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spk33: Ladies and gentlemen, please stand by. The conference will begin momentarily. We thank you for your patience and ask that you please stay connected. Thank you. Greetings. Welcome to Seacoast Banking Corporation's second quarter 2023 earnings conference call. My name is Malika and I will be your operator. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. 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 conference over to Chuck Schaefer. Chairman and CEO of Seacoast Bank. Mr. Schaefer, you may begin.
spk29: Thank you all for joining us this morning. As we provide our comments, we'll reference the second quarter 2023 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracy Dexter, Chief Financial Officer, Michael Young, Treasurer and Director of Investor Relations, James Stallings, Chief Credit Officer, and David Houshell, Director of Credit Risk Analytics. The Seacoast team produced another quarter of solid financial performance with strong adjusted earnings, resulting in an adjusted return on tangible common equity of 16.1%. Our capital and liquidity ratios were robust, and our asset quality remains excellent. As noted in our press release in June, we completed the technology conversion of Professional Bank. This wraps up a concentrated period of acquisition activity that boosted Seacoast beyond the $10 billion in assets threshold, definitively positioning Seacoast as Florida's bank. The company now serves the entire peninsula of Florida with a presence in every major market in the state, expanding our unique, locally resonant banking brand across the strongest economy in the nation. With the professional bank conversion completed, we have aggressively reoriented the company to focus on organic growth through the remainder of 2023. We will leverage the exceptional talent we acquired in recent years in combination with additional marketing investments to drive customer and low-cost deposit growth. we have launched a large-scale enterprise-wide plan that involves every employee in the company focusing heavily on customer growth, fee income generation, and streamlining operations to allow our bankers to execute with speed. We expect this refocus plan to be a significant pivot for the company, resulting in much stronger customer acquisition for the balance of 2023 and beyond. As part of this program, we'll reduce headcount by 5% in the third quarter. The resulting lower third quarter compensation expense will be partially reinvested in additional marketing programs that drive low-cost deposit growth, and we also expect lower loan originations in the third quarter, leading to lower deferral of origination costs. We expect the full benefit of the reduction in force to be realized in Q4 with a decline in expenses from the third to the fourth quarter and reduce the run rate into 2024. Tracy will provide expense guidance in her prepared remarks. And turning to M&A, we believe mid to late 2024 will be a period of rapid industry consolidation. Our goal is to position the company for this opportunity by entering 2024 with strong capital and liquidity. We'll be fully prepared to take advantage of these opportunities as they materialize, and we'll position Seacoast to be the acquire of choice in Florida. And to conclude, we continue to operate from a position of significant strength in the nation's most robust local economy. This strong statewide economic backdrop and our fortress balance sheet positioned Seacoast well compared to peers, and sets us up to take advantage of opportunities we expect to rise in the coming periods. I'd like to thank all the Seacoast and professional bank associates for their hard work on the professional conversion. You all did an amazing job, and the conversion was incredibly smooth. I'll now turn the call over to Tracy to walk through our financial results.
spk23: Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, beginning with the highlights on slide four. Over the past three quarters, We've closed and converted three bank acquisitions, including the conversion of Professional Bank in early June. Our M&A strategy has contributed to our now statewide presence, growing share in all major Florida markets, and positioning Seacoast among the largest Florida headquartered institutions and the only publicly traded bank with an exclusive focus on the state of Florida. M&A opportunities may arise again soon, but for now we're focused on compounding tangible book value and organic growth through customer acquisition. Sequentially, net income in the second quarter increased 164% to $31.2 million, and adjusted net income increased 68% to $49.2 million. On an adjusted basis, return on tangible common equity was 16.08%. Our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. The ratio of tangible common equity to tangible assets increased during the quarter to 8.53%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 7.87%. We're pleased to have maintained stability in the level of overall deposits, despite an increasingly competitive environment. Our credit standards remain disciplined and focused on relationship lending, and our loan to deposit ratio ended the quarter unchanged at 82%. Credit risk metrics remain strong, with low levels of charge-offs, non-accrual loans, and criticized assets. We continue to maintain robust liquidity, and our total borrowing capacity is 184% of uninsured and uncollateralized deposits. Turning to slide five, net interest income declined by 4.2 million, or 3% during the quarter, with higher deposit costs and lower purchase accounting accretion partially offset by higher yields. Net interest margin contracted to 3.86%. In the securities portfolio, yields increased 28 basis points to 3.13%. Loan yields increased to 5.33%, excluding accretion, and the add-on rate in June averaged 7.1%. The cost of deposits increased to 1.38%, while our funding base remains strong with 57% transaction accounts. Looking ahead, we're modeling net interest margin to decline approximately 30 basis points in the third quarter, stabilizing into 2024. Moving to slide six, adjusted non-interest income was in line with the guidance we provided at 21.8 million, an increase of 1.5 million from the previous quarter and an increase of 4.5 million from the prior year quarter. Service charges increased 7% with continued expansion of our commercial treasury management offerings and new customer acquisition. Interchange revenue increased 8% with higher transaction counts from both business and consumer customers. As a reminder, the Durbin Amendment became effective for Seacoast beginning July 1st of this year, so our interchange income in future periods will be lower with the constraints of those rules. The impact on net income is mitigated through our efforts to diversify revenue streams in recent years. Investments in our Wealth Management Division have resulted in significant growth. And in the second quarter of 2023, wealth management income was higher by 8% from the prior quarter and by 20% from the prior year quarter. The addition of an insurance agency business through an acquisition in the fourth quarter of 2022 added $1.2 million to second quarter non-interest income. Looking ahead, we continue to focus on growing our broad base of revenue sources. And with the benefit of the expanded franchise, We expect third quarter non-interest income of approximately 20 to 21 million, having largely offset the Durbin impact with other sources of revenue. Moving to slide seven, wealth revenues increased 8% compared to the first quarter and 20% compared to the second quarter of 2022. Assets under management increased 36% from a year ago to 1.6 billion and have increased at a compound annual growth rate of 28% in the last three years. Our family office-style offering continues to resonate with customers, generating strong returns for the franchise. Moving to slide eight. Adjusted non-interest expense for the quarter was in line with the guidance we provided at $84 million. Increases from the prior quarter reflect running the Seacoast and professional customer platforms in parallel for most of the second quarter. These platforms, along with branding, systems, and processes, are now fully converted to Seacoast and cost synergies will be fully realized in the second half of 2023 and into 2024. Salaries and benefits on an adjusted basis decreased by 600,000, reflecting the absence in the second quarter of the seasonal effect in the first quarter of higher payroll taxes and 401 contributions. Data processing costs are typically volume-based, and the increase aligns with the larger customer base and higher transaction volume. Similarly, occupancy-related costs are in line with the bank's larger footprint for much of the second quarter. Near the end of the second quarter, we consolidated five retail branch locations. Looking ahead, cost synergies from recent acquisitions will positively impact the back half of the year and meaningfully benefit 2024. We've executed a number of disciplined expense initiatives in order to maintain our focus on efficiency, including a reduction of our headcount by 5%. In the third quarter, we expect expenses on a gap basis of approximately 93 to 95 million. This includes the amortization of intangibles and approximately two to three million in severance costs. The third quarter also includes additional marketing expenses and lower deferral of loan origination costs. Adjusted expenses for the third quarter are expected to be near flat to the second quarter. Looking further to the fourth quarter, as cost synergies and efficiency initiatives take effect, we expect expenses to drop by 3 to 4 million and maintain that run rate into 2024. Moving to slide nine, the efficiency ratio on an adjusted basis was 56 percent. The increase quarter over quarter was primarily the result of declining net interest income as deposit costs increased. As we scale the company and become the leading bank in our Florida markets, we continue to pace our investments with discipline. Turning to slide 10, loan outstandings were near flat as we maintain our strict credit discipline and as we continue to see the impact of higher rates on market demand. Average loan yields increased by three basis points during the quarter to 5.89% and increased 16 basis points when excluding accretion on acquired loans. We expect loan yields to continue to increase in the coming periods And looking forward, we believe loan outstandings will decline modestly over the back half of 2023. Turning to slide 11, 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 disciplined, conservative credit culture. 