Q2 2021 Seacoast Banking Corporation of Florida Earnings Call

July 23, 2021

[music].

Welcome.

<unk> Banking Corporation second quarter of 2021 earnings Conference call. My name is Vanessa and I will be your operator.

Before we begin I have been asked to direct your attention to the statement contained at the end the companys release regarding forward looking statements.

<unk> 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 I will now turn the call over to Mr. Chuck paper like event and CEO of Seacoast Bank.

Thank you Vanessa and thank you all for joining us this morning.

As we provide our comments we have referenced the second quarter 2021, earning slide deck, which can be found at seacoast banking dot com.

With me. This morning is Tracey Dexter Chief Financial Officer.

Jeff Lee Chief Digital Officer.

During the quarter the seacoast team generated strong operating performance growing tangible book value per share an annualized 11% from the prior quarter to $17.8 wild.

While distributing a dividend of <unk> 13 per share to our shareholders.

The adjusted efficiency ratio was 53, 5% in line with prior guidance and the adjusted return on tangible common equity ratio was $14.714.2 7%.

We continued to manage our capital prudently focused on consistently building shareholder value over the long run while maintaining a fortress balance sheet. Additionally, we continued to deliver peer leading operating efficiency, while making investments to position the company for the accelerated growth we see in the coming periods.

The Florida economy continues to expand meaningfully with strong inbound population growth driven by low taxes of business friendly environment and of post pandemic work from anywhere economy.

Last year, Florida population grew by 388000 residents of 1061 people a day in Florida unemployment rate continues to improve each month, most recently 4.9% compared with the national unemployment rate of 5.9%.

Corporate relocations continue to occur with many organizations, bringing large portions of their staffs of Florida.

In particular, South Florida has become a hotspot for banking financial services and technology relocations, including firms such as Elliot management, Blackstone and Goldman Sachs and in Orlando for example, Deloitte KPMG have made significant investments along with many other large corporations.

This strong economic backdrop of population growth and corporate relocations helped support a robust quarter for deposit growth interchange income and notably a growing commercial pipeline of.

Additionally, the wealth business continued its vigorous path toward generating another $133 million in assets under management this quarter, taking us to $1.2 billion in AUM at quarter end.

Remarkably deposit transaction accounts have grown $860 million from yearend or 22% demonstrating the underlying quality and strength of our customer franchise in Florida.

Loan Outstandings, excluding PPP in loans held for sale declined $6 million from the prior quarter essentially in line with our guidance of flat growth for the second quarter.

The commercial pipeline exiting the quarter is strong and growing our late stage commercial pipeline was 322 million at quarter end up 34% from the prior quarter end and up 175% from the prior year same period.

We expect loan growth, excluding <unk> to be in the high single digits annualized in Q3, and Q4 and Tracey will elaborate further on her comments I.

I would also like to specifically note. Despite the pressures the excess liquidity is putting on the net interest margin of the industry, we will not waver from our strict credit underwriting standards, and we will focus on disciplined and appropriate growth.

Our asset quality metrics remained strong with NPL and NPA ratios moving favorably quarter over quarter and we are pleased with the credit portfolio performance and continue to see no material issues on the horizon.

During the quarter, we continued to expand our commercial banking leadership team in the Tampa St. Pete MSA and we expect this to lead to further build out of banking talent in that market.

This investment follows the significant expansion of our commercial banking team in Orlando late last year, and we continue to have multiple active conversations with bankers and teams occurring around the state.

And we expect numerous tap further talent announcements in the coming quarters.

Additionally, we completed the significant enhancement of our Encino commercial lending platform, which will help facilitate faster turn times and further our speed to market.

We expect that we expect to close the legacy Bank transaction. The first week of August and legacy is ahead of our modeled assumptions of the deal announcement with loans deposits and net income all ahead of plan and.

And as of them as a reminder, we pick up of very strong lending team and the legacy transaction with extensive experience in South, Florida, and we continue to have multiple conversations with potential acquisition targets across the state of Florida.

And to conclude the company recorded another quarter of impressive performance generating disciplined growth and franchise value.

Our fundamentals remain very strong with a well capitalized low risk balance sheet strict underwriting standards and a very attractive customer franchise well positioned for growth.

Our goal remains to continue increasing market share in the robust, Florida marketplace in a disciplined manner by focusing on growing value, creating relationships, improving digital customer experiences and driving greater productivity across the franchise with.

With the robust growth and transformation occurring in Florida, We believe our plan of a consolidating market share across the state will drive significant value for shareholders in the long run. We are excited about the future ahead, and we're excited with the momentum occurring across the state I'll now turn the call over to Tracy who will walk through our financial results.

Thank you Chuck good morning, everyone.

Directing your attention to the second quarter results, let's start with slide 5.

Net income was $31.4 million for the second quarter on a GAAP basis, an increase of 25% year over year.

