SBCF (2020 - Q4)

Welcome to the Seacoast Fourth Quarter Earnings Conference Call. My name is Richard, and I’ll be the operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Before we begin, I have been asked to direct your attention to the statement contained at the end of the 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 their comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. Chuck Sh

Thank you all for joining us this morning. As we provide our comments, we will reference the fourth quarter 2020 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Denny Hudson, Executive Chairman; Tracey Dexter, Chief Financial Officer; Jeff Lee, Chief Digital Officer; David Houdeshell, Director of Credit Analytics and Policy; and Richard Raiford, our Chief Credit Officer. Before we get started, I'd like to congratulate Denny on his new role as Executive Chairman. I know and I speak for all of our associates, our Board of Directors and our community, and expressing our sincere best wishes to you as you enter this next phase of your professional career. For the last 28 years, you have led and created an incredible, innovative institution that has delivered tremendous value for both shareholders and customers. You, your father, uncle and grandfather, before you have steered an institution that has helped shape the fabric of our communities that we serve, and has had tremendous value as it had tremendous positive impact on our customers, our associates and their families. I want to wish you my sincere congratulations and to thank you for all your guidance, mentorship and friendship over the years. You helped shape my career and many of our teammates professional lives and your leadership has been incredibly impact on us all. Thank you for all you've done. And I know I speak for both of us that we are excited and believe the road ahead is filled with opportunity. Congrats again, Denny, and I'll turn the call over to you.

Thanks, Chuck. For over 42 years, I've served our customers, shareholders and associates as a Seacoast team member. And as you said, including 28 of those years as CEO. It has indeed been a great honor to be able to contribute along many others who along the way gave so much of themselves to build what we've become. Perhaps my most gratifying accomplishments have been the leaders that have been forged in the culture that defines us as a company. I couldn't be more pleased to have you now step into the CEO role. You will bring into that role the energy and will the win that you've consistently demonstrated and other roles you've held, as well as an extraordinary focus on creating value for shareholders.

Thank you, Denny. Thanks for the kind words. And now turning to the quarter, I opened by expressing my appreciation for the Seacoast team for producing another excellent quarter of impressive results, despite the backdrop of a pandemic. The Seacoast associates continue to generate top quartile returns by focusing on value creating customer relationships, driving best-in-class customer satisfaction and growing market share in a thriving Florida marketplace.

Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results. Let's start with Slide 6. For the fourth quarter on a GAAP basis, earnings per share was $0.53, on an adjusted basis, which excludes M&A and isolated expense consolidation charges, earnings per share increased to $0.55 from $0.50 in the third quarter. On a GAAP basis, we reported a 1.49% return on tangible assets, and 13.87% return on tangible common equity. On an adjusted basis, fourth quarter results were 1.5% adjusted ROTA, and 14% adjusted ROTCE. As we continue to grow our capital base, it's worth mentioning that if the fourth 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 18.8%, increasing from 17.3% in the third quarter. Tangible book value per share increased to $16.16, up from $15.57 last quarter, an increase of 15% on an annualized basis. The efficiency ratio was 48.2%, compared to 61.6% in the prior quarter, and on an adjusted basis was 48.8% compared to 54.8% in the prior quarter. Lower cost of deposits had a positive impact on our margin, with a decline of 5 basis points from 24 basis points last quarter to 19 this quarter.

Good. Thank you, Tracey. Richard, I think we're ready for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question online comes from Mr. Michael Young. Please go ahead. Your line is open.

Hey, good morning.

Good morning, Michael.

I guess I kicked off prematurely congratulating Denny last call, and with 42 years with one company I guess an encore is welcome. So congrats again, Denny. And I know Chuck, even though he's not a blood family member, he probably feels like that at this point with how long you all have worked together. So wish you the best in the future. And we'll obviously miss hearing you on these calls on a regular basis.

Thank you, Michael. It's been terrific working with you over the years. It's great to get to know you. So thanks for that.

Thanks, Michael.

And you're leaving the company in good hands and with a high class problem of very high capital levels, so wanted to start there. Maybe Chuck, just on capital levels being high, you guys announced the share buyback, obviously in December, once you kind of saw the deferrals come down. But now the stocks are valued pretty well. So just how do you kind of view deploying the capital from here maybe in the absence of M&A materializing?

