Welcome to Seacoast Banking Corporation's Third Quarter 2023 Earnings Conference Call. My name is Daisy, and I will be your operator. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct 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 conference over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Thank you all for joining us this morning. As we provide our comments, we'll reference the third 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. The Seacoast’s team produced another quarter of solid financial performance in line with the guidance we provided last quarter, despite the backdrop of a challenging yield curve. As we discussed on last quarter's call, following a period of elevated acquisition activity, we returned our focus to organic growth, leveraging the exceptional talent that had joined in recent years, and the additional marketing investments we made late in the quarter to drive low cost deposit growth in deepened client relationships. This campaign resulted in 3.7% annualized organic deposit growth in the quarter, including both expanded relationships across our customer base, as well as fully new relationships. The average add-on rate for those deposits was 3.75%, and we used this additional funding to pay down broker deposits at rates near 5%, further strengthening our fortress balance sheet, and adding liquidity capacity. We also remain intensely focused on expense discipline, reducing headcount by 6% during the quarter, with the full expense benefit of this headcount reduction heading Q4. We expect expenses to decline in the fourth quarter, and we'll remain vigilant operating the company where they focus on managing overhead prudently into 2024, and Tracy will provide further expense guidance in our prepared remarks. Turning to lending and credit, we continue to take a very careful approach to lending in the current environment. As we guided on last quarter's call, loan outstanding declined from the prior quarter, primarily the result of much lower customer demand.…

Thank you, Chuck. Good morning, everyone. Directing your attention to third quarter results, beginning with the highlights on slide 4. Annual deposit market share data released as of June 30th demonstrates the strength of our franchise and the results of our expanded market presence and strong relationship focus. Seacoast moved up three slots to number 15 in the state, maintaining a leading position in our legacy markets and seeing strong growth in our newer markets. As we work to move into the top 10, we'll continue our relationship -centric approach. We're pleased to report growth in organic deposits at an annualized rate of 3.7%, combined with $334 million in paydowns of wholesale funding. Our broker deposits and FHLB advances combined represent only 3% of total liabilities. We're focused on relationship-based customer acquisition and positioning Seacoast for top 10 market share in all major Florida markets. Our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. Seacoast Tier 1 capital ratio increased to 13.9% and the ratio of tangible common equity to tangible assets increased during the quarter to 8.68%. Also notable, if all health maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 7.89%. Our credit standards remain disciplined and focused on relationship lending and our loan to deposit ratio ended the quarter at 83%. Credit risk metrics remain strong with low levels of non-approval loans and criticized assets. We're closely managing our expense base and executed on several expense-related initiatives during the quarter including a headcount reduction and the consolidation of one branch location. Tangible book value per share increased to $14.26. Removing the impact of the change in accumulated comprehensive income, tangible book value per share at September 30th would have been $14.56…

Thank you, Tracey. All right, operator, I think we're ready for Q&A.

[Operator Instructions] Our first question comes from the line of David Feaster.

Hey, good morning, everybody. Maybe just starting on the loan side. It's great to see the improvement in the commercial loan pipeline. It sounds like we're, stabilizing there. I'm curious what drove the increase in the pipeline. Is it demand changing or customers just more accepting of a higher rate environment on pricing or just more competitors pulling back or just your lenders out there just blocking, tackling, gathering business. So just curious kind of what drove the increase in the commercial pipeline, the complexion of it and kind of how new loan yields are trending.

Well, as we discussed on prior calls, David, we are very cautious to drive loan growth in a period where we thought the market had driven structure to a weakened standard and pricing to lower spreads than what we thought was appropriate. As times marched on here, the market's gotten more reasonable and what we're seeing is the ability to get conservative credit structures, strong deposits and in many cases strong DDA in these relationships as well as spreads we think that appropriately reflect the opportunity that we're taking. So In many ways, the market has moved back towards our more conservative credit posture and as a result, we're seeing more demand, which is very much positive.

That's great. And then maybe just following up on that deposit front, you guys touched on some of the broad deposit thoughts. And I'm just curious if we could dig in maybe some of the underlying trends that you're seeing there and the competitive landscape. We obviously have headwinds from client deposit activation, right? I mean, folks are using more cash in some of that migration. But just curious maybe how you're seeing on underlying account growth and relationship growth just from the full relationships that you talked about earlier. So just curious where you're having wind and where you see opportunity to drive core deposit growth.

