Q4 2023 Seacoast Banking Corp of Florida Earnings Call
Okay.
Welcome to the Seacoast banking Corporation's fourth quarter and full year 2023 earnings Conference call. My name is Laura and I will be your operator.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
Before we begin I've been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements.
Seacoast will be discussing issues that constitute forward looking statements within the meaning of the securities and Exchange Act and its comments today.
Are intended to be covered within the meaning of that act.
Please note that this conference is being recorded.
I will now turn the call over to Chuck Shaffer, Chairman and CEO Seacoast Bank. Mr. Schafer you may begin.
Thank you Andrew and thank you all for joining US. This morning, as we provide our comments will reference the fourth quarter and full year 2023 earnings slide deck, which you can find at seacoast banking dot com.
I'm joined today by Tracey Dexter Chief Financial Officer, Michael Young Treasurer, and director of Investor Relations, James Stallings, Chief Credit Officer.
She gets delivered another solid quarter of financial performance generally in line with last quarter's guidance.
The decline in net interest income was offset by expense reductions, resulting in a pretax pre provision return on tangible assets of $1 four 8%.
And an adjusted return on tangible common equity of nearly 12% and efficiency ratio of 60%.
It goes to ended the year or she goes ended the year with an industry, leading tier one capital ratio of 14, 6%.
Making it one of the strongest banks in the nation.
On previous calls we've highlighted this capital strength would likely provide opportunities for the bank.
This quarter evidenced to clear benefits.
First we were able to opportunistically repurchased 546000 shares of our common stock at a weighted average price of $19 80 reps.
Representing an attractive earn back on the deployed capital.
Secondly, our tangible book value increased nearly 6% from the prior quarter as we've been able to maintain a large percentage of our securities in <unk> compared to peers, our substantial capital and fortress balance sheet will continue to offer strategic advantages and further optionality in the future.
And during the quarter the effects of quantitative tightening and rising interest rates on the industry has become increasingly evident a coordinated margin declined 11 basis points slightly exceeding exceeding our guide by one basis point.
This was mainly driven by the ongoing transition of noninterest bearing accounts to interest bearing products, which was consistent with previous quarters trends.
And to note that we're not seeing attrition of engage customers and in fact gross customer acquisition of checking accounts was up 13% from the same period one year ago.
Notably we believe the first half of 2024 represents the low point for our net interest margin and net interest income Tracey will offer additional guidance on this shortly.
We have implemented measures to optimize our efficiency across the organization and then in the third quarter, we reduced our workforce by 6%, which led to an 8% decrease in expenses in Q4 2023.
Furthermore, the completion of a second phase of cost reductions and early Q1 2024 is projected to further decrease our annual operating expenses by an additional 15 man.
And turning to our lending strategy, we incur we were encouraged by the growth in our lending pipelines, while maintaining a prudent approach in the current economic climate.
Our loan portfolio grew by 2% annualized from the previous quarter and we expect continued growth into 2024.
Our loan add on rate rose to near 8% during this period.
And Additionally, it is important to emphasize that required a comprehensive banking relationship with seacoast for all of our lending activities, ensuring a mutually beneficial partnership with our clients.
Our asset quality remains robust showcasing sustained strength.
We continue to see a return to a more normalized credit environment and we've included a chart in the accompanying slides to offer greater clarity and insight into this trend.
This chart presents a view of the classified and criticized loan trends over the last five years. The ratio is consistent and aligned with the five year average on scoring the stability of our asset quality.
Or a triple L stands at a $149 million equating to 1.48% of total loans.
This figure places us in a strong position with an allowance ratio among the highest in our peer group.
We have another 174 million in purchase discount.
Looking ahead, our financial standing our reserves position us exceptionally well compared to our peers, which will allow us to navigate and adapt to any developments the cycle may present.
And in conclusion as we enter 2024, our commitment to upholding our conservative balance sheet principles is unwavering we are dedicated to astutely, managing our expenses, while strategically investing to stimulate growth in low cost deposits.
This disciplined approach is key to fostering our robust capital growth.
It'll help us maintain a diverse and stable funding base further strengthening our company's fortress balance sheet. Ultimately these efforts are aimed at enhancing the long term value of our franchise, ensuring resilience and prosperity in the years to come and turn the call over to Tracy to walk through our financial results. Thank you Jack good morning, everyone.
Directing your attention to fourth quarter results, beginning with slide four.
<unk> reported net income of 35 per share in the fourth quarter and on an adjusted basis, which excludes amortization of intangibles and securities related losses net income was <unk> 43 per share.
On an adjusted basis P. PNR to total assets was 148% adjusted our OTC. He was 11, 8% and the efficiency ratio improved from the prior quarter to 60%.
Highlighting our continued focus on expense discipline after reducing head count by 6% during the third quarter, we saw the full benefit too expensive that reduction in the fourth quarter.
Additional opportunities for efficiency have been identified and will generate expense savings in 2024, which I will talk about shortly.
We're pleased to report that 2023 with another record year for our wealth management team with assets under management, increasing 23% to $1 7 billion in full year revenues increasing 16%.
Tangible book value per share increased 82 to $15 eight.
Benefiting from the 26% decline in unrealized losses on securities in OCI.
Our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet.
<unk> tier one capital ratio increased to 14, 6% and the ratio of tangible common equity to tangible assets increased during the quarter to $9 three 1%.
Also notable is all held to maturity securities were presented at fair value. The TCE to Ta ratio would still be a strong 868%.
Our fourth quarter results include $2 9 million in losses on the sale of approximately $83 million in securities reinvesting the proceeds into higher yielding securities.
The opportunistic repositioning has an expected earn back of approximately one three years.
We also repurchased 546000 shares at $19 80, when prices dipped in late October.
Turning to slide five.
Net interest income declined by $8 5 million or 7% during the quarter with lower purchase loan accretion higher deposit cost and deposit product mix shift.
Partially offset by higher yields.
Core net interest margin contracted 11 basis points to 3.0% to 2% one basis point higher than the range of guidance we provided.
In the securities portfolio yields increased 10 basis points to 342%.
Loan yields excluding accretion increased six basis points to five 4%.
Accretion of purchase discounts on acquired loans was lower this quarter by $3 5 million compared to the third quarter.
The cost of deposits increased to 2%, while the pace of that increase continues to slow and our funding base remains strong with 54% transaction accounts.
Looking ahead to the first quarter, we expect core net interest margin to be in a range from flat to lower by five basis points.
Moving to slide six.
Noninterest income excluding securities activity increased $1 6 million in the fourth quarter to $19 8 million.
Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition.
Interchange income during the fourth quarter included an annual volume based incentives from the payment network that added zero point $7 million for the quarter beyond that interchange revenue was up slightly from the third quarter to $1 7 million.
Increased saleable SBA production in the fourth quarter resulted in gains of 0.9 million.
Other income was higher by 0.4 million largely related to loan swap activity.
In the securities portfolio, the company recognized an opportunity to sell low yielding bonds with modest losses, which I will discuss in more detail on a later slide.
Looking ahead, we continue to focus on growing noninterest income and we expect first quarter noninterest income in a range from $18 5 million to $20 million.
Moving to slide seven.
Assets under management increased 23% from a year ago to a record $1 7 billion and have increased at a compound annual growth rate of 27% in the last five years two.
<unk> 2023 was one of the best years, yet with significant new client acquisition and nearly $350 million in new assets under management.
Management revenues in 2023 were $12 8 million, an increase of 16% year over year.
Our family office style offering continues to resonate with customers generating strong returns for the franchise.
Onto slide eight.
