Q3 2021 Seacoast Banking Corporation of Florida Earnings Call

October 29, 2021

All participants please standby your call will begin momentarily once again please standby.

[music].

Yeah.

Welcome to the CECO Spanking Corporation's third quarter 2021 earnings Conference call. My name is John and I'll be your operator for today's call before we begin I haven't.

And ask the direct your attention to the statement contained at the end of the company's press 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 Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Cooper you may begin.

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

Provide our comments will reference the third quarter 2021 earnings slide deck, which can be found at CECO spanking Dot com.

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

And Jeff Lee Chief Digital Officer.

The CECO team generated strong operating performance during the quarter growing tangible book value per share, 13% from the prior year to $17 52.

The adjusted efficiency ratio was 51, 5% modestly better than our previous guidance and adjusted pre tax pre provision earnings improved to $43 9 million up from $37 8 million in the prior quarter.

There is noise in the quarter. The result of closing the legacy bank transaction and negotiating and announcing the Sabal Palm Bank in Florida business Bank transactions.

When you look past the day, one provisioning for legacy Bank and one time expenses net interest income and noninterest income or better than consensus estimates and adjusted non interest expense was in line with guidance.

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 the reversal and the provision in the prior quarter and one time merger related expenses associated with all three transactions.

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 Bokor, Aton, Delray Beach and Pompano Beach.

Lastly, with Dennis badly Marcia Snyder's leadership, the legacy Bank team continued to produce at very strong levels through close and the team has had a considerable pipeline of new business at seacoast already.

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

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

The solid economic backdrop of population growth combined with significant recruiting activity that ramped up materially a year ago has contributed to the increase in commercial loan production and resulted in an increase in the pipeline.

When analyzing the change in loan Outstandings quarter over quarter. There are a lot of there are a lot of moving parts.

To help understand these dynamics we included a table on page 11 of the slide deck, which provides growth by category.

The table breaks out organic growth by removing the loans acquired from legacy Bank.

And wholesale purchase pools.

If you focus on the commercial banking line items, you will see growth in total total commercial outstandings starting to emerge.

In aggregate the commercial portfolio grew $26 million from the prior quarter or a 3% annualized growth rate.

This growth includes the offsetting impact of a number of payoffs in the commercial and land development category during the quarter.

I believe this table demonstrates the underlying positive dynamic starting to show up in the balance sheet, our strategic focus of expanding commercial banking capability in terms of bankers and technology is working.

And we are only focused on acquiring and expanding value creating relationships as this strategy delivers growth in franchise value and risk appropriate segments.

Also the pipeline showed significant progress in the quarter with the late stage pipeline, increasing 44% from the same time, one year ago as disclosed.

The early stage pipeline now exceeds 1 billion a record number.

This growth is coming from a combination of C&I and CRE with nearly 60% of the volume year to date considered C&I, including owner occupied commercial real estate and 40% investor commercial real estate.

Notably approximately 30% of our commercial bankers joined in the last 12 months and it takes time for bankers to begin to ramp up production. This group contributed only 11% of the volume this year, indicating there is much more upside on production.

Lastly, there is a material opportunity to continue to add to our commercial banking team in the coming quarters as our story tools and process resonate with bankers, who want to join a growing and dynamic enterprise.

We recently announced additional leadership hiring and the Naples in northeast, Florida markets and expect to begin building commercial banking focused teams in these markets in the coming year.

We have a record pipeline of high quality talent ready to exit larger banks for something more exciting.

When you put all this together it provides a level of confidence that loan growth is emerging and pre pandemic growth levels are in near reach we're targeting mid single digit organic loan growth in Q4 and high single digit loan growth in 2022.

I would also like to reiterate that despite the pressure of the excess the excess liquidity is putting on the net interest margin across the industry, we will not waver from our strict credit underwriting standards and we will focus on disciplined growth with appropriate risk adjusted returns.

Our asset quality metrics remained strong with NPL and NPA ratios moving favorably quarter over quarter.

We are pleased with the credit portfolio's performance and continue to see no material issues on the horizon.

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 fortress balance sheet strict underwriting standards and an 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 the robust growth and transformation occurring in Florida, We believe our plan of consolidating market.

Sure across the state will drive significant value for shareholders over time.

Cited about the future ahead excited about our momentum across the straight across the state and I will turn the call over to Tracy to walk through the financial results.

Thank you Jack good morning, everyone.

Directing your attention to the third quarter results beginning with slide five.

