Earnings Call Transcript - SBCF Q4 2020

Operator, Operator

Welcome to the Seacoast Fourth Quarter Earnings Conference Call. My name is Richard, and I’ll be the operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Before we begin, I have been asked to direct your attention to the statement contained at the end of the press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and their comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded.

Chuck Shaffer, CEO

Thank you all for joining us this morning. As we provide our comments, we will reference the fourth quarter 2020 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Denny Hudson, Executive Chairman; Tracey Dexter, Chief Financial Officer; Jeff Lee, Chief Digital Officer; David Houdeshell, Director of Credit Analytics and Policy; and Richard Raiford, our Chief Credit Officer. Before we get started, I'd like to congratulate Denny on his new role as Executive Chairman. I know, and I speak for all of our associates, our Board of Directors and our community, in expressing our sincere best wishes to you as you enter this next phase of your professional career. For the last 28 years, you have led and created an incredible, innovative institution that has delivered tremendous value for both shareholders and customers. You, your father, uncle, and grandfather before you have steered an institution that has helped shape the fabric of our communities that we serve, and has had tremendous positive impact on our customers, our associates, and their families. I want to wish you my sincere congratulations and to thank you for all your guidance, mentorship, and friendship over the years. You helped shape my career and many of our teammates' professional lives, and your leadership has been incredibly impactful on us all. Thank you for all you've done. And I know I speak for both of us that we are excited and believe the road ahead is filled with opportunity. Congrats again, Denny, and I'll turn the call over to you.

Dennis Hudson, Executive Chairman

Thanks, Chuck. For over 42 years, I've served our customers, shareholders, and associates as a Seacoast team member. And as you said, including 28 of those years as CEO. It has indeed been a great honor to be able to contribute along with many others who along the way gave so much of themselves to build what we've become. Perhaps my most gratifying accomplishments have been the leaders that have been forged in the culture that defines us as a company. I couldn't be more pleased to have you now step into the CEO role. You will bring into that role the energy and will to win that you've consistently demonstrated in other roles you've held, as well as an extraordinary focus on creating value for shareholders.

Chuck Shaffer, CEO

Thank you, Denny. Thanks for the kind words. And now turning to the quarter, I opened by expressing my appreciation for the Seacoast team for producing another excellent quarter of impressive results, despite the backdrop of a pandemic. The Seacoast associates continue to generate top quartile returns by focusing on value-creating customer relationships, driving best-in-class customer satisfaction, and growing market share in a thriving Florida marketplace.

Tracey Dexter, CFO

Thank you, Chuck. Good morning, everyone. Directing your attention to the fourth quarter results. Let's start with Slide 6. For the fourth quarter on a GAAP basis, earnings per share was $0.53. On an adjusted basis, which excludes M&A and isolated expense consolidation charges, earnings per share increased to $0.55 from $0.50 in the third quarter. On a GAAP basis, we reported a 1.49% return on tangible assets, and 13.87% return on tangible common equity. On an adjusted basis, fourth quarter results were 1.5% adjusted ROTA, and 14% adjusted ROTCE. As we continue to grow our capital base, it's worth mentioning that if the fourth 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 18.8%, increasing from 17.3% in the third quarter. Tangible book value per share increased to $16.16, up from $15.57 last quarter, an increase of 15% on an annualized basis. The efficiency ratio was 48.2%, compared to 61.6% in the prior quarter, and on an adjusted basis was 48.8% compared to 54.8% in the prior quarter. Lower cost of deposits had a positive impact on our margin, with a decline of 5 basis points from 24 basis points last quarter to 19 this quarter.

Chuck Shaffer, CEO

Good. Thank you, Tracey. Richard, I think we're ready for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question online comes from Mr. Michael Young. Please go ahead. Your line is open.

Michael Young, Analyst

Hey, good morning.

Chuck Shaffer, CEO

Good morning, Michael.

Michael Young, Analyst

I guess I kicked off prematurely congratulating Denny last call, and with 42 years with one company, I guess an encore is welcome. So congrats again, Denny. And I know Chuck, even though he's not a blood family member, he probably feels like that at this point with how long you all have worked together. So wish you the best in the future. And we'll obviously miss hearing you on these calls on a regular basis.

Dennis Hudson, Executive Chairman

Thank you, Michael. It's been terrific working with you over the years. It's great to get to know you. So thanks for that.

Chuck Shaffer, CEO

Thanks, Michael.

Michael Young, Analyst

And you're leaving the company in good hands and with a high-class problem of very high capital levels, so wanted to start there. Maybe Chuck, just on capital levels being high, you guys announced the share buyback, obviously in December, once you kind of saw the deferrals come down. But now the stocks are valued pretty well. So just how do you kind of view deploying the capital from here, maybe in the absence of M&A materializing?

