Earnings Call Transcript - SBCF Q2 2024

Operator, Operator

Welcome to Seacoast Banking Corporation's Second Quarter 2024 Earnings Conference Call. My name is Pam, and I will be your operator. Before we begin, I have been asked to direct your attention to the statement at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and its comments today are intended to be covered within the meaning of the Act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Chuck Shaffer, Chairman and CEO

Thank you, Pam, and good morning, everyone. As we go through our presentation, we'll be referring to the second quarter earnings slide deck, which is available at seacoastbanking.com. I'm here today with Tracey Dexter, Chief Financial Officer; Michael Young, Treasurer and Director of Investor Relations; and James Stallings, Chief Credit Officer. The Seacoast team had a strong quarter with good earnings performance and continued strong customer acquisition. Our investments in talent and marketing paid off with a 60% increase in commercial loan originations from the previous quarter and a record $744 million late-stage pipeline entering Q3. As we anticipated on our comments last quarter, we saw low single-digit loan growth in the second quarter at 2.4%, and we expect production to increase in Q3, which will boost net interest income and the net interest margin. Tracey will provide more details on this shortly. We've been focused on increasing non-interest income and have seen improved performance in wealth management fees, service charges on deposits, and insurance agency revenue in each of the past four quarters. Our efforts to reduce expenses have also been successful, with adjusted non-interest expenses declining sequentially for the past four quarters, approximately $9 million per quarter lower than a year ago. During the quarter, we worked on lowering our cost of deposits by reducing offer grades, and we saw our cost of deposits begin to stabilize in May. And looking at our asset quality, we continue to maintain strong performance. Charge-offs were slightly higher this quarter at approximately 40 basis points annualized, mainly due to a limited number of loans, each of which were previously reserved for, which decreased the allowance for credit losses upon charge-off. While classified and criticized increased slightly from the prior quarter, nonperforming loans declined by $17 million. Our allowance for credit losses stands at $142 million, equal to 1.41% of total loans and including the reserve for unused commitments, this ratio moves to 1.46% of total loans, positioning us strongly amongst our peer group. Additionally, we have another $151 million in purchase discount. Our balance sheet puts us in a great position compared to peers, allowing us to navigate any challenges the cycle may present. Overall, it was a solid quarter, generally in line with the previous guidance across all areas. As we stated in previous quarters, we believe we reached an inflection point in net interest income in the second quarter and expect growth in net interest income and net interest margin as we enter the back half of 2024. We are committed to maintaining our conservative balance sheet principles to ensure long-term success, and we remain steadfast in our goal of establishing Seacoast as a leading player in Florida. I'll now pass the call to Tracey to review our financial results. Tracey?

