Seacoast Banking Corporation of Florida

NASDAQ:SBCF

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the Seacoast Fourth Quarter Earnings Conference Call. My name is Richard, and I’ll be the operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct the 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. Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

[Chuck Shaffer, CEO]

Thank you all for joining us this morning. As we provide our comments, we will reference the fourth quarter 2020 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Denny Hudson, Executive Chairman; Tracey Dexter, Chief Financial Officer; Jeff Lee, Chief Digital Officer; David Houdeshell, Director of Credit Analytics and Policy; and Richard Raiford, our Chief Credit Officer.

Before we get started, I'd like to congratulate Denny on his new role as Executive Chairman. I know and I speak for all of our associates, our Board of Directors and our community, and expressing our sincere best wishes to you as you enter this next phase of your professional career.

For the last 28 years, you have led and created an incredible, innovative institution that has delivered tremendous value for both shareholders and customers. You, your father, uncle and grandfather, before you have steered an institution that has helped shape the fabric of our communities that we serve, and has had tremendous value as it had tremendous positive impact on our customers, our associates and their families. I want to wish you my sincere congratulations and to thank you for all your guidance, mentorship and friendship over the years.

You helped shape my career and many of our teammates professional lives and your leadership has been incredibly impact on us all. Thank you for all you've done. And I know I speak for both of us that we are excited and believe the road ahead is filled with opportunity. Congrats again, Denny, and I'll turn the call over to you.

[Dennis Hudson, Executive Chairman]

Thanks, Chuck. For over 42 years, I've served our customers, shareholders and associates as a Seacoast team member. And as you said, including 28 of those years as CEO. It has indeed been a great honor to be able to contribute along many others who along the way gave so much of themselves to build what we've become.

Perhaps my most gratifying accomplishments have been the leaders that have been forged in the culture that defines us as a company. I couldn't be more pleased to have you now step into the CEO role. You will bring into that role the energy and will the win that you've consistently demonstrated and other roles you've held, as well as an extraordinary focus on creating value for shareholders.

[Chuck Shaffer, CEO]

Thank you, Denny. Thanks for the kind words. And now turning to the quarter, I opened by expressing my appreciation for the Seacoast team for producing another excellent quarter of impressive results, despite the backdrop of a pandemic. The Seacoast associates continue to generate top quartile returns by focusing on value creating customer relationships, driving best-in-class customer satisfaction and growing market share in a thriving Florida marketplace.

During the quarter, the company generated earnings per share on an adjusted basis of $0.55, finished 2020, with an efficiency ratio below 50%, and grew tangible book value per share of 15% on an annualized basis to $16.16. Asset quality, liquidity and capital are all strong, and we continue to generate meaningful capital growth, bolstering our fortress balance sheet.

Our capital ratios are more substantial than most of our peers, which will provide strategic flexibility as we move through the coming period and ultimately an economic recovery. Last quarter, Florida's governor moved to Phase 3 of the state's recovery plan, fully opening up Florida's businesses with no restrictions. We have seen our business customers return to full operation and an acceleration of the migration from the northeast to Florida, primarily high net worth individuals and many corporate relocations.

We we're encouraged by the state's economic recovery, supported by another round of federal stimulus and the potential for a third round of stimulus shortly. We are heads down on another round of PPP and are seeing strong demand for a second round of PPP loans. As of Wednesday evening, we had taken applications for a $170 million or over 1,500 loans to assist Florida's businesses.

We continue to maintain a conservative stance in the phase of COVID's uncertain path. Our ACL coverage remained flat quarter-over-quarter, and we continue to model our ACL with a weight towards a more severe downturn. As evidence of the recovery materializes in the coming year, we will begin to challenge this assumption, and Tracy will have more details on the ACL modeling in our prepared comments.

We continue to be vigilant in maintaining our disciplined, conservative credit culture and our focus on generating value creating customer relationships. We are passing on deals that do not price to an appropriate risk adjusted return, and are seeing, in some cases, competition price credit facilities at levels that we will not match.

We saw increased loan production in the fourth quarter with commercial volumes totaling $277 million, in line with the reopening of the state, and impressively, our yield on loans, removing the impact of PPP and accretion on acquired loans increased from the prior quarter, despite pressure from lower rates.

