Good morning and welcome to the Seacoast Second Quarter Earnings Conference Call. My name is Brandon and I will be your operator for today. [Operator Instructions] 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.And 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. Good morning, everybody and thank you for joining us today for Seacoast second quarter 2019 conference call. Our press release which we released yesterday after the market close and our investor presentation can be found on the Investor portion of our website under the title Presentations. With us today is Chuck Shaffer, our Chief Financial Officer and Chief Operating Officer, who will discuss our financial and operating results.Also with us today are Julie Kleffel, our Community Banking Executive; Chuck Cross, our Commercial Banking Executive; David Houdeshell, our Chief Credit Officer; and Jeff Lee, our Chief Digital Officer. As you saw in yesterday’s press release, Seacoast reported another strong quarter with continued, solid organic growth in our customer base. Importantly, we generated significant improvement in operating leverage this quarter as well, the result of improved revenue growth and further streamlining our operations. We grew adjusted net revenue 18% to $74 million and achieved adjusted net income of $26 million, up 41% year-over-year. We reported $0.50 in adjusted earnings per share, an increase of 32% year-over-year driven by higher loans and deposits as a result of our balanced growth strategy and a tremendous growth in fees this quarter. Not only were mortgage fees up, but also most of the other categories, including wealth, which produced one of its strongest quarters ever in new asset growth.We also completed the implementation of our plan announced during last quarter’s call to identify approximately $10 million in annual cost reductions. These improvements, together with continued execution of our balanced growth strategy, drove operating leverage which more than offset and should continue to offset what we said last quarter would be a more challenging rate environment. These changes were taken in response to the shift in the yield curve that occurred late last…

Thank you, Denny and thank you all for joining us this morning. As I provide my comments, I will reference the second quarter 2019 earnings slide deck which can be found at seacoastbanking.com.Beginning with Slide 4, we are successfully executing our strategy across all business lines. Adjusted net income grew year-over-year 41% to $25.8 million, resulting in earnings per diluted share of $0.50. We reported a 1.59% adjusted return on intangible assets and a 15.2% adjusted return on tangible common equity. Tangible book value per share grew 5.2% sequentially to $13.65. We ended the quarter with a tangible common equity ratio of 10.7% and an average loan-to-deposit ratio of 87.3%, affording ample room for continued loan growth. As we continue to grow our capital base, it’s worth mentioning illustratively if the second quarter’s tangible common equity to tangible asset ratio was adjusted to a normalized target of 8%, our adjusted return on tangible common equity would be 19.2%, increasing from 18.8% in the prior quarter. And our performance was highlighted by continued improvements and generating operating leverage with a focus on growing revenues while streamlining operations. The adjusted efficiency ratio declined 4.4% sequentially to 51.4% and the adjusted non-interest expense to tangible asset ratio declined to 2.34%.During the quarter, we completed our previously announced expense reduction initiative, reducing the full-time equivalent employee count from 902 to 852 renegotiated key vendor contracts, enhanced cost control across a number of line items and consolidate one banking center location with an additional closure planned for the third quarter. And you can be assured that our continued diligent focus on efficiency is accompanied by great care and ensuring that we do not impede on Seacoast ability to drive revenue growth. Non-interest income improved significantly from the prior quarter with improvements across most line items,…

Great. Thank you, Chuck. And operator, we’d be pleased to take a few questions.

[Operator Instructions] And on the line from Sandler O’Neill, we have Steve Scouten. Please go ahead.

Hey good morning guys. How are you doing?

Hey, how are you?

Good, good. Chuck, I appreciate all the guidance around the NIM moving forward, and I just want to make sure I heard it properly, you said low 3.90s if we don’t get a rate cut, but high 3.80s if we do get the July and September cuts. Is that correct?

That’s correct. Hey, exactly. Under a flat rate scenario, it would be low 3.90s. Under a – the forward curve, which includes a rate cut in both July and September, high 3.80s for the third quarter. And if you look at net interest income, we expect net interest income to grow modestly in the third quarter and then expand meaningfully in Q4 and into 2020, primarily the result of growth in the balance sheet combined with the reducing rates paid to deposit customers. So we’re going to [indiscernible] and we’ve already started some of it begin – reducing rates, and if we see the Fed cut rates next week, we’re going to sort of aggressively cutting some of our deposit rates.

Okay. And can you remind us, if you have the numbers, kind of how much of your loan book adjusts immediately with the potential Fed cut and maybe conversely, how much of your deposits are indexed to some of various-related index?