On an adjusted basis, which excludes M&A and branch consolidation charges net income was $33.3 million, an increase of 31% year over year.

Earnings per share on a GAAP basis increased to 56 cents compared to <unk> 47 in the prior year.

Adjusted earnings per share increased to 59 from 48%.

On a GAAP basis, we reported $1, 48% return on tangible assets and $13.8 8% return on tangible common equity on an adjusted basis second quarter <unk> was $1.5 2% and Aro TCE was 14, 7%.

As we continue to grow our capital base, it's worth mentioning that if the second quarter's tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%. Our adjusted return on tangible common equity would be 19% increasing from 16, 7% in the second quarter of 2020.

Tangible book value per share increased to $17.8.

Up from $16.62 last quarter, and an increase of 13% over the prior year inclusive of a cash dividend of 13 issued during the second quarter.

Total loan pipelines increased by 83% from this point last year, including an increase of 175% in commercial loan pipeline in line with a strong Florida economic recovery.

We continue to invest in commercial talent and technology, while not wavering on our strict credit underwriting policy.

Looking forward, we see significant opportunity to continue expanding commercial banking talent across the state.

Credit quality remains strong and we continue to see low levels of charge offs and declines in nonperforming assets.

As a result, we released $4.9 million in loan loss reserves this quarter.

The cost of deposits decreased by another 5 basis points to 8 basis points.

On the wealth management team continues to reach new records with year over year growth of $451 million in assets under management, bringing total AUM to $1.2 billion and.

And another record quarter in interchange income, which reached $4.1 million as we continue to see higher transactional volume and higher per card spending.

Turning to slide 6.

Net interest income on a fully tax equivalent basis decreased 1% sequentially to $65.9 million and the net interest margin declined 28 basis points to 3.3%.

I'd like to take a moment here to break down the 2 drivers of this decline first we saw meaningful increases during the quarter in near zero rate transaction accounts.

Transaction accounts grew 35% during the quarter on an annualized basis.

This was the result of both the Onboarding of new relationships and additional cash balances held by current relationships.

These higher deposit balances strengthen our borrowers balance sheets and the growth shows the incredible economic expansion that is happening in Florida.

While the resulting increase in our cash balances is impactful to the margin. We are pleased with the continuing growth of our high quality customer franchise.

Overall growth in our cash balances this quarter accounted for 23 of the 28 basis point decline in margin.

The other issue that contributed to the decline in net interest margin compared to the prior quarter as lower PPP interest and fees on lower balances of those PPP loans continue through forgiveness.

Lower PPP accounted for the other 5 basis points of the 28 basis point decline.

Looking at other components of the net interest margin, we're very pleased with the resilience of the securities and loan yields despite continued falling rates in the quarter.

We've been prudent in deploying excess cash with rates remaining low.

<unk> added a net $253 million for the Securities book this quarter and the yield on the securities portfolio dropped only 2 basis points.

In the loan book, excluding the effects of PPP and accretion of purchase discounts loan yields decreased only 2 basis points to 4.3%.

Offsetting and favorable is improvement in the cost of deposits, which decreased by 5 basis points to 8 basis points in the second quarter, reflecting our continued repricing down of interest bearing deposits and time deposits.

Looking ahead to the third quarter, we expect the cost of deposits to remain in the high single digits, including with the Onboarding of the legacy Bank of Florida acquisition in the first week of August.

We expect that there will continue to be downward pressure on the net interest margin in the third quarter, given the continuing effect of excess liquidity and lower add on yields.

Moving to slide 7.

Adjusted non interest income, which excludes securities gains and losses was $15.4 million lower by $2.4 million from the previous quarter and an increase of $1.6 million from the prior year quarter.

We continue to focus on driving non interest income in particular, we're very focused on building of wealth management line item given its high return capital and the value it adds to our commercial relationships.

The wealth management team continues to deliver strong growth and successful relationship expansion with an increase of $133 million of AUM this quarter and an increase of $451 million from this time last year.

As a result wealth management income increased to a record $2.4 million this quarter.

Other increases from the prior quarter include an increase of zero point $3 million in interchange revenue from higher transaction volume and higher spend.

In our mortgage banking business as expected revenue was lower on lower refinancing demand and tight housing level and inventory levels.

However, the pipeline has stabilized and this team will continue to contribute meaningful results, having built a strong foundation of relationships with local real estate professionals and other Florida partners and a reputation for delivering the highest service levels. We.

We will continue to capitalize on low interest rates and on a strong Florida housing market.

In the category of other income results are lower by comparison as the prior quarter included $1.7 million in 1 time collections on previously acquired loans.

We expect SBA volume to improve in the coming quarters with the focus shifting away from PPP.

And we purchased $25 million of bully late in the <unk> in the second quarter with of tax equivalent first year yield of 4.5% that will positively impact future periods.