We expect loan growth to return to pre-COVID levels on the back half of 2021, assuming the economic recovery continues to take hold in the state. Our asset quality metrics remain strong quarter-over-quarter, with loans and nonaccrual status and classified and criticized asset ratios improving from the prior quarter. NPA ratios also improved.

Our portfolio deferred loans is down to 1% of loans, or $74.1 million. We are pleased with the deferred portfolio's performance of the year, despite ending the year at a negligible amount and encouraged by continued improvement in asset quality, despite the pandemic.

We focused on building fee-based revenues in 2020, providing strong results in mortgage banking and wealth management. The mortgage business had a record breaking year, recording almost $15 million in fee income. And impressively, the wealth management team generated $69 million in new AUM in the quarter, bringing the full year AUM generated in 2020 to a remarkable $282 million.

To conclude, the quarter was impressively strong, and sets the company up well entering 2021. Our goal remains to continue increasing market share in a disciplined manner by focusing on growing value creating relationships, improving digital customer experiences, and driving greater productivity across the franchise by delivering products and services to our markets more efficiently than our competition.

As the pandemic winds down throughout this year, we believe there'll be opportunities to continue to our disciplined acquisition strategy, and key growth markets across the state of Florida.

I'll now turn the call over to Tracey, who will walk through our financial results.

[Tracey Dexter, CFO]

Thank you, Chuck. Good morning, everyone. Directing your attention to fourth quarter results. Let's start with Slide 6. For the fourth quarter on a GAAP basis, earnings per share was $0.53, on an adjusted basis, which excludes M&A and isolated expense consolidation charges, earnings per share increased to $0.55 from $0.50 in the third quarter. On a GAAP basis, we reported a 1.49% return on tangible assets, and 13.87% return on tangible common equity.

On an adjusted basis, fourth quarter results were 1.5% adjusted ROTA, and 14% adjusted ROTCE. As we continue to grow our capital base, it's worth mentioning that if the fourth quarter’s tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our adjusted return on tangible common equity would be 18.8%, increasing from 17.3% in the third quarter.

Tangible book value per share increased to $16.16, up from $15.57 last quarter, an increase of 15% on an annualized basis. The efficiency ratio was 48.2%, compared to 61.6% in the prior quarter, and on an adjusted basis was 48.8% compared to 54.8% in the prior quarter. Lower cost of deposits had a positive impact on our margin, with a decline of 5 basis points from 24 basis points last quarter to 19 this quarter.

Commercial originations during the fourth quarter increased to $277.4 million, compared to $88.2 million in the third quarter. While we continue to maintain a conservative posture, our growth reflects well qualified borrowers that can demonstrate the strength to navigate the pandemic economy. The wealth management team continues to build on AUM growth, with impressive results that saw a total AUM of 33% year-over-year to $870 million and continued strong revenue.

And throughout the pandemic, we've worked closely with our borrowers to provide payment accommodations that help support their businesses through this difficult year. Nearly all of those loans have resumed their original payment terms. At year end, only $74.1 million in loans remain on some kind of modification program. That's just 1% of total loans.

Lastly, we added a slide showing the remarkable shift of affluence and corporate relocations, primarily from the northeastern United States to Florida. The state is benefitting tremendously from its lower taxes, warm weather and easy flights back to the northeast. The population change felt throughout the Seacoast footprint and particularly in South Florida will benefit Seacoast as the Florida economy continues to expand.

Turning to Slide 7, net interest income increased $5.3 million sequentially, to $68.9 million. Of that increase, $3.5 million relates to higher PPP revenue, the result of both the change we made in the prior quarter to align fee recognition with the contractual maturity of the loans, and also the benefit of PPP loan forgiveness, which began in the fourth quarter and resulted in the recognition of $1.5 million in additional PPP loan fees. We still have $9.5 million in deferred fees on PPP loans that will be recognized over the loans remaining contractual life, or sooner as the loans are forgiven.

The net interest margin excluding PPP and accretion of purchase discount, decreased by 5 basis points from 3.42% to 3.37%. A decrease in securities yields was the primary driver, with continuing elevated prepayments in the securities portfolio, and the deployment of some of our excess liquidity into securities in the fourth quarter.

The effect of lower yields and securities was partially offset by lower costs of deposits, which dropped to 19 basis points. We expect the cost of deposits to continue to decline in the first quarter of 2021.

