Seacoast Banking Corporation of Florida's (SBCF) CEO Dennis Hudson on Q4 2015 Results - Earnings Call Transcript

| About: Seacoast Banking (SBCF)

Seacoast Banking Corporation of Florida (NASDAQ:SBCF)

Q4 2015 Earnings Conference Call

January 28, 2016, 10:00 AM ET

Executives

Dennis S. Hudson - Chairman and Chief Executive Officer

Stephen A. Fowle - Executive Vice President and Chief Financial Officer

Charles K. Cross - Executive Vice President and Commercial Banking Executive

Charles M. Shaffer - Executive Vice President and Community Banking Executive

David D. Houdeshell - Executive Vice President and Chief Risk and Credit Officer

Jeffrey D. Lee - Chief Marketing Officer

Analysts

Robert H. Ramsey - FBR Capital Markets & Co.

Operator

Welcome to the Seacoast’s Fourth Quarter and Year-End Earnings Conference Call. My name is Christine , 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 Denny Hudson, CEO. You may begin.

Dennis S. Hudson

Thank you very much for joining us today for Seacoast’s fourth quarter earnings conference call. Our press release released yesterday after the market close and slides with supplementary information are posted on our website at seacoastbanking.com.

Before we begin, I’ll direct your attention as we 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 as a result 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 Cross, who leads our Commercial Banking Team; Chuck Shaffer, who heads Community Banking, David Houdeshell, our Chief Credit Officer and Jeff Lee, our Chief Marketing Officer. We’ll all be available to answer questions following the conclusion of our prepared remarks.

We are very pleased with Seacoast’s fourth quarter results, which cap the year of strategic development and operational progress in which we grew core earnings per share on a diluted basis by 46%. Our balanced growth strategy comprising digital and other investments that expand our franchise combined with selective strategic transaction that deepened our market presence and enable us to market to our acquired banks customers continue to produce results for shareholders in the fourth quarter and for the year as a whole.

Fourth quarter revenue rose to $36.9 million an increase of 16% year-on-year. We pull this growth to the bottom line as well with adjusted fourth quarter net income rising 56% to $6.5 million compared with the year ago period. Note that the increase and adjusted income excludes the $416,000 bargain purchase gain resulting from post acquisition recoveries related to our acquisition of Grand Bankshares in Palm Beach earlier this year.

While our successful integration of recent acquisitions made a meaningful contribution to our fourth quarter performance, our operating results show the impact of our investments in organic growth. Total loans excluding acquisitions increased 12% or $218 million compared to the same quarter last year and the households reserve increased 5% organically compared with year ago levels during the quarter.

When we include our acquisitions, our households grew this year by about 8%. As our customers rely less on high cost branch and paper based transactions and more on lower cost digital operations we provide them, Seacoast has reached substantial operating efficiency. We are enormously pleased with some of the other results during the fourth quarter.

More than 10% of deposit accounts were opened outside the branch, up from virtually none in 2014. Nearly 30% of deposits were made outside of our branch network compared with around 20% in late 2014, and consumer loans originated outside of our branch, branches averaged 24% of total consumer loans compared to zero in 2014.

Turning to acquisitions, the integration of recently acquired BankFIRST in Orlando and Grand Bankshares in Palm Beach made meaningful contributions to the quarter's results. Both acquisitions grew households served by the 90-day mark following the close of those transactions. Growth in our Orlando franchise in the first year following integration has exceeded our expectations with households rising 7%. So not only have these acquisitions scaled up our level of households, they are also now contributing to higher organic growth.

The acquisition of BankFIRST in Orlando, which occur just over a year ago has served as a corner stone for our expansion in Central Florida and set the stage for the acquisition of BMO Harris, Orlando banking operations, which we announced in October and Floridian Bankshares which we announced in November. These transactions will make us a Top-10 Orlando bank and a Top-5 Florida base bank based on deposits.

We have received regulatory approval for both of these transaction and we expect to close the Floridian acquisition late in the first quarter and the BMO Harris branch purchase late in the second quarter. We look forward to welcoming more than 14,000 new households to the Seacoast family once these transactions.

The tremendous flexibility of our technology platform enables us to more quickly optimize locations without diminishing customer service and product delivery. We consolidated three branches during 2015 with very minimal customer impact and anticipate that we will consolidate an additional four legacy locations in the first half of 2016. Again, as our customers discover greater convenience, we can adjust the pace of consolidation.

We closed out 2015 well position to drive further increases in shareholder value. As we consider our business today and our vision for continued execution of our balanced growth strategy, we expect to produce earnings per share of $1 in 2016 and substantially increase in our earnings run rate as we exit the year. We continue to commence to maintain a disciplined approach to growing our balance sheet with the focus on organic growth and we believe we will continue to drive long-term shareholder value.

With that I would like to turn the call over to Steve Fowle, our Chief Financial Officer to discuss some results for the quarter and afterwards we look forward to your questions. Steve.