Tracey Dexter, Chief Financial Officer

Thank you, Chuck. Good morning, everyone. Directing your attention to second-quarter results, beginning with slide 4. Seacoast reported net income of $30.2 million or $0.36 per share in the second quarter. As Chuck mentioned, we're seeing the benefit of recent expense reduction actions, and as a result, non-interest expense is down 10% compared to the prior year quarter. The pace of increase in the cost of deposits slowed during the quarter and was flat in May and June. Pre-tax pre-provision earnings on an adjusted basis increased by $2 million quarter-over-quarter, benefiting from growing revenue sources, including wealth, treasury management, and insurance, along with well-controlled expenses. Our loan pipelines have grown meaningfully, and we continue to see stable credit trends. Tangible book value per share increased to $15.41, and our capital position continues to be very strong. Seacoast's Tier 1 capital ratio is 14.8%, and the ratio of tangible common equity to tangible assets is 9.3%. Also notable, if all held to maturity securities were presented at fair value, the tangible common equity to tangible assets ratio would still be a strong 8.6%. We also repurchased nearly 40,000 shares at just over $22 on price dips during the quarter. Turning to Slide 5. Net interest income declined modestly during the quarter with higher deposit costs and growth in deposit balances, partially offset by higher yields on loans and securities. Core net interest margin contracted 4 basis points to 2.87%. In the securities portfolio, yields increased 22 basis points to 3.69%, benefiting from recent purchases. Loan yields, excluding accretion, increased 4 basis points to 5.52%. Accretion of purchase discounts on acquired loans was lower by $0.4 million compared to the prior quarter. The cost of deposits increased to 2.31%, with the exit rate flat month-over-month at 2.33%. Looking ahead, we expect that the second quarter was the trough for net interest income and that we will see growth in both net interest income and net interest margin in the third quarter, driven by higher yields on loans and stabilizing deposit costs. Our rate assumptions are unchanged and include a 125 basis point rate cut in November. Moving to Slide 6. Non-interest income, excluding securities activity, increased by $2 million in the second quarter to $22.2 million. Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Wealth and insurance agency income continue to grow. In the Bank-Owned Life Insurance portfolio, we restructured policies to capture higher rates, resulting in higher income, which will continue into future periods. Other income was higher by $0.7 million, including a gain on the sale of one non-performing commercial real estate loan. Looking ahead, we continue to focus on growing non-interest income, and we expect third-quarter non-interest income in the range from $21 million to $22 million. Moving to Slide 7. Assets under management have increased 12% year-to-date to a record $1.9 billion and have increased at a compound annual growth rate of 27% in the last five years. Wealth management revenues during the quarter increased to $3.8 million, up 6% from the prior quarter and 14% from the prior-year quarter. Our family office style offering continues to resonate, and internal referrals are a significant contributor, generating strong returns for the franchise and deepening relationships with our customers. Moving to Slide 8. Non-interest expense for the quarter was $82.5 million, lower than the range of guidance we provided last quarter. Recent expense reduction initiatives are benefiting nearly every category. Outside of the impact of severance-related charges in the first quarter, salaries and wages increased by $0.7 million, including annual merit increases and annual stock award grants. Investments in growth-focused talent will also continue to be a priority. We saw a typical seasonal increase in employee benefits and payroll taxes in the first quarter, leading to a comparative decline in the second quarter. In outsourced data processing and occupancy costs, we incurred one-time charges early in the first quarter associated with consolidation activities, leading to a comparative decline in expenses in these categories in the second quarter. Our planned investments in branding and in marketing campaigns across the state led to higher marketing expenses. Other expenses were lower across several categories, and the efficiency ratio improved to 60.2%. Discipline around expenses will continue to be a focus. In the third quarter, we expect non-interest expense to be between $84 million and $85 million. Turning to Slide 9. Loan outstandings increased at an annualized rate of 2.4%, and the pipeline has grown 46% to $834 million. Average loan yields, excluding accretion on acquired loans, increased 4 basis points to 5.52%. The pipeline is very strong, and looking forward, we expect the pace of loan growth to continue to increase, expecting mid-single-digit growth in the coming quarter. Turning to Slide 10. Portfolio diversification in terms of asset mix, industry, and loan types has been a critical element of the company's lending strategy. Exposure is broadly distributed, and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Non-owner-occupied commercial real estate loans represent 34% of all loans and are distributed across industries and collateral types. As we have for many years, we consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. These measures are significantly below the peer group at 34% and 222% of consolidated risk-based capital, respectively. We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk. Moving on to credit topics on Slide 11. The allowance for credit losses totaled $141.6 million or 1.41% of total loans compared to 1.47% in the prior quarter. A small number of individually evaluated credits were charged off during the quarter, resolving previously established specific reserves. The allowance for credit losses, combined with the $151 million remaining unrecognized discount on acquired loans, totaled $293 million or 2.9% of total loans that's available to cover potential losses, providing substantial loss absorption capacity. On Slide 12, providing a longer-term view of our stable asset quality trends, recall that the period presented includes eight separate bank acquisitions and a near-doubling of asset size. The stability of our credit experience during that period reflects the consistently applied discipline of our credit culture. Moving to Slide 13, looking at quarterly trends in credit metrics. Our credit metrics remained strong. Non-performing loans declined to 0.6% of total loans, with a number of non-accruals resolved either through charge-offs, sale, or being paid off. Accruing past due homes and criticized and classified loans each increased slightly as a percentage of total loans but remain low. Moving to Slide 14 and the investment securities portfolio. The average yield on securities has benefited from purchases in recent quarters at higher yields, with the portfolio yield increasing during the second quarter by 22 basis points to 3.69%. Changes in the rate environment negatively impacted portfolio value, and as a result, the overall unrealized loss position increased by $6 million. Turning to Slide 15 and the deposit portfolio. Total deposits increased by $100 million. The cost of deposits increased this quarter to 2.31%, a slower pace of increase than in previous periods, consistent with our expectations. In fact, in June, we saw no increase from the prior month at 2.33%. Looking forward, we expect continued growth in core deposits and stabilization of deposit costs, and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering. On Slide 16, Seacoast continued to benefit from a diverse deposit base. Customer transaction accounts represent 50% of total deposits, which continues to highlight our long-standing relationship-focused approach. Our customers are highly engaged and have a long history with us, and low average balances reflect the granular relationship nature of our franchise. Finally, on Slide 17, our capital position continues to be very strong, and we're committed to maintaining our Fortress balance sheet. Tangible book value per share increased to $15.41, and the ratio of tangible common equity to tangible assets remains exceptionally strong at 9.3%. Our risk-based and Tier 1 capital ratios are among the highest in the industry. In summary, we remain steadfastly committed to driving shareholder value, and our consistent, disciplined expense management positions us well as we continue to build Florida's leading regional bank. Chuck, I'll turn the call back to you.

