Welcome to Seacoast Banking Corporation's Third Quarter 2022 Earnings Conference Call. My name is Cheryl, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you have a question, please 1 on your touchtone phone -- before we begin, I have been asked to direct your attention to the statement at the beginning of the company's press release regarding forward-looking statements. Seacoast will be discussing issues and 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 the act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Schafer, you may begin.

Thank you, Cheryl, and thank you all for joining us this morning. As we provide our comments, we will reference the third quarter 2022 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracey Dexter, Chief Financial Officer; and Michael Young, Treasurer and Director of Investor Relations. Let me start by thanking the entire Seacoast team for their tremendous effort in recovering from Hurricane Ian last month. All Seacoast branches opened within a few short days and the group quickly transitioned to assisting our customers and communities. Additionally, the team properly reverted to closing the Drummond and Apollo acquisitions and 1 week after the storm pass, they completed the technology conversion at Apollo, of which I'll say a little more in a moment. I'm very proud of our hard work and resilience and for supporting our communities in the face of such a challenging weather event. And to comment further on Hurricane Ian, we reserved a little over $2 million during the quarter, related to the storm based on an analysis of our exposure in the hardest-hit counties of Florida and an outreach program executed by our banking team. The results of the qualitative feedback from our bankers and customers and the quantitative analysis performed by our credit analytics team has been favorable, leading us to believe the impact on Seacoast may be limited given the path of the storm, which primarily impacted Southwest Florida, where Seacoast has less exposure when compared to the remainder of the state. We expect to have a more complete understanding of the impact by the end of the fourth quarter, but at this point, we believe any impact on our financial results will be inconsequential. Turning to the third quarter results. The Seacoast team delivered another outstanding quarter of earnings…

Thank you, Tracy, and Cheryl, I think we're ready for Q&A.

[Operator Instructions] our first question comes from Brandon King from Truist Securities. Your line is now open.

Thank you, good morning.

Good morning, Brian.

Yes. Good moribng. So I want to start on deposits. I understand you're bringing on a sizable amount of deposits with acquisitions. But I wanted to know what was the outlook for organic growth the positives in the near term?

Hey, Brandon, this is Tracy. Outflows in transaction accounts in the third quarter really didn't appear to be largely rate-driven I kind of broke down the balances there. But we expect to continue to see headwinds to overall deposit growth in the fourth quarter. We do expect to see others move quickly on deposit pricing and just general absorption of liquidity across the system will likely be a factor. But all that said, Q4 is typically an active and pretty strong quarter for deposits. with seasonal inflows for us. We're conscious of the velocity of change in the market, but we'll continue to be intentional in our actions. We're competitive and focused on relationships -- so far, we've been willing to let some of the transaction and rate focus deposits go, but we'll just continue to be intentional about that.

Okay. And then with the acquisitions coming online and then being closed, could you update us on what the marks were and kind of what you're expecting for purchase accounting accretion in the fourth quarter?

Yes. It's all pretty recent. So we're still in the process of finalizing the mark. We really don't have anything to share at this point about the October 7 close.

Okay. And the high 390 net interest margin, that includes -- that's on a reported basis and on a core basis?

The high 3.90s margin is a core basis.

Core. Okay. Okay. All right. Well, I'll stay back in the queue. Thank you for taking my questions.

Thank you, Our next question comes from Stephen Scouten from Piper Sandler. Your line is now open.

Hey, good morning, everyone. Guys, I'd love to hear what you're seeing more holistically throughout your environment loan demand. It looked like the pipelines were back up a bit quarter-over-quarter, which is nice to see. So just I'm kind of wondering what you're hearing from your customers, how you're thinking about demand into the next quarter and into '23, given the environment and all we're seeing in here?

Yes, when you step back, I mean, I guess I'll start with -- I announced the time to be thoughtful as we move through this period. And we continue to be very deliberate in what we're willing to put in the portfolio and where we're not. And kind of looking back over time, we've talked about our intention to be a conservative lender. -- remain disciplined, remain focused on diversity. And so I think that's positioned us incredibly well as to where we are. A lot of what we've seen coming in, we've done a lot of hiring over the last 18 months. And so we see material relationships moving over. What gives me a lot of excitement is the fact that not only are we bringing over the loans we're bringing over deposits, wealth and other full sort of relationships out of other organizations. And so I think that, that momentum continues. We've put together an incredibly strong commercial banking team over the recent period. continue to grow that team. And at least looking into the coming quarter, we expect still high single-digit growth rate. We tend to be very intentional on maintaining underwriting standards and in some asset classes, we've backed away from given where we are, and we continue to be very careful around monitoring the ability for operating companies to manage margins in an inflationary period. But ultimately, we continue to be cautious, thoughtful, but have momentum going here in the fourth quarter. When you look out into the coming year, it's tough to give any further guidance, we'll see how things continue to play out through the fourth quarter. But I do think now is the time to be cautious now is the time to be thoughtful -- and the good news is, I think that as everybody somewhat is moving back to a more conservative position, it opens up the ability for us to get structures that we like and pricing that we like. And so we remain disciplined early through this cycle. This allows us to be thoughtful as we move through this part of the cycle- and ultimately get the risk-adjusted returns where we want them.

