Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q3 2023 Earnings Call Transcript

Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Welcome to Seacoast Banking Corporation's Third Quarter 2023 Earnings Conference Call. My name is Daisy, and I will be your operator. During the presentation, all participants will be in a listen-only mode. Afterwards, 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 that act. Please note, that this conference is being recorded. I will now turn the conference over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Chuck Shaffer: Thank you all for joining us this morning. As we provide our comments, we'll reference the third quarter 2023 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; James Stallings, Chief Credit Officer; and David Houdeshell, Director of Credit Risk Analytics. The Seacoast’s team produced another quarter of solid financial performance in line with the guidance we provided last quarter, despite the backdrop of a challenging yield curve. As we discussed on last quarter's call, following a period of elevated acquisition activity, we returned our focus to organic growth, leveraging the exceptional talent that had joined in recent years, and the additional marketing investments we made late in the quarter to drive low cost deposit growth in deepened client relationships.

This campaign resulted in 3.7% annualized organic deposit growth in the quarter, including both expanded relationships across our customer base, as well as fully new relationships. The average add-on rate for those deposits was 3.75%, and we used this additional funding to pay down broker deposits at rates near 5%, further strengthening our fortress balance sheet, and adding liquidity capacity. We also remain intensely focused on expense discipline, reducing headcount by 6% during the quarter, with the full expense benefit of this headcount reduction heading Q4. We expect expenses to decline in the fourth quarter, and we'll remain vigilant operating the company where they focus on managing overhead prudently into 2024, and Tracy will provide further expense guidance in our prepared remarks.

Turning to lending and credit, we continue to take a very careful approach to lending in the current environment. As we guided on last quarter's call, loan outstanding declined from the prior quarter, primarily the result of much lower customer demand. And when originating new credit facilities, we are requiring much wider spreads, larger depository relationships, and conservative credit structures. Our average add-on rate increased to nearly 8% by late in the quarter, and in all cases required a full relationship with Seacoast. Our asset quality remains strong with the decline in nonperforming loans and declining classified and criticized assets from the prior quarter. We did charge-off on an $11.3 million acquired loan this quarter. This was expected and the loan was fully reserved in our allowance through purchase accounting, and thus had no impact on earnings or capital for the quarter.

Turning to M&A, we believe late 2024 will be a period of rapid industry consolidation. Our goal is to position Seacoast for this opportunity by entering 2024 with strong capital and liquidity. We'll be fully prepared to take advantage of these opportunities as they materialize and position Seacoast to be the choir of choice in Florida. And to conclude, we continue to operate from position of significant strength in the nation's most robust local economies. Florida's strong statewide economic backdrop and our fortress balance sheet, position Seacoast well compared to peers, and sets us up to take advantage of opportunities we expect will arise in the coming periods. Our key focus exiting this year and into 2024 will be on generating franchise value through deposit growth and diligently managing expenses.

These are our two areas of focus. I'd like to thank all the Seacoast associates for the continued hard work during the quarter and congratulate the team on a great launch of our organic growth campaign. I'm excited to see where you take it in the coming quarters. And lastly, I'm proud that we moved our deposit market share in Florida from number 18 to number 15 in 2023. Consolidating market share in Florida will yield tremendous franchise value in the long run. 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 third quarter results, beginning with the highlights on slide 4. Annual deposit market share data released as of June 30th demonstrates the strength of our franchise and the results of our expanded market presence and strong relationship focus. Seacoast moved up three slots to number 15 in the state, maintaining a leading position in our legacy markets and seeing strong growth in our newer markets. As we work to move into the top 10, we'll continue our relationship -centric approach. We're pleased to report growth in organic deposits at an annualized rate of 3.7%, combined with $334 million in paydowns of wholesale funding. Our broker deposits and FHLB advances combined represent only 3% of total liabilities.

We're focused on relationship-based customer acquisition and positioning Seacoast for top 10 market share in all major Florida markets. Our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. Seacoast Tier 1 capital ratio increased to 13.9% and the ratio of tangible common equity to tangible assets increased during the quarter to 8.68%. Also notable, if all health maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 7.89%. Our credit standards remain disciplined and focused on relationship lending and our loan to deposit ratio ended the quarter at 83%. Credit risk metrics remain strong with low levels of non-approval loans and criticized assets.

