Seacoast Banking Corporation of Florida

Good morning and welcome to the Seacoast Banking Corporation's fourth quarter and full year 2021 earnings conference call. My name is Brandon and I'll be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Before we begin, I have been asked to direct your attention to the statement contained at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and its comments today are intended to be covered within the meaning of that act. Please note this conference is being recorded, and I will now turn the call over to Chuck Schaefer, President and CEO of Seacoast Bank. Mr. Schaefer, you may begin.

Thank you, Brandon, and thank you all for joining us this morning. As we provide our comments, we will reference the fourth quarter 2021 earnings slide deck, which you can find at seacoastbanking.com. Joining me this morning is Tracy Dexter, Chief Financial Officer, and Jeff Lee, Chief Digital Officer. The Seacoast team delivered another outstanding quarter, generating $42.3 million in pre-tax, pre-provision earnings, and grew tangible book value per share 10% from the prior year to $17.84. Additionally, the company reported an adjusted efficiency ratio of 53.4%, and the adjusted return on tangible assets was 1.49%. These strong shareholder returns were complemented with solid growth in loan outstandings, growing 8% on an annualized basis. We saw growth in both our commercial and consumer segments, and we are exiting 2021 with loan pipelines at record levels. The business environment in Florida has never been better. There continues to be a significant migration of affluent individuals and companies relocating to Florida due to low taxes, a business-friendly environment, and a post-pandemic work-from-anywhere economy. This migration to Florida is in combination with the best hiring market we've seen in years. High-quality bankers are increasingly frustrated with the cultural challenges and complexities emerging with upstream mergers and larger organizations, and as a result, are looking for a culture that allows them to service their clients and get business accomplished. Given our tool set, speed to market, and consistency in executing for clients, bankers are choosing to call Seacoast home. Since the prior quarter end, we've added 12 commercial bankers and seven mortgage bankers to our team. And in line with our growth plan we've discussed on previous calls, we are launching teams in Jacksonville and Naples. We expect hiring to continue robustly in the coming quarters as we have a record pipeline of high-quality talent ready to exit larger banks for something more exciting. We will introduce our customers to a significantly enhanced digital banking platform in early February, including many new tools and digital products. We will follow this up in May with the launch of an enhanced online account opening product for both business and consumer customers. This investment in technology will significantly improve our customers' mobile and online banking experience, lower our costs to acquire new customers, and reduce our costs to service our client base. And lastly, I'm incredibly proud of the many Seacoast associates for their hard work in 2021. We are building a bank that will strongly compete across the state, and the fruits of this labor are starting to show up in both customer and balance sheet growth. As we enter 2022, we will soon have a significantly enhanced digital banking offering for our customer base. We are operating a best-in-class data analytics platform, supporting growth in our frontline businesses. and we are building what could be the strongest commercial banking team in Florida in the coming years. When you put all this together, it provides me with a level of confidence that 2021 has the potential to be an outstanding year for discipline growth. Our fundamentals remain very strong with a well-capitalized, low-risk fortress balance sheet, strict underwriting standards, and a desirable customer franchise positioned to take market share in Florida. I will also note that acquisition discussions continue across the state, and we expect we'll have opportunities to continue to execute our successful M&A strategy in the coming year. I'll now turn the call over to Tracy, who will walk through our financial results.

