Seacoast Banking Corporation of Florida

Welcome to Seacoast Banking Corporation's fourth quarter and full year 2024 earnings conference call. My name is Jericho and I'll be your operator. All lines has been placed on view to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star one, followed by the number one on your telephone keyboard. If you would like to withdraw your question, press star one 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 the 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.

Okay. Thank you, Jericho. And good morning, everyone. As we go through our presentation, we'll refer to the fourth quarter earnings slide deck available at seacoastbanking.com. I'm here today with Tracy Dexter, our Chief Financial Officer, Michael Young, our Treasurer and Director of Investor Relations, and James Stallings, our Chief Credit Officer. SECO's team delivered an outstanding quarter. This period showcased profitability enhancements we've been focusing on, while also demonstrating the organic growth and margin expansion we anticipated would materialize by late 2024. Adjusted pre-tax, pre-provision earnings were $56.6 million, a 22% increase from the prior quarter, and the net interest margin expanded by 22 basis points to 3.39%. Our strong, granular core deposit franchise allowed us to reduce the cost of deposits by 26 basis points in the fourth quarter, while the team grew loans by 4% on an annualized basis. The adjusted return on tangible assets improved to 1.24%, up from 0.98%, and the adjusted efficiency ratio declined from 59.8% to 56.1%. Our capital position remained strong, with a tangible common equity ratio of 9.6%, and a CET1 ratio of 14.8%. Asset quality metrics also improved, showing a significant decline in classified and criticized assets. This quarter marked a strong finish to 2024, and we're entering 2025 from a position of significant strength. Our investments and talent across our footprint have fully taken effect, driving substantial onboarding and new relationships. And while we started the quarter slowly due to the two hurricanes, The team finished the quarter strong, setting a record for loan production with originations of $900 million during the period. Loan volume was well diversified, encompassing both C&I and commercial real estate. We also ended the year on a high note in wealth management and treasury management fees, overcoming lost revenue from service charges and interchange due to the hurricanes early in the quarter. And as we enter 2025, we're starting the year with strong momentum with all our business lines positioned for success. With an improved yield curve and a stronger macroeconomic outlook, we're excited about the year ahead. We continue to see numerous opportunities to recruit growth-focused talent and teams, and we anticipate we'll see opportunities to deploy our strong capital position. And with that, 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 $34.1 million, or $0.40 per share, in the fourth quarter, and adjusted net income of $40.6 million, or $0.48 per share. Net interest income of $115.8 million is up 9% from the prior quarter. The cost of deposits declined 26 basis points to 2.08%. Net interest margin expanded 22 basis points to 3.39%. And excluding accretion on acquired loans, net interest margin expanded 15 basis points to 3.05%. Non-interest income, excluding securities activity, increased 8% from the prior quarter, and expenses were well-controlled, resulting in improvement in the efficiency ratio to 56%. Loan production was strong, with growth in balances near 4% on an annualized basis, overcoming elevated payoffs, and several strategic loan sales in the fourth quarter. Return on tangible assets increased to 1.06% on a gap basis and 1.24% on an adjusted basis. Return on tangible common equity increased to 10.9% on a gap basis and 12.74% on an adjusted basis. Tangible book value per share of $16.12 represents a 7% year-over-year increase with a decline in the fourth quarter due to the impact of changes in rates on other comprehensive income in the securities portfolio. 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%. Turning to slide five, net interest income expanded by 9.1 million during the quarter, driven primarily by lower deposit costs. The net interest margin expanded 22 basis points to 3.39%, and excluding accretion on acquired loans, expanded 15 basis points to 3.05%. In the securities portfolio, Yields increased two basis points to 3.77%, benefiting from recent purchases. Loan yields were down one basis point to 5.93%. Excluding accretion, loan yields declined by 10 basis points to 5.48%. The impact of the lower Fed funds rate on our variable rate portfolio, along with interest adjustments resulting from the planned sale of consumer fintech loans, accounted for the decrease. The cost of deposits decreased 26 basis points to 2.08%, demonstrating the strength of our granular core deposit franchise built through our relationship-focused banking model. Looking ahead to the first quarter, we expect continued expansion of net interest income and expect the core net interest margin to expand another approximately 7 to 10 basis points, driven by continued loan and deposit growth and lower deposit costs. For the full