Looking ahead, we expect overall non interest income in the third quarter of approximately $16 million as we continue to focus on growing our broad base of revenue sources.

Moving to slide 8.

Adjusted noninterest expense for the second quarter was slightly below the guidance range, we provided and totaled $43.4 million lower by <unk> 5 million from the prior quarter.

Addressing all changes on an adjusted basis salary.

Salaries and benefits expense was flat, reflecting the offsetting effects of lower 401, K and other benefits compared to a seasonally high first quarter and lower deferrals of PPP loan origination costs compared to the first quarter.

The PPP program ended early in the second quarter, and the lower originations impacted deferred costs by $1.9 million quarter over quarter.

Legal and professional fees were lower by <unk> 3 million and occupancy related charges were lower by <unk> 3 million much of which is driven by the 3 branch consolidations in the first quarter.

Looking ahead, we expect to maintain our expense discipline as we always do we expect third quarter expenses, excluding the amortization of intangible assets and including the addition of legacy Bank of Florida to the franchise and investments in commercial banking to be in the range of $46 million to $47 million.

Moving to slide 9 the adjusted efficiency ratio in the second quarter increased to 53%, reflecting lower PPP in mortgage banking revenue of.

Offset by higher wealth and interchange revenue lower cost of deposits and lower noninterest expenses.

Reiterating the guidance, we provided last quarter, we continue to expect the full year 2021 efficiency ratio to be in the low to mid fifties.

Turning to slide 10 loans outstanding excluding PPP loans decreased this quarter by only $6 million.

For the first 6 months of 2021 loan production has been in line with our expectation entering the year and in line with prior guidance.

We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines, regardless of the level of liquidity we are carrying.

Florida is economic recovery is now well established and recent talent additions and investments in technology position as well as loan demand returns.

This is evident in our growing pipeline with the commercial pipeline higher by 34% compared to March 31, and the consumer pipeline higher by 13%.

Across our markets and products, we are seeing increasing loan demand in line with Florida strong economic recovery.

In residential lower pipelines reflect slowed refinance activity and tight housing inventory levels.

During the quarter, we also purchased of $38 million residential pool.

We will continue to be opportunistic where we find wholesale loan transactions that meet our underwriting criteria as an alternative to investment security purchases and have already identified additional on purchase pools that we expect to close in the coming quarter.

Looking forward, we expect organic loan growth, excluding PPP to be in the mid single digits for the coming 2 quarters.

And in addition, we expect to add opportunistic wholesale pool purchases that meet our underwriting criteria that should take us to annualized growth in the high single digits in each of the coming 2 quarters.

We expect organic loan growth to return to pre pandemic levels in 2022.

We're pleased to report loan yields this quarter were excluding PPP and accretion of purchase discount we saw a decrease of just 2 basis points to 4.3%.

We expect loan yields to further modestly declined in the third quarter with lower add on yields assuming no change in the rate environment and increased originations.

Turning to slide 11.

A graphic shows our year to date summary of PPP activity.

We originated $256 million year to date under the renewed program primarily in the first quarter.

We processed $457 million and forgiveness year to date, including $243 million in the second quarter, bringing principal balances of PPP loans outstanding at June $30 million to $375 million.

Overall since the start of the original program, we've collected $27.6 million in SBA fees of.

Of that we recognized 17 million life to date and have $10.6 million in fees remaining to be recognized in future periods.

Turning to slide 12, highlighting the diversity of our exposure and concentration levels well below regulatory guidance.

Our portfolio is broadly distributed across various asset classes.

Stabilized income producing commercial real estate represents 26% of loans outstanding owner occupied commercial real estate represents 20% of the portfolio.

And residential real estate comprises 23% of the portfolio.

Approximately 74% of our commercial portfolio, excluding PPP is secured by real estate with borrowers that have meaningful equity in their investments and lower loan to values.

For years, we've consistently managed our portfolio to keep construction and land development loans and commercial real estate loans, well below regulatory guidance.

At June 30th that represented 22% and 150% of risk based capital respectively.

Our loan portfolio is diverse and broadly distributed across categories with an average commercial loan size, excluding PPP of 420000.

Turning to slide 13 for the securities portfolio.

Purchases in the second quarter were primarily agency Cmos and the lower yield of those additions resulted in a decline in yield on the portfolio of 2 basis points.

<unk> in the yield curve drove unrealized gains higher during the quarter.

We're carefully making new investments.

In bonds that have lower extension risk with shorter durations.

Looking forward to the third quarter, we will continue to be prudent on how much cash we will put back to work in this portfolio and expect net additions of $200 million to $250 million.

We expect that these will generally be assets with a 4 year duration that will roll down the curve, providing liquidity to invest at higher rates as we go through time and we're currently seeing add on yields of approximately 135%.

Turning to slide 14.