In the loan portfolio, the effect on net interest margin from accretion and purchase discounts on acquired loans was 23 basis points in the fourth quarter of 2020, compared to 17 basis points in the third quarter. Excluding the effects of PPP and accretion of purchase discounts, loan yields increased 1 basis point to 4.23%.

Looking ahead, we expect net interest margin excluding PPP and purchase loan accretion will continue to decline modestly in the first half of 2021. Given the effect of excess liquidity, though, we expect to continue to see the offsetting effect of lower funding rates during that period.

Moving to Slide 8, non-interest income was $14.9 million, a decrease of $2 million or 12% from the previous quarter, and excluding securities gains an increase of $1.1 million or 8% from the prior year quarter. Our mortgage banking business continues to capitalize on low interest rates and on the strong Florida housing market, with revenues of $3.6 million in the fourth quarter. That is down from a record third quarter and we do see a slowdown in refinance activity.

That said, the Florida housing market is benefiting from remarkable population migration trends and low rates. And we've built a strong foundation with local real estate professionals, who have experienced our teams consistently delivering the highest service levels.

The fourth quarter was also strong for our wealth management team, with $1.9 million in revenue and additions of $69 million in new assets under management, bringing total AUM to $870 million. During the full year 2020, the wealth team added new AUM of $282 million, an impressive achievement.

Interchange revenue was $3.6 million, compared to a record $3.7 million in the third quarter. In 2020, Seacoast customers used their debit cards at an accelerated pace, driving record interchange results for the full year. Service charges on deposits increased by $0.2 million compared to the third quarter. Both business customers and consumers continue to maintain higher average balances.

Looking ahead, noting the lower mortgage pipeline as we enter the first quarter, we expect non-interest income to be in a range in the first quarter of approximately $14 million to $15 million.

Moving to Slide 9, adjusted non-interest expense totaled $41.9 million, a decrease of $3.5 million from the prior quarter, and just below our guided range of $42 million to $44 million. Addressing all changes on an adjusted basis, salaries and benefits decreased by $1.5 million compared to the third quarter. The decrease reflects the impact of higher deferrals associated with accelerated commercial loan originations.

Legal and professional fees decreased compared to the third quarter due to a one-time recovery of certain legal expenses incurred during 2020. Within other expense, we recorded a $1.3 million increase in foreclosed property expense, largely the result of declines in value on two OREO properties. Also and offsetting other expense includes $0.8 million release of reserves for unfunded commitments, reflecting the impact of an improved economic forecast in relevant segments. Other expense also reflects lower mortgage production related expenses and lower marketing costs during the quarter.

Looking ahead, we expect to maintain our cost discipline and focus on investments in key areas of technology, commercial banking, talent acquisitions, and operational efficiency. We expect first quarter expenses, excluding the amortization of intangible assets to be in the range of $43.5 million to $44.5 million.

As a reminder, the first quarter includes the return of seasonal expenses associated with payroll taxes.

Moving to Slide 10, the adjusted efficiency ratio in the fourth quarter decreased to 48.8%, exiting the year below 50%. Looking ahead, we expect to make investments in key areas of technology and commercial banking talent, driving growth moving forward. We expect the full year 2021 efficiency ratio to be in the low 50s.

Turning to Slide 11, loans outstanding increased 10% for the full year to $5.7 billion. Excluding PPP loans, total outstandings decreased by $51 million or 1% in the fourth quarter of 2020. Loan originations increased during the fourth quarter to $541 million, compared to $338 million in the third quarter, including an increase of $189 million quarter-over-quarter in commercial.

We continue to maintain our conservative approach to underwriting, and as we're seeing increased demand, we remain focused on relationships that can demonstrate the strength to navigate a pandemic economy.

On PPP loans, the SBA started processing loan forgiveness applications in the fourth quarter of 2020, and during the fourth quarter, $72 million of our PPP loans were forgiven. As of this week, forgiveness approved by the SBA to-date is now over $135 million.

As you know, the PPP program opened again in January, accommodating both first time borrowers and second draws for borrowers who had participated in the first round. Thus far, we have over 1,500 borrowers in various stages of the application and funding process for approximately $170 million in new PPP loans so far.

The pipeline and commercial was $167 million at the end of the fourth quarter, a decrease from prior quarter in line with historical seasonal trends. The consumer pipeline increased to $18 million compared to $17 million last quarter.

