Seacoast Banking Corporation of Florida

Welcome to the Seacoast Banking Corporation's third quarter 2021 earnings conference call. My name is John Elb, your operator, for today's call. Before we begin, I have been asked to direct your attention to the statement contained 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. And now I'll turn a call over to Chuck Schaefer, President and CEO of Seacoast Bank. Mr. Schaefer, you may begin.

Thank you, John, and thank you all for joining us this morning. As we provide our comments, we'll reference the third quarter 2021 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Tracy Dexter, Chief Financial Officer, and Jeff Lee, Chief Digital Officer. The SECOS team generated strong operating performance during the quarter, growing tangible book value per share 13% from the prior year to $17.52. The adjusted efficiency ratio was 51.5%, modestly better than our previous guidance, and adjusted pre-tax, pre-provision earnings improved to 43.9 million, up from 37.8 million in the prior quarter. There's noise in the quarter, the result of closing the legacy bank transaction, and negotiating and announcing the Sable Palm Bank and Florida Business Bank transactions. When you look past the day one provisioning for Legacy Bank and one-time expenses, net interest income and non-interest income were better than consensus estimates and adjusted non-interest expense was in line with guidance. The driver of the decline in GAAP earnings quarter over quarter was solely attributable to booking the day one provision for loan losses associated with the acquisition of the Legacy Bank portfolio as compared with a reversal in the provision in the prior quarter, and one-time merger-related expenses associated with all three transactions. Looking more deeply at the legacy bank transaction, it's clear this transaction was one of our better transactions completed to date. The balance sheet was larger than modeled at close, and this transaction had near zero tangible book value dilution, strong earnings accretion, and bolted on some of the best micro markets in South Florida, including Boca Raton, Delray Beach, and Pompano Beach. Lastly, with Dennis Bedley and Marcia Snyder's leadership, the Legacy Bank team continued to produce at very strong levels through close, and the team has had a considerable pipeline of new business at Seacoast already. The Florida economy continues to expand with inbound population growth, driven by low taxes, a business-friendly environment, and a post-pandemic work-from-anywhere economy. Corporate relocations continue to occur with many organizations bringing large portions of their staff to Florida. This solid economic backdrop of population growth combined with significant recruiting activity that ramped up materially a year ago has contributed to the increase in commercial loan production and resulted in an increase in the pipeline. When analyzing the change in loan outstandings quarter over quarter, there are a lot of moving parts. To help understand these dynamics, we included a table on page 11 of the slide deck, which provides growth by category. The table breaks out organic growth by removing the loans acquired from Legacy Bank and wholesale purchase pools. If you focus on the commercial banking line items, you'll see growth and total commercial outstandings starting to emerge. In aggregate, the commercial portfolio grew $26 million from the prior quarter, or a 3% annualized growth rate. This growth includes the offsetting impact of a number of payoffs in the commercial and land development category during the quarter. I believe this table demonstrates the underlying positive dynamics starting to show up in the balance sheet. Our strategic focus of expanding commercial banking capability in terms of bankers and technology is working. and we are only focused on acquiring and expanding value-creating relationships as this strategy delivers growth and franchise value in risk-appropriate segments. Also, the pipeline showed significant progress in the quarter, with the late-stage pipeline increasing 44% from the same time one year ago as disclosed. The early-stage pipeline now exceeds one billion, a record number. This growth is coming from a combination of CNI and CRE, with nearly 60% of the volume year-to-date considered CNI, including owner-occupied commercial real estate, and 40% investor commercial real estate. Notably, approximately 30% of our commercial bankers joined in the last 12 months, and it takes time for bankers to begin to ramp up production. This group contributed only 11% of the volume this year, indicating there is much more upside on production ahead. Lastly, there's a material opportunity to continue to add to our commercial banking team in the coming quarters as our story, tools, and process resonate with bankers who want to join a growing and dynamic enterprise. We recently announced additional leadership hiring in the Naples and Northeast Florida markets and expect to begin building commercial banking-focused teams in these markets in the coming year. We have a record pipeline of high-quality talent ready to exit larger banks for something more exciting. When you put all this together, it provides a level of confidence that loan growth is emerging and pre-pandemic growth levels are in near reach. We are targeting mid single digit organic loan growth in Q4 and high single digit loan growth in 2022. I would also like to reiterate that despite the pressure the excess liquidity is putting on the net interest margin across the industry, we will not waiver from our strict credit underwriting standards and we will focus on disciplined growth with appropriate risk-adjusted returns. Our asset quality metrics remain strong with MPL and MPA ratios moving favorably quarter over quarter, and we are pleased with the credit portfolio's performance and continue to see no material issues on the horizon. And to conclude, the company recorded another quarter of impressive performance, generating disciplined growth and franchise value. Our fundamentals remain very strong with a well capitalized low risk fortress balance sheet, strict underwriting standards, and an attractive customer franchise well positioned for growth. Our goal remains to continue increasing market share in the robust Florida marketplace in a disciplined manner by focusing on growing value creating relationships, improving digital customer experiences, and driving greater productivity across the franchise. With the robust growth and transformation occurring in Florida, We believe our plan of consolidating market share across the state will drive significant value for shareholders over time. We're excited about the future ahead, excited about our momentum across the state, and I'll turn the call over to Tracy to walk through the financial results.

