Welcome to the Seacoast Third Quarter Earnings Conference Call. My name is Ealda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.I will now turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank. Mr. Hudson, you may begin.

Good morning, everybody, and thank you for joining us today for Seacoast third quarter 2019 conference call. Our press release which we released yesterday just 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 are 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 Community – our Commercial Banking Executive; David Houdeshell, our Chief Credit Officer; and Jeff Lee, our Chief Digital Officer.Seacoast reported an exceptionally strong order with – quarter with continued solid growth – solid organic growth. We posted record revenues and earnings for the quarter. Adjusted earnings per share was $0.53 for the quarter and $1.50 for the first nine months of the year. This represented earnings growth of 43% compared to the third quarter of 2018 and 30% year-to-date.The previously announced cost reductions, which were completed last quarter, took full effect this quarter. As I said last quarter, the adjustments to our cost structure were taken in response to a more challenging outlook for the environment brought about by a flat yield curve. As a result, in spite of the rate environment, we produced meaningful improvement in operating leverage this quarter.Our incredibly valuable customer franchise has produced very favorable deposit funding costs, which helped us mitigate much of the effect of a persistent inverted in today’s flat yield curve. And our work earlier around the year around our cost structure more than offset the rest.Additional contributions to operating leverage came from record growth in fee revenue for the quarter. Proactive changes we made in our mortgage unit earlier this year in response to the yield curve are producing…

Thank you, Denny, and thank you all for joining us this morning. As I provide my comments, I’ll reference the third quarter 2019 earnings slide deck, which can be found at seacoastbanking.com.Beginning with Slide 4, our team produced a strong quarter, with adjusted net income growing year-over-year 57% to $27.7 million, resulting in earnings per diluted share of $0.53. We reported a 1.67% adjusted return on tangible assets and a 15.3% adjusted return on tangible common equity.We continue to build shareholder value, with tangible book value per share growing 4.8% sequentially to $14.30. We ended the quarter with a tangible common equity ratio of 11.1% and an average loan deposit or loan to deposit ratio of 88%, affording ample room for continued growth.As we continue to grow our capital base, it’s worth mentioning that it’s the third quarter’s tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%. Our return on tangible common equity would be 20.5%, increasing from 19.2% in the prior quarter.Our performance was highlighted by continued improvements in generating operating leverage with a focus on growing revenues, while streamlining operations. The adjusted efficiency ratio declined 2.4% sequentially to 49% and the adjusted noninterest expense to tangible asset ratio declined to 2.22%.Year-to-date, we’ve generated a 11% operating leverage, with adjusted revenues increasing 18% and adjusted noninterest expense increasing 7%, despite the headwind from a more challenging interest rate environment.You can be assured that our continued diligent focus on efficiency is accompanied by great care and ensuring that we do not impede on our ability to drive revenue growth. Both our mortgage and commercial banking units showed continued momentum in the quarter with robust loan originations resulting in disciplined growth in loans outstandings with a new record in mortgage banking gains. We’re exiting the…

Thank you, Chuck. And, operator, we’d be pleased to take some questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Michael Young from SunTrust.

Hey, good morning, everyone.

Hi, Michael.

Wanted to start on the efficiency ratio comment. Chuck, you made – there’s obviously a lot of different rate assumptions that could be embedded in that. So maybe you could just kind of clarify what – what’s reflected in that outlook for 2020 in terms of curve steepness and number of rate cuts, et cetera? And is this kind of a target you guys are going to hit regardless of what that looks like?

Yes. Sure, Michael. We’ve assumed in that a rate cut in October, December and March, 25 basis points each.

Okay. And any curve steepening embedded in that?

No. We assume – it’s basically the – we – because basically, it’s all we have at this point to go on is the forward curve and that’s what’s in the model.

Okay. And then similarly, maybe on just kind of the loan to deposit ratio, obviously, still pretty low. So you guys have a lot of room there. Should we expect that to start to increase next year with some positive remix to defend the margin, or kind of how should we be modeling that going forward?

Yes. I think the way to think about it is, it’s certainly something that provides a room for growth and it’s something we manage carefully. We do expect it to increase over time and sort of end in the low-90s as we’re exiting 2020, near to low-90s.