In residential pipeline for $117 million compared to $183 million, reflecting the expected slowing of refinance activity from third quarter’s record levels. Our markets continue to benefit from high levels of purchase activity, and our team is well positioned to continue to outperform competitors.

Looking forward, assuming the economic recovery takes hold, we expect loan growth to return to pre-pandemic levels in the second half of 2021. The yield on loans excluding PPP and accretion of purchase discount increased slightly to 4.23%. We expect loan yields to slowly decline modestly in the first half of 2021, with lower add on yields, assuming no change in the rate environment.

Turning to Slide 12, highlighting the diversity of our exposure and concentration levels well below regulatory guidance. We are confident that our established conservative posture is serving us well in this environment, and we intend to continue to manage our credit exposures prudently. Our portfolio is broadly distributed across various asset classes.

Stabilized income producing commercial real estate represents 24% of loans outstanding, owner occupied commercial real estate represents 21% of the portfolio, and residential real estate comprises 23% of the portfolio. Approximately 80% of our commercial portfolio is secured by real estate with borrowers that have meaningful equity in their investments, and lower loan to value. The average LTV of the commercial portfolio secured by real estate is 55%.

For years, we have consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. At December 31, that represented 24% and 157% of risk-based capital, respectively. Those levels have continued to decline and are lower than most in our peer group. Our loan portfolio is diverse and broadly distributed across categories, with an average commercial loan size excluding PPP of just under $400,000.

Turning to Slide 13, for a look at loans with payment accommodations. Since last March, along with the entire industry, we supported our customers with short term payment deferral programs. As 2020 progressed, the large majority of these borrowers successfully resumed making contractual payments, and the level of loans with accommodations has dropped from nearly $1.1 billion at June 30 to $74.1 million at December 31.

Turning to slide 14, for a more detailed look at our CRE and AD&C portfolios, including accommodation. Diversification across industries and collateral types has been a critical tenant of our strategy, which we believe continues to position us well in this environment. The largest exposure in our aggregated owner occupied CRE and construction portfolios is office buildings.

Loans in the office building category with active payment accommodations at year-end totaled only $6 million. That has declined from $135 million in payment accommodations we have reported in this category at the end of the third quarter. The average loan size in our office portfolio is $600,000, the average LTV is 57%. 56% of this portfolio is classified as owner occupied, comprised primarily of independent professional practices, including medical, accounting, engineering and other like type professionals. The remainder of the office portfolio is stabilized income producing investment properties.

Our second largest segment is retail real estate, representing only 8% of total loans. These are typically multi day shopping centers and many were provided with payment accommodations during the year. Outstanding payment accommodations in the retail category has dropped as of the end of the fourth quarter to only $4.5 million, compared to $147 million at the end of the third quarter.

We're very pleased with the positive impact that our payment deferral efforts have had in assisting local businesses, and with the ability of those borrowers in nearly every case to return to making contractual payments. As you know, the retail portfolio does not include regional mall complexes, outlet malls, movie theatres or entertainment venues. The average loan size in our retail portfolio is $1.3 million and the average LTV is 58%.

We've also been very pleased with the performance of our hotel and restaurant portfolios, where the large majority of borrowers have returned to making contractual payments, reflecting the strength of our operators and the lower leverage across the portfolio.

The restaurant and hotel portfolios are primarily secured with real estate, with an average loan to value of only 55%. Our hotel exposure is well diversified. The majority of our exposure is beachside and along interstate and major arteries that benefit from weekend travel, where there are no occupancy restrictions. We have little exposure in theme park locations and do not finance resort or conference center facilities.

Turning to Slide 15, for a more detailed look at our commercial and financial loans. The largest exposure is in holding companies owned by high net worth individuals for aircraft and marine vessels, and this represents a modest 4% of total loans, none of which have active payment accommodations.

In total for the commercial and financial portfolio, loans with payment accommodations declined from $61 million at the end of the third quarter to under $12 million at the end of the fourth quarter.

Turning to slide 16 and 17, for the securities portfolio. With the decline in rates and faster prepayments on mortgage backed securities, yields are down this quarter by 39 basis points. We made additional purchases of primarily agency grade mortgage backed securities, at an average add on yield of 1.43% and an average life of 4.6 years.