We're closely managing our expense base and executed on several expense-related initiatives during the quarter including a headcount reduction and the consolidation of one branch location. Tangible book value per share increased to $14.26. Removing the impact of the change in accumulated comprehensive income, tangible book value per share at September 30th would have been $14.56 representing an annualized growth rate of 8%. Turning to slide 5, net interest income declined by $7.6 million or 6% during the quarter with higher deposit costs partially offset by higher yields. Consistent with our expectations, net interest margin contracted 29 basis points to 3.57%. In the securities portfolio, yields increased 19 basis points to 3.32. Loan yields increased four basis points to 5.93% with a September add-on rate near 8% offset by payoff activity accelerating deferred costs.

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The yield-on loans excluding accretion on acquired loans increased three basis points from the prior quarter. The cost of deposits increased to 1.79% while the pace of that increase has slowed from the second quarter and our funding base remains strong with 55% transaction accounts. Notably impactful to deposit costs this quarter was the Florida Bar Association's IOTA program changes enacted in May requiring financial institutions to pay interest on these accounts at a specified spread to an index. This contributed approximately five basis points to the increase in deposit costs in the third quarter. Looking ahead, we expect the declines we've seen in net interest margin over the last few quarters to slow materially, though we intend to remain competitive on deposits.

We expect only 5 to 10 basis points of margin compression in the fourth quarter. We expect margin to then stabilize and begin to improve in the back half of 2024. Moving to slide 6. As we continue to focus on growing our broad base of revenue sources. Third quarter results reflect the first-time impact to Seacoast of the Durbin Amendment, which limits interchange-related revenue for banks with over $10 billion in assets. This droves a decline in interchange of $3.4 million. Service charges increased 2% with continued expansion of our commercial treasury management offerings and new customer acquisition. Wealth management revenues were down slightly, reflecting broader market performance. Assets under management of $1.6 billion have grown 29% year-over-year.

The addition of an insurance agency business through an acquisition in the fourth quarter of 2022 added $1.2 million to third quarter noninterest income. Looking ahead, we continue to focus on growing revenue, and we expect fourth quarter noninterest income of approximately $19 million to $21 million. Moving to slide 7, assets under management increased 29% from a year ago to $1.6 billion and have increased at a compound annual growth rate of 24% in the last three years. Our family office style offering continues to resonate with customers, generating strong returns for the franchise. Moving on to slide 8, adjusted noninterest expense for the quarter was lower than the guidance we provided coming in at $83.2 million. During the quarter, we completed a 6% reduction enforce and consolidated one additional branch location.

Looking forward, we will operate with a disciplined and prudent approach to expense management, cost synergies from recent acquisitions, and recent expense reduction initiatives continue to positively impact results. We expect adjusted expenses for the fourth quarter to further decline as cost synergies and efficiency initiatives take effect coming in at $80 million to $83 million. And we anticipate maintaining that run rate into 2024. Adding back the amortization of intangible assets, that's an expectation of $86 million to $89 million. We remain committed to an intense focus on expenses and will continue to look for opportunities to optimize our business model. Moving to slide 9, the efficiency ratio on an adjusted basis with 60%, the increase quarter-over- quarter reflects lower net interest income as deposit costs continue to increase though at a slower pace.

Also impactful to net interest income was the required change to interest paid on IOTA accounts which translated to approximately 1.5 points on efficiency ratio and the first full quarter of the Durbin Amendment on interchange revenue which impacted the efficiency ratio by another approximately 1.5 points. As we scale the company and adjust expenses in accordance with the rate outlook and with the return of higher margins in 2024, we believe the efficiency ratio will stabilize from this point forward. Turning to slide 10. Loan outstanding declined by 1% as we maintain our strict credit discipline and as we continue to see the impact of higher rates on market demand. Average loan yields increased to 5.93% with increases partially offset by higher FASB cost amortization due to payoffs.

We expect loan yields to continue to increase in the coming periods as our fixed rate loans mature and reprice. New loan yields in the third quarter were near 8%. Looking forward, we believe loan outstanding will be relatively stable in the fourth quarter and then return to modest growth in 2024. Turning to slide 11. Portfolio diversification in terms of asset mix, industry, and loan type has been a critical element of the company's lending strategy. Exposure across industries and collateral types is broadly distributed and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels. We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk.

