Welcome to the Seacoast Second Quarter Earnings Conference Call. My name is Richard and I will be your operator for today's call. At this time all participants are in a listen-only mode. [Operator Instructions] Before we begin, I have been asked to direct your attention to the statement contained at the end of the press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and 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 all for joining us this morning. As we provide our comments, we will reference the second quarter 2020 earnings slide deck which can be found at Seacoastbanking.com. As you know we announced several changes this quarter and the roles of our executive leadership. With me today is, in his new role is as President and COO is Chuck Shaffer. Chuck has been with Seacoast for many years and has held roles across the organization. He has been instrumental and influencing our success in recent years and I have every confidence in his ability in the new position. Also a new role this quarter are Tracey Dexter now CFO and formally our Corporate Controller and Jay Walker, who has expanded his role as Treasurer and now as Director of Corporate Strategy. Joining us always are Jeff Lee, our Chief Digital Officer, and David Houdeshell, our Chief Credit Officer. I'd like to express my sincere appreciation to the Seacoast team for their hard work over the past four months. The pandemic environment has proven challenging to navigate, but our associates performed incredibly well. I am very proud of their efforts to serve our customers and our communities through this challenging period. Chuck, I'll turn it over to you to share your views on the second quarter.

Thank you, Dennis. I also would like to express my sincere appreciation for the entire Seacoast team for their dedication to service and their steadfast focus on keeping Seacoast successful during this unprecedented period. During the quarter, we saw significant increases in the number of COVID cases across the entire state. And while the state remains open for business, customers remain cautious and businesses are carefully navigating an uncertain environment. And as such, we'll continue to be vigilant and maintaining our disciplined and conservative credit culture. We entered this downturn from a position of strength with a fortress balance sheet, inclusive of robust capital position, ample liquidity and a diversified well underwritten credit portfolio, the underlying economic performance of the organization remains impressively resilient. As a result of the efficient operating model, the Seacoast team is built over the last five years. This quarter's performance resulted in pre tax, pre provision adjusted return on tangible assets of 2.12%. And despite continued prudent increases in reserve levels, tangible book value per share grew by nearly [5%] [ph] to $15.11. We remain cautious and disciplined in extending credit, primarily focusing on current clients and tightened credit criteria, such as increasing required debt service coverage ratios and reducing loan to value limits. We've also reduced focused on several industries and asset types and are requiring customers to provide detailed and supportable medium to long-term cash flow projections that demonstrate an ability to sustain further revenue deterioration. Since the paycheck protection program launched in April, we've originated over 5000 PPP loans for 591 million. And during the quarter, we saw a significant slowdown in requests for deferrals and of the loans with payment deferrals that came due in July 60% have made a payment thus far. We continue to increase our ACL coverage ratio…

Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, let's turn to Slide 6. Net interest income increased 4.1 million sequentially. The net interest margin decreased 23 basis points to 3.70. The effect on net interest margin from accretion of purchase discounts on acquired loans were 16 basis points in the second quarter of 2020 compared to 27 basis points in the first quarter of 2020 and 27 basis points in the second quarter of 2019. The lower accretion is a result of lower levels of commercial prepayments this quarter. The effect on net interest margin of interest and fees earned on PPP loans, with 8 basis points in the second quarter. Excluding accretion on acquired loans and interest in fees on PPP loans, the net interest margin decreased by 20 basis points. That decrease is primarily the result of carrying conservative additional liquidity and growth in deposit balances in the second quarter. Quarter-over-quarter, the yield on loans decreased 34 basis points and excluding accretion on acquired loans and interest in fees on PPP loans. The yield on loans decreased 26 basis points. The decrease reflects the first full quarter of lower rates after the Federal Reserve actions in March that lowered overnight rates by 150 basis points. The yield on securities also decreased 34 basis points affected by lower rates and as we noted in the first quarter, unusually high levels of pay downs in the first quarter that did not recur in the second quarter. The cost of deposits decreased substantially from 57 basis points in the first quarter to 31 basis points in the second quarter. Late in the first quarter, we were aggressive with lowering rates on deposits and the second quarter reflects the full benefit of that action. Looking ahead, we…

Thanks, Tracey. And operator, we'd be pleased to take a few questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question on line comes from Mr. Michael Young. Please go ahead.