We're carefully investing in bonds that have little extension risk and we'll roll down the curve over an approximately four year period. Market values across the portfolio increased, bringing the net unrealized gain to $34.3 million.

Looking forward to the first quarter, given the historically low rate environment, we're being cautious on how much cash we will put back to work in this portfolio and expect to invest approximately $150 million to $250 million, with similar yields and duration to the fourth quarter activity.

Turning to Slide 18 and 19, deposits outstanding were $6.9 billion, an increase of $18 million quarter-over-quarter and an increase of $1.3 billion or 24% year-over-year. Compared to the third quarter, the cost of deposits was lower by 5 basis points to 19 basis points. Looking ahead, we expect the cost of deposits to continue to decline in the first quarter of 2021.

Moving to Slide 20, the allowance for credit losses under CECL reflects our estimate of lifetime expected credit losses, which includes our expectation that some loans will migrate into loss through the cycle. Coverage on loans, excluding PPP is 1.79%, down slightly from 1.8% in the prior quarter.

In addition to what we feel is a prudent level of allowance. Note, that we also have $30.2 million in purchase discount that will be earned over the life of those loans as an adjustment to yield. Also of note, our obligations under unfunded loan commitments have a separate reserve of $2.2 million.

Turning to Slide 21 on asset quality, charge-offs in the fourth quarter were $3.1 million. This was comprised primarily of a small number of commercial loans, and none of those charge-offs individually exceeded $600,000. The level of non-performing loans decreased by $0.8 million to $36.1 million, still representing 0.63% of total loans.

Criticized loans were 16% of total risk based capital at December 31st. As the third quarter deferrals expired and we were able to see borrowers demonstrating the ability to return to making full payments, several loans were upgraded out of criticized categories in the fourth quarter. We continue to remain cautious and are taking an appropriately conservative approach to grading.

The overall allowance for credit losses at December 31, is $92.7 million and allowance coverage excluding PPP loans is down slightly to 1.79%. We continue to have a guarded view of the economic outlook and the timing of a full recovery. So our allowance estimate still gives significant way to the Moody's S3 moderate recession scenario, where the characteristics of the downturn could be sustained over a more extended period. We will continue to revisit this assumption in 2021, as evidence of the recovery materializes.

Turning to Slide 22, our capital position continues to be strong, and our long standing commitment to maintaining a fortress balance sheet has positioned us for resilience. Tangible book value per share is $16.16, an increase of nearly 4% over the third quarter, and 15% when annualized. The tangible common equity to tangible asset ratio was 11% at the end of the fourth quarter, and has consistently been among the highest in our peer group. The Tier 1 capital ratio was 17.4%. And the total risk based capital ratio was 18.5% at December 31, each increasing over the prior quarter. Return on tangible common equity increased to 14% on an adjusted basis.

To wrap up on Slide 23, looking back from the beginning of 2017 to today, we have achieved a compounded annual growth rate in tangible book value per share of 12%, driving shareholder value creation. We are confident that our established, conservative posture and efficient operating model will serve us well as the recovery progresses.

We look forward to your questions. I'll turn the call back over to Chuck.

[Chuck Shaffer, CEO]

Good. Thank you, Tracey. Richard, I think we're ready for Q&A.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question online comes from Mr. Michael Young. Please go ahead. Your line is open.

[Michael Young, SunTrust]

Hey, good morning.

[Chuck Shaffer, CEO]

Good morning, Michael.

[Michael Young, SunTrust]

I guess I kicked off prematurely congratulating Denny last call, and with 42 years with one company I guess an encore is welcome. So congrats again, Denny. And I know Chuck, even though he's not a blood family member, he probably feels like that at this point with how long you all have worked together. So wish you the best in the future. And we'll obviously miss hearing you on these calls on a regular basis.

[Dennis Hudson, Executive Chairman]

Thank you, Michael. It's been terrific working with you over the years. It's great to get to know you. So thanks for that.

[Chuck Shaffer, CEO]

Thanks, Michael.

[Michael Young, SunTrust]

And you're leaving the company in good hands and with a high class problem of very high capital levels, so wanted to start there. Maybe Chuck, just on capital levels being high, you guys announced the share buyback, obviously in December, once you kind of saw the deferrals come down. But now the stocks are valued pretty well. So just how do you kind of view deploying the capital from here maybe in the absence of M&A materializing?

