Seacoast Banking Corporation of Florida
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Welcome to Seacoast Second Quarter Earnings Conference Call. My name is Adriane, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. Please note this conference is being recorded. Before we begin, I draw your attention to the statement contained at the end of the press release regarding forward-looking statements. During the call certain issues will be discuss that constitute forward-looking statements within the meanings of the Securities and Exchange Act, and as a result the comments are intended to be covered within the meaning of the Act. I’ll now turn the call over to Mr. Dennis Hudson, Chairman and CEO. Mr. Hudson, you may begin.

[Dennis Hudson:]

Thank you very much. And thank all of you for joining us today on our call. We’d also like to mention that there are a few slides go along with this call, as well as the copy of our press release that we released yesterday afternoon, and these are posted on our website at seacoastbanking.com, and they can be found under the title Presentations. Also with me today is Steve Fowle, our Chief Financial Officer, who is going to be reviewing some of our results after the opening comments that I will make, as well with us in the room are Chuck Cross, who leads our Commercial Banking Business line; and Chuck Shaffer, our Community Banking Business leader; David Houdeshell, our Chief Credit Officer; and Jeff Lee, our Chief Marketing Officer. All of us will be available to answer questions should you have any following our remarks. I guess, I’d open by saying, we had another strong quarter. This quarter with very significant growth we feel in revenue on both a sequential and a year-over-year basis. As you're going to hear in a minute, net income is also up significantly year-on-year. Our strategic framework to focus on improving profitability, investing for growth and managing risk continues to yield consistent results and we believe that these results demonstrate -- our value proposition and our approach to Community Banking are really beginning to resonate in the marketplace. We also believe the investments we have made and are making will continue to fuel further success in capture greater opportunity as we move into the future. This quarter I was also encouraged by our continued strength in our credit quality with declines in nonperforming loans and nonperforming assets. I thought I would mentioned at the outset here are few areas in which we have made substantial investments and share with you some of the results that these investments are producing. First, our most significant investment over the last couple of years has been around expanding our accelerated business banking platform to further serve the commercial business markets of particularly South Florida and Orlando. These investments are now producing some of the best growth we've seen not just in loans, but also core deposits and other services. Moreover, it’s contributing to meaningfully good new growth in high value business households. Other investments to streamline processes around our Small Business Banking platform together with new leadership and better execution is growing higher value Small Business households that are rate that is, frankly, very pleasing to us. And this is happening just as the local economy is providing greater opportunity for Small Business expansion. Similar results are also evident this quarter around our Residential and Consumer Lending areas, and these results are particularly benefiting from investments we've made in some of our Digital Marketing and Data Analytics. Over the past 18 months, we've increased our investments around Digital Marketing, using innovative thinking and predictive intelligence, and we are benefiting from more effective cross-sell efforts to expand our number of services utilized by each customer. I thought I would share also a few metrics that suggest we are on to something here and our investments are paying off. Year-to-date, we acquired a 37% improvement in new households acquired compared to the same time last. Year-to-date, we've produced around $60 million in new small consumer loans, compared with just $30 million for the same period last year, around 93% improvement. Households with an activated debit card have grown by almost 10% year-to-date compared with a growth rate of about 6% year-to-date over the same time last year. And our households with mobile engaging with us, using mobile technology, have grown as well. This year, they are up about 28% compared with about 18% growth in the same time last year. So really beginning to see some acceleration and some pretty significant movement as a result of these investments. Finally, I wanted to update you on our investment in our Orlando acquisition which was closed and integrated just three quarters ago. Over that short period, we have seen meaningful growth on households, coming out of the acquired customer base. We’ve seen growth in the revenue and we’ve seen growth in services per household each and every quarter. And the growth has accelerated each quarter. Compare this to slightly negative to neutral historical growth we observed in that customer base, during our diligence. The growth rates on this acquired customer base have not caught up to our legacy growth rates but the improvement is on pace to get us there in another couple of quarters. As you can see, we’re leveraging our investments to grow across a larger customer base and we’re doing so frankly with very little incremental cost. We will do the same with our acquisition of Grand Bankshares, which closed last Friday and was integrated last weekend. This acquisition makes us the third largest Florida-based bank in Palm Beach County. These acquisitions complement our legacy banking business and enable us to successfully add new customers and expand in doing adjacent markets, again fueling our franchise growth. Since 1926, we have understood and appreciated the economic value of Florida. And research is now showing that Florida again is outpacing the rest of the country. We’re leader in using digital technology and data analytics to offer our customer’s mobile and other convenience products in a way that is on par with some of the largest banks in the country. The metrics I just shared with you demonstrate that we are succeeding and we’re really in the early stages of applying these techniques to our customer base. Our acquisitions have opened up a sizable market to us both in Orlando and Palm Beach County and have allowed us to scale up our investments more quickly. We look forward to the second half of this year and expect to see continued sustained growth through our strategic initiatives and investments. We’re going to be expanding our marketing and process execution to our new customers in the important Palm Beach market. And now, I’d like to turn the call over to our Chief Financial Officer, Steve Fowle, who is going to share a few other insights and highlights for the quarter. And then of course, we’d be happy to take a few questions. Thanks. Steve.

