Seacoast Banking Corporation of Florida

Welcome to the Seacoast Banking Corporation's second quarter 2022 earnings conference call. My name is Vanessa and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press zero then one on your touchtone phone. 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 that this conference is being recorded. I will now turn the call over to Chuck Schaefer, Chairman and CEO of Seacoast Bank.

Thank you, Vanessa, and thank you all for joining us this morning. As we provide our comments, we'll reference the second quarter 2022 earnings slide deck, which you can find at secosbanking.com. Joining me today are Tracy Dexter, Chief Financial Officer, and Michael Young, Treasurer and Director of Investor Relations. Let me start by thanking the SECOS team for their continued focus and dedication to building the most competitive banking franchise in Florida. They've done an outstanding job integrating Sable Palm Bank and Business Bank of Florida, enabling us to enter the highly attractive dynamic Sarasota market and continuing to grow our presence in Brevard County. Looking ahead, we expect to close both the Apollo and Drummond transactions in October and are well prepared with a proven playbook to integrate Apollo in the fourth quarter of this year and Drummond in the first quarter of 2023. As we've mentioned, we completed our digital banking conversion in the first quarter, and the feedback from customers has been tremendous. This important project is a further extension of how we've lowered our cost to serve while enhancing our customers' experience. An important indicator of success is the significant reduction in inbound calls to our call centers as customers engage with our new digital banking features. Our commercial banking transformation continues with further additions of high-quality banking talent from larger organizations. Seco's client-centered culture has quickly made us the home of choice for talented bankers looking for a more culturally aligned organization. Complementing these efforts, we are launching a revamp of our treasury business to support growth into middle market operating companies. By attracting talented bankers, acquisitions, and through de novo expansion, we will have expanded the company into the fast-growing Florida markets of Naples, Jacksonville, Sarasota, Miami, Gainesville, and Ocala by the end of this year. Florida remains a robust, dynamic banking market, and we added an updated slide in the deck providing additional evidence of the wealth migration to Florida post-pandemic. Florida exceeded every state in the nation in attracting affluent, wealthy individuals and corporations during the last two years, adding materially to the state's GDP. Signifying its strength, the state of Florida announced a budget surplus of $21.8 billion for the fiscal year 2021-2022 and and refunded excess tax collections to corporations. Turning to our results, the Seacoast team delivered another outstanding quarter of earnings, generating $46.4 million in pre-tax, pre-provisioned earnings, up 11% from the prior quarter, driven by improved operating leverage. Further, the team achieved 7% loan growth and annualized loan growth and 8% annualized growth in non-interest-bearing demand deposits. We saw excellent expansion in the netism margin, which, excluding PPP and accretion on acquired loans, increased 19 basis points from the prior quarter. And as a whole, all of our key shareholder metrics improved, with the adjusted efficiency ratio down 2 percentage points to 53%, and the adjusted return on tangible equity up to 13.97%, while carrying a 9.74% tangible common equity ratio. During the quarter, the ACL coverage ratio remained nearly flat at 1.39%, and considering the loss absorption included in the purchase accounting marks, the company is reserved at a 1.71% coverage rate. Considering this credit backstop, the high quality of the customer franchise, and our strictly underwritten credit portfolio, we are operating with one of the most robust balance sheets in our peer group. We continue to take a conservative approach to reserving for the allowance for credit losses, underwriting, and capital. And lastly, I'll point out that our credit metrics remain impressively strong. Classified and criticized assets continue to decline. The company recorded net recoveries for the quarter. Non-performing assets declined quarter over quarter, and past dues remain stable. In summary, our quarterly performance and strategic highlights demonstrate the strength of the franchise and the quality of the agile, innovative team we've built here at Seacoast. We are focused on building the most competitive banking organization in Florida by creating highly valuable statewide brand and generating a high-quality customer portfolio in what is arguably the best banking market in the United States. We will be disciplined and focused in growing and serving high-value, lower-risk customer segments and markets while delivering strong risk-adjusted returns to our shareholders. I'll turn the call over to Tracy to walk through our financial results.

