SEACOAST BANKING CORP OF FLORIDA quarterly report, Q3 FY2020

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Seacoast Banking Corporation of Florida — Q3 2020 Form 10-Q

Business context and reporting period. Seacoast is a Florida-based bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Results reflect the COVID-19 environment, the Paycheck Protection Program (PPP), and acquisitions of First Bank of the Palm Beaches in March and Fourth Street Banking Company/Freedom Bank in August.

Key financial results

  • Q3 earnings: Net income was $22.6 million, or $0.42 per diluted share, versus $25.6 million and $0.49 in Q3 2019. For the first nine months, net income was $48.4 million, or $0.91 per diluted share, versus $71.6 million and $1.38 in 2019. Adjusted net income, a non-GAAP measure, was $27.3 million in Q3 and $58.3 million for the nine months.
  • Net interest income and margin: GAAP net interest income was $63.5 million in Q3, up from $60.9 million a year earlier; nine-month net interest income was $194.0 million versus $181.9 million. Tax-equivalent net interest margin was 3.40% in Q3, down from 3.89% a year earlier and 3.70% in Q2; the nine-month margin was 3.67% versus 3.95%.
  • Credit provision: Q3 provision for credit losses was a net reversal of $0.8 million, compared with a $2.3 million provision in Q3 2019. Nine-month provision rose to $36.3 million from $6.2 million, reflecting CECL adoption and the year’s economic outlook. The allowance for loan losses was $94.0 million at quarter-end; excluding government-guaranteed PPP loans, the allowance was 1.80% of loans.
  • Noninterest income and expense: Q3 noninterest income was $16.9 million, up 22% year over year, including higher mortgage banking fees. Noninterest expense was $51.7 million, up 34%, including $4.3 million of merger-related costs and $0.5 million of branch-consolidation costs. The reported efficiency ratio was 61.65%, versus 48.62% a year earlier; the adjusted ratio was 54.82%, a non-GAAP measure.
  • Cash flow: Operating cash flow for the first nine months was $18.3 million, down from $75.3 million in 2019. Investing activities used $382.1 million, while financing activities provided $548.9 million, including $826.7 million of net deposit growth. Cash and cash equivalents ended the period at $309.6 million, compared with $124.5 million at year-end 2019.
  • Balance sheet and liquidity: Total assets were $8.29 billion, up 17% from year-end. Loans were $5.86 billion, up 13%; deposits were $6.91 billion, up 24%. Noninterest-bearing demand deposits were $2.40 billion, 35% of deposits, versus 28% at year-end. Brokered CDs were $381 million, with $147.2 million due in Q4 2020. FHLB borrowings were $35 million, down from $315 million at year-end; subordinated debt was $71.3 million. Management reported $135 million of available unsecured lines and $1.7 billion of secured lines, subject to change.
  • Capital: Shareholders’ equity was $1.10 billion. The consolidated total risk-based capital ratio was 17.98%; the bank’s CET1 ratio was 15.74%. Management stated the company and bank exceeded applicable well-capitalized thresholds.

Material changes versus comparable periods

  • Net income declined year over year in Q3 and for the nine-month period, while GAAP net interest income increased. Lower funding costs helped offset lower asset yields and margin compression.
  • The company acquired $330 million of deposits and $303 million of loans in the Freedom Bank transaction. Together, the two 2020 acquisitions contributed to balance-sheet growth and increased operating and integration expenses.
  • Adoption of CECL on January 1, 2020 increased the allowance by $21.2 million and reduced retained earnings by $16.9 million, net of tax effects. Prior-period figures use the previous credit-loss accounting method.
  • Nonaccrual loans rose to $36.9 million from $27.0 million at year-end; nonperforming assets were $52.8 million, up 34% from $39.3 million. The reported NPA-to-assets ratio was 0.64%, versus 0.55% at year-end.

Outlook, commentary, and risks

  • Management said the cost of deposits was expected to decline further in Q4 2020. It expected FDIC assessment expense of approximately $0.5 million in Q4 and further branch consolidations in 2021; the filing does not provide broader earnings or revenue guidance.
  • PPP origination fees totaled $17.2 million, deferred and recognized over time. After the SBA had not processed forgiveness applications by quarter-end, the company changed to recognition over the loans’ contractual maturity. It recognized $0.2 million in Q3 versus $4.0 million in Q2 and estimated about $2.1 million per quarter for the next six quarters if no early forgiveness occurs; actual timing may vary.
  • At September 30, $702.7 million of loans, or 13% of loans excluding PPP, were on payment deferral; none were classified as TDRs. Management said 97% were scheduled to resume regular payments in Q4. Borrowers may not resume payments, potentially leading to further modifications, interest reversals, and additional credit-loss provisions.
  • Management’s credit-loss estimate used a baseline economic forecast with qualitative adjustments for uncertainty, including possible renewed virus spread, business impacts, and the availability of fiscal stimulus. Outcomes could differ materially from those assumptions.
  • Key risks include COVID-19-related credit deterioration and collateral-value declines; commercial real estate and Florida geographic concentration; PPP forgiveness, compliance, and litigation exposure; deposit and liquidity changes; interest-rate sensitivity; acquisition integration and customer retention; and operational, third-party, and cybersecurity risks. Management said pending legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

  1. Whether borrowers on deferral resume scheduled payments, particularly in commercial real estate, and how deferrals evolve into delinquencies, nonaccruals, or losses.
  2. Whether the CECL allowance and its economic assumptions remain adequate as conditions change; review the allowance, charge-offs, risk ratings, and nonperforming assets together.
  3. PPP forgiveness timing, fee recognition, borrower eligibility, and any resulting compliance, repayment, or litigation exposure.
  4. How much of deposit and loan growth reflects acquisitions, PPP-related balances, and temporary pandemic effects, and whether acquired operations achieve expected benefits.
  5. Whether margins and earnings can withstand low interest rates, loan and securities yield declines, and changes in deposit costs; assess the company’s interest-rate sensitivity assumptions.
  6. How recurring operating costs and the efficiency ratio trend after merger and branch-consolidation expenses; compare GAAP results with management’s non-GAAP adjusted measures.