On a GAAP basis, net income was $22 9 million and on an adjusted basis, which excludes merger related and other isolated charges net income was $29 4 million the decline from the prior quarter and adjusted earnings reflect an increase in the provision for loan losses. It is due to the day one impact of the legacy Bank Act.

Sure.

Pre tax pre provision adjusted earnings were $43 9 million, an increase of $6 1 million or 16% from the second quarter, and an increase of $7 5 million or 21% from the prior year quarter.

We continue to deliver steadily increasing tangible book value per share, which ended the period at $17 52 and.

An increase of 13% from the same time last year.

Organic loan production is increasing with commercial loan originations increasing to $332 million from $193 million in the second quarter and 88 million. This time last year.

The late stage commercial pipeline is also very strong at a record $369 million.

We continue to see strong asset quality trends with the ratio of nonperforming loans declining to 0.55%.

Cost of deposits remains in the single digits as we continue to monitor the competitive landscape and adjust rates accordingly.

<unk> account balances continue to grow and excluding legacy bank increased $65 million or five 5% annualized during the quarter.

A strong quarter for noninterest income with another record for wealth management, and a new record in SBA saleable games.

The acquisition of legacy Bank was completed in August in the third quarter results reflect all associated costs and purchase accounting adjustments, including goodwill of approximately $31 million.

The acquisition impact third quarter results in noninterest expense with cost of approximately $6 million and in the provision for loan losses, where the day, one impact was $8 2 million.

And lastly, during the quarter, we announced the stable palm and flu.

We're in a business bank acquisition, which will close in January 2022.

Turning to slide six.

Net interest income on a fully tax equivalent basis was higher by $5 5 million or 8% in the third quarter and the net interest margin declined by only one basis point to 322%.

Net interest income includes higher interest and fees on loans, primarily due to growth in the loan portfolio, we're ending loan balances, excluding PPP increased $642 million during the quarter.

Net interest income also includes the benefit of higher fees on PPP loans.

You'll recall that when those loans are forgiven, we accelerate the recognition of fees that otherwise would have been spread over the life of alone.

The CECO steam processed $217 million and forgiveness this quarter and we recognized $5 9 million in PPP interest and fees.

Excluding PPP yields in the core loan portfolio declined seven basis points to 429% with elevated payoffs and continuing declines in rates.

In the Securities portfolio, we've continued to pace, our investments of excess liquidity, adding a net 256 million and the growth in the securities portfolio contributed to higher securities interest income.

Yields in the securities portfolio declined four basis points to 159%.

Offsetting and favorable is continued improvement in the cost of deposits, which dropped to seven basis points in the third quarter. As we've continued to monitor the competitive landscape and adjust rates accordingly, including for the newly acquired legacy Bank deposits.

Overall net interest margin dropped only one basis point from three 2% to 3% to $3 two 2%.

Excluding PPP and accretion on acquired loans, which introduced significant variability net interest margin was in line with forecast expectations declining from 3.3% to $2 eight 9%.

Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single digits.

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

Our modeling suggests that the fourth quarter may represent the lower bound for net interest margin assuming the current forward rate curve and with loan growth. We expect the margin to begin improving in 2022.

Moving to slide seven.

Adjusted noninterest income, which excludes securities gains and losses was $19 1 million higher by $3 7 million or 24% from the previous quarter, and an increase of $2 1 million or 12% from the prior year quarter.

As you can see in the results we have continued to focus on driving noninterest income.

The wealth management team continues to deliver strong growth and successful relationship expansion and revenue during the quarter increased to $2 6 million we.

We remain very focused on building the wealth management business given its high return on capital and the value it adds to our commercial relationships.

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

However, the pipeline has stabilized and this team will continue to contribute meaningful results by continuing to capitalize on low interest rates and on the strong Florida housing market.

We expect mortgage banking gains in the fourth quarter to be in line with the third quarter and results for 2022 will be dependent on rates and housing inventory levels in Florida.

Our SBA team has delivered outstanding results this quarter generating record gains 0.8 million as non PPP opportunities return.

We're focused on building this business in the coming year and expect continued improvement in this line item in 2022.

Also we expanded our position in bank owned life insurance, both repurchases and through the legacy Bank acquisition.

Slowly purchased late in the second quarter with attacks tax equivalent first year yield of four 5% contributed to the increase in bully income during the quarter.

Finally meaningfully contributing to noninterest income this quarter was a gain of $3 million on one of our SBA IC investments.

Income from these investments can vary widely among periods.

Looking ahead, we expect overall noninterest income in the fourth quarter in a range of approximately 16 million to $17 million as we continue to focus on growing our broad base of revenue sources.