[Steve Fowle:]

Thank you, Denny and thanks all of you, who have taken the time to join us for the call today. Our second quarter results reflect another successful quarter for Seacoast as our investments pay off and as our business teams were able to drive significant revenue growth. As Denny noted earlier, revenues increased a solid $1.5 million this quarter to $34.5 million. This is a 4.5% not annualized linked quarter growth rate. We grew revenues $11.9 million or 53% compared to the second quarter of 2014. Our ability to produce continued topline growth drove another quarter of strong results. Year-over-year net income increased $3.9 million or 203% to $5.8 million and decreased slightly from $5.9 million in the first quarter of 2015. This translates to $0.18 per diluted common share, compared to $0.07 in the second quarter last year and essentially flat with the first quarter of 2015. Investment of franchise including the effective use of digital marketing and seller efforts by our customer-facing personnel led to growth across our businesses. First, we grew total loans by $602 million from last year. Excluding loans acquired with our Orlando acquisition, we increased loans $238 million or 18%. During this quarter, we also grew loans, strong 18% annualized. And our pipeline finished the quarter at 12 month highs. This growth is more remarkable when you consider that our lending teams have been able to build this momentum while maintaining industry and geographic diversification metrics and managing to a very conservative house limit. Household also continue to grow at a strong steady pace increasing 5%, annualized over first quarter levels and 5% from prior year levels, again normalized for required households. The success allowed us to grow core customer deposits to the 19.8% pace above last year, adjusted for the acquisition and flat from last year despite entering a seasonally slow summer period and despite intentional runoff of our higher cost CD portfolio. Non-interest checking now represents 31% of all deposits and combined with low cost interest checking, demand accounts have reached 54% of our total deposits. As a result, we improved margin 40 basis points from last year and net interest income held flat with last quarter despite the fact that we did not record anywhere near the level of purchased loan accretion. You may remember last quarter we indicated that Q1 had about 10 basis points or $750,000 in excess purchase loan accretion above our expected levels. You might also remember we expected margin to decrease to about 350 during 2015, spot on with what we are reporting this quarter. Going forward, we believe that continued strength and loan growth and other favorable balance sheet mix dynamics will allow for modest upside opportunity in margin this year. With Grand Bank acquisition and the potential for increased late rates later in the year may fuel additional margin opportunity, although it's too early to say more about either of these dynamics. Our business also drove significant service fee income growth. Our refinance business had a solid quarter and mortgage banking held at levels very close to our strong Q1 performance. And with 5% household growth, interchange income and deposit service charges showed strong increases despite part of the quarter being impacted by lower summer activity levels. We also recorded $725,000 gain on participated loan in non-interest income. This represents a discount we recognized when we participated out a portion of Bancshares loan in order to meet additional credit needs of a good customer who is approaching our house limit. We consider this income to be core. It’s almost in all respects, the same as purchased loan accretion recognized in margin, but for the fact, the loan was participated. Our long-term revenue growth reflects investment in our franchise over the past couple years. This growth story can be seen in a couple metrics, I think are revealing. 2012 was a year when many banks like Seacoast, returning focus from the impact of the great recession and beginning to turn focus to the future. Using this year, the starting point, we've grown pre-tax, pre-provision net income at 120% growth rate based on an annualized first half of 2015. Investment and technology acquisitions in our accelerate model has helped us produce 23% annual growth in revenues, while allowing us to hold expense growth to 6%, remarkable operating leverage. This quarter expenses reflect the impacts of such investment. Q2 increase in expense over last year of course, reflects our significant entry into the Orlando market, offset by cost savings initiative. The linked quarter increase of $1.1 million reflects $337,000 in corporate development charges, up more than $60,000 from Q1, more than $350,000 in expenses from the acquisition of our factoring business in May. This is their ongoing run rate for the portion of the quarter that they were part of us. This lift out was slightly added into our bottom line this quarter cup. The expense growth also included approximately $375,000 increase in production driven commission expense and $250,000 in increased marketing expense. Marketing expense this quarter included investments in digital customer acquisition and corporate branding in our new Orlando market, both of which should provide long-term benefits for Seacoast. Strong revenue increases only one measure for the benefit of investment. Additionally, investment technology aimed at adding convenience for our customers like mobile banking has helped us become more efficient. Over the past five years, growth in intentional pruning of branches, we’ve closed about 30% of our branches over the same period. It has allowed us to improve our deposits per square foot from between $9,000 and $10,000 of borderline acceptable level to better than 12,500 per square foot, more than 30% improvement. And we expect to continue to improve this metric. So while expenses have increased, we are focused on continuing to improve ROA and bottom-line results by continuing operating leverage improvement. We expect average expenses to average asset ratio to decrease about 10 to 15 basis points as we exit this year, excluding Grand acquisition, ongoing or one-time merger charges. Ongoing benefit from this merger will only help this metric. So all that said, I return the call back to Dennis.

