Welcome to the Seacoast Banking Corporation Second Quarter 2017 Earnings Conference Call. My name is Hilda and I will be your operator. Before we begin, I have been asked to direct your attention to the statement contained at the end of our 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. I will now turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank. Mr. Hudson, you may begin.

Thank you very much operator and thank you everyone for joining us today on our call. Our press release which we released yesterday after the market close as well as an investor presentation can be found on the investors portion of our website under presentations. With us today is Chuck Schaffer, our Chief Financial Officer, who will discuss our financial and operating results, as well as Julie Kleffel, our Community Banking Executive; Chuck Cross, our Commercial Banking Executive; David Houdeshell, our Chief Risk Officer; and Jeff Lee, our Chief Marketing and Analytics Officer. Our second quarter's results show again that Seacoast core balanced growth strategy combining investments and organic growth with well-integrated acquisition that strengthen our position in important Florida market is working. Household acquisition and all loan production categories were strong this quarter as we continue to stick to our credit guardrails and we're benefiting from our low cost deposit base and the acquisitions we recently completed are contributing as well to our results. Second quarter net revenue increased 14% over the prior quarter and 25% over the second quarter last year. Adjusted net income for the quarter rose 23% sequentially and 38% compared to 2016. Adjusted net income per share of $0.29 for the quarter is up 12% sequentially and 21% compared to the prior year. Our return metrics continue to trend higher with adjusted return on tangible assets of 1.02% for the quarter, adjusted return on average tangible shareholders' equity of 11.22% and adjusted efficiency ratio now of 61.2%. These are substantial improvements over the prior year and we're on track to achieve our Vision 2020 medium term guidance goals of an adjusted return on average tangible assets of more than 1.3% and return on equity exceeding 15% and bringing our efficiency ratio down to at or…

Thank you, Denny, and thank you all for joining this morning. As I provide my comments, I will reference the slide deck which can be found at www.seacoastbanking.com. I'll start this morning on slide five discussing some of the highlights for the quarter. Net revenue increase 25% year-over-year to $55 million and adjusted net income was up 38% to $12.7 million. Sequentially, net revenue increased 13.7% or $6.6 million and adjusted net income was up 23% or $2.4 million. Adjusted return on tangible common equity ended the quarter at 11.2%. Adjusted return on tangible assets was 1.02% for the quarter and the adjusted efficiency ratio declined to 61.2%. All three ratios have improved meaningfully from one year prior improvement. This improvement evidences are continued progression towards our Vision 2020 objectives and our commitment to continue to make progress in providing value for shareholders. During the quarter, we completed the acquisition of GulfShore Bank and announced an agreement to purchase NorthStar Banking Corporation, strengthening our position in attractive Tampa MSA. We also announced an agreement to purchase Palm Beach Community Bank, broadening our presence in South Florida, the state's largest MSA. We achieved another record quarter for consumer and small business origination and reached 100,000 households by quarter end. For context in 2013, we served just over 66,000 households. This represents a 50% increase in household serves since implementing our balanced growth strategy. Let's move forward to slide six, certain items, some of which we discussed on last quarter's call impacted non-interest expense in the second quarter. GulfShore and other acquisition-related charges totaled $5.1 million in the quarter and additionally, we added one more branch closure into 2017, bringing total branch closures year-to-date to five. This impacted the quarter by $1.9 million in consolidation related charges and as discussed on the…

Great. Thanks Chuck. And operator, we'd be pleased to take the questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from David Feaster from Raymond James.

Hey good morning guys.

Good morning David.

Let's start with the NIM, even excluding that you talked about the loan yields grew by -- even excluding the 13 basis points of accretion, could you maybe just walk us through what drove that? It was better than I was expecting, even though you are asset-sensitive, then GulfShore was actually dilutive to the NIM if my math is correct. Could you just give us some details in to what drove that? And how much more of the benefit from the June hike, you would expect in the third quarter?

