, Florida market. Freedom Bank operated two branches in St. Petersburg, which were converted to Seacoast branches.
Impact of COVID-19, the CARES Act and the Paycheck Protection Program on Comparability Among Periods
Early in 2020, the global economy began experiencing a downturn resulting from the COVID-19 pandemic. Seacoast reacted quickly at the onset to make adjustments to operations intended to protect the health and welfare of our associates and customers. The Company's range of digital banking products combined with continued access to branches through drive-thrus and lobby appointments has allowed the Company to continue to meet customer needs. A robust and well-tested business continuity program has allowed the Company to maintain productivity levels with a majority of associates working remotely.
The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders to close businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary, and some permanent, closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears (including a decline in demand for banking products or services, including loans and deposits which could impact our future financial condition, results of operations and liquidity), related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. Although financial markets have rebounded from significant declines that occurred
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earlier in the pandemic and global economic conditions showed signs of improvement beginning during the second quarter of 2020, many of the effects that arose or became more pronounced after the onset of the COVID-19 pandemic have persisted through the end of the year. These changes have had and are likely to continue to have a significant adverse effect on the markets in which we conduct our business and the demand for our products and services.
Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the first quarter of 2021 and beyond, especially if COVID-19 infections increase and new economic restrictions are mandated. Our borrowing base includes customers in industries such as hotel/lodging, restaurants, and retail, all of which have been and are likely to continue to be significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.
Future economic conditions are subject to significant uncertainty. We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position. Current economic pressures and their effects on our customers, coupled with the implementation of the CECL expected loss methodology for determining our allowance for credit losses, have contributed to a substantially increased provision for credit losses in 2020.
We continue to monitor closely the impact of the COVID-19 pandemic on our customers, as well as the effects of the CARES Act. Uncertainties associated with the pandemic include the duration of the outbreak (including the impact of new variants of the virus that may be resistant to the various vaccines available), the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 has had, and is expected to continue to have, a significant adverse impact on our business, financial position and operating results. The extent to which the COVID-19 pandemic will impact our operations and financial results in 2021 cannot be fully estimated at this time.
In March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act includes provisions for the Paycheck Protection Program (“PPP”) offered through the U.S. Small Business Administration (“SBA”). Loans originated under this program have a contractual rate of interest of 1% with principal and interest that may be forgiven provided that the borrower uses the funds in a manner consistent with PPP guidelines. Seacoast assisted borrowers in 2020 with more than 5,500 loans originated through the PPP and, when combined with PPP loans acquired from Freedom Bank, outstanding balances totaled $567.0 million at December 31, 2020. The SBA established a fee structure based on loan size. Fees received by Seacoast, net of related costs, totaled $17.2 million, and are deferred and recognized as an adjustment to yield over time.
Seacoast recognized net fees of $7.8 million and contractual interest of $4.2 million on PPP loans in 2020. The remaining $9.5 million in deferred PPP loan fees at December 31, 2020 will be recognized over the loans' remaining contractual maturity or sooner, as loans are forgiven.
In January 2021, the Company began accepting applications for the re-opening of the PPP lending program on our fully digital origination platform. As of February 18, 2021, the Company had originated approximately 1,800 loans totaling $180 million under the latest round of PPP.
Loan Modifications
The CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, provides financial institutions the option to exclude from troubled debt restructuring (“TDR”) consideration certain loan modifications that might otherwise be categorized as TDRs under ASC 310-40 in order to assist borrowers financially impacted by COVID-19. This option is available for modifications that are deemed to be COVID-related, where the borrower was not more than 30 days past due on December 31, 2019, and the modification is executed between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. Federal banking regulators issued similar guidance that also allows lenders to conclude that short-term modifications for borrowers financially affected by the pandemic should not be considered TDRs if the borrower was current at the time of modification. Seacoast began offering payment accommodations to eligible borrowers in March 2020 and, at December 31, 2020, $74.1 million of loans, or 1% of total loans, had active payment accommodations, down 93% from a peak of $1.1 billion in the second quarter of 2020. None of these loans have been classified as TDRs. During the payment accommodation period, Seacoast typically continues to recognize interest income.
Adoption of New Accounting for Credit Losses
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The adoption resulted in an increase to the allowance for credit losses on loans of $21.2 million and an addition to the reserve for unfunded lending-related commitments of $1.8 million.
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2020 Financial Performance Highlights
•Steady build of shareholder value through consistent growth in tangible book value per share, which ended the period at $16.16, an increase of 15% during the fourth quarter on an annualized basis.
•The tangible common equity ratio of 11% supports Seacoast's ability to deploy capital for organic growth and opportunistic acquisitions.
•Record net income of $29.3 million in the fourth quarter, increasing 30% quarter-over-quarter.
•Record levels of mortgage banking fees and wealth management income in 2020, reflecting increases of 126% and 18%, respectively, from 2019.
•The successful acquisitions of First Bank of the Palm Beaches and Freedom Bank added experienced bankers while expanding the Company's presence in attractive growth markets, which we believe will further support sustainable, profitable growth.
•Total deposits per banking center were $135.9 million at December 31, 2020, an increase of 17% from $116.3 million one year earlier.
•Continued discipline around expenses, primarily achieved through focus on reducing overhead and streamlining business and cost savings processes, achieving a fourth quarter 2020 efficiency ratio below 50%.
Results of Operations
Earnings Summary
For the year ended December 31, 2020, net income totaled $77.8 million, or $1.44 per diluted share, compared to $98.7 million, or $1.90 per diluted share, for the year ended December 31, 2019. Return on average assets (“ROA”) was 0.99% and return on average equity (“ROE”) was 7.44% in 2020 compared to 1.45% and 10.63%, respectively, in 2019.