[Dennis Hudson:]

Thank you, Steve. And we will be happy to take some questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we see Stephen Scouten from Sandler O'Neill on line for question. Please go ahead.

[Stephen Scouten:]

Hey, guys. Good afternoon. Thanks for taking my questions here.

[Dennis Hudson:]

Sure.

[Steve Scouten:]

I guess one thing I was curious about is obviously your shares have had a really nice run here really over the last couple of years. And I am curious now with the momentum you’ve seen in the organic growth, do you look at continual M&A opportunities to kind of enhance that potential? Or are you more focused on kind of letting these current investments kind of play out as it is?

[Dennis Hudson:]

Well, as I have said often when asked that question, our focus has been and remains improving profitability and generating organic growth. The key factors to growing value for shareholders over time are to get those metrics right. And we are beginning I think to get those metrics right. So I wouldn’t say M&A is what we’re leading with, what we’re leading with is how do we grow this business organically and create much better operating leverage as we go forward. Obviously the acquisitions we’ve done have been very helpful to moving as faster and we are pleased with the results. So stay tuned and we will see. I mean, we said repeatedly that we would be open to opportunistic ideas that really add value to the franchise and grow value for shareholders. And we will just say that I haven’t said we lead with organic, we lead with metrics we talked about because it’s incredibly valuable and we will just have to think.

[Steve Scouten:]

That’s helpful. If I could ask one more if that’s okay.

[Dennis Hudson:]

Sure.

[Steve Scouten:]

Just as you’re talking about continued operating leverage and I know Steve spoke to kind of lowering the expense to average assets by maybe 10 to 15 points over the next year. I mean, is that -- if I am hearing correctly more driven just by continued in average assets and maybe a stable expense base, or are there more absolute reductions to come at this point or land of investments and I know others kind of going to overwhelm that on an absolute basis?

[Dennis Hudson:]

Go ahead.

[Steve Fowle:]

Steve, it’s Steve. We continue to invest in the franchise. So I would expect the expenses to increase as we go through time long-term. I know though that those investments are paying off. We talked a lot about metrics proving that. So operating leverage is really what we’re focusing on to help drive bottomline growth.

