Welcome to the Seacoast First Quarter Earnings Conference Call. My name is James, and I will be your operator for today’s call. [Operator Instructions]Before we begin, however, 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 our comments today are intended to be covered within the meaning of that act. Please note also this conference is being recorded.I’d now like to turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank. Mr. Hudson, you may begin.

Thank you, operator and thanks to all of you for joining us this morning. As we provide our comments, we’ll reference the first quarter 2020 earnings slide deck, which can be found at seacoastbanking.com.With me this morning is Chuck Shaffer, our CFO and COO; Jeff Lee, Chief Digital Officer; Tracey Dexter, Corporate Controller; Jay Walker, Corporate Treasurer; and David Houdeshell, our Chief Credit Officer.I’m going to start on Slide 4. I’d like to open the call by expressing my very sincere appreciation to the Seacoast team for their hard work over this last six weeks. Given the incredible challenge that came with COVID-19, our Seacoast associates have performed in an outstanding manner, showing their pride in the organization and delivering excellent support and appreciation for all of our customers. We’ve had a significant portion of our employee base from multiple disciplines within the company working 24/7 on the Paycheck Protection Program over the last four weeks. I’ve had many customers approach me and express their sincere gratitude for the service that Seacoast team has provided. And I just want all of you to know, I couldn’t be more proud of your effort and the results that you’re producing and the good work that you’re doing for our customers.I will start by sharing some of the actions we’ve taken to respond to the health-related and economic implications of this crisis. We’ve approached this challenging environment knowing that we are uniquely prepared in four key ways. First, our business continuity program. As you know, we have a long history of operating in this state and it’s a state that’s prone to hurricanes and other weather events. As a result, we were able to quickly mobilize our business continuity program and adapt those activities to this unique challenge.Our teams shifted to working remotely…

Thank you, Denny. I would also like to express my sincere appreciation for the Seacoast team and their hard work on PPP. The actions taken by the Seacoast team over the last six weeks have truly been remarkable to watch. And I too couldn’t be more proud to work alongside this team helping our customers in this challenging environment. The teamwork 24/7 work effort and overall commitment to assisting customers. It’s been nothing short of remarkable.Directing your attention now to first quarter results, we’ll turn to Slide 5. Net interest income increased $1.4 million sequentially. The net interest margin increased 9 basis points to 3.93%, excluding accretion on acquired loans, the net interest margin increased by 3 basis points. Quarter-over-quarter, the yield on loans increased 1 basis point and the yield on securities increased 13 basis points, primarily the result of high levels of pay downs in both portfolios. During the quarter, two agency CMBS securities prepaid resulting in accretion of $716,000 favorably impacting the security yield by 22 basis points and the net interest margin by 4 basis points.The cost of deposits declined by 4 basis points and late in the quarter we aggressively reduced deposit rates. The full benefit of this action will be realized in the coming quarter. Also late in the quarter, we began strategically increasing brokered deposits to supplement our liquidity position, given the unknown impact of COVID-19 on business and economic conditions. Looking forward to the second quarter, the unfavorable impact of our margin from this conservative positioning will be partially offset by fees collected on PPP loans. And moving out beyond the second quarter, if the economic situation improves, we would expect the brokered and other wholesale funding to mature, which will benefit the margin. We remain cautious in guiding beyond these comments…

Thank you, Chuck. And Operator, we’d be pleased to take a few questions.

[Operator Instructions] And our first question comes from David Feaster [Raymond James].

Good morning, everybody. I just wanted to start on the PPP program. I appreciate the commentary on the number of applications that you’ve got in the second round. I suspect that those are smaller dollars. I guess, how do you think about the volumes potentially in the second round and then are you focused on existing clients only? Are you looking at this as an opportunity to acquire new customers? And then finally, how active that I think Palm Beaches or Freedom Bank had been in the program as well?

Thank you, David, happy to answer the question. In the second round, at least as of this morning, we processed over another 2,000 and have $147 million with the trend numbers. Our overall volume of applications has been right around 2,500, 2,600 applications. We think as long as the system holds today, we’ll likely get through that. We’ve been focused primarily on our current customer base. That was our objective here as we move through the PPP program and we wanted to take care of customers, take care of their needs before we thought about handling prospects. So at least, to-date, it’s been nothing. But it’s been a solely a focus on current customers. And obviously, First Bank of the Palm Beaches was part of the Seacoast program. So they were part of those numbers and have contributed. And everything, I’ve heard from the Freedom Bank team is, they’ve been heavily engaged and gotten through all their customers as well. And they’re doing a great job.So we are incredibly proud of the Seacoast team. I think, we are very aggressive to reaching out to customers and the team has worked 24/7 through basically four weeks straight through the nights and weekends. And it’s been our number one priority to help get to this capital in the hands of our customers. And we’ve been proud to do it. And the team has performed marvelously.

