Seacoast Banking Co. of Florida Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 8 speakers on the call.

Operator

Welcome to Seacoast Banking Corporation's 2nd Quarter 2024 Earnings Conference Call. My name is Pam, and I will be your operator. Before we begin, I have been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements. Seacoast will be discussing issues that constitute forward looking statements within the meaning of the Securities and Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded.

Operator

I will now turn the call over to Chuck Schafer, Chairman and CEO of Seacoast Bank. Mr. Schafer, you may begin.

Speaker 1

Thank you, Pam, and good morning, everyone. As we go through our presentation, we'll be referring to the 2nd quarter earnings slide deck, which is available at seacoastbanking.com. I'm here today with Tracy Dexter, Chief Financial Officer Michael Young, Treasurer and Director of Investor Relations and James Stallings, Chief Credit Officer. The Seacoast team had a strong quarter with good earnings performance and continued strong customer acquisition. Our investments in talent and marketing paid off with a 60% increase in commercial loan originations from the previous quarter and a record $744,000,000 late stage pipeline entering Q3.

Speaker 1

As we anticipated on our comments last quarter, we saw a low single digit loan growth in the 2nd quarter at 2.4% annualized and we expect production to increase in Q3, which will boost net interest income and the net interest margin. Tracy will provide more details on this shortly. We've been focused on increasing non interest income and have seen improved performance in wealth management fees, service charges on deposits and insurance agency revenue in each of the past 4 quarters. Our efforts to reduce expenses have also been successful with adjusted non interest expenses declining sequentially for the past 4 quarters, approximately $9,000,000 per quarter lower than a year ago. During the quarter, we worked on lowering our cost of deposits by reducing we saw our cost of deposits begin to stabilize in May.

Speaker 1

And looking at our asset quality, we continue to maintain strong performance. Charge offs were slightly higher this quarter at approximately 40 basis points annualized, mainly due to a limited number of loans, each of which were previously reserved for, which decreased the ACL upon charge off. While classified and criticized increased slightly from the prior quarter, non performing loans declined by $17,000,000 Our ACL stands at 142,000,000 dollars equal to 1.41 percent of total loans and including the reserve for unused commitments, this ratio moves to 1.46% of total loans, positioning us strongly amongst our peer group. And additionally, we have another $151,000,000 in purchase discount. Our balance sheet puts us in great position compared to peers, allowing us to navigate any challenges this cycle may present.

Speaker 1

Overall, it was a solid quarter, generally in line with the previous guidance across all areas. As we stated in previous quarters, we believe we reached an inflection point in net interest income in the second quarter and reflect reached an inflection point in net interest income in the second quarter and expect growth in net income and netish margin as we enter the back half of twenty twenty four. We're committed to maintaining our conservative balance sheet principles to ensure long term success and we remain steadfast in our goal of establishing Seacoast as a leading player in Florida. I'll now pass the call to Tracy to review our financial results. Tracy?

Speaker 2

Thank you, Chuck.

Speaker 3

Good morning, everyone. Directing your attention to second quarter results, beginning with Slide 4. Seacoast reported net income of $30,200,000 or $0.36 per share in the Q2. As Chuck mentioned, we're seeing the benefit of recent expense reduction actions and as a result non interest expense is down 10% compared to the prior year quarter. The pace of increase in cost of deposits slowed during the quarter and was flat in May June.

Speaker 3

Pretax pre provision earnings on an adjusted basis increased $2,000,000 quarter over quarter benefiting from growing revenue sources including wealth, treasury management and insurance and well controlled expenses. Our loan pipelines have grown meaningfully and we continue to see stable credit trends. Tangible book value per share increased to $15.41 and our capital position continues to be very strong. Seacoast Tier 1 capital ratio is 14.8% and the ratio of tangible common equity to tangible assets is 9.3%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 8.6%.

Speaker 3

We also repurchased nearly 40,000 shares at just over $22 on price dips during the quarter. Turning to Slide 5. Net interest income declined modestly during the quarter with higher deposit costs and growth in deposit balances, partially offset by higher yields on loans and securities. Core net interest margin to 3.69%, benefiting from recent purchases. To 3.69%, benefiting from recent purchases.