Maybe just wanted to start off with kind of a cadence of the PPP impacts on the income statement. It looked like you guys already started to recognize some of the accelerated benefit on interest income and then also just wanted to get a feel for how the expense trajectory would ramp back up.

I do take that. As we've pointed out, we had a number of costs associated with originating those loans in the second quarter, and some of that we've estimated 2.9 million in salaries expense. So you can think about whether that would be deferred if other originations occurred or would just recur in a future period. In terms of earning on PPP loans, we have net 17 million in fees earned of which 4 million were earned during the second quarter. And based on our initial judgments, you can expect the rest of that to come in over mostly the rest of the year. So we've got about 24% earned of the total 17 so far.

Okay, thanks. And maybe just jumping over to just kind of the loans that are on deferral. I know you guys were a little more liberal with allowing those deferrals and appreciate kind of the timeline on when they'll return back to, I guess, a normal payment schedule, if they're able, but maybe you could just walk through any additional modifications that you might plan to make come into that October period or beyond and how you're handling it from here.

Yes. As we talked about, in the last call, we were aggressive in reaching out to our customers to assist through the challenging period we're in. We got those customers early and it was something our bankers executed on well and therefore we are able to offer payment deferrals to a number of our customers. To give you a sense of what we've seen through the first 15 days of July, we've had about 1200 loans reserved deferral status through July 15, 60% of those have returned to making payments, 18% of those took another deferral and the remainder are still working their way through the payment and billing cycle. So that if that helps give you some sense of where we're at.

Yes. That's helpful. I guess just trying to get a feel for -- would you expect deferral levels come down to kind of low single digits, maybe to the end of this year? And would you look to do any just kind of TDRs or something like that as we head into 2021, if there were still some beleaguered credits.

We haven't put together a projection per se of exactly where this heads but we do feel fairly strongly that they should come down in the coming quarters. And if anything, we're to move to TDR status, will be depending on largely where the economy is and how those borrowers are doing by the time we get to the fourth quarter. Based on the first 15 days, you're right, that would be pretty significant the decline, we'll just have to see how things evolve over overtime here. But we're very encouraged with what we've seen thus far.

And maybe just one last one and this may be too early. But on capital, I mean, your capital levels are very high, quite strong, obviously, that's a good place to be right now. But as we look at some more of the medium, or maybe even longer term, how do you think about kind of capital levels? And when would you start to -- what would give you confidence, I guess to start to return those to a more normalized level.

And as you said, in the current environment, I think our key focus is to continue to protect and build tangible book value and grow capital. That's, I think, the most important thing we can be focused on. And we'll remain conservative in our posturing around capital through this period. The biggest thing that will help us make any decision on capital will be Clarity and if Clarity emerges late this year into 2021. There's a number of options for capital, including organic growth in M&A as well as buybacks and dividends. And so, we'll consider the various capital options as Clarity emerges, but that likely doesn't seem like it'll occur until later this year into 2021.

Thank you. Our next question online comes from Mr. Steve Moss. Please go ahead.

I want to just start off with kind of what you're seeing for business activity here. You guys mentioned that interchange income or return to pre pandemic levels in June kind of wondering what you're seeing for July.

Yes. I don't think we have anything on July yet this week. We haven't gotten the data yet. We did definitely saw business activity pick back up at a fairly rapid pace through the months of May and June, as we came out of the stay at home orders. We're still fully open for business in the state of Florida and consumers are out doing business. Obviously, COVID cases have increased fairly significantly here in the last five weeks. But things are happening, businesses are opening our conversations with customers, they continue to reiterate to us that they're focused on maintaining operations and focus on being successful through this period and we're working to assist them in doing that. And so things have come back, things are happening, but certainly not at the levels that they were pre pandemic.

