Seacoast Banking's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Seacoast Banking (SBCF)

Seacoast Banking Corporation of Florida (NASDAQ:SBCF)

Q1 2014 Results Earnings Conference Call

April 25, 2014 09:30 AM ET

Executives

Dennis Hudson - Chairman and CEO

Will Hahl - Chief Financial Officer

David Houdeshell - Chief Credit Officer

Analysts

Scott Valentin - FBR Capital Markets

Tom Alonso - Macquarie Group

Christopher Marinac - FIG Partners

Operator

Welcome to the Seacoast First Quarter Conference Call. My name is Christine, and I will be the 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 Mr. Dennis Hudson. You may begin.

Dennis Hudson

Thank you very much, Christine and welcome everybody to our conference call this morning. As always before we begin, we direct your attention to the statement contained at the end of our press release, regarding forward statements. During the call we are going to be talking about certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act. And accordingly our comments are intended to be covered within the meaning Section 27A of that act.

With me today is Will Hahl our CFO and David Houdeshell our Chief Credit Officer.

Today, we are going to be discussing our earnings results for the quarter. We will have few comments as well on the outlook for the year. And of course we’ll also discuss our just announced acquisition of BankFIRST, we’re quite excited about the acquisition that’s our first since 2006 and one that I believe is going to be very important to our future.

But first let me just give you a brief overview of the quarter. By the way we have posted slides on our website on seacoastbanking.com under presentations. During our conversation today I will be referring to those slides.

Last night we reported earnings of $0.09 per share up from $0.06 per share the prior year and up from $0.03 in the linked quarter. This improvement was due of course to better performance, which we’re going to talk about in a minute as well as the redemption at year-end of our preferred stock outstanding, which of course freed up additional income to be attributed to common shareholders.

Our pre-tax income was up 83% over the prior year and this perhaps is a better way to compare our performance, because as you well know we were not accruing any tax expense last year. Pre-tax income was $2 million last year in the first quarter and this year our pre-tax grew to $3.7 million in the first quarter. While we’re clearly making progress in improving our earnings, we’re still not performing at a level that makes me happy and in a minute I am going to tell you what we’re doing about it.

But first I want to tell you what did make me happy this quarter. If you flip to our first quarter earnings slides, I am on slide three. We produced some terrific customer growth this quarter. Our zero cost demand deposit accounts grew by some $61 million or 13% over the prior year. Total transaction accounts exceeded $1 billion in the quarter and our commercial loans grew by 12% year-over-year. These are all areas where we’ve been focusing our spending and our investments over the past couple of years and I am proud of the job that our team has done to produce these kinds of results.

Our net household growth also more than doubled in the first quarter, when compared to the prior year. So we’re seeing some very good and some continuing growth in our customer accounts and customer balances in a very tough low margin marketplace. Keep in mind that growth that we’re reporting is totally organic or how are we doing it, in order to better executions and great service by our dedicated team members. But that’s not enough, we need to continue to step up our investments, because the world is continuing to transform as our customers demand new and more convenient ways to interact with us.

And as I said earlier I am not happy with the level of earnings we’re producing, so let me tell you what we’re doing about it. Let me tell you what we are doing to clear the way for better earnings and for provide for increased spending for innovation. Because in this environment we’ve got to do both. If you flip to page number four you can see that we’re bringing down our overall cost structure and I’ve been doing so fairly consistently over the past five quarters. What we need to move these numbers down faster.

So far this year we’ve identified around $2.3 million in cost savings, the $1.4 million we announced in the first quarter and the $1.9 million we have just announced this quarter, all of which are either in the process or have been implemented. I have also committed us to taking around one third of those savings off for use in new spending and investments design to support even better customer growth and faster revenue improvements.

We’re also looking for ways to bring down our fixed legacy cost which remain large, while we explore lower cost ways to bring better service and convenience to our customers. So stay tuned I expect to announce additional legacy cost initiative in our next call and we’re going to continue to invest in growth as I said while we make meaningful progress on our earnings.

On page five, you can see we continue to see loan growth this quarter. We expect these trends to pick up next quarter as a result of even better pipelines that have developed towards the end of this quarter.

