Seacoast Banking Co. of Florida Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 11 speakers on the call.

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. Before we begin, I've been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements.

Operator

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 call over to Chuck Schafer, Chairman and CEO of Seacoast Bank, Mr. Schaeffer, you may begin.

Speaker 1

Thank you all for joining us this morning. As we provide our comments, we'll reference the Q3 2023 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracy Dexter, Chief Financial Officer Michael Young, Treasurer and Director of Investor Relations James Dollings, Chief Credit Officer and David Haddishall, Director of Credit Risk Analytics. The CECOS 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 have joined in recent years and the additional marketing investments we made late in the quarter to drive low cost deposit growth and deepen 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.

Speaker 1

The average add on rate for those deposits was 3.75 percent And we use 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 hitting Q4, we expect expenses to decline in the Q4 and we'll remain vigilant operating the company with focused on managing overhead prudently into 2024, and Tracy will provide further expense guidance in her 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.

Speaker 1

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 a decline in non performing loans and declining classified and criticized assets from the prior quarter. We did charge off $111,300,000 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.

Speaker 1

Turning to M and 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 We'll be fully prepared to take advantage of these opportunities as they materialize and position CECOS to be the acquirer of choice in Florida. And

Speaker 2

to conclude, we continue to

Speaker 1

operate from a position of significant strength in the nation's most robust local economies. Florida's strong statewide economic backdrop and our fortress balance sheet positions CECOS 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 of CECO's associates for the continued hard work during the quarter And congratulate the team on a great launch of our organic growth campaign.

Speaker 1

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 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 Tracy to walk through our financial results.

Speaker 3

Thank you, Chuck. Good morning, everyone. Directing your attention to 3rd quarter results, Beginning with the highlights on Slide 4. Annual deposit market share data released as of June 30 demonstrates strength of our franchise and the results of our expanded market presence and strong relationship focus. Seacoast moved up 3 slots to number 15 in the state, Maintaining a leading position in our legacy markets and seeing strong growth in our newer markets.

Speaker 3

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 $334,000,000 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.

Speaker 3

CECO's 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 held to 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 accrual 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 1 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 30 would have been $14.56 representing an annualized growth rate of 8%.

Speaker 3

Turning to Slide 5. Net interest income declined by $7,600,000 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 4 basis points to 5.93 percent with the September add on rate near 8% offset by payoff activity accelerating deferred costs.

Speaker 3

The yield on loans excluding accretion on acquired loans increased 3 basis points from the prior quarter. The cost of deposits increased to 1.79%, while the pace of that increase has slowed from the 2nd quarter and our funding base remains strong with 55% transaction accounts. Notably impactful to deposit costs this quarter with 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 5 basis points to the increase in deposit costs in the 3rd 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.

Speaker 3

We expect only 5 to 10 basis points of margin compression in the 4th quarter. We expect margin to then stabilize and begin to improve in the back half of twenty twenty four. Moving to Slide 6. As we continue to focus On growing our broad base of revenue sources, 3rd quarter results reflect the first time impact to Seacoast of the Durbin amendment, which limits interchange related revenue for banks with over $10,000,000,000 in assets. This drove a decline in interchange of 3,400,000 Service charges increased 2% with continued expansion of our commercial treasury management offerings and new customer acquisition.

Speaker 3

Wealth Management revenues were down slightly, reflecting broader market performance. Assets under management of 1 point to added $1,200,000 to 3rd quarter noninterest income. Looking ahead, we continue to focus on growing revenue, and we expect 4th quarter non interest income of approximately $19,000,000 to $21,000,000 Moving to Slide 7. Assets under management increased 29% from a year ago to $1,600,000,000 and have increased at a compound annual growth rate of 24% in the last 3 years. Our family office style offering continues to resonate with customers, generating strong returns for the franchise.

