Welcome to the Seacoast Third Quarter Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Before we begin, I've been asked to direct your attention to the statements 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. I will now turn the call over to Mr. Dennis Hudson, Chairman and CEO of Seacoast Bank. Mr. Hudson, you may begin.

Thank you, John, and good morning everybody, and thank you for joining us today on our call. Our press release, which we released yesterday after the market closed, and our investor presentation can be found at the Investor portion of our Web site under the title Presentations. With us today is Chuck Shaffer, our Chief Financial Officer, who will discuss our financial and operating results. Also with us today is Julie Kleffel, our Community Banking Executive; Chuck Cross, our Commercial Banking Executive; David Houdeshell, our Chief Risk Officer; and Jeff Lee, our Chief Marketing Officer. I'm going to open the call today by discussing Seacoast's business model and then reviewing our third quarter results. This quarter's operating results and financial performance show the continuing strong fundamentals that underline Seacoast's balanced growth strategy. Last year at Investor Day, we took a deep dive into our strategy, which has produced a very granular, diverse loan book that continues to absolutely avoid any theory concentration. Our customer-focused balanced growth strategy has been the foundation upon which we build strong operating results. Our strategy requires us to build diverse customer relationships, and as we've discussed many times, we've developed a data and analytics competency that drives our execution of the strategy. We're proud of the balanced growth that we've produced, and one of the real payoffs particularly in the rate environment we now see is the impact that our strategy is having on our funding, this was very evident this quarter as we continue to grow low cost deposits. Our non-interest bearing deposits were up 8% year-over-year. Our cost of deposits increased only four basis points from the prior quarter, and remained a very low 43 basis points, while our average rate on new loans added for the quarter increased 16 basis points to…

Thank you, Denny, and thank you all for joining us this morning. As I provide my comments I'll reference to the third quarter earnings slide deck which will be found at seacoastbanking.com. Starting with Slide five, we had another strong quarter as we continue to build momentum across our business lines and benefit from investments in analytics, C&I focused business banking, low cost deposit base and expense control. We're on a clear path to achieve the Vision 2020 objectives we presented at Investor Day in 2017. GAAP net income grew to $0.34 per diluted share and adjusted net income grew 16% year-over-year to $17.6 million equivalent to $0.37 per diluted to common share. As Denny mentioned this is net of an increase in a specific reserve for a single loan we discussed on last quarter's call equivalent to $0.05 per share. We reported a 1.225 adjusted return on tangible assets and a 12.4% adjusted return on tangible common equity and we ended the quarter with a tangible book value per share of $12.1. Highlights included the third consecutive record quarter for consumer small business originations which increased 20% sequentially and are up 45% from the prior year. This portfolio continues to benefit as our investments in pricing, credit and marketing analytics matured. Additionally this portfolio is averaged out on a rate increase 25 basis points sequentially and is up 84 basis points from the prior year. Our commercial banking business enters the fourth quarter with a strong pipeline of a $197 million supported by a proprietary commercial portal software tool. This tool which we discussed last quarter allows our bankers to significantly expand customer relationships by providing direct insights in the current commercial customer behaviors and needs. Early in its implementation, we're seeing good results. And turning to the net…

Thank you, Chuck, and John on the phone. I guess we are ready for a few questions.

Thank you. [Operator Instructions] And our first question is from David Feaster from Raymond James.

Hi, good morning, guys.

Hey, Dave.

I'd like to start it on the loan yields. There's pretty impressive sequential growth there. Could you just talk about what drove this specifically, and maybe your thoughts on new loan yields, how pricing stranded, we've heard that there might be some pressure on the CRE side, obviously that's not as big a growth driver for you, but is there any where you're seeing pressure and -- or benefits? And secondarily, maybe some insight into what drove the increase in securities yields, is that a portfolio restructuring, what drove that?

