Seacoast Banking Corporation of Florida — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company is a Florida-focused bank pursuing organic growth and acquisitions; 2018 comparisons include the full-period effects of acquisitions completed in 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $50.2 million | $44.2 million | $100.0 million | $82.3 million |
| Net income | $17.0 million | $7.7 million | $35.0 million | $15.6 million |
| Diluted EPS | $0.35 | $0.18 | $0.73 | $0.38 |
| Provision for loan losses | $2.5 million | $1.4 million | $3.6 million | $2.7 million |
| Noninterest income | $12.7 million | $10.5 million | $25.0 million | $20.4 million |
| Noninterest expense | $38.2 million | $41.6 million | $75.4 million | $76.4 million |
Q2 net interest margin was 3.77% on a tax-equivalent basis, down from 3.84% a year earlier; first-half margin was 3.78%, up from 3.74%. The reported Q2 efficiency ratio improved to 58.4% from 73.9%; the adjusted non-GAAP ratio was 57.3% versus 61.2%. Adjusted Q2 net income was $18.3 million, or $0.38 per diluted share, versus $12.7 million, or $0.29, a year earlier.
Financial position, cash flow and credit
- Total assets were $5.92 billion at June 30, up 1.9% from year-end 2017. Loans were $3.97 billion, up 4.1%; deposits were $4.70 billion, up 2.3%.
- Cash and cash equivalents were $131.5 million. Six-month operating cash flow was $82.9 million, investing cash flow was negative $143.7 million, and financing cash flow was positive $82.8 million; cash increased $22.0 million.
- Borrowings included $205.0 million of FHLB advances, $200.1 million of customer repurchase agreements, and $70.7 million of subordinated debt. Shareholders’ equity was $716.2 million; the company reported a 12.09% equity-to-assets ratio.
- Regulatory capital ratios exceeded well-capitalized thresholds: consolidated CET1 was 12.91%, total risk-based capital 15.21%, and Tier 1 leverage 11.02%.
- Nonperforming assets rose to $34.6 million from $27.2 million at year-end; nonperforming loans were 0.66% of loans versus 0.51%. Management attributed a significant increase in nonaccrual portfolio loans to one commercial real estate credit. Q2 net charge-offs were $1.7 million; the allowance for loan losses was $28.9 million, or 0.88% of portfolio loans excluding acquired loan categories.
Material changes and management outlook
- First-half net income more than doubled year over year, supported by higher net interest income, loan growth, acquisition contributions, and lower reported expenses. Average loans increased 26% year over year in the first half.
- Funding costs rose: the average rate on interest-bearing liabilities was 0.67% for the first half versus 0.38% a year earlier. Management cited loan growth, balance-sheet mix, and higher benchmark rates as key influences on interest income and margin.
- Available-for-sale securities had $23.0 million of gross unrealized losses at quarter-end, compared with $8.5 million at year-end 2017. The company recorded a $12.2 million decline in other comprehensive income for the first half, primarily reflecting higher rates. Management said it did not intend, and was not likely required, to sell loss-position securities before recovery.
- Management reiterated its Vision 2020 targets: return on tangible assets above 1.30%, return on tangible common equity above 16%, and efficiency ratio below 50%. First-half adjusted return on tangible assets was 1.33%; adjusted return on tangible common equity was 14.1% and adjusted efficiency ratio 57.2%. Management expected efficiency to improve in 2018 and loan growth to continue, but did not provide specific earnings guidance.
- The proposed First Green Bancorp acquisition, announced in June, was expected to close early in Q4 2018, subject to regulatory and shareholder approvals and other conditions. First Green reported approximately $629 million of loans and $629 million of deposits as of March 31, 2018.
- Management reported positive interest-rate sensitivity: its model estimated net interest income would rise 4.2% over the next 12 months under a parallel 100-basis-point rate increase and 8.2% under a 200-basis-point increase. These are model estimates, not guarantees.
Risks, contingencies and unusual items
- Key risks include Florida economic and real-estate conditions, commercial real-estate concentration, borrower credit quality, interest-rate and deposit-cost changes, acquisition integration and execution, competition, cybersecurity, regulation, and litigation.
- Commercial real estate loans represented 45% of total loans; management stated CRE and construction concentrations were below regulatory guidance levels. Unfunded loan commitments totaled $840 million.
- Legal proceedings are part of the ordinary course of business; management did not expect them to materially affect financial condition, results, or cash flows and reported no significant contingent-liability accruals.
- The company adopted ASC 606 with no material financial-statement impact. It planned to adopt the current expected credit loss standard (CECL) on January 1, 2020; the impact had not been determined and could increase the allowance through a one-time retained-earnings adjustment.
- The Tax Cuts and Jobs Act reduced the effective tax rate; the first-half 2018 rate was 23.9% versus 34.0% a year earlier. Management said deferred tax assets were more likely than not to be realized.
Investor verification priorities
- Review the rise in nonperforming assets and the specific commercial real estate credit driving higher nonaccrual loans.
- Assess whether margin and earnings growth can persist as deposit and other funding costs rise.
- Track unrealized securities losses, liquidity needs, and the company’s ability to hold securities until recovery.
- Verify First Green’s approvals, closing timing, integration costs, and expected contribution to growth and efficiency.
- Compare reported and adjusted performance measures, including the non-GAAP exclusions, with the 2020 targets.