Chuck Shaffer, Chairman and CEO

Thank you, Tracey. All right, Pam, I think we're ready for Q&A.

Operator, Operator

Your first question comes from David Feaster of Raymond James. Please go ahead.

David Feaster, Analyst

Can you hear me? You hear me now?

Chuck Shaffer, Chairman and CEO

Yes.

David Feaster, Analyst

Hey, good morning, everybody. Sorry about that.

Chuck Shaffer, Chairman and CEO

Hey, buddy. No worries.

David Feaster, Analyst

Great to see the inflection in loan growth. And just given the increase in pipeline, it seems like this trajectory is structurally improving. And it sounds like the majority of it you gain in share from the new hires hitting stride. Is that the right way to think about it? And just kind of how is demand broadly from your perspective? And where are you seeing the most growth opportunities today?

Chuck Shaffer, Chairman and CEO

Yes, David, you captured that accurately. Looking at the quarter, we experienced a 2.4% annualized loan growth, which aligns with our previous guidance. As Tracey mentioned, we expect mid-single-digit growth in the upcoming quarter. What’s particularly encouraging is that, similar to our discussion last quarter, most of the growth is coming from new customer relationships and prospects as we continue to onboard clients, thanks to the investments we've made in talent over the past two years. The demand from our existing customers is still relatively low, as has been observed across the industry. However, we are gaining market share primarily from large regional banks onto the Seacoast balance sheet. I remain optimistic, as I did last quarter, about the future, and I'm excited about the strong team we've built.

David Feaster, Analyst

That's perfect. And then maybe somewhat of a difficult question to answer because there's a lot of moving parts, but I'm curious, how do you think about the size of the balance sheet? Obviously, loan growth improvement like we just talked about. We talked about core deposit growth returning. I'm just curious, how do you think about plans for that core deposit growth? Would you expect to reduce some wholesale funding and borrowings first, and use securities cash flows to fund growth with the balance sheet remaining relatively stable? Is that the right way to think about it? I'm just kind of curious how do you think about that and some of the puts and takes?

Chuck Shaffer, Chairman and CEO

Michael, do you want to take that one?

Michael Young, Treasurer and Director of Investor Relations

Yes. Hey, David, Good morning. I would think about it as really our balance sheet growing at the pace of deposit growth from here. As Chuck mentioned, we have momentum building on the lending side. We expect some benefits, obviously, on the deposit side as well as we kind of take that market share and have faster customer acquisitions. So we're thinking that the deposit side of the balance sheet may grow in kind of the low single digits. So a little bit of remix, but we really want to grow the balance sheet from here.

David Pfister, Analyst

Okay. That makes sense. And then last one for me. Just given the move in rates, curious how you think about balance sheet optimization opportunities? And curious, what you guys would be interested in. Obviously, additional restructuring could make some sense, but any interest in loan sales or anything else like that? I know you sold some NPAs this quarter, but just curious whether the move in rates has changed your appetite and if it has opened up maybe some more doors.

Michael Young, Treasurer and Director of Investor Relations

Yes. Hey, David, this is Michael, again. I think if you step back and look at the balance sheet as a whole, we have very high levels of capital. We've done that intentionally to have a lot of ballast in turbulent times. We still have that optionality, as you mentioned, and that's a focus of ours to maintain that optionality. But there continue to be opportunities with rate volatility, etc., and changing kind of forward outlooks where we can take opportunities on the margin as you've seen us do some small portfolio restructurings and some other things along the way between Bank-Owned Life Insurance and securities to optimize earnings. So those opportunities, obviously, are still out there. As Chuck often says, we're really just very math-focused and disciplined around the earned back and doing the right thing for shareholders long-term.

Chuck Shaffer, Chairman and CEO

And I think, David, if you step back and just look at our balance sheet, we do have and we'll have, as Mike said, there's probably some opportunities around the edges to do some of that. But importantly, we are seeing net interest income and the margin inflect at this point with some loan growth coming on the back half of the year and stabilizing deposit costs. I'm pretty encouraged about the profitability outlook for 2025.

David Pfister, Analyst

Okay. That’s great. Thanks, everybody.

Chuck Shaffer, Chairman and CEO

Thanks, Dave.

Operator, Operator

Your next question comes from the line of Woody Lay of KBW. Please go ahead.