Okay. And then the last one just on capital. I understand you kind of made some comments around it already in terms of having flexibility. But the capital levels have built pretty significantly at this point. And the outlook would be for that to continue, especially with the pace of loan growth currently.So, can you just give us a little more color around kind of priorities there and timing? I mean, should we kind of be thinking wait till 2020 and achieve Vision 2020 and then that’s when we would look for more capital flexibility, or are you seeing something on the near-term M&A horizon, or are you think that it gives you encouragement that that’s going to get deployed sooner?

Thanks, Michael. Our Board and our team, the management team really regularly reviews our capital position, in light of our outlook and forecast, including opportunities that we see for balance sheet growth and also a kind of a look at the forward operating environment. And we’re certainly comfortable that our current very robust capital levels, which along with as we continue to say our diligent credit discipline, supports our commitment to maintaining a truly fortress balance sheet through the cycle.We’re focused on consistently building shareholder value as evidenced by the returns that we just pointed out, the CAGR growth in tangible book value since we announced our Vision 2020 objectives in early 2017 has been around 13%. So we’re really delivering value to shareholders and as the capital growth.That said, as we continue to see growth in capital, we’re going to regularly reevaluate the full range of capital management alternatives and we’ll seek to deploy our capital prudently as circumstances warrant. So all I can say, as we continue to look at it, and we’ll certainly let you know, as we have thoughts around the whole capital management issue.

Okay. And just on the fortress of balance sheet comment, I mean, does that imply a higher capital level than the 8% TCE, Chuck, that you kind of referred to earlier. I don’t know if you have any thoughts around where you guys kind of plan to maintain that over a longer period of time?

Yes. We haven’t given a target sort of on a forward basis, but certainly want to maintain a balance sheet and maintain a strong, robust balance sheet at this part of the cycle. And we’ll continue to look at the growth in capital and update you on our capital options as we move forward.

Okay, thanks.

The next question comes from Stephen Scouten from Sandler O’Neill.

Hey, everyone. Good morning.

Hey, Stephen. Good morning.

So I apologize. I missed some of the prepared remarks. But I’m curious on the securities remix and kind of where you are in that progress if there’s much more efforts to be done there, how you think about that as a percentage of assets? And kind of where you are on fixed to floating within the securities portfolio today?

Yes. So maybe I’ll start with a back part of your question, and I can talk about the remixing. Today, the portfolio is 66% fixed and the remainder is floating with some of that being sort of adjustable with fixed rate terms then floats. But if you’re modeling, I’d assume 66% fixed.Just generally and thinking about the balance, really we’ll continue to be focused on putting loans on the balance sheet over securities. But as the 10-year moves around, we continue to be opportunistic, depending on where that’s at, and we’ll take action where we can reinvest at higher rates. And And if the 10-year were to fall low enough, we may take action the other way. So we continue to manage the portfolio from a total return perspective and continue to be active there. And we’ll see how things play out with interest rates as we move forward.

Okay, great. And then loan demand or new originations were obviously very strong this quarter. What are you seeing in terms of changes in competition? I know you gave the number of, what was it, 51 basis points sequential new loan yield decline. But are you seeing compromising on structure as well as pricing, or are you able to still find? I mean, it seems you’re able to fund still credits that you like, maybe just to the lower yield, but they’re still reasonable structures?

Yes. Where the majority of sort of the irrational behavior is coming from the non-bank competitors, particularly live companies and the CMBS market and that’s primarily on larger deals. So on the larger deals, we see the pressure there. And we’re avoiding matching those terms. And in cases where we have customers that are being pushed into the – that type of environment, we’re letting that walk and looking to deploy our credit policy elsewhere. So it’s not something that we’re going to do.

And you recall, we run a more granular strategy from a credit perspective than most. And so that keeps us out of some of the most competitive parts of that market, although, we do see…

Yes.

…the question more competition and certainly with what happened with rates here over the last few months, that contributes to that competition. But I guess, what I always say is, we just need to work harder and look at more opportunities, look at more deals, and we’re pleased with the ramp up of people in the commercial area, in particular, and how that is giving us access to more deals to look at. So that we can continue to be thoughtful and prudent around our credit criteria and we will not waver from that.

