SBCF (2021 - Q2)

Welcome to Seacoast Banking Corporation’s Second Quarter 2021 Earnings Conference Call. My name is Vanessa and I will be your operator. 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. I will now turn the call over to Mr. Chuck Shaffer, President and CEO of Seacoast Bank. Chuck Sh

Thank you, Vanessa and thank you all for joining us this morning. As we provide our comments, we will reference the second quarter 2021 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, Chief Financial Officer and Jeff Lee, Chief Digital Officer. During the quarter, the Seacoast team generated strong operating performance, growing tangible book value per share and annualized 11% from the prior quarter to $17.08, while distributing a dividend of $0.13 per share to our shareholders. The adjusted efficiency ratio was 53.5% in line with prior guidance and the adjusted return on tangible common equity ratio was 14.27%. We continue to manage our capital prudently focused on consistently building shareholder value over the long run while maintaining a fortress balance sheet. Additionally, we continue to deliver peer-leading operating efficiency while making investments to position the company for the accelerated growth we see in the coming periods. The Florida economy continues to expand meaningfully with strong inbound population growth driven by low taxes, a business-friendly environment and a post-pandemic work from anywhere economy. Last year, Florida’s population grew by 388,000 residents or 1,061 people a day and Florida’s unemployment rate continues to improve each month, most recently 4.9% compared with the national unemployment rate of 5.9%. Corporate relocations continue to occur with many organizations bringing large portions of their staff to Florida. In particular, South Florida has become a hotspot for banking, financial services and technology relocations, including firms such as Elliott Management, Blackstone and Goldman Sachs. And in Orlando, for example, Deloitte and KPMG have made significant investments along with many other large corporations. This strong economic backdrop of population growth and corporate relocations helped support a robust quarter for deposit growth, interchange income and notably, a growing commercial pipeline. Additionally, the wealth business continued its vigorous path forward generating another $133 million in assets under management this quarter, taking us to $1.2 billion in AUM at quarter end. Remarkably, deposit transaction accounts have grown $860 million from year end or 22%, demonstrating the underlying quality and strength of our customer franchise in Florida. Loan outstandings, excluding PPP and loans held-for-sale declined $6 million from the prior quarter, essentially in line with our guidance of flat growth for the second quarter. The commercial pipeline exiting the quarter is strong and growing. Our late-stage commercial pipeline was $322 million at quarter end, up 34% from the prior quarter end and up 175% from the prior year same period. We expect loan growth, excluding PPP, to be in the high single-digits annualized in Q3 and Q4 and Tracey will elaborate further in her comments.

Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, let’s start with Slide 5. Net income was $31.4 million for the second quarter on a GAAP basis, an increase of 25% year-over-year. On an adjusted basis, which excludes M&A and branch consolidation charges, net income was $33.3 million, an increase of 31% year-over-year. Earnings per share on a GAAP basis increased to $0.56 compared to $0.47 in the prior year. Adjusted earnings per share increased to $0.59 from $0.48. On a GAAP basis, we reported 1.48% return on tangible assets and 13.88% return on tangible common equity. On an adjusted basis, second quarter ROTA was 1.52% and ROTCE was 14.27%. As we continue to grow our capital base, it’s worth mentioning that if the second 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 19% increasing from 16.7% in the second quarter of 2020. Tangible book value per share increased to $17.08, up from $16.62 last quarter and an increase of 13% over the prior year, inclusive of a cash dividend of $0.13 issued during the second quarter. Total loan pipelines increased by 83% from this point last year, including an increase of 175% in commercial loan pipelines in line with the strong Florida economic recovery. We continue to invest in commercial talent and technology while not wavering on our strict credit underwriting policy. Looking forward, we see significant opportunity to continue expanding commercial banking talent across the state. Credit quality remains strong and we continue to see low levels of charge-offs and declines in non-performing assets. As a result, we released $4.9 million in loan loss reserves this quarter. The cost of deposits decreased by another 5 basis points to 8 basis points. The wealth management team continues to reach new records with year-over-year growth of $451 million in assets under management, bringing total AUM to $1.2 billion and another record quarter in interchange income, which reached $4.1 million as we continue to see higher transactional volume and higher per card spending. Turning to Slide 6, net interest income on a fully tax equivalent basis decreased 1% sequentially to $65.9 million and the net interest margin declined 28 basis points to 3.23%. I would like to take a moment here to break down the two drivers of this decline. First, we saw meaningful increases during the quarter in near zero rate transaction accounts. Transaction accounts grew 35% during the quarter on an annualized basis. This growth was the result of both the onboarding of new relationships and additional cash balances held by current relationships. These higher deposit balances, strengthened our borrowers’ balance sheets and the growth shows the incredible economic expansion that is happening in Florida.

