Seacoast Banking Corporation of Florida
Q1 2016 Earnings Call Transcript

Published: 29 Apr 2016

[Operator:]

Welcome to the Seacoast’s First Quarter Earnings Conference Call. My name is Victoria, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Dennis Hudson. Dennis, you may begin.

[Dennis Hudson:]

Thank you very much and thank you all for joining us today for first quarter 2016 earnings conference call. Our press release released yesterday after the market close and slides with some supplementary information are posted on our website at seacoastbanking.com and you can find that information under presentations. Before we begin, I’ll direct your attention as always do to the statement contained at the end of the press release regarding Forward-Looking Statements that we will be making during our call. We’ll be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and our comments are intended to be covered within the meaning of the Act. With me today is Steve Fowle, our Chief Financial Officer, who will be discussing our financial and operating results. Also joining us in the room are Chuck Shaffer, who heads Community Banking Division; David Houdeshell, our Chief Risk Officer and Jeff Lee, Marketing and Analytic. All of us are going to be available to answer your questions following the conclusion of our prepared remarks. Earnings for the first quarter came in very close to our expectation. Adjusted earnings per share were $0.19 for the quarter with an adjusted ROA of 0.76% and an adjusted return on tangible common of 8.5%. Our earnings for the quarter were not at a level that we feel are at all acceptable and we are forecasting significant improvements in coming quarters. We are reiterating our previous targets of an adjusted $1 per share for 2016 and obviously this means we expect to see meaningful improvement in Q2 and even greater improvement in the second half of the year as we post better earnings. Steve is going to give us some additional details later in the call but I would the elements that will drive further earnings improvement this year will be planned legacy branch consolidations as well as a revenue and cost efficiencies related to our recent acquisition. In addition, contributing to our improvement will be continued organic growth. The two acquisitions one of which closed and was converted in March and the other one which will close and convert in June add around 800 million of assets to our balance sheet. They are both in market and there are overlaps between each of the acquired franchises as well as overlaps of those acquired franchises with our existing franchise. So if you think about it we’re layering in not two but three distinct franchises together and we’re doing this simultaneously. Each franchise has its own infrastructure to support and serve its customers. Everything of course from branches to credit support to sales and the efficiency afforded us due to combining a total of 3 rather than 2 are beyond that found any typical consolidation. And yet our combined customers actually gaining in terms of convenience, we’ll have more offices at the end than any of the original three franchises had while our added scale has provided significant efficiency gains. There is another way we look at it, by the end of this year, we expect our overall deposits per branch to hit $80 million or more which is a substantial improvement compared with 65 million which was a number at the start of this year. So with continued organic growth and significant gains and efficiency we believe we can hit an adjusted $1 per share this year and that comes with very needed improvements in ROA, ROE and our overhead ratio and don’t forget part of this gain also results from our digital and analytics focus, particularly our success in shifting ordinary transactions out of the branch and into our other channels. This will continue to be an important element as we go forward and we’re going to continue to find opportunities to refine our branch footprint as our digital strategy takes hold and as I said earlier routine transactions are pulled into lower cost channels like our mobile, ATM and remotes deposits channels. The success we’ve achieved through implementing our digital analytics and marketing strategy, this is paying off for shareholders in three areas. First by powering our organic growth, also number two by boosting our cross sale effectiveness which is deepening and increasing the profitability of our customer relationships and finally it’s paying off for shareholders by transforming our business model as we continue to shift transactions out of branches which are inherently most costly to our low cost out of branch channels. I am going to discuss each of these dynamics in turn, starting with organic growth. First quarter organic growth in households was again strong at 4.2% annualized. Adding the 3,400 households that we gained in our acquisition of Floridian bank which again closed in the first quarter, our total households grew 5% for the quarter, not annualized. Equally impressive showing our ability to successfully integrate and retain customers from the banks we've acquired our previous BankFirst and Grand Bank acquisitions which all occurred over the last 18 months posted households growth in excess of our legacy franchise, in fact the combined household growth in those two franchises that we acquired achieved a 6.7% annualized rate in the first quarter. The second dynamic is our remarkable increase in cross-sell effectiveness. Our cross sell engine is bearing fruit by strengthening relationships with customers as we provide them additional services. As you know as we add additional services the profitability and the stickiness of our customers increase and the cost of our serving those customers as a percent of revenue is greatly reduced. In 2014 our digital efforts were in their infancy, our success since 2015 is due in large measure to our retail organizations embrace off the opportunity provided by our cross sell engine. This engine uses software and analytics to drive cross sell against seven distinct marketing touch points, including both digital and human. Here are the results, sales of all products and services excluding the Floridian acquisition grew 2.6% quarter-over-quarter or about 10.5% annualized. Consumer loans sold to existing households continue to grow. With an annualized first quarter growth rate of 4% compared to the first quarter of last year. To give you an indication of the effectiveness of our cross sell engine, consumer loan production is up 57% compared with the first quarter of 2014. New deposit accounts sold to existing households also was continuing to grow. With our first quarter annualized growth rate of 7%. Compared to 2014's first quarter our new account origination is up 47% at our cross sell engine. Debit card spend from our customers reached a new high in the first quarter of this year, up 15.8% compared with last year's first quarter and up almost 2% sequentially. And that growth results from a lot of outbound calling in cross sell that we're doing to encourage debit card usage. Lastly, we're making steady progress in transforming our business model. And this progress is laying a foundation for future cost reduction. Nearly one-third, 31% to be precise of our cheque deposits were made outside of our branches in the first quarter of '16 compared to 29% in the fourth quarter of last year and 22% in the year ago quarter. That's almost 1 million annualized basic cheque transactions taking place on our mobile app, in our ATM --.

