Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q1 2023 Earnings Call Transcript

Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q1 2023 Earnings Call Transcript April 28, 2023

Seacoast Banking Corporation of Florida reports earnings inline with expectations. Reported EPS is $0.36 EPS, expectations were $0.36.

Operator: Welcome to Seacoast Banking Corporation’s First Quarter 2023 Earnings Conference Call. My name is Carlos, 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 the – that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Chuck Shaffer: Thank you, Carlos, and thank you all for joining us this morning. As we provide our comments, we will reference the first quarter 2023 earnings slide deck, which you can find at seacoastbanking.com. I’m joined today by Tracey Dexter, Chief Financial Officer; Michael Young, Treasurer and Director of Investor Relations, James Stallings, Chief Credit Officer; and David Houdeshell, Director of Credit Risk Analytics. Our first quarter produced another strong period of adjusted pretax, pre-provision earnings and a solid result in our adjusted pretax pre-provision return on assets. While the quarter included the day 1 CECL impact and other customary merger expenses associated with our most recent acquisitions, our underlying earnings performance and forward-looking capital generation were strong.

Quarter-over-quarter, Q1 highlights include growth in deposits, only modest NIM pressure, increased liquidity ratios, continued robust capital – a continued robust capital position, strong asset quality and assets under management increased to $1.5 billion. Additionally, on January 31, we closed our acquisition of Professional Bank, materially increasing our South Florida market share. As you all know, the banking industry saw significant volatility in March. These events emphasize the importance of Seacoast’s granular and tenured deposit franchise and disciplined credit and conservative balance sheet principles. And these events are a reminder of the value of Seacoast fortress balance sheet, which has been built over a 96-year history. We are pleased to report we saw no impact to deposits as a result of the three bank failures, and we’ve added a new slide showing our weekly deposit trends.

Our deposit base is stable, providing a significant source of strength and is supported by a broad set of relationships. Seacoast has over 270,000 customers across Florida, including retail consumers, small businesses, professionals, small operating companies, middle market operating companies, municipalities and other public entities. We have always focused on growing and generating franchise value by focusing on relationship-based customer growth and product penetration and avoiding non-relationship-based transactions and non-core businesses. This strategy has resulted in a demand deposit ratio of 37% of total deposits, which is in the upper quartile compared to the entire industry. We only operate businesses that service and grow customer relationships.

We do not run nationwide equipment finance, fintech lending, forward flow arrangements or other non-franchise generating businesses. Our business model is built solely around servicing and growing consumers and companies in Florida. Over many decades, Seacoast has strived to build diversity in deposits and loan book granularity and to be prepared to manage the company through all types of cycles. Consequently, we ended the quarter with a robust common equity Tier 1 ratio of 12.8% and a tangible common equity intangible asset ratio of 8.4%. Illustratively, if we were to liquidate our entire securities portfolio, including HCM securities, Seacoast’s tangible common at would still be a robust 7.8%. We also have an allowance for credit loss coverage ratios of 1.54% and considering the loss absorption, including in the purchase accounting marks on loans, we are backstopped at a 3.67% loan coverage rate.

We also operate from a position of strength and liquidity with an 82% loan-to-deposit ratio, which will provide balance sheet flexibility as we move forward. Uniquely, our acquisition strategy has put us in a favorable balance sheet position in the current environment compared to less acquisitive banks. As a result of the acquisitions that we completed in recent months, we have marked one third of our balance sheet to fair value through purchase accounting, which has brought a large portion of the balance sheet to current market rates. And overall, we continue to see strong asset quality across the portfolio. Seacoast has less exposure to commercial real estate than our peer set with a consolidated CRE to risk-based capital ratio of only 236% and exposure to construction and land development of only rise in the coming periods.

We will have optionality that others will not have. I’ll now turn the call over to Tracey to walk through the financial results.

Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, beginning with highlights on Slide 4. Pretax pre-provision earnings continue to increase with 1% growth quarter-over-quarter to $46.3 million. Adjusted pretax pre-provision earnings increased 7% to $71.1 million and as a percentage of tangible assets was 2.18%. The Net interest income expanded 10% to over $131 million. Loan originations in combination with purchase accounting accretion, supported a 57 basis point increase in loan yields and the cost of deposits expanded only 56 basis points. Net interest margin was down only modestly, declining 5 basis points from the fourth quarter to 4.31%. We delivered disciplined expense management, maintaining an adjusted efficiency ratio of 53.1%.

Our capital position continues to be very strong, and we’re committed to maintaining our fortress balance sheet. Despite the somewhat dilutive effect of recent acquisitions, our ratio of tangible common equity to tangible assets was 8.4%. Also notable, our held to maturity or HTM securities portfolio represents less than 25% of total securities. And if all HTM securities were presented at fair value, the TCE to TA ratio would still be a strong 7.8%. Our credit standards remain disciplined and focused on relationship lending. The growth in loan balances came largely from the acquisition of Professional. Our loan-to-deposit ratio ended the quarter at 82%. Credit risk metrics remained strong with low levels of charge-offs, nonaccrual loans and criticized assets.

The company increased borrowings to boost its liquidity position during the quarter, and total borrowing capacity is 163% of uninsured and uncollateralized deposits. Along with these achievements, we continue to execute on our strategic initiatives, including closing on the acquisition of Professional Bank at the end of January. The transaction value of $421 million included $248 million in goodwill, $49 million in core deposit intangibles and a total loan portfolio discount of $134 million. Operating results in the first quarter were impacted by the day one provision for current expected credit losses on Professional Bank’s loans of $26.6 million and on unfunded commitments of $1 million. Turning to Slide 5. Net interest income expanded 10% during the quarter, increasing $11.5 million with higher yields and higher loan balances.

Net interest margin contracted modestly to 4.31%, which includes the benefit of $15.9 million in purchase accounting accretion. As a reminder, approximately one third of our assets were repriced to current market rates through acquisition accounting over the last two quarters, repositioning, earning asset yields to current market rates. The dilution we’ve taken over the last two quarters reflects this repricing, but will accrete back through income over the coming periods. In the securities portfolio, yields increased 8 basis points to 2.85% and loan yields expanded 57 basis points to 5.86%. We continue to benefit from a strong low-cost funding base with 59% transaction accounts, and the 77 basis points cost of deposits remains well below peers.

Looking ahead to the second quarter, we expect net interest income to remain relatively flat compared with the first quarter. We expect market conditions and an inverted yield curve to continue to put pressure on the net interest margin in the near term. Moving to Slide 6. Adjusted noninterest income was in line with the guidance we provided last quarter at $20.2 million, an increase of $2.6 million from the previous quarter and an increase of $4.4 million from the prior year quarter. Our growing deposit base generated a 6% sequential increase in service charges, interchange revenue was flat, coming off the seasonally high fourth quarter and with two fewer days in the first quarter. Wealth management income was higher by 6% from the prior quarter as we continue to successfully add new relationships.

The addition of an insurance agency business through acquisition in the fourth quarter added $1.1 million to first quarter results and other income included an increase in SBIC income and loan swap related 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 second quarter noninterest income in a range from $22 million to $24 million. And as a reminder, the impact of the Durbin Amendment on our interchange revenue will take effect beginning in the third quarter. Moving to Slide 7. Wealth revenues increased 6% compared to the fourth quarter and 15% compared to the first quarter of 2022. Assets under management have increased 24% from a year ago to $1.5 billion and have increased at a compound annual growth rate of 20% in the last 2 years.

Moving to Slide 8. Adjusted noninterest expense for the quarter was in line with the guidance we provided last quarter at $81.9 million. Increases from the prior quarter were aligned with the expanded associate base and growing customer base. It’s important to note that cost synergies from the three most recent acquisitions will be fully realized in the second half of 2023. Salaries and benefits on an adjusted basis increased $6.3 million, reflecting the increase in staff to support Seacoast’s expanded state-wide franchise and also due to the seasonal effect of higher payroll taxes and 401(k) 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 increase in the bank’s footprint during the quarter.