Yes, sure, all right. We'll start with the loan yield question and then migrate to securities yield. Starting with -- just talk a little bit about consumer and small businesses, we talked a little bit on the last call about this, but I think we did some great work, we add our credit and our analytics guys, as well as our finance team spend some time really looking at the way we think about pricing, both in small business and consumer. We put in the new pricing models kind of middle part of the second quarter, and that led to both growth and increases in new loan add-on yields is something that we will continue to expand in the commercial part of our business as we move forward, but that turned into real results and the quarter was above the kind of the change in the treasury curve. So we are very pleased to see that, and then…

I just like to kind of add that in the environment we're in today, very important for us to look at pricing, and something we talked about internally few months back, and I think you did a great job kind of explaining what we are doing. I'm trying to explain why we are doing it, and that is that we are just moving into another -- a different kind of phase here where this becomes very, very critical for us to get the right pricing in these things. The second thing I would say, just to add-on to what you said, Chuck, is a bigger factor probably was the mix, and we believe that it's appropriate in this environment to really focus we've been saying that for quite some time on small business consumer, some of the segments of the market that continue to perform well and give us the opportunity to have the kind of spreads we think we deserve as we look forward. So and again, back to strategy of all supported by the analytics prowess [ph] that we developed and then to assist our folks with better execution as we go into the market. So this is not something, it is kind of a one-off deal or a temporary thing that we think this is very sustainable and something we will continue to see.

Yes, I'll add to, if you look at our balance sheet, look at the liquidity on the balance sheet with a lower loan-to-deposit ratio and the build and the fact that we operate multiple business lines and including as we talked in the past about a competitive consumer so, we have options to manage that mix maybe more than most. So we come into this, into the part of the cycle with more liquidity, more options to manage mix and we think that all leads to NIM expansion as we move into 2019. Now, this is not the time in the cycle you want to really be pressing down on theory growth. This is not the time in the cycle where you want to have liquidity issues. This is a time to be very thoughtful and careful about how pricing and how mix really starts to give us advantage in terms of margin. You got comments on the investment book?

Yes, just quick comment on the security portfolio, we are about 40% of that portfolios variable, David, and we saw that reprice in the quarter, we carry a CLO portfolio, that's a floating rate portfolio that we invested in early 2017 that turned out to be a great investment, it has yielded nice returns, that repriced in the quarter as well as we saw some slowdown in amortization of discount and that helped the -- our premium sorry, the amortization of a premium and that helped us well. So the combination the two lead to yield expansion in the securities portfolio.

Okay, that's helpful. Thanks. I appreciate the NIM guidance too, your ability to manage the loan-to-deposit ratio up as helped, you defend your NIM and then provide for expansion and based on guidance, it seems like you'll be exiting next year around 93% loan-to-deposit ratio, inclusive of First Green. I guess where are you comfortable with that ratio going? I think previously we've talked about 90% or so, are you comfortable with that going and then the NIM guidance 3 to 4 basis points of expansion. What kind of betas are you assuming for that? Or are they accelerating in? You think of that 3 to 4 basis points sustainable and feature hikes inclusive of First Green?

Yes, so I'll start with loan deposit ratio. I think with the guidance we provided the high single-digit loan growth the 6% target deposit growth, we think we hit about a 90% loan deposit ratio into 2020. So we think we have plenty of room to go there as we move forward and, we have the ability to manage that as to how much we put on and manage the mix and the NIM as we move forward and yes, I feel confident in 3 to 4 basis points NIM expansion on each core point rate hike, primarily because the deposit beta does continue to perform very well. We only saw a little north of 20 basis points move and the deposit beta over the last 12 months given a 100-basis point increase and Fed Funds as I mentioned before, 52% of our deposit books transactional and if you look 32% of DDA, but above that is a large portfolio of very low operating type accounts with small amount of interest paid on them. Now, certainly deposit competition remains aggressive. And it's something we are carefully monitoring, but we think we can manage as we move into next year. And again, back to the strategy the growth we've seen in the lean and shift we've made in the small business and consumer over the last couple of years, really puts us in a stronger position to defend the deposit growth number as well, so and to defend the cost of deposits as well. So that's been a big, big, big impact.

Just to wrap-up yield curves and the way they change can impact this, but looking forward, we continue to see NIM expanding into 2019.

Okay, last one from me. I know it's early but I guess given some of the cost saving initiatives that you highlighted and the operating leverage from your digital investments, somewhat offset by continued hiring and further investments in the business, you think core expenses, exclusive of First Green could essentially be flat, year-over-year in 2019?