Speaker 3

Moving on to Slide 8. Adjusted non interest expense for the quarter was lower than the guidance we provided coming in at $83,200,000 During the quarter, we completed a 6% reduction in force and consolidated 1 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 4th quarter to further decline as Cost synergies and efficiency initiatives take effect coming in at $80,000,000 to $83,000,000 and we anticipate maintaining that run rate into 2024. Adding back the amortization of intangible assets, that's an expectation of $86,000,000 to $89,000,000 We remain committed to an intense focus on expenses and we'll continue to look for opportunities to optimize our business model.

Speaker 3

Moving to Slide 9. The efficiency ratio on an adjusted basis was 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 1st 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.

Speaker 3

Turning to Slide 10. Loan outstandings 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 percent with increases partially offset by higher FAS cost amortization due to payoff. 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 3rd quarter were near 8%.

Speaker 3

Looking forward, we believe loan outstandings will be relatively stable in the 4th 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.

Speaker 3

We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk. Turning to Slide 12. Non owner occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. Importantly, C and 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 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.

Speaker 3

Diversification across industries and collateral types has been a critical tenant 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 149,700,000 A single expected charge off totaling $11,300,000 was the driver of the change. This acquired loan to a C and I borrower was fully reserved through purchase 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.

Speaker 3

Combined, the allowance for credit losses and the $186,000,000 remaining unrecognized discount on acquired loans represents 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 impact of higher rates on the economy. Non performing loans declined to 0.41 percent of total loans and the percentage of criticized and classified loans to total assets declined to 1.36%. Moving to Slide 17 in the investment securities portfolio.

Speaker 3

The average yield on securities increased during the quarter by 19 basis points to 3 3 2 percent. 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 and the deposit portfolio. Excluding the pay down of brokered deposits, Organic deposits increased by $108,000,000 or 3.7 percent annualized despite the typical seasonally slower period. Transaction accounts represent 55 percent of overall deposits, which continues to highlight our long standing relationship focused approach.

Speaker 3

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 Q4 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 perform 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 outstandings to continue to increase. On Slide 19, the bar chart shows the addition of balances in higher rate categories that affected the overall mix during the quarter.

Speaker 3

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 non interest 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.

Speaker 3

On Slide 20, demonstrating our significant capacity to fund potential outflows. The bar on the right identifies balances above the FDIC insured limit, excluding public funds accounts that have collateral backed protection. Uninsured and uncollateralized deposits total approximately $3,500,000,000 which if needed would be almost completely funded by And finally on Slide 21, our capital position continues to be very And we're committed to maintaining our fortress balance sheet. You can see the increase in tangible common equity to tangible assets in the 3rd 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.

Speaker 3

Also of note, the 13.9% Tier 1 capital ratio is among the highest in 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.

Speaker 1

Thank you, Tracy. All right, operator, I think we're ready for Q and A.

Speaker 3

Thank

Operator

One moment please.

Speaker 4

Our first question comes from the line of David

Speaker 5

Maybe just starting on the loan side, it's great to see the improvement in the commercial loan pipeline. It sounds like we're Stabilizing there. I'm curious what drove the increase in the pipeline? Is it demand changing or customers just More accepting of a higher rate environment on pricing or just more competitors pulling back or just your lenders out there just Blocking, tackling, gathering business. So just curious kind of what drove the increase in the commercial pipeline, the complexion of it and kind of how new loan yields are trending?

Speaker 1

Well, as we discussed on prior calls, David, we were very cautious to drive loan growth in a period where we thought The market had driven structure to a weakened standard and pricing to lower spreads than what we thought was appropriate. As times marched on here, the market's gotten more reasonable and what we're seeing is the ability to get conservative credit structures, Strong deposits and in many cases strong media in these relationships as well as spreads we think that appropriately Reflect the opportunity that we're taking. So in many ways, the market has moved back towards our more conservative credit posture. And as a result, we're seeing more demand, which is very much positive.

Speaker 5

That's great. And then maybe just following up on that deposit front. You guys touched on some of the broad deposit thoughts. And I'm just curious if we could dig into maybe some of the underlying trends that you're seeing there in the competitive landscape. We obviously have headwinds from client deposit activation, right?

