Earnings Call Transcript - SBCF Q2 2025

Operator, Operator

Welcome to Seacoast Banking Corporation's Second Quarter 2025 Earnings Conference Call. My name is Angela, and I will be your operator. Before we begin, I want to highlight the statement at the end of the company's press release regarding forward-looking statements. Seacoast will discuss topics that are considered forward-looking statements under the Securities and Exchange Act, and its remarks today are meant to fall under this definition. Please note that this conference is being recorded. I will now hand the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may start.

Charles Shaffer, Chairman and CEO

Okay. Thank you, Angela, and good morning, everyone. As we proceed with our presentation, we'll refer to the second quarter earnings slide deck available at seacoastbanking.com. Joining me today are Tracey Dexter, our Chief Financial Officer; Michael Young, our Treasurer, Head of Corporate Development, and Investor Relations; and James Stallings, our Chief Credit Officer. The Seacoast team delivered exceptional results in the second quarter of 2025, reflecting the strength of our growing franchise, the discipline and focus of our team, and the momentum we continue to build across all of our markets. This quarter was highlighted by a substantial increase in net income, up 36% from the prior quarter, largely driven by a 10 basis point expansion in the net interest margin, and this was the result of robust loan growth and disciplined deposit cost management. We also delivered solid performance in noninterest income and continued to demonstrate effective expense control. Profitability improved across the board. We made meaningful progress in our strategic priorities. Annualized loan growth reached 6.4%, supported by a strong commercial pipeline, an outcome of a multiyear strategy to attract top talent from larger institutions. This talent continues to drive high-quality loan production and deepen customer relationships. We also successfully closed the Heartland Bancshares transaction a few weeks ago and remain on track to close the Villages Bank Corporation acquisition in the fourth quarter. Both franchises bring high-quality deposit bases and complementary balance sheets. And once fully integrated, we expect these transactions to significantly enhance Seacoast's profitability profile. And turning to credit. Asset quality remains sound. Nonperforming loans declined to 0.61% of total loans, and net charge-offs were just $2.5 million, reflecting our continued focus on disciplined underwriting and proactive risk management. Criticized and classified loans remain stable. And in closing, I want to express my sincere appreciation to our dedicated associates for their commitment to advancing our growth and profitability goals. Their focus and execution continue to drive our success. We remain very confident in our strategic direction, and we're enthusiastic about the opportunities that lie ahead. And with that, I'll turn it over to Tracey to walk through our financial results. Tracey?

