Seacoast Banking Corporation of Florida's CEO Discusses Q1 2013 Earnings Call Transcript

| About: Seacoast Banking (SBCF)

Seacoast Banking Corporation of Florida (NASDAQ:SBCF)

Q1 2013 Earnings Call

April 26, 2013 9:00 am ET


Dennis S. Hudson III – Chairman and Chief Executive Officer

William R. Hahl – Executive Vice President and Chief Financial Officer

Russ Holland – Executive Vice President, Chief Lending Officer


Enrique Acedo – Raymond James & Associates, Inc

Scott Huntington – Bodell Overcash Anderson & Co. Inc.


Welcome to the Seacoast First Quarter 2013 Earnings Conference Call. My name is Lorisa, 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.

I’ll now turn the call over to Dennis Hudson. Sir, you may begin.

Dennis S. Hudson III

Thank you very much and welcome to Seacoast’s first quarter 2013 conference call. Before we begin as always we direct your attention to the statement contained at the end of our press release regarding forward statements. During the call, we will 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 Section 27A of that Act.

With me today are Bill Hahl, our CFO; Russ Holland, our Chief Lending Officer, who is responsible for building our commercial and business banking lines; Rick Perez, who is responsible for consumer banking and wealth management areas; and David Houdeshell, our Chief Credit Officer.

We made substantial progress this quarter as you look here throughout the call this morning. Earnings for the quarter were a little over $2 million, excluding credit costs associated with our foreclosed property sales, our pre-tax, pre-provision earnings were around $3.5 million for the quarter.

Our earnings for the quarter were also much cleaner as we dropped the charges and other noise associated with a project to reduce expenses and improve our performance. This project was announced as you know two quarters ago and was largely completely at the end of 2012.

As a result, our core expenses were down this quarter by about $920,000. Overall, total expenses were down by $2.8 million, or 12.7% compared with last year, and we’re on track to cut $7.4 million or more out of our expense base for the full-year 2013.

While we have brought down our expense structure, keep in mind that we’re also redeploying new overhead into growth initiatives. This redeployment has been very impactful on our expense structure particularly last year in 2012 and the impact continued into this quarter.

As we outlined in our press release last night, we’ve added $3.5 million in new lending teams and support personnel to our expense base over the past 18 months, all of which is associated with our revenue initiatives. These initiatives are designed to improve our performance not just this year, but in 2014 and beyond.

This means an aggregate, we have redeployed on the order of 15% of our expense structure over the past 18 months, while simultaneously bringing down our total overall expense structure as I just reported and what I think is a meaningful way.

This important investment and investment in new production teams improved overall loan production, and it is critical in this tough environment we feel. But the tough environment also opens up opportunity as well for us in two important areas. We’ve been focusing on residential home purchase loan given the improving market conditions, as well as more recently small business mortgage refi activity. These activities are giving us access to more new customer opportunities frankly than I’ve ever seen more recently.

As you will hear in a minute, our lending production results are growing very nicely and are expected to continue to move up in the next few quarters. Part of our plan to further improve our bottom line also includes some aggressive work to improve revenue performance in other areas, and we made substantial progress here as well during the quarter.

Recall that during much of last year, we reported tremendous success in growing new households. The result has been much better growth in core deposits across all segments and across all of our markets. This has been translated into much better revenue growth.

Fee revenues were up significantly this quarter. Total non-interest income grew by 20% over the prior year with much stronger results coming this quarter from our wealth and continued to rough business and continued strong growth coming out of our consumer banking business.

Taking together, our overall total revenues were up modestly for the quarter as our net interest margin actually contracted slightly. As you know, we are in a difficult interest rate environment, still continuing to produce revenue growth, I think is a great accomplishment this quarter.

Before I turn the call over to Bill for a few more comments, I would just add that our asset quality metrics continue to improve basically across the board this quarter. Our non-accrual loans ratio fell below 3% for the first time since the crisis, and our incoming problem credits this quarter were quite modest.

The economy continues to firm nicely here in Florida, our residential markets have if anything heated up even more since the last call. We had local realtors have begun telling that they are concerned that we could be facing an actual inventory shortage later this year. First time I’ve heard that since the crisis period, very good news certainly if you are a seller.

Unemployment while substantially improved, it’s still high and growth in the economy remains here in Florida remains somewhat low and uneven. So the outlook, however, though continues to strengthen with construction employment turning up nicely and inbound migration starting to improve again.

So now I’d like to turn the call over to Bill for a few additional comments. Bill?

