Seacoast Banking Co. of Florida Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 8 speakers on the call.

Operator

Welcome to Seacoast Banking Corporation's First Quarter 2024 Earnings Conference Call. My name is Marvie Lou, and I will be your operator. Later, we will conduct a question and answer session. 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. ECOS 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.

Operator

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

Okay. Thank you, and thank you all for joining us this morning. As we provide our comments, we'll reference the Q1 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 and James Stallings, Chief Credit Officer. We started 2024 on solid footing, one of the strongest quarters on record for customer acquisition.

Speaker 1

This results from our focused investment over the last 24 months and 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 $160,000,000 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 and I and we expect a meaningful Q2 for closings.

Speaker 1

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. And 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.

Speaker 1

Tracy 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 $80,000,000 from the prior quarter, primarily due to a handful of closings that pushed into the 2nd quarter, elevated pay downs in our construction portfolio and $30,000,000 in credits we purposely exited. Our loan pipeline grew substantially by nearly 50% to 573,000,000 dollars 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.

Speaker 1

And additionally, it's important to emphasize that we continue to acquire a comprehensive banking relationship with CCOS

Speaker 2

for all

Speaker 1

of our lending activities, ensuring a mutually beneficial partnership with

Speaker 3

Our

Speaker 1

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 $147,000,000 equating to 1.47 percent 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 $163,000,000 in purchase discount.

Speaker 1

Our fortunate 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 exceptional financial institution in one of the nation's most economically attractive states.

Speaker 1

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

Speaker 4

Thank you, Chuck. Good morning, everyone. Directing your attention to Q1 results, beginning with Slide 4. Seacoast reported net income of $0.31 per share 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.

Speaker 4

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 $3,100,000 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.

Speaker 4

CECO's Tier 1 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 $100,000 gain on the liquidation of our Visa B shareholdings. The gain offset a $3,800,000 loss on the sale of approximately $87,000,000 in security. The opportunistic repositioning has an expected earn back of approximately 1.9 years.

Speaker 4

Before we continue, I'd like to draw your attention to a change in our presentation. Beginning in the Q1 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 $5,700,000 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 percent 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.

Speaker 4

In the securities portfolio, yields increased 5 basis points to 3.47%. Loan yields excluding accretion increased 8 basis points to 5.48%. Accretion and purchase discounts on acquired loans was lower by 0 point $7,000,000 compared to the prior quarter. The cost of deposits increased to 2.19 percent and we added an overall $239,000,000 in deposit balances, including growth in non interest bearing DDA. Looking ahead, we expect net interest income to stabilize in the 2nd quarter and to grow from that point forward.

Speaker 4

Our assumptions include 1 25 basis point rate cut in November and 1 in December. Moving to Slide 6. Non interest income excluding securities activity increased $500,000 in the Q1 to 20,300,000 Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Interchange income during the Q4 of 2023 included an annual volume based incentive from the payment network, resulting in a comparative decline in the Q1. Other income was higher by $500,000 with higher salable production in our marine lending business and higher income from SBIC Investments.

Speaker 4

Looking ahead, we continue to focus on growing non interest income and we expect 2nd quarter noninterest income in a range from $20,000,000 to $22,000,000 Moving to Slide 7. Assets under management increased 9% this quarter to a record 1,900,000,000 dollars and have increased at a compound annual growth rate of 28% in the last 5 years. Wealth Management revenues during the quarter increased to 3 point percent 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. Onto Slide 8.

Speaker 4

Non interest expense for the quarter was $90,400,000 and on an adjusted basis was $83,300,000 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 1,200,000 dollars In outsourced data processing costs, we incurred $4,100,000 in one time charges associated with consolidation activities and began to see the benefits this quarter with a decline of $600,000 on an adjusted basis. Legal and professional fees were lower with the 4th 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 we'll maintain this discipline around expenses.

Speaker 4

We expect 2nd quarter non interest expense to be in a similar range to the Q1 between $83,500,000 84,500,000 dollars Turning to slide 9. Loan outstandings declined by $84,900,000 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 percent and in the Q1, we continued to see new loan yields in the 8% range. The pipeline is very strong with a large portion in C and I and looking forward, we expect loan growth in the low single digits. Turning to slide 10.

