Earnings Call Transcript - SBCF Q1 2021

Operator, Operator

Welcome to the Seacoast Banking Corporation’s First 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 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. And I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Chuck Shaffer, President and CEO

Thank you all for joining us this morning. As we provide our comments, we will reference the first quarter 2021 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, our Chief Financial Officer; Jeff Lee, Chief Digital Officer; and Denny Hudson, Executive Chairman. I will open by expressing my gratitude to the Seacoast team for producing another consecutive quarter of record results. The Seacoast associates continue to generate top quartile returns by focusing on value-creating customer relationships, driving best-in-class customer satisfaction and expanding market share in a growing Florida marketplace. During the quarter, the Company generated earnings per share on an adjusted basis of $0.63, while posting an adjusted efficiency ratio of 51.9% in a quarter that is impacted by seasonally higher payroll and benefits expenses. Asset quality, liquidity and capital are all strong, and we continue to generate meaningful capital growth, bolstering our fortress balance sheet. This week, our Board approved the introduction of a $0.13 dividend, which represents approximately a 21% payout ratio, generally in line with our peers, providing a new source of return to our shareholders. We believe this will have no impact on our organic growth or acquisitive growth strategy moving forward, particularly when you consider the capital generation resulting from the Company’s efficient operations. The state of Florida is now fully reopened with restaurants, hotels and other hospitality venues on a path to return to pre-COVID levels as the vaccination process continues to move forward rapidly and the state population continues to swell. Our borrowers across multiple industries and asset classes are reporting robust demand with key issues primarily arising from supply chain and labor shortages. The state’s unemployment rate continues to improve, and most recently, was reported at 4.7%, which on a comparative basis is where the state was in 2017. Given the rising demand and increasing population, we expect economic conditions to continue to improve, particularly in the metro markets we primarily serve. Given the significant recovery occurring across the state, low unemployment and clear evidence emerging of a V-shaped recovery, we have returned to our pre-pandemic credit policy and conservative underwriting guidelines. We saw increased loan pipelines quarter-over-quarter across all of our business lines with the overall pipeline increasing 44% to total $434 million at quarter end. Looking more specifically at the late-stage published commercial pipeline, we ended the quarter at $241 million, up 44% from the prior quarter. And although we generally don’t publish this number, the overall complete commercial pipeline, which includes early-stage deals, has increased 55% from a few quarters ago.

Tracey Dexter, Chief Financial Officer

Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, let’s start with slide 5. Net income was a record $33.7 million for the first quarter on a GAAP basis, increasing 15% quarter-over-quarter. On an adjusted basis, which excludes M&A and isolated branch consolidation charges, net income was $35.5 million, an increase of 16% quarter-over-quarter. Earnings per share on a GAAP basis were $0.60 compared to $0.53 in the prior quarter. On an adjusted basis, earnings per share increased to $0.63 from $0.55. On a GAAP basis, we reported 1.70% return on tangible assets and 15.62% return on tangible common equity. On an adjusted basis, first quarter ROTA was 1.75% and ROTCE was 16.01%. As we continue to grow our capital base, it’s worth mentioning that if the first 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 21.8%, increasing from 18.8% in the fourth quarter. Tangible book value per share increased to $16.62, up from $16.16 last quarter, and increased 15% year-over-year. The cost of deposits declined to 13 basis points from last quarter’s 19 basis points. Loan pipelines increased 44% from prior quarter end as Florida’s economic recovery begins to drive increased demand. The wealth management team continues AUM growth with an impressive increase of $156 million in assets under management this quarter to surpass a milestone $1 billion in total AUM. Strong mortgage banking and interchange revenue further bolstered results.

Chuck Shaffer, President and CEO

Thank you, Tracey. And operator, we’re prepared to take a few questions.

Operator, Operator

Our first question is from Steve Moss. Please go ahead.

Steve Moss, Analyst

Good morning. To start with loan growth, can you provide more details about the pipeline build and its connection to your C&I borrowers? Additionally, what is the potential for growth to exceed the high single-digit to low double-digit growth rates in the second half of 2021?

Chuck Shaffer, President and CEO

I think if you analyze our loan pipeline, you'll notice there's a bit more commercial real estate in it compared to what we've observed in the past. This is largely because commercial and industrial borrowers are holding a considerable amount of cash. As you may have seen from our portfolio, it's heavily weighted in professional practices, including many attorneys, doctors, and owner-operated businesses, all of which received stimulus money through the Paycheck Protection Program. In these cases, we need to see these businesses utilize that cash before they're willing to make investments. When we guide on pre-pandemic growth of mid to high single digits for the latter half of the year, the higher end of that projection will be influenced by C&I businesses making investments, while the lower end will occur if they continue to retain that cash. The speed at which this happens partly depends on the forgiveness of loans; as we process forgiveness and borrowers gain confidence in their cash reserves, they'll either distribute it or invest it, leading to an uptake in credit. If you're modeling our outcomes, you should consider how quickly C&I borrowers return to the marketplace. Nevertheless, we remain optimistic about achieving mid to high single-digit growth in the second half of the year, given the recovery of the Florida economy. Over the last two quarters, the recovery has been robust, and the vaccination rollout is progressing rapidly. If you visit Florida, it feels quite similar to the pre-pandemic environment. Both consumers and businesses are holding a significant amount of cash from the stimulus payments, so credit issues have eased, and we expect growth to resume by late this year.

