Seacoast Banking Corporation of Florida

Welcome to the Seacoast Banking Corporation's fourth quarter and full year 2023 earnings conference call. My name is Audra and I will be your operator. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. 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 call over to Chuck Schaefer, Chairman and CEO of Seacoast Bank. Mr. Schaefer, you may begin.

Thank you, Audra, and thank you all for joining us this morning. As we provide our comments, we'll reference the fourth quarter and full year 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, and James Stallings, Chief Credit Officer. Seagos delivered another solid quarter of financial performance, generally in line with last quarter's guidance. The decline in net interest income was offset by expense reductions, resulting in a pre-tax, pre-provision return on tangible assets of 1.48%, and an adjustable return on tangible common equity of nearly 12%, and an efficiency ratio of 60%. Seagos ended the year with an industry-leading Tier 1 capital ratio of 14.6%, making it one of the strongest banks in the nation. On previous calls, we've highlighted this capital strength would likely provide opportunities for the bank. This quarter evidenced two clear benefits. First, we were able to opportunistically repurchase 546,000 shares of our common stock at a weighted average price of $19.80, representing an attractive earn-back on the deployed capital. Secondly, our tangible book value increased nearly 6% from the prior quarter, as we've been able to maintain a large percentage of our securities in AFS compared to peers. Our substantial capital and fortress balance sheet will continue to offer strategic advantages and further optionality in the future. And during the quarter, the effects of quantitative tightening and rising interest rates on the industry have become increasingly evident. Our coordinated margin declined 11 basis points, slightly exceeding our guide by one basis point. This was mainly driven by the ongoing transition of non-interest-bearing accounts to interest-bearing products, which was consistent with previous quarter's trends. It's important to note that we're not seeing attrition of engaged customers, and in fact, gross customer acquisition of checking accounts was up 13% from the same period one year ago. Notably, we believe the first half of 2024 represents the low point for our net interest margin and net interest income. Tracy will offer additional guidance on this shortly. We have implemented measures to optimize our efficiency across the organization. And in the third quarter, we reduced our workforce by 6%, which led to an 8% decrease in expenses in Q4 2023. Furthermore, the completion of a second phase of cost reductions in early Q1 2024 is projected to further decrease our annual operating expenses by an additional $15 million. And turning to our lending strategy, we were encouraged by the growth in our lending pipelines while maintaining a prudent approach in the current economic climate. Our loan portfolio grew by 2% annualized from the previous quarter, We expect continued growth into 2024. Our loan add-on rate rose to near 8% during this period. And additionally, it's important to emphasize that we required a comprehensive banking relationship with SECOS for all of our lending activities, ensuring a mutually beneficial partnership with our clients. Our asset quality remains robust, showcasing sustained strength. We continue to see a return to a more normalized credit environment, and we've included a chart in the accompanying slides to offer greater clarity and insight into this trend. This chart presents a view of the classified and criticized loan trends over the last five years. The ratio is consistent in line with the five-year average, unscoring the stability of our asset quality. Our A-triple-L stands at $149 million, equating to 1.48% of total loans. This figure places us in a strong position, with an allowance ratio among the highest in our peer group. Additionally, we have another $174 million in purchase discount. In looking ahead, our financial standing and reserves position us exceptionally well compared to our peers, which will allow us to navigate and adapt to any developments this cycle may present. And in conclusion, as we enter 2024, our commitment to upholding our conservative balance sheet principles is unwavering. We are dedicated to astutely managing our expenses while strategically investing to stimulate growth in low-cost deposits. This disciplined approach is key to fostering robust capital growth. It will help us maintain a diverse and stable funding base, further strengthening our company's fortress balance sheet. Ultimately, these efforts are aimed at enhancing the long-term value of our franchise, ensuring resilience and prosperity in the years to come. I'll turn the call over to Tracy to walk through our financial results.

Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results, beginning with slide four. Seacoast reported net income of 35 cents per share in the fourth quarter, and on an adjusted basis, which excludes amortization of intangibles and securities-related losses, net income was 43 cents per share. On an adjusted basis, PPNR to total assets was 1.48%, adjusted ROTCE was 11.8%, and the efficiency ratio improved from the prior quarter to 60%. Highlighting our continued focus on expense discipline, after reducing headcount by 6% during the third quarter, we saw the full benefit to expense of that reduction in the fourth quarter. Additional opportunities for efficiency have been identified and will generate expense savings in 2024 which I will talk about shortly. We're pleased to report that 2023 was another record year for our wealth management team, with assets under management increasing 23% to $1.7 billion and full-year revenues increasing 16%. Tangible book value per share increased $0.82 to $15.08, benefiting from a 26% decline in unrealized losses on securities in AOCI. Our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. SECO's Tier 1 capital ratio increased to 14.6%, and the ratio of tangible common equity to tangible assets increased during the quarter to 9.31%. Also notable, if all health maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 8.68%. Our fourth quarter results include $2.9 million in losses on the sale of approximately $83 million in securities, reinvesting the proceeds into higher yielding securities. The opportunistic repositioning has an expected earn back of approximately 1.3 years. We also repurchased 546,000 shares at $19.80 when prices dipped in late October. Turning to slide five. Net interest income declined by $8.5 million, or 7% during the quarter, with lower purchase loan accretion, higher deposit costs, and deposit product mix shift all partially offset by higher yields. Core net interest margin contracted 11 basis points to 3.02%, one basis point higher than the range of guidance we provided. In the securities portfolio, yields increased 10 basis points to 3.42%. Loan yields excluding accretion increased six basis points to 5.4%. Accretion of purchase discounts on acquired loans was lower this quarter by 3.5 million compared to the third quarter. The cost of deposits increased to 2% while the pace of that increase continues to slow and our funding base remains strong with 54% transaction accounts. Looking ahead to the first quarter, We expect core net interest margin to be in a range from flat to lower by five basis points. Moving to slide six. Non-interest income excluding securities activity increased 1.6 million in the fourth quarter to 19.8 million. Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Interchange income during the fourth quarter included an annual volume-based incentive from the payment network that added $0.7 million to the quarter. Beyond that, interchange revenue was up slightly from the third quarter to $1.7 million. Increased saleable SBA production in the fourth quarter resulted in gains of $0.9 million. Other income was higher by $0.4 million, largely related to loan swap activity. In the securities portfolio, the company recognized an opportunity to sell low yielding bonds with modest losses, which I will discuss in more detail on a later slide. Looking ahead, we continue to focus on growing non-interest income and we expect first quarter non-interest income in a range from 18.5 million to 20 million. Moving to slide seven, assets under management increased 23% from a year ago to a record 1.7 billion. and have increased at a compound annual growth rate of 27% in the last five years. 2023 was one of the group's best years yet, with significant new client acquisition and nearly $350 million in new assets under management. Wealth management revenues in 2023 were $12.8 million, an increase of 16% year-over-year. Our family office-style offering continues to resonate with customers, generating strong returns for the franchise. On to slide eight. Non-interest expense for the quarter was $86.4 million, which is at the lower end of the range of guidance we provided. Salaries and wages were lower by $8 million, which is comprised of the following changes. The third quarter included $3.2 million in severance associated with the third quarter reduction in force, and there were no such charges in the fourth quarter. The resulting lower headcount from that effort reduced expenses in the fourth quarter by approximately $1.7 million. Finally, beyond direct salary expense reductions, this category also benefited from higher loan production during the fourth quarter, resulting in higher deferrals of origination costs. This benefited the quarter by approximately $2.8 million. In marketing, as we've mentioned in prior calls, we're focused on driving organic growth throughout our markets and continue to make additional investments in marketing and brand recognition campaigns. Legal and professional fees were somewhat higher, aligned with the timing of projects and legal matters which are now complete. Higher FDIC assessments were the result of adjustments arising from the company's growth in asset size early in 2023 upon the acquisition of Professional Bank. Changes in real estate-owned expense related to valuation adjustments on three of our former branch properties. We expect the final disposition of several properties in the first quarter of 2024. Other non-interest expense was lower across many areas, and the efficiency ratio improved from 62.6% in the third quarter to 60.3% in the fourth quarter. Recent expense reduction initiatives continue to positively impact results, and we've taken additional meaningful action in the first quarter of 2024. We expect one-time expenses of approximately $5 million in the first quarter to affect these