Seacoast Banking Corporation of Florida — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019. The company operates primarily through Seacoast Bank in Florida. Comparisons are with the corresponding 2018 periods unless otherwise noted; balance-sheet comparisons are with December 31, 2018. The October 2018 First Green acquisition affects year-over-year comparability.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income (GAAP) | $60.1 million | $50.2 million | $120.9 million | $100.0 million |
| Net income | $23.3 million | $17.0 million | $46.0 million | $35.0 million |
| Diluted EPS | $0.45 | $0.35 | $0.88 | $0.73 |
| Net interest margin (tax-equivalent) | 3.94% | 3.77% | 3.98% | 3.78% |
| Noninterest income, including securities losses | $13.6 million | $12.7 million | $26.4 million | $25.0 million |
| Noninterest expense | $41.0 million | $38.2 million | $84.1 million | $75.4 million |
| Provision for loan losses | $2.6 million | $2.5 million | $3.9 million | $3.6 million |
Balance sheet, funding and credit
- At June 30, total assets were $6.82 billion, loans before allowance were $4.89 billion, deposits were $5.54 billion and shareholders’ equity was $930.2 million.
- Cash and cash equivalents were $159.8 million, up from $116.0 million at year-end. Six-month operating cash flow was $49.4 million, versus $61.6 million in 2018.
- FHLB borrowings fell to $140 million from $380 million at year-end; the remaining amount matured in July 2019. Subordinated debt was $70.9 million. Repurchase agreements declined to $82.0 million from $214.3 million.
- Deposits grew $364.0 million, or 7%, from year-end; total loans increased $62.9 million. Noninterest demand deposits were 30.1% of deposits.
- Allowance for loan losses was $33.5 million, up from $32.4 million at year-end. Nonperforming loans were 0.47% of loans and nonperforming assets were 0.50% of assets, down from 0.55% and 0.58%, respectively. Q2 net charge-offs were 0.15% of average loans.
- Regulatory capital ratios exceeded well-capitalized thresholds: consolidated total risk-based capital 15.29%, CET1 13.29%, and leverage 11.77%.
Material changes and management commentary
- Q2 net income rose 37% year over year; six-month net income rose 31%. Management attributed stronger net interest income mainly to loan growth, asset mix and acquisition effects. Six-month tax-equivalent net interest income increased 21%.
- Quarterly net interest margin eased to 3.94% from 4.02% in Q1 2019. Management cited a lower yield curve, six-basis-point contraction in loan yield and nine-basis-point increase in deposit cost during Q2; it said deposit-rate pressure began to abate late in the quarter.
- Q2 noninterest expense declined from Q1 but increased year over year; six-month expense increased 12%. Management reported completing a $10 million annual expense-reduction initiative, including a 50-employee reduction, vendor renegotiations and other cuts. One additional branch consolidation was planned for Q3.
- The standard Q2 efficiency ratio improved to 53.48% from 58.41% a year earlier; the adjusted, non-GAAP ratio was 51.44%. Management expects efficiency ratios to improve during the remainder of 2019.
- Management’s 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%. Q2 reported returns were 1.50% and 14.30%, respectively; adjusted measures were 1.59% and 15.17%. These are targets, not guaranteed outcomes.
- Q2 securities losses, net, were $0.5 million, including losses on security sales. Available-for-sale securities’ net unrealized gains improved with lower interest rates. Management stated it did not intend, and was not more likely than not required, to sell securities in unrealized-loss positions before recovery.
- The company adopted lease accounting in January 2019, recognizing $29 million of right-of-use assets and $33 million of lease liabilities at transition. It expects CECL adoption on January 1, 2020 to increase the credit-loss allowance, but had not determined the amount.
Outlook, risks and contingencies
No specific full-year earnings or revenue guidance is provided. Management cited strong loan pipelines and expects prudent growth and operating improvements to support earnings. Key risks disclosed include interest-rate and deposit-cost changes, credit quality and commercial real estate concentration, Florida economic and real-estate conditions, acquisition integration, competition, cybersecurity and operational risks, and regulatory or legal developments. Commercial real estate was 45% of loans; management said relevant concentration measures remained below regulatory guidance. Legal proceedings were not considered likely to have a material adverse effect, and no significant contingent-liability accruals or known potentially significant pending matters were reported.
Important facts for investors to verify
- Whether deposit growth and funding mix remain sustainable, and how the July 2019 FHLB maturity was refinanced or repaid.
- Whether margin pressure and deposit costs continue, particularly as the yield curve and rates change.
- Loan growth, commercial real estate concentrations, nonperforming assets, charge-offs and allowance adequacy.
- Progress toward the Vision 2020 targets, including whether expense reductions translate into durable efficiency gains.
- The eventual CECL adoption impact and the amount of expected allowance and retained-earnings adjustments.
- Underlying performance excluding acquisition effects, purchase-accounting accretion and management’s non-GAAP adjustments.