KBRA Affirms Ratings for Seacoast Banking Corporation of Florida

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Stuart, Florida based Seacoast Banking Corporation of Florida (NASDAQ: SBCF) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Seacoast National Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

As a growing franchise concentrated in demographically attractive Florida markets, SBCF almost doubled in assets since 2018, in no small part due to its active acquisition strategy (eight deals completed since 2019). Through this significant expansion, we have considered the company's growth strategy as a responsible and well executed one, noting that digestible, in-market acquisitions have coincided with continued solid core earnings (exclusive of merger noise and accretion income; average adjusted ROA of ~1.15% from 2020-2022) and a capital profile that has historically been, and remains today, stronger than most peer institutions. In this regard, SBCF’s 2Q23 CET1 ratio of 12.9% is ~110 bps higher than the median of similarly rated institutions, and the company’s TCE ratio (8.5%), while admittedly lower than 2021-2022 due to unrealized losses on AFS securities, also compares favorably to peers. We believe SBCF’s core capital profile, all else equal, sets the company up well to navigate through an increasingly uncertain economic and banking environment. KBRA also views SBCF’s funding profile positively. Though the company’s funding base has not been immune to headwinds facing the banking industry at large (i.e., rising funding costs and a negative mix shift), SBCF’s deposit profile remains comparatively attractive both in terms of composition and cost. With respect to the former, SBCF’s granular deposit base is comprised of 34% noninterest-bearing accounts and features a not insignificant proportion of small dollar consumer deposits (43% of deposits). This favorable composition mix unsurprisingly allows for deposit costs that, while rising, are 31 bps below the KBRA rated bank median at 2Q23 (1.38% vs. 1.69%).

SBCF’s contemporary asset quality performance has been solid, buoyed, in part, by a granular, diversified loan portfolio, sound underwriting and loan review practices, and the company’s presence in the economically vibrant state of Florida; but also in no small part attributable to the extraordinarily benign credit environment of the past decade plus - one that has been enjoyed by nearly all industry peers. At 39% and 241% of total loans and total risk-based capital, respectively, we note that SBCF’s investor CRE exposure is more modest than most peers, which could prove beneficial if industry concerns regarding CRE are ultimately realized. While we believe SBCF, an experienced acquirer historically, adequately vets credit risk in acquired loan books, we are aware of potential risk related to the fact that, as of 2Q23, ~39% of the company’s existing loan portfolio was underwritten outside of the legacy institution. As mentioned, frequent M&A activity has led to “noisy” GAAP earnings in recent periods. Even so, we view SBCF’s core earnings as respectable and recognize the company’s relatively diverse set of recurring fee income streams sourced from deposit service charges, card interchange, wealth management, mortgage banking, and insurance agency income. Still, NIM pressures are expected to weigh on earnings in the short to intermediate term.

Rating Sensitivities

Positive ratings momentum is limited in the short to intermediate term due to the more challenging industry outlook. However, positive ratings momentum could develop over the longer term if SBCF successfully integrates recent acquisitions, continues to scale, and continues to reflect capital, funding, and asset quality profiles that compare favorably to peers. Negative ratings pressure could occur if the company takes a more aggressive approach to capital management. While not expected, a deterioration in the company's funding profile or asset quality that is worse than peer would pressure the ratings.

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