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.

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…

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…

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

[Operator Instructions]. We'll go first to Eric Spector at Raymond James.

Hey, good morning everybody. This is [Eric Down] (ph) in for Eric Spector. Just wanted to touch on the funding side to start off. I appreciate the loan growth guidance of low single digits in -- it's great to see you reduce wholesale and brokered funding this quarter and the new account openings. I'm just curious how you think about funding the loan growth and how you think about core deposit growth in 2024, what initiatives you have in place to grow deposits? And do you expect to grow deposits at the same pace as the loans? Just any color on that, that would be helpful.

Yes. Thanks for the question, Eric. So I think as we look into 2024, a lot will be determined by kind of the pace of the Fed movement within the year. Obviously, with more cuts could be favorable to deposit flows in general. But on a broad trend, we would expect to have our deposit growth maybe be slightly below loan growth and continue to remix positively from a loan-to-deposit ratio perspective in 2024. That's probably the high-level thoughts there.

Got it. That's helpful. And then just outside of the margin, just as we think about the impacts of just declining rates on the balance sheet and income statement, when you expect to see additional loan growth from that if we see cuts and at what level of segments would you expect to see it from first? And then just curious how you think about repricing deposits if we'd be in the Fed rate cuts and drive additional core deposit flows if rates begin coming down?

That's a great question, Eric. It kind of depends on how things play out over the rest of the year. What I'm very encouraged by is we're seeing the opportunity to step in where the market's somewhat pulling away from lending and really get well structured, high-quality credits, a lot of equity in projects and we're getting rate. So where as we've talked about on past calls, we kind of pulled back given some of the more, I would describe it kind of getting on the edge of where we are comfortable in terms of underwriting structure. We're now seeing the opportunity to underwrite very conservatively, get the right pricing on deals and then move the relationships over. Our pipelines grew. We saw better production last quarter and then looking forward even into the first few weeks of 2024 here, we're seeing the pipeline continue to grow. So very encouraged by that. And so as that plays out, we'll see how growth kind of comes along with that, and that will kind of determine exactly where are we and how we step into the deposit market as Michael said I think the biggest driver of where the deposit market goes is whether or not the Fed does cut rates and whether or not the Fed starts buying bonds and puts some liquidity back into the market. So I think that will be very interesting to see how the back half of 2024 plays out. But I like where we're positioned. I like the fact that we went ahead and doubled down our effort to get our expense base rightsized. And so when you kind of step back and think about where we are, I think we've been proactive in getting the expense base sort of reset while going into the coming year where we're seeing loan growth pull through and as that plays out into the coming year, if we do see some rate cuts in the back half really starts to set up a really nice '25, '26. So we're taking a more medium- to longer-term view of the situation. structuring the balance sheet and the expense base to prepare for that and looking forward to what things could look like in the coming years.

Got it. That's really helpful. And then just one of the lastly, just touch on credit. And if you could just touch on what drove the increase in NPAs criticizing classified and just more broadly, if you could just provide some color on just how credit is trending? I think you kind of spoke to expectations of some normalization, where are you most concerned about credit going forward? And just talk about how your economic outlook has changed. And if you're assuming any rate cuts in that outlook? And any color there would be helpful.

Yes. I think where we saw -- it's really the increase in NPLs is only a couple of credits both were C&I-driven credits, one of which is basically a restructure that potentially will move back to accrual once it sort of achieves stabilization, which we seem really confident it will. And in the other, we've got reserved in a specific generally. So when we think about that, that's really what drove some of that I don't know, James, if you have any color on that or anything you want to add to that. But I think as far as we think about where we continue to watch, I think the biggest sort of area that we continue to be thoughtful about is '21 and '22 were such strong years for the U.S. economy that a lot of inflation-driven revenue pushed through small businesses and operating companies. And then along with that, came higher expenses. So now we're kind of moving through that period and revenues are potentially going to come down a little bit, and it's important to monitor our operating companies to make sure they properly manage margins and manage expenses into the coming years. That's really be a summary. I don't know, James, anything you'd add to that?

