SBCF (2021 - Q1)

Welcome to the Seacoast Banking Corporation’s First Quarter 2021 Earnings Conference Call. My name is John, and I’ll be your operator for today’s call. Before we begin, I’ve 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 I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin. Chuck Sh

Thank you all for joining us this morning. As we provide our comments, we will reference the first quarter 2021 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, our Chief Financial Officer; Jeff Lee, Chief Digital Officer; and Denny Hudson, Executive Chairman. I will open by expressing my gratitude to the Seacoast team for producing another consecutive quarter of record results. The Seacoast associates continue to generate top quartile returns by focusing on value-creating customer relationships, driving best-in-class customer satisfaction and expanding market share in a growing Florida marketplace. During the quarter, the Company generated earnings per share on an adjusted basis of $0.63, while posting an adjusted efficiency ratio of 51.9% in a quarter that is impacted by seasonally higher payroll and benefits expenses. Asset quality, liquidity and capital are all strong, and we continue to generate meaningful capital growth, bolstering our fortress balance sheet. This week, our Board approved the introduction of a $0.13 dividend, which represents approximately a 21% payout ratio, generally in line with our peers, providing a new source of return to our shareholders. We believe this will have no impact on our organic growth or acquisitive growth strategy moving forward, particularly when you consider the capital generation resulting from the Company’s efficient operations. The state of Florida is now fully reopened with restaurants, hotels and other hospitality venues on a path to return to pre-COVID levels as the vaccination process continues to move forward rapidly and the state population continues to swell. Our borrowers across multiple industries and asset classes are reporting robust demand with key issues primarily arising from supply chain and labor shortages. The state’s unemployment rate continues to improve, and most recently, was reported at 4.7%, which on a comparative basis is where the state was in 2017. Given the rising demand and increasing population, we expect economic conditions to continue to improve, particularly in the metro markets we primarily serve. Given the significant recovery occurring across the state, low unemployment and clear evidence emerging of a V-shaped recovery, we have returned to our pre-pandemic credit policy and conservative underwriting guidelines. We saw increased loan pipelines quarter-over-quarter across all of our business lines with the overall pipeline increasing 44% to total $434 million at quarter end. Looking more specifically at the late-stage published commercial pipeline, we ended the quarter at $241 million, up 44% from the prior quarter. And although we generally don’t publish this number, the overall complete commercial pipeline, which includes early-stage deals, has increased 55% from a few quarters ago.

Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, let’s start with slide 5. Net income was a record $33.7 million for the first quarter on a GAAP basis, increasing 15% quarter-over-quarter. On an adjusted basis, which excludes M&A and isolated branch consolidation charges, net income was $35.5 million, an increase of 16% quarter-over-quarter. Earnings per share on a GAAP basis were $0.60 compared to $0.53 in the prior quarter. On an adjusted basis, earnings per share increased to $0.63 from $0.55. On a GAAP basis, we reported 1.70% return on tangible assets and 15.62% return on tangible common equity. On an adjusted basis, first quarter ROTA was 1.75% and ROTCE was 16.01%. As we continue to grow our capital base, it’s worth mentioning that if the first 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 21.8%, increasing from 18.8% in the fourth quarter. Tangible book value per share increased to $16.62, up from $16.16 last quarter, and increased 15% year-over-year. The cost of deposits declined to 13 basis points from last quarter’s 19 basis points. Loan pipelines increased 44% from prior quarter end as Florida’s economic recovery begins to drive increased demand. The wealth management team continues AUM growth with an impressive increase of $156 million in assets under management this quarter to surpass a milestone $1 billion in total AUM. Strong mortgage banking and interchange revenue further bolstered results.

Thank you, Tracey. And operator, we’re prepared to take a few questions.

Our first question is from Steve Moss. Please go ahead.

Good morning. I guess, maybe just starting with loan growth here. Maybe just a little bit more color in terms of -- it sounds like on the pipeline build, it’s coming from more of your C&I borrowers. Just a little more color there, and perhaps also, what the possibility of maybe seeing growth come above the high single digit, low double digit type growth rates in the second half of 2021?

I think, the puts and takes there, if you work your way through it, is -- if you were to look at our loan pipeline, you would see that there is a little more CRE in the pipeline than what we’ve seen in the past. And the reason that is C&I borrowers tend to be sitting on a tremendous amount of cash. And as you know, if you spend time looking at our portfolio, it primarily and heavily weights into professional practice, a lot of attorneys, doctors, lawyers and owner operated businesses, all of which to receive stimulus money through PPP. And in all cases, in those businesses, we need to work through that cash before they’re going to be willing to make investments. And so, when we provide sort of our guidance around pre-pandemic growth of sort of mid to high single-digit growth on the back half of the year, I would describe the range of outcomes there on the high end of that will be more driven by the C&I businesses coming back out and making investments will be towards the lower end of that if they continue to sort of hoard the cash. And I think the pace of which that will happen depends to some extent on forgiveness, as we work through forgiveness and borrowers are more confident in the cash then being in their balance sheet, they’ll either distribute it or invest it and alongside investing it would take down credit. And so, if you were to think about modeling us out, you somewhat have to take a position on how quick those C&I borrowers come back into the marketplace. But, we still feel very confident on the back half of the year of sort of mid to high single-digit growth given the Florida economy. And we’ve seen significant recovery over the last two quarters. It’s been very robust. The vaccination process is moving quickly. If you were in Florida, you would feel very much like it was pre-pandemic thing to very much return our balance sheets of both consumers, and businesses are bulked up with a tremendous amount of cash from the stimulus payments. And therefore, credit issues have moderated, and we expect growth to return late this year.

