Seacoast Banking Corporation of Florida

Good morning and welcome to Seacoast Banking Corporation's first quarter 2022 earnings conference call. My name is Brandon and I'll be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session during which you may dial 01 if you have a question. Please note it is 01, not star 1. Before we begin, I've been asked to direct your attention to the statement contained at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note this conference is being recorded. I will now turn the call over to Chuck 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 first quarter 2022 earnings slide deck. which you can find at secosbanking.com. Joining me this morning is Tracy Dexter, Chief Financial Officer, and Jeff Lee, Chief Digital Officer. The SECOS team delivered another outstanding quarter of earnings and growth, generating $41.7 million in pre-tax, pre-provision earnings, 7% annualized loan growth across multiple loan categories, and an impressive 25% annualized growth in deposit outstandings. In addition, the investments we have made in client-facing technology and high-performing bankers are generating solid performance in new customer acquisition and organic balance sheet growth. I'm incredibly proud of the Seacoast team's focus and dedication to building the most competitive banking franchise in Florida, integrating our recent acquisition successfully, and driving continued transformation across our technology stack. During the first quarter, we expanded our franchise in Fort Lauderdale, and established a new presence in three markets, Naples, Sarasota, and Jacksonville, and announced the acquisition of Apollo Bank Shares, bringing five new locations to Seacoast in Miami-Dade County. Apollo will enable us to grow our presence and expand our position in the attractive South Florida market, and we look forward to welcoming their employees and customers later this year. Overall, we have received a very warm reception in these expansionary markets, with customer onboarding occurring in Jacksonville and Naples, which contributed to the growth in pipeline and deposit outstandings. Let me take a moment to discuss the economic outlook in the ARLL. During the quarter, we slowed the pace of reserve release, primarily due to conservative posturing resulting from unknown potential macroeconomic impacts from the war in Ukraine, inflationary considerations, and continued supply chain challenges. We will continue to take a conservative approach to reserving for the allowance for loan losses, underwriting, and capital. That said, it should be noted that there is no evidence right now of any issues arising in our markets. As you can see from the slides, asset quality measures continue to improve with almost no net charge-offs and continued improvements in criticized and non-performing loans from the prior quarter. The business environment in Florida remains impressively strong, and our consumer and business customers' balance sheets are as healthy as they've ever been. Average deposit balances and liquidity held by both consumers and businesses remain higher than pre-pandemic levels. The significant migration of affluent individuals and companies relocating to Florida due to low taxes, a business-friendly environment, and a post-pandemic work-from-anywhere economy continues to be robust and supported the material deposit growth across the franchise. The combination of a strong Florida economy, the build-out of our commercial franchise across the state, and the additions to our consumer and mortgage lending teams drove material growth in our loan pipelines. We continue to manage growth conservatively, enforcing strict underwriting standards, and maintaining a fortress balance sheet. When you combine the prospect for continued high single-digit discipline growth with the steepness in the yield curve that has emerged recently, the outlook for net interest income and resulting earnings has materially improved. Lastly, I want to note that acquisition discussions continue across the state. and we expect we will have continued opportunities to execute our successful M&A strategy over the remainder of the year. I'll now turn the call over to Tracey, who will walk through our financial results.

Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, beginning with highlights on slide five. The net interest margin expanded nine basis points to 3.25 percent, and on a core basis, expanded 14 basis points to 3.05 percent. With the increase in rates during the quarter, New purchases of securities and loan originations supported higher loan and securities yields, as did the addition of the acquired bank portfolios in early January. Our asset-sensitive balance sheet is beneficial in this rising rate environment, and our high level of liquidity provides flexibility to fund growth at higher interest rates, all of which will benefit the margin in the coming period. The recent steepening of the yield curve has had a material positive impact on new securities and loan add-on yields, and has materially improved the outlook for net interest income. Our cost of deposits remains steady at six basis points. Organic loan growth was strong this quarter at an annualized rate of 7%. With our investment in a number of very experienced bankers over the last few quarters, 20 bankers in 2021 and 14 bankers so far in 2022, the momentum continues with commercial originations up 83% year over year, and a strong pipeline that's 56% higher than at December 31st. I'll emphasize that the growth is in keeping with the bank's credit standards, and the additional volume is being driven by the larger team. Credit risk metrics continue to improve, with charge-offs, non-accruals, and criticized loans all lower compared to the previous quarter. The quarterly provision for credit losses includes $5.1 million from the day-one impact of the two bank acquisitions that closed in January. Deposit growth was also very strong this quarter. Outside of growth related to acquisitions, organic deposits were up over 6% this quarter and 25% annualized, due in large part to new commercial relationships and an expanding Florida economy. The rate environment has been beneficial to yields, but had a negative effect on the value of our investment portfolio. Available-for-sale securities declined in value this quarter by approximately 5%. The resulting drop in accumulated other comprehensive income due to lower securities values impacted tangible book value per share by $1.07. There's also significant market expansion to highlight this quarter. We closed on the acquisitions of Sable Palm Bank in Sarasota and Florida Business Bank in Melbourne in early January. Additionally, we opened the Naples branch with a market president and full team and a Jacksonville commercial lending office with a market president and five new North Florida bankers. In March, we announced the upcoming acquisition of Apollo Bank in Miami. This expansion across some of Florida's most attractive MSAs will build franchise value over the long run. Finally, and subsequent to quarter end, last week we announced that in the second quarter, the cash dividend on common shares will increase 31% to 17 cents per share. With the continued success of our balanced growth strategy, and peer-leading capital levels. We're pleased to be able to deliver the dividend increase and will continue to revisit the dividend payout ratio periodically. Let's move on to some of the detail, turning to slide six. Overall net interest margin expanded nine basis points from 3.16% to 3.25%. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin increased by 14 basis points from 2.91% to 3.05%. Net interest income on a fully tax equivalent basis increased by 4.2 million or 6% sequentially to 76.6 million. The increase in net interest income reflects both higher average balances and higher yields on loans and securities during the quarter. In the securities portfolio, we've continued to pace our investments of excess liquidity with ending balances higher by $171 million and yields increasing 11 basis points to 1.68%. Non-PPP loan yields expanded six basis points to 4.24%, supported by the two acquired bank portfolios. Looking ahead, we expect net interest income and margin to increase as our asset sensitive position with significant core deposit funding and ample liquidity will benefit from higher rates. We continue to expect that net interest margin will expand five to six basis points for each 25 basis point increase in the Fed funds rate on a static balance sheet. Assuming the forward curve as of April 14th, which includes eight additional rate hikes in 2022, we expect the core NIM to expand to the low 340s by the end of 2022. To be clear, this expected significant expansion of net interest margin in combination with expected growth over the remainder of the year has materially improved the outlook for net interest income. Moving to slide seven, adjusted non-interest income was 15.8 million, a decrease of 2.5 million from the previous quarter and a decrease of $2 million from the prior year quarter. The main driver of the decrease from the prior quarter is the absence of significant SBIC investment income this quarter, the timing and amount of which vary meaningfully between periods, and the gain in the fourth quarter of $750,000 from the sale of a website domain name. In our core activities, our growing deposit base generated a 7% sequential increase in service fees, and interchange revenue was flat coming off the seasonally high fourth quarter and with two fewer days in the first quarter. Wealth management income was higher by $300,000 or 13% from the prior quarter as we continue to successfully add new relationships. In mortgage, despite low housing inventory and continued slowing refinancing demand, the mortgage banking team has done a tremendous job