Speaker 5

I mean folks using more cash in some of that But just curious maybe how you're seeing on like underlying account growth and relationship growth just from the full relationships that you talked about earlier. So just Curious where you're having wins and where you see opportunity to drive core deposit growth?

Speaker 1

Yes. I would say our biggest opportunity has been Continues to be just client angst and unhappiness with larger regional banks. When you look at the banker Portfolio we have and the team that we put together, their former backgrounds typically are upstream market banks. And so We continue to see a lot of upset customers with their larger, more regional banks. And as a result, we've been just taking market share.

Speaker 1

That'd be the best We describe it in all cases. We're seeing full relationships coming on. We're not out marketing high yield CDs. We're not out marketing High cost money market, we are in the market. We are competitive, but what we're seeing is full, deep relationships coming over.

Speaker 1

As we move past An elevated period of M and A, we've now moved to a point here where we are very focused on organic growth across the state. We've got a stronger and bigger budget for marketing in the state. We're out driving brand Recognition for the company and at the same time, we've got a lot of talent that's joined us in the last 24 months that is now Working their connectivity to bring on relationships. So that as I mentioned at the outset, we're seeing a reasonable add on rate for those deposits and Very happy to see it. And I don't know Michael or Tracy, anything you want to talk about the individual items in there.

Speaker 6

Yes. David, one other I think just big picture comment. We kind of pulled back On lending when we felt like it was irrational, that's long back the other way as Chuck mentioned. And then similarly on the deposit side, coming out of March April, There were some irrational pricing in the market from various competitors that we chose not to participate in. And so I think you're seeing kind of more rationality on both sides of the balance sheet, particularly as peers' loan growth is decelerating.

Speaker 6

They're being a little less competitive at really high rates to drive market share. So I think we're just seeing kind of the market stabilize and our consistent Process kind of working right on both sides of the balance sheet now. So we've made sure we didn't hurt ourselves on either loans or deposits Right through the last 12 months and now we're in really good standing as we head forward into 2024 in the back half of this year.

Speaker 5

That's great color. I appreciate it. And then appreciate all the guidance that you guys gave and some of the preliminary thoughts. But I'm just curious, maybe Looking out to 2024, I mean, we're not giving guidance for that yet. But I guess as you look at the Street estimates, look, there's a wide range At this point, just given there's a lot of moving parts from the M and A activity, I guess, when you look at Street and consensus Outlook, is there anything that you see that's wildly off?

Speaker 5

Or do you think the Street's relatively realistic based on your preliminary thoughts? And just Curious how you think about that as we try and manage expectations heading into next year?

Speaker 1

I'd say we feel good about Street estimates. It generally lines up with what our thoughts are. There's some line items one way or the other, but overall, Street estimates are pretty good. Michael, I don't know if you can add to that in terms of the model, but overall, We feel pretty good about Street estimates.

Speaker 6

Yes. I mean there's obviously some volatility around credit expectations and rate expectations that are probably in each Individual model, but generally, it seems like we're in good shape.

Speaker 1

Generally, the bottom line, we're in line. Yes.

Speaker 5

That's great. Appreciate all the color. Thanks, everybody.

Speaker 1

Thank you, David.

Speaker 4

Our next question comes from the line of Stephen Scouten. Please proceed with your question.

Speaker 7

Hey, thanks. Good morning. Appreciate you guys not calling out my estimates this morning.

Speaker 2

So thank you for that.

Speaker 7

Just curious, you guys gave some guidance on it, Tracy. You said maybe 5 to 10 basis Points of additional NIM compression expected in the 4th quarter. I don't know if you have like the September NIM or what you're seeing We saw at quarter end that might give us some visibility into that starting point. And then thinking about that 24%, you said maybe second half upside, if you could Give any color about what drives that? I assume it's fixed rate loan repricing, but kind of the puts and takes we might see into 2024 as well.

Speaker 7

Thanks.