Sure. I’ll take – and I will give you securities as well. On the securities portfolio, approximately 64% is fixed, 29% is floating and then on – the remaining 7% are adjustable that hit reset dates. On the loan book, 58% is fixed, 23% is adjustable. So in other words, once it hits its reset date it re-priced. And 22% is truly variable, which is about $1.1 billion and of that, about $800,000 is tied to prime and $200,000 is tied to 1-month LIBOR.

Okay. And then on the deposit side, do you have a large amount of index?

Yes. I would say, generally, the sweep repo in public funds that we have are generally contractual and are tied to changes in Fed fund rates as well as we’ll begin reducing rates on some of our more higher-yielding money market, higher-yielding savings products.

Okay, okay. And on the security side, I feel like that’s a decent change away from a higher floating rate percentage on securities. Is that – did that happen this quarter with that, the higher-yielding securities that you invested? Were those fixed rate securities in a way from variable rate as well?

No. I think the way to think about that is we’ve always carried that level of adjustable rate securities going back to about 2017, but during the quarter, we – as the tenure dropped below 2%, we add some sub-2% securities that we sold out and reinvested – it was kind of high 2.90s on the fixed rate side.

Okay.

So to be clear, the reinvestment we did this quarter was indeed in fixed rates.

Yes, in fixed rates.

And I would say the variable portion of that book is coming down due to payoffs.

Yes. That’s right.

And that’s – it’s factoring down.

And what sort of securities are there that you’re able to get that sort of yield on?

It was primarily agency CMOs and MBSs.

Okay, great.

We just kind of got, I don’t know if you want to call it lucky, but we timed the tenure correctly. Kind of sold one when it was low and reinvested when it was high.

Perfect, perfect. And then maybe last question for me just on your expense guidance. How much hiring are you guys planning in terms of additional production personnel through the end of the year within that guidance you give?

Our plans calls for about 7 to – maybe it’s around 7 commercial bankers on – over the remainder of the year. We hired 5 this quarter, and we’ve gotten the target around 7 and continue to recruit.

And what we are seeing is some of the hires we did last year and earlier this year now starting to perform.

Yes.

Perform. And that’s why we’re confident in the forward guidance that we gave you, that as well as just continued good performance on the part of the whole team, is driving higher levels of loan production as we get into the second half of this year. So we’re really confident about the net interest income expansion beginning next quarter and accelerating as we get deeper into the year and into 2020. And I think that’s a key thing to really keep thinking about – is the volume side of this play.

Yes. And if you step back and look at the growth in the pipeline and as well as the growth in the commercial deposit customers, you can see indications of this team coming online and sort of the first thing they bring over is relationships with deposit funding and then adds to credit needs come behind that, we’re starting to see that build as well. So we’re very pleased with where we are at halfway through the year here.

Helpful color. Thank you so much guys.

Yes. And that’s really best demonstrated in some of the great deposit growth we had this quarter in the commercial book that Chuck talked about earlier.

Great, thanks again.

Thanks, Steve.

Thanks, Steve.

From Raymond James, we have Michael Rose. Please go ahead.

Hey good morning guys.

Hey Mike.

I just wanted to talk about the capital generation, as we think about deployment, and you guys have obviously done some M&A, what does the M&A landscape look like? And would you be open to buy back at some point? Thanks.

Thanks. Our preference is to use capital for growth, and there’s no question about it. We continue to, I would say, stay active in that market, in the M&A market. And we think there’s potential for that growth. Using capital for growth provides better returns, we think, for shareholders, as we look forward. And I would just state that we can buy back shares at any time, and you certainly can see that our capital ratios are strong today. And we continue to accrete capital, and we can make the decision at any time. And we’re mindful that doing so dilutes tangible book value and when we look at the crossover payback it can be, we’re going to competing that, in our minds, against what we see out there in terms of other growth plays around M&A and the like. So, we’ll continue to evaluate our growth opportunities and again, I’d just reiterate we can initiate a buy back at any time. And that’s something we continue to look at.

I appreciate the color. And just moving back to loan growth. I appreciate the hires and how that will impact growth as we move forward, but the pay downs I mean I know they’re hard to predict, but I’m sure you have some scheduled pay downs, but as we think about accelerated pay downs, I mean would the ball process be that with rates coming down if the Fed does cut then we could see some acceleration in the market and in pay downs? Thanks.

