Q1 2022 Seacoast Banking Corporation of Florida Earnings Call

April 29, 2022

Okay.

[music].

Good morning, and welcome to Seacoast banking Corporation's first quarter 2022 earnings Conference call. My name is Brandon and I'll be your operator today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you made Dallas zero. One if you have a question. Please note it is zero.

Thats Star one before we begin I've been asked to direct your attention to the statement contained 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 Exchange Act and its comments today are intended to be covered within the meaning of that.

Correct.

Please note. This conference is being recorded I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Schafer you may begin.

Thank you, Brian and thank you all for joining US. This morning, as we provide our comments will reference to the first quarter 2022 earnings slide deck, which you can find at seacoast banking dot com.

Joining me. This morning is Tracey Dexter Chief Financial Officer, and Jeff Lee Chief Digital Officer.

The CECO team delivered another outstanding quarter of earnings and growth generating 40, generating $41 7 million in pre tax pre provision earnings 7% annualized loan growth across multiple loan categories, and an impressive 25% annualized growth in deposit Outstandings and.

In addition, the investments we've made in client facing technology and high performing bankers are generating solid performance in new customer acquisition.

Organic balance sheet growth.

I'm incredibly proud of the seacoast team's focus and dedication to building the most competitive banking franchise in Florida integrating our recent acquisitions successfully.

And driving continued transformation across our technology stack.

During the first quarter, we expanded our franchise in Fort Lauderdale, and established a new presence in three markets Naples Sarasota in Jacksonville.

And announced the acquisition of Apollo Bancshares, bringing five new locations the seacoast Miami Dade County.

Paulo will enable us to grow our presence and expand our position in the attractive South Florida market and we look forward to welcoming their employees and customers later this year.

Overall, we received a very warm reception these expansionary markets, where customer onboarding occurring in Jacksonville, and Naples, which contributed to the growth in pipeline and deposit outstandings.

Let me take a moment to discuss the economic outlook and the triple up during the quarter, we slowed the pace of reserve release, primarily due to conservative posturing, resulting from unknown potential macroeconomic impacts from the war in Ukraine inflationary considerations and continued supply chain challenges, we will continue to take a conservative approach to reserving for the <unk>.

<unk> for loan losses underwriting and capital.

That said it should be noted that there is no evidence right now of any issues arising in our markets. As you can see from the slides asset quality measures continue to improve with almost no net charge offs and continued improvements in criticized and nonperforming loans from the prior quarter.

The business environment in Florida remains impressively strong in our consumer and business customers balance sheets are as healthy as healthy as they've ever been.

Average deposit balances and liquidity held by both consumers and businesses remained higher than pre pandemic levels.

The significant migration of affluent individuals and companies relocating the Florida due to low taxes, a business friendly environment and a post pandemic work from anywhere economy continues to be robust and supported the material deposit growth across the franchise.

The combination of a strong Florida economy, the buildout of our commercial franchise across the state and the additions to our consumer and mortgage lending teams drove material growth in our loan pipelines we.

We continue to manage growth conservatively enforcing strict underwriting standards and maintaining a fortress balance sheet.

When you combine the prospect for continued high single digit disciplined growth with the steepness in the yield curve that has emerged recently the outlook for net interest income and resulting earnings has materially improved.

Lastly, I want to note that acquisition discussions continue across the state and we expect we will have continued opportunities to execute our successful M&A strategy over the remainder of the year.

I'll now turn the call over to Tracy, who will walk through our financial results. Thank you Jack good morning, everyone.

Directing your attention to first quarter results beginning with highlights on slide five.

The net interest margin expanded nine basis points to three 5% and on a core basis expanded 14 basis points to three points here at 5%.

With the increase in rates during the quarter, new purchases of securities and loan originations supported high higher loan and securities yields as the addition of the acquired bank portfolios in early January .

Our asset sensitive balance sheet is beneficial in this rising rate environment and our high level of liquidity provides flexibility to fund growth at higher interest rates, all of which will benefit the margin in the coming period.

The recent steepening of the yield curve has had a material positive impact on new securities and loan add on yields and has materially improved the outlook for net interest income.

Our cost of deposits remained steady at six basis points.

Organic loan growth was strong this quarter at an annualized rate of 7%.

With our investment in a number of very experienced bankers over the last few quarters 20 bankers in 2021 and 2014 bankers. So far in 2022, no momentum continues with commercial originations up 83% year over year, and a strong pipeline that 56% higher than at December 31st.

I'll emphasize that the growth is in keeping with the bank's credit standards and the additional volume is being driven by the larger team.

Credit risk metrics continue to improve with charge offs non accrual and criticized loans, all lower compared to the previous quarter.

The quarterly provision for credit losses includes $5 1 million from the day, one impact of the two bank acquisitions that closed in January .

Deposit growth was also very strong this quarter.

Outside of growth related to acquisitions organic deposits were up over 6% this quarter and 25% annualized due in large part to new commercial relationships and an expanding Florida economy.

The rate environment has been beneficial to yields but had a negative effect on the value of our investment portfolio.

Available for sale Securities declined in value this quarter by approximately 5%.

The resulting drop in accumulated other comprehensive income due to lower securities values impacted tangible book value per share by $1 seven.

There is also a significant market expansion to highlight this quarter, we closed on the acquisitions of Sabal Palm Bank in Sarasota, Florida business Bank in Melbourne in early January .

Additionally, we opened the Naples branch with a market president in full team and a Jacksonville commercial lending office with a market president in five new North Florida bankers.

In March we announced the upcoming acquisition of Apollo Bank in Miami.

This expansion across some of Florida's most attractive msas will build franchise value over the long run.

Finally, and subsequent to quarter end last week, we announced that in the second quarter. The cash dividend on common shares will increase 31% to <unk> 17 per share.

With the continued success of our balanced growth strategy and peer leading capital levels. We're pleased to be able to deliver the dividend increase and we will continue to revisit the dividend payout ratio periodically.

Let's move on to some of the detail turning to slide six.

Overall net interest margin expanded nine basis points from three 6% to three 5%.

Excluding PPP and accretion on acquired loans, which introduced significant variability net interest margin increased by 14 basis points from 291% to 3.0% to 5%.

Net interest income on a fully tax equivalent basis increased by $4 2 million or 6% sequentially to $76 6 million the.

The increase in net interest income reflects both higher average balances and higher yields on loans and securities during the quarter.

In the Securities portfolio, we've continued to pace, our investments of excess liquidity with ending balances higher by $171 million and yields increasing 11 basis points to one 6% to 8%.

Non PPP loan yields expanded six basis points to four 4% supported by the two acquired bank portfolios.

Looking ahead, we expect net interest income and margin to increase as our asset sensitive position with significant core deposit funding and ample liquidity will benefit from higher rates.

We continue to expect that net interest margin will expand five to six basis points for each 25 basis point increase in the fed funds rate on a static balance sheet.

Assuming the forward curve as of April 14th which includes eight additional rate hikes in 2022, we expect the core NIM to expand to the low 300 <unk> by the end of 2022.

To be clear this expected significant expansion of net interest margin in combination with expected growth over the remainder of the year has materially improved the outlook for net interest income.

Okay.

Moving to slide seven.

Adjusted Noninterest income was $15 8 million a decrease of $2 5 million from the previous quarter and a decrease of $2 million from the prior year quarter.