Speaker 6

Hey, Stephen, it's Michael. Yes, so just I think as we exit the quarter, it's just kind of where deposit costs are. So spot deposit costs are about Closer to 187 kind of exiting the quarter. So we'll have some pull through that. Loan yields this quarter were a little low, sort of just lower fees In the quarter, but those things will kind of move throughout Q4 and kind of line up with that NIM guide.

Speaker 6

So just trying to give you a little clarity there. But As we've talked about, I think big picture over the last year, it's just with our fixed loan book repricing, we'll start See more and more benefit of that and more of our book repricing into the higher rate environment as we move through 2024 and that will outweigh any deposit cost pressure that We may feel and so you kind of see that stabilizing as we get into 2024 and the NIM starting to head higher, right, as we get into kind of year 2, year 3 of the higher rate regime will reprice more of our book up into that higher pricing level. So that's kind of the right way to think about it.

Speaker 7

Got it. And is there do we think about just like a 4 year duration kind of evenly on the fixed rate loan book? Or is there any lumpiness to the Kind of turnover of that portfolio over the

Speaker 2

next 12 months at all that we should know?

Speaker 6

Not When you think about it cumulatively for maturities and amortization, we don't do a lot of interest only lending. So we have a good bit of Origination quarter for us. So we do have a few more maturities, this quarter than normal. So that will help a little bit as we get into Q4.

Speaker 7

Got it. Makes sense. And then, Chuck, I like the NIM comment I mean, the NIM, the M and A commentary for 2024. I hope you're right. I'm curious what that looks like in your mind.

Speaker 7

I know it's hard to say, hard to know what opportunities might present themselves, but Would you expect to look at larger banks at this point in time? Or would you continue to take advantage of some of the maybe $500,000,000 to 1,500,000,000 kind of banks that you guys have kind of feasted on the past few years?

Speaker 2

Yes. I

Speaker 1

mean, I'll talk kind of high level, but We continue to be very focused on the same strategy we've executed before. We're focused on Florida only. We're focused on smaller transactions In Florida, that's primarily what the opportunity is, dollars 500,000,000 to a Vanish type banks is what's available to us in the state. We'll continue to focus there. M and A is tough right now.

Speaker 1

The math is challenging. We don't have much of an for dilution right now. And so it's difficult to get a deal done in the current environment, but I think on the back half Next year is we continue to see the cycle mature. The struggles around generating earnings will drive Sellers to become more reasonable on pricing and we'll probably start to see some deals come to market. It's just going to take time just Like anything we're seeing sort of the market bid ask spread has to come together.

Speaker 1

I think it will take sort of maturing of this period to get there. But as that happens, I think, obviously, seller prices come down that allows deals to happen and that sellers will get liquidity in their investments. But It will take a little time. I also think the industry, obviously, we've seen margin compression across the entire Banking industry and the best way to solve a lot of the earnings challenges is consolidating expense basis. And so I think that I think all the natural drivers to drive the industry there will be there.

Speaker 1

It's just when and what

Speaker 8

time does that actually happen.

Speaker 7

Yes, makes a lot of sense. Okay. And then just last thing for me, any thoughts around like any sort of securities restructuring or would there be And is that something you guys would consider at this point in time?

Speaker 6

Steve, I'd just say consistent commentary We continue to evaluate and if the earn back on that is strong relative to our other capital deployment opportunities, That would be something we would look to engage in. I think to date where it has been enacted by some other banks, I think it's just It's a little too much of a yield curve bet that was made, right, to shorten up, on their securities book, sell long and reinvest short. And We want to lock out kind of the earn back if we make a move like that. So we're certain of the earn back execution and timeline of the ROI that we would get.

Speaker 2

Yes, makes a lot of sense.

Speaker 7

Okay. Appreciate all the color.

Speaker 8

Have a great day.

Speaker 7

Thanks, Steve.

Speaker 4

Our next question comes from the line of Brady Gailey. Please proceed with your question.

Speaker 2

Hey, thanks. Good morning, guys.

Speaker 1

Hey, Brady.