Moving to slide eight.

Adjusted noninterest expense for the third quarter was in line with the guidance, we provided at $46 8 million.

Salaries and benefits expenses were higher compared to the second quarter, reflecting the addition of commercial banking talent and of the legacy Bank franchise.

Legal and professional fees were higher by 450000.

This line item includes smaller increases across a number of areas, including related to support for technology optimization initiatives.

Other expenses were higher by <unk> 4 million and include higher marketing expenses due to timing of campaigns and the 133000 day, one provision for credit losses on legacy banks unfunded commitments.

Looking ahead, we expect to maintain our expense discipline as we always do we expect fourth quarter expenses, excluding the amortization of intangible assets to be in the range of 48 million to $49 million.

The increase quarter over quarter is the result of the addition of the legacy Bank franchise and investments, we're making in commercial banking talent.

Looking forward to 2022, we expect expenses to reflect the full impact of the additions of legacy Bank, Florida business Bank and Sabal Palm Bank, along with commercial banking talent expansion into Jacksonville, and Naples, and enhancements and digital technology for our customers.

We believe these investments support sustainable growth in the coming years and position the company to take advantage of the unique growing economy in Florida.

This results in a 2022 efficiency ratio target below 55% for the full year with the ratio trending down throughout the year and exiting 2020 to near 50%.

Higher results early in the year are due to the expense seasonality associated with the first quarter and timing of expenses associated with investments.

Moving to slide nine.

The adjusted efficiency ratio in the third quarter decreased to 51, 5% and reflect higher net interest income and higher noninterest income compared to the prior quarter, partially offset by higher noninterest expense.

Reiterating the guidance we've provided in the last several quarters. We continue to expect the full year 2021 efficiency ratio to be below 55%.

Turning to slide 10.

Loan balances, excluding PPP are higher by 13% from the prior quarter.

That increase includes organic growth and commercial categories.

Loan pool purchases and the legacy bank acquisition offset by declines in consumer mortgage banking and construction and land development loans.

Commercial growth as a highlight as Florida's economic recovery is now well established and recent talent additions and investments in technology position as well as loan demand is returning.

We're very encouraged by the commercial pipeline, which has increased materially from the start of the year.

We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines, while achieving organic loan growth.

Looking forward to the fourth quarter, we continue to expect organic loan growth, excluding PPP to be in the mid single digits for the coming quarter and expect loan growth to return to an annualized growth rate of high single digits in 2022.

As a reminder, the first quarter each year is typically a seasonally slower quarter.

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

Turning to slide 11, highlighting loan growth in key categories.

The addition of legacy bank during the quarter added $439 million of non PPP loan balances.

Wholesale purchases totaled $198 million, having made these investments as an alternative to additional investments in the securities portfolio.

We've highlighted the commercial line items in the top green box, showing an organic increase of $26 million in aggregate across commercial categories.

This growth represents a 3% annualized growth rate in our commercial book during the quarter.

We view this as a very positive indicator of the growth that's emerging as a result of our investments in commercial talent and technology over the last year.

On an overall basis, excluding the legacy bank acquisition and wholesale purchases loans outstanding increased by a net $6 million during the quarter.

Turning to slide 12.

Graphic shows the year to date summary of PPP activity.

We originated $256 million in PPP loans earlier in the year under the renewed program with.

We processed $675 million and forgiveness year to date, including $217 million in the third quarter, bringing principal balances of PPP loans outstanding at September $30 million to $191 million net of deferred fees.

Overall since the start of the original program, we've collected $27 6 million in SBA fees.

That we recognized $22 2 million life to date and have five $4 million and fees remaining to be recognized in future periods.

We expect the majority of this remaining fee income to be fully recognized by the first quarter of 2022.

Turning to slide 13 for the securities portfolio.

Continue to invest excess liquidity at a moderate pace in the investment securities portfolio with approximately $420 million in purchases this quarter offset by Paydowns for net growth of $256 million.

Additions were largely agency guaranteed with short duration and yields of 142% and overall portfolio value declined a bit with steepening of the curve during the quarter.

Somewhat offsetting and beneficial to yield was a yield maintenance provision in place on one holding that resulted in a $400000 benefit when the security paid down early.

We will continue to steadily pace, our investments overtime in bonds that have lower extension risks with shorter durations and continue to expect net additions of $250 million in the fourth quarter.

Turning to slide 14 deposits outstanding were $8 3 billion, an increase of $498 million quarter over quarter, which includes the addition in August of $495 million from legacy Bank.