Steve Moss, Analyst

Right. And maybe just on that business activity aspect, your interchange income stepped up here quarter-over-quarter. Just kind of curious, do you think about that as continuing to go higher from here, or if there’s just anything unusual there?

Chuck Shaffer, President and CEO

I think Q1 is usually the strong point, but I don’t expect it to materially move lower from this point forward. So, a lot of that’s been driven by stimulus in the economy and spending which we’ve seen both across the card companies and our own debit portfolio as well as we’ve talked in the past, we continue to market for interchange, we continue to drive stimulus campaigns, and we’ll expect to continue to focus on that. But I think Q1 was a high point. And then, if you were modeling, Q4 will be a high point again.

Steve Moss, Analyst

Okay. That’s helpful. And then, just one last one from me. Just in terms of looking at the margin and in particular loan pricing, just kind of curious as to where new loans are coming on these days versus roll-off yields?

Chuck Shaffer, President and CEO

Yes. Steve, in the prior quarter, I can give you an exact answer, we were at 3.81% for our add-on rate in Q1, and that’s been very stable for us over probably the last three quarters. And that’s a mix across all of our asset classes. And the roll-off rate, I don’t have in front of me. Tracey, do you know what the roll-off rate is?

Tracey Dexter, Chief Financial Officer

I think I do. Roll-off rate 4.24% in the first quarter.

Operator, Operator

Our next question is from Michael Young. Please go ahead.

Michael Young, Analyst

I wanted to begin with a discussion on capital and liquidity. You have the advantage of having high levels of both, which positions you well for future opportunities. It seems there may be some loan growth in the latter half of the year. However, with the recent dividend announcement and even with that growth, you will still be building capital. I’m interested in your perspective on potential opportunities to utilize that capital, and whether you might consider any temporary measures, similar to past acquisitions of mortgage loan pools to leverage your capital and liquidity. Are there any such opportunities available?

Chuck Shaffer, President and CEO

We prefer to maintain a significant amount of capital and believe in the strength of our balance sheet. We will continue to evaluate our capital strategy over time, focusing primarily on organic growth and mergers and acquisitions. The discussions in the M&A market have been strong and have been increasing over the past six months, so we ideally would allocate resources toward M&A. Currently, we have established a dividend and will reassess it as needed. It's essential to find a balance between growth and maintaining a strong balance sheet. We'll see how things unfold in the coming years, but our primary goals remain organic growth and M&A.

Michael Young, Analyst

Okay. And I guess, the other question I had was just through Vision 2020, you guys have done a really great job of kind of balancing reinvestment with culling of expenses in other areas. The guide for next quarter looks like that is slated to continue. But, are there opportunities to be, I guess, a little more aggressive, either in hiring or other areas to maybe invest a little more in the future for growth at this point in the cycle?

Chuck Shaffer, President and CEO

Yes, we have several important investments planned for the upcoming year, including hiring. We're actively recruiting both individuals and teams, and we are currently in discussions with several candidates. If we look back at the first quarter and late last year, we successfully brought on a team in the Central Florida area, which includes a new market president and a new regional credit officer. We have clear visibility on additional future hires as we progress through the next year, and these hires are included in our investment strategy. Additionally, we've been investing significantly in reducing our origination cycle times, particularly within our commercial banking sector, to accelerate our product delivery. We expect to see results from this investment later this year as our team works to enhance our digital origination process. Furthermore, we are also focused on improving the digital experience for our customers. We anticipate that by 2022, we will have a much more enhanced digital platform, which we are very enthusiastic about. I believe we will not increase our expense base over time, as we have plans to manage investments while maintaining our efficiency ratio. As always, we challenge ourselves to make tough decisions on legacy costs as we shift towards a digital future. We will certainly continue to make investments. In Florida, as the economy rebounds, there is an active hiring environment for bankers and an uptick in M&A discussions, creating opportunities to attract talent.

Michael Young, Analyst

Okay. And last one for me. You guys have made a lot of investment on the fee income side of the house to kind of offset the low rate environment. Could you maybe just talk about mortgage, in particular? I guess, that’s been high from an industry perspective. I know a lot of investment’s gone in there. So, should we expect kind of market share gain to mute the industry volume fall off or maybe just higher volumes in Florida generally kind of muting the industry impact?