Yeah, that's great color. And then are you seeing any kind of changing dynamics from competitors that last comment maybe so. Are you seeing any I don't know, whether it's the larger regional banks or smaller banks or what have you pulled back at all to a degree that does create opportunity for you guys?

There definitely is a significant pullback in commercial real estate across the markets. I would say that you've seen commercial real estate spreads move widen way out. And we definitely see the competition pulling back, Stephen.

Okay. Great. And I think I know the answer to this question based on some of your earlier commentary, but it would seem to me that the strength of Florida in a weakening environment nationally would only shine through more. I mean it seems like population flows are still strong and the real estate market is still relatively strong there compared to the rest of the country. I mean would you expect your deposits and your geography to be a big differentiator in a maybe less certain environment?

So what I like about where we are is we have optionality as we move through time, right? So if you step back and look at the position of our balance sheet, and look at the capital we carry, the reserves and the allowance, the reserves and the purchase marks, the strong, diverse core customer base and the discipline we've executed over time -- and then you combine that with what Florida has been, particularly over the last 3 or 4 years, if you look at the amount of wealth accumulation that's coming to market, the economic drivers I definitely think that Florida outperforms through this cycle. And so what gives me comfort is we do have the strength in this balance sheet. We have the optionality that will provide opportunities again to take advantage of organic growth through well-priced, well-structured credit relationships, deposit relationships as well as potential acquisitions over time. And so I think I think we are about as positioned as best as we can be. I think this is a moment where a company like ours tends to perform -- and when you step back and look even more broadly as we pull these 3 deals together, -- our ultimate goal is to come out the other side of these deals with a 160-plus ROTA on the back half of the year after we execute against the cost saves. So when you have that profitability momentum, the capital and the position of strength. And then the last thing I'd add is just the momentum with our culture and the company and the desire to be a part of our company, we're in really good shape. And -- but as we move through this period, we need to be thoughtful, cautious conservative and be very aware of the risks that are emerging in the economy.

Yes. Great color. And then if I could squeeze in one last question, just kind of around the pro forma balance sheet with Professional. I see they're up to around a 90% loan-to-deposit ratio. Do you guys have a feel for where - with the two recently closed deals and then professional, where you might be on a loan-to-deposit ratio perspective and kind of how you have to think about I guess, protecting your deposits with the absorption of that?

I mean we're in the mid- to high 70s, probably when you put all 3 organizations together as we move through this period. The good news is on all of our transactions, they're tracking with the models when you look at the income that's being generated in all cases, just like you're seeing across the banking system, balance sheets tend to be a little smaller, but margins tend to be a lot higher. And so I think we're in good shape going into this period. Their loan to deposit ratio is a little higher, ours is a little lower [indiscernible] is certainly way lower. And so I think when you put it all together, it really probably doesn't move the needle from where we are much, which still gives us a lot of liquidity as we move through time to redeploy in the loans.

And Steven, this is Michael. I was just going to add that really we're just working to optimize the rate volume mix as we move forward. So we're obviously in a very dynamic environment. So we'll continue to monitor that and manage through that to just optimize profitability and returns to shareholders.

Perfect. Appreciate the color. It sounds like a lot of good things to come.

Thank you. Our next call – questions comes from Brady Gailey from KBW. Your line is now open.

Thank you. Good morning. So I just want to be clear on the expense guidance, the $72 million to $77 million. So that includes the 2 acquisitions and that excludes the intangible amortization, does it also exclude merger charges?

It does. It excludes merger charges.

Okay. So it seems like that's just a pretty big step up kind of from where consensus was. I hear you pointing to the hiring that you've made. But any other -- I mean, is it just the hiring? Or is there any other inflationary pressure that's pushing those expenses higher?