No. I think you said it well, Chuck. I think what we're seeing is a normalization -- as we talk about normalization of our credit metrics, it's really a normalization of the operating environment for our C&I companies where they went through sort of a shock from COVID and then all of the PPP and the stimulus money driving inflationary pressure on the demand side. And so a number of companies just need to sort of readjust to a more normal operating environment. We're seeing declining deposit balances, which is something that we are keeping an eye on. But it's nothing that I would say is isolated to a particular industry or sector. It's just sort of a general normalization of the ability to generate cash flow by our customers.

Yes. So we continue to keep an eye on that. I'd say if that was anywhere that we were going to be focused on. But what -- again, just encouraged by the fact that our capital is as strong as it is. Our allowance is as strong as it is, that's going to allow us to be proactive and get out ahead of anything and manage these things to the best economic outcome if the cycle does sort of merge here. But we feel very good where we're at. I think what you've seen is normalization. We're coming off a period where there was almost nothing for a good period of time that was heavily backed up by government stimulus. And so I think it's important for all banks to keep that in mind as we move through time here.

Okay. Thanks for the very detailed answer. And then just lastly, just -- what are you assuming in terms of rate cuts in your outlook? And then I'll step back after that. Thanks for taking my question.

Yes. No problem, Eric. So we are baking in three rate cuts into our expectations for 2024. But if we had six cuts, that would be even more beneficial just to getting us back to a, we'll call it, a more normal operating environment with the yield curve that might be more flat to up eventually. So the faster we can get to that, the better, but we've got three cuts built in for '24 based on what we expect kind of starting mid-year.

We'll go next to Brady Gailey at KBW.

Hey, thanks. Good morning, guys.

Hey, Brady.

Maybe just a follow-up on what Michael just said. So the impact to net interest margin of down rates, would you consider Seacoast to be liability sensitive like the more rate cuts we get the better the margin will be?

Yes, it's a good question, Brady. I think the reality will depend on the deposit lag that we may or may not see as an industry. So that's more of an industry comment if in a quantitative tightening environment as rates go down, will banks be able to lower deposit rates commensurate like mini May model. I think for us, we assume a little bit of a deposit pricing lag that might occur, but we'll see in that environment kind of how pricing adjusts. So the reality is that if rates move down faster, we are mostly a fixed rate asset book. So we will benefit certainly over the long term and really even over the medium term, but over the very short-term, it could, for a quarter be kind of more a question of timing.

Yes. If you look at it in the long term, 2025, 2026 it's materially beneficial.

Okay. All right. And then, Tracey, when you were talking about the expense guide of $82 million to $84 million for the first quarter, does that include all of the impact of the cost saves that you all just realized? Or is that going to be more of a full boat thing in 2Q?

The impact of the cost saves, the $5 million we expect is kind of a onetime set aside outside the $82 million to $84 million.

The $82 million to $84 million is kind of fully baked in what we expect in Q1 and probably a little bit of modest improvement into Q2 and then kind of -- that's kind of the run rate going into the next year.

Okay. All right. And then finally for me, I just I know Seacoast's historically been a pretty acquisitive company. It feels like a lot of bank CEOs are pointing to the back half of this year as when M&A will start to become a little more active. What are your updated thoughts on M&A, Chuck?

The conversations are picking back up. That would be a way to describe the market. That being said, I think we'll continue to be very thoughtful in the market of where we'd be looking would be something similar to what we've done in the past, typically smaller end market community banks under $1 billion in general. And -- but that being said, prices have to make sense and earn backs have to make sense. And so as long as the market allows for appropriate pricing in deals, we could be there. But we don't have a lot of appetite for a lot of earn back right now. So the deals will have to be priced appropriately. And if it makes sense and we can sort of have a conservative view on that, we'd look at it. But otherwise, we probably wouldn't do something if it's outsized in price. Price is going to matter a lot and particularly. We want to be careful with capital and dilution. And so we'll be thoughtful would be the way to describe it.

And Chuck, I mean, Seacoast is at $15 billion. I know the focus is still within the state lines of Florida. I mean are there still some targets out there that would be not too small, but more meaningful that you guys could seriously consider? Is there a target list that makes sense for you, guys?

Yes. There's about 10 to 15 banks in the state that are very attractive to us that at the right sort of structure and the right situation, we would certainly be active in.

Okay. All right, great. Thanks, guys.

Thanks, Brady.

And one clean up, Brady, or just a reminder that on the expense guide, the $82 million, 84 million, that is inclusive of a tangible asset amortization. We made that shift, as Tracey mentioned in our comments. So I just want to make sure, Brady, that we're talking all-in expenses now.

