Seacoast Banking Corporation of Florida (SBCF) 2014 Q4 法說會逐字稿

Welcome to the Seacoast fourth-quarter and year end earnings conference call. My name is Christine and I will be the operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Dennis Hudson. You may begin.

Thank you very much and welcome to the Seacoast fourth-quarter conference call. Before I begin, as always I direct your attention to the statement contained at the end of our press release regarding forward-looking statements. During our call we'll be discussing certain 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 that Act.

The earnings release and slides that go along with this call are also posted on our website SeacoastBanking.com and they can be found under presentations.

With me today is Chuck Cross who heads up our Commercial Business banking line and Chuck Shaffer who heads up our Consumer and Small Business banking line. And also with me today is Bill Hahl, our CFO as well as David Houdeshell, our Chief Credit Officer.

We ended the year with a great quarter capped by the acquisition of BANKshares which closed in the beginning of the fourth quarter. The acquisition combined with strong growth from our legacy franchise generated a 27% increase in fourth-quarter adjusted profits compared to the preceding quarter. The acquisition also contributed 33 out of the 39 basis points. Because with the acquisition as well as some growth 33 out of the 39 basis points in net interest margin expansion on a sequential quarter basis. And the acquisition fuels the momentum -- adds to the momentum we've been generating over this past year.

Our loan pipelines remain very strong generating this past year 12% year-over-year growth in our loan portfolio and our customer growth rates as well as product penetration within our customer base is quite exciting. We believe we've only scratched the surface on the growth in our markets. Overall, the fourth quarter revenues grew 44% year-over-year reflecting the acquisition, the growing impact of our strategic investment and an improving Florida market place.

As we said in the release we're quite optimistic about the Florida economy. We touch briefly on some of the highlights of our marketplace but I'd like to spend just a minute or two reviewing some of the details of the economic reports I've been reading because Florida really is an interesting story right now.

Florida's real growth state product is projected to grow at a better rate than the nation as a whole and solidly positive. The growth rates vary depending on who's making the prediction. For example, the University of Central Florida has our growth rate for the state pegged at 2.7%. Global Insight is estimating 3.7% growth and JP Morgan Chase is even more optimistic at 4.2%. So I think you can see the growth state product is really headed in the right direction now.

According to the Census Bureau our population for the state was 19.9 million at the end of the year surpassing New York as the nation's third most populous state. The report indicated that the state added an average of 745 new residences every day over the past year.

Population growth with providing a lot of fuel for Florida's economy and generating now good job growth. According to UCF the unemployment rate will continue to drop with the addition of thousands of jobs. Nonform employment has projected to grow at 2.3% in 2015 faster than the same numbers for the United States as a whole which is projected to grow at 1.7%.

The sectors with the highest growth in 2015 are projected to be construction at 8.7% growth, business and professional services at 3.7% growth and transportation, warehouse and utilities at 2.6%. We're also projecting the housing starts would rise to $111,500 in the year 2015 which is up 34% from the same number in 2014. We think it'll grow another 20% as we move into 2016. These numbers all come from UCF.

Housing prices we've observed continue to improve throughout just about every market in Florida. With statewide average price appreciation today in the month of November was about 3% for single-family homes according to the Florida realtors.

And foreclosure action activities also improving. According to UCF Dr. (inaudible) ranked first for quite some time after the crisis. Florida has now moved to fifth place among states for noncurrent mortgages. Major reason this shift is occurring is the reduction in new delinquent mortgages as we look at the incoming pipeline.

Florida's underwater homes declined from a high of 50% of all residential mortgages to now 15% in the most recent data. So, in short, the Florida economy we think is a great platform for our franchise and the investments we have been making over the last couple of years are now clearly driving significantly better results in terms of growth.

I'd like to hit a few highlights for the quarter and then we can open up the call for a few questions. Our adjusted earnings for the quarter totaled $4.2 million or $0.13 which is up about 27% from the $3.3 million or 13% -- $0.13 we earned in the third quarter. Excluding the adjustments for one timers and those one timers were primarily our merger-related [cost], branch closer costs and a few other items we've listed in the press release. Excluding those one timers, we posted a GAAP loss of $1.5 million or $0.05 per share for the fourth quarter.

Our adjusted pretax pre-provision earnings were up 72% over the third quarter and they were more than double what we generated in the fourth quarter of last year. This improvement in pretax adjusted pretax pre-provision earnings I think best reflects the impact of the acquisition and the previously announced legacy cost help as well as much better organic growth that we began to see this quarter. Our pretax pre-provision earnings should be higher in the first quarter of 2015 due to the full quarter impact of the savings we implemented this quarter with both the acquisition and our legacy cost help.