[Dennis Hudson:]

Having said that, we continue to deal with the business model adjustment and that will undoubtedly, in fact we currently are looking at many different opportunities here, will undoubtedly result in bringing down over time our legacy cost structure. And we’ve very quietly over the last couple of years brought down probably more than 25% of our legacy branches. And we have more work to do I would say in that area over time. Our focus however in the near term remains and this is critical important on generating in our new channels growth, both in customers and growth in cross-sell. And as we get that better and better and we prove to ourselves that we can execute, I think it opens up the door for us to move more quickly to bring down the legacy cost structure. The legacy cost structure is not just branches. It’s basically everything that we’ve operated for the last 30 years. So we are very passionate about moving forward to a generally much lower cost structure. I’d also point out, Steve, that our cost structure in terms of some of the metrics you look at, for example, our overhead ratio is built upon a net interest margin of around 3.5%. And if you look at some of the better performers from a cost standpoint that are out there, they are built often on net interest margins of 5%. So I think one metric that I try to keep an eye on are the expenses as a percentage of assets. And here at Seacoast, that’s a sub 3% number and we see that number going down.

[Steve Scouten:]

Great. Okay. Thanks, guys. I appreciate the color.

[Operator:]

And your next question comes from Scott Valentin from FBR Capital Markets. Please go ahead.

[Scott Valentin:]

Good afternoon. And thanks for taking my question. Just with regard to the margin, I know, I appreciate the guidance you guys had point out in the first quarter, there were some outsized accretion. Just wondering how we should think about maybe the core margin, so ex accretion, it sounded like you guys see some upper bias to the margin?

[Dennis Hudson:]

Yes, we do. That really has to do with balance sheet mix. As we look at this quarter, we were at maybe slightly below, but pretty much at our expected level of merger accretion. So that is always going to be a lumpy number. But it is something that like I say, right this quarter we expect we’re pretty close to where our long-term run rate should be.

[Scott Valentin:]

Okay. In terms of driving the core margin higher, so it was ex accretion, is that -- are you guy about 30% securities to assets? Imagine, over time that comes down, the loan balances go up and you get some net benefit to asset yields, is it the main driver of kind of the core margin?

[Dennis Hudson:]

That is the main driver. I think we have incremental adjustments around the fringes as well, but that's really the main driver of that improvement potential.

[Scott Valentin:]

Okay. Thanks very much.

[Operator:]

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

[Chris Marinac:]

Thanks. Good afternoon. Just the leverage I guess, sort of follow-up on Steve’s comments about leverage, should we expect to see some incremental benefit to efficiency in ROA, the second half of this year? Or Steve, would you think more of the pronounced changes effective in 2016?

[Steve Fowle:]

The remainder of this year should be somewhat noisy with charges from the Grand acquisition, particularly next quarter where we expect most of the one-timers to be recorded. But no, I’d expect the improvement to start this year.

[Chris Marinac:]

Okay. Great. And then Denny, when you look at the digital channel, how much of your loan growth is coming from that today? And I guess, more importantly, if you looked out to the end of 2016, for example, how much change would we see in that channel because it’s driving a loan growth?

[Dennis Hudson:]

We continue to focus pretty heavily on this structure. It right now is about 20% of our consumer volume. Our focus has been on the consumer side on that. And as we look forward, we’re looking for opportunities to expand that into potentially mortgage lending, as well as small business, so more to come on that as we look forward. But it has been -- is increase do as much as 20% of our consumer loan production, which is up from 0% a year ago. So we've seen a tremendous growth in that line and we’ll continue to focus on as we move forward.

[Steve Fowle:]

On the cost associated with that lift is very nominal. And the key here is, it’s eminently scalable and very exciting for us. Jeff, did you have any other things to add?

[Jeff Lee:]

Yes. Just good momentum in that direction, we’re seeing trends as well from deposit account opening as well. We’re trending closer to 10%, that’s being opened outside of the branch. So it gives us quite a bit of flexibility as we move forward.

[Dennis Hudson:]

We have internal goals that we’ve not shared with you to move those numbers much higher. And again, as they begin to gain faster and better momentum, it makes us more confident about re-looking at a pacing of legacy cost out that could be really helpful for us in terms of building tremendous value over the next year or two.

[Steve Fowle:]

Yes. And that 20% that I quoted, we’ll continue to see that grow month to month. So we expect that to grow as we move forward and it becomes a bigger part of our consumer channel.

[Chris Marinac:]

And my follow-up is, is there a point in the next couple of quarters where we see some further branch rationalization? It sounds like you’re looking for more momentum that’s kind of justify that. I was just curious on the timing of when that may happen.