year 2025, assuming no change in the yield curve and one Fed rate cut, we expect to exit the year with core net interest margin around 3.35%. An additional rate cut could add another approximately five basis points. Moving to slide six, non-interest income excluding securities activity increased $2 million in the fourth quarter to $25.5 million. Service charges declined, largely due to fee waivers early in the fourth quarter post-hurricane. Beyond that, our investments in talent and significant market expansion across the state have resulted in continued growth in treasury management services to commercial customers. Other income was higher by 2.5 million, including higher SBIC income and gains on loan sales. Looking ahead to the first quarter, we continue to focus on growing non-interest income, and we expect non-interest income in a range from 20 million to 22 million. That's a modest step down from the fourth quarter to the first, given the favorable items like loan sales and SBIC income that positively impacted the fourth quarter. Moving to slide seven. Our wealth division reached a number of internal milestones in 2024, including record new assets under management. Total AUM has increased 20% year over year to 2.1 billion, and has increased at a compound annual growth rate of 24% in the last five years. On to slide eight. Non-interest expense in the fourth quarter was consistent with the guidance we provided, coming in at $85.6 million on a GAAP basis. Continued investments have been focused on acquiring revenue-producing talent while maintaining strong expense control. We continue to remain focused on profitability and performance and expect continued disciplined management of overhead and the efficiency ratio. Moving to slide 9. Loan outstandings increased at an annualized rate of 3.7%. Record production of over $900 million in the fourth quarter had funding levels of approximately 50%. Offsetting strong production in the quarter were elevated payoffs and approximately $40 million in loan sales. Loan sales included the disposition of two larger commercial real estate relationships, each generating a gain on sale and reducing classified loan balances. Also sold were consumer fintech loans acquired in 2022, which had contributed about eight basis points to charge-offs in 2024. Loan yields were down, excluding accretion, by 10 basis points. Approximately 27% of the loan portfolio is comprised of variable rate loans, which saw rate changes in line with movements in market rates. In addition, the cleanup of the consumer FinTech portfolios resulted in adjustments to interest income of approximately $500,000. Accretion continued to be variable and was elevated this quarter in line with elevated payoffs. Looking forward, we expect core loan yields in the first quarter to stabilize. The pipeline remains strong, and we expect low to mid-single-digit loan growth in the coming quarter, moving toward high single-digit growth by the end of the year. 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 36% and 224% 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 $138.1 million, or 1.34% of total loans, compared to 1.38% in the prior quarter. The allowance for credit losses, combined with the $128 million remaining unrecognized discount on acquired loans, totals $266 million, or 2.6% of total loans, that's available to cover potential losses, providing substantial loss absorption capacity. Moving to slide 12, looking at quarterly trends and credit metrics. Contributing to charge-offs in the fourth quarter, we entered into arrangements to sell approximately $20 million in consumer FinTech loans, and as a result, charged down these loans by $3 million. Non-performing loans represented 0.9% of total loans, while an increase from the prior quarter, additions to non-accrual loans in the fourth quarter included a small number of credits for which no loss is expected. as collateral values are well in excess of the loan balances. Benefiting from the sale of two commercial real estate loan relationships, the ratio of criticized and classified loans to total loans decreased to 2.17%. Moving to slide 13 and the investment securities portfolio. The average yield on securities has benefited from purchases in recent quarters at higher yields, including a restructure executed early in the fourth quarter. and the portfolio yield increased during the fourth quarter to 3.77%. We took advantage of favorable market conditions and repositioned a portion of the available for sale portfolio in October. We sold securities with proceeds of approximately $113 million with an average book yield of 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 earnback of less than three years. On to slide 14 in the deposit portfolio. Total deposits were $12.2 billion, flat from the prior quarter. The cost of deposits declined 26 basis points to 2.08%. We remain keenly focused on organic growth and are very encouraged about the continued activity and focus across the franchise on deposit gatherings. On slide 15, 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 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 7% year-over-year to $16.12, 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. I'll now turn the call back over to Chuck.

