Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q4 2022 Earnings Call Transcript

Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q4 2022 Earnings Call Transcript January 27, 2023

Seacoast Banking Corporation of Florida beats earnings expectations. Reported EPS is $0.34, expectations were $0.15.

Operator: Greetings, and welcome to the Seacoast Banking Corporation’s Fourth Quarter and Full-Year 2022 Earnings Conference Call. My name is Malika, and I will be your operator for today. 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 conference over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may now begin.

Chuck Shaffer: Thank you all for joining us this morning. As we provide our comments will reference the fourth quarter and full-year 2022 earnings slide deck, which you can find at seacoastbanking.com. I’m joined today by Tracey Dexter, Chief Financial Officer; and Michael Young, Treasurer and Director of Investor Relations. Looking back at 2022, we made remarkable progress in expanding the franchise throughout Florida. Through acquisitions and new market launches, we strengthened our competitive position across the state and across the $10 billion in assets threshold. We started the year with the completion of the Sabal Palm Bank and Florida Business Bank of Florida transactions, putting us in the desirable Sarasota market and continuing our growth in Brevard County.

Also in the first quarter, we entered Naples and Jacksonville with de novo teams, resulting in better than expected customer growth in both markets over the last 12 months. In early October, we completed the acquisition of Drummond Bank, expanding our presence in North Florida including Ocala and Gainesville and added an exceptional C&I team covering both markets. Also in October, we expanded our franchise into the dynamic Miami-Dade County market with the Apollo acquisition. And during the third quarter, we announced the addition of Professional Bank expanding our reach in South Florida even further. Moreover, in early 2022, we continued our focus on delivering better digital experiences to our customers. Completing a significant digital conversion adding Zelle, budgeting tools, account aggregation, proved digital onboarding, Spanish language and several other digital customer experience improvements.

We enhanced our commercial banking team in 2022 with a transformative year of recruiting well-seasoned commercial bankers treasury officer and credit officers throughout Florida, meaningfully increasing productivity over the prior year. Our wealth team also had an outstanding year, adding $425 million to bring assets under management to near $1.4 billion at year-end. Throughout the year, we made investments across all of our operational areas in technology and talent, building resilience and scalability to Seacoast transitions to a mid-size bank. Seacoast had an exceptional 2022, setting ourselves apart as Florida’s leading community bank. Turning to our financial results. The team finished the year with excellent performance. We materially expanded our net interest margin during the fourth quarter, increasing 69 basis points from the prior quarter with loan yields rising 84 basis points.

At the same time, the cost of deposits increased only 12 basis points. This represents an impressive cycle to date beta of less than 5%. We believe the strength of our relationship focused lending model and our granular deposit franchise is finally becoming more evident during a period of higher interest rates versus other more transactional wholesale a rapid growth business models. We generated $67 million in adjusted fourth quarter pre-tax, pre-provision earnings, an increase of $17.7 million from the prior quarter. While achieving a 52% efficiency ratio. Our fourth quarter adjusted pre-tax pre-provision return on tangible assets improved to 2.28% and our adjusted return on tangible equity improved to 15%, up from 12.5%. Seacoast continues to operate from a position of strength with capital allowance ratios at the top of our peer group.

We ended the quarter with a TCE ratio of 9.1% and an ACL coverage ratio of 1.40%. And considering the loss absorption included in the purchase accounting marks, the company’s backstop at a 2.60% coverage rate. Additionally, should a downturn materialize, Florida has the potential to outperform the rest of the country, given the wealth accumulation and population growth over the last few years. Florida has exceeded every state in the nation and attracting affluent wealthy individuals and corporations, adding materially to the state’s GDP and further bolstering the state’s economic drivers. Our credit metrics remain outstanding and we continue to be a disciplined conservative lender focused on building a carefully underwritten and diversified portfolio by nurturing full client relationships to bring low cost funding.

