Edgar Filing: SEACOAST BANKING CORP OF FLORIDA

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to __________________.

Commission File No. 0-13660

Seacoast Banking Corporation of Florida

(Exact Name of Registrant as Specified in its Charter)

Florida

59-2260678

(State or Other Jurisdiction of Incorporation or

Organization

(I.R.S. Employer Identification No.)

815 COLORADO AVENUE, STUART FL		34994
(Address of Principal Executive Offices)		(Zip Code)

(772) 287-4000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated	Accelerated	Non-Accelerated	Small Reporting
Filer ¨	Filer x	Filer ¨	Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Common Stock, $0.10 Par Value – 37,993,013 shares as of June 30, 2016

INDEX

SEACOAST BANKING CORPORATION OF FLORIDA

		PAGE #

Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed consolidated balance sheets – June 30, 2016 and December 31, 2015	3

	Condensed consolidated statements of income – Three months and six months ended June 30, 2016 and 2015	4

	Condensed consolidated statements of comprehensive income – Three months and six months ended June 30, 2016 and 2015	5

	Consolidated statements of cash flows – Six months ended June 30, 2016 and 2015	6-7

	Notes to condensed consolidated financial statements	8-35

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36-64

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65

Item 4.	Controls and Procedures	66

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults upon Senior Securities	67
Item 4.	Mine Safety Disclosures	68
Item 5.	Other Information	68
Item 6.	Exhibits	69

SIGNATURES		70

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

	June 30,			December 31,
(Dollars in thousands, except share amounts)	2016			2015
ASSETS
Cash and due from banks	$	113,028		$	81,216
Interest bearing deposits with other banks		13,774			54,851
Total cash and cash equivalents		126,802			136,067

Securities:
Available for sale (at fair value)		923,560			790,766
Held for investment (fair value: $404,572 at June 30, 2016, and $202,813 at December 31, 2015)		401,570			203,525
Total Securities		1,325,130			994,291

Loans held for sale (at fair value)		20,075			23,998

Loans		2,616,052			2,156,330
Less: Allowance for loan losses		(20,725	)		(19,128	)
NET LOANS		2,595,327			2,137,202

Bank premises and equipment, net		63,817			54,579
Other real estate owned		8,694			7,039
Goodwill		64,123			25,211
Other intangible assets, net		16,154			8,594
Bank owned life insurance		43,729			43,579
Net deferred income taxes		62,648			60,274
Other assets		54,705			43,946
	$	4,381,204		$	3,534,780

LIABILITIES
Deposits	$	3,501,316		$	2,844,387
Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days		183,387			172,005
Federal Home Loan Bank (FHLB) borrowings		151,000			50,000
Subordinated debt		70,101			69,961
Other liabilities		49,971			44,974
		3,955,775			3,181,327

SHAREHOLDERS' EQUITY
Common stock, par value $0.10 per share, authorized 60,000,000 shares, issued 38,023,769 and outstanding 37,993,013 shares at June 30, 2016 and issued 34,356,892 and outstanding 34,351,409 shares at December 31, 2015		3,799			3,435
Other shareholders' equity		421,630			350,018
TOTAL SHAREHOLDERS' EQUITY		425,429			353,453
	$	4,381,204		$	3,534,780

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

	Three Months Ended				Six months ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2016		2015		2016		2015
Interest and fees on loans	$	29,244	$	21,988	$	55,278	$	44,009
Interest and dividends on securities		6,902		5,124		12,749		10,172
Interest on interest bearing deposits and other investments		433		249		723		498
TOTAL INTEREST INCOME		36,579		27,361		68,750		54,679

Interest on deposits		1,238		845		2,155		1,593
Interest on borrowed money		848		850		1,880		1,710
TOTAL INTEREST EXPENSE		2,086		1,695		4,035		3,303

NET INTEREST INCOME		34,493		25,666		64,715		51,376

Provision for loan losses		662		855		861		1,288

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		33,831		24,811		63,854		50,088

Noninterest income
Service charges on deposits		2,230		2,115		4,359		4,117
Interchange income		2,370		2,033		4,587		3,770
Other income		4,511		4,698		8,795		8,267
Securities gains, net (includes net losses of ($19) and $0 in other comprehensive income reclassifications for the three months ended June 30, 2016 and 2015 respectively, and net gains of $28 and $0 for the six months ended June 30, 2016 and 2015, respectively.)		47		0		136		0
TOTAL NONINTEREST INCOME		9,158		8,846		17,877		16,154

Noninterest expenses
Salaries and wages		13,884		9,301		27,283		18,090
Employee benefits		2,521		2,541		5,003		4,956
Outsourced data processing costs		2,803		2,234		7,242		4,418
Occupancy		3,645		2,011		6,617		4,034
Legal and professional fees		2,656		1,590		5,013		3,253
Other		9,299		6,611		15,991		12,723
TOTAL NONINTEREST EXPENSES		34,808		24,288		67,149		47,474

INCOME BEFORE INCOME TAXES		8,181		9,369		14,582		18,768

Provision for income taxes (includes $(7) and $0 in income tax benefit from reclassification items for the three months ended June 30, 2016 and 2015, respectively, and $11 and $0 in income tax provision for the six months ended June 30, 2016 and 2015, respectively.)		2,849		3,564		5,284		7,104
NET INCOME	$	5,332	$	5,805	$	9,298	$	11,664

PER SHARE COMMON STOCK:
Net income diluted	$	0.14	$	0.18	$	0.25	$	0.35
Net income basic		0.14		0.18		0.26		0.35
Cash dividends declared		0.00		0.00		0.00		0.00
Average shares outstanding - diluted		38,141,550		33,233,508		36,797,259		33,184,764
Average shares outstanding - basic		37,470,071		32,978,006		36,159,473		32,971,670

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2016			2015			2016			2015
NET INCOME	$	5,332		$	5,805		$	9,298		$	11,664
Other comprehensive income:
Unrealized gains on securities available for sale		9,131			(2,477	)		17,117			2,298
Amortization of unrealized losses on securities transferred to held for investment, net		(122	)		(169	)		(244	)		(294	)
Reclassification adjustment for losses (gains) included in net income		19			0			(28	)		0
Provision for income taxes		(3,485	)		1,022			(6,502	)		(774	)
COMPREHENSIVE INCOME	$	10,875		$	4,181		$	19,641		$	12,894

See notes to condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

	Six Months Ended
	June 30,
(Dollars in thousands)	2016			2015
Cash flows from operating activities
Interest received	$	66,387		$	55,164
Fees and commissions received		16,989			15,629
Interest paid		(3,545	)		(3,587	)
Cash paid to suppliers and employees		(57,211	)		(46,616	)
Origination of loans designated held for sale		(83,207	)		(109,958	)
Sale of loans designated held for sale		87,130			102,380
Net change in other assets		(834	)		(462	)
Net cash provided by operating activities		25,709			12,550
Cash flows from investing activities
Maturity of securities available for sale		59,151			63,681
Maturity of securities held for investment		15,584			17,400
Proceeds from sale of securities available for sale		12,211			0
Purchases of securities available for sale		(149,969	)		(84,693	)
Purchases of securities held for investment		(213,766	)		(24,366	)
Net new loans and principal repayments		(133,007	)		(114,794	)
Proceeds from the sale of other real estate owned		4,207			3,004
Proceeds from sale of Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock		1,700			3,725
Purchase of FHLB and Federal Reserve Stock		(9,297	)		(3,388	)
Net cash from bank acquisition		260,471			0
Additions to bank premises and equipment		(133	)		(6,651	)
Net cash (used in) provided by investing activities		(152,848	)		(146,082	)
Cash flows from financing activities
Net increase in deposits		5,421			188,643
Net increase in federal funds purchased and repurchase agreements		11,382			4,036
Net increase (decrease) in FHLB borrowings		101,000			(65,000	)
Stock based employee benefit plans		72			62
Dividends paid		0			0
Net cash provided by financing activities		117,875			127,741
Net decrease in cash and cash equivalents		(9,264	)		(5,791	)
Cash and cash equivalents at beginning of period		136,066			100,539
Cash and cash equivalents at end of period	$	126,802		$	94,748

See notes to condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

	Six Months Ended
	June 30,
(Dollars in thousands)	2016			2015
Reconciliation of net income to cash provided by operating activities
Net income	$	9,298		$	11,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,235			1,708
Amortization of premiums and discounts on securities, net		2,385			1,972
Other amortization and accretion, net		(1,110	)		(994	)
Change in loans held for sale, net		3,923			(7,578	)
Provision for loan losses		861			1,288
Gain on sale of securities		(136	)		0
Gain on sale of loans		(872	)		(708	)
Losses (gains) on sale and write-downs of other real estate owned		(252	)		134
Losses (gains) on disposition of fixed assets		1,937			1
Change in interest receivable		(2,460	)		136
Change in interest payable		350			(370	)
Change in prepaid expenses		(584	)		(721	)
Change in accrued taxes		5,582			7,487
Change in other assets		(834	)		(462	)
Change in other liabilities		5,386			(1,007	)
Net cash provided by operating activities	$	25,709		$	12,550

Supplemental disclosure of non cash investing activities:
Fair value adjustment to securities	$	16,602		$	2,004
Transfer from loans to other real estate owned		2,805			1,629
Transfer from bank premises to other real estate owned		3,176			0
Purchase of securities on trade date		1,198			0
Matured securities recorded as a receivable		349			528

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Seacoast Banking Corporation of Florida and Subsidiaries

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of these condensed consolidated financial statements required the use of certain estimates by management in determining the Company’s assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, fair value of other real estate owned, and the valuation of deferred tax assets. Actual results could differ from those estimates.

NOTE B — RECENTLY ISSUED ACCOUNTING STANDARDS, Not adopted as of June 30, 2016

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective on January 1, 2018, with early adoption permitted January 1, 2017. The Company is currently assessing the impact of adoption of ASU 2014-09.

In January 2016, the FASB issued ASU No. 2016-01 for “Recognition and Measurement of Financial Assets and Liabilities”. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The update requires: a) equity investments (except those accounted for under the equity method of accounting) to be measured at fair value and recognized in net income, b) simplifies impairment assessments of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and if impaired requires measurement of the investment at fair value, c) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value d) requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, e) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The ASU is effective for fiscal years beginning after December 15, 2017, and must be adopted on a modified retrospective basis, including interim periods within those fiscal years. The adoption of this standard is being evaluated for its impact on the Company’s operating results and financial condition.

In February 2016, the FASB amended existing guidance related to the recognition of lease assets and lease liabilities on the balance sheet and disclosures on key information about leasing arrangements, under ASU 2016-02. It will be necessary for all parties to classify leases to determine how to recognize lease-related revenue and expense. The amendment requires lessees to put most leases on their balance sheet and record expenses to the income statement. Changes in the guidance eliminate real estate centric provisions for sale-leaseback transactions, including initial direct costs and lease execution costs for all entities. For lessors, the new FASB standard modifies classification criteria and accounting for sales type and direct financing leases. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. The amended accounting is applicable periods after December 15, 2018 and interim periods within that year.

In March 2016, under ASU 2016-04, “Liabilities – Extinguishments of Liabilities, Breakage for Certain Prepaid Stored-Value Products” the FASB intends for entities to recognize liabilities for the sale of prepaid stored value products redeemable for goods, services, or cash. This guidance aligns recognition of breakage for these liabilities in a way consistent with how gift card breakage will be recognized. Effective date for implementation is for annual periods after December 15, 2018.

In March 2016, the FASB issued ASU 2016-09 for “Compensation—Stock Compensation, Improvements to Employee Share Based Payments Accounting.” The guidance will alter the manner in which companies account for share based payments to employees. Entities will be required to immediately recognize income tax effects of awards in the income statement when the awards vest or are settled. Additional paid-in capital pools will be eliminated. This change is effective for fiscal years after December 15, 2016, and interim periods with that year.

In June 2016, the FASB issued ASU 2016-13 for “Measurement of Credit Losses on Financial Instruments”, to replace the incurred loss impairment methodology with a current expected credit loss methodology for financial instruments measured at amortized cost and other commitments to extend credit. Expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability of cash flows, including information about past events, current conditions, and supportable forecasts. The resultant allowance for credit losses reflects the portion of the amortized cost basis that the entity does not expect to collect. Additional quantitative and qualitative disclosures are required upon adoption. The Company is evaluating the impact of the ASU. Adoption is required January 1, 2020, with early adoption permitted January 1, 2019.

NOTE C — BASIC AND DILUTED EARNINGS PER COMMON SHARE

For each of the periods ended June 30, 2016 and 2015, options to purchase 127,000 shares and 282,000 shares, respectively, were antidilutive and accordingly were excluded in determining diluted earnings per share.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2016		2015		2016		2015
Basic:
Income available to common shareholders	$	5,332	$	5,805	$	9,298	$	11,664
Average basic shares outstanding		37,470,071		32,978,006		36,159,473		32,971,670
Basic earnings per share	$	0.14	$	0.18	$	0.26	$	0.35

Diluted:
Income available to common shareholders plus assumed conversions	$	5,332	$	5,805	$	9,298	$	11,664
Average basic shares outstanding		37,470,071		32,978,006		36,159,473		32,971,670
Restricted stock and stock options		671,479		255,502		637,786		213,094
Average diluted shares outstanding		38,141,550		33,233,508		36,797,259		33,184,764
Diluted earnings per share	$	0.14	$	0.18	$	0.25	$	0.35

NOTE D — SECURITIES

The amortized cost and fair value of securities available for sale and held for investment at June 30, 2016 and December 31, 2015 are summarized as follows:

	June 30, 2016
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities	$	13,207	$	353	$	0		$	13,560
Mortgage-backed securities of U.S. Government Sponsored Entities		202,580		4,283		(99	)		206,764
Collateralized mortgage obligations of U.S. Government Sponsored Entities		282,426		3,312		(744	)		284,994
Private mortgage backed securities		32,668		0		(782	)		31,886
Private collateralized mortgage obligations		78,202		605		(1,059	)		77,748
Collateralized loan obligations		124,617		18		(1,616	)		123,019
Obligations of state and political subdivisions		60,936		3,499		0			64,435
Corporate and other debt securities		76,845		948		(94	)		77,699
Private commercial mortgage backed securities		43,291		519		(355	)		43,455
	$	914,772	$	13,537	$	(4,749	)	$	923,560

SECURITIES HELD FOR INVESTMENT
Mortgage-backed securities of U.S. Government Sponsored Entities	$	182,956	$	4,068	$	0		$	187,024
Collateralized mortgage obligations of U.S. Government Sponsored Entities		170,102		2,743		(87	)		172,758
Collateralized loan obligations		41,444		0		(3,401	)		38,043
Private collateralized mortgage obligations		7,068		0		(141	)		6,927
	$	401,570	$	6,811	$	(3,629	)	$	404,752

	December 31, 2015
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities	$	3,833	$	78	$	0		$	3,911
Mortgage-backed securities of U.S. Government Sponsored Entities		192,224		847		(1,322	)		191,749
Collateralized mortgage obligations of U.S. Government Sponsored Entities		242,620		470		(4,900	)		238,190
Private mortgage backed securities		32,558		0		(766	)		31,792
Private collateralized mortgage obligations		77,965		700		(708	)		77,957
Collateralized loan obligations		124,477		0		(1,894	)		122,583
Obligations of state and political subdivisions		39,119		882		(110	)		39,891
Corporate and other debt securities		44,652		37		(416	)		44,273
Private commercial mortgage backed securities		41,127		13		(720	)		40,420
	$	798,575	$	3,027	$	(10,836	)	$	790,766

SECURITIES HELD FOR INVESTMENT
Mortgage-backed securities of U.S. Government Sponsored Entities	$	64,993	$	574	$	(16	)	$	65,551
Collateralized mortgage obligations of U.S. Government Sponsored Entities		89,265		581		(406	)		89,440
Collateralized loan obligations		41,300		0		(1,360	)		39,940
Private collateralized mortgage obligations		7,967		0		(85	)		7,882
	$	203,525	$	1,155	$	(1,867	)	$	202,813

Proceeds from sales of securities during the six month period ended June 30, 2016 were $12.1 million, with gross gains of $147,000 and gross losses of $11,000. No sales of securities were transacted during the six month period ended June 30, 2015.

