Q2 2024 Seacoast Banking Corp of Florida Earnings Call
Okay.
Pam: Welcome to Seacoast banking Corporation second quarter 'twenty 'twenty four earnings Conference call. My name is Pam and I will be your operator.
Before we begin I have been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements seacoast will be discussing issues that constitute forward looking statements within the meaning of the securities and Exchange Act in its comments today are intended to be covered.
Pam: But then the meaning of that act. Please note that this conference is being recorded.
Charles M. Shaffer: I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Schafer you may begin.
Thank you Pam and good morning, everyone. As we go through our presentation, we'll be referring to the second quarter earnings slide deck, which is available at seacoast banking dot com I'm here today with Tracey Dexter Chief Financial Officer, Michael Young Treasurer, and director of Investor Relations and James Stallings, Chief Credit Officer.
The seacoast team had a strong quarter with good earnings performance and continued strong customer acquisition.
Our investments in talent and marketing paid off with a 60% increase in commercial loan originations from the previous quarter and a record $744 million late stage pipeline entering Q3.
As we anticipated on our comments last quarter, we saw low single digit loan growth in the second quarter at two 4% annualized and we expect production to increase in Q3, which will boost net interest income and the net interest margin Tracey will provide more details on this shortly.
We've been focused on increasing noninterest income and have seen improved performance in wealth management fees service charges on deposits and insurance agency revenue in each of the past four quarters.
Our efforts to reduce expenses have also been successful with adjusted non interest expenses declining sequentially for the past four quarters, approximately 9 million per quarter lower than a year ago.
During the quarter, we worked on lowering our cost of deposits by reducing offered rates and we saw our cost of deposits began to stabilize in may.
And looking at our asset quality will continue to maintain strong performance charge offs were slightly higher this quarter at approximately 40 basis points annualized mainly due to a limited number of loans each of which were previously reserved for.
This decrease the ACL upon charge off.
Classified and criticized increased slightly from the prior quarter non performing loans declined by $17 million.
Our ACL stands at 142 million equal to 1.41% of total loans and including the reserve for unused commitments. This ratio moves to 1.46% of total loans positioning us strongly amongst our peer group.
Charles M. Shaffer: And Additionally, we have another $151 million in purchase discount.
Our balance sheet puts us in great position compare to peers, allowing us to navigate any challenges as cycle may present.
Overall, it was a solid quarter generally in line with the previous guidance across all areas. As we stated in previous quarters. We believe we reached an inflection point in net interest income and in the second quarter.
Charles M. Shaffer: Right.
It's an inflection point in net interest income in the second quarter.
We expect growth in net interest income and net margin as we enter the back half of 2024.
We have competed committed to maintaining our conservative balance sheet principles to ensure long term success and we remain steadfast in our goal of establishing <unk> as a leading player in Florida.
Now I'll pass the call to Tracy to review our financial results Tracy. Thank you Jack good morning, everyone.
Directing your attention to the second quarter results beginning with slide four.
Seacoast reported net income of $30 2 million or 36 cents per share in the second quarter.
As Chuck mentioned, we're seeing the benefit of recent expense reduction actions and as a result, noninterest expenses down 10% compared to the prior year quarter.
The pace of increase in cost of deposits slowed during the quarter and was flat in May and June.
Pre tax pre provision earnings on an adjusted basis increased 2 million quarter over quarter benefiting from growing revenue sources, including wealth Treasury management, and insurance and well controlled expenses.
Our loan pipelines have grown meaningfully and we continue to see stable credit trends.
Tangible book value per share increased to $15.41 and our capital position continues to be very strong.
Tier one capital ratio was 14, 8% and the ratio of tangible common equity to tangible assets is nine 3%.
Also notable if all held to maturity securities were presented at fair value. The TCE to Ta ratio would still be a strong eight 6%.
We also repurchased nearly 40000 shares at just over $22 unpriced depth during the quarter.
Charles M. Shaffer: Turning to slide five.
Net interest income declined modestly during the quarter with higher deposit costs and growth in deposit balances, partially offset by higher yields on loans and securities.
Core net interest margin contracted four basis points to 287%.
In the securities portfolio yields increased 22 basis points to 369% benefiting from recent purchases.
Loan yields excluding accretion increased four basis points to 552%.
Charles M. Shaffer: Accretion of purchase discounts on acquired loans with lower by zero point $4 million compared to the prior quarter.
