Seacoast Banking Corporation of Florida

Welcome to the Seacoast Banking Corporation's third quarter 2024 earnings conference call. My name is JL 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 star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Before we begin, I've 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'll now turn the call over to Chuck Schaefer, Chairman and CEO of Seacoast Bank. Mr. Schaefer, you may begin.

All right. Thank you, and good morning, everyone. Before we start, I want to express our sympathy for all those affected by the hurricanes. Our hearts go out to all those who lost loved ones or experienced catastrophic losses. I also want to express my sincere appreciation for our associates who, with unwavering resilience, valiantly reacted to both hurricanes, securing our facilities while preparing their homes and families, and quickly focusing on supporting our customers and communities before and after the storm. I'm incredibly impressed and proud of our entire team. And Tracy will provide a few further thoughts on the hurricanes here shortly. As we turn to the quarter, we will refer to the third quarter earnings slide deck, which is at seacoastbanking.com. And I'm here with Tracy Dexter, our CFO, Michael Young, Treasurer and Director of Investor Relations, and James Stallings, our Chief Credit Officer. The Seacoast team produced an excellent quarter. The results this quarter evidenced the inflection in growth and the start of margin expansion that we expected to materialize in the second half of 2024. We continue to see our investments in banker talent, marketing, and customer-focused culture paying off, producing annualized loan growth of 7% and annualized customer deposit growth of 7%. And of note, loan originations were up 22% quarter over quarter, and commercial non-interest-bearing demand deposits grew by 67 million. Importantly, this quarter also generated annualized growth in tangible book value per share of 20% to $16.20. And additionally, net interest income, non-interest income, pre-tax, pre-provision earnings, and the NIM excluding accretion on acquired loans all improved sequentially. This quarter showcases the strength of the banking team we've been intently building over the last few years. And while completing our acquisitions in late 22 and 23, We also recruited an exceptional commercial banking team, credit team, and retail banking talent with additions in all markets. This quarter, we continued this expansion with further investments in bankers in Fort Lauderdale, Gainesville, and Tampa. And importantly, as we transformed our front line, we've also made all the necessary governance and enterprise risk investments to be a well-functioning, compliant, mid-sized bank. So in summary, this quarter demonstrated several proof points of our operating strategy. First, organic growth was substantial compared to the industry, driven by the investment in talented banking teams across the state over the last 24 months. And secondly, we saw growth in net interest income and the core net interest margin, which aligned with our previous guidance. Expenses were well controlled, and non-interest income was up over 30% from one year ago. The combination of an expanding margin into 2025 with strong organic growth will support earnings improvements as we move into the coming year. And just to remind you, we are unwavering in our commitment to maintaining our conservative balance sheet principles. This commitment is the cornerstone of our strategy and a key factor in ensuring our long-term success. We remain steadfast in our mission to establish Seacoast as the leading player in Florida. Now I'll pass the call to Tracy to talk about our financial results.