I think, if you look at the 2019, if you take the expense guidance, I gave you and Q4 and that, we closed on First Green on the 19. So we didn't have a full quarter of First Green expenses. So, modestly increasing, I think from the first quarter out through the fourth quarter, we do expense -- I believe expenses remain flat throughout 2019.

Okay, thanks, guys.

Our next question is from Michael Young from SunTrust.

Hey. Michael, and I would just point out follow-up, why do we think they'll remain flat? Because we are de-investing in areas that don't give us returns? And when you look at the whole picture, we think we can achieve that. Sorry, Mike.

No, that's all right. Michael.

I wanted to maybe just start off on the credit piece this quarter, obviously, the last two quarters is kind of offset some pretty good results. So maybe can you just walk us through kind of where that stands now? I think it was maybe a $7 million credit, seems like there is at least maybe $5 million reduction and your exposure on that credit. So just kind of where are we now? And is there any hope for some positive improvement down the road on that at all?

Hey, Michael, this is David. Yes, just for perspective, next level is originated in 2007, really, it's a peak to the valuations with regard to a lot of theory. We've been working this down, it's closer to $8 million in verses $7 million and the core tenant was occupied close to 80% of this space vacated they continue to pay. So we sort of have this position where we have a performing -- non-performing like credit although we're still looking for a replacement tenant to carry overall deal downside analysis our reserves appropriate we just competed 30 days ago or evaluation of the market we updated our appraisal and we feel very good with the position that we have down the assets going forward.

I don't so point out that the tenant that left did not leave because of economic issues like the concerns or problems of quite the contrary that tenant was performing exceedingly well in that location and moved to a larger preferable location in the market in that same market. And so it was the tenant really vacated for very positive reasons unfortunately, this issue for us, so we're not seen this confidently say this is not the beginning of something worse, we actually see a very strong environment out there and the rationale for the vacancy was actually for very positive reasons. And so how did we end up here, well unfortunately it just kind of dates back to a very difficult time in 2007 and the spring was over leverage after the crisis and we've been working a down as David said and we do not believe there's any further loss or charger.

And so it's just there is a replacement of that tenant in the future I mean could this end up you're getting upgraded or paid off for at some point and kind of removing it from the books or any kind of thought on what could happened to the positive.

Yes, well that we're not counting on anything positive and we've kind of built into the special provision that we took kind of a what we think is a pretty negative scenario, so there could be some upside but it's not something we would ever count on.

Yes and I would just add to that our for standard guidance this mark down market rates would be today, so we are very flattened the assets is found if it's sold would be believe with trade for the investments we have so, there is not a lot of upside with any sense.

Okay. Thanks for that color and Chuck just back on the kind of expense outlook I think you said 30.5 to maybe 39.5 x fee amortization in the fourth quarter. That's with First Green or without First Green.

That's with First Green.

Okay, so essentially you guys have gotten almost all of the cost savings already.

Yes, we are head of schedule on the cost saves Michael and we expect to have a lot of those benefits in Q4.

We worked hard to get everything integrated in close simultaneously last weekend and so there's now some small amount that will continue to see but it.

Oftentimes will carry branches side-by-side for a very good time in this case for just give you a tangible example we consolidated the branches same weekend, so we worked harder this time to move things faster.

Okay, yes that's pretty impressive and then just moving into next year that the $7 million in cost saves you mentioned kind of the investing I guess in certain areas sounds like maybe mortgage is one of those but can you just give a little color around kind of where you're harvesting some of those expenses from potentially?

Sure, yes I think the way of think about it is, part of it is mortgage you're right there and then some of the costs will come out of mortgage thoughts are include some vendor renegotiation some staffing efficiencies that we see across the organization and accessing some legacy technology type expenses on the front side as we mentioned we're investing that in commercial bankers and tools for those commercial bankers and both fulfillment. And if you remember back to start overall technology strategy is the build a world class analytics tool set we think we've built at least invest in class for community banking for using that as a way to generate leads. We now are putting fulfillment on top of it going to out that faster pull through both in commercial and small business and so we think the combination of taking some cost out of these lower return parts of the company, putting it into the fulfillment and be able to pull deal through as well as in investing in expansion markets campus and Broward County south Palm Beach County those are markets that are expanding markets where we have very low market share. And building out a banker team and in those markets I think what the three key investments they're leads to both better growth moving into next year as well as NIM expansion as we bring in some higher yielding assets.