Amortizing core deposit intangible assets increased during the quarter with the addition of Professional Bank. Amortization of these assets during the first quarter was $6.7 million, and we expect the full year 2023 amortization to be approximately $28 million. Looking ahead, we expect to maintain our expense discipline with second quarter adjusted expenses, excluding the amortization of intangibles in a range from $82 million to $85 million. For modeling GAAP results, we expect the amortization of core deposit intangibles to be approximately $7.7 million in the second quarter. Looking beyond to the third quarter as cost synergies take effect, we expect expenses to step down by $3 million to $4 million in the third quarter. Moving to Slide 9.

The efficiency ratio on an adjusted basis was 53%. As we scale the company and become the leading bank in our Florida markets, we continue to pace our investments with discipline, evidenced by our consistent focus on efficiency. Looking forward to the full year 2023, we expect to maintain the adjusted efficiency ratio in the low to mid-50s. Of note, this does not include expense associated with the amortization of intangibles. Turning to Slide 10. I Loan outstandings were near flat, excluding acquisition as we continue to see the impact of higher rates on market demand and as we maintain our strict credit discipline. Early in the third quarter 2022, we recognize the potential negative impact on the economy from actions taken by the Federal Reserve in both rates and quantitative tightening.

Consistent with our conservative lending strategy, we began to reduce our willingness to originate construction and land development lending and tightened underwriting guidelines on investor commercial real estate. As such, loan production slowed in the first quarter of 2023, lowering the growth rate and building liquidity on the balance sheet. This also allowed us to be less aggressive in raising deposit rates and better manage our exposure to an inverted curve on the net interest margin. We believe this is a prudent choice given the expectation for further rate hikes and quantitative tightening and will result in loan outstandings remaining relatively flat in the coming quarter. Average loan yields increased by 57 basis points during the quarter to 5.86%, which includes 69 basis points of accretion.

As a reminder, the fair value marks on the loan portfolios from Apollo, Drummond and Professional result in significant accretion driven income that will be recognized in net interest income in the coming periods. 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. In the upper right of the slide, you can see that our construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels. Of note, we’ve always taken a prudent approach to commercial real estate lending using stressed interest rates to size loans.

Turning to Slide 12. Our loan portfolio is diverse and broadly distributed across categories. Non-owner-occupied commercial real estate loans represent 34% 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 33% of the total portfolio. Turning to Slide 13, looking at the broad dispersion of the portfolio in markets across the state with larger balances in South Florida and Orlando where business and population growth have been particularly evident. The Florida market has led the country in the past few years in population growth and continued to show strength in the local economies in our markets.

On to Slide 14, providing some detail on the categories within the investor commercial real estate portfolio. The largest segment is classified as retail with an average loan size of $1.9 million and weighted average loan-to-value of 52%. This is followed by office, where the average loan size is approximately $1.6 million and a weighted average loan-to-value of 55%. For the investor CRE portfolio overall, the average loan size is $1.5 million, and the weighted average loan-to-value is 54%. 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 long-time focus on granularity and on creating valuable customer relationships. The CRE retail segment targets grocery or credit tenant anchored shopping plazas, single-credit tenant retail buildings, smaller outparcels and other small retail units.

There’s no exposure to shopping malls or big box retail. This segment is supported by a very strong Florida economy and is typically anchored by very strong credit or near credit tenants. These loans have significant equity in them based on our underwriting standards at origination. We have just 12 loans over $10 million, which have tenants in the grocery, financial services and health care industries. We’ve seen no sign of weakness in occupancy or rental rates. There are no loans on nonaccrual and only one loan that carried past due, and it was less than $1 million at the end of the quarter. The CRE office segment targets low to mid-rise suburban offices across Florida. There are no high-rise office towers and little exposure to central business districts.

We have only 9 loans over $10 million, which are financial services, health care services, legal firm and other local professional services. We’ve seen no sign of weakness in occupancy or rental rates. There are no loans past due or on nonaccrual at the end of the quarter. Moving on to credit topics on Slide 15. The allowance for credit losses increased during the quarter to an overall $155.6 million, with an increase in coverage to 1.54%. The provision in the first quarter was $31.6 million, which included $26.6 million in day one provision on the Professional Bank loans. The allowance for credit losses, combined with the $216 million remaining unrecognized discount on acquired loans totaled $371.6 million or 3.67% of total loans that’s available to cover potential losses.