On page six, you can see that mortgage banking revenue slowed considerably in the quarter, which worked against our more recent growth trends for total fee revenues. Service charges were also impacted by higher balances this quarter, as business customers experienced higher cash balances due to an incredibly strong winter season this year in Florida.

On page eight, you can see the coverage ratio continues to climb as we booked the net recovery this quarter. Charge-offs that are kind have been coming out of our residential book over the last year and half, two years, have dropped to very low numbers now. And we expect those numbers to remain low, as our loan rates are backed way off. And as you can see our problem inflows have become quite small and it remains quite steady.

So, our earnings were improved this quarter, we're pleased with the progress, we have a lot more ahead of us however and we'll continue to focus on bringing our cost structure in line as we invest for the future as well.

Now I'd like to shift the conversation over to the acquisition that we also announced last night. We posted a second slide deck on our Seacoast Banking website. And again it's listed under presentations and it's titled Acquisition of BANKshares.

The transaction we announced last night is expected to be significantly accretive to earnings, 13% in fact and will be modestly dilutive to tangible book value, in fact less than 5% dilutive to tangible book, which we believe will be earned back using incremental earnings produced in the transaction in less than three years. We calculate the internal rate of return for this transaction to be around 19%.

Let me tell you about BankFIRST, which is of course the bank sub of the company we acquired BANKshares. This company has been around for over 25 years. And with $674 million in assets, operates a dozen locations around Orlando and also over on the East Coast around Melbourne, the north end of our current market and up through part of the Space Coast.

Roughly 65% of the business is centered around the Orlando market and the rest on the coast. The footprint fits very well into our existing Orlando franchise and adds significantly to our market presence in both markets, both the Orlando market and the Space Coast market. The combination together creates the fifth largest Florida-based community bank and significantly improves our market presence in the Orlando, MSA where on a combined basis we become the sixth largest.

BankFIRST has for many years been focused on serving small and medium sized business customers in its markets with outstanding service. Strong core customers make up their entire customer base with a very strong business DDA mix. The keys to their success have been many: Strong focused strategy; solid experience leadership under the direction of CEO, Don McGowan; and most importantly, a great group of market leaders and other team members who will be joining us to create the best business banking team in the state of Florida.

If you take a look at page 7 in the deck, you can see that the combination adds tremendous value to our already very valuable deposit profile. Our combined DDA mix grows to over 30%. This transaction also pushes up our total deposits by a meaningful 28%. All of that growth in very low cost or no cost categories. Pro-forma cost of deposits when both companies are combined is a remarkable 17 basis points.

If you turn to page eight in the deck, we see a remarkably clean and solidly performing loan portfolio. This was one of the very few banks in the State of Florida that performed pretty darn well through the great recession. Today their problem credits and their NPAs are right on top of our numbers. Absorbing this portfolio is not expected to add much to our complexity or to our cost structure.

Pro forma loan composition, you can see that on page nine, is actually quite complementary with Seacoast. On the whole, we will see an increase in the mix of our owner occupied CRE and C&I loans which of course we really like and a decrease in our residential mortgage mix which we also like. So our portfolio becomes even more balanced and actually has improved in other in terms of other fundamentals including yields, average loan size and exposure to interest rate risk.

The transaction that we announced last night is a 100% stock, it has a fixed exchange ratio without any collars.

If you turn to page 10 you can also see our pro forma capital ratios actually will change very little and remain very strong with a TCE ratio of around 9.5% and a Tier 1 leverage ratio at 10.5%. These ratios leave us room for more growth in the future. So as I said earlier, we’ll see a 13% earnings accretion in 2015 when we expect to have all of our cost savings in place and that accretion numbers based on our either consensus estimate of $0.61 per share for 2015.

We do not expect any delay in obtaining approvals and we expect that we will close very early in the fourth quarter of this year. So, with that I’d like to turn the call back to the operator and open the floor for a few questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Scott Valentin from FBR Capital Markets. Please go ahead.

Scott Valentin - FBR Capital Markets

Good morning and thanks for taking my question. Just with regard to the cost saves you just spoke about I guess $1.4 million was previously announced. And I guess is the $1.9 million in addition to the $1.4 million? And then I know you also mentioned a $2.3 million, don’t know if that was the total cost saves you expect and just I assume that’s pre-acquisition and maybe what timeframe you expect to realize those cost saves?