William R. Hahl

Thanks, Denny, and good morning, everyone. Like last quarter and the quarter before we posted a slide deck that provides highlights on our website that we’ll be commenting on this morning and before we take questions. So I’m going to begin turn to Slide 3, and how we are building shareholder value.

As Denny mentioned, we had a clean quarter with no significant or unusual items. Net income for the first quarter was $2 million, up from both the fourth quarter’s net income of $240,000 and last year’s $938,000.

Net income available to common shareholders was $1.1 million, or $0.01 per diluted common share. The highlight noted on Slide 3 is our improving non-interest income, which is helping to build our revenues in this tough environment. Excluding security gains and fair value change of asset loan, we generated strong growth in non-interest income over the last 12 months with first quarter growth of 20.1%, compared to a year ago, reflecting strong mortgage banking fees, wealth management fees, and increased fees related to our deposit franchise growth, and from our deposit product restructuring late in the quarter, which had a positive impact on both increasing service charges and interchange revenues in the quarter and ongoing.

Growth in the non-interest income is also highlighted on Slide 5 in the deck. The strong fee-based revenues resulted in total revenue for the first quarter increasing to $21.9 million, up $361,000 from a year ago.

On a linked-quarter basis, revenues increased for the third consecutive quarter, as net interest income was down as a result of margin compression, but non-interest income items were mostly higher across all categories.

The franchise is growing as average loans are up $33 million, or 2.7% for the first quarter, compared to a year ago and steadily improving growth in commercial loan balances with total production of $119 million for the quarter, compared to $99 million a year ago. Top line loan growth was impacted linked-quarter by the decline in non-accrual loans of $5.7 million from year-end 2012 and $6.5 million compared to a year ago.

Balance sheet growth remains steady and was up approximately 1.3% linked-quarter with solid growth in the transaction and savings deposits up 11.1% year-over-year. Average earning assets were up $58 million linked-quarter, or 2.9% with increases in the investment portfolio and cash held at the Fed at some off Q1’s customer funding increases are seasonal related.

Another highlight from Slide 3 is the continued reduction of our risk posture as credit quality trends continued to improve in first quarter with net charge-offs declining to $1.5 million, down 20 basis points from the fourth quarter at a very reasonable 49 basis points of average loans for the first quarter compared to 113 basis points last year.

The provision and allowance have trended lower as well consistent with the improvements in all of our problem loan category as non-performing loans are down by $5.7 million linked-quarter, non-performing assets to total assets declined to 3.7%. The coverage ratio for non-performing loans increased slightly to 61.2%. Slide 7, highlights the trends over the last four quarters in our credit quality measures.

Turning to Slide 4 for a few comments about what has been achieved related to non-interest expenses compared to a year ago. Over the last year, quarterly expenses have declined by over $2.8 million as a result of not only cyclical credit cost declining, but also through our profitability improvement plan, which contained over a 100 separate elements designed to achieve meaningful improvements through a balanced focus on expense reductions and revenue enhancements.

As the tenure of the commercial loan officers increase, revenues should increase, which contributes to a lower efficiency ratio. I mentioned last quarter, we had over 11 season loan officers in 2012 with 6 in the second half of the year. Moreover, we added in the first quarter, and a total of $538,000 of salaries and benefits overhead is attributable to loan officers and credit support personnel with six months or less tenure.

Turning to Slide 6, this increase lending capacity has allowed us to take market share and depend our own performing loan portfolio and helps to protect the net interest margin.

We are right where we want to be positioned to increase originations over the remainder of 2013, while we’ve made progress in improving our efficiency, we believe our expenses are still too high and we will continue to focus on opportunities to reduce expenses that do not impact our ability to grow revenue.

Now, some color on the net interest margin. Last quarter we said loan growth would be the key for a stable to improving NIM. We also indicated that, we could continue to lower our deposit costs [augment] NIM, average deposit costs were down in the first quarter to 17 basis points from 20 basis points in the fourth quarter and 29 basis points from a year ago.

Our ability to continue to grow deposits while reducing costs has been a real strength of franchise. As shown on Slide 9, the margin is being supported by the retail franchise to increases in household acquisitions, balances for households, and improved deposit mix. These positive factors are being offset by others, which I will now discuss.

The net interest margin declined 7 basis points from the fourth quarter as earning asset yields declined 10 basis points to 3.44% impacted by the increased cash liquidity and a larger investment portfolio relative to the net increase in the loan book.

In addition, the impact of the Fed’s actions to keep rates low has increased prepayments in the investment portfolio and resulted in lower add-on yields. The seasonal increase in funding from deposit growth and REPO increases in the

first quarter earned to the spread of approximately 1.5% and accounted for majority of the NIM decline.