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 12, non-owner occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. Importantly, CNI loans and the related owner-occupied CRE, which is repaid through cash flows of the business, not from the sale or leasing of the property, represent 32% of the total portfolio. On slides 13 and 14, we provide additional detail on the dispersion of non-owner-occupied commercial real estate loans in markets across the state and in categories including retail and office, noting the strong performance of these segments to date and key credit monitoring metrics. Diversification across industries and collateral types has been a critical tenet of our strategy, and the low average commercial loan sizes are the result of our longtime focus on granularity and on creating valuable customer relationships. Moving on to credit topics on slide 15. The allowance for credit losses increased during the quarter to an overall 159.7 million, with an increase in coverage to 1.58%. The allowance for credit losses combined with the $202 million remaining unrecognized discount on acquired loans totals $362 million, or 3.6% of total loans that's available to cover potential losses. Moving to slide 16, looking at trends in credit metrics. Our credit metrics remain very strong. Nevertheless, we remain watchful of inflation pressures and the broader economic environment and are carefully considering the ongoing impacts of higher rates on the economy. Charge-offs were three basis points during the quarter and have averaged six basis points in the last four quarters. Non-performing loans represent 0.48% of total loans, and the percentage of classified assets to total assets was 0.9%. And in the allowance, we continue to assess the environment and the factors that might affect loan performance, and this quarter, the allowance for credit losses moved four basis points higher to 1.58% of total loans. Moving to slide 17 in the investment securities portfolio, the average yield on securities increased during the quarter by 28 basis points to 3.13%, in part due to swap activity we undertook during the quarter. Additional rate hikes will benefit the securities portfolio as a result. Changes in the yield curve during the quarter were detrimental to portfolio values, increasing the overall unrealized loss position from the end of the prior quarter. Turning to slide 18 in the deposit portfolio, deposits outstanding were near flat at $12.3 billion. Transaction accounts represent 57 percent of overall deposits, which continues to highlight our longstanding relationship-focused approach. The cost of deposits increased this quarter to 1.38 percent with the dynamic changes in the industry and the materially increased competitive landscape. Additionally, we had a full quarter impact of professional banks, And for the first time since the pandemic, we're seeing Florida's seasonal residents leave the state to return north for the summer. One item that's unique to Florida, the Florida Bar Association in May amended the trust account program known as IOTA, requiring financial institutions to pay interest on these accounts at a specified spread to an index. This change impacted deposit costs during the second quarter by approximately five basis points. Overall, our expectation for the third quarter is that the cost of deposits will continue to increase with higher rates, though the extent of the impact is difficult to predict with certainty. That said, we continue to outperform peers in our cost of deposits as the environment serves to highlight the strength of our low-cost deposit base and focus on relationships. On slide 19, the bar chart shows the addition of balances in higher rate categories that affected the overall mix during the quarter. Seacoast continues to benefit from a diverse and granular deposit base with the top 10 depositors representing only 3% of total deposits. Our consumer franchise contributes 43% of overall deposit balances with an average balance per account of only $23,000. Business customers represent 57% of total deposits with an average balance per account of only $109,000. Our customers are highly engaged and have a long history with us. And we have a peer-leading level of non-interest-bearing deposits, representing 34 percent of the deposit base. This provides significant strength in maintaining deposit costs over time and reflects the granular relationship nature of our franchise. On slide 20, demonstrating our significant capacity to fund potential outflows, the bar on the right identifies balances above the FDIC-insured limit, excluding public funds accounts that have collateral-backed protection. Uninsured and uncollateralized deposits total approximately $3.5 billion, which, if needed, would be almost completely funded by Seacoast cash and borrowing capacity at the Federal Reserve. Beyond that, Seacoast has an additional nearly $3 billion in sources of liquidity above the $3.5 billion. We have not used and don't plan to use the Federal Reserve's new bank term funding program. And finally, on slide 21, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. You can see the increase in tangible common equity to tangible assets in the second quarter as we move past the initially dilutive effect of recent acquisitions, reflecting our commitment to driving shareholder value creation. In summary, considering our strong capital levels, prudent credit culture, and high-quality customer franchise, we have one of the strongest balance sheets in the industry, providing optionality if the environment becomes more challenging, and to continue building Florida's leading community bank. Chuck, I'll turn the call back to you.
spk29: Thank you, Tracy. And Malika, I think we're ready for Q&A.
spk33: Perfect. Thank you. Ladies and gentlemen on the phone lines, if you wish to register for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, it is 1-4 to ask a question. Our first phone question is from the line of Brady Gailey. Please go ahead. Your line is now open.
spk02: Hey, thank you. Good morning, guys.
spk03: Good morning, Brady. I know it's embedded in your fee income guidance, but I was just wondering the size of the Durbin hit. I know, I think in the past we've talked about roughly 12 million a year. So that'd be 3 million a quarter. Is that still the right way to think about that impact from Durban?
spk01: It is Brady. You can use that number.
spk03: Okay. All right. And then, you know, non-interest bearing, uh, you know, fell here. You're not alone. The industry is seeing that across the board, but for Seacoast, you know, your mid 30% non-interest bearing deposits to total, where do you think that lands?
spk18: Yeah, Brady, this is Michael. You know, I would just call it a couple things. You know, we had some elevated tax payments this quarter, early in the quarter. And then, as was mentioned in the prepared remarks, we really had to return to a true season in Florida, which is a little idiosyncratic for us versus some of the other banks nationally. So, We hope to see some kind of return of that benefit into the coming quarters, into the back half of the year. But generally, we're modeling from a conservative perspective that that might trend down a little bit from here into the low 30 percentage range. But that's just from a modeling conservatism point of view. But we do think there were some kind of idiosyncratic drivers this quarter that may return positively in the future. Okay.
spk03: All right, and then, you know, Chuck, I heard your comments about maybe a year from now the M&A environment will be a little more active. You know, you guys have been very active in the Florida Bank M&A. I'm just wondering, you know, once that spigot gets turned back on, you know, what is Seacoast's M&A strategy? I mean, there's not a lot of larger targets left in the state, and I know professional is a big deal for you all, maybe your biggest ever, but do you return to you know, looking at kind of smaller privately held targets when you think about bank M&A?
spk29: Yeah, thanks for the question, Brady. You know, if you sort of look back here recently, you know, we did do a lot of deals here over the last 14, 15 months. It was a concentrated period of M&A. You know, we did that to position ourselves as a statewide brand. We're now in every major metro market. Team did an incredible job of integrating and bringing those deals on. There's a lot of, um, competency here inside the organization, both in terms of technology and socially, how to bring deals into Seacoast. I think in the near term, as I mentioned in my prepared comments, our focus is on organic growth. We've had a lot of resources, a lot of effort focused on consolidating banks. And at this point here, at least in the near term, the next couple quarters at least, our focus will be heavily on organic growth. We're going to sort of release all those resources and energy into growing the bank here on the back half of the year. I'm pretty excited about what we can possibly get done there. And then moving into the 2024, depending on the environment and depending what deals look like, I think it's probably more of a return to a smaller bank M&A. As you say, if you look across the landscape, there's about 60 to 70 banks, probably 20 to 25 banks that fit within our profile, primarily smaller billion and under institutions that we think could make a lot of sense We still think the highest and best franchise value for Seacoast is consolidating market share in Florida. If you were to look at where we are in terms of market share, we're right around number 15. I'd love to drive the company into the top 10. I think that would create incredible value for shareholders over the long run. And so if those opportunities emerge, it's kind of back to exactly what we've been doing, Brady.
spk03: All right, that's helpful. And then finally for me, your bigger picture is, If you look over time, Florida tends to be kind of a boom-bust state when it comes to real estate prices. And, you know, real estate prices have been booming for a while down there. So I'm just wondering, as we head into uncertain economic times, do you think there could be some real softness in real estate prices, or is there a dynamic difference this time around that could insulate real estate prices in Florida?