Tracey Dexter, CFO

Thank you, Chuck. Good morning, everyone. I would like to highlight our second quarter results, starting with Slide 4. The Seacoast team performed remarkably well this quarter, achieving a net income of $42.7 million or $0.50 per share, marking a 36% increase from the prior quarter. Adjusted net income, which excludes merger-related charges, also saw a 39% sequential rise to $44.5 million or $0.52 per share. All profitability metrics have improved, including a return on assets of 1.08% and a return on tangible common equity of 12.8%. We have also improved our efficiency ratio, which, when excluding merger-related costs, stands at 55%. Loan production remained robust, with a 6% annualized growth in balances. Our net interest income reached $126.9 million, up 7% from the previous quarter, and the net interest margin expanded by 10 basis points to 3.58%. Excluding accretion on acquired loans, the net interest margin expanded by 5 basis points to 3.29%. The improvement in net interest margin was supported by a decrease in deposit costs from 1.93% in the previous quarter to 1.8% this quarter, demonstrating our commitment to relationship-based funding and disciplined pricing. The tangible book value per share has risen to $17.19, which represents a 12% increase year-over-year. Our capital position remains very strong, with a Seacoast Tier 1 capital ratio of 14.6% and a tangible common equity to tangible assets ratio of 9.75%. We completed the acquisition of Heartland Bancshares on July 11, adding four branches and about $777 million in assets. Furthermore, we announced our proposed acquisition of Villages Bank Corporation, which will enhance our presence in Central Florida and add approximately $4.1 billion in assets, expected to close in late October 2025. Moving to Slide 5, net interest income for the quarter increased by $8.4 million, supported by loan growth and reduced deposit costs. The net interest margin saw a 10 basis point increase to 3.58%, and excluding accretion on acquired loans, it expanded by 5 basis points to 3.29%. In our securities portfolio, yields decreased by 1 basis point to 3.87%, while loan yields increased by 8 basis points to 5.98%. Excluding accretion, loan yields remained flat compared to the previous quarter. Through effective deposit cost management, we reduced deposit costs by 13 basis points to 1.8%. With strong momentum in loan growth, stabilizing deposit costs, and additional liquidity and acquisitions, we anticipate continued growth in net interest income throughout the remainder of the year. We also expect to finish the year with a core net interest margin around 3.35%, factoring in one anticipated rate cut in September and another in December, with potential contributions from the two acquisitions adding approximately 10 basis points to that figure. According to Slide 6, noninterest income, excluding securities activity, was $24.5 million, a 10% increase from the second quarter of 2024. Fee revenue has benefited from the expansion of treasury management services to our commercial clients, while our wealth and insurance divisions have shown consistent performance. Saleable mortgages originated during the quarter resulted in gains of $0.7 million, and BOLI income increased to $3.4 million, including a $0.9 million benefit. Other income totaled $7.5 million and included a $3 million payroll tax credit claimed by a previously acquired bank. Looking ahead to the third quarter, we estimate noninterest income to be between $20 million and $22 million. As shown on Slide 7, our Wealth division continued to experience robust growth, adding $215 million in new assets under management this year, with total AUM up 16% compared to last year. On Slide 8, noninterest expenses in the second quarter amounted to $91.7 million, an increase of $1.1 million, which includes $2.4 million in merger-related costs. Increased salaries and wages reflect annual merit increases and incentive-based bonuses, while other areas of expense align with our profitability expectations. Our adjusted efficiency ratio improved to 55.4%, down from 59.5% last quarter, indicating continued operating leverage. We anticipate adjusted expenses for the third quarter, excluding direct merger costs, to be between $92 million and $94 million. According to Slide 9, loan outstandings increased at an annualized rate of 6.4%, with production reaching $854 million in the second quarter. Our pipeline remains strong at $921 million, and we are seeing high demand in our markets. Loan yields increased by 8 basis points, attributed to higher accretion on acquired loans following elevated payoffs. Looking forward, we expect to maintain mid- to high single-digit organic loan growth in the coming quarter and throughout 2025, although tariffs may introduce some uncertainty. Turning to Slide 10, our lending strategy is centered around portfolio diversification in terms of asset mix, industry, and loan type. Our exposure is well-distributed, and we are committed to a disciplined and conservative credit culture. Nonowner-occupied commercial real estate loans account for 34% of all loans and are diversified across various industries and collateral types. Consistent with our practices, we manage construction and land development loans and commercial real estate loans well below regulatory guidance. Our loan portfolio is structured with a diverse distribution across categories, maintaining granularity to effectively manage risk. On Slide 11, the allowance for credit losses reached $142.2 million, which is 1.34% of total loans, showing no change in allowance coverage from the previous quarter. Our estimation process considers recent market volatility and macroeconomic factors, and we closely monitor economic and fiscal policies that may impact our borrowers. Together with the remaining unrecognized discount on acquired loans of $108.5 million, our allowance for credit losses totals $250.6 million, or 2.36% of total loans, providing a significant capacity for loss absorption. Moving to Slide 12, our credit quality remains strong, with net charge-offs of $2.5 million during the quarter, or 9 basis points annualized. Nonperforming loans decreased by $6.8 million, representing only 0.61% of total loans, and accruing past due loans decreased to 0.13% of total loans. The level of criticized and classified loans slightly decreased to 2.39% of total loans. On Slide 13, regarding the investment securities portfolio, we utilized wholesale funding to purchase securities in the first half of the year in preparation for the Heartland acquisition, primarily adding agency securities with an average book yield close to 5%. Interest rate swaps that had previously benefited us matured in April, impacting our overall portfolio yield, which has been offset by new purchases. Net unrealized losses in the AFS portfolio improved by $16 million during the quarter due to changes in long-term rates. Moving to Slide 14 and the deposit portfolio, total deposits decreased by $77 million, as anticipated, due to seasonal trends and a strategic decision to move away from very high-rate deposit relationships. We actively managed to lower deposit costs, which fell by 13 basis points to 1.8%. This funding will be replaced with lower-cost core franchise deposits from Heartland, enhancing our margin outlook. We aim for low single-digit organic deposit growth for the full year 2025. As shown on Slide 15, Seacoast benefits from a diverse deposit base, with customer transaction accounts comprising 47% of total deposits, reflecting our long-established relationship-driven approach. Our customers are engaged and maintain long-term relationships with us, and low average balances highlight the granular nature of our franchise. Finally, on Slide 16, our capital position is very strong, and we are dedicated to maintaining a solid balance sheet. Tangible book value per share has increased to $17.19, and our ratio of tangible common equity to tangible assets is notably strong at 9.8%. We have seen significant advancements in our return on equity measures, and our risk-based and Tier 1 capital ratios remain among the highest in the industry. As a reminder, we plan to invest some of this capital in the Heartland and Villages transactions, which will significantly improve our return on capital. In conclusion, this quarter's results reflect the strength of our core business and disciplined execution throughout the organization. We are confident in our capacity to deliver strong and sustainable performance. Our balance sheet is well-positioned, and our capital situation is robust. We will continue to pursue our organic growth and profitability objectives as we integrate recent acquisitions and expand the franchise. I will now hand the call back to you, Chuck.

