Welcome to the Seacoast Second Quarter Earnings Conference Call. My name is Cynthia and I'll be your operator for today's call. [Operator Instructions]. I will now turn the call over Dennis Hudson. Mr. Hudson, you may begin.

Thank you for joining us today in our second quarter 2016 earnings conference call. Our press release issued yesterday after the market close and updated investor presentation slides with supplementary information are posted on the Investor portion of our website at seacostbanking.com and you can find that information under Investor Services at the top of the page and then drop down to Presentation. Before we begin, I'll direct your attention, as always, to the statement contained at the end of our press release regarding forward-looking statements that we'll be making during the call. We'll be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and our comments today are intended to be covered within the meaning of the Act. With me in the room today is Steve Fowle, our Chief Financial Officer who is going to discuss our financial and operating results. Also in the room are Chuck Shaffer, who heads our Community Banking Division; Chuck Cross, who heads our Commercial Banking Division; David Houdeshell, our Chief Risk Officer; Jeff Lee, Marketing and Analytic. All of us will be available to answer your questions following the conclusion of our prepared remarks. The second quarter results show that Seacoast balanced growth strategy combining investments in our digital transformation to power a stronger organic growth and reduce our costs and the benefits, from our recent strategic acquisition, are all on track and producing results for shareholders. The second quarter featured a year-on-year revenue growth of 26% and a 28% growth in adjusted fully diluted earnings per share. Seacoast data-driven multi-channel approach to cross selling drove strong results contributing to record-high consumer, small business and mortgage quarterly loan production, as well as record-breaking debit card volumes. We've been implementing Seacoast methodical transformation for the last eight quarters…

Thank you, Denny and thanks to all of you for taking the time to join us this morning. Second quarter growth reflect continued execution of our business strategy, the transformation Denny just discussed and a step towards our 2016 goal of $1 adjusted earnings per share. We reported GAAP earnings of $5.3 million or $0.14 per diluted share, compared to $4 million or $0.11 per share in the first quarter of this year and $5.8 million or $0.18 per diluted share, in the year-ago period. Our second quarter GAAP earnings include a number of noncore items as detailed in our press release, including expenses incurred from closing and integration of BMO Harris, our Orlando operations and trailing expenses from last quarter's Floridian acquisition, expenses related to branch closures, including both Legacy Seacoast branches and acquired branches, the charge taken in conjunction with the early termination of Federal Home Loan bank borrowing. These acquisitions will provide strong returns for Seacoast, including expected IRRs near 20% or better, while the FHLB advance prepayment and branch consolidations provide additional economic benefits for our company. As typical for the banking industry, we exclude securities gains from our adjusted earnings. This quarter, we've revised our adjusted entries for this quarter and historically in response to the SEC's recent guidance on non-GAAP presentation. This change led us to eliminate adjustments for OREO expenses and asset disposition costs which were relatively small dollar adjustments. Adjusted net income increased $2 million or 29%, from first quarter levels to $8.8 million. Adjusted earnings increased $2.7 million or 45%, from the year-ago period. Adjusted diluted earnings per share increased to $0.23, up 21% linked quarter and 28% year-over-year. Our operating metrics also reflect a step forward for our business model. Adjusted ROA improved 9 basis points to 84 basis points…

Thanks, Steve. And the operator we would be pleased to take a few questions.

[Operator Instructions]. And our first question comes from Steven Scouten with Sandler O'Neill. You may begin.

This is actually Peter Reeson for Steven. I wanted to get your thoughts on the comments that you made in your prepared remarks and also in the press release where you were talking about the commercial real estate as a percent of total capital. That's obviously been our theme this earning season, so I was just wondering, have you seen any increased comments from regulators or is there is any additional pressure from that or is this just a homegrown concern?

We have no concern about CRE and if you interpreted our comments to suggest we're slowing our growth in CRE, that's not what we're saying. What we're saying is that we're executing a plan to grow our loan portfolio that is balanced and we were making the point that our CRE exposure is quite low compared with other companies and so we will continue to grow CRE, but we will grow it in careful manner as we go forward and we'll grow it within our guard rails that have pretty significant impacts on the granularity and the diversity of that portfolio. So you're going to continue to see overall loan growth and we'll have nice CRE growth. I'm not sure if I captured your question or concern.

I guess, just kind of switching gears a little bit, this might be for Steve, but obviously the NIM was lower on some of that excess liquidity from the branch acquisitions and preparing for those. So, would you assume that, given a little bit of deployment with that liquidity, maybe in the second half, that you could see a stable NIM from here, maybe in 3Q and 4Q?