Speaker 4

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 percent and 2 22 percent of consolidated risk based capital respectively.

Speaker 4

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 $146,700,000 or 1.47 percent of total loans compared to 1.48% in the prior quarter. The allowance for credit losses combined with the $163,000,000 remaining unrecognized discount on acquired loans totaled $310,000,000 or 3.1 percent 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.

Speaker 4

Our credit metrics are strong and we remain watch full 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 percent 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.

Speaker 4

Also recall that the period presented includes 8 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 Q1, we sold all our holdings of Visa Class B shares and recognized a net gain of $4,100,000 We also recognized the opportunity to sell low yielding bonds with modest losses on a small percentage of the investment portfolio. The proceeds approximately $87,000,000 were reinvested into bonds with an average yield 5.5%.

Speaker 4

With an expected earn back of less than 2 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 $14,500,000 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 $10,400,000 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.

Speaker 4

The cost of deposits increased this quarter to 2.19 percent and we expect in the Q2 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, CECOS 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 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.

Speaker 4

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.

Speaker 4

Chuck, I'll turn the call back to you.

Speaker 1

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, operator, we'll take questions.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Brandon King with Truvis Securities. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 1

Good morning, Brandon.

Speaker 3

So just starting off on the margin, could you kind of give us a sense of how you're thinking about how the margin could trend this year and kind of your updated forward curve assumptions?

Speaker 5

Yes, sure Brandon. This is Michael. Just to start the updated assumptions, take the last part first. As Tracy mentioned in the prepared comments, one cut in November and then one in December. Obviously, that last one doesn't have a lot of impact.

Speaker 5

The shift versus our prior forecast was the delay in cuts being later in the year with some upward pressure in the cost of related to that. So in general though, we still expect the margin to bottom in the first half of the year this year and expand from there. But the pace of fed cuts will be kind of the ultimate driver at the pace of expansion or magnitude of expansion in the back half of the year. So with the delay in that, we would expect less expansion of the margin in the back half.

Speaker 3

Okay. So it's fair to say that if like if debt funds are stable that kind of the margins just kind of stay stable at this at the current range?

Speaker 1

In the near term, in the long run, we expect margin to begin to expand. And importantly, as Tracy said in her prepared comments, we think NII is starting to stabilize and then starts to grow fairly strongly on the back half of the year and into 2025.

Speaker 3

Okay, okay. Got it. Then I want to talk about the pipelines are much higher quarter over quarter. So just could you put that into context as far as what you're seeing, that's coming from, whether it's from existing customers or taking market share and talent additions?

Speaker 1

Yes. Thanks, Brandon. I mean, that's super excited about the efforts by our banking team this quarter on business development. We saw deposit growth across nearly every market in the state. We saw growing pipelines across most every market in the state.

Speaker 1

And we also saw a larger percentage of our pipeline growing in C and I. And so what we're seeing just kind of at a broad level is the opportunity to continue to take clients from some of the national and large regional banks and a lot of that's coming from heavy investment in talent over the last 24 months. We're now starting to mature into that investment and we're starting to see material client aggregation. If you kind of just think about a moderate size operating company, typically they're going to have about 5 or 6 products. They're going to have a letter of credit that's a line of credit that's tied to sulfur plus a spread.

Speaker 1

We're moving that over. They typically have an operating account. We're moving that over. They typically have a money market account or a sweep account. We're moving that over.

Speaker 1

We're collecting the TM, the merchant and the treasury. What we're leaving behind is the 4% equipment loan and the 4% building loan. But the next equipment request that comes up, we're going to do that equipment request for that client. And so the sort of when you look at the blended add on rate on the depository side for that, what you're seeing is maybe a $370,000,000 type cost to that money coming into the franchise, which I'm really pumped up about. I'm excited about what I'm seeing in terms of all the wins that we're sort of all the way across the franchise.

