00:08 Welcome to the Seacoast Banking Corporation's Third Quarter twenty twenty one Earnings Conference Call. My name is John, I'll be your operator for today's call. 00:16 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. 00:39 And I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

00:47 Thank you, John, and thank you all for joining us this morning. As we provide our comments, we'll reference the third quarter twenty twenty one 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. 01:05 The Seacoast team generated strong operating performance during the quarter, growing tangible book value per share, thirteen percent from the prior year to seventeen point five two dollars. The adjusted efficiency ratio was fifty one point five percent, modestly better than our previous guidance. And adjusted pre-tax pre-provision earnings improved to forty three point three million dollars, up from thirty seven point eight million dollars in the prior quarter. 01:31There is noise in the quarter, the result of closing the Legacy Bank transaction and negotiating and announcing the Sabal Palm Bank and Florida Business Bank transactions. When you look past the day one provisioning for Legacy Bank and one-time expenses, net interest income and non-interest income were better than consensus estimates, and adjusted noninterest expense was in line with guidance. 01:54 The driver of the decline in GAAP earnings, quarter-over-quarter, was solely attributable to booking the day one provision for loan losses associated with the acquisition of the Legacy Bank portfolio as compared with a reversal in the provision in the prior quarter, and one-time merger related expenses associated with all three transactions. 02:14 Looking more deeply at the Legacy Bank transaction, it's clear this transaction was one of our better transactions completed to date. The balance sheet was larger than modeled at close and this transaction had near-zero tangible book value dilution, strong earnings accretion, and bolted on some of the best micro markets in South Florida, including Boca Raton, Delray Beach, and Pompano Beach. 02:37 Lastly,…

07:21 Thank you, Chuck. Good morning, everyone. Directing your attention to third-quarter results, beginning with slide five. On a GAAP basis, net income was twenty two point nine million dollars, and on an adjusted basis, which excludes merger-related and other isolated charges, net income was twenty nine point four million dollars. The decline from the prior quarter in adjusted earnings reflects an increase in the provision for loan losses that is due to the day one impact of the Legacy Bank acquisition. 07:50 Pre-tax pre-provision adjusted earnings were forty three point nine million dollars, an increase of six point one million dollars or sixteen percent from the second quarter, and an increase of seven point five million dollars or twenty one percent from the prior-year quarter. We continue to deliver steadily increasing tangible book value per share, which ended the period at seventeen point five two, an increase of thirteen percent from the same time last year. 08:16 Organic loan production is increasing with commercial loan originations increasing to three hundred and thirty two million dollars from one hundred and ninety three million dollars in the second quarter, and eighty eight million dollars, this time last year. The late-stage commercial pipeline is also very strong at a record three hundred sixty nine million dollars. We continue to see strong asset quality trends with the ratio of non-performing loans declining to zero point five five percent. 08:42 Cost of deposits remains in the single digits as we continue to monitor the competitive landscape and adjust rates accordingly. Transaction account balances continue to grow, and excluding Legacy Bank, increased sixty five million dollars or five point five percent annualized, during the quarter. 09:01 A strong quarter for non-interest income with another record for wealth management and a new record in SBA saleable…

28:10 Thank you, Tracey. And, John, I think we're ready for Q&A.

28:14 Thank you. We'll now begin the question-and-answer session. And our first question is from David Feaster from Raymond James.

28:38 Hey. Good morning, everybody.

28:40 Good morning. David.

28:41 Hey, David.

28:43 I just wanted to dig in maybe a bit into some of the commentary on the troughing NIM in the fourth quarter. I guess, could you maybe just walk us through some of the puts and takes with competitive yield and the liquidity deployment and the potential for earning asset mix, and just help us think about the margin as we go forward? And more importantly, the NII growth trajectory as well, it sounds like we should actually potentially see NII outpace loan growth next year, excluding PPP, if I'm thinking about that correctly?