That’s terrific. And are you able to use this program as a way to maybe drive additional wallet share, ask for more the relationship drives to deposits and I guess, as deposits continue to come in, especially with the PPP program and everything and it’s challenging loan backdrop, I guess. How do you think about utilizing excess liquidity and your just overall thoughts there?

Yes, I think just generally on liquidity, obviously, the environment is dynamic. And there’s a lot going on. So we’re going to be prudent and disciplined and execute a conservative approach to liquidity as we move through this period. We have built up liquidity on the balance sheet and that’s something we’ll carry. And if there becomes – the clarity starts to emerge on where this is headed. Obviously, some of that liquidity could be reverse back out of the balance sheet and invested in either investment securities or loans. But for now, we’re building liquidity and carefully watching the environment.

I think, we’ve done a really good job of building out what we think is a very prudent ladder of funding in that area. And we’ve done it in such a way where we can bring it back down fairly quickly. And so we’ll just have to see how this all plays out. But in the meantime, we thought it was really important to be very conservative when it came to – making sure we had the proper liquidity.

Okay. And then are you able to use the PPP program to drive additional wallet share with your clients and additional deposits or you get more of the whole relationship?

Our focus has been on existing customers and I think, I’ve received just tons of calls from existing customers around this issue and there’s been a lot of appreciation expressed for, what a great job our folks have done in responding to this. We think as we move forward, that could be a good possibility for us. I think it’s enabled us to strengthen our relationships. We have a very strong understanding of all of our clients and that’s allowed us to really strengthen those relationships and I think that’s absolutely right. As we move forward, we will consider depending on how those funds last whether we would accept applications from potential new clients.

And the only thing I’d add to that is I think this is provided unique environment for not only Seacoast but for community banks in general to show the value that we bring to customers as the relationships we have, the knowledge and understanding of our customers is far greater than large banks and the community banks have really been able to shine through this progress through this process.

Okay. That’s helpful. Last one from me. Just curious on the technology and the data analytics front, I guess, how has the data analytics helps you navigate this kind of environment? And secondarily, I guess with the increased digital adoption from your clients, has that allowed you to accelerate some efficiencies? Or created any other opportunities for you?

David, Jeff Lee. I’ll take that. I think the data side obviously very important to us as we got into to this event. I think having the deep understanding of the customers being able to analyze who we should proactively reach out to. How we rank order, who we’re reaching out to. You got to imagine a lot of volume we have to consider and how we stage that and the data is fundamental, whether it’s on the credit side or whether it’s on the customer analytics side. So that proved very important as we’re thinking about how to efficiently get through all that we had in front of us.In terms of the digital adoption numbers, it’s been nothing short of astounding. All the work that we’ve done in that area and it’s really paid off in spades in this kind of event where we’ve remained close with our customers, even though our branches are only open for drive through and appointment only. But those digital channels have surged. We stayed close with customers. And so it’s really positioned us quite well, as we’re working through this thing.

Okay. Thanks guys.

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

Good morning, guys. Just – as we think about business activity here going forward, I mean, obviously, you slowed production here, kind of just wondering any color in terms of just kind of what you’re thinking about loan balances in near term?

Yes. I think, our approach at the moment has been only to focus on current relationships and we’re taking care of current deeper relationships we have, where we have customers with the e-balance sheets, lots of liquidity and the ability to handle downside stress. And so given that, obviously, that’s going to slow sort of loan growth as we move forward, out beyond guidance of that, these hard to provide given the dynamic nature of the environment. But that’s, we’re obviously carefully watching the general economic backdrop and we’re remained prudent and disciplined as we move through this period.

I appreciate that. And then just going into a little bit here, in terms of the hotel, motel exposure, I know it’s small. But I was just wondering what are the loan-to-values there, debt service coverage and the same thing with your entire construction portfolio?

You want to take that one, David.