spk29: I think a lot's changed in Florida over the last 10 years. You know, you've had much stronger urban anchors built out in Orlando, South Florida, Tampa, Jacksonville, you know, and in particular, Southeastern Florida has become incredibly strong, incredibly diverse in terms of the economic drivers. I also think in Florida, there was not a lot of construction. You know, typically the issue with Florida has been in the past and where the boom bust sort of history comes from. is construction and oversupply sort of chasing the demand of inbound sort of population growth. But if you look at really since the last crisis, there's really construction didn't come on until the last three or four years. And so the housing market remains remarkably stable. We see absorption being very reasonable. We see supply being very reasonable. We still see strong population growth. I feel very confident in real estate values in Florida. I don't think we're going to see the pace of increase we're seeing. We're seeing stabilization in terms of value increases. Residential, to me, feels very healthy and very strong. In large part, the same thing on the commercial side. Again, there's just not been a lot of new supply coming in the market. The absorption's been there. The market's remained strong. Population growth is there. That all being said, we're always very mindful of that. We're very mindful of the fact that we have a concentrated geography in Florida. That's why we tried to build a very diverse portfolio in terms of both asset size, asset type, and the granularity that we build and the strength of the capital base. So we know Florida. We know the history. But I feel good about where we are, Brady. Great.
spk24: Thanks, Chuck. Thank you.
spk33: Thank you. Our next question is from the line of David Feaster. Please go ahead. Your line is now open.
spk17: Hey, good morning, everybody.
spk33: Morning, David.
spk15: Morning.
spk17: Maybe just shifting back to the deposit side, I'm curious on the organic core deposit growth that you're seeing. Where are you having success, and how do you think about core deposit growth going forward? I know you said Last quarter, you had one of the highest levels of customer account growth later in the quarter. I'm just curious, where are you seeing success driving core deposit growth, and then how are new core interest-bearing add-on rates at this point? Where are you able to drive new money growth?
spk29: Maybe I'll start with the first part, and then, Michael, you can follow up with the second on new money rates. You know, what's very exciting to me, David, is, you know, we've built an incredible commercial banking team across the state over the last couple of years. And I think we're still in the first quarter of moving those relationships over. Week in and week out, I've been out with those teams calling on customers, calling on really strong relationship opportunities. We're seeing really great opportunities around sort of small to medium-sized enterprises that are willing to bring on, you know, full relationships. And we've had a lot of focus on consolidating and converting banks that now is behind us. And so I'm excited about combining some additional marketing expenses, some additional branding here in the coming periods in conjunction with a lot of new bankers we've added to the team. And I think there's an incredible opportunity to go out and unleash that team We have also, as you know, a really strong retail footprint. We have a really strong sales and service culture in that retail footprint. And we're going to unleash those guys as well. So kind of as we think about the back half of the year, we're going to combine a lot of new, very strong, what I think are, you know, I'm sorry, biased here, but the best commercial banking team in the state of Florida in combination with what is, you know, we've talked about in the past, a unique ability to drive cross-sell via our digital and data analytics platform in combination with additional marketing expenses. And we're going to go after this really hard. So I'm excited about the back half of the year. There's a lot of energy in the company about this. And, you know, I think there's a lot of opportunity, Dave.
spk18: And then as a follow-up on the rate piece of that conversation, David, you know, I think we've made a lot of investments into treasury management platform to go along with our commercial bank expansion. And the combination of that and all the new relationships that Chuck mentioned is bringing over a lot of new accounts. And, you know, the blended average of those, you know, new add-ons are still pretty attractive. As we move volume on, you know, we're obviously paying a little higher rate on the interest-bearing portion to be competitive in the market. But then trying to get those, you know, core operating BDA accounts alongside of that to blend that average cost down, you know, probably into the threes on a blended basis. is really the focus. And one quick follow up to Brady's question earlier, I think it's an important distinction and call out is, you know, following the events in March and April, we moved a lot of those operating accounts into the ICS product. And so that does come with a bit of a reclassification from DDA into now. So that's, you know, maybe an important call out to look at as well.
spk17: Could you quantify that? That's a good point. Do you know how big of an impact that was?
spk18: It was sizable. I don't want to get too fine a point on that, but probably over $150 million.
spk17: Okay. And then maybe on the other side of the equation, could you help us think about the expectations for payoffs and paydowns on the loan side in the next six to 12 months? and maybe where roll-off rates are and how new loan yield add-on rates are. I'm just trying to combine what, you know, with the commentary on what we're seeing with new deposit rates in the threes, you know, kind of maybe where the core NIM can stabilize once funding costs, you know, stabilize and we can start paying down the borrowings and those types of things. What kind of could be the normalized margin, you know?
spk18: Yeah, no, definitely understand that, David. The roll-off rates have been increasing a little bit. We had a little higher pay down quarter this quarter, a little over $300 million, and the rates are a little higher. I think what we're seeing is people with variable rate loans are electing to pay those down a little bit. So that's kind of leading to, at least thus far, a little higher roll-off rate on loans that are paying off and maturing. Then on the add-on side, though, we're definitely seeing good add-on yields. I think risk-adjusted returns are starting to improve in the market, and we're seeing loan pricing generally move higher. That's been a headwind to growth for us over the last six to nine months that we've articulated where we just felt like risk-adjusted returns weren't there. But now that we're getting into the seven handles, mid-high sevens with much better structure, much better underwriting, It's attractive. So bringing that all together versus the 3% add-on rates, you're kind of looking at a blended 4% margin on new production. And that's kind of really the focus here is to defend that margin and the profitability now that we're getting paid for the risk that's there in the market.
spk17: Yeah. Okay. That makes a ton of sense. And I'm glad to hear that. And then, but maybe following up on your point on the risk adjusted returns, I mean, you've been very disciplined on the pricing and structure front. Not surprisingly, it's translated into slowing originations. But I'm guessing – I'm just curious, I guess, A, how much of the slowdown in originations maybe do you think is strategic on your part in terms of being a bit more selective versus slower market demand? And then I'm just curious – Where are you still seeing good risk-adjusted returns? And then are you concerned at all about lender retention and maybe some poaching as you slow down production? I'm just curious what you're hearing from your lenders. Are they pushing back at all?
spk29: Yeah, just starting with the market demand side, if you think about what we do in the areas we focus on, it's primarily operating companies and stabilized income producing commercial real estate. And so, you know, on the stabilized income producing real estate, you know, market demand is really evaporated. There's just not been a lot of, uh, projects that pencil, you know, a lot of, uh, uh, acquisitions of stabilized commercial real estate is it's just not happening now. Uh, so that, that I would describe largely, um, uh, slowing down due to market demand. C&I, to some extent, same thing. Rates are much higher. And so I would say probably the way I think about it is three quarters of its market demand, a quarter of it's probably us. And, you know, sort of stepping back and looking at the bigger picture, the way we've thought about the business is as we go through the coming quarters and into next year, we know the Fed's going to continue to shrink the balance sheet. We know there's going to be a quantitative tightening effect. that will occur in both terms of rate and monetary supply. And so, you know, protecting the liquidity of the company is incredibly important, particularly as you enter into 2024, where, you know, you could fill the loan portfolio with transactional lending. But what we want to maintain is the firepower to go out and compete, particularly as things turn here. and really compete for the broader operating companies and the broader relationships that are going to bring deposits, treasury, wealth management opportunities, equipment lending, these solid, deep, highly profitable relationships. And what we don't want to do is burn up our liquidity on solving a loan growth problem in the near term when knowing long term we need to get out and compete for funding and compete in two what will be a shrinking pie of deposits. We know that the overall industry deposit pie, if you think about it that way, is going to continue to shrink. The Fed has told us so. And so maintaining liquidity, maintaining flexibility, and maintaining optionality to take on very high-quality, strong risk-adjusted returns is where we've been incredibly focused. Kind of the last part of your question with our banking teams, they're incredibly engaged. They have come over. They're bringing relationships over. In terms of incentives, we rotated them to deposits and other things, so they have the opportunity to make plenty of money. They have an opportunity to make a huge contribution here, and they've been brought into thinking about how to really go out and compete, and they're doing an incredible job. So I have really no concerns about the team being poached. I think they're excited to be part of our franchise and continue to bring their friends with them. So I'm pretty pleased with where we are there too, David.