Thank you, Tracey, and Vanessa, I think we’re ready for Q&A.

Thank you, sir. And we have our first question from David Feaster. Please go ahead, sir.

Hi, good morning everybody.

Hi, David. Good morning.

Good morning.

So look, the Florida economy has been doing very well. Economic activity is improving. It’s great to hear the commentary on the new hires and the pipeline builds. I’m just curious, as you look at your pipeline and the originations, how much of the growth that you’re seeing, you think is from existing clients just being more active and more confident in the economic recovery and demanding new credit? And then how much do you think is from these new hires or client migration from the PPP, just curious some of the dynamics within that?

Great question, David. Thank you. What’s exciting, at least over the last couple of quarters is we are starting to see customers come off the sidelines that were sitting on large portion of the cash and reinvesting in our business. We’re seeing that kind of across the state, particularly in our owner-operated companies, which is great to see, and we’re seeing more CRE opportunities that continue to fill the pipeline. I would say that it’s a mix between both current customers, which is the amount of activity there is growing. And importantly, a lot of it is coming from the new hiring. The Orlando team that we acquired late last year is now well established and sort of in the growth side of that trajectory. And we’ve just brought on a new team over in the Tampa-St. Pete market. I expect further bankers to follow there and build out as we move through time. So it’s a mix, but both current customers and prospects and the velocity that’s going on there gives us some confidence that we’re going to see sort of organically mid-single-digit growth in the next couple of quarters. And then return back to high single-digit growth moving into next year. So we’re feeling good where we’re at. We’re right on where we would thought we would be this time of year, right on our guidance. And we’re starting to see the acceleration. We’re expecting 2022 to be a much better year for loan growth.

That’s terrific. And then I just wanted to touch base on M&A. I appreciate your commentary in the prepared remarks. And look, M&A has been a bit more competitive in Florida. It’s been interesting to see some out-of-state buyers that maybe hadn’t been expected. Just curious, the pulse of the M&A landscape, the strategy near-term, how pricing and conversations are trending and what geographies that you’re most focused on?

Thank you, David. And I would say we’ve been very active in the M&A space. As you know, over the last 8 years. We’ve done 11 transactions. We’ve done two or three transactions a year over that period of time. I would expect that pace to continue. We continue to have multiple conversations around the state. We – I think we’ve established ourselves as a high-quality acquirer, a good integrator. And we know Florida, and that goes a long way in understanding the management teams that we’re trying to acquire and the banks we’re acquiring. And I think there is a lot of opportunities as we move forward. There’s 87 banks remaining in Florida. I would say as we’ve gotten larger and we’re growing, about half of those make sense. So there is 40 plus opportunities in the state. And then lastly, I would say we continue to be focused on Naples up to Tampa, the entire I-4 region, all of Central Florida at large and the entire East Coast of Florida from Jacksonville to South Florida. As we continue to build what we think is Florida’s Bank, extending our Broward presence to the adjacent Miami-Dade market will make sense at some point as we move forward. We’ve entered that market organically over the last couple of years, and we’ve been focused primarily on domestic commercial businesses there. But there are a few well-run commercial banks in that market with deep roots that could make sense for us as we move through time. And so the combination of what’s happening in the state, the growth in the economy, the M&A. I think when we think about building shareholder value, concentrating market share in and around the entire state, I think, makes the most sense in the long run, and we are very focused on getting that done for our shareholders.

That makes a lot of sense. And then just pro forma for the deal that’s pending right now, we are going to be pushing up close to that $10 billion asset threshold. I am just curious, how do you think about $10 billion? It doesn’t seem as daunting as it used to be, but I am just curious your thoughts on crossing it organically, opportunities that you might have to stay under $10 billion near-term in delayed Durbin. And then just could you remind us of the impacts of Durbin on the bank.

Thank you, David. Yes. Obviously, with where we are at $9.3 billion and the addition of Legacy, we will be approaching $10 billion as we get to the end of the year. We do have a number of options to move deposits off balance sheet. As such, we will not or we don’t expect to cross $10 billion in the current year. We do expect to cross in the coming year. And as we cross, the Durbin impact is approximately $7.7 million after tax and roughly another $1.5 million after tax due to higher FDIC expense and reduction of the Federal Reserve dividend. And so – and just as a reminder on that, it only impacts half the year, the year after we cross. And so really, we are only – we won’t see the impacts of crossing $10 billion until the second half of 2023. And we believe we have identified a path forward. We know we need to offset that revenue impact, and we believe there is a number of M&A transactions that could be put together in a way that get us across during that period of time. And the last thing I would add to that is, I think our strategy of doing smaller, low-risk accretive transactions, specifically in Florida, adds considerable shareholder value over time and is the most effective way to neutralize the Durbin impact.