Sure. Yes, this is David Houdeshell. Thanks for the question. So there are hospitality exposures pretty conservative to begin with. Our loan-to-values when we go into these properties is typically around low-70%s. Today, our overall portfolio stands about 63% loan-to-value. On a debt service coverage basis, that’s really tough to say. In the near term, several of them are very strained with regard to overall performance. We have completed a stress test against every asset in the portfolio and they can whether pretty hefty annual downside stress and we’ll just see how long this cycle lasts and when they get back on their feet. We have been working with those customers on the PPP program and some other programs to help them with the assistance and we’re pretty – feeling pretty good about their performance and long-term prospects on the backside of this cycle.

Yes. And the one thing I’d add to that is given the low loan-to-values in that portfolio, both the restaurant and the hotel, those sponsors obviously have heavy investments in that and the majority of the – those loans are secured by real estate.

Okay, great. And I guess, do you – if you have the loan-to-values on restaurant, that’d be helpful. And then the $295 million in construction too, please?

Yes, the restaurant, David.

The overall portfolio for restaurants was in the – I don’t have them right in front of me. I just have the total blended hospitality book.

Yes. We’ll send it to you, Steve. And I’ll send you the construction as well. I don’t have that in front of me either. What I will mention to you, on the construction portfolio, its $295 million, obviously, well below regulatory guidance around concentrations to capital. And the largest category in that construction book is $89 million, which is actually, loans to individual residential borrowers for building homes. So even thought that $295 million, $89 million is not really necessarily commercial construction or even builder lines, it’s actually individual lines to construct home. So it’s a very conservative construction portfolio.

I appreciate that color. And then in terms of just funding costs here, interest bearing liabilities came down 8 bps, obviously pretty aggressive rate cuts here. I’m sorry, if I missed it, but just wondering just how much should we look for that bucket to decline here?

Yes. Gives and takes there’s probably the best thing to give you is, we brought in some additional wholesale and brokered funding to support liquidity given the environment. On the flip side, the cost of deposits will go down probably into the high 30’s as we move into the coming quarter. But there’ll be some puts and takes there around how much liquidity we keep on the balance sheet.

Okay. I appreciate all the color. Thank you very much guys.

Our next question is from Stephen Scouten [Piper Sandler].

Hey guys. How you doing today?

Hey, Steve.

Chuck, I know it’s hard to say and I know you don’t want to give any specific guidance per se, I don’t think. But in terms of how the NIM is performing, maybe relative to the guidance in the last K, I think it was down 1.5% with 100 basis point move. Can you talk maybe a little bit relative to that number, how you think you’re performing and give us an idea of when you think you can see the floor in your NIM, if you have any insight to that?

Yes. Probably the best guy to thank, obviously the NIM it has some pressure with the rates fall on 150 basis points and putting on some excess liquidity. I will mention that, 60% of our loan book is fixed and so that’s beneficial and that helps support as well as the cost of deposits. The other sort of variable there that’s going to play into this is how much of the PPP income gets recorded over the coming months. So it’s hard to get a sense of that because we don’t know if it’s going to be a four month window that that income gets recorded or a seven month window. But I think, NIM will move downward as we move forward. But how much downward it moves, it’s hard to judge given all the variability here that’s going on.

Okay. And on the security book, I know that was up, I think 13 bps and you said some of that was on prepayments. Is that kind of a onetime jump or would you expect that to stay at similar level?

It was really driven off of the refinance activity in the underlying mortgage market, both commercial and mortgage. And I think we’ll continue to see higher refinance. Jay, do you have anything you’d add to that?

Yes. Stephen, those were two agency CMBS securities that about a net $700,000 prepayment penalty/discount earned. So they’re kind of one offs, but you don’t typically don’t know what to expect there. Those are lumpy.

Yes. Given the falling rates in the underlying refinance market, potentially we’ll continue to see stuff like that come through and as well as it drove higher accretion on the loan book. And I’ll remind you that we have a pretty good size purchase discount that still exist in the loan book that if refinance activity remains strong, we would probably see some of that come through. But that also would be dependent on how much credit is available to commercial borrowers to refinance in this environment.

Okay. And then thinking about loan growth expectations, you obviously give good data on the pipeline. I’m wondering what you expect to see trend wise, what you’re seeing from customers maybe in the month of April. And really if you even want to see any loan growth at this point in time or would you kind of tighten your boxes on underwriting just to keep loans from growing disproportionately in the near-term?

Yes, that’s a great question. And we’ll just have to carefully look at answering that question as we kind of rolled forward over the next couple of months.