Moving to Slide 16, looking at trends in credit metrics. We remain watchful of inflation pressures in the broader economic environment and are carefully considering the ongoing impact of higher rates on the economy, though our credit metrics remain very strong. Charge-offs were 14 basis points annualized during the quarter and have averaged 5 basis points in the last 4 quarters. Nonperforming loans represent 0.5% of total loans and the percentage of classified assets to total assets was 1.03%. And in the allowance, we continue to assess the environment and the factors that might affect loan performance. In this quarter, the allowance for credit losses moved higher to 1.54% of total loans, driven primarily by the addition of Professional Bank.

Moving to Slide 17 and the investment securities portfolio. The average yield on securities increased during the quarter by 8 basis points to 2.85% and changes in the yield curve during the quarter benefited the portfolio values, reducing the overall unrealized loss position by approximately $35 million from the end of the prior quarter. Given our strong capital position, we’ve kept the majority of our securities in the available-for-sale classification with less than 25% classified as held to maturity. Turning to Slide 18 and the deposit portfolio. Deposits outstanding totaled $12.3 billion, which includes the addition of $2 billion in deposits from the Professional Bank acquisition. Transaction accounts represent 59% of overall deposits, which highlights our long-standing relationship-focused approach.

The cost of deposits increased this quarter to 77 basis points, with the dynamic changes in the industry and the competitive landscape. Our expectation 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 expect to outperform peers as the environment serves to highlight the strength of our low-cost deposit base. 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 less than 5% of total deposits. Our consumer franchise contributes 40% to overall deposit balances with an average balance per account of only 22,000.

Business customers represent 60% of total deposits with an average balance per account of only 101,000. Our customers are highly engaged with the majority having 10 or more transactions per month. Customers of Seacoast have had their banking relationship with us an average of nearly 10 years. And we have a peer-leading level of noninterest-bearing deposits, representing 37% of the deposit base. This provides significant strength in maintaining deposit costs over time and reflects the granular relationship nature of our franchise. Moving to Slide 20, with a focus on the stability of deposit balances during the quarter. Despite industry headlines and the failure of three banks in March, our relationship-driven approach with business operating accounts and a long-standing business and consumer base demonstrated notable stability during the quarter, something we think says a lot about the strength of the franchise and the strong relationships we have with our customers.

On Slide 21, 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 totaled approximately $3.9 billion, which, if needed, would be fully funded by Seacoast cash and borrowing capacity at the Federal Reserve. Beyond that, Seacoast has an additional nearly $2.5 billion in sources of liquidity above the $3.9 billion. We’ve not used and don’t plan to use the Federal Reserve’s new bank term funding program. And finally, on Slide 22. Our capital position continues to be very strong, and we’re committed to maintaining our fortress balance sheet. You can see the somewhat dilutive effect of the acquisitions in the last two quarters on tangible equity.

While those measures will return over time, we’re committed 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 a recession materializes and to continue building Florida’s leading community bank. Chuck, I’ll turn it over to you.

Chuck Shaffer: Thanks, Tracy. Before we go to Q&A, I’d like to thank our Seacoast team for another outstanding quarter and all your hard work. And just to reiterate, we are in an enviable position. We believe we’ve built the bank in the right way over the long term, and it’s built to handle all cycles. So we’re operating from a true position of strength, fortress balance sheet. We have a granular and tenured deposit franchise, very strong profitability metrics, and we’re operating in the strongest state in the nation. So operator, we’re ready for Q&A.

Q&A Session

Operator: Thank you Our first question from the line of David Feaster. Please go ahead.

Unidentified Analyst: Good morning, everybody.

Chuck Shaffer: Good morning, David.

Unidentified Analyst: Maybe let’s just start on the deposit front. I really appreciate Slide 20. And if I’m hearing you guys correctly, it sounds like basically, you guys had no impact from the failures on deposit floors. Basically, we just awaken clients maybe to the higher rates out there and accelerated migration. Is that a fair characterization? And then just curious, the early read on the second quarter, especially on the NIB front, have you seen those balances start to stabilize? Or are you still seeing that migration or clients utilize cash to pay down higher cost debt or go into the wealth side?