The main driver of the decrease from the prior quarter is the absence of significant Spic's investment income this quarter, the timing and amount of which vary meaningfully between periods and the gain in the fourth quarter of 750000 from the sale of a website domain name.

In our core activities are growing deposit base generated a 7% sequential increase in service fees and interchange revenue was flat coming off the seasonally high fourth quarter and with two fewer days in the first quarter.

Wealth management income was higher by 300000 or 13% from the prior quarter as we continue to successfully add new relationships.

In mortgage despite low housing inventory and continued slowing refinancing demand the mortgage banking team has done a tremendous job refocusing on purchase money and as a result mortgage banking fees were $1 7 million a decline of only 300000 from the prior quarter.

Looking ahead, we continue to focus on growing our broad base of revenue sources and expect second quarter non interest income in a range from 17% to $17 5 million.

Moving to slide eight.

Adjusted noninterest expense for the first quarter was below the range of guidance, we provided at $50 7 million.

<unk> and benefits expenses were higher compared to the fourth quarter, reflecting the growth in the associate base as the footprint has expanded the two acquisitions and also due to the seasonal effect of higher payroll taxes and 401K contributions.

Data processing costs increased primarily as a result of the launch of the upgraded online and mobile banking platform, which I will discuss momentarily and increases in occupancy reflect the impact of the expanded footprint into Naples, Sarasota and Jacksonville.

Looking ahead, we expect to maintain our expense discipline, while investing for growth.

Expenses were lower in the first quarter than expected as the full impact of planned hires wont fully materialize until the second quarter.

We expect second quarter expenses, excluding the amortization of intangible assets to be in the range of $52 5 million to $53 5 million.

The increase quarter over quarter is primarily the result of continued investments in talent and the full impact of additional overhead from new locations opened and overhead associated with the two bank acquisitions.

On slide nine.

You can see the typical seasonal trend of an increase in adjusted efficiency ratio from Q4 to Q1.

We expect the adjusted efficiency ratio to remain below 55% in the second quarter and to decline throughout the year, resulting in a full year 2022 ratio that will be in the low <unk>.

Assuming the forward yield curve plays out we could see the overhead ratio dip into the high <unk> towards the end of 2022.

Turning to slide 10.

The record pipeline. This quarter is in large part the result of our success in recruiting talent, including leaders with proven success and developing high performing commercial banking teams.

We brought in 14 experienced bankers during the quarter. In addition to the 20 bankers we added during 2021.

We continue to add high quality commercial banking talent recruiting from large regional banks.

As a result, we've experienced material improvement in productivity across the commercial banking franchise and expect continued recruiting success over the remainder of the year.

Turning to slide 11.

Highlighting the continued diversity of our exposure and concentration levels well below regulatory guidance.

Activity. This quarter included the two acquisitions and our residential purchased pool.

Non owner occupied commercial real estate increased from 29% last quarter to 30%.

And residential real estate increased from 24% last quarter to 25% offset by a lower percentage of PPP loans.

This diversification highlights our disciplined approach to managing concentrations.

Construction and commercial real estate concentrations remained well below regulatory guidelines and you can see the average commercial loan size remained low at 524000.

Turning to slide 12.

Beyond acquisitions, and a loan pool purchase organic loans increased $104 million or 7% on an annualized basis.

The record pipeline of nearly $620 million in commercial bodes well for production next quarter and loan yields are benefiting from acquisitions and the higher rate environment.

Looking forward, we expect loan growth to continue with an annualized growth rate in the high single digits for the remainder of the year.

Additionally, we've seen the market reprice fixed rate new loan pricing materially up over 100 basis points over the last 60 days.

We expect core yields to continue to increase with higher rates translating to slower prepayments better new add on yields and the positive impact of the portfolios coming on from the acquisition.

Using the forward curve as of April 14th we expect core yields to expand to the low <unk> in the second quarter and to the $4 <unk> by the end of 2022.

Okay.

Turning to slide 13 for the securities portfolio.

We continue to invest excess liquidity at a moderate pace and the investment securities portfolio with net additions of $171 million and have meaningful additional liquidity for loan production and strategic purchases at higher rates.

Additions this quarter were primarily agency Cmos with an average duration of three nine and a weighted average yield of two 1% and new add on yields. So far in April have averaged three 3% positively impacted by recent steepness in the front end of the curve.

The duration of the portfolio remained short within our three to four target that will roll down the curve and allow us to deploy the resulting cash flow at higher future rates.

With new purchases in the second quarter, we will continue to steadily pace, our investments expecting net growth of approximately 150 million to $250 million.

Turning to slide 14, we.

We maintain a strong liquidity position with ample cash to deploy into rising rates.

Our cash and cash equivalents to total assets at the end of the quarter was 11, 2% and combined with Securities was 33, 7%.

While the loan to deposit ratio remains lower than the historical norm at 70%.

Turning to slide 15, illustrating seacoast historical deposit beta.

Chico's longstanding relationships and high proportion of transaction accounts translates to a relatively low beta and.

In the last full rising rate cycle from the third quarter of 2015 to the second quarter of 2019, the deposit beta was 28%.

Each cycle is different but we do have an even more favorable deposit mix today than in the past with 38, 1% noninterest bearing versus 31, 7% back in 2015, and 62% transaction accounts compared to 54% at the start of the last cycle.

That evolution supports our expectation that deposit costs will remain low and that rate increases will be directly impactful to the NIM, particularly in the early hikes.

When compared to the prior cycle, we exhibit a comparatively higher liquidity position lower loan to deposit ratio and better deposit mix. As a result, we expect we would continue to outperform most in the industry.

Turning to slide 16.

Posits outstanding were $9 2 billion, an increase of $1 2 billion quarter over quarter.

Outside of the growth coming from the two bank acquisitions organic deposits increased 6% this quarter or 25% annualized with much of that growth coming from new commercial relationships generated by the expansion of our commercial banking franchise.

Transaction accounts represent 62% of total deposits and have grown 33% year over year, demonstrating the strength of our customer franchise, our growing Florida economy, and our ability to win share in the marketplace.

Moving to slide 17, the wealth management business continues to build new relationships.

Assets under management has more than doubled in the last two years and revenues are up 13% quarter over quarter.

Team has done a remarkable job building a high net worth family office model and partnering with our commercial team to build.

Deepen banking relationships.

This relationship driven approach generates value for our most profitable clients and we will continue to deliver strong returns over the long run.

On slide 18, we highlight our delivery this quarter of an upgraded online and mobile banking platform for consumers and businesses.

We've been a leader in digital servicing for a number of years and this new platform strengthens our position even further by providing a better user experience better tools and enabling better digital sales capabilities.

A new digital platform work seamlessly across mobile tablet and desktop offering many new features and over 400 functions to our customers.

Some of the new features include Zelle account aggregation and new reporting tools with account opening functionality launching this summer.

Additionally, we have integrated this platform with our existing customer analytics platform, thereby enabling us to cross sell digitally at a much higher level.

Customer adoption, thus far has exceeded our internal benchmarks and customer feedback has been overwhelmingly positive.

Moving to slide 19.

The allowance for credit losses increased during the quarter by $6 5 million to an overall $89 8 million with the increase in loan balances from organic growth and acquisitions, partially offset by slightly lower coverage.

