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Executives

Dennis Hudson – Chairman and CEO

Bill Hahl – EVP and CFO

Analysts

Enrique Acedo – Raymond James

Seacoast Banking Corporation of Florida (SBCF) Q4 2013 Earnings Call January 30, 2014 10:00 AM ET

Operator

Welcome to the Seacoast Fourth Quarter and Year End 2013 Earnings Conference Call. My name is Larine and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Dennis Hudson. Mr. Hudson, you may begin.

Dennis Hudson

Thank you very much. As always we like to first of all welcome you to the fourth quarter 2013 conference call. We’d like to direct your attention to the statement that we placed at the end of our press release regarding our forward statements.

During the call, we’ll be discussing certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act. And our comments are intended to be covered within the meaning of Section 27A of this Act. With me today is Bill Hahl, our CFO; David Houdeshell, our Chief Credit Officer; and Chuck Shaffer who is running our Retail Operation network.

2013 was truly a transformational year for Seacoast. We dramatically increased our market presence across every ones of our business lines. We added new revenues producing personnel to our teams in every area from commercial lending to small business banking to wealth management to mortgage banking. And we implemented better profits as around relationship building in our retail offices our traditional retail offices to help improve our organic growth in our legacy markets.

We also rolled out significant investments in our new distribution channels focused on growing small business relationships in several metro areas adjacent to our legacy markets. A distribution channel we call accelerate business which now operates in five locations staffs with some of the best customer acquisition team members in the business. Our internet and our digital distribution platform that’s transformed as well during the year as we added almost 19 I think they added 19 new digital products for both consumers and our business clients.

And we saw a tremendous engagement by our customer base throughout the year as almost half of our internet banker – internet banking users moved into our new digital products sweep. We are actually almost doubled our mobile banking users during the year and transaction volumes are even higher in terms of the growth rate. And we did this just as a markets here in Florida, made these investments just as the markets here in Florida begin to move beyond recovery and into early stages of a return to growth. I think our timing was spot on, the investments we made this year help drive much better growth as detailed out in our earnings release.

We were able to absorb all of these investments and people and in technology into our cost structure and still bring down our overall total expenses and operating expenses for the year. In fact, overall top total expense structure this year was reduced by 9%. As a result our pre-tax earnings were improved each quarter and I’m referring to pre-tax earnings because I think it’s a better measure of our progress given the large recapture of our deferred tax asset last quarter.

Pre-tax earnings were improved each quarter when compared to the prior year and totaled a $11.6 million for 2013. Earnings are not where we want them to be but they’re moving in the right direction and we look to produce additional progress in 2014. More importantly however our investments and increased market presence set the stage for better growth rates in 2014 and beyond. This growth together with additional planned reductions in cost for the first coming up will be key to more earnings growth in 2014.

Another important milestone this quarter was the redemption of all of our $15 million in outstanding preferred stock at year end. We also completed our $75 million common equity raise including $25 million which closed early in January. These milestones together was last couple of quarters the recovery of our deferred tax asset dramatically improve the quality of our capital structure and results on a TCE ratio of little over 10%.

I now going to turn the call over to Bill for a few comments on the quarter and then I’ll have some closing comments to make before we open it up to questions. Bill?

Bill Hahl

Thanks Danny. And good afternoon everyone. My remarks will reference to the slide that we posted for the call on our website. And so, I’ll begin with some highlights on slide 3. Net income for the year totaled $52 million including the net tax benefits that Danny referred to of $40 million related to the reversal of the deferred tax valuation allowance. And probably a better measure of the progress for this year is the increase in income before-taxes which totaled $11.6 million compared to a loss last year at $710,000. And this increase in results was driven across the board with the result of revenue growth, expense management and decline in cyclical credit cost in other expense items.

Pre-tax fourth quarter income totaled $3.1 million up from $2.9 million a year earlier. Net income available to common shareholders for the year was $47.9 million or $2.44 per diluted common share compared to a net loss last year at $0.24. In December we redeemed all of the outstanding Series A preferred stock and thus eliminate future dividends for that stock which totaled $4.1 million in 2013. As Danny mentioned, this action along with the $75 million common equity rates completed in the fourth quarter as significantly improved the quantity and quality of our capital.