And as a reminder, our portfolio has been built over the long term with a consistent growth rate while driving diversification by product type segment and vintage. A final thought, considering the continued economic strength of Florida are carefully underwritten credit portfolio with low CRE and C&I concentrations and peer leading capital levels, we believe a very strong balance sheet that can weather any challenges ahead. Further such strength should provide optionality to be offensive and potentially more volatile economic environment including opportunistic market share gains, organic growth and acquisition opportunities. I’ll now turn the call over to Tracey.

Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results, beginning with the highlights on Slide 5. The net interest margin expanded 69 basis points to 4.36% and on a core basis expanded 43 basis points to 4.01%. Loan originations, in combination with acquisitions at higher book yields and the low cost of deposits we maintained during the quarter supported higher net interest margin. Our cost of deposits increased only 12 basis points during the fourth quarter to 21 basis points. We’ve managed deposit pricing largely on an exception basis since the beginning of the rate cycle, but we do expect to see an increase at a quicker pace in the coming months, given the velocity of rate movement and the competitive environment.

Pre-tax, pre-provision earnings continued to increase with 7% growth quarter-over-quarter to $46 million and when adjusted for merger related costs and amortization of acquired intangibles in each period, pre-tax, pre-provision earnings increased 36% to $66.6 million and as a percentage of tangible assets to 2.28%. We delivered organic loan growth. In addition to growth through acquisition this quarter, our credit standards remain disciplined and focused on relationship lending. And we saw annualized organic growth of 14% this quarter. I’ll emphasize that the growth is in keeping with the bank’s credit standards and is a combination of solid production in the quarter and slowing loan prepayments. The loan-to-deposit ratio ended the quarter at 82%.

Average loan yields increased 84 basis points to 5.29% and the December weighted average add-on yields reached 6.5%. Credit risk metrics remained strong, with non-accrual loans representing 0.35% of total loans compared to 0.32% in the prior quarter. The quarterly provision for credit losses is $14.1 million including $15 million in initial provision on the Apollo and Drummond acquired loans, offset by the release of $2.1 million in reserves we established in the third quarter to provide for losses potentially resulting from the impact of Hurricane Ian, that did not materialize. The allowance for credit losses stands at 1.4% of total loans and continues to reflect the possibility of potentially deteriorating economic conditions. Wealth Management was a particular bright spot during the quarter and for the full-year 2022 with the wealth management team adding $425 million in assets under management over the last 12 months.

And as you know, there has been significant activity on the M&A front, including the closings of the Apollo and Drummond transactions on October 7th, and the upcoming acquisition of Professional Bank expected on January 31, with system conversion late in the second quarter of 2023. Turning to Slide 6. Net interest income expanded 36% during the quarter, adding $31.5 million with higher yields and higher loan balances. Net interest margin expanded 69 basis points to 4.36% and excluding PPP and accretion on acquired loans, net interest margin increased by 43 basis points to just over 4%. In the securities portfolio, yields increased 41 basis points to 2.77% and loan yields expanded 84 basis points to 5.29%. We continue to benefit from a strong low-cost funding base with 64% transaction accounts and the cost of deposits increased only 12 basis points to 21 basis points.

Photo by Clay Banks on Unsplash

In additions during the quarter of Apollo and Drummond banks, further enhance the deposit base with longstanding granular relationships. Looking ahead, we expect continued expansion of net interest income, driven by balance sheet growth and more modestly increasing yields on loans and securities outpacing increasing deposit costs. In the first quarter, we modeled net interest income in a range between $132 million and $138 million with the actual outcomes highly dependent on the pace and velocity of deposit competition in the coming quarter. Moving to Slide 7. Adjusted non-interest income was $17.6 million, an increase of $1.2 million from the previous quarter and a decrease of $700,000 from the prior year quarter. We saw increases in service charges and interchange revenue and wealth management revenue increased 6% from prior quarter and 22% from the prior year quarter.