Thanks, Jeff. Good morning, everyone. Let's begin with highlights for our second quarter results on slide five. The net interest margin expanded 13 basis points to 3.38%, and on a core basis, expanded 19 basis points to 3.24%. Adjusted pre-tax, pre-provision net revenue was 46.4 million, an increase of 11% compared to the prior quarter, and an increase of 23% compared to the prior year quarter. the result of higher net interest income driven by expanding margin, increasing non-interest income, and a reduction in non-interest expense. With the increase in rates during the quarter, new purchases of securities and loan originations supported higher loan and securities yields, and our cost of deposits remains at six basis points. Organic loan growth was strong this quarter at an annualized rate of 7%, despite elevated payoffs when compared to the prior quarter. With our continued investment in experienced bankers and the expanded footprint, we're well positioned for growth, and during the quarter, commercial originations are up 139% year-over-year. Credit risk metrics continue to improve, with charge-offs, non-accrual, and criticized loan ratios all lower compared to the previous quarter. Tangible book value per share ended the period at $16.66. Excluding the year-to-date decrease in fair value of available-for-sale debt securities, tangible book value per share would have been $18.55 or an increase of 9% year-over-year. Given our higher capital ratios, we chose to maintain the majority of our securities portfolio in AFS, which impacted tangible book value per share but provides sales optionality in future periods. With the continued success of our balanced growth strategy and peer leading capital levels, we were pleased to deliver an increase to the dividend in the second quarter and will continue to revisit the dividend payout ratio periodically. I'll also highlight that since the beginning of 2022, we've executed on significant market expansion. We closed on the acquisitions of Sable Palm Bank in Sarasota and Business Bank of Florida 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. And in May, we announced the upcoming acquisition of Drummond Community Bank in the North Florida market, including Gainesville and Ocala. This expansion across some of Florida's most attractive MSAs is building both franchise value and scarcity value over the long term. Moving to net interest income and margin on slide six. Net interest income on a tax equivalent basis increased 5.1 million or 7% compared to the prior quarter with both higher balances and higher yields on loans and securities. These increases were partially offset by lower PPP fee accretion, with only $17 million in PPP loans remaining. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin expanded 19 basis points from 3.05% to 3.24%. Securities portfolio yields increased 30 basis points to 1.98%, and core loan yields increased 10 basis points to 4.10%. The cost of deposits remained flat to the prior quarter at only six basis points. 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 each 25 basis point rate hike on a static balance sheet would be beneficial in a range of five to six basis points to net interest margin. Assuming the forward curve as of the first week in July, which included an additional 50 basis point rate hike in September, we expect an increase of approximately 5 million to net interest income in the third quarter, with the core NIM excluding purchase accounting accretion expanding to around 350. Moving to slide seven. Adjusted non-interest income was $17.3 million, an increase of $1.4 million from the previous quarter and an increase of $1.9 million from the prior year quarter. Service charges on deposits increased $0.6 million to $3.4 million, reflecting higher demand account balances and changes in monthly maintenance and ATM fees partially offset by slightly lower overdraft fees. In the third quarter, Changes we're making to reduce overdraft fees will take effect with an estimated impact of $1.5 million annually. Wealth management performed well during the quarter, overcoming broad-based market valuation declines with revenues 4% higher sequentially and 16% higher compared to the same quarter last year. Mortgage banking fees are lower, reflecting the continued impact of rising rates and limited housing inventory on saleable loan production. Other income in the second quarter includes higher loan swap fees and an increase in production and resulting gains on saleable SBA loans. Looking ahead, we continue to focus on growing our broad base of revenue sources and expect third quarter non-interest income in a range from $17 to $17.5 million. This assumes mortgage banking fees continue to remain challenged, and it includes one month's impact from changes being made to the company's overdraft policy. Moving to slide eight, adjusted non-interest expense for the second quarter was $51.7 million. When excluding gains on the sale of REO, that figure would be $52.6 million at the lower end of the range of guidance we provided last quarter. Excluding the impact of merger-related costs in each period, salaries and benefits increased $0.9 million as we continue to add talent and support growth initiatives. Smaller increases in marketing, occupancy and data, and other expenses were offset by decreases in legal fees. Looking ahead, we expect to maintain our expense discipline while continuing investments to support growth. We expect third-quarter expenses, excluding the amortization of intangible assets, to be in the range of $53 million to $54 million, with the planned increase resulting from continued investments in talent and scaling the business. Turning to Slide 9, the efficiency ratio has improved from the prior quarter, including on an adjusted basis, and we expect continued results in the low 50s for the remainder of the year. Turning to Slide 10, highlighting the continued diversity of our exposure and our disciplined approach to managing concentrations, the distribution of loans by category remains stable compared to the prior quarter. Construction and commercial real estate concentrations remain well below regulatory guidelines and well below