Speaker 1

There's a lot of incredible business development being done by our team. That team is now maturing into probably into a year's worth of seasonality here. So we're moving past non solicits and other things that were restrictions we had to work through. So we're now seeing a lot of clients on boarding with the bank. We also have worked really hard to focus our entire company on deposit gathering and client acquisition, a lot of effort inside the company.

Speaker 1

We're seeing the impact of that show up. We had a phenomenal quarter for new clients. So that's leading to strong wealth pipeline, strong deposit growth in the quarter. We had DDA growth in the quarter growing pipelines kind of across the board. So I'm pretty pumped up about what the quarter had and pumped up about what the rest of the year could look like.

Speaker 3

Got it. Thank you for that. And lastly, it was encouraging to see kind of slight uptick in non interest bearing deposits. Do you think it could grow from this base here or anything seasonality to point out that could maybe see some decline near

Speaker 5

term and yes.

Speaker 1

Yes, we're keenly focused on growing that. That's one of our core objectives for this year. And we will see some tax payments here in April that's naturally going to occur. But as that kind of happens, we expect to continue building DDA. And so that is our focus.

Speaker 1

And as I said, what we're trying to really get done here is moving on full relationships that includes DDA. So I was really pleased with what I saw in the quarter. It came from a lot of new prospect growth and we will continue to focus on growing DDA. I think we're running right now about 30% DDA to total deposits. I think that's very solid, very solid in the industry and we'll continue to work to keep it as close to that as we can.

Speaker 3

Got it. Thanks for taking my questions.

Speaker 1

Awesome. Thanks, Brian. Operator, I think we're ready for another question.

Operator

Sorry. Your next question comes from the line of David Fister with Raymond James.

Speaker 5

Thank you.

Speaker 6

Hey, David. Hey, good morning, everybody.

Speaker 1

How are you? Great.

Speaker 6

I am curious maybe a high level question. Curious how you're thinking about managing the balance sheet today. I mean you're a bit liability sensitive at this point. The rate outlook continues to change pretty rapidly. So I'm just curious how you think about managing a balance sheet at this point, just given the uncertainty on rates, increased likelihood of a higher for longer environment?

Speaker 6

I mean you guys have obviously been active with securities optimization. I'm just curious if there's any other initiatives or what else you might be considering?

Speaker 5

Yes, sure, David. This is Michael. I think at a high level, we have been focused on market share gain and you saw the really strong deposit growth in the Q1. As we deploy that into loans throughout the rest of the year, I think you'll see the benefits of that pull through with better support for kind of overall margin at that point in time. And then I would also add, we're not going to stand still here.

Speaker 5

There was sort of a propensity to kind of wait until the Fed cut to take action on the deposit book, but I think you're going to see us lean into that a little more that we haven't yet this cycle. So that could be another kind of tailwind, but we're going to continue to actively manage it and try to drive the best return profile we can for shareholders in the interim.

Speaker 1

And just high level, David, if you think about the way we position the balance sheet, we've got very strong allowance. We've got the purchase discount. We've got a lot of capital. The capital gives us optionality. If the earn back is there for buybacks, we'll take it.

Speaker 1

If the earn back is there for a purchase, we'll take it. The earn back is there for a deal. We'll look at that too. So we have choices here. And then sort of 4th, as Michael mentioned, we're very keenly focused on essentially taking market share across the state of Florida.

Speaker 1

And so I think we have options as we move forward. We'll continue to manage that and continue to watch for opportunities as they develop.

Speaker 6

And maybe on that same topic, right? I mean, you guys have done a good job kind of it seems like we're kind of increasingly focused on organic growth and you've had a lot of success recruiting high quality talent to the bank. I'm curious, how do you think about hires at this point? I mean, we're starting to see that horsepower kind of come to fruition to see what they can do. Are you still interested in hires?

Speaker 6

And are you still having success recruiting?

Speaker 1

Yes, definitely. There's more to come there. We're going to obviously manage expenses carefully. Our goal is to keep our expense load in line. And so we'll have to find ways to offset those investments as we find them.