Noninterest expense for the quarter was $86 4 million, which is at the lower end of the range of guidance we provided.
Salaries and wages were lower by $8 million, which is comprised of the following changes.
The third quarter included $3 2 million in severance associated with the third quarter reduction in force and there were no such charges in the fourth quarter.
The resulting lower head count from that effort reduced expenses in the fourth quarter by approximately $1 7 million.
Finally beyond direct salary expense reductions. This category also benefited from higher loan production during the fourth quarter, resulting in higher deferrals of origination cost. This.
This benefited the quarter by approximately $2 8 million.
In marketing as we've mentioned in prior calls we're focused on driving organic growth throughout our markets and continue to make additional investments in marketing and brand recognition campaign.
Legal and professional fees were somewhat higher aligned with the timing of projects and legal matters, which are now complete.
Higher FDIC assessments were the result of adjustments arising from the Companys growth and asset size early in 2023 upon the acquisition of professional bank.
Changes in real estate owned expense related to valuation adjustments on three of our former branch properties.
We expect the final disposition of several properties in the first quarter of 2020 for them.
Other noninterest expense was lower across many areas and the efficiency ratio improved from 62, 6% in the third quarter to 63% in the fourth quarter.
Recent expense reduction initiatives continue to positively impact results and we've taken additional meaningful action in the first quarter of 2024, we expect one time expenses of approximately $5 million in the first quarter to affect these actions, which will reduce the full year 2024 expense by approximately <unk> 15.
Also I'd like to highlight an important upcoming change to our presentation.
Beginning in the first quarter of 2024 of our presentation format will no longer exclude amortization of intangibles from adjusted expenses.
With that change in mind, we expect first quarter noninterest expense inclusive of amortization of intangibles to be in a range of $82 million to $84 million.
Turning to slide nine.
Loan Outstandings increased 2% on an annualized basis during the quarter and we remain committed to our disciplined credit culture.
Average loan yields excluding accretion on acquired loans increased six basis points to five 4%.
We expect loan yields to continue to increase in the coming periods as our fixed rate loans mature and reprice.
In the fourth quarter, we continued to see new loan yields in the 8% range and.
And looking forward, we expect loan growth in the low single digits.
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 across industries, and collateral types as broadly distributed and we continue to be vigilant in maintaining our disciplined conservative credit culture.
Non owner occupied commercial real estate loans represent 33% of all loans and our distributed across industries and collateral types.
Construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels.
We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk.
Turning to slide 11.
Credit topics.
The allowance for credit losses totaled $148 9 million or $1, 48% of total loans compared to 149% in the prior quarter.
The allowance for credit losses, combined with the $174 million remaining unrecognized discount on acquired loans totaled $323 million or three 2% of total loans that is available to cover potential losses.
Onto slide 12, looking at quarterly trends and credit metrics.
Our credit metrics are strong and we remain watchful of the ongoing impacts of higher rates on the economy.
The charge off rate during the quarter with 0.19% annualized.
Nonperforming loans represent <unk>, 5% of total loans and accruing past due loans are 0.3% of total loans.
The percentage of criticized and classified loans to total assets increased over the prior quarter to one 6%.
On slide 13, providing a longer term view of our stable asset quality trends.
Recall that in the third quarter of 2023, we recorded an expected charge offs of $11 3 million. This was an acquired loan that was fully reserved through purchase accounting and the charge off did not impact earnings or capital.
That loan drove that somewhat higher charge off level in 2023.
Noting the stable trends in nonperforming past dues and criticized and classified loans over the past five years also recall that much has changed at seacoast over this five year period, including eight separate bank acquisitions, and a near doubling of asset size and the stability of our credit experience during that period reflects the consistently.
<unk> discipline of our credit culture.
Moving to slide 14 in the investment Securities portfolio.
We recognized an opportunity to sell low yielding bonds with modest losses on a small percentage of the investment portfolio. The.
The proceeds approximately $83 million were reinvested into higher yielding bonds with strong prepayment protection and good convexity by.
By selling short duration low yielding securities from the portfolio and reinvesting into longer duration prepayment protected agency MBS, we were able to add considerable yield and interest income while prioritizing predictability expecting an earn back period of only one three years.
The average yield on securities increased during the quarter by 10 basis points to 342%.
Changes in the rate environment impacted portfolio values positively and as a result, the overall unrealized loss position improved by $105 6 million.
This contributed 61 of.
Of the total 82 increase in tangible book value per share during the quarter.
Okay.
Turning to slide 15 in the deposit portfolio.
Excluding the pay down of brokered deposits organic deposits decreased by $145 million.
We saw lower balances near yearend, particularly in distributions from escrow and other attorney in trust accounts, which comprised approximately $100 million of the decline.
Noninterest demand deposits represent 30% of total deposits and transaction accounts represent 54% of total deposits, which continues to highlight our long standing relationship focused approach.
The cost of deposits increased this quarter to 2% the slower pace of increase than in the past several quarters.
Overall, our expectation for the first quarter is that the cost of deposits will continue to increase, albeit at a lower pace.
That said, we remain keenly focused on organic growth.
On slide 16, the bar chart shows non brokered customer balances, including the sweep repurchase products.
<unk> continues to benefit from a diverse and granular deposit base and customer funding declined modestly consistent with typical year end patterns.
We continue to be very effective in new customer acquisition with a number of fourth quarter, new transaction accounts, increasing by 13% year over year.
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.
<unk> book value per share increased to $15 eight.
The ratio of tangible common equity to tangible assets continues to increase reaching an exceptionally strong nine 3% in the fourth quarter.
Our risk based and tier one 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 community bank.
Jeff I'll turn the call back to you. Thank you Tracy.
Jeff Smith: Operator, I think we're ready for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Eric Wasserstrom: We'll go first to Eric sector at Raymond James.
Hey, good morning, everybody. This is Eric in for David Feaster.
Eric Wasserstrom: Thanks for taking the question.
Eric Wasserstrom: Thanks, Rob.
Just wanted to touch on the funding side to start off.
Eric Wasserstrom: Appreciate the loan growth guidance of low single digit since it was great to see reduced wholesale brokerage funding this quarter and the new account openings. Just curious how you think about funding loan growth. How do you think about core deposit growth in 2024, what initiatives you have in place to grow deposits.
Rob: Do you expect to grow deposits at the same pace loans, just any color on that that'd be helpful.
Operator: Welcome to the Seacoast Banking Corporation's fourth quarter and full year 2023 earnings conference call. My name is Barbara, and I will be your operator. All lines have been placed on mute to prevent any background noise.
Yes. Thanks for the question, Eric So I think as we look into 2024 level will be determined by kind of the pace of the fed.
Movement within the year, obviously with more cuts could be favorable to deposit flows in general but.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Before we begin, I have been asked to direct your attention to the statement at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Tess Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.
Eric Wasserstrom: On a broad trend, we would expect to have our deposit growth maybe slightly below loan growth and continue to remix positively from a loan to deposit ratio perspective in 2024, that's probably the high level thoughts there.
Eric Wasserstrom: Got it.
Eric Wasserstrom: Paul.
And then just.
Outside of the margin just.
Eric Wasserstrom: As we think about the impact of declining rates on the balance sheet and income statement.
Do you start to see additional loan growth from from that if we see Hudson.
At what level and what segments would you expect to see some first.
And then just curious how you think about repricing deposits.
We'd be industry rates.