Thank you, Chuck. Good morning, everyone. Directing your attention to third quarter results, beginning with slide five. On a GAAP basis, net income was $22.9 million, and on an adjusted basis, which excludes merger related and other isolated charges, net income was 29.4 million. The decline from the prior quarter in adjusted earnings reflects an increase in the provision for loan losses that is due to the day one impact of the Legacy Bank acquisition. Pre-tax, pre-provision adjusted earnings were 43.9 million, an increase of 6.1 million or 16% from the second quarter, and an increase of 7.5 million or 21% from the prior year quarter. We continue to deliver steadily increasing tangible book value per share, which ended the period at $17.52, an increase of 13% from the same time last year. Organic loan production is increasing with commercial loan originations increasing to $332 million from $193 million in the second quarter and $88 million this time last year. The late stage commercial pipeline is also very strong at a record $369 million. We continue to see strong asset quality trends with the ratio of non-performing loans declining to 0.55%. Cost of deposits remains in the single digits as we continue to monitor the competitive landscape and adjust rates accordingly. Transaction account balances continue to grow and excluding legacy bank increased 65 million or 5.5% annualized during the quarter. A strong quarter for non-interest income with another record for wealth management and a new record in SBA saleable gains. The acquisition of Legacy Bank was completed in August and the third quarter results reflect all associated costs and purchase accounting adjustments including goodwill of approximately $31 million. The acquisition impacts third quarter results in non-interest expense with costs of approximately $6 million. and in the provision for loan losses, where the day one impact was 8.2 million. And lastly, during the quarter, we announced the Sable Palm and Florida Business Bank acquisitions, which will close in January 2022. Turning to slide six, net interest income on a fully tax-equivalent basis was higher by 5.5 million, or 8% in the third quarter, and the net interest margin declined by only one basis point to 3.22%. Net interest income includes higher interest and fees on loans, primarily due to growth in the loan portfolio, where ending loan balances, excluding PPP, increased $642 million during the quarter. Net interest income also includes the benefit of higher fees on PPP loans. You'll recall that when those loans are forgiven, we accelerate the recognition of fees that otherwise would have been spread over the life of the loan. The Seacoast team processed $217 million in forgiveness this quarter, and we recognized $5.9 million in PPP interest and fees. Excluding PPP, yields in the core loan portfolio declined seven basis points to 4.29% with elevated payoffs and continuing declines in rates. In the securities portfolio, we've continued to pace our investments of excess liquidity, adding a net $256 million and the growth in the securities portfolio contributed to higher securities interest income. Yields in the securities portfolio declined four basis points to 1.59%. Offsetting and favorable is continued improvement in the cost of deposits, which dropped to seven basis points in the third quarter, as we've continued to monitor the competitive landscape and adjust rates accordingly, including for the newly acquired legacy bank deposits. Overall net interest margin dropped only one basis point from 3.23% to 3.22%. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin was in line with forecast expectations, declining from 3.03% to 2.89%. Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single digits. We expect that there will continue to be downward pressure on loan and securities yields in the fourth quarter, given the continuing effect of excess liquidity and lower add-on yields, and therefore continued modest downward pressure on net interest margin. Our modeling suggests that the fourth quarter may represent the lower bound for net interest margin, assuming the current forward rate curve, and with loan growth, we expect the margin to begin improving in 2022. Moving to slide seven. Adjusted non-interest income, which excludes securities gains and losses, was $19.1 million, higher by $3.7 million or 24% from the previous quarter, and an increase of $2.1 million or 12% from the prior year quarter. As you can see in the results, we've continued to focus on driving non-interest income. The wealth management team continues to deliver strong growth and successful relationship expansion. and revenue during the quarter increased to 2.6 million. We remain very focused on building the wealth management business given its high return on capital and the value it adds to our commercial relationships. In our mortgage banking business, as expected, revenue is lower on lower refinancing demand and tight housing inventory levels. However, the pipeline has stabilized and this team will continue to contribute meaningful results by continuing to capitalize on low interest rates and on a strong Florida housing market. We expect mortgage banking gains in the fourth quarter to be in line with the third quarter, and results for 2022 will be dependent on rates and housing inventory levels in Florida. Our SBA team has delivered outstanding results this quarter, generating record gains of $0.8 million as non-PPP opportunities return. We're focused on building this business in the coming year and expect continued improvements in this line item in 2022. Also, we expanded our position in bank owned life insurance, both through purchases and through the legacy bank acquisition. Boley purchased late in the second quarter with a tax equivalent first year yield of 4.5% contributed to the increase in Boley income during the quarter. Finally, Meaningfully