Speaker 1

But yes, where we find really high quality bankers either in wealth, commercial or otherwise, and they can bring a book of business, we're going to take a look at it. There is still a lot of opportunity in that regard. There's a lot of talent that still wants to join the franchise and kind of in the investments we've made over the last few years, I still think we're in the early innings of that investment pulling through. If you think about acquiring team back before rates kind of where they were, you move all those clients credit as you initiated loans. It's difficult when those loan books are sitting at 3%, 3.5%, 4%.

Speaker 1

So we're moving those clients with deposits, which just takes longer. So it's taking a little while to see that pull through, but now we're starting to really see it pull through. And importantly, it's been a while since we had the distraction of a deal. And so we're now I think the last time we had a conversion was June of last year. So we're 9 months out from our last conversion,

Speaker 5

12 months out from our last

Speaker 1

or more than 12 months out from months out from a 15 months out from our last announced acquisition. So a lot of those distractions have moved away to allow us to focus on organic growth and allow us to focus on taking market share across the state. So like I said earlier, I'm very excited about what I'm seeing, just numbers and numbers of wins happening kind of all over the place, in wealth, commercial and retail. We're just we're winning business left and right.

Speaker 6

That's terrific. And maybe switching gears to the fee line. It was great to see the increase in fees. I know it's been a big focus. It seems like insurance has been especially strong.

Speaker 6

Wealth has also had nice AUM wins. You talked about being interested in potentially recruiting some wealth advisors. I'm curious if you could touch on those business lines, what you're seeing, and thoughts on expanding or investing in those and potential cross sell opportunities?

Speaker 1

Yes. Maybe I'll start with the insurance agency. That integration to Seagose has gone exceptionally well. It's an amazing team inside that agency. We're super excited to have them on board and spend a lot of time with them.

Speaker 1

I think there's more to be done there. We haven't even really got started on building a cross sell business around that agency. That's something that's in the works here on the back half of the year. There's a lot to be done there that this prior quarter was a record quarter for that agency, best quarter they've ever had in their history. So really pleased with what's happening there.

Speaker 1

I like the business, the return on capital is really good. And the wealth story continues to be an exceptional story. They had a really good quarter. AUM grew by $160,000,000 Pipeline is super strong. We're setting up to have a really good wealth year.

Speaker 1

Returns there are really good. Both those businesses take a long time to build, but they generate really good returns. And so we're focused there. And then the other piece on all that David is we've made a lot of investment in our TM team. So our treasury management capabilities both in terms of technology, service offerings, people, it's just gotten remarkably better from where we were 24 months ago.

Speaker 1

And so we are winning, like I mentioned earlier, we are winning operating companies, we are winning TM accounts. That's a whole another line of business that's early in its innings to fully mature and provide benefits. So there's opportunities here. Mortgage banking has kind of been held back just given the market, where the market is. There's just still not a lot of inventory, not a lot moving there.

Speaker 1

But we'll continue to be really focused on fees, continue to be really focused on growing that line item. And I couldn't be again, just I'm excited about what's going on in wealth, excited about what's going on in insurance, those are 2 really solid businesses for us.

Speaker 6

That's great. Thanks everybody.

Speaker 1

Thanks, David.

Operator

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

Speaker 7

Hey, good morning guys.

Speaker 1

Good morning, Woody.

Speaker 7

It's great to hear you so upbeat on the customer acquisition front. And I mean, we saw really strong deposit growth in the Q1. Do you think this is a trend that can sort of carry on throughout the year?

Speaker 1

That's the goal. We're in this moment here where we do see tax payments going out. We'll probably see a little bit of decline in public funds that seasonally happens here in the Q2. But given the focus across the franchise, I'd like to have another quarter before I tell you for certain, but it was a really solid quarter, really pipelines are good, deposit pipelines are good. So I'm feeling pretty confident about it, Woody.

Speaker 5

Yes. And what are you seeing on

Speaker 7

the loan competition side? I mean, there's a lot of peers that don't have the balance sheet flexibility that you all have. So are you seeing competitors sort of pull out?

Speaker 5

Any thoughts there?