That makes a lot of sense. Alright. Thanks everybody.

Thank you, David.

And thank you. We have our next question from Michael Young. Your line is open.

Hi, good morning. Thanks for taking the question.

Good morning Michael.

I wanted to ask maybe sort of a bigger picture question just on the efficiency ratio guide. Obviously, impressive that you guys are able to hold that despite kind of lower rate environment, but also, over time, you have been investing into some more fee-oriented businesses, which typically come at higher efficiency ratios. So, that plus potential Durbin amendment hit coming, etcetera, etcetera. Are there areas that you are still able to pull cost savings from or is there sort of an expectation of higher rates or just kind of what all is built into the longer term kind of low-50s efficiency ratio guide?

Yes. When we look forward to ‘21 and into ‘22, we think we can remain in that low to mid-50s efficiency ratio. Part of its growth, we expect growth to return in the coming year, which drives NII. We expect NII to be higher as we go into the coming year. We expect the wealth management business to continue to grow, and we still have opportunities to be thoughtful about branch consolidation where it makes sense. And through M&A, we will have opportunities to take cost out as well. And so we feel fairly confident that we can maintain that low-50 to mid-50s efficiency ratio as we move in the coming year, and obviously, higher rates would be even more beneficial. But even on a forward rate curve, we think that, that really is will be our objective. I think that drives the most amount of return to shareholders, and that will continue to be our goal.

Okay. That’s helpful. Yes, M&A is probably the hidden piece there. I wanted to also just ask kind of on the growth outlook, obviously, good to see the pipelines rebounding. I know you guys have done a tremendous amount of hiring. So, it might be good to get an update on kind of number of lenders now versus maybe a year ago. But also just sort of as we look at growth from here, what’s sort of the constraining factor? Is it client demand? Is it pricing and price competition versus other players in the market? Any other color there would be helpful.

Yes. The best way I can describe the environment is, obviously, there is a lot of liquidity in the industry and therefore, pricing competition and to some extent, growing structure competition has been challenging. And as we mentioned in our prepared comments, we are not going to, in any way, loosen our credit underwriting, our standards. We will continue to maintain our same policy as we move through time. But what gives me some comfort is we are starting to see more opportunities with existing clients that are sort of coming off the sidelines and investing back in their businesses. That’s exciting. We are seeing expansion in, for example, the healthcare sector and in many other cases with companies getting larger. And so we feel fairly confident moving forward. And the sort of additional to that is we have tremendous momentum in the hiring space. We – what’s been great is we brought on new talent in the organization. That talent has further talent that wants to follow and be a part of Seacoast. And given the size we are, the balance sheet we are, the growth trajectory and what’s going on in and around the state. There is a lot of excitement within our franchise around commercial banking and the momentum there. And I think all of that leads us to a great place in the coming year.

Okay. And one last one for me, if I could, just on capital, obviously, you guys announced the share buyback, dividends in place. But the recent kind of drop in bank valuations has led to maybe slightly more attractive share price for Seacoast. Should we expect that you guys might consider nibbling if we got any lower than where we are today or given the kind of the M&A environment and organic growth that you are talking about over the next 6 months, 12 months, is that really on the back burner?

As we mentioned in the past, we look at things in terms of earn-back, and we will compare the earn-back and a buyback until the earn-back in deals and constantly weigh the two against each other. So, all I can tell you Michael is we will continue to revisit it as time moves on. We will see where prices go. We are not buying any shares right now, but we will continue to monitor the situation.

Okay. Thanks. I appreciate the color.

And we have our next question from Steve Moss. Please go ahead

Hi, good morning.

Hi Steve.

Maybe just following up on the pipeline here, just kind of curious what the underlying mix is between commercial and CRE and where are you guys seeing new opportunities in CRE as well?

Roughly, if you were to break it down today, 22% of the pipeline, C&I, 44% is non-owner occupied CRE and another 30% is owner occupied CRE is about what the pipeline looks like on the commercial side.

Okay. And just – okay, that’s helpful. And in terms of the types of properties you are just seeing on commercial real estate. Just kind of curious as to where the opportunities are for you guys these days?

The mix between – we tend to see smaller deal sizes, but smaller multifamily, smaller warehouse, other smaller office-type projects is really where we are seeing the volume.

Okay. That’s helpful. And then in terms of loan pricing here, just kind of curious where add-on yields are relative to the portfolio?

Yes, I have got that. The add-on yields for the second quarter, 3.68%.

Portfolio yield. Yes, you can see the portfolio yield in the release. Exactly, it sounds about right.