Sure. I think, the way to think about it we did have nice NIM expansion quarter-over-quarter. A fair amount of our loans are type of LIBOR. And if you go back and look at LIBOR, LIBOR increased more rapidly than the actual Fed funds rate increase. So we saw about half of our loan book repriced in the prior quarter. We'll see about half of that reprice in the third quarter. So that help as well is in kind of comparing to the guidance we provided the deposit portfolio outperformed our own expectations and we are only up 3 basis points quarter-over-quarter despite the increase in short-term rates. So we saw expansion on both sides. And then, the other thing I'll point out is that our add-on rate for the quarter for loans was strong at 438 which was a pick-up from prior quarters as well, so nice performance in the NIM even when you remove the impact of the outsized accretion.

Okay. And just talking about organic loan growth, so looking for the mid-teens growth rate going forward nice loan growth organically in the quarter, could you maybe just give us some detail on what drove the organic growth in the quarter?

It was generally across all categories. I mean, we've kind of got everything performing pretty darn well at this point. And not to be overlooked is a strong growth in consumer and small business. When you look back over the last year or two, we've seen some nice improvements in mix and I think those mix improvements helped support the add-on rate that we just talked about, that's been part of our plan. As we've gone forward and we'll continue to tweak the mix to try to achieve the best returns we can get while sticking to our really important guardrails around risk and the like. Any other thoughts there?

No, at this point the economy is still robust. We’ve strong growth particularly in Central Florida. Four quarter still continues to produce very well for us and it's -- we continue to see a good outlook on loan growth.

And as you look ahead over the next year, we see a substantial growth in team as a result of the acquisitions in Tampa as well as some folks that were already with us in Tampa and you rolled that out in the next year and we're excited about what we can continue to do there in terms of producing growth. As I said in my comments, we're going to run the same playbook, a very similar playbook that we ran in Orlando and that combined with the exposure to that market, I think could meaningfully help us maintain really decent growth rates in some discreet markets very robust markets.

Okay. That's helpful. And last one for me. Just like to talk about deposits. I believe you've highlighted 6% deposit growth going forward, could you just talk about the competitive environment? Your expectations for deposit betas going forward and your willingness to raise deposit prices going forward in order to hit that growth number, given that you noted that -- people don't pay you for rate and as you…

Yes.

…you slowed growth because you don't want to raise rates, so just some color there?

Yes, I'll start off and then Chuck you can weigh in. But I would just say that the growth we've had has been outstanding overtime. As Chuck mentioned in his comments, we actually were not as competitive in some of the institutional and there were really primarily talking about municipalities and the like and we saw a lot of our municipal deposits rotating to some funds that are run by the State of Florida. Just not an area we want to get into something we have anticipated as we go into this period of potentially higher rates. And I think that accounted for a big chunk of kind of what happened this quarter in terms of a little bit lower growth rate. As we look however deeper into the individual markets and look at our deposit growth even this quarter. When you adjust out some of those kinds of things like I mentioned and some other impacts we see actually very strong growth and we are pretty darn confident that we'll see this rotate back into a 6% plus deposit growth, but other comments, Chuck.

The only other thing I'll mention you mentioned about the deposit beta just kind of gives some color for your models or whatever. We run about a 14 basis point beta on 100 basis point increases. And that the big piece of why that so low is you're well aware our non-interest bearing checking still represents a big piece of the deposit funding and provides value in rising rates scenario.

And because of our activities, the sales activities particularly around some of the work we're doing with the digital both in cross-sell and prospect work that we're doing. Those are our fastest growing line items. The non-interest bearing core deposits out there and so we'll continue to focus on that we're getting better and better at turning these insights into much better growth than in relationship based deposits and that's where is that right now. So I think we'll see as Chuck said in his remarks, we'll see some tweaking of our competitiveness. In some areas of consumer CDs for example recently but we were planning to maintain this incredibly valuable deposit book and actually have seen some tremendous growth. And just to reemphasize, we've seen very solid growth rates in market for both consumer and especially for small business over the last year and that continued into this quarter, although we had a little bit of an impact here with some of the things we talked about earlier [indiscernible] summer. And we're in this kind of the absolute low point for us for funding.

That's great color. Thanks guys.

Thanks.

Thanks, Dave.

We have question from Michael Young from SunTrust.

Hi, good morning.

Hi, Michael.

Hi, Mike.