So there's been some improvement, as I've talked with individual customers, certainly with the recent increase in cases we saw some declines. So I've heard about some declines in revenue in restaurants. But generally speaking, I don't think we've seen that. And so we're pretty optimistic about where we are right now, the state did not close down in response to the increased cases, just about every municipality and every county in the state now requires folks to wear masks when they're in public areas. And if you walked around Florida right now, that's what you'd see. And it's kind of interesting. We've seen the number of new cases begin to stabilize in the last two or three weeks and we've seen, the number of deaths come way down across the state over the last two weeks. So it's kind of encouraging information that perhaps would suggest that things are stabilizing now in Florida.

Great. That's helpful. And then, on the margin here, you obviously have a lot of PPP noise. But outside of that it was a really healthy decline in funding costs. And I heard your comment, [indiscernible] reflected in the numbers. Just kind of curious as to, maybe ex-PPP, how you guys were thinking about the margin here going forward?

Hey, Steve, Jay here. I'll take that. Yes, I think if you assume kind of similar accretion levels on loans, we would probably see some more pressure on the asset side, securities and loans just from dilution from lower add-on rates. But we do have a little bit of room on the funding side. We have some higher rate brokered funding that we would expect to roll off the balance sheet as well as some retail CDs that we'll reprice over the back half of the year. So overall, I think there is less of a liquidity effect as some of these higher rate wholesale funding rolls off the balance sheet and any excess liquidity we're looking to deploy into the securities book. So kind of ex-PPP, I think under this scenario, you could expect core margin to be maintained at roughly the same level you saw exiting the second quarter.

Our next question on line comes from David Feaster. Please go ahead.

I appreciate the commentary on loans in the prepared remarks, but just wanted to get any thoughts on organic growth ex-PPP. Loans ex-PPP decreased a bit more than expected. Just curious the trends you're seeing. It sounds like some of this was strategic where you're tightening the credit box, but just any commentary on C&I utilization, pay-offs and pay down trends, competitive landscape. Just what's the overall demand for new credit?

Yes. I would describe it as you're thinking about modeling is the third quarter will probably look a lot like the second quarter pretty much across the businesses. We expect mortgage to0 remain very strong. Refinance remains very strong as well as residential real estate market has been surprisingly resilient to all this. And so we expect mortgage business to remain very strong going in the quarter as well as I would expect our consumer businesses to look a lot like the second quarter. And on the commercial side, we remained very conservative, prudent in our underwriting practices. I would say there is not a tremendous demand out there for credit in the marketplace right now. And we're picking our path very cautiously and thoughtfully and so out pass the quarter. It's really hard to provide any guidance but if you're thinking about the third quarter, I think it will look a lot like second quarter.

Borrower selection in a time like this is critical. And that's where we've been very focused, as you know, forever and some of the work we've done around borrower selection, loan selection and that continues today. So --

And I'll just also mention, the other thing is, there is other ways to drive revenue, which is mortgages and deposits. And we saw almost a 50% increase in new customer acquisition on the business side quarter-over-quarter, which I was very encouraged by. And the large banks remain very difficult from availability standpoint, performed poorly when compared to the community banks on PPP and just access to the national banks has been hard for customers. We're taking advantage of that. We've been aggressive out in the marketplace with outreach from our bankers and that's turned into business. So in some ways, while it's a challenging environment, it's provided opportunities for us to grow the franchise.

Just to be clear, I mean, many of the large bank competitors here, the mega banks have many and many of their offices closed fully.

Yes.

So customers are confused. They are having a hard time, as Chuck said, getting into talk with anybody or and they've had some real problems with call centers, wait times and the like. So there's a lot of dissatisfaction out there. And we're hopeful, but maybe that's been helpful to our recent surge in new customer growth. So we feel pretty good about that. We started advertising again, which we think is important. And it should be an interesting period over the balance of the year.

Yes. That's helpful color. And that's a great trend, but just kind of following up on that. What are you seeing on the opportunities for new higher, I mean as you guys are sitting, maybe some of the big banks getting frustrated by the performance there? Are you seeing more inbound calls? Are you interested in new hires or even a potential growth, maybe trying to be a bit more aggressive in terms of hiring and expansion when others are being a bit more careful?