Charles Shaffer, Chairman and CEO

All right. Thank you, Tracey. And operator, we'll take some questions.

Operator, Operator

And your first question comes from the line of David Feaster with Raymond James.

David Feaster, Analyst

I want to start by discussing growth. I'm really encouraged by the growth trends we've observed in the past few quarters and the ongoing strength of our pipeline. I’d like to understand the competitive landscape from your perspective in Florida and the factors driving this growth. Is the growth primarily due to increased demand and activity from your clients now that things have stabilized, or is it more about the new hires you've made that are capturing market share? I'm curious about these dynamics.

Charles Shaffer, Chairman and CEO

Thank you, David. I'll begin by discussing the factors contributing to our growth and then address the competitive environment. We have taken a focused approach to recruit bankers in all of our markets and have seen significant success in this area over the past couple of years. As I mentioned before, we've built a strong commercial and treasury management team, which is driving growth as we onboard new clients from our recruiting efforts. One key factor is that economic conditions remain robust across our footprint, with strong demand for credit. The impact of tariffs has been minimal, and we have not observed any weakening in market confidence; the focus remains steady. Our pipeline going into the third quarter is strong, and I am confident in our ability to achieve mid- to high single-digit growth over the next few quarters and into 2026. Our team's performance has been exceptional, and I feel assured about our prospects moving forward, driven by talent and market demand. On the competitive side, the landscape has become increasingly competitive, particularly in commercial real estate. We saw many large banks exit this space in 2023 and 2024, but they have now re-entered significantly. The competition is fiercer than ever in all our markets. Nevertheless, we are navigating this landscape well, selecting our opportunities carefully, and I am satisfied with our growth this quarter and optimistic about our future growth outlook.

David Feaster, Analyst

That's great. That's helpful. And maybe just switching gears to the other side of the balance sheet, right? You've done a great job actively managing funding costs, continue to push deposit costs lower. Obviously, we've got the Heartland and the Villages deal coming online. But I guess, at a high level, how do you think about funding costs? Is there much deposit cost leverage left? And where do you see the most opportunity to drive the core deposit growth that you were talking about?

Charles Shaffer, Chairman and CEO

I'll let Michael take the deposit cost side and maybe come back with a few comments around driving growth. But Michael, do you want to talk a little bit about the outlook for deposit costs?

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

Sure, David. We had a great quarter thanks to the team's proactive management. We have emphasized our customer-friendly approach during the liquidity-constrained environment in 2023 and 2024, and we've been working on reducing deposit costs as the Federal Reserve cut rates. This quarter, we implemented some tactical moves that significantly improved our return on assets, which has been our focus. We aim to be careful in our strategy, ensuring we don’t hinder our growth. We plan to balance growth in volume with rate management going forward. The key opportunity now is to grow our core operating accounts while reducing our cost of funds through DDA growth over time. The addition of new bankers has helped in bringing valuable relationships that should enhance this growth. Regarding volume, we are at a seasonal low for public funds, especially with tax-related outflows occurring at the end of the first quarter and beginning of the second quarter. We anticipate that seasonal trends will shift from headwinds to tailwinds in the second half of the year.