[Steve Fowle:]

Yeah. As Dennis mentioned, we look for is opportunistic, opportunities to take that. So far as mentioned earlier over the prior years we’ve closed the number of branches with zero impact on our customer base. During that period of time we’ve been able to grow the customer base while closing those branches. And as opportunities present themselves for us to exit branches we will. But we will do in a way that’s customer friendly and allows us to continue grow customer against those transactions. So we will continue to look for opportunities to take advantage of that.

[Dennis Hudson:]

And Chris, I’d tell you that it absolutely is part of our plan going forward to pull the trigger on lot of those stuffs, and would not be surprised to have us talking about that next quarter.

[Chris Marinac:]

Okay. Very well Denny. Thanks very much guys for color.

[Dennis Hudson:]

Thanks.

[Operator:]

[Operator Instruction] And we have Taylor Brodarick from Guggenheim on line with the question. Please go ahead.

[Taylor Brodarick:]

Great. Thank you. I think just one from me, guys. Obviously, loan growth was very solid for the quarter and you’ve seen some pretty outstanding loan growth from some -- you are the Florida-only peers? I was just curious, if you could comment on the competition is not specifically, but whether it's a function of theirs maybe some bigger credits out there that maybe your in-house lending limit doesn't work with or are you seeing a deterioration in structure being offered or is pricing just extremely fierce and getting more so?

[Chuck Cross:]

This is Chuck Cross. Just a comment, our loan growth was across all segments. And we've stayed away from the very large credits that others maybe you're chasing. Florida has always been a very price competitive environment, but if you are -- it’s a right place with the right speed in the market with the right customer you can get a fair price and we feel like we are still achieving that. There's been a lot of press about loosening of underwriting standards and I think that in a lot of the bigger deals, you're seeing limited guarantees in some loosening of financial covenants, and we make prudent decisions and bail-out when we need to.

[Dennis Hudson:]

And we stay away from the larger deals that are more heavily competed for I would say. I mean, when you, we’ve not reveal the numbers, but when you look at the number of credits that we booked this past quarter it was the largest we've ever done in terms of number of loan. So the number growth has far exceeded the dollar value of growth that we've seen out there and that is very impressive to me. It’s coming across all quarters. It’s being done with the air cover of digital to help boost what we're doing on the ground. And we’re staying focused in smaller value commercial opportunities that we feel very comfortable with. So we’re growing it in a way that is more sustainable and less likely to be susceptible to lumpiness as we -- if we were to move into period of downturn and so forth. So it’s an exciting period, I mean, the competition is there. I say this repeatedly there's never ever, ever been a time in my career where we haven't had lots of competition and lots of crazy competition and it’s just something you deal with everyday, and our team both on a credit side and the production side do, I think, a nice job of balancing.

[Chuck Cross:]

Yeah. Taylor, the earlier you heard about the investments and over the prior years we made investments to have speed market. We think it’s something that differentiate ourselves in the marketplace and add value that we get pay for.

[Dennis Hudson:]

Only one of our fastest growing lines right now is Small Business. This is exactly the right time to be up there with smoother processes and Small Business. We worked on that two years ago and anticipation of the economy improving to the point where Small Business began to grow again and over this past 12 months, we've invested more in leadership in that area and we've invested more in marketing in that area, and it is really paying off now. Since some of the highest number count of Small Business relationships, which of course come with a very significant coverage of the deposits and that's one of our fastest growing lines. If you look in the back of our tables, you'll see some of our growth rates in DDA, checking accounts and other transaction accounts, and you see there's kind of an emerging trend of faster growth on the business side. And that’s direct result of that. Can't wait to see what that produces as we get back into the seasonal high period of Q4 and Q1 of next year.

[Chuck Cross:]

And I'll point out on that that the Palm Beach County market, which is a new market for us opens a world of opportunities to bring that down into the Palm Beach County.

[Dennis Hudson:]

Yes.

[Taylor Brodarick:]

That’s great. Thank you for all the detail both of you.

[Dennis Hudson:]

Thank you.

[Operator:]

We have no further questions at this time. I’ll turn the call back over to Mr. Dennis Hudson for our final comments.

[Dennis Hudson:]

Well, thank you all very much for attending today. We look forward to continuing to keep you up-to-date with our progress when we announced next quarter's results. Thank you.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.