[Operator:]

Pardon the interruption, this is the conference operator. Can I get your company please [indiscernible] Pardon the interruption, this is the conference operator, we’re currently one on one, [Operator Instructions]. Alright, I'll sequence you back in.

[Dennis Hudson:]

A year ago and up 10% -- 10.3% sequentially. Looking specifically at mobile adoption, more than 27% of our eligible primary customer -- checking customers are now actively engaged on a regular basis with our mobile banking app. That represents a 19% increase in users in just the last six months, nearly 9% of cheque deposits were made just in mobile phones in March of this year. And we're beginning the catch up in a favorable way with a lot of the top tier money center banks, Bank of America I think reported mobile deposits accounted for 16% of all deposits. Turning to acquisitions, we're pleased to have completed the Floridian acquisition this quarter in March. After a flawless conversion, we look forward to serving our new customers and expanding our communities both in Orlando and in Daytona Beach. Later this quarter we expect to complete our acquisition of the BMO Harris Orlando banking franchise which will bring us another 8,000 customers both consumers, small business and medium businesses and this will help us further solidify our position in Orlando where we will then become a top 10 bank in the metro area with almost $1 billion in low cost deposits. We announced during the quarter of the closing of four Seacoast's legacy branches and I think four or five Floridian branches. Our ability to keep Seacoast's net promoter score and other customer satisfaction metrics high by delivering services in ways that our customers prefer, whether it be to our ATMs, mobile or online banking or even our Florida based 24x7 call center will increasingly benefit shareholders. It will enable us to reduce our infrastructure, boost our ROA and help generate additional income producing assets. Becoming a digital savvy but homegrown community bank benefits from here in Florida being based in Florida one of the most buoyant economies in the nation. Florida’s economic growth continues to outpace the nation and we’re especially proud that Orlando ranked number one in 2015 among the nation’s large labor markets in job creation. To close out my comments I just want to join together with my fellow directors and say that we are very pleased to have announced this quarter the appointment of Herb Lurie and Tim Huval to our Board. Herb has a distinguish career as an M&A attorney before leading the financial institutions and M&A group at Merrill Lynch and most recently Guggenheim Securities. Tim is a transformational leader with deep Human Resource and operations experience including work in high volume credit approval and fulfillment. While he was at Bank of America and more recently in his role as Chief Human Resources Officer and a member of executive team at Humana. Both of these terrific folks bring additional depth and capabilities to what is already and exceptional Board of Directors. Your Board is engaged and deeply involved in the strategic direction and operation of Seacoast and we really look forward to Tim and Herb’s contributions going forward. And as I said at the outside reflecting our confidence and our sustained ability to increase our earnings, we’re affirming our adjusted diluted EPS guidance of $1 per share this year. This represents around a 32% growth from our 2015 results, further we expect Seacoast commitment to the ongoing innovation of its industry leading platform will continue to drive further operational gains. And one last thing we look forward to seeing shareholders at the upcoming conference. In fact our executive team will be at the Piper Jaffray Conference next Thursday and Friday in Orland, the same team will be attending the SunTrust conference on May 25 in New York. We invite all of you to attend as we will be taking investors on a deeper drive into the plans we have to improve our performance, build significant value for shareholders. With that I’d like to turn the call over to Steven Fowle our Chief Financial Officer, who is going to discuss some of the results for the quarter and afterwards as always we look forward to a few questions.