[Chuck Shaffer, CEO]

Yes. Happy to address it, Michael, and thanks for the question. Our view on capital remains very similar. We are still in a pandemic, it's still an uncertain period. And so we're very comfortable with where our capital levels are today. And we'll continue to take a disciplined approach to the environment we're in.

That being said, we'll continue to revisit the various options for capital which includes buybacks, dividends, organic and M&A. Our preference is the use capital for both organic growth and M&A, we think that's the highest use.

And on buybacks, we'll continue to look at that on an earn back basis. And we'll use it opportunistically when it makes sense for shareholders. And always, as we move forward, we'll continue to revisit all the various components, including dividends, and it'll be something we'll continue to look at, particularly as the economy continues to recover here over the coming year.

[Michael Young, SunTrust]

Okay. And wanted to also ask just on kind of the NII dollars. Obviously, I know NIM can be a little hard to forecast, although you guys have kind of a view on maybe how much securities are going to purchase. But it was just net-net, however, you want to talk about it maybe on a core basis ex-PPP or with PPP whatever is easiest. But how do you kind of see the stability and/or progression higher in NII dollars as we move through 2021?

[Tracey Dexter, CFO]

Yes, I can start. We expect significant variability as you said in PPP, and an increase in purchase discount that will affect NII. We do expect the margin to continue to decline if we remain in this rate curve.

But as a reminder, we also have very low deposit costs. And if we do see the curve expand later in the year that would be beneficial to the margin. The economic recovery supporting loan growth in the second half of the year will also be beneficial to NII.

[Chuck Shaffer, CEO]

Yes, and just real quick, I'll just mention Michael. And you know, one of the benefits we have at Seacoast is the high quality of the deposit base. We have at 19 basis point cost of funds, primarily transactional long duration. And the positive outlook ahead for us, as we see the yield curve begin to steepen ideally, on the backside of this recovery, we see loan growth recover.

There's a positive story there as margin widens out, loan growth recovers and we're able to keep cost of deposits low, that's what's always historically happened to the franchise. What's happens with high quality franchises like ours, and given the relationship nature of the franchise and we think there's an expansion of margin that could happen, if that yield curve would have materialized on the backside of the recovery.

[Michael Young, SunTrust]

Okay. And last one for me just on kind of loan growth. Generally, I know you all were kind of fairly cautious in the second half of last year, just given the pandemic and wanting to see kind of, I guess, positive implications in a path forward. Florida has been relatively probably more open than many other states and benefiting from tourism, maybe disproportionately.

So, do you kind of see that that optimism and confidence to begin making new loans more aggressively, as you get back to that kind of historical, we'll call it high single digit, low double digit growth rate?

[Chuck Shaffer, CEO]

Yes, I think the way we are thinking about we're certainly still being cautious and thoughtful as we navigate this period. And when we look at new loan requests, we're looking for borrowers that have the ability to navigate the pandemic and have the ability to navigate further deterioration.

That all being said, Florida is recovering. We've now vaccinated 25% of our senior population, which is a positive development. We're seeing all of our businesses open. So that gives us some confidence that the back half of the year could be relatively strong as we move through the first half.

That being said, it is still recovering. It's still the social distancing and things are going on in the state. And so we don't see as many opportunities as we were seeing during the period prior to the pandemic, we do expect that to come back and you can see that in the quarterly run rate moving up from $80 million to $277 million from the third quarter to fourth quarter as we were able to get back out. And seasonally, the first quarter is normally slower. But when we look out beyond the first quarter into second, third and fourth quarter, we expect things to start to come back.

[Michael Young, SunTrust]

Okay. Great, thanks.

[Chuck Shaffer, CEO]

Thanks, Michael.

[Operator]

Thank you. Our next question online comes from Mr. David Feaster. Please go ahead.

[David Feaster, Raymond James]

Hey, good morning, everybody.

[Chuck Shaffer, CEO]

Good morning, David.

[David Feaster, Raymond James]

I just wanted to dig into the commercial pipeline a bit and loan production. It was a great production quarter. I was just curious, maybe the composition of production in the pipeline. I guess, first of all, how much of this do you think from existing clients versus new clients that you brought over from the lumber hires or the PPP programs?

And then just maybe the breakdown between CRE and C&I, I guess just would you expect more contribution from C&I just given the focus there going forward?

