Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q1 2024 Earnings Call Transcript April 26, 2024

Seacoast Banking Corporation of Florida isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Seacoast Banking Corporation's First Quarter 2024 Earnings Conference Call. My name is Marvalue, and I will be your operator. Later, we will conduct a question-and-answer session. [Operator Instructions]. 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: Okay, thank you and thank you all for joining us this morning. As we provide our comments, we'll reference the first quarter earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracey Dexter, Chief Financial Officer; Michael Young, Treasurer and Director of Investor Relations; and James Stallings, Chief Credit Officer. We started 2024 on solid footing, one of the strongest quarters on record for customer acquisition. This results from our focused investment over the last 24 months in acquiring the most talented revenue-producing bankers in Florida, strong execution by our retail team, and further investments in marketing and branding across all of our markets. We saw significant new opportunities throughout the state which drove growth in DDA and supported an annualized deposit growth rate of 8%.

Additionally, we had an outstanding quarter in wealth management with fee-based assets under management increasing by $160 million and exited the quarter with a significant wealth pipeline. Both our SBA team and our insurance agency had solid quarterly results and our treasury team continues to win middle market commercial depository accounts. Our loan pipeline reached its highest point in over a year with a large proportion of that in C&I, and we expect a meaningful second quarter for closings. I was incredibly proud of the team's focus on customer acquisition and we saw deposit growth in nearly every market we operate in. Given all the significant business development activity occurring across the franchise, I'm very excited about our prospects for new client acquisition over the remainder of 2024.

Turning to expense management, as we discussed on last quarter's call, we fully executed our cost savings initiative earlier this quarter. This initiative was designed to reduce overhead to offset revenue compression associated with the current interest rate environment. At this point, we are done with this exercise and expect adjusted non-interest expense in 2024 to be down significantly from 2023, and do not expect further one-time expenses. Tracey will provide further guidance shortly. Taking a deeper dive into lending and asset quality, we are encouraged by the growth in our pipelines while maintaining a prudent approach in the current economic climate. Loan outstandings were down about 80 million from the prior quarter, primarily due to a handful of closings that pushed into the second quarter, elevated paydowns in our construction portfolio, and 30 million in credits we purposely exited.

Our loan pipeline grew substantially by nearly 50% to 573 million, and new loan add-on rates were approximately 8% during the quarter. Looking forward, we continue to expect low single-digit growth for the remainder of the year, and additionally, it's important to emphasize that we continue to require a comprehensive banking relationship with Seacoast for all of our lending activities, ensuring a mutually beneficial partnership with our clients. Our asset quality continues to show sustained strength and charge-offs for the quarter were just 15 basis points. Annualized and classified and criticized assets remain nearly flat from the prior quarter. Our ACL stands at 147 million, equating to 1.47% of total loans. This figure places us in a strong position with an allowance ratio among the highest in our peer group.

Additionally, we have another 163 million in purchase discount. Our fortress balance sheet positions us exceptionally well compared to our peers, allowing us to navigate and adapt to any developments this cycle may present. And as we progress through 2024, our steadfast commitment to upholding conservative balance sheet principles remains unwavering. We are resolute in our efforts to prudently manage our expenses while strategically investing to stimulate growth in low-cost deposits, as evidenced by our performance this quarter. This focus will not only help us maintain a diverse and stable funding base, but also fortify our company's already robust balance sheet. Ultimately, these endeavors are geared towards building the long-term value of our franchise, ensuring resilience and prosperity in the years to come, and establishing an exceptional financial institution in one of the nation's most economically attractive states.

I'll now turn the call over to Tracey to walk through our financial results.

Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, beginning with Slide 4. Seacoast reported net income of $0.31 per share in the first quarter, and on an adjusted basis, net income was $0.37 per share. On an adjusted basis, return on tangible assets was 1.04%, ROTCE was 11.15%, and the efficiency ratio was 61.1%. Deposit growth was strong at 8% annualized, with solid results in growing new customers across the entire franchise. Our wealth management team continues to deliver strong results, with assets under management increasing 9% during the quarter. Highlighting our continued focus on expense discipline, we're seeing the benefit of recent actions we've taken to streamline expenses, with adjusted non-interest expense down 3.1 million from the prior quarter.

Our loan pipelines have grown meaningfully, and we continue to see stable credit trends. Tangible book value per share increased to $15.26, overcoming the negative impact of the rate environment on unrealized losses on securities in AOCI. Our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. Seacoast tier one capital ratio is 14.6%, 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 TCE to TA ratio would still be a strong 8.6%. Our first quarter results include a $4.1 million gain on the liquidation of our Visa B shareholdings. The gain offset a 3.8 million loss on the sale of approximately 87 million in securities.

The opportunistic repositioning has an expected earnback of approximately 1.9 years. Before we continue, I'd like to draw your attention to a change in our presentation. Beginning in the first quarter of 2024, our presentation format no longer excludes amortization of intangibles from adjusted expenses, and we've updated the presentation of prior periods for comparability. On to Slide 5. Net interest income declined by 5.7 million, or 5% 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 11 basis points to 2.91%, outside the range of guidance we provided, due largely to better-than-forecast growth in deposit balances, and in part due to the investment in securities creating leverage on the balance sheet.