Chuck Shaffer: We saw no impact, David. As you can see, we worked with a number of our customers. We had a number of our customers we put into ICS as we went through the process. But as you – probably the most important part of that slide that I’d sort of direct your attention to is the noninterest-bearing DDA. If you look at the noninterest-bearing DDA throughout that entire period, they really did not move, which I think it serves is an incredible reminder of the strength of the relationships we have, the depth and granular deposit franchise we have and very proud of our team and very proud of the bank that we’ve built over this period as we – looking back at the success we had there. And as we started this quarter, we’re still in great shape. DDA remains about the same relative percentage as to where we ended the quarter, and we’re doing great, David.

Unidentified Analyst: That’s terrific. And then maybe I thought the comment on this – the bottom of Slide 18 about the net organic customer growth in March was the highest level since the pandemic. But that’s quite a feat. Just curious – what do you think is driving that? Obviously, you’ve had a lot of new hires brought a lot of talent over there. Is it just those folks being out there and this maybe was a catalyst for folks to come over and move to Seacoast just given the strength of your balance sheet and the volatility. And is this a tailwind for deposit growth going forward? And are you still seeing kind of those trends of net customer growth into the second quarter?

Chuck Shaffer: The way I’d describe it, David, is it’s a combination of things. One, as you know, we’ve acquired a lot of talent over the last year, built what I think is one of the strongest commercial banking teams in the state, and they continue to bring over new relationships, as well as we focused on it. We are out in the market. We were marketing for the first time in some period. We put some investment dollars into growth and that drove a very strong month for customer growth. I think looking forward, that will be very much a key focus as we move through the remainder of the year and super proud of that as well, David.

Unidentified Analyst: That’s great. And then maybe as this relates to the loan growth side. I mean, obviously, this customer growth has predominantly been the deposit relationships, it seems like at this point. Does that kind of leave you with some built-in loan growth maybe over time as we migrate the full relationship and more of those lending relationships? And look, you’ve got a conservative — extremely conservative approach to lending and have been tightening standards and pushing pricing. I’m just curious, as you look out, how is demand trending across your footprint from your perspective? And where do you still see good risk-adjusted returns at this point?

Chuck Shaffer: Yes. Maybe at a high level, I’d kind of go back to the guide. We guided to flat loan growth in the coming quarter. Our approach at this point is to focus on profitability and strong risk-adjusted returns. So where we see opportunities to acquire customers at good yields and good returns, we will. But I think it’s a period to be prudent. When you think back to last time we were in inverted curves in the last cycles, that usually led to recessions. And I think we’re pretty much teed up here to head into a recession in the back half of the year and into next year. And so we’re going to take a very prudent approach to loan growth as we move through time, looking for very strong risk de-terms, looking for relationships. We’re going to want to see funding attached to lending as we move through this environment. And that’s about where we are, David.

Unidentified Analyst: What segments still do bring good risk-adjusted returns? Is it C&I? Are there anything on the CRE front. Just curious, where are you seeing those?

Chuck Shaffer: C&I primarily, David. We slowed fairly materially, pretty much backed out completely of construction and land development late last year. Just knowing that the last thing we really wanted to see spec construction coming out in a recession, so we slowed that materially. Commercial real estate, we’re really not seeing a lot of volume. And when you kind of step back and think about where that part of the market is, you’re really going to have to get a very high yield to hit a risk-adjusted return. So where we’re seeing the most opportunities on the C&I side. As you know, we worked pretty hard over the last year to build out a stronger and bigger C&I team. and where we’re bringing over deposits, treasury, wealth, et cetera, that’s leading to loan growth on the C&I side, on our occupied CRE, but it’s primarily a focus of bringing over companies into what I mean companies, the full relationship of a company into Seacoast.

Unidentified Analyst: That’s helpful color. Thank you.

Chuck Shaffer: Thanks, David.

Operator: Our next question comes from the line of Graham Dick. Please go ahead.

Unidentified Analyst: Good morning, everybody.