We'll move next to Stephen Scouten at Piper Sandler.

Hey, thanks, guys. Good morning. Just a follow-up on that expense point and clarify. So it sounds like the $15 million in savings maybe half or $10 million or so of that annualized might be in the 1 quarter run rate and then there's a little bit of incremental run rate that helps 2Q expenses. Is that the right way to think about it?

Yes, Stephen, I'd just say, keep in mind, Q1 is usually a little higher with FICA taxes and kind of the annual resets there. And so you kind of got the expense saves with that as an offset. And then in 2Q, that starts to burn back down, so you get to kind of more of the normalized run rate at next Q1. That makes sense?

Okay. And then how should we think about noninterest-bearing deposits moving forward? The decline this quarter was a little more pronounced at year-end. Just kind of wondering what you're thinking, how you're thinking that trends moving forward?

Yes, it's a good question. I think we did see the outflow in Q4. It's been a continuing trend as we see clients use deposits to pay down their variable rate loans, in particular, that have moved to pretty high rates. We could see that continue. Some of that, as I mentioned, may be dependent on what the Fed does, but we would expect, like you've seen with other banks in the industry as a whole that you would see some continued bleed of demand deposit balances. We're about 30% mix today with growth, we'll probably be growing interest-bearing categories a little faster than DDA as well. So the mix shift may continue to head lower, a historical range for us would be somewhere around 25% to 27% potentially. So that may be kind of a good area to focus on.

Great. That's helpful, Michael. And then just last thing for me. I'm curious what you guys think could drive maybe upside to this kind of low-single-digit loan growth. I mean it sounds like the pipelines are improving nicely. You feel like you're getting good structured credit. It sounds like a little bit more on the offensive. So what do you think would have to play out for that to maybe be higher than those expectations?

Lower rates. I mean that would probably be the biggest thing. The biggest challenge...

Improved CRE?

Yes. The biggest challenge is just with higher rates, just the demand for stabilized product is just not there. So really what would be the biggest driver is demand for stabilized products or operating companies wanting to make investments with debt. What we see today is operating companies making investments with cash. So we need lower rates, I think really would drive the bulk of it.

That makes sense. Thanks for the comments, guys. Appreciate it.

Thank you.

[Operator Instructions]. We'll go next to Brandon King at Truist Securities.

Hey, good morning. Thanks for taking my questions.

Good morning, Brandon.

So on the fixed rate repricing, could you quantify how much of your loan portfolio, I guess, fixed rate loans you expect to reprice this year and kind of what the runoff yields are?

Yes. You said fixed rate loan repricing, right, Brandon?

Yes.

Okay. So this year, we'll have about $650 million roughly of -- that's a combination of maturities and amortization. Recall we're fully amortizing lender in most cases. So that's kind of the combination of that. And it's around a 5% rate effectively. That's kind of what you should think about for 2024.

Okay. And just looking out, does that amount increase in 2025 and 2026 potentially?

It's pretty consistent. We do have more, I would say, maturities if you go out another year or two from some of the origination vintages in '20 and '21. But again, given kind of the amortization that we see off our book, the cash flows, if you will, are pretty consistent around $500 million or so a year with various rate profiles, but actually somewhat declining rate profile. So we actually get more benefit into '25 and '26.

Okay. And I guess with the expectation of those repricing for that 8% level potentially, are you pretty comfortable with your borrowers being able to absorb that sort of increase?

Do you want to take that, James.

Yes. Well, we've done pretty extensive testing, particularly within our existing CRE portfolio relative to maturing fixed rate loans in -- sorry, we have done a pretty extensive testing within the portfolio for maturing loans with fixed rates and I would say, less than 10% or 15% have any sort of significant impact. And of those that do, we have proactively reached out and found sponsors, largely willing to right size the loan to accommodate the higher debt service carry.

So we feel pretty good about where we are Brandon.

Okay. And I would add, Brandon, given the fixed rates and the full amortization, the loan-to-values are amortizing down with time. And the projects, given that they're not bridge floating rate facilities and things like that, they have time to react and respond to that as well.