The provision this quarter was $6 6 million, which includes $5 1 million to establish an initial allowance on the two acquired banks.

We remain watchful of inflation pressures and are carefully considering the impact of higher rates on the economy, though our credit metrics remain very strong and continue to improve.

In addition to the allowance the total purchase discount remaining on bank acquisitions is $24 1 million, which will be earned as an adjustment to yield over the life of those loans.

We will continue to take a conservative approach to provisioning.

On to credit metrics on slide 20.

Were seeing sustained positive trends with net charge offs near zero nonperforming loans decreasing to 0.41% of total loans and the percentage of criticized loans to risk based capital moving lower this quarter.

There was a modest decrease in allowance coverage to total loans compared to last quarter from 143% to $1 four zero percent.

The decrease reflects the sustained positive trends in credit loss indicators.

We continue to assess the environment and the factors that might affect loan performance and this quarter concluded that this modest decrease in reserves was appropriate.

Turning to slide 21.

Our capital position continues to be very strong.

<unk> book value per share is $17 12.

The decline from last quarter, that's attributed solely to the decline in accumulated other comprehensive income the result of recording increasing unrealized losses in the securities portfolio.

Without the impact of securities valuations on OCI tangible book value per share would have increased to $18 19.

The ratio of tangible common equity to tangible assets was nine 9% impacted by both the OCI impact on securities and also by balance sheet growth yet remains among the highest in our peer group.

Regulatory capital ratios declined modestly on growing asset balances, particularly through acquisition.

The tier one capital ratio was 16, 8% and the total risk based capital ratio was 17, 7%.

Yeah.

And finally on slide 22, our longer term look at tangible book value per share.

Over the last five years, we have achieved a compounded annual growth rate of 10% driving shareholder value creation.

Our growth outlook remains favorable evidenced by growth in commercial loans and deposits driven by the expansion of our commercial banking franchise.

The recent steepening of the yield curve and the potential for rising rates will have a material positive impact on net interest income looking forward, particularly in light of our low cost funding base.

All of this is positioned on a foundation of strong liquidity and capital from which we will optimize the opportunities of this strong, Florida economy and continue to execute on our strategic growth initiatives.

We look forward to your questions Chuck I'll turn the call back to you.

Thank you Tracy.

And I think we're ready for Q&A.

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From <unk>, we have Brady Gailey. Please go ahead.

Hey, Thanks, good morning, guys.

Good morning Brady.

So I'm just curious the 20, new bankers that you added last year.

<unk> just in the first quarter.

Does that include the bankers you've acquired via M&A or is that true.

You've hired a outside of M&A.

It's primarily outside of M&A, I'd say, 90%, 95% of its outside of M&A.

So that's a big step up when you did.

On average five hires per quarter last year now youre at 14.

It's Ed.

Is that a one off or efforts to hire really stepped up and you think you could hire 60 people this year.

No I would say our target for the remainder of the year is probably roughly another 10 to 15 is more of a way to think about it over the remainder of the year and over the last.

Say 15 to 18 months, we've been very focused on taking advantage of disruption from larger regional banks and providing a better opportunity for for bankers and it's just been an incredibly.

Opportunistic environment to bring in high quality talent to the organization and what's been.

Really great to see.

Great mix.

C&I bankers as well as a few CRE bankers long way and these are very high quality relationship focused bankers that are doing a great job of bringing new opportunities to us and when you look at our sort of late stage pipeline that we disclosed in the public filings rougher.

Roughly about half of that is coming from the new team that's come on and so we're seeing them bring credit facilities. We're seeing them bring deposits are big part of our deposit growth in the quarter was from the new hiring and so it is a full sort of relaunch of our commercial banking franchise across the state and we're super excited about it.

And then maybe on the flip side.

One of your competitors just had their earnings call last hour.

They had much.

An opportunity for them to grow market share and to recruit talent, they specifically called out.

<unk> first Raj the seacoast Apollo deal as an opportunity for them. So so maybe on the flip side, how do you go about.

<unk>.

But you do acquire via M&A.

We focus very heavily on building, a culture, where bankers want to be and we feel very confident in our ability to integrate bankers, we've done a great job now.

<unk> experienced in the acquisition sort of game and fully understand the social considerations and have a very good track record of maintaining talent. So.

To answer your question directly Brady I have no concern.

Okay.

Can you guys give guidance, which is helpful. But I just had one question, but the high single digit loan growth.

So you guys are the purchasing.

The mortgage pools here and there, but does that high single digit loan growth.

Growth.

Good.

Additional.

Rajiv purchases of pools or how should we think about.

How active you all will be purchased.

Purchasing those revenue goals.

Yes, we're pretty much done with that for now thats on hold and that guidance does not include any any pool purchases. So I think when you look at the pipeline and our outlook for growth.

We're not going to buy any wholesale purchases in the near term.

Okay.

Got it thanks for the color guys.

Thank you Brad.

Yeah.

From Raymond James We have David Feaster. Please go ahead.

Hey, good morning, everybody.

Hey, David Good morning.

Maybe just following up on that.

Last question.

Yes high single digit pace.

Given the first quarter results the economic backdrop.

A 70% increase in the pipeline and the Leather-hard prudent.

<unk> I'm, just curious what's embedded in that growth outlook, how payoffs and payoffs payoffs and paydowns are trending and what kind of.

Expectation.

Great Todd.

Continue to increase maybe we see a deceleration in production or just curious what's embedded in that growth outlook.

Yes, Great question, David and maybe Tracy I'll, let you talk about prepayments or payoffs in a second because I know you have the numbers, but generally I would say in the coming quarter, we expect to be at the very high end of single digits. You can see from the pipeline that we're exiting the quarter very strong and it's a diversified.

Grupo blending that we'll put into the portfolio. So I feel feel great about that over the more longer term view I think high single digits is where we'll land.

To be seen what the impact of higher rates do on loan demand, we have not seen any issues emerged to date, but it's something we will carefully to keep our eye on it.

Tracy you want to talk about payoffs for the quarter sure just the numbers on the first quarter, we did see a moderate slowdown in payoffs in the first quarter.

18% lower than the prior quarter.

And I think we'll expect a little further moderation in payoffs to your point and maybe just a follow up David.

Kind of the very positive sort of outlook here is that because we have the hiring that's gone on in the quality of the teams were bringing on it's allowed us to be very thoughtful and conservative around the type of assets, we want to put in the portfolio and so we continue to execute a very conservative approach to underwriting.

<unk>.

That's a good place to be.

Okay. That's helpful and then.

Maybe on the other side of equation the deposit growth front has been phenomenal I mean organically around like $600 million.

Curious what your Crystal ball ads for deposit growth as we look forward I mean.

You continue to bring on new C&I bankers and increased composition of deals like.

There could be.

<unk> continued growth.

Just curious whether you're starting to see migration within that book or whether you would expect deposit growth to slow.

And then just how deposit pricing is trending more broadly.

Yes, I think.

Our core deposit we think at least in the short term, you'll see some outflows related to tax payments in the second quarter. So we're expecting more normalized deposit growth maybe mid single digits for the remainder of 'twenty. Two on rate. We just continually review market rates will act to make sure that we have.

Remain competitive for our customers.

As we've observed historically.

Banks traditionally are slower to move rates earlier in the rate hike cycle.