spk18: And I might just add to that, you know, listen, ever, you know, as you all know, and as we communicate to those lenders when they're joining the company, they know our conservative culture and they know that that's served us well and will serve us well through through economic volatility. So just lots of communication internally around that and the ability to get back into market earlier than peers and the strength of our capital base and liquidity. that we'll be able to deploy. So we've just been, you know, very communicative about generating, you know, kind of capital and dry powder so we can serve clients when other banks have to step away, likely in the coming quarters.
spk15: Makes complete sense. Thank you. Thank you, Dave.
spk33: Thank you. Our next question is from the line of Brandon King. Please go ahead. Your line is open.
spk22: Hey, good morning. Thanks for taking my questions. Good morning, Brandon. So I wanted to follow up on the conversation on deposits and then also loan growth and managing the balance sheet. It seems like core deposit growth should kind of trend higher from here, and loans seem like they're being stabled to down a little bit. So how are you thinking about the loan-to-deposit ratio going forward? I know it's in the 80s now. Are you looking to kind of drive that down kind of in the 70s, or just in general how you think about the balance sheet?
spk18: Yeah, Brandon, this is Michael. So I think holistically, some of that will be driven by the amount of success we have on the deposit side. But we do have an opportunity, I think, as the securities cash flow comes in. Loan growth has been a little softer. We generate more cash, and we're probably able to pay down you know, some higher cost borrowings and de-lever the balance sheet a little bit, which would take our loan to deposit ratio a little higher from here, probably towards 84%, 85% is probably the trajectory we would head towards. But, you know, a lot of that will depend on just if we're getting paid for risk on the loan side and if we are, you know, able to generate that deposit growth that we think might be coming in the back half of the year.
spk22: And with that, what do you think about the securities portfolio now with those cash flows? coming online, are you looking to redeploy that potentially to higher yielding securities or would that generally just go down to paying down higher cost lending?
spk18: Yeah, I think generally we're just using the cash flow off the securities book at this point to fund lending and loan growth. So I think you should just assume we've got about $300 million in cash flow off the securities book over the next 12 months with half of that roughly principal payments, so you should just assume that the securities book continues to trend lower related to that kind of trend. And how much cash flow are you expecting? Again, could you remind us? Yeah, it's a little over $300 million over the next 12 months.
spk22: Okay. And then lastly, I noticed the interest rate swaps that have benefited securities yields. Could you give us the thought process around putting on those interest rate swaps and how you're managing the asset sensitivity going forward?
spk18: Sure. So, you know, just good opportunity in the market. And we had, you know, a portion, as Tracy mentioned, of the deposits that flipped to floating related to IOTA deposits. And so it was a proactive opportunity to really kind of mute some of those impacts. And so we moved $400 million to a pay-fix swap where we're paying about $390 and now receiving overnight SOFR, which moved us to more variables. So the securities book now is just under 30% variable versus 70% fixed. So it's just a proactive opportunity to pick up a good bit of incremental yield here near term over the next two years without a lot of downside risk from rates potentially moving lower. So that's kind of the overall... and opportunity there that we took and remind me the second part of your question there, Brandon.
spk22: Oh yeah. Just going forward, you are expecting to do more trades like this, or do you think you're in a good spot just given the position of funding?
spk18: Yeah, we'll always be opportunistic and, you know, depending on our expectations of the market and interest rates and our balance sheet positioning, you know, kind of what the appropriate, uh, moves are to make to manage that risk, you know, in the environment ahead as we see, you know, rate volatility and things unfolding. So we'll be incremental there, no big swings, no big bets, just incremental movements to improve the overall positioning and earnings and yield returns for the bank within the risk context. So I think that's kind of the right way to think about it. Nothing specific to call out today.
spk00: Okay.
spk21: That's all I had to take my questions. Thank you, Brandon.
spk33: Thank you. Our next question is from the line of Stephen Skelton. Please go ahead. Your line is now open.
spk20: Yeah, thanks. Good morning. Hey, I wanted to follow around on the NIM guidance, the 30 base points quarter over the quarter decline. Kind of what's fueling that larger shift maybe than what we're hearing from a lot of other banks into the third quarter? If there's any dynamics with professional that make your – you know, NIM moving to the third quarter any different? Just kind of walk me through those pieces if you could.
spk18: Sure, Steven. This is Michael again. You know, I think that, you know, a couple key call outs I would make there. One is the IOTA impact. That's about a 10 basis point increase to the cost of funding or cost of deposits there. So, you know, that's an idiosyncratic driver for us. It's maybe different from peers. It's kind of a one-time reset. And then we should be kind of on a normalized run rate from there. You know, the other piece is just probably the spot rate exiting the quarters a little higher. So if we just kind of run rate that going forward, you know, there's a little pressure to be felt there. And, you know, as we mentioned, kind of the seasonality around deposits for us, we're kind of at that trough from a deposit perspective around that seasonality. So it's driving a little incremental margin pressure this quarter and maybe next quarter. that, you know, I think with some return of seasonality tailwinds as opposed to headwinds, you could see some benefit along with all the organic growth efforts that we're discussing internally. So I think that's kind of the moving pieces that's getting us there. And then, you know, hopefully we'll see those benefits kind of start to materialize as we head later in the year and maybe into 2024.
spk20: Okay. So really just those things you spoke to earlier. Can you give us a feel for what you're assuming from a loan beta perspective moving forward and a deposit beta perspective?
spk18: Sure. On the loan beta side, you know, we are not growing very quickly at the moment. And so, you know, we'll see probably less loan beta. We've got about, you know, 60% kind of fixed rate balance sheet on the loan side. So, you know, just not as much loan repricing there. But We'll see some incremental movement, obviously, as lower rate loans mature and then we're able to reprice and any refinancing that we can do in the interim. So that's kind of on the loan side. On the deposit side and betas, I think just generally for the industry, you're going to see higher betas on incremental Fed hikes from here. So I don't think there's a differential there for us versus anyone else, really. So we'll just kind of have to see how far the Fed moves and what the impacts will be there. But, you know, we've managed QM beta pretty well thus far and really are outperforming peers from a cumulative beta perspective, though we did have a lot of catch-up, obviously, this quarter. But we think we likely stabilize a little bit from here and likely trend better, hopefully.
spk20: Perfect, perfect. On that 60% fixed rate, how do you think about the rollover of that? I mean, is that like a five-year kind of time period that we can think of fairly ratably over that book of loans and how they reprice over time?
spk18: Yeah, that's about right, Stephen. You know, most things are kind of maturing or really the life of the loan is extending to maturity. So, you know, five-year average life is probably fair. You know, in higher rate times, you might have seen a three-and-a-half-year life or something like that. But, you know, we're not seeing those early payoffs or paydowns, so five years is probably appropriate at this point. Makes sense. Makes sense.
spk20: Okay, and then last thing for me, you know, with the discounts, the purchase discounts, I mean, you're so reserved in purchase discounts, like around 2%, a Florida economy strong, y'all's loan book is super conservative and granular, you're going to be growing a little slower, it sounds like. I mean, could we see this kind of zero-ish provision for a while? Does that seem possible in your modelings?
spk23: Yeah, Steven, you know, our allowance coverage is up about four basis points from the prior quarter. The economic scenarios that we use continue to contemplate risks related to sustained higher rates, persistent inflation. We just look at those economic scenarios each quarter in the context of, you know, our Florida environment and what we're seeing in our portfolio. And, you know, we just try and make our best estimate each quarter. So it's difficult to say in advance. I do think that we are well covered when you certainly include the impact of the remaining purchase discount. And I think we feel pretty comfortable at that level.
spk29: Yeah, I'd just follow up with that. The balance sheet's incredibly strong. When you look at the capital we have, the loss absorption that's there in our ACL coverage ratio, we feel very confident in our position here. Yeah, no question.
spk20: Great. Thanks, guys, for the color and the time. Appreciate it.
spk05: Thank you, Stephen.
spk33: Thank you. Once again, as a reminder, ladies and gentlemen, it is 1-4 to ask a question on the phone lines. And at this moment, I'm showing no further question on the phone lines.
spk29: Okay. Thank you, operator. And we're around if anybody wants to have follow-up calls. And appreciate everybody joining us this morning. Thank you.