We expect to recapture an additional $1.1 million in expense phase in the first quarter as a result of the full impact of the cost saves, as I said. So I think it's very significant and if you look carefully at the table in the release and also, I think in the slide deck that we posted, I think it's very important to focus on our adjusted pretax pre-provision earnings because they're up very significantly.

Our effective tax rate this quarter was higher than usual, as noted in our release, but as we go forward we anticipate the tax rate will improve into a range of 36% to 38% based on the tax exempt investments we added to the balance sheet at the end of this past year 2014. We're also evaluating other tax favored investments that could further benefit our tax rate in the year ahead but we've not made any final decisions in that direction.

Looking ahead to 2015 it is clear to me that the momentum is building due to better organic growth as the significant investments we've made over the past 18 months produce greater results. These investments are now being further supported by all of the positive economic trends related to growth in Florida that I spoke of earlier.

One of our most significant investments has been our new Accelerate Commercial banking channel. Other investments include improved digital access for our customers and better and more automated digital marketing technology.

Loan growth really started to accelerate in 2014. As I said, total loans grew at 12% year-over-year and they improved -- their growth rate improved in the fourth quarter to an annualized rate of 15% for the quarter. Our low-cost funding is also growing with noninterest deposits up 56% for the year and up 11% for the year excluding the acquisition. Overall deposit growth was up 34% for the year and was up 5% without the contribution from the BANKshares acquisition.

Much of the growth in our noninterest bearing deposits over the last couple of quarters reflects our success in attracting commercial and small business customers through both our Accelerate channel and also across our branch system. In fact, our DDA mix is now improved to 30% of total deposits from 26% of total deposits just over the last year. Our total cost of deposits today, in fact for this past quarter, was only 11 basis points. A number we're quite proud of and one that reflects the rich deposit base we have built.

For the third consecutive quarter loan growth fueled growth in net interest income and expansion in our margin. As expected, the BANKshares loan portfolio also contributed strong net interest margin and we are very pleased that our NIM came in at 3.56% which was a bit better than we had estimated last quarter aided by investments of cash liquidity, both legacy and from the acquisition and organic growth.

Next quarter we expect the margin to stabilize at best and possibly trend a few basis points lower if interest rates remain unchanged. If interest rates increase then we could see further improvement in the net interest margin in the short term. We are asset sensitive and our outcome model indicates that when rates increase 100 basis points, net interest income should increase approximately 9%.

Our noninterest income grew for almost every line item this quarter. Noninterest income, excluding securities gains, grew 20% in the fourth quarter compared to the year ago and was up 16% from the linked quarter on annualized. We added a new source of income from bank owned life insurance during the quarter which was partially generated from investments acquired with BANKshares and partially generated from new investments we initiated during the quarter.

We've been very successful in our efforts to reduce overhead costs and streamline our operating platform. Over the past year we've closed six branches and consolidated Seacoast Marine offices generating savings of $1.8 million in annual cost reduction. Of course the one-time costs related to these consolidations and closures increased fourth-quarter expenses by $4.3 million but those costs are now behind us and we estimate less than three years earnback of these costs.

We also implemented annual cost reductions of a little more than $5.5 million that we promised in the BANKshares acquisition. We expect to get the full benefit or another $1.1 million of cost out compared to this quarter fully realized in the first quarter of 2015. This will move our adjusted fourth-quarter efficiency ratio from 75% or so to closer to 70% in the coming quarter and getting nearer to our immediate goal of the mid-60s, a level we achieved prior to the recession. Overall we're very pleased with the progress of the integration of this acquisition into our network and the contribution its customer base is making to our earnings.

We also couldn't be more pleased with the quality and capability of the leadership team, the production teams and the staff that have joined us from BANKshares. They have integrated quickly with our counterparts and we are already seeing improvements in new business pipelines and in account openings. Overall, the acquisition is expected to be as good as or better than our original projections. We believe the acquisition will continue to contribute very positive improvements to our franchise in the coming years.

And now, I'd like to turn the call back over to the Operator and we'd be happy to open the floor for a few questions.

(Operator Instructions)

Stephen Scouten, Sandler O'Neill.

Hello, good morning.

Good morning.

A question on the expenses. One clarifier, the $1.1 million in Q1, is that a gross number or is that an annualized figure?

That is the impact in Q1.

In Q1. Great. Any other large scale expense cuts or anything? Any further plans that aren't reflected yet in the run rate apart from one off type expense saves from here?