In 2014, approximately $158.8 million of investment securities available for sale were transferred into held for investment. The unrealized holding losses at the date of transfer totaled $3.1 million. For the securities transferred into the held for investment category from available for sale, unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of these securities as an adjustment of yield in a manner consistent with the amortization of a discount. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount. At June 30, 2016, the remaining unrealized holding losses totaled $2.1 million.

Securities at June 30, 2016 with a carrying and fair value of $169.6 million and $165.7 million, respectively, were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Securities with both a carrying value and fair value of $183.4 million were pledged as collateral for repurchase agreements.

The amortized cost and fair value of securities at June 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because prepayments of the underlying collateral for these securities may occur, due to the right to call or repay obligations with or without call or prepayment penalties.

	Held for Investment				Available for Sale
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due in less than one year	$	0	$	0	$	8,166	$	8,324
Due after one year through five years		0		0		86,415		86,694
Due after five years through ten years		41,444		38,043		136,999		137,851
Due after ten years		0		0		32,736		34,544
		41,444		38,043		264,316		267,413
Mortgage-backed securities of U.S. Government Sponsored Entities		182,956		187,024		202,580		206,764
Collateralized mortgage obligations of U.S. Government Sponsored Entities		170,102		172,758		282,426		284,994
Private mortgage backed securities		0		0		32,668		31,886
Private collateralized mortgage obligations		7,068		6,927		78,202		77,748
Other debt securities		0		0		11,289		11,300
Private commercial mortgage backed securities		0		0		43,291		43,455
	$	401,570	$	404,752	$	914,772	$	923,560

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at June 30, 2016 and December 31, 2015, respectively.

	June 30, 2016
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities of U.S. Government Sponsored Entities	$	8,029	$	(6	)	$	6,046	$	(93	)	$	14,075	$	(99	)
Collateralized mortgage obligations of U.S. Government Sponsored Entities		0		0			77,297		(744	)		77,297		(744	)
Private mortgage backed securities		27,424		(539	)		16,824		(329	)		44,248		(868	)
Private collateralized mortgage obligations		3,984		(166	)		49,650		(1,035	)		53,634		(1,201	)
Collateralized loan obligations		41,111		(1,444	)		102,048		(3,573	)		143,159		(5,017	)
Corporate and other debt securities		9,118		(87	)		2,150		(7	)		11,268		(94	)
Private commercial mortgage backed securities		4,544		(50	)		17,003		(305	)		21,547		(355	)
Total temporarily impaired securities	$	94,210	$	(2,292	)	$	271,018	$	(6,086	)	$	365,228	$	(8,378	)

	December 31, 2015
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses

Mortgage-backed securities of U.S. Government Sponsored Entities	$	112,236	$	(1,082	)	$	14,508	$	(256	)	$	126,744	$	(1,338	)
Collateralized mortgage obligations of U.S. Government Sponsored Entities		97,512		(973	)		147,266		(4,333	)		244,778		(5,306	)
Private mortgage backed securities		31,792		(766	)		0		0			31,792		(766	)
Private collateralized mortgage obligations		19,939		(321	)		31,533		(472	)		51,472		(793	)
Collateralized loan obligations		101,601		(1,642	)		60,922		(1,612	)		162,523		(3,254	)
Obligations of state and political subdivisions		11,570		(110	)		0		0			11,570		(110	)
Corporate and other debt securities		31,342		(416	)		0		0			31,342		(416	)
Private commercial mortgage backed securities		37,838		(720	)		0		0			37,838		(720	)
Total temporarily impaired securities	$	443,830	$	(6,030	)	$	254,229	$	(6,673	)	$	698,059	$	(12,703	)

The tables above include securities held for investment that were transferred from available for sale into held for investment during 2014. Those securities had unrealized losses of $3.1 million at the date of transfer. None of these securities had a fair value with an unrealized loss for less than twelve months at June 30, 2016. At December 31, 2015, the fair value of those securities in an unrealized loss position for less than twelve months was $38.9 million, and the unrealized losses on those securities in an unrealized loss position for less than twelve months was $0.4 million. None of these securities were in an unrealized loss position for more than twelve months at June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016, private label securities with a fair value of $97.9 million secured by collateral originated in 2005 and prior were in an unrealized loss position. Their unrealized loss position of approximately $2.1 million is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgage loans with low loan to values, subordination and all historically have had minimal foreclosures. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

At June 30, 2016, the Company also had $0.8 million of unrealized losses on collateralized mortgage obligations and mortgage backed securities of government sponsored entities having a fair value of $91.4 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

At June 30, 2016, the Company also had $5.0 million of unrealized losses on collateralized loan obligations having a fair value of $143.2 million that were attributable to a combination of factors, including relative changes in interest rates, spreads and interest movements since the time of purchase. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

At June 30, 2016, $32.8 million of remaining securities categories had unrealized losses of $0.5 million, but losses have been outstanding for less than twelve months. Management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not change in credit quality.

As of June 30, 2016, management does not intend to sell securities that are in unrealized loss positions and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at June 30, 2016.

Included in other assets is $24.0 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At June 30, 2106, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the carrying value of the $24.0 million of cost method investment securities.

The Company also holds 11,330 shares of Visa Class B stock, which following resolution of Visa litigation will be converted to Visa Class A shares (the conversion rate was 1.6483 shares of Class A stock for each share of Class B stock) for a total of 18,675 shares of Visa Class A stock with a value of $1.4 million. Our ownership is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at a zero basis.

NOTE E — LOANS

Information relating to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) is summarized as follows:

June 30, 2016	Portfolio Loans		PCI Loans		PUL's		Total
	(Dollars in thousands)
Construction and land development	$	115,789	$	114	$	26,484	$	142,387
Commercial real estate		849,537		11,836		378,135		1,239,508
Residential real estate		723,297		688		70,336		794,321
Commercial and financial		245,821		1,014		76,631		323,466
Consumer		112,580		0		2,933		115,513
Other loans		857		0		0		857
NET LOAN BALANCES (1)	$	2,047,881	$	13,652	$	554,519	$	2,616,052

December 31, 2015	Portfolio Loans		PCI Loans		PUL's		Total
	(Dollars in thousands)
Construction and land development	$	97,629	$	114	$	11,044	$	108,787
Commercial real estate		776,875		9,990		222,513		1,009,378
Residential real estate		678,131		922		44,732		723,785
Commercial and financial		188,013		1,083		39,421		228,517
Consumer		82,717		0		2,639		85,356
Other loans		507		0		0		507
NET LOAN BALANCES (1)	$	1,823,872	$	12,109	$	320,349	$	2,156,330

(1) Net loan balances as of June 30, 2016 and December 31, 2015 include deferred fee/costs (net) and fair value adjustments on acquired loans, aggregating to $14.6 million and $7.7 million for each period, respectively.

Purchased Loans - PCI loans are accounted for pursuant to ASC Topic 310-30. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference.

We have applied ASC Topic 310-20 accounting treatment to PULs. The unamortized fair value mark established at acquisition on the loans has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans.

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter for PCI loans. The table below summarize the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of PCI loans during the three and six month periods ended June 30, 2016 and 2015. Contractually required principal and interest payments have been adjusted for estimated prepayments.

Three Months Ended June 30, 2016

	March 31, 2016			Additions			Deletions			Accretion		Reclassifications from nonaccretable difference		June 30, 2016
	(In thousands)
Contractually required principal and interest	$	25,967		$	2,278		$	(3,669	)	$	0	$	0	$	24,576
Nonaccretable difference		(6,293	)		(2,633	)		2,676			0		0		(6,250	)
Cash flows expected to be collected		19,674			(355	)		(993	)		0		0		18,326
Accretable yield		(3,143	)		(1,215	)		(1,086	)		770		0		(4,674	)
Carrying value of acquired loans		16,531		$	(1,570	)	$	(2,079	)	$	770	$	0		13,652
Allowance for loan losses		0													0
Carrying value less allowance for loan losses	$	16,531												$	13,652

Six Months Ended June 30, 2016

	December 31, 2015			Additions			Deletions			Accretion		Reclassifications from nonaccretable difference		June 30, 2016
	(In thousands)
Contractually required principal and interest	$	19,966		$	9,148		$	(4,538	)	$	0	$	0	$	24,576
Nonaccretable difference		(5,247	)		(4,109	)		3,106			0		0		(6,250	)
Cash flows expected to be collected		14,719			5,039			(1,432	)		0		0		18,326
Accretable yield		(2,610	)		(1,831	)		(1,271	)		1,038		0		(4,674	)
Carrying value of acquired loans		12,109		$	3,208		$	(2,703	)	$	1,038	$	0		13,652
Allowance for loan losses		0													0
Carrying value less allowance for loan losses	$	12,109												$	13,652

Three Months Ended June 30, 2015

	March 31, 2015			Additions		Deletions			Accretion		Reclassifications from nonaccretable difference			June 30, 2015
	(In thousands)
Contractually required principal and interest	$	13,284		$	0	$	(1,720	)	$	0	$	0		$	11,564
Nonaccretable difference		(5,076	)		0		999			0		176			(3,901	)
Cash flows expected to be collected		8,208			0		(721	)		0		176			7,663
Accretable yield		(1,089	)		0		63			101		(176	)		(1,101	)
Carrying value of acquired loans		7,119		$	0	$	(658	)	$	101	$	0			6,562
Allowance for loan losses		(93	)												(212	)
Carrying value less allowance for loan losses	$	7,026												$	6,350

Six Months Ended June 30, 2015

	December 31, 2014			Additions		Deletions			Accretion		Reclassifications from nonaccretable difference			June 30, 2015
	(In thousands)
Contractually required principal and interest	$	14,831		$	0	$	(3,267	)	$	0	$	0		$	11,564
Nonaccretable difference		(5,825	)		0		1,663			0		261			(3,901	)
Cash flows expected to be collected		9,006			0		(1,604	)		0		261			7,663
Accretable yield		(1,192	)		0		148			204		(261	)		(1,101	)
Carrying value of acquired loans		7,814		$	0	$	(1,456	)	$	204	$	0			6,562
Allowance for loan losses		(64	)												(212	)
Carrying value less allowance for loan losses	$	7,750												$	6,350

The following tables present the contractual delinquency of the recorded investment in past due loans by class of loans as of June 30, 2016 and December 31, 2015:

					Accruing
	Accruing		Accruing		Greater						Total
June 30, 2016	30-59 Days		60-89 Days		Than						Financing
(Dollars in thousands)	Past Due		Past Due		90 Days		Nonaccrual		Current		Receivables

Portfolio Loans
Construction and land development	$	0	$	13	$	0	$	244	$	115,532	$	115,789
Commercial real estate		279		0		373		1,424		847,461		849,537
Residential real estate		834		542		193		9,053		712,675		723,297
Commercial and financial		251		71		0		0		245,499		245,821
Consumer		18		0		0		198		112,364		112,580
Other		0		0		0		0		857		857
Total		1,382		626		566		10,919		2,034,388	$	2,047,881

Purchased Unimpaired Loans
Construction and land development		0		0		0		36		26,448	$	26,484
Commercial real estate		640		0		0		1,485		376,010		378,135
Residential real estate		1		387		0		910		69,038		70,336
Commercial and financial		171		0		0		210		76,250		76,631
Consumer		0		0		0		0		2,933		2,933
Other		0		0		0		0		0		0
Total		812		387		0		2,641		550,679	$	554,519

Purchased Credit Impaired Loans
Construction and land development		0		0		0		0		114	$	114
Commercial real estate		0		0		0		1,719		10,117		11,836
Residential real estate		0		0		0		0		688		688
Commercial and financial		0		0		0		0		1,014		1,014
Consumer		0		0		0		0		0		0
Other		0		0		0		0		0		0
Total		0		0		0		1,719		11,933	$	13,652

Total Loans	$	2,194	$	1,013	$	566	$	15,279	$	2,597,000	$	2,616,052

					Accruing
	Accruing		Accruing		Greater						Total
December 31, 2015	30-59 Days		60-89 Days		Than						Financing
(Dollars in thousands)	Past Due		Past Due		90 Days		Nonaccrual		Current		Receivables

Portfolio Loans
Construction and land development	$	665	$	0	$	0	$	269	$	96,695	$	97,629
Commercial real estate		810		0		0		2,301		773,764		776,875
Residential real estate		141		0		0		9,941		668,049		678,131
Commercial and financial		59		0		0		0		187,954		188,013
Consumer		430		0		0		247		82,040		82,717
Other		0		0		0		0		507		507
Total	$	2,105	$	0	$	0	$	12,758	$	1,809,009	$	1,823,872

Purchased Unimpaired Loans
Construction and land development	$	0	$	0	$	0	$	40	$	11,004	$	11,044
Commercial real estate		179		0		0		2,294		220,040		222,513
Residential real estate		66		0		0		0		44,666		44,732
Commercial and financial		39		0		0		130		39,252		39,421
Consumer		39		0		0		0		2,600		2,639
Other		0		0		0		0		0		0
Total	$	323	$	0	$	0	$	2,464	$	317,562	$	320,349

Purchased Impaired Loans
Construction and land development	$	0	$	0	$	0	$	0	$	114	$	114
Commercial real estate		132		0		0		1,816		8,042		9,990
Residential real estate		0		0		0		348		574		922
Commercial and financial		0		0		0		0		1,083		1,083
Consumer		0		0		0		0		0		0
Other		0		0		0		0		0		0
Total	$	132	$	0	$	0	$	2,164	$	9,813	$	12,109

Total Loans	$	2,560	$	0	$	0	$	17,386	$	2,136,384	$	2,156,330

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful” and these loans are monitored on an ongoing basis. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The principal balance of loans classified as doubtful are generally charged off. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.

Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager. The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of June 30, 2016 and December 31, 2015:

June 30, 2016

	Construction						Commercial
	& Land		Commercial		Residential		and		Consumer
(Dollars in thousands)	Development		Real Estate		Real Estate		Financial		Loans		Total
Pass	$	128,495	$	1,202,160	$	765,410	$	314,048	$	114,547	$	2,524,660
Special mention		7,492		11,546		1,981		7,784		1,174		29,977
Substandard		5,537		14,312		4,438		1,409		103		25,799
Doubtful		0		0		0		0		0		0
Nonaccrual		280		4,628		9,963		210		198		15,279
Pass-Troubled debt restructures		51		5,788		0		15		0		5,854
Troubled debt restructures		532		1,074		12,529		0		348		14,483
	$	142,387	$	1,239,508	$	794,321	$	323,466	$	116,370	$	2,616,052

December 31, 2015

	Construction						Commercial
	& Land		Commercial		Residential		and		Consumer
(Dollars in thousands)	Development		Real Estate		Real Estate		Financial		Loans		Total
Pass	$	100,186	$	973,942	$	697,907	$	226,391	$	83,786	$	2,082,212
Special mention		3,377		12,599		629		1,209		1,392		19,206
Substandard		4,242		9,278		3,197		769		70		17,556
Doubtful		0		0		0		0		0		0
Nonaccrual		309		6,410		10,290		130		247		17,386
Pass-Troubled debt restructures		58		5,893		0		18		0		5,969
Troubled debt restructures		615		1,256		11,762		0		368		14,001
	$	108,787	$	1,009,378	$	723,785	$	228,517	$	85,863	$	2,156,330

NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

During the six months ending June 30, 2016 and 2015, the total of newly identified Troubled Debt Restructurings (“TDRs”) totaled $1.7 million and $1.0 million, respectively.

The Company’s TDR concessions granted generally do not include forgiveness of principal balances. 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. When a loan is modified as a TDR, there is not a direct, material impact on the loans within the consolidated balance sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.

The following table presents loans that were modified within the six months ending June 30, 2016:

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding		Specific		Valuation
	of		Recorded		Recorded		Reserve		Allowance
(Dollars in thousands)	Contracts		Investment		Investment		Recorded		Recorded
Residential real estate		6	$	1,660	$	1,489	$	0	$	171
		6	$	1,660	$	1,489	$	0	$	171

The following table presents loans that were modified within the six months ending June 30, 2015:

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding		Specific		Valuation
	of		Recorded		Recorded		Reserve		Allowance
(Dollars in thousands)	Contracts		Investment		Investment		Recorded		Recorded
Residential real estae		1	$	26	$	25	$	0	$	1
Commercial real estate		2		911		859		0		52
Consumer		4		48		45		0		3
		7	$	985	$	929	$	0	$	56

No accruing loans that were restructured within the twelve months preceding June 30, 2016 defaulted during the six months ended June 30, 2016, and no loans restructured within the twelve months preceding June 30, 2015 defaulted during the twelve months ended June 30, 2015. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company’s policy.

As of June 30, 2016 and December 31, 2015, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:

	June 30, 2016
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	206	$	289	$	0
Commercial real estate		1,445		2,947		0
Residential real estate		9,390		13,882		0
Commercial and financial		15		15		0
Consumer		168		267		0
Impaired Loans with an Allowance Recorded:
Construction and land development		621		631		28
Commercial real estate		6,865		6,866		381
Residential real estate		12,192		12,546		1,806
Commercial and financial		0		0		0
Consumer		379		379		49
Total:
Construction and land development		827		920		28
Commercial real estate		8,310		9,813		381
Residential real estate		21,582		26,428		1,806
Commercial and financial		15		15		0
Consumer		547		646		49
	$	31,281	$	37,822	$	2,264

	December 31, 2015
			Unpaid		Related
	Recorded		Principal		Valuation
(Dollars in thousands)	Investment		Balance		Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development	$	107	$	255	$	0
Commercial real estate		2,363		3,911		0
Residential real estate		9,256		13,707		0
Commercial and financial		17		17		0
Consumer		264		349		0
Impaired Loans with an Allowance Recorded:
Construction and land development		835		870		84
Commercial real estate		7,087		7,087		429
Residential real estate		12,447		12,803		1,964
Commercial and financial		0		0		0
Consumer		351		351		40
Total:
Construction and land development		942		1,125		84
Commercial real estate		9,450		10,998		429
Residential real estate		21,703		26,510		1,964
Commercial and financial		17		17		0
Consumer		615		700		40
	$	32,727	$	39,350	$	2,517

For the three months ended June 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:

	Three Months Ended				Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
Impaired Loans with No Related Allowance Recorded:
Construction & land development	$	214	$	0	$	1,838	$	14
Commercial real estate		1,860		2		2,942		23
Residential real estate		9,587		37		10,877		30
Commercial and financial		16		0		116		1
Consumer		183		1		141		0
Impaired Loans with an Allowance Recorded:
Construction & land development		634		6		816		11
Commercial real estate		6,906		73		7,188		51
Residential real estate		11,993		100		15,682		99
Commercial and financial		0		0		0		0
Consumer		356		5		503		5
Total:
Construction & land development		848		6		2,654		25
Commercial real estate		8,766		75		10,130		74
Residential real estate		21,580		137		26,559		129
Commercial and financial		16		0		116		1
Consumer		539		6		644		5
	$	31,749	$	224	$	40,103	$	234

For the six months ended June 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:

	Six Months Ended				Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
Impaired Loans with No Related Allowance Recorded:
Construction & land development	$	179	$	0	$	1,839	$	32
Commercial real estate		2,063		5		2,950		27
Residential real estate		9,493		71		11,268		65
Commercial and financial		16		0		118		3
Consumer		212		1		114		0
Impaired Loans with an Allowance Recorded:
Construction & land development		702		13		832		16
Commercial real estate		6,970		147		7,649		125
Residential real estate		12,128		185		16,106		198
Commercial and financial		0		0		0		0
Consumer		353		9		516		11
Total:
Construction & land development		881		13		2,671		48
Commercial real estate		9,033		152		10,599		152
Residential real estate		21,621		256		27,374		263
Commercial and financial		16		0		118		3
Consumer		565		10		630		11
	$	32,116	$	431	$	41,392	$	477

Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted. At June 30, 2016 and at December 31, 2015, accruing TDRs totaled $20.3 million and $20.0 million, respectively.

The impaired loans are measured for impairment based on the value of underlying collateral or the present value of expected future cash flows discounted at the loan’s effective rate. The valuation allowance is included in the allowance for loan losses.

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal.

Nonaccrual loans and accruing loans past due 90 days or more (excluding purchased loans) totaled $10.9 million and $0.6 million, respectively, at June 30, 2016, and $12.8 million and $0 at December 31, 2015, respectively. Purchased nonaccrual and accruing loans past due 90 days or more were $4.4 million and $0 million at June 30, 2016, and $4.6 million and $0 at December 31, 2015.

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period ended and six-month period ended June 30, 2016 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended June 30, 2016
			Provision								Net
	Beginning		for Loan			Charge-					(Charge-Offs)			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Recoveries			Balance
Construction & land development	$	1,285	$	(239	)	$	0		$	114	$	114		$	1,160
Commercial real estate		6,677		495			(3	)		23		20			7,192
Residential real estate		8,512		(420	)		(28	)		235		207			8,299
Commercial and financial		1,991		566			(38	)		72		34			2,591
Consumer		1,259		260			(53	)		17		(36	)		1,483
	$	19,724	$	662		$	(122	)	$	461	$	339		$	20,725

	Allowance for Loan Losses for the Six Months Ended June 30, 2016
			Provision								Net
	Beginning		for Loan			Charge-					(Charge-Offs)			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Recoveries			Balance
Construction & land development	$	1,151	$	(180	)	$	0		$	189	$	189		$	1,160
Commercial real estate		6,756		510			(176	)		102		(74	)		7,192
Residential real estate		8,057		(10	)		(145	)		397		252			8,299
Commercial and financial		2,042		147			(93	)		495		402			2,591
Consumer		1,122		394			(80	)		47		(33	)		1,483
	$	19,128	$	861		$	(494	)	$	1,230	$	736		$	20,725

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period and six-month period ended June 30, 2015 is summarized as follows:

	Allowance for Loan Losses for the Three Months Ended June 30, 2015
			Provision								Net
	Beginning		for Loan			Charge-					(Charge-Offs)			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Recoveries			Balance
Construction & land development	$	842	$	(101	)	$	(19	)	$	165	$	146		$	887
Commercial real estate		4,827		535			(146	)		62		(84	)		5,278
Residential real estate		9,666		(182	)		(155	)		358		203			9,687
Commercial and financial		1,374		(411	)		(255	)		237		(18	)		945
Consumer		919		895			(60	)		28		(32	)		1,782
	$	17,628	$	736		$	(635	)	$	850	$	215		$	18,579

	Allowance for Loan Losses for the Six Months Ended June 30, 2015
			Provision								Net
	Beginning		for Loan			Charge-					Charge-			Ending
(Dollars in thousands)	Balance		Losses			Offs			Recoveries		Offs			Balance
Construction & land development	$	722	$	19		$	(66	)	$	212	$	146		$	887
Commercial real estate		4,528		765			(302	)		287		(15	)		5,278
Residential real estate		9,784		(549	)		(322	)		773		451			9,686
Commercial and financial		1,179		(288	)		(274	)		328		54			945
Consumer		794		1,193			(254	)		50		(204	)		1,783
	$	17,007	$	1,140		$	(1,218	)	$	1,650	$	432		$	18,579

The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio (excluding PCI loans) and related allowance at June 30, 2016 and December 31, 2015 is shown in the following tables:

	At June 30 2016
	Individually Evaluated for				Collectively Evaluated for
	Impairment				Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	827	$	28	$	141,446	$	1,132	$	142,273	$	1,160
Commercial real estate		8,310		381		1,219,362		6,811		1,227,672		7,192
Residential real estate		21,582		1,806		772,051		6,493		793,633		8,299
Commercial and financial		15		0		322,437		2,591		322,452		2,591
Consumer		547		49		115,823		1,434		116,370		1,483
	$	31,281	$	2,264	$	2,571,119	$	18,461	$	2,602,400	$	20,725

	At December 31, 2015
	Individually Evaluated for				Collectively Evaluated for
	Impairment				Impairment				Total
	Carrying		Associated		Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance		Value		Allowance
Construction & land development	$	942	$	84	$	107,731	$	1,067	$	108,673	$	1,151
Commercial real estate		9,450		429		989,938		6,327		999,388		6,756
Residential real estate		21,703		1,964		701,160		6,093		722,863		8,057
Commercial and financial		17		0		227,417		2,042		227,434		2,042
Consumer		615		40		85,248		1,082		85,863		1,122
	$	32,727	$	2,517	$	2,111,494	$	16,611	$	2,144,221	$	19,128

Loans collectively evaluated for impairment at December 31, 2015 included loans acquired from BANKshares on October 1, 2014 and Grand Bankshares on July 17, 2015 that are not PCI loans, and loans at June 30, 2016 included loans acquired from Floridian and BMO Harris as well that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment represents the total fair value discount of each PUL, is accreted into interest income over the remaining lives of the related loans on a level yield basis, and remained adequate at June 30, 2016.

The table below summarizes PCI loans that were individually evaluated for impairment based on expected cash flows at June 30, 2016 and December 31, 2015:

	PCI Loans Individually Evaluated for Impairment
	June 30, 2016				December 31, 2015
	Carrying		Associated		Carrying		Associated
(Dollars in thousands)	Value		Allowance		Value		Allowance
Construction & land development	$	114	$	0	$	114	$	0
Commercial real estate		11,836		0		9,990		0
Residential real estate		688		0		922		0
Commercial and financial		1,014		0		1,083		0
Consumer		0		0		0		0
	$	13,652	$	0	$	12,109	$	0

NOTE G — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are accounted for as secured borrowings. For securities sold under agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of collateral pledged. At June 30, 2016 and December 31, 2015, Company securities pledged were as follows by collateral type and maturity:

(Dollars in thousands)	Overnight and Continuous Maturity
Fair Value	June 30,		December 31,
	2016		2015
Mortgage backed securities and collateralized mortgage obligations of U.S. Government Sponsored Entities	$	183,387	$	172,005

NOTE H — EQUITY CAPITAL

The Company is well capitalized and at June 30, 2016, the Company and the Company’s principal banking subsidiary, Seacoast National Bank, or “Seacoast Bank”, met the common equity Tier 1 capital ratio (CET1) regulatory threshold of 6.5% for well-capitalized institutions under the Basel III standardized transition approach, as well as risk-based and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.

NOTE I — CONTINGENCIES

The Company and its subsidiaries, because of the nature of their businesses, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Company’s consolidated financial condition, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.

NOTE J — FAIR VALUE

Under ASC 820, fair value measurements for items measured at fair value on a recurring and nonrecurring basis at June 30, 2016 and December 31, 2015 included:

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
(Dollars in thousands)	Measurements		(Level 1)		(Level 2)		(Level 3)
At June 30, 2016:
Available for sale securities (1)	$	923,560	$	100	$	923,460	$	0
Loans held for sale (2)		20,075		0		20,075		0
Loans (3)		5,202		0		4,357		845
Other real estate owned (4)		8,694		0		582		8,112

At December 31, 2015:
Available for sale securities (1)	$	790,766	$	225	$	790,541	$	0
Loans held for sale (2)		23,998		0		23,998		0
Loans (3)		7,511		0		6,052		1,459
Other real estate owned (4)		7,039		0		598		6,441

(1)

See Note D for further detail of fair value of individual investment categories.

(2)

Recurring fair value basis determined using observable market data.

(3)

See Note F. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310.

(4)

Fair value is measured on a nonrecurring basis in accordance with ASC 360.

The fair value of impaired real estate loans which are collateral dependent is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans, appraised values or internal evaluation are based on the comparative sales approach. These impaired loans are considered level 2 in the fair value hierarchy. For commercial and commercial real estate impaired loans, evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At June 30, 2016 the range of capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.9%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these impaired loans is considered level 3 in the fair value hierarchy. Impaired loans measured at fair value total $5.2 million with a specific reserve of $1.7 million at June 30, 2016, compared to $7.5 million with a specific reserve of $2.9 million at December 31, 2015.