In the securities portfolio, yields increased 5 basis points to 3.47%. Loan yields, excluding accretion, increased 8 basis points to 5.48%. Accretion of purchase discounts on acquired loans was lower by 0.7 million compared to the prior quarter. The cost of deposits increased to 2.19%, and we added an overall 239 million in deposit balances, including growth in non-interest-bearing DDA. Looking ahead, we expect net interest income to stabilize in the second quarter and to grow from that point forward. Our assumptions include one 25 basis point rate cut in November and one in December. Moving to Slide 6. Non-interest income excluding securities activity increased 0.5 million in the first quarter to 20.3 million. Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition.

Interchange income during the fourth quarter of 2023 included an annual volume-based incentive from the payment network, resulting in a comparative decline in the first quarter. Other income was higher by 0.5 million, with higher saleable production in our marine lending business and higher income from SBIC investments. Looking ahead, we continue to focus on growing non-interest income, and we expect second quarter non-interest income in a range from 20 million to 22 million. Moving to Slide 7. Assets under management increased 9% this quarter to a record 1.9 billion and have increased at a compound annual growth rate of 28% in the last five years. Wealth management revenues during the quarter increased to 3.5 million, up 9% from the prior quarter and 16% from the prior year quarter.

With a significant pipeline at quarter end, we expect continued strong client acquisition in wealth management over the remainder of 2024. On to Slide 8. Non-interest expense for the quarter was 90.4 million and on an adjusted basis was 83.3 million, in line with the guidance we provided last quarter. We saw a typical seasonal increase in employee benefits and payroll taxes, leading to an increase of 1.2 million. In outsourced data processing costs, we incurred 4.1 million in one-time charges associated with consolidation activities and began to see the benefits this quarter with a decline of 0.6 million on an adjusted basis. Legal and professional fees were lower, with the fourth quarter reflecting expenses associated with legal matters which are now complete.

The efficiency ratio moved somewhat higher, affected by higher deposit costs associated with growth and seasonal payroll tax expenses. The successful execution of our recent expense reduction initiatives have begun to positively impact results and lower ongoing costs and will maintain this discipline around expenses. We expect second quarter non-interest expense to be in a similar range to the first quarter, between 83.5 million and 84.5 million. Turning to Slide 9. Loan outstandings declined by 84.9 million during the quarter, partially attributed to elevated payoffs and paydowns across our construction portfolio. Average loan yields, excluding accretion on acquired loans, increased 8 basis points to 5.48%, and in the first quarter, we continued to see new loan yields in the 8% range.

The pipeline is very strong, with a large portion in C&I, and looking forward we expect loan growth in the low single digits Turning to Slide 10. Portfolio diversification in terms of asset mix, industry, and loan type 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 manage 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 36% 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 146.7 million, or 1.47% of total loans, compared to 1.48% in the prior quarter. The allowance for credit losses combined with the 163 million remaining unrecognized discount on acquired loans totals 310 million, or 3.1% of total loans that's available to cover potential losses, providing substantial loss absorption capacity. Moving to Slide 12, looking at quarterly trends in credit metrics. Our credit metrics are strong, and we remain watchful of the ongoing impacts of higher rates on the economy. The annualized charge-off rate during the quarter was 15 basis points.

Non-performing loans represent 0.77% of total loans, and accruing past-due loans remain at 0.3% of total loans. Criticized and classified loans were near flat at 2.4% of total loans. On Slide 13, providing a longer-term view of our stable asset quality trends. Also, 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 14 and the investment securities portfolio. During the first quarter, we sold all our holdings of Visa Class B shares and recognized a net gain of 4.1 million. We also recognized the opportunity to sell low-yielding bonds with modest losses on a small percentage of the investment portfolio.

The proceeds, approximately 87 million, were reinvested into bonds with an average yield of 5.5%. With an expected earnback of less than two years, this was an opportunity to increase interest income and improve our securities yields. In the overall portfolio, the average yield on securities increased during the quarter by 5 basis points to 3.47%. Changes in the rate environment negatively impacted portfolio values, and as a result, the overall unrealized loss position increased by 14.5 million. Turning to Slide 15 and the deposit portfolio. Seacoast has been keenly focused on deposit growth, and the 8% annualized growth this quarter demonstrates our success in acquiring relationships. Non-interest demand deposits grew 10.4 million, and while growth in money market and other interest-bearing accounts has resulted in higher deposit costs, this relationship-based funding supports our continued progress in deepening market share as we become Florida's leading regional bank.

The cost of deposits increased this quarter to 2.19%, and we expect in the second quarter a continued increase, albeit at a slower pace. Looking forward, we expect continued growth in deposits and are very encouraged about the activity and focus across the franchise on deposit gathering. On Slide 16, Seacoast continues to benefit from a diverse deposit base. Non-interest-bearing deposits represent 30% of total deposits, which was flat from the prior quarter, and transaction accounts represent 52% of total deposits, which continues to highlight our longstanding 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 $15.26, 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, Tracy. And to our Seacoast bankers on the call, we had an exceptional quarter for customer growth. Proud of everything you guys did. Thanks for all the hard work. And at this point, our operator will take questions.

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