Thank you, Roger, and thank you all for joining us this morning as we provide our comments with reference to the fourth quarter and full year 2023 earnings slide deck, which you can find at secospanking.com. I'm joined today by Tracy Dexter, Chief Financial Officer; Michael Young, Treasurer and Director of Investor Relations; and James Stallings, Chief Credit Officer. Segal delivered another solid quarter of financial performance, generally in line with last quarter's guidance. The decline in netted income was offset by expense reductions, resulting in a pre-tax, pre-provisioned return on tangible assets of $1.48 per share, and an adjusted return on tangible common equity of nearly 12% and an efficiency ratio of 60%. He goes to the end of the year with an industry-leading Tier 1 capital ratio of 14.6%, making it one of the strongest banks in the nation. On previous calls, we've highlighted that this capital shrink would likely provide opportunities for the bank. This court is evidence to clear the benefit.
Drive additional core deposit flows if rates begin coming down.
That's great question, Eric It kind of depends on how things play out over the rest of the year what I'm very encouraged by is we're seeing the opportunity to step in where the market is somewhat pulling away from lending.
Eric Wasserstrom: Really good well structured high quality credits a lot of equity.
Eric Wasserstrom: And projects and we're getting right, so where we've talked about on past calls, we kind of pulled back given some of the more I would describe as kind of getting on the edge of where we are comfortable in terms of underwriting structure. We're now seeing the opportunity to underwrite very conservatively get the right pricing on deals and then new the full <unk>.
Eric Wasserstrom: Relationships over our pipelines grew we saw better production last quarter and then looking forward even into the first few weeks of 2024 here. We're seeing the pipeline continue to grow so very encouraged by that and so as that plays out we'll see how is growth growth kind of comes along with that and then that will kind of determine exactly where.
First, we were able to opportunistically repurchase 546,000 shares of our common stock at a weighted average price of $19.80, representing an attractive earnback on the capital deployed. Secondly, our tangible book value increased nearly 6% from the prior quarter, as we've been able to maintain a large percentage of our securities in AFS compared to peers. Our substantive capital and fortuitous balance sheet will continue to offer strategic advantages and further optionality in the future. During the quarter, the effect of quantitative tightening and rising interest rates on the industry became increasingly evident. Our coordinated margin declined 11 basis points, slightly exceeding our guide by 1 basis point.
How we step into the deposit market as Michael said I think the biggest driver of where the deposit market goes is whether or not the fed does cut rates and whether or not the fed starts buying bonds and put some liquidity back into the market. So.
I think that'll be very <unk>.
<unk> to see how the back half of 2024 plays out, but I like where we're positioned.
Jeff Smith: Like the fact that we went ahead and double down our effort to get our expense base right sized.
So when you kind of step back and think about where we are I think we've been proactive in getting the expense base sort of reset while going into the coming year, where we're seeing loan growth pull through and as that plays out into the coming year. If we do see some rate cuts on the back half really starts to set up a really nice 'twenty five 'twenty six so we're taking.
This was mainly driven by the ongoing transition of non-interest bearing accounts to interest-bearing products, which was consistent with previous quarters' trends. However, it's important to note that we're not seeing attrition of engaged customers, and in fact, customer acquisition of checking accounts was up 13% from the same period one year ago. Notably, we believe the first half of 2024 represents the low point for our net interest margin and net interest income. Tracy will offer additional guidance on this shortly. We've implemented measures to optimize efficiency across the organization.
More medium to longer term view of the situation structuring the balance sheet in the expense base to prepare for that.
Jeff Smith: Looking forward to what things could look like in the coming years.
Got it that's really helpful.
And then just wanted to lastly, just touch on credit.
And in the third quarter, we reduced our workforce by 6%, which led to an 8% decrease in expenses in Q4, 2023. Furthermore, the completion of the second phase of cost reductions in early Q1 2024 is projected to further decrease our annual operating expenses by an additional $15 million. In turning to our lending strategy, we were encouraged by the growth in our lending pipelines while maintaining a prudent approach in the current economic environment. Our loan portfolio grew by 2% annualized from the previous quarter, and we expect continued growth into 2024. Low and high rates on rates rose to near 8% during this period. And additionally, it's important to emphasize that we required a comprehensive banking relationship with Seacoast for all of our lending activities, ensuring a mutually beneficial partnership with our clients.
And if you could just touch on what drove the increase in NPA is criticizing classified news.
More broadly if you could just provide some color on just how <unk>.
Credits trending I think you kind of spoke to expectations of some normalization.
Jeff Smith: Where are you most concerned about credit going forward and just talk about how your economic outlook has changed.
Good to.
If you're assuming any rate cuts in that outlook any color there would be helpful.
Jeff Smith: Yes, I think where we saw it.
Really the increase in Npls is only a couple of credits.
Both for C&I driven credits one of which is basically a restructure that potentially will move back to accrual once it sort of achieve stabilization, which we had some fairly confident it will.
Our asset quality remains robust, showcasing sustained strength. We continue to see a return to a more normalized credit environment, and we've included a chart in the accompanying slides to offer greater clarity and insight into this trend. This chart presents a view of the classified and criticized loan trends over the last five years. The ratio is consistently in line with the five-year average when scoring the stability of our asset class.
And any other we've got reserves and a specific generally so when we think about that that's really what drove some of that I don't know James if you have any color on that or anything you want to add to that but I think as far as we think about.
Where we continue to watch I think the biggest sort of.
Our ALLL stands at $149 million, equating to 1.48% of total loans. This trigger places us in a strong position with an allowance ratio among the highest in our peer group. Additionally, we have another $174 million in purchase discounts. In looking ahead, our financial standing reserves position us exceptionally well compared to our peers, which will allow us to navigate and adapt to any developments this cycle may present. And in conclusion, as we enter 2024, our commitment to upholding our conservative balance sheet principles is unwavering.
The area that we continue to be thoughtful about is 21 and 'twenty, two where such strong years for the U S economy that a lot of inflation driven revenue pushed through small businesses and operating companies and then along with that came higher expenses. So now that we're kind of moving through that period and revenues are potentially going to come down.
A little bit it's going to be important to monitor our operating companies to make sure. They properly managed margins and manage expenses into the coming years.
Thats really be a summer allo jameson anything you'd add to that.
We are dedicated to astutely managing our expenses while strategically investing to stimulate growth and low-cost deposits. This disciplined approach is key to fostering robust capital growth. It will help us maintain a diverse and stable funding base, further strengthening our company's balance sheet. Ultimately, these efforts are aimed at enhancing the long-term value of our franchise, ensuring resilience and prosperity in the years to come. I will turn the call over to Tracy, who will walk you through our financial report. Thank you, Chuck. Good morning, everyone.
You said it well Chuck I think what we're seeing is a normalization as we talk about normalization of our credit metrics, which really a normalization of the operating environment for our C&I companies were.
They went through sort of a shock from Covid and then all of the PPP and stimulus money driving.
Inflationary pressure on the demand side and so a number of companies.
I'm directing your attention to fourth-quarter results beginning with slide four. Seacoast reported net income of $0.35 per share in the fourth quarter, and on an adjusted basis, which excludes amortization of intangibles and securities-related losses, net income was $0.43 per share. On an adjusted basis, PPNR to total assets was 1.48%, adjusted ROTCE was 11.8%, and the efficiency ratio improved from the prior quarter to 60%. Highlighting our continued focus on expense discipline, after reducing head count by 6% during the third quarter, we saw the full benefit of that reduction in the fourth quarter. Additional opportunities for efficiency have been identified and will generate expense savings in 2024, which I will talk about shortly. We're pleased to report that 2023 was another record year for our wealth management team, with assets under management increasing 23% to $1.7 billion and full-year revenues increasing 16%. Tangible book value per share increased $0.82 to $15.08, benefiting from a 26% decline in unrealized losses on securities in AOCI.