Fair value of available for sale securities are determined using valuation techniques for individual investments as described in Note D.

When appraisals are used to determine fair value and the appraisals are based on a market approach, the fair value of other real estate owned (“OREO”) is classified as a level 2 input. When the fair value of OREO is based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, the fair value of OREO is classified as Level 3.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarter-end valuation process.

During the first six months ended June 30, 2016, there were no transfers between level 1 and level 2 assets carried at fair value.

For loans classified as level 3 the transfers in totaled $0.1 million for the first six months of 2016, consisting of loans that became impaired during 2016. Transfers out consisted of charge-offs of $0.1 million, and loan foreclosures migrating to OREO and other reductions (including principal payments) totaling $0.6 million.

Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reported periods, significantly impact the Company’s provision for loan losses.

For OREO classified as level 3 during the first six months of 2016, foreclosed loans transferred in totaled $2.4 million and migrated bank branches taken out of service totaled $2.8 million. Transfers out summed to $3.5 million, consisting entirely of sales.

The carrying amount and fair value of the Company’s other significant financial instruments that are not measured at fair value on a recurring basis in the balance sheet as of June 30, 2016 and December 31, 2015 is as follows:

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
At June 30, 2016:
Financial Assets
Securities held to maturity (1)	$	401,570	$	0	$	404,752	$	0
Loans, net		2,590,125		0		0		2,609,526
Financial Liabilities
Deposit liabilities		3,501,316		0		0		3,501,977
Subordinated debt		70,101		0		52,785		0

At December 31, 2015:
Financial Assets
Securities held to maturity (1)	$	203,525	$	0	$	202,813	$	0
Loans, net		2,129,691		0		0		2,147,024
Financial Liabilities
Deposit liabilities		2,844,387		0		0		2,843,800
FHLB advances, maturing in 2017 (2)		50,000		0		51,788		0
Subordinated debt		69,961		0		52,785		0

(1)

See Note D for further detail of fair value of individual investment categories.

(2)

Redemption in April 2016 and no longer outstanding

The short maturity of Seacoast’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, interest bearing deposits with other banks, federal funds purchased and securities sold under agreement to repurchase, maturing within 30 days.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at June 30, 2016 and December 31, 2015:

Securities: U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities are reported at fair value utilizing Level 2 inputs. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have a complicated structure. The Company’s portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. The fair value of collateralized loan obligations are determined from broker quotes. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.

Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Company’s policy on loans held for investment. None of the loans are 90 days or more past due or on nonaccrual as of June 30, 2016 and December 31, 2015.

At June 30, 2016 and December 31, 2015, the aggregate fair value, contractual balance (including accrued interest) and gains or losses was as follows:

	June 30,		December 31,
(Dollars in thousands)	2016		2015
Aggregate fair value	$	20,075	$	23,998
Contractual balance		19,538		23,384
Gains (losses)		537		614

Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.

Borrowings: The fair value of floating rate borrowings is the amount payable on demand at the reporting date. The fair value of fixed rate borrowings is estimated using the rates currently offered for borrowings of similar remaining maturities.

Subordinated debt: The fair value of the floating rate subordinated debt was based on independent third party analysis, that included discounted cash flow analysis, assessments of the Company’s current incremental borrowing rate for similar instruments, and market quotes for similar debt.

NOTE K — BUSINESS COMBINATIONS

Acquisition of Grand Bankshares, Inc.

On July 17, 2015, the Company completed its acquisition of Grand Bankshares, Inc. (“Grand”) whereby Grand was merged with and into the Company. Grand’s subsidiary bank, Grand Bank & Trust of Florida (“GB”) was simultaneously merged with and into Seacoast National Bank. The Company acquired 100% of the outstanding common and preferred stock of Grand. The total purchase price was $18.7 million.

With the acquisition, the Company further solidified its market share in the attractive Palm Beach market, expanding its customer base and leveraging operating costs through economies of scale, enhancing its fee income and positively affecting its net interest income operating results. The acquisition contributed $188.4 million in total deposits and $111.3 million in total loans to our balance sheet.

The acquisition of Grand constitutes a business combination and was accounted for under ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available.

No goodwill was recognized for this whole bank acquisition that resulted in a bargain purchase gain of $416,000 recorded to income in the fourth quarter of 2015. In addition, a $2.6 million core deposit intangible (“CDI”) was recorded.

Acquisition of Floridian Financial Group, Inc.

On March 11, 2016, the Company completed its acquisition of Floridian Financial Group, Inc. (“Floridian”), the parent company of Floridian Bank. Simultaneously, upon completion of the merger, Floridian’s wholly owned subsidiary bank, Floridian Bank, was merged with and into Seacoast National Bank. Floridian, headquartered in Lake Mary, Florida, operated 10 branches in Orlando and Daytona Beach, of which several will consolidate with Seacoast locations. This acquisition added approximately $417 million in total assets, $337 million in deposits, and $267 million in loans to Seacoast. As a result of this acquisition the Company expects to further solidify its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The Company acquired 100% of the outstanding common stock of Floridian. Under the terms of the definitive agreement, Floridian shareholders received, at their election, (i) the combination of $4.29 in cash and 0.5291 shares of Seacoast common stock, (ii) $12.25 in cash, or (iii) 0.8140 shares of Seacoast common stock, subject to a customary proration mechanism so that the aggregate consideration mix equals 35% cash and 65% Seacoast shares (based on Seacoast’s closing price of $15.47 per share on March 11, 2016).

This transaction closed on March 11, 2016.

	March 11, 2016
Shares exchanged for cash	$	26,699,000

Number of Floridian Financial Group, Inc. common shares outstanding		6,222,119
Per share exchange ratio		0.5289
Number of shares of common stock issued		3,291,066
Multiplied by common stock price per share on March 11, 2016	$	15.47
Value of common stock issued		50,912,791

Total purchase price	$	77,611,791

The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

			Measurement
	Initial Report		Period			As Adjusted
Date of acquisition	March 11, 2016		Adjustments			March 11, 2016
			(in thousands)
Assets:
Cash	$	28,243	$	0		$	28,243
Investment securities		66,912		95			67,007
Loans, net		268,249		(1,543	)		266,706
Fixed assets		7,801		(628	)		7,173
Core deposit intangibles		3,375		0			3,375
Goodwill		29,985		1,283			31,268
Other assets		12,879		793			13,672
	$	417,444	$	0		$	417,444

Liabilities:
Deposits	$	337,341	$	0		$	337,341
Other liabilities		2,492		0			2,492
	$	339,833	$	0		$	339,833

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

	March 11, 2016
(Dollars in thousands)	Book Balance		Fair Value
Loans:
Single family residential real estate	$	38,304	$	37,367
Commercial real estate		172,531		167,105
Construction/development/land		20,546		18,108
Commercial loans		39,070		37,804
Consumer and other loans		3,385		3,110
Purchased credit-impaired		6,186		3,212
Total acquired loans	$	280,022	$	266,706

For the loans acquired we first segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we considered to identify loans as Purchase Credit Impaired (“PCI”) loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard.” These loans were then evaluated to determine estimated fair values as of the acquisition date. As required by generally accepted accounting principles, we are accounting for these loans pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of March 11, 2016 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

(Dollars in thousands)	March 11, 2016

Contractually required principal and interest	$	8,031
Non-accretable difference		(4,109	)
Cash flows expected to be collected		3,922
Accretable yield		(710	)
Total purchased credit-impaired loan acquired	$	3,212

Second, loans without specifically identified credit deficiency factors are referred to as Purchased Unimpaired Loans (“PULs”) for disclosure purposes. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the economic environment both nationally and locally as well as the real estate market particularly in Florida. We have applied ASC Topic 310-20 accounting treatment to the PULs.

The Company believes the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. In determining the valuation amount, a third party analyzed the deposits based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

The Company recognized goodwill of $31 million for this acquisition that is nondeductible for tax purposes. The acquisition of Floridian constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. For Floridian, fair values as presented for securities, loans, fixed assets, and certain other assets and liabilities are necessarily considered preliminary.

The operating results of the Company for the three months and six months ended June 30 2016 include the operating results of the acquired assets and assumed liabilities since the date of acquisition of March 11, 2016. Results for the three-month period ended June 30, 2016 includes Floridian for the full quarter. Pro-forma data for the three months ended 2015 and six months ending June 30, 2016 and 2015 listed in the table below present pro-forma information as if the acquisition occurred at the beginning of 2015.

	Three Months
	Ended		Six Months Ended
	June 30,		June 30,
(Dollars in thousands, except per share amounts)	2015		2016		2015

Net interest income	$	28,808	$	67,473	$	57,706
Net income available to common shareholders		6,345		13,151		16,034
EPS - basic		0.17		0.36		0.35
EPS - diluted		0.17		0.35		0.35

Acquisition of BMO Harris Central Florida Offices, Deposits and Loans

On October 14, 2015, the Company announced that Seacoast’s wholly-owned subsidiary, Seacoast National, entered into a Branch Sale Agreement with BMO Harris Bank N.A. (“BMO”) pursuant to which it had agreed to purchase, subject to the terms of the Agreement, fourteen branches of BMO located in the Orlando Metropolitan Statistical Area (“MSA”).

This transaction closed on June 3, 2016.

On June 3, 2016, Seacoast National assumed approximately $314 million in deposits related to business and consumer banking customers at a deposit premium of 3.0% of the deposit balances and $63 million in business loans at a loan premium of 0.5%. As a result of this acquisition the Company expects to further improve its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and bank premises and leases related to the fourteen branches acquired, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

Date of acquisition	June 3, 2016
	(In thousands)
Assets:
Cash from BMO (net of payable to BMO Harris)	$	234,094
Loans, net		62,671
Fixed assets		3,715
Core deposit intangibles		5,223
Goodwill		7,645
Other assets		952
	$	314,300

Liabilities:
Deposits	$	314,248
Other liabilities		52
	$	314,300

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

	June 3, 2016
(Dollars in thousands)	Book Balance		Fair Value
Loans:
Commercial real estate	$	31,564	$	31,200
Commercial loans		32,479		31,471
Purchased credit-impaired		0		0
Total acquired loans	$	64,043	$	62,671

At June 3, 2016, no loans acquired from BMO Harris were specifically identified with a credit deficiency factor(s). The factors we consider to identify loans as PCI loans are acquired loans that were nonaccrual, 60 days or more past due, designated as TDR, graded “special mention” or “substandard.” PULs were evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the economic environment both nationally and locally as well as the real estate market particularly in Florida. We have applied ASC Topic 310-20 accounting treatment to the PULs.

The Company recognized intangibles of $13 million for this acquisition that is deductible for tax purposes over a 15-year period. The acquisition of BMO Harris’s Orlando banking operations by Seacoast National constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. With the closing of the BMO Harris transaction near the end of the second quarter 2016 reporting period, fair values as presented for loans, fixed assets, deposits, and certain other assets and liabilities are necessarily considered preliminary.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 (the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast 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. For purposes of the following discussion, the words the “Company,” “we,” “us,” and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.

SECOND QUARTER 2016

Strategic Overview

Results demonstrate the impact of our digital transformation strategy, successful integration of acquisitions, and disciplined loan growth. Seacoast continues to execute on its plan to grow our core business organically, innovating to build franchise and increase efficiency, and grow through mergers and acquisitions. We believe that these investments better position us to increase net income to common shareholders today and prospectively. We expect:

Improved earnings through cost reductions primarily related to branch consolidations, a substantial portion of the cost savings coming from the integration of Floridian and previously announced legacy branch consolidations during the second quarter of 2016 and, substantially all of the savings related to our BMO Harris branch acquisitions to be realized in the third quarter of 2016;

continued implementation of our digital strategy, which is enabling us to add new households, both organically and in our recently acquired banks; driving cross sells of services and transforming our business model and reducing overhead. By the end of the third quarter of 2016, after adding 14 BMO Harris locations to our six Floridian locations and eight existing branches, and because we have deep information understanding on customers’ use patterns, we have flexibility as we reshape our branch network, and we anticipate we will have reduced our Orlando Branch count from 28 to 15—a meaningful improvement in efficiency and enabled in large part by our ongoing digital transformation;

acquisitions continue to fuel growth. Customers acquired from BankFirst show a 27% increase in total services 18 months from acquisition and customers acquired from the Grand Bank acquisition show a 10% improvement in total services less than a year from acquisition;

ongoing customer satisfaction, showing Seacoast’s ability to move customers to lower cost distribution channels while further building customer engagement, as evidenced in the second quarter of 2016 which included an increase in deposits made outside the branch to 32%, compared to 30% in the first quarter of 2016 and 25% in the second quarter of 2015; checks deposited via our mobile application are approaching 10%; an increase in consumer loans opened outside the branch to 23%, compared to 19% in the first quarter of 2016 and 16% during the second quarter of 2015; and, we are automating a portion of our back office processes with more than 40% of new consumer loan applications receiving e-signing and benefiting from automated underwriting; and,

the Company is pleased to have completed its acquisition and converted Floridian late in the first quarter of 2016 as well as loans, deposits and branch sites acquired from BMO Harris late in the second quarter of 2016. The Company looks forward to serving new customers and the expanded communities it serves as we execute on savings opportunities, eliminating redundant functions and consolidating branch locations over the next several months. Seacoast’s customer service model, combining convenience with customer analytics technology, drives accelerated levels of cross sell and revenue while growing households at an even faster rate in our acquired markets.

Our success in Orlando and Palm Beach counties, where we acquired BankFirst on October 1, 2014 and Grand on July 17, 2015, continues with household growth remaining strong and cross sell statistics outpacing growth in Seacoast legacy markets. Seacoast welcomes new customers from Floridian and BMO Harris’ Orlando banking operations. With the BMO Harris acquisition in early June, we further solidified Seacoast’s status in Orlando propelling Seacoast to a top-10 position in this market.

For second quarter of 2016, Seacoast reported net income of $5.3 million, compared to $5.8 million in the second quarter last year. On June 3, 2016, Seacoast closed the previously announced acquisition of BMO Harris’s Orlando operations, and results for the second quarter include $5.8 million in charges taken in conjunction with the acquisition, branch closures and other items. Adjusted net income (a non-GAAP measure—see page 49, “Results of Operations”) excluding adjustments for Floridian and BMO Harris expenses and other non-core items increased by $2.7 million to $8.8 million, a 45% increase from year ago levels, and increased by $2.0 million or 30% on linked quarter basis. For the second quarter of 2016, diluted earnings per common share (EPS) were $0.14 and adjusted diluted EPS (a non-GAAP measure—see page 49, “Results of Operations”) were $0.23, improving from $0.18 and $0.18, respectively, reported for diluted EPS and adjusted diluted EPS (a non-GAAP measure—see page 49, “Results of Operations”) for the second quarter a year ago, $0.11 and $0.19, respectively, for diluted EPS and adjusted diluted EPS for the first quarter 2016 (a non GAAP measure—see page 49, “Results of Operations”).