Comparing overall performance to the prior year quarter, the decrease relates to lower mortgage banking activity impacted by rising rates with mortgage related income of $2 million in the fourth quarter of 2021 compared to about $400,000 in the fourth quarter of 2022. Looking ahead, we continue to focus on growing our broad base of revenue sources and with the benefit of the expanded franchise, we expect first quarter non-interest income in a range from $20 million to $23 million, which includes the partial quarter activity from Professional Bank. Moving to Slide 8. Adjusted non-interest expense for the quarter was $70.4 million, which was lower than the guidance we provided last quarter. Increases from the prior quarter were aligned with the expanded associate base and growing customer base and it’s important to note that the Drummond and Apollo cost synergies will fully materialize, beginning in the second quarter of 2023.

Salaries and benefits on an adjusted basis increased $12.3 million, reflecting the increase in staff to support Seacoast’s expanded statewide franchise as well as increases in incentives related to higher commercial production during the quarter. Data processing are typically volume based and the increase aligns with the larger customer base and higher transaction volumes. 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 Apollo and Drummond. Amortization of these assets during the fourth quarter was $4.8 million and we expect the full-year amortization, including the addition of Professional Bank to be approximately $28 million.

Looking ahead, we expect to maintain our expense discipline while continuing investments to support growth. We expect first quarter expenses, scaling with the growing size of the organization in the range of $86 million to $90 million inclusive of the operating results of Apollo and Drummond and a partial quarter for Professional. On an adjusted basis, excluding the amortization of intangibles, that would be $80 million to $84 million. On Slide 9, the efficiency ratio on an adjusted basis improved to 52%. As we scale the company for growth 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 efficiency ratio in the low 50s.

Turning to Slide 10. The chart on the left highlights the continued diverse mix of our credit exposures and our disciplined approach to managing concentration. In the upper right of the slide, construction and commercial real estate concentrations remained well below regulatory guidelines and well below peer levels. Turning to Slide 11. Loan outstandings increased $241 million or 14% excluding acquisitions on an annualized basis. Commercial originations were up over the prior quarter and looking forward, we’re seeing market demand generally slowing impacted by rising rates. Average core loan yields increased by 50 basis points during the quarter to 4.8% with the December weighted average add-on yields reaching 6.5%. We expect the pace of loan growth to moderate somewhat, expecting an annualized growth rate in the first quarter in the mid-single digits.

Loan yields will continue to benefit from the higher rate environment and we expect core yields in the first quarter excluding purchase accounting accretion to expand meaningfully to the 520s range. Turning to Slide 12. In the investment securities portfolio, the average yield increased during the quarter by 41 basis points to 2.77%. Values have stabilized and duration in the AFS portfolio has extended somewhat from around 3.5 in the third quarter to 3.73 in the fourth quarter. Turning to Slide 13. Deposits outstanding totaled just under $10 billion, which is an increase of $1.2 billion from September. Net of acquired balances. There were outflows of approximately $320 million in non-interest bearing demand accounts. Our cost of deposits increased by only 12 basis points and we did see some outflows with impacts from rate sensitivity and a general absorption of liquidity in the market.

The competitive environment is increasingly dynamic and our expectation is that the cost of deposits will increase at a faster pace in the first quarter than in the fourth quarter. In addition to the impact of adding higher cost deposits from Professional Bank. That said, we continue to expect to outperform peers of the environment serves to highlight the strength of our low cost deposit base. Looking forward to the first quarter, including the impact of Professional Bank, we expect our cost of deposits to move above 50 basis points. Providing more precise guidance is difficult given the increasingly dynamic competitive market for deposits. Moving to Slide 14, Wealth revenues increased 6% compared to the third quarter and 22% compared to the fourth quarter of 2021.

The previously mentioned deposit outflows contributed in part to the strong results for the Wealth Management division. You’ll see that assets under management has increased 60% from $870 million two years ago to nearly $1.4 billion today. Moving on to credit topics on Slide 15. The allowance for credit losses increased during the quarter by $18.6 million to an overall $113.9 million with a decline in coverage of 2 basis points to 1.4%. The provision this quarter was $14.1 million which included $15 million assigned to the portfolios acquired from Apollo and Drummond, offset by the release of $2.1 million with set aside for Hurricane Ian, but fortunately, did not need. We remain watchful of inflation pressures and are carefully considering the ongoing impact of higher rates on the economy though our credit metrics remain very strong.