contributing to non-interest income this quarter was a gain of $3 million on one of our SBIC investments. Income from these investments can vary widely among periods. Looking ahead, we expect overall non-interest income in the fourth quarter in a range of approximately $16 million to $17 million as we continue to focus on growing our broad base of revenue sources. Moving to slide eight. Adjusted non-interest expense for the third quarter was in line with the guidance we provided at $46.8 million. Salaries and benefits expenses were higher compared to the second quarter, reflecting the addition of commercial banking talent and of the legacy bank franchise. Legal and professional fees were higher by $450,000. This line item includes smaller increases across a number of areas, including related to support for technology optimization initiatives. Other expenses were higher by $0.4 million and include higher marketing expenses due to timing of campaigns and the $133,000 day one provision for credit losses on Legacy Bank's unfunded commitments. Looking ahead, we expect to maintain our expense discipline as we always do. We expect fourth quarter expenses excluding the amortization of intangible assets to be in the range of $48 million to $49 million. The increase quarter over quarter is the result of the addition of the Legacy Bank franchise and investments we're making in commercial banking talent. Looking forward to 2022, we expect expenses to reflect the full impact of the additions of Legacy Bank, Florida Business Bank, and Sable Palm Bank, along with commercial banking talent, expansion into Jacksonville and Naples, and enhancements in digital technology for our customers. We believe these investments support sustainable growth in the coming years and position the company to take advantage of the unique growing economy in Florida. This results in a 2022 efficiency ratio target below 55% for the full year, with the ratio trending down throughout the year and exiting 2022 near 50%. Higher results early in the year are due to the expense seasonality associated with the first quarter, and timing of expenses associated with investments. Moving to slide 9, the adjusted efficiency ratio in the third quarter decreased to 51.5% and reflects higher net interest income and higher non-interest income compared to the prior quarter, partially offset by higher non-interest expense. Reiterating the guidance we've provided in the last several quarters, We continue to expect the full year 2021 efficiency ratio to be below 55%. Turning to slide 10, loan balances excluding PPP are higher by 13% from the prior quarter. That increase includes organic growth in commercial categories, loan pool purchases, and the legacy bank acquisition, offset by declines in consumer, mortgage banking, and construction and land development loans. Commercial growth is a highlight as Florida's economic recovery is now well established and recent talent additions and investments in technology position us well as loan demand is returning. We're very encouraged by the commercial pipeline which has increased materially from the start of the year. We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines while achieving organic loan growth. Looking forward to the fourth quarter We continue to expect organic loan growth, excluding PPP, to be in the mid single digits for the coming quarter and expect loan growth to return to an annualized growth rate of high single digits in 2022. As a reminder, the first quarter each year is typically a seasonally slower quarter. We expect loan yields to further modestly decline in the fourth quarter with lower add-on yields, assuming no change in the rate environment and increased origination. Turning to slide 11, highlighting loan growth in key categories. The addition of Legacy Bank during the quarter added $439 million of non-PPP loan balances. Wholesale purchases totaled $198 million, having made these investments as an alternative to additional investments in the securities portfolio. We've highlighted the commercial line items in the top green box, showing an organic increase of $26 million in aggregate across commercial categories. This growth represents a 3% annualized growth rate in our commercial book during the quarter. We view this as a very positive indicator of the growth that's emerging as a result of our investments in commercial talent and technology over the last year. On an overall basis, excluding the legacy bank acquisition and wholesale purchases, loans outstanding increased by a net 6 million during the quarter. Turning to slide 12. The graphic shows a year-to-date summary of PPP activity. We originated $256 million in PPP loans earlier in the year under the renewed program. We've processed $675 million in forgiveness year-to-date, including $217 million in the third quarter, bringing principal balances of PPP loans outstanding at September 30 to $191 million net of deferred fees. Overall, since the start of the original program, We've collected $27.6 million in SBA fees. Of that, we've recognized $22.2 million life to date and have $5.4 million in fees remaining to be recognized in future periods. We expect the majority of this remaining fee income to be fully recognized by the first quarter of 2022. Turning to slide 13 for the securities portfolio. We continue to invest excess liquidity at a moderate pace in the investment securities portfolio, with approximately $420 million in purchases this quarter, offset by paydowns for net growth of $256 million. Additions were largely agency guaranteed with short duration and yields of 1.42%. And overall portfolio value declined a bit with steepening of the curve during the quarter. Somewhat offsetting and beneficial to yield was a yield maintenance provision in place on one holding that resulted in a $400,000 benefit when the security paid down early. We'll continue to steadily pace our investments over time in bonds that have lower extension risk with shorter durations and continue to expect net additions of $250 million in the fourth quarter. Turning to slide 14, deposits outstanding were $8.3 billion an increase of $498 million quarter over quarter, which includes the addition in August of $495 million from Legacy Bank. The cost of deposits has continued to decline and for the third quarter was seven basis points. Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single digits. Transaction accounts represent 59% of total deposits and have grown 30% year over year. Excluding the impact of Legacy Bank, transaction account balances increased 65 million, or 5.5% annualized during the quarter. We're pleased with the growth in deposit balances year to date, despite the margin pressure. This growth demonstrates the strength of our customer franchise, a growing Florida economy, and our ability to win share in the marketplace. And on slide 15, illustrated on the chart is the deposits per branch which stepped down only slightly this quarter to $165 million, even with the addition of net four new branches, with five from Legacy Bank and one consolidation. Also, in order to manage excess liquidity, and as we approach the $10 billion asset mark, we're using off-balance sheet deposit products through third-party programs. We expect to remain under $10 billion at year-end 2021, and at September 30th, we had $233 million in off-balance sheet deposits compared to 116 million at June 30th. Our branch optimization strategy is supported by our digital and analytics competency, which continues to provide opportunity to drive growth and operating efficiency across our retail franchise. In the last five years, we've consolidated 28% of our physical branches. We think physical branches are extremely important to our customers. In fact, we're planning two de novo branches that will open in the coming months as part of our balanced expansion strategy in Florida's high growth markets. One is in Naples, which is located in southwest Florida and complements our west coast growth strategy that includes Tampa and Sarasota. The other is in Plantation in the dynamic Broward County market and supports our deepening presence in south Florida, which is the seventh largest MSA in the country. Moving to slide 16. The wealth management business continues to deliver tremendous growth with assets under management growing at a compound annual growth rate of 34% since year end 2019. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team, generating value for our most profitable clients and delivering another record revenue quarter. We'll continue to invest and focus on building out wealth management as we move forward. Moving to slide 17 and to credit topics, the allowance for loan losses increased during the quarter from $81.1 million to $87.8 million with the increase in total loan balances. In particular, we reserve on day one for the full life of loan expected losses on the Legacy Bank acquisition. At the date of acquisition, that added $11.2 million to the reserve, $8.2 million of which is reflected in the third quarter provision. At the end of each quarter, we update our estimate for the portfolio. In line with sustained indications of overall economic recovery, the allowance as a percentage of total loans excluding PPP decreased to 1.54% from 1.6% in the prior quarter. In addition to assigning a day one reserve on legacy bank loans, we also reported a $6 million purchase discount on legacy bank loans. bringing the total purchase discount remaining on all bank acquisitions to $26.6 million, which will be earned as an adjustment to yield over the life of those loans. Turning to slide 18 on asset quality, credit measures remain strong with charge-offs, non-accrual, and criticized loans at historically low levels. Net charge-offs in the third quarter were $1.4 million, or 10 basis points on average loans, and the level of non-performing loans decreased to 32.6 million, representing 0.55% of total loans. Criticized loans increased slightly from 13% last quarter to 14% of risk-based capital in the third quarter, with the increase driven by the addition of a small number of legacy bank loans conservatively assigned risk ratings in these categories. All were also assigned appropriate reserves at the acquisition date. The overall allowance for credit losses at September 30th is 87.8 million and allowance coverage excluding PPP loans decreased six basis points to 1.54%. Turning to slide 19, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. Tangible book value per share is $17.52, an increase of 13% year over year. The tangible common equity to tangible asset ratio increased to 10.6% at the end of the third quarter and has consistently been among the highest in our peer groups. The Tier 1 capital ratio was 17.7% and the total risk-based capital ratio was 18.6% at September 30th. Return on tangible common equity was 11.7% on an adjusted basis. Acknowledging our peer group leading capital levels, it's worth mentioning that if the third quarter's tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our adjusted return on tangible common equity would be 15.3% for the quarter and 18.5% for 2021 year to date. As I mentioned earlier, The current quarter's return on tangible equity was impacted by recording the day one provision for loan losses associated with acquiring Legacy Bank. And finally, on slide 20, looking back from the beginning of 2017 to today, we've achieved a compounded annual growth rate in tangible book value per share of 12%, driving shareholder value creation. We've positioned this franchise with a foundation of strong liquidity and capital from which we'll continue to execute on our strategic growth initiatives and optimize the opportunities of this strong Florida economy. We look forward to your questions. I'll turn the call back over to Chuck.