I want to start off on the expense side, Chuck. It sounds like with the additional branch here you're going to close this year you'll have about 10% of a branch reduction relative to the 20% you expect, can you maybe just talk a little bit about the timing of additional branch reductions? And then also any other sort of expense improvement items that we should see in the back half?

Sure. I will be happy to answer the question, Mike. Yes, so we did we achieved, we've achieved five branch closers and you're right. It was when we laid out the 20% over 24 to 36 months we're about halfway there, maybe a little over halfway based on the original number. I would suggest you that over the remainder of the year we probably we have nothing that we're actively working on anything that where do we put together we would most likely impact the 2018. There will be some consolidation as we move through the acquisitions that will happen as we talked about in the prior discussion. So excluding that just sort on the legacy franchise, I think we've done what we're going to get done in 2017 and the work we'll do on further branch consolidation will happen in 2018. And we continue what I would say is that just on expenses in general, some of the work we've done earlier in the year just materialize sort of halfway through the second quarter we'll see some of that show up as we move forward. And we're continuing to work through the organization to streamline and curtail expenses.

Okay, great. And then just on the adjusted efficiency ratio guidance in the 50s going into 2018, are you talking about on a full year basis or just fourth quarter?

Exiting the year, is the way to think about it, so fourth quarter moving into first quarter.

Okay, great. And then maybe just one for Denny any kind of zooming out a little bit, we've got some additional acquisitions higher interest rates than when Vision 2020 was laid out. So I assume that's all sort of a benefit to that target. I mean at some point are we starting to think about that as vision 2019 or is it too early to kind of move the guideposts up?

I'm sorry; I didn't quite get the question that was here.

If I could rephrase, Michael. Michael was saying based on the run rate could we move the expectations from the Vision 2020 discussion up a year?

Well, if we do we'll surely let you know.

Okay.

I think we're still targeting that vision just got to jump in there we're still targeting our Vision 2020 is exit 2019 into 2020 objective. And as we move forward if we see positive momentum there will certainly bring back those thoughts.

But I think the key point is we feel really comfortable, we're on track for hitting our promise in February when were at the Investor Day we feel really good about it. The thing that excites me the most is some of the success we continue to build out of -- lot of transformation work that we earlier talked about. As I said that's beginning to contribute a more meaningful part of our growth and all of the growth it contributes is driving fee revenue, it's driving deeper relationships with our customers and it's driving low cost funding as well as some of the higher yielding small business loans and consumer loans as we go forward. And so we're at a really important point where we'll continue to invest in those structures and in that transformation because we think it really begins as we -- as we lay it out in Investor Day, it really begins to drive momentum in terms of our returns to shareholders. So, very excited about that and very optimistic that we'll hit the numbers that we talked about and who knows as we get a little deeper into it, we may have an update to talk to you about in terms of getting a little faster, we'll just have to see how it lays out.

Thanks for the color.

Great. Thanks Mike.

The next question comes from Steve Moss from FBR Capital.

Hey good morning guys. It's actually Kyle Peterson on for Steve today. Just wondering if you could talk a little bit more kind of on the loan deposit growth going forward, I mean obviously, you're targeting kind of mid-teens loan growth, 6% deposit growth for the time being. Do you guys have like a target either timing or loan-to-deposit ratio kind of where you would want to kind of grow those on a more matched basis? Just given that the current run rate will obviously have that loan deposit ratio creeping up over time.

I'll just add a comment here. We've seen some pretty dramatic improvement in the loan deposit ratio over the last several years as we've continue to lay out the growth rates that you described. And we think we have a little more gas in that tank to continue to improve that ratio and comments Chuck on kind of our thinking there.

No, I think that's the way. You mentioned its mid-teen loan growth, 6% deposit growth and if you just run that out in your model, I think you'll see towards the latter part of 2018, we approach about a 90% loan to deposit ratio. So, I think we got plenty of runway ahead there to continue to expand the ratio and realize the benefits from that.

And again one thing to keep in mind is the mix of loans and how that could change over the next couple of years and produce greater fee growth for us while also supporting decent loan growth. And so we're mindful of that and I think -- I guess what we're saying is we're comfortable pushing up to the 90% range in the next couple of years. We see that happening. And in the meantime, we have a lot of levers we can pull to begin to move away from balance sheet more into fees. It's an important theme internally that we'll continue to look at.