Yes. Happy to address it, Michael, and thanks for the question. Our view on capital remains very similar. We are still in a pandemic, it's still an uncertain period. And so we're very comfortable with where our capital levels are today. And we'll continue to take a disciplined approach to the environment we're in. That being said, we'll continue to revisit the various options for capital which includes buybacks, dividends, organic and M&A. Our preference is the use capital for both organic growth and M&A, we think that's the highest use. And on buybacks, we'll continue to look at that on an earn back basis. And we'll use it opportunistically when it makes sense for shareholders. And always, as we move forward, we'll continue to revisit all the various components, including dividends, and it'll be something we'll continue to look at, particularly as the economy continues to recover here over the coming year.

Okay. And wanted to also ask just on kind of the NII dollars. Obviously, I know NIM can be a little hard to forecast, although you guys have kind of a view on maybe how much securities are going to purchase. But it was just net-net, however, you want to talk about it maybe on a core basis ex-PPP or with PPP whatever is easiest. But how do you kind of see the stability and/or progression higher in NII dollars as we move through 2021?

Yes, I can start. We expect significant variability as you said in PPP, and an increase in purchase discount that will affect NII. We do expect the margin to continue to decline if we remain in this rate curve. But as a reminder, we also have very low deposit costs. And if we do see the curve expand later in the year that would be beneficial to the margin. The economic recovery supporting loan growth in the second half of the year will also be beneficial to NII.

Yes, and just real quick, I'll just mention Michael. And you know, one of the benefits we have at Seacoast is the high quality of the deposit base. We have at 19 basis point cost of funds, primarily transactional long duration. And the positive outlook ahead for us, as we see the yield curve begin to steepen ideally, on the backside of this recovery, we see loan growth recover. There's a positive story there as margin widens out, loan growth recovers and we're able to keep cost of deposits low, that's what's always historically happened to the franchise. What's happens with high quality franchises like ours, and given the relationship nature of the franchise and we think there's an expansion of margin that could happen, if that yield curve would have materialized on the backside of the recovery.

Okay. And last one for me just on kind of loan growth. Generally, I know you all were kind of fairly cautious in the second half of last year, just given the pandemic and wanting to see kind of, I guess, positive implications in a path forward. Florida has been relatively probably more open than many other states and benefiting from tourism, maybe disproportionately. So, do you kind of see that that optimism and confidence to begin making new loans more aggressively, as you get back to that kind of historical, we'll call it high single digit, low double digit growth rate?

Yes, I think the way we are thinking about we're certainly still being cautious and thoughtful as we navigate this period. And when we look at new loan requests, we're looking for borrowers that have the ability to navigate the pandemic and have the ability to navigate further deterioration. That all being said, Florida is recovering. We've now vaccinated 25% of our senior population, which is a positive development. We're seeing all of our businesses open. So that gives us some confidence that the back half of the year could be relatively strong as we move through the first half. That being said, it is still recovering. It's still the social distancing and things are going on in the state. And so we don't see as many opportunities as we were seeing during the period prior to the pandemic, we do expect that to come back and you can see that in the quarterly run rate moving up from $80 million to $277 million from the third quarter to fourth quarter as we were able to get back out. And seasonally, the first quarter is normally slower. But when we look out beyond the first quarter into second, third and fourth quarter, we expect things to start to come back.

Okay. Great, thanks.

Thanks, Michael.

Thank you. Our next question online comes from Mr. David Feaster. Please go ahead.

Hey, good morning, everybody.

Good morning, David.

I just wanted to dig into the commercial pipeline a bit and loan production. It was a great production quarter. I was just curious, maybe the composition of production in the pipeline. I guess, first of all, how much of this do you think from existing clients versus new clients that you brought over from the lumber hires or the PPP programs? And then just maybe the breakdown between CRE and C&I, I guess just would you expect more contribution from C&I just given the focus there going forward?

The way I would think about it, David is it's a mix. It's primarily current customers that we know well and have done business within the past that are bringing back opportunities to us. It tends to lean into owner occupied commercial real estate, given the nature of the C&I and owner operated companies that we focus on. There is a portion that CRE to sort of well qualified, strong balance sheets, high liquidity, again, showing clear ability to navigate the pandemic. But it's a mix, but leans heavily more into owner-occupied CRE and more professional practices we've done in the past.