Chuck Shaffer, President and CEO

Yes. The way we think about mortgage is it’s a great way to acquire customers. And so, we focus on Florida only. We focus on the markets we’re in. And we look at it as a way to service our current customers as well as grow a new customer base. I think that’s the highest value of the mortgage business. It builds sustainable annuitized revenue that comes alongside that cross sell. And so, as we move forward, we are always actively looking to recruit originators into the franchise. But over time, if refinance demand were to slow, that’s why our guide is to slower mortgage income in the coming quarters. That all being said, the team here at Seacoast has done an incredible job of prioritizing purchase money and servicing the realtors in the markets we’re in, and along the East Coast here, we’re the number one market share on the mortgage side. And we continue to expand that business, in particular, in Orlando and as well as Tampa. We’ve hired a number of mortgage originators in those two markets. But again, our key focus with mortgage is to drive customer growth and franchise value over time.

Operator, Operator

Our next question is from David Feaster. Please go ahead.

David Feaster, Analyst

It was great to see the increase in the pipeline. It’s extremely encouraging. I just was curious, how much of this is from existing customers that you think are getting more ready to invest, just given the improved economic outlook versus new customer acquisition from the new hires that you’ve made and just an update kind of where we are in the migration of new clients from the PPP program.

Chuck Shaffer, President and CEO

Sure. Looking at the pipeline, most of it consists of new customers we've been attracting and developing new relationships. A lot of this is driven by our expansion plans, as we've grown into the Tampa, West Coast, and South Florida markets. We're encountering more opportunities due to our business growth. As I mentioned earlier, our overall pipeline, which includes early-stage deals, shows that we have a higher number of deals per banker than we have seen in several years. Our entire team is engaged, which we find exciting. They are promoting the full range of our services, resulting in increased loan opportunities that significantly contribute to our asset under management growth, which has been impressive. We’re up almost $450 million year-over-year in AUM attributed to that team as they work alongside our wealth team. We're really enthusiastic about the commercial business and are committed to making it more competitive. We've made substantial investments in technology and leadership throughout Florida, and we plan to continue this approach. There’s a real opportunity for us, especially as many community banks have either exited or shrunk, while larger community banks have expanded significantly. This creates a favorable environment for us to establish ourselves as the commercial bank in the metro markets we serve. On the PPP side, we are continuously acquiring new customers and cross-selling existing ones. I don’t have the exact figures at the moment, but I can provide those for you later today, David. We're leveraging this as an opportunity to bring in more customers.

David Feaster, Analyst

That’s great. And just kind of curious, reading between the lines, it sounds like you’re a lot more confident that your appetite for credits improved pretty significantly. I guess, just given the build in the pipeline, the improved economic outlook and with the distraction from PPP in the rearview. Do you think that loans, exclusive of PPP, have troughed here, and that we should start seeing growth in the second quarter, or do you think there could be some additional runoff just from payoffs and paydowns?

Chuck Shaffer, President and CEO

Right now, our model would have very slight growth in the coming quarter, and then fairly significant growth in Q3 and Q4. So, I think this is the trough.

David Feaster, Analyst

Okay. And then, just wanted to touch on the strategy for deploying your excess cash. It sounds like you’re going to be pretty methodical and invest over time, or is it that do you expect maybe some of this liquidity to flow out? And I guess, just how do you think about your asset sensitivity in the securities book, just in light of this liquidity build? And do you see an opportunity to maybe take some duration risk and take some massive sensitivity off the table, or just how are you just thinking about that?

Chuck Shaffer, President and CEO

I think, Tracey, you can jump in here, too, if you want. But, I think we’ll continue to be patient. I think the risk of higher rates is fairly material at this point. And so, we don’t want to get ahead of ourselves and then find ourselves underwater in these long duration type low-yielding bonds. And so, we’ll be very methodical, David. It is a careful balance of earnings to the risk of market value declines in a higher rate environment. Today, we’ve focused on sort of sliding in for four-year duration with no extension risk. You take a little yield hit there and it pushes the yield down in the 1.20, 1.30 range, but we think that’s appropriate. And our guide to you for the coming quarter is a net $200 million in growth.

Tracey Dexter, Chief Financial Officer

Yes. And David, you’re right to mention some of the uncertainties there. The excess liquidity is driven largely by trends in PPP forgiveness, those higher customer deposit balances. And so, changes in that behavior would certainly cause us to reconsider.

Chuck Shaffer, President and CEO

Yes. You can kind of envision a period here where that excess liquidity that’s in bank balance sheets, including ours and everybody else’s begins to wane in the coming year as that money gets invested. So our sort of thought there is the C&I-type customers that have all of this cash will begin to invest later in this year. I think they have to. I think it’s pent up, and they’ve been waiting for, like I said, to work through forgiveness as well as some clarity on the economic recovery and the impact of the pandemic. I think, as we’ve talked in the past, we were waiting for some very clear indications around that, including vaccine, stimulus, etc. I think we’ve been able to see that, and that gives us confidence that the state is doing incredibly well. And we’re feeling confident about the future ahead on our economic recovery.

Operator, Operator

And I have no further questions at this time.

Chuck Shaffer, President and CEO

All right. Thank you. Thank you, everybody, for joining us this morning. And we’ll talk soon. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for participating. And you may now disconnect.