Nothing that we are prepared to talk about I would say at this point. We are -- I think the key as you look at this quarter is to focus on our adjusted pretax pre-provision earnings and look at the trend and the trend begins to reveal the impact of the expense cuts we announced last quarter and the prior quarter. And, as you know, we've disclosed the $1.1 million of further impact that we'll have in Q1. So if you take our adjusted pretax pre-provision number, add $1.1 million, you see a pretty incredible trend developing into Q1 on a pretax pre-provision basis. And also confusing this quarter with a higher tax rate and that tax rate goes down next quarter. I guess the other thing to think about is we booked a provision this quarter, a small provision this quarter, and our linked quarter number was actually a recapture. All of that gets more clearly reflected and pulled out if you look at it on a pretax pre-provision.

And that probably leads to a good followup there. You have still low charge-offs but charge-offs as opposed to net recoveries on the 14 basis point the charge-offs. What do you expect to see moving forward and how do you think about the provision relative to those expectations as well?

I think we're thinking that the -- David you want to answer that? I think charge-offs are likely to remain fairly contained and growth probably is the driver right?

Yes, exactly Dennis. Good morning. The charge-offs are about settled to where they are. They were getting back to more normal times pre-recession and whatever provision and expense we would be contributing in the near-term would stem from loan growth where we see across the franchise.

Okay, so could we estimate something like 1% provisioning on new loan growth? Is that a good way to think about it?

That's probably pretty aggressive but --

Okay, fair enough. And then one last question. Obviously, you guys have been growing impressively on the loan book and the Accelerate initiative has really delivered fairly quickly I would say and 15% organic growth in Q4 off of 16% in Q3. So what do you think is a sustainable growth rate for you guys especially with that strong commercial pipeline?

Well, you asked the question, right? I think we are -- Chuck, it would be interesting what you'd say, but I would say probably our goal is to keep that up. I don't think we're looking at higher growth, for example. But, we'll see.

The mathematics of it, we're working off a larger book, but with the Florida economy continuing to improve and with our execution continuing to improve and our pipeline we think we're going to see continued nice growth for the foreseeable future.

And one of the reasons we're more confident about that statement today than we would have been even six month ago, is, which I said last quarter, is that we've now seen robust growth in the early stages of our pipeline as well as the more mature part of the pipeline. And that total number, which is quite large right now, has been sustained over several months. So as we look ahead it is suggesting to us that the growth rate we produced recently plus or minus is sustainable for the foreseeable future.

Okay, great. Thanks for all the color, guys. I appreciate it.

Scott Valentin, FBR Capital Markets.

Good morning and thanks for taking my question. With regard to a fuel prices have come down quite considerably over the past call it, six months. Just wondering if you're seeing that in your numbers both in consumer credit if you're seeing any improvement there and also do you expect more activity on the loan side, on the consumer side due to lower fuel prices?

Probably way too early to make that kind of a call. But it's certainly a help. Consumers are certainly in better shape and at least for now. And I would say Chuck Shaffer, we're seeing really good growth in the consumer area right now.

We still see continued demand for consumer product that's increasing. It's increased substantially over the last four quarters. So it's hard to say what the long-term impact of the lower fuel types will be on interest rates and the like. But for the moment it's definitely a benefit and we continue to see demand for consumer product.

But I would say none of that improvement is due to fuel price. It's due to better execution on our part across the franchise and just a general improving economy. Think lower unemployment. Think better more positive outlook over the last particularly six months on the part of the consumer that we see kind of back in spending again, doing home-improvements, things like that are the greater drivers that we see anecdotally every day.

The other thing that's impacting the demand there is the continued rise in home values and the local markets that help our consumer base.

In fact, that's been a huge impact on us as home prices have come back and people have been able to right size their homes and move forward with their lives. That's been a big impact. Even on the residential area.

So, from a home value perspective just in terms of consumer confidence you think it's had a been impact as opposed to extracting equity?

Yes.

Okay. And then, on noninterest income, you obviously had a big bump. Almost $1 million in the quarter. Just wondering where else you see opportunities on the noninterest income side to grow that?

I think the primary driver would be continuing to grow our overall customer base.

Yes, the biggest impact on the noninterest income is to continue to grow households. We see that there's obviously a direct correlation between the fees associated with the deposit base, both service charges as well as our well fees. If we bring more households through the pipeline we see the expansion of that into the other business line. So continued growth of the overall customer base is probably the biggest driver of the continued fee growth.

And we've seen some improvement in spending that hits our interchange fees that we have there. And we have lots of activities underway in that area to better benefit from some of the growth we're seeing in household. I'd say that also the mortgage fees we're looking at better mortgage production starting out this quarter but we'll see how the quarter develops.

I'll add to that too. One of the things we put in place over the last 12 to 18 months is more focused on cross sell and account execution as well as a follow-on cross sell offerings for BR marketing area. And so, one of the things we focused on is getting deeper penetration into the customer base and that's escalated into additional fees as well.