Speaker 3

Loan yields excluding accretion increased 4 basis points to 5.52%. Accretion and purchase discounts on acquired loans was lower by $400,000 compared to the prior quarter. The cost of deposits increased to 2.31 percent with the exit rate flat month over month at 2.33%. Looking ahead, we expect that the 2nd quarter was the trough for net interest income and we'll see growth in both net interest income and the net interest margin in the 3rd quarter, driven by higher yields on loans and stabilizing deposit costs. Our rate assumptions are unchanged and include 1 25 basis point rate cut in November.

Speaker 3

Moving to slide 6. Non interest income excluding securities activity increased $2,000,000 in the 2nd quarter to $22,200,000 Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Wealth and insurance agency income continue to grow. In the BOLI portfolio, we restructured policies to capture higher rates, resulting in higher income, which will continue into future periods. Other income was higher by $700,000 including a gain on sale of 1 non performing commercial real estate loan.

Speaker 3

Looking ahead, we continue to focus on growing non interest income and we expect 3rd quarter non interest income in a range from $21,000,000 to $22,000,000 Moving to Slide 7. Assets under management have increased 12% year to date to a record $1,900,000,000 and have increased at a compound annual growth rate of 27% in the last 5 years. Wealth Management revenues during the quarter increased to 3,800,000 dollars up 6% from the prior quarter and 14% from the prior year quarter. Our family office style offering continues to resonate and internal referrals are a significant contributor generating strong returns for the franchise and deepening relationships with our customers. Moving to Slide 8.

Speaker 3

Non interest expense for the quarter was $82,500,000 lower than the range of guidance we provided last quarter. Recent expense reduction initiatives are benefiting nearly every category. Outside of the impact of severance related charges in the Q1, salaries and wages increased $700,000 including annual merit increases and annual stock award grants. Investments in growth focused talent will also continue to be a priority. We saw a typical seasonal increase in employee benefits and payroll taxes Q2.

Speaker 3

In outsourced data processing and occupancy costs, we incurred one time charges early in the Q1 associated with consolidation activities, leading to a comparative decline in expense in these categories in the Q2. Our planned investments in branding and in marketing campaigns across the state led to higher marketing expenses. Other expenses were lower across several categories and the efficiency ratio improved to 60.2%. Discipline around expenses will continue to be a focus and in the Q3, we expect non interest expense to be between $84,000,000 85,000,000 dollars Turning to Slide 9. Loan outstandings increased at an annualized rate of 2.4% and the pipeline has grown 46 percent to $834,000,000 Average loan yields excluding accretion on acquired loans increased 4 basis points to 5.52%.

Speaker 3

The pipeline is very strong and looking forward, we expect the pace of loan growth to continue to increase and expect mid single digit growth in the coming quarter. Turning to Slide 10. Portfolio diversification in terms of asset mix, industry and loan type has been a critical element of the company's lending strategy. Exposure is broadly distributed and we continue to be vigilant in maintaining disciplined conservative credit culture. Non owner occupied commercial real estate loans represent 34% of all loans and are distributed across industries and collateral types.

Speaker 3

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 34% and 2 22 percent of consolidated risk based capital respectively. We've managed our loan portfolio with diverse distribution across Slide 11. The allowance for credit losses totaled $141,600,000 or 1.41 percent of total loans compared to 1.47% in the prior quarter. A small number of individually evaluated credits were charged off during the quarter resolving previously established specific reserves.

Speaker 3

The allowance for credit losses combined with the $151,000,000 remaining unrecognized discount on acquired loans, totaled $293,000,000 or 2.9 percent of total loans that's available to cover potential losses, providing substantial loss absorption capacity. On Slide 12, providing a longer term view of our stable asset quality trends, recall that the period presented includes 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 13, looking at quarterly trends in credit metrics. Our credit metrics remain strong.

Speaker 3

Non performing loans declined to 0.6 percent of total loans with a number of non accruals resolved either through charge off, sale or being paid off. Accruing past due loans and criticized and classified loans each increased slightly as a percentage of total loans, but remain low. Moving to Slide 14 and the investment securities portfolio. The average yield on securities has benefited from purchases in recent quarters at higher yields with the portfolio yield increasing during the Q2 by 22 basis points to 3.69%. Changes in the rate environment negatively impacted portfolio values and as a result the overall unrealized loss position increased by 6,000,000 dollars Turning to Slide 15 and the deposit portfolio.