Adjusted net income1 for the year ended December 31, 2020 totaled $89.0 million, or $1.65 per diluted share, compared to $104.6 million, or $2.01 per diluted share, in 2019.
Quarter
First Second Third Fourth Total
On both a GAAP and adjusted basis, return on average tangible assets and return on average tangible shareholders' equity decreased in 2020 when compared to the prior year. The change reflects the impact on net income of increased provisioning for credit losses in 2020 attributed to the adoption of CECL on January 1, 2020, and the financial impact of the COVID-19 pandemic, as well as growth in the balance sheet resulting from PPP loans, acquisitions, and higher deposit balances.
In 2020, the Company's efficiency ratio, defined as noninterest expense less foreclosed property expense and amortization of intangibles divided by net operating revenue (net interest income on a fully tax equivalent basis plus noninterest income excluding securities gains and losses), was 54.84%, compared to 51.71% for 2019. Changes from the prior year reflect higher 2020 expenses, including acquisition-related costs, partially offset by lower funding costs and increases in noninterest income. The adjusted efficiency ratio1 in 2020 was 51.63% compared to 50.90% in 2019. The Company expects to maintain an adjusted efficiency ratio in the low 50s for the full year 2021.
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Net Interest Income and Margin
Net interest income for the year ended December 31, 2020 totaled $262.7 million, increasing $19.1 million, or 8%, compared to the year ended December 31, 2019. Net interest income (on a fully taxable equivalent basis)1 for the year ended December 31, 2020 was $263.2 million, increasing $19.3 million, or 8%, compared to the year ended December 31, 2019. In 2020 and 2019, net interest margin was 3.65% and 3.92%, respectively.
In 2020, net interest income and the net interest margin reflect the impact of interest rate cuts by the Federal Reserve in the first quarter of 2020 in response to the COVID-19 pandemic. Loans and security yields contracted by 59 and 67 basis points, respectively, offset by a decline in the cost of deposits by 37 basis points. The impact on net interest margin from accretion of purchase discounts on acquired loans was 21 basis points in 2020, compared to 25 basis points in 2019. PPP loans decreased net interest margin by three basis points in 2020.
Table 2 presents the Company’s average balance sheets, interest income and expenses, and yields and rates, for the past three years.
The following table details the trend for net interest income and margin results (on a fully taxable equivalent basis)1, yield on earning assets and rate on interest bearing liabilities.
Total average loans increased $745.3 million, or 15%, during 2020 compared to 2019 with growth attributed primarily to loans originated in the PPP, and the two bank acquisitions completed in 2020. Average investment securities balances increased $99.6 million, or 8%, during 2020 compared to 2019.
Average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 79% in 2020 and 2019. The mix of loans has remained stable, with volumes related to commercial real estate representing 52% of total loans, excluding PPP loans, at December 31, 2020, compared to 49% at December 31, 2019. Residential loan balances with individuals (including home equity loans and lines and personal construction loans) represented 28% of total loans, excluding PPP loans, at December 31, 2020 compared to 32% at December 31, 2019. (see “Loan Portfolio”).
1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.
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Loan production is detailed in the following table for the periods specified:
For the Year Ended December 31,
Commercial/commercial real estate loan pipeline at year-end $ 166,735 $ 277,788
Residential pipeline - saleable at period end $ 92,017 $ 18,995
Residential pipeline - portfolio at period end $ 25,083 $ 19,107
Commercial and commercial real estate loan production in 2020 totaled $655.8 million, compared to $1.1 billion in 2019. During 2019, the Company acquired $72.4 million in fixed-rate commercial real estate loans from the wholesale market. No purchases were made in the wholesale market during 2020.
Residential loan production totaled $638.6 million in 2020 compared to $523.6 million in 2019. 2019 includes purchases of residential loans from the wholesale market totaling $134.7 million. No purchases were made in the wholesale market during 2020.
Consumer originations totaled $219.3 million during 2020 compared to $214.5 million during 2019.
Seacoast originated more than 5,500 loans to borrowers through the PPP program for $599.0 million in 2020, and acquired $55.0 million in PPP loans from Freedom Bank. Under the terms of the SBA's program, principal and interest on PPP loans may be forgiven provided the borrower uses the funds in a manner consistent with the program's guidelines. As of December 31, 2020, $71.8 million in PPP loans had been forgiven.
Average debt securities increased $99.6 million, or 8%, from 2019. Securities comprised 18% and 19% of average earning assets in 2020 and 2019, respectively. Yields on securities decreased from 3.00% in 2019 to 2.33% in 2020.
In 2020, the cost of average interest-bearing liabilities decreased 57 basis points to 0.53% from 2019, reflecting the impact of interest rate reductions in 2019 and 2020. The low overall cost of our funding reflects the Company’s successful core deposit focus that produced strong growth in customer relationships over the past several years. Noninterest bearing demand deposits at December 31, 2020 represent 33% of total deposits, compared to 28% at December 31, 2019. The cost of average total deposits (including noninterest bearing demand deposits) in 2020 was 0.32%, compared to 0.69% in 2019.