[Steve Fowle:]

Thank you Dennis and thanks all of you for taking the time to join us this afternoon. First quarter results were largely as we had anticipated and discussed with you last quarter. We reported GAAP earnings of 3.2 million or $0.09 per share included several non-core items. First a 5.5 million in expenses related to closing and successfully integrating our Floridian acquisition late in the second quarter. This acquisition will provide a 20% of better IRR for Seacoast. Two, a $700,000 charge related to our decision to close four legacy Seacoast branches in slower growth, Central Florida. This will provide nearly $1 million in annual savings following the second quarter book branch closing date. And third $450,000 in unanticipated debt benefit from our bank owned life insurance program. While it can be argued is that this benefit is ongoing as it is part of bullies all in return, we believe it’s appropriate to adjust this benefit out of our core earnings as this kind of gain will occur but only on a very periodic and unpredictable basis. Excluding these items, adjusted net income increased 10% compared to last year’s 6.8 million, and our adjusted diluted earnings per share was $0.19 flat with last year and last quarter. Let me take you through our income statements. First quarter performance was a result of significant revenue growth supported by and offset by increased expenses related to franchise growth and a regular first quarter impact of higher payroll taxes and other increased benefits. Revenue improved considerably increasing nearly $6 million of 18% over prior year levels to 38.9 million and $2 billion, or 5% not annualized from fourth quarter 2015 levels. Despite a seasonally slow quarter for loan growth due in part to larger than normal paydowns. We continue to grow existing households organically at solid rates and accelerated cross sale efforts to existing and new customers. Our success in cross selling is the a result of investments we’ve made beginning in 2014 in data analytics to better know our customers behavior and digital marketing initiative that leverage our online and mobile presence, ATM network and 24x7 call center. We also saw the success to be digital, initiatives reflected in the performance of our recently acquired markets of Orlando and Palm Beach County which continue to outperform our expectations. Balance sheet expansion and improving mix also drove the growth in net interest income which increased 4.5 million or 18% from last year’s first quarter and $1.1 million or 4% from the fourth quarter of 2015. Net interest margin increased to 3.68% up compared to last year and to the last quarter. Our cross sell success and overall franchise growth drove significant increases in fee income. Adjusted service fee income increased 859,000 or 12% over 2015's first quarter and 385,000 or 5% not annualized from the fourth quarter of 2015. To the point a strong showing and interchange income which improved 28% from prior year levels and 11% from last quarter was a result of specific analytics driven customer outreach coordinated through multiple channels and demonstrates the opportunity available through our innovative cross sell platform. Our reduced provision for loan losses also helped results this quarter. Our provision decreased to just under $200,000 down from $369,000 last quarter, the result of continued improvement in credit quality statistics and a seasonally slower first quarter for loan growth. This decrease in provision also reflects $397,000 of net recoveries realized this quarter and resulted in a slight increase of our allowance for loan losses to non-acquired loans to 1.04%. This resulted in an increase in coverage of nonperforming loans to a 127% up from a 110%. Expenses both reported and adjusted increased year-over-year and quarter-over-quarter. GAAP expenses were up 10.4 million from the first quarter of 2015, which was the first full quarter following our acquisition of BankFirst in the significant cost cutting initiative. Adjusting for one-time acquisitions related and other non-core expenses, expenses increased 4.4 million year-over-year. Approximately 3.5 million of this 4.4 million increase relates to ongoing expenses from Grand Bank and factoring acquisitions made in 2015. Additionally, roughly 400,000 was related to ongoing operating expenses from the acquired Floridian franchise, so approximately 3.9 million of the 4.4 million increase was due to acquisition. Additional cost increases came primarily in salary and benefit costs including decreased deferred origination costs as efforts to streamline origination and processing led to a decreased direct cost and incentives. Year-over-year increases in items like data processing also reflect our continued organic growth. Adjusted expenses increased 1.3 million quarter-over-quarter, in addition of the 400,000 of ongoing operating expense in Floridian, first quarter results are impacted by increased benefit costs such as employment tax related costs, incentive and 401(NYSE

[Dennis Hudson:]

Yes, thank you Steve. And I think we’ll just open the floor to question if we have any.

[Operator:]

[Operations Instructions] And our first question comes from Michael Young from SunTrust.

[Michael Young:]

I wanted to start with the re-affirmation of $1 EPS target. Does that still includes sort of $0.06 benefit from rate hikes and assuming now that, that maybe a little less likely, should we really set our sights slightly below $1 or do you think you can make up the ground on that?

