Seacoast Banking Corporation of Florida
Q2 2013 Earnings Call Transcript

Published: 29 Jul 2013

[Operator:]

Welcome to the Seacoast second quarter 2013 earnings conference call. [Operator instructions.] And I will now turn the call over to Dennis Hudson. Mr. Hudson, you may begin.

[Dennis Hudson:]

Thank you very much and welcome to our second quarter 2013 conference call. As always, before we begin we’ll direct your attention to our statement contained at the end of our press release regarding forward statements. During the call, we will be discussing a number of issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and accordingly our comments are intended to be covered within the meaning of Section 27A of the act. With me today is Bill Hahl, our chief financial officer; David Houdeschell, our chief credit officer; and Rick Perez, our retail banking executive. Our progress continued this quarter. Earnings were up 50% from the first quarter and totaled $2.9 million. We are on target with the expense reductions announced last year and we are very pleased with the success of our revenue initiatives this quarter. We also continued to see further improvement in credit quality. When you take it together, these improvements in the first half of the year suggest we’re well on our way to achieving our targeted results for ’13 and further substantial improvements in earnings as we move into 2014. Loan growth and loan production were much improved for the quarter. Our overall loan production for the quarter totaled $183 million in new credits, which was a sequential increase of 53% over the prior quarter. This included much stronger commercial customer growth and another great quarter of very strong consumer loan production, which came primarily from a very strong home purchase market here in south Florida. Our loan production this quarter was the best that we’ve produced since the downturn, and it reflects well, I think, on the investments that we have been making to deepen our exposure, particularly in the Orlando and south Florida markets as well as much better activity in some of our other markets. We also have a number of tactics underway to achieve even better revenue growth as we build and serve our growing customer base. This quarter, as you saw, we produced a 21% increase in noninterest revenues, which came from just about every component of this important revenue item. We also improved our revenue mix, with over 28% of revenues now coming from fees and other noninterest sources. The expense savings we announced last year continue to be implemented and are on schedule. Total expenses for the quarter were down 8.1% compared with the prior year, as reductions were implemented and credit costs continued to decline. This decline came in spite of rather significant increased spending for people and facilities added that are related to our growth initiatives. We also hit another milestone this quarter, as nonperforming assets fell to less than 2% of assets for the first time since the start of the great recession. Classified assets at the bank level also fell below 25% of tier one capital and the allowance for loan losses for the first time in the cycle, which is at a level most regulatory bodies consider to be quite accessible. And our restructured loans this quarter were reduced by 28% during the quarter. We now enjoy asset quality measures that are better than we experienced prior to the start of the great recession. So in sum, I would say we are very pleased with our progress this quarter. We’re on track and we expect continued progress in the next quarter. I’m going to turn the call over to Bill, who will provide a little more detail on the quarter, and then we’ll open things up for a few questions. Bill?

[William Hahl:]

Thanks, Denny, and good morning everyone. We posted a slide deck that provides highlights on our website that we’ll be commenting on this morning before we take questions. I’m going to start on slide three with a few comments on the highlights for the quarter and the first six months. As Denny mentioned, it was a good start of the year, with accelerating loan production, continued household growth, and importantly no significant or unusual items. Net interest income for the first six months was $5 million, up $6.4 million from last year’s net loss of $1.4 million. Net income available to the common shareholders year to date was $3.1 million, or $0.03 per diluted common share, compared to a net loss of $0.03 last year. For five quarters now, our tactics designed to build noninterest income have been contributing to the build of our revenues in this tough rate environment. Over the last 12 months, noninterest income, excluding security gains, grew 21.4%, reflecting strong mortgage banking fees, wealth management fees, increased fees related to our deposit franchise growth, and from deposit product restructuring late in the first quarter, which had a positive impact of increasing checking balances as well as service charges and interchange revenues. Linked quarter unannualized mortgage banking service charges and interchange fees were up 12.8%, 5.8%, and 9.8% respectively. For the first six months, noninterest income is up 20.8% compared to 2012. The strong fee-based revenue growth and a stable net interest margin for the quarter pushed total revenues to $22.4 million, which was an increase of $1.2 million from a year ago. On a linked quarter basis, revenues increased for the fourth consecutive quarter. The total revenues year to date are up $1.6 million and totaled $44.4 million. Total assets increased year over year by $76 million funded with core customer funds, with solid growth in noninterest bearing transaction accounts, up 19% year over year, and now comprise 27% of total deposits. Savings deposits, excluding time deposits, are up 5.5% year over year. Now I’ll turn to slide four, and a few comments about cost reductions and noninterest expenses compared to a year ago. Over the last year, quarterly expenses have been managed lower as a result of cyclical credit costs declining and our branch consolidations and other cost-cutting projects. As part of our commercial and business banking growth plan, we have invested a significant portion of the reduction in operating expenses in customer acquisition, capacity, and additional business bankers and credit support personnel, as revenue growth needs to continue and at a faster pace. This quarter, expenses are lower by $1.7 million compared to a year ago and are down $4.4 million year to date, decreasing the efficiency ratio and indicating operating leverage is improving. Turning to slide five, our expenses in our expanded lending platform and commercial relationship teams is paying off as sequential loan growth increased 3.5% and average loans are up $22 million, or 7.2% annualized linked quarter. This is the highest growth we’ve experienced since the start of the recession. Our expanded teams are steadily improving growth in commercial loan balances with total loan production of $183 million for the quarter compared to $119 million last quarter and $110 million a year ago. Top line loan growth was impacted linked quarter and year over year by a decline in non-accrual loans of $2 million from last quarter and a decline in nonaccrual loans of $15 million compared to a year ago. On a year to date basis, loan production totaled $306 million, up from $210 million in 2012. Now some color on the net interest margin. After declining 7 basis points in the first quarter, the margin declined only 3 basis points in the second quarter. With low add-on rates for investments and higher prepayments impacting the investment portfolio, yields declined 9 basis points. The loan portfolio was positively impacted by lower non-accruals, but lower add-on rates offset, and the yield declined 5 basis points. We continue to make substantial progress improving the retail franchise with increases in households, increasing the average balance per household, and the improved deposit mix. These results have had a positive impact on the net interest margin. Growing our net investment income remains our focus, and we believe we can continue to generate growth, even in this low rate environment. The primary opportunities for growth in net interest income and margins remains an improved earnings asset mix in favor of loans and further growth in core customer funding. Continuing to reduce the cost of interest bearing liabilities will produce limited impact. This number declined only 2 basis points linked quarter, so we must remain focused on growing our checking and core deposit franchise and improving our loan production. As we highlighted in the slides seven through nine, we continue to improve credit quality and bring down credit costs, and we don’t see much in the way of any bumps in the road ahead. New credit inflows are down and stable, and the level of substandard or problem loans are getting quite low and quite granular. In closing, I will say we projected last quarter on the call that commercial loan production would improve, and it did. The investments in business bankers should result in further improvement in the second half of the year, although we’re expecting a little softening in the upcoming summer quarter. Our noninterest income is growing at over 20%, and is supported by both household growth and services per household. We remain focused on managing core operating expenses, both through cost cutting and investments, and we believe we have further opportunities to increase revenues, which will lead to a lower efficiency ratio. With that, I’ll turn the call back to Denny for any questions.

