Seacoast Banking of Florida - Q4 2023

Transcript

Tracey Dexter (EVP and CFO)

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 (Chairman and CEO)

Thank you, Audra, and thank you all for joining us this morning. As we provide our comments, we'll reference 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 pre-tax, 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 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 this capital strength would likely provide opportunities for the bank. This quarter evidenced two 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. During the quarter, the effects of quantitative tightening and rising interest rates on the industry have become increasingly evident. Our [coordinated] margin declined 11 basis points, slightly exceeding our guide by 1 basis point.

This was mainly driven by the ongoing transition of non-interest-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.

In turning to our lending strategy, we were 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 required a comprehensive banking relationship with Seacoast for all of our lending activities, ensuring a mutually beneficial partnership with our clients. 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 trends over the last five years.

The ratio is consistently in line with the five-year average on scoring the stability of our asset quality. Our ALL 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. In 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. 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 and low-cost deposits. This disciplined approach is key to fostering 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. Turn the call over to Tracey to walk through our financial results.

Tracey Dexter (EVP and CFO)

Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results, beginning with slide 4. 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 headcount 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 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 5. Net interest income declined by $8.5 million, or 7% during the quarter, with lower purchase loan accretion, higher deposit costs, 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%. 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 6. 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 salable 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 non-interest income, and we expect first quarter non-interest income in a range from $18.5 million-$20 million. Moving to slide 7. 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. Non-interest 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 three of our former branch properties. We expect the final disposition of several properties in the first quarter of 2024.

Other non-interest 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 one-time 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 non-interest expense, inclusive of amortization of intangibles, to be in a range of $82 million-$84 million..Turning to slide 9.

Loan outstandings increased 2% on an annualized basis during the quarter, and we remain committed to our disciplined credit culture. Average loan yields, excluding accretion on acquired loans, increased six basis points to 5.4%. We expect loan yields to continue to increase in the coming periods as our fixed rate loans mature and reprice. In the fourth quarter, we continued to see new loan yields in the 8% range, and looking forward, we expect loan growth in the low single digits. Turning to slide 10. Portfolio diversification in terms of asset mix, industry, and loan type has been a critical element of the company's lending strategy. Exposure across industries and collateral types is broadly distributed, and we continue to be vigilant in maintaining our disciplined, conservative credit culture.

Non-owner occupied commercial real estate loans represent 33% of all loans and are distributed across industries and collateral types. Construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels. We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk. Turning to slide 11, to credit topics. The allowance for credit losses totaled $148.9 million, or 1.48% of total loans, compared to 1.49% in the prior quarter. The allowance for credit losses, combined with the $174 million remaining unrecognized discount on acquired loans, totals $323 million, or 3.2% of total loans, that is available to cover potential losses. On to slide 12, looking at quarterly trends in credit metrics.

Our credit metrics are strong, and we remain watchful of the ongoing impact of higher rates on the economy. The charge-off rate during the quarter was 0.19% annualized. Non-performing loans represent 0.65% of total loans, and accruing past due loans are 0.3% of total loans. The percentage of criticized and classified loans to total assets increased over the prior quarter to 1.6%. On slide 13, providing a longer-term view of our stable asset quality trends. Recall that in the third quarter of 2023, we recorded an expected charge-off of $11.3 million. This was an acquired loan that was fully reserved through purchase accounting, and the charge-off did not impact earnings or capital. That loan drove the somewhat higher charge-off level in 2023.

Noting the stable trends in non-performing, past dues, and criticized and classified loans over the past five years, also recall that much has changed at Seacoast over this five-year period, including eight separate bank acquisitions and a near doubling of asset size. The stability of our credit experience during that period reflects the consistently applied discipline of our credit culture. Moving to slide 14 and the investment securities portfolio. We recognized an opportunity to sell low-yielding bonds with modest losses on a small percentage of the investment portfolio. The proceeds, approximately $83 million, were reinvested into higher-yielding bonds with strong prepayment protection and good convexity. By selling short-duration, low-yielding securities from the portfolio and reinvesting into longer-duration, prepayment-protected Agency CMBS, we were able to add considerable yield and interest income while prioritizing predictability, expecting an earn-back period of only 1.3 years.

The average yield on securities increased during the quarter by 10 basis points to 3.42%. Changes in the rate environment impacted portfolio values positively, and as a result, the overall unrealized loss position improved by $105.6 million. This contributed $0.61 of the total $0.82 increase in tangible book value per share during the quarter. Turning to slide 15 and the deposit portfolio. Excluding the paydown of brokered deposits, organic deposits decreased by $145 million. We saw lower balances near year-end, particularly in distributions from escrow and other attorney and trust accounts, which comprised approximately $100 million of the decline. Non-interest demand deposits represent 30% of total deposits, and transaction accounts represent 54% of total deposits, which continues to highlight our long-standing relationship-focused approach.

