Welcome to Seacoast Banking Corporation's First Quarter 2023 Earnings Conference Call. My name is Carlos, and I will be your operator. [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 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.

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…

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…

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.

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

Good morning, everybody.

Good morning, David.

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?

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.

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?

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.

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?

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.

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?

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.

That's helpful color. Thank you.

Thanks, David.

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

Good morning, everybody.

Good morning, Graham.

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?

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 [ph] 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.

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 [ph] et cetera? Thanks.

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.

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?

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.

Okay. Got it. Thanks, guys.

Thanks.

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

Thanks. Good morning, guys.

Good morning, Brady.

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?

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?

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.

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.

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?

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.

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?

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.

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?

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.

All right, great. Thanks, guys.

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

Good morning. So last cycle, the cumulative deposit beta was around 28% [ph] 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.

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.

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?

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.

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.

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.

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?

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

Okay. Thanks for taking my questions.

[Operator Instructions] Next question from the line of David Bishop. Please go ahead.

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?

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.

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 [ph] said, we'll pay it back now. No need to carry it.

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.

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.

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

Just curious, new origination yields, but you're onboarding new production this quarter at across your segments?

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.

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.

Got it. Thanks.

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

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.

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