[Dennis Hudson:]

Thank you, Bill, and, again, as I said at the outset, I think we’re off to a good start in 2013. We’re right where we thought we would be, and we look forward to continuing to report progress over the next couple of quarters. With that, I’ll open the call to a few questions.

[Operator:]

[Operator instructions.] And we have our first question from Michael Rose with Raymond James. Please go ahead.

[Michael Rose:]

Just wanted to get an update on the DTA recapture. With criticized and classified to tier one where it is, and where it has been now for a couple of quarters, can you give us kind of the timeline there based on what we’ve seen out of a couple of other banks more recently? And then beyond that, what the plans would be for the remarketed TARP funds as we move into 2014.

[Dennis Hudson:]

First of all, with regard to the DTA, all I can tell you is we’re working with our accountants to answer the question you just asked. And I guess we are of the belief that our earnings are a little cleaner today. We’ve had, actually, technically speaking, nine out of the ten last quarters have produced positive earnings. We think over the last four quarters, adjusting for some of the cost outs that we announced at the end of the year, we’ve had much improved earnings. And I think we’re getting close. I would also point out that you can do the math yourself, Michael. And we come out of a three-year cumulative loss next quarter, which is a big piece of negative evidence that goes away in the calculus. So I think we indicated in the release that we thought it could happen as soon as the second half of this year. Wish I could give you better insight, but that’s kind of where we are on that. With respect to the preferred that is outstanding, as you know that rate ratchets up later in the first quarter, and we continue to look at alternatives, and think about that. Key here is for our earnings to continue to improve, and our regulatory status to improve, and we think we are on target with both of those items, as well as, of course, the impact of a DTA recapture. I think as those all come together, potentially later this year we’ll be in a stronger position to deal with that issue.

[Michael Rose:]

And then two follow ups if I could. I assume it’s because of this quarter’s growth, but the commercial pipeline, obviously first to second, was down. Can you give us some confidence or some guidance into that rebuilding of the pipeline as we move into the back half of the year? And then secondarily, if you could just address the accelerate program that you guys have put into place, that would be helpful.

[Dennis Hudson:]

Well, with respect to the pipeline, we’ve been reporting for some quarters now the progress on building the pipeline, and in the slide deck, on page five, you can see that we had a great quarter in Q2 in terms of closings for commercial. But not to be lost is the tremendous growth we had on the consumer side as well, with a very, very strong residential market. We see those trends continuing into the second half of the year, but we are mindful that we’re also going into the depth of the summer season, and we tend to find it a little more difficult to get activity to the table in the summer quarters. So we’re going to have another great quarter we think, but mindful that it’s a summer quarter. So I think the long term trends continue. The pipeline, as you noted, is down a little bit at the end of Q2 for commercial. I would tell you things continue to look very solid on the consumer side. We’ve focused our attention, as I said, for many quarters on away from the refi market on the consumer side, which puts us in a more stable position, we think, to generate continued residential volume given the very hot market that now exists for residential transactions in Florida. And then you mentioned our accelerate program. Again, having good success in Florida and in the Orlando market with teams that we have acquired into our accelerate business program, and we’ll have more to say on that over the next couple of quarters as we get even more growth and success behind us. But the program’s going well, and we’re very pleased with the results, particularly those that you can see on page five. We have plans to continue to grow over the balance of this year.

[Operator:]

[Operator instructions.] We have Mark Heilweil with Spectrum Advisory. Please go ahead.

[Mark Heilweil:]

I was just wondering if you want to comment on the withdrawal of Cap Gem’s application to raise its ownership up to 25%. What was behind that?

[Dennis Hudson:]

I don’t think their interest in Seacoast has changed at all. I think the application was reviewed because of some technical issues that they’re addressing. I wouldn’t read anything at all into that change.

[Operator:]

And I see no further questions in queue at this time.

[Dennis Hudson:]

Well, thank you very much for attending today. We look forward to reporting on continued progress next quarter.