And better operating leverage over time, the fulfillment of creating a fully digital fulfillment process. Allows us to further levers the analytics capabilities to drive top line and as we get better at that and do that it drives better operating leverage which is a key component of our 2020 vision.

And alongside that I will one I'd just like to know any timing or expectation on when you might be able to start standing those off or well kind of occur throughout the year and then on the direct fulfillment side and then also you guys have been able to I guess it's focused on listing pricing already in kind of consumer small business to reflect probably higher cost funds et cetera but this will allow you to originate with a lower cost structure so but there's kind of benefit of maybe being able to charge higher price for speed versus having higher operating leverage in anticipate giving some of that pricing back or kind of how do you look at that piece of the equation.

I think you nailed it that's exactly the plan. Everything you said, I think getting paid for speed, particular for small dollar loan to fulfill more directly. I think as really important it provides real value to the customer and that builds value throughout the whole customer value chain, so that it's really important part of what we're doing and in terms of the timing it will happen throughout the year and I think our goal, overall goal is to have this completed all of it completed by the end of next year. And if we can move faster we just might on getting some very looks in room.

Okay, thanks for that color. Appreciate it guys.

Thanks, Michael.

Our next question is from Stephen Scouten from Sandler O'Neill.

Hey guys, how you're doing today?

Hi, Stephen.

Question for you, I mean obviously the deposit franchise holding up phenomenally and just showing a real strength there. I'm wondering in your modeling and as you think about your NIM guidance, how are you thinking about the non-interest bearing deposits and if we could see some remix away from non-interest bearing and back into CDs kind of more to a historical kind of percentage or kind of how you're thinking about that theoretical risk?

I just want to say something; we are growing customers at a rate that supports the numbers that we've described. We are growing customers at a rate that allows us to confidently say we believe we can grow, the overall deposit book 6% and you see where over indexing on that growth rate in DDA and that is a 100% due to the customer growth that we have and the lean into which we talked about the last several years into doing a better job of growing a small business which is meant incredibly impactful. I mean with when you look at the small business growth in customers that we've created over the last year. They've essentially funded themselves, so as we're growing new calls customers particularly leaning into small business we have many of those that bring just deposits and then we have others that bring deposits and loans and when you kind of add it all together. It all in an aggregate way funds itself, critically important in the environment we're going into that be where our focus is, that's where all the value creation is going to come is in that kind of a thinking in terms of the strategy that we have, so it included in everything I just said is any kind of mixing that began to occur out of DDA. But that DDA book is core customers it's not large unusual types of customers that you're going to see that going back and forth.

Okay, very helpful. Thanks Denny and then and maybe thinking about the technology investments you guys have made, can you remind me us any of the investments you made it created proprietary products that could create any revenue opportunities I mean it's obviously been phenomenal for your franchise and what it's done for your earnings potential but I'm wondering if there's any kind of ancillary benefits on top of that.

Hey, Stephen, Jeff Lee. Good to hear from you. Yes we certainly looked at and we've had quite a bit of interest this right now that we see so many opportunities within our own franchise to continue to leverage our technology and our analytics to fuel our associates to drive further growth, so we are weighing options but I would tell you right now we see a lot of opportunities to continue to harvest what we have within our own customer base, so that's where our focus is.

We're developing so many proof points on that but which has been so astounding but as we find other ways to utilize this, across the franchise and even into some of the back office areas and in the risk areas we're already seeing that yield really good results we talked a little bit about that earlier on the call. We just have so much more to do, we think that's where frankly the near term value is in this.

Okay, fantastic and then maybe just lastly from an M&A perspective. I mean you guys have put up a great organic growth and deal that was some incremental M&A over the last couple years but I mean with the pullbacks we've seen in the market as a whole and then obviously your stock is based on as well, how do you think about M&A and the ability to announce the deals from here with the value of your shares?