Chuck Shaffer, CEO

Yes. Happy to address it, Michael, and thanks for the question. Our view on capital remains very similar. We are still in a pandemic, it's still an uncertain period. And so we're very comfortable with where our capital levels are today. And we'll continue to take a disciplined approach to the environment we're in. That being said, we'll continue to revisit the various options for capital which includes buybacks, dividends, organic and M&A. Our preference is to use capital for both organic growth and M&A; we think that's the highest use. And on buybacks, we'll continue to look at that on an earn-back basis. And we'll use it opportunistically when it makes sense for shareholders. And always, as we move forward, we'll continue to revisit all the various components, including dividends, and it'll be something we'll continue to look at, particularly as the economy continues to recover here over the coming year.

Michael Young, Analyst

Okay. And wanted to also ask just on kind of the NII dollars. Obviously, I know NIM can be a little hard to forecast, although you guys have kind of a view on maybe how much securities are going to purchase. But it was just net-net, however, you want to talk about it maybe on a core basis ex-PPP or with PPP, whatever is easiest. But how do you kind of see the stability and/or progression higher in NII dollars as we move through 2021?

Tracey Dexter, CFO

Yes, I can start. We expect significant variability, as you said, in PPP, and an increase in purchase discount that will affect NII. We do expect the margin to continue to decline if we remain in this rate curve. But as a reminder, we also have very low deposit costs. And if we do see the curve expand later in the year that would be beneficial to the margin. The economic recovery supporting loan growth in the second half of the year will also be beneficial to NII.

Chuck Shaffer, CEO

Yes, and just real quick, I'll just mention, Michael. And you know, one of the benefits we have at Seacoast is the high quality of the deposit base. We have a 19 basis point cost of funds, primarily transactional long duration. And the positive outlook ahead for us, as we see the yield curve begin to steepen ideally, on the backside of this recovery, we see loan growth recover. There's a positive story there as margin widens out, loan growth recovers, and we're able to keep cost of deposits low; that's what's always historically happened to the franchise. What happens with high-quality franchises like ours, and given the relationship nature of the franchise, and we think there's an expansion of margin that could happen if that yield curve would have materialized on the backside of the recovery.

Michael Young, Analyst

Okay. And last one for me just on kind of loan growth. Generally, I know you all were kind of fairly cautious in the second half of last year, just given the pandemic and wanting to see kind of, I guess, positive implications in a path forward. Florida has been relatively probably more open than many other states and benefiting from tourism, maybe disproportionately. So, do you kind of see that optimism and confidence to begin making new loans more aggressively, as you get back to that kind of historical, we'll call it high single-digit, low double-digit growth rate?

Chuck Shaffer, CEO

Yes, I think the way we are thinking about it, we're certainly still being cautious and thoughtful as we navigate this period. And when we look at new loan requests, we're looking for borrowers that have the ability to navigate the pandemic and have the ability to navigate further deterioration. That all being said, Florida is recovering. We've now vaccinated 25% of our senior population, which is a positive development. We're seeing all of our businesses open. So that gives us some confidence that the back half of the year could be relatively strong as we move through the first half. That being said, it is still recovering. It's still the social distancing and things are going on in the state. And so we don't see as many opportunities as we were seeing during the period prior to the pandemic. We do expect that to come back, and you can see that in the quarterly run rate moving up from $80 million to $277 million from the third quarter to fourth quarter as we were able to get back out. And seasonally, the first quarter is normally slower. But when we look out beyond the first quarter into the second, third, and fourth quarter, we expect things to start to come back.

Michael Young, Analyst

Okay. Great, thanks.

Chuck Shaffer, CEO

Thanks, Michael.

Operator, Operator

Thank you. Our next question online comes from Mr. David Feaster. Please go ahead.

David Feaster, Analyst

Hey, good morning, everybody.

Chuck Shaffer, CEO

Good morning, David.

David Feaster, Analyst

I just wanted to dig into the commercial pipeline a bit and loan production. It was a great production quarter. I was just curious, maybe the composition of production in the pipeline. I guess, first of all, how much of this do you think is from existing clients versus new clients that you brought over from the lumber hires or the PPP programs? And then just maybe the breakdown between CRE and C&I; I guess just would you expect more contribution from C&I just given the focus there going forward?

Chuck Shaffer, CEO

The way I would think about it, David, is it's a mix. It's primarily current customers that we know well and have done business within the past that are bringing back opportunities to us. It tends to lean into owner-occupied commercial real estate, given the nature of the C&I and owner-operated companies that we focus on. There is a portion of CRE to sort of well-qualified, strong balance sheets, high liquidity, again, showing clear ability to navigate the pandemic. But it's a mix, but leans heavily more into owner-occupied CRE and more professional practices we've done in the past.

David Feaster, Analyst

Okay. And then I guess, just curious kind of the pulse of your clients as we head into next year. Have you found that they’re still a bit nervous or they’re willing to start investing in some expansionary CapEx, and maybe I guess start seeing some accelerating growth here as utilization increases? Just curious kind of the pulse of your client here.