Okay. And then a little bit -- I noticed you guys mentioned -- made the decision in comp portfolio, a greater portion of resi mortgage production. I guess is that driven just by the kind of current mortgage banking market? Do you just like the economics of the stuff on the balance sheet better and kind of -- is it arms, is it fixed rate, just a little more color on the strategy there?

Yes, it's a combination of things. But no doubt the marketplace here is driving some of that mix change. Having said that, there are a lots -- as I said, there are a lots of levers we can pull, a lot of dials we can adjust to kind of put that back in a better place and that's one thing. That's the current topic here and we expect to see that begin to kind of evolve in a more favorable direction to bring our fees back into the income statement. But no doubt the market has shifted a little and will continue to shift. By that we're seeing tighter inventory across the state, again, not at a level that gives us concern, but at the tighter market, we see tremendous growth out there. We're seeing growth in construction spending at this point and that's having some impact as well as more jumbo demand kind of out there. So, having said that, we had great growth in some of our pipelines and in the other categories as well so. So, we'll continue to adjust and hit our targets.

Okay. And I guess is the incremental resi that's getting up growing on balance sheet versus sold-off, is that jumbo? Is that -- come more standard agency fixed or kind of what's going?

This quarter it leaned a little bit into some of the construction lending. That was an impact as well as a little bit of jumbo.

Okay. And then last one for me and I'll hop out. Wondered if you could talk a little bit more about the accretion kind of map from here kind of given with GulfShore, kind of scheduled basis, obviously we'll get something from GulfShore and then Palm Beach and NorthStar kind of in later parts of the year, just kind of where you see that going in the last two quarters and beyond?

It's -- to jump in there. It's really hard to predict. It's all really related to customers either refinancing or paying off credit. And so it's something that is virtually unpredictable. But we did sort of reload the purchase pool with the GulfShore acquisition and when we acquired the other two institutions that will definitely add to the unaccredited discounts. So, it's difficult to predict in the quarter itself. As we talked about, we had about 13 basis points, 10 basis points with loan, three basis points securities, but we don't really count on that. Looking forward, we just use our shorter run rate on accretion.

So, said another way it continues to be somewhat volatile. If you look back over time, we've tended to talk in terms of eight or 10 basis points over time and that probably will continue and I would say particularly with the pending acquisitions, continuing to build the purchase loan book, which is marked, we'll continue to see that and be dealing with that for some time again. We don't count on it, but it seems to be there every quarter.

Right. Okay. So, eight to 10 bps kind of on a scheduled basis. And obviously the accelerated old piece and push and pull, but eight to 10 bps is good.

Yes.

On average.

Yes.

Okay. Thanks guys.

And I would just say most of the -- some of the volatility has to do with really positive things happening with businesses being sold to larger companies that are not borrowing locally. We've seen some of that and I think it's just indicative of the positive environment we continue to operate in which the other side of that coin is that continues to drive robust loan growth. So, while we suffer through a little bit of volatility on that line item, it's also producing very nice loan growth for us across the Board.

Okay. Yes. Thanks for the color guys. I'll hop back now.

Thanks Kyle.

The next question comes from Jeff Cantwell from Guggenheim Securities.

Hi, good morning.

Morning.

Morning Jeff.

Morning. Hi. Most of my questions have already been answered. Just on the back of your comments earlier about asset sensitivity, can you just give us some color on how you're thinking about your asset sensitivity and looking out over time? Just want to be able to think through all the puts and takes given that your digital strategy has been gaining traction. But also just thinking about what your asset sensitivity profile looks like once you pull out all your acquisitions as well as relates to your historical asset sensitivity? Thanks.