The cost of deposits has continued to decline and for the third quarter was seven basis points.

Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single digits.

Transaction accounts represent 59% of total deposits and have grown 30% year over year.

Excluding the impact of legacy Bank transaction account balances increased $65 million or five 5% annualized during the quarter.

We're pleased with the growth in deposit balances year to date, despite the margin pressure.

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

And on Slide 15 illustrated.

Illustrated on the chart is the deposits per branch, which stepped down only slightly this quarter to $165 million, even with the addition of net four new branches with five from legacy Bank and one consolidation.

Also in order to manage excess liquidity and as we approach the 10 billion asset Mark were using off balance sheet deposit products through third party programs.

We expect to remain under $10 billion at year end 2021, and at September 30, we had $233 million in off balance sheet deposits compared to $116 million at June 30th.

Our branch optimization strategy is supported by our digital and analytics competency, which continues to provide opportunity to drive growth and operating efficiency across our retail franchise.

In the last five years, we've consolidated 28% of our physical branches.

We think physical branches are extremely important to our customers. In fact, we're planning to de Novo branches that will open in the coming months as part of our balanced expansion strategy in Florida as high growth markets.

One is in Naples, which is located in southwest, Florida, and complements our west coast growth strategy that includes Tampa and Sarasota.

The other is implantation in the dynamic Broward County market and supports our deepening presence in South, Florida, which is the seventh largest MSA in the country.

Moving to slide 16, the wealth management business continues to deliver tremendous growth with assets under management growing at a compound annual growth rate of 34% since year end 2019.

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 and to credit topics.

Allowance for loan losses increased during the quarter from $81 1 million to $87 8 million with the increase in total loan balances in.

In particular, we reserve on day, one for the full life of loan expected losses on the legacy Bank acquisition.

At the date of acquisition that added $11 2 million to the reserve $8 2 million of which is reflected in the third quarter provision.

At the end of each quarter, we update our estimate for the portfolio in line with sustained indications of overall economic recovery the allowance as a percentage of total loans, excluding PPP decreased to one 5% or 4% from one 6% in the prior quarter.

In addition to assigning a day one reserve on legacy Bank loans, We also reported a $6 million purchase discount on legacy bank loans, bringing the total purchase discount remaining on all bank acquisitions to $26 6 million, which will be earned as an adjustment to yield over the life of those loans.

Turning to slide 18 on asset quality.

Measures remained strong with charge offs non accrual and criticized loans at historically low levels.

Net charge offs in the third quarter were $1 4 million or 10 basis points on average loans and.

And the level of nonperforming loans decreased to $32 $6 million, representing zero point, 55% of total loans.

Criticized loans increased slightly from 13% last quarter to 14% of risk based capital in the third quarter with the increase driven by the addition of a small number of legacy bank loans conservatively assigned risk ratings in these categories.

All were also assigned appropriate reserves at the acquisition date.

The overall allowance for credit losses at September 30th is $87 8 million and allowance coverage, excluding PPP loans decreased six basis points to 154%.

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 of $17 52.

An increase of 13% year over year.

The tangible common equity to tangible asset ratio increased to 10, 6% at the end of the third quarter and has consistently been among the highest in our peer group.

The tier one capital ratio was 17, 7% and the total risk based capital ratio was 18, 6% at September 30th.

Return on tangible common equity was 11, 7% on an adjusted basis acne.

Acknowledging our peer group, leading capital levels, it's worth mentioning that if the third 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 15, 3% for the quarter and 18, 5% for 2021 year to date.

As I mentioned earlier the current quarter's return on tangible equity was impacted by recording the day, one provision for loan losses associated with acquiring legacy bank.

And finally on slide 20, looking back from the beginning of 2017 to today, we have achieved a compounded annual growth rate and tangible book value per share of 12% driving shareholder value creation.

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

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

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

Thank you and now begin the question and answer session.

Question for Star then one on your Touchtone phone.

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Queue. Please press the pound sign or.

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Once again, if you have a question with Star then one on your Touchtone phone.

And our first question is from David Feaster from Raymond James.

Hey, good morning, everybody.

Good morning, David.

I just wanted to dig in maybe some.

Some of the commentary on the Tropic NIM in the fourth quarter I guess could you maybe just walk us through some of the puts and takes with.

Competitive yields and the liquidity deployment and the potential for earning asset mix and just help us think about the margin as we go forward.

More importantly.

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.

I can start with that thank you.