Yes. No, that’s a good reminder, Denny. I appreciate that. And then lastly, for me, maybe also as it pertains to the new loans, with that move in new loan yields, I was really impressed with the only 6 basis point decline in average yields for the portfolio. So what exactly, I guess, maybe led to that performance there?Is there maybe less movement on the existing portfolio than we would have thought, or is there a catch up that we should see in 4Q where the magnitude of the decline in average millennials will be greater, or specifically as we look at new loan yields, again, I just kind of surprised it only moved down 6 basis points, given the sharp move we’ve seen in rates?

Yes. Well, remember, over – so over 60% of that loan book is fixed rate, and then there’s another 25% or so that are sort of fixed to adjustable that have fixed rate periods in them. And we – given the outlook for lower long-term rates have been adding some duration into that book, and I think that’s protected the downside risk. And I’d go back to my guidance if you’re thinking about fourth quarter margin mid-380s is probably about appropriate, given where we see the yield curve headed.

Okay, super. Thanks for the color and congrats on a great quarter, guys.

Thanks.

The next question comes from Steve Moss from B. Riley FBR.

Good morning, guys.

Hi, Steve.

Just wanted to circle back on expenses and hiring? I’m just wondering if you added any new bankers this quarter? And just what are you thinking for total expenses for the fourth quarter? Not sure if I heard it or if I just missed it?

Sure. Yes. We added three bankers in the quarter. We continue to, I would describe it as opportunistically recruit. Where we find talent, we will make hires. And we are still out in the market recruiting the best bankers we can find, particularly in Tampa and South Florida. And given our expansionary efforts there, we are out outlook and we’ll add as we move forward, but three bankers in the quarter. On the expense guide, $37 million to $38 million for the fourth quarter, excluding the amortization of intangible assets is what we’ve provided.

Okay. That’s helpful. And then on the margin, I heard for the – the 3.05% guidance for the fourth quarter. But if we do get that rate cut in the first quarter, what are you thinking for the margin kind of going – thinking about a little different ways, if you have acceleration loan growth, maybe not as much margin pressure into the first quarter?

Yes. We didn’t provide any guidance out beyond the fourth quarter. But as you state, with loan growth being there, there is some protection to the margin, as well as I still think we have a lot opportunity if we continue to see rate cuts on the back-half of this year to be very diligent with our deposit pricing and be ahead of that with deposit costs.So we look at that every week, and we are very thoughtful about deposit pricing and we’ll continue to be so. And I think that – if you look at the way our deposit pricing has behaved here, it really does reflect the high value of the deposit franchise and how – what the quality is there, given the customer base and the granularity of that customer base. So deposit portfolio continues to perform incredibly well, and we’ll be ahead of rates.

I thought I’d try. On credit here with charge-offs 15, 17 basis points this quarter, just kind of wondering what you’re thinking about trends there? Going forward, I’m assuming that there’s just pretty much no recoveries left to offset charge-offs?

Yes. By remodeling, I would model somewhere between 15 and 20 basis points between now and the middle part of next year. And as we move into next year, I’ll update that guide as we move forward.

All right. Thank you very much. Good quarter.

Thanks, Steve.

The next question comes from Michael Rose from Raymond James

Hey, guys, good morning.

Good morning.

Wanted to dig into the loan growth commentary a little bit and some comments you made, Denny. So if I strip out the purchase of loans that you guys made this quarter, it looks like loans were up about 4% annualized. I know you guys are guiding to mid to high single digits. But you made some comments and I think a lot of banks have made comments around being a little bit more cautious. You had one bank, has pretty big presence in your markets, last week point to stupidity in the market. I’m sure you heard those comments.So as I think about it moving into next year, granted, the pipelines have continued to grow. But there’s obviously some cautiousness on your part to project, or to protect risk-adjusted returns. Is more of a single-digit growth rate as we move into next year, a good way to think about it, or because of the growth in the pipeline and the hires that you have made and project to make? Do you still think you can can generate outsized loan growth? Thanks.

