Seacoast Banking Corporation of Florida — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. Seacoast is a Florida-focused bank holding company. Comparisons are with Q2 and first-half 2019, or with December 31, 2019 for balance-sheet items.
Key financial results
| Metric | Q2 2020 | Six months ended June 30, 2020 | Comparable period |
|---|---|---|---|
| Net income | $25.1 million | $25.8 million | Q2 2019: $23.3 million; H1 2019: $46.0 million |
| Diluted EPS | $0.47 | $0.49 | Q2 2019: $0.45; H1 2019: $0.88 |
| Net interest income, GAAP | $67.3 million | $130.4 million | Q2 2019: $60.1 million; H1 2019: $120.9 million |
| Provision for credit losses | $7.6 million | $37.1 million | Q2 2019: $2.6 million; H1 2019: $3.9 million |
| Net interest margin, FTE | 3.70% | 3.81% | Q2 2019: 3.94%; H1 2019: 3.98% |
| Net cash from operating activities | Not separately stated | $30.4 million | H1 2019: $49.4 million |
Q2 adjusted net income, a non-GAAP measure, was $25.5 million ($0.48 diluted EPS); H1 adjusted net income was $30.9 million ($0.59 diluted EPS), down 38% from H1 2019. H1 reported earnings fell 44%, principally amid a much larger credit-loss provision and COVID-related economic uncertainty. The company recorded $4.8 million of merger-related expenses in H1.
Financial position, funding and capital
- Total assets were $8.08 billion, up 14% from year-end 2019. Deposits were $6.67 billion, up $1.08 billion; loans were $5.77 billion, up $573.6 million before allowance.
- Cash and cash equivalents rose to $524.3 million from $124.5 million. H1 cash flows were $30.4 million from operations, negative $363.6 million from investing and positive $733.0 million from financing.
- The allowance for credit losses was $91.3 million, versus $35.2 million at year-end. It equaled 1.76% of loans excluding PPP loans. The company adopted CECL on January 1, increasing the allowance by $21.2 million and reducing retained earnings by $16.9 million.
- FHLB borrowings were $135.0 million, down from $315.0 million; subordinated debt was $71.2 million. Shareholders’ equity was $1.03 billion. The company’s total risk-based capital ratio was 17.60%; the bank’s was 16.51%, above the 10.00% well-capitalized threshold.
- Available liquidity included $1.4 billion in secured credit lines and $135.0 million in unsecured lines. Management said rising deposits made use of the Federal Reserve’s PPP loan funding facility unnecessary.
Material changes and operating developments
- Q2 net income increased from Q2 2019, while H1 net income declined year over year. Lower funding costs supported net interest income, but the margin contracted: Q2’s 3.70% was down from 3.94% a year earlier and 3.93% in Q1 2020. Management attributed sequential compression partly to elevated cash balances and lower asset yields.
- Commercial originations slowed as the company tightened underwriting amid uncertainty. Residential refinancing activity was strong. PPP loans outstanding were $576.5 million at quarter-end; the company reported originating more than 5,000 loans. It had deferred $17 million of net PPP fees, recognized $4 million in Q2, and noted uncertainty about forgiveness timing and recognition of the remaining fees.
- The company completed its acquisition of First Bank of the Palm Beaches in March for approximately $21.9 million, including stock issued and cash paid for vested options. It announced a proposed acquisition of Fourth Street Banking Company, expected to close in August 2020 subject to approvals and customary conditions.
- Available-for-sale securities had $22.7 million of net unrealized gains, net of tax, included in equity. The company repositioned CLO holdings, replacing A-rated securities with AAA-rated securities.
Outlook, risks and contingencies
- Management cited continuing uncertainty from COVID-19, including possible renewed restrictions, weaker borrower repayment capacity, unemployment and pressure on collateral values. It said further credit-loss provisions may be needed; no numerical earnings guidance was provided.
- At June 30, $1.08 billion of loans, or 21% of non-PPP loans, were on payment deferral; none were classified as TDRs. Deferrals were scheduled to end for 39% of those loans in Q3 and 61% in Q4. Management warned that some borrowers may not resume payments, potentially leading to further modifications, nonaccrual loans or losses.
- Nonperforming assets totaled $45.9 million, up 17% from year-end; nonperforming loans were 0.52% of total loans. Commercial real estate represented about 43% of loans, and the company has geographic concentration in Florida.
- Other risks include PPP forgiveness, servicing or eligibility disputes and related litigation; interest-rate and liquidity changes; acquisition integration and execution; operational and cybersecurity risks from remote work; and possible adverse effects on fee income and loan demand. Management did not expect existing legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether deferred borrowers resume payments and how the $1.08 billion deferral book performs after scheduled deferral expirations.
- Whether the $91.3 million allowance adequately reflects evolving economic conditions, particularly in commercial real estate and Florida markets.
- PPP forgiveness outcomes, loan repayment and the timing of recognition of the remaining deferred fees.
- Deposit stability, liquidity needs, and the effects of lower rates and unusually high cash balances on net interest margin.
- Completion and integration of the proposed Fourth Street acquisition, including costs and expected benefits.