Seacoast Banking Corporation of Florida — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017 unless stated otherwise. Seacoast is a Florida-focused bank holding company. Results reflect organic growth and the full-quarter contribution of three 2017 acquisitions: GulfShore, NorthStar and Palm Beach Community Bank (PBCB).
Financial results and key metrics
| Metric | Q1 2018 | Comparison |
|---|---|---|
| Net interest income | $49.8 million | Up 30% from Q1 2017; up 3% from Q4 2017 |
| Net interest margin | 3.80% tax-equivalent | 3.63% in Q1 2017; 3.71% in Q4 2017 |
| Noninterest income | $12.3 million | Up 24% from Q1 2017; Q4 2017 included a $15.2 million Visa share-sale gain |
| Noninterest expense | $37.2 million | Up 7% from Q1 2017; adjusted expense was $35.7 million, a non-GAAP measure |
| Net income / diluted EPS | $18.0 million / $0.38 | $7.9 million / $0.20 in Q1 2017 |
| Adjusted net income / diluted EPS | $19.3 million / $0.40 | Non-GAAP; $10.3 million / $0.26 in Q1 2017 |
| Efficiency ratio | 57.8% | 71.1% in Q1 2017; adjusted ratio was 57.1% (non-GAAP) |
- Return on average tangible assets was 1.34%; return on average tangible shareholders’ equity was 14.4%.
- Total assets were $5.90 billion, loans $3.90 billion, and deposits $4.72 billion. Loans rose $79.7 million and deposits $126.8 million from year-end.
- Cash and cash equivalents were $135.9 million, up from $109.5 million. Operating cash flow was $53.9 million; investing activities used $109.2 million and financing activities provided $81.7 million.
- Allowance for loan losses was $28.1 million, versus $27.1 million at year-end. Provision was $1.1 million; net charge-offs were approximately $1,000.
- Nonperforming assets were $29.6 million, up from $27.2 million at year-end; nonperforming loans were 0.50% of total loans. CRE and construction/land-development concentrations were 207% and 64% of risk-based capital, respectively, below cited regulatory guidance levels of 300% and 100%.
- Deposits were the primary funding source. FHLB borrowings were $208.0 million, repurchase agreements $173.2 million, and subordinated debt $70.6 million. The filing reports total regulatory capital ratios of 14.95% consolidated and 13.73% at the Bank, with the Bank’s Tier 1 leverage ratio at 9.82%.
Material changes versus comparable periods
- Year-over-year earnings growth benefited from higher net interest income, loan growth and acquisitions; average loans were up 33% year over year. The comparison also reflects a substantially larger average share count, partly associated with acquisition-related stock issuance.
- Funding costs rose: interest expense was $5.7 million versus $2.6 million in Q1 2017, and the average rate on interest-bearing liabilities increased to 0.62% from 0.35%. Management attributed improved margin to loan growth, balance-sheet mix and higher market rates.
- Noninterest expense rose year over year, while the reported efficiency ratio improved. Adjusted results exclude specified acquisition, intangible-amortization and other items; these non-GAAP measures should be considered alongside GAAP results.
- Available-for-sale securities had $17.9 million of gross unrealized losses at quarter-end, versus $8.4 million at year-end. Other comprehensive loss was $8.0 million, largely reflecting higher interest rates; management said it did not intend or expect to be required to sell loss-position securities before recovery.
Outlook, commentary, risks and unusual items
- Management expects 2018 earnings to benefit from the full-year impact of the 2017 acquisitions, organic growth and cost reductions, and expects efficiency ratios to improve during 2018. It cited strong pipelines across commercial, mortgage, consumer and small-business lending.
- Vision 2020 targets are return on tangible assets of at least 1.30%, return on tangible common equity of at least 16%, and an efficiency ratio below 50%. These are targets, not guarantees.
- Management’s interest-rate simulations estimate net interest income would increase 5.1% with a 100-basis-point parallel rate increase and 9.8% with a 200-basis-point increase over the next 12 months. Outcomes depend on modeling assumptions and actual rate, deposit and balance-sheet behavior.
- Key risks include economic and interest-rate changes, borrower credit quality, Florida real-estate and geographic concentration, acquisition integration and expected cost savings, competition, cybersecurity and technology execution, regulation, and valuation estimates. The company plans to adopt CECL in 2020; the adoption impact had not been determined, though management expected a one-time cumulative allowance adjustment.
- The Tax Cuts and Jobs Act reduced the reported Q1 effective tax rate to 24.3% from 34.1% a year earlier. A $248,000 deferred-tax-asset write-down related to acquisition measurement adjustments partly offset the benefit. Q4 2017 included an $8.6 million tax provision adjustment related to the tax law.
- Management said pending legal matters were not expected to have a material adverse effect; it reported no significant contingency accruals or known pending matters it considered potentially significant. No material changes to the risk factors from the 2017 Form 10-K were reported.
Most important facts for investors to verify
- Whether loan and deposit growth, margin expansion and acquisition contributions continue, and how much growth is organic.
- Credit trends, including nonperforming assets, the allowance, charge-offs, OREO and CRE concentration exposure.
- Deposit pricing and retention, funding costs, and the sensitivity of earnings to actual interest-rate movements.
- Progress toward management’s 2018 efficiency expectations and Vision 2020 targets, using both GAAP and clearly reconciled non-GAAP measures.
- The impact of securities valuation changes, CECL adoption, acquisition accounting adjustments and tax-related estimates on future capital and earnings.