Dennis Hudson

The answer is yes to all your questions. The $1.9 million is an addition to the $1.4 million.

Scott Valentin - FBR Capital Markets

Okay. And in terms of timing of kind of the cost save strategies?

Dennis Hudson

Well, the $1.4 million was executed at the end of the first quarter. So its impact will be felt, full effect beginning in the second quarter. $1.9 million has been affected recently and will take effect kind of half way through the second quarter and so we’ll get a partial effect in Q2 and then full effect of both in the Q3. And I think we indicated in the press release that our total expense structure, core expense structure falls below $17.9 million when it’s fully affected per quarter, when it is fully affected. I also indicated on the call that we are also pursuing additional costs out which we’ll be talking about next quarter.

Scott Valentin - FBR Capital Markets

Okay, all right. Thank you very much.

Dennis Hudson

You are welcome.

Operator

Thank you. Our next question comes from [Enrique Assetto] from Raymond James. Please go ahead.

Unidentified Analyst

Hey good morning guys.

Dennis Hudson

Good morning.

Unidentified Analyst

First of all congrats on the deals. I was wondering, I mean how comfortable would you guys be handling more than one deal at a time. I know you guys have had a little bit of overlap before and your capital ratios or [UTC] is going to above an 8 on a pro forma basis. So could you maybe give me some color around that area, will be helpful?

Dennis Hudson

Well I think, we want to be very selective in the work we do on the acquisition front, I talked that great links in my remarks about the impact this acquisition has meaningful in terms of size relative to our size, number one. And number two has a deposit portfolio and the loan portfolio that it is highly complementary and actually accretive in terms of strategically accretive to our focus and our future and so forth.

So, we'll continue to focus on franchises that meet that objective. But we've done in the past more than one at the same time and it's something we wouldn't necessarily look away from, no current plans of course, but as we get later in this year we'll be looking what opportunities exist out there, so.

Unidentified Analyst

All right. Thanks. That's helpful. And if I could switch back to the quarter, I know you guys said that your pipeline was up at the end of the quarter. And you guys usually provide a commercial loan pipeline breakout, which I didn't see in the press release. Can you maybe give me some color on your pipeline, maybe if you have a number and I guess just put it out there, that would be helpful as well?

Dennis Hudson

Yes, we don't have the number out there. Our pipeline is kind of fluctuated over the last year and a half, but it is beginning to fill up more comprehensively and some of the early stage parts of the pipeline and that's become more consistent. So, we think we're moving into a period where we'll have a little more consistency to our growth and more stable growth.

The other impact is that, we moved a lot of problem assets off the balance sheet over the last, since back in the crisis period, but even though in the last 12 months to 18 months. When you look at how some of our problem numbers have come down. And we're now at a point where those numbers are at a low enough level where that impact is kind of stop affecting our growth rate.

So, we're feeling more comfortable with what we're going to see more consistent, stable loan growth going forward. It's going to be, I would say comparable to some of the growth we saw this quarter and we'll continue focusing on that.

And I think as you look out further in the year and into 2015, I can emphasize enough the acquisition we announced provides a very significant number of new folks into the combined production teams that are going to be very helpful we think for us as we continue to build out our production objectives and goals into 2015.

Unidentified Analyst

All right. Well, thank you very much.

Operator

Thank you. Our next question comes from Tom Alonso from Mcquarie Group. Please go ahead.

Tom Alonso - Macquarie Group

Hey, guys. Good morning, congrats on the deal. Just real quickly on the cost saves any sort of sense on the timing of when those are realized are just sort of through the year, by the end of ‘15, you will be at 100% of the run rate?

Dennis Hudson

Acquisition cost saves is…

Tom Alonso - Macquarie Group

Yes, I am sorry. I apologize, yes the acquisition cost saves.

Dennis Hudson

Thanks. No, we are planning on a integration work being done towards the end of this year, but I think we're going to have, way we have looked at, we're planning on having 100% of the cost saves in place in the first quarter of ‘15. So we are looking at them being fully realized in the fiscal year 2015. And the run rate, our goal is to have that the run rate impact basically in January ‘15.

Tom Alonso - Macquarie Group

Okay.

Dennis Hudson

If we, for some reasons saw a delay in the approval or integration for any reason which we did not currently see, it could push out a month or two, but that’s kind of the downside risk I would say. So, we are looking to get, pick all of that up in the first quarter.