And the timing for this and for those activities that Chuck mentioned is really important because two and three years ago, I'm not sure how successful we would have been given kind of the hunkered down attitude that our customer base and consumers in general were feeling. But we're there now as they're coming out of they're shells spending more and more opportunities for us than we're seeing some actually pretty shockingly good success as we better execute going forward.

Thanks very much.

Taylor Brodarick, Guggenheim Securities.

Great, thank you. I think three for me. On the margin, Denny, do you think assuming you give up a little bit this quarter per your comments, is that assuming sort of this where rates have been in the last month or so, are you assuming sort of a worst case base stay there for the next quarter?

Yes, absolutely. There is no change at all in the rate environment. It is very low environment, as you know. Just with what happened, let's say, over the last three or four months. We're assuming it stays that bad or worse as we go forward when we made that statement. But you had a comment?

I think the acquired loan portfolio is quite short as well and it did have a nice yield to it. So as we see that portfolio renew at lower rates and so forth that puts a little pressure on the margin.

Right. And the context is the next longer term. As Bill said, it was short. A lot of bare ripple, right? That sort of thing as well. But that's in the context of the next several quarters there will be some sort of consistent downward pressure coming out of that book.

Okay, great. Thanks for the color on all that.

Excuse me and by the way, that's offset by the growth. So you kind of put all of those dynamics together and what we're seeing is a few basis points potentially unless we see rates move back.

Great, thank you. And I think just thanks for the color on the macro picture in Florida. That movement, either population in migration or increased economic activity, is that uniform across the footprint or is there any better pockets of growth in your market?

I would say generally speaking some of the Metro areas that we're recently focused on the last two or three years have been leading the state out of that. Would you agree, Chuck?

Totally agree. I think the Metropolitan areas are getting the growth above the non-metropolitan areas.

And probably the number one fastest to recover obviously is South Florida. And that affects our recent investments Fort Lauderdale, Boca and South but it's also bleeding up into Palm Beach and the Treasure Coast really helping us in those core markets where we have so much market share. And then the number two market for sure in Florida in terms of recovery has got to be Orlando. And the acquisition in our prior legacy franchise up in Orlando is really starting to benefit.

Okay, great. I think last one for me, just a minor one, another nonrecurring items going forward. Anything to model or just assume?

I could tell you that -- I could honestly say that we can guarantee you there are going to be very few if any adjustments in Q1. We will have a very very clean quarter in Q1. We'll have another $1.1 million of expense reduction that we will carry forward into Q1 and a lower tax rate at a much more -- it will be our first really solid quarter I would say coming out of everything with very solid clean results in Q1.

Okay, great. Thank you everybody.

(Operator Instructions)

Stephen Scouten, Sandler O'Neill.

Hello Stephen. Hello.

I'm sorry can you hear me?

Yes.

If no one else has anymore questions I'll just in with another. I was curious on the securities investments that you noted in the release. I think you said the approximate life was about 6.5 years. What's the thinking there, I guess? Are you believing that rates are lower for longer and is that a longer life than you would normally invest in at this point in time? Or can you give me any color around that ideology?

Stephen, those are uncapped floating rate investments that we added. So the 6.5 years is kind of as far as interest rate risk component is really not a factor if that's what you're getting at.

That answers my question perfectly. And then, Denny, one other thing just on the M&A front. Obviously, you got this deal closed and it's been already seems to be a nice benefit and something you're excited about. How are you thinking about further M&A from here and can you give any color to the amount of activity or discussions that are ongoing as well as maybe pricing conditions?

I would just say that this was a very important acquisition for us to get behind us. It pushed us ahead very nicely. It was moderately priced. It's producing better results than we expected and we're very pleased with it. I would say our focus right now, Stephen, is on one thing and one thing only. And that is, getting our earnings up to a far more respectable level which we think comes next quarter and improving the quality of earnings. And I think as you look at this quarter and adjust for the one-timers that we described, underlying all of that is a much higher quality earnings even in Q4. That's going to be very evident in Q1 as all of that moves forward without all of those -- all of that noise into Q1 and so it's improving earnings. It's improving the quality of earnings and getting us much better visibility and then as we get back out into deeper I would say, into this year, with much higher quality, much better and much higher earnings. Then, we'll just have to see. I think we'll be in a more competitive position from a shareholder perspective to think about those kinds of opportunities. We had some ground to make up here very quickly as our earnings now shift into very clean clear earnings starting in Q1. So that's our focus right now and I think it needs to be our focus.

Okay, great. Thanks for letting me hop back in.

Sure.

Thank you. We have no further questions at this time.

Okay, well thank you very much for your time today. We look forward to reporting much better results even in Q1. Thank you.

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