Yes. There’s no doubt as rates fall, the opportunity for pay downs goes up, but we’ve worked that into our forward guide, and we feel like the mid- to high single-digit capsulates the potential for those higher pay downs, and we’re pleased with the growth on the – in the pipeline and the like. So, we think we have enough momentum to overcome that on the back half of the year.

But just to reiterate, we’ve worked that assumption into our go-forward guidance that we had around growth. We feel pretty confident about that. When we look at this quarter, Q2, we did see, as Chuck said, an increase in payoffs, early payoffs, that was quite meaningful, $56 million, I think you said Chuck.

Quarter-over-quarter.

Quarter-over-quarter. So that was an increase over Q1 in payoffs. So, payoffs have been running high, they increased this quarter. And when we deconstruct that delta, that included some loans that we decided to let go and let run, and there were some things that had weaker credit, metrics that we felt was a good move as we saw borrowers looking to cash out and take additional funding and so forth that we think made sense. So, the reason I tell you that is I think that contributed to the to that increase this quarter, and we do not expect to see that to happen in the coming quarter, but we’ll have just have to see.

And from B. Riley, we have Steve Moss. Please go ahead.

Hi. Good morning guys. Just want to follow-up on the loan production side. A really good year-over-year increase in the pipeline here. You just you guys have spoken to even more production going forward, obviously given the hires. Just kind of wondering how much more of an increase could we see into the third and fourth quarters?

The increase in loan growth pipeline?

Pipeline.

Pipeline.

Yes. I think we expected it to continue accelerating, Steve, and if you look at the growing balance sheet, we’ve got to continue to grow the pipeline, and we’ll continue to focus on it growing it here into the third and fourth quarter. I would say, the bulk of the new members we brought on the team are just hitting their strides and on by the end of the third and fourth quarter, we’ll start to see some of those deals come into the pipeline. So, we feel good about the momentum there. And just kind of overall, we continue to play sort of defense around portfolio administration, letting go some of the higher-risk relationships that we see coming due in at the same time sort of playing heavy offense on expanding our distribution in Tampa and as well as in South Florida, Chuck. You got anything you want to add to that?

Yes. This is Chuck Cross. I’ll add a little more color on that. The bankers that we hired in Q1 and Q2 are really starting to add to the pipeline and the pipeline has grown since June 30, meaningful. And we’ve got a number of offer letters out right now. So, we think we’ll continue to hit hiring another 7 commercial bankers before the end of the year, and those folks will help us grow the pipeline. So, things are looking good for what we’ve.

Forecast.

And I think generally, across the board, we also expect better production out of the team, even the existing legacy team, here on the back half of the year.

And I just want to add a couple of comments. First of all, the top half of the pipeline, which we do not publish, has grown very meaningfully in the last 2 quarters. That speaks to our increased confidence. Second of all, Chuck mentioned portfolio administration aspects kind of working against us here. I view that as an anomaly this quarter. We are not going to see that happen in the same way this quarter. We just don’t have things that we’re really worried about in the portfolio. We feel very good about the credit that we have in the portfolio. Those were just some anomalies that I think, an opportunity, kind of presented itself.

Right. And then I guess in terms of the mix of pipeline is also shifting most toward C&I. Is it a correct assumption?

Yes.

Okay. And then the other thing I did want to ask on is in terms of the competition you’re seeing per commercial real estate. Who’s been most aggressive in that market these days?

Yes. This is Chuck Cross again. I think the white con companies and the conduits are really coming on strong, and they’re the ones that have the long amortization, non-recourse, higher loan to values than we’re used to as the bank, and they do really long interest-only periods.

Okay. And then my third question, just on the CD rates. Chuck, you discussed lowering them here this quarter. Kind of wondering where that’s pricing today versus what we thought for the portfolio?

Yes. We we’re down, if you were to go back, 3 months ago, the CD market, it had gone well above 2% into the 2.30-ish range, we’re down below 2% now, 1.75%. And we think there’ll continue to be opportunities to cut that back. I think given the meaningful shift in the yield curve, you’re going to see we’ve already seen it out of the large banks, which really control deposit pricing, really a fairly strong pull back in money market offers as well as CD rates, and we’ll follow suit. And that should allow us to get deposit cost down.

Alright. Thank you very much.

Thank you. We’ll now turn it back to Mr. Hudson for closing remarks.

Great. Well, thank you all for joining us today, and we look forward to talking with you again as we close out the third quarter. Thanks a lot.

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for joining. You may now disconnect.