29:15 I can start with that. Thanks. So, core NIM declined fourteen basis points to two point eight nine percent in the third quarter. As we look ahead, investment securities and loan yields should continue to modestly drift down, but the cost of deposits remains in the high-single-digits. We're looking at loan add on yields that are pretty stable in the fourth quarter compared to the third quarter. On new securities yields, we would expect in a range of one point four percent to one point five percent for the fourth quarter. We also expect to continue to put to work some of the excess liquidity in the investment securities portfolio, an additional two fifty million dollars there. 29:57 As PPP forgiveness starts to wind down near the end of this quarter, and largely in the fourth quarter, assuming deposit growth begins to normalize, we could see core NIM modestly decline in the fourth quarter, but we do think that to lower bound, and then building back, entering twenty twenty two. To your point, PPP forgiveness will likely have fully come off by maybe early in the first quarter of twenty twenty two. We do, however, have that significant amount of liquidity to deploy in organic loan growth, and some opportunistic loan pool purchases to support that NII growth. 30:38 Chuck, anything you want to add to that?

30:40 No. The only thing I'd add is, I think, David, if you're thinking about modeling, we do expect sort of quarter-to-quarter continued modest increases when you look throughout twenty twenty two, primarily as the mix improves to loans out of cash, and we expect to invest about a net two fifty million dollars in the securities portfolio. When you add all that together with where we think the loan pipeline is and our expectations for growth in the coming year, we think net interest income growth looks pretty strong in twenty twenty two.

31:09 Yes, okay. That makes sense. And then, just kind of following it up on the production in the new hires. You know, it's great to hear the pipeline that you have. I'm just curious how much of the new hires that you guys have recently announced have been driving some of this growth? In PPP, a client acquisition and just maybe get a sense of the embedded production from those new teams? Just an update on the expansion upstream a bit in the middle market and how that's gone?

31:41 Great, great question, David. And let me start by saying, what's been really good to see over the last quarter, in which we've talked about on prior calls, is the emergence of owner-operated companies coming back to the table and borrowing money. That was incredibly slow late last year, kind of through the first quarter, and over the last six months, we're now seeing a fair amount of growth, and if you look at the table we provided, and you look at owner-occupied CRE, for example, you see fairly solid growth during the quarter, which is great to see. 32:15 When you look at the new hires, about twenty percent of our commercial bankers are new to the company in the last twelve months, and they've only contributed about eleven percent. So, I think there is a lot more upside to come out of the work we've done on recruiting as well as I'm super excited about the amount of volume we're seeing on talent, looking forward into twenty twenty two. So, when you put all that together, that gives us confidence about loan growth in the coming year. 32:44 And importantly, as I mentioned, what's been great to see is the emergence of true demand for credit out of our core C&I customers, which is really an indication of what's going on in the local economy here, and -- was just down yesterday with a number of our customers, and it was nothing short of giddy about all the population growth. We're starting to see a lot of inbound population growth from California, couple -- speaking to a couple of CPAs, they're sort of backlogged and helping get customers businesses opened in Florida, and get licensing done. 33:20 And so, just remarkable what's going on here. And I would even argue that I think the Florida economy is stronger than it was pre-COVID, and so, we're seeing this start to light back up, particularly over the last three months to six months. I think that's driving some of the growth, as well as some of the new hiring. And as I mentioned earlier, sort of our early-stage pipeline is over one billion dollar, which is a record number for us. So we're starting to see it come together and just couldn't be more excited about what I think is out ahead for us.

33:50 That's great. And then, I mean, great to see the de novo expansion in Naples, and we've got the new hires in Jacksonville. I just wanted to -- as you step back and look at your footprint, I mean, where do you think we could see some more de novo expansion? I mean, is it more deepening in existing markets or filling in gaps? I mean, when we look at the map, the only real gap might be along the I-4 corridor in Central Florida, but just curious, your thoughts on de novo expansion, and how you think about M&A versus de novo? A project depends on opportunities, but just wanted to get your thoughts on that.