Just need to sort of readjust to a more normal operating environment, we're seeing declining.
Deposit balances, which is something that we're keeping an eye on but.
It's nothing that I would say is isolated to a particular industry or sector. It's just sort of a general normalization of the.
The ability to generate cash flow by our customers. So we continue to keep an eye on that and I'd say if that was anywhere that we were going to be focused on but you know what.
Again, just encouraged by the fact that our capital is strong as is our allowance is as strong as it is that's going to allow us to be proactive and get out ahead of anything and manage these thanks to the best economic outcome. If the cycle does sort of merge here, but we.
We feel we feel very good where we're at I think what you're seeing is normalization.
We're coming off a period, where there was almost nothing for a good period of time that was heavily backed up by government stimulus and so I think it's important for all banks to keep them and keep that in mind as we move through time here.
Okay. Thanks, Thanks for the very detailed answer and then just lastly, just.
What are you assuming in terms of rate cuts in your and your outlook and then I'll step back after that thanks again for taking the questions.
Our capital position continues to be very strong, and we're committed to maintaining our fortress balance rule. Because the Tier 1 Capital Ratio increased to 14.6%, and the Ratio of Tangible Common Equity to Tangible Assets increased during the quarter to 9.31%. Also, it is notable that if all health maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 8.68%.
Yes, no problem area. So we are baking in three rate cuts into our expectations for 2024, but we do know that if we had six cuts that would be even more beneficial just to getting us back to.
We will call it a more normal operating environment with a yield curve that might be more flat to up eventually so.
Or we can get to that the better but we got three cuts built in for 24 based on what we expect kind of starting mid year.
Our fourth-quarter results include $2.9 million in losses on the sale of approximately $83 million in securities, reinvesting the proceeds into higher-yielding securities. The opportunistic repositioning has an expected earnback of approximately 1.3 years. We also repurchased 546,000 shares at $19.80 when prices dipped in late October. Turning to slide 5.
We will go next to Brady Gailey of <unk>.
Hey, Thanks, good morning, guys.
Great.
Maybe just a follow up on what Michael just said so the impact to net interest margin of down rates would you consider seacoast to be liability sensitive like the more rate cuts, we get the better the margin will be.
Net interest income declined by 8.5 million, or 7% during the quarter, with lower purchase loan accretion, higher deposit costs, and deposit product mixed gift, all partially offset by higher yields. Core Net Interest Margin contracted 11 basis points to 3.02%, one basis point higher than the range of guidance we provided. In the securities portfolio, yields increased 10 basis points to 3.42%, while low yields excluding accretion increased six basis points to 5.4%. Accretion of purchase discounts on acquired loans was lower this quarter by $3.5 million compared to the third quarter.
Yes, it's a good question Brady I think the reality will depend on the deposit lag that we may or may not see as an industry. So that's more of an industry comment if <unk> and <unk>.
Quantitative tightening environment as rates go down will banks be able to lower deposit rates commensurate like many may model I think for us we assume a little bit of a deposit pricing lag that might occur, but we will see in that environment kind of how pricing adjust.
So the reality is that if rates move down faster, we are mostly a fixed rate asset book. So we will benefit certainly over the long term and really even over the medium term, but over the very short term it could for a quarter be kind of more question of timing.
The cost of deposits increased to 2% while the pace of that increase continues to slow, and our funding base remains strong with 54% transaction accounts. Looking ahead to the first quarter, we expect Core Net Interest Margin to be in a range from flat to lower by five basis points. Moving to slide six, non-interest income, excluding securities activity, increased $1.6 million in the fourth quarter to $19.8 million.
If you look out in the long term $2025 226 is materially beneficial.
Okay.
Alright, and then Tracy when you were talking about the expense guide of $82 million to $84 million for the first quarter does that include all of the impact of the cost saves the urologists realized or is that.
There'll be more of a <unk> answer to you.
The impact of the cost saves the $5 million, we expect as kind of a one time set aside outside the 82 to 84 with the 82 to 84 is kind of fully baked in what we expect in Q1, and probably a little bit of modest improvement into Q2, and then kind of is that's kind of the run rate going into the next year.
Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisitions. Interchange income during the fourth quarter included an annual volume-based incentive from the payment network that added $0.7 million to the quarter. Beyond that, interchange revenue was up slightly from the third quarter to $1.7 million. Additionally, increased saleable SBA production in the fourth quarter resulted in gains of $0.9 million. Other income was higher by $0.4 million, largely related to loan swap activities.
Okay, Alright, and then finally for me I, just I know seacoast has historically been a pretty acquisitive company that feels like a lot.
Thanks, Ceos are calling into the back half of this year is when M&A will start to become a little more active.
Are your updated thoughts on M&A truck.
In the securities portfolio, the company recognized an opportunity to sell low-yielding bonds with modest losses, which I will discuss in more detail on a later slide. Looking ahead, we continue to focus on growing non-interest income, and we expect first quarter non-interest income in the range of $18.5 million to $20 million. Moving to slide seven.
The conversations are picking back up that would be a way to describe the market.
That being said I think we will continue to be very thoughtful in the market of where we'd be looking would be something similar to what we've done in the past typically smaller end market community banks.
Under our $1 billion in general and.
But that being said prices has to make sense and earn back so to make sense and so.
Assets under management increased 23% from a year ago to a record $1.7 billion and have increased at a compound annual growth rate of 27% in the last five years. 2023 was one of the group's best years yet, with significant new client acquisitions and nearly $350 million in new assets under management. Wealth Management revenues in 2023 were $12.8 million, an increase of 16% year-over-year.
As long as.
As the market allows for appropriate pricing and deals we could be there but.
We don't have a lot of appetite for a lot of our earn back right now so the deals will have to be priced appropriately.
If they make sense and we can sort of have a conservative view on that we'd look at it but otherwise we probably wouldn't do something if it was outsized in price price is going to matter a lot.
Particularly.
Our family office-style offering continues to resonate with customers, generating strong returns for the franchise. On to slide 8, non-interest expense for the quarter was $86.4 million, which is at the lower end of the range of guidance we provided. Salaries and wages were lower by $8 million, which was comprised of the following changes. The third quarter included $3.2 million in severance associated with the third quarter reduction in force, and there were no such charges in the fourth quarter.
I wanted to be careful capital on dilution and so we'll be we'll be thoughtful in the way to describe it.
And Chuck Seacoast is a $15 billion I know the focus is still within the state lines of Florida.
Are there still some targets out there that would be.
Not too small but more meaningful.
Guys could seriously consider is there still a target list that makes sense for you guys.
Yes, there is about 10 to 15 banks.
State that are very attractive to us that.
The resulting lower headcount from that effort reduced expenses in the fourth quarter by approximately $1.7 million. Finally, beyond direct salary expense reductions, this category also benefited from higher loan production during the fourth quarter, resulting in higher deferrals of origination costs. This benefited the quarter by approximately 2.8 million. In marketing, as we've mentioned in prior calls, we're focused on driving organic growth throughout our markets and continue to make additional investments in marketing and brand recognition campaigns. Legal and professional fees were somewhat higher, aligned with the timing of projects and legal matters, which are now complete.
At the rate.
The structure and the right situation, we would certainly.
B activin.
Okay, Alright, great. Thanks, guys.
Thanks Barry.
And one one cleanup Brady or just a reminder that on the expense guide. The 80 to 84 that is inclusive of intangible asset amortization, we made that shift as Tracy mentioned in our comments. So I just wanted to make sure Brady that we're talking all in expenses now.
We'll move next to Stephen Scouten of Piper Sandler.
Hey, Thanks, guys. Good morning, just a follow up on that expense point and clarify.
