Seacoast Banking Corporation of Florida — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; comparisons are with Q2 and first-half 2021 unless stated otherwise. Dollar amounts are in millions except per-share data.
Business context
Seacoast is a Florida-focused bank holding company. It completed acquisitions of Sabal Palm Bancorp and Business Bank of Florida on January 3, 2022, and announced proposed acquisitions of Apollo Bancshares and Drummond Banking Company, both expected to close early in Q4 2022 subject to remaining conditions.
Financial performance and position
| Metric | Q2 / June 30, 2022 | Comparison |
|---|---|---|
| Net interest income | $81.6 million | Up 24% year over year |
| Net interest margin, fully tax-equivalent | 3.38% | 3.23% in Q2 2021; 3.25% in Q1 2022 |
| Net income / diluted EPS | $32.8 million / $0.53 | Net income up from $31.4 million; diluted EPS down from $0.56 |
| Six-month net income / diluted EPS | $53.3 million / $0.86 | Net income down 18% from $65.1 million; EPS was $1.17 in 2021 |
| Noninterest income | $17.0 million | Up 11% year over year in Q2; first-half total of $32.3 million was down 2% |
| Noninterest expense | $56.1 million | Up 23% year over year in Q2; first-half expense up 25% |
| Efficiency ratio / adjusted efficiency ratio | 56.22% / 53.15% | Q2 2021: 54.93% / 53.49% |
| Total assets / loans / deposits | $10.8 billion / $6.5 billion / $9.2 billion | Assets up 12%, loans up $616.5 million and deposits up 14% from Dec. 31, 2021 |
| Cash and cash equivalents | $901.4 million | $737.7 million at Dec. 31, 2021 |
| Allowance for credit losses | $90.8 million; 1.39% of loans | Allowance was $83.3 million at year-end 2021 |
| Capital | Consolidated CET1 15.80%; total risk-based capital 17.70% | Bank and company exceeded applicable well-capitalized thresholds |
For the six months, operating cash flow was $98.3 million, investing cash flow was negative $466.7 million, and financing cash flow was positive $531.9 million. The company paid $18.5 million in dividends. Subordinated debt was $71.8 million; repurchase agreements were $110.6 million. No FHLB borrowings were outstanding.
Material changes and credit
- Loan growth reflected acquisitions, a $111.3 million purchased residential loan pool, and organic production. Excluding acquisitions and that pool, management reported annualized loan growth of 7% in each of Q1 and Q2.
- First-half commercial originations rose 110% to $834.8 million. Residential mortgage production for sale fell 64% to $93.9 million as rising rates and limited housing inventory slowed activity.
- Mortgage banking fees fell 64% in the first half, while service charges, wealth management income and BOLI income increased.
- Q2 provision for credit losses was $0.8 million, versus a $4.9 million reversal in Q2 2021. First-half 2022 provision was $7.4 million, including acquisition-related provisioning.
- Nonperforming assets declined 35% from year-end to $28.9 million; nonaccrual loans were $26.4 million. Net charge-offs averaged 0.04% of loans over the four most recent quarters.
- Rising rates drove a $116.5 million first-half other comprehensive loss, principally from unrealized securities losses. AFS securities had $163.2 million in gross unrealized losses at June 30; management attributed these to rates and spreads, expected recovery of amortized cost, and recorded no credit-loss allowance.
Outlook, risks and unusual items
- Management expects loan growth, excluding acquisitions, at an annualized high-single-digit rate for the remainder of 2022. It expects the adjusted efficiency ratio to remain in the low 50s, while Q3 expenses are expected to increase from investments in talent and business scale.
- Management described the balance sheet as asset-sensitive and expects higher rates to benefit net interest income as assets reprice faster and more than liabilities. Static-balance-sheet modeling estimated NII increases of 5.1% over 12 months and 7.2% over 24 months for a 100-basis-point rate rise; actual results depend on assumptions and balance-sheet changes.
- Key risks include inflation, recession and rate movements; Florida and commercial real estate concentration; credit quality and collateral values; securities valuation; acquisition execution and integration; liquidity and deposit competition; and the transition from LIBOR. The company had approximately $218 million of loans indexed to LIBOR at June 30.
- Liquidity included $2.2 billion of available secured credit lines and $165 million of unsecured lines. Brokered deposits were $106.8 million, up from $8.0 million at year-end. Management reported no known pending legal matters expected to be material and no material changes to previously disclosed risk factors.
- Unusual items include acquisition-related costs and the large securities-related accumulated other comprehensive loss. The Q2 tax expense also reflects a $1.0 million refund of prior-period Florida corporate income tax.
Important facts for investors to verify
- Whether the announced Apollo and Drummond acquisitions close on the anticipated timetable and deliver expected growth and cost benefits.
- How net interest income, deposit costs and deposit mix respond as rates rise, including the validity of management’s asset-sensitivity assumptions.
- Whether loan growth and asset quality remain sound, especially in commercial real estate and Florida markets, and whether the allowance remains adequate.
- Whether unrealized securities losses remain rate-driven and recoverable, and the implications for tangible equity and capital if securities are sold.
- How acquisition-related and growth investments affect reported expenses, adjusted metrics, and the outlook for the efficiency ratio.