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The following table details the Company's customer relationship funding as of:
December 31,
(In thousands, except percentages) 2020 2019
Noninterest demand deposit mix 33 % 28 %
The Company’s focus on convenience, with high-quality customer service, expanded digital offerings and distribution channels provides stable, low-cost core deposit funding. Over the past several years, the Company has strengthened its retail deposit franchise using new strategies and product offerings, while maintaining a focus on growing customer relationships. Seacoast believes that digital product offerings are central to core deposit growth and have proved to be of meaningful value to its customers in this environment. Seacoast's call center and retail associates continue to lead the market in availability and customer service standards, with the call center out-performing large bank call center wait times and service level standards. The impact of PPP originations and individual stimulus payments, as well as the acquisition of FBPB in the first quarter of 2020 and Freedom Bank in the third quarter of 2020, have all contributed to higher deposit balances. The Company has also seen a continued shift toward mobile banking use as customers recognize the ease of access and security features of such engagement. At December 31, 2020, registered mobile devices had increased 16% compared to December 31, 2019, while online users increased 13% in the same time period. Growth in mobile banking use represents both consumer and business customers utilizing the convenience of mobile and online channels. During 2020, average transaction deposits (noninterest and interest bearing demand) increased $676.3 million, or 25%, compared to 2019. Along with new relationships, deposit programs and digital sales have improved the Company's market share and deepened relationships with existing customers.
Growth in core deposits has also provided low funding costs. The Company’s deposit mix remains favorable, with 83% of average deposit balances comprised of savings, money market, and demand deposits in 2020.
Sweep repurchase agreements with customers increased $33.5 million, or 39%, to $119.6 million at December 31, 2020 compared to $86.1 million at December 31, 2019. The average rate on customer repurchase accounts was 0.33% in 2020 compared to 1.35% in 2019. No federal funds purchased were utilized at December 31, 2020 or 2019.
The Company had no FHLB borrowings outstanding at December 31, 2020 compared to $315.0 million at December 31, 2019. FHLB borrowings averaged $139.4 million at an average rate of 1.10% for the full year 2020, compared to $131.9 million at an average rate of 2.28% for the full year 2019 (see “Note J - Borrowings” to the Company’s consolidated financial statements).
In 2020, average subordinated debt of $71.2 million related to trust preferred securities issued by subsidiary trusts of the Company carried an average cost of 3.07%, down from 4.75% in 2019, reflecting the impact of lower interest rates as the subordinated debt cost is based on LIBOR plus a spread (see “Note J - Borrowings”).
Provision for Credit Losses
The provision for credit losses was $38.2 million for the full year 2020 compared to $11.0 million for the full year 2019. On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses. Under the CECL approach, the Company reserves for the full amount of expected credit losses over the life of the loans. The estimate is based on current conditions and reasonable and supportable forecasts. This use of CECL requires earlier recognition, when compared with the previous accounting guidance, of credit losses that are deemed expected but not yet probable. The expectation of higher future losses due to the ongoing impact of COVID-19 on the current and forecasted economic environment resulted in the increase in provisioning during 2020.
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Noninterest Income
Noninterest income (excluding securities gains and losses) totaled $60.3 million in 2020, an increase of $4.8 million, or 9%, compared to 2019. Noninterest income accounted for 19% of total revenue in 2020 and 2019 (net interest income plus noninterest income, excluding securities gains and losses).
Service charges on deposits for the year ended December 31, 2020 compared to the year ended December 31, 2019 decreased $2.1 million, or 18%, to $9.4 million. This decrease reflects the impact of the COVID-19 pandemic on service charges, including the waiver of certain account charges during the second quarter of 2020, as well as higher average deposit balances resulting in lower overdraft fees in 2020. Overdraft fees represented 44% of total service charges on deposits in 2020 compared to 55% in 2019.
Interchange revenue totaled $13.7 million in 2020, an increase of 2% from $13.4 million in 2019. Growth in business customers and marketing targeted at increasing debit card utilization across all customers resulted in record interchange revenue for the year.
Wealth management revenues, including brokerage commissions and fees and trust income, increased $1.2 million, or 18%, to $7.5 million for the year ended December 31, 2020. A determined and consistent focus on building new relationships and providing exceptional services resulted in considerable growth during 2020, with assets under management (“AUM”) increasing 33% year-over-year to $870 million as of December 31, 2020.
Mortgage banking fees increased by $8.2 million, or 126%, to $14.7 million for the year ended December 31, 2020 compared to 2019. In 2020, Seacoast continued to capitalize on the robust residential refinance market and a vibrant Florida housing market, resulting in record results for the year.
Marine finance fees were $0.7 million in 2020, a decrease of $0.4 million, or 34%, compared to fees of $1.1 million in 2019.
Gains on sale of the guaranteed portion of SBA loans totaled $0.7 million for the year ended December 31, 2020, a decrease of $1.8 million compared to 2019. A shift toward PPP production beginning in the second quarter of 2020 in response to the COVID-19 pandemic resulted in lower production of saleable SBA loans for 2020.
Bank owned life insurance (“BOLI”) income totaled $3.6 million in 2020, a decrease of $0.1 million, or 3%, compared to the prior year.
Other income decreased $0.5 million, or 5%, year-over-year. 2020 results reflect higher swap fees, which are more than offset by a $1.0 million BOLI death benefit recognized in 2019.
Securities gains in 2020 totaled $1.2 million, resulting from the sale of $96.7 million of debt securities, and a $0.1 million increase in the value of the CRA-qualified mutual fund investment. Securities gains in 2019 totaled $1.2 million, resulting from the sale of $202.7 million of debt securities, and a $0.2 million increase in the value of the CRA-qualified mutual fund investment.
Noninterest Expense
The Company has demonstrated its commitment to efficiency through disciplined, proactive management of its cost structure. Noninterest expenses in 2020 totaled $185.6 million and included acquisition-related expenses of $9.1 million, expenses related to branch consolidation of $0.8 million, and $0.3 million in bonuses to retail associates for keeping critical functions operating at full capacity through the initial stages of the Company's response to the COVID-19 pandemic. In 2019, noninterest expenses totaled $160.7 million, including $1.0 million in acquisition-related expenses, $1.8 million in expenses related to branch consolidation, and $0.1 million in business continuity expenses relating to a hurricane event. Adjusted noninterest expense1 in 2020 totaled $169.5 million, an increase of 12% from 2019, reflecting overall growth of the organization. Changes in the categories of noninterest expense for the year ended 2020 compared to 2019 are further described below.