Speaker 3

Total deposits increased by 100,000,000 The cost of deposits increased this quarter to 2.31 percent, a slower pace of increase than in previous periods consistent with our expectations. In fact, in June, we saw no increase from the prior month at 2.33%. Looking forward, we expect continued growth in core deposits and stabilization of deposit costs and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering. On Slide 16, CECOS continues to benefit from a diverse deposit base. Customer transaction accounts represent 50% of total deposits, which continues to highlight our longstanding relationship focused approach.

Speaker 3

Our customers are highly engaged and have a long history with us and low average balances reflect the granular relationship nature of our franchise. And finally, on Slide 17, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. Tangible book value per share increased to 15 point $4.1 and the ratio of tangible common equity to tangible assets remains exceptionally strong at 9.3%. Our risk base 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 3

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

Speaker 1

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

Operator

Thank Your first question comes from the line of David Feaster of Raymond James. Please go ahead.

Speaker 1

David, you may be on mute.

Speaker 4

Can you hear me?

Speaker 1

Can you hear me now?

Speaker 5

There you are. Okay.

Speaker 4

Good morning, everybody. Sorry about that.

Speaker 5

Hey, buddy. No

Speaker 4

worries. Great to see the inflection in loan growth. And just given the increase in pipelines, it seems like this trajectory is structurally improving. And it sounds like the majority of it you gained in share from the new hires hitting stride. Is that the right way to think about it?

Speaker 4

And just kind of how is demand broadly from your perspective? And where are you seeing the most growth opportunities today?

Speaker 1

Yes, David, I think you characterized and read it well. I think when you step back and look at the quarter, we saw 2 0.4% annualized loan growth that was about where we had guided to in the prior quarter. As Tracy mentioned, our guide is the mid single digit in the coming quarter. And what's really encouraging about it, just like we talked about last quarter, is the bulk of what's coming on is new customer relationships and prospects as we continue to onboard clients, primarily as a result of the investments we've made over the last 24 months in Talend around the state. The demand of our current customers, I would say, remains pretty light just like you've seen across the industry.

Speaker 1

But what we're seeing is we're moving market share primarily out of large regional banks onto the CECO's balance sheet. And so I'm very encouraged as we talked about last quarter, remain very encouraged and think the team we've built is 1st class and I'm super excited about where we're headed.

Speaker 4

That's terrific. And then maybe somewhat of a difficult question to answer because there's a lot of moving parts, but I'm curious how do you think about the size of the balance sheet? Obviously, loan growth is improving like we just talked about. We talked about core deposit growth returning. I'm just curious, how do you think about plans for that core deposit growth?

Speaker 4

Would you expect to reduce some wholesale funding and borrowings first and use securities cash flows to fund growth with the balance sheet remaining relatively stable? Is that the right way to think about it? I'm just kind of curious how do you think about that and some of the puts and

Speaker 1

takes? Michael, you want to take that one?

Speaker 6

Yes. Hey, David. Good morning. This is Michael. I would think about it as really our balance sheet growing at the pace of deposit growth from here.

Speaker 6

As Chuck mentioned, we've got momentum building on the lending side, on the loan side. We expect some benefits obviously on the deposit side as well as we kind of take that market share and have faster customer acquisitions. So we're thinking that the deposit side of the balance sheet may grow in kind of the low single digit. So a little bit of remix, but we really want to grow the balance sheet from here.

Speaker 4

Okay. That makes sense. And then last one for me, just given the move in rates, curious how do you think about balance sheet optimization opportunities? And curious what you guys would be interested in. Obviously, additional restructurings could make some sense, but any interest in loan sales or anything else like that?

Speaker 4

I know you sold some NPAs this quarter, but just curious whether the move in rates has changed your appetite and as it opened up maybe some more doors?

Speaker 6

Yes. Hey, David, this is Michael again. I think if you step back and look at the balance sheet as a whole, we have very high levels of capital. We've done that intentionally to have a lot of ballast in turbulent times. We still have that optionality, as you mentioned, and that's a focus of ours to maintain that optionality.