Higher FDIC assessments were the result of adjustments arising from the company's growth in asset size early in 2023 upon the acquisition of professional banks, and changes in real estate owned expense related to valuation adjustments on three of our former branch properties. We expect the final disposition of several properties in the first quarter of 2024. Other non-interest expense was lower across many areas, and the efficiency ratio improved from 62.6% in the third quarter to 60.3% in the fourth quarter.
It sounds like the $15 million in savings.
Maybe half or $10 million or so of that annualized might be in the one quarter run rate and then theres a little bit of incremental run rate that helps <unk> expenses is that the right way to think about it.
Yeah, Stephen I'd, just say keep in mind Q1 is usually a little higher with FICA taxes, and kind of the annual resets there and so.
You've kind of got the expense saves with that as an offset and then into Q that that starts to burn back down so you've yet to kind of more of the normalized run rate ex Q1 bump that may.
Recent expense reduction initiatives continue to positively impact results, and we've taken additional meaningful action in the first quarter of 2024. We expect one-time expenses of approximately $5 million in the first quarter to affect these actions, which will reduce the full year 2024 expenses by approximately $15 million. Also, I'd like to highlight an important upcoming change to our presentation. Beginning in the first quarter of 2024, our presentation format will no longer exclude amortization of intangibles from adjusted expenses. With that change in mind, we expect first quarter non-interest expense, inclusive of amortization of intangibles, to be in a range of $82 to $84 million. Turning to slide 9.
Sure.
Okay.
And then how should we think about noninterest bearing deposits moving forward.
The decline this quarter was a little more pronounced at year end.
Just kind of wondering what youre thinking.
Are you thinking that trends moving forward.
Yes, it's a good question I think we did see the outflow in Q4, it's been a continuing trend as we see clients use deposits to pay down their variable rate loans in particular that have moved to pretty high rates.
We could see that continue some of that as I have mentioned may be dependent upon what the fed does but we would expect to like you've seen with other banks in the industry as a whole that you would see some continued bleed of.
Demand deposit balances were about 30% mix today with growth will probably be growing interest bearing categories, a little faster than DDA as well. So the mix shift may continue to add lower.
Loan outstandings increased 2% on an annualized basis during the quarter, and we remain committed to our disciplined credit culture. Average loan yields, excluding accretion on acquired loans, increased six basis points to 5.4%. We expect loan yields to continue to increase in the coming periods as our fixed rate loans mature and reprice. In the fourth quarter, we continued to see new loan yields in the 8% range, and looking forward, we expect low growth in the low single digits. Turning to slide 10.
Historical range for us would be somewhere around 25% to 27% potentially.
So that may be kind of a good good area to focus on.
Great. That's helpful. Michael and then just last thing for me I am curious.
What you guys think it could drive maybe upside to this kind of low single digit loan growth. It sounds like the pipelines are improving nicely do you feel like youre getting good structured credit it sounds like a little bit more on the offensive. So what do you think would have to play out for that maybe be higher than those expectations.
Portfolio diversification in terms of asset mix, industry, and loan type has been a critical element of the company's lending strategy. Exposure across industries and collateral types is broadly distributed, and we continue to be vigilant in maintaining our discipline's conservative credit culture. Non-owner-occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. However, construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels.
Lower rates that'd probably be the drag you're seeing the biggest thing.
Yes, the biggest challenges just with higher rates as the demand for stabilized product is just not there so.
Really what would be the biggest drivers.
<unk> for stabilized products or operating companies wanting to make investments with that what we see today is operating companies, making investments with cash.
We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk. Turning to slide 11, the credit topic. The allowance for credit losses totaled $148.9 million, or 1.48% of total loans, compared to 1.49% in the prior quarter. The allowance for credit losses, combined with the $174 million remaining unrecognized discount on acquired loans, totals $323 million, or 3.2% of total loans that is available to cover potential losses. On to slide 12, looking at quarterly trends in credit metrics. Our credit metrics are strong, and we remain watchful of the ongoing impact of higher rates on the economy. The charge-off rate during the quarter was 0.19% annualized.
So we need lower rates I think really would drive the bulk of it.
That makes sense. Thanks for the comments guys I appreciate it.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone Keypad will go next to Brandon King at tourists Securities.
Hey, good morning, Thanks for taking my questions.
Good morning, Brian.
So on the fixed rate repricing could you.
Quantified how much of your.
Our loan portfolio I guess fixed rate loans, you expect to reprice this year and kind of what the run off yields.
Yes, you said fixed rate loan repricing right Brian.
Okay.
So this year, we will have about $650 million roughly.
That's a combination of maturities and amortization recover.
Non-performing loans represent 0.65% of total loans, and accruing past-due loans represent 0.3% of total loans. The percentage of criticized and classified loans to total assets increased over the prior quarter to 1.6%. On slide 13, providing a longer-term view of our stable asset quality trends. Recall that in the third quarter of 2023, we recorded an expected charge-off of $11.3 million. This was an acquired loan that was fully reserved through purchase accounting, and the charge-off did not impact earnings or capital. That loan drove that somewhat higher charge-off level in 2023.
Fully amortizing lender in most cases, so that's kind of a combination of that and it's around a 5% rate effectively.
That's kind of what you should think about for 2024.
Okay, and just looking out does that amount increase in 2025 and 2026 potentially.
It's pretty consistent.
You have more I would say maturities. If you go out another year or two from some of the origination vintages in 2020, one, but again given kind of the amortization that we see off our book the cash flows if you will or pretty consistent around.
Noting the stable trends in non-performing, past-use, and criticized and classified loans over the past five years, also recall that much has changed at Seacoast over this five-year period, including eight separate bank acquisitions and a near doubling of asset size, and the stability of our credit experience during that period reflects the consistently applied discipline of our credit culture. Moving to slide 14 in the investment securities portfolio, We recognized an opportunity to sell low-yielding bonds with modest losses on a small percentage of the investment portfolio. The proceeds, approximately $83 million, were reinvested into higher-yielding bonds with strong prepayment protection and good convexity. By selling short-duration, low-yielding securities from the portfolio and reinvesting into longer-duration, prepayment-protected agency CMBS, we were able to add considerable yield and interest income while prioritizing predictability, expecting an earn-back period of only 1.3 years. The average yield on securities increased during the quarter by 10 basis points to 3.42%.
$500 million or so a year.
<unk> rate profiles, but actually somewhat declining rate profiles, so we actually get more benefit in the 25 and 26.
Okay.
And I guess with the expectation of those in pricing to that.
8% level potentially.
Are you pretty comfortable with your borrowers being able to absorb that sort of increase.
I'll take that James.
Yes, we believe we have done.
Yes.
Yes.
No.
Thanks, Greg.
Sorry.
We have done pretty extensive testing within the portfolio for maturing loans with fixed rates and I would say less than 10, or 15% have any sort of significant impact and of those that do we have proactively reached out and plan on sponsors largely willing to two <unk>.
<unk> alone to accommodate the higher debt service scary.
So we feel pretty good about where Brandon.
Changes in the rate environment impacted portfolio values positively, and as a result, the overall unrealized loss position improved by $105.6 million. This contributed $0.61 of the total $0.82 increase in tangible book value per share during the quarter. Turning to slide 15 in the Deposit Portfolio, excluding the pay-down of brokered deposits, organic deposits decreased by $145 million. We saw lower balances near year-end, particularly in distributions from escrow and other attorney and trust accounts, which comprise approximately $100 billion of the decline. Non-interest demand deposits represent 30% of total deposits, and transaction accounts represent 54% of total deposits, which continues to highlight our long-standing, relationship-focused approach. The cost of deposits increased this quarter to 2%, a slower pace of increase than in the past several quarters.