Seacoast has expanded its footprint while decreasing its reliance on branches through successful bank acquisitions and the repositioning of the banking center network in strategic growth markets to meet the evolving needs of its customers. At December 31, 2020, deposits per banking center were $135.9 million, up 17% from $116.3 million at December 31, 2019. The Company consolidated one banking center location in 2020 and three in 2019. The Company plans to further consolidate three banking center locations in the first quarter of 2021.
Salaries and wages totaled $88.5 million in 2020, an increase of $14.7 million, or 20%, compared to 2019. Results in 2020 include $2.8 million in bank acquisition-related charges. Record levels of saleable mortgage production resulted in higher
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commissions, and bonuses were paid to retail associates for keeping critical functions operating at full capacity through the initial stages of the Company's response to the COVID-19 pandemic. Higher headcount is attributed to the recruitment of seasoned bankers in key markets, to the FBPB and Freedom Bank acquisitions, and the addition of staff to support the PPP. Higher loan originations in 2020 relating to the PPP resulted in higher deferrals of related salary costs.
During 2020, employee benefit costs, which include group health insurance, 401(k) plan contributions, payroll taxes, and unemployment compensation, increased $1.8 million, or 13%, compared to 2019. The increase is attributed to higher headcount and higher health insurance costs.
The Company utilizes third parties for core data processing systems. The data processing costs associated with these third parties fluctuate based on the number of transactions processed and the negotiated rates associated with those transactions. Outsourced data processing costs totaled $19.1 million and $15.1 million in 2020 and 2019, respectively. Of the $4.0 million, or 26%, increase in 2020, $2.7 million is the result of acquisition-related costs incurred in 2020. The Company continues to improve and enhance mobile and other digital products and services through key third parties. Outsourced data processing costs may increase in the future as customers adopt improved products and as business volumes grow.
Telephone and data line expenses, including electronic communications with customers, between branch locations and personnel, and with third party data processors, remained flat year-over-year at $3.0 million. The Company continues to manage expenses for this category, which has benefited from branch consolidation, while continuing to grow alternative service channels including the Customer Support Center and digital applications.
Total occupancy, furniture and equipment expenses in 2020 totaled $20.0 million, a decrease of $0.5 million, or 2%, compared to 2019. The decrease reflects the benefit of recent branch consolidations. The Company continues to strategically manage its branch footprint to balance customer needs for access to physical branches with the ability to provide services through telephone-based and digital channels. Branch consolidations will continue for the Company and the banking industry in general as the customer service dynamic continues to evolve.
In 2020 and 2019, marketing expenses totaled $4.8 million and $4.2 million, respectively. The Company continues to carefully manage the use of marketing campaigns to target potential high value customers in a cost effective manner through a mix of digital communications, direct mail, event sponsorships and donations.
Legal and professional fees increased by $0.6 million in 2020, or 7%, to $9.2 million, which includes $2.7 million in merger-related expenses in 2020, compared to $0.4 million in 2019.
FDIC assessments were $1.3 million in 2020, compared to $0.9 million in 2019. In the third quarter of 2019, the FDIC announced the achievement of the target deposit insurance reserve ratio, resulting in the Company's ability to apply previously awarded credits to its deposit insurance assessment. The Company used these credits to offset $0.9 million of expenses during 2019 and $0.7 million during 2020. The credits were fully utilized by the second quarter of 2020.
For the year ended December 31, 2020, foreclosed property expense and net loss on sale was $2.3 million, compared to $0.1 million in 2019. Results in 2020 primarily reflect the write-downs of two properties in the fourth quarter upon the receipt of updated valuations.
Other expense totaled $15.8 million and $15.2 million in 2020 and 2019, respectively. The increase of $0.6 million, or 4%, includes higher recruiting fees and higher mortgage production-related expenses.
Income Taxes
In 2020, the provision for income taxes totaled $22.8 million, compared to $29.9 million in 2019. In 2019, a reduction in the State of Florida corporate income tax rate resulted in the write-down of certain deferred tax assets, resulting in additional income tax expense of $1.1 million. In 2020, changes under the CARES Act provided for the carryback of net operating losses that resulted in an income tax benefit of $0.4 million. Discrete tax benefits related to share-based compensation were $0.1 million and $0.8 million in 2020 and 2019, respectively.
Fourth Quarter Review
Net income totaled $29.3 million in the fourth quarter of 2020, an increase of $6.7 million, or 30%, from the third quarter of 2020, and an increase of $2.2 million, or 8%, compared to the fourth quarter of 2019. Adjusted net income1 totaled $30.7 million, an increase of $3.4 million, or 12%, from the third quarter of 2020, and an increase of $3.9 million, or 14%, compared
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to the fourth quarter of 2019. Diluted earnings per common share (“EPS”) was $0.53 and adjusted diluted EPS12was $0.55 in the fourth quarter of 2020, compared to diluted EPS of $0.42 and adjusted diluted EPS1 of $0.50 in the third quarter of 2020 and compared to diluted EPS of $0.52 and adjusted diluted EPS1 of $0.52 in the fourth quarter of 2019.
Revenues increased $3.3 million, or 4%, from the third quarter of 2020 and increased $5.6 million, or 7%, from the fourth quarter of 2019. Net interest income increased $5.3 million, or 8%, compared to the third quarter of 2020 and increased $7.0 million, or 11%, compared to the fourth quarter of 2019.
