Seacoast Banking Corporation of Florida

Welcome to Seacoast Banking Corporation's second quarter 2024 earnings conference call. My name is Pam and I will be your operator. 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, Pam, and good morning, everyone. As we go through our presentation, we'll be referring to the second quarter earnings slide deck, which is available at seacoastbanking.com. I'm here today with Tracy Dexter, Chief Financial Officer, Michael Young, Treasurer and Director of Investor Relations, and James Stallings, Chief Credit Officer. The SECOS team had a strong quarter with good earnings performance and continued strong customer acquisition. Our investments in talent and marketing paid off with a 60% increase in commercial loan originations from the previous quarter and a record $744 million late-stage pipeline entering Q3. As we anticipated on our comments last quarter, we saw low single-digit loan growth in the second quarter, at 2.4% annualized, and we expect production to increase in Q3, which will boost net interest income and the net interest margin. Tracy will provide more details on this shortly. We've been focused on increasing non-interest income and have seen improved performance in wealth management fees, service charges on deposits, and insurance agency revenue in each of the past four quarters. Our efforts to reduce expenses have also been successful, with adjusted non-interest expenses declining sequentially for the past four quarters. approximately $9 million per quarter lower than a year ago. During the quarter, we worked on lowering our cost of deposits by reducing offered rates, and we saw our cost of deposits begin to stabilize in May. And looking at our asset quality, we continue to maintain strong performance. Charge-offs were slightly higher this quarter at approximately 40 basis points annualized, mainly due to a limited number of loans, each of which were previously reserved for, which decreased the ACL upon charge-off. While classified and criticized increased slightly from the prior quarter, non-performing loans declined by 17 million. Our ACL stands at 142 million, equal to 1.41% of total loans, and including the reserve for unused commitments, this ratio moves to 1.46% of total loans, positioning us strongly amongst our peer group. And additionally, we have another 151 million in purchase discounts. Our balance sheet puts us in great position compared to peers, allowing us to navigate any challenges the cycle may present. Overall, it was a solid quarter, generally in line with the previous guidance across all areas. As we stated in previous quarters, we believe we reached an inflection point in net interest income in the second quarter and expect growth in net interest income and net interest margin as we enter the back half of 2024. We're committed to maintaining our conservative balance sheet principles to ensure long-term success, and we remain steadfast in our goal of establishing Seacoast as a leading player in Florida. I'll now pass the call to Tracy to review our financial results. Tracy?

Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, beginning with slide four. Seacoast reported net income of 30.2 million, or 36 cents per share, in the second quarter. As Chuck mentioned, We're seeing the benefit of recent expense reduction actions, and as a result, non-interest expenses down 10% compared to the prior year quarter. The pace of increase in cost of deposits slowed during the quarter and was flat in May and June. Pre-tax, pre-provision earnings on an adjusted basis increased $2 million quarter over quarter, benefiting from growing revenue sources, including wealth, treasury management and insurance, and well-controlled expenses. Our loan pipelines have grown meaningfully, and we continue to see stable credit trends. Tangible book value per share increased to $15.41, and our capital position continues to be very strong. Seacoast Tier 1 capital ratio is 14.8%, and the ratio of tangible common equity to tangible assets is 9.3%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 8.6%. We also repurchased nearly 40,000 shares at just over $22 on price dips during the quarter. Turning to slide five. Net interest income declined modestly during the quarter with higher deposit costs and growth in deposit balances partially offset by higher yields on loans and securities. Core net interest margin contracted four basis points to 2.87%. In the securities portfolio, yields increased 22 basis points to 3.69%, benefiting from recent purchases. Loan yields, excluding accretion, increased four basis points to 5.52%. Accretion of purchase discounts on acquired loans was lower by $0.4 million compared to the prior quarter. The cost of deposits increased to 2.31%, with the exit rate flat month over month at 2.33%. Looking ahead, we expect that the second quarter was the trough for net interest income, and we'll see growth in both net interest income and the net interest margin in the third quarter, driven by higher yields on loans and stabilizing deposit costs. Our rate assumptions are unchanged and include one 25 basis point rate cut in November. Moving to slide six. Non-interest income, excluding securities activity, increased two million in the second quarter to 22.2 million. Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Wealth and insurance agency income continued to grow. In the BOLI portfolio, we restructured policies to capture higher rates, resulting in higher income, which will continue into future periods. Other income was higher by $0.7 million, including a gain on sale of one non-performing commercial real estate loan. Looking ahead. We continue to focus on growing non-interest income and we expect third quarter non-interest income in a range from 21 million to 22 million. Moving to slide seven. Assets under management have increased 12% year to date to a record 1.9 billion and have increased at a compound annual growth rate of 27% in the last five years. Wealth management revenues during the quarter increased to 3.8 million up 6% from the prior quarter and 14% from the prior year quarter. Our family office style offering continues to resonate and internal referrals are a significant contributor, generating strong returns for the franchise and deepening relationships with our customers. Moving to slide eight, non-interest expense for the quarter was $82.5 million, lower than the range of guidance we provided last quarter. Recent expense reduction initiatives are benefiting nearly every category. Outside of the impact of severance-related charges in the first quarter, salaries and wages increased $0.7 million, including annual merit increases and annual stock award grants. Investments in growth-focused talent will also continue to be a priority. We saw a typical seasonal increase in employee benefits and payroll taxes in the first quarter, leading to a comparative decline in the second quarter. In outsourced data processing and occupancy costs, we incurred one-time charges early in the first quarter associated with consolidation activities, leading to a comparative decline in expense in these categories in the second quarter. Our planned investments in branding and in marketing campaigns across the state led to higher marketing expenses. Other expenses were lower across several categories, and the efficiency ratio improved to 60.2%. Discipline around expenses will continue to be a focus, and in the third quarter, we expect non-interest expense to be between $84 million and $85 million. Turning to slide nine. Loan outstandings increased at an annualized rate of 2.4%, and the pipeline has grown 46% to $834 million. Average loan yields, excluding accretion on acquired loans, increased four basis points to 5.52%. The pipeline is very strong and looking forward, we expect the pace of loan growth to continue to increase and expect mid single digit growth in the coming quarter. 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 is broadly distributed and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Non-owner occupied commercial real estate loans represent 34% of all loans and are distributed across industries and collateral types. As we have for many years, we consistently manage our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. These measures are significantly below the peer group at 34% and 222% of consolidated risk-based capital respectively. We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk. Moving on to credit topics on slide 11. The allowance for credit losses totaled $141.6 million, or 1.41% of total loans, compared to 1.47% in the prior quarter. A small number of individually evaluated credits were charged off during the quarter, resolving previously established specific reserves. The allowance for credit losses combined with the $151 million remaining unrecognized discount on acquired loans totals $293 million or 2.9% of total loans that's available to cover potential losses, providing substantial loss absorption capacity. On slide 12, providing a longer term view of our stable asset quality trends, recall that the period presented includes eight separate bank acquisitions and a near doubling of asset size. The stability of our credit experience during that period reflects the consistently applied discipline of our credit culture. Moving to slide 13, looking at quarterly trends in credit metrics, our credit metrics remain strong. Non-performing loans declined to 0.6% of total loans with a number of non-accruals resolved either through charge-off, sale, or being paid off. Accruing past due loans and criticized and classified loans each increased slightly as a percentage of total loans but remain low. Moving to slide 14 in the investment securities portfolio, the average yield on securities has benefited from purchases in recent quarters at higher yields, with the portfolio yield increasing during the second quarter by 22 basis points to 3.69%. Changes in the rate environment negatively impacted portfolio values, and as a result, the overall unrealized loss position increased by 6 million. Turning to slide 15 and the deposit portfolio, total deposits increased by $100 million. The cost of deposits increased this quarter to 2.31%, a slower pace of increase than in previous periods, consistent with our expectations. In fact, in June, we saw no increase from the prior month at 2.33%. Looking forward, we expect continued growth in core deposits and stabilization of deposit costs. and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering. On slide 16, Seacoast continues to benefit from a diverse deposit base. Customer transaction accounts represent 50% of total deposits, which continues to highlight our longstanding relationship-focused approach. 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 $15.41, and the ratio of tangible common equity to tangible assets remains exceptionally strong at 9.3%. 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 regional bank. Chuck, I'll turn the call back to you.