Stephen A. Fowle

Thank you, Denny and thanks to all of you for taking the time to join us this morning. Our fourth quarter improve both year-on-year and sequentially showing the operating leverage inherit in Seacoast commercial loan origination and other branch consumer transaction convenience. Fourth quarter diluted EPS rose to $0.18 per share compared with the $0.5 loss in the year ago period and net income was $6 million compared to a fourth quarter loss of $1.5 million last year.

Adjusted earnings factoring out merger related and other non-core items was $6.5 million or $0.19 per diluted share up 46% from $0.13 in the fourth quarter last year and nearly flat link quarter. For the year as a whole, earnings per share more than tripled to $0.66 per share in 2015 as strong prudent loan growth combined with successful acquisitions to grow margin and operating leverage.

As of past quarters, we continue to drive growth by leveraging our investment in digital analytics as well as our commercial banking service offering. As Denny mentioned, customer acquisition remain strong household grew at a 5% annualized quarterly rate matching organic household growth rate of 5% for all of 2015.

Loans increased $57 million or 3% sequentially and 18% over the last year 12% after adjusting for the Grand acquisition. Much of this quarter's growth came late in the quarter and again this growth was attained while maintaining a diverse granular self originated loan portfolio with an average Q4 loan size of 139,000.

Deposit growth accelerated with seasonal public fund inflows. Deposits increased to $102 million or 4% non-annualized from third quarter levels. Year-over-year deposits grew $428 million or 18%, 10% when adjusted for acquisitions. Off note non-interest demand deposits represent a strong 30% of deposits, including interest checking demand deposits represent 56% of total deposits and our overall cost to deposits stand adjusted 12 basis points.

Turning to our income statement. Our net income was impacted by notable items this quarter. First, during the fourth quarter we had recoveries from loans and REO acquired from Grand Bank. These recoveries exceeded the provisional mark we had made to the assets at the time of the transaction.

When the revised value associated with the assets was recorded in accordance with gap, we eliminated Grand’s goodwill and recorded approximately $416,000 of bargain purchased gain. This was a $1.6 million swing in valuation from previous estimates. Second, we made progress in our pending acquisition of Floridian and our BMO Harris Orlando branch purchase. Cost related to these acquisitions and other adjusting entries are noted in our press release.

As Denny stated, we recently receive regulatory approval for both acquisitions. With these adjustments we recorded an adjusted EPS of $0.19 as follows. During the quarter, we recorded $29.1 million net interest income or a NIM of 3.67%, net interest income improves a strong $4.4 million or 18% from prior year levels and was up slightly linked quarter.

The linked quarter improvements notable as Q3 included about $700,000 to $800,000 or 10 basis points in excess purchase loan accretion largely due to modifications of current relationships during that third quarter. We recorded essentially no excess purchase loan accretion in Q4.

Net interest margin improved 11 basis points from Q4 2014 and was down eight points sequentially. Remember though Q3 had about 10 basis points of NIM from excess loan appreciation. So directionally, margin continues to see upside. We’ve been successful in driving fundamental margin and net interest income improvement as we’ve enhanced our balance sheet mix and we’ve actively managed assets yields.

For next quarter, we expect a slight increase in net interest income as growth is offset by a shorter quarter and relatively flat to slightly decreased net interest margin as benefit of loan growth is offset by $100 million security purchases made at the end of 2015 in December in anticipation of liquidity from the upcoming BMO Harris brand purchase.

As we progress through 2016, organic growth and acquisitions will add substantially to net interest income, but margin will be diluted as we initially deploy our liquidity from our branch purchase in the securities.

Adjusted fee income was up strong 9% from 2014 levels, reflecting household growth. Notably interchange income, a good measure of customer growth and engagement increased 24% from prior year levels. Debit card transaction volume hit a record for Seacoast in the fourth quarter. Linked quarter, fee income decreased 300,000 to $7.8 million as holiday driven slowdowns in mortgage banking, brokerage and marine fees outweighed activity related fee increases in areas like interchange.

In 2015 overall, our fee growth outpaced customer acquisition rates. We see additional opportunity for outsized growth in 2016 as we further penetrate our new markets for Seacoast with fee based businesses like mortgage and wealth. Fourth quarter expenses show decreases from both fourth quarter 2014 and sequential quarter comparisons. Both prior periods contain significant adjusting entries related to merger and other non-core activity. Adjusted, expenses were up 200,000 well less than 1% sequentially and rose $1.6 million or 6% from prior year levels.

The linked quarter increase include small increases in areas like occupancy data processing somewhat offset by decreases in salary and benefits. Such volatility quarter-to-quarter can be expected. Compared to the year ago period, increases reflect investments we’ve made in our franchise including acquisition, talent acquisition and other investment in our business strategy, and variable cost associated with growth of the franchise.

I want to remind you that first quarter typically faces decreased revenues from lower number of days in the quarter and noticeably higher expenses particularly in payroll tax and benefit cost. This dynamic will run against the positive impact of our continued growth. For the remainder of the year, we expect organic growth combined with our in-market acquisitions should drive efficiency down to the low 60s.