Yes, I think that combined with the nice loan growth we've got and the ability to change the makeup of our balance sheet as a result, that it should be stable, just slightly increasing as we move forward and I lean toward slightly increasing from what our modeling is showing us.

And our next question comes from Michael Young with Sun Trust. You may begin.

Steve, I appreciate all the color on the branch numbers and deposit rates and everything in slide 49. It's very helpful. I just wanted to maybe start off with kind of what you're seeing in terms of deposit retention from the branch acquisition at this point.

So far, everything has gone right according to plan, particularly in the Orlando market, in the consolidated Floridian franchises as well as BMO, we've seen very little runoff and it's gone extremely well. Out in some of the branch locations in the middle of the state that we consolidated, where we have vast different distances between branches, we've seen a little more runoff, but it's about exactly where we expected. So nothing abnormal and it's actually all performing quite well.

Okay, great. And I just wanted to also ask, going forward, given how that's done and the Floridian deal, should we be expecting additional acquisitions? Are you seeing a decent pipeline in Florida or is it going to be more focused on the Accelerate initiative from here? Just kind of what your thoughts are on organic versus inorganic growth?

Yes, well we continue to say and continue to execute a very balanced strategy around growth and I've said many times that we lead with organic growth. If we can't be growing this company organically, then we probably shouldn't be doing this. And we've had some very strong organic growth numbers, as you heard, in terms of loan growth, particularly this quarter. And as you look across the last couple of years, we've had very strong organic growth. We look for acquisitions to supplement that growth where it really makes sense and so the really key attribute for us is focusing on the customers that we're acquiring and determining whether they fit into our strategy going forward. And thus far, the acquisitions have significantly improved some of our performance metrics as we've integrated them into this larger issue of transformation. So they're very impactful and we'll continue to look for opportunities. As we stated earlier, that continues to be a component of our value creation and when we see opportunities to do that, we certainly want to take advantage of them. So I wouldn't say we lead with M&A; we do use it to supplement our organic growth. We'll continue to see that. I think the environment out there, right now, a lot of smaller banks that maybe have questionable value that we've seen out there and we'll just continue to stay alert to opportunities.

And I guess going back to the CRE hot topic in the industry. Would you be reticent to acquire a bank -- I mean obviously the banks in Florida are a little more heavy-CRE, given the market. Would you be reticent to acquire on that maybe had higher concentrations there?

And the advantage of M&A, vis-a-vis, the whole CRE question, is purchase accounting and the ability to really look carefully at those portfolios. The good news is depending on the acquisition candidate, they tend to be far more granular, that's a good thing for us and they tend to give you more exposure or a more balanced exposure to other markets in some cases. So it would just all depend on the situation. We're receiving no concerns. In fact, I've had great conversation with our regulators about this and because of the ways we drive our growth, particularly being careful around CRE, I think we have capacity there for some growth. You're right; it could be a limiting factor depending on the situation. We'd have to think that would be one of the many factors we'd consider. I think, suffice it to say, I think that the primary point here and the headline around this conversation would be that we, today, operate with an extraordinarily low concentration in CRE which provides us -- you could look at it the other way, provides us with some opportunity.

And Steve, just one last one the securities book; from here, obviously I would expect those balances to come down with loan growth, but how should we think about earning asset growth, maybe relative to loan growth, if that's an easy way to characterize it?

Yes, so I think you're right. We leveraged the balance sheet to the point we thought was appropriate through the end of the year, so the growth in the balance sheet will come from loan originations as we move forward. Is that what you're asking?

And our next question comes from Bob Ramsey with FBR & Co. You may begin.

I just wanted to clarify around margin. I think you guys said earlier you expect it to be stable to slightly increasing and I thought there would be some compression from the BMO branch acquisition and securities around that. Is that already what we see in the second quarter or is there a little bit of pressure from the full quarter impact, that deal in the third quarter and then from there you're stable or if you could just clarify a little bit?

I think a lot of its behind us, maybe not all of it, but a lot of its behind us, because we did do the bulk of the securities purchases before the middle of the quarter. And the compression the margin really had to do with those securities purchases, as well as a little bit of excess liquidity, right around the acquisition time. So again, our model is showing that we've got upside opportunity as we move forward which means that dynamics from the acquisition, like replacing Federal Home Loan bank borrowings with their lower-cost deposits, adding their loans onto our balance sheet, the loan growth that we had at the end of the quarter, other factors, are going to more than outweigh both the additional compression from securities and the overall competiveness interest in the rating department.