Posits outstanding were $7.8 billion, an increase of $450 million quarter over quarter, and an increase of $1.2 billion or 18% year over year.

Transaction accounts represent 60% of total deposits and have grown 30% year over year with factors like PPP and other stimulus funds contributing to higher customer balances.

We're pleased with the growth in deposit balances for the first half of the year. Despite the margin pressure.

This growth demonstrates the strength of our customer franchise of growing Florida economy, and our ability to win share in the marketplace.

And on slide 15, the cost of deposits has dropped further from 13 basis points in the first quarter to 8 basis points in the second quarter.

Looking ahead to the third quarter, we expect the cost of deposits to remain in the high single digits inclusive of the addition of legacy Bank of Florida.

Also illustrated on this slide is the growth in deposits per branch, which reached 163 million at June 30 of 2021, an increase from June 2019 of 44%.

The trend in the chart is impressive as our digital and analytics competency continues to provide opportunity to drive operating efficiency across our retail franchise.

Moving to slide 16, the wealth management business continues to deliver tremendous growth in assets under management, which increased 13% from the end of last quarter and 64% from this time last year.

The team has done a remarkable job building a high net worth family office model and partnering with our commercial team generating value for our most profitable clients and delivering another record revenue quarter.

We will continue to invest and focus on building out wealth management as we move forward.

Moving to slide 17.

Allowance for credit losses under Cecil reflects our estimate of lifetime expected credit losses, which includes our expectation that some loans will migrate into loss through the cycle.

The allowance as a percentage of total loans, excluding PPP declined to 1.6% down from $1, 71% in the prior quarter.

This is a reflection of improvement in economic conditions and resulted in us recording of reversal of provision expense this quarter.

We also have $24.4 million in purchase discount on previously acquired loans that will be earned over the life of those loans as an adjustment to yield.

As we approach the expected closing of the acquisition of legacy Bank in early August I'd like to provide a reminder, about the accounting for loans will acquire.

The accounting rules require that we record a day 1 provision on loans not designated as credit deteriorated net non PCI loans and that represents the large majority of the loans in legacy portfolio or.

Our initial estimate of that day, 1 provision was approximately $7.5 million I will point out, though that the actual day, 1 provision and the overall portfolio valuation adjustment may be somewhat lower than the initial estimate provided as economic conditions have improved from the time of announcement of the transaction.

The bank's performance has exceeded our expectations and the portfolio has grown.

We will complete the full updated portfolio of valuation as of the closing date, but wanted to at least point out that we do expect to record a provision for loan losses associated with the acquisition of legacy bank in the third quarter.

Turning to slide 18 on asset quality.

Credit measures are strong and continue to improve.

Net charge offs in the second quarter were only 655000 and the level of nonperforming loans decreased by $2.4 million to $32.9 million, representing 0.61% of total loans.

Criticized loans declined to 13% of total risk based capital at June 30.

Performance on loans previously provided with payment of accommodations has remained strong and we have only $7 million in loans with active payment of accommodations.

The overall allowance for credit losses at June 30 is $81.1 million and allowance coverage, excluding PPP loans decreased 11 basis points to 1.6%.

We maintained a prudent level of allowance and we'll continue to revisit this estimate throughout the remainder of 2021.

Turning to.

Slide 19, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet.

Tangible book value per share is $17.8.

An increase of 13% year over year.

The tangible common equity to tangible asset ratio was 10, 4% at the end of the second quarter and has consistently been among the highest in our peer group.

The tier 1 capital ratio was 18, 3% and the total risk based capital ratio was 19, 2% at June 30th each increasing over the prior quarter, even with the impact of the new shareholder dividend.

Return on tangible common equity was 14, 3% on an adjusted basis.

And finally on slide 20.

Looking back from the beginning of 2017 to today, we have achieved a compounded annual growth rate intangible book value per share of 12% driving shareholder value creation and successfully navigating the pandemic.

We've positioned this franchise with a foundation of strong liquidity and capital from which we will execute on our strategic growth initiatives and optimize the opportunities of this strong Florida economy.

We look forward to your questions I will turn the call back over to Chuck.

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

Thank you Sir we will now begin our question and answer session.

Have a question. Please press Star then 1 on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign or the Haskins and if youre using a speakerphone. Please pick up the handset first before pressing the numbers once again with your question. Please press Star then 1 on your Touchtone phone and we have our first quest.

From David Feaster. Please go ahead Sir.

Hey, good morning, everybody, Hey, David Good morning.

AMA.

The Florida economy has been doing very well economic activities improving its great to hear of a commentary on the new hires on the pipeline build I'm just curious as you look at your pipeline and the originations how much of the growth that Youre seeing you think each from existing clients.

Being more active and more confident in the economic recovery and demand of new credit and then how much do you think is from these new hires or client migration from the Pvp just curious.