Net interest income (on a tax-equivalent basis), for the fourth quarter of 2020 totaled $68.9 million, an increase of $5.3 million, or 8%, from the third quarter of 2020, and an increase of $7.1 million, or 11%, from the fourth quarter 2019. Net interest margin (on a tax-equivalent basis), increased 19 basis points to 3.59% from the third quarter of 2020, and contracted 25 basis points from the fourth quarter of 2019. During the fourth quarter of 2020, net interest income included $5.2 million in interest and fees earned on PPP loans compared to $1.7 million in the third quarter of 2020. Lower PPP loan fees in the third quarter resulted from a calculation change to align fee recognition with the contractual maturity of the loans. Loan forgiveness began in the fourth quarter of 2020, resulting in accelerated recognition of $1.5 million in PPP loan fees.
Noninterest income, excluding securities gains and losses, totaled $14.9 million for the fourth quarter of 2020, a decrease of $2.0 million, or 12%, from the third quarter of 2020 and an increase of $1.1 million, or 8%, from the fourth quarter of 2019. Mortgage banking gains decreased by $1.6 million to $3.6 million in the fourth quarter of 2020, compared to record results in the prior quarter. The low interest rate environment continued to result in heightened refinance demand, though at lower levels than in the third quarter.
Noninterest expenses for the fourth quarter of 2020 totaled $43.7 million, a decrease of $8.0 million, or 15% from the prior quarter and an increase of $5.6 million, or 15%, from the fourth quarter of 2019. Compared to the third quarter of 2020, salaries and wages decreased by $1.6 million to $21.5 million, primarily reflecting the effect of higher expense deferrals associated with accelerated commercial loan originations in the fourth quarter. Other decreases compared to the third quarter of 2020 are primarily attributed to merger-related expenses.
A provision for loan losses of $1.9 million was recorded in the fourth quarter of 2020 compared to a reversal of $0.8 million in the previous quarter. The ratio of allowance for credit losses to total loans was 1.62% at December 31, 2020, compared to 1.60% at September 30, 2020. Excluding PPP loans, the ratio was 1.79% at December 31, 2020, compared to 1.80% at September 30, 2020.
12Non-GAAP measure, see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.
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Explanation of Certain Unaudited Non-GAAP Financial Measures
This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The financial highlights provide reconciliations between GAAP and adjusted financial measures including net income, fully taxable equivalent net interest income, noninterest income, noninterest expense, tax adjustments, net interest margin and other financial ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might define or calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.
The following tables provide reconciliation between GAAP and adjusted (non-GAAP) financial measures.
Quarters
Fourth Third Second First Total
Total Adjustments to Noninterest Income 18 (4) (1,230) (19) (1,235)
Business continuity expenses — — — (307) (307)
Branch reductions and other expense initiatives (354) (464) — — (818)
Provision for credit losses on unfunded commitments 795 (756) (178) (46) (185)
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Quarters
Fourth Third Second First Total
Total Adjustments to Noninterest Income 18 (4) (1,230) (19) (1,235)
Impact of other adjustments for Adjusted Net Income 0.01 0.18 (0.04) 0.21 0.09
Adjusted Return on Average Tangible Assets 1.50 % 1.38 % 1.33 % 0.32 % 1.17 %
Impact of other adjustments for Adjusted Net Income 0.13 1.71 (0.38) 1.91 0.83
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Quarters
Fourth Third Second First Total
Tax equivalent adjustment to securities (23) (32) (31) (30) (116)
Tax equivalent adjustment to loans (89) (86) (85) (84) (344)
Tax equivalent adjustment to securities (23) (32) (31) (30) (116)
Tax equivalent adjustment to loans (89) (86) (85) (84) (344)
Quarters
Fourth Third Second First Total
BOLI benefits on death (included in other income) — (956) — — (956)
Business continuity expenses — (95) — — (95)
Branch reductions and other expense initiatives — (121) (1,517) (208) (1,846)
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Quarters
Fourth Third Second First Total
Foreclosed property expense and net (loss)/gain on sale (3) (262) 174 40 (51)
Impact of other adjustments for Adjusted Net Income (0.09) 0.06 0.09 0.02 0.02
Adjusted Return on Average Tangible Assets 1.57 % 1.67 % 1.59 % 1.50 % 1.58 %
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Quarters
Fourth Third Second First Total
Impact of other adjustments for Adjusted Net Income (0.76) 0.57 0.87 0.25 0.21
Tax equivalent adjustment to securities (32) (33) (36) (39) (140)
Tax equivalent adjustment to loans (54) (46) (47) (48) (195)
Tax equivalent adjustment to securities (32) (33) (36) (39) (140)
Tax equivalent adjustment to loans (54) (46) (47) (48) (195)
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Financial Condition
Total assets increased $1.2 billion, or 17% year-over-year to $8.3 billion at December 31, 2020, reflecting the impact of PPP loan originations and the completion of two acquisitions during the year.
Securities
Information related to yields, maturities, carrying values and fair value of the Company’s securities is set forth in Tables 13-16 and “Note D - Securities” of the Company’s consolidated financial statements.
At December 31, 2020, the Company had $1.4 billion in securities available-for-sale, and $184.5 million in securities held-to-maturity. The Company's total debt securities portfolio increased $374.4 million, or 31% from December 31, 2019. During the year ended December 31, 2020, there were $830.3 million of debt security purchases and $379.9 million in paydowns and maturities over the same period. For the year ended December 31, 2020, proceeds from the sale of securities totaled $96.7 million, with net gains of $1.1 million. During the year ended December 31, 2019, there were $309.5 million of debt security purchases and $144.2 million in paydowns and maturities over the same period. For the year ended December 31, 2019, proceeds from the sale of securities totaled $202.7 million, with net losses of $1.0 million.