Well, we have guided mid to high for this year. And I guess, we, as we said in the remarks, we’re going to stand by that guidance, and we believe we’ll hit mid to high. You’re right, the organic growth this quarter, which we stated, I think was 4% to 5%, I think it was 5% for this quarter. And on an annualized basis, and with the – overall the reasons we stated, we see that continuing to ramp up a little bit as we get into the next quarter.So we feel pretty comfortable about the guide, as we look into next year. As we get close to the end of the year, we’ll give more color on guide for next year. But we think we’ll, at this point, guide to mid to high. Do you have any other comments?

Yes. The only thing I’d add is, earlier in the year and throughout 2019, we’ve continued to expand our team of bankers and that helped supporting the growth. If you look at markets like Tampa and Broward County, we continue to add talent there and gotten a lot of that work done going all the way back to the fourth quarter of 2018. So some of the guide does reflect the expansion of the team that we put in place.

And for all the harping around competition and the like, I mean, it is a pretty favorable environment for growth, given that rates are low. And so, there could be demand…

Yes.

…out there and we’re seeing that and we picked that up. Again, we have to be disciplined, careful, particularly careful today. We want to continue to maintain the strict underwriting that we’ve been executing for many years now. We want to maintain the granularity. It takes us out of some of the more hypercompetitive parts of the market, which I think is smart. And we just have to work hard and probably work twice as hard as we would have a couple of years ago to achieve the growth.So we have plenty of room for growth with the loan to deposit ratio that we had and the anticipation of continued deposit growth. We’re in a fabulous market that is very deep and very diverse here in Florida, and we’ll continue to take advantage of that while remaining very careful and adhering to all of our strict underwriting guidelines.

Yes. That’s all great color. And, again, I was trying to reconcile more for next year as opposed to kind of the fourth quarter and full-year this year. Just going back to the capital question a little bit, there has been a pickup, I guess, in M&A chatter, in and around the markets that you guys are in. Would you characterize that your conversations have been relatively active? And then, separately, have you gotten any inbound calls as of late? Thanks.

Yes, I’ll take that one, Michael. Yes, we’re still active. And as we’ve talked on prior calls, we continue to have fairly robust conversations with potential targets. We’re still focused on Florida only, primarily Southwest Florida, the Tampa across I-4 into Daytona and down the East Coast to Broward County. And we still believe there’s plenty of opportunities and we’ll continue to view them as opportunistic and want to create value in those acquisitions and want to do things that are shareholder friendly. So as we continue to have conversations, we’ll see where things go. But it is active and we still view there’s plenty of opportunities.

As you know, we’ve been very disciplined and thoughtful around our M&A strategy, and it remains a key part of our of our strategy. As we look forward, we think there will be more opportunities, as Chuck said, and we continue our conversations.

All right. Maybe just one final one for me. As it relates to capital, I think you guys ceased the dividend back in the first quarter of 2009. Would that be a potential lever that you would pull to deploy some of the capitals as we move forward? Where does that stay on the priority list, I guess? Thanks.

As we said earlier, we will continue to reevaluate the full range of our capital management alternatives, including dividends. And we’ll have those conversations with our Board. And our overall objective is to deploy our capital prudently as circumstances weren’t as we look ahead. So all I can tell you is, we’ll continue to evaluate and look at that. And if we have something to say, we’ll certainly be talking with you on future calls.

Fair enough. Thanks for all the color, guys.

Thanks.

Thanks, Michael.

We have a question from Jeff Cantwell from Guggenheim Securities.

Hi, good morning. Thanks for squeezing me in and congratulations on the results.

Thanks, Jeff.

I wonder if I could ask a quick follow-up question related to your commentary on the current operating environment. You’ve been touching on this a bit. But my question is, when you think about managing your business through this cycle, where have you been making the biggest adjustments in your strategic thinking over the past few quarters? Could you talk to us a little bit about that? It sounds like you’re increasing your focus on cost containment and efficiency. But I was just hoping to get more thoughts on how you’re thinking about being more opportunistic/pragmatic in the current operating environment? Thanks.