spk33: Thank you, ladies and gentlemen. That does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day. Thank you. Thank you. you Bye. Greetings. Welcome to Seacoast Banking Corporation's second quarter 2023 earnings conference call. My name is Malika and I will be your operator. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. 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. SECOS 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 conference over to Chuck Schaefer. Chairman and CEO of Seacoast Bank. Mr. Schaefer, you may begin.
spk29: Thank you all for joining us this morning. As we provide our comments, we'll reference the second quarter 2023 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracy Dexter, Chief Financial Officer, Michael Young, Treasurer and Director of Investor Relations, James Stallings, Chief Credit Officer, and David Houshell, Director of Credit Risk Analytics. The SECOS team produced another quarter of solid financial performance with strong adjusted earnings, resulting in an adjusted return on tangible common equity of 16.1%. Our capital and liquidity ratios were robust, and our asset quality remains excellent. As noted in our press release in June, we completed the technology conversion of Professional Bank. This wraps up a concentrated period of acquisition activity that boosted SECOS beyond the $10 billion in assets threshold, definitively positioning SECOS as Florida's bank. The company now serves the entire peninsula of Florida with a presence in every major market in the state, expanding our unique, locally resonant banking brand across the strongest economy in the nation. With the professional bank conversion completed, we have aggressively reoriented the company to focus on organic growth through the remainder of 2023. We will leverage the exceptional talent we acquired in recent years in combination with additional marketing investments to drive customer and low-cost deposit growth. we have launched a large-scale enterprise-wide plan that involves every employee in the company focusing heavily on customer growth, fee income generation, and streamlining operations to allow our bankers to execute with speed. We expect this refocus plan to be a significant pivot for the company, resulting in much stronger customer acquisition for the balance of 2023 and beyond. As part of this program, we'll reduce headcount by 5% in the third quarter. The resulting lower third quarter compensation expense will be partially reinvested in additional marketing programs that drive low-cost deposit growth, and we also expect lower loan originations in the third quarter, leading to lower deferral of origination costs. We expect the full benefit of the reduction in force to be realized in Q4, with a decline in expenses from the third to the fourth quarter, and we'll reduce the run rate into 2024. Tracy will provide expense guidance in her prepared remarks. And turning to M&A, we believe mid to late 2024 will be a period of rapid industry consolidation. Our goal is to position the company for this opportunity by entering 2024 with strong capital and liquidity. We'll be fully prepared to take advantage of these opportunities as they materialize, and we'll position Seacoast to be the acquire of choice in Florida. And to conclude, we continue to operate from a position of significant strength in the nation's most robust local economy. This strong statewide economic backdrop and our fortress balance sheet positioned Seacoast well compared to peers and sets us up to take advantage of opportunities we expect to rise in the coming periods. I'd like to thank all the Seacoast and professional bank associates for their hard work on the professional conversion. You all did an amazing job and the conversion was incredibly smooth. I'll now turn the call over to Tracy to walk through our financial results.
spk23: Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, beginning with the highlights on slide four. Over the past three quarters, We've closed and converted three bank acquisitions, including the conversion of Professional Bank in early June. Our M&A strategy has contributed to our now statewide presence, growing share in all major Florida markets, and positioning Seacoast among the largest Florida headquartered institutions and the only publicly traded bank with an exclusive focus on the state of Florida. M&A opportunities may arise again soon, but for now we're focused on compounding tangible book value and organic growth through customer acquisition. Sequentially, net income in the second quarter increased 164% to $31.2 million, and adjusted net income increased 68% to $49.2 million. On an adjusted basis, return on tangible common equity was 16.08%. Our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. The ratio of tangible common equity to tangible assets increased during the quarter to 8.53%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 7.87%. We're pleased to have maintained stability in the level of overall deposits, despite an increasingly competitive environment. Our credit standards remain disciplined and focused on relationship lending, and our loan to deposit ratio ended the quarter unchanged at 82%. Credit risk metrics remain strong, with low levels of charge-offs, non-accrual loans, and criticized assets. We continue to maintain robust liquidity, and our total borrowing capacity is 184% of uninsured and uncollateralized deposits. Turning to slide five, net interest income declined by 4.2 million, or 3% during the quarter, with higher deposit costs and lower purchase accounting accretion partially offset by higher yields. Net interest margin contracted to 3.86%. In the securities portfolio, yields increased 28 basis points to 3.13%. Loan yields increased to 5.33%, excluding accretion, and the add-on rate in June averaged 7.1%. The cost of deposits increased to 1.38%, while our funding base remains strong with 57% transaction accounts. Looking ahead, we're modeling net interest margin to decline approximately 30 basis points in the third quarter, stabilizing into 2024. Moving to slide six, adjusted non-interest income was in line with the guidance we provided at 21.8 million, an increase of 1.5 million from the previous quarter, and an increase of 4.5 million from the prior year quarter. Service charges increased 7% with continued expansion of our commercial treasury management offerings, and new customer acquisition. Interchange revenue increased 8% with higher transaction counts from both business and consumer customers. As a reminder, the Durbin Amendment became effective for Seacoast beginning July 1st of this year, so our interchange income in future periods will be lower with the constraints of those rules. The impact on net income is mitigated through our efforts to diversify revenue streams in recent years. Investments in our wealth management division have resulted in significant growth. And in the second quarter of 2023, wealth management income was higher by 8% from the prior quarter and by 20% from the prior year quarter. The addition of an insurance agency business through an acquisition in the fourth quarter of 2022 added $1.2 million to second quarter non-interest income. Looking ahead, we continue to focus on growing our broad base of revenue sources And with the benefit of the expanded franchise, we expect third quarter non-interest income of approximately 20 to 21 million, having largely offset the Durbin impact with other sources of revenue. Moving to slide seven, wealth revenues increased 8% compared to the first quarter and 20% compared to the second quarter of 2022. Assets under management increased 36% from a year ago to 1.6 billion, and have increased at a compound annual growth rate of 28% in the last three years. Our family office style offering continues to resonate with customers, generating strong returns for the franchise. Moving to slide eight. Adjusted non-interest expense for the quarter was in line with the guidance we provided at 84 million. Increases from the prior quarter reflect running the Seacoast and professional customer platforms in parallel for most of the second quarter. These platforms, along with branding, systems, and processes, are now fully converted to Seacoast, and cost synergies will be fully realized in the second half of 2023 and into 2024. Salaries and benefits on an adjusted basis decreased by $600,000, reflecting the absence in the second quarter of the seasonal effect in the first quarter of higher payroll taxes and 401k contributions. Data processing costs are typically volume-based, and the increase aligns with the larger customer base and higher transaction volume. Similarly, occupancy-related costs are in line with the bank's larger footprint for much of the second quarter. Near the end of the second quarter, we consolidated five retail branch locations. Looking ahead, cost synergies from recent acquisitions will positively impact the back half of the year and meaningfully benefit 2024. We've executed a number of disciplined expense initiatives in order to maintain our focus on efficiency, including a reduction of our headcount by 5%. In the third quarter, we expect expenses on a gap basis of approximately $93 to $95 million. This includes the amortization of intangibles and approximately $2 to $3 million in severance costs. The third quarter also includes additional marketing expenses and lower deferral of loan origination costs. adjusted expenses for the third quarter are expected to be near flat to the second quarter. Looking further to the fourth quarter, as cost synergies and efficiency initiatives take effect, we expect expenses to drop by $3 to $4 million and maintain that run rate into 2024. Moving to slide 9, the efficiency ratio on an adjusted basis was 56%. The increase quarter over quarter was primarily the result of declining net interest income as deposit costs increased. As we scale the company and become the leading bank in our Florida markets, we continue to pace our investments with discipline. Turning to slide 10, loan outstandings were near flat as we maintain our strict credit discipline and as we continue to see the impact of higher rates on market demand. average loan yields increased by three basis points during the quarter to 5.89%, and increased 16 basis points when excluding accretion on acquired loans. We expect loan yields to continue to increase in the coming periods, and looking forward, we believe loan outstandings will decline modestly over the back half of 2023. Turning to slide 11. 