Charles Shaffer, Chairman and CEO

Yes. And the only thing I'd add to that, Michael, I think you answered that really well is we don't have any deposit verticals or any sort of wholesale deposits in the franchise. We win deposits and loans customer by customer. The entire balance sheet is relationship-based. And so as we move forward, as we onboard customers and prospects, particularly those coming off the balance sheets of the larger banks, we'll continue to add to our core deposit franchise. And we're not focused on driving high-rate deposits and sort of more transactional-based deposits. It is about net new checking core accounts and driving business growth over time.

David Feaster, Analyst

That's good. I'm curious about your thoughts on balance sheet optimization. You've been very active with these two deals, which provide significant financial flexibility and options. You've already made some preparations for the Heartland deal and mentioned some strategies with swaps. Given these two transactions, the expectation of Fed cuts, and the current situation, how have your plans for managing and optimizing the balance sheet evolved, and what are your priorities moving forward?

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

Sure, David. This is Michael. I think the long-term plan is the same. These acquisitions are super valuable deposit franchises, and we're super glad to have them as part of the overall Seacoast franchise. It looks a lot like who we are and who we've always been. And so it will just continue to add ballast to the balance sheet and keep us very steady through various rate cycles that may emerge. Obviously, there's a lot of different permutations and outcomes that may transpire in terms of interest rates over the medium term, and we're just very focused on managing that interest rate risk appropriately. But I think it really gives us a lot of raw material and opportunity to optimize earnings and profitability for the franchise as we move forward. And particularly as time progresses, we've talked a lot about just the fixed rate repricing trends on our balance sheet and even the acquired balance sheet. So we're stepping into sort of margin expansion assets repricing higher and then this really core sticky deposit franchise that I think we've evidenced through the second quarter that will be positive for us. So we'll get an initial lift as we reposition the securities portfolios here in the back half of '25. And then the upside comes from that low 70s loan-to-deposit ratio remixing up towards 80% and eventually 85% loan-to-deposit ratio as we deploy that with banker hires and loan growth over the coming years.

Charles Shaffer, Chairman and CEO

Yes. And I would point investors and shareholders back to the deck we put out on the Villages transaction that contemplated both bank deals in the forward direction of Seacoast. And what you can see in that deck is the 130-plus ROA emerges fairly, very strong return on tangible common equity, and that's the result of that repositioning. So we believe we're right on track with what we presented in the Villages deck there, and we also put some earnings guidance in there as well. So if you're looking for where we think we're headed, just go back to that deck, that's the outlook.

Operator, Operator

Your next question comes from the line of Woody Lay with KBW.

Woody Lay, Analyst

I wanted to follow up on deposit costs. I think so far through the easing cycle, your interest-bearing deposit beta is around 80%. Obviously, there's kind of been some one-time corrections in there stemming from 2023. But how do you think about the deposit beta going forward with incremental rate cuts?

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

Yes, Woody, this is Michael. I'll take that one. I think what we had articulated is that we were kind of aggressive late in the cycle on betas on the way up to protect liquidity, and we expect it to be aggressive on the way down and reestablishing because we do think we have a very strong deposit franchise, those lower deposit costs that Seacoast is known for. And I think we've evidenced that here through this quarter. So I think you've seen kind of the more aggressive move down in betas. And then from here, we'll return to more normalized betas as we have incremental Fed cuts potentially through next year. So we had a 45% cumulative beta this cycle versus prior cycles, closer in the low 30s. I would expect we kind of return to that low 30s kind of top of the house beta, again, not on interest-bearing, just total deposits as we see incremental Fed cuts move in from here.

Woody Lay, Analyst

Got it. I can't recall if you mentioned the beta assumptions at the beginning of the year for the 3.35% core NIM for Seacoast, but it seems like you may have slightly outperformed expectations. Have there been any offsets on the asset side that could affect maintaining that core NIM guidance at 3.35%, or could there be potential upside?