refocusing on purchase money And as a result, mortgage banking fees were $1.7 million, a decline of only $300,000 from the prior quarter. Looking ahead, we continue to focus on growing our broad base of revenue sources and expect second quarter non-interest income in a range from $17 to $17.5 million. Moving to slide eight, adjusted non-interest expense for the first quarter was below the range of guidance we provided at $50.7 million. Salaries and benefits expenses were higher compared to the fourth quarter, reflecting the growth in the associate base as the footprint has expanded, the two acquisitions, and also due to the seasonal effect of higher payroll taxes and 401 contributions. Data processing costs increased primarily as a result of the launch of the upgraded online and mobile banking platform, which I will discuss momentarily. and increases in occupancy reflect the impact of the expanded footprint into Naples, Sarasota, and Jacksonville. Looking ahead, we expect to maintain our expense discipline while investing for growth. Expenses were lower in the first quarter than expected, as the full impact of planned hires won't fully materialize until the second quarter. We expect second quarter expenses, excluding the amortization of intangible assets, to be in the range of $52.5 million to $53.5 million. The increase quarter over quarter is primarily the result of continued investments in talent and the full impact of additional overhead from new locations opened and overhead associated with the two bank acquisitions. On slide nine, you can see the typical seasonal trend of an increase in adjusted efficiency ratio from Q4 to Q1. We expect the adjusted efficiency ratio to remain below 55% in the second quarter and to decline throughout the year, resulting in a full year 2022 ratio that will be in the low 50s. Assuming the forward yield curve plays out, we could see the overhead ratio dip into the high 40s towards the end of 2022. Turning to slide 10, the record pipeline this quarter is, in large part, the result of our success in recruiting talent including leaders with proven success in developing high-performing commercial banking teams. We brought in 14 experienced bankers during the quarter, in addition to the 20 bankers we added during 2021. We continue to add high-quality commercial banking talent, recruiting from large regional banks. As a result, we've experienced material improvement in productivity across the commercial banking franchise and expect continued recruiting success over the remainder of the year. Turning to slide 11, highlighting the continued diversity of our exposure and concentration levels well below regulatory guidance. Activity this quarter included the two acquisitions and a residential purchase pool. Non-owner-occupied commercial real estate increased from 29% last quarter to 30%, and residential real estate increased from 24% last quarter to 25%, offset by a lower percentage of PPP loans. This diversification highlights our disciplined approach to managing concentrations. Construction and commercial real estate concentrations remain well below regulatory guidelines, and you can see the average commercial loan size remains low at $524,000. Turning to slide 12, beyond acquisitions and a loan pool purchase, organic loans increased $104 million or 7% on an annualized basis. The record pipeline of nearly $620 million in commercial bodes well for production next quarter, and loan yields are benefiting from acquisitions and the higher rate environment. Looking forward, we expect loan growth to continue with an annualized growth rate in the high single digits for the remainder of the year. Additionally, we've seen the market reprice fixed rate new loan pricing materially, up over 100 basis points over the last 60 days. We expect core yields to continue to increase with higher rates translating to slower prepayments, better new add-on yields, and the positive impact of the portfolios coming on from the acquisitions. Using the forward curve as of April 14th, we expect core yields to expand to the low 410s in the second quarter and to the 440s by the end of 2022. Turning to slide 13 for the securities portfolio. We continue to invest excess liquidity at a moderate pace in the investment securities portfolio with net additions of $171 million and have meaningful additional liquidity for loan production and strategic purchases at higher rates. Additions this quarter were primarily agency CMOs with an average duration of 3.9 and a weighted average yield of 2.1%, and new add-on yields so far in April have averaged 3.3%. positively impacted by recent steepness in the front end of the curve. The duration of the portfolio remains short within our three to four target that will roll down the curve and allow us to deploy the resulting cash flow at higher future rates. With new purchases in the second quarter, we'll continue to steadily pace our investments, expecting net growth of approximately $150 million to $250 million. Turning to slide 14, we maintain a strong liquidity position with ample cash to deploy into rising rates. Our cash and cash equivalents to total assets at the end of the quarter was 11.2% and combined with securities was 33.7%, while the loan-to-deposit ratio remains lower than the historical norm at 70%. Turning to slide 15, illustrating Seacoast's historical deposit data. Seacoast's longstanding relationship and high proportion of transaction accounts translates to a relatively low beta. In the last full rising rate cycle, from the third quarter of 2015 to the second quarter of 2019, the deposit beta was 