actions which will reduce the full year 2024 expense by approximately $15 million. Also, I'd like to highlight an important upcoming change to our presentation. Beginning in the first quarter of 2024, our presentation format will no longer exclude amortization of intangibles from adjusted expenses. With that change in mind, we expect first quarter non-interest expense inclusive of amortization of intangibles to be in a range of $82 to $84 million. Turning to slide nine, loan outstandings increased 2% on an annualized basis during the quarter, and we remain committed to our disciplined credit culture. Average loan yields, excluding accretion on acquired loans, increased six basis points to 5.4%. We expect loan yields to continue to increase in the coming periods as our fixed rate loans mature and reprice. In the fourth quarter, we continued to see new loan yields in the 8% range. and looking forward, we expect loan growth in the low single digits. Turning to slide 10, portfolio diversification in terms of asset mix, industry, and loan type has been a critical element of the company's lending strategy. Exposure across industries and collateral types is broadly distributed, and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Non-owner-occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. 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 11, to credit topics. The allowance for credit losses totaled $148.9 million, or 1.48% of total loans, compared to 1.49% in the prior quarter. The allowance for credit losses, combined with the $174 million remaining unrecognized discount on acquired loans, totals $323 million, or 3.2% of total loans that is available to cover potential losses. On to slide 12, looking at quarterly trends in credit metrics. Our credit metrics are strong, and we remain watchful of the ongoing impacts of higher rates on the economy. The charge-off rate during the quarter was 0.19% annualized. Non-performing loans represent 0.65% of total loans, and accruing past-due loans are 0.3% of total loans. The percentage of criticized and classified loans to total assets increased over the prior quarter to 1.6%. On slide 13, providing a longer-term view of our stable asset quality trends. Recall that in the third quarter of 2023, we recorded an expected charge-off of $11.3 million. This was an acquired loan that was fully reserved through purchase accounting, and the charge-off did not impact earnings or capital. That loan drove a somewhat higher charge-off level in 2023. Noting the stable trends in non-performing, past dues, and criticized and classified loans over the past five years, also recall that much has changed at Seacoast over this five-year period, including eight separate bank acquisitions and a near doubling of asset size. And the stability of our credit experience during that period reflects the consistently applied discipline of our credit culture. Moving to slide 14 and the investment securities portfolio. We recognized an opportunity to sell low-yielding bonds with modest losses on a small percentage of the investment portfolio. The proceeds, approximately 83 million, were reinvested into higher-yielding bonds with strong prepayment protection and good convexity. By selling short-duration, low-yielding securities from the portfolio and reinvesting into longer-duration, prepayment-protected agency CMBS, we were able to add considerable yield and interest income while prioritizing predictability, expecting an earn-back period of only 1.3 years. The average yield on securities increased during the quarter by 10 basis points to 3.42%. Changes in the rate environment impacted portfolio values positively, and as a result, the overall unrealized loss position improved by 105.6 million. This contributed 61 cents of the total 82 cent increase in tangible book value per share during the quarter. Turning to slide 15 in the deposit portfolio, excluding the pay down of broker deposits, organic deposits decreased by 145 million. We saw lower balances near year end, particularly in distributions from escrow and other attorney and trust accounts, which comprised approximately 100 million of the decline. Non-interest demand deposits represent 30% of total deposits, and transaction accounts represent 54% of total deposits, which continues to highlight our longstanding, relationship-focused approach. The cost of deposits increased this quarter to 2%, a slower pace of increase than in the past several quarters. Overall, our expectation for the first quarter is that the cost of deposits will continue to increase, albeit at a lower pace. That said, we remain keenly focused on organic growth. On slide 16, the bar chart shows non-brokered customer balances, including the sweep repurchase products. Seacoast continues to benefit from a diverse and granular deposit base, and customer funding declined modestly, consistent with typical year-end patterns. We continue to be very effective in new customer acquisition, with the number of fourth quarter new transaction accounts increasing by 13% year over year. Our customers are highly engaged and have a long history with us, and low average balances reflect the granular relationship nature of our franchise. And finally, on slide 17, our capital position continues to be very strong, and we're committed to maintaining our Fortress balance sheet. Tangible book value per share increased to $15.08, The ratio of tangible common equity to tangible assets continues to increase, reaching an exceptionally strong 9.3% in the fourth quarter. Our risk-based and Tier 1 capital ratios are among the highest in the industry. In summary, we remain steadfastly committed to driving shareholder value, and our consistent, disciplined expense management positions us well as we continue to build Florida's leading community bank. Chuck, I'll turn the call back to you.