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

Yes, it's a good question, Woody. I think we certainly moved more on the deposit side than where we maybe expected to be at this point, but also the Fed cuts are occurring later in the year and maybe we'll only have 1 instead of 2. And so if you think about it that way, we're kind of ahead of the game, but where we'll land at the end of the year is maybe just slightly different because of the delay in the Fed cuts doesn't change the cumulative outcome. And then the one other thing I would just call out is on the asset yield side, we've had those benefits from the pay fixed swaps in 2024 kind of handed off to some higher just prepayment and interest recovery benefits as we work through some credit resolution in the first half of this year. And then we'll expect that continued back book fixed rate repricing to really take the lead in the second half of the year combined with, I think, balance sheet growth. And so I think we're just leaning a little more towards growth versus margin optimization in the back half, which should land us in a similar spot. And then we basically spoke to the deals we'll add roughly once we close the deal just about 10 basis points to the margin at that point in time. And so just a little bit cagey on when that will close, if that will be early in the fourth quarter or late in the fourth quarter will kind of dictate how much margin expansion we get there.

Woody Lay, Analyst

I appreciate that clarification. I have one last question. Over the past year, you have been balancing investments in the franchise while also focusing on improving profitability. In the second quarter, we saw a significant improvement. While some one-time factors may have contributed, profitability remains strong. Given this and the disruptions in your area, what are your thoughts on reinvesting in the franchise?

Charles Shaffer, Chairman and CEO

Yes. That's a great question, Woody. And we'll see what opportunities present themselves. Obviously, last time there was significant disruption, we materially capitalized on that disruption, and you're seeing the benefits of that now pull through our financials. As we move forward, we'll opportunistically look at opportunity, and we'll weigh that against delivering what we've committed to shareholders in terms of returns. I'd say my primary focus is delivering what we have in the our Villages deck and getting our profitability up to where I think it needs to be. But if unique opportunities present themselves, we'll obviously look at them.

Operator, Operator

Your next question comes from the line of David Bishop with Hovde Group.

David Bishop, Analyst

We keep hearing about large banks returning to the commercial real estate market. I'm curious about what you're observing in terms of loan pricing and spreads, and how they have trended over the past 90 days.

Charles Shaffer, Chairman and CEO

It's been tough. I don't know, James Stallings, if you want to talk about what you're seeing? He's our Chief Credit Officer. He's looking at deals every day, commercial real estate pricing.

James Stallings, Chief Credit Officer

Yes, thanks, Chuck, and thanks, David. It's a good question. We are observing that for top-tier sponsors and high-quality assets, there is increasing competition now compared to 18 to 24 months ago, particularly in the last 90 days. We're starting to see some spread compression, with spreads below 2, including 180 to 190 basis point spreads on some very quality transactions. Additionally, there is some pressure on structure as sponsors are pushing for longer interest-only periods, even for stabilized properties, to enhance cash-on-cash returns for their investors. While there is competition, the positive aspect is that credit quality remains strong, which supports the structures necessary for us to secure business.

Charles Shaffer, Chairman and CEO

Yes. We are carefully balancing the pursuit of appropriate risk-based returns while maintaining a stable growth outlook. We will selectively choose our opportunities with a disciplined approach to credit. As pricing continues to compress, we will be strategic in our decisions. We will continue to support our high-quality Tier 1 sponsors as we have in the past, but we will be mindful moving forward, especially as the competitive landscape has increased compared to last year.

David Bishop, Analyst

Got it. That's a good segue, Chuck, maybe to the next question here or sticking with credit. Unusually low loss content this quarter. I think charge-offs were sub-10 basis points. Just curious as you look across the horizon, just maybe any sort of thoughts where you think you see net charge-offs stabilizing here in the near term?

Charles Shaffer, Chairman and CEO

Yes. Credit quality remains very stable, and our outlook is for it to remain stable. We're not seeing any deterioration across the portfolio. If anything, we're seeing it sort of clean up as we've moved through past some of the M&A from '22 and '23. So what I can tell you is I feel pretty good about our outlook on asset quality. I think it does remain very stable moving forward.