Yes, I would say our biggest opportunity has been continues to be just client angst and unhappiness with larger regional banks. When you look at the banker portfolio we have and the team that we've put together, their former backgrounds typically are upstream market banks. And so we continue to see a lot of upset customers with their larger, more regional banks and as a result we've been just taking market share. That'd be the best way to describe it in all cases. We're seeing full relationships coming on. We're not out marketing high yield CDs. We're not out marketing high cost money market. We are in the market. We are competitive. But what we're seeing is full deep relationships coming over. As we move past an elevated period of M&A, we've now moved to a point here where we are very focused on organic growth across the state. We've got a stronger and bigger budget for marketing in the state. We're out driving brand recognition for the company and at the same time we've got a lot of talent that's joined us in the last 24 months that is now working their connectivity to bring on relationships. So that, as I mentioned in the outset, we're seeing a reasonable add-on rate for those deposits and very happy to see it. And not only Michael or Tracey, anything you want to talk about the individual items in there.

Yes, David, one other, I think just big picture comment, we kind of pulled back on lending when we felt like it was irrational. That's long back the other way, as Chuck mentioned, and then similarly on the deposit side, coming out of March and April, there was some irrational pricing in the market from various competitors that we chose not to participate in. And so I think you're seeing kind of more rationality on both sides of the balance sheet, particularly as peer's loan growth is decelerating, they're being a little less competitive at really high rates to drive market share. So I think we're just seeing kind of the market stabilize and our consistent process kind of working right on both sides of the balance sheet now. So we've made sure we didn't hurt ourselves on either loans or deposits right through the last 12 months and now we're in really good standing as we head forward into 2024 in the back half of this year.

That's great color. I appreciate it. And then appreciate all the guidance that you guys gave and some of the preliminary thoughts. But I'm just curious, maybe looking out to 2024, I mean we're not giving guidance for that yet. But I guess as you look at the street estimates, look, there's a wide range at this point just given there's a lot of moving parts from the M&A activity. I guess when you look at street and consensus outlook, is there anything that you see that's wildly offered? Do you think the streets, relatively realistic based on your preliminary thoughts and just curious how you think about that as we try and manage expectations heading into the next year?

I'd say we feel good about street estimates. It generally lines up with what our thoughts are. There are some line items, one way or the other, but overall street estimates are pretty good. Michael, I don't know if you think you can add to that in terms of the model, but overall, we feel pretty good about street estimates.

Yes. I mean there's, obviously some volatility around, credit expectations and then rate expectations that are probably in each, individual model, but generally seems like we're in good shape.

Generally bottom line, we're in line.

Our next question comes from line of Stephen Scouten.

Hey, thanks. Good morning. Appreciate you guys not calling out my estimates this morning, so thank you for that. Just curious, you guys gave some guidance and Tracey you said maybe 5 to 10 basis points of additional NIM compression expected in the fourth quarter. I don't know if you have like the September NIM or what you're seeing, what you saw at quarter end that might give us some visibility into that starting point. And then thinking about that 2040, you said maybe second half upside. If you could give any color about what drives that, I assume it's fixed rate loan repricing, but kind of the puts and takes we might see in the ‘24 as well. Thanks.

Hey, Steven, it's Michael. Yes, so just, I think as we exit the quarter, it's just kind of where deposit costs are. So spot deposit costs are about, closer to 187 kinds of exiting the quarter. So we'll have some pull through that. Loan yields this quarter were a little low, sort of just lower fees in the quarter, but those things will kind of move throughout Q4 and kind of line up with that NIM guide. So just trying to give you a little clarity there. But, as we've talked about, I think big picture, over the last year, it's just with our fixed loan book repricing, we'll start to see more and more benefit of that and more of our book repricing into the higher rate environment as we move through 2024. And that will, outweigh any, deposit cost pressure that we may feel. And so, you kind of see that stabilizing as we get into 2024 and the NIM starting to head higher, right, as we get into kind of your two, your three of the higher rate regimes, we will reprice more of our book up into that higher pricing level. So that's kind of the right way to think about it.

Got it. And is there, do we think about just like a four year duration kind of evenly on the fixed rate loan book or is there any lumpiness to the, kind of turnover at that portfolio over the next 12 months at all that we should know?