Some of the dynamics within that.

Great question, David Thank you.

What's exciting at least over the last couple of quarters as we are starting to see.

Customers come off the sidelines there were sitting on a large portion of the cash and reinvest in our business, we're seeing that kind of across the state, particularly in our.

On our operated companies, which is great to see and we're seeing more CRE opportunities that continue to fill the pipeline I would say that it's a mix between both current customers, which is the amount of activity. There is growing and importantly, a lot of it is coming from the new hiring the Orlando.

<unk> team that we acquired late last year is now well established and sort of as in their growth side of that trajectory and we've just brought on a new team over in the Tampa St. Pete market I expect further of bankers to follow there and build out as we move through time and so it's a mix but both.

Both current customers and prospects in the velocity, that's going on there it gives us some confidence that.

We're going to see sort of organically mid single digit growth. The next couple of quarters, and then return back to high single digit growth moving into next year. So we're feeling good where we're at we're right on where we would thought we were be this time of year right on our guidance.

And we're starting to see the acceleration, we're expecting 2022 to be a much better year for loan growth.

That's terrific.

And I just wanted to touch base on M&A I appreciate your commentary on the prepared remarks.

Look in the low has been a bit more competitive in Florida.

An interesting change from out of state buyers debt.

Maybe hadn't been expected just curious the pulse of the M&A landscape.

Strategy near term, how pricing and conversations are trending and what geographies. We're most focused on.

Thank you David.

I would say we've been very active in the M&A space as you know over the last.

8 years, we've done 11 transactions, we've done 2 or 3 transactions of year over that period of time I would expect that pace to continue.

To have multiple conversations around the state.

I think we've established ourselves as a high quality acquire a good integrator and we know, Florida and that goes a long way in understanding the management teams that were trying to acquire and the banks were acquiring and I think there's a lot of opportunities. We move forward. There's 87 banks remaining in Florida I would say is we.

We've got larger and we're growing about half of those makes sense. So there's 40 plus opportunities in the state.

And then lastly, I would say we continue to be focused on Naples of the Tampa the entire 4 region.

All of Central Florida at large and the entire east coast of Florida from Jacksonville to South Florida.

As we continue to build what we think is Florida bank, extending our broward presence to the adjacent Miami Dade market will make sense at some point as we move forward, we've entered that market organically over the last couple of years and we've been focused primarily on domestic commercial businesses. There, but there are a few well run commercial banks in that market with.

Deep roots that can make sense for us as we move through time.

So the combination of what's happening in the state of the growth in the economy. The M&A I think when we think about building shareholder value.

Concentrating market share in and around the entire state I think makes the most sense from a long run and we are very focused on getting that done for our shareholders.

That makes a lot of loans and will flow for.

The deal that is pending right now we're going to be pushing up close to that $10 billion of ASO threshold I mean Im curious how you think about 10 billion doesn't seem as daunting as it used to be but I'm. Just curious your thoughts on crossing it organically opportunity that you might have.

Stay under 10 billion near term.

In delayed Durbin and then just could you remind us of the impact of Durbin on the bank.

Thank you David Yes, obviously with where we are at $9.3 billion and the addition of legacy will be approaching $10 billion as we get to the end of the year. We do have a number of options to move deposits off balance sheet as such we will not or we don't expect to cross $10 billion in the current year.

We do expect to cross in the coming year.

And as we cross the Durbin impact is approximately $7.7 million after tax and roughly another $1.5 million after tax due to higher FDIC expense and reduction of the federal reserve dividend.

And so.

And just as a reminder on that 1.

Only impact half of the year.

The year after we crossed and so really we're only that we won't see the impacts of crossing 10 until the second half of 2023.

And we believe we've got identified a path forward, we know we need to offset that revenue impact.

And we believe there is a number of M&A transactions that can be put together in a way that get us across during that period of time and the last thing I would add to that is I think our strategy of doing smaller low risk accretive transactions, specifically in Florida adds considerable shareholder value over time and as the.

Most effective way to neutralize the durbin impact.

It makes a lot of sense alright, thanks, everybody. Thank you Dave.

And thank you we have our next question from Michael Yang Your line is open.

Hey, good morning, Thanks for taking the question good morning, Michael.

I wanted to ask maybe sort of a bigger picture question just on the efficiency ratio guide obviously.

Presses that you guys are able to hold that despite kind of the lower rate environment, but also over time, you've been investing into some more fee oriented businesses, which typically come at higher efficiency ratios. So.

That plus potential Durbin amendment of it coming et cetera et cetera.

Are there areas that you are still able to pull cost savings from or is there sort of an expectation of higher rates or just kind of what else is built into the longer term kind of low 50% efficiency ratio guide when.

When we look forward to 'twenty, 1 and into 'twenty..2 we think we can remain in the low to mid 50% efficiency ratio.