Moving to Slide 16. Charge-offs were only 4 basis points on the overall portfolio. Non-performing loans represent 0.35% of total loans. The percentage of criticized loans to risk-based capital increased modestly with conservative grading on acquired loans. And in the allowance, we continue to assess the environment and the factors that might affect loan performance, and this quarter the allowance for credit losses is modestly lower at 1.4% of total loans, again attributed to the release of hurricane reserves. On Slide 17, 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 fourth quarter on tangible equity and from prior quarters this year of the decline in accumulated other comprehensive income, while those measures will return over time.

We’re committed to driving shareholder value creation. The ratio of tangible common equity to tangible assets is a strong 9.1%. In this quarter, adjusted return on tangible common equity was 15.1%. In summary, considering our peer leading 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 flexibility to be opportunistic and client selection, organic growth and acquisition opportunities and to continue to build Florida’s leading community bank. We’ll look forward to your questions. Chuck, I’ll turn the call back to you.

Chuck Shaffer: Thank you, Tracey. And before we go to Q&A, I just want to say, thank you to all the Seacoast associates on the call. 2022 was truly a special year. I’m incredibly proud of all of you and thank you for all your hard work and effort. Okay. Operator, we’re ready for Q&A.

Operator: Our first phone question is from the line of Brady Gailey. Please go ahead. Your line is now open.

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Q&A Session

Brady Gailey: So, I wanted to start with loan growth. I know you guys had been expecting high-single digit. It sounds like you’re more in the mid-single digit area for the first quarter of the year. Should we think about mid-single digits as appropriate for the entire year? Or do you think that you get back to the high-single after you get through the kind of seasonally slow at 1Q?

Chuck Shaffer: Yes. And maybe looking back at the quarter, we really had a very good quarter for loan growth and it was a nice mix between C&I and commercial real estate, and large part was driven by a lot of the new additions to the teams. We added over the back half of the year, last year and it was really great to see the relationships come over with that additional talent, generally very high quality relationships that joined the franchise. As a result of the quality talent we hired and so we’re very pleased with the outcome, also pleased with the average add-on rate hitting about 650 there towards the end of the year. So nice pull up in new loan yields. And then looking forward, it’s tough to provide guidance beyond quarter and we’re guiding to mid-single digits for the first quarter.

I would say, at this point given the inversion of the curve. I think it’s prudent for us to be cautious and thoughtful as we move through this period will to add high quality opportunities as they come on to particularly high quality relationships coming with both deposits and loans. But beyond that Brady, we’ll have to see how things play out for the year, but mid-single digit guide for Q1.

Brady Gailey: Okay. And then your accretable yield really ticked up in the fourth quarter, it was almost $10 million, that was more than yield it for the first three quarters of the year combined. I know that line item can be very difficult to forecast. And I know you’re about add professional into that bucket, but any shot at what accretable yield could be for the full-year 2023?

Tracey Dexter: Yes, I think, when we look back at the fourth quarter and the acquisition estimates – the credit marks came in really in line with our expectations. But to your point, the rate marks with those measurements driven off of the rate environment on October 7 for both banks, the date of closing. The rate marks came in a bit higher and so impacting the accretable yield. And so I think as we look forward, accretion kind of a difficult number to model as you point out, but with about 9.7 in the fourth quarter and the addition of Professional Bank in the first, our model shows about $10 million or $11 million in the first quarter, and you’ll see it move a little higher after that.

Brady Gailey: Okay. All right. And then lastly from me, I mean, Seacoast has been incredibly active in M&A. You’re close in – your biggest deal ever next week. I know bank M&A nowadays is tougher just with the rate mark component, but how do you think about bank M&A. You’ve done a lot as it time to stop and pause and digest what you’ve done or are you still on the offense and you could see additional deals beyond Professional this year?