The cost of deposits increased this quarter to 2%, a slower pace of increase than in the past several quarters. Overall, our expectation for the first quarter is that the cost of deposits will continue to increase, albeit at a lower pace. That said, we remain keenly focused on organic growth. On slide 16, the bar chart shows non-brokered customer balances, including the sweep repurchase products. Seacoast continues to benefit from a diverse and granular deposit base, and customer funding declined modestly, consistent with typical year-end patterns. We continue to be very effective in new customer acquisition, with the number of fourth quarter new transaction accounts increasing by 13% year-over-year. Our customers are highly engaged and have a long history with us, and low average balances reflect the granular relationship nature of our franchise.

Finally, on slide 17, our capital position continues to be very strong, and we're committed to maintaining our fortress balance sheet. Tangible book value per share increased to $15.08. The ratio of tangible common equity to tangible assets continued to increase, reaching an exceptionally strong 9.3% in the fourth quarter. Our risk-based and Tier 1 capital ratios are among the highest in the industry. In summary, we remain steadfastly committed to driving shareholder value, and our consistent, disciplined expense management positions us well as we continue to build Florida's leading community bank. Chuck, I'll turn the call back to you.

Chuck Shaffer (Chairman and CEO)

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

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. We'll go first to Eric Spector at Raymond James.

Eric Spector (Senior Equity Research Associate, Banks)

Hey, good morning, everybody. This is Eric, filling in for David Feaster. Thank you for taking the question.

Chuck Shaffer (Chairman and CEO)

No problem.

Eric Spector (Senior Equity Research Associate, Banks)

Just, just wanted to touch on the funding side to start off. Appreciate the loan growth guidance of low single digits, and it's great to see you reduce wholesale and brokered funding this quarter and the new account openings. Just curious how you think about funding loan growth and how you think about core deposit growth, in 2024. What initiatives do you have in place to grow deposits? Do you expect to grow deposits at the same pace as loans? Just any color on that, that would be helpful.

Michael Young (Treasurer and Director of Investor Relations)

Yeah. Thanks for the question, Eric. So I think, you know, as we look into 2024, you know, 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, you know, on a broad trend, you know, 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.

Eric Spector (Senior Equity Research Associate, Banks)

Got it. 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, would you expect to see additional loan growth from that if we see cuts? And at what level and what segments would you expect to see it from first? And then just curious how you think about repricing deposits if we begin to see rate cuts and drive additional core deposit flows if rates begin coming down.

Chuck Shaffer (Chairman and CEO)

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, you know, we're seeing the opportunity to step in where the market's somewhat pulling away from lending and, you know, really get well-structured, high-quality credits, a lot of equity, in projects, and we're getting rates. So, you know, where we, as we've talked about on past calls, we kind of pulled back, given some of the, you know, more I would describe it, kind of getting on the edge of where we were 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 full 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 then that'll kind of determine exactly how we step into the deposit market. As Michael said, I think the biggest driver where the deposit market goes is whether or not the Fed does cut rates and whether or not the Fed, you know, starts buying bonds and put some liquidity back into the market. So, you know, I think that'll 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, you know, doubled down our effort to get our expense base right-sized. 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 on the back half, you know, it really starts to set up a really nice 2025, 2026. 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.

Eric Spector (Senior Equity Research Associate, Banks)

Got it. That, that's really helpful. And then just wanted to lastly, just touch on credit. And if you could just touch on what drove the increase in NPAs and criticized classified, and just more broadly, if you could just provide some color on just how credit's 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, in that outlook, and any color there would be helpful.

Chuck Shaffer (Chairman and CEO)

Yeah, I think, you know, where we saw it, it's, you know, really the increase in NPLs was only a couple of credits, both for 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're fairly confident it will. And the other, we've got reserved in a specific, generally. So when we think about that, that's really what drove some of that. You know, I don't know, James, if you have any color on that or anything you want to add to that.

But, you know, I think as far as we think about where, you know, we continue to watch, I think the biggest sort of area that we continue to be thoughtful about is 2021 and 2022 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 that we're kind of moving through that period and revenues are potentially going to come down a little bit, it's going to be important to monitor our operating companies to make sure they properly manage margins and, you know, manage expenses into the coming years. That, that's really a summary. I don't know, James, anything you'd add to that?

James Stallings (EVP, Chief Credit Officer)

No, I think you said it well, Chuck. I think, you know, 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, you know, 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, you know, just need to sort of readjust to a more normal operating environment. We're seeing, you know, declining deposit balances, which is something that we are keeping an eye on.

Chuck Shaffer (Chairman and CEO)

Yeah.

James Stallings (EVP, Chief Credit Officer)

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.

