Seacoast Banking Corporation of Florida — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. The company is a Florida-based bank holding company. Results include the First Green acquisition, completed October 19, 2018, which affects comparison with Q1 2018.
Financial results and condition
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Interest income | $72.5 million | $55.5 million in Q1 2018 |
| Net interest income (GAAP) | $60.8 million | $49.8 million in Q1 2018 |
| Net interest margin | 4.02% (tax-equivalent) | 3.80% in Q1 2018; 4.00% in Q4 2018 |
| Noninterest income | $12.8 million | $12.3 million in Q1 2018 |
| Noninterest expense | $43.1 million | $37.2 million in Q1 2018 |
| Net income / diluted EPS | $22.7 million / $0.44 | $18.0 million / $0.38 in Q1 2018 |
| Adjusted net income / diluted EPS | $24.2 million / $0.47 | $19.3 million / $0.40 in Q1 2018; non-GAAP |
| Operating cash flow | $20.1 million | $32.6 million in Q1 2018 |
- Reported diluted EPS rose year over year; management attributed higher net interest income in part to loan growth, the First Green acquisition, improved asset yields, and purchase-accounting loan discount accretion. Funding costs also increased: the rate on interest-bearing liabilities was 1.13%, versus 0.62% a year earlier.
- Reported efficiency ratio was 56.55%, compared with 57.80% in Q1 2018. The adjusted ratio was 55.81%, compared with 57.05%; both adjusted figures are non-GAAP.
- Total assets were $6.78 billion, up $35.7 million from year-end. Loans were $4.83 billion, broadly stable versus year-end; deposits increased 8% to $5.61 billion. Cash and cash equivalents rose to $204.0 million from $116.0 million.
- FHLB borrowings declined to $3.0 million from $380.0 million at year-end. Subordinated debt was $70.9 million; customer repurchase agreements were $148.0 million. Shareholders’ equity was $896.4 million; the company and bank exceeded applicable well-capitalized regulatory thresholds.
- The allowance for loan losses was $32.8 million, versus $32.4 million at year-end; Q1 provision was $1.4 million and net charge-offs were $1.0 million. Nonperforming assets declined to $34.3 million from $39.3 million; nonperforming loans were 0.46% of loans.
- Commercial real estate represented about 45% of loans. Management reported CRE and construction lending concentrations below regulatory guidance levels, but the portfolio is concentrated in Florida and exposed to local economic and property-market conditions.
Material changes and unusual items
- Year-over-year growth reflects both organic activity and First Green, which contributed $631.5 million of loans at acquisition. The filing’s pro forma Q1 2018 net income, assuming First Green had been acquired at the start of 2018, was $22.1 million; this is not the reported comparative result.
- Deposit costs, time-deposit balances, and interest expense increased. Average loan balances were up 25% year over year, while average securities balances declined 13%.
- Cash flow from investing was positive $84.5 million, mainly reflecting securities sales and proceeds from bank stock sales; financing cash flow was negative $16.5 million, including repayment of $377.0 million of FHLB borrowings. Operating cash flow was lower than in Q1 2018.
- Adoption of lease accounting on January 1, 2019 resulted in initial recognition of approximately $29 million of right-of-use assets and $33 million of lease liabilities. The company also transferred $52.8 million fair value of securities from held-to-maturity to available-for-sale following adoption of hedge-accounting guidance.
Outlook, risks and contingencies
- Management reaffirmed its Vision 2020 targets: return on tangible assets of at least 1.30%, return on tangible common equity of at least 16%, and an efficiency ratio below 50%. Q1 reported measures were 1.48%, 14.86%, and 56.55%, respectively; adjusted measures are defined separately by the company.
- Management expects approximately $10 million in annual pretax expense reductions from planned actions, including reducing approximately 50 full-time equivalent positions and two additional banking-center consolidations. It anticipates about $1.5 million of severance charges and states that greater operating leverage is expected in 2020 and beyond. These are forward-looking expectations.
- Management reported strong commercial and consumer/small-business pipelines and expects First Green to continue supporting net interest income. It also cited digital lending and servicing investments as longer-term efficiency initiatives.
- Interest-rate sensitivity modeling projected net interest income increases of 2.91% for a 100-basis-point rate rise and 5.65% for a 200-basis-point rise over months 1–12; a 100-basis-point decline projected a 2.69% decrease. Results depend on modeling assumptions and are not forecasts.
- Key risks include interest-rate and funding-cost changes, borrower credit deterioration, Florida real estate and economic conditions, commercial real estate concentration, acquisition integration, competition, cybersecurity and operational risks, and regulatory or legal matters. Management said it knew of no pending legal matter likely to materially adversely affect the company; no material change to previously disclosed risk factors was reported.
- The company plans to adopt CECL on January 1, 2020; it may increase the allowance through a one-time retained-earnings adjustment, but the impact had not been determined. Management stated it had no significant contingent-liability accruals and believed deferred tax assets were more likely than not realizable.
Important facts for investors to verify
- Separate organic loan, deposit, and earnings trends from First Green acquisition effects and purchase-accounting accretion.
- Track deposit mix and pricing, brokered CDs, and whether lower wholesale borrowing is sustained without pressuring funding costs or liquidity.
- Monitor credit quality, charge-offs, allowance adequacy, Florida property conditions, and commercial real estate exposure.
- Assess progress against Vision 2020 targets and whether the announced expense reductions are achieved after severance and branch-closure costs.
- Review the eventual CECL adoption impact and the assumptions underlying interest-rate sensitivity and investment valuations.
- Compare adjusted and tax-equivalent non-GAAP measures with the corresponding GAAP results and the company’s reconciliations.