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

And David, this is Michael. Just as a reminder, in 2024, we had the consumer fintech portfolio that we've called out before that we largely liquidated in the fourth quarter that had added about 8 basis points to net charge-offs. So that's kind of removed and gone. And so you're seeing kind of the benefits of that pull through. But longer term, we expect mid-cycle to be 20 to 25 basis points, it's just kind of a mid-cycle level for us.

David Bishop, Analyst

Got it. And then one sort of housekeeping question, Mike. I know into the Heartland deal, you had the securities in front of that. Should we expect that to unwind here in the third quarter and have some runoff both the securities and borrowing side?

Michael Young, Treasurer, Head of Corporate Development and Investor Relations

Yes. Not on the securities side because those wouldn't have been a part of our financials. So the securities balances will remain fairly consistent, but we will delever a little bit or plan to on the wholesale funding side. So we had a little higher brokered and FHLB borrowings in the second quarter, and you'll see those likely come down depending on kind of the path forward for us into the Villages, but that's really the plan as we stand here today.

Operator, Operator

Your next question comes from the line of Russell Gunther with Stephens Inc.

Russell Gunther, Analyst

I wanted to follow up on the loan growth discussion to ensure I understand correctly. Recently, you expressed confidence in maintaining a mid- to high single-digit growth pace as you look towards 2026, even with a larger balance sheet resulting from these deals. I want to confirm that is accurate. Additionally, could you address the transaction that occurred last night, what kind of opportunity you believe it presents, and how Seacoast plans to take advantage of any dislocation?

Charles Shaffer, Chairman and CEO

Yes, sure. Thanks, Russell. Just to reiterate, we still feel very confident in our mid- to high single-digit growth rate on the loan side going into back half of this year and into '26. So I think that guidance remains sound, and I'm confident in our ability to deliver that. And then the transaction last night, obviously, like I mentioned earlier, any disruption is always beneficial. We'll see how that all plays out and see where opportunities may come to us. We operate with a very sound, strong capital position, sort of in a differentiated way, are going to have a lot of liquidity to put to work over the coming years and have a really strong culture inside the organization of supporting frontline bankers. And as you see from a lot of the awards we've won around Best Places to Work, et cetera, we've got a very strong, capable, sustainable business here, and I think it will be attractive to banking talent over time. And as that opportunities come up, we'll look at them. And any time there's upstream disruption that's beneficial and even beyond the transaction announced last night, I suspect there will be more over time. And so we'll look to take advantage of that across all our markets.

Russell Gunther, Analyst

Yes. I appreciate that, Chuck, and a good point, certainly on excess liquidity, capital, and culture. And then I had a follow-up on the margin expectation, just to make sure I heard you right. So core 3.35% NIM for the back half of the year. And then as you fold in the 2 deals, is the guide for a reported margin of 3.45% in the back half of the year?

Charles Shaffer, Chairman and CEO

Core margin would be 3.45%. So we're guiding to core accretion income can come in high or low quarter-to-quarter. So we're just guiding off the core. So 3.35% in the fourth quarter the guide with acquisitions adding about 10 basis points to the margin from the lower cost of funding that those will bring in.

Operator, Operator

There are no further questions. I would now like to turn the call back over to Mr. Shaffer for closing remarks.

Charles Shaffer, Chairman and CEO

All right. Thank you, Angela. And I just want to say thank you to the Seacoast team. We've got a very focused effort here to grow in that high single-digit range over time and deliver upper quartile returns and the team is heads-down focused on that this quarter. I think this quarter evidences the outcome of that, and I feel really good about where we're headed here into the coming years. So I appreciate everybody on the Seacoast team for all their hard work, and welcome to the Heartland team joining the franchise here in the last few weeks and looking forward to the conversion. And we're looking forward to the Villages transaction in the fourth quarter. We've had a lot of great interaction with that team. It's been a really solid cultural combination, and we're super excited about what that looks like later this year. So thank you to everybody on our team. You guys did an awesome job, and we'll be around if anybody has questions on the quarter. And that will conclude our call.

Operator, Operator

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