[Chuck Shaffer, CEO]

The way I would think about it, David [ph] is it's a mix. It's primarily current customers that we know well and have done business within the past that are bringing back opportunities to us. It tends to lean into owner occupied commercial real estate, given the nature of the C&I and owner operated companies that we focus on. There is a portion that CRE to sort of well qualified, strong balance sheets, high liquidity, again, showing clear ability to navigate the pandemic. But it's a mix, but leans heavily more into owner-occupied CRE and more professional practices we've done in the past.

[David Feaster, Raymond James]

Okay. And then I guess, just curious kind of the pulse of your clients as we head into next year. Have you found that they’re still a bit nervous or they’re willing to start investing in some expansionary CapEx, and maybe I guess start seeing some accelerating growth here as utilization increases? Just curious kind of the pulse of your client here.

[Chuck Shaffer, CEO]

I think things are still recovering, as we have described it. And generally folks are still cautious. That being said, there is definitely a sense of optimism as to what’s out ahead for Florida. And we do see more conversations happening pretty much across the state and there is more confidence growing in this state. And I think as the vaccine and the vaccination process takes hold that will provide a lot more confidence as we move forward.

And as you know there’s a lot of liquidity in both our borrowers and businesses across the state that ultimately will need to be redeployed into things as we move forward. But the lot of liquidity and growing optimism is the way I'd describe it.

[David Feaster, Raymond James]

Okay. And then just curious on the margin, I know it's hard to say, but especially in light of the likelihood for the liquidity builds in the challenging backdrop and all that. Just any thoughts on the core NIM, and where we might trough and maybe the timing of it? I know that’s a tough question, but any insight into maybe when we can bottom would be helpful?

[Tracey Dexter, CFO]

I can start. So the core NIM excluding PPP purchase loan accretion declined 5 basis points during the quarter to 3.37%. It will likely continue to modestly decline in the first half of 2021, given continued pressure on securities yield, the dilutive effect as we said of excess liquidity, though, we expect to continue to see lower funding rates during that period.

Beyond that, it's pretty difficult to provide guidance on NIM, given the potential uncertainty of the rate environment and also the ongoing effect of the pandemic and stimulus programs that might also impact that.

[David Feaster, Raymond James]

Okay. And where do you think we kind of might trough at around there? I mean are we going to stay kind of north of 3.30% or kind of maybe dip in 3.20s?

[Chuck Shaffer, CEO]

It's hard to give guidance, David, beyond the quarter. It's too difficult, its once you get out beyond the quarter or two, the big variability kind of to go back to what I mentioned the Michael is, if we were to see the yield curve steepen, for our balance sheet where we have some assets that we have lot of liquidity, and the ability to drag out deposit costs over long run there’s a lot of support for margin.

But we would need to see the 10 year move up and the longer end of the curve start to move, which we think is a reasonable possibility given the level of inflation and the level of government support going on.

[David Feaster, Raymond James]

Yes. Okay. All right. Thanks, everybody.

[Chuck Shaffer, CEO]

Thanks, David.

[Operator]

Thank you. Our next question online comes from Mr. Steve Moss. Please go ahead. Your line is open.

[Steve Moss, B. Riley FBR]

Good morning.

[Chuck Shaffer, CEO]

Hi, Steve.

[Steve Moss, B. Riley FBR]

I guess maybe just following up on the margin here in terms of just maybe how we think about like total purchase discount accretion for 2021 in dollar amount, but there's kind of a range. Maybe, if you could frame that out for us, Tracey?

[Tracey Dexter, CFO]

Yes. Also, an area that's difficult to model, a lot of volatility. In the current quarter accretion of purchase discounts positively impacted yields by 30 basis points. Last quarter, it was 22 basis points. Highly dependent on payoffs, but we have modeled a benefit about 27 basis points to loan yield could be higher, could be lower.

[Steve Moss, B. Riley FBR]

Okay, that's helpful. And then I think you said, low 50s efficiency ratio for 2021. Just kind of curious, if maybe some of the realization of PPP fees are influencing that number? And then just kind of how your thoughts are on expenses, what your investment needs are hiring or technology versus wanting to rationalize expenses.

[Tracey Dexter, CFO]

Yes, looking ahead in 2021, we expect to maintain the cost discipline that we've always had. We focus on investments in key areas of technology, operational efficiency. Like I said, we expect the efficiency ratio to be in the low 50s. And...