We believe our capital strength with allow us to participate in the future bank consolidations in our markets and for us to continue to execute on growing our franchise at a faster pace. Further, revenue excluding security gains and losses for the fourth quarter were $22.3 million and were up about $500,000 from a year ago. On a linked quarter bases revenues were slightly lower reflecting the impact of higher interest rates which lowered residential loan demand and our mortgage banking fees. The linked quarter comparison was also impacted by a recovery of interest income of about $500,000 related to non-accrual loans in the third quarter and we had no comparable recovery in the fourth.

Year-to-date, our tactics designed to build non-interest income have had positive impacts with fees overall growing by 13.4% for the year. Total revenue year-to-date were up by $3.2 million or 3.7% with mortgage banking fees up 12.5%, service charges up 6%, interchange fees up 20.5%. In addition, wealth management fees were also strong and were up 30% year-over-year.

Slide 6 has some additional highlights about non-interest income growth for so I retrieve to those – our next slide. Total assets increased by about $95 million and it was funded with core customer funds with solid growth in our non-interest bearing transaction accounts which were up 10% year-over-year and which now comprise approximately 26% of total deposits up from 24% and 19% for the two previous years respectively. Total transaction accounts now exceed $1 billion and we’re up 7.7% year-over-year and now comprise approximately 56% of total deposits compared to 53% a year ago.

We also highlighted on slide 3 our risk – reduced risk factor which is now quantitatively at pre-crisis levels. We have included additional information on our much improved credit quality and reduced cost on slide 7 through 9.

Now I’ll turn on to slide 4 and a few comments on cost reductions in common interest expenses. The quarter expenses were lower by $1.1 million or 6% compared to a year ago, and are down $7.4 million year-to-date in line with the guidance we provided last year. Lower non-interest expenses for the year were the result of credit cost declining, saving from our branch consolidations we executed in 2012 as well as our other cost cutting initiatives. In order to improve the margin and continue to grow loans as Danny mentioned we’ve invested a significant portion of our expense reductions into additional business bankers and credit support personnel.

And more recently, in enhancing our customer experience with additional ways our customers can access their accounts through our digital channels. Our redeployment of overhead savings has been focused on delivery channels, the increased loan production personnel and new digital products that Danny mentioned. These cost over the last three years have been significant and an impactful on the efficiency ratio in the short run but are considered investments for future revenue growth. We want to continue to grow the revenues at a faster pace and to look for ways to redeploy and reduce our fixed legacy cost as we better align our delivery channels with the evolving customer needs. We began implementing cost reductions in of about $1.2 million in January of 2014 in support of our goal to continuously to improve the operating leverage, well also improving the overall top-line revenue growth rates.

Now I move on to slide 5 with some highlights related to our loan growth this year. Loan production over the last 12 months totaled $563 million and was up 18.8% compared to a year ago. Net loans are up $78 million or 6.4% year-over-year. The improvement in loans growth is a result of continued growth across all of our portfolios but it also includes much better growth this year coming from our commercial and business lending which totaled $200 million an increase of $89 million compared to 2012 proving that the investments we’ve been making in loan personnel and accelerate business is beginning to payoff.

We predicted on last quarter’s call that our commercial volume would be better in the fourth quarter and it was commercial production totaled $60 million compared to about $38 million in the third quarter. We continue to refine or accelerate business banking model and as we do we should see sustained increase in quarterly loan production particularly as Danny mentioned as the economy in our markets begins to move to a growth mode.

Now, some color on the net interest margin. The margin declined by 17 basis points in the fourth quarter compared to the third quarter. But as we mentioned in the last quarter we would see some pressure on the margin as a result of increased seasonal public customer funds invested at low spread. And we also had some interest recovered on non-performing loans in the third quarter. As I said earlier in the third quarter we received about $500,000, that increased the third quarter margin by about 10 basis points for that 17 delta that I talked about.

In addition, we had early payoffs at some TDR loans in the third quarter which had been booked with valuation discount which also had a positive impact on net interest margin in the third quarter by about 5 basis points. I think going forward, we’ll probably see less impact in these type of items. Like the margin, the loan yield was impacted by these items and was lower in the fourth quarter and totaled 4.29% compared to 4.59% in the third quarter. In the securities portfolio our prepay speeds remain slow and those yields improved by 17 basis points in response to a [shape of] yield curve.

Our continued progress in improving our core customer funding and our improved deposit mixes reduce interest-bearing deposit cost by about 1 basis points in the fourth quarter. Our normal seasonally higher funding from public funds relationships also contributed as I mentioned earlier to that decline in a margin for the quarter. Growing net interest income continues and remains our focus and we believe that we should be able to generate growth in certain line item even in this lower interest rate environment as our primary opportunities for growth in that remains the improved loan production improving the asset – earning asset mix in favor of loans and continued further growth in our customer funding, low cost customer funding.

