Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q4 2023 Earnings Call Transcript

Seacoast Banking Corporation of Florida (NASDAQ:SBCF) Q4 2023 Earnings Call Transcript January 26, 2024

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Operator: Welcome to the Seacoast Banking Corporation’s Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Audra, and I will be your operator. [Operator Instructions] After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Before we begin, I have been asked to direct your attention to the statement at the end of the company’s press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Chuck Shaffer: Thank you, Audra, and thank you all for joining us this morning. As we provide our comments, we’ll reference to the fourth quarter and full year 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; and James Stallings, Chief Credit Officer. Seacoast delivered another solid quarter of financial performance generally in line with last quarter’s guidance. The decline in net interest income was offset by expense reductions, resulting in a pretax pre-provision return on tangible assets of 1.48% and an adjustable return on tangible common equity of nearly 12% and an efficiency ratio of 60%.

Seacoast ended the year — Seacoast ended the year with an industry-leading Tier 1 capital ratio of 14.6%, making it one of the strongest banks in the nation. On previous calls, we’ve highlighted that this capital strength would likely provide opportunities for the bank. This quarter evidenced 2 clear benefits. First, we were able to opportunistically repurchase 546,000 shares of our common stock at a weighted average price of $19.80, representing an attractive earn-back on the deployed capital. Secondly, our tangible book value increased nearly 6% from the prior quarter as we’ve been able to maintain a large percentage of our securities in AFS compared to peers. Our substantial capital and fortress balance sheet will continue to offer strategic advantages and further optionality in the future.

And during the quarter, the effects of quantitative tiding and rising interest rates on the industry have become increasingly evident. Our core net interest margin declined 11 basis points, slightly exceeding our guide by 1 basis point. This was mainly driven by the ongoing transition of noninterest bearing accounts to interest-bearing products, which was consistent with previous quarters’ trends. It’s important to note that we’re not seeing attrition of engaged customers and in fact, gross customer acquisition of checking accounts was up 13% from the same period one year ago. Notably, we believe the first-half of 2024 represents the low point for our net interest margin and net interest income. Tracey will offer additional guidance on this shortly.

We have implemented measures to optimize our efficiency across the organization. And in the third quarter, we reduced our workforce by 6%, which led to an 8% decrease in expenses in Q4 2023. Furthermore, the completion of a second phase of cost reductions in early Q1 2024 is projected to further decrease our annual operating expenses by an additional $15 million. And turning to our lending strategy, we are encouraged by the growth in our lending pipelines while maintaining a prudent approach in the current economic climate. Our loan portfolio grew by 2% annualized from the previous quarter, and we expect continued growth into 2024. Our loan add-on rate rose to near 8% during this period. And additionally, it’s important to emphasize that we acquired a comprehensive banking relationship with Seacoast for all of our lending activities, ensuring a mutual beneficial partnership with our clients.

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Q&A Session

Our asset quality remains robust, showcasing sustained strength. We continue to see a return to a more normalized credit environment and we’ve included a chart in the accompanying slides to offer greater clarity and insight into this trend. This chart presents a view of the classified and criticized loan trend in the past five years. The ratio is consistently in line with the five-year average on scoring the stability of our asset quality. Our ALLL stands at $149 million, equating to 1.48% of total loans. This figure places us in a strong position with an allowance ratio among the highest in our peer group. Additionally, we have another $174 million in purchase discount. And looking ahead, our financial standing and reserves position us exceptionally well compared to our peers, which will allow us to navigate and adapt to any developments this cycle may present.

And in conclusion, as we enter 2024, our commitment to upholding our conservative balance sheet principles is unwavering. We are dedicated to astutely managing our expenses while strategically investing to stimulate growth in low-cost deposits. This disciplined approach is key to fostering a robust capital growth. It will help us maintain a diverse and stable funding base, further strengthening our company’s fortress balance sheet. Ultimately, these efforts are aimed at enhancing the long-term value of our franchise, ensuring resilience and prosperity in the years to come. I’ll turn the call over to Tracey to walk through our financial results.

Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results, beginning with slide four. Seacoast reported net income of $0.35 per share in the fourth quarter and on an adjusted basis, which excludes amortization of intangibles and securities-related losses net income was $0.43 per share. On an adjusted basis, PPNR to total assets was 1.48%, adjusted ROTCE was 11.8% and the efficiency ratio improved from the prior quarter to 60%. Highlighting our continued focus on expense discipline after reducing head count by 6% during the third quarter, we saw the full benefit to expense of that reduction in the fourth quarter. Additional opportunities for efficiency have been identified and will generate expense savings in 2024, which I will talk about shortly.