Not when you think about it cumulatively for maturities and amortization, we don't do a lot of interest only lending. So we have a good bit of principal amortization that comes off of that as well. So when you take all that together, it's actually, it's pretty smooth. Q4 is usually a higher origination quarter for us. So we do have a few more maturities this quarter than the normal. So that'll help a little bit as we get into the Q4.

Got it, makes sense. And then Chuck, I like the NIM comment. I mean, definitely the M&A commentary for ‘24. I hope you're right. I'm curious what that looks like in your mind. I know it's hard to say, hard to know what opportunities might present themselves, but would you expect to look at larger banks at this point in time, or would you continue to take advantage of some of the maybe $500 million to $1.5 billion kind of banks that you guys have kind of feasted on the past few years?

Yes, I mean, I'll talk kind of high level, but we continue to be very focused on the same strategy we've executed before. We're focused on Florida only. We're focused on smaller transactions in Florida. That's primarily what the opportunity is,$ 500 million to a banished type banks are what's available to us in the state. We'll continue to focus there; M&A is tough right now. The math is challenging. We don't have much of an appetite for dilution right now. And so it's difficult to get a deal done in the current environment, but I think on the back half of next year is, we continue to see the cycle mature. The struggles around generating earnings will drive sellers to become more reasonable on pricing and we'll probably start to see some deals, come to market. It's just going to take time. Just like anything we're seeing sort of the market bid-ask spread, has to come together. I think it'll take sort of maturing of this period to get there, but is that happens? I think, obviously, seller prices come down. That allows deals to happen and, the sellers will get liquidity in their investments, but it'll take a little time. I also think, the industry, obviously we've seen margin compression across the entire banking industry and the best way to solve a lot of the earnings challenges is consolidating expense basis. And so I think that all the natural drivers to drive the industry there will be there. It's just when and what time does that actually happen.

Yes, makes a lot of sense. Okay. And then just last thing for me, any thoughts around like any source security, restructuring, or would there be, that's something you guys would consider at this point in time?

See, I’d just say, consistent commentary there. We continue to evaluate. And if the earn back on that is strong relative to our other capital deployment opportunities, then that would be something we would look to engage in. I think, to date, where it has been enacted by some other banks, I think it's just, it's a little too much of a yield curve bet that was made, right? To shorten up on their securities books, how long and reinvest short. And we don't, we want to lock out kind of the earn back. If we make a move like that, so we're certain of the earn back execution and timeline of the ROI that we would get.

Our next question comes from the line of Brady Gailey.

Hey, thanks. Good morning, guys. So M&A is not a near term opportunity. I know you guys have been, pretty successful in hiring bankers to come join the Seacoast team. But, at the same time, you just did a workforce production and the efficiency ratio is running a little higher than it normally is for you guys. So how do you think about hiring in this environment? Is that something that you'll continue to pursue or is that, on pause at this point?

Either way, I think about a Brady is, we're focused, like I mentioned, in my prepared comments on two things or kind of our two priority focuses. One is deposit growth is very important. And two is expense management. I think we still have opportunity on expenses here going into 2024. We're keenly focused on that inside the company right now. If we sell a team or a banker or bank, a few bankers that we're, be immediately accretive. They have the ability to drive business to us that fit our culture and want to be a part of us. We certainly would look at those opportunities, but I would describe it as being carefully optimistic or carefully opportunistic is the best way to describe it. We're not going to aggressively go out and hire right now. If we see somebody that's really a strong player and wants to join the franchise, we'll certainly look at that. But the expense management is a key focus of ours and really will be going into 2024.

And by expense management, I know you closed the location and that the reduction, I mean, is that still on the table going forward? Or do you think you're kind of done as far as announcing your cost reduction plans.

I think there's more work for us to do. I don't want to get into sort of specifics on that because we need to work through that, but I think we still got some opportunity.

Okay. All right. And then, I liked hearing the comment about the market share that Seacoast has now improving to number 15. You want to get into the top 10. Any idea or do you have a goal of when you'd like to get into the top 10? Is that a couple years away? I'm just curious how you think about the possible timing there.

I think about it this way. We want to be an upper quartile performer. We want to deliver strong shareholder returns, and that's our priority. Growing market share is part of that but priority one is delivering returns, priority two is growing market share. And so if we see opportunities, we'll take them. There's no sort of timeline to that. It's more balancing and appropriate investment to return to expense management as we move through time, but no timeline, just more importantly delivering good returns to our shareholders.