With the large amount of liquidity on balance sheets. We expect this time to be similar but we're certainly monitoring that closely.

Looking at our our relationship status with our customers to make sure that we remain competitive.

We really see no deposit pricing pressure today, David at all.

When you step back and look at deposit growth.

It's a combination of the hiring we brought in and the strength of the Florida economy, our business customers are doing.

Just incredibly well given the population growth.

So there are generating capital in building, our balances and it's contributing to our deposit growth.

As well as the hiring in the first quarter. The 14 hires we brought in pretty much all where C&I and back to the entire team was C&I. So theyre, bringing great relationships that are full relationships and its exact kind of business, we want to see.

That's great and then maybe just touching on credit more broadly you've got a pretty good pulse on the landscape and asset qualities for novel <unk> got incredibly conservative approach to credit.

Just kind of given some of the macro.

Concerns given the inflation.

Inflationary pressures on that supply chain as you can.

Pretty aggressive pace of fed hikes does seem to be common.

What keeps you up at night, what you're watching closely is the macro environment or any other trends all the competitive landscape, leading you to start tightening the credit box at all.

Theres been no concern to date.

As you look at the asset quality metrics credit quality has been pristine.

Florida unemployment rate is at three 2%, which is back to pre pandemic levels and as I mentioned earlier, we've seen our consumer business customers that are stronger than they've ever been but that being said, David our heads aren't the sand we read the headlines just like everybody else clearly higher rates will slow the economy and that impact will be felt across the country.

That being said, Florida is doing incredibly well the inbound population growth continues and I think there are unique factors in Florida, specifically compared to other geographies.

In combination of sort of the work from anywhere demographic shifts and other sort of reasons to move to Florida. We think that continues and when you look at.

Housing demand it continues to be primarily driven by out of state buyers, primarily cash buyers I mean, there is a very affluent people continuing to move to Florida.

Carefully continue to monitor past dues FICO scores other indicators of stress and carefully navigate this but what ill last thing I'll point out is unlike the seven or eight or maybe the $90 91, downturns, where the fight was against valuation issues and oversupply. This fight is against inflation supply chain. So it's a very different.

Outlook, we're facing today and so the the impact of that remains uncertain and we will see how how fast the fed moves and whether or not they overdo it but I feel good about the fact, we're in Florida, I think Florida outperforms in this type of cycle.

We feel pretty good about what things look like I would say when you say what keeps us up at night I would say, we're carefully looking at the impact of higher rates on cap rates as rates go up.

Investors have other alternative investments as you sort of push the risk free rate against the cap rate I think you would have to be very thoughtful about sizing and leverage in commercial real estate and sort of the offset to that is increase in rental rates, which you've certainly seen in things like multifamily, but when you look at like office for example.

You get higher higher risk free rates pushing cap rates, and then you combine that with potentially slower demand for and use of lease terms.

That's where we're being a little more cautious and careful but overall things are as of this point remain incredibly good in Florida.

That's great. Thank you all.

Thank you Dave.

From tourists, we have Michael Yang. Please go ahead.

Hey, thanks for taking the questions.

And most recently actually.

Tracy I wanted to start with just a clarification on your comments I think on the 150 million to $250 million of securities growth is that from is that for the remainder of the year starting in <unk> is that cumulative for the year or is that per quarter, just was trying to clarify that.

Yes, Michael we expect that amount per quarter over the remainder of the year.

Okay perfect.

And is there any.

Issue or concern with kind of making that deployment as rates are rising.

Kind of fire that bullet, a little too early versus getting higher yields and a couple of quarters.

I think our approach has been to just be steady.

And deploy that cash in.

At our pace over time, so we've been purposeful over the last year.

Keep new investments around that range.

We do keep.

Portfolio at a target duration between three and four we have added any longer duration securities or anything with duration extension risk to the HTM portfolio over that time, but.

Really generating cash flow and enable to follow the cycle with the cash flow that comes off of that portfolio and I'll point out when you look at our asset liability sort of scenario you see material increases in net interest income on the up scenarios and that's in large part because of the quality of the deposit franchise and when you look at the loan.

Book is relatively short as well so a lot of cash continues to roll down the curve. It will get reinvested in so that that does thats why we studied with the sort of dollar cost averaging of putting a little bit and each quarter, but rather than trying to time it exactly but.

It is something we're carefully considering.

Okay Perfect and then another clarifying question just Tracy on the purchase accounting accretion this quarter or is that kind of a good run rate to move forward for the rest of the year with or is there any puts and takes to that.

Yes that varies and it's really difficult to predict but.

This quarter is.

Good of a benchmark as any I think that's fair.

Okay.

Then last one just Chuck I guess bigger picture kind of asking the growth question, another way youre into 70% loan to deposit ratio.

<unk> got 34, new bankers kind of year over year.

Added and you've got plenty of capital to fund growth. So is there anything that would that would cause you to.

I guess not pursue growth if it were there.

<unk> growth be higher than kind of that high single digit range I know, you've kind of talked about that as a speed limit in the past, but given kind of where the economy that would you be willing to go faster than that.

Just kind of given all those building blocks.

I think high single digits is about the fastest speed we want to go we want to continue to carefully put assets in the portfolio that we know will work.

Due to the long term and so that's kind of our objective Michael.

Okay. So would you would you if there was stronger demand would you just see more remix potentially I mean are there other things that you would kind of shrink or yes. We have yes, we have the option of selling more. So for example, one of the vehicles. We have is in our marine book, we can sell more of that we can sell more of the mortgage banking I mean, we have other levers that we can pull.

To drive more fee income is offset.

Okay perfect. Thank you I'll step back.

Thanks, Michael.

From B Riley Securities, we have Steve Moss. Please go ahead.

Hi, good morning.

Okay.

Most of my questions have been asked and answered here I guess, just maybe following up on your comments Chuck.

Put some overlays there just kind of curious.

No.

It sounds like this is probably the bottom until there is better economic clarity on the reserve model or are you guys going and maybe Theres. Some reserve building going forward here.

No Steve I think that's the right way to think about it we reduced the allowance coverage modestly this quarter, we're comfortable with this level of reserves given the uncertainty in economic conditions.

Certainly as we look at the activity in our markets, we see indications of strength.

But underlying no underlying asset quality concerns and I think we'll just continue to consider each quarter, what the circumstances are what our model and our process Taylor.

At this point, we think our reserve levels are prudent we don't see a benefit in releasing but.

But we will have a better read on that each quarter going given all the variables that are going on.

Sort of macro headlines it's quarter to quarter issue.

Okay.

Sounds good and then just on.

The tech initiatives side.

You guys talked about.

Re launch of a commercial bank here kind.

Kind of curious what.

Upcoming initiatives you guys have in the pipeline.

Yes, a number of things.

We continue to push forward on commercial there is a law.

Lot being laid out to be more competitive on the treasury side of commercial is where be bringing in.

Bankers, particularly C&I bankers that are focused on the.

Sort of lower end of the middle market, if you will bringing up our tech stack and our offerings. There is a focus of ours.

Bring a lot to the table here over the remainder of the year and Jeff anything you would add on the technology side I know, we've done a great job, bringing Q2, where it is and then some of the work we've done to integrate.