We’re pleased to report that 2023 was another record year for our wealth management team, with assets under management increasing 23% to $1.7 billion and full-year revenues increasing 16%. Tangible book value per share increased $0.82 to $15.08, benefiting from a 26% decline in unrealized losses on securities in AOCI. Our capital position continues to be very strong, and we’re committed to maintaining our fortress balance sheet. Seacoast’s Tier 1 capital ratio increased to 14.6% and the ratio of tangible common equity to tangible assets increased during the quarter to 9.31%. Also notable, if all held to maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 8.68%. Our fourth quarter results include $2.9 million in losses on the sale of approximately $83 million in securities reinvesting the proceeds into higher-yielding securities.

The opportunistic repositioning has an expected earn back of approximately 1.3 years. We also repurchased 546,000 shares at $19.80 when prices dipped in late October. Turning to slide five. Net interest income declined by $8.5 million or 7% during the quarter, with lower purchased loan accretion, higher deposit cost and deposit product mix shift, all partially offset by higher yields. Core net interest margin contracted 11 basis points to 3.02%, 1 basis point higher than the range of guidance we provided. In the securities portfolio, yields increased 10 basis points to 3.42%. Loan yields, excluding accretion, increased 6 basis points to 5.4%. The accretion of purchase discounts on acquired loans was lower this quarter by $3.5 million, compared to the third quarter.

The cost of deposits increased to 2% while the pace of that increase continues to slow, and our funding base remains strong with 54% transaction accounts. Looking ahead to the first quarter, we expect core net interest margin to be in a range from flat to lower by 5 basis points. Moving to slide six. Non-interest income, excluding securities activity, increased $1.6 million in the fourth quarter to $19.8 million. Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition. Interchange income during the fourth quarter included an annual volume-based incentive from the payment network that added $0.7 million to the quarter. Beyond that, interchange revenue was up slightly from the third quarter to $1.7 million.

Increased saleable SBA production in the fourth quarter resulted in gains of $0.9 million. Other income was higher by $0.4 million, largely related to loan swap activity. In the securities portfolio, the company recognized an opportunity to sell low-yielding bonds with modest losses, which I will discuss in more detail on a later slide. Looking ahead, we continue to focus on growing noninterest income, and we expect first quarter noninterest income in a range from $18.5 million to $20 million. Moving to slide seven. Assets under management increased 23% from a year ago to a record $1.7 billion and have increased at a compound annual growth rate of 27% in the last five years. 2023 was one of the group’s best years yet with significant new client acquisition and nearly $350 million in new assets under management.

Wealth Management revenues in 2023 were $12.8 million, an increase of 16% year-over-year. Our family office style offering continues to resonate with customers generating strong returns for the franchise. On to Slide 8. Noninterest expense for the quarter was $86.4 million, which is at the lower end of the range of guidance we provided. Salaries and wages were lower by $8 million, which is comprised of the following changes. The third quarter included $3.2 million in severance associated with the third quarter reduction in force, and there were no such charges in the fourth quarter. The resulting lower headcount from that effort reduced expenses in the fourth quarter by approximately $1.7 million. Finally, beyond direct salary expense reductions, this category also benefited from higher loan production during the fourth quarter resulting in higher deferrals of origination costs.

This benefited the quarter by approximately $2.8 million. In marketing, as we’ve mentioned in prior calls, we’re focused on driving organic growth throughout our markets and continue to make additional investments in marketing and brand recognition campaigns. Legal and professional fees were somewhat higher aligned with the timing of projects and legal matters, which are now complete. Higher FDIC assessments were the result of adjustments arising from the company’s growth in asset size early in 2023 upon the acquisition of Professional Bank. Changes in real estate owned expense related to valuation adjustments on 3 of our former branch properties. We expect the final disposition of several properties in the first quarter of 2024. Other noninterest expense was lower across many areas, and the efficiency ratio improved from 62.6% in the third quarter to 60.3% in the fourth quarter.

Recent expense reduction initiatives continue to positively impact results, and we’ve taken additional meaningful action in the first quarter of 2024. We expect onetime expenses of approximately $5 million in the first quarter to affect these actions, which will reduce the full year 2024 expense by approximately $15 million. Also, I’d like to highlight an important upcoming change to our presentation. Beginning in the first quarter of 2024, our presentation format will no longer exclude amortization of intangibles from adjusted expenses. With that change in mind, we expect first quarter noninterest expense inclusive of amortization of intangibles to be in a range of $82 million to $84 million. Turning to slide nine. Loan outstandings increased 2% on an annualized basis during the quarter, and we remain committed to our disciplined credit culture.