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 disciplined, conservative credit culture. 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 12, non-owner occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. Importantly, C&I loans and the related owner occupied CRE, which is repaid through cash flows of the business, not from the sale or leasing of the property, represent 32% of the total portfolio. On slides 13 and 14, we provide additional detail on the dispersion of non-owner-occupied commercial real estate loans in markets across the state and in categories including retail and office, noting the strong performance of these segments to date in key credit monitoring metrics. Diversification across industries and collateral types has been a critical tenet of our strategy, and the low average commercial loan sizes are the result of our longtime focus on granularity, and on creating valuable customer relationships. Moving on to credit topics on slide 15. The allowance for credit losses increased during the quarter to an overall $159.7 million with an increase in coverage to 1.58%. The allowance for credit losses combined with the $202 million remaining unrecognized discount on acquired loans totals $362 million, or 3.6% of total loans that's available to cover potential losses. Moving to slide 16, looking at trends in credit metrics, our credit metrics remain very strong. Nevertheless, we remain watchful of inflation pressures and the broader economic environment and are carefully considering the ongoing impacts of higher rates on the economy. Charge-offs were three basis points during the quarter and have averaged six basis points in the last four quarters. Non-performing loans represent 0.48% of total loans, and the percentage of classified assets to total assets was 0.9%. And in the allowance, we continue to assess the environment and the factors that might affect loan performance. And this quarter, the allowance for credit losses moved four basis points higher to 1.58% of total loans. Moving to slide 17 in the investment securities portfolio, The average yield on securities increased during the quarter by 28 basis points to 3.13%, in part due to swap activity we undertook during the quarter. Additional rate hikes will benefit the securities portfolio as a result. Changes in the yield curve during the quarter were detrimental to portfolio values, increasing the overall unrealized loss position from the end of the prior quarter. Turning to slide 18 and the deposit portfolio, Deposits outstanding were near flat at $12.3 billion. Transaction accounts represent 57% of overall deposits, which continues to highlight our longstanding, relationship-focused approach. The cost of deposits increased this quarter to 1.38%, with the dynamic changes in the industry and the materially increased competitive landscape. Additionally, we had a full quarter impact of professional banks, And for the first time since the pandemic, we're seeing Florida's seasonal residents leave the state to return north for the summer. One item that's unique to Florida, the Florida Bar Association in May amended the trust account program known as IOTA, requiring financial institutions to pay interest on these accounts at a specified spread to an index. This change impacted deposit costs during the second quarter by approximately five basis points. Overall, our expectation for the third quarter is that the cost of deposits will continue to increase with higher rates, though the extent of the impact is difficult to predict with certainty. That said, we continue to outperform peers in our cost of deposits as the environment serves to highlight the strength of our low-cost deposit base and focus on relationships. On slide 19, the bar chart shows the addition of balances in higher rate categories that affected the overall mix during the quarter. Seacoast continues to benefit from a diverse and granular deposit base with the top 10 depositors representing only 3% of total deposits. Our consumer franchise contributes 43% of overall deposit balances with an average balance per account of only $23,000. Business customers represent 57% of total deposits with an average balance per account of only $109,000. Our customers are highly engaged and have a long history with us. And we have a peer-leading level of non-interest-bearing deposits, representing 34% of the deposit base. This provides significant strength in maintaining deposit costs over time and reflects the granular relationship nature of our franchise. On slide 20, demonstrating our significant capacity to fund potential outflows, the bar on the right identifies balances above the FDIC insured limit, excluding public funds accounts that have collateral-backed protection. Uninsured and uncollateralized deposits total approximately $3.5 billion, which, if needed, would be almost completely funded by Seacoast cash and borrowing capacity at the Federal Reserve. Beyond that, Seacoast has an additional nearly $3 billion in sources of liquidity above the $3.5 billion. We have not used and don't plan to use the Federal Reserve's new bank term funding program. And finally, on slide 21, our capital position continues to be very strong, we're committed to maintaining our fortress balance sheet you can see the increase in tangible common equity to tangible assets in the second quarter as we move past the initially dilutive effect of recent acquisitions reflecting our commitment to driving shareholder value creation in summary considering our strong capital levels prudent credit culture and high quality customer franchise we have one of the strongest balance sheets in the industry providing optionality if the environment becomes more challenging, and to continue building Florida's leading community bank. Chuck, I'll turn the call back to you.
spk29: Thank you, Tracy. And Malika, I think we're ready for Q&A.
spk33: Perfect. Thank you. Ladies and gentlemen on the phone lines, if you wish to register for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, it is 1-4 to ask a question. Our first phone question is from the line of Brady Gailey. Please go ahead. Your line is now open.
spk02: Hey, thank you. Good morning, guys.
spk03: Good morning, Brady.
spk02: Good morning.
spk03: I know it's embedded in your fee income guidance, but I was just wondering the size of the Durbin hit. I know I think in the past we've talked about roughly 12 million a year. So that'd be 3 million a quarter. Is that still the right way to think about that impact from Durban?
spk01: It is Brady. You can use that number.
spk03: Okay. All right. And then, you know, non-interest bearing, uh, you know, fell here. You're not alone. The industry is seeing that across the board, but for Seacoast, you know, your mid 30% non-interest bearing deposits to total, where do you think that lands?
spk18: Yeah, Brady, this is Michael. You know, I would just call it a couple things. You know, we had some elevated tax payments this quarter, early in the quarter. And then, as was mentioned in the prepared remarks, we really had a return to a true season in Florida, which is a little idiosyncratic for us versus some of the other banks nationally. So we hope to see some kind of return of that benefit into the coming quarters, into the back half of the year. But you know, generally we're modeling from a conservative perspective that that might trend down a little bit from here into the low 30 percentage range. But, you know, that's just from a modeling conservatism point of view. But we do think there were some kind of idiosyncratic drivers this quarter that may return positively in the future. Okay.
spk03: All right. And then, you know, Chuck, I heard your comments about maybe a year from now the M&A environment will be a little more active. You know, you guys have been very active in florida bank m&a just wondering you know what once that spigot gets turned back on you know what what is seacoast m&a strategy i mean there's not a lot of larger targets left in the state so i know professional was a big deal for y'all maybe your biggest ever but do you return to you know looking at kind of smaller privately held targets when you think about bank m&a
spk29: Yeah, thanks for the question, Brady. You know, if you sort of look back here recently, you know, we did do a lot of deals here over the last 14, 15 months. It was a concentrated period of M&A. You know, we did that to position ourselves as a statewide brand. We're now in every major metro market. Team did an incredible job of integrating and bringing those deals on. There's a lot of competency here inside the organization, both in terms of technology and socially, how to bring deals into Seacoast. I think in the near term, as I mentioned in my prepared comments, our focus is on organic growth. We've had a lot of resources, a lot of effort focused on consolidating banks. And at this point here, at least in the near term, the next couple quarters at least, our focus will be heavily on organic growth. We're going to sort of release all those resources and energy into growing the bank here on the back half of the year. I'm pretty excited about what we can possibly get done there. And then moving into the 2024, depending on the environment and depending what deals look like, I think it's probably more of a return to the smaller bank M&A. As you say, if you look across the landscape, there's about 60 to 70 banks, probably 20 to 25 banks that fit within our profile, primarily smaller, billion and under institutions that we think could make a lot of sense. We still think the highest and best franchise value for Seacoast is consolidating market share in Florida. If you were to look at where we are in terms of market share, we're right around number 15. I'd love to drive the company into the top 10. I think that would create incredible value for shareholders over the long run. And so if those opportunities emerge, it's kind of back to exactly what we've been doing, Brady.
spk03: All right, that's helpful. And then finally for me, your bigger picture is, If you look over time, Florida tends to be kind of a boom-bust state when it comes to real estate prices. And, you know, real estate prices have been booming for a while down there. So I'm just wondering, as we head into uncertain economic times, do you think there could be some real softness in real estate prices, or is there a dynamic difference this time around that could insulate real estate prices in Florida?