Speaker 2

So M and A is not a near term opportunity. I know you guys have been Pretty successful in hiring bankers to come join the CECOS team. But at the same time, you The workforce production and the efficiency ratio is running a little higher than it normally is for you guys. So how do you think about You're hiring in this environment. Is that something that you'll continue to pursue?

Speaker 2

Or is that on pause at this point? The

Speaker 1

way I think about it, Brie, is we're focused, like I mentioned in my prepared comments on 2 things or kind of our 2 priority focuses. 1 is Deposit growth is very important. And 2 is expense management. I think we still have opportunity on expenses here going into 2024. We're Keenly focused on that inside the company right now.

Speaker 1

If we saw a team or a banker or a bank a few bankers that were Be immediately accretive, they have the ability to drive business to us that fit our culture and want to be a part of us. We certainly would look at those opportunities, but I would describe it as being carefully optimistic is the best way to describe it. We're not going to aggressively go out and hire right now. If we See somebody that's really a strong player and wants to join the franchise, we'll certainly look at that. But the expense management is a key focus of ours And really we'll be going into 2024.

Speaker 2

And by expense management, I know you closed the location and did the Reduction, I mean, is that still on the table going forward? Or do you think you're kind of done as far as announcing cost reduction plans?

Speaker 1

I think there's more work for us to do. I don't want to get into sort of specifics on that because we need to work through that, but I think we still got some opportunity. Okay.

Speaker 2

All right. And then I liked hearing the comment about the market share that Seacoast has now improving the Number 15, you want to get into the top 10. Any idea or do you have a goal of when you'd like to get into the top 10? Is that A couple of years away. I'm just curious how you think about the possible timing there.

Speaker 1

I think about it this way. We want to be an upper quartile performer. We want to deliver strong shareholder returns and that's our priority. Growing market share is part of that, but Priority 1 is delivering returns, priority 2 is growing market share. And so if we see opportunities, we'll take them.

Speaker 1

There's no sort of timeline to that. It's more Seeing an appropriate investment to return to expense management as we move through time, but no time line, just more importantly delivering good returns to our

Speaker 6

And Brady, I'd just add on the heels of that. Not all deposit market share is the same, right? We don't have deposit verticals and things like that that we're driving after. Generally customer funds, so it's not just some corporate deposits that are placed somewhere.

Speaker 1

We're after generating franchise value.

Speaker 2

Yes, that makes sense. Thanks for the color guys.

Speaker 1

Thanks, Brady.

Speaker 4

Our next question comes from the line of Russell Gunther. Please proceed with your question.

Speaker 8

Hey, good morning, guys. Just wanted to follow-up quickly. Hey Chuck, good morning. Just follow-up on the loan growth conversation, appreciate all the color on how you're thinking about things. Just one from a growth volume perspective, modest growth in 2024.

Speaker 8

Do you guys think about that as a low single digit number, Mid single digit number and then wherever volume shakes out just maybe the mix you're contemplating?

Speaker 6

Yes. I think listen Russell, I would gauge that based on kind of the economic backdrop that we find ourselves in 20 24, I think we've been pretty conservative, right, about what we thought that might look like in particular in the first half of the year. Obviously, with a very strong GDP print here recently, maybe it's a little bit better, but not sure on sort of the macroeconomic forces. We are seeing, as Chuck mentioned earlier, kind of competitors pull back and retrench a bit. And so that does present an opportunity potentially to pick up market share.

Speaker 6

But All that together, I think we see good production. And I think we'll start to see the kind of balances grow as we move into 2024, but Hard to put a fine point on it depending on kind of what the macroeconomic environment is that we're in.

Speaker 8

Yes. Okay, great.

Speaker 1

What we won't do is just chase We won't chase loan growth to chase loan growth. We're going to take opportunities where we see good returns and it probably keeps us in the low single digits, but we'll see how things play out.