Yes, so we have them and we will remain focused on opportunities that provide real value for our shareholders. We're not going to give away our shareholders hard earned value and so if we were to consider anything in this environment and have to have the same payback, the same returns and most importantly add to the customer franchise. We're not looking to dilute the tremendous value we've created here from the customer side we're looking to create value and that's been and remains one of the key focus areas that we focus on is this new franchise going to add value from a customer standpoint over the long term. All I can say about the stock price as it certainly is not as it's not going to make us meeting those goals and easier to have stock price we are and we'll just have to see how things play out but I just want to make very clear that we're not going to step away from all of the, any of the metrics that we've used historically to create value for shareholders were those are hardened and in place.

Great, thanks a lot guys. Appreciate it.

Thank you.

Our next question is from Steve Moss from B. Riley FBR.

Good morning guys. Just wanted to touch a bit further on commercial real estate, I'm wondering should we think that portfolio being roughly stable or grown like mid single digits and then second thing, what are you guys seen for commercial real estate yield these days.

I think overall growth we have some growth in that most of our CRE growth has come through acquisitions so, most of the banks we've acquired have had great deposit franchises and a little bit more focus on CRE for all the reasons we probably understand, so most of our growth in CRE has come through that but we have had some, I think single digit growth but any common Chuck?

Yes, Steve this is Chuck Cross, CRE is a very competitive market in Florida right now and we're stick into our guns on underwriting and because of that we're not seeing great growth in our CRE loan portfolio but we do have some good CRE investor customers that we stick with and so we have some modest growth in that portfolio. As far as pricing right in this price in the Florida market it's you're not going to get great pricing but we get acceptable pricing and we stick their guns on our pricing models.

Yes and I'll just add to that, we have the risk adjusted pricing model. We use it on every deal and if a deal doesn't hit our risk adjusted returns we won't move the deal forward, so where pricing is gotten and I think we've talked in the past particularly into South Florida CRE pricing has been challenging we let deals go in that market and not competed given the risk adjusted return, so we remain disciplined and we'll remain disciplined as we move forward both on credit and pricing and will and that's the way we look at the market.

All right, thank you very much.

Thanks, Steve.

Our next question is from Christopher Marinac from FIG Partners.

Thanks guys. Good morning. Just one more question on the credit side just had to do with sort of where classifieds kind of trends would be what the kind of actually trend down for 930 just because you've taken the write down of that one credit.

Dave, you want to take that one?

Yes, non-performing loans assets would be pretty much flat if you take out the impact of that one for credit it's taken back to last two quarters.

Just to be clear we did not write it down. We booked a provision and so we have an additional allowance against that loan and so you would not expect to see that impact the level of substandard or non-accruals, just point out that the non-performing loans actually remain kind of flat.

We see no deterioration at all, Chris, then in the portfolio quarter-over-quarter remained consistent.

Right, so the small change that happened in CRE that already happened in the second quarter is old news and you're moving on with this decision, correct?

That's exactly the way to think about it.

Okay, perfect and then on another topics, the with your guide on margins for the next quarter, how does that play out into the first half of next year is there still the ability to push margin slightly higher even though you've got competition because you have the asset sensitivity pieces you outlined plus you still have the leverage component I mean is it just directionally okay for us to think of a slight uptick beyond Q4 in the margin.

Yes, I think if you think back to the way we manage the balance sheet, we've been prudent in managing liquidity. We've been prudent and managing wholesale leverage and that's now paying off for us. I think were uniquely positioned to manage the margin move in into next year. I think will outperform other banks like size banks in this manner but yes, I think as you move in a 2019. We do expect margin to continue to expand part of the expansion into Q4 as First Green part of it a Seacoast and we've modeled then for your rate hikes into next year one of March one in June and one in December and we expect the margin continue to expand into 2019.

Very good, thank you guys. Appreciate all the background today.

Thanks, Chris.

And I will turn the call back over to Mr. Hudson for closing remarks.

Great, well I'd like to thank everybody for coming today. We've enjoyed the conversation and we look forward to talking further in the Q4.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for participating, and you may now disconnect.