Analytics, but any other thoughts you have on holding the good and especially after the most recent integration great sales capabilities, great servicing capabilities and just echo Chuck just the continued focus on commercial.

The aim of making it easier for bankers make it easier for customers and so that will continue to be a big area of focus for us.

The last thing I would add to that Steve just when you look at this quarter whats remarkable and what I'm incredibly proud of the teams are doing is amongst driving.

Acquisition strategy.

We've built out a incredible organic operating model here, where we built out better client facing technology, we bolted on new markets, we're bolting on new bankers.

The demand for our bank is getting stronger and stronger every day in terms of both customers and bankers and it is material and we are feeling it and it is exciting so it's incredible looking back at this quarter, maybe the quarter. Prior lot of transformational work has gone on in the company to position ourselves for being more.

Our competitive and.

Solid disciplined growth here over the coming couple of years. So just couldn't be more proud of what the teams put together.

Great. Thank you very much I appreciate all the color.

Thanks, Steve.

Okay.

We have a follow up from Michael Yang. Please go ahead.

Hey, Thanks for the follow up I, just wanted to kind of follow up on the expense outlook. So I appreciate the color for for <unk>, but given kind of the acquisition related cost saves just trying to figure out how much of that sort of embedded by Q2 or if there is kind of levers there into the back half of the year.

And any other kind of puts and takes that we should be expecting as we move forward.

Yes, as we look ahead for expenses Youll continue to see higher salary and production related costs as we move through the year the.

The market for talent has been very competitive in all areas of the bank. So we've accounted for that in the forecast, although the impact of the expanded footprint, which you see pretty fully in the first quarter, but of course that will continue in.

And volume driven costs like data processing and ongoing investments in technology will continue to scale with growth over time.

Offset as we move through the year, particularly in the second half you'll see the full effect of cost efficiencies.

Once the <unk> acquisition is fully converted so all in than the adjusted efficiency ratio will come in closer to the 54% 55% range in the first half of the year and then step down to the low $50 as we exit 2022.

Okay and then.

Last one for me just Chuck maybe a bigger picture kind of rates rising as you mentioned, it's driven more by the need to fight inflation. That's obviously can have some impact on the cost base going forward.

So just how should we think about sort of the benefit to revenue versus <unk>.

To manage the inflationary pressure as we think longer term and reinvestment et cetera, how much of that kind of rate hikes is going to flow through to the bottom line versus being eaten up by my expenses.

Our thinking right now is most of the rate hikes, followed the bottomline, we guided to Martin <unk>.

<unk> ratio is starting to drop into the high 40% exiting the year.

I mean, when you look at high single digit growth and the impact of the forward curve it materially improves the outlook for net interest income and earnings.

It's not a small change in the outlook has gotten a lot stronger.

As you look forward.

Okay perfect. Thank you.

Thanks, Michael.

Thank you we will now turn it back to Chuck Shaffer for closing comments.

Okay. Thank you Brandon.

I appreciate everybody's time today and that will conclude our call.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.

Okay.

Yes.

Okay.

Yeah.

[music].

Good morning, and welcome to Seacoast banking Corporation's first quarter 2022 earnings Conference call. My name is Brandon and it'll be your operator today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which he made Dallas zero. One if you have a question. Please note. It is zero one star one.

Before we begin I've been asked to direct your attention to the statement contained 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. This conference is being recorded I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Schafer you may begin.

Thank you Brandon and thank you all for joining US. This morning, as we provide our comments will reference the first quarter 2022 earnings slide deck, which you can find at seacoast banking dot com.

Joining me. This morning is Tracey Dexter Chief Financial Officer, and Jeff Lee Chief Digital Officer.

The seacoast team delivered another outstanding quarter of earnings and growth generating 41, generating $41 7 million in pre tax pre provision earnings 7% annualized loan growth across multiple loan categories and an impressive 25% annualized growth in deposit outstandings.

In addition, the investments we've made in client facing technology and high performing bankers are generating solid performance in new customer acquisition and organic balance sheet growth.

I'm incredibly proud of the seacoast team's focus and dedication to building the most competitive banking franchise in Florida.

<unk>, our recent acquisition successfully.

And driving continued transformation across our technology stack.

During the first quarter, we expanded our franchise in Fort Lauderdale, and established a new presence in three markets Naples Sarasota in Jacksonville.

And announced the acquisition of Apollo Bancshares, bringing five new locations. The seacoast Miami Dade County, Apollo will enable us to grow our presence and expand our position in the attractive South Florida market and we look forward to welcoming their employees and customers later this year.

Let me take a moment to discuss the economic outlook in the a triple up.

During the quarter, we slowed the pace of reserve release, primarily due to conservative posturing, resulting from unknown potential macroeconomic impacts from the war in Ukraine inflationary considerations and continued supply chain challenges. We will continue to take a conservative approach to reserving for the allowance for loan losses underwriting and capital.

That said it should be noted that there is no evidence right now of any issues arising in our markets. As you can see from the slide asset quality measures continue to improve with almost no net charge offs and continued improvements in criticized and nonperforming loans from the prior quarter.

The business environment in Florida remains impressively strong in our consumer and business customers balance sheets are as healthy as healthy as I've ever been at.

Average deposit balances and liquidity held by both consumers and businesses remained higher than pre pandemic levels.

The significant migration of affluent individuals and companies relocating to Florida due to low taxes, a business friendly environment and a post pandemic work from anywhere economy continues to be robust and supported the material deposit growth across the franchise.

We continued to manage growth conservatively enforcing strict underwriting standards and maintaining a fortress balance sheet.

Lastly, I want to note that acquisition discussions continue across the state and we expect we will have continued opportunities to execute our successful M&A strategy over the remainder of the year.

I'll now turn the call over to Tracy, who will walk through our financial results. Thank you Jack good morning, everyone.

Directing your attention to first quarter results beginning with highlights on slide five.

The net interest margin expanded nine basis points to three 5% and on a core basis expanded 14 basis points to three points here at 5%.

The recent steepening of the yield curve has had a material positive impact on new securities and loan add on yields and has materially improved the outlook for net interest income.

Our cost of deposits remained steady at six basis points.

Organic loan growth was strong this quarter at an annualized rate of 7%.

I will emphasize that the growth is in keeping with the bank's credit standards and the additional volume is being driven by the larger team.

Credit risk metrics continue to improve with charge offs non accrual and criticized loans, all lower compared to the previous quarter.

The quarterly provision for credit losses includes $5 1 million from the day, one impact of the two bank acquisitions that closed in January .

Deposit growth was also very strong this quarter outside of growth related to acquisitions organic deposits were up over 6% this quarter and 25% annualized due in large part to new commercial relationships and an expanding Florida economy.

The rate environment has been beneficial to yields but had a negative effect on the value of our investment portfolio avail.

Available for sale Securities declined in value this quarter by approximately 5%.

The resulting drop in accumulated other comprehensive income due to lower securities values impacted tangible book value per share by $1 seven.

There is also a significant market expansion to highlight this quarter, we closed on the acquisitions of stable Palm Bank in Sarasota, and Florida business Bank in Melbourne in early January <unk>.

Additionally, we opened a enabled branch with a market president in full team and Jacksonville commercial lending office with a market president in five new North Florida bankers.

In March we announced the upcoming acquisition of Apollo Bank in Miami.

This expansion across some of Florida's most attractive msas will build franchise value over the long run.