spk29: I think a lot's changed in Florida over the last 10 years. You know, you've had much stronger urban anchors built out in Orlando, South Florida, Tampa, Jacksonville, you know, and in particular, Southeastern Florida has become incredibly strong, incredibly diverse in terms of the economic drivers. I also think in Florida, there was not a lot of construction. You know, typically the issue with Florida has been in the past and where the boom bust sort of history comes from. is construction and oversupply sort of chasing the demand of inbound sort of population growth. But if you look at really since the last crisis, there's really construction didn't come on until the last three or four years. And so the housing market remains remarkably stable. We see absorption being very reasonable. We see supply being very reasonable. We still see strong population growth. I feel very confident in real estate values in Florida. I don't think we're going to see the pace of increase we're seeing. We're seeing stabilization in terms of value increases. Residential, to me, feels very healthy and very strong. In large part, the same thing on the commercial side. Again, there's just not been a lot of new supply coming in the market. The absorption's been there. The market's remained strong. Population growth is there. That all being said, we're always very mindful of that. We're very mindful of the fact that we have a concentrated geography in Florida. That's why we tried to build a very diverse portfolio in terms of both asset size, asset type, and the granularity that we build and the strength of the capital base. So we know Florida. We know the history. But I feel good about where we are, Brady.
spk24: Great. Thanks, Chuck. Thank you.
spk33: Thank you. Our next question is from the line of David Feaster. Please go ahead. Your line is now open.
spk17: Hey, good morning, everybody.
spk33: Morning, David.
spk15: Morning.
spk17: Maybe just shifting back to the deposit side, I'm curious on the organic core deposit growth that you're seeing. Where are you having success and how do you think about core deposit growth going forward? I know you said Last quarter, you had one of the highest levels of customer account growth later in the quarter. I'm just curious, where are you seeing success driving core deposit growth, and then how are new core interest-bearing add-on rates at this point? Where are you able to drive new money growth?
spk29: Maybe I'll start with the first part, and then, Michael, you can follow up with the second on new money rates. You know, what's very exciting to me, David, is, you know, we've built an incredible commercial banking team across the state over the last couple years, and I think we're still in the first quarter of moving those relationships over. Week in and week out, I've been out with those teams calling on customers, calling on really strong relationship opportunities. We're seeing really great opportunities around sort of small to medium-sized enterprises that are willing to bring on, you know, full relationships. And we've had a lot of focus on consolidating and converting banks that now is behind us. And so I'm excited about combining some additional marketing expenses, some additional branding here in the coming periods in conjunction with a lot of new bankers we've added to the team. And I think there's an incredible opportunity to go out and unleash that team We have also, as you know, a really strong retail footprint. We have a really strong sales and service culture in that retail footprint. And we're going to unleash those guys as well. So kind of as we think about the back half of the year, we're going to combine a lot of new, very strong, what I think are, you know, I'm sorry, biased here, but the best commercial banking team in the state of Florida in combination with what is, you know, we've talked about in the past, a unique ability to drive cross sell via our digital and data analytics platform in combination with additional marketing expenses. And we're going to go after this really hard. So I'm excited about the back half of the year. There's a lot of energy in the company about this. And, you know, I think there's a lot of opportunity, Dave.
spk18: And then as a follow up on the rate piece of that conversation, David, you know, I think we've made a lot of investments into treasury management platform to go along with our commercial bank expansion and And the combination of that and all the new relationships that Chuck mentioned is bringing over a lot of new accounts. And, you know, the blended average of those, you know, new add-ons are still pretty attractive. As we move volume on, you know, we're obviously paying a little higher rate on the interest-bearing portion to be competitive in the market. But then trying to get those, you know, core operating BDA accounts alongside of that to blend that average cost down, you know, probably into the threes on a blended basis. is really the focus. And one quick follow-up to Brady's question earlier, I think it's an important distinction and call-out is, you know, following the events in March and April, we moved a lot of those operating accounts into the ICS product. And so that does come with a bit of a reclassification from DDA into now. So that's, you know, maybe an important call-out to look at as well.
spk17: Could you quantify that? That's a good point. Do you know how big of an impact that was?
spk18: It was sizable. I don't want to get too fine a point on that, but probably over $150 million. Okay.
spk17: And then maybe on the other side of the equation, could you help us think about the expectations for payoffs and paydowns on the loan side in the next six to 12 months? and maybe where roll-off rates are and how new loan yield add-on rates are. I'm just trying to combine what, you know, with the commentary on what we're seeing with new deposit rates in the threes, you know, kind of maybe where the core NIM can stabilize once funding costs, you know, stabilize and we can start paying down the borrowings and those types of things. What kind of could be the normalized margin, you know?
spk18: Yeah, no, definitely understand that, David. The roll-off rates have been increasing a little bit. We had a little higher pay down quarter this quarter, a little over $300 million, and the rates are a little higher. I think what we're seeing is people with variable rate loans are electing to pay those down a little bit. So that's kind of leading to, at least thus far, a little higher roll-off rate on loans that are paying off and maturing. Then on the add-on side, though, we're definitely seeing good add-on yields. I think risk-adjusted returns are starting to improve in the market, and we're seeing loan pricing generally move higher. That's been a headwind of growth for us over the last six to nine months that we've articulated where we just felt like risk-adjusted returns weren't there. But now that we're getting into the seven handles, mid-high sevens with much better structure, much better underwriting, it's attractive. So bringing that all together versus the 3% add-on rates, you're kind of looking at a blended 4% margin on new production. And that's kind of really the focus here is to defend that margin and the profitability now that we're getting paid for the risk that's there in the market.
spk17: Yeah. Okay. That makes a ton of sense. And I'm glad to hear that. And then, but maybe following up on your point on the risk adjusted returns, I mean, you've been very disciplined on the pricing and structure front. Not surprisingly, it's translated into slowing originations. But I'm guessing – I'm just curious, I guess, A, how much of the slowdown in originations maybe do you think is strategic on your part in terms of being a bit more selective versus slower market demand? And then I'm just curious – twofold question. Where are you still seeing good risk-adjusted returns? And then are you concerned at all about lender retention and maybe some poaching as you slow down production? I'm just curious what you're hearing from your lenders. Are they pushing back at all?
spk29: Yeah, just starting with the market demand side, if you think about what we do in the areas we focus on, it's primarily operating companies and stabilized income producing commercial real estate. And so, you know, on the stabilized income producing real estate, you know, market demand is really evaporated. There's just not been a lot of, uh, projects that pencil, you know, a lot of, uh, uh, acquisitions of stabilized commercial real estate is, it's just not happening now. Uh, so that, that I would describe largely, um, is slowing down due to market demand. C&I, to some extent, same thing. Rates are much higher. And so I would say probably the way I think about it is three-quarters of its market demand, a quarter of it's probably us. And, you know, sort of stepping back and looking at the bigger picture, the way we've thought about the business is as we go through the coming quarters and into next year, we know the Fed's going to continue to shrink the balance sheet. We know there's going to be a quantitative tightening issue. that will occur in both terms of rate and monetary supply. And so, you know, protecting the liquidity of the company is incredibly important, particularly as you enter into 2024, where, you know, you could fill the loan portfolio with transactional lending. But what we want to maintain is the firepower to go out and compete, particularly as things turn here. and really compete for the broader operating companies and the broader relationships that are going to bring deposits, treasury, wealth management opportunities, equipment lending, these solid, deep, highly profitable relationships. And what we don't want to do is burn up our liquidity on solving a loan growth problem in the near term when knowing long term we need to get out and compete for funding and compete in two what will be a shrinking pie of deposits. We know that the overall industry deposit pie, if you think about it that way, is going to continue to shrink. The Fed has told us so. And so maintaining liquidity, maintaining flexibility, and maintaining optionality to take on very high-quality, strong risk-adjusted returns is where we've been incredibly focused. Kind of the last part of your question with our banking teams, they're incredibly engaged. They have come over. They're bringing relationships over. In terms of incentives, we rotated them to deposits and other things, so they have the opportunity to make plenty of money. They have an opportunity to make a huge contribution here, and they've been brought into thinking about how to really go out and compete, and they're doing an incredible job. So I have really no concerns about the team being poached. I think they're excited to be part of our franchise and continue to bring their friends with them. So I'm pretty pleased with where we are there too, David.