Yes. I'd describe our strategy around new hires is opportunistic where we see well seasoned strong bankers in the marketplace that we think would be additions to the franchise. We'll make those hires all while being thoughtful about cost. In this environment, we need to continue to be prudent on our expense discipline, something that's weaved into the fabric of our organization but where we have opportunities to acquire good solid bankers with track records and portfolios to customers, we'll absolutely take a look at them.

Okay. That's helpful. And then last one for me. Just, obviously, I think this whole environment has really just supported your strategy overall. But just curious, as you look forward and maybe do your strategic planning is there other opportunities that identified to either enhance the product offering or digital initiatives or any comments on how you're planning to maybe adapt further in this new normal or is it just more of an affirmation of your business model.

Hey, David, Jeff Lee. I'll take that. I think to start, certainly an affirmation of the business model, which we introduced at the Investor Day in February 2017, if you'll remember that. The notion of multi-channel distribution being vitally important and now it's really in our mind positioned us well. But if you think about where we want to push harder, I think it's about the digital suite that we have to serve those business customers. We've made a lot of progress with consumer and we've seen really good momentum with the business side of the house. I do think that there is more to be done in that area. There is probably more from a servicing aspect that we can look at and we continue to look at our product set as well. We think that's a part of the consideration set for the businesses that we want to attract to the franchise in this opportunity, it's the capability set. So you expect to see us pushing even more on the business side of the digital front.

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

Thanks for all the information last night and today and I had a similar question for you, Jeff too sort of what is next in the industry? I think you mentioned it well that focus on the business customer. But are other banks catching up to Seacoast or is it simply that they kind of figured out what you introduced three years ago?

I would tell you, I think every bank in the country now understands that you've got to be thoughtful about how you interact with customers when you don't see them face-to-face anymore. That was a major part of our thesis back in '14, '15 before we even unveiled that in the '17 Investor Day. We expected customers to naturally migrate to more convenient channels. It's just a logical thing to expect whether it's the call center, whether it's the digital channels. And that's why we really locked in on, how do you interact with customers and have thoughtful conversations when you don't see them face-to-face. And so I know for a fact, there is a heightened sense of urgency across the non-mega banks when you look at kind of what's happening and the ideas about a new normal, about what this is going to look like. I do think it positions us well. This notion of multi-channel distribution really focused on driving the non-routine activities or the routine activities to the non-branch channels. I think you're going to see that take hold at a greater pace across the industry. But I think it's a cultural change too that I think a lot of these banks are going to have to go through. We've focused a lot on the cultural aspects of what we're trying to do. That can't be underestimated, in my view. Chuck?

Yes. And I'll just add to that. That's exactly what I was thinking about when you were talking there is that when you look back at what we've gotten done from a cultural perspective and the performance of our bankers with outreach, we were already moving toward accessing customers via phone, via digital, via online and using other channels to support those needs of customers and this pandemic has largely accelerated that. And if you look at the integrated approach we've taken with appointments in the branches, over 6,000 appointments since we rolled out the appointment tool earlier in the year, the availability of our call center and our call centers' availability to serve all needs of customers and providing mobile suite. It's integrated approach along with an analytics-driven sales process that I think allows us to probably outcompete here for a while in this environment.

Great. So I guess there's a kind of a scorecard going forward, it's simple or simply watching the new business wins on deposits as well as loans is kind of the best way to keep track. Is there anything else that you would look forward?

Yes. And the other piece would be continuing to move the servicing part of our organization to lower cost channels. That's a big emphasis for us. I think the pandemic allow us to accelerate that as customers seek for other ways to service their relationships. And the more we can get servicing cost down, the more it frees up the availability to take cost in the franchise and move them over into growth-oriented activities and support capital. And so that's the way we'll be approaching this moving forward.

Thank you. And our final question comes from Jeff Cantwell. Please go ahead.

Chuck, I just want to ask you a strategic one, and I'm going to piggyback on a question you were just asked earlier. Can you tell us a little bit about how you're thinking about managing the balance sheet in this environment? The question is actually, what are you most focused on right now? And what should we expect over the next few months or couple of quarters? Just how fast should Seacoast be growing the balance sheet? And how prudent do you think is the approach in this environment could all be in uncertainty out there? Thanks a lot.