Speaker 6

But there are continue to be opportunities with rate volatility, etcetera and changing kind of forward outlooks where we can take opportunities on the margin as you've seen us do some small portfolio restructurings and some other things along the way between BOLI and securities to optimize earnings. So those opportunities obviously are still out there. And as Chuck often says, we're really just very math focused and disciplined around the earn back and doing the right thing for shareholders long term.

Speaker 1

And I think, David, if you step back and just look at our balance sheet, we do have and we'll have, as Michael said, probably some opportunities around the edges to do some of that. But importantly, we are seeing net interest income in the margin inflect at this point with some loan growth coming on the back half of the year and stabilizing deposit costs. I'm pretty encouraged about the profitability outlook for 2025.

Speaker 4

Okay. That's great. Thanks, everybody.

Speaker 1

Thanks David.

Operator

Your next question comes from the line of Wudi Lei of KBW. Please go ahead.

Speaker 7

Hey, good morning guys.

Speaker 1

Good morning, Woody.

Speaker 7

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

Speaker 1

Yes. I think the way to think about it, we mentioned this on last quarter's call, the pipeline does weigh more into C and I. And so the funding level is lower than what historically we would see. Again, we're super encouraged because we're bringing on a line of credit, we're bringing on operating company and we're bringing with it deposits and the full relationship. And but that'll take 12 to 18 months to fund up as we move through the next into next year.

Speaker 1

But what we're building is momentum into the back half. And so the funding levels are a little lower than they've been historically, but the momentum is very strong.

Speaker 7

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

Speaker 1

Yes, it will take some time because there's a lot of notes in that portfolio. But yes, the loans we're adding on are generally larger than that as we move forward. But there's a very large granular portfolio there that's why that average loan size is as low as it is. But looking forward, the new volume coming on is larger.

Speaker 7

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

Speaker 6

Hey, Woody, this is Michael. Yes, I think we've taken the back book repricing actions that we discussed kind of on the last quarterly call and you saw the stability that materialized in the quarter, on both interest bearing deposit costs and the total cost of deposits. And so I think going forward from here, we still want to grow deposits and we still want to take market share while there's a good opportunity to do so. And so we might still expect some slight increase in the cost of deposits going forward, but at a much lower pace than what we're seeing in terms our loan yields improving. And so that's going to lead to that margin expansion into the back half that Tracy and Chuck both referenced.

Speaker 6

So I think that's kind of the right way to think about it. Obviously, DDA mix is the most important factor and we feel pretty good about stabilization there as well.

Speaker 7

Sounds great. Thanks for taking my questions.

Speaker 1

Thank you, Woody.

Operator

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

Speaker 2

Hey, good morning.

Speaker 1

Hey, Brandon.

Speaker 5

Good morning, Brandon.

Speaker 2

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

Speaker 6

Hey, Brandon. This is Michael. Obviously, that depends somewhat on what your interest rate outlook is. We are modeling for a November 1st cut and only one cut this year, followed by greater cuts kind of into 2025. But really the balance sheet is slightly liability sensitive, but close to neutral.

Speaker 6

So a lot of it's going to be based on kind of the active management that we do and the pace really of our loan growth versus BDA balances that are going to be kind of the drivers of how much of the expansion we get into

Speaker 1

the back half. And as you know, Brandon, there's a lot of lots of you got an election year, there's a lot going on. We don't know where the Fed is going to go. So providing much guidance there over the long run is tough. We'll wait and see how things play out.

Speaker 2

Okay. And I guess, is it fair to assume just modest expansion? Is that a way to think about it? You're not expecting any sort of material ramp? Is that the way to think about it?

Speaker 6

Yes. I think modest is probably a fair characterization. The benefit that we do have though is if rates decline further, we have a little more of a fixed loan book that again is stepping up into the higher rate regime. So that's really kind of the tailwind that's buffering us going forward and that should also help us if rates do head lower.

Speaker 2

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

Speaker 3

Yes. Hi, Brandon. Charge offs this quarter largely reflect previously reserve balances and it's a small number of loans. The large portion of that is the acquired portfolios that are in runoff mode along with a small number of other specific reserves. So while the charge offs are elevated this quarter, we do still expect a normalized level on an average basis would be around 25 basis points.

Speaker 3

Our year to date annualized charge offs are 27 basis points.