Okay. And then I guess, just curious kind of the pulse of your clients as we head into next year. Have you found that they’re still a bit nervous or they’re willing to start investing in some expansionary CapEx, and maybe I guess start seeing some accelerating growth here as utilization increases? Just curious kind of the pulse of your client here.

I think things are still recovering, as we have described it. And generally folks are still cautious. That being said, there is definitely a sense of optimism as to what’s out ahead for Florida. And we do see more conversations happening pretty much across the state and there is more confidence growing in this state. And I think as the vaccine and the vaccination process takes hold that will provide a lot more confidence as we move forward. And as you know there’s a lot of liquidity in both our borrowers and businesses across the state that ultimately will need to be redeployed into things as we move forward. But the lot of liquidity and growing optimism is the way I'd describe it.

Okay. And then just curious on the margin, I know it's hard to say, but especially in light of the likelihood for the liquidity builds in the challenging backdrop and all that. Just any thoughts on the core NIM, and where we might trough and maybe the timing of it? I know that’s a tough question, but any insight into maybe when we can bottom would be helpful?

I can start. So the core NIM excluding PPP purchase loan accretion declined 5 basis points during the quarter to 3.37%. It will likely continue to modestly decline in the first half of 2021, given continued pressure on securities yield, the dilutive effect as we said of excess liquidity, though, we expect to continue to see lower funding rates during that period. Beyond that, it's pretty difficult to provide guidance on NIM, given the potential uncertainty of the rate environment and also the ongoing effect of the pandemic and stimulus programs that might also impact that.

Okay. And where do you think we kind of might trough at around there? I mean are we going to stay kind of north of 3.30% or kind of maybe dip in 3.20s?

It's hard to give guidance, David, beyond the quarter. It's too difficult, its once you get out beyond the quarter or two, the big variability kind of to go back to what I mentioned the Michael is, if we were to see the yield curve steepen, for our balance sheet where we have some assets that we have lot of liquidity, and the ability to drag out deposit costs over long run there’s a lot of support for margin. But we would need to see the 10 year move up and the longer end of the curve start to move, which we think is a reasonable possibility given the level of inflation and the level of government support going on.

Yes. Okay. All right. Thanks, everybody.

Thanks, David.

Thank you. Our next question online comes from Mr. Steve Moss. Please go ahead. Your line is open.

Good morning.

Hi, Steve.

I guess maybe just following up on the margin here in terms of just maybe how we think about like total purchase discount accretion for 2021 in dollar amount, but there's kind of a range. Maybe, if you could frame that out for us, Tracey?

Yes. Also, an area that's difficult to model, a lot of volatility. In the current quarter accretion of purchase discounts positively impacted yields by 30 basis points. Last quarter, it was 22 basis points. Highly dependent on payoffs, but we have modeled a benefit about 27 basis points to loan yield could be higher, could be lower.

Okay, that's helpful. And then I think you said, low 50s efficiency ratio for 2021. Just kind of curious, if maybe some of the realization of PPP fees are influencing that number? And then just kind of how your thoughts are on expenses, what your investment needs are hiring or technology versus wanting to rationalize expenses.

Yes, looking ahead in 2021, we expect to maintain the cost discipline that we've always had. We focus on investments in key areas of technology, operational efficiency. Like I said, we expect the efficiency ratio to be in the low 50s. And...

The only thing I'd add to that Steve is, we'll be opportunistic with acquiring talent through time. We are actively recruiting, particularly commercial banking talent around the state. And we're seeing good opportunities for that, but expect to manage the business in the low 50s throughout the year.

Okay. And just in terms of -- does that include the PPP fees being realized into NII?

It does.

It does. Okay. And then in terms of the purchases of securities here, the $150 million to $250 million number, was that just for the first quarter? Or just maybe -- just how you think about securities as a percentage of assets here going forward?

Yes, it just meant to guide to the first quarter.

