Seacoast Banking Corporation of Florida — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Seacoast is a Florida-based bank holding company. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net interest income, GAAP | $16.5 | $16.2 | $33.0 | $33.4 |
| Provision for loan losses | $0.9 | $16.8 | $1.5 | $18.8 |
| Noninterest income | $4.5 | $5.6 | $8.8 | $11.9 |
| Noninterest expense | $19.1 | $18.9 | $38.7 | $41.8 |
| Net income (loss) | $1.1 | $(13.8) | $1.5 | $(15.4) |
| Net income (loss) available to common shareholders | $0.2 | $(14.7) | $(0.4) | $(17.2) |
- Q2 diluted and basic EPS were reported as $0.00; first-half EPS was also rounded to $(0.00), reported as $0.00 in the statement, despite the $0.4 million common-shareholder loss. Preferred dividends and discount accretion were $0.9 million for Q2 and $1.9 million for the half year.
- Tax-equivalent net interest margin was 3.36% in Q2, down 12 basis points from Q1 but up 9 basis points year over year. The yield on earning assets fell to 4.12%; the average cost of interest-bearing liabilities declined to 0.95%.
- Management attributed the improved first-half result mainly to substantially lower loan-loss provisioning. Q2 noninterest income was lower year over year largely because there were no securities gains; Q2 2010 included $1.4 million of such gains. Q2 expenses were up $0.2 million year over year, partly due to higher OREO and asset-disposition costs.
Financial position, cash flow and credit
- At June 30, 2011, total assets were $2.083 billion, shareholders’ equity $171.1 million, deposits $1.681 billion, net loans $1.158 billion and cash and cash equivalents $166.9 million. Compared with December 31, 2010, assets rose $66.5 million, deposits rose $44.2 million, net loans declined $45.2 million and cash declined $44.5 million.
- Total securities were $636.4 million, up $174.4 million from year-end, while gross loans fell $51.7 million to $1.189 billion. Deposits were down 2.0% year over year; noninterest-bearing demand deposits grew 16.4% year over year to $321.9 million. Brokered time deposits had fallen to $7.5 million.
- Debt and borrowing included $102.8 million of repurchase agreements, $50.0 million of FHLB advances and $53.6 million of subordinated debt. The company reported $6.3 million of unpaid Series A preferred dividends and $2.5 million of deferred trust-preferred interest.
- First-half operating cash flow was $20.2 million; investing activities used $113.6 million, primarily reflecting securities purchases; financing activities provided $48.9 million. Cash and cash equivalents declined $44.5 million during the half year.
- The allowance for loan losses was $31.2 million, or 2.63% of loans, versus 3.10% a year earlier. First-half net charge-offs were $8.1 million; provision was $1.5 million. Nonaccrual loans were $46.2 million, down from $90.9 million a year earlier, and nonperforming assets totaled $72.0 million, down from $109.9 million.
- Accruing troubled debt restructurings were $60.2 million. Commercial real estate remained a major exposure; real estate-secured loans represented 91.6% of total loans. Management reported that construction and land-development loans had declined substantially as part of its risk-reduction efforts.
- Regulatory capital remained above minimums: consolidated Tier 1 capital ratio 17.65%, total risk-based capital ratio 18.92% and Tier 1 leverage ratio 10.23%. Seacoast National was reported well-capitalized, subject to an OCC agreement requiring at least an 8.50% Tier 1 leverage ratio and 12.00% total risk-based capital ratio.
Outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management said lending conditions remained challenging, although loan production and the commercial loan pipeline had improved; it expected prudent lending opportunities to remain constrained by weak economic conditions. Management also said continued credit-cost moderation could support lower future charge-offs, while cautioning that losses could remain elevated.
- Management cited Florida economic and real-estate weakness, unemployment, loan collateral values, commercial real-estate concentration, interest-rate movements, deposit competition, funding access and regulatory changes as principal risks. Results depend on estimates for loan losses, securities values, deferred taxes and contingencies.
- The company had a $47.3 million valuation allowance against net operating loss carryforwards and reported $16.9 million of net deferred tax assets supported by tax-planning strategies. A cumulative pretax loss history is negative evidence for realization; future tax benefits remain uncertain.
- The bank remained subject to a formal OCC agreement concerning asset quality and credit-risk management. The parent company could not receive bank dividends without prior OCC approval. Common, preferred and trust-preferred distributions remained suspended; TARP-related restrictions also limited dividends and repurchases.
- Management did not expect pending accounting standards discussed in the filing to materially affect financial position or results, except that it was still evaluating the impact of updated troubled-debt-restructuring guidance. Management believed pending litigation was not likely to have a material adverse effect, but gave no assurance about outcomes.
- Interest-rate modeling estimated net interest income would increase 10.5% under a 200-basis-point rate increase over 12 months; an instantaneous 200-basis-point increase was estimated to reduce economic value of equity by 9.9%. These are model estimates and depend on assumptions.
Most important facts for investors to verify
- Whether lower provisioning and nonaccrual balances reflect durable credit improvement, and how charge-offs, OREO sales and the allowance evolve.
- The quality and concentration of remaining commercial real-estate and other Florida real-estate exposures, including TDR performance and collateral valuations.
- Whether loan and deposit trends support sustainable net interest income as asset yields, liquidity levels and funding costs change.
- The conditions and approvals required to resume dividends, repay TARP preferred stock or trust-preferred obligations, and permit the bank to upstream capital to the parent.
- The recoverability of deferred tax assets and the effect of any ownership change under Section 382 on tax attributes.