<unk> of its growth, we expect growth to return in the coming year, which drives NII, we expect NII to be higher as we go into the coming year. We expect the wealth management of business to continue to grow and we still have opportunities to be thoughtful about branch consolidation, where it makes sense and through M&A, we will have opportunities to take cost out as well.

So we feel fairly confident that we can maintain that low 50, mid 50% efficiency ratio as we move in the coming year, and obviously higher rates would be even more beneficial but even on a forward rate curve. We think thats really as will be our objective, but I think that drives the most amount of return to shareholders and that will continue to be our goal.

Okay. That's helpful. Yes, M&A is probably of the here.

Piece there.

1 of them wanted to also just ask you know kind of on the growth outlook. Obviously, good to see the pipelines rebounding I know you guys have done a tremendous amount of hiring so it might be good to get an update on kind of a number of lenders now versus maybe a year ago.

But also just just sort of as we look at growth from here, what's sort of the constraining factor is it is it client demand is it pricing and price competition versus other players in the market any.

Any other color there would be helpful.

The best way I can describe the environment as obviously.

There's a lot of liquidity in the industry, and therefore pricing competition and to some extent growing structure of competition has been challenging.

As we mentioned in our prepared comments, we are not going to in any way.

Loosen our credit underwriting standards will continue to maintain our same policy as we move through time, but what gives me some comfort as we are starting to see.

More opportunities with existing clients that are sort of coming off the sidelines on investing back on their businesses.

Exciting we're seeing expansion in for example, the health care sector.

And in many other cases with companies getting.

Larger and so we.

We feel fairly confident moving forward and then sort of additional to that is we have tremendous momentum in the hiring space.

What's been great is we brought on new talent in the organization that talent has further talent that wants to follow on would be a part of seacoast.

And given the size we are of the balance sheet, we are the growth trajectory and what's going on in and around the state Theres a lot of excitement within our franchise around commercial banking and the momentum there.

<unk>.

I think all of that leads us to a great place in the coming year.

Okay and 1 last 1 from me if I could just just on capital.

Obviously, you guys announced the share buyback.

Dividends in place, but the recent kind of drop in bank valuations has.

Led to maybe slightly more attractive share price for seacoast should we expect that you guys might.

Consider nibbling, if we got on any lower than where we are today or given the kind of of the M&A environment and organic growth that you are talking about over the next 6 to 12 months is that does that really on the back burner.

As we've mentioned in the past we look at things in terms of earn back and will compare the earn back on the buyback till they earn back end deals and constantly weigh the 2 against each other.

So all I can tell you Michael is we'll continue to revisit it as time moves on we'll see where prices go.

Not buying any shares right now, but we will continue to monitor the situation.

Okay. Thanks, I appreciate the color.

And we have our next question from Steve Moss. Please go ahead.

Hi, good morning.

Steve.

Maybe just following up on the pipeline here, just kind of curious what the underlying mixes between commercial and CRE.

Where are you guys seeing new opportunities.

Larry as well.

Roughly if you were to break it down today, 22% of the pipeline C&I, 44% is non owner occupied CRE and another 30% is owner occupied CRE was about what the pipeline looks like on the commercial side.

Okay.

Okay, that's helpful and in terms of the.

Types of properties, you're just seeing on commercial so just kind of curious as to.

Where the opportunities are for you guys of these days.

The mix between.

We tend to see smaller deal sizes, but smaller multifamily smaller warehouse.

Other smaller office type projects is really where we're seeing the volume.

Okay. That's helpful. And then in terms of loan pricing here, just kind of curious where add on yields on a relative to the portfolio.

Yeah I've got that.

On the add on yields for the second quarter of 368%.

On.

Portfolio yield.

You can see the portfolio yield on the release for sort of seen of FERC ultimately exactly as it sounds about right.

Okay.

<unk> and.

That's pretty much it from me thanks.

Thanks for all of the color here today. Thanks.

Thanks, Steve.

Thank you. Our next question is from Stephen Scouten. Please go ahead Sir.

Hey, good morning, everyone.

Good morning, Steve.

So I guess, maybe maybe kind of following up on that last question with the $3.68 add on yields of $4.7 tier.

For 2014, if I strip out accretion kind of maybe more core loan yield.

Obviously as growth picks up that will put more pressure.

On average loan yields, but youll deploying liquidity, but I guess can you talk a little bit about what you see as the path for the NIM maybe.

Maybe over the next 12 months to 18 months I know thats really hard to predict but I'm just kind of curious how much you think it can move up off of these levels of liquidity gets deployed.

Yes, Thanks Stephen.

Yes, the core NIM, excluding PPP and the purchase loan accretion declined 22 basis points. We're at 3.3 in the second quarter and like we mentioned in the prepared remarks 23 basis points.

Usually the whole decline is really due to the extra liquidity between quarters.

