SEACOAST BANKING CORP OF FLORIDA quarterly report, Q3 FY2019

Seacoast Banking Corporation of Florida — Q3 2019 Form 10-Q

Business context and period: Regional banking company; nearly all operations are conducted through Seacoast Bank. This unaudited report covers the quarter and nine months ended September 30, 2019. Comparisons are with the corresponding 2018 periods unless otherwise noted; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.

Key financial results

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Net interest income	$60.9 million	$51.6 million	$181.9 million	$151.5 million
Noninterest income	$13.9 million	$12.3 million	$40.4 million	$37.3 million
Net income	$25.6 million	$16.3 million	$71.6 million	$51.3 million
Diluted EPS	$0.49	$0.34	$1.38	$1.07
Net interest margin, fully taxable equivalent	3.89%	3.82%	3.95%	3.79%
Net cash from operating activities	—	$75.3 million	$84.9 million

Q3 net interest income increased 18% year over year; net income increased 57%. Nine-month net income increased 40%.
Q3 noninterest expense was $38.6 million, up 3% year over year; nine-month expense was $122.7 million, up 9%. The reported efficiency ratio improved to 48.62% for Q3 from 57.04% a year earlier and was 52.85% for the nine-month period, versus 57.75%.
Q3 net interest margin eased 5 basis points from Q2’s 3.94%. Management cited lower loan and securities yields following Federal Reserve rate cuts, partly offset by lower deposit costs. Acquired-loan discount accretion contributed 25 basis points to Q3 margin.
At September 30, total assets were $6.89 billion, loans $4.99 billion, deposits $5.67 billion, and shareholders’ equity $962.7 million. Assets rose 2% and deposits 10% from year-end 2018; loans increased $161.1 million.
Cash and cash equivalents were $132.3 million, up from $116.0 million at year-end. Nine-month investing cash outflow was $78.7 million and financing cash inflow was $19.7 million; cash increased $16.3 million.
Funding included $70.4 million in repurchase agreements, $50.0 million in FHLB borrowings, and $71.0 million in subordinated debt. FHLB borrowings were down from $380.0 million at year-end. The company reported total risk-based capital of 15.55% and CET1 of 13.59%; management said the company and bank exceeded well-capitalized thresholds.

Material changes and credit position

Growth in loans and deposits contributed to higher interest income and net interest income; loan growth was partly supported by acquired balances and loan purchases. Average loans rose 23% year over year in Q3.
Commercial real estate loans totaled $2.31 billion, or 46% of total loans. CRE and construction concentrations were below regulatory guidance limits, but remain an exposure to monitor. The largest ten commercial and CRE relationships totaled $240.4 million, of which $154.6 million was funded.
Nonperforming assets were $39.6 million, 0.58% of assets, broadly unchanged from year-end. Nonperforming loans were 0.52% of loans, versus 0.55% at year-end. Q3 net charge-offs were $2.1 million, or 0.17% of average loans; management said five customer relationships moved to nonperforming status during the quarter.
The allowance for loan losses was $33.6 million, up from $32.4 million at year-end. Nine-month provision was $6.2 million, down from $9.4 million. Seven loans totaling $4.0 million were restructured as TDRs in the nine-month period; three defaults totaling $2.1 million related to one borrower.
Available-for-sale securities had net unrealized gains of approximately $13.6 million at quarter-end, compared with net unrealized losses of approximately $17.0 million at year-end. The filing attributes the improvement primarily to lower rates. Q3 included $0.9 million of net securities losses from sales.

Outlook, commentary, and risks

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%. Q3 results were 1.61%, 14.73%, and 48.62%, respectively. These targets and ratios include non-GAAP measures; the filing provides reconciliations.
Management said loan pipelines remained strong and expects continued potential earnings improvement from loan growth and credit-risk management. The company completed rollout of a digital loan-origination platform and expects efficiency and productivity benefits in 2020 and beyond. Expense initiatives, including workforce reductions and three banking-center consolidations, are expected to produce about $10 million in annual pretax savings.
Management expected mortgage refinance activity to slow in Q4 2019. It was testing a correspondent mortgage channel aimed at higher-net-worth Florida customers.
Funding items to watch: all $458.4 million of brokered CDs outstanding at quarter-end mature in Q4 2019; the remaining $50.0 million of FHLB borrowings was due in October 2019. Management described core deposits as the primary funding source and stated the company was not dependent on significant wholesale funding.
The company expects a higher allowance for credit losses upon adopting CECL on January 1, 2020, recorded as a one-time cumulative adjustment to retained earnings. The amount was not yet determined; management identified acquired purchased-unimpaired loans as a primary contributor and cautioned that CECL may increase quarterly provision volatility.
Unusual items included a $1.0 million BOLI death benefit in Q3 and a $1.1 million deferred-tax-asset write-down after Florida reduced its corporate tax rate, partly offset by a $0.4 million tax benefit from applying the new rate. Management reported no significant contingent-liability accruals and did not expect existing legal proceedings to materially affect results.
Key stated risks include interest-rate and funding-cost changes, Florida economic and real-estate conditions, commercial real-estate concentration, borrower credit quality, acquisition integration, competition, cybersecurity and operational risks, regulatory requirements, and assumptions underlying loan-loss reserves and deferred tax assets. The filing reported effective disclosure controls and no material change to internal control over financial reporting during Q3.

Important facts for investors to verify

How the Q4 2019 brokered-CD maturities and October FHLB maturity were funded, and the resulting deposit mix and funding costs.
The size and timing of the CECL transition adjustment, especially its effect on acquired loans, retained earnings, and future credit-loss provisions.
Whether loan growth and pipelines convert to sustained earnings as acquired-loan accretion declines and market rates affect asset yields and deposit pricing.
Credit trends in CRE and other loan categories, including nonperforming loans, charge-offs, TDR defaults, and allowance adequacy.
Progress toward Vision 2020 targets and the realized savings from expense initiatives; assess non-GAAP adjustments alongside GAAP results.
The persistence of securities gains in accumulated other comprehensive income and the risks of realized losses if securities must be sold before recovery.