Yeah. I think if you just think about just balance sheet management in this environment, obviously, interest rates have changed meaningfully and the outlook has changed given the dynamic environment we're in. I think the best way to describe it is, we'll be very prudent and conservative as we move forward. We've put more liquidity in the balance sheet given the environment we are in. We'll continue to manage to a robust capital position. And from a loan growth expectation, as we talked about, I'd probably expect loans outstandings to decline modestly in the coming quarter given our conservative posturing around credit. Overall though, there's other ways to, as I mentioned earlier, there's other ways to generate franchise value, and that's focusing on fees. It's also focusing on growing deposit customers and customers in general, and maintaining a prudent approach to our expense base. And so we'll continue to appropriately manage both income and the balance sheet as we move through time but we'll do that from sort of a conservative lane.

Okay, great. Thanks. My second question is on interchange income. Is it fair for us to assume that the second quarter should be the bottom for revenue there and that there should be improvement from here on out? I maybe base case is, economic activity will probably improve over the next few months off the bottoms that we up saw here in the second quarter. Is that fair? And can you maybe just talk to us about that a little bit? Thanks.

At this point, barring anything wildly unexpected from a pandemic standpoint, I mean, one would expect the number to continue to recover. When you peel apart the quarterly aspect, it was really April that took a big hit, and I think that's where everyone took a pause on what they were doing. And then, in May the number honestly pop right back up to prior levels. A lot of people buying staples and doing the things you have to do to keep your household kind of operational. So again, Jeff, barring anything wildly unforeseen, I would expect to see the number to continue to trend the way it had been previously.

And I'll mention too. The vast majority of our interchange comes from debit, which is more every day type interchange versus vacation interchange of credit cards and other rewards programs. So as every day spend returns, we expect debit to return.

Got it. And then, lastly -- if I could squeeze in one final one in. There's a lot of chatter in the fintech world right now about digital migration. And what I mean by that is that's basically consumers moving over to digital banking in response to COVID. Seacoast has always had a very strong tech sector. I think you are the right people to be asking this. And the question is, are you seeing digital migration by your customers, and if so, can you tell us in what ways you are seeing them migrate to digital, is it wealth, is it mobile banking, is it online bill payments, is it sell or sending people money? I'm just curious if you could give us a feel for what you're seeing. And maybe just remind us how digital banking by consumers helps Seacoast from an operational standpoint? I appreciate that. Thanks very much.

Yes, no problem. We've certainly seen the usage number go up. And I think, Jeff, when you dig into those numbers, what you're seeing is you've got always a portion of your users that are always active. What we've seen now was those people who were moderately active are now becoming much more dependent on the channel to stay connected with their bank and their banking relationship. And so that's kind of the first thing that pops when you look at just the usage numbers across consumer and across, importantly for us, business, you've seen those numbers pop. I think also numbers that you've seen pop is just the amount of deposits that are now being done outside of the branch network. That's a number we've focused on for a number of years now where now nearly 60% of all consumers are making their deposits outside the branch network. So that's kind of a big deal. That number gives us a lot of operating flexibility as we move forward. Those small businesses now are increasingly finding the digital channels and non-branch channels even more convenient in this environment, 44%. So we think as that continues to evolve, it gives us some flexibility. But importantly, Chuck mentioned it well, it helps our organization free up time to focus on the high value things we can do for our clients, growing relationships as more and more of the routine is digitize. I do think it's an inflection point for the industry. Does it mean we're all digital-only banks, of course, not. That's just not who we are and that's not what our customers expect. But it does mean that we're providing really good digital experiences for our customers. And then, when that face-to-face moment of truth happens, whether it's by Zoom or truly face-to-face, we're there and we have the technology to be able to facilitate that.

Thank you, Jeff. Great. Thank you, operator. I think that concludes the question-and-answer session. And we all look forward to speaking again as we complete the third quarter. Thank you.

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