Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q2 2024 Earnings Conference Call July 26, 2024 10:00 AM ET

Company Participants

Chuck Shaffer - Chairman & Chief Executive Officer
Tracey Dexter - Chief Financial Officer
Michael Young - Treasurer & Director, Investor Relations

Conference Call Participants

David Feaster - Raymond James
Woody Lay - KBW
Brandon King - Truist Securities
Stephen Scouten - Piper Sandler

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

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% annualized, 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 ACL upon charge-off.

While classified and criticized increased slightly from the prior quarter, nonperforming loans declined by $17 million. Our ACL 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.

And additionally, we have another $151 million in purchase discount. Our balance sheet puts us in 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

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 cost of deposits slowed during the quarter and was flat in May and June.

Pre-tax pre-provision earnings on an adjusted basis increased $2 million quarter-over-quarter, benefiting from growing revenue sources, including wealth, treasury management, and insurance, and 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 TC TCE to TA 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 we'll see growth in both net interest income and the net interest margin in the third quarter, driven by higher yields on loans and stabilizing deposit costs. Our rate assumptions are unchanged and include 125 basis point rate cut in November.

Moving to Slide 6. Non-interest income, excluding securities activity, increased $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 BOLI 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 sale of one non-performing commercial real estate loans. 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 $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 expense 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. And 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 and expect 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.

And 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

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Feaster of Raymond James. Please go ahead.

Chuck Shaffer

David, you maybe on mute.

David Feaster

Can you hear me? You hear me now?

Chuck Shaffer

Yes.

David Feaster

Hey, good morning, everybody. Sorry about that.

Chuck Shaffer

Hey, buddy. No worries.

David Feaster

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

Yes, David, I think you characterized it and read it well. I think when you step back and look at the quarter, we saw a 2.4% annualized loan growth that was about what we had guided to in the prior quarter.

As Tracey mentioned, our guide, the mid single-digit in the coming quarter. And what's really encouraging about it, just like we talked about last quarter is the bulk of what's coming on is new customer relationships and prospects as we continue to onboard clients, primarily as a result of the investments we've made over the last 24 months in talent around the state.

The demand of our current customers, I would say, remains pretty light, just like you've seen across the industry. But what we're seeing is we're moving market share primarily out of large regional banks on to the Seacoast balance sheet. And so I'm very encouraged as we talked about last quarter, I remain very encouraged and I think we -- the team we've built is first class, and I'm super excited about where we're headed.

David Feaster

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

Michael, do you want to take that one?

Michael Young

Yes. Hey, David, Good morning. this is Michael. I would think about it as really our balance sheet growing at the pace of deposit growth from here. As Chuck mentioned, we've got momentum building on the lending side, on the loan 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

Okay. That makes sense. And then last one for me. Just given the move in rates, curious how do 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 as it opened up maybe some more doors.

Michael Young

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 are -- continue to be opportunities with rate volatility, et cetera, 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 BOLI and securities to optimize earnings.

So those opportunities, obviously, are still out there. And 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

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

Okay. That’s great. Thanks, everybody.

Chuck Shaffer

Thanks, Dave.

Operator

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

Woody Lay

Hey, good morning, guys.

Chuck Shaffer

Good morning, Woody.

Woody Lay

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

Chuck Shaffer

Yes. I think the way to think about it, we mentioned this on last quarter's call, the pipeline does weight more into C&I. And so the funding level is lower than what historically we would see. Again, we're super encouraged because we're bringing on a line of credit. We're bringing on an operating company, and we're bringing with the deposits and the full relationship. And that will take 12 to 18 months to fund up, as we move through the next -- into next year. But what we're building is momentum into the back half. And so the funding levels are a little lower than they've been historically, but the momentum is very strong.

Woody Lay

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

Chuck Shaffer

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. But looking forward, the new volume coming on is larger.

Woody Lay

Yeah. And then on -- maybe shifting over to deposit costs. I mean, it was great to see the month-over-month trends. It sounds like you think this is a trend that can persist from here?

Michael Young

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, DDA mix is the most important factor, and we feel pretty good about stabilization there as well.

Woody Lay

Sounds great. Thanks for taking my questions.

Chuck Shaffer

Thank you, Wood.

Operator

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

Brandon King

Hey, good morning.

Chuck Shaffer

Hey, Brandon.

Michael Young

Good morning, Brandon.

Brandon King

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

Michael Young

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 DDA balances that are going to be kind of the drivers of how much advent we get into the back half

Chuck Shaffer

And as you know, Brandon, there's a lot of lots. You've got an election year. 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

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

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 going forward, and that should also help us in head lower.

Brandon King

Okay. And then on the credit side, with the increase in net charge-offs to those smaller trades, could you just remind us kind of what those credits are -- and were they legacy Seacoast or the acquired credit just some more characterization there?

Tracey Dexter

Yeah, hi, Brandon. Charge-offs this quarter largely reflect previously reserved balances, and it's a small number of loans. The large portion of that is the acquired portfolios that are in runoff mode, along with a small number of other specific reserves. So 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

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

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 which 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

Okay. Thanks for taking my questions.

Chuck Shaffer

Thanks, Brandon.

Operator

[Operator Instructions] Our next question comes from the line of Stephen Scouten of Piper Sandler. Please go ahead.

Stephen Scouten

Hey, good morning, everyone.

Chuck Shaffer

Morning, Steve.

Stephen Scouten

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

Michael?

Michael Young

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

Yes. That makes sense. That makes sense. And then just thinking about -- and I know we've talked about this in the past, but at least as of last quarter's Q, you guys still modeled to slightly asset sensitive. Has that changed appreciably or is it really more modeling and a static balance sheet versus the reality of what may play out that causes me to believe you're slightly liability sensitive.

Chuck Shaffer

Yes. I think we modeled a slightly liability sensitive. I can get with you off-line 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

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

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

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

Chuck Shaffer

Okay. Thanks a lot.

Operator

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

Chuck Shaffer

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. And I appreciate everybody joining the call. Thank you, Pam. That will conclude.

Operator

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