[Steve Fowle:]

Yes. Hi. This is Steve Fowle. The forward expectations don’t include anywhere near that level. We typically look to the forward curve as our best guess for where rates are going to go and use that in our continued analysis of forward earnings. What we do so reiterate the $1 per share and where we’re expecting less in terms of upraise benefit and we’ll make that up with two things. First the accelerated cost saving from the acquisition and also from continued initiatives that we undertake internally to manage expenses.

[Dennis Hudson:]

Well said in another way we are committed to producing the dollar and we will get them.

[Michael Young:]

Got it. And was there anything on the elevated payoffs that was specifically unusual, the backup in rates driving that and should we expect that level to continue or should that normalize in the second quarter?

[Chuck Shaffer:]

This is Chuck Shaffer. No I wouldn’t expect it to continue. We have some onetime payoff that came through and we let a couple of deals go due to term that we were unwilling to match, so I wouldn’t expect it.

[Steve Fowle:]

And when we looked at it in compared I think Steve over the last couple of quarters really wasn’t -- it was elevated but it was not significantly elevated. It was little higher than normal, what do you think Danny?

[Michael Young:]

[Indiscernible] than normal run rate over two to here quarters view so may have just received a couple [indiscernible].

[Chuck Shaffer:]

I mean we’ve been concerned about that that’s a great question and hard to say that I guess or outlook is where things continue to kind of normalize as we go forward but again the up number on payoffs was not materially up it was just up somewhat and I think there were some other factors as we dug in [Multiple speakers].

[Dennis Hudson:]

So, I’d actually consider that part of net pay downs. Number of smaller changes as opposed to one big [Multiple Speakers].

[Chuck Shaffer:]

Yeah, our lines usage was little under where we had expected it.

[Steve Fowle:]

Just piggy back on the back of our pipelines going into Q2 remains strong and we expect loan growth and loan [indiscernible] here in the second quarter.

[Dennis Hudson:]

They’ve grown considerably on the commercial side, also residential is up very nicely. So we’re looking at having better performance in terms of production in Q2 and beyond.

[Michael Young:]

And just to be clear, the pay downs that you did see where those going to sort of permanent financing markets, maybe outside the banking industry, are you seeing and as Steve you also comment on the pressure on loan yields from competitive pressures. Is that more driven by new entrants into the market that you've seen over the last six months to a year? Any color there?

[Dennis Hudson:]

You know, I mean David may have something to say, in terms of the competition I would say everybody is now fully engaged. And included in that would be the larger mega banks, Wells Fargo, BofA, Chase, in particular with Wells Fargo I would say are fully engaged in this space. And I would say it's less of smaller community banks, more of the larger banks which are able competitors. David any other comments there?

[David Houdeshell:]

I would say we’ve seen the life’s companies -- from the permanent market factor be stronger up just this quarter, but it’s been a comeback in the last few quarters [ph]. I think it's the full reflection of the power of the economy for us, [indiscernible] back and their investment cycle, so this is an environment we're [indiscernible].

[Michael Young:]

Just one last -- question, just be the level of purchase accounting accretion in the margin this quarter and maybe any outlook going forward for that once the deals closing in a full run rate?

[Steve Fowle:]

Yes, so we did not have a significant amount of excess accretion this quarter like we had in the year ago period and to back that point we decided that there was over 10 basis points of excess accretion. Our normal accretion has been running about 10 basis points. As we -- as older deals lifecycle mature and we put on new deals I don't expect that change materially.

[Dennis Hudson:]

So, we had really no excess accretion this quarter, it was a very standard quarter and this is what it is.

[Steve Fowle:]

You also asked for an outlook and I would guess we continue to base all of our forecast on no excess accretion metric and that's our plan going forward and when it comes it's very difficult to predict as you well know.

[Operator:]

And our next question comes from Christopher Marinac from FIG Partners. Please go ahead.

[Christopher Marinac:]

Danny if we look at the operating expenses this quarter and also in the second quarter, are we going to see improvement in second quarter, or is there more noise in 2Q and there we're going to see more real improvement in second half of this year. Just want to understand the timing?

[Steve Fowle:]

You'll see both.

[Dennis Hudson:]

Yes, so I think you deal with adjusted earnings, my comment there was those should remain relatively flat quarterly through the course of the year, we do expect additional one-timers in the next two quarters, probably 2 million to 2.5 million next quarter, near 1 million in the third quarter related to primarily the BMO Harris acquisition.

[Steve Fowle:]

You said adjusted earnings remain flat.

[Dennis Hudson:]

Adjusted expenses.

[Steve Fowle:]

I'm sorry adjusted expenses, okay.