Finally, and subsequent to quarter end last week, we announced that in the second quarter. The cash dividend on common shares will increase 31% to <unk> 17 per share with.

Let's move on to some of the detail turning to slide six.

Overall net interest margin expanded nine basis points from three 6% to three 5%.

Excluding PPP and accretion on acquired loans, which introduced significant variability net interest margin increased by 14 basis points from 291% to 3.0% to 5%.

Net interest income on a fully tax equivalent basis increased by $4 2 million or 6% sequentially to $76 6 million.

The increase in net interest income reflects both higher average balances and higher yields on loans and securities during the quarter.

In the Securities portfolio, we've continued to pace, our investments of excess liquidity with ending balances higher by $171 million and yields increasing 11 basis points to 168%.

Non PPP loan yields expanded six basis points to four 4% supported by the two acquired bank portfolios.

Looking ahead.

We expect net interest income and margin to increase as our asset sensitive position with significant core deposit funding and ample liquidity will benefit from higher rates.

We continue to expect that net interest margin will expand five to six basis points for each 25 basis point increase in the fed funds rate on a static balance sheet.

Assuming the forward curve as of April 14th which includes eight additional rate hikes in 2022, we expect the core NIM to expand to the low three <unk> by the end of 2022.

To be clear this expected significant expansion of net interest margin in combination with expected growth over the remainder of the year has materially improved the outlook for net interest income.

Moving to slide seven.

Adjusted Noninterest income was $15 8 million a decrease of $2 5 million from the previous quarter and a decrease of $2 million from the prior year quarter.

The main driver of the decrease from the prior quarter is the absence of significant <unk> investment income this quarter, the timing and amount of which vary meaningfully between periods and the gain in the fourth quarter of 750000 from the sale of a website domain name.

Wealth management income was higher by 300000 or 13% from the prior quarter as we continue to successfully add new relationships.

Looking ahead, we continue to focus on growing our broad base of revenue sources and expect second quarter non interest income in a range from 17 to $17 5 million.

Moving to slide eight.

Adjusted noninterest expense for the first quarter was below the range of guidance, we provided at $50 7 million.

Salaries and benefits expenses were higher compared to the fourth quarter, reflecting the growth in the associate base as the footprint has expanded the two acquisitions and also due to the seasonal effect of higher payroll taxes and 401K contributions.

Looking ahead, we expect to maintain our expense discipline, while investing for growth.

Expenses were lower in the first quarter than expected as the full impact of planned hires wont fully materialize until the second quarter.

We expect second quarter expenses, excluding the amortization of intangible assets to be in the range of $52 5 million to $53 5 million the.

On slide nine.

You can see the typical seasonal trend of an increase in adjusted efficiency ratio from Q4 to Q1, we.

We expect the adjusted efficiency ratio to remain below 55% in the second quarter and to decline throughout the year, resulting in a full year 2022 ratio that will be in the low <unk>.

Assuming the forward yield curve plays out we could see the overhead ratio dip into the high <unk> towards the end of 2022.

Turning to slide 10.

The record pipeline. This quarter is in large part the result of our success in recruiting talent, including leaders with proven success and developing high performing commercial banking teams.

We brought in 14 experienced bankers during the quarter. In addition to the 20 bankers we added during 2021.

We continue to add high quality commercial banking talent recruiting from large regional banks.

As a result, we've experienced material improvement in productivity across the commercial banking franchise and expect continued recruiting success over the remainder of the year.

Turning to slide 11.

Highlighting the continued diversity of our exposure and concentration levels well below regulatory guidance.

Activity. This quarter included the two acquisitions and our residential purchased pool.

Non owner occupied commercial real estate increased from 29% last quarter to 30%.

In residential real estate increased from 24% last quarter to 25% offset by a lower percentage of PPP loans.

This diversification highlights our disciplined approach to managing concentrations.

Construction and commercial real estate concentrations remained well below regulatory guidelines and you can see the average commercial loan size remained low at 524000.

Turning to slide 12.

Beyond acquisitions, and a loan pool purchase organic loans increased $104 million or 7% on an annualized basis.

A record pipeline of nearly $620 million in commercial bodes well for production next quarter and loan yields are benefiting from acquisitions and the higher rate environment.

Looking forward, we expect loan growth to continue with an annualized growth rate in the high single digits for the remainder of the year.

Additionally, we've seen the market re priced fixed rate new loan pricing materially up over 100 basis points over the last 60 days.

We expect core yields to continue to increase with higher rates translating to slower prepayments better new add on yields and the positive impact of the portfolios coming on from the acquisitions.

Using the forward curve as of April 14th we expect core yields to expand to the low <unk> in the second quarter and to the $4 <unk> by the end of 2022.

Okay.

Turning to slide 13 for the securities portfolio.

We continue to invest excess liquidity at a moderate pace in the investment securities portfolio with net additions of $171 million and have meaningful additional liquidity for loan production and strategic purchases at higher rates.

The duration of the portfolio remained short within our three to four target that will roll down the curve and allow us to deploy the resulting cash flow at higher future rates.

With new purchases in the second quarter, we will continue to steadily pace, our investments expecting net growth of approximately $150 million to $250 million.

Turning to slide 14, we.

We maintain a strong liquidity position with ample cash to deploy into rising rates.

Our cash and cash equivalents to total assets at the end of the quarter was 11, 2% and combined with Securities was 33, 7%.

The loan to deposit ratio remains lower than the historical norm at 70%.

Turning to slide 15, illustrating seacoast historical deposit beta.

CECO has long standing relationships and high proportion of transaction accounts translates to a relatively low beta and.

In the last full rising rate cycle from the third quarter of 2015 to the second quarter of 2019, the deposit beta was 28%.

That evolution supports our expectation that deposit costs will remain low and that rate increases will be directly impactful to the NIM, particularly in the early hikes.

Turning to slide 16.

Posits outstanding were $9 2 billion, an increase of $1 2 billion quarter over quarter.

Moving to slide 17.

The wealth management business continues to build new relationships.

Assets under management has more than doubled in the last two years and revenues are up 13% quarter over quarter.

The team has done a remarkable job building a high net worth family office model and partnering with our commercial team to build.

And deepen banking relationships this.

Relationship driven approach generates value for our most profitable clients and we will continue to deliver strong returns over the long run.

On slide 18, we highlight our delivery this quarter of an upgraded online and mobile banking platform for consumers and businesses.

The new digital platform work seamlessly across mobile tablet and desktop offering many new features and over 400 functions to our customers.

Some of the new features include Zelle account aggregation and new reporting tools with account opening functionality launching this summer.

Additionally, we have integrated this platform with our existing customer analytics platform, thereby enabling us to cross sell digitally at a much higher level.

Customer adoption, thus far has exceeded our internal benchmarks and customer feedback has been overwhelmingly positive.

Moving to slide 19.

The provision this quarter was $6 6 million, which includes $5 1 million to establish an initial allowance on the two acquired banks.

We remain watchful of inflation pressures and are carefully considering the impact of higher rates on the economy, though our credit metrics remain very strong and continue to improve.

In addition to the allowance the total purchase discount remaining on bank acquisitions is $24 1 million, which will be earned as an adjustment to yield over the life of those loans we.

We will continue to take a conservative approach to provisioning.