Great. Just I'll kind of make a few comments there and not to reiterate what we said, but 3% to 6% and a 100 to 200 type NII improvement and 6% to 12% on and 12 to 24-month period. I think we continue to stay in that kind of range as we move forward. I'll point out that the acquisitions we acquired, GulfShore was -- had a fairly large variable book nature to it. So, I don't think in any way it interrupts our assets sensitivity. And then looking at the two acquisitions we're doing later this year, both those asset profiles are fairly asset sensitive as well. So, I don't see that changing. I can only see it getting slightly better as we move forward as far as creating more assets sensitivity. When you look at our loan book, 58% of it is fixed, 42% of it is variable adjustable, and our investment portfolio is about 60% fixed, 40% variable. So, still plenty of assets sensitivity on the balance sheet. And when you combine that with the core deposit portfolio, which is a very long duration, highly diversified, low cost core portfolio, it just leads to NIM expansion and higher rates.

And again just to pile on here, the work we're doing to grow that low cost, no cost funding is a key attribute to driving value over the next couple of years and the work we're doing in some of the transformational things that we talked about earlier, the use of analytics to help drive those kinds of relationships, being able to use that information to refocus the organization -- or keenly focus the organization in the right areas of growth, not just growing the balance sheet, but growing the balance sheet in areas that really provide great returns for shareholders is a key focus for us going forward. So, we think that it's a game changer for us and will put us in a stronger position than many as we navigate the next couple of years and achieve our 2020 Vision.

Great. Thanks very much. Thanks Jeff.

Thanks Jeff.

The next question comes from Christopher Marinac from FIG Partners.

Thanks. Good morning guys. And Chuck I wanted to go I want to go back to expenses, I guess slide nine. So, as we look at the next couple of quarters and kind of implied guidance for the second half, do expenses still grow on an absolute basis in dollars? I realize that maybe the change in the percentages may shift, but I just want to understanding that if the absolute dollars is still growing?

I think the way to think about it is if you look at the second quarter, I think we'll be modestly lower than the second quarter in the third and fourth on a legacy basis. But in the fourth quarter, obviously, we have the two acquisitions coming on. So, you have to consider that. And so when the two acquisitions come on, we will see expense increases in the fourth quarter related to operating expenses from those two organizations. But that's the way I think about expenses looking forward.

Okay, that's great. And then is 2018 a part of the story that you're operating leverage gets greater than what you've been able to achieve here in recent quarters?

When you look back historically, we continue to create operating leverage. I think as we look out into the -- again, if you look at the Vision 2020 medium term guidance we gave, that obviously shows continued expansion in operating leverage. So, -- and with the efficiency ratio moving downward into the 50s, it's all just evidence to the fact that operating leverage continues to be created over time.

Our plan is to hit the -- get into the 50s as we exit this year. And when you look at the 2020 Vision, just to reiterate what Chuck just said, we'll be down into the 50s as we move through next year and we expect to see continuous improvement in operating leverage driven by primarily some of the transformation activities that we have. We have a clear cut path and a roadmap to reduce our cost-to-serve while improving the way we serve our customers. We have a clear cut math pathway to continue to grow in the right kinds of asset classes with the right kind of funding over time and that drives tremendous -- the combination of the two really drive improved operating leverage. That's the whole game over the next couple of years. And it wouldn't be there without the transformation work that we're doing. And it's aided by the scaling that occurs with the right kind of M&A when we see opportunistic things to select that really fit well in building a rational franchise here across the State of Florida.

Great, that's helpful guys. And just I guess one more separate question. If we have another one or two Fed rate hikes, to what extent does that help validate the model in terms of what you have to pay incrementally? Just sort of curious if you can see signs where you don't have to be paying as much as rates change.

When you say pay, you're referring to deposit customer?

Correct. Exactly.

Yes. No, I think, yes, that is one of the benefits we have with the deposit portfolio is the NIM expansion and deposit betas that are there. I think this quarter evidence if you look back over the increase in short-term rates and where it's been and we're only up three basis points quarter-over-quarter, it shows the strength of that. And I think when you look at with a couple more increases in the Fed funds rate; it's very speculative. If that were to happen, it continues to create value with NIM expansion looking forward.

Great guys Thanks again. Appreciate the background.

Thanks Chris.

We have no further questions. I would like to turn the call over to Mr. Hudson for closing remarks.

Great. Thank you, operator, and thanks to everybody on the call this morning. We appreciate your interest and look forward to giving you an update as we hit the next quarter. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.