Our in-market acquisitions, together with organic and acquisition-related revenue growth, are expected to drive substantial earnings improvements throughout the balance of 2016. Seacoast management affirms its goal of an adjusted diluted EPS target (a non-GAAP measure—see page 49, “Results of Operations”) of $1.00 for 2016.

Financial Condition

Total assets increased $1.148 billion or 35.5% from June 30, 2015 to $4.381 billion at June 30, 2016. The acquisitions of Grand and Floridian, and acquired loans (and branches) from BMO Harris’s Orlando operation, along with organic growth, has driven this balance sheet success.

Loan Portfolio

Total loans (net of unearned income and excluding the allowance for loan losses) were $2.616 billion at June 30, 2016, $678.7 million or 35.0% more than at June 30, 2015, and $459.7 million or 21.3% more than at December 31, 2015. The Grand acquisition on July 17, 2015, Floridian acquisition on March 11, 2016, and loans acquired from BMO Harris on June 3, 2016, contributed $112 million, $276 million and $64 million in loans, respectively.

The following tables detail loan portfolio composition at June 30, 2016, December 31, 2015 and June 30, 2015:

June 30, 2016	Portfolio Loans		PCI Loans		PUL's		Total
	(Dollars in thousands)
Construction and land development	$	115,789	$	114	$	26,484	$	142,387
Commercial real estate		849,537		11,836		378,135		1,239,508
Residential real estate		723,297		688		70,336		794,321
Commercial and financial		245,821		1,014		76,631		323,466
Consumer		112,580		0		2,933		115,513
Other loans		857		0		0		857
NET LOAN BALANCES (1)	$	2,047,881	$	13,652	$	554,519	$	2,616,052

December 31, 2015	Portfolio Loans		PCI Loans		PUL's		Total
	(Dollars in thousands)
Construction and land development	$	97,629	$	114	$	11,044	$	108,787
Commercial real estate		776,875		9,990		222,513		1,009,378
Residential real estate		678,131		922		44,732		723,785
Commercial and financial		188,013		1,083		39,421		228,517
Consumer		82,717		0		2,639		85,356
Other loans		507		0		0		507
NET LOAN BALANCES (1)	$	1,823,872	$	12,109	$	320,349	$	2,156,330

June 30, 2015	Portfolio Loans		PCI Loans		PUL's		Total
	(Dollars in thousands)
Construction and land development	$	79,644	$	1,489	$	14,045	$	95,178
Commercial real estate		693,212		3,350		195,766		892,328
Residential real estate		657,247		506		38,024		695,777
Commercial and financial		153,455		1,217		35,653		190,325
Consumer		61,423		0		1,490		62,913
Other loans		878		0		0		878
NET LOAN BALANCES (1)	$	1,645,859	$	6,562	$	284,978	$	1,937,399

(1)

Net loan balances at June 30, 2016, December 31, 2015 and June 30, 2015 include deferred fees/costs (net) and fair value adjustments on acquired loans, aggregating to $14.6 million, $7.7 million, and $6.2 million, respectively.

Commercial real estate mortgages were higher by $347.2 million or 38.9% to $1,239.5 million at June 30, 2016, compared to June 30, 2015, a result of strong loan production and loans acquired in the mergers. Granularity of commercial real estate lending is a focus, with office buildings of $316.3 million or 25.5% of commercial real estate mortgages, comprising the largest concentration with a substantial portion owner-occupied. Portfolio composition also includes lending for retail trade, industrial, healthcare, churches and educational facilities, recreation, multifamily, mobile home parks, lodging, restaurants, agriculture, convenience stores, marinas, and other types of real estate.

The Company’s ten largest commercial real estate funded and unfunded loan relationships at June 30, 2016 aggregated to $126.9 million (versus $114.1 million a year ago) and for the 59 commercial real estate relationships in excess of $5 million the aggregate funded and unfunded totaled $473.3 million, of which $413.2 million was funded.

Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction loans, totaled approximately $908 million and $332 million, respectively, at June 30, 2016, compared to $654 million and $239 million, respectively, a year ago.

Residential mortgage loans increased $98.5 million or 14.2% to $794.3 million as of June 30, 2016. At June 30, 2016, approximately $586 million or 74% of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages). Fixed rate mortgages totaled approximately $126 million (16% of the residential mortgage portfolio) at June 30, 2016, of which 15- and 30-year mortgages totaled approximately $25 million and $101 million, respectively. Remaining fixed rate balances were comprised of home improvement loans totaling $84 million, most with maturities of 10 years or less and home equity lines of credit, primarily floating rates, totaling approximately $144 million at June 30, 2016. In comparison, loans secured by residential properties having fixed rates totaled approximately $102 million at June 30, 2015, with 15- and 30-year fixed rate residential mortgages totaling approximately $23 million and $79 million, respectively, and home improvement mortgages and equity lines of credit totaled $68 million and $93 million, respectively, a year ago.

Reflecting the impact of organic loan growth and the Floridian, Grand, and BMO Harris loan acquisitions, commercial loans outstanding at June 30, 2016 increased to $323.5 million, up substantially from $190.3 million a year ago. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Company’s lending limits, such as small- to medium-sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses are smaller and subject to the risks of lending to small to medium sized businesses, including, but not limited to, the effects of a downturn in the local economy, possible business failure, and insufficient cash flows.

The Company also provides consumer loans (including installment loans, loans for automobiles, boats, and other personal, family and household purposes) which increased $52.6 million or 83.6% year over year and totaled $115.5 million (compared to $62.9 million a year ago). Of the $52.6 million increase, $27.8 million was in marine loans, $4.8 million in automobile and truck loans, and $20.2 million in other consumer loans.

At June 30, 2016, the Company had unfunded loan commitments of $504 million, compared to $320 million at June 30, 2015.

Loan Concentrations

The Company has been pursuing an aggressive program to reduce exposure to loan types that have been most impacted by stressed market conditions in order to achieve lower levels of credit loss volatility in the future. While commercial and commercial real estate loan relationships greater than $10 million increased by $38.0 million to $199.7 million, they represent 7.6% of the total loan portfolio at June 30, 2016, compared with $161.7 million or 13.0% of the total portfolio at year-end 2010.

Concentrations in total construction and land development loans and total CRE loans have been reduced. Construction and land development and commercial real estate loan concentrations as a percentage of total risk based capital for our subsidiary bank (as defined in regulatory guidance regarding construction (and land development) and CRE concentrations have decreased from 39% and 218%, respectively, at December 31, 2010, to 37% and 206%, respectively, as of June 30, 2016. Regulatory guidance suggests limits of 100% and 300%, respectively.

The Company defines commercial real estate in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006, which defines commercial real estate (“CRE”) loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e. loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts, or “REITs”, and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner occupied CRE are generally excluded.

Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality

Nonperforming assets (“NPAs”) at June 30, 2016 totaled $24.0 million, and were comprised of $10.9 million of nonaccrual portfolio loans, $4.4 million of nonaccrual purchased loans, $3.8 million of non-acquired other real estate owned (“OREO”), $1.6 million of acquired OREO and $3.3 million of branches out of service. NPAs decreased from $25.5 million as of June 30, 2015 (comprised of $15.1 million of nonaccrual portfolio loans, $4.5 million of nonaccrual purchased loans, $4.8 million of non-acquired OREO, and $1.1 million of acquired OREO). At June 30, 2016, more than 97% of nonaccrual loans were secured with real estate. At June 30, 2016, nonaccrual loans have been written down by approximately $3.9 million or 22.1% of the original loan balance (including specific impairment reserves). During the twelve months ended June 30, 2016, total OREO increased $2.8 million or 63.2%, reflecting $3.3 million of branches that were taken out of service, and are actively being marketed.

The Company pursues loan restructurings in selected cases when it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, 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. We are optimistic that most of these credits will rehabilitate and be upgraded versus migrating to nonperforming or OREO prospectively. Accruing restructured loans totaled $20.3 million at June 30, 2016, compared to $23.4 million at June 30, 2015. Accruing TDRs are excluded from our nonperforming asset ratios. The tables below set forth details related to nonaccrual and restructured loans.

							Accruing
June 30, 2016	Nonaccrual Loans						Restructured
(Dollars in thousands)	NonCurrent		Performing		Total		Loans
Construction & land development
Residential	$	0	$	0	$	0	$	272
Commercial		0		36		36		51
Individuals		0		244		244		260
		0		280		280		583
Residential real estate mortgages		993		8,970		9,963		12,530
Commercial real estate mortgages		383		4,245		4,628		6,862
Real estate loans		1,376		13,495		14,871		19,975
Commercial and financial		118		92		210		15
Consumer		61		137		198		347
	$	1,555	$	13,724	$	15,279	$	20,337

At June 30, 2016 and 2015, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification:

	2016				2015
(Dollars in thousands)	Number		Amount		Number		Amount
Rate reduction		86	$	15,122		98	$	17,379
Maturity extended with change in terms		61		8,085		66		7,914
Forgiveness of principal		0		0		1		1,588
Chapter 7 bankruptcies		41		2,515		50		2,922
Not elsewhere classified		14		1,674		15		1,951
		202	$	27,396		230	$	31,754

During the first six months of 2016, newly identified TDRs totaled $1.7 million, compared to $2.6 million for all of 2015. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. No accruing loans that were restructured within the twelve months pre-ceding June 30, 2016 defaulted during the six months ended June 30, 2016, or for the first six months of 2015. 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.

At June 30, 2016, loans totaling $31.3 million were considered impaired (comprised of total nonaccrual, loans 90 days or more past due, and TDRs) and $2.3 million of the allowance for loan losses was allocated for potential losses on these loans, compared to $38.5 million and $3.1 million, respectively, at June 30, 2015.

In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. Typically loans 90 days or more past due are reviewed for impairment, and if deemed impaired, are placed on nonaccrual. Once impaired, the current fair market value of the collateral is assessed and a specific reserve and/or charge-off taken. Quarterly thereafter, the loan carrying value is analyzed and any changes are appropriately made as described above.

Cash and Cash Equivalents and Liquidity Risk Management

Cash and cash equivalents (including interest bearing deposits), totaled $126.8 million on a consolidated basis at June 30, 2016, compared to $136.1 million at December 31, 2015 and $94.7 million at June 30, 2015. Interest bearing deposits are maintained in Seacoast Bank’s account at the Federal Reserve Bank of Atlanta. Cash and cash equivalents vary with seasonal deposit movements and may vary with the level of principal repayments and investment activity occurring in Seacoast Bank’s securities and loan portfolios.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows.

Funding sources primarily include customer-based core deposits, collateral-backed borrowings, cash flows from operations, and asset sales (primarily secondary marketing for residential real estate mortgages and marine financings).

Cash flows from operations are a significant component of liquidity risk management and we consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments. Deposits are also a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, safety and competitive forces. We routinely use securities and loans as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody.

Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity, both anticipated and unanticipated, are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, securities held for sale and interest-bearing deposits. The Company is also able to provide short term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency securities not pledged to secure public deposits or trust funds. At June 30, 2016, Seacoast Bank had available unsecured lines of $50 million and lines of credit under current lendable collateral value, which are subject to change, of $869 million. Seacoast Bank had $813 million of United States Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements, and had an additional $359 million in residential and commercial real estate loans available as collateral. In comparison, at June 30, 2015, the Company had available unsecured lines of $40 million and lines of credit of $814 million, and had $614 million of U.S. Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements, as well as an additional $248 million in residential and commercial real estate loans available as collateral.

The Company does not rely on and is not dependent on off-balance sheet financing or significant amounts of wholesale funding.

The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses, to service the Company’s debt and to pay dividends upon Company common stock and preferred stock. At June 30, 2016, Seacoast Bank can distribute dividends to the Company of approximately $81 million. At June 30, 2016, the Company had cash and cash equivalents at the parent of approximately $15.0 million, compared to $43.7 million at December 31, 2015, with the decrease directly related to cash paid in the Floridian acquisition (see “Note K – Business Combinations”).

Securities

Information related to maturities, carrying values and fair value of the Company’s securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements.

At June 30, 2016, the Company had no trading securities, $923.6 million in securities available for sale, with the remainder of $401.6 million in securities held for investment. The Company's total securities portfolio increased $348.3 million or 35.6% from June 30, 2015. During the third quarter of 2015, $46.4 million were added from Grand, and during the first quarter of 2016, securities totaling $66.9 million were added from Floridian. Security purchases during second quarter 2016 of $258.3 million were primarily to utilize cash received by Seacoast from BMO Harris, with an increase of $203.4 million in securities held for investment (almost a doubling from first quarter of 2016). These efforts were primary contributors to the overall increase in the securities portfolio. Funding for investments is derived from liquidity, both legacy and that acquired in mergers, and increases in funding from our core customer deposit base.

Securities are generally acquired which return principal monthly that can be reinvested. The duration of the investment portfolio at June 30, 2016 was 4.4 years, compared to 3.3 years at June 30, 2015 and 3.8 years at December 31, 2015.

At June 30, 2016, available for sale securities had gross unrealized losses of $4.7 million and gross unrealized gains of $13.5 million, compared to gross unrealized losses of $10.8 million and gross unrealized gains of $3.0 million at December 31, 2015. All of the securities with unrealized losses are reviewed for other-than-temporary impairment at least quarterly. As a result of these reviews it was determined that the unrealized losses were not other than temporarily impaired and the Company has the intent and ability to retain these securities until recovery over the periods presented (see additional discussion under “Other Fair Value Measurements” and “Other than Temporary Impairment of Securities” in “Critical Accounting Policies and Estimates”).

Company management considers the overall quality of the securities portfolio to be high. The Company has no exposure to securities with subprime collateral. The Company holds no interests in trust preferred securities.

Deposits and Borrowings

The Company’s balance sheet continues to be primarily core deposit funded.

Total deposits increased $896.1 million or 34.4% to $3.501 billion at June 30, 2016, compared to one year earlier. Core customer funding increased to $3.298 billion at June 30, 2016, a $828.5 million or 33.5% increase from the second quarter of 2015. Excluding acquisitions, core customer funding increased by $158.0 million or 6.4% from one year ago and total deposits increased $66.6 million or 2.6% from one year ago. Total deposits grew $656.9 million or 23.1% from year-end 2015. Excluding acquired deposits from Floridian and BMO Harris, total deposits increased $15.8 million or 0.6% (not annualized) from year-end 2015. Deposit growth since year-end 2015 was impacted by seasonal decreases in public fund balances, which decreased by $51.9 million during first six months of 2016.