On to credit metrics on slide 20.

There was a modest decrease in allowance coverage to total loans compared to last quarter from 143% to $1 four zero percent.

The decrease reflects the sustained positive trends in credit loss indicators.

We continue to assess the environment and the factors that might affect loan performance and this quarter concluded that this modest decrease in reserves was appropriate.

Turning to slide 21.

Our capital position continues to be very strong tan.

Tangible book value per share is $17 12.

A decline from last quarter, that's attributed solely to the decline in accumulated other comprehensive income the result of recording increasing unrealized losses in the securities portfolio.

Without the impact of securities valuations on OCI tangible book value per share would have increased to $18 19.

The ratio of tangible common equity to tangible assets was nine 9% impacted by both the OCI impact on securities and also by balance sheet growth yet remains among the highest in our peer group.

Regulatory capital ratios declined modestly on growing asset balances, particularly through acquisition.

The tier one capital ratio was 16, 8% and the total risk based capital ratio was 17, 7%.

And finally on slide 22, our longer term look at tangible book value per share.

Over the last five years, we have achieved a compounded annual growth rate of 10% driving shareholder value creation are.

Our growth outlook remains favorable evidenced by growth in commercial loans and deposits driven by the expansion of our commercial banking franchise.

We look forward to your questions Chuck I'll turn the call back to you.

Thank you Tracy.

And I think we're ready for Q&A.

Thank you Sir we will now begin the question and answer session. If you have a question. Please dial zero one on your touch tone phone if you would.

I'd like to be removed from the queue. Please tell zero too.

On a speakerphone please pick up your handset first before Darwin.

Once again, if you have a question please dial zero one on your Touchtone phone.

From <unk>, we have Brady Gailey. Please go ahead.

Hey, Thanks, good morning, guys.

Good morning Brady.

So I'm just curious the 20, new bankers that you added last year.

<unk> just in the first quarter.

Does that include the bankers you've acquired via M&A or is that true.

You've hired a outside of M&A.

It's primarily outside of M&A, I'd say, 90%, 95% of its outside of M&A.

Sorry, that's a big step up when you did.

On average five hires per quarter last year and now Youre at 14.

It's Ed.

Is that a one off or efforts to hire really stepped up and you think you could hire 60 people this year.

No I would say our target for the remainder of the year is probably roughly another 10 to 15 is more of a way to think about it over the remainder of the year and over the last.

Say 15 to 18 months, we've been very focused on taking advantage of disruption from larger regional banks and providing a better opportunity for for bankers and it's just been an incredibly.

Opportunistic environment to bring in high quality talent to the organization and what's been.

Really great to see is it's a great mix.

Roughly about half of that is coming from the new team that's come on and so we're seeing then Brian credit facilities, we're seeing them bring deposits are big part of our deposit growth in the quarter was from the new hiring and so it is a full sort of relaunch of our commercial banking franchise across the state and we're super excited about it.

And then maybe on the flip side.

One of your competitors just had their earnings call last hour.

They had much Johan.

You'll have an opportunity for them to grow market share and to recruit talent, they specifically called out.

First Raj and the seacoast Apollo deal as an opportunity for them. So so maybe on the flip side, how do you go about.

<unk>.

But you do require via M&A.

We focus very heavily on building, a culture, where bankers want to be and we feel very confident in our ability to integrate bankers, we've done a great job now.

<unk> experienced in the acquisition sort of game and fully understand the social considerations and have a very good track record of maintaining talent. So.

To answer your question directly Brady I have no concern.

Okay.

Can you guys give great great guidance, which is helpful. But I just had one question about the high single digits loan growth.

So you guys are the purchasing.

The mortgage pools here and there, but does that high single digit loan growth growth include.

Additional rajiv purchases of pools or how should we think about.

As you all will be.

Purchasing those revenue goals.

Yes, we're pretty much done with that for now thats on hold and that guidance does not include any any core purchases. So I think when you look at the pipeline and our outlook for growth.

We're not going to buy any wholesale purchases in the near term.

Okay.

Got it thanks for the color guys.

Thank you Brad.

Yeah.

From Raymond James We have David Feaster. Please go ahead.

Hey, good morning, everybody.

David Good morning.

Maybe just following up on that.

Last question.

Yes high single digit pace, just given the first quarter results the economic backdrop.

A 70% increase in the pipeline and the lender hires.

Prudent conservative I'm, just curious what's embedded in that growth outlook, how payoffs and payoffs payoffs and paydowns are trending in.

What kind of.

Expectations.

Rates continue to increase maybe we see a deceleration in production or I'm, just curious what's embedded in that growth outlook.

Group of lending that we'll put into the portfolio. So I feel feel great about that over the more longer term view.

High single digits is where we'll land.

It remains to be seen what the impact of higher rates do on loan demand, we have not seen any issues emerged to date, but it's something we will carefully to keep our eye on and Tracey you want to talk about payoffs for the quarter sure just the numbers on the first quarter, we did see a moderate slowdown in payoffs in the first quarter about 18 person.

<unk> lower than the prior quarter.

And I think we will expect a little further moderation in payoffs to your point and maybe just a follow up David.

Kind of the.

A positive sort of outlook here is that because we have the hiring thats gone on in the quality of the teams were bringing on it's allowed us to be very thoughtful and conservative around the type of assets, we want to put in the portfolio and so we continue to execute a very conservative approach to underwriting and.

That's a good place to be.

Okay.

Helpful. And then maybe on the other side of equation. The deposit growth has been phenomenal I mean organically up around like $600 million Im just curious what your crystal ball has for deposit growth as we look forward I mean.

You continue to bring on new C&I bankers and increased stock compensation and feels like.

It should.

<unk> continued growth.

Just curious whether you're starting to see migration within that book or whether you'd expect deposit growth to slow.

And then just how deposit pricing is trending more broadly.

Yes, I think.

We remain competitive for our customers.

As we've observed historically.

Thanks traditionally are slower to move rates earlier in the rate hike cycle.

With the large amount of liquidity on balance sheets. We expect this time to be similar but we're certainly monitoring that closely.

Looking at our our relationship status with our customers to make sure that we remain competitive yes, we've really seen no deposit pricing pressure today, David at all.

When you step back and look at deposit growth.

It's a combination of the hiring we brought in and the strength of the Florida economy, our business customers are doing.

Just incredibly well given the population growth.

So there are generating capital in building, our balances and it's contributing to our deposit growth.

As well as the hiring in the first quarter. The 14 hires we brought in pretty much all where C&I and back to the entire team with C&I. So theyre, bringing great relationships that are full relationships and its exact kind of business, we want to see.

That's great and then maybe just touching on credit more broadly you've got a pretty good pulse on the landscape and asset quality is phenomenal you've got an incredibly conservative approach to credit.

Just kind of given some of the macro.

Concerns given the inflation.

Inflationary pressures on our supply chain as you can.

A pretty aggressive pace of fed hikes that seem to be common.

Curious what keeps you up at night, what Youre watching closely is the macro environment or any other trends all the competitive landscape, leading you to start tightening the credit box at all.

Theres been no concern to date.

As you look at the asset quality metrics credit quality has been pristine.

Florida unemployment rate is at three 2%, which is back to pre pandemic levels and as I mentioned earlier, we've seen our consumer business customers are just stronger than they've ever been but that being said David our heads are at in the sand. We read the headlines just like everybody else clearly higher rates will slow the economy and that impact will be felt across the country.

