SEACOAST BANKING CORP OF FLORIDA quarterly report, Q2 FY2023

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Seacoast Banking Corporation of Florida — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited. Amounts are in U.S. dollars; financial figures are generally in millions unless stated otherwise.

Business context

Seacoast is a Florida-focused banking company operating primarily through Seacoast Bank. Results and balance-sheet growth reflect the January 31, 2023 acquisition of Professional Holding Corp. (Professional), which added approximately $2.7 billion of assets, including $2.1 billion of deposits and $2.0 billion of loans. Integration and system conversion, including consolidation of five South Florida branches, were completed in June.

Financial performance and position

  • Q2 earnings: Net income was $31.2 million, or $0.37 per diluted share, down 5% from Q2 2022. Adjusted net income, a non-GAAP measure, was $49.2 million, or $0.58 per diluted share.
  • First-half earnings: Net income was $43.1 million, or $0.52 per diluted share, down 19% from the first half of 2022. Adjusted net income was $78.4 million, or $0.94 per diluted share.
  • Revenue and margin: Q2 net interest income was $127.0 million, up 56% year over year but down 3% from Q1. Fully tax-equivalent net interest margin was 3.86%, versus 3.38% a year earlier and 4.31% in Q1. Management cited rising deposit costs, the inverted yield curve, and lower acquired-loan discount accretion as pressures.
  • Costs and profitability: Q2 noninterest income was $21.6 million, up 27% year over year. Noninterest expense was $107.9 million, up 92%; the reported efficiency ratio was 67.34%, compared with 56.22% in Q2 2022. Acquisition-related charges were $15.6 million in Q2 and $33.2 million for the first half. Adjusted efficiency ratio was 56.44% in Q2 and 54.76% for the first half; both are non-GAAP measures.
  • Credit costs: Q2 included a $0.8 million provision reversal; Q2 2022 had $0.8 million of provision expense. First-half provision expense was $30.8 million, including $26.6 million recorded for Professional-acquired loans. The allowance for credit losses was $159.7 million, or 1.58% of loans, at June 30.
  • Balance sheet and funding: Total assets were $15.0 billion, up 24% from year-end 2022, primarily due to Professional. Loans were $10.1 billion, deposits $12.3 billion, and cash and cash equivalents $727.9 million. Noninterest-bearing deposits were 34% of deposits, down from 41% at year-end.
  • Liquidity and debt: Management reported $5.7 billion of available borrowing capacity in addition to cash, and liquidity sources equal to 155% of uninsured deposits. Uninsured deposits were 34% of deposits; uninsured and uncollateralized deposits were 28%. Balance-sheet borrowings included $290.2 million of repurchase agreements, $160.0 million of FHLB borrowings, and $106.0 million of subordinated debt.
  • Capital: Shareholders’ equity was $2.05 billion. The company’s CET1 ratio was 12.89%, total risk-based capital ratio 14.70%, and leverage ratio 10.56%; the bank’s corresponding leverage ratio was 9.87%. Management stated that the company and bank exceeded applicable well-capitalized thresholds.
  • Cash flow: First-half operating cash flow was $58.1 million, investing cash flow was a $328.6 million source, and financing cash flow was a $139.3 million source. Cash and cash equivalents increased by $525.9 million, including acquisition-related and other investing and funding flows.

Material changes versus comparable periods

  • Q2 net interest income rose 56% year over year, supported by higher loan and securities balances and yields, but sequential margin declined as deposit costs increased and purchased-loan discount accretion fell.
  • For the first half, net interest income increased to $258.1 million from $158.2 million, while net income declined to $43.1 million from $53.3 million. Higher acquisition-related costs, intangibles amortization, and credit provisions weighed on reported earnings.
  • Average deposit cost reached 1.38% in Q2, versus 0.77% in Q1 and 0.06% in Q2 2022. Time deposits grew to $1.64 billion at June 30 from $522.7 million at year-end.
  • Loan growth included approximately $2.0 billion from Professional. Nonaccrual loans increased to $48.3 million from $28.8 million at year-end, primarily reflecting Professional; nonperforming assets were $55.9 million, or 0.37% of assets.
  • Available-for-sale securities had $253.4 million of gross unrealized losses at June 30, compared with $248.7 million at year-end. Management attributed the losses primarily to interest rates and investment spreads and recorded no credit-loss allowance on these securities.

Outlook, commentary, and risks

  • Management expected merger-related expense synergies to be fully realized in the second half of 2023. It completed a workforce reduction of approximately 5% in late July, with estimated third-quarter severance charges of $2.0 million to $3.0 million; the full expense benefit was expected in Q4. Management said lower compensation costs in Q3 would largely be offset by marketing investment and lower expense deferrals as loan originations slow.
  • Commercial loan originations and pipelines declined year over year. Management cited higher rates and a selective approach to new credit facilities amid a cautious economic outlook. The Durbin amendment became effective for the company on July 1, 2023 and is expected to reduce interchange income beginning in Q3.
  • Interest-rate sensitivity modeling estimated that a parallel 200-basis-point increase would reduce projected 12-month net interest income by 8.5% and economic value of equity by 11.1%. These are model estimates, not forecasts, and depend on assumptions.
  • Key disclosed risks include deposit competition and outflows, interest-rate and securities valuation exposure, Florida real estate and commercial real estate concentration, credit deterioration, acquisition integration, inflation and economic slowdown, cybersecurity and vendor risks, and litigation or regulatory developments. Management said pending legal proceedings were not expected to have a material adverse effect.
  • Construction and land development and commercial real estate concentrations were 52% and 256% of bank total risk-based capital, respectively, below cited regulatory guidance levels of 100% and 300%. CRE and Florida geographic exposure remain important risks.

Important facts for investors to verify

  • Whether Professional integration synergies materialize as expected, and how workforce reductions and severance affect expenses in Q3 and Q4.
  • Deposit retention, mix, and pricing trends—especially time-deposit growth, brokered deposits, and uninsured or uncollateralized balances—as funding costs rise.
  • Loan quality trends, including the rise in nonaccrual loans, commercial real estate exposures, charge-offs, and the adequacy of the $159.7 million credit allowance.
  • Net interest margin sensitivity to interest rates, continued acquired-loan discount accretion, and unrealized securities losses and related capital effects.
  • Impact of the Durbin amendment on interchange revenue and whether weaker loan pipelines affect future growth.
  • Reported versus adjusted earnings and efficiency measures; adjusted figures are non-GAAP and exclude specified acquisition, amortization, and other items.