So core NIM declined 14 basis points to 289% 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.

New Securities yields we would expect in a range of one four to one 5% 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 250 million there.

As PPP forgiveness starts to wind down near the end of <unk>.

This quarter and largely in the fourth quarter, assuming deposit growth begins to normalize who could see core NIM modestly decline in the fourth quarter, but we do think that the lower bound and then building back entering 2022 to your point PPP forgiveness.

We will likely have fully come off by maybe early in the first quarter of 2022.

Do however have the significant amount of liquidity to deploy in organic loan growth.

And some opportunistic loan pool purchases to support that NII growth.

Chuck anything you want to add to that 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 2022, primarily as the mix improves to loans out of cash and we expect to invest about a net $2 50 in the securities portfolio. When you add all that together with where we think the loan pipeline is in our expectations.

Patients with growth in the coming year, we think net interest income growth looks pretty strong in 2022.

Yes, okay that makes sense.

Then just kind of following up on the production and the new hires.

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 being driving some of this growth.

PPP client our client acquisition and just maybe get a sense of the embedded production from those new teams.

An update on the expansion upstream of the middle market and how that.

Sean.

Great Great question, David and then 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 the owner occupied CRE for example, Youll know youll see fairly solid growth during the quarter.

Which is great to see when you look at the new hires.

About 20% of our commercial bankers are new to the company in the last 12 months.

They've only contributed about 11%. So I think there is a lot more upside to come out of the work we've done on recruiting as well.

Super excited about the amount of volume we're seeing on talent looking forward into 2022. So when you put all that together that gives us confidence about loan growth in the coming year and importantly, as I mentioned, what's been great to see is the emergence of true demand for credit out of our core <unk>.

Customers, which is really an indication of what's going on in the local economy here.

That's 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.

So you can do a couple of CPA is there sort of backlog than helping get customers businesses opened in Florida and get licensing done. So just just a remarkable what's going on here I know I would even argue that I think the Florida economy stronger than it was pre COVID-19 and so we're seeing that start to lay back up particularly over the last three to six months.

And I think thats driving some of the growth as well as some of the new hiring as I mentioned earlier some of our early stage pipeline is over $1 billion, which is a record number for us. So we're starting to see it come together and just couldnt be more excited about what I think is that ahead for us.

That's great.

And then.

Great to see the de Novo expansion.

April then we've got the new hire Jacksonville, just wanted to as you can.

Step back and look at your footprint.

Do you think we could do some more de novo expansion I mean is it more deepening in existing existing markets or.

Filling in gaps I mean, when we look at the map on the real gap might be along the I four corridor in central Florida, but just curious your thoughts on de Novo expansion and how you think about M&A versus de novo projects depends on opportunities, but just wanted to get your thoughts on that.

Sure, Yes, great question.

With M&A, we continue to be focused on kind of I'd say Jacksonville downturn.

South, Florida, including Miami Dade with the right opportunity.

The entire I four quarter, Tampa over and then southwest Florida.

We're going to go where there's opportunity as you said, where we see acquisition opportunities that make sense for shareholders, we're certainly going to pursue them.

And from a de Novo perspective, its more about talent, where we see talent and where we see disruption will lead us to opportunities to grow customers in those markets and as I mentioned earlier, what's exciting about what's going on in the state as we are starting to see real meaningful economic expansion and so.

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. So I would say David continued focus on the same exact markets we've been focused on.

A few fill in markets and there for example, Naples is one where there's not a lot of M&A opportunity, but great market and with the right talent. We think we can do well there and so we'll go where the opportunity is.

Alright. Thanks.

Thank you Dave.

Our next question is from Steve Moss from FBR.

Good morning.

Yes.

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 payoffs and pay downs Youre seeing just kind of I mean, obviously, there's pricing pressure just wondering if you're also seeing competition on structure.

I'll start with the roll on roll off and I'll hit the structure question Tracy sure if I carve out the loan purchases or organic add on rates were about $3. Six one this quarter, just a little lower than last quarter was $3 six nine pricing does remain competitive but we saw some recent steepening of the curve.

That should help those.

Levels stabilize as we go into the fourth quarter.

In terms of payoffs are overall payoffs remain elevated although marginally lower than the prior quarter and our overall fall off rate moved down a little bit from last quarter for two 2% this quarter.

Yeah, 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 would say the pricing pressures are intense.

More than we've seen in the past given the level of liquidity.

<unk>.

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.

Okay.

Helpful and then in terms of.