And Brady, I'd just add on the heels of that, not all deposit market shares the same, right? We don't have deposit verticals and things like that that we're driving after. Ours are true, generally customer funds, so it's not just some corporate deposits that are placed somewhere.

Yes. We're after generating franchise value.

Our next question comes from a line of Russell Gunther.

Please receive your question. Hey, good morning, guys. Just wanted to follow up on the loan growth conversation. Appreciate all the color on how you're thinking about things. Just one from a growth volume perspective, modest growth in ‘24. You guys think about that as a low single digit number, a mid-single digit number, and then wherever volume shakes out just maybe the mix you're contemplating.

Yes, I think, listen Russell, I would gauge that based on kind of the economic backdrop that we find ourselves in 2024. I think we've been pretty conservative, right, about what we thought that might look like in particular in the first half of the year. Obviously, with a very strong GDP print here recently, maybe it's a little bit better but not sure on, sort of the macroeconomic forces. We are seeing, as Chuck mentioned earlier, kind of competitors pull back and retrench a bit and so that does present an opportunity potentially to pick up market share but, all that together, I think we see good production and I think we'll start to see, the kind of balances grow as we move into 2024 but hard to put a fine point on it, depending on kind of what the macroeconomic environment is that we're in.

Yes, okay, great.

What we'll do is just chase -- we won't chase loan growth to chase loan growth. We're going to take opportunities where we see good returns and it probably keeps us in the low single digits, but we'll see how things play out.

Okay, I appreciate it guys. And then I think just broad strokes comments, discussed expectations for continued deposit growth alongside that loan growth. So is the 80% loan to deposit ratio a target we should think about going forward or could that drift higher? How do you think about managing that?

I think, we'd be comfortable going up to about 90%. That's about where our guardrail is. I think over time it drifts that way, but it takes a fair amount of time to get there. So there's plenty of room to manage that ratio. But importantly, it's the Fed continues to shrink the balance sheet and the deposit market remains competitive. Growing deposits is a very much key focus of ours. And, ideally, we'd grow deposits and keep the liquidity on the balance sheet as we move through time. But we'd be comfortable up to about 90% in the long run.

And the pacing on that, just keep in mind, as we said before, the cash flow off the securities book is about$ 330 million or so every 12 months. So that kind of limits some of our remixing. We would probably remix right out of securities and into loans over time, but you'd probably pick up a couple points, maybe two points or so on the loan to deposit ratio a year at that pace, assuming we don't do something more meaningful, in terms of a restructure or something, if that became, attractive at some point.

That's very helpful, guys. Thank you both. On the fee guide, so I think a little bit of a step up in 4Q, if you could just discuss the drivers there. And then I know we have the full year of Durbin to contend with as we think about ‘24. So you expect to be able to run flat or maybe a little bit of fee income growth, just broad strokes outlook would be helpful.

Yes, this is Tracey. In the third quarter, we had expected a little bit of a maybe better volumes in mortgage and SBA to some extent. So those were both a little slower than expected in part because of some closings that pushed into October. So that'll be an area that comes in a little higher in the fourth quarter. I think generally deposit related charges will continue to benefit from the increased size and breadth of the organization and some good momentum in deposit relationships as Chuck has described. Wealth management, somewhat driven by the market conditions. On interchange, I think you've seen the adjustments that we'll see. So I expect that to remain pretty stable through the fourth quarter.

Okay, great. And then last one for me, just an update on your shared national credit exposure, which I think is tiny and maybe all acquired, but just correct me if I'm wrong in your general thoughts on the asset class.

Almost none. Less than 0.5% of the portfolios in sheer national credits, they're all acquired. We've never actually acquired or originated one here at Seacoast. So it's very, very small. We really have also no bot, participations are very little bot participations, same thing. They've only come in through acquired acquisitions. So we've never relied on snicks or participations to support our loan growth. Everything we've done and originated at Seacoast has been, driven organically out through our banking team.

Our next question comes in line of David Bishop.