Speaker 8

Okay. I appreciate it, guys. And then, I think just Broadstreet's comments discussed expectations for continued deposit growth alongside that loan growth. So Is the 80% loan to deposit ratio a target we should think about going forward or could that drift higher? How do you think about managing that?

Speaker 1

I think we'd be comfortable going up to about 90%. That's about where our guardrail is. I think over time it drifts that way, but it takes Fair amount of time to get there, so there's plenty of room to manage that ratio. But importantly, as That continues to strengthen the balance sheet and the deposit market remains competitive. Growing deposits is a very much key focus of ours.

Speaker 1

And ideally, we grow deposits and the liquidity on the balance sheet as we move through time, but we'd be comfortable up to about 90 in the long run.

Speaker 8

Okay. And the rest of

Speaker 6

the The pacing on that, just keep in mind, as we said before, the cash flow of securities book

Speaker 7

is about

Speaker 6

$330,000,000 or so every 12 months. So that Kind of limit some of our remixing. We would probably remix right out of securities and into loans over time, but you'd probably pick up a couple of points, Maybe 2 points or so on the loan to deposit ratio a year at that pace, assuming we don't do something more meaningful in terms of a restructure or something if that became Attractive at some point.

Speaker 8

That's very helpful guys. Thank you both. On the fee guide, so I think a little bit of In 4Q, if you could just discuss the drivers there. And then, I know we have the full year of Durbin to contend with as we think about 'twenty four. So You expect to be able to run flat or maybe a little bit of fee income growth, just broad strokes outlook would be helpful.

Speaker 3

Yes, this is Tracy. In the Q3, we had expected a little bit, maybe better volumes in mortgage and SBA to some extent. Comes in a little higher in the 4th quarter. I think generally deposit related charges will continue to benefit from the Increased size and breadth of the organization and some good momentum in deposit relationships, As Chuck has described, wealth management somewhat driven by the market conditions. On interchange, I think you've seen The adjustments that we'll see, so, I expect that to remain pretty stable through the Q4.

Speaker 8

Okay, great. And then last one for me, just an update on your Shared National Credit exposure, which I think is tiny and maybe all acquired, but just Correct me if I'm wrong in your general thoughts on the asset class.

Speaker 1

Almost none. Less than 0.5 The portfolio is in Shared National Credits. They're all acquired. We've never actually acquired 1 or originated 1 here at Seacoast. So it's very, very small.

Speaker 1

We really have also no bot participations or very Little bought participation, same thing. They've only come in through acquired acquisitions. So we've never relied on SNCs or participations to Our loan growth, everything we've done and originated at CECOS has been driven organically out through our banking team.

Speaker 8

Understood. Okay, guys. Thank you very much. That's it for me.

Speaker 7

Thank you, Russell.

Speaker 4

Our next question comes from the line of David Bishop. Please proceed with your question.

Speaker 1

Hey, good morning guys.

Speaker 7

Hi, David. Chuck or Mike, quick or Tracy, quick question. It sounded like you noted that payoffs We're a little bit elevated this quarter versus last that may have restrained loan growth. Just curious if you have that number versus last quarter? And then Maybe Michael in terms of the maturity schedule next year Q4, just curious maybe what the roll off yields are looking like versus the add on yields?

Speaker 7

Sounds like add on yields are close to 8% if I heard right, maybe just some color on those topics.

Speaker 6

Yes, sure. So the payoffs This quarter were about $270,000,000 which is a little higher than what we had been seeing and that was at A little higher yield though, 6.3% roughly. So seeing some of the variable higher rate loans pay down as people just Decide to kind of pay down those lines once you get to certain high levels of absolute rates. The new origination yields were Upper 70% or upper 7% s for sure, 7.8% roughly in the quarter. And then as we look forward into Q4 and next We're seeing kind of fixed rate book paying off and paying down in the mid-4s to maybe high-4s.

Speaker 6

So Definitely a positive trend as we see that new originations replacing kind of runoff of back book and refinancing a back book.