A couple of things. I think consensus didn't fully contemplate a full quarter's worth. So given that we had guided that we closed in Q4, we closed early. So the other sort of issue is drum and I think what consensus picked it up, doesn't file a FRi9C,so it's hard to see the full consolidated, which includes the insurance sub. So when you work the math all the way through that, I think we're kind of right on our run rate. And just kind of to talk about expenses in Q3, looking back, we took the opportunity to bring in what I believe to be probably the best group of people up in sort of the I-75 corridor. -- very solid, well-performing well-executing team that's probably our largest team we've acquired to date. And so that impacted the quarter with some onetime signing bonuses, et cetera, but the payback on that will be material in terms of our ability to to grow in that market. When you bolt that together with Drummond, it's a really nice group to put together.

And when you think about I know you guys are always looking for the next acquisition or looking for the next higher opportunities to keep up the growth. Do you think you will still be very focused on the hiring effort. Like do you think that expense growth could be a little higher just as you - I mean I know it will pay off over time, but do you expect to continue to hire at kind of an above-average pace here?

I think it probably slows, Brady, to some extent, given where we're going into potentially a slower economy in all likelihood, we won't be hiring at the pace we are. I think there will be hires along the way, but I think there will also be some cost that comes out along the way. And so I don't think it moves at the pace it is over time. That being said, if we see great opportunities, we're going to take them. And the market for that has been better than I've ever sort of seen in many, many years. And so we'll be careful and cautious. Ultimately, again, just kind of pointing back to coming out of the other side of the deal, I'd like to be at north of ROTA of 160. I think that will generate strong operating profits, strong returns as we move through time. And we'll continue to manage towards that. We've got to balance the cost out through the deals. We've got to manage the investments we're making for growth. But when you go through all the wash of that, that's where I want to land.

And Chuck, you guys have been so active on the M&A front over the last few years. Professional is a fairly large transaction for you all. I mean, do you take a breather after you close professional on the M&A side, especially considering kind of the economic uncertainty? Or do you keep on going on that front?

Yes. I describe it this way. Our short-term focus right now is integrating the 3 banks. I mean that's got to be our -- or that got has to be our focus. And we'll potentially look at more deals as we move through next year. The challenge is right now, given the dynamic environment modeling deals right now is particularly challenging when you look at deposit funding cost and a weaker economy. So it's possible, but for now, we're focused -- sort of laser focused on integrating the deals and coming out with a strong profit profile.

[Operator Instructions] Our next question comes from David Feaster from Raymond James. Your line is now open.

Good morning, everybody. Maybe can we just touch a bit on the middle market expansion efforts and whether the new hires you've made have been to kind of support that. And I guess just -- any updates on the treasury management build-out? And anything else that you may need in order to support that expansion more towards the lower end of the middle market and support some large, more sophisticated borrowers?

Yes. As we've talked, we've been focused on executing against the lower end of middle market. moderate-sized operating companies has been a target for us. And we're seeing very good reception in that regard. A fair amount of the commercial banking hire when we've done over the last year, our C&I operating focus hires, including the team we just put inside the company. And so we've made great progress on that. We continue to onboard relationships. I'm very pleased with our progress. I'd say we're about 2/3 to 3/4 of the way through the treasury build. There's probably a little more cost to come on that. It's not anything material, but we still got some build to do there. But as we go into this period and when I look forward into what probably is the most important thing we can be focused on, which is funding and deposits, having a really well put together C&I-focused commercial banking team and then complementing that with really strong treasury officers in combination with a lot of the investment we made in technology late and early late last year, early this year, I think it really does put us in a position to begin to take material market share over the next years. And we've made real progress there, David.

That's great. Good to hear it. And then asset quality remains phenomenal. You just -- you always have a great pulse on the local economy. And you talked about some of the competitive dynamics that you're seeing in CRE. I'm just curious -- as you look out there, I mean, we're not seeing anything necessarily in your book, but is there anything that you're watching more closely? Are you starting to see higher rates impact cap rates at all? And I guess any other trends within your portfolio or even the industry from a competitive standpoint that might be worth pointing out?