Thank you, Tracy. And operator, I think we're ready for Q&A.

Thank you. We will now begin the question and answer session. So if you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw the question, simply press star 1 again. And our first question comes from Wood Lay from KBW. Please go ahead.

Hey, good morning, guys. Good morning, Wood. Good morning.

Wanted to start on the loan growth front. I mean, it was a pretty strong quarter, you know, given the elevated payoffs and some of the other headwinds there. It looks like the pipeline is a little bit down entering the first quarter, but how are you thinking about loan growth in the year ahead?

Yeah, and I think Tracy provided her guide of low to mid single digits sort of early in the year into moving to high single digits late in the year. I think that's kind of the way to think about it. I would look at the pipeline as typical just seasonality. Typically, we clear the pipeline at the end of the year. The first quarter is usually a little slower start, and then it builds beyond that already here in the first 30 days of the year. The pipeline's built back up some, so I'm I'm really confident about where we're headed there. Built a great team. They continue to onboard a lot of relationships. So we're headed the right direction.

Got it. And then any color on the yield on new production and how that compared relative to the third quarter? Are you seeing any impact on loan rates from increased competition?

Hey, Woody. This is Michael. Yeah, we saw in the fourth quarter we were at about a little above 7% on add-on rates. It was a little lower. I think that was just a pull through from kind of the lower rate environment we saw at the end of the third quarter. But now as the long end of the curve has come in higher, as we enter 2025, that's really supportive of our loan add-on rates. That said, there is competition, certainly, and we remain mindful of that. And we'll compete on price for good relationships, but not on structure. So we'll keep an eye on that. But we still feel, I think, directionally very good about the yield curve and its shape headed into 2025 and that being supportive of our loan yields and higher loan yields throughout the year.

Got it. And then lastly, in the opening comments, you mentioned that there could be some opportunities to deploy some excess capital later in the year. Would that be primarily through M&A and just any update on your overall thoughts on M&A?

Yeah, I would say post-election conversations have accelerated, I think generally across Florida and across the industry. So we think we may have opportunities to put capital to work as the year moves on. We did look at a few things the prior quarter that really we didn't like the pricing on, so we passed on them. But we are active in the M&A market, and we will be opportunistic if something comes along.

All right.

Thanks for taking my questions.

Congrats on the good quarter. Thanks, Luke.

Our next question comes from the line of Russell Gunter from Stevens.

Please go ahead. Hey, good morning, guys. Hey, Russell. Morning, Russell.

I wanted to follow up on the loan sales in the quarter. I think you mentioned a couple of portfolios. So just for a point of clarification on my end, is it the $20 million of consumer fintech, is that what was sold, or is there anything beyond that for key results?

Right. The fourth quarter included about $20 million also in sales of a couple of non-performing commercial real estate relationships. So with the purchase discount that remained on those loans, those ended up with a gain on sale during the fourth quarter. So $20 million in commercial real estate and then the $20 million in consumer fintech nearly fully resolved the kind of runoff portfolios in consumer fintech that we acquired a couple years ago.

Okay. Thank you, Tracy. That's helpful. And then in terms of, Chuck, you touched on it a bit, in terms of the acceleration expected in loan growth throughout the course of the year, I'm just curious, embedded in that, how are you guys thinking about the pace of payoffs and the headwind that may or may not present for you guys?

Hey, Russell, this is Michael. I'll take that one. You know, we had a higher payoff quarter in the fourth quarter. We had kind of signaled that, I think, on the third quarter call, which is why we're, you know, more at a mid single digit growth rate. Also, with the impact of hurricanes in the fourth quarter. We don't have the same lumpiness in terms of maturities as we move into 2025, so it should be better in terms of our ability to generate net loan growth. So we had a very strong production quarter in the fourth quarter, but offset by the payoffs, we don't have those same headwinds really as we move forward into 2025. but we do still have maturities of that lower rate fixed rate portfolio that are burning off about $600 million there in the kind of high fours that will reset now with the higher yield curve into a much higher rate environment.

Thanks, Michael. I appreciate it. And then just also circling back to the deployment of excess capital, I'm just curious if you guys are thinking about or how you guys are thinking about continuing to kind of nip and tuck at the securities portfolio with restructuring throughout 2025, and if so, whether or not that's embedded in the guide provided earlier.

Hey, Russell, this is Michael again. You know, we evaluated, as we've said, you know, frequently when we've seen opportunities where the earn back got inside of three years, we felt like that was an attractive use of capital. We aren't there right now, but we'll continue to evaluate that as we move forward and look for opportunities. But I think we will see how the environment unfolds and where the rate environment is to see whether or not that's going to be beneficial or the right use of capital versus our other capital priorities. And then whether that's embedded into our guide, it's not currently at this time.

Great. Thanks, Michael. And then guys, just one last one for me. Commentary around expenses were in line with expectations for this quarter. Apologies if I missed it, but just how are you guys thinking about the expense run rate over the course of 2025?