That being said, Florida is doing incredibly well the inbound population growth continues and I think there are unique factors in Florida, specifically compared to other geographies.

In combination of sort of the work from anywhere demographic shifts and other sort of reasons to move to Florida. We think that continues and when you look at.

Housing demand it continues to be primarily driven by out of state buyers, primarily cash buyers I mean, youre very affluent people continuing to move to Florida.

Carefully continue to monitor past dues FICO scores other indicators of stress and carefully navigate this but last thing I'll point out is unlike the seven or eight or maybe the 991 downturns, where the fight was against valuation issues and oversupply. This fight against inflation supply chain. So it is a very different.

We feel pretty good about what things look like I would say when you say what keeps us up at night I would say, we're carefully looking at the impact of higher rates on cap rates as rates go up.

Investors have other alternative investments as you sort of push the risk free rate against the cap rate I think.

We have to be very thoughtful about sizing and leverage.

Commercial real estate and sort of the offset to that is increase in rental rates, which you've certainly seen in things like multifamily, but when you look at like office for example, yes.

Higher higher risk free rates pushing cap rates, and then you combine that with potentially slower demand for and use of lease terms.

That's where we're being a little more cautious and careful but overall things are as of this point remain incredibly good in Florida.

That's great. Thank you all.

Thank you Dave.

From tourists, we have Michael Yang. Please go ahead.

Hey, thanks for taking the questions.

Yeah.

Tracy I wanted to start with just a clarification on your comments I think on the $150 million to $250 million of securities growth is that from does that for the remainder of the year starting in <unk> is that cumulative for the year or is that per quarter, just was trying to clarify that yes.

Yes, Michael we expect that amount per quarter over the remainder of the year.

Okay perfect.

And is there any.

Issue or concern with kind of making that deployment as rates are rising.

Kind of fire that bullet, a little too early versus getting higher yields and a couple of quarters.

I think our approach has been to just be steady.

And deploy that cash in.

At our pace over time, so we've been purposeful over the last year.

To keep new investments around that range.

We do keep.

<unk> portfolio at a target duration between three and four we have added any longer duration securities or anything with duration extension risk to the HTM portfolio over that time, but.

Really generating cash flow and enable to follow the cycle with the cash flow that comes off of that portfolio, Yes, I'll point out when you look at our asset liability sort of scenario you see material increases in net interest income on the up scenarios and that's in large part because of the quality of the deposit franchise and when you look at the low.

Book is relatively short as well so a lot of cash continues to roll down the curve that will get reinvested in so that that is that's why we studied with the sort of dollar cost averaging of putting a little bit and each quarter, but rather than trying to time it exactly but.

It is something we're carefully considering.

Yes that varies and it's really difficult to predict but.

But this quarter is as good of a benchmark as any I think thats fair.

Okay.

Then last one just Chuck I guess bigger picture kind of asking the growth question another way youre at a 70% loan to deposit ratio.

<unk> got 34, new bankers kind of year over year.

Added and you've got plenty of capital to fund growth. So is there anything that would that would cause you to.

I guess not pursue growth if it were there.

Half growth be higher than kind of that high single digit range I know, you've kind of talked about that as a speed limit in the past, but given kind of where the economy that would you be willing to go faster than that.

Kind of given all those building blocks.

I think high single digits is about the fastest speed we want to go we want to continue to carefully put assets in the portfolio. Because we know we will will carry us through the long term and so that's kind of our objected Michael.

To drive more fee income is offset.

Okay perfect. Thank you I'll step back.

Thanks, Michael.

From B Riley Securities, we have Steve Moss. Please go ahead.

Good morning.

Yes.

Most of my questions have been asked and answered here I guess, just maybe following up on your comments Chuck you put some overlays theyre just kind of curious.

It sounds like this is probably the bottom until there is better economic clarity on the reserve model or are you guys thinking maybe there was some reserve building going forward here.

Certainly as we look at the activity in our markets, we see indications of strength.

But underlying no underlying asset quality concerns and I think we'll just continue to consider each quarter. What the circumstances are what our model and our process tell us at.

At this point, we think our reserve levels are prudent we don't see a benefit in releasing but.

But we will have a better read on that each quarter going given the all the variables that are going on.

And sort of macro headlines it's quarter to quarter issue.

Okay.

Sounds good and then just on.

The tech initiatives side.

You guys talked about.

Re launch of the commercial bank here kind.

Kind of curious what.

Upcoming initiatives you guys have in the pipeline.

Yes, a number of things.

We continue to push forward on commercial there is a law.

Lot being laid out to be more competitive on the treasury side of commercial is where be bringing in C&I bankers, particularly C&I bankers that are focused on the.

Sort of lower end of the middle market, if you will bringing up our tech stack and our offerings. There is a focus of ours.

Analytics, but any other thoughts you have on that holding the good and especially after the most recent integration great sales capabilities, great servicing capabilities and just echo Chuck's to continued focus on commercial with a.

Aimed at making it easier for bankers make it easier for customers and so that will continue to be a big area of focus for us.

Last thing I'd add to that Steve just when you look at this quarter whats remarkable and what I'm incredibly proud of the teams are doing is amongst driving a acquisition strategy. We've built out a incredible organic operating model here, where we built out better client facing.

Technology, we bolted on new markets, we're bolting on new bankers.

<unk> and <unk>.

Solid disciplined growth here over the coming couple of years. So just couldn't be more proud of what the teams put together.

Great. Thank you very much I appreciate all the color.

Thanks, Steve.

Okay.

We have a follow up from Michael Yang. Please go ahead.

Hey, Thanks for the follow up Tracey just wanted to kind of follow up on the expense outlook I appreciate the color for for <unk>, but given kind of the acquisition related cost saves just trying to figure out how much of that sort of embedded.

By Q2, or if there is kind of levers there into the back half of the year.

And any other kind of puts and takes that we should be expecting as we move forward.

Yes, as we look ahead for expenses Youll continue to see higher salary and production related costs as we move through the year the.

<unk> driven cost like data processing and ongoing investments in technology will continue to scale with growth over time.

Offsets as we move through the year, particularly in the second half you will see the full effect of cost efficiencies.

Okay, and then last one for me just Chuck maybe bigger picture on kind of rates rising as you mentioned, it's driven more by the need to fight inflation. That's obviously can have some impact on the cost base going forward.

So just how should we think about sort of the benefit to revenue versus.

Trying to manage the inflationary pressure as we think longer term and reinvestment et cetera, how much of that kind of rate hikes is going to flow through to the bottom line versus being eaten up by the expenses.

Our thinking right now is most of the rate hikes, followed the bottomline, we guided to.

The efficiency ratio is starting to drop into the high 40% exiting the year.

But I mean, when you look at high single digit growth.

The impact of the forward curve it materially improves the outlook for net interest income and earnings. So it's not a small change things if the outlook has gotten a lot stronger.

We look forward.

Okay perfect. Thank you.

Thanks, Michael.

Thank you we will now turn it back to Chuck Shaffer for closing comments.

Okay. Thank you Brandon.

I appreciate everybody's time today and that will conclude our call.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.

Q1 2022 Seacoast Banking Corporation of Florida Earnings Call

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