I feel really good about our book. I think it's performing extremely well. I feel good about it over the cycle. I think we've been very focused on maintaining discipline I would say cap rates really have not yet adjusted to the reality of higher rates. I still think that is a risk. Probably the biggest risk to all banks right now is higher long moderate to long-term rates on the treasury curve. If that were to move up, I think the impact on commercial real estate valuations would be an issue we would be dealing with. I think you need to be really cautious there. We've really sort of pulled out a nonmedical office kind of pulled out of retail unless it's truly credit tenant anchored -- we pulled out of hotels. We're not bringing on any builder lines, ALS, land, very cautious with self-storage. We've taken a pretty conservative approach on what we're willing to do -- and with the potential impact of higher rates on cap rates, we're expecting a lot more equity in transactions. And basically demanding more equity and transactions on the commercial real estate side. So it's definitely a -- it is not an environment where you want to get over your skis. It's not an environment you want to be driving really high growth rates. It's an environment to be thoughtful and cautious and make sure you have the right sponsors. And importantly, probably most importantly, along with sponsorship would be having underwriting structures that will protect the bank through cycles. And so -- it's a constant conversation here. It's a key focus of ours. That being said, in Florida, things remain very benign. You can see by our portfolio past dues are well contained, classified criticizes keep coming down. It's probably the most pristine credit environment that we've ever seen. So it's a concern about the future, but not the current period.

And David, just to rewind a quarter or two as well, when other peers were growing at much faster rates we were stressing a lot of our CRE deals at those higher kind of leverage points and a lot of those pushed out of our pipeline, so we grew slower in the prior 2 quarters. Now we're seeing that market come back to us where people are willing to be accepting of those higher amounts of equity that we force in the deals.

That's a good point. And then last one for me, just maybe touching on rate rate sensitivity. You guys have done a great job driving margin expansion. The balance sheet is naturally rate sensitive, right? I'm just curious, how do you think about managing rate sensitivity going forward? Obviously, we've got another 75 supposed to be coming next week and probably another 75 in December. But - just curious how you think about managing rate sensitivity and potentially lock in some of this in? And how you would look to approach that?

Yes, we continue to be really thoughtful there and careful, David. It's -- over the last couple of years, we've demanded a lot of our commercial real estate go to swap and therefore, saw a much bigger portion of our portfolio moving to variable. On the deposit side, we really followed the national banks and have been slow to reprice deposits, basically focused on profitability. We've always been an asset-sensitive organization, the sort of crown jewel of the company is the deposit franchise. I think the deposit franchise will outperform. That being said, like Tracy talked about earlier, it is definitely got more dynamic. We're seeing rate specials from the national banks and things hitting the market now. It's definitely gotten more competitive -- but ultimately, we'll see the margin expand into this quarter, maybe a little bit into the first quarter, and then we'll have to see where rates go. -- beyond that, it's hard to say. But we'll continue to be thoughtful there. We've been thoughtful in managing the duration of the investment portfolio. Most of the liquidity at this point will be used to fund loan growth as we move through time. And we'll focus on driving strong margins and strong profits.

That’s helpful. Thanks, everybody.

Thank you. Our next question comes from David Bishop from Hovde Group. Your line is now open.

Good morning. Thanks for taking my question. How we should think about the loan funding into next year, you mentioned a lot of the cash has been used up. Given what you're seeing in terms of the competitive backdrop for deposits and such, especially with the state the wholesale funding, maybe broker CDs play a figure role in the near to intermediate term in terms of funding that group?

I think we still got plenty of liquidity to fund growth for a period of time. The acquired balance sheets will bring liquidity to fund growth. we'll be able to reposition the bond books and use that liquidity for growth with time. And so I think we still got a long road ahead before we're going to get into brokered or other higher cost funding sources. That being said, we probably will begin to compete more with rate in the marketplace with our core customers. I do expect us to continue to move some of our deposits over into our Wealth Management business, just it's the right thing for the customer when you can ladder CD Air ladder [ph] treasuries for those customers. But I don't think we'll be dipping into core for period of time. or two, sorry, into noncore related or wholesale funding for a period of time. Got it. And I think Tracy had mentioned maybe the September core loan yields. I think earlier on the call, any chance you have the cost of deposits at the same time frame? And that's all I had?

Yes. We've been a little cautious to give a guide on that, just given the dynamic environment. I'd just point you back to the NIM guidance, as you model it out, David, it's really too dynamic to get too specific on cost of deposits. I still think we'll be better than most, and I don't think you'll see a dramatic change, but we do expect it to go up.

I would I'll just add that our cost of deposits wasn't meaningfully different at the end of the quarter than what we reported for the full quarter.

Thank you.

And we have no further questions in queue. At this time, I will turn the call back to you Mr. Shaffer for closing comments.

Okay. Thank you, Sheryl. I appreciate everybody's time this morning, and we'll talk to everybody soon.

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