Turning to slide 12. Nonowner unoccupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. Importantly, C&I loans and the related owner occupied CRE, which is repaid through cash flows of the business, not from the sale or leasing of the property, also represent 33% of the total portfolio. On slides 13 and 14, we provide additional detail on the dispersion of non-owner occupied commercial real estate loans in markets across the state and in categories including retail and office, noting the strong performance of these segments to date in key credit monitoring metrics. Diversification across industries and collateral types has been a critical tenet of our strategy and the low average commercial loan sizes are the result of our long-time focus on granularity and on creating valuable customer relationships.

Moving on to credit topics on slide 15. The allowance for credit losses decreased during the quarter to an overall $149.7 million. A single expected charge off totaling $11.3 million was the driver of the change. This acquired loan to a C&I borrower was fully reserved through purchase accounting and the charge off did not impact earnings or capital. Outside of that loan, charge offs were in line with our recently historically low experience. Combined, the allowance for credit losses and the $186 million remaining unrecognized discount on acquired loans represent 3.4% of outstanding loan balances. Moving to slide 16, looking at trends in credit metrics. Our credit metrics remain very strong. though we remain watchful of inflation pressures and the broader economic environment and are carefully considering the ongoing impacts of higher rates on the economy.

Nonperforming loans decline to 0.41% of total loans and the percentage of criticized and classified loans to total assets decline to 1.36%. Moving to slide 17, in the Investment Securities portfolio, the average yield on securities increased during the quarter by 19 basis points to 3.32%. Higher interest rates during the quarter were detrimental to portfolio values, increasing the overall unrealized loss position from the end of the prior quarter. Turning to slide 18 in the Deposit portfolio. Excluding the paydown of broker deposits, organic deposits increased by $108 million or 3.7% annualized, despite the typical seasonally slower period. Transaction accounts represent 55% of overall deposits, which continues to highlight our long-standing relationship focused approach.

The cost of deposits increased this quarter to 1.79% with the dynamic changes in the industry and the materially increased competitive landscape, though the pace of increase has slowed. Overall, our expectation for the fourth quarter is that the cost of deposits will continue to increase with higher rates, albeit at a slower pace than previous quarters, though the extent of the impact is difficult to predict with certainty. That said, we continue to outperform peers in our cost of deposits as the environment serves to highlight the strength of our low-cost deposit base and focus on relationships. We remain keenly focused on organic growth and expect deposit outstanding to continue to increase. On slide 19, the bar chart shows the addition of balances and higher rate categories that affected the overall mix during the quarter.

Seacoast continues to benefit from a diverse and granular deposit base with the top 10 depositors representing only 3% of total deposits. Our consumer franchise contributes 43% of overall deposit balances with an average balance per account of only $24,000. Business customers represent 57% of total deposits with an average balance per account of $111,000. Our customers are highly engaged and have a long history with us, and we have a peer leading level of noninterest-bearing deposits representing 32% of the deposit base. This provides significant strength in maintaining deposit costs over time and reflects the granular relationship nature of our franchise. On slide 20, demonstrating our significant capacity to fund potential outflows. The bar on the right identifies balances above the FDIC insurance limit, excluding public funds accounts that have collateral backed protection.

Uninsured and uncollateralized deposits total approximately $3.5 billion, which if needed would be almost completely funded by Seacoast’s cash and borrowing capacity at the Federal Reserve. And finally on slide 21, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. You can see the increase in tangible common equity to tangible assets in the third quarter as we move past the initially dilutive effect of recent acquisitions reflecting our commitment to driving shareholder value creation. We expect this ratio to continue to increase in the coming periods. Also of note, the 13.9% Tier 1 capital ratio is among the highest in the industry. In summary, considering our strong capital levels, prudent credit culture and high quality customer franchise, we have one of the strongest balance sheets in the industry providing optionality if the environment becomes more challenging and to continue building Florida's leading community bank.

I'll now turn the call back over to Chuck.

Chuck Shaffer: Thank you, Tracey. All right, operator, I think we're ready for Q&A.

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