Thanks, Chuck. Good morning, everyone. Directing your attention to fourth quarter results, beginning with slide five. Earnings per share was 62 cents in the fourth quarter, an increase of 17% compared to the prior year quarter. On a gap basis, Net income increased 24% year-over-year to $36.3 million, and on an adjusted basis, which excludes merger-related and other isolated items in each period, net income increased 20% to $36.9 million. Organic loan production continues to increase, resulting in fourth quarter annualized loan growth of 8%. Commercial loan originations were a record $409 million, increasing 23% from prior quarter and 47% from the prior year quarter. The commercial pipeline also reached a record level 398 million. That's nearly 140% higher than year end 2020. The team also set a record for production in consumer lending with fourth quarter originations increasing 9% from the prior quarter and 53% from the prior year quarter. The net interest margin, excluding the effects of PPP loans and accretion on acquired loans, increased two basis points to 2.91%. We continue to deliver steadily increasing tangible book value per share, which ended the period at $17.84, an increase of 10% from the end of 2020. Cost of deposits remains in the single digits. Our wealth management division continues to grow. with new assets under management of 419 million for the full year 2021. AUM of 1.2 billion at December 31st, 2021 is a year-over-year increase of 42%. And the acquisitions of Sable Palm Bank and Florida Business Bank were successfully completed in early January. Purchase accounting adjustments, including a day one provision for loan losses, will impact the first quarter of 2022. Turning to slide six, Overall net interest margin dropped six basis points from 3.22% to 3.16%. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin increased by two basis points from 2.89% to 2.91%. Net interest income on a fully tax equivalent basis increased by 1 million or 1% in the fourth quarter to 72.4 million. The increase includes an increase in interest and fees on loans, primarily due to growth in the loan portfolio, where ending loan balances excluding PPP increased 119 million during the quarter. Offsetting the increases in organic growth was lower recognition of fees on PPP loans. We recognized 3.4 million in PPP interest and fees compared to 5.9 million in the third quarter of 2021. Excluding PPP, Yields in the core loan portfolio declined 11 basis points to 4.18%. In the securities portfolio, we've continued to pace our investments of excess liquidity, adding a net $210 million, and the growth in the securities portfolio contributed to higher securities interest income. Yields in the securities portfolio declined two basis points to 1.57%. Offsetting and favorable to net interest margins, are lower cash balances and continued improvement in the cost of deposits, which dropped to six basis points in the fourth quarter. We expect that the core net interest margin has stabilized and will expand into the coming year. For modeling purposes, we expect that net interest margin will expand four to six basis points per each 25 basis point increase in the Fed funds rate. Exiting 2022, we expect core net interest margin will be higher by approximately 20 basis points compared to the fourth quarter of 2021, inclusive of three rate hikes during the year, which we had modeled in the second, third, and fourth quarters. As a reminder, we operate with an asset-sensitive balance sheet, predominantly core deposit funded, and we continue to carry ample liquidity that we'll reprice with higher rates. As a frame of reference, a 100 basis point shock on our static balance sheet would translate to an approximate 7% increase in net interest income. Moving to slide seven. Adjusted non-interest income was $18.3 million, a decrease of $700,000 from the previous quarter, and an increase of $3.4 million from the prior year quarter. As you can see in the results year over year, We've continued to focus on driving non interest income in 2021. The wealth management team continues to deliver strong growth and successful relationship expansion and revenue during the quarter was strong at 2.4 million. We remain very focused on building the wealth management business, given its high return on capital and the value it adds to our commercial relationships. In our mortgage banking business, as expected, revenue is lower on lower refinancing demand and tight housing inventory levels. Lower pipelines are typical of seasonal conditions at the end of the year, and the team will continue to contribute meaningful results with recent hiring and a strong Florida housing market. Our SBA team has had a very successful year as non-PPP opportunities return, though the fourth quarter did see lower production compared to the third quarter. we expect increasing production in the coming year. We saw a meaningful contribution again this quarter from our SBIC investments, though income from these investments can vary widely among periods. We also had a unique gain from the sale of a website domain name that we acquired in a bank acquisition several years ago. That gain was $750,000 and is not included in the presentation of adjusted non-interest income. Looking ahead, We expect wealth management and SBA to continue to grow. Mortgage banking gains will remain constrained by market conditions in the first quarter, and we expect improvements beginning in the second quarter, with recent hiring positioning us to capitalize on the opportunities. Overall, for non-interest income, we expect first quarter to be between $16 and $17 million. Moving to slides eight and nine, Adjusted non-interest expense for the fourth quarter was at the lower end of the range of the guidance we provided at $48.3 million. Salaries and benefits expenses were higher compared to the third quarter, reflecting the addition of commercial banking talent and higher production-related incentives. As we prepare for the upgrade of our mobile and digital banking platform in February, fourth quarter expenses included costs related to preparation and testing, and you see that in the increase in data processing costs. Looking ahead, we expect to maintain our expense discipline as we always do. We expect first quarter expenses, excluding the amortization of intangible assets, to be in the range of 52 to 53 million. The increase quarter over quarter is the result of the two acquisitions that closed early this month, adding approximately 2.8 million in additional overhead in the first quarter, and an additional approximately $1.2 million in continued investments in talent and in digital enhancements. We expect the adjusted efficiency ratio to be approximately 56% in the first quarter, in line with prior year seasonality, and to decline somewhat ratably throughout the year to be in the low 50s by the fourth quarter. This includes growth in net interest income through the year and reflects cost efficiencies associated with the two transactions that take full effect by the second half of the year. As a reminder for the two transactions, system conversion and branding changes will take place for Florida Business Bank in March and with Sable Palm Bank in May. Turning to slide 10 and our efforts in commercial banking. The record levels of production and pipeline this quarter are in part the result of our success in bringing together this group of individuals and others with significant market expertise and proven success in developing high-performing commercial banking teams. We brought in 20 new bankers in 2021 and have targeted even more additions in 2022 as we expand our footprint across the state. Turning to slide 11, highlighting the diversity of our exposure and concentration levels well below regulatory guidance. Our portfolio is broadly distributed across various asset classes, stabilized income-producing commercial real estate represents 29% of loans outstanding. Owner-occupied commercial real estate represents 20% of the portfolio, and residential real estate comprises 24% of the portfolio. For years, we've consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. At December 31st, that represented 19% and 162% of risk-based capital respectively. Our loan portfolio is diverse and broadly distributed across categories with an average commercial loan size excluding PPP of less than 500,000. Turning to slide 12, loan balances excluding PPP are higher by 119 million from the prior quarter representing annualized growth for the quarter of 8%. That increase represents organic growth in commercial and consumer categories, partially offset by a decline in residential mortgage loans. Commercial growth is a highlight as recent talent additions and investments in technology are building momentum and delivered record level originations this quarter of $409 million, an increase of 23% over the third quarter and an increase of 47% compared to the fourth quarter of 2020. The year ended with a record commercial pipeline as well of 398 million. Consumer growth was also strong with originations of 73 million, increasing 9% from the third quarter and 53% compared to the prior year quarter. The consumer pipeline, which was 30 million at year end, had increased 63% from year end 2020. For further detail by loan segment of production and pipeline levels by quarter, Please reference slide 24 in the presentation deck. Looking forward, we expect loan growth to continue with an annualized growth rate in the mid to high single digits in the first quarter of 2022 and expand to high single digits for the remainder of the year. We expect core yields stabilize near fourth quarter levels and to be somewhat higher in the first quarter, supported by the positive impact of the portfolios coming on from the two acquisitions. Turning to slide 13, the graphic shows PPP activity for the year. We've processed $778 million in forgiveness year to date, including $103 million in the fourth quarter, bringing principal balances of PPP loans outstanding at December 31st to $91 million net of deferred fees. Overall, since the start of the program, we've collected $27.6 million in SBA fees. Of that, We've recognized over 25 million life to date and have 2.4 million in fees remaining to be recognized in future periods. We expect the majority of this remaining fee income to be fully recognized by the first quarter of 2022. Turning to slide 14 for the securities portfolio, we continue to invest excess liquidity at a moderate pace in the investment securities portfolio with approximately 430 million in purchases this quarter offset by paydowns and sales for net growth of $210 million. Additions were largely agency guaranteed with short duration, and overall portfolio value declined with expectations for higher rates. Visible in the chart is that we've added during the year to our held to maturity portfolio, thereby limiting the impact of valuation changes to tangible book value. With new purchases, we will continue to steadily pace our investments expecting net additions of approximately $150 to $250 million in the first quarter, and continue to focus on shorter-duration agency bonds that will roll down the curve and allow us to deploy the resulting cash flow at