Okay.
I would add Brandon.
Given the fixed rate and the full amortization.
The loan to values are amortizing down with time and.
Are the projects given that they're not bridge floating rate facilities and things like that they have time to react and respond to adhere to that as well, yes, yes got it thats an important point.
And then lastly in regards to credit quality.
Your borrowers are dealing with inflationary pressures, but could you speak to impair.
The impact of higher insurance, particularly in your markets as more of an issue than other areas of the country, but could you talk about that and how your customers have been able to do that and manage through that and if you are still concerned about that.
Yes, it's a great question and it is one of the few what I would say is sort of Florida centric negative headwinds that we're facing.
Today, we are we are seeing it primarily on the increase in wind coverage relative to two larger properties, we are sort of dealing with it on a case by case basis.
Overall, our expectation for the first quarter is that the cost of deposits will continue to increase, albeit at a lower pace. That said, we remain keenly focused on organic growth. On slide 16, the bar chart shows non-brokered customer balances, including the sweep repurchase product.
In most cases, the sponsors have the ability to address the higher.
Higher premiums, but in some cases, you are coming to us and asking for the ability to adjust lower coverage than what we were effectively requiring is that they've got the liquidity to self insure and so that's how we're making accommodations, but we've we've done a lot of work around this and we're finding that all <unk>.
Seacoast continues to benefit from a diverse and granular deposit base, and customer funding declined modestly, consistent with typical year-end patterns. We continue to be very effective in new customer acquisition, with the number of fourth-quarter new transaction accounts increasing by 13% year over year. 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 Capitol position continues to be very strong, and we're committed to maintaining our fortress balance sheet. Tangible book value per share increased to $15.08.
<unk> in Florida sort of facing the same issue.
Yes. So it is an issue, but it isn't it isn't super widespread but there are unique situations, where we're having to deal with it and we're hoping we get some resolution to that in the coming years, but.
That is a challenge Brian Theres no doubt.
Got it thanks for taking my questions.
Thank you.
And we will go next to David Bishop at Hub group.
The ratio of Tangible Common Equity to Tangible Assets continues to increase, reaching an exceptionally strong 9.3% in the fourth quarter. Our risk base and tier one 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 community bank. Jeff, I'll turn the call back to you. Thank you, Tracy.
Hey, good morning, guys.
Dave.
Hey.
Question for you the slide regarding some of the deposit headwinds you faced this quarter.
You called out the title company balances does.
Is that an opportunity to rebuild those if we get a rally in the mortgage market just curious maybe how the how far those deposit balances are down maybe from the peak of the housing cycle.
Operator: And operator, I think we're ready for Q&A. Thank you. At this time, I would like to remind everyone, in order to ask a question, press start and the number 1 on your telephone keypad. We'll go first to Eric Spector at Raymond. Hey, good morning, everybody. This is Eric Dowden for David Feaster. Thank you for taking the question. Negron.
Yes, they are down a lot from the peak of the housing cycle, Yeah, definitely if you saw and as well as commercial as we've seen the slowdown in commercial real estate, that's certainly pull through in the title companies and the attorneys.
We do normally see kind of the end of the year. We saw this last year, where theyre trying to get transactions closed and get everything done by the end of the year and so typically they do.
Just wanted to touch on the funding side to start off. I appreciate the loan to us, Scott. It's great to see you reduce wholesale and brokerage funding this quarter in the new account. I was curious how you think about funding loan growth and how you think about core deposit growth in 2024. What initiatives do you have in place to grow deposits? Do you expect to grow deposits at the same pace as loans? Is there any color on that?
Sort of come down during that period of time little bit higher this year than prior years, but if.
If the market, which Marc I think the market will return here in Q1, we do expect them to start to fund back up so.
A bit of a nuance seasonal thing there we do bank a lot of attorneys and a lot of title companies. So we're probably a little outsized there and the impact we see on that.
Yeah, thanks for the question, Eric. So I think, you know, as we look into 2024, that'll be determined by kind of the pace of the Fed movement within the year, obviously, with more cuts could be favorable to deposit flows in general. But, you know, on a broad trend, we would expect our deposit growth to maybe be slightly below loan growth and continue to moderate positively from a loan to deposit ratio perspective in 2024. That's probably the high-level thoughts there. I got it.
And I know one of the sticking points recently has been the cost the Io to cost. There. So you are not sort of managing that.
That vertical way, just given that increased cost due to iota.
We were still in definitely still on the vertical and we liked the business.
Just paying more interest expense for it.
Got it and then within the.
The wealth management side has had some good growth there to that.
Acquisitions play into the M&A acquisition strategy.
Well first I'd say I'm Super excited about our wealth management business in the coming year. We've got one of the strongest pipelines. We've had in some time, so I am expecting a very good Q1, and Q2 team is doing an awesome job.
That's helpful. On the other side of the margin, just as we think about the impact of just declining rates on the balance sheet and income statement, would you expect to see additional loan growth from that if we see cuts? And at what level and in what segments would you expect to see it from first? And I'm just curious how you think about repricing deposits if we do miss the rate test and have additional core deposits as long as it's raised to the income amount. That's a great question, Eric. It kind of depends on how things play out over the rest of the year. What I'm very encouraged by is, you know, we're seeing the opportunity to step in where the market is somewhat pulling away from lending and, you know, really get well-structured, high-quality credits, a lot of equity in projects, and we're getting rates.
They are very integrated with our commercial bankers as an amazing relationship there and they continue to refer back and forth. It's Ben.
A really good story for us.
We're excited where we are headed.
I don't know that we're really focused on RA acquisitions, David if something came along that was interesting we might take a quick look at it but it's not there's not an area of focus right now.
Got it and then final question may be up.
Tracy in terms of the purchase accounting accretion I know thats declined.
Modestly this quarter just curious if we should see an uptick to that $14 $15 million level will get are sort of a new run rate. Thanks.
So, you know, as we've talked about on past calls, we kind of pulled back given some of the, you know, more, I would describe it as kind of getting on the edge of where we were comfortable in terms of underwriting structure. We're now seeing the opportunity to underwrite very conservatively, get the right pricing on deals, and then move core relationships over. Our pipelines grew, we saw better production last quarter, and then looking forward even into the first few weeks of 2024 here, we're seeing the pipeline continue to grow. So, we're very encouraged by that. And so, as that plays out, we'll see how growth kind of comes along with that, and then that'll kind of determine exactly where we and how we step into the deposit market. As Michael said, I think the biggest driver of where the deposit market goes is whether or not the Fed does cut rates and whether or not the Fed, you know, starts buying bonds and puts some liquidity back into the market.
Good question after several quarters of very high accretion in the fourth quarter was meaningfully lower generally accretion runs higher when individual loans with high marks have payoffs are meaningful paydowns in the fourth quarter, we just saw notably fewer prepayments on loans with high marks and so I feel like that's going to continue to be difficult.
Predict the uncertainty just to highlight really only exists around the timing.
We do expect to earn the full remaining purchase mark, but the pace at which that comes through is kind of out of our hands.
In terms of expectations going forward, it's hard to see that it likely to go back to the the higher levels from Q2 or Q3.
I'm updating our expectations to look a little more like <unk>, but.
But really variable Liberia, we don't really have much control over it and it's kind of out of our hands go up could remain the same.