I’ll kick off, and then maybe, Chuck, you can add something. But clearly, we’ve been very attentive to the impact that the really rapid change in the rate outlook had on the business. And as you pointed out, that required us to look more carefully at our cost structure and the like. And I think that’s something we’ve certainly done. Any other thoughts?

No, just we are continuously looking out ahead and what the environment is out in front of us. And earlier in the year, we saw interest rates were going to be a challenge. That’s why we got very active on the cost side and that’s helped support and grow earnings. And as we look forward, we continue to see opportunities to remain discipline on cost containment, as well as we see our opportunities continue to work on our deposit cost if we continue – if the yield forward curve continues to play out.But importantly, I think, we’ve positioned the balance sheet very effectively. And the balance sheet has liquidity, the balance sheet has strong capital and the balance sheet is supported by strong underwriting. So we feel good about where we’re at in the cycle and we’ll continue to look forward and make appropriate adjustments to continue to deliver value for shareholders.

And we really think that’s the key in terms of the medium-term outlook. And that is to maintain an incredibly strong, diverse profitable balance sheet as where we are today. And that gives us options that maybe others would find more challenging. So we think that’s important.

Thanks. I appreciate that. Just a related follow-up to that is, when we think about the outlook for lending, I just want to circle back to what you were talking about earlier. It sounds like you’re contemplating, maybe a more pragmatic approach next year, given the flattening in the yield curve. Is that a fair statement? And clearly, I understand this question comes in the context of your strong pipeline. But I guess, I’m just trying to get a better feel for where lending growth is going, where you clearly have to balance the strong economy, I guess, a flatter yield curve into careful underwriting that you’re mentioning. So any more color there would be appreciated? Thanks.

Yes. If you step back and look at our strategy, we have a diversity of loan mix. And so if you look at the asset classes we grow, we have a consumer portfolio, a C&I portfolio, as well as a CRE portfolio, where we see the heightened level of challenge on covenants and guarantees and the like is in larger CRE.So in that part of the space, we have been cautious and in many cases have led deals either lead the bank or not competed on deals. But the remainder of our lending function continues to see good inbound volume.And then I’d say, the second thing as we move forward in the lending environment is, we continue to expand the bank into robots markets. And so those markets continue to support growth and continue to provide opportunities to grow the balance sheet. So there are – there is pockets of the market that are very stressed and we’re staying away from that. And we’re taking advantage of other areas that we think we can create value within areas that meet our risk-adjusted return threshold.

And again, to reiterate, probably for the first time, staying true to our strict underwriting criteria and not allowing us to…

That’s right.

…drift the portfolio in a direction that is anything, but strong.

Great. And then my last one is, you had a press release a few days ago on converting your platform to nCino. I thought that was interesting. Can you talk to us about that a little bit? Is that cost savings initiative? Is that a growth initiative? Is it significant? What’s the right way for us to think about that? I would appreciate if you could frame that for us? Thanks.

Yes. Hey, Jeff, this is Chuck Cross, I’ll take that question. We’ve implemented the nCino operating system, so that we could standardize and digitize our processes. And it’s not only in commercial banking, but small business, SBA and treasury management. And we just feel like that it’s critical to our continued digital transformation, so that we can easily provide solutions to our customers. So it’s more how we do the business and just expense control.

Yes. Now just weigh in and say that, that investment has led to better productivity and we expect even better productivity as it matures into 2020. And it’s led to – will lead to further cost control, as well as leading to helping support the speed of how we get deals to market. And so it’s allowed us to have a lot more clarity and transparency around the lending process and that adds a lot of value to our operations.

It’s not just the technology really, Jeff, it’s how we implement and how we approach it to better serve some of the objectives that you just heard from Chuck and Chuck. And we’ve been very focused on thinking through how we plan that and we’re going through – we’ve had a very, very good results so far, and we think we’re going to get a lot more efficient as we go through time into next year.

Great. Thanks very much.

Thanks.

Thanks, Jeff.

We have reached the end of the question-and-answer session. I will now turn the call over to Mr. Hudson for final remarks.

I’ll just, again, thank everybody for attending today. We are pleased with our progress, and we really look forward to reporting continued progress next year as we report on the fourth quarter in the total year. Thanks, everybody, for attending today.

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