Tom Alonso - Macquarie Group

Okay, great thanks. That’s very helpful. And then I think when you were talking about the acquired portfolio here, you said their loans are a little bit larger than yours and you said it gives you more interest rate. I think you said risk but is that just saying that there is more variable-rate loans in that portfolio?

Dennis Hudson

If that’s what I said, I apologize. I was trying…

Tom Alonso - Macquarie Group

I may have heard it wrong, I didn’t think you meant to say that so.

Dennis Hudson

Yes. The actual, obviously the portfolio I was making the point that beyond some of the mix improvements that I referred to, it brings to us obviously a smaller average loan size. So it further granulizes them and diversifies from a size standpoint our combined portfolio. Number two, I said that I thought it helped improve our interest rate risk structure given some of the terms on those loans, the duration of the portfolio like when we look at that. So it helps improve from a diversity standpoint and from a rate risk standpoint we believe.

Tom Alonso - Macquarie Group

Great. Okay, thanks. I think I heard that completely wrong. Thank you for that.

Dennis Hudson

Sure, thanks for asking.

Operator

Thank you. Our next question comes from Christopher Marinac from FIG Partners. Please go ahead.

Christopher Marinac - FIG Partners

Hey thanks, Denny good morning. I Wanted to ask about integration as it pertains to kind of what you have learned from the last acquisitions way back in 2006 kind of what would be the things that you may do differently now than some what you did take look backup pre-crisis?

Dennis Hudson

Well our 2006 acquisition was very similar and then it was a older franchise that had some real core customers and it went extremely well and we worked, I think one thing that we learned in that acquisition was working very closely with the team at the other bank, was very important to maintaining those customers. And that was -- that got us into some of the center parts of the state in some markets where we had no exposure at all. And I think it went extremely well.

We had another smaller acquisition a year earlier or 9 months earlier that was in the Orlando market but it was the opposite, it was a bank in Orlando that had been around for fairly short period of time. It had large -- it had more concentrated relationships in the bank, very little in terms of loan portfolio, simply put, was less of a sort of a true deep franchise from a customer standpoint. And that one didn't work out as well for us and so back in ‘05. So, we think this as an excellent partner for us. We like the people, they have tremendously deep relationships with their customers and they’ve been doing this for a very long time.

So, we’re looking forward to picking up this customer base and a lot of the leaders, the leader -- basically pretty much the entire leadership team which is going to really help us move the ball forward. So, we think that also in terms of integration risk here, we both use the same vendor for some of our core processing, we think that’s going to make it little easier and that will have a less revenue integration risk. I don’t know if that answered your question, Chris.

Christopher Marinac - FIG Partners

No, that’s helpful background. And I guess my other question, just as one as we are doing the math on sub three year payback on the tenure book dilution, what is the accretion back in their earnings that you see in the first couple of years through that and do you get substantially most of that back for that calculation or will it take longer than three years for keep discounts?

Dennis Hudson

Chris, can you speak up that last part?

Christopher Marinac - FIG Partners

Sure, I was asking about the discounts as it pertains to the non-accretion that comes back into calculation of the payback period?

Dennis Hudson

I’m sorry, we still didn’t -- we are not...

Will Hahl

Telephonically.

Dennis Hudson

Yes, you are breaking up a little bit, if you could just say it one more time? I’m sorry.

Christopher Marinac - FIG Partners

Sure. Can you hear me now?

Dennis Hudson

Yes. Much better.

Christopher Marinac - FIG Partners

The payback period sub-three years, is there or are there discounts coming back into accretion that is part of this and are you substantially calculating most of the discounts in the next three years?

Will Hahl

Well, you mean on the loan book? It’s not really that material, if that’s what you are, in another words…

Christopher Marinac - FIG Partners

Okay, yes.

Will Hahl

Accretable yield type of things is that what you are getting at. Yes, it’s a small number.

Christopher Marinac - FIG Partners

Okay. Sounds good. Thanks.

Dennis Hudson

Thanks Chris.

Operator

Thank you. (Operator Instructions). We have no further questions at this time.

Dennis Hudson

Great. Well, thank you very much for attending today. And we look forward to speaking with everybody again next quarter. 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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