The cost of deposits increased to 2.31% with the exit rate flat month over month at 233%.
Looking ahead, we expect that the second quarter was the trough for net interest income and we will see growth in both net interest income and the net interest margin in the third quarter, driven by higher yields on loans and stabilizing deposit costs.
Our rate assumptions are unchanged and include 125 basis point rate cut in November.
Moving to slide six.
Noninterest income excluding securities activity increased $2 million in the second quarter to $22 2 million.
Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition.
Wealth and insurance agency income continue to grow.
In the Bowie portfolio, we restructured policies to capture higher rates, resulting in higher income, which will continue into future periods.
Other income was higher by 0.7 million, including a gain on sale of one nonperforming commercial real estate loan.
Looking ahead, we continue to focus on growing noninterest income and we expect third quarter non interest income in a range from 21 million to $22 million.
Moving to slide seven.
Assets under management have increased 12% year to date to a record $1 9 billion and have increased at a compound annual growth rate of 27% in the last five years.
Wealth management wealth management revenues during the quarter increased to $3 8 million up 6% from the prior quarter and 14% from the prior year quarter.
Our family office style offering continues to resonate and internal referrals are a significant contributor generating strong returns for the franchise and deepening relationships with our customers.
Moving to slide eight noninterest.
Noninterest expense for the quarter was $82 5 million lower than the range of guidance, we provided last quarter.
Recent expense reduction initiatives are benefiting nearly every category.
Outside of the impact of severance related charges in the first quarter salaries and wages increased 0.7 million, including annual Merit increases and annual stock Award grants.
Investments in growth focused talent will also continue to be a priority.
We saw a typical seasonal increase in employee benefits and payroll taxes in the first quarter, leading to a comparative decline in the second quarter.
In outsource data processing and occupancy costs, we incurred one time charges early in the first quarter associated with consolidation activities, leading to a comparative decline in expense in these categories in the second quarter.
Our planned investments in branding and marketing campaigns across the state led to higher marketing expenses.
Charles M. Shaffer: Other expenses were lower across several categories and the efficiency ratio improved to 62%.
Charles M. Shaffer: Discipline around expenses will continue to be a focus and in the third quarter, we expect noninterest expense to be between $84 million and $85 million.
Turning to slide nine.
Loan Outstandings increased at an annualized rate of two 4% and the pipeline has grown 46% to $834 million.
Average loan yields excluding accretion on acquired loans increased four basis points to 552%.
Charles M. Shaffer: The pipeline is very strong and looking forward, we expect the pace of loan growth to continue to increase and expect mid single digit growth in the coming quarter.
Turning to slide 10.
Portfolio diversification in terms of asset mix industry and loan type has been a critical element of the company's lending strategy exposure as broadly distributed and we continue to be vigilant in maintaining our disciplined conservative credit culture.
Non owner occupied commercial real estate loans represent 34% of all loans and our distributed across industries and collateral types.
As we have for many years, we consistently manage our portfolio to keep construction and land development loans and commercial real estate loans, well below regulatory guidance.
These measures are significantly below the peer group at 34% and 222% of consolidated risk based capital respectively.
We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk.
Moving on to credit topics on slide 11.
The allowance for credit losses totaled $141 6 million or 141% of total loans compared to 1.47% in the prior quarter.
A small number of individually evaluated credits were charged off during the quarter resolving previously established specific reserves.
The allowance for credit losses, combined with the $151 million remaining unrecognized discount on acquired loans totaled $293 million or two 9% of total loans, that's available to cover potential losses, providing substantial loss absorption capacity.
On slide 12, providing a longer term view of our stable asset quality trends.
Call that the period presented includes eight separate bank acquisitions, and a near doubling of asset size.
The ability of our credit experience during that period reflects the consistently applied discipline of our credit culture.
Charles M. Shaffer: Moving to slide 13, looking at quarterly trends and credit metrics, our credit metrics remain strong nonperforming loans declined to <unk>, 6% of total loans with a number of non accruals resolved either through charge off sale or being paid off.
Accruing past due loans and criticized and classified loans each increased slightly as a percentage of total loans, but remained low.
Charles M. Shaffer: Moving to slide 14 in the investment Securities portfolio.
Average yield on securities has benefited from purchases in recent quarters at higher yields with the portfolio yield increasing during the second quarter by 22 basis points to 369%.
Changes in the rate environment negatively impacted portfolio values and as a result, the overall unrealized loss position increased by $6 million.