With that likely continued build of liquidity elevated deposit growth in PPP forgiveness in the coming quarters. We do expect continued pressure on the NIM into the third quarter and likely through year end.

Beyond year end, it's pretty difficult to provide guidance given all of the uncertainties, but if I break down the other part of the NIM investment securities and loan yields.

They should continue to modestly drift down for the next couple of quarters, while the cost of deposits.

Should remain in the high single digit we're looking at like we said add on yields in Q2.368, but we would expect those to come down modestly if if the rate environment remains the same in the Securities book 1 of 3.9% in Q2, we would expect to moderate a little maybe in the range of.

1 of 3 to 1.4% in Q3, the only thing I'd add to that.

Steven is as a reminder, the legacy bank portfolios, we bring that on as of higher yielding portfolio with a higher margin on the aggregate bank transactions, so that supportive in the coming quarters.

Yes got it and I guess, maybe ex <unk>.

Extra legacy portfolio do you think you can grow NII, even with that margin pressure I mean, obviously the.

The liquidity of the drag on the NIM, but.

And you're still earn money there and you still earn some spread and it gives you a lot of potential. So how do you think about that as it related to NII dollars, yes, we expect NII to grow as we move forward into the coming year.

Great great Okay.

And then the loan loss reserve.

On the 49.

Thanks.

This is odd to say is we just came out of the pandemic, but it takes a lot of higher relative maybe where some of your peers of already bled theres down too so.

Is there any specific reason why that would be I mean, obviously of your portfolio is traditionally a lot more granular. So I'm wondering is there anything there or do you think maybe it's just differences in views on about how to how to model the different scenarios.

Yes, we really don't see anything in the near term you can see the improvements in some of the credit quality metric, we reduced the allowance coverage by 11 basis points. This quarter. When you look at excluding PPP and really our primary economic forecast scenario is the Moody's baseline that had journey.

<unk> improved indications throughout.

<unk> in the.

Near term.

As we look out of the activity in our markets. We certainly see all of these indications of strength, but we still think it's prudent given just the unprecedented economic conditions.

We keep of reserves at a level of it acknowledges that there may be potential bumps in the road on the way and I'll just add we'll take a conservative approach to debt.

Yes got it.

And then I guess the last thing Chuck you mentioned the potential of look further expanding further into the Miami area from Broward.

How different of a market is that from the rest of your Florida footprint I mean is that.

How cohesive I guess is that to the rest of your franchise I know some people will talk about Miami almost of it.

On state down there. So is that is that of a concern for you at all or do you feel like that will blend well into the rest of your franchise.

We're already down there organically, we're already calling in the market. So we know it pretty well I mean, there's obviously a different market to mid <unk>.

Other parts of the state, but there are a.

A few very high quality banks, there with very strong well run operations and good operators.

And what I would say is that we're already sort of adjacent or in Broward. We have bankers they called out on the market. We know the market well we have to be thoughtful when we're down there. There's obviously different types of risks that have to be considered but we've worked pretty hard to be prepared for that and if opportunities come we will look at them in the meantime.

We continue to look in and around the entire state. So it's.

I would also add with Miami, it's really is transforming like the rest of the state. There is a lot of northeastern money moving into Miami, bringing with a growth and bringing with it businesses and so big transformation happening in South Florida to the positive.

Yes, no that makes.

That's very helpful. Thanks, so much Chuck Tracey really appreciate the time, thank you Steve.

Thank you.

Have no further questions I will now turn the call back over to Mr. Shaffer for closing remarks.

Thank you Vanessa and thank you everybody for joining US. This morning of this will conclude our call and I appreciate the time.

And thank you ladies and gentlemen, this concludes our conference. Thank you for your participation you may now disconnect.

Okay.

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Yes.

Okay.

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Okay.

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Welcome to Seacoast Banking Corporation second quarter of 2021 earnings Conference call. My name is Vanessa and I will be your operator.

Before we begin I haven't asked to direct your attention to the statement contained at the end the Companys what's release regarding forward looking statements.

We'll be discussing issues that constitute forward looking statements within the meaning of the Securities and Exchange Act and its 1 of today are intended to be covered within the meaning of that act.

Please note that this conference is being recorded I Wonder I'll turn the call over to Mr. Chuck of paper that's event N C E O of Seacoast Bank.

Thank you Vanessa and thank you all for joining us this morning.

As we provide our comments we were referenced the second quarter 2021, earning slide deck, which can be found at seacoast banking dot com.

With me. This morning is Tracey Dexter Chief Financial Officer.

And Jeff Lee Chief Digital Officer.

During the quarter the seacoast team generated strong operating performance growing tangible book value per share an annualized 11% from the prior quarter to $17.8.

While distributing a dividend of <unk> 13 per share to our shareholders.

