Business context and reporting period
Seacoast Banking Corporation of Florida filed this Form 10-K for the fiscal year ended December 31, 2018, including fourth-quarter results. The company is a Florida-focused financial holding company providing commercial and retail banking, wealth management, and mortgage services through Seacoast National Bank. At year-end, it operated 51 branches and seven commercial banking centers.
In October 2018, Seacoast completed its acquisition of First Green Bancorp, adding approximately $817 million in assets, $631 million in loans, and $624 million in deposits at acquisition. The company continued to pursue growth through acquisitions, organic lending, and digital banking.
Financial performance and condition
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total assets, year-end | $6.75 billion | $5.81 billion |
| Total deposits, year-end | $5.18 billion | $4.59 billion |
| Net loans, year-end | $4.79 billion | $3.79 billion |
| Net interest income | $211.5 million | $176.3 million |
| Net interest margin, tax-equivalent | 3.85% | 3.73% |
| Net income | $67.3 million | $42.9 million |
| Diluted EPS | $1.38 | $0.99 |
| Provision for loan losses | $11.7 million | $5.6 million |
| Operating cash flow | $129.6 million | $48.9 million |
| Shareholders’ equity, year-end | $864.3 million | $689.7 million |
Reported net interest income plus noninterest income was approximately $261.5 million, up from $234.8 million in 2017. Net income growth reflected higher net interest income, acquisitions and a lower tax provision; the 2017 comparison included a $15.2 million Visa stock sale gain and an $8.6 million one-time tax charge from federal tax reform. Adjusted net income, a company-defined non-GAAP measure, was $79.1 million, and adjusted diluted EPS was $1.62 in 2018.
Average funding costs increased: the average cost of deposits, including noninterest-bearing balances, was 0.43% versus 0.21% in 2017. Year-end noninterest-bearing demand deposits were 30.3% of deposits. Total deposits grew 13% including First Green; excluding that acquisition, deposits declined about 1% from year-end 2017.
Year-end borrowings included $380 million of Federal Home Loan Bank advances, $214.3 million in repurchase agreements, and $70.8 million of subordinated debt. Cash and cash equivalents were $116.0 million. Seacoast reported $130 million of available unsecured lines and $781.7 million of borrowing capacity under current lendable collateral values. The company and bank exceeded applicable well-capitalized thresholds: consolidated total risk-based capital was 14.43%, and the bank’s leverage ratio was 10.49%.
Net cash from operations was $129.6 million; investing activities used $174.6 million, primarily reflecting loan growth; and financing activities provided $51.4 million. Cash and cash equivalents increased $6.4 million during the year. No common dividends were declared or paid.
Material changes versus the prior comparable period
- Assets increased 16% and loans increased 26% year over year, with a substantial contribution from the First Green acquisition. Excluding acquisitions, loan growth was 10%.
- Net interest margin increased 12 basis points to 3.85%; fourth-quarter tax-equivalent margin was 4.00%.
- Provision for loan losses more than doubled to $11.7 million. Net charge-offs increased to $6.2 million from $1.6 million, or 0.15% of average loans versus 0.05%.
- Noninterest expense rose 8% to $162.3 million, including $9.7 million of merger-related charges. The adjusted efficiency ratio improved to 56.1% from 58.7%.
- Nonperforming loans increased to $26.5 million from $19.5 million. Nonperforming assets were $39.3 million versus $27.2 million; the increase included more closed branches classified as real estate owned.
Outlook, commentary, risks and unusual items
Management expected 2019 net interest income to benefit from the full-year contribution of First Green and anticipated improved efficiency. It targeted $7 million in 2019 expense reductions, with savings to be reinvested in bankers in Tampa and South Florida, digital loan origination, and small-business digital fulfillment. Management’s Vision 2020 targets included an efficiency ratio below 50%; the annualized fourth-quarter 2018 result was 54.19%. These are management targets, not guarantees.
Key risks include the Florida economy and real estate markets, commercial real estate concentration, rising deposit costs and interest-rate sensitivity, acquisition integration and execution, credit-loss estimates, regulatory and capital requirements, cybersecurity and third-party technology dependence, and hurricanes or other severe weather. CRE loans were 44.2% of the loan portfolio; regulatory concentration measures were below stated guidance thresholds. The company stated its CRE concentration controls were designed to manage, but could not eliminate, related risk.
The allowance for loan losses was $32.4 million, or 0.67% of total loans including acquired loans; management cited a 0.89% allowance ratio for portfolio loans excluding purchased loans. The 2018 provision included $3.1 million related to a large impaired CRE loan that was charged off in the fourth quarter. The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2020; the effect had not yet been determined.
Available-for-sale securities had $17.0 million in net unrealized losses at year-end, recorded in accumulated other comprehensive income; management attributed losses principally to interest-rate and spread movements and reported no other-than-temporary impairment. The 2018 results also included $9.7 million of acquisition costs and $0.5 million of taxes and penalties associated with redemption of First Green bank-owned life insurance policies. The auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective.
Most important facts for investors to verify
- How much of loan, deposit, and earnings growth was organic versus attributable to First Green and other acquisitions, and whether integration benefits are being realized.
- Whether credit quality and provisioning remain adequate as nonperforming loans and net charge-offs increased; review CRE exposures, allowance assumptions, and subsequent loan performance.
- Whether deposit pricing and funding costs continue to rise, and how that affects net interest margin and liquidity.
- Reconcile GAAP results with management’s non-GAAP adjusted earnings and efficiency measures, including the adjustments excluded from each.
- Monitor the $7 million expense-reduction plan, Vision 2020 targets, and the eventual CECL adoption impact, which management had not quantified.