The first quarter. Anything beyond that we will provide more guidance as we move forward. Again, just as Tracey mentioned, a little cautious here to put a lot of money back to work with the 10 year near 1%, with the likelihood is I mentioned earlier of the possibility of a rising yield curve later in the year, not wanting to over commit to the current period and being somewhat balanced and disciplined about how much money we put back to work over time. But $150 million to $250 million for Q1 is about right, and then beyond that we'll continue to be -- it'll just depend on the outlook for rates and the economy in general.

Okay, great. Well, thank you very much. That's all my questions.

Thanks, Steve.

Thank you. Our next question on line comes from Mr. Christopher Marinac. Please go ahead.

Hey, thanks to morning. Chuck or Tracey, I apologize if I missed this. Is there a timing for the third round of PPP in terms of when you recognize that forgiveness? Do you think that'll be this year or it will take longer?

Yes, we've got -- well as a couple of days ago, we have about $170 million so far in loans funded under that third round of the program. We're assuming a pace of forgiveness that similar to what we're seeing so far with round one. So for the latest round of PPP, we're estimating forgiveness starts around the second quarter of 2021, with about a third of that forgiven by the end of this year.

So those ones will be off the books and that new $170 million will be off the books within a year or less?

We're estimating about a third of those will be gone by the end of this year. So most will still be here at the end of 2021.

Okay, great. Thanks for clarifying.

Yes, those are five year contractual maturities. And we're still kind of learning from the experience and the pace of forgiveness and what to expect from the first round.

Okay, got it. Sounds good. And then a more of a strategic question. So Chuck, as all the conversations you are having and various people making suggestions at Seacoast. Do you feel compelled to do anything from the bigger size? Or do you still feel comfortable doing kind of small tuck in acquisitions that you've been very successful with the past several years?

Yes, on the M&A front, I would say we are seeing deal conversations accelerate post-COVID, which is a positive. And I think our focus will remain generally on smaller tuck-in acquisitions, primarily in key growth markets, Florida, Tampa, Orlando, South Florida, North of Miami, sort of Fort Lauderdale up the East Coast is kind of our key markets. And it'll likely still be tuck in acquisitions, Chris. Those generate good cost out, they generate good growth in our market share in those markets and allow us to expand our presence in an economically feasible way. And if we've done in the past, they generated good shareholder returns, and that's where our focus will be.

Sounds good. Thanks very much. And Denny, best wishes to your next chapter.

Hey, thanks, Chris.

Thank you. And our final question comes from Mr. Stephen Scouten. Please go ahead.

Hey, good morning, everyone. How are you doing?

Hey, Steve.

Just maybe a follow up on some of Chris' questions there around kind of strategic decisions. Does there come a point where, these tuck in deals I think you've mentioned previously, maybe five or six that could potentially come to fruition over time, were those opportunities kind of exhaust themselves? And do you start thinking about deals outside of the state at some point in time, given just how rapidly you guys generate capital internally?

Thanks, Stephen for the question. Our strategy is to remain in the state and in particular, the growing parts of the state. If you think about Florida, given the population growth, and in particular the acceleration of that population growth during COVID, and you sort of layer on top of that, the quality of the population growth coming into the state. It's fairly remarkable. And I think our best strategic path forward is to get as concentrated as we can, and what is probably one of the most robust markets in the country. And that's going to generate the most franchise value.

Yes. That makes all the sense. Okay. And then, in terms of talent acquisition, you guys noted a couple banker hires, a treasury management individual. How do you think about the pace of potential hires in 2021? I mean, do you have a target in mind? Do you have a fairly aggressive plan? Or is it just more opportunistic in nature?

We definitely have a plan to hire as we move forward, both in terms of banker talent and leadership talent and around the organization. And we'll continue to hire, but it'll be opportunistic. We're not going to sort of make hires just to hit a number. We're going to hire the right people in the right markets that fit into the culture well, and folks we can believe in. So it'll be opportunistic as we move through the year.

Perfect. Thank you. And Denny, I know your role is changing, but I still expect to hear from you. But, congrats nonetheless on the transition.

Okay. Thanks, Steve. Look forward to talking to you.

Thanks, Steve.

We have no further questions at this time. I'd like to turn the call over to Mr. Shaffer for closing remarks.

Thank you, Richard, and thanks, everybody for the questions. And we look forward to talking to you next quarter. Thank you.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.