Chuck Shaffer (Chairman and CEO)

Yeah. 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, you know, what—you know, again, just encouraged by the fact that our capital is 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 a cycle does sort of merge here. But, you know, we feel, we feel very good where we're at. I think what you're seeing is normalization.

You know, we're coming off a period where there was almost nothing for, you know, a good period of time that was heavily backed up by government stimulus, and so, you know, I think it's important for all banks to keep, keep, keep that in mind as we move through time here.

Eric Spector (Senior Equity Research Associate, Banks)

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

Michael Young (Treasurer and Director of Investor Relations)

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

Operator (participant)

We'll go next to Brady Gailey at KBW.

Brady Gailey (Managing Director, Equity Research)

Hey, thanks. Good morning, guys.

Chuck Shaffer (Chairman and CEO)

Hey, Brady.

Brady Gailey (Managing Director, Equity Research)

Maybe just to 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?

Michael Young (Treasurer and Director of Investor Relations)

Yeah, it's a good question, Brady. You know, 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, you know, in a quantitative tightening environment, as rates go down, will banks be able to lower deposit rates, you know, commensurate, like, you know, many may model? You know, I think for us, we assume a little bit of a deposit pricing lag that might occur, but we'll see, you know, in that environment, kind of how pricing adjusts.

The reality is that, you know, 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, you know, for a quarter, be kind of more a question of timing.

Chuck Shaffer (Chairman and CEO)

Yeah. If you look out in the long term, 2025, 2026 is materially beneficial.

Brady Gailey (Managing Director, Equity Research)

Okay. All right, and then, Tracy, when you were talking about the expense guide of $82 million-$84 million for the first quarter, does, 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?

Tracey Dexter (EVP and CFO)

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

Chuck Shaffer (Chairman and CEO)

The 82-84 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.

Brady Gailey (Managing Director, Equity Research)

Okay. All right, and then, finally, for me, I just thought, you know, Seacoast has 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?

Chuck Shaffer (Chairman and CEO)

Yeah, the conversations are picking back up. That'd be a way to describe the market. You know, that being said, I think we'll continue to be very thoughtful. You know, the market of where we'd be looking would be something similar to what we've done in the past, typically smaller in-market community banks, under a billion in general. But that being said, you know, prices have to make sense and earn backs have to make sense. And so, you know, we as long as, you know, the market allows for appropriate pricing in deals, you know, we could be there. But, you know, 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.

If they make sense then we can sort of have a conservative view on that, you know, we'd look at it, but otherwise, you know, we probably wouldn't do something if it was outsized in price. You know, price is going to matter a lot, and, you know, particularly, we want to be careful with capital and dilution, and so we'll be thoughtful, would be a way to describe it.

Brady Gailey (Managing Director, Equity Research)

Yeah. And, Chuck, so 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, you know, not too small, but more meaningful, that you guys could seriously consider? Is there still a target list that makes sense for you guys?

Chuck Shaffer (Chairman and CEO)

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

Brandon King (Equity Research Analyst)

Okay. All right, great. Thanks, guys.

Chuck Shaffer (Chairman and CEO)

Thanks, Brady.

Michael Young (Treasurer and Director of Investor Relations)

One cleanup, Brady, or just a reminder that on the expense guide, the $82-$84, that is inclusive of intangible 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, so.

Operator (participant)

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

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Hey, thanks, guys. Good morning. Just to follow up on that expense point and clarify: so the, it sounds like the $15 million in savings, maybe half or $10 million or so of that annualized might be in the one 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?

Michael Young (Treasurer and Director of Investor Relations)

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

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Okay. And then how should we think about non-interest-bearing deposits moving forward? You know, 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 trend's moving forward?

Michael Young (Treasurer and Director of Investor Relations)

Yeah, it's a good question. You know, I think, you know, we did see, you know, the outflow in Q4. It's been a continuing trend as we see clients, you know, use deposits to, you know, pay down their variable rate loans, in particular, that have moved to pretty high rates. You know, we could see that continue. You know, some of that, as I've mentioned, may be dependent upon what the Fed does. But, you know, 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. You know, we're about 30% mix today. With growth, we'll probably be growing, you know, interest-bearing categories a little faster than DDA as well, so the mix shift may continue to head lower.

You know, a historical range for us, you know, would be, you know, somewhere around 25%-27%, potentially. So that may be kind of a good, good area to focus on.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

Great. That's helpful, Michael. And then just last thing for me, I'm curious, you know, 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. Sounds like a little bit more on the offensive. So, you know, what do you think would have to play out for that to maybe be higher than those expectations?

Chuck Shaffer (Chairman and CEO)

Lower rates. I mean, that'd probably be the driving thing, the biggest thing to you, you know? It's the biggest challenge-

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

To move CRE?