Debt securities generally return principal and interest monthly. The modified duration of the investment portfolio at December 31, 2020 was 3.8 years, compared to 3.5 years at December 31, 2019.
At December 31, 2020, available-for-sale securities had gross unrealized losses of $2.1 million and gross unrealized gains of $28.7 million, compared to gross unrealized losses of $2.7 million and gross unrealized gains of $8.8 million at December 31, 2019. The Company assesses securities in an unrealized loss position on a quarterly basis. As of December 31, 2020, the Company expected to recover the entire amortized cost basis of these securities and therefore no allowance for credit losses was recorded.
The credit quality of the Company’s securities holdings are primarily investment grade. As of December 31, 2020, the Company’s investment securities, except for $35.3 million of securities issued by states and their political subdivisions, generally are traded in liquid markets. U.S. Treasury and U.S. government agencies and obligations of U.S. government-sponsored entities totaled $1.3 billion, or 79%, of the total portfolio. The portfolio also includes $91.2 million in private label securities, most secured by residential real estate collateral, with low loan to values and average credit support of 22%. The Company also has invested $202.2 million in uncapped 3-month LIBOR floating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase first lien broadly syndicated corporate loans while providing support to senior tranche investors. As of December 31, 2020, all of the Company's collateralized loan obligations were in AAA/AA tranches with average credit support of 30%. The Company performs routine stress testing on these securities to assess both structure and collateral.
Loan Portfolio
Loans, net of unearned income and excluding the allowance for credit losses, were $5.6 billion at December 31, 2020, an increase of $479.4 million, or 9%, compared to December 31, 2019. In the second quarter of 2020, the Company began originating Paycheck Protection Program (“PPP”) loans established by the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. At December 31, 2020, the Company had $567 million in PPP loans outstanding. Excluding PPP loans, loans outstanding decreased year-over-year by $30 million to $5.2 billion. The Company adhered to its conservative underwriting guidelines through 2020 in response to the impact of the COVID-19 pandemic on the economic environment. For the year ended December 31, 2020, non-PPP commercial loan originations, including small business and SBA loans, were $655.8 million, compared to $1.1 billion for the year ended December 31, 2019, a decrease of 38%. The loan pipeline for commercial loans totaled $166.7 million at December 31, 2020.
Residential loans originated for sale in the secondary market were $509.4 million for the year ended December 31, 2020, compared to $236.5 million for the year ended December 31, 2019. A vibrant refinance market and a strong Florida housing market, combined with the residential lending team's focus on high-quality service levels to homebuyers, refinance customers and local real estate professionals, resulted in record originations for the year. Originations of residential loans retained were $129.2 million in 2020, compared to $287.0 million in December 31, 2019. The saleable residential mortgage pipeline at December 31, 2020 totaled $92.0 million while the retained pipeline was $25.1 million.
During 2020, the Company successfully completed two bank acquisitions, resulting in loans acquired of $146.8 million in the FBPB acquisition and $303.4 million in the Freedom Bank acquisition.
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During 2019, the Company purchased $201.1 million in loans, with an average loan size of $297 thousand and an average yield of 3.92%. The Company made no loan purchases during 2020.
The Company has maintained a conservative approach to underwriting and has intentionally slowed loan growth since the onset of the pandemic in light of increased economic uncertainty. Assuming the economic recovery commences in the second half of 2021, the resumption of growth will be accompanied by defined risk management procedures. Lending policies contain guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the principal amount of loans. The Company's exposure to commercial real estate lending remains below regulatory limits (see “Loan Concentrations”).
The following table details loan portfolio composition at December 31, 2020 for portfolio loans, purchased credit deteriorated loans (“PCD”) and loans purchased which are not considered credit deteriorated (“Non-PCD”) as defined in “Note E - Loans”; and at December 31, 2019 for portfolio loans, purchased unimpaired loans (“PUL”) and purchased credit impaired loans (“PCI”). With the adoption of ASC Topic 326 - Financial Instruments - Credit Losses on January 1, 2020, the Company re-evaluated the aggregation of loans into segments, and separated Commercial Real Estate - Owner Occupied from Commercial Real Estate - Non Owner Occupied. In prior years, all Commercial Real Estate loans were considered a single segment.
(In thousands) Portfolio Loans Acquired Non-PCD Loans PCD Loans Total
(In thousands) Portfolio Loans PULs PCI Loans Total
Commercial real estate loans, inclusive of owner-occupied commercial real estate, increased $158.2 million, or 7%, totaling $2.5 billion at December 31, 2020, compared to December 31, 2019. Owner-occupied loans represent $1.1 billion, or 45%, of the commercial real estate portfolio. Office building loans of $761.1 million, or 27%, of commercial real estate mortgages, comprise our largest concentration with a substantial portion owner-occupied.
Fixed-rate and adjustable-rate loans secured by commercial real estate, excluding construction loans, totaled approximately $2.1 billion and $453.7 million, respectively, at December 31, 2020, compared to $2.0 billion and $418.8 million, respectively, at December 31, 2019.
At December 31, 2020, Seacoast had $74.1 million of loans with payment accommodations to borrowers financially impacted by the COVID-19 pandemic, none of which have been classified as a TDR. If economic conditions deteriorate further, these borrowers may be unable to resume scheduled payments, which may result in reversal of accrued interest, further modification of terms and additional necessary provisions for credit losses. At December 31, 2020, of loans that were provided with payment assistance during 2020, 94% are in current status or have paid off the balance entirely, less than 1% are 30 or more days past due, and 5% have been provided with an additional accommodation, including additional payment deferrals or interest only payment arrangements. Interest and fees have typically continued to accrue on these loans throughout their accommodation period.