Chuck Shaffer: Good morning, Graham.

Unidentified Analyst: So you just were talking about profitability and risk-adjusted returns just a little bit just now, but primarily on the loan level. I guess as you zoom out and you look at the focus on profitability across the entire franchise, is there any particular target you guys are working towards maybe one now in the near term even as the revenue growth story is challenging across the industry. And then maybe also another one, that would be more of a longer-term target whenever the rate environment normalizes?

Chuck Shaffer: I’d point you back to the adjusted efficiency ratio guide of the low to mid-50s. I mean I think that’s probably the best indicator of our expectations around profitability. And when you think about this environment sort of growing your way out of the problem is, in our view, a full sort of Aaron I think at this point, our objective is drive strong risk-adjusted returns, protect the margin, drive profitability and generate capital. And I think that’s the most important part of our story as we move forward. We come out of this period of merging together four banks, ultimately, there’s opportunities as we move to that from an expense scenario. And as we come out of that, there’s going to be real strength in capital generation in the coming quarters, and that’s where our focus is going to be.

Unidentified Analyst: Okay. Very helpful. And then I guess just going back to the loan side, maybe on the credit side of things. I appreciate all the color you guys gave on the CRE book. Can you talk about just the main aspects of your portfolio you think protect Seacoast from any pending downturn in national CRE markets? And then also what the market may be missing about Community Bank, CRE books like yours versus some of the larger stuff that’s financed through the CMBS market or some of the G-SIBs et cetera? Thanks.

Chuck Shaffer: Yes. So a couple of things. When you step back to what we’ve worked really hard to build is we’ve worked to build as we characterize it a fortress balance sheet. The tenets of that are true granularity and diversity on the asset side of the balance sheet and true granularity and diversity on the deposit side of the balance sheet. And so there’s diversity in our loan book in terms of asset class, there’s diversity in industries, there’s diversity and types of loans we’ve made. We’ve got basically a third, a third, a third model that we’ve built into the – the asset side and importantly, the loan sizes and the target market for us are much smaller. When you think about where we’ve targeted, we don’t have office towers in downtown urban complexes.

We don’t have central business district office towers. Our typical offices that we’ve lent to and we really have not been lending into office now for a couple of years. Our smaller low to mid-rise suburban offices supporting doctors and lawyers and other small professionals, architects, et cetera, that are in the office. And so we feel very good about the portfolio. As you can see, we have nothing on nonaccrual, nothing past due. The loan sizes are small. And in the last sort of most important thing I’d say about Seacoast specifically, is we’re in Florida. You look at what’s happened in the last 3 years, the growth rates, the population growth, the strength of our economy, Florida is doing incredibly well and remain so.

Unidentified Analyst: Got it. That’s really helpful color. And I think should resonate the all investors out there. I guess the last thing for me would just be on the reserve. It’s now above 2% when you include discounting and the reserve itself is above 150. I know that’s pretty hard to tell. But are you expecting you’ll hold it around these levels going forward, just given the economic uncertainty? Do you think that the CECL model might actually require, I don’t know, some drawdown in it over the next couple of quarters?

Tracey Dexter: Yes. Graham, we look at forward economic conditions and give those serious thought each quarter, we may make adjustments based on the data as it evolves and what’s inferred by the model forecast and areas. We already incorporate into our allowance considerations and forecast scenarios, some weighting on the recessionary influences, the S3 scenario as we prepare that model and the overall estimate. So when the forecast changes, we certainly consider adjusting our total reserve assumptions, but we’ll continue to be prudent in our coverage ratio.

Unidentified Analyst: Okay. Got it. Thanks, guys.

Chuck Shaffer: Thanks.

Operator: Next question from the line of Brady Gailey. Please go ahead.

Unidentified Analyst: Thanks. Good morning, guys.

Chuck Shaffer: Good morning, Brady.

Unidentified Analyst: So accretable yield was a relatively large amount in the first quarter, about $16 million. How do you think about how yield accretion will trend from here? I mean, obviously, that’s a bucket that will shrink over time, but at the same time, you disclosed Professional relatively recently. So what’s the outlook for yield accretion?