Chuck Shaffer, CEO

I think things are still recovering, as we have described it. And generally folks are still cautious. That being said, there is definitely a sense of optimism as to what’s out ahead for Florida. And we do see more conversations happening pretty much across the state, and there is more confidence growing in this state. And I think as the vaccine and the vaccination process takes hold, that will provide a lot more confidence as we move forward. And as you know, there’s a lot of liquidity in both our borrowers and businesses across the state that ultimately will need to be redeployed into things as we move forward. But the lot of liquidity and growing optimism is the way I'd describe it.

David Feaster, Analyst

Okay. And then just curious on the margin. I know it's hard to say, but especially in light of the likelihood for the liquidity builds in the challenging backdrop and all that. Just any thoughts on the core NIM, and where we might trough and maybe the timing of it? I know that’s a tough question, but any insight into maybe when we can bottom would be helpful?

Tracey Dexter, CFO

I can start. So the core NIM excluding PPP purchase loan accretion declined 5 basis points during the quarter to 3.37%. It will likely continue to modestly decline in the first half of 2021, given continued pressure on securities yield, the dilutive effect as we said of excess liquidity, though, we expect to continue to see lower funding rates during that period. Beyond that, it's pretty difficult to provide guidance on NIM, given the potential uncertainty of the rate environment and also the ongoing effect of the pandemic and stimulus programs that might also impact that.

David Feaster, Analyst

Okay. And where do you think we kind of might trough at around there? I mean, are we going to stay kind of north of 3.30% or kind of maybe dip in the 3.20s?

Chuck Shaffer, CEO

It's hard to give guidance, David, beyond the quarter. It's too difficult, it’s once you get out beyond the quarter or two, the big variability kind of to go back to what I mentioned to Michael is, if we were to see the yield curve steepen for our balance sheet where we have some assets that we have a lot of liquidity, and the ability to drag out deposit costs over the long run there’s a lot of support for margin. But we would need to see the 10-year move up and the longer end of the curve start to move, which we think is a reasonable possibility given the level of inflation and the level of government support going on.

David Feaster, Analyst

Yes. Okay. All right. Thanks, everybody.

Chuck Shaffer, CEO

Thanks, David.

Operator, Operator

Thank you. Our next question online comes from Mr. Steve Moss. Please go ahead. Your line is open.

Steve Moss, Analyst

Good morning.

Chuck Shaffer, CEO

Hi, Steve.

Steve Moss, Analyst

I guess maybe just following up on the margin here in terms of just maybe how we think about like total purchase discount accretion for 2021 in dollar amount, but there's kind of a range. Maybe, if you could frame that out for us, Tracey?

Tracey Dexter, CFO

Yes. Also, an area that's difficult to model, a lot of volatility. In the current quarter, accretion of purchase discounts positively impacted yields by 30 basis points. Last quarter, it was 22 basis points. Highly dependent on payoffs, but we have modeled a benefit about 27 basis points to loan yield it could be higher or could be lower.

Steve Moss, Analyst

Okay, that's helpful. And then I think you said, low 50s efficiency ratio for 2021. Just kind of curious, if maybe some of the realization of PPP fees are influencing that number? And then just kind of how your thoughts are on expenses, what your investment needs are hiring or technology versus wanting to rationalize expenses.

Tracey Dexter, CFO

Yes, looking ahead in 2021, we expect to maintain the cost discipline that we've always had. We focus on investments in key areas of technology, operational efficiency. Like I said, we expect the efficiency ratio to be in the low 50s. And...

Chuck Shaffer, CEO

The only thing I'd add to that, Steve, is we'll be opportunistic with acquiring talent through time. We are actively recruiting, particularly commercial banking talent around the state. And we're seeing good opportunities for that, but expect to manage the business in the low 50s throughout the year.

Steve Moss, Analyst

Okay. And just to clarify, does that include the PPP fees being recognized in net interest income?

Chuck Shaffer, CEO

It does.

Steve Moss, Analyst

It does. Okay. In terms of the purchases of securities, was the $150 million to $250 million figure just for the first quarter? Also, how do you view securities as a percentage of assets going forward?

Tracey Dexter, CFO

Yes, it just meant to guide to the first quarter.

Chuck Shaffer, CEO

The first quarter. We will provide additional guidance as we progress. As Tracey mentioned, we are being a bit cautious about investing significantly given that the 10-year yield is around 1%. There is a potential for a rising yield curve later in the year, so we want to avoid overcommitting at this moment and instead adopt a balanced and disciplined approach to how we reinvest our funds over time. A target of $150 million to $250 million for Q1 seems appropriate, and from there, our decisions will depend on the outlook for interest rates and the overall economy.

Steve Moss, Analyst

Okay, great. Well, thank you very much. That's all my questions.

Chuck Shaffer, CEO

Thanks, Steve.

Operator, Operator

Thank you. Our next question online comes from Mr. Christopher Marinac. Please go ahead.