Speaker 7

Got it. And then did I hear that the deposit inflows this quarter came in somewhere around the $250,000,000 replacing the brokers at 5%, I wasn't sure if I got those numbers right earlier in the

Speaker 6

call. It's a little higher than that on a blended Probably in the mid-3s, so replacing brokered 5 that would have rolled up certainly in this environment probably up to the mid-5s. Yes, that was a strong mix shift for us this quarter. And that did occur throughout So we'll see some impacts of that benefiting Q4 a little bit.

Speaker 7

Got it. And then Chuck, I'm sure a topic you love to talk about the You mentioned the IOTA impact. Any chance any lobbying efforts out there to get that overturned? Any chance that That goes way here in the near term. You think that's pretty sticky here for the duration of the near term?

Speaker 1

I'll be careful with my comments here, but I would say the Florida banking industry is working really hard to get that issue to a better And I'll probably leave it at that.

Speaker 7

Fair enough. And then maybe a question for the credit line guys just to make sure They're still weak. Curious, we've heard a lot of other competitors talk about some issues in the senior care assisted living industry. Just curious any exposure there and if so what you're seeing in terms of your trends internally?

Speaker 1

David, you want to take that one? Or James?

Speaker 9

Well, I would say 1st and foremost, we are aware of the issues in the industry. We've had conversations with peers about it. The good news is that Seacoast Exposure is minimal. I mean, I think we might have 1 or 2 small facilities, but it's not even on my radar. Yes.

Speaker 1

We never been in the space, never really liked Space for a lot of reasons and just not something we've done much of.

Speaker 7

Perfect. Appreciate the color.

Speaker 4

Our next question comes from the line of Brandon King. Please proceed with your question.

Speaker 10

Hey, good morning.

Speaker 1

Yes, Brennan. Good morning, Brennan.

Speaker 10

So with rates potentially peaking here, just wanted to get updated thoughts on how you Are you expecting to manage the balance sheet asset sensitivity going forward? If you're debating any sort of strategy to kind of But just to extend duration from here?

Speaker 6

Yes. It's a good question, Brandon. And we're a little bit liability We do kind of similarly expect that rates may kind of stabilize here for a period. I think in general, we will manage the kind of rate sensitivity appropriately. Our best case would be a Somewhat steepening of the yield curve or just kind of a stabilization at current rates.

Speaker 6

So I think the way to think about it is that we'll probably try to manage the tail risk, right, if rates were to Down or up significantly consistent with our kind of conservative nature. That's really what we're focused on. And then just optimizing the profitability and performance of The balance sheet that we have today, during the interim. So those are kind of the pieces I would call out.

Speaker 10

Okay. And On the broker deposits, what is the expectation for when those could be fully paid off? Are there any chunky maturities coming up

Speaker 6

It's kind of blended over the next year. We've got a few more Larger chunks maybe over the next kind of 4, 5 months, but it's kind of laddered out a little bit at this point. So we'll continue likely as we have success From our team reeling in deposits to continue to pay those off and pay those down with time.

Speaker 7

Okay.

Speaker 10

And then lastly, just thinking about balance sheet growth here, is the way to think about it maybe is kind of a Static balance sheet maybe into the second half of next year once loan growth improves. Is that a fair way to think about it?

Speaker 6

I think dependent, right, on our success with growth and kind of what the macro environment looks like, those are Caveats, I guess, but we the team's engaged and locked in and focused on growing core relationships. And as we do that, We'll continue to see balance sheet growth. As we mentioned earlier, some of the dynamics in the market improving. I think you're seeing some of that accrue to our benefit. We've been patient and now we're seeing good opportunities to be active.

Speaker 6

And so that's kind of where we're at right now.

Speaker 10

Okay. That's all for me. Thanks for taking my questions.

Speaker 1

Thanks, Brenna.

Speaker 4

Chuck Schafer, there are no further questions at this time. I will turn the call back over to you.

Speaker 6

Okay. Thank you all

Speaker 2

for joining us this morning. That will conclude our call.

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Earnings Conference Call
Seacoast Banking Co. of Florida Q3 2023
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