Since June 30, 2015, interest bearing deposits (interest bearing demand, savings and money markets deposits) increased $464.4 million or 30.9% to $1.968 billion, noninterest bearing demand deposits increased $338.4 million or 41.9% to $1.146 billion, and CDs increased $93.4 million or 31.9% to $386.3 million. Excluding acquired deposits, noninterest demand deposits were $108.1 million or 12.6% higher (not annualized) at June 30, 2016, versus December 31, 2015, and represent 32.8% of total deposits compared to 31.0% at June 30, 2015. Deposit growth reflects our success in growing households both organically and through acquisitions.

Customer repurchase agreements totaled $183.4 million at June 30, 2016, increasing $25.7 million or 16.3% from June 30, 2015. The repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance.

At June 30, 2016, borrowings were comprised of subordinated debt of $70.1 million related to trust preferred securities issued by trusts organized or acquired by the Company, and borrowings from FHLB of $151.0 million. At June 30, 2016, FHLB borrowings outstanding were all maturing within 30 days, and the rate for FHLB funds averaged 0.51% during the second quarter of 2016, and 0.43% at June 30, 2016. Deposits are seasonally lower in the summer and higher in the winter, with anticipated increases in deposits in fourth quarter 2016 expected likely to reduce funding from FHLB borrowings.

In April of 2016, an early redemption cost of $1.8 million was incurred related to prepayment of $50 million of FHLB advances having a weighted average fixed rate of 3.22% and scheduled to mature in late 2017 (see “Noninterest Expenses”). The two FHLB advances redeemed were outstanding since 2007. We anticipate a reduction in interest expense of approximately $0.4 million per quarter, or $1.6 million annually, from this early redemption.

The Company has two wholly owned trust subsidiaries, SBCF Capital Trust I and SBCF Statutory Trust II that were both formed in 2005. In 2007, the Company formed an additional wholly owned trust subsidiary, SBCF Statutory Trust III. The 2005 trusts each issued $20.0 million (totaling $40.0 million) of trust preferred securities and the 2007 trust issued an additional $12.0 million in trust preferred securities. As part of the October 1, 2014 BANKshares acquisition the Company acquired three junior subordinated debentures totaling $5.2 million, $4.1 million, and $5.2 million, respectively. As part of the Grand acquisition, the Company acquired an additional junior subordinated debenture totaling $7.2 million. The acquired junior subordinated debentures (in accordance with ASU 805 Business Combinations) were recorded at fair value, which collectively is $5.4 million lower than face value. This amount is being amortized into interest expense over the acquired subordinated debt’s remaining term to maturity.

Under Basel III and Federal Reserve rules, qualified trust preferred securities and other restricted capital elements can be included as Tier 1 capital, within limitations. The Company believes that its trust preferred securities qualify under these capital rules. The weighted average interest rate of our outstanding subordinated debt related to trust preferred securities was 2.89% for the three month period ended June 30, 2016, compared to 2.43% for all of 2015.

Off-Balance Sheet Transactions

In the normal course of business, the Company may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk.

Lending commitments include unfunded loan commitments and standby and commercial letters of credit. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement.

Loan commitments to customers are made in the normal course of our commercial and retail lending businesses. For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. Loan commitments were $504 million at June 30, 2016 and $320 million at June 30, 2015.

Capital Resources

The Company’s equity capital at June 30, 2016 increased $98.6 million to $425.4 million since June 30, 2015, and increased $72.0 million from year-end 2015. The ratio of shareholders’ equity to period end total assets was 9.71% at June 30, 2016, forty basis points lower than at June 30, 2015. Equity capital increased from a combination of earnings retained by the Company, increased unrealized gains on securities, and capital issued in conjunction with acquisitions completed over the course of the last twelve months. During the first quarter of 2016, the Floridian transaction increased shareholders’ equity $50.9 million, and during the third quarter of 2015, the Grand transaction increased shareholder’s equity $17.2 million, as the Company issued shares of common stock as consideration for each merger. The BMO Harris purchase did not include an issuance of any equity. The ratio of shareholders’ equity total assets declined as the Company successfully grew assets at a faster pace than equity over this period.

Activity in shareholders’ equity for the six months ended June 30, 2016 and 2015 follows:

(Dollars in thousands)	2016		2015
Beginning balance at December 31, 2015 and 2014	$	353,453	$	312,651
Net income		9,298		11,664
Issuance of stock pursuant to acquisition of Floridian		50,913		0
Stock compensation (net of Treasury shares acquired)		1,422		1,311
Change in other comprehensive income		10,343		1,230
Ending balance at June 30, 2016 and 2015	$	425,429	$	326,856

Capital ratios remain healthy and are well above regulatory requirements for well-capitalized institutions. Seacoast’s management uses certain “non-GAAP” financial measures in its analysis of the Company’s capital adequacy. Seacoast’s management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company.

	Seacoast			Seacoast			Minimum to be
June 30, 2016:	(Consolidated)			National			Well Capitalized*

Common equity Tier 1 ratio (CET1)		10.95	%		12.15	%		6.5	%
Tier 1 capital ratio		12.75	%		12.15	%		8	%
Total risk-based capital ratio		13.45	%		12.85	%		10	%
Tier 1 leverage ratio		9.26	%		8.82	%		5	%

For subsidiary bank only

The Company’s total risk-based capital ratio was 13.45% at June 30, 2016, below our ratio of 16.01% at December 31, 2015. Larger pro rata cash payments and more modest amounts of common stock issued to Floridian shareholders, as well as ongoing reinvestment of liquidity into securities and loans with higher risk weightings and the addition of Floridian’s and BMO Harris‘s loans with higher risk weightings, were primary causes for Tier 1 and total risk-based capital ratios decreasing during the second quarter of 2016. At June 30, 2016, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 8.82%, declining from 9.36% at December 31, 2015, reflecting the effect of push down accounting (or lack thereof) on Seacoast’s subsidiary bank’s capital.

The Company and Seacoast National are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast National can pay over $81 million of dividends to the Company.

	Quarters(1)
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
(Dollars in thousands except per share data)	2016			2016			2015			2015			2015

Net income, as reported	$	5,332		$	3,966		$	6,036		$	4,441		$	5,805

BOLI income		0			(464	)		0			0			0
Security (gains)		(47	)		(89	)		(1	)		(160	)		0
Bargain purchase gain		0			0			(416	)		0			0
Total adjustments to revenue		(47	)		(553	)		(417	)		(160	)		0

Severance		464			306			187			670			29
Merger related charges		2,448			4,038			1,043			2,120			337
Branch closure charges and costs related to expense initiatives		1,121			691			0			0			0
Other		0			0			0			121			0
Miscellaneous losses		0			0			48			112			0
Early redemption cost for FHLB advances		1,777			0			0			-			0
Total adjustments to noninterest expense		5,810			5,035			1,278			3,023			366

Effective tax rate on adjustments		(2,322	)		(1,690	)		(328	)		(1,072	)		(140	)
Adjusted net income (1)	$	8,773		$	6,758		$	6,569		$	6,232		$	6,031
Earnings per diluted share, as reported	$	0.14		$	0.11		$	0.18		$	0.13		$	0.18
Adjusted earnings per diluted share (1)	$	0.23		$	0.19		$	0.19		$	0.18		$	0.18
Average shares outstanding (000)		38,142			35,453			34,395			34,194			33,234

Adjusted net income (1)	$	8,773		$	6,758		$	6,569		$	6,232		$	6,031
Provision for loan losses		662			199			369			987			855
Income taxes		5,172			4,125			4,052			3,771			3,703
Adjusted pretax, pre-provision income (1)	$	14,607		$	11,082		$	10,990		$	10,990		$	10,589

Revenue	$	43,651		$	38,941		$	37,299		$	37,253		$	34,512
Total adjustments to revenue		(47	)		(553	)		(417	)		(160	)		0
Adjusted revenue (1)	$	43,604		$	38,388		$	36,882		$	37,093		$	34,512

Noninterest expense	$	34,808		$	32,341		$	27,169		$	29,127		$	24,288
Total adjustments to noninterest expense		5,810			5,035			1,278			3,023			366
Adjusted noninterest expense (1)	$	28,998		$	27,306		$	25,891		$	26,104		$	23,922

(1) Presentation has been revised in accordance with SEC's Division of Corporation Finance Compliance and Disclosure Interpretations, Non-GAAP Financial Measures" issued May 17, 2016

Non-GAAP measures regarding Net Income

The table above provides reconciliation between Generally Accepted Accounting Principles (“GAAP”) net income and adjusted net income (1). Management uses these non-GAAP financial amounts in its analysis of the Company’s performance and believes the presentation provides a clearer understanding of the Company’s performance. The Company believes the presentation of adjusted net income (1) enhances investor understanding of the performance trend and facilitates comparisons with the performance of other financial institutions. The limitations associated with adjusted net income (1) are the risk that persons might disagree as to the appropriateness of items comprising the measure and that different companies might calculate the measure differently. The Company provides reconciliations between GAAP and non-GAAP measures, and these measures should not be considered an alternative to GAAP.

We believe that our success in increasing net income is the result of our success in significantly growing our businesses and balance sheet, while attaining operating efficiency. This success also reflects the success we have had in identifying and incorporating acquisitions. We expect that the Company’s capital will increase with positive earnings. The board and management currently believe that the Company’s overall level of capital is more than sufficient to support growth, given the current economic environment.

Net Interest Income and Margin

Net interest income (on a tax equivalent basis) for the quarter totaled $34.8 million, increasing $4.5 million or 14.5% during the second quarter of 2016 compared to the first quarter of 2016, and was $9.0 million or 35.0% higher than second quarter 2015’s result. Net interest margin expanded to 3.63%, a 13 basis point improvement when compared to second quarter 2015’s margin, and a contraction of 5 basis points compared to first quarter 2016.

Loan growth, balance sheet mix and yield/cost management have been the primary forces affecting net interest income and net interest margin improvement. Acquisitions have accelerated income growth. Purchase of investment securities ahead of the BMO Harris acquisition, which added deposits of $317 million and business banking loans totaling $64 million, combined with additional liquidity at the time of the acquisition, was the main contributor to net interest margin decline linked quarter.

Year over year improvement of results for each period reflect the increases in net loans and investment securities, and deposit growth, with continued increases in low-cost, no-cost deposits compared to prior years. The business volumes from Grand on July 17, 2015, Floridian on March 11, 2016, and BMO Harris’s Orlando operating base on June 3, 2016, amplified the Company’s performance in the third quarter of 2015, and the first and second quarters of 2016, helping to drive the $9.0 million increase in net interest income for the second quarter of 2016 compared to the second quarter of 2015.

We anticipate 2016’s net interest income will continue to benefit from the full year impact of these acquisitions.

The following table details the trend for net interest income and margin results (on a tax equivalent basis), the yield on earning assets that has improved tremendously and the rate paid on interest bearing liabilities that has changed nominally for the past five quarters:

	Net Interest		Net Interest			Yield on			Rate on Interest
(Dollars in thousands)	Income (1)		Margin (1)			Earning Assets (1)			Bearing Liabilities
Second quarter 2015	$	25,788		3.50	%		3.73	%		0.33	%
Third quarter 2015		29,130		3.75			3.98			0.33
Fourth quarter 2015		29,216		3.67			3.90			0.33
First quarter 2016		30,349		3.68			3.92			0.34
Second quarter 2016		34,801		3.63			3.85			0.31

(1) On tax equivalent basis, a non-GAAP measure.

Average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 65.7% during the second quarter of 2016, compared to 64.4% a year ago. As average total loans as a percentage of earning assets increased, the mix of loans has improved, with volumes related to commercial real estate representing 50.7 percent of total loans at June 30, 2016 (compared to 48.9% at June 30, 2015)(see “Loan Portfolio”).

Commercial and commercial real estate loan originations for the quarter exceeded $111 million, with the commercial pipeline (in underwriting and approval or approved and not yet closed) totaling $113 million at June 30, 2016, ahead of prior-year levels. Second quarter 2015’s commercial and commercial real estate loan originations totaled $68 million, and the pipeline at June 30, 2015 was $109 million. Consumer loan and small business originations totaled $81 million (inclusive of lines of credit) during the second quarter of 2016 compared to $55 million one year ago. Closed residential production for the quarter totaled $104 million compared with $82 million during the second quarter 2015, with a total residential pipeline of $66 million at June 30, 2016 up from $54 million one year ago.

Customer relationship funding is detailed in the following table for the last five quarters:

Customer Relationship Funding	Quarters
	Second			First			Fourth			Third			Second
(Dollars in thousands)	2016			2016			2015			2015			2015

Noninterest demand	$	1,146,791		$	1,054,069		$	854,447		$	869,877		$	808,429
Interest-bearing demand		776,389			750,904			734,749			618,344			599,268
Money market		860,930			741,657			665,353			660,632			621,973
Savings		330,928			313,179			295,851			286,810			282,588
Time certificates of deposit		386,278			362,638			293,987			306,633			292,919
Total deposits	$	3,501,316		$	3,222,447		$	2,844,387		$	2,742,296		$	2,605,177

Customer sweep accounts	$	183,387		$	198,330		$	172,005		$	148,607		$	157,676

Total core customer funding (1)	$	3,298,425		$	3,058,139		$	2,722,405		$	2,584,270		$	2,469,934

Noninterest demand deposit mix		32.8	%		32.7	%		30.0	%		31.7	%		31.0	%

(1) Total deposits and customer sweep accounts, excluding time certificates of deposit

Total deposits increased $896.1 million or 34.4% to $3.501 billion at June 30, 2016, compared to one year earlier. Core customer funding increased to $3.298 billion at June 30, 2016, a $828.5 million or 33.5% increase from the second quarter of 2015. Excluding acquisitions, core customer funding increased by $158.0 million or 23.1% from one year ago and total deposits increased $66.6 million or 2.6% from one year ago. Also, at June 30, 2016, total deposits grew $656.9 million or 13.3% from year-end 2015. Deposit growth for 2016 was impacted by seasonal decreases in public fund balances, which decreased by $52 million during the first six months of 2016 from year-end 2015.

Noninterest demand deposits grew $292.3 million or 34.2% from the end of 2015 and $338.4 million or 41.9% from the second quarter of 2015. Noninterest demand deposits increased to 32.8% of total deposits, up from 31.0% a year ago. The overall cost of total deposits remained as relatively low at 0.10% for the second quarter of 2016, identical to the rate paid for all of 2015.