Right. And maybe just on that business activity aspect, your interchange income stepped up here quarter-over-quarter. Just kind of curious, do you think about that as continue to go higher from here, or if there’s just anything unusual there?

I think, Q1 is usually the strong point, but I don’t expect it to materially move lower from this point forward. So, a lot of that’s been driven by stimulus in the economy and spending which we’ve seen both across the card companies and our own debit portfolio as well as we’ve talked in the past, we continue to market for interchange, we continue to drive stimulus campaigns, and we’ll expect to continue to focus on that. But I think Q1 was a high point. And then, if you were modeling, Q4 will be a high point again.

Okay. That’s helpful. And then, just one last one from me. Just in terms of looking at the margin and in particular loan pricing, just kind of curious as to where new loans are coming on these days versus roll-off yields?

Yes. Steve, in the prior quarter, I can give you an exact answer, we were at 3.81% for our add-on rate in Q1, and that’s been very stable for us over probably the last three quarters. And that’s a mix across all of our asset classes. And the roll-off rate, I don’t have in front of me. Tracey, do you know what the roll-off rate is?

I think I do. Roll-off rate 4.24% in the first quarter.

Our next question is from Michael Young. Please go ahead.

I wanted to start, I guess, maybe just on the capital, and quite frankly, liquidity. I mean, you guys have kind of a high-class problem of really having high levels of both of those, which is potential energy for the future. It sounds like there’s some greater loan growth maybe coming in the back half. But even with that and the dividend announcement, which was nice to see. You’re still going to have -- be building capital. So, just kind of curious your outlook on opportunities to deploy that. And if you would do anything sort of in the interim, maybe on a temporary basis, I know you bought pools of mortgage loans and things like that in the past just to kind of lever capital and liquidity. So, anything like that that’s out there?

I think the way to think about that is, one, we like carrying a significant amount of capital. We like the fortress balance sheet concept that we’ve put together here. And we’ll continue to revisit capital over time. Our primary focus for capital is organic growth and M&A. I think, the M&A market conversations have been robust and increasing over the last six months. And so, I think ideally, we put that into M&A. And at this point, we’ve put a dividend in place and we’ll just revisit it over time, Michael. It’s a careful balance of growth versus strength in the balance sheet. And we’ll just see what -- how it plays out as we move through the coming years. But ideally, again, it would be an organic growth and M&A.

Okay. And I guess, the other question I had was just through Vision 2020, you guys have done a really great job of kind of balancing reinvestment with culling of expenses in other areas. The guide for next quarter looks like that is slated to continue. But, are there opportunities to be, I guess, a little more aggressive, either in hiring or other areas to maybe invest a little more in the future for growth at this point in the cycle?

Yes. We have a number of key investments in the coming year. Part of that is hiring. We are very much active out recruiting both, individuals and teams. We have a number of folks we’re talking to right now. And if you look back in the first quarter and late last year, we brought in a team up in the Central Florida area, including a new market president and a new regional credit officer. We have line of sight towards a number of future hires here as we come in the coming year, and that is baked into our investment plans. And then, secondarily, we’ve been making a significant amount of investment in our origination cycle times in the Company, particularly in the commercial banking business, to be able to deliver product to market faster. Some of the results of that investment and work will come later this year as the team continues to basically build a much quicker digital origination process. And then, thirdly, we’ve been investing in digital front end for our customers. We expect as we enter 2022 and through 2022 to have a much more robust digital front end for our customers, something we’re excited about it. It is -- I don’t think we’ll increase our expense base as we move through time. We’ve got that offset and we’ve got a plan to make these investments while managing our efficiency ratio. And so, as you know, we continuously challenge ourselves to make the hard trade-off decisions around sort of legacy overhead to a digital future ahead. And we’ll continue to make investments, for sure. In Florida, just generally, around team hires and what’s going on as the economies come back here, bankers are back out in force along with fairly increased M&A conversations, so has opportunities to acquire talent.

Okay. And last one for me. You guys have made a lot of investment on the fee income side of the house to kind of offset the low rate environment. Could you maybe just talk about mortgage, in particular? I guess, that’s been high from an industry perspective. I know a lot of investment’s gone in there. So, should we expect kind of market share gain to mute the industry volume fall off or maybe just higher volumes in Florida generally kind of muting the industry impact?