Tracey Dexter: Yes, you’re right. It’s really difficult to predict with any certainty, about $16 million here in the first quarter with two months of Professional. And so our general thought is that, that number will pick up a bit in the second quarter, maybe offset by the roll-off of accretion in other aspects of the portfolio. So I’ve got around $16 million in the model, but that’s likely to be variable. Michael?

Michael Young: And Brady, yes, I was just going to remind you, obviously, we also have the CDI amortization expense as well. So kind of a net impact of the two. I just don’t want people to overstate the magnitude of the impact on the bottom line of just the accretable yield portion.

Chuck Shaffer: And Brady, let me just add – let me add to that real quick. The important thing to think about when you think about marking the balance sheet to fair value here, unlike maybe prior periods where we saw less rate change, I think you need to think about it in terms of book yield moving forward. So essentially, we acquired these loans at a fairly material discount and that’s going to creep back through just like a bond wood. And so we will see higher loan yields moving forward as a result. Those loans have been marked to current market. About third of the balance sheet is now marked to current market, and that will be supportive to our margin.

Unidentified Analyst: All right. And then I was a little surprised to hear about the flat linked quarter spread income guidance? I mean Professional was not even fully included in 1Q. So I’m just wondering kind of what’s driving that flat spread income guidance quarter-on-quarter?

Chuck Shaffer: Sure, Brady. So I think the thing to think about here just the cost of deposits, right? We’re seeing some increase there as we’re being more competitive on rate and protecting balances there. So that’s probably the biggest driver. As you look forward to the next quarter, we’ll have, as you mentioned, an additional quarter of Professional Bank in the second – or I’m sorry, an additional month of Professional Bank in the second quarter, which will push deposit cost up a little bit as well. So that’s kind of the main driver along with a little less loan growth because we are being very conservative in terms of the risk we’re putting on the balance sheet at this point in time.

Unidentified Analyst: And then so flat loan balances next quarter. When you look at the back half of the year and into ’24, are you also expecting loans to be flat? Or do you think you reengage in loan growth after this next quarter?

Chuck Shaffer: Economy dependent. We’ll see how things play out. We’ll continually sort of challenge that assumption as we move through time, but it will be dependent upon where we think the economy is headed and where we think quantitative tightening seated.

Unidentified Analyst: Yes. And then finally, for me, you got the $100 million buyback out there. I mean the stock is 1.5 times tangible, which historically is a pretty — has been a pretty attractive valuation for you guys. Any thoughts on getting active on the buyback here?

Chuck Shaffer: We had the whole $100 million available, which was great. We didn’t buy back any shares when the price was higher. So with hindsight, that looked like a pretty good decision. We’ll continue to think about it like a math equation, like we talked about, we look at it as an earn back compared to other alternatives we have. And if that is the best choice, we’ll take it, but we’ll continue to weigh against everything we got here out ahead of us. And importantly, like I said, our main goal right now is build capital and prepare ourselves to be — have the option to take advantage of opportunities that potentially will emerge as a result of the environment later this year or into next year.

Unidentified Analyst: All right, great. Thanks, guys.

Operator: Next question is from the line of Brandon King. Please go ahead.

Unidentified Analyst: Good morning. So last cycle, the cumulative deposit beta was around 28% And I think last quarter, there was comments that you potentially be around that level or potentially outperform. But just wanted to get your updated thoughts on the deposit beta from a quantitative perspective.

Michael Young: Yes. Thanks, Brandon. This is Michael. I think big picture, just kind of zooming out, it will depend a lot on the pace of additional rate hikes from here if we go much higher or stay higher for longer, we’ll obviously have impacts for the industry as a whole. But for Seacoast on a stand-alone basis, I still think kind of that 28% to 30% cumulative beta makes sense. A little bit of mix shift, obviously, with the professional bank addition that pushes that up just slightly, but that’s generally not a lot of change there from a cumulative beta perspective.

Unidentified Analyst: Okay. And just so I’m clear, I got to have the message right. With the lower loan growth, you don’t get as much of a benefit from that fixed rate or in general loan repricing, which kind of implies that there’s less NII benefits going forward. Is that fair?