spk18: And, and I might just add to that, you know, listen, ever, you know, as you all know, and as we communicate to those lenders, when they're joining the company, they know our conservative culture and they know that that's served us well and will serve us well through, through economic volatility. So just lots of communication internally around that and the ability to get back into market, you know, earlier than peers and the strength of our capital base and liquidity. that we'll be able to deploy. So we've just been very communicative about generating capital and dry powder so we can serve clients when other banks have to step away, likely in the coming quarters.
spk15: Makes complete sense. Thank you. Thank you, Dave.
spk33: Thank you. Our next question is from the line of Brandon King. Please go ahead. Your line is open.
spk22: Hey, good morning. Thanks for taking my questions. Good morning, Brandon. So I wanted to follow up on the conversation on deposits and then also loan growth and managing the balance sheet. It seems like core deposit growth should kind of trend higher from here, and loans seem like they're being stabled to down a little bit. So how are you thinking about the loan-to-deposit ratio going forward? I know it's in the 80s now. Are you looking to kind of drive that down kind of in the 70s, or just in general how you think about the balance sheet?
spk18: Yeah, Brandon, this is Michael. So, you know, I think holistically some of that will be driven by the amount of success we have on the deposit side. But we do have an opportunity, I think, as, you know, the securities cash flow comes in, you know, loan growth has been a little softer. We generate more cash and we're probably able to pay down some higher-cost borrowings and de-lever the balance sheet a little bit, which would take our loan-to-deposit ratio a little higher from here, probably towards 84%, 85% is probably the trajectory we would head towards. But a lot of that will depend on just if we're getting paid for risk on the loan side and if we are able to generate that deposit growth that we think might be coming in the back half of the year. Thanks.
spk22: And with that, what do you think about the securities portfolio now with those cash flows coming online? Are you looking to redeploy that potentially to higher-yielding securities, or would that generally just go down to paying down higher-cost lending?
spk18: Yeah, I think generally we're just using the cash flow off the securities book at this point to fund lending and loan growth. So I think you should just assume we've got about $300 million in cash flow off the securities book. over the next 12 months with, you know, half of that roughly principal payments. So you should just assume that the securities book continues to trend lower related to that kind of trend. And how much cash flow are you expecting? Again, could you remind us? Yeah, it's a little over $300 million over the next 12 months.
spk22: Okay. And then lastly, I noticed the interest rate swaps that have benefited securities yields. Could you give us the thought process around putting on those interest rate swaps and how you're managing the asset sensitivity going forward?
spk18: Sure. So, you know, just good opportunity in the market. And we had, you know, a portion, as Tracy mentioned, of the deposits that flipped to floating related to IOTA deposits. And so it was a proactive opportunity to really kind of mute some of those impacts. And so we moved $400 million to a pay-fix swap where we're paying about $390 and now receiving overnight SOFR, which moved us to more variables. So the securities book now is just under 30% variable versus 70% fixed. So it's just a proactive opportunity to pick up a good bit of incremental yield here near term over the next two years without a lot of downside risk from rates potentially moving lower. So that's kind of the overall outlook. and opportunity there that we took and remind me the second part of your question there, Brandon.
spk22: Oh yeah. Just going forward, you are expecting to do more trades like this, or do you think you're in a good spot just given the position of funding?
spk18: Yeah, we'll always be opportunistic and, you know, depending on our expectations of the market and interest rates and our balance sheet positioning, you know, kind of what the appropriate, uh, moves are to make to manage that risk, you know, in the environment ahead as we see, you know, rate volatility and things unfolding. So we'll be incremental there, no big swings, no big bets, just incremental movements to improve the overall positioning and earnings and yield returns for the bank within the risk context. So I think that's kind of the right way to think about it. Nothing specific to call out today.
spk00: Okay.
spk21: That's all I had to take my questions. Thank you, Brandon.
spk33: Thank you. Our next question is from the line of Steven Skouten. Please go ahead. Your line is now open.
spk20: Yeah, thanks. Good morning. Hey, I want to follow around on the NIM guidance, the 30 base points quarter over quarter decline. I don't know what's fueling that larger shift maybe than what we're hearing from a lot of other banks into the third quarter. If there's any dynamics with professional that make your – you know, NIM moving to the third quarter any different? Just kind of walk me through those pieces, if you could.
spk18: Sure, Steven. This is Michael again. You know, I think that, you know, a couple key call outs I would make there. One is the IOTA impact. That's about a 10 basis point increase to the cost of funding or cost of deposits there. So, you know, that's an idiosyncratic driver for us. It's maybe different from peers. It's kind of a one-time reset. And then we should be kind of on a normalized run rate from there. You know, the other piece is just probably the spot rate exiting the quarters a little higher. So if we just kind of run rate that going forward, you know, there's a little pressure to be felt there. And, you know, as we mentioned, kind of the seasonality around deposits for us, we're kind of at that trough from a deposit perspective around that seasonality. So it's driving a little incremental margin pressure this quarter and maybe next quarter. that, you know, I think with some return of seasonality tailwinds as opposed to headwinds, you could see some benefit along with all the organic growth efforts that we're discussing internally. So I think that's kind of the moving pieces that's getting us there. And then, you know, hopefully we'll see those benefits kind of start to materialize as we head later in the year and maybe into 2024.
spk20: Okay. So really just those things you spoke to earlier, can you give us a feel for what you're assuming from a loan beta perspective moving forward and a deposit beta perspective?
spk18: Sure. On the loan beta side, you know, we are not growing very quickly at the moment. And so, you know, we'll see probably less loan beta. We've got about, you know, 60% kind of fixed rate balance sheet on the loan side. So, you know, just not as much loan repricing there. But We'll see some incremental movement, obviously, as lower rate loans mature and then we're able to reprice and any refinancing that we can do in the interim. So that's kind of on the loan side. On the deposit side and betas, I think just generally for the industry, you're going to see higher betas on incremental Fed hikes from here. So I don't think there's a differential there for us versus anyone else, really. So we'll just kind of have to see how far the Fed moves and what the impacts will be there. But, you know, we've managed QM beta pretty well thus far and really are outperforming peers from a cumulative beta perspective, though we did have a lot of catch-up, obviously, this quarter. But we think we likely stabilize a little bit from here and likely trend better, hopefully. Perfect, perfect.
spk20: On that 60% fixed rate, how do you think about the rollover of that? I mean, is that like a five-year kind of time period that we can think of fairly ratably over that book of loans and how they reprice over time?
spk18: Yeah, that's about right, Stephen. You know, most things are kind of maturing, or really the life of the loan is extending to maturity. So, you know, five-year average life is probably fair. You know, in higher rate times, you might have seen a three-and-a-half-year life or something like that, but, you know, we're not seeing those early payoffs or paydowns, so five years is probably appropriate at this point. Makes sense. Makes sense.
spk20: Okay, and then last thing for me, you know, with the discounts, the purchase discounts, I mean, your total reserve and purchase sales was like around 2%. Florida economy strong. Y'all's loan book is super conservative and granular. You're going to be growing a little slower, it sounds like. I mean, could we see this kind of zero-ish provision for a while? Does that seem possible in your modelings?
spk23: Yeah, Stephen, you know, our allowance coverage is up about four basis points from the prior quarter. The economic scenarios that we use continue to contemplate risks related to sustained higher rates, persistent inflation. We just look at those economic scenarios each quarter in the context of, you know, our Florida environment and what we're seeing in our portfolio. And, you know, we just try and make our best estimate each quarter. So it's difficult to say in advance. I do think that we are well covered when you certainly include the impact of the remaining purchase discount. And I think we feel pretty comfortable at that level.
spk29: Yeah, just to follow up with that, the balance sheet's incredibly strong. When you look at the capital we have, the loss absorption that's there in our ACL coverage ratio, we feel very confident in our position here. Yeah, no question.
spk20: Great. Thanks, guys, for the color and the time. Appreciate it.
spk05: Thank you, Stephen.
spk33: Thank you. Once again, as a reminder, ladies and gentlemen, it is 1-4 to ask a question on the phone lines. And at this moment, I'm showing no further question on the phone lines.
spk29: Okay. Thank you, operator. And we're around if anybody wants to have follow-up calls. And appreciate everybody joining us this morning. Thank you.
spk33: Thank you, ladies and gentlemen. That does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.
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