So, you know, I think it'll be very interesting to see how the back half of 2024 plays out. But I like where we're positioned. I like the fact that we went ahead and, you know, doubled down on our effort to get our expense base right. And so, when you kind of step back and think about where we are, I think we've been proactive in getting the expense base sort of reset while going into the coming year where we're seeing loan growth pull through. And as that plays out into the coming year, if we do see some rate cuts in the back half, you know, it really starts to set up a really nice 25, 26. So, we're taking a more medium to longer-term view of the situation, structuring the balance sheet and the expense base to prepare for that, and looking forward to what things could look like in the coming years. Got it. That's really helpful.
Got it appreciate the color.
Yes.
And at this time, we have no further questions I would like to turn the conference over to Chuck Shaffer for closing remarks.
Alright, well. Thank you all for joining us this morning.
Thank you to the entire CECO team.
We had a great Q4, and looking forward to 2024 I think it can be an amazing year appreciate everybody's hard work.
Everybody that joined the call we're around for calls after the meeting if anybody wants to jet Okay. Thank you Roger.
Youre welcome and that does conclude today's conference call again. Thank you for your participation you may now disconnect.
[music].
Yes.
And then, just wanted to touch on credit, and if you could just touch on which road the increase in MPAs and credit-backing costs is on. More broadly, if you could just provide some color on how credit's trending, I think you kind of spoke to expectations of some normalization. Where are you most concerned about credit going forward and just talk about how your economic outlook has changed and, if you're assuming any rate cuts in that outlook and color, that would be helpful. Yeah, I think, you know, where we saw it really increase in NPLs is only a couple of loans, both for CNI-driven loans, one of which is basically a restructure that potentially will move back to accrual once it sort of achieves And the other we've got reserved in a specific, generally speaking.
Okay.
Okay.
Yes.
So when we think about that, that's really what drove some of that, you know. I don't know, James, if you have any color on that or anything you want to add to that, but, you know, I think as far as we think about... where we continue to watch. I think the biggest sort of area that we continue to be thoughtful about is that 21 and 22 were such strong years for the US economy that a lot of inflation-driven revenue pushed through small businesses and operating companies. And along with that came higher expenses. So now that we're kind of moving through that period, and revenues are potentially going to come down a little bit, it's going to be important to monitor our operating companies to make sure they properly manage margins and manage expenses in the coming years. That's really just a summary, I don't know, James, anything you'd add to that? No, I think you said it well, Chuck.
I think, you know, what we're seeing is a normalization, as we talk about normalization of our credit metrics, it's really a normalization of the operating environment for our C&I companies, where they went through sort of a shock from COVID and then all of the PPP and the stimulus money driving inflationary pressure on the demand side. And so a number of companies, you know, just need to sort of readjust to a more normal operating environment. We're seeing, you know, declining deposit balances, which is something that we're keeping an eye on. But it's nothing that I would say is isolated to a particular industry or sector. It's just sort of a general normalization of the ability of our customers to generate cash flow.
We continue to keep an eye on that thing we were going to be focused on, but, you know, again, just encouraged by the fact that our capital is as strong as it is, our allowance is as strong as it is, that's going to allow us to be proactive and get out ahead of anything and manage these things to the best economic outcome if the cycle does sort of merge here. But, you know, we feel very good where we are. I think what you're seeing is normalization.
You know, we're coming off a period where there was almost nothing for a good period of time that was heavily backed up by government stimulus. And so, you know, I think it's important for all banks to keep that in mind as we move forward. Okay, thanks for the very detailed answer. And then just one last question. What are you assuming in terms of rate cuts in your outlook? And then I'll step back after that.
Thanks again for taking the questions. Yeah, no problem, Eric. So we are baking in three rate cuts into our expectations for 2024, but we do know that, you know, if we had six cuts, that would be even more beneficial just to get us back to, you know, we'll call it a more normal operating environment with a yield curve that might be more flat. So, you know, the faster we can get to that, the better, but we've got three cuts built in for 24, based on what we expect, kind of starting mid-June. We'll go next to Brady Gary at KBW.
Operator: Hey, thanks. Good morning, guys. Hey Brady, maybe just to follow up on what Michael just said, so the impact on net interest margin of down rates, would you consider CCOs to be liability sensitive, like the more rate cuts we get, the better the margin will be? Yeah, it's a good question, Brady.
You know, I think the reality will depend on the deposit lag that we may or may not see as an industry, so that's more of an industry comment: you know, in a quantitative tightening environment, as rates go down, will banks be able to lower deposit rates, you know, commensurate with, you know, many may model? I think for us, we assume a little bit of a deposit pricing lag that might occur, So the reality is that, you know, if rates move down faster, we are mostly a fixed-rate asset book, so we will benefit, certainly over the long term and really even over the medium term, but over the very short term, it could, you know, for a quarter, be kind of more a question of timing. You look at it in the long term, 2025, 2026 is materially beneficial to Bob Rosenberg. Thank you. Thank you.
All right, and then, Tracy, when you were talking about the expense guide of 82 to 84 million for the first quarter, does that include all of the impact of the cost saves that Yellow Shirts realized, or is that going to be more of a full dose thing in 2Q? The impact of the cost is, the $5 million we expect is kind of a one-time set-aside outside the $82 million to $84 million. The $82 million to $84 million is kind of fully baked into what we expect in Q1 and probably a little bit of modest improvement into Q2, and then that's kind of the run rate going into the future. Okay. All right.
And then finally, for me, I guess I'm going to seek us out to historically have been a pretty acquisitive company. It feels like a lot of bank CEOs are pointing to the back half of this year as when M&A will start to become a little more active. What are your updated thoughts on M&A, Chuck? The conversations are picking back up, and I'd be able to describe the market. That being said, I think we'll continue to be very thoughtful. The market or where we'd be looking would be something similar to what we've done in the past, typically smaller in market community banks, under a billion in general. And with that being said, you know, prices have to make sense, and earnbacks have to make sense.
And so, you know, as long as we, you know, we could be there, but we don't have a lot of appetite for a lot of earnback right now, so the deal is about to be priced appropriately, and if it makes sense and we can sort of have a conservative view on that, we'd look at it, but otherwise, we probably wouldn't do something if it was outsized in price. You know, price is going to matter a lot, and you know, particularly, we want to be careful with capital and dilution, and so we'll be thoughtful about the way to describe it. Jeff, and Chuck, I mean, CCOS is at $15 billion, and I know the focus is still within the state lines of Florida. I mean, are there still some targets out there that would be, you know, not too small but more meaningful that you guys could seriously consider? Is there still a target list that makes sense for you guys?
Yes, there are about 10 to 15 banks in the state that are very attractive to us that hit the right, you know, sort of structure and the right situation we would certainly be active in. Okay. All right, great. Thanks, guys. Thank you.
Operator: And one point, Brady, or just a reminder that on the expense guide, the 1884, that is inclusive of intangible asset amortization. We stressed that, as Tracy mentioned, in our comments. So I just wanted to make sure, Brady, that we're talking all inexpensive. We'll move next to Stephen Scouten at Piper Sound. Hey, thanks, guys. Good morning.
Just to follow up on that expense point and clarify, it sounds like the $15 million in savings, Maybe half or ten million or so of that annualized might be in the one-quarter run rate, and then there's a little bit of incremental run rate that helps to keep expenses. Is that the right way to think about it? Yes, Stephen, I'd just say, you know, keep in mind Q1 is usually a little higher with FICA taxes and kind of the annual resets there, and so, you know, you've kind of got these spin saves with that as an offset, and then in 2Q, that starts to burn back down, so you get to kind of more of the normalized run rate of that next Q1.
Okay. And then how should we think about non-interest-bearing deposits moving forward? You know, the decline this quarter is a little more pronounced at year-end. Just kind of wondering what you're thinking, how you're thinking about trends moving forward. Yeah, it's a good question.