With that said, I wanted to turn back to comment Danny made about goals for this year. We are providing as adjusted EPS target of $1 per share for 2016. This reinforces our continued progress and earnings performance. More importantly, this kind performance signpost the results we believe our strategy can continue to provide.

We are positioned to benefit from investments we've made and continue to make in our business strategy and franchise that will produce margin and operating leverage organically. We also have built a strong core funding franchise, more than half our deposits are solid, core checking accounts and our cost to deposits as a result is low 12% basis points.

We anticipate that a rising rate environment in 2016 will illuminate the value of this customer base through improved net interest income and margin. Finally, we are scheduled to close two acquisitions in the first half of the year, the Floridian acquisition scheduled late this quarter and the BMO Harris branch purchase late in the second quarter. These acquisitions both have strong IRRs and will be accretive to earnings per share excluding merger cost and short-term transaction related expense.

To put numbers to our outlook, we are heading into 2016 with $0.19 per quarter run rate that translates to $0.76 per share annualized. The forward rate curve and we use this rate curve as a best guess to what will happen in 2016, will add about $0.06 or more to our results. With these factors out of our control, the first rate hike did happened already and represents the sizeable portion of this success.

2016 M&A activity again excluding non-recurring cost will add $0.4 to $0.6 plus or minus to our earnings as we successfully integrate operation. And this benefit will be an annuity as we have had great success and cross selling into an further growing in our acquired markets at a rate often in excess of our core franchise.

Finally, organic growth in core operating performance is definitely in our controlled, will add an additional $0.12 to $0.14 to our bottom line and this operating leverage improvement is anticipated despite past and continued significant investment in our business model. So as you look at these forward thoughts, you will note coming into the year with the flattish first quarter and our performance will accelerate as we go through the year.

We look forward to executing on 2016 is a next step in our business plan. With that said, now I will turn the call back over to Denny.

Dennis S. Hudson

Thank you very much, Steve. We are happy to take a few questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen [Operator Instructions] and our first question is from Bob Ramsey of FBR. Please go ahead.

Dennis S. Hudson

Good morning.

Robert H. Ramsey

Sorry about that I had my mute button on, good morning. I guess I was hoping maybe you could a little bit about the efficiency assumption that sort of underlies your 2016 guidance and I'm curious not only sort of where you see things overall, but maybe where you end the year once you have got both of these acquisitions folded in?

Dennis S. Hudson

Steve, do you want to take that?

Stephen A. Fowle

Yes. So we anticipate with organic growth that we will have nice operating leverage probably about 4% to 5% operating leverage as we go through the year on some really strong organic loan growth. That operating leverage will start to drive our efficiency ratio down, but as we pick up the acquisitions and integrate them and realize the efficiencies through those acquisitions, we think we can get our efficiency ratio down in the low [65] (Ph) at the end of the year.

Dennis S. Hudson

And I think the key thought behind the acquisitions, we have a franchise in Orlando going into those negotiation and adding these two franchises on top of our existing investment there creates tremendous improvement in our operating leverage in that markets. So lots of consolidation work will occur as a result of the combination and putting all three together and so we have some pretty nice upside coming out of that as Steve described earlier in the past to $1 a share. And I think it's just a continued good execution of our strategic plan really gets us there and I'm pretty confident about it.

Robert H. Ramsey

Okay. You may have given this detail and I might have missed it, but the BMO branch deal, I think the release you said late 2Q is when you anticipate that close in, is it fair to model it at the June 30 or do you have the better sense of what the timing might look like?

Stephen A. Fowle

Yes. I think by June 30 we will have the transaction closed. Again we are expecting a late Q2 probably June-ish types of integration.

Robert H. Ramsey

Okay. And can you remind me is there much seasonality in the expense number in the first quarter for I don’t know annual increases or FICO or 401-K match or anything else?

Stephen A. Fowle

Yes. There is definitely is. So first quarter fee income is hurt, because there is a shorter number of days, expenses are hurt, because we now have people in the company that haven’t capped on social security. We have payroll taxes as a result that are higher, we have bonus payments in 401-K matches accelerated at that time of the year. So typically Q1 for us and for most company's is a tough quarter, but as I was concluding my remarks you know it was like gave some insight in the fact that Q1 is probably pretty flattish to where we are.

Robert H. Ramsey

Okay, great. Thank you very much.

Dennis S. Hudson

And I think Bob the other thing to keep in mind is. As Steve said earlier as we see steady improvement as we go through the year, but we have the added boost of the additional size as we get into the second half of the year. And so again, we kind of start out flattish, have some nice growth, and then it really begins to accelerate as we hit the backend of the year and feel the impact positive impacts of the M&A that we do. So continued organic growth, the M&A impacts and also the cost opportunity that we laid out in our remarks really affect fully the back half of the year.

Robert H. Ramsey

Great. Thank you very much.

Operator

Thank you [Operator Instructions]. And I’m showing no further questions. So I’ll turn the call back over to Danny Hudson.

Dennis S. Hudson

Okay, well thank you very much for attending today and we look forward to updating everybody following the conclusion of Q1. Thank you.

Operator

Thank you. And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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