[Christopher Marinac:]

So BMO is a level of adjusted expenses now at the end of the quarter, BMO will have that increased slightly and then those business will fall?

[Steve Fowle:]

Right.

[Christopher Marinac:]

And then there was a slightly fall…

[Steve Fowle:]

That's right, so the acquisitions will add on through this legacy expense run rate.

[Dennis Hudson:]

So, I would think about it this way Chris, Q2 will receive the full force and effect of the Floridian acquisition and we'll be down to -- in this quarter I think we only have 20 days of revenue and expense in there and virtually none of the cost savings. So, a significant chunk, I say substantially all of the cost savings related to Floridian will be realized in Q2 and we'll have another call it 20 days of impact from BMO, I think our closing date is early June, forget the date, but it's early June and so we'll have handful of days in Q2, just as we did with Floridian in Q1. And we will realize substantially all of the BMO cost savings in Q3 on top of the remaining cost savings related to Floridian in Q3, so you add it all together and we have substantial improvement in Q2. And we have even greater improvement in Q3 and then full improvement in Q4, Q4 should be a very clean quarter. And we're going to be disclosing next quarter kind of where we are on the cost out related, so you'll have a lot more visibility I think till later in the year and the kind of run rate we're going to create as we approach the end of the year which will be a substantial improvement over where we started this year as you know.

[Christopher Marinac:]

Got it. So from a standpoint of the branches going forward, there are still additional branch rationalization that will see later as you integrate BMO and kind of look at the whole enterprise.

[Steve Fowle:]

We will do a substantial amount of that work this year and again next quarter I think we’ll have some very specific information to share with you about kind of where we are in that process and I think they have much more visibility around what the second half of the year is going to reveal.

[Christopher Marinac:]

Got it, okay. And then last question I guess also from the strategic standpoint. Are there additional opportunities on the M&A front and do you think that the price expectations you can kind of overlap with where they can be accretive and productive financially for Seacoast?

[Steve Fowle:]

As you know there was very little activity earlier in the year I think due to currency value issues just generally. But we stick to what we’ve been saying which is we do not believe we deserve continued operation unless we can produce decent organic growth and we have focused a tremendous amount of internal activity over the last couple of years on rebuilding our capability to create organic growth. That drives real value for shareholders overtime and we’re very pleased with our progress. We have more progress to make as we get deeper into the year and we found opportunities we think for M&A to supplement that growth in the ways that fit really nicely with for example our cross sell engine and the other processes we have in place around organic growth and we’ve actually proven conclusively that not only do we achieve the cost out and not only do we achieve tremendous integration work that has been very, very smooth with our streamline playbook that we developed a couple of acquisition before but on top of that we’re beginning to generate the revenue growth on top of that customer base. I’ll give you one specific, when you look at a month-to-month result coming out on the last couple of acquisitions our customer attrition in the first 90 days was no different than our gross attrition rate for the company as a whole. So we saw some net attrition rate, but they were not elevated compared with growth attrition rates for the company as a whole. After a 90 day period, we saw things dramatically pickup in terms of cross sell and in terms of new accounting acquisition on top of that customer base. So as I said earlier in the call, I don’t think this will continue forever, but at least the early returns in the first year where they were double the rates we were achieving in our legacy franchise and I think that’s the function of the deeper market, there is new franchises produced. When we look at us over the last two years, we have shifted a tremendous amount of infrastructure into metro areas and then the strongest metro areas in the United States again Orlando Metro and Palm Beach County, Broward County in South Florida. We’re staying out of Davie County and by shifting our resources around like that, we think we can continue to achieve outsized organic growth. To answer your question on, do we see M&A opportunities out there? We’re always vigilant in looking, not a lot of buyers out there at this point and we just -- we’ll continue to remain very disciplined where there is all a function of one thing and that is our customer base was acquiring and our ability to serve that customer base and create real value for our shareholders. So that remains a focus, we’re not a serial acquire driving temporary growth in the value with tremendous accretion. We’re an organic growth company and by end of this year I want to be able to prove that we are outperforming most in terms of the ability to produce organic growth, but that doesn’t preclude us from tackling an acquisition if it makes sense to us late this year and with something that might occur next year. So we’ll just have to see how that unfolds.

[Christopher Marinac:]

Great. Thank you. Thanks Steve.

[Stephen Fowle:]

Thanks Chris.

[Operator:]

And there are no further questions at this time.

[Dennis Hudson:]

Great. Thank you for attending today. We look forward to updating you on our results in July. Thank you.

[Operator:]

Thank you ladies and gentlemen and this concludes today’s call. Thank you for participating. You may now disconnect.