34:26 Sure. Yes. Great question. Kind of starting with M&A, we continue to be focused on kind of -- so, I'd say Jacksonville down to South Florida, including Miami-Dade with the right opportunity. The entire I-4 quarter Tampa over, and then Southwest Florida. We're going to go where there is opportunity, as you said, where we see acquisition opportunities that make sense for shareholders. We're certainly going to pursue them. 34:52 And from a de novo perspective, it's more about talent, where we see talent and where we see disruption will lead us to opportunities to grow customers in those markets. And what's -- as I mentioned earlier, what's exciting about what's going on in the state is we're starting to see real meaningful economic expansion, and so, it gives us the opportunity to fill out more effectively in these markets with some de novo growth. And then, the amount of talent opportunities that are showing up, it gives us even more opportunity. 35:25 So I'd say, David, continuing to focus on the same exact markets we've been focused on. There's a few fill-in markets in there, for example, Naples is one where there's not a lot of M&A opportunity, but it's a great market and with the right talent, and we think we can do well there. And so, we'll go where the opportunity is.

35:44 All right. Thanks.

35:46 Thank you, David.

35:48 Our next question is from Steve Moss from FBR.

35:53 Good morning.

35:54 Good morning, Steve.

35:57 Maybe just starting with loan pricing. Just kind of curious as to where the roll-on/roll-off yields are? And also, just in terms of the pay-offs and pay-downs, you're seeing, just kind of -- I mean, obviously there is pricing pressure, just wondering if you're also seeing competition on the structure?

36:16 Let’s start with the roll-on/roll-off and I'll hit the structure question, Tracey.

36:20 Sure. If I carve out the loan purchases, our organic add-on rates were about three point six one percent in this quarter. Just a little lower than last quarter, it was three point six nine percent. The pricing does remain competitive, but we saw some recent steepening in the curve, so that should help those -- those levels stabilize as we go into the fourth quarter. In terms of payoffs, our overall payoffs remained elevated, although marginally lower than the prior quarter. And our overall fall-off rate moved down a little bit from last quarter four point two two percent, this quarter.

36:59 Yes, Steve, on the structure side. We don't see -- we've seen a few things come to market that we wouldn't do. But for the most part, the competitive pressures have been around pricing. I'd say the pricing pressures are intense more than we've seen in the past, given the level of liquidity seems that for the most part, people are holding the line on structure, which is good to see. But it's definitely very competitive in the marketplace given the levels of liquidity.

37:30 Okay, that's helpful. And then, in terms of -- hear you guys on sweeping off-balance sheet deposits. I know the two pending acquisitions, obviously, add more assets, but you guys have just a tremendous amount of liquidity, the mass gets tight, but kind of curious, do you think you could sweep in standard ten billion dollars by year-end twenty twenty two?

37:53 We do expect to stay under ten billion dollars this year and plan to exceed, certainly with the acquisitions that are coming in the first part of twenty twenty two. So, we are planned and our guidance includes the assumption that we'll cross ten billion dollars in twenty twenty two.

38:14 Yes. We've built up a number of vehicles that we think will allow us to continue to move the deposits off-balance sheet and stay under ten billion dollars at the end of the year, Steve.

38:24 Right. Okay, that's helpful. And just in terms of M&A, I know you guys have -- obviously, two deals pending, but kind of curious how are discussions going? I hear you on the new hires and the pipeline new hires, does that kind of tilt towards more organic growth and hiring going forward? Or just kind of curious if there is any real shift in M&A there?

38:51 No. I would say it's same strategy, no shift. We continue to focus on the right opportunities, in the right markets, and if it makes sense for shareholders we'll pursue M&A as we have in the past. It's good to see the organic hiring coming online. I think that enhances what we're doing already, so it'll be a combination of the two moving forward. 39:12 The two pending deals we have, we've received approval from the OCC. We're still awaiting our Fed waiver, which we expect to come in the near term, and expect to close those probably in the first week of January. So, we expect to get those closed and if we come across something that makes sense, it'll likely be announcement in twenty twenty two, but we want to get the two deals closed that we have and continue to focus on growth.

39:38 Okay, great. Thank you very much. Appreciate all the color.

39:41 Thanks, Steve.

39:45 Our next question is from Steve Scouten from Sandler O'Neill.

39:52 Hey. How's it going, guys?

39:53 Hi, Steve.