With that, I’ll turn the call back to Danny for some questions.

Dennis Hudson

Hey, thanks Bill. As I said it’s been a transformational year for Seacoast. We positioned ourselves for even better growth in 2014 and beyond. This past year we simplified and strengthened our capital structure. We made meaningful improvement in our earnings. We turned around our loan growth. We continue to aggressively grow our core deposits and we’ve done all of this well also cutting our total expense structure as we reinvest some of the savings backed into the revenue initiatives we’ve just talked about.

All of this as I said last quarter we continue to challenge each other to find innovate rates ways to grow our revenues faster and to fund the innovation required with redeployment of our heavy legacy cost even as we continue to bring down the overall cost structure. And we must bring down legacy cost by discovering ways to better align our delivery channels with customer needs that are just now starting to rapidly change. As I said last quarter, this is not going to occur overnight but it’s going to occur on a more compressed timeframe probably we think and most community banks believe and are resulting greater convenience and improved experience for the customer – for our customers.

So, with that I’ll turn the call back over to our operator and we’d be pleased to take a few questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions). And our first question comes from Enrique Acedo from Raymond James. Please go ahead.

Enrique Acedo – Raymond James

Hey, good morning guys.

Dennis Hudson

Good morning.

Enrique Acedo – Raymond James

I was curious as to why period end share count only went up about 4.65 million shares from 3Q 2013? If I recall correctly, your offering was 34.9 million shares. So, if you divide that by 5, to put it just it coming out of 7 million shares. Does that imply a lower diluted share count going forward?

Dennis Hudson

It could be I mean I don’t know – you realize that’s on 25 million common shares, we didn’t close that until early January.

Enrique Acedo – Raymond James

Okay.

Dennis Hudson

That’s – so it’s $25 million I’m sorry not 25 million shares but $25 million.

Bill Hahl

Of course some capital rates was delayed and closed in January.

Enrique Acedo – Raymond James

Okay.

Dennis Hudson

So, those are an outstanding year.

Enrique Acedo – Raymond James

Okay, that makes sense. And maybe if I can move on to the fee item side I mean should we think of 4Q 2013 as a bottom for mortgage banking and what are – what categories are you most focused on for 2014?

Dennis Hudson

Is this is in the area of fees?

Enrique Acedo – Raymond James

Yes, yes, sure yes.

Dennis Hudson

Yes. We’re growing every fee item across the board as you saw. Our wealth management fees grew dramatically and 30 on the order of 30% in 2013 and across the board all our deposit fees and so forth. All being driven by growth in customers and growth in customer balances and growth in usage of some of our new digital products out there. So, those trends we believe continue into 2014. You’re right, we had a disappointment in the fourth quarter with respect to our mortgage fees, mortgage fees were up I think over the prior year but disappointed us and we had a pretty soft quarter in the fourth quarter.

We think that will be a challenge in 2014 when compared to 2013 but we are also working pretty hard to extend our market coverage to a larger market area and make up that difference. So, I can’t give any better guidance to that other than nationally there’s been some softness in the mortgage market as a result of the rate movement that occurred late in the summer and so forth. So, we think it’s a more challenging environment for us in 2014 than 2013 was but we have also been have been executing strategies to increase our volume with entry into other markets and that’s showing some signs of success. We’ll hopefully close that gap.

Bill Hahl

And coupled with I just point out that – as I said we began implementing some cost reductions in that mortgage area as one of the areas that we are trying to rationalize the expense structure there.

Enrique Acedo – Raymond James

Okay. That’s actually really helpful. And just one last one, I promise. Do you guys have the exact impact on NIMs that was at the – and slow on public deposits had are between the quarter?

Bill Hahl

No, not – it was I mean you could probably do the math. When I say very low spreads I mean very low like 8 basis points. I think if you look at the line for our sweep repurchases that we’re up about $44 million, I think on average. So, you can do the math and sort of calculate what that cost was.

Enrique Acedo – Raymond James

I will. Thanks, guys. Appreciate it.

Bill Hahl

Okay.

Operator

Thank you. (Operator instructions). And at this time, I am showing no further questions.

Dennis Hudson

Okay. Well thank you very much. And we look forward to reporting this month’s progress next quarter. Thank you.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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