Woody Lay, Analyst

Hey, good morning, guys.

Chuck Shaffer, Chairman and CEO

Good morning, Woody.

Woody Lay, Analyst

So how does the mix of the loan pipeline compare to historical levels? Is it more weighted to C&I than in the past?

Chuck Shaffer, Chairman and CEO

Yes. I think it's important to note that, as we mentioned in last quarter's call, our pipeline is more focused on commercial and industrial loans. As a result, the funding level is lower than what we've typically seen in the past. However, we are very optimistic because we are securing a line of credit, establishing an operating company, and fostering full relationships with our deposits. This process will take about 12 to 18 months to fully realize, as we progress into next year. What we're creating is momentum for the second half of the year. While the funding levels are somewhat below historical averages, the momentum remains very positive.

Woody Lay, Analyst

Yeah. And then on the sort of average commercial loan side, you disclosed this around $750,000. Just given your revamped the commercial lending team, you're competing more with large regionals. Do you expect that average loan size to increase over time?

Chuck Shaffer, Chairman and CEO

Yeah, it will take some time because there's a lot of notes in that portfolio. But yes, the loans we're adding on are generally larger than that as we move forward. But there's a very large granular portfolio there; that's why that average loan size is as low as it is. Looking forward, the new volume coming on is larger.

Woody Lay, Analyst

It was encouraging to observe the month-over-month trends in deposit costs. Do you believe this trend can continue moving forward?

Michael Young, Treasurer and Director of Investor Relations

Hey, Woody, this is Michael. Yeah, I think we've taken the back book repricing actions that we discussed kind of on the last quarterly call, and you saw the stability that materialized in the quarter on both interest-bearing deposit costs and the total cost of deposits. And so I think going forward from here, we still want to grow deposits, and we still want to take market share while there's a good opportunity to do so. And so we might still expect some slight increase in the cost of deposits going forward, but at a much lower pace than what we're seeing in terms of our loan yields improving, and so that's going to lead to that margin expansion into the back half that Tracy and Chuck both referenced. So I think that's kind of the right way to think about it. Obviously, the Demand Deposits Accounts mix is the most important factor, and we feel pretty good about stabilization there as well.

Woody Lay, Analyst

Sounds great. Thanks for taking my questions.

Chuck Shaffer, Chairman and CEO

Thank you, Woody.

Operator, Operator

Your next question comes from the line of Brandon King of Truist Securities. Please go ahead.

Brandon King, Analyst

Hey, good morning.

Chuck Shaffer, Chairman and CEO

Hey, Brandon.

Michael Young, Treasurer and Director of Investor Relations

Good morning, Brandon.

Brandon King, Analyst

So what magnitude of margin NII expansion are you expecting in the back half of this year?

Michael Young, Treasurer and Director of Investor Relations

Hey, Brandon, this is Michael. Obviously, that depends somewhat on what your interest rate outlook is. We are modeling for a November first cut and only one cut this year, followed by greater cuts kind of into 2025. But really, the balance sheet is slightly liability sensitive, but close to neutral. So a lot of it is going to be based on kind of the active management that we do and the pace really of our loan growth versus our Demand Deposit Account balances that are going to be kind of the drivers of how much advent we get into the back half.

Chuck Shaffer, Chairman and CEO

And as you know, Brandon, there's a lot going on. We don't know where the Fed is going to go. So providing much guidance there over the long run is tough. We'll wait and see how things play out.

Brandon King, Analyst

Okay. I guess, is it fair to assume just modest expansion. Is that the way to think about it? You're not expecting any sort of material ramp? Is that the way to think about it?

Michael Young, Treasurer and Director of Investor Relations

Yeah. I think modest is probably a fair characterization. The benefit that we do have though is if rates decline further, we have a little more of a fixed loan book that, again, is stepping up into the higher rate regime. So that's really kind of the tailwind that's offering us moving forward, and that should also help us in head lower.

Brandon King, Analyst

Okay. Regarding the credit side, with the rise in net charge-offs for those smaller trades, could you clarify what those credits are and whether they are from legacy Seacoast or the acquired credit? Please provide some more details on that.

Tracey Dexter, Chief Financial Officer

Yeah, hi, Brandon. Charge-offs this quarter largely reflect previously reserved balances, and it's a small number of loans. A large portion of that is the acquired portfolios that are in runoff mode, along with a small number of other specific reserves. While the charge-offs are elevated this quarter, we do still expect a normalized level on an average basis would be around 25 basis points. Our year-to-date annualized charge-offs are 27 basis points.