Yes. The way we think about mortgage is it’s a great way to acquire customers. And so, we focus on Florida only. We focus on the markets we’re in. And we look at it as a way to service our current customers as well as grow a new customer base. I think, that’s the highest value of the mortgage business. It builds sustainable annuitized revenue that comes alongside that cross sell. And so, as we move forward, we are always actively looking to recruit originators into the franchise. But over time, if refinance demand were to slow, that’s why our guide is to slower mortgage income in the coming quarters. That all being said, the team here at Seacoast has done an incredible job of prioritizing purchase money and servicing the realtors in the markets we’re in, and along the East Coast here, we’re the number one market share on the mortgage side. And we continue to expand that business, in particular, in Orlando and as well as Tampa. We’ve hired a number of mortgage originators in those two markets. But again, our key focus with mortgage is to drive customer growth and franchise value over time.

Our next question is from David Feaster. Please go ahead.

It was great to see the increase in the pipeline. It’s extremely encouraging. I just was curious, how much of this is from existing customers that you think are getting more ready to invest, just given the improved economic outlook versus new customer acquisition from the new hires that you’ve made and just an update kind of where we are in the migration of new clients from the PPP program.

Sure. If you were to look at the pipeline, I’d say the majority of it is new customers that we’ve been bringing in. It is new relationships. A lot of it’s the expansionary plans, we’ve grown into the Tampa, West Coast market and into South Florida. And so, we’re seeing more and more opportunities that is largely coming from our expansion of our business. And I would tell you, like I mentioned earlier, our sort of overall pipeline, including early-stage deals, if you were to sort of measure that on a productivity basis, we have more deals per banker in the pipeline than we’ve had really going back over a number of years. So, our entire population is in the game, which we’re excited about. They’re selling the full bank. So, we’re seeing not only growth in loan opportunities, they are significantly contributing to the AUM growth, which has been substantial. If you run the math on that, we’re up almost $450 million, north of $450 million year-over-year in AUM that’s come from that team, expanding, help expand that business alongside our wealth team. And they’re selling the full bank. So, we’re super excited about the commercial business. It’s something we continue to focus on to make it more competitive. As I mentioned earlier, we’ve made a lot of investments in technology there. We’ve made a lot of investments in leadership around the state of Florida. And we’ll continue to. It’s -- I think there’s an opportunity for us here, particularly as all the community banks have either exited or gotten smaller or the larger community banks have gotten much larger. There’s a nice space for us to slide in here and be the commercial bank of these metro markets that we serve. And so, on the PPP side, we continue to get customers. We continue to cross sell customers. I don’t have the exact numbers in front of me. I can get them for you later today, David. But, we continue to use it as an opportunity to acquire customers.

That’s great. And just kind of curious, reading between the lines, it sounds like you’re a lot more confident that your appetite for credits improved pretty significantly. I guess, just given the build in the pipeline, the improved economic outlook and with the distraction from PPP in the rearview. Do you think that loans, exclusive of PPP, have troughed here, and that we should start seeing growth in the second quarter, or do you think there could be some additional runoff just from payoffs and paydowns?

Right now, our model would have very slight growth in the coming quarter, and then fairly significant growth in Q3 and Q4. So, I think this is the trough.

Okay. And then, just wanted to touch on the strategy for deploying your excess cash. It sounds like you’re going to be pretty methodical and invest over time, or is it that do you expect maybe some of this liquidity to flow out? And I guess, just how do you think about your asset sensitivity in the securities book, just in light of this liquidity build? And do you see opportunity to maybe take some duration risk and take some massive sensitivity off the table, or just how are you just thinking about that?

I think, Tracey, you can jump in here, too, if you want. But, I think, we’ll continue to be patient. I think, the risk of higher rates is fairly material at this point. And so, we don’t want to get ahead of ourselves and then find ourselves under water in these long duration type low-yielding bonds. And so, we’ll be very methodical, David. It is a careful balance of earnings to the risk of market value declines in a higher rate environment. Today, we’ve focused on sort of sliding in for four-year duration with no extension risk. You take a little yield hit there and it pushes the yield down in the 1.20, 1.30 range, but we think that’s appropriate. And our guide to you for the coming quarter is a net $200 million in growth.

Yes. And David, you’re right to mention some of the uncertainties there. The excess liquidity is driven largely by trends in PPP forgiveness, those higher customer deposit balances. And so, changes in that behavior would certainly cause us to reconsider.

Yes. You can kind of envision a period here where that excess liquidity that’s in bank balance sheets, including ours and everybody else’s begins to wane in the coming year and as that money gets invested. So our sort of thought there is the C&I type customer that’s got all of this cash will begin to invest later in this year. I think they have to. I think it’s pent up, and they’ve been waiting for, like I said, to work through forgiveness as well as some clarity on the economic recovery and the impact of the pandemic. I think, as we’ve talked in the past, we were waiting for some very clear indications around that, including vaccine, stimulus, et cetera. I think we’ve been able to see that and that gives us confidence that the state is doing incredibly well. And we’re feeling confident about the future ahead on our economic recovery.

And I have no further questions at this time.

All right. Thank you. Thank you, everybody, for joining us this morning. And we’ll talk soon. Thank you.

Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for participating. And you may now disconnect.