Okay. Perfect and that’s pretty much for me. Thanks for all the color here today.

Thanks Steve.

And thank you. Our next question is from Stephen Scouten. Please go ahead sir.

Hi, good morning everyone.

Good morning.

Hi Steve.

So, I guess maybe kind of following up on that last question. With the 3.68% add-on yields, the 4.17%, may get like 4.13% if I strip out accretion, kind of maybe more core loan yield. Obviously, as growth picks up, that will put more pressure on average loan yields, but you are deploying liquidity. But I guess, can you talk a little bit about what you see as the path for the NIM, maybe over the next 12 months to 18 months? I know that’s really hard to predict. But I am just kind of curious how much you think it can move up off these levels as liquidity gets deployed?

Yes. Thanks, Stephen. Yes, the core NIM, excluding PPP and the purchase loan accretion declined 22 basis points for at 3.03% in the second quarter. And like we mentioned in the prepared remarks, 23 basis points, essentially the whole decline is really due to the extra liquidity between quarters with that likely continued build of liquidity, elevated deposit growth and PPP forgiveness in the coming quarters. We do expect continued pressure on the NIM into the third quarter and likely through year-end. Beyond year-end, it’s pretty difficult to provide guidance given all of the uncertainties. But if I break down the other parts of the NIM investment securities and loan yields, they should continue to modestly drift down for the next couple of quarters while the cost of deposits should remain in the high-single digits. We are looking at, like we said, add-on yields in Q2, 3.68%, but we would expect those to come down modestly if the rate environment remains the same. In the securities book, 1.39% in Q2, we would expect to moderate a little maybe in the range of 1.3% to 1.4% in Q3.

The only thing I would add to that, Stephen, is a reminder, the Legacy Bank’s portfolio as we bring that on is a higher-yielding portfolio with a higher margin on the aggregate bank transaction. So, that’s supportive in the coming quarters.

Yes. Got it. And I guess maybe ex the legacy portfolio, do you think you can grow NII even with that margin pressure? I mean, obviously, the liquidity is a drag on the NIM. But you still earn money there and you still earn some spread and it gives you a lot of potential. So, how do you think about that as it relates to NII dollars?

Yes, we expect NII to grow as we move forward into the coming year.

Great. Okay. And then the loan loss reserve 1.49. It seems this is odd to say as we just came out of the pandemic, but it seems a lot higher relative to maybe where some of your peers have already bled theirs down to. So, is there any specific reason why that would be? I mean, obviously, your portfolio is traditionally a lot more granular. So, I am wondering is there anything there or you think maybe it’s just differences and views about how to model the different scenarios?

Yes. We really don’t see anything in the near-term. You can see the improvements in some of the credit quality metrics. We reduced the allowance coverage by 11 basis points this quarter when you look at excluding PPP. And really, our primary economic forecast scenario is the Moody’s baseline. That had generally improved indications throughout particularly in the near-term. And as we look out at the activity in our markets, we certainly see all these indications of strength, but we still think it’s prudent given just the unprecedented economic conditions that we keep a reserve at a level that acknowledges that there may be potential bumps in the road on the way.

And I will just add, we will take a conservative approach to that.

Yes. Got it. And then I guess the last thing, Chuck, you mentioned the potential to look further expanding further into the Miami area from Broward. How different of a market is that from the rest of your Florida footprint? I mean, is that – how cohesive, I guess, is that to the rest of your franchise? I know some people will talk about Miami almost as its own state down there. So, is that a concern for you at all or do you feel like that will blend well into the rest of your franchise?

Well, we are already down there organically. We are already calling in the market, so we know it pretty well. I mean there is obviously a different market to many other parts of the state. But there are a few very high-quality banks there with very strong, well-run operations and good operators. And what I would say is that we are already sort of adjacent. We are in Broward. We have bankers that call down in the market. We know the market well. We have to be thoughtful when we are down there. There is obviously different types of risks that have to be considered. But we have worked pretty hard to be prepared for that. And if opportunities come, we will look at them. In the meantime, we continue to look in and around the entire state. So, it’s – I would also add, with Miami, it really is transforming like the rest of the state. There is a lot of Northeastern money moving into Miami, bringing with it growth and bringing with it businesses. And so big transformation happening in South Florida to the positive.

Yes. That makes a lot of sense. That’s very helpful. Thanks so much. Chuck, Tracey, I appreciate the time.

Thanks Steve.

And thank you. We have no further questions. I will now turn the call back over to Mr. Shaffer for closing remarks.

Thank you, Vanessa, and thank you, everybody, for joining us this morning. And this will conclude our call. And I appreciate the time.

And thank you, ladies and gentlemen. This concludes our conference. Thank you for your participation. You may now disconnect.