Speaker 2

Okay. And with the reserve, I mean, you have strong reserves with also the acquired credit discount. Is it fair to assume that's going to continue to march lower given how high it is putting all those pieces together?

Speaker 3

I think it depends. Each quarter, we look at the current credit conditions, expected forward economic conditions. We assess the allowance just with the forecast scenarios. The Moody's forecast scenarios drive a lot of the quantitatively derived loss model outcomes. And of course, we also consider adjustments, which may be appropriate based on metrics specific to our markets or our portfolio.

Speaker 3

We go through this comprehensive process each quarter, so the circumstances at each quarter end really drive changes in the reserve. I think it's reasonable to assume that we'll use the allowance for the purpose it was built to cover losses as they arise. So if we do see the economic outlook improving and the portfolio conditions are supportive, we may end up with a lower coverage level than we have today.

Speaker 2

Okay. Thanks for taking my questions.

Speaker 1

Thanks, Brian.

Operator

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

Speaker 5

Hey, good morning, everyone.

Speaker 1

Hi, Stephen.

Speaker 5

I guess I know earlier you said balance sheet growth probably in line with deposit growth, but obviously year to date, I think deposits have moved faster than loans and so the loan to deposit ratio is down

Speaker 1

a bit. I mean, do you

Speaker 5

think we could see that move back to 85% range and kind of lever the balance sheet a bit more over time?

Speaker 6

Michael? Hey, Stephen, this is Michael. Yes, I think that that's fair. We obviously maintain our conservative stance on capital, but also liquidity. So we don't want to move that too high.

Speaker 6

But as you can see with the building pipeline, building lending momentum after we sort of intentionally decelerated loan growth last year due to our risk posture, I think as we move forward, you're going to see the loan growth building and probably coming in at a slightly faster pace than deposit growth, which would help us to relever the balance sheet, as you mentioned a little bit. But really what that's going to do is just build earnings momentum and revenue momentum.

Speaker 5

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

Speaker 6

Yes. I think we modeled slightly liability sensitive. I can get with you offline on that, Stephen, but we're basically down 100 basis points. We pick up about 1% percent in revenue. So that depends on if you're looking at dynamic or static.

Speaker 6

Obviously, our balance sheet has been moving pretty quickly and so that has a pretty big impact. And just our ability to manage the balance sheet is probably stronger. So, that's where I think really if you zoom out and look at our balance sheet, we've got a little higher amount of fixed rate assets that should be more stable in terms of their pricing versus our liabilities that some will automatically reprice, but obviously we would be proactively re pricing downward if rates were to decline. And so that's what will give us kind of earnings leverage into a down rate scenario. Yes.

Speaker 6

And Tom, right now

Speaker 1

Yes, you're right.

Speaker 5

I have some reading comprehension issues this morning. It goes up 0.7% and then down 100 basis points, so apologies there. Yes. And then just last thing for me around M and A discussions. I mean, obviously, the stock is appreciably higher than it was maybe a quarter ago.

Speaker 5

The whole market is trending up. Does that help M and A conversations maybe with some of these smaller private banks or conversations picking up at all as of yet? And how do you think about those capital priorities today?

Speaker 1

Yes, great question. Obviously, with higher stock price, higher multiples across the industry, that would be indicative of more opportunities for M and A. I would say from an M and A perspective, I'm very encouraged by our organic growth story. I think there's a lot of momentum inside the company. I think we are at this inflection point.

Speaker 1

So if we were to look at something, it would really have to make a lot of economic sense to kind of take us off what we're focused on. But not to say we wouldn't do a deal, but that deal is going to have to make a lot, a lot of sense. So that's kind of where we are on it,

Speaker 5

Stephen. Great. Sounds like a perfect dynamic. Appreciate all the time.

Speaker 1

Okay. Thanks, Bill.

Operator

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

Speaker 1

All right. Awesome. Thank you all for joining us this morning. Thank you to the Seacoast team. I thought it was a very solid quarter and looking forward to the back half of this year and appreciate everybody joining the call.

Speaker 1

Thanks, Pam. That will conclude.

Operator

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

Powered by Quartr
Earnings Conference Call
Seacoast Banking Co. of Florida Q2 2024
00:00 / 00:00