Speaker 1

Yes, we did sort of late last year, but in early in this year, but over the last 60, 90 days, we've seen competitors really pull back in. I would say the one challenge that's emerged is some of regional banks that were largely pulling relationships out of gotten really aggressive on cutting pricing to hold relationships. That wasn't happening. That's a little bit of an emergence. And then there seems to be a number of banks reentering the commercial real estate and construction space.

Speaker 1

And so it did feel like there was some pullback, but we are seeing the competitiveness sort of return. That being said, I like where we're at. I like our optionality and I like our ability to continue to win business and that's what we're doing. But it has gotten a little more competitive here recently.

Speaker 7

Yes. And then I know internally you are very focused on your overall exposure and concentration in the certain loan segments. As you look at the loan portfolio today, are there segments that you feel you're underweighted to that you could look to grow? And then vice versa, are there segments that are more full and likely won't see much growth from here?

Speaker 1

Yes. We're sort of fully open the business for C and I operating companies pretty much across the board. There's a couple of industries in there that obviously we wouldn't do, but generally manufacturing, distribution, business services, all the health care, all the things you could sort of name, we're open and targeting. On the commercial real estate side, there's plenty of room to do commercial real estate. Obviously, office is something we're not going to really look at right now.

Speaker 1

And our hotel exposure is generally at its max. We've been working on reducing that. In fact, we worked out or let a couple of hotel loans get refinanced out from us here to work that down. So hotel hospitality is kind of on hold at this point. Office is definitely on hold.

Speaker 1

But outside of that, we're looking at other pretty much anything else that comes to retail. We'll look at opportunities, particularly grocery anchored retail, multifamily, if it's stabilized and that's working, we'll look at that as well. Industrial, we'll look at those projects as well. But really the only thing that's one of our sort of we're on a max cap on is hospitality and office.

Speaker 7

Got it. Thanks for taking my questions.

Speaker 1

Thanks, Woody.

Operator

Your next question comes from the line of Stephen Scouten with Piper Sandler.

Speaker 5

Hey, good morning, everyone. You might have just answered one of my questions here. I think you noted like $30,000,000 in loans that you kind of allowed to leave the bank. Was that indeed in this, the hospitality portfolio?

Speaker 1

Yes, most of it was. Yes, there were weaker credits that came due through renewal and there was other banks that were willing to sort of take us out of that and we let that happen, Steve.

Speaker 5

Perfect. And then what would it take for you guys to get a bit more aggressive around growth? And maybe I'm hearing this away you're not intending it to, but my takeaway is kind of you're being conservative because you have a great bank and a great franchise and you don't want to disrupt that. Being said, it sounds like you've got a great team in place and the pipelines have grown significantly. So what would kind of, I don't know, give you more confidence to be a bit more aggressive in putting that stuff on the balance sheet?

Speaker 1

Clarity of the economic environment, I'd say the biggest thing. I mean, it's a struggle right now to get your head around where rates are headed, where growth is headed. GDP underperformed here recently. We talk a lot internally about stagflation and what the impacts of stagflation could be. So it's we're always as you know, it's pretty well, Steve.

Speaker 1

We're always going to be cautious, prudent, exercise discipline and but clarity around where we're headed on all this would be super helpful. The team we build is amazing. I'd love if that clarity emerge because I think we could run incredibly hard, but I think we just got to continue to pick our sponsors carefully and pick our winners and that's what we're doing.

Speaker 5

Yes, makes sense. And it was really interesting anecdotally to hear you say that some of your competitors are kind of coming back into the market a bit. Do you think that affects kind of what is out there from a talent acquisition perspective? And has there been any sort of shift in who you might be talking to in terms of large regionals or like size competitors or anything like that in terms of the potentially available talent?

Speaker 1

No. We're still pulling the same thread and still working down the same angle. We like regional bank talent. It fits well with our credit appetite, fits well with our risk posture and fits well with our cross sell model. They come equipped to sell wealth and TM in the full gamut, which is what we want to see.

Speaker 1

And so we'll continue to recruit from the same places, Steve.

Speaker 5

Got it. Very helpful. Thanks for the time. Awesome.

Speaker 3

And your next question comes from

Operator

the line of David Bishop with Hovde Group.