higher future rates. Turning to slide 15, deposits outstanding were $8.1 billion, a decrease quarter over quarter due primarily to our management of brokered money market deposits. As we manage excess liquidity and overall cash levels, we have continued to make use of wholesale funding and off-balance sheet deposit products through third-party programs. Off-balance sheet levels remained near flat compared to the prior quarter at $228 million, and the decline in brokered deposits drove much of the change in overall deposits. As we move into January, I'll note that we have brought back approximately $150 million in deposits from brokered programs to the balance sheet. and the acquisitions of Sable Palm Bank and Florida Business Bank have added another $560 million in deposits. At year end 2021, transaction accounts represented 62% of total deposits and had grown 29% year over year, demonstrating the strength of our customer franchise, a growing Florida economy, and our ability to win share in the marketplace. We expect deposit balances exiting the first quarter to be in a range between $8.8 and $8.9 billion. We expect to continue to use off-balance sheet programs for liquidity management purposes at approximately the same levels we have in the past two quarters. On to slide 16. The cost of deposits has continued to decline, and for the fourth quarter was only six basis points. Looking ahead, we believe this represents the lower bound for deposit costs though we expect the cost of deposits to remain in the single digits for most of 2022. For reference, our non-maturity deposits in the last full rate cycle repriced at a rate of 24%, and when looking at just the first 100 basis points of the last cycle, the rate was only 10%. Ultimately, over the long term, decisions about repricing will be made in light of the rate environment and competitive factors. Illustrated in the chart on slide 16 is the deposits per branch, which stepped down this quarter to $154 million. We opened two new branches in the fourth quarter, which brought the per branch deposit level down. In addition, as I mentioned, the decline in brokered money market deposits also brought down overall deposit levels. Our branch optimization strategy is supported by our digital and analytics competency. which continues to provide opportunity to drive growth and operating efficiency across our retail franchise. In the last five years, we've consolidated 27% of our physical branches. We still think physical branches are extremely important to our customers, and as a result, expanded our Broward County presence with two new branches during the fourth quarter. We also have a branch opening in Naples later in the first quarter. complementing our Florida West Coast growth strategy that includes Tampa and Sarasota. The strategic positioning of physical branch locations in top growth markets is a key part of our continuing growth strategy. Moving to slide 17, the wealth management business has delivered growth in assets under management with a compound annual growth rate of 33% over the past two years and 42% in 2021. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team to build relationships. This relationship-driven approach generates value for our most profitable clients and will continue to deliver tremendous growth. Moving to slide 18 and to credit topics, the allowance for loan losses decreased during the quarter to $83.3 million, representing a decline in portfolio coverage excluding PPP, from 1.54% in the prior quarter to 1.43% this quarter. The decrease is in line with sustained indications of overall economic recovery and continuing strong portfolio quality trends. In addition to the allowance, the total purchase discount remaining on prior bank acquisitions is 23.1 million, which will be earned as an adjustment to yield over the life of those loans. Turning to slide 19 on asset quality, credit measures remain strong with charge-offs, non-accrual, and criticized loans at historically low levels. Net charge-offs in the fourth quarter were 570,000, or four basis points on average loans, and the level of non-performing loans decreased by 2 million to 30.6 million, representing 0.52% of total loans. Criticized loans decreased to 13% of risk-based capital in the fourth quarter, And the overall allowance for credit losses at December 31st is $83.3 million, with allowance coverage excluding PPP loans of 1.43%. Turning to slide 20, our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. Tangible book value per share is $17.84, an increase of 10% year over year. The tangible common equity to tangible asset ratio increased to 11.1% at the end of the year and has consistently been among the highest in our peer group. The Tier 1 capital ratio was 17.4% and the total risk-based capital ratio was 18.2% at December 31st. Adjusted return on tangible common equity was 14.1%. Acknowledging our peer group leading capital levels, it's worth mentioning that if the fourth quarter's tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our adjusted return on tangible common equity would be 19% for the fourth quarter and 18.6% for the full year 2021. And finally, on slide 21, looking back over the last five years, we've achieved a compounded annual growth rate in tangible book value per share of 12%, driving shareholder value creation. We've positioned this franchise with a foundation of strong liquidity and capital from which we'll continue to execute on our strategic growth initiatives and optimize the opportunities of this strong Florida economy. We look forward to your questions. Chuck, I'll turn the call back to you.