Turning to slide 15 in the deposit portfolio.
Total deposits increased by $100 million the cost of deposits increased this quarter to 231% a slower pace of increase than in previous periods consistent with our expectations in.
In fact in June we saw no increase from the prior month at 233%.
Looking forward, we expect continued growth in core deposits and stabilization of deposit cost and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering.
Charles M. Shaffer: On slide 16, <unk> continues to benefit from a diverse deposit base.
Customer transaction accounts represent 50% of total deposits, which continues to highlight our long standing relationship focused approach. Our customers are highly engaged and have a long history with us and low average balances reflect the granular relationship nature of our franchise.
Charles M. Shaffer: And finally on slide 17, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet Tam.
Tangible book value per share increased to $15.41 and the ratio of tangible common equity to tangible assets remains exceptionally strong at nine 3%.
Charles M. Shaffer: 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 regional bank jackpot.
Charles M. Shaffer: Jacques I'll turn the call back to you. Thank you Tracy Alright, Pam I think we're ready for Q&A.
Thank you if you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again.
You are called upon to ask your question in a listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute.
One moment for your first question.
Your first question comes from the line of David Feaster of Raymond James.
Speaker Change: Please go ahead.
Okay.
Okay.
David you may be on mute.
Speaker Change: Yes.
Can you hear me.
Can you hear me now.
Speaker Change: Hey, good morning, everybody sorry about that.
Speaker Change: Okay.
Speaker Change: Great to see the inflection in loan growth and just given the increase in pipelines. It seems like this trajectory is structurally improving and it sounds like the majority of its your gain in share from the new hires hitting stride is that the right way to think about it and just kind of how how is demand broadly from from your perspective, and where are you.
You're seeing the most growth opportunities today.
Speaker Change: Yes, David I think you characterized it well I think when you step back and look at the quarter we.
Speaker Change: Two 4% annualized loan growth that was about where we had guided to in the prior quarter illustration mentioned, our guide is the mid single digit in the coming quarter and whats.
It's really encouraging about it just like we talked about last quarter is the bulk of what's coming on as new customer relationships and prospects as we continue to onboard clients primarily as a result of the investments we've made over the last 24 months and talent around the state.
Of our current combustor and customers I would say remains pretty light just like you've seen across the industry.
But what we're seeing is we're moving market share primarily out of large regional banks onto the <unk> balance sheet. So.
Speaker Change: Im very encouraged as we talked about last quarter remain very encouraged in.
The team we built is first class.
Super excited about where we're headed.
That's terrific.
Speaker Change: And then maybe somewhat of a difficult question to answer because there's a lot of moving parts, but I'm curious how do you think about the size of the balance sheet, obviously loan growth improving like we just talked about we talked about core deposit growth.
Returning.
Speaker Change: I'm just curious how do you think about plans for that core deposit growth would you expect.
Reduced some wholesale funding of borrowings first in your securities cash flows to fund growth with the balance sheet remaining relatively stable is that the right way to think about it I am just.
Speaker Change: Kind of curious how do you how do you think about that in some of the puts and takes.
Michael you want take that one yeah, Hey, David Good morning. This is Michael I I would think about it is really our balance sheet growing in the pace of deposit growth from year.
Jeff mentioned, we've got momentum building on the lending side on the loan side, we expect some some benefits obviously on the deposit side as well as we kind of take that market share and faster customer acquisition. So we're thinking that the deposit side of the balance sheet may grow in kind of a low single digit so a little bit of a remix but.
We really want to grow the balance sheet from here.
Okay.
Makes sense.
Speaker Change: Then last one from me just just given the move in rates curious how do you think about optimism balance sheet optimization opportunities.
And.
Curious what you guys would be interested in obviously additional restructuring could make some sense, but any interest in loan sales or anything else like that I know you sold some.
NPA this quarter, but just curious whether the move in rates has changed your appetite as it opened up maybe some more doors.
Yeah, Hey, David This is Michael again.
I think if you step back and look at the balance sheet as a whole we have very high levels of capital.
We've done that intentionally to have a lot of ballast in turbulent times.
Still have that Optionality as you mentioned and that's a focus of ours to maintain that optionality.
There continue to be opportunities with rate volatility et cetera, and changing kind of afford outlooks, where we can take opportunities on the margin as you've seen us do some small portfolio restructurings and some other things along the way between barley and securities to optimize earnings.