Chuck Shaffer (Chairman and CEO)

Yeah, the biggest challenge is, you know, just with higher rates, just the demand for stabilized product is just not there. So, you know, it 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, you know, so we need lower rates, I think really would drive the bulk of it.

Stephen Scouten (Managing Director and Senior Equity Research Analyst)

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

Chuck Shaffer (Chairman and CEO)

Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll go next to Brandon King at Truist Securities.

Brandon King (Equity Research Analyst)

Hey, good morning. Thanks for taking my questions.

Chuck Shaffer (Chairman and CEO)

Good morning, Brandon.

Brandon King (Equity Research Analyst)

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?

Michael Young (Treasurer and Director of Investor Relations)

Yeah. You said fixed-rate loan repricing, right, Brandon?

Chuck Shaffer (Chairman and CEO)

Yeah.

Brandon King (Equity Research Analyst)

Yep. Yep.

Michael Young (Treasurer and Director of Investor Relations)

Okay. So this year, we'll have about $650 million, roughly, of... That's a combination of maturities and amortization. Recall, we're a 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.

Brandon King (Equity Research Analyst)

Okay. Just, you know, looking out, does that amount increase in 2025 and 2026, potentially?

Michael Young (Treasurer and Director of Investor Relations)

It's pretty consistent. You know, we do have more, I would say, maturities, if you go out, you know, another year or two from some of the origination vintages in 2020 and 2021. But again, given kind of the amortization that we see off our book, you know, the cash flows, if you will, are pretty consistent around, you know, $500 million or so a year, with various rate profiles, but actually somewhat declining rate profiles. So we actually get more benefit into 2025 and 2026.

Brandon King (Equity Research Analyst)

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

Chuck Shaffer (Chairman and CEO)

You want to take that, James?

James Stallings (EVP, Chief Credit Officer)

Yeah, I will. We've done pretty extensive testing, particularly within our existing CRE portfolio, relative to maturing fixed-rate loans in... Oh, sorry. We have done 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. Of those that do, we have proactively reached out and found sponsors largely willing to rightsize the loan to accommodate the higher debt service carry.

Chuck Shaffer (Chairman and CEO)

So we feel pretty good about where we are, Brandon.

Brandon King (Equity Research Analyst)

Okay.

Michael Young (Treasurer and Director of Investor Relations)

I would add, Brandon, you know, given the fixed rates and the full amortization, you know, the loan to values are amortizing down with time and, you know, 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.

Brandon King (Equity Research Analyst)

Yeah. Yes, got it. That's a, that's an important point. And then lastly, 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?

James Stallings (EVP, Chief Credit Officer)

Yeah, 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, you know, 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.

Michael Young (Treasurer and Director of Investor Relations)

Yeah.

Chuck Shaffer (Chairman and CEO)

Yeah, 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.

Brandon King (Equity Research Analyst)

Okay. Got it. That's it for take my questions.

Chuck Shaffer (Chairman and CEO)

Thank you.

Operator (participant)

We'll go next to David Bishop at Hovde Group.

David Bishop (Director, Equity Research)

Hey, good morning, guys.

Chuck Shaffer (Chairman and CEO)

Hey, David.

Michael Young (Treasurer and Director of Investor Relations)

Good morning, Dave.

David Bishop (Director, Equity Research)

Hey, 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.

Chuck Shaffer (Chairman and CEO)

Yeah, they're down a lot from the peak of the housing cycle. Yeah, definitely. If you saw... You know, and as well as commercial, you know, as we've seen the slowdown in commercial real estate, that certainly pulled 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, you know, 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. A little bit higher this year than prior years, but, you know, if the market, which 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 outsized there in our, the impact we see on that.

David Bishop (Director, Equity Research)

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

Chuck Shaffer (Chairman and CEO)

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

David Bishop (Director, Equity Research)

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

Chuck Shaffer (Chairman and CEO)

Well, 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. The team's doing an awesome job. They're very integrated with our commercial bankers. There's an amazing relationship there, and they continue to refer back and forth. It's been a really good story for us, so I'm, I'm very excited where we're headed. You know, I, I don't know that we're really focused on RIA acquisitions, David. You know, if something came along that was interesting, we might take a quick look at it, but it's not, it's not an area of focus right now.

David Bishop (Director, Equity Research)

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

Tracey Dexter (EVP and CFO)

Yeah, it's a good question. After several quarters of very high accretion, the fourth quarter was meaningfully lower. You know, generally, accretion runs higher when individual loans with high marks have payoffs or meaningful paydowns. In the fourth quarter, we just saw notably fewer prepayments on loans with high marks. So I feel like that's gonna 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. You know, 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.

Chuck Shaffer (Chairman and CEO)

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

David Bishop (Director, Equity Research)

Got it. Appreciate the color.

Operator (participant)

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

Chuck Shaffer (Chairman and CEO)

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

Operator (participant)

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