Chuck Shaffer: We had pretty good higher loan yields this quarter, and those continue to move higher. I think you’ll see that in the forthcoming quarter as well. I would just say big picture that our loan growth is focused on booking the right loan growth and the high-quality loan growth versus chasing risk out the curve at wider spreads. So that’s kind of the way to think about it. We’ll see how that materializes in a very dynamic environment that lies ahead.

Unidentified Analyst: Okay. Okay. And net charge-offs stood at low levels, but there was an uptick in the quarter. Could you provide any color around what led to those net charge-offs in the quarter.

Chuck Shaffer: It’s still very low. If you look at it historically, Brandon, I would describe it as just a couple of little one-off type charge-offs, nothing of any significance. And we’re bouncing off the bottom. I mean we’ve had almost zero net charge-offs now for a number of quarters, somewhat of an abnormal environment. And so with time, we’ll move back in a more normalized period, but nothing of any consequence there.

Unidentified Analyst: Okay. So is it fair to assume that charge-offs will kind of increase from this level, I guess, in this quarter? Or could we see kind of just volatility and just trend slightly higher throughout the year potentially?

Chuck Shaffer: If I were modeling the industry in general, I would model back to a more normalized credit environment over time.

Unidentified Analyst: Okay. Thanks for taking my questions.

Operator: Next question from the line of David Bishop. Please go ahead.

Unidentified Analyst: Good morning. Just curious, Chuck, it looks like you guys built a little bit of excess liquidity here. I imagine with a motion caution over and above the balance sheet noise from professional. — borrowings of short-term cash and equivalents up to $800 million. Do you see that trending down relatively quickly? Or do you think you said with that elevated liquidity here for a couple of quarters or so?

Chuck Shaffer: No, I think the way you characterize it is fair. I think that will – that was quickly kind of on and off. We obviously prudently put more cash on the balance sheet as things materialize in March and you saw higher levels there at quarter end, but you should probably expect that to trend back down to more normalized levels into 2Q.

Michael Young: We have a lot of confidence at this point, given the strength of the deposit franchise, outperformed through this period. And so I don’t think we’ll carry as much Federal Home a bank advances as we did. Michael said, we’ll pay it back now. No need to carry it.

Unidentified Analyst: Got it. And then maybe circling in on Brady’s question. I guess I have a little double in terms of the net interest income guide. Not sure if that includes purchase accounting accretion income because a , assuming average earning assets with a full quarter professional around $13.5 billion, which maybe on can that wrong, would imply the margin settles back down like 390, 395 – are you expecting that sort of type of attrition? Just curious if I’m missing something in terms of the NII guide.

Chuck Shaffer: Yes, I think we’ll stick with the NII guide that Tracey provided. I think generally, as you think about that, as we mentioned before, there will be a little higher deposit beta going forward and then it will ultimately just depend on what happens kind of with Fed and how much they hike and when they hike as opposed to what the output is. But NII dollars is what we’re really managing to at this point.

Michael Young: Market is very dynamic right now. So giving NIM guidance with confidence is difficult.

Unidentified Analyst: Just curious, new origination yields, but you’re onboarding new production this quarter at across your segments?

Chuck Shaffer: Yes. We were in the high 6s this quarter. We expect those to continue to move higher into 2Q is probably the right way to think about it towards 7 or low 7s in that range. So that’s kind of where we’ve been, where we were and where we’re headed. So I would just kind of use that as a general guide.

Michael Young: And as Michael mentioned before and one of the responses, where we’re putting new assets on, it’s in the lower risk part of the market. And so it may bring the add-on yield down a little bit, but I think that’s a prudent choice.

Unidentified Analyst: Got it. Thanks.

Operator: We have no further questions on the phone line. I’ll turn it over back to you, Mr. Shaffer. Please go ahead.

Chuck Shaffer: All right. Thank you all for joining our call this morning. Again, thank you to all the Seacoast associates for another outstanding quarter. I appreciate everybody’s hard work and we’ll talk to everybody next quarter. Thank you.

Operator: That concludes today’s call. We thank you for your participation and ask you to please disconnect your lines.