Seacoast Banking Corporation of Florida — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Seacoast is a Florida-based bank holding company operating primarily through Seacoast Bank. Comparisons below are with Q1 2019 unless otherwise stated.
Financial performance and condition
- Earnings: Net income was $0.7 million, or $0.01 per diluted share, versus $22.7 million, or $0.44, a year earlier. Adjusted net income, a non-GAAP measure, was $5.5 million, or $0.10 per diluted share. The sharp decline primarily reflected a $29.5 million credit-loss provision and $4.6 million in merger-related expenses.
- Revenue and margin: Net interest income was $63.2 million, up from $60.8 million. Noninterest income was $14.7 million, up from $12.8 million. Tax-equivalent net interest margin was 3.93%, compared with 4.02%; lower funding costs and loan growth helped, while lower rates pressured asset yields. Deposit cost fell to 0.57% from 0.67%.
- Expenses and returns: Noninterest expense rose to $47.8 million from $43.1 million. The reported efficiency ratio was 59.85%, versus 56.55%; the adjusted ratio was 53.61%, versus 55.81%. Return on average tangible assets was 0.11%, versus 1.48%.
- Loans and credit: Loans were $5.32 billion at quarter-end, up $118.8 million from December 31, 2019. The allowance for credit losses was $85.4 million, or 1.61% of loans, versus $35.2 million, or 0.68%, at year-end. The increase includes $21.2 million from adopting CECL and reflects pandemic-related economic forecasts. Net charge-offs were $1.0 million, or 0.07% of average loans. Nonperforming assets were $40.2 million, or 0.55% of assets.
- Cash flow and liquidity: Operating cash flow was $24.7 million; investing cash flow was $109.1 million and financing cash flow was $56.6 million. Cash and cash equivalents increased to $314.9 million from $124.5 million at year-end. Deposits grew $302.7 million to $5.89 billion. The company reported $160 million of available unsecured lines and $1.2 billion of secured lines, subject to change.
- Debt and capital: At March 31, FHLB borrowings were $265.0 million, subordinated debt was $71.2 million, and repurchase agreements were $64.7 million. Shareholders’ equity was $991.8 million. Consolidated total risk-based capital was 16.62%, CET1 was 14.27%, and the leverage ratio was 12.19%; the company and bank exceeded applicable well-capitalized thresholds.
Material changes and unusual items
- Seacoast adopted CECL on January 1, 2020. Adoption increased the allowance by $21.2 million and reduced retained earnings by $16.9 million, net of tax.
- The March 13 acquisition of First Bank of the Palm Beaches added two branches, approximately $174 million of deposits and $147 million of loans at acquisition. The $21.9 million purchase price included Seacoast stock and cash; preliminary goodwill recorded was $6.8 million.
- Unrealized losses on available-for-sale securities increased during the quarter amid market volatility. Management attributed these losses primarily to market spreads and interest rates and recorded no credit-loss allowance on the securities.
- Management had announced Vision 2020 targets of an efficiency ratio below 50%, return on tangible assets above 1.30%, and return on tangible common equity above 16%. It said COVID-19 makes achievement uncertain and did not provide revised targets.
Outlook, risks and contingencies
- Management said COVID-19’s effects on customers, markets, credit quality and results were highly uncertain and expected results in Q2 and likely the remainder of 2020 to be significantly affected. It described a near-term recession in the economic scenario used to estimate credit losses and warned that further provisions may be needed.
- By April 30, Seacoast had processed approximately 2,500 loan-payment deferrals totaling $1.0 billion; these were not classified as troubled debt restructurings. In April, it also processed more than 3,700 PPP loans totaling over $530 million. Forgiveness, expected loan lives and future yield effects remained uncertain.
- The company cited credit and collateral risk, Florida and commercial real estate concentrations, potential customer draws on $1.1 billion of unfunded commitments, interest-rate volatility, operational and cybersecurity risks, and possible disruption to third-party services.
- A proposed Fourth Street Banking Company/Freedom Bank acquisition was expected to close in Q3 2020, subject to approvals and other conditions. Management said pending legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- How credit quality, payment deferrals and the CECL allowance develop as the economic outlook changes.
- Whether deposit growth and available borrowing capacity remain sufficient if customers draw commitments or funding conditions tighten.
- The pace and economics of PPP loan forgiveness, including fee recognition and the impact on future yields.
- Progress toward the Fourth Street transaction and integration of the First Bank of the Palm Beaches acquisition.
- Whether management revises its Vision 2020 targets and how interest-rate changes affect net interest income and margins.