those of the peer group. And the average commercial loan size remains low at $558,000. Turning to slide 11, loans net of PPP increased $112 million or 7% on an annualized basis. Coming off a record high pipeline in the first quarter, we delivered record originations of $462 million in commercial. Prepayments were notably higher in the second quarter, totaling $348 million compared to $244 million in the first quarter and compared to an average $286 million per quarter in 2021. If not for the $103 million increase in prepayments compared to the prior quarter, loan growth would have been over 13% annualized. Looking to the third quarter, we expect loan growth to continue with an annualized growth rate in the high single digits The commercial pipeline at June 30th is lower than at March 31st, reflecting the impact of higher rates on loan demand. However, as long-term rates have fallen, the pipeline has recovered, providing us confidence in our third quarter guidance. Loan yields will continue to benefit from the higher rate environment, and what we anticipate will be slower prepayments and better new add-on yields. Through last week, new add rates in July have moved up to around 460. Using the forward curve as of the first week in July, we expect core yields to expand to the low 430s in the third quarter of 2022. As a reminder, this excludes purchase accounting accretion. Turning to slide 12 for the securities portfolio, we continue to invest excess liquidity at a moderate pace in the investment securities portfolio. With net additions of 142 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 3.3, and new add-on yields during the quarter averaged 3.31%, positively impacted by recent steepness in the front end of the curve. Through last week, securities purchase add-on rates in July have improved to approximately 4%. In October, with the closing of the Apollo and Drummond transactions, we will acquire cash and the securities portfolios. Our deal models contemplated selling and reinvesting those funds, and we'll begin our deployment strategy for investing those funds beginning in the third quarter. We'll steadily pace our investments, expecting net growth in the portfolio by the end of the third quarter of approximately $200 million to $250 million. Turning to slide 13. we maintain a strong liquidity position and ample cash to deploy into rising rates. Our cash and cash equivalents to total assets at the end of the quarter was 8.3%, and combined with securities was 32%, while the loan-to-deposit ratio remains lower than the historical norm at 71%. Turning to slide 14, illustrating SECO's historical deposit beta. SECO's longstanding relationships and high proportion of transaction accounts translates to a historically 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 39% non-interest bearing versus less than 32% back in 2015, and 64% 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 continue to be beneficial to the NIM. When compared to the prior cycle, we exhibit a comparatively higher liquidity position, lower loan to deposit ratio, and better deposit mix. While we have not increased deposit pricing to date in this cycle, we expect the competitive environment to become increasingly dynamic. We have a very strong deposit base and expect that we will continue to outperform our peers on deposit betas in the coming quarters. Turning to slide 15, at quarter end, deposits outstanding were $9.2 billion, a decrease of $55 million quarter over quarter, with non-interest-bearing demand deposits growing at an annualized rate of 8% during the quarter, offset by declines in money market and CD accounts. Transaction accounts represent 64% of total deposits and have grown 6% on an annualized basis. Thus far in July, we've begun to see more requests for exception pricing, and we continue to manage this on an exception basis. Moving to slide 16, the allowance for credit losses increased during the quarter by $0.9 million to an overall $90.8 million, keeping pace with loan growth while maintaining coverage nearly flat to last quarter at 1.39%. We remain watchful of inflationary 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 $21.4 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. When combining both the allowance for credit losses and the purchase discount remaining, we're operating from a more conservative position than our peer set. On to credit metrics on slide 17. We're seeing sustained positive trends with a net recovery position during the quarter and non-performing loans decreasing to 0.4% of total loans. The percentage of criticized loans to risk-based capital moved lower this quarter. And again, allowance coverage is near flat to last quarter at 1.39%. We continue to assess the environment and the factors that might affect loan performance and will retain a conservative posture in our outlook and estimate. Turning to slide 18, our capital position continues to be very strong. Tangible book value per share is $16.66 a decline from last quarter that's attributed solely to the decline in accumulated other comprehensive income, the result of recording unrealized losses in the securities portfolio. The ratio of tangible common equity to tangible assets was 9.7%, also impacted by the change in AOCI from securities. Despite the decline, this TCE to TA ratio remains among the highest in our peer group. Regulatory capital ratios were not affected by changes in securities valuations and were flat to prior quarter. Return on tangible common equity was higher in the second quarter on both a gap and adjusted basis, with the second quarter benefiting from higher net interest income and the first quarter negatively impacted by the day one provision of 5.1 million on loans acquired from Stable Palm and Business Bank of Florida. And finally, on slide 19, A longer-term look at tangible book value per share demonstrates our sustained ability to generate value for shareholders. Over the last five years, we've achieved a compound annual growth rate of 9%, positioned on a foundation of strong liquidity and capital, from which we'll continue to optimize the opportunities of a 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.