Brandon King, Analyst

Okay. And with the reserve, I mean, you have strong reserves with also the acquired credit discount. Is it fair to assume that's going to continue to march lower, given how high it is putting all those pieces together?

Tracey Dexter, Chief Financial Officer

I think it depends. Each quarter we look at the current credit conditions, expected forward economic conditions. We assess the allowance just with the forecast scenarios. The Moody's forecast scenarios drive a lot of the quantitatively derived loss model outcomes. And of course, we also consider adjustments that may be appropriate based on metrics specific to our markets or our portfolio. We go through this comprehensive process each quarter, so the circumstances at each quarter end really drive changes in the reserve. I think it's reasonable to assume that we'll use the allowance for the purpose it was built, to cover losses as they arise. So if we do see the economic outlook improving and the portfolio conditions are supportive, we may end up with a lower coverage level than we have today.

Brandon King, Analyst

Okay. Thanks for taking my questions.

Chuck Shaffer, Chairman and CEO

Thanks, Brandon.

Operator, Operator

Our next question comes from Stephen Scouten of Piper Sandler. Please proceed.

Stephen Scouten, Analyst

Hey, good morning, everyone.

Chuck Shaffer, Chairman and CEO

Morning, Steve.

Stephen Scouten, Analyst

I guess I know earlier you said balance sheet growth probably in line with deposit growth, but obviously year-to-date deposits have moved faster than loans. And so the loan to deposit ratio is down a bit. I mean, do you think we could see that move back to 85% range and kind of lever the balance sheet a bit more over time?

Chuck Shaffer, Chairman and CEO

Michael?

Michael Young, Treasurer and Director of Investor Relations

Hey, Stephen, this is Michael. Yeah, I think that's fair. We obviously maintain our conservative stance on capital, but also liquidity. So we don't want to move that too high. But as you can see with the building pipeline, building lending momentum, after we sort of intentionally decelerated loan growth last year due to our risk posture, I think as we move forward, you're going to see the loan growth building and probably coming in at a slightly faster pace than deposit growth, which would help us to re-lever the balance sheet, as you mentioned a little bit. But really what that's going to do is just build earnings momentum and revenue momentum.

Stephen Scouten, Analyst

Yes, that makes sense. I know we've discussed this before, but based on last quarter's data, your modeling appears to be slightly asset sensitive. Has that significantly changed, or is it more a matter of modeling and a static balance sheet compared to what might actually happen, leading me to think you may be slightly liability sensitive?

Chuck Shaffer, Chairman and CEO

Yes. I think we modeled a slightly liability sensitivity. I can get with you offline on that, Stephen. But we're basically down 100 basis points. We pick up about 1% in revenue. So that depends on if you're looking at dynamic or static. Obviously, our balance sheet has been moving pretty quickly, and so that has a pretty big impact in just our ability to manage the balance sheet is probably stronger. So that's where, I think, really, if you zoom out and look at our balance sheet, we've got a little higher amount of fixed-rate assets that should be more stable in terms of their pricing versus our liabilities that some will automatically reprice. But obviously, we would be proactively repricing downward if rates were to decline. And so that's what will give us kind of the earnings leverage into a down rate scenario.

Stephen Scouten, Analyst

You're right. I have some reading comprehension issues this morning those up 0.7% and down 100 basis points, so apologies there. And then just last thing for me around M&A discussions. I mean, obviously, the stock is appreciably higher than it was maybe a quarter ago. The whole market is trending up. Does that help M&A conversations made with some of these smaller private banks or conversations picking up at all as of yet? And how do you think about the capital priorities today?

Chuck Shaffer, Chairman and CEO

Yes. Great question. Obviously, with a higher stock price, higher multiples across the industry, that would be indicative of more opportunities for M&A. I would say from an M&A perspective, I'm very encouraged by our organic growth story. I think there's a lot of momentum inside the company. I think we are at this inflection point. So if we were to look at something, it would really have to make a lot of economic sense to kind of take us off what we're focused on. But not to say we wouldn't do a deal, but that deal is going to have to make a lot, a lot of sense. So that's kind of where we are on it, Stephen.

Stephen Scouten, Analyst

Great. It sounds like a perfect dynamic. Appreciate it.

Chuck Shaffer, Chairman and CEO

Okay. Thanks a lot.

Operator, Operator

There are no other questions. I will hand the call back over to Chuck for closing remarks.

Chuck Shaffer, Chairman and CEO

All right. Awesome. Thank you all for joining us this morning. Thank you to the Seacoast team. I thought it was a very solid quarter and looking forward to the back half of this year. I appreciate everybody joining the call. Thank you, Pam. That will conclude.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.