Shrink was on sweep off balance sheet deposits I know the two pending acquisitions, obviously, you add more assets, but you guys have just a tremendous amount of liquidity baskets tight but kind of curious do you think you could sweep and standard 10 billion by year end 'twenty two.

We do expect and we do expect to stay under $10 billion. This year and plan to exceed certainly with the acquisition, but that are coming in the first part of 2022. So we our plan and our guidance includes the assumption that we will cross $10 billion in 2022.

We've built up a number of.

Vehicles that we think will allow us to continue to move to deposits off balance sheet and stay under 10 at the end of the year.

Right Okay.

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.

Pipeline, new hires does that kind of tilt.

Towards more organic growth and hiring going forward or.

I'm curious if there's any real shift in M&A there.

No I would say same strategy no shift we continue to focus on the right opportunities and 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 would be a combination of the two moving forward. 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 <unk>.

Near term, we 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 would likely be announcement in 2022, but.

And we want to get the two deals closed that we have and continue to focus on growth.

Okay, great. Thank you very much I appreciate all the color. Thanks, Steve.

Our next question is from Steve <unk> from Sandler O'neill.

Okay.

Hey, How's it going guys Hi, Steve.

I guess a couple of things.

It sounded like you guys were thinking deposit growth maybe from here Mike.

Kind of normalize it'd be a little bit.

Little bit lower than what we've seen in the past.

If that's correct what was kind of what kind of lead you to believe that what are you guys seeing that.

That would lend to that direction.

Yeah, we think.

Ending deposit balances have continued to increase over the last couple of quarters. We've seen some interesting studies that have found some correlation between the fed Securities Holdings. So we are looking at the timing of the feds tapering of purchases.

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.

I'd say Steven.

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 pullback on deposits. It will take all the way to the point of.

Pure contraction of their 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.

Yes, no that makes sense okay helpful.

And then kind of thinking about forward rate sensitivity as we.

For some higher rates here in 'twenty three I think at last update you guys were screening at plus 7% and up 100 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.

Possibly less than your peers.

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.

We would expect that continued benefit of low cost funding. So we would expect meaningful increases in NII and NIM in the first 12 months of a rate adjustment and we don't I don't know, we don't have the deposit betas in front of US we can get to that.

But what I would state is as you know about our franchise, it's highly transaction funded nearly 60% of the deposit basis transaction oriented.

And given the history and long time 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 that.

The rise in deposit cost is probably better than others.

And kind of the true kind of as rates have got low here, it's hard to sort of look.

Look between the banks and see the good deposit basis.

Not so good deposit basis, but we've always had one of the premium deposit franchise in the country.

And it's because of the 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 leads and owner operated companies of which generally have deeper more thorough depository relationships with us. So there's a lot of upside for us when rates go up.

Deposit base provides a lot of franchise value in that scenario and I think we performed very well in higher rate scenario.

Yes for sure that's helpful. Okay, and then maybe just last one for me I mean, you guys have been definitely ahead of the curve.

From your peers in terms of use of digital tools.

Kind of implementing technology and the way you deliver to customers I'm wondering if there's any.

Push into we're seeing a lot of these banks pushing the <unk> type initiatives pushing.

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Buy now pay later types I mean, there's all these different avenues I feel like banks are leaning into point of sale lending.

And the like are there any other.

Technology, driven initiatives that you guys are undertaking that might be might be new to the story.

Yes, nothing around defy or.

The pay now models.

We continue to be focused on grilled and building a very strong franchise in Florida, and we're doing that through.

The investments, we've made and Daniel 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 super competitive generates the most value for shareholders over time will continue to carefully watch what's emerging out there and <unk> and other.

Things, but but nothing to talk about today.

Great. Okay. Thanks for the color I appreciate it guys. Thanks, Dave.

Once again, if you do have a question press Star then one on your Touchtone phone.

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

Thank you John I appreciate everybody's time and.

I appreciate everybody's calling into the call and look forward to 2020 will talk to you soon.

Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.

[music].

Welcome to the CECO Spanking Corporation's third quarter 2021 earnings Conference call. My name is John and I'll be your operator for today's call before we begin I've 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.

These 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.

Now I'll turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Cooper you may begin.

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

Our comments will reference the third quarter 2021 earnings slide deck, which can be found at CECO spanking Dot com.

With me. This morning is Tracey Dexter Chief Financial Officer, and Jeff Lee Chief Digital Officer.

The CECO team generated strong operating performance during the quarter growing tangible book value per share, 13% from the prior year to $17 52.