Federal funds purchased and sweep repurchase agreements (with Seacoast Bank customers) at June 30, 2016 and 2015 totaled $183.4, increasing $25.7 million or 16.3% from a year ago. No term federal funds purchased were outstanding for Seacoast Bank on these dates in 2016 or 2015. The average yield on customer repurchase accounts was 0.21% for the second quarter of 2016.

Fixed rate advances from the FHLB of $50.0 million (with an inception date in November 2007) were to mature in 2017; these advances were redeemed in April 2016 for at a cost of $1,777,000 (see “Noninterest Expense”). The rate on the redeemed FHLB advances was 3.22%, and compares to a rate on FHLB borrowings (maturing in 30 days or less) of 0.51% during the second quarter of 2016.

For 2016, average subordinated debt summed to $70.1 million related to trust preferred securities issued by subsidiary trusts of the Company (including acquired subordinated debt for BANKshares and Grand) remain outstanding.

The following table details average balances, net interest income and margin results (on a tax equivalent basis) for the second and first quarter of 2016, and the second quarter of 2015.

	2016																2015
	Second Quarter								First Quarter								Second Quarter
	Average					Yield/			Average					Yield/			Average					Yield/
(Dollars in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
Assets
Earning assets:
Securities:
Taxable	$	1,185,022		$	6,603		2.23	%	$	996,301		$	5,683		2.28	%	$	957,374		$	4,977		2.08	%
Nontaxable		28,445			459		6.45			17,929			251		5.60			15,311			225		5.87
Total Securities		1,213,468			7,062		2.33			1,014,230			5,934		2.34			972,685			5,202		2.14

Federal funds sold and other investments		110,636			433		1.57			52,213			290		2.23			79,031			249		1.26

Loans, net		2,532,533			29,392		4.67			2,246,773			26,074		4.67			1,904,011			22,032		4.64

Total Earning Assets		3,856,637			36,887		3.85			3,313,216			32,298		3.92			2,955,727			27,483		3.73

Allowance for loan losses		(20,185	)							(19,558	)							(18,247	)
Cash and due from banks		92,159								81,947								71,858
Premises and equipment		63,149								57,062								49,275
Intangible assets		69,449								37,006								32,188
Bank owned life insurance		43,542								43,647								36,111
Other assets		102,049								88,061								98,215

	$	4,206,800							$	3,601,381							$	3,225,127

Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand	$	755,206		$	161		0.09	%	$	710,083		$	155		0.09	%	$	612,433		$	110		0.07	%
Savings		322,567			39		0.05			303,207			37		0.05			279,354			41		0.06
Money market		810,709			488		0.24			667,466			412		0.25			607,271			373		0.25
Time deposits		366,263			550		0.60			304,401			313		0.41			303,802			321		0.42
Federal funds purchased and securities sold under agreements to repurchase		195,802			129		0.26			193,036			127		0.28			167,903			77		0.18
FHLB borrowings		171,011			215		0.51			57,308			409		2.87			50,165			400		3.20
Other borrowings		70,064			504		2.89			69,987			496		2.85			64,649			373		2.31
Total Interest-Bearing
Liabilities		2,691,622			2,086		0.31			2,298,180			1,949		0.34			2,085,577			1,695		0.33

Noninterest demand		1,059,039								906,231								795,707
Other liabilities		39,391								26,154								17,505
Total Liabilities		3,790,052								3,230,565								2,898,789

Shareholders' equity		416,748								370,816								326,338

	$	4,206,800							$	3,601,381							$	3,225,127

As a % of earning assets:
Interest expense							0.22	%							0.24	%							0.23	%
Net interest income (1)				$	34,801		3.63	%				$	30,349		3.68	%				$	25,788		3.50	%

(1) On a fully taxable equivalent basis, a non-GAAP measure, as defined (see Non-GAAP Measure on page 53). All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.

Non-GAAP Measures regarding Net Interest Income and Margin

Fully taxable equivalent net interest income is a common term and measure used in the banking industry but is not a term used under generally accepted accounting principles (“GAAP”). We believe that these presentations of tax-equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors’ understanding of the Company’s business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered as an alternative to GAAP. The following information is provided to reconcile GAAP measures and net interest income and net interest margin on a tax equivalent basis.

	Second			First			Fourth			Third			Second
	Quarter			Quarter			Quarter			Quarter			Quarter
(Dollars in thousands)	2016			2016			2015			2015			2015
Nontaxable interest income	$	308		$	127		$	116		$	119		$	122
Tax Rate		35	%		35	%		35	%		35	%		35	%
Net interest income (TE)	$	34,801		$	30,349		$	29,216		$	29,130		$	25,788
Total net interest income (not TE)		34,493			30,222			29,100			29,011			25,666
Net interest margin (TE)		3.63	%		3.68	%		3.67	%		3.75	%		3.50	%
Net interest margin (not TE)		3.60			3.67			3.66			3.73			3.48

Noninterest Income

Noninterest income excluding securities gains, totaled $9.1 million for the second quarter of 2016, $0.3 million above $8.8 million recorded in the second quarter of 2015. Included in second quarter 2015’s noninterest income was a $725,000 gain on participated loan. Adjusting for the gain on the participated loan, fee income increased $1.0 million or 12%. Significant contributors to the increase in noninterest income include mortgage banking revenue of $1.4 million, which increased $0.3 million or 33% from the year-ago period reflecting record originations. Strong increases in interchange income and service charges on deposit accounts, up 17% and 5%, respectively, reflect intentional customer analytics-driven cross sell combined with strong household growth and customer engagement.

Noninterest income excluding securities gains, increased $481,000 or 6% (not annualized) from first quarter 2016 levels. First quarter 2016 noninterest income included $464,000 in unanticipated non-taxable income related to the Bank’s investment in bank owned life insurance (BOLI). BOLI income for the first quarter of 2016 included a death benefit of $0.5 million for the untimely passing of a Seacoast associate. Excluding securities gains and the unanticipated BOLI income for first quarter 2016, noninterest income increased $0.9 million or 11% from the first quarter of 2016. Again, strength in mortgage banking revenue, as well as transaction-based fees such as interchange and deposit service charges also added to the linked-quarter gain. Other noninterest income increased at a strong pace, representing growth in our businesses and returns on certain CRA investments.

Year-to-date 2016 (the first six months) noninterest income accounted for 21.5% of total revenue (defined as net interest income plus noninterest income, excluding securities gains).

Noninterest income for the second quarter of 2016, compared to first quarter 2016 and the second quarter of 2015, is detailed as follows:

	Second		First		Second
	Quarter		Quarter		Quarter
(Dollars in thousands)	2016		2016		2015
Service charges on deposits	$	2,230	$	2,129	$	2,115
Trust income		838		806		759
Mortgage banking fees		1,364		999		1,032
Brokerage commissions and fees		470		631		576
Marine finance fees		279		141		492
Interchange income		2,370		2,217		2,033
Other deposit-based EFT fees		116		127		96
BOLI income		379		841		334
Gain on participated loan		0		0		725
Other income		1,065		739		684
Total	$	9,111	$	8,630	$	8,846

Noninterest Expenses

Noninterest expenses in the first and second quarters of 2016 reflect merger activity and other investments in the Seacoast strategy.

Noninterest expenses increased $10.5 million from the second quarter of 2015, largely driven by $5.8 million in expenses related to the acquisition of 14 branch offices from BMO Harris on June 3, 2016 and other non-core expenses. Adjusted noninterest expense1 increased $5.1 million from prior-year levels. The year-over-year increase in adjusted expense1 reflects ongoing costs related to the 2015 and 2016 acquisitions of Grand and Floridian, and BMO Harris’ Orlando operations. Expenses also reflect support of organic growth of and investment in the franchise. Larger drivers include salary and benefits costs, occupancy, furniture and equipment costs, and data processing expense, largely from acquisition activity. While adjusted noninterest expenses1expenses grew 21% compared to prior year levels, total revenues, excluding securities gains grew 26%, providing 5% operating leverage.

Noninterest expense increased $2.5 million from the first quarter of 2016. Adjusted noninterest expense1 grew $1.7 million or 6%. Contributing to the higher adjusted noninterest expense during the second quarter of 2016 were salary and benefits costs, occupancy, furniture and equipment costs, and data processing expense, largely from acquisition activity. Expenses related the acquisition of Floridian on March 11, 2016 were significant as well.

Salaries and wages totaling $13.9 million were $4.6 million or 49.3% higher for 2016’s second quarter, compared to 2015 for the same period. Of the $4.6 million increase in the second quarter of 2016, approximately $1.1 million in total salaries and wages was related to merger related activity and bank closures. Base salaries were $2.4 million higher during the second quarter of 2016, due to acquisitions, investments in strategy and people to support growth. Improved revenue generation and lending production, among other factors resulted in commissions, cash and stock incentives (aggregated) that were $1.5 million higher for 2016, compared to second quarter a year ago.

Seacoast Bank utilizes third parties for its core data processing systems and outsourced data processing costs are directly related to the number of transactions processed. Outsourced data processing costs totaled $2.8 million for the second quarter of 2016, a $0.6 million or 25% increase in cost compared to second quarter a year ago. The primary cause is related to growth in total households banking with Seacoast. The Company wholly expects its digital servicing capabilities and technology will continue to support better, more efficient channel integration, allowing consumers to choose their path of convenience to satisfy their banking needs, resulting in organic growth of our products and services as well as related revenue.

Total occupancy, furniture and equipment expenses for the second quarter of 2016 increased $2.1 million or 74% (on an aggregate basis) to $4.9 million year over year versus 2015’s second quarter expense. Branch closure charges summed to $1.1 million and $0.7 million, respectively, in the second and first quarters of 2016. This increase is primarily driven by the ten branches acquired in the Floridian and BMO Harris acquisitions, and the write down of legacy and acquired branches designated to be closed this year. Branch consolidations over the remainder of 2016 will lessen the impacts of acquired locations. Branch consolidation is likely to continue for the Company and the banking industry in general, as customers increase their usage of digital and mobile products.

Legal and professional fees were higher by $1.1 million or 67% compared to second quarter a year ago, primarily due to professional fees related to third party conversion assistance for our recent acquisitions.

Increases in remaining expenses were not as significant, but did include the $1.8 million for early redemption of the FHLB advances previously discussed.

Noninterest expenses for the second quarter of 2016, compared to first quarter 2016 and the second quarter of 2015, is detailed as follows:

	Second			First			Second
	Quarter			Quarter			Quarter
(Dollars in thousands)	2016			2016			2015
Salaries and wages	$	13,884		$	13,399		$	9,301
Employee benefits		2,521			2,482			2,541
Outsourced data processing costs		2,803			4,439			2,234
Telephone / data lines		539			528			443
Occupancy		3,645			2,972			2,011
Furniture and equipment		1,283			998			819
Marketing		957			1,049			1,226
Legal and professional fees		2,656			2,357			1,590
FDIC assessments		643			544			520
Amortization of intangibles		593			446			315
Asset dispositions expense		160			90			173
Net (gain)/loss on other real estate and other repossessed assets		(201	)		(51	)		53
Early redemption cost for Federal
Home Loan Bank advances		1,777			0			0
Other		3,548			3,088			3,062
Total	$	34,808		$	32,341		$	24,288

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:

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the allowance and the provision for loan losses;

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acquisition accounting and purchased loans;

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intangible assets and impairment testing;

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other fair value adjustments;

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other than temporary impairment of securities;

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realization of deferred tax assets; and

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contingent liabilities.

The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information.

Allowance and Provision for Loan Losses – Critical Accounting Policies and Estimates

Management determines the provision for loan losses charged to operations by continually analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge-offs, and by estimating losses inherent in its portfolio. While the Company’s policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses necessarily approximate and imprecise.

For 2016’s second quarter and first six months, we recorded provisioning for loan losses of $0.7 million and $0.9 million, respectively, which compared to provisioning of $0.9 million and $1.3 million, respectively, for 2015’s second quarter and first six months. Net recoveries of $0.7 million through June 30, 2016, compare to net recoveries for the first six months of 2015 of $0.4 million (see “Note F – Impaired Loans and Allowance for Loan Losses”). For 2016, provisioning for loan losses reflects continued strong credit metrics, offset by continued loan growth. Delinquency trends remain low and show continued stability (see section titled “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality”).

Management continuously monitors the quality of the Company’s loan portfolio and maintains an allowance for loan losses it believes is sufficient to absorb probable losses inherent in the loan portfolio. The allowance for loan losses increased $1.9 million to $20.7 million at June 30, 2016, compared to $18.8 million at June 30, 2015. The allowance for loan losses (“ALLL”) framework has four basic elements: (1) specific allowances for loans individually evaluated for impairment; (2) general allowances for pools of homogeneous non-purchased loans (“portfolio loans”) within the portfolio that have similar risk characteristics, which are not individually evaluated; (3) specific allowances for purchased impaired loans which are individually evaluated based on the loans expected principal and interest cash flows; and (4) general allowances for purchased unimpaired pools of homogeneous loans that have similar risk characteristics. The aggregate of these four components results in our total allowance for loan losses.

The first element of the ALLL analysis involves the estimation of allowance specific to individually evaluated impaired portfolio loans, including accruing and nonaccruing restructured commercial and consumer loans. In this process, a specific allowance is established for impaired loans based on an analysis of the most probable sources of repayment, including discounted cash flows, liquidation of collateral, or the market value of the loan itself. It is the Company’s policy to charge off any portion of the loan deemed a loss. Restructured consumer loans are also evaluated in this element of the estimate. As of June 30, 2016, the specific allowance related to impaired portfolio loans individually evaluated totaled $2.2 million, compared to $3.1 million as of June 30, 2015.

The second element of the ALLL analysis, the general allowance for homogeneous portfolio loan pools not individually evaluated, is determined by applying allowance factors to pools of loans within the portfolio that have similar risk characteristics. The general allowance factors are determined using a baseline factor that is developed from an analysis of historical net charge-off experience and qualitative factors designed and intended to measure expected losses. These baseline factors are developed and applied to the various portfolio loan pools. Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the historical loss. These influences may include elements such as changes in concentration risk, macroeconomic conditions, and/or recent observable asset quality trends.

The third component consists of amounts reserved for purchased credit-impaired loans. On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the purchased credit impaired portfolio.

The final component consists of amounts reserved for purchased unimpaired loans. Loans collectively evaluated for impairment reported at June 30, 2016 include loans acquired from BMO Harris on June 3, 2016, Floridian on March 11, 2016, Grand on July 17, 2015 and BANKshares on October 1, 2014 that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date.

Our analyses of the adequacy of the allowance for loan losses also takes into account qualitative factors such as credit quality, loan concentrations, internal controls, audit results, staff turnover, local market conditions and loan growth.