Speaker 1

Yes. Good morning. Hey, David. Hey, Chuck, sound pretty optimistic,

Speaker 2

especially as we get into 2025 for the direction of spread income in the margin, any sort of maybe top level holistic guidance you can give us into 2025 if rates do stabilize, we start to get fed rate cuts maybe that the impact there on spread income or the margin? Thanks.

Speaker 5

Hey, David, it's Michael. I think just I'll give you some of the pieces. We're obviously not going to give any guidance for 2025 at this point in time, but a lot of the trends we've seen are still consistent. We've got about $1,000,000,000 of kind of lower fixed rate assets that will turn over the next 12 months that will reprice higher. We expect that at some point here the rate of increase on deposits should decelerate as we mentioned some of the pro balance sheet return to growth, you're going to see a more positive revenue trajectory as we head into 2025.

Speaker 5

And that should be a more stable earnings base, right? We don't have ongoing things that we need to derisk like you're seeing with other banks. We don't have a lot of reserve to build. We don't have capital that we need to build. So we really have kind of the wins at our back and the ability to kind of move forward and grow the bank and grow the franchise value the bank and grow earnings as well.

Speaker 2

Got it. And then your accretion income has been under a little bit of pressure here. Is that $10,000,000 sort of run rate good under this interest rate environment and if rates do start to fall, could we is that impacted by potentially prepayments or payoffs? Just curious how we should think about the pace of purchase accounting accretion?

Speaker 4

David, as you said, as expected, the accretion has tapered off since the periods immediately following the recent acquisition. Generally, accretion runs higher when the individual loans with high marks have payoffs or meaningful pay downs. And so we've seen notably fewer prepayments on loans with high marks. That's going to continue to be difficult to predict, but maybe just a point of emphasis, it does come back eventually, and just the uncertainty that exists around timing. But I think probably what you're seeing in the Q1, that 10% to 10.5%, I guess, would be a reasonable guess.

Speaker 2

Got it. And then Chuck, I know you're pretty bold up about the commercial loan pipeline. Any chance you'd share the commercial deposit pipeline, how that looks, any visibility there from a dollar perspective or percentage basis of that pipeline?

Speaker 1

I don't have it in front

Speaker 5

of me, David, and I don't really have a number to give you.

Speaker 1

I wouldn't give it to you if I have it. I just don't have it in front of me.

Speaker 5

Maybe just a gearing ratio on that. We do require compensating balances, so you can see we're seeing in terms of the loan pipeline and assume some percentage right of those loans or a percentage of the balances of those loans would be also coming in, in terms of deposit funding. And the trick for modeling there is just to remind you again, we are going

Speaker 1

to see some tax payments here made. I think we're see tax payments across the industry. It's not going to be a heavy tax year for all banks for a lot of reasons, but as well as public funds typically come down. So we'll have that kind of fighting that through April here, but as we continue to grow, we'll grow through it.

Speaker 2

Got it. And then final question, a little bit of tick up in the substandard criticized. Just curious when you look at that book, is there material difference in the average size of those loans versus maybe the portfolio average? Is it chunkier than what we see on average?

Speaker 1

No, no. It's kind of the average portfolio. Classified, criticized were generally flat quarter over quarter, up just a hair. Generally, we're seeing just normal, I call it, seasoning of the cycle here. And then when you look at the NPL book, that book is kind of just spread amongst a number of smaller transactions as well.

Speaker 1

So we feel pretty good where we are on asset quality. Feel pretty strongly about where we're positioned. And we've got the allowance to generally cover anything that's going to come our way, I think.

Speaker 2

Perfect. Thank you for the color.

Speaker 3

Awesome.

Operator

That concludes our Q and A session. I will now turn the conference back over to Mr. Schafer for closing remarks.

Speaker 1

Okay. Thank you very much. Thank you all for joining us this morning. I do think we had an exceptional quarter for the CECO team did an amazing job. And I'm excited to see what we can do over the remainder of the year and we're around.

Speaker 1

If anybody has any questions, feel free to reach out. Okay. Thank you, operator. That will conclude our call.

Operator

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

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Earnings Conference Call
Seacoast Banking Co. of Florida Q1 2024
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