Seacoast Banking Corporation of Florida — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; monetary amounts below are in U.S. dollars. The quarter included Floridian, acquired March 11, for the full quarter, and BMO Harris’s Orlando operations, acquired June 3. Comparisons with prior periods are therefore affected by acquisitions.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Net interest income | $34.5 million | $25.7 million | Up 34.4% |
| Noninterest income | $9.2 million | $8.8 million | Up 3.5% |
| Net interest income plus noninterest income | $43.7 million | $34.5 million | Up 26.5% |
| Provision for loan losses | $0.7 million | $0.9 million | Down $0.2 million |
| Noninterest expense | $34.8 million | $24.3 million | Up 43.3% |
| Income before taxes | $8.2 million | $9.4 million | Down 12.7% |
| Net income | $5.3 million | $5.8 million | Down 8.1% |
| Diluted EPS | $0.14 | $0.18 | Down $0.04 |
- For the six months, net interest income was $64.7 million versus $51.4 million; net income was $9.3 million versus $11.7 million; diluted EPS was $0.25 versus $0.35.
- Tax-equivalent net interest margin was 3.63% in Q2, up 13 basis points year over year but down 5 basis points sequentially. The filing reports GAAP net interest margin of 3.60% for Q2.
- Management’s non-GAAP adjusted net income was $8.8 million and adjusted diluted EPS was $0.23 for Q2, versus $6.0 million and $0.18, respectively, a year earlier. These measures exclude specified items and are not substitutes for GAAP results.
Financial position, liquidity and capital
- At June 30, total assets were $4.381 billion, loans before allowance were $2.616 billion, deposits were $3.501 billion, and shareholders’ equity was $425.4 million. From December 31, 2015, assets rose 24.0%, loans 21.3%, and deposits 23.1%, with acquisitions a significant factor.
- Cash and cash equivalents were $126.8 million, down from $136.1 million at year-end. Six-month operating cash flow was $25.7 million; investing cash use was $152.8 million; financing cash inflow was $117.9 million. Cash decreased $9.3 million.
- Borrowings comprised $183.4 million of federal funds and repurchase agreements, $151.0 million of FHLB borrowings, and $70.1 million of subordinated debt. The company redeemed $50 million of higher-cost FHLB advances in April, incurring a $1.8 million cost; it expects roughly $0.4 million quarterly interest savings.
- Consolidated CET1, Tier 1, total risk-based capital, and leverage ratios were 10.95%, 12.75%, 13.45%, and 9.26%, respectively. Seacoast Bank’s leverage ratio was 8.82%. The company said it remained well capitalized; total risk-based capital had been 16.01% at year-end 2015.
- Management reported $50 million in available unsecured lines, $869 million in collateralized lines, $813 million of unpledged securities available for repurchase agreements, and another $359 million of real estate loans available as collateral. The bank could distribute approximately $81 million in dividends to the parent, subject to regulatory constraints.
Material changes and notable items
- Q2 expenses included $5.8 million of specified merger, branch-closure, early-redemption and other non-core items. Reported noninterest expense rose $10.5 million year over year, reflecting acquisition-related costs, operating investment and branch closures. Management said adjusted expenses rose 21% while revenue excluding securities gains rose 26%, providing 5% operating leverage.
- Floridian added approximately $417 million of assets, $337 million of deposits and $267 million of loans; its purchase price was $77.6 million and preliminary goodwill was $31.3 million. The BMO Harris transaction added about $314 million in deposits and $63 million in business loans; acquisition accounting and fair values remained preliminary.
- Loans increased 35.0% year over year to $2.616 billion, including acquired balances. Commercial real estate loans were $1.240 billion. The allowance for loan losses was $20.7 million, or 1.01% of portfolio loans excluding purchased loans, compared with 1.10% a year earlier.
- Nonperforming assets were $24.0 million, down from $25.5 million a year earlier. Nonaccrual loans were $15.3 million, including purchased loans; nonaccrual portfolio loans alone were $10.9 million. Newly identified TDRs were $1.7 million in the first half.
- Available-for-sale securities were $923.6 million and held-for-investment securities were $401.6 million. Management attributed unrealized losses principally to interest rates and spreads, expected recovery of amortized cost, and reported no securities as other-than-temporarily impaired.
Outlook, management commentary and risks
- Management affirmed a 2016 target of $1.00 in adjusted diluted EPS, a non-GAAP measure. It expected full-year net interest income to benefit from acquisitions and projected cost savings from branch consolidations, including substantial BMO-related savings in Q3 2016.
- The company planned to reduce its Orlando branch count from 28 to 15 by the end of Q3 2016, combining acquired and existing locations. Management cited digital adoption, customer growth, cross-selling and efficiency initiatives as supporting its strategy.
- Interest-rate simulations estimated net interest income would rise 5.2% with a 100-basis-point rate increase and 9.6% with a 200-basis-point increase over 12 months. These are model estimates and depend on assumptions about rates, customer behavior and balance-sheet growth.
- Key stated risks include acquisition integration and realization of expected savings or revenue, customer and deposit attrition, credit losses and real-estate concentration, interest-rate and liquidity exposure, competition, local economic conditions, and regulatory or accounting changes. The company operates primarily in central and southeastern Florida; 87.2% of loans were secured by real estate.
- Management considered pending legal matters not likely to have a material adverse effect, while noting outcomes cannot be assured. It reported no material change in previously disclosed risk factors and no significant contingent-liability accruals or known potentially significant pending matters.
Investor verification priorities
- Verify the reconciliation and assumptions behind adjusted net income, adjusted EPS, and the $1.00 adjusted EPS target; these are non-GAAP measures.
- Track whether Floridian and BMO Harris integration, branch reductions, and forecast expense savings are delivered, and compare subsequent results with acquisition-related cost estimates.
- Assess organic versus acquired loan and deposit growth, deposit mix and costs, and the effect of BMO-related liquidity deployment on net interest margin.
- Monitor credit quality, allowance adequacy, criticized and nonaccrual loans, TDR performance, real-estate concentrations, and acquired-loan fair-value estimates.
- Confirm capital and liquidity remain adequate as assets grow, FHLB funding changes, and acquired balances are integrated; review sensitivity to interest-rate and deposit assumptions.