28%. Each cycle is different, but we do have an even more favorable deposit mix today than in the past, with 38.1% non-interest bearing versus 31.7% back in 2015, and 62% transaction accounts compared to 54% at the start of the last cycle. That evolution supports our expectation that deposit costs will remain low and that rate increases will be directly impactful to the NIM, particularly in the early hikes. When compared to the prior cycle, we exhibit a comparatively higher liquidity position, lower loan to deposit ratio, and better deposit mix. As a result, we expect we would continue to outperform most in the industry. Turning to slide 16, deposits outstanding were $9.2 billion, an increase of $1.2 billion quarter over quarter. Outside of the growth coming from the two bank acquisitions, organic deposits increased 6% this quarter, or 25% annualized, with much of that growth coming from new commercial relationships generated by the expansion of our commercial banking franchise. Transaction accounts represent 62% of total deposits, and have grown 33% year over year, demonstrating the strength of our customer franchise, a growing Florida economy, and our ability to win share in the marketplace. Moving to slide 17, the wealth management business continues to build new relationships. Assets under management have more than doubled in the last two years, and revenues are up 13% quarter over quarter. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team to build and deepen banking relationships. This relationship-driven approach generates value for our most profitable clients and will continue to deliver strong returns over the long run. On slide 18, we highlight our delivery this quarter of an upgraded online and mobile banking platform for consumers and businesses. We've been a leader in digital servicing for a number of years, And this new platform strengthens our position even further by providing a better user experience, better tools, and enabling better digital sales capabilities. The new digital platform works seamlessly across mobile, tablet, and desktop, offering many new features and over 400 functions to our customers. Some of the new features include Zelle, account aggregation, and new reporting tools with account opening functionality launching this summer. Additionally, we've integrated this platform with our existing customer analytics platform, thereby enabling us to cross-sell digitally at a much higher level. Customer adoption thus far has exceeded our internal benchmarks, and customer feedback has been overwhelmingly positive. Moving to slide 19, the allowance for credit losses increased during the quarter by 6.5 million to an overall 89.8 million. with the increase in loan balances from organic growth and acquisitions partially offset by slightly lower coverage. The provision this quarter was $6.6 million, which includes $5.1 million to establish an initial allowance on the two acquired banks. We remain watchful of inflation pressures and are carefully considering the impacts of higher rates on the economy, though our credit metrics remain very strong and continue to improve. In addition to the allowance, the total purchase discount remaining on bank acquisitions is $24.1 million, which will be earned as an adjustment to yield over the life of those loans. We will continue to take a conservative approach to provisioning. On to credit metrics on slide 20. We're seeing sustained positive trends with net charge-offs near zero, non-performing loans decreasing to 0.41% of total loans, and the percentage of criticized loans to risk-based capital moving lower this quarter. There's a modest decrease in allowance coverage to total loans compared to last quarter, from 1.43% to 1.40%. The decrease reflects these sustained positive trends in credit loss indicators. We continue to assess the environment and the factors that might affect loan performance, and this quarter concluded that this modest decrease in reserves was appropriate. Turning to slide 21, our capital position continues to be very strong. Tangible book value per share is $17.12, a decline from last quarter that's attributed solely to the decline in accumulated other comprehensive income, the result of recording increasing unrealized losses in the securities portfolio. Without the impact of securities valuations on AOCI, tangible book value per share would have increased to $18.19. The ratio of tangible common equity to tangible assets was 9.9%, impacted by both the AOCI impact on securities and also by balance sheet growth, yet remains among the highest in our peer group. Regulatory capital ratios declined modestly on growing asset balances, particularly through acquisition. The Tier 1 capital ratio was 16.8%, and the total risk-based capital ratio was 17.7%. And finally, on slide 22, a longer-term look at tangible book value per share. Over the last five years, we've achieved a compounded annual growth rate of 10%, driving shareholder value creation. Our growth outlook remains favorable, evidenced by growth in commercial loans and deposits driven by the expansion of our commercial banking franchise. The recent steepening of the yield curve and the potential for rising rates will have a material positive impact on net interest income looking forward, particularly in light of our low-cost funding base. All this is positioned on a foundation of strong liquidity and capital from which we will optimize the opportunities of this strong Florida economy and continue to execute on our strategic growth initiatives. We look forward to your questions. Chuck, I'll turn the call back to you.