Thank you, Chuck. Good morning, everyone. Directing your attention to third quarter results, beginning with slide four. SECOS reported net income of $30.7 million, or $0.36 per share, in the third quarter. Pre-tax pre-provision earnings on an adjusted basis increased nearly $2 million quarter over quarter, benefiting from growing revenue sources and well-controlled expenses. Tangible book value per share increased 20% annualized to $16.20. Loan production was strong, with growth in balances of 6.6% on an annualized basis, and the pipeline for future production remains robust. Growth in customer deposits was also strong. Total deposits grew 4.2% annualized, which includes a decline in brokered deposits. Excluding brokered, customer deposits grew 6.6% annualized, and non-interest bearing accounts grew over 5% annualized. On the net interest margin, consistent with the guidance we provided last quarter, the margin excluding accretion of purchase discount on acquired loans has begun to expand, increasing three basis points during the quarter to 2.90%. In addition, we saw 2% growth in net interest income, consistent with our expectations. Non-interest income increased 7% from the prior quarter and 33% from the prior year quarter, with continued success in deepening customer relationships through services including wealth management, treasury management, and insurance. and we continue to grow the team with additional investments in talent in key markets. Our capital position continues to be very strong. SECO's Tier 1 capital ratio is 14.8%, and the ratio of tangible common equity to tangible assets is 9.6%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be over 9%. Turning to slide five. Net interest income expanded by $2.3 million during the quarter, with growth in loans and securities, along with growing non-interest-bearing deposits, outpacing a three-basis point increase in deposit costs. Core net interest margin expanded three basis points to 2.90%. In the securities portfolio, yields increased six basis points to 3.75%, benefiting from recent purchases. Loan yields excluding accretion also increased six basis points to 5.58%. Accretion of purchase discounts on acquired loans was lower by one million compared to the prior quarter. The cost of deposits increased to 2.34%, but with exit rates in September beginning to more fully reflect rate declines. Looking ahead to the fourth quarter, we expect continued expansion of net interest income and expect the core net interest margin to expand in a range of 5 to 10 basis points, driven by continued loan and deposit growth and declining deposit costs. Our expectations include two 25 basis point rate cuts in the fourth quarter. Moving to slide six, non-interest income excluding securities activity increased 1.3 million in the third quarter to 23.5 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. Other income was higher by 1.5 million, including higher SBIC income and higher loan swap fees. Looking ahead, we continue to focus on growing non-interest income, and we expect fourth quarter non-interest income in a range from 22 million to 23 million. Moving to slide seven, assets under management have increased 16% year to date to just under $2 billion and have increased at a compound annual growth rate of 26% in the last five years. Wealth management revenues year to date reached $11.1 million, up 17% from the corresponding period in the prior year. Moving to slide eight, non-interest expense for the quarter was $84.8 million, consistent with the guidance we provided last quarter. Recent expense reduction initiatives are benefiting nearly every category, with the increase from the prior quarter reflecting continued investments in revenue-producing talent. Expenses are well controlled, and the efficiency ratio improved to 59.8%. Discipline around expenses will continue to be a focus, and in the fourth quarter, we expect core non-interest expense to again be between $84 and $86 million. Turning to slide nine. Loan outstandings increased at an annualized rate of 6.6 percent and average loan yields excluding accretion on acquired loans increased six basis points to 5.58 percent. The pipeline remains strong and looking forward we expect mid single digit loan 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 35% 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 227% 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 $140.5 million, or 1.38% of total loans, compared to 1.41% in the prior quarter. The allowance for credit losses combined with the $142 million remaining unrecognized discount on acquired loans totals $282 million, or 2.8% of total loans, that's available to cover potential losses, providing substantial loss absorption capacity. As we move into the fourth quarter, We're continuing to assess the potential impact of Hurricane Milton on our customers and whether and to what extent that may result in future credit losses. That may result in the need for a build in allowance in the fourth quarter. And based on our work to date, that may be in a range between $5 and $10 million. Moving to slide 12, looking at quarterly trends in credit metrics. Our credit metrics remain strong. Charge-offs included the resolution of a small number of individually evaluated credits with previously established specific reserves and the continued runoff of isolated acquired portfolios. Non-performing loans represented 0.79% of total loans. Additions to non-accrual loans in the third quarter included a small number of credits delinquent on payments, but for which no loss is expected as collateral values are well in excess of the loan balances. The level of criticized and classified loans to total loans remained flat at 2.59%. Moving to slide 13 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 third quarter to 3.75%. Changes in the rate environment positively impacted portfolio values, And as a result, the overall unrealized loss position improved by $83 million. In October, we took advantage of favorable market conditions and have repositioned a portion of the available for sale portfolio. We sold securities with proceeds of approximately $113 million, yielding an average 2.8%, resulting in a pre-tax loss of approximately $8 million, impacting fourth quarter results. The proceeds were reinvested in agency mortgage-backed securities with a book yield of approximately 5.4% for an estimated earn back of less than three years. Turning to slide 14 in the deposit portfolio. Total deposits increased by 127.5 million with an increase in customer deposits of nearly 196 million partially offset by a decline in broker balances. The cost of deposits increased this quarter only three basis points to 2.34% a slower pace of increase than in previous periods consistent with our expectations. In September, based on actions we've taken in the portfolio, rates began to decline. Looking forward to the fourth quarter, we expect continued growth in core deposits and a continued decline in deposit costs, and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering. On slide 15, Seacoast continues to benefit from a diverse deposit base. Customer transaction accounts represent 49% of total deposits, which continues to highlight our long-standing, 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 16, 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 $16.20, and the ratio of tangible common equity to tangible assets remains exceptionally strong at 9.6%. 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.