Yeah, I think we've been really successful in executing on our expense discipline initiatives across the organization. Looking ahead, as you know, there's some seasonality to expenses that will impact the first quarter. You'll always see things like higher FICA and 401K kind of lifting expenses in the first quarter. Through the year, we'll continue to look for opportunities to invest in growth. So I'd expect some variability throughout the year, but we'll continue to manage our disciplined approach.

Very good. Thanks, Tracy. Hey, thanks, guys, for taking all of my questions. Thanks. Thank you.

Our next question comes from David Feaster from Raymond James. Please go ahead.

Hey, good morning, everybody. Good morning, David. I wanted to circle back to the growth side and the guidance for accelerating growth over the course of the year. You know, look, the origination activity is extremely encouraging. What you guys have been able to do is great. I'm curious, how much of the expectations for the acceleration and growth is is driven by, you know, expectations for improving demand versus you gaining share in the continued hires that, that you've got and just, you know, high level, just curious, what's the pulse of the market from your perspective and what are you expecting the growth to be driven by?

Well, as you know, David, we made a lot of investments in talent over the last 12 to 24 months. And importantly, in 2020, late 22, 23, we held back on lending during that period one because the rates were lower and two because due to just the environment, that I think served us very well because it gave us a very attractive liquidity position today that we can put to work. So as we continue to onboard teams, they view that as an opportunity to come on and join us, and we have the balance sheet to grow as we move forward. So primarily in the guide and what we expect is growth driven by the investments we've made in talent across the franchise. Demand remains reasonably strong. It seems to be growing. I think the 10-year part of the curve will be kind of the wild card as to whether or not demand remains strong. If the 10-year holds in where it is, I think you'll continue to see demand in the marketplace. Competition is definitely out there again. Some of the super regional national banks have kind of moved back in the commercial real estate market where they were out of it for a while. But I feel confident in our ability to hit our objectives. We've got a great team. They're onboarding great relationships and pipeline's already growing through the first part of this year.

That's great. That's great. And you have had a lot of success hiring. And just listening to kind of the prepared comments, it sounds like there might be some appetite for additional hires. You know, there's obviously been some disruption to state from M&A, expectations that, you know, more is going to come. The credit unions have been, you know, pretty active, much to everybody's chagrin. But just kind of curious your thoughts on hiring and, you know, capitalizing on some of this disruption and Yeah, just curious what you guys are looking at there.

Yeah, we continue to see a lot of opportunity to hire. It's almost too much opportunity because we're having to balance back to profitability. And so we're balancing profitability to hiring and growth and trying to find that right mix. But, yeah, there's still a lot of opportunities to put and grow our team across the state. and uh so we'll we'll manage the profitability i think our primary uh focus right now is driving our profitability metrics in the right direction and then you know we'll balance that back against growth but i think we got the right mix now with the with the great team and the you know the right prospects for growth and so we'll continue to balance it all out but i feel good about where we're headed and maybe along those same lines i mean it

the stage is set for some pretty material revenue growth. It sounds like expense growth, there's some investment opportunities on the horizon. How do you think about the profitability profile of the bank and the ability to drive positive operating leverage this year? Just as some of these investments come to fruition and it sounds like maybe just depending on the revenue growth and loan growth outlook, some of that might flow to the expense side and we reinvest it.

Hey, David. This is Michael. I'll take that one. On operating leverage, we definitely will show positive operating leverage this year with a margin in the NII dynamics. That's going to be a nice tailwind. I think I would kind of anchor us back to what we talked about in the past. We used to be sort of a 50% to 55% efficiency ratio company when we were driving sort of an M&A growth model. Now that we're shifting increasingly towards organic growth, It comes with a little higher efficiency ratio as well as with just being a mid-sized bank. So that 55% to 60% range is something we plan to manage within. And we'll have normal sort of inflationary pressures on the expense base year to year. And then we'll just see kind of what the talent pipeline looks like and the opportunities ahead.

Maybe if I could just follow up, David. If you think back, David, to kind of how we managed through Back in 22, 23, we held back on growth during that period. We bolstered liquidity given the market dynamics. We allowed capital to grow, and that's all kind of set us up to this position where we are, where we were conservative during that period, built the team, migrated to a mid-sized bank, built the compliance function, and made the right investments there. We're now at the, you know, the sort of right moment, if you will, of we've made the investments. It's time to capitalize on those investments. And if the market continues to provide a solid yield curve here, I think, you know, there'll be a lot of opportunity for us.

That's terrific. Thanks, everybody. Thanks, Dave.