You know, I think, you know, we did see the outflow in Q4, but it's been a continuing trend as we see clients using deposits to, you know, pay down their, their variable rate loans, in particular that have moved to pretty high rates. We could see that continue. Some of that, as I mentioned, may be dependent upon what the Fed does. But, you know, we would expect, like we've seen with other banks in the industry as a whole, that you would see some continued bleed of demand deposit balances. You know, we're about 30% mixed today.
With growth, we'll probably be growing interest-bearing categories a little faster than DDA as well, so the mix shift may continue to head lower. You know, a historical range for us would be, you know, somewhere around 25 to 27% potentially. So, that may be kind of a good, good area to focus on. Great. That's awesome, Michael.
And then, just last thing for me, I'm curious, you know, what you guys think could drive maybe upside to this kind of low single-digit loan growth. And it sounds like the pipelines are improving nicely. You guys are getting good structured loans. It sounds like a little bit more on the offensive.
So, you know, what do you think would have to play out for that to play out? higher than those x-ray pictures, lower rates, I mean, that'd probably be the driving thing, the biggest thing, you know. Yeah, the biggest challenge is, you know, just the higher rates; the demand for stabilized products is just not there, so, you know, it really won't be the biggest driver. Demand for stabilized products or operating companies wanting to make investments with debt. That's what we see today is operating companies making investments with cash, so we need lower rates, I think, really would drive the bulk of it. Does that make sense? Thanks for the comments, guys. I appreciate it. Night. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. We'll go next to Brandon King at Truist Security. Hey, good morning. Thanks for taking my question. Come on, bring it on.
Operator: So, on the suit's review pricing, could you quantify how much of your loan portfolio, I guess fixed-rate loans, expect to reprice this year and kind of work the runoff for you. Yeah, you said fixed-rate loan repricing, right, Brandon? Yeah. Yeah. Yeah.
OK. So this year, we'll have about $650 million, roughly. That's a combination of maturities and amortization. Recall, we're a fully amortizing lender in most cases. So that's kind of a combination of that. And it's around a 5% rate, effectively. That's kind of what you should think about for 2024.
Okay, and just looking out, does that amount increase in 2025 and 2026, potentially? It's pretty consistent, you know; we do have more, I would say, maturities if you go out another year or two from some of the origination vintages in 20 and 21, but again, given kind of the amortization that we see off our book, the cash flows, if you will, are pretty consistent around $500 million or so a year with various rate profiles but actually somewhat declining rate profiles, so we actually get more benefit into 25 and 26. Okay, and I guess with the exhortation of those who are proxies for that. 8% level potentially, are you pretty comfortable with your bars being able to absorb that sort of increase? and David Bishop and Will Weaver.
We have done pretty extensive testing within the portfolio for maturing loans with fixed rates, and I would say less than 10 or 15 percent have any sort of significant impact. And of those that do, we have proactively reached out and found sponsors largely willing to right-size the loan to accommodate the higher debt service cost. We feel pretty good about working with Brandon. And I would add, Brandon, given the fixed rates and the full amortization, the loan-to-value ratio is amortizing down with time, and, you know, the projects, given that they're not bridged, floating rate facilities and things like that, they have time to react and respond to that as well. Yeah, that's got it.
That's an important point. And then lastly, regarding credit quality, I didn't have any. Barbers are dealing with inflationary pressures, but could you speak to the impact of higher insurance? I know, particularly in real markets, it's more of an issue than other areas of the country, but could you talk about that and how your customers have been able to deal with that or manage through that, and if you're still concerned about it? Yeah, it's a great question, and it is one of the few, what I would say is sort of Florida-centric negative headwinds that we're facing. Today, we are seeing it primarily on the increase in wind coverage relative to larger properties. We're sort of dealing with it on a case-by-case basis, and in most cases, the sponsors have the ability to address the higher premiums, but in some cases, they're coming to us and asking for the ability to adjust lower coverage, and what we're effectively requiring is that they've got the liquidity to self-insure, and so that's how we're making accommodations.
But we've done a lot of work around this, and we're finding that all banks in Florida are sort of facing the same issue. Yeah, so it is an issue, but it isn't super widespread, but there are unique situations where we're having to deal with it, and we're hoping we get resolution to that in the coming years. That is a challenge, Brian, there's no doubt.
Operator: Alright, let's take one more question. And we'll go next to David Bishop at Huffington. Hey, good morning, guys. Thank you very much.
David Jason Bishop: Hey, question for you, the slide regarding some of the deposits. You faced this quarter, you called out the title company balances. Is that an opportunity to rebuild those if we get a rally in the mortgage markets? I'm curious maybe how far those deposit balances are down, maybe from the peak of the housing cycle. Yeah, they're down a lot from the peak of the housing cycle.
Yeah, definitely, if you saw, and as well as commercial, you know, if we've seen the slowdown in commercial real estate, that's certainly pulled through in the title companies and the attorneys. We do normally see them kind of at the end of the year. We saw this last year where, you know, they're trying to get transactions closed and get everything done by the end of the year. And so typically, they do sort of come down during that period of time.
A little bit higher this year than prior years, but, you know, if the market, with the market, I think the market will return here in Q1. We would expect them to start to fund back up. It's a bit of a nuanced seasonal thing there.
We do bank a lot of attorneys and a lot of title companies, so we're probably a little outsized in our field, and I know one of the sticking points recently has been the cost, the IOTA cost there. So, you know, you're not sort of managing that, that, that for a whole way, just given that increased cost to IOTA. No, we're definitely still in the vertical. We like the business, and more. Goddard
And then within the wealth management thought is, has had some good growth there. Could that, could RIA acquisitions play into the M&A acquisition strategy? Well, first, I'd say I'm super excited about our wealth management business for the coming year. We've got one of the strongest pipelines we've had in some time, so I'm expecting a very good Q1 and Q2. The team's doing an awesome job. They're very integrated with our commercial bankers.
There's an amazing relationship there, and they continue to refer back and forth. It's a really good story for us, so I'm very excited where we're headed. You know, I don't know that we're really focused on RA acquisitions. David, you know, something came along that was interesting.
We might take a quick look at it, but it's not an area of focus. Scott, one final question, maybe Tracy, in terms of the purchase accounting accretion and that modest decline, you know, modest this quarter, just curious if you should see an uptick to that $14-15 million level again or if it's just sort of a new run rate. Thanks. Yeah, that's a good question.
After several quarters of very high accretion, the fourth quarter was meaningfully lower. You know, generally, accretion runs higher when individual loans with high marks have payoffs or meaningful paydowns. In the fourth quarter, we just saw notably fewer prepayments on loans with high marks.
So, I feel like that's going to continue to be difficult to predict. The uncertainty, just to highlight, really only exists around the timing. We do expect to earn the full remaining purchase marks, but the pace at which that comes through is kind of out of our hands. You know, in terms of expectations going forward, it's hard to see that it's likely to go back to the higher levels from Q2 or Q3. I'm updating our expectations to look a little more like 4Q. We don't really have much control over it, it's kind of out of our hands. It could go up, it could remain down.
I appreciate the cover. And at this time, we have no further questions. I would like to turn the conference over to Chuck Schaffer for closing remarks. All right. Well, thank you all for joining us this morning and just thank you to the entire SECO team. We had a great Q4 and are looking forward to 2024. I think it could be an amazing year.
I appreciate everybody's hard work. I appreciate everybody that joined the call. We're around for calls after the meeting if anybody wants to chat. Okay. Thank you, Audra. You're welcome. And that does conclude today's conference call. Again, thank you for your participation. You may now disconnect.