The adjusted efficiency ratio was 51, 5% modestly better than our previous guidance and adjusted pre tax pre provision earnings improved to $43 9 million up from $37 8 million in the prior quarter.

There is noise in the quarter. The result of closing the legacy bank transaction and negotiating and announcing the Sabal Palm Bank in Florida business Bank transactions.

Looking more deeply at the legacy Bank transaction. It's clear this transaction was one of our better transactions completed to date the.

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

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

This solid economic backdrop of population growth.

And bind with significant recruiting activity that ramped up materially a year ago has contributed to the increase in commercial loan production and resulted in an increase in the pipeline.

When analyzing the change in loan Outstandings quarter over quarter. There are a lot of there are a lot of moving parts.

To help understand these dynamics we included a table on page 11 of the slide deck, which provides growth by category.

The table breaks out organic growth by removing the loans acquired from legacy bank and wholesale purchase pools.

If you focus on the commercial banking line items, you will see growth in total total commercial outstandings starting to emerge.

In aggregate the commercial portfolio grew $26 million from the prior quarter or a 3% annualized growth rate.

This growth includes the offsetting impact of a number of payoffs in the commercial and land development category during the quarter.

And we are only focused on acquiring and expanding value creating relationships as this strategy delivers growth in franchise value and risk appropriate segments.

Also the pipeline showed significant progress in the quarter with the late stage pipeline, increasing 44% from the same time, one year ago as disclosed.

The early stage pipeline now exceeds 1 billion a record number this growth is coming from a combination of C&I and CRE with nearly 60% of the volume year to date considered C&I, including owner occupied commercial real estate and 40% investor commercial real estate.

We recently announced additional leadership hiring in the Naples in northeast, Florida markets and expect to begin building commercial banking focused teams in these markets in the coming year.

We have a record pipeline of high quality talent ready to exit larger banks for something more exciting.

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 and continue to see no material issues on the horizon.

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 fortress balance sheet strict underwriting standards and an attractive customer franchise well positioned for growth.

They're across the state will drive significant value for shareholders over time.

Cited about the future ahead excited about our momentum across the straight across the state and I will turn the call over to Tracy to walk through the financial results.

Thank you Ted good morning, everyone.

Directing your attention to the third quarter results beginning with slide five.

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Pre tax pre provision adjusted earnings were $43 9 million, an increase of $6 1 million or 16% from the second quarter, and an increase of $7 5 million or 21% from the prior year quarter.

We continue to deliver steadily increasing tangible book value per share, which ended the period at $17.52 an increase of 13% from the same time last year.

Organic loan production is increasing with commercial loan originations increasing to 332 million from $193 million in the second quarter and 88 million. This time last year.

The late stage commercial pipeline is also very strong at a record $369 million.

We continue to see strong asset quality trends with the ratio of nonperforming loans declining to 0.55%.

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 65 million or five 5% annualized during the quarter.

A strong quarter for noninterest income with another record for wealth management, and a new record in SBA sale gains.

The acquisition of legacy Bank was completed in August in the third quarter results reflect all associated costs and purchase accounting adjustments, including goodwill of approximately $31 million.

The acquisition impact third quarter results in noninterest expense with costs of approximately $6 million and in the provision for loan losses, where the day, one impact was $8 2 million.

And lastly, during the quarter, we announced the Sabal Palm Influent, a business bank acquisitions, which were closed in January 2022.

Turning to slide six.

Net interest income on a fully tax equivalent basis with higher by $5 5 million or 8% in the third quarter and the net interest margin declined by only one basis point to 322%.

Net interest income includes higher interest and fees on loans, primarily due to growth in the loan portfolio, we're ending loan balances, excluding PPP increased $642 million during the quarter.

Net interest income also includes the benefit of higher fees on PPP loans.

You'll recall that when those loans are forgiven, we accelerate the recognition of fees that otherwise would have been spread over the life of the loan.

The CECO team processed $217 million and forgiveness this quarter, and we recognized $5 $9 million in PPP interest and fees.

Excluding PPP yields in the core loan portfolio declined seven basis points to 429% with elevated payout and continuing declines in rates.

In the Securities portfolio, we've continued to pace, our investments of excess liquidity, adding a net $256 million and the growth in the securities portfolio contributed to higher securities interest income.

Yields in the securities portfolio declined four basis points to 159%.

Overall net interest margin dropped only one basis point from three 2% to 3% to three 2%.

Excluding PPP in accretion on acquired loans, which introduced significant variability net interest margin was in line with forecast expectations declining from three 3% to $2 89%.

Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single digits.

Moving to slide seven.

As you can see in our results we've continued to focus on driving noninterest income.

The wealth management team continues to deliver strong growth and successful relationship expansion and revenue during the quarter increased to $2 6 million.

We remain very focused on building the wealth management business given its high return on capital and the value it adds to our commercial relationships.

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

However, the pipeline has stabilized and this team will continue to contribute meaningful results by continuing to capitalize on low interest rates and on the strong Florida housing market.

We expect mortgage banking gains in the fourth quarter to be in line with the third quarter and results for 2022 will be dependent on rates and housing inventory levels in Florida.

Our SBA team has delivered outstanding results this quarter generating record gains zero point $8 million as non PPP opportunities return.

We're focused on building this business in the coming year and expect continued improvement in this line item in 2022.

Also we expanded our position in bank owned life insurance, both repurchases and through the legacy Bank acquisition.

Slowly purchase late in the second quarter with a tax equivalent first year yield of four 5% contributed to the increase in bully income during the quarter.

Finally meaningfully contributing to noninterest income this quarter with a gain of $3 million on one of our SBA IC investments.

Income from these investments can vary widely among period.

Looking ahead, we expect overall noninterest income in the fourth quarter in a range of approximately 16 million to $17 million as we continue to focus on growing our broad base of revenue sources.

Moving to slide eight.

Adjusted noninterest expense for the third quarter was in line with the guidance, we provided at $46 8 million.

Salaries and benefits expenses were higher compared to the second quarter, reflecting the addition of commercial banking talent and of the legacy Bank franchise.

Legal and professional fees were higher by 450000.

This line item includes smaller increases across a number of areas, including related to support for technology optimization initiatives.

The increase quarter over quarter is the result of the addition of the legacy Bank franchise and investments, we're making in commercial banking talent.

Looking forward to 2022, we expect expenses to reflect the full impact of the additions of legacy Bank, Florida business Bank and Sabal Palm Bank.

Along with commercial banking talent expansion into Jacksonville, and Naples, and enhancements and digital technology for our customers.

We believe these investments support sustainable growth in the coming years and position the company to take advantage of the unique growing economy in Florida.

This results in a 2022 efficiency ratio target below 55% for the full year with the ratio trending down throughout the year and exiting 2020 to near 50%.

Higher results early in the year are due to the expense seasonality associated with the first quarter and timing of expenses associated with investments.

Moving to slide nine.

Reiterating the guidance we've provided in the last several quarters. We continue to expect the full year 2021 efficiency ratio to be below 55%.

Turning to slide 10.

Loan balances, excluding PPP are higher by 13% from the prior quarter.

That increase includes organic growth in commercial categories.

Loan pool purchases and the legacy bank acquisition offset by declines in consumer mortgage banking and construction and land development loans.

Commercial growth as a highlight as Florida's economic recovery is now well established and recent talent additions and investments in technology position as well as loan demand is returning.

We're very encouraged by the commercial pipeline, which has increased materially from the start of the year.

We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines, while achieving organic loan growth.

As a reminder, the first quarter each year is typically a seasonally slower quarter.

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

Turning to slide 11, highlighting loan growth in key categories.

The addition of legacy bank during the quarter added $439 million of non PPP loan balances.

Wholesale purchases totaled $198 million, having made these investments as an alternative to additional investments in the securities portfolio.

We've highlighted the commercial line items in the top green box, showing an organic increase of $26 million in aggregate across commercial categories.

This growth represents a 3% annualized growth rate in our commercial book during the quarter.

We view this as a very positive indicator of the growth that's emerging as a result of our investments in commercial talent and technology over the last year.

On an overall basis, excluding the legacy bank acquisition and wholesale purchases loans outstanding increased by a net $6 million during the quarter.

Turning to slide 12, the graphic shows the year to date summary of PPP activity.

We originated $256 million in PPP loans earlier in the year under the renewed program.

Overall since the start of the original program, we've collected $27 6 million in SBA fees.

Of that we recognized $22 2 million life to date and have $5 4 million in fees remaining to be recognized in future periods.

We expect the majority of this remaining fee income to be fully recognized by the first quarter of 2022.

Turning to slide 13 for the securities portfolio.

We continue to invest excess liquidity at a moderate pace in the investment securities portfolio with approximately $420 million in purchases this quarter offset by Paydowns for net growth of $256 million.

Additions were largely agency guarantee with short duration and yields of 142% and overall portfolio value declined a bit with steepening of the curve during the quarter.