Our next question comes from Christopher Maranek from Janie Montgomery Scott. Please go ahead.

Thanks. Good morning. Tracy, I want to go back to the margin and sort of cost of funds discussion. If the Fed doesn't cut rates further, is there a possibility that deposit costs just kind of go flat and maybe even tick up if treasuries go back up? I'm just curious kind of what is possible there. I know the first quarter, first half guide that you gave us and just kind of thinking beyond that.

Yeah, our current forecast includes one Fed rate cut in the middle of the year. We're seeing the benefit now of, you know, being able to address the deposit costs and be proactive about some of that. That'll continue a little bit, but I think you'll see some meaningful stabilization in deposit costs. Michael, you want to expand on that?

Yeah, maybe, Chris, just to start the year, you know, we're down from even the December level, so we're starting from a very strong position there. You know, some stability, I think, initially in deposit costs, and then if we don't see a rate cut midyear, maybe a slight drift upwards from there, but very slight. And then on the flip side, right, there's two sides to that equation. On the loan yield side, we still feel very positive about the back book repricing trend that should outpace the deposit costs and lead to that margin expansion as we move throughout the year.

Great. Thanks for the additional color. And then just back on the criticized cost aside, the improvement that we saw this quarter, Chuck, do you see any changes with either loans maturing or just reappraisal process that would just cause those criticized to go back up? It's not as much a loss question as it is just sort of direction of that ratio.

I think I characterize we feel really good about our asset quality position. I think we've managed the bank conservatively for a number of years now, and our classified and criticized ratios are fairly strong compared to, or actually really strong compared to the the industry in general. And so, you know, I think it's stable at this point. Chris, I don't know of any reason why classified and criticized would increase from here.

Great. Thanks for taking all of our questions this morning.

Our next question comes from David Bishop from Huff Day Group. Please go ahead.

Yeah, good morning, folks. Hey, David. Quick question, Chuck, in terms of maybe visibility in terms of the deposit pipeline here. It looks like this quarter may be leading to cash and short-term liquidity to fund the loan growth. How should we think about funding of loan growth in 2025?

I'll make a few high-level comments and let Michael jump in here. But given our low loan deposit ratio, we're not out competing in the high-rate CD market. We're not out competing for the higher cost transactional deposits. We're focused solely on relationships-based sort of relationships. And so we're focused on DDA and bringing on operating accounts. And that takes longer, but it's the right stuff to do. It's building franchise value. And so we're going to stay out of the high rate stuff. But Michael, you want to talk a little bit about that?

Yeah, one other, you know, just kind of nuanced thing here, but, you know, given the low loan to deposit ratio, we can grow deposits at a slower pace on a percentage basis than loans and still fully fund the loan book. So, you know, I think we feel pretty good about our ability to grow deposits this year with some of the headwinds from 23 and 24. sort of remediating in the progress we made on deposit costs in the fourth quarter. We're starting from a good spot on a cost basis so we can be competitive as we move throughout 2025. That said, if we were less successful on the deposit side, we do have over $350 million in securities book cash flow that would come in throughout the year that could be used to help fund loan growth without having to sell any securities. So just giving you a couple of the moving pieces, but we feel good about deposit growth in 2025.

Okay, perfect. And then maybe a question for Tracy. I assume some of the uptake in the purchase accounting accretion income this quarter was a function of some of the payoffs you mentioned. Just curious as we think as maybe, you know, as a percent of the margin or so, a contribution of margin. I think this year it was like 31 basis points on average per quarter. Do you see that sort of stack? I assume it steps down. Maybe should we think about an average in the low 20 base support range contribution margin? How should we think about that during the year?

Yeah, David, I think that's right to think about it stepping down over time. The accretion remains quite variable and difficult to predict. The fourth quarter, as you said, was a bit higher, kind of aligned with elevated payoffs. I would think maybe... looking ahead we'd see something more aligned with the levels in the third quarter or before which was kind of on the lower end recent quarterly results have ranged from maybe nine to ten million a quarter in accretion so working off that number maybe the lower end of that range is a good estimate for going forward but again really difficult to predict got it appreciate the color

No further questions at this time. Mr. Schaefer, I turn the call back over to you.

Okay, thank you, and appreciate everybody joining the call, and appreciate the Seacoast team. You guys did an awesome job. It was a great quarter, and I look forward to talking to you next quarter. I think that will conclude our call. Thank you, sir.

This concludes today's call. Thank you for joining. You may now disconnect.