Yes. Got it. That's an important point. And then lastly, in regards to credit quality, I know you kind of mentioned how your borrowers are dealing with inflationary pressures. But could you speak to the impact of higher insurance, I know, particularly in your markets, is more of an issue than other areas of the country. But could you talk about that and how your customers have been able to deal with that or manage through that? And if you're still concerned about that to this day?

Yes, it's a great question, and it is one of the few, what I would say is sort of Florida-centric negative headwinds that we're facing today. We are seeing it primarily on the increase in wind coverage relative to larger properties. We're sort of dealing with it on a case-by-case basis. And in most cases, the sponsors have the ability to address the higher premiums. But in some cases, they're coming to us and asking for the ability to adjust lower coverage. And what we're effectively requiring is that they've got the liquidity to self-insure and so that's how we're making accommodations. But we've done a lot of work around this, and we're finding that all banks in Florida are sort of facing the same issue.

Yes. So it is an issue, but it isn't super widespread, but there are unique situations where we're having to deal with it, and we're hoping we get some resolution to that in the coming years. But that is a challenge, Brandon. There's no doubt.

Got it. Thanks for taking my questions.

Thank you.

And we'll go next to David Bishop at Hovde Group.

Hey, good morning, guys.

Good morning, David.

A question for you, the slide regarding some of the deposit headwinds you faced this quarter. You called out the title company balances. Is that an opportunity to rebuild those if we get a rally in the mortgage market? Just curious maybe how far those deposit balances are down maybe from the peak of the housing cycle.

Yes, they're down a lot from the peak of the housing cycle. Yes, definitely, if you saw -- and as well as commercial, as we've seen the slowdown in commercial real estate, that's certainly pull through in the title companies and the attorneys. We do normally see kind of the end of the year. We saw this last year where they're trying to get transactions closed and get everything done by the end of the year. And so typically, they do sort of come down during that period of time. Little bit higher this year than prior years. But if the market -- what market -- I think the market will return here in Q1, we would expect them to start to fund back up. So a bit of a nuanced seasonal thing there. We do bank a lot of attorneys and a lot of title companies. So we're probably a little outside there and not the impact we see on that.

And I know one of the sticking points recently has been the cost, the iota cost there. So you're not sort of managing that vertical away, just given that increased cost due to iota.

No. We were still definitely still in the vertical, like the business and just paying more interest expense for it.

Got it. And then within the wealth management side has had some good growth there. Could that could RIA acquisitions play into the M&A acquisition strategy?

Well, first, I'd say I'm super excited about our Wealth Management business in the coming year. We've got one of the strongest pipelines we've had in some time. So I'm expecting a very good Q1 and Q2, team is doing an awesome job. They are very integrated with our commercial bankers. It's an amazing relationship there, and they continue to refer back and forth. It's been a really good story for us. I'm very excited to where we're headed. I don't know that we're really focused on RIA acquisition. David, if something came along that was interesting, we might take a quick look at it, but it's not an area of focus right now.

Got it. And then one final question, maybe Tracey, in terms of the purchase accounting accretion, I know that declined modestly this quarter, just curious if we should see an uptick to that $14 million, $15 million level again or it's just sort of a new run rate?

Yes. It's a good question. After several quarters of very high accretion in the fourth quarter was meaningfully lower. Generally, accretion runs higher when individual loans with high mark have payoffs or meaningful pay downs in the fourth quarter, we just saw notably fewer prepayments on loans with high marks. So I feel like I'm going to continue to be difficult to predict. The uncertainty, just to highlight really only exists around the timing. We do expect to earn the full remaining purchase mark, but the pace at which that comes through is kind of out of our hands. In terms of expectations going forward, it's hard to see that it's likely to go back to the higher levels from Q2 or Q3, I'm updating our expectations to look a little more like 4Q. But really variable.

But very, we don't really have much control over it, and it's kind of out of our hands. It could go up, could remain the same.

Got it, appreciate the color.

And at this time, we have no further questions. I would like to turn the conference over to Chuck Shaffer for closing remarks.

All right. We thank you all for joining us this morning. And just thank you to the entire Seacoast team. We had a great Q4 and looking forward to 2024. I think it could be an amazing year. I appreciate everybody's hard work. I appreciate everybody to join the call. We're around for calls after the meeting if anybody wants to chat. Okay. Thank you, Audra.

You're welcome. And that does conclude today's conference call. Again, thank you for your participation. You may now disconnect.