Yes. What I would is we’re going to be very prudent and disciplined as we move through this period and very, very thoughtful. And that’s probably the best guidance we can give you at this point Stephen. We’re going to have to wait and see how things play out here over the coming quarters. But for now it’s a very conservative point of view.

Okay. And then last thing, not a big delay. I think you mentioned maybe a two month potential delay in the Freedom Bank deal. Anything specific that’s driving that or just regulatory slowdown from approval.

We’re fully approved. It’s just the difficulty of trying to close a transaction with the operational teams being under work from home orders as well as the technology providers having the same constraints. So it’s more of a technical issue that’s causing the delay, just the amount of people available.

And you can just imagine, we’ve got more or less all hands on deck with a PPP program. A lot of those folks are the same folks that would be working on the integration teams. And as we looked forward, it was just very, very difficult to imagine how we could do both at the same time. And PPP program is obviously critical for our customers. And so that took priority over the acquisition.

Yes. Makes a lot of sense. Thanks guys for all the information.

Thanks, Steve.

Our next question is Christian Marinac, [FIG Partners] I’m sorry, Christopher, apologize.

Hey guys. Good morning, Chris Marinac. Just wanted to ask the roadmap for the deferred assets and kind of how you see that playing out. Are there any new deferrals that are likely and then what’s the roadmap to how they kind of move on or even get to a classified criticized status?

David, do you want to talk about maybe how we decisioned things going on deferral?

Sure. Yes. So we have some certain criteria. We looked at our overall customer base but we had criteria for payment performance. So on general basis, they had to be current for the last 18 months of performance. So in good standing with the bank we would certainly ask customers to describe what type of strain they were incurring with regard to the COVID activities as well as just making some rational decisions based on performance capacity and granting them. We have granted deferrals to allow very strong good customers that are in certain business sectors that we’re taking a cautionary position early on in this cycle. We have seen deferrals paper down over the last several weeks, which I think is really driven by some of the more strain customers seeking the PPP program loans to help them through this difficult period of time.So every customer, we’ve had a discussion, we had criteria. In some cases if they didn’t quite have good performance, we would ask for financial information, give that quick review before rendering our final decision. So we feel pretty good about the customer base that’s in that portfolio. And the deferral periods are anywhere from just a month or two to a full three or four months and more based on some of the criteria and the guidance that has come out from the regulators.

Only thing I would add is, we were pretty aggressive in reaching out to our customers. As you know, the analytics work that we’ve done really helps us identify customers that we think could be at risk and really based on the industry and the like. And so we were very – I think, strategic and really targeted our outbound work in a way that is designed to really increase our knowledge or about what’s really happening out there right at this moment from our customers. And just to reiterate, if you made a request, we had a really deep conversation with you about why this makes sense and so forth. So, we fully expect that as we get through the pandemic and conditions change and things open up, we’ll see all those loans come back online and so forth. Probably be dealing with a small subset of issues. And we’ll just deal with it as we get to it. But we’re pretty confident about that.

So that’s great. And I guess that implies that really if you did not qualify for a deferral that that’s already picked up and substantiated and special mentioned data for this quarter, right?

Yes, exactly right.

Okay. And then on what triggers any reversal of interest? I guess loans have to go non-accrual or become a TDR, which doesn’t sound like that’s a second quarter event. But I’m just curious if you think some of them might head that way or is that a low likelihood from what you can tell?

It’s low likelihood. Right now those are all on deferral. We expect them all to come back on making payments today. We’re accruing interest like we normally would. And unless something materializes between now and when they come back on deferral that has caused them to co-pass due and result in a grading change that would move them towards non-accrual. But we don’t expect that. And as David mentioned, that we were very proactive in reaching out to customers to help them access that program over a period of time.And when you look at our overall book being as diverse as it is and is distributed as it is and not being in some of the higher risk asset classes, we feel good where we’re at during this period. And our reserve and CECL reflects a qualitative component roughly over – roughly 37 basis points on top of our quantitative component reflecting the risk above the baseline scenario. So that qualitative reserve in combination with capital PPP and the proactive work we did around deferrals, we think we are very well positioned given the environment we’re in.

Great. Thanks for all the background. And just one last clarification. Chuck, you mentioned the $147 million on round two. That’s a separate figure from what you did on around one, is that correct?

That’s correct.

Okay, great. Just want to clarify. Thanks for everything.

Thanks, Chris.

Thank you, Chris.

Operator, if we don’t have any further questions, I guess, just like to thank everybody for attending today. And we look forward to updating you next quarter.

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