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The following table presents loans with accommodations, excluding PPP loans, at December 31, 2020:
Construction and land development $ 1,032 $ 245,108 — %
The following table details commercial real estate and construction and land development loans outstanding by collateral type at December 31, 2020:
($ in thousands) OOCRE, CRE & ADC % of Total Loans With Payment Accommodations
1-4 Family Residence - Individual Borrowers 48,472 1 301
School/ Education 28,133 — —
1-4 Family Residence - Spec Home 23,846 — —
Manufacturing Building 18,106 — —
1-4 Family Residence - Builder Lines 16,280 — —
Recreational Property 14,976 — —
Other Properties 16,531 — —
The largest collateral type in the CRE and construction portfolios, when aggregated, is office buildings, representing 13% of the portfolio. The average loan size in the office building category is $600 thousand, the average loan to value (“LTV”) is 57%, and 56% of this category is classified as owner-occupied. This primarily includes medical, accounting, engineering, health care, veterinarians and other similar professionals.
The second-largest category is retail, representing 8% of total loans. The average loan size in the retail category is $1.3 million and the average LTV is 58%. Loans collateralized by hotels/motels represent $130.7 million with an average loan size of $2.9 million and an average LTV of 54%. Restaurant exposure is limited at $49.6 million in loans, and is distributed among quick serve and full-service restaurants, with an average loan size of $788 thousand and LTV of 57%.
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The following table details the commercial and financial loans outstanding by industry type at December 31, 2020:
Professional, Scientific, Technical & Other Services 101,661 2 991
Accommodation & Food Services 16,830 — 351
Public Administration 12,056 — —
Commercial and financial loans outstanding increased $76.5 million, or 10%, year-over year to $854.8 million as of December 31, 2020. The Company's primary customers for commercial and financial loans are small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing companies. Such businesses are smaller and subject to the risks of lending to small- to medium-sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.
Residential mortgage loans decreased $165.2 million, or 11%, year-over-year to $1.3 billion as of December 31, 2020. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At December 31, 2020, approximately $436.3 million, or 32%, of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages). Fixed rate mortgages totaled $499.0 million, or 37%, of the residential mortgage portfolio at December 31, 2020, of which 15- and 30-year mortgages totaled $38.4 million and $362.9 million, respectively. Remaining fixed rate balances were comprised of home improvement loans totaling $163.5 million, most with maturities of 10 years or less. Home equity lines of credit, primarily floating rates, totaled $341.6 million at December 31, 2020. In comparison, fixed-rate loans secured by residential properties totaled $590.0 million at December 31, 2019, with 15- and 30-year fixed-rate residential mortgages totaling $43.5 million and $372.0 million, respectively, and home equity mortgages and lines of credit totaled $243.8 million and $292.1 million, respectively.
The Company also provides consumer loans, which includes installment loans, auto loans, marine loans and other consumer loans, which decreased $19.5 million, or 9%, year-over-year to a total of $188.7 million at December 31, 2020, compared to $208.2 million at December 31, 2019. Of the $19.5 million decrease, automobile loans and other consumer loans decreased $20.6 million and $5.3 million, respectively, while marine loans increased $6.4 million.
At December 31, 2020, the Company had unfunded commitments to make loans of $1.5 billion, compared to $1.0 billion at December 31, 2019 (see “Note Q - Contingent Liabilities and Commitments with Off-Balance Sheet Risk” to the Company’s consolidated financial statements).
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Loan Concentrations
The Company has developed guardrails to manage loan types that are most impacted by stressed market conditions in order to achieve lower levels of credit loss volatility in the future. Outstanding balances for commercial and commercial real estate (“CRE”) loan relationships greater than $10 million totaled $753.7 million, representing 13% of the total portfolio, at December 31, 2020, compared to $680.2 million, or 13%, at December 31, 2019.
The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at December 31, 2020 aggregated to $254.3 million, of which $188.0 million was funded, compared to $268.9 million at December 31, 2019, of which $179.0 million was funded. The Company had 135 commercial and commercial real estate relationships in excess of $5 million totaling $1.3 billion, of which $1.2 billion was funded at December 31, 2020, compared to 120 relationships totaling $1.2 billion at December 31, 2019, of which $1.0 billion was funded.
Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of total risk based capital, declined to 26% and 169%, respectively, at December 31, 2020, compared to 40% and 204% as of December 31, 2019. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 24% and 157%, respectively, of total consolidated risk based capital. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multifamily property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e. loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans on owner occupied CRE are generally excluded.
Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality
Table 12 provides certain information concerning nonperforming assets for the years indicated.
Nonperforming assets (“NPAs”) at December 31, 2020 totaled $48.9 million, an increase of $9.5 million, or 24%, compared to 2019, and were comprised of $36.1 million of nonaccrual loans, $10.2 million of other real estate owned (“OREO”) and $2.6 million of branches taken out of service. Compared to December 31, 2019, nonaccrual loans increased by $9.2 million, or 34%, and non-branch OREO decreased $4.3 million, or 62%, the result of property sales. Approximately 80% of nonaccrual loans were secured with real estate at December 31, 2020. Nonaccrual loans have been written down by approximately $8.4 million, or 12%, of the original loan balance (including specific impairment reserves). See the tables below for details about nonaccrual loans.
Nonperforming loans to total loans outstanding at December 31, 2020 increased to 0.63% from 0.52% at December 31, 2019. Nonperforming assets to total assets at December 31, 2020 increased to 0.59% from 0.55% at December 31, 2019.
The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.