39:56 I guess a couple things. Tracey, it sounds like you guys were thinking deposit growth, maybe, from here might kind of normalize, be a little bit -- a little bit lower than what we've seen in the past, is that's correct, what would kind of what kind of lead you to believe that what are you guys seeing that would lend to that direction?

40:17 Yes, we think -- the ending deposit balances have continued to increase over the last couple of quarters. We've seen some interesting studies that have found some correlations between the Fed securities holdings. So, we are looking at the timing of the Fed tapering of purchases. That's one of the things that tells us that the balances will stay around a little longer, but maybe -- maybe not necessarily continue to grow at this pace. We're also, as Chuck said, starting to see really increasing appetite in our market for expansion.

40:51 Yes, I'd say, Stephen, it's clear that the industry was very correlated to the Fed's increase in the balance sheet. We think even with tapering that really doesn't pull back on deposits, it will take all the way to the point of pure contraction of that balance sheet before we'll see any challenge there. So, we think it's multiple years of high levels of liquidity here before we start to see that come back out of the marketplace.

41:17 Yes. No, that makes sense. Okay, helpful. And then, kind of thinking about forward rate sensitivity as we hope to be prepared for some higher rates here in twenty twenty three. I think at last update, you guys were screening that like plus seven percent and up hundred basis point-scenario. Any changes to that asset sensitivity, or are you planning to do anything differently? And I guess, what are you assuming for deposit betas moving forward because I would assume it's demonstrably less than your peers?

41:49 Yes. No significant change in our expectations in terms of asset sensitivity. We have an asset-sensitive balance sheet with a strong core low-cost deposit base. So, higher rates would certainly provide more upside to loans and securities yields, while we would expect that continued benefit of low-cost funding. So, we would expect meaningful increases in NII and NIM in the first twelve months of the rate adjustment.

42:17 Yes. And we don't -- I don't -- we don't have the deposit betas in front of us, Steve, and we can get that to you. But that -- what I would state is, as you know about our franchise, it's highly transaction-funded, nearly sixty percent of the deposit base is transaction-oriented. And given the history and longtime nature of the organization. the duration of that funding base is extremely long. And so, historically, and we believe even going forward in a higher rate environment, the ability to lag the rise in deposit cost is probably better than others. 42:50 And kind of the true -- it's kind of -- its rates have gotten low here. It's hard to sort of look between the banks and see the good deposit bases and the not-so-good deposit bases. But we've always had one of the premium deposit franchise in the country, and it's because of the duration that's in that deposit base and the engagement that exists there too, as we've talked in the past. The bulk of our commercial portfolio leans into owner-operated companies of which generally have deeper, more thorough depository relationships with us. 43:21 So, there's a lot of upside for us when rates go up. The deposit base provides a lot of franchise value in that scenario. And I think we'd perform very well in a higher-rate scenario.

43:31 Yes, for sure. That's helpful. Okay. And then maybe just last thing for me, I mean you guys have been definitely ahead of the curve from your peers, in terms of use of digital tools, and kind of implementing technology in the way you deliver to customers. I'm wondering if there is any push into -- we're seeing a lot of these banks pushing the DeFi-type initiatives, pushing to -- I mean, buy now, pay later-types. I mean, there's all these different avenues, I feel like banks, they are moving into point of sale lending and the like. Are there any other kind of technology-driven initiatives that you guys are undertaking that might be new to the story?

44:10 Yes, nothing around DeFi or the pay-now models. We continue to be focused on grill and building a very strong franchise in Florida. And we're doing that through the investments we'd made in data -- data analytics, over time. And then, here in the first quarter, we're going to fully upgrade our digital toolset for our customer base. And we think the combination of that with high-quality bankers building a bank that's super competitive, generates the most value for shareholders over time, we'll continue to carefully watch what's emerging out there in DeFi, and other things. But nothing to talk about today.

44:49 Great. Okay. Thanks for the color. Appreciate again.

44:51 Thanks, Stephen.

44:54 And I have no further questions, I'll turn it back to Charles for closing remarks.

45:12 Thank you, John. I appreciate everybody's time and I appreciate everybody calling into the call, and look forward to twenty twenty two. We'll talk to you soon.

45:21 Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating and you may now disconnect.