Hey, good morning, guys. Hey, Chuck or Mike or Tracey, quick question. It sounded like you noted that payoffs were a little bit elevated this quarter versus last and may have restrained loan growth. Just curious if you had that number versus last quarter. Then maybe Michael, in terms of the maturity schedule, next year and fourth quarter, just curious maybe what the roll-off yields are looking like versus the add-on yields. Sounds like add-on yields are close to 8% if I heard right. Maybe just some color on those topics.

Yes, sure. So the payoffs this quarter were about $270 million, which is a little higher than what we had been seeing. And that was a little higher yield, though, 6.3% roughly. So seeing some of the variable, higher rate loans pay down as people just, decide to kind of pay down those lines once you get to certain high levels of absolute rates. The new origination yields were, yes, upper 70 or upper 7 for sure, 7.8% roughly in the quarter. And then as we look forward into Q4 and next year, we're seeing kind of fixed rate book paying off and paying down in the mid-4s to maybe high -4s, so definitely a positive trend as we see that new originations are placing kind of runoff of a back book and refinancing a back book so.

Got it. And then did I hear that the deposit inflows this quarter came in somewhere around, was it 250 replacing the brokers at 5%, I wasn't sure, right, in fact, thought those numbers right earlier in the call.

Is a little higher than that on a blended basis, probably in the mid-3s. So replacing broker at 5% that would have rolled up, certainly in this environment, probably up to the mid-5s. So that was a strong makeshift for us this quarter. And that did occur throughout the quarter, so we'll see some impacts of that benefiting Q4 a little bit.

Got it. And then Chuck, I'm sure a topic you love to talk about, you mentioned the IOTA impact. Any chance, any lobbying efforts out there to get that overturned, any chance that goes away here in the near term, you think that's pretty sticky here for the duration or releasing [inaudible] term?

I'll be careful with my comments here, but I would say the Florida banking industry is working really hard to get that issue to a better place, and I'll probably leave it at that.

Fair enough. And then maybe a question for the critical eyes, guys, just to make sure they're still awake. Curious, we've heard a lot of other competitors talk about some issues in the senior care or assist delivery industry. Just curious, any exposure there, and if so, what you're seeing in terms of your trends internally?

David, you want to take that one or James?

Well, I would say first and foremost, we are aware of the issues in the industry. We've had conversations with peers about it. The good news is that Seacoast exposure is minimal. I think we might have one or two small facilities, but it's not even on my radar.

We've never been in the space. Never really liked space for a lot of reasons, and it's just not something we've done much of.

Our next question comes from the line of Brandon King.

Hey, good morning. So with rates potentially peaking here, I just want to get updated thoughts on how you are expecting to manage the balance sheet as a sensitivity going forward. If you're debating any sort of strategy, you make kind of participate extend duration from here.

Yes, it's a good question, Brandon. We're a little bit liability sensitivity today, we do kind of similarly expect that the rates may kind of stabilize here for a period. I think in general we will manage the kind of rate sensitivity appropriately. Our best case would be a somewhat steepening of the yield curve or just kind of a stabilization at current rates. So I think the way to think about it is that we'll probably try to manage the tail risk, right, if rates were to move down or up significantly consistent with our kind of conservative nature. That's really what we're focused on and then just optimizing the profitability and performance of the balance sheet that we have today during the interim. So those are kind of the pieces I would call out.

Okay. And on the broker deposits, what is the expectation for when those could be fully paid off? Are there any chunky maturities coming up over the next few quarters?

It's kind of blended over the next year. We've got a few more larger chunks maybe over the next kind of four or five months, but it's kind of laddered out a little bit at this point. So we'll continue likely as we have success from our team, reeling in deposits to continue to pay those off and pay those down in time.

Okay. And then lastly, just thinking about balance sheet growth here. Is the way to think about it maybe is kind of a static bare balance sheet maybe until the second half of next year once the loan growth improves? Is that a fair way to think about it?

I think dependent right on our success with growth and kind of what the macro environment looks like, those are two caveats I guess, but the team's engaged and locked in and focused on growing core relationships. And as we do that, we'll continue to see balance sheet growth. As we mentioned earlier, some of the dynamics in the market improving. I think you're seeing some of that accrue to our benefit. We've been patient and now we're seeing good opportunities to be active and so that's kind of where we're at right now. Chuck Shaffer, there are no further questions at this time. I will turn the call back over to you.

Okay, thank you all for joining us this morning. That'll conclude our call.

That does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your line.