So those opportunities obviously are still out there and as Chuck often says we're really just very math focused and disciplined around the earn back and doing the right thing for shareholders long term.
And I think David if you step back and just look at our balance sheet. We do have and we will have as Mike said, probably some opportunities around the edges to do some of that but importantly, we are seeing net interest income and the margin inflect at this point with some loan growth coming on the back half of the year and stabilizing deposit costs.
I'm pretty encouraged about the profitability outlook for 2025.
Okay, that's great. Thanks, everybody.
David: Thanks, David.
Speaker Change: Your next question comes from the line of will delay of K B W.
Please go ahead.
Hey, good morning, guys.
Woody.
So how does how does the mix of the loan pipeline compared to historical levels is it more weighted to C&I than than in the past.
Speaker Change: Yes, I think the way to think about it we mentioned this on last quarter's call.
The pipeline does weight more than <unk>.
And so the funding level is lower than what historically, we would see.
Again, we're super encouraged because we're bringing on line of credit or bringing on it.
Speaker Change: Operating company, and we're bringing with the deposits and the whole relationship and but that will take 12 to 18 months to fund up as we move through the next into next year, but what we're building is momentum into the back half and so the funding levels are a little lower than they've been historically, but the momentum is very strong.
Yes.
And then on the sort of average commercial loan size you disclosed at around 750000, just given your you sort of revamped the commercial lending team you're competing more of the large regionals do you expect that average loan size increase over time.
Yes, it will take some time because theres a lot of notes in that portfolio, but yes. The loans, we're adding on are generally larger than that as we move forward.
Speaker Change: But there is a.
Very large granular portfolio there.
Why that an average loan size is as low as it is.
But looking forward the new volume coming on is larger.
Yes.
And then maybe shifting over to deposit cost I mean, it was great to see the month over month trends.
It sounds like you think this is a trend that can persist from here.
Hey, everybody. This is Michael Yeah, I think we've taken the back book repricing actions that we discussed kind of on the last quarterly call and you saw the stability that materialized in the quarter on both interest bearing deposit costs and the total cost of deposits and I think going forward from here.
We still want to grow deposits and we still want to take market share while there's a good opportunity to do so and so we might still expect some slight increase in the cost of deposits going forward, but.
At a much lower pace than what we're seeing in terms of our loan yields improving and so thats going to lead to that margin expansion into the back half that Tracy and Chuck both referenced so I think thats kind of the right way to think about it obviously DDA mix is the most important factor and we feel pretty good about stabilization there as well.
Sounds great. Thanks for taking my questions.
Thank you.
Speaker Change: Thank you.
Your next question comes from the line of Brandon King of Chili's Securities. Please go ahead.
Hey, good morning.
Brian: Hey, Brian.
Good morning, Brian.
So what magnitude of margin expansion are you expecting in the back half of this year.
Hey, Brendan this is Michael.
Obviously that depends somewhat on what's your interest rate outlook is we are modeling for a November 1st cut in only one cut this year.
Led by greater cuts kind of into 2025, but really the balance sheet is slightly liability sensitive.
But close to neutral. So there are a lot of it is going to be based on kind of the active management that we do and the pace really of our loan growth versus our DDA balances that are going to be kind of the drivers of how much expansion, we get into the back half.
And as you know Brandon and Theres a lot of lives.
<unk> got an election year. There is a lot going on we don't know where the fed is going to go so Friday much guidance there over the long run staff.
And see how things play out.
Okay.
Brandon: I guess is it.
Fair to assume just modest expansion is that a way to think about it youre not expecting any sort of material ramp.
Is that the way to think about it.
Yes, I think modest is probably a fair characterization the.
Speaker Change: The benefit that we do have though is if rates decline further we have a little more of a fixed loan book that again is stepping up into the higher rate regime. So thats really kind of a tailwind that's buffering us going forward and that should also help us if rates do head lower.
Okay.
And then on the credit side with the increase in net charge offs to those smaller credits could you just.
Remind us kind of what those credits are and where the legacy CECO, So where the acquired credit system more characterization of that.
Brandon: Yes, Hi, Brandon.
To us this quarter largely reflect previously reserve balances.
It's a small number of lung and a large portion of that is the acquired portfolios that are in runoff mode, along with a small number of other specific reserves. So well the charge offs are elevated this quarter, we do still expect a normalized level on a on an average basis would be around 25 basis points, our year to date annualized.