The adjusted efficiency ratio was 53, 5% in line with prior guidance and the adjusted return on tangible common equity ratio was 14, 7% of $14.2 7%.

We continue to manage our capital prudently focused on consistently building shareholder value over the long run while maintaining a fortress balance sheet. Additionally, we continued to deliver peer leading operating efficiency, while making investments to position the company for the accelerated growth we see in the coming periods.

The Florida economy continues to expand meaningfully with strong inbound population growth driven by low taxes of business friendly environment and of post pandemic work from anywhere economy.

Last year, Florida population grew by 388000 residents of 1061 people a day and Florida unemployment rate continues to improve each month, most recently 4.9% compared with the national unemployment rate of 5.9%.

Corporate relocations continue to occur with many organizations, bringing large portions of their staff to Florida.

This strong economic backdrop of population growth and corporate relocations helped support a robust quarter for deposit growth interchange income and notably a growing commercial pipeline.

Additionally, the wealth business continued its vigorous path forward generating another $133 million in assets under management this quarter, taking us to $1.2 billion in AUM at quarter end.

Markedly deposit transaction accounts have grown $860 million from yearend or 22% demonstrating the underlying quality and strength of our customer franchise in Florida.

Loan Outstandings, excluding PPP in loans held for sale declined $6 million from the prior quarter essentially in line with our guidance of flat growth for the second quarter.

The commercial pipeline exiting the quarter is strong and growing our late stage commercial pipeline was 322 million at quarter end up 34% from the prior quarter and end up of 175% from the prior year same period.

We expect loan growth, excluding PPP to be in the high single digits annualized in Q3, and Q4 and Tracey will elaborate further on her comments.

I'd also like to specifically note that despite the pressures the excess liquidity is putting on the net interest margin of the industry, we will not waver from our strict credit underwriting standards, and we will focus on disciplined and appropriate growth.

Our asset quality metrics remained strong with NPL and NPA ratios moving favorably quarter over quarter, and we are pleased with the credit portfolio's performance.

Moving to see no material issues on the horizon.

During the quarter, we continued to expand our commercial banking leadership team in the Tampa St. Pete MSA and we expect this to lead to further build out of banking talent in that market.

And we expect numerous tap further talent announcements in the coming quarters.

Additionally, we completed the significant enhancement of our Encino commercial lending platform, which will help facilitate faster turn times and further our speed to market.

We expect we expect to close the legacy Bank transaction. The first week of August and legacy is ahead of our modeled assumptions of the deal announcement with loans deposits and net income all ahead of plan.

And as from as a reminder, we pick up of very strong lending team and the legacy transaction with extensive experience in South, Florida, and we continue to have multiple conversations with potential acquisition targets across the state of Florida.

And to conclude the company recorded another quarter of impressive performance generating disciplined growth in franchise value. Our fundamentals remain very strong with a well capitalized low risk balance sheet strict underwriting standards and a very attractive customer franchise well positioned for growth.

Thank you Chuck good morning, everyone.

Directing your attention to the second quarter results, let's start with slide 5.

Net income was $31.4 million for the second quarter on a GAAP basis, an increase of 25% year over year.

On an adjusted basis, which excludes M&A and branch consolidation charges net income was $33.3 million, an increase of 31% year over year.

Earnings per share on a GAAP basis increased to 56 cents compared to <unk> 47 in the prior year.

Adjusted earnings per share increased to 59 from 48%.

On a GAAP basis, we reported $1, 48% return on tangible assets and $13.8 8% return on tangible common equity on an adjusted basis second quarter, our LTA with 152% and Aro TCE was 14, 7%.

Tangible book value per share increased to $17.8.

Up from $16.62 last quarter, and an increase of 13% over the prior year inclusive of a cash dividend of 13 issued during the second quarter.

Total loan pipelines increased by 83% from this point last year, including an increase of 175% in commercial loan pipelines in line with a strong Florida economic recovery.

We continue to invest in commercial talent and technology, while not wavering on our strict credit underwriting policy.

Looking forward, we see significant opportunity to continue expanding commercial banking talent across the state.

Credit quality remains strong and we continue to see low levels of charge offs and declines in nonperforming assets.

As a result, we released $4.9 million in loan loss reserves this quarter.

The cost of deposits decreased by another 5 basis points to 8 basis points.

The wealth management team continues to reach new records with year over year growth of $451 million in assets under management, bringing total AUM to $1.2 billion.

And another record quarter in interchange income, which reached $4.1 million as we continue to see higher transactional volume and higher per card spending.

Turning to slide 6.

Net interest income on a fully tax equivalent basis decreased 1% sequentially to $65.9 million and the net interest margin declined 28 basis points to 3.2% to 3%.

I'd like to take a moment here to break down the 2 drivers of this decline first we saw meaningful increases during the quarter in near zero rate transaction accounts.

Transaction accounts grew 35% during the quarter on an annualized basis net.