Growing our net interest income remains our focus and we believe, we can continue to generate growth even in this low rate environment. Net interest income was lower linked-quarter by $208,000, which can be explained by the two fewer days in the first quarter relative to the four.

The primary opportunity for growth in the net interest income remains an improved during asset mix in favor of loans and reducing funding costs and improving deposit mix.

We had a very strong increase in core deposit growth and improved mix year-over-year with non-interest bearing deposits increasing to nearly 26% of deposits, up from 22.7% a year ago, while at the same time, time deposits now comprised 18% of total deposits compared to 20% first quarter last year.

As I’ve highlighted, it was a clean quarter as we projected last quarter with improving commercial loan production from our investment in revenue producing personnel. We are much better prepared to grow today than we were a year ago.

We have reduced our risk and we are excited about all the opportunities that we have to continue to benefit from our business momentum and much improved conditions in our markets. We remain focus on managing core operating expenses and we believe we have further opportunities to increase revenues and improve our efficiency ratio throughout the remainder of the year.

With that, I’ll turn the call back to Denny for some questions.

Dennis S. Hudson III

Thank you, Bill, and we’ll open the floor to questions.

Question-and-Answer Session

Thank you. I will now begin the question-and-answer session. (Operator Instructions) We do have a question from a participant from Oriel Asset Management.

Dennis S. Hudson III

Go ahead.


Your line is now un-muted.

Dennis S. Hudson III

Operator, maybe tell them, they need to un-mute.


If your line is muted on your end, please un-mute your line. (Operator Instructions) Scott Huntington from Bodell is online with a question.

Scott Huntington – Bodell Overcash Anderson & Co. Inc.

Good morning, folks, nice quarter. Just wondered, again, I had commented last meeting on this reverse and just wanted to know just what type of institutions you think that a reverse would bring into play. Large cap, I don’t understand. So if you can expand that? I would appreciate it.

Dennis S. Hudson III

Yeah, I recall the question last quarter, and I guess, we just say again that we want to have the ability – maintain our ability to perform a reverse split if we think it make sense, we have no current plans to do it. The reason we are – have that in there is as you all know it brings additional investors to the table that might be otherwise restricted from investing in stock that are trading at a low nominal value. And I think that’s the issue and we’ve probably talked about that in the past.

William R. Hahl

Yeah, I just want to…

Scott Huntington – Bodell Overcash Anderson & Co. Inc.

We don’t have color on that, when you talk about bringing in different institutions one of cases might be this, so these are the parameters, there is a market capitalization and of course you have the ability to pay dividends or cash dividends are another example. So if it’s a (inaudible) and I think that the reaction has been poor once again, since they are doing well, completely ignoring what is much, much better performance on the part of all the employees there at Seacoast, I mean, it really is a lot of credit to go around. And I could see doing it, your inability to buy – position to buyback shares and after your share is about 20% and 30% after reverse and you get dabble of shares closer to book, but it really sound to see just who you might be bringing in this reverse?

Dennis S. Hudson III

Yeah, Bob, I appreciate the comments and I suggest maybe you give me a call and we can talk offline and I’d like to kind of hear more of your thoughts and I appreciate the call.

Scott Huntington – Bodell Overcash Anderson & Co. Inc.

Thank you, folks

Dennis S. Hudson III

Thanks, Bob.

Scott Huntington – Bodell Overcash Anderson & Co. Inc.

Keep on hammering the way you believe in us and trust your hard work and strong position will be ultimately rewarded. Thank you very much.


Enrique Acedo from Raymond James is summoning with a question.

Enrique Acedo – Raymond James & Associates, Inc.

Hey. Good morning, guys.

Dennis S. Hudson III

Good morning.

Enrique Acedo – Raymond James & Associates, Inc.

Just a real question on employee expenses, was there an element of seasonality, I saw an increase of about $490,000 quarter-to-quarter?

Dennis S. Hudson III

Well, yeah, typically in the first quarter, your taxes and some employment taxes and the like are higher until those phase out. So if you talk about employee, their salaries and benefits combined?

Enrique Acedo – Raymond James & Associates, Inc.


Dennis S. Hudson III

Yeah, you’ll see a bump in from the fourth quarter and first quarter almost every year.

Enrique Acedo – Raymond James & Associates, Inc.

All right. Thank you, sir.

Dennis S. Hudson III

Yeah, thank you.


And we have no further questions. Do you have any final remarks?

Dennis S. Hudson III

No. that’s it. I really appreciate your attending today and we look forward to updating you next quarter on our continued progress.


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

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