Beginning in March 2020, in response to the economic downturn resulting from the COVID-19 pandemic, the Company has offered payment accommodations to affected borrowers. As of December 31, 2020, pandemic-related accommodations totaled $74.1 million and are not considered troubled debt restructurings (“TDRs”). If economic conditions deteriorate further, these borrowers may be unable to resume scheduled payments, which may result in further modification of terms and the potential for classification as a TDR in future periods.
In addition to pandemic-related accommodations, 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 have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing restructured loans totaled $4.2 million at December 31, 2020, compared to $11.1 million at December 31, 2019. Accruing TDRs are excluded from nonperforming asset ratios. The tables below set forth details related to nonaccrual and accruing restructured loans.
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Nonaccrual Loans AccruingRestructured
(In thousands) Non-Current Current Total Loans
Construction & land development
Residential $ — $ — $ — $ 109
Commercial real estate mortgages - non-owner occupied 2,030 6,053 8,083 —
Nonaccrual Loans AccruingRestructured
(In thousands) Non-Current Current Total Loans
Construction & land development
Residential $ — $ — $ — $ —
At December 31, 2020 and December 31, 2019, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:
(Dollars in thousands) Number Amount Number Amount
During the year ended December 31, 2020, ten loans totaling $0.7 million were modified to a TDR, compared to nine loans totaling $4.7 million for the year ended December 31, 2019. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. There were no defaults on loans that had been
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modified in TDRs within the twelve months preceding December 31, 2020 and four defaults totaling $3.2 million within the twelve months preceding December 31, 2019. A restructured loan is considered in default when it becomes 90 days or more past due under the modified terms, has been transferred to nonaccrual status, or has been transferred to OREO.
In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. The accrual of interest is generally discontinued on loans, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Consumer loans that become 120 days past due are generally charged off. The loan carrying value is analyzed and any changes are appropriately made as described above quarterly.
Allowance for Credit Losses on Loans
On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses. The new guidance replaced the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposure such as loan commitments, standby letters of credit, financial guarantees and other similar instruments.
Management estimates the allowance using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.
Upon adoption of the new model, the initial adjustment to the allowance for credit losses was an increase of $21.2 million, bringing the ratio of allowance to total loans from 0.68% at December 31, 2019 to 1.08% at January 1, 2020. The increase was attributed to the new requirement to estimate losses over the full remaining expected life of the loans and to the impact of the new guidance on the Company's acquired loan portfolio. The economic forecast scenario as of January 1, 2020 projected a stable macroeconomic environment over the three year forecast period. In addition to the $21.2 million impact of the initial adoption of ASC Topic 326, increases in the allowance during 2020 reflected the deterioration of the current and forecasted macroeconomic environment with the onset and continuation of the COVID-19 pandemic.
No allowance has been assigned to PPP loans, which are guaranteed by the U.S. government. Net charge-offs for 2020 were $7.6 million, or 0.14% of average loans, excluding PPP loans, compared to $8.1 million, or 0.16%, for 2019. Excluding PPP loans, the ratio of allowance to total loans increased to 1.79% at December 31, 2020 from 0.68% at December 31, 2019 and 1.08% at January 1, 2020. Uncertainty related to market conditions and the economic outlook will likely continue as the ongoing effects of the pandemic and the impact of additional government assistance programs remain unknown.
Activity in the allowance for credit losses is summarized as follows:
Paycheck Protection Program — — — — — — — —
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Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. At December 31, 2020, the Company's largest concentrations of credit risk were $2.5 billion in loans secured by commercial real estate and $1.3 billion in loans secured by residential real estate, representing 45% and 23% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida.
With the emergence of the COVID-19 pandemic in 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on expected losses on loans is difficult to estimate with precision, and it is possible that additional provisions for credit losses could be needed in future periods.
LIBOR Transition
The Company, along with the entire financial services industry, is preparing for the expected phase-out of the benchmark London Interbank Offered Rate (“LIBOR”). In preparing for the transition from LIBOR, the Company has formed a LIBOR transition steering committee which is responsible for overseeing the execution of the Company's enterprise-wide LIBOR transition program, and for evaluating and mitigating the risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review of the financial products, agreements, contracts and business processes that may use LIBOR as a reference rate, and the development and execution of a strategy to transition away from LIBOR, with appropriate consideration of the potential financial, customer, counterparty, regulatory and legal impacts.
As of December 31, 2020, the Company has identified approximately $400 million in loans for which the repricing index is tied to LIBOR. The Company also invests in securities and has issued subordinated debt tied to LIBOR. The Company’s back-to-back swap agreements with customers and other derivatives are governed by the International Swap Dealers Association (“ISDA”). ISDA has developed fallback language for swap agreements and has established a protocol to allow counterparties to modify legacy trades to include the new fallback language. The Company continues to monitor regulatory and legislative activity with regard to LIBOR-based products to identify all necessary actions and facilitate the transition to alternative reference rates.
The Company has adopted Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and the subsequent amendment, which provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g., discontinuation of LIBOR) if certain criteria are met. The Company will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period, and does not expect the standard to have a material impact on the consolidated financial statements.
Cash and Cash Equivalents, Liquidity Risk Management and Contractual Commitments
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.
Funding sources include primarily customer-based deposits, collateral-backed borrowings, brokered deposits, cash flows from operations, cash flows from our loan and investment portfolios and asset sales, primarily secondary marketing for residential real estate mortgages and marine loans. Cash flows from operations are a significant component of liquidity risk management and the Company considers both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk.
The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding. Brokered certificates of deposit (“CDs”) at December 31, 2020 totaled $233.8 million, compared to $472.9 million at December 31, 2019. All of the brokered CDs outstanding at December 31, 2020 have maturities of 12 months or less.