Also the deposit book we acquired there was extraordinary. I think over 56%, 57% of checking accounts. We're talking a lot of zero-cost acquisitions of deposits there, so it was a solid move we thought.

And then shifting to expenses, with the full quarter impact to BMO, do you end up a little bit above $29 million to $30 million end of the third quarter? I'm just trying to get sense what the run rate is before you get some of those savings in there.

Let me give a few general comments about the dynamics that are at work here just to kind of clarify and then maybe Steve could weigh in. But how do we get -- there's been a lot of questions about how we get to the dollar and we've published that dollar as a goal in January. And we've talked a little bit earlier -- Steve gave some good comments about that, but I look at it as being driven by acquisition dynamics and transformation dynamics. And starting with the acquisition dynamics, this is kind of how I think about it. In Q2, we had the impact of BMO in terms of the revenue impact, really for one month, as we closed at the tail end of Q2 and we had virtually none of the cost-outs. We also absorbed in Q2, most of the impact of the Floridian cost-outs in a full quarter, a full load of Floridian revenue. As we flip ahead to Q3, we begin to absorb all of the Floridian cost-outs, full quarter impact of those cost-outs and just some of the BMO cost-outs, combined with all of the BMO revenue impact for the quarter. And then finally, as we get into Q4, we pick up the full revenue and the full cost-out impact of both BMO and Floridian with, actually, little to no cost adds back in the rest of the enterprise then. And then when I look at transformation dynamics, we're speeding up our transformation dynamics in response to the rate challenge and those dynamics are driving operating leverage and it's around greater revenue momentum and greater efficiency as we scale up some of the automation that we put in place over the last couple of years to create much greater operating margins. And that continues as we look out and lay that out into our forecast in Q3 and in Q4. So while we could look at the environmental changes as a real challenge and a headwind, I view it more as a catalyst for us to move much faster as we go forward. And I'd also just encourage people on the phone, we've developed a lot of proprietary tools to drive our business model and invite all of you to come down and spend some time with us here in our facility, so that we could show you some of the things we're doing again to drive revenue momentum and create the sufficiency as we leverage up and drive operating margin. Did you have anything to add?

Yes, just hang on to that. Again, we remain focused as well on expense management in our Legacy Organization. As an example, from Q1 to Q2, see our adjusting expenses increased by $1.7 million and that came despite operating expenses from BMO and Floridian, that added, we think, about $2 million to $2.5 million, so our Legacy costs actually came down quarter-to quarter. Now with our strong organic growth, you can't expect that every quarter, but I think that's just an example of the focus that we do have and the opportunity we do have on a continuing basis for expense management.

And then one other question, we're shifting gears; I wonder if you could comment on the relationship with CapGen. They obviously publicly expressed some frustration about tangible book-value growth and GAAP profitability; just curious if they've expressed specific targets for those or other measures and any thoughts there.

Well, it's kind of silly to talk about GAAP as a driver for investors in a period where we did four acquisitions. It's hard to make sense of that. So we'll continue to focus on adjusted, as I think it's very helpful to investors to understand the underlying core or results of the company. We're quite pleased with the results we've produced and the growth that we've produced. We're on target. We've had some of the highest growth or the most significant growth we've seen and we think the opportunities in this market are tremendous for us to continue those trends. So when you stand back and look at it and kind of look forward to where we're headed, we're actually quite pleased. And as we look into 2017, we'll continue to feel the full-year impact of all of those acquisition dynamics that were evident in 2016 and the deeper effects of the transformation dynamics that we talked about earlier in the call, as we speed our processes up. And so these dynamics, I think, were -- will continue to drive value as we look forward. I think we'll -- investors including CapGen should be pleased with the results that we're producing and that we see us beginning to deliver even out into 2017. Growing evidence out there that speeds the transformation is an important key to becoming a growth company.

Okay. And the differences GAAP and non-GAAP will shrink in the third quarter and it should be pretty negligible fourth quarter and beyond. Is that right?

Yes, I think that's an accurate portrayal.

[Operator Instructions].

Well, thank you very much for attending today. We really look forward to meeting with you again in the next quarter to talk about our Q3 results. Again, as I said earlier, we invite all of you to come down and visit us and take a look at some of the things that we're developing and implementing in terms of changes in business model to help us as we drive even better organic growth and operating leverage over the next couple of quarters. Thank you.

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