Charge offs of 27 basis.
Okay.
And with the reserve I mean, you have strong reserves with also the acquired credit discount is it fair to assume that's going to continue to March slower given how high it is putting all those pieces together.
I think it depends each quarter, we look at the current credit conditions expected forward economic conditions, we assess the allowance.
Brandon: With the forecast scenarios, the Moody's forecast scenarios drive a lot of the quantitatively derived loss model outcomes.
And of course, we also consider adjustments, which may be appropriate based on metrics specific to our markets or our portfolio.
Through this comprehensive process each quarter, so the circumstances at each quarter and really drive changes in the reserve I think its reasonable to assume that we will use the allowance for the purpose. It was built to cover losses as they arise. So if we do see the economic outlook, improving and the portfolio conditions are supportive.
We may end up with a lower coverage level than we have today.
Okay. Thanks.
Thanks for taking my questions.
Thanks, Brian.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad. Our next question comes from the line of Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
David I guess I know earlier, you said balance sheet growth probably in line with deposit growth, but obviously year to date I think deposits have moved.
Faster than loans, and so the loan to deposit ratios down a bit I mean, do you think we could see that move back.
85% range and kind of lever the balance sheet a bit more overtime.
Michael.
Hey, Stephen This is Michael Yeah, I think that that's fair, we obviously maintain our conservative stance on capital, but also liquidity. So we don't want to move that too high.
But as you can see with a building pipeline building lending momentum after we sort of intentionally decelerated loan growth last year due to our risk posture I think as we move forward you're going to see that the loan growth building and probably coming in at a slightly faster pace than deposit growth, which would which would help us to re lever the balance.
Sheet is you mentioned a little bit, but really what that is going to do is just build earnings momentum and revenue momentum.
Yes that makes sense that makes sense and then just thinking about I know we've talked about this in the past, but at least as of <unk>.
Last quarter SKU, you guys still model a slightly asset sensitive.
Brandon: Has that changed appreciably or is it really more modeling.
<unk> balance sheet versus the reality of what May play out.
Speaker Change: Because you might have been slightly liability.
Ability center.
Yes.
We modeled slightly liability sensitive.
I can get with you offline on that Stephen but.
We're basically down 100 basis points, we pick up about 1% in revenue so that it depends on if youre looking at dynamic or static obviously, our balance sheet has been moving pretty quickly and so that has a pretty big impact.
And just our ability to manage the balance sheet is probably stronger so.
That's where I think really if you zoom out and look at our balance sheet. We've got.
A little higher amount of fixed rate assets that.
This should be more stable in terms of their pricing versus our liabilities that some will automatically reprice, but obviously, we would be proactively repricing downward if rates were to decline and so thats, what it will give us kind of the earnings leverage into a downrate scenario, yes in summary that have some reading reading comprehension issue is this.
Yes.
Speaker Change: 7% ended down 100 basis points, so apologies there.
Speaker Change: Yes.
And then just last thing for me.
Speaker Change: Around M&A discussions I mean, obviously the stock is appreciably higher than it was maybe a quarter ago. The whole market is trending up does that help M&A conversations maybe with some of these smaller private banks or conversations picking up at all.
As of yet and how do you think about the capital priorities today.
Speaker Change: Yeah, Great question, obviously with the higher stock price higher multiples across the industry that would be indicative of more opportunities for M&A I would say from an M&A perspective, I'm very encouraged by our organic growth story I think theres a lot of momentum inside the company I think we are at this inflection point.
If we were to look at something and they would really have to make a lot of economic sense to kind of take us off what we're focused on but.
Speaker Change: Not to say, we wouldnt do a deal but that deal is going to have to make a lot a lot of sense. So that's kind of where we are on it Steve.
Speaker Change: Steven.
Great It sounds like a perfect dynamic for <unk>.
Okay. Thanks, a lot.
There are no other questions I will hand, the call back over to Chuck for closing remarks.
Chuck: Alright awesome. Thank you all for joining us. This morning. Thank you to the seacoast team I thought it was a very solid quarter and looking forward to the back half of this year and I appreciate everybody joining the call. Thanks, Pam that'll conclude.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Okay.
Okay.
[music].
Okay.
Okay.
Sure.
Yeah.
Sure.
[music].
Sure.
Speaker Change: Yes.
Yes.
Thanks.
Yes.
Yes.
Okay.