The Company’s independent Credit Administration Department assigns all loss factors to the individual internal risk ratings based on an estimate of the risk using a variety of tools and information. Its estimate includes consideration of the level of unemployment which is incorporated into the overall allowance. In addition, the portfolio loans are segregated into a graded loan portfolio, residential, installment, home equity, and unsecured signature lines, and loss factors are calculated for each portfolio.

The loss factors assigned to the graded loan portfolio are based on the historical migration of actual losses by grade over 4, 8, 12, 16, 20 and 24 quarter intervals. Minimum and maximum average historical loss rates over one to five years are referenced in setting the loss factors by grade within the graded portfolio. Management uses historical loss factors as its starting point, and qualitative elements are considered to capture trends within each portion of the graded portfolio. The direction and expectations of past dues, charge-offs, nonaccruals, classified loans, portfolio mix, market conditions, and risk management controls are considered in setting loss factors for the graded portfolio. The loan loss migration indicates that the minimum and maximum average loss rates and median loss rates over the past many quarters have been declining. Also, the level of criticized and classified loans has been declining as a result of a combination of upgrades and loan payoffs, which are reducing the risk profile of the loan portfolio. Additionally, the risk profile has declined given the shift in complexion of the graded portfolio, particularly a reduced level of commercial real estate loan concentrations.

Residential and consumer (installment, secured lines, and unsecured lines) are analyzed differently as risk ratings, or grades, are not assigned to individual loans. Residential and consumer loan losses are tracked by pool. Management examines the historical losses over one to five years in its determination of the appropriate loss factor for vintages of loans currently in the portfolio rather than the vintages that produced the significant losses in prior years. These loss factors are then adjusted by qualitative factors determined by management to reflect potential probable losses inherent in each loan pool. Qualitative factors may include various loan or property types, loan to value, concentrations and economic and environmental factors.

Residential loans that become 90 days past due are placed on nonaccrual and a specific allowance is made for any loan that becomes 120 days past due. Residential loans are subsequently written down if they become 180 days past due and such write-downs are supported by a current appraisal, consistent with current banking regulations.

Our charge-off policy meets or exceeds regulatory minimums. Losses on unsecured consumer loans are recognized at 90 days past due compared to the regulatory loss criteria of 120 days. Secured consumer loans, including residential real estate, are typically charged-off or charged down between 120 and 180 days past due, depending on the collateral type, in compliance with Federal Financial Institution Examination Council guidelines. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in the legal process of collection. Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.

Management continually evaluates the allowance for loan losses methodology and seeks to refine and enhance this process as appropriate. As a result, it is likely that the methodology will continue to evolve over time.

Our Loan Review unit is independent, and performs loan reviews and evaluates a representative sample of credit extensions after the fact for appropriate individual internal risk ratings. Loan Review has the authority to change internal risk ratings and is responsible for assessing the adequacy of credit underwriting. This unit reports directly to the Directors’ Loan Committee of Seacoast Bank’s board of directors.

Net recoveries for the three months and six months ended June 30, 2016 totaled $339,000 and $736,000, respectively, compared to net recoveries of $215,000 and $432,000, respectively, for the three months and six months ended June 30, 2015. Note F to the financial statements (titled “Impaired Loans and Allowance for Loan Losses”) summarizes the Company’s allocation of the allowance for loan losses to construction and land development loans, commercial and residential estate loans, commercial and financial loans, and consumer loans, and provides more specific detail regarding charge-offs and recoveries for each loan component and the composition of the loan portfolio at June 30, 2016 and 2015. Although there is no assurance that we will not have elevated charge-offs in the future, we believe that we have significantly reduced the risks in our loan portfolio.

The allowance as a percentage of portfolio loans outstanding (excluding PCI and PUL loans) was 1.01% at June 30, 2016, compared to 1.10% at June 30, 2015. The allowance for loan losses represents management’s estimate of an amount adequate in relation to the risk of losses inherent in the loan portfolio. The reduced level of impaired loans contributed to a lower risk of loss and the lower allowance for loan losses as of June 30, 2016. The risk profile of the loan portfolio has been reduced by implementing a program to decrease the level of credit risk in such portfolio by strengthening credit management methodologies and implementing a low risk “back-to-basics” strategic plan for loan growth. New loan production has shifted to adjustable rate residential real estate loans, owner-occupied commercial real estate, small business loans for professionals and businesses, and consumer lending. Strategies, processes and controls are in place to ensure that new production is well underwritten and maintains a focus on smaller, diversified and lower-risk lending. Aided by initiatives embodied in new loan programs and continued aggressive collection actions, the portfolio mix has changed dramatically and has become more diversified. The improved mix is most evident by a lower percentage of loans in income producing commercial real estate and construction and land development loans. Prospectively, we anticipate that the allowance is likely benefit from continued improvement in our credit quality, but offset by more normal loan growth as business activity and the economy improves.

Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. The Company’s most significant concentration of credit is a portfolio of loans secured by real estate. At June 30, 2016, the Company had $2.176 billion in loans secured by real estate, representing 87.2% of total loans, up from $1.683 billion and a percent of total loans (versus 86.9%) at June 30, 2015. In addition, the Company is subject to a geographic concentration of credit because it only operates in central and southeastern Florida.

While it is the Company’s policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, borrower payment behaviors and local market conditions as well as conditions affecting individual borrowers, management’s judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer companies identified by the regulatory agencies.

In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, which is undertaken both to ascertain whether there are probable losses that must be charged off and to assess the risk characteristics of the portfolio in aggregate. This review considers the judgments of management, and also those of bank regulatory agencies that review the loan portfolio as part of their regular examination process. Our bank regulators have generally agreed with our credit assessment, however in the future, regulators could seek additional provisions to our allowance for loan losses, which would reduce our earnings.

Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates

The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Over the life of the purchased credit impaired loans acquired, the Company continues to estimate cash flows expected to be collected. The Company evaluates at each balance sheet date whether the present value of the acquired loans using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.

Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates

Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles from the BANKshares, Grand, Floridian and BMO Harris acquisitions are being amortized on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We performed an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles—Goodwill and Other, in the fourth quarter of 2015 for the BANKshares acquisition (on October 1, 2014). Seacoast employed an independent third party with extensive experience in conducting and documenting impairment tests of this nature, and concluded that no impairment occurred.

Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

Other Fair Value Measurements – Critical Accounting Policies and Estimates

“As Is” values are used to measure fair market value on impaired loans, OREO and repossessed assets. All impaired loans, OREO and repossessed assets are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions. When necessary, the “As Is” appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral dependent impaired loans are loans that are solely dependent on the liquidation of the collateral for repayment. If an updated assessment is deemed necessary, and an internal valuation cannot be made, an external appraisal will be requested. Upon receipt of the “As Is” appraisal a charge-off is recognized for the difference between the loan amount and its current fair market value.

At June 30, 2016, outstanding securities designated as available for sale totaled $923.6 million. The fair value of the available for sale portfolio at June 30, 2016 was more than historical amortized cost, producing net unrealized losses of $2.1 million that have been included in other comprehensive income (loss) as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2016 and 2015. The credit quality of the Company’s securities holdings are primarily investment grade.

Seacoast Bank also holds 11,330 shares of Visa Class B stock, which following resolution of Visa’s litigation will be converted to Visa Class A shares (the conversion rate presently is 1.6483 shares of Class A stock for each share of Class B stock) for a total of 18,675 shares of Visa Class A stock. Our ownership is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at zero basis.

Other Than Temporary Impairment of Securities – Critical Accounting Policies and Estimates

Our investments are reviewed quarterly for other than temporary impairment (“OTTI”). The following primary factors are considered for securities identified for OTTI testing: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820, Fair Value Measurement. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.

Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company’s other sources of liquidity, as well as the cash flow from principal and interest payments from its securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.

Realization of Deferred Tax Assets – Critical Accounting Policies and Estimates

At June 30, 2016, the Company had net deferred tax assets (“DTA”) of $62.6 million. Although realization is not assured, management believes that realization of the carrying value of the DTA is more likely than not, based upon expectations as to future taxable income and tax planning strategies, as defined by ASC 740 Income Taxes. In comparison, at June 30, 2015 the Company had a net DTA of $58.6 million.

Contingent Liabilities – Critical Accounting Policies and Estimates

The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At June 30, 2016, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant.

Interest Rate Sensitivity

Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility.

Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company’s second quarter 2016 Asset and Liability Management Committee (“ALCO”) model simulation indicates net interest income would increase 9.6% if interest rates increased 200 basis points up over the next 12 months and 5.2% if interest rates increased 100 basis points. This compares with the Company’s second quarter 2015 model simulation, which indicated net interest income would increase 9.8% if interest rates were increased 200 basis points up over the next 12 months and 5.1% if interest rates were increased 100 basis points. Recent regulatory guidance has placed more emphasis on rate shocks.

The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 13.8% at June 30, 2016. This result includes assumptions for core deposit re-pricing validated for the Company by an independent third party consulting group.

The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile.

Effects of Inflation and Changing Prices

The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

Special Cautionary Notice Regarding Forward Looking Statements

Various of the statements made herein under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” and elsewhere, are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of Seacoast to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “support”, “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “further”, “point to,” “project,” “could,” “intend” or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

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the effects of future economic and market conditions, including seasonality;

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governmental monetary and fiscal policies, as well as legislative, tax and regulatory changes;

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legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, and changes in the scope and cost of FDIC insurance and other coverage;

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changes in accounting policies, rules and practices;

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the risks of changes in interest rates on the level and composition of deposits, loan demand, liquidity and the values of loan collateral, securities, and interest sensitive assets and liabilities; interest rate risks, sensitivities and the shape of the yield curve;

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the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market areas and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;

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the failure of assumptions underlying the establishment of reserves for possible loan losses;

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the risks of mergers and acquisitions, include, without limitation, unexpected transaction costs, including the costs of integrating operations; the risks that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected;

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the potential failure to fully or timely realize expected revenues and revenue synergies, including as the result of revenues following the merger being lower than expected;

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the risk of deposit and customer attrition; any changes in deposit mix; unexpected operating and other costs, which may differ or change from expectations;

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the risks of customer and employee loss and business disruption, including, without limitation, as the result of difficulties in maintaining relationships with employees; increased competitive pressures and solicitations of customers by competitors; as well as the difficulties and risks inherent with entering new markets; and

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other risks and uncertainties described herein and in our annual report on Form 10-K for the year ended December 31, 2015 and otherwise in our Securities and Exchange Commission, or “SEC”, reports and filings.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management’s discussion and analysis “Interest Rate Sensitivity”.

Market risk refers to potential losses arising from changes in interest rates, and other relevant market rates or prices.

Interest rate risk, defined as the exposure of net interest income and Economic Value of Equity, or “EVE,” to adverse movements in interest rates, is the Company’s primary market risk, and mainly arises from the structure of the balance sheet (non-trading activities). The Company is also exposed to market risk in its investing activities. The Company’s Asset/Liability Committee, or “ALCO,” meets regularly and is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by the Company’s Board of Directors. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board. These limits reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons.

The Company also performs valuation analyses, which are used for evaluating levels of risk present in the balance sheet that might not be taken into account in the net interest income simulation analyses. Whereas net interest income simulation highlights exposures over a relatively short time horizon, valuation analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows, the net result of which is the EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risks and options risks embedded in the balance sheet. In contrast to the net interest income simulation, which assumes interest rates will change over a period of time, EVE uses instantaneous changes in rates.

EVE values only the current balance sheet, and does not incorporate the growth assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected changes in balances and pricing of the indeterminate life deposit portfolios. Core deposits are a more significant funding source for the Company, making the lives attached to core deposits more important to the accuracy of our modeling of EVE. The Company periodically reassesses its assumptions regarding the indeterminate lives of core deposits utilizing an independent third party resource to assist. With lower interest rates over a prolonged period, the average lives of core deposits have trended higher and favorably impacted our model estimates of EVE for higher rates. Based on our second quarter 2016 modeling, an instantaneous 100 basis point increase in rates is estimated to increase the EVE 15.7% versus the EVE in a stable rate environment, while a 200 basis point increase in rates is estimated to increase the EVE 29.6%.

While an instantaneous and severe shift in interest rates is used in this analysis to provide an estimate of exposure under an extremely adverse scenario, a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon, i.e., the next fiscal year. Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, change in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of its chief executive officer and chief financial officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of June 30, 2016 and concluded that those disclosure controls and procedures are effective. There have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s second quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

While the Company believes that its existing disclosure controls and procedures have been effective to accomplish these objectives, the Company intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.

Part II OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are subject, in the ordinary course, to litigation incident to the business in which they are engaged. Management presently believes that none of the legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject are materially likely to have a material adverse effect on the Company’s consolidated financial position, or operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should consider the factors discussed in “Part I, Item 1A. Risk Factors” in our report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition and prospective results. The risks described in this report, in our Form 10-K or our other SEC filings are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes with respect to the risk factors disclosed in our Annual Report on form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities during the first and second quarters of 2016, entirely related to equity incentive plan activity, were as follows:

							Maximum
	Total				Total Number of		Number of
	Number of				Shares Purchased		Shares that May
	Shares		Average Price		as part of Public		yet be Purchased
Period	Purchased		Paid Per Share		Announced Plan*		Under the Plan
1/1/16 to 1/31/16		0	$	0.00		187,785		227,215
2/1/16 to 2/29/16		3,252		14.81		191,037		223,963
3/1/16 to 3/31/16		0		0.00		191,037		223,963
Total - 1st Quarter		3,252		14.81		191,037		223,963

4/1/16 to 4/30/16		7,213		15.99		198,250		216,750
5/1/16 to 5/31/16		466		16.15		198,716		216,284
6/1/16 to 6/30/16		18,999		16.31		217,715		197,285
Total - 2nd Quarter		26,678		16.22		217,715		197,285

*The plan to purchase equity securities totaling 165,000 was approved on September 18, 2001, with no expiration date. An additional 250,000 shares was added to the plan and approved on May 20, 2014.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

During the period covered by this report, there was no information required to be disclosed by us in a Current Report on Form 8-K that was not so reported, nor were there any material changes to the procedures by which our security holders may recommend nominees to our Board of Directors.

Item 6. Exhibits

	Exhibit 31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.1	Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.2	Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 101	The following materials from Seacoast Banking Corporation of Florida’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Notes to Condensed Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SEACOAST BANKING CORPORATION OF FLORIDA

August 9, 2016	/s/ Dennis S. Hudson, III
	DENNIS S. HUDSON, III
	Chairman & Chief Executive Officer

August 9, 2016	/s/ Stephen A. Fowle
	STEPHEN A. FOWLE
	Executive Vice President & Chief Financial Officer