[Chuck Shaffer, CEO]

The only thing I'd add to that Steve is, we'll be opportunistic with acquiring talent through time. We are actively recruiting, particularly commercial banking talent around the state. And we're seeing good opportunities for that, but expect to manage the business in the low 50s throughout the year.

[Steve Moss, B. Riley FBR]

Okay. And just in terms of -- does that include the PPP fees being realized into NII?

[Chuck Shaffer, CEO]

It does.

[Steve Moss, B. Riley FBR]

It does. Okay. And then in terms of the purchases of securities here, the $150 million to $250 million number, was that just for the first quarter? Or just maybe -- just how you think about securities as a percentage of assets here going forward?

[Tracey Dexter, CFO]

Yes, it just meant to guide to the first quarter.

[Chuck Shaffer, CEO]

The first quarter. Anything beyond that we will provide more guidance as we move forward. Again, just as Tracey mentioned, a little cautious here to put a lot of money back to work with the 10 year near 1%, with the likelihood is I mentioned earlier of the possibility of a rising yield curve later in the year, not wanting to over commit to the current period and being somewhat balanced and disciplined about how much money we put back to work over time. But $150 million to $250 million for Q1 is about right, and then beyond that we'll continue to be -- it'll just depend on the outlook for rates and the economy in general.

[Steve Moss, B. Riley FBR]

Okay, great. Well, thank you very much. That's all my questions.

[Chuck Shaffer, CEO]

Thanks, Steve.

[Operator]

Thank you. Our next question on line comes from Mr. Christopher Marinac. Please go ahead.

[Christopher Marinac, FIG]

Hey, thanks to morning. Chuck or Tracey, I apologize if I missed this. Is there a timing for the third round of PPP in terms of when you recognize that forgiveness? Do you think that'll be this year or it will take longer?

[Tracey Dexter, CFO]

Yes, we've got -- well as a couple of days ago, we have about $170 million so far in loans funded under that third round of the program. We're assuming a pace of forgiveness that similar to what we're seeing so far with round one. So for the latest round of PPP, we're estimating forgiveness starts around the second quarter of 2021, with about a third of that forgiven by the end of this year.

[Christopher Marinac, FIG]

So those ones will be off the books and that new $170 million will be off the books within a year or less?

[Tracey Dexter, CFO]

We're estimating about a third of those will be gone by the end of this year. So most will still be here at the end of 2021.

[Christopher Marinac, FIG]

Okay, great. Thanks for clarifying.

[Tracey Dexter, CFO]

Yes, those are five year contractual maturities. And we're still kind of learning from the experience and the pace of forgiveness and what to expect from the first round.

[Christopher Marinac, FIG]

Okay, got it. Sounds good. And then a more of a strategic question. So Chuck, as all the conversations you are having and various people making suggestions at Seacoast. Do you feel compelled to do anything from the bigger size? Or do you still feel comfortable doing kind of small tuck in acquisitions that you've been very successful with the past several years?

[Chuck Shaffer, CEO]

Yes, on the M&A front, I would say we are seeing deal conversations accelerate post-COVID, which is a positive. And I think our focus will remain generally on smaller tuck-in acquisitions, primarily in key growth markets, Florida, Tampa, Orlando, South Florida, North of Miami, sort of Fort Lauderdale up the East Coast is kind of our key markets. And it'll likely still be tuck in acquisitions, Chris. Those generate good cost out, they generate good growth in our market share in those markets and allow us to expand our presence in an economically feasible way. And if we've done in the past, they generated good shareholder returns, and that's where our focus will be.

[Christopher Marinac, FIG]

Sounds good. Thanks very much. And Denny, best wishes to your next chapter.

[Dennis Hudson, Executive Chairman]

Hey, thanks, Chris.

[Operator]

Thank you. And our final question comes from Mr. Stephen Scouten. Please go ahead.

[Stephen Scouten, Piper Sandler]

Hey, good morning, everyone. How are you doing?

[Chuck Shaffer, CEO]

Hey, Steve.

[Stephen Scouten, Piper Sandler]

Just maybe a follow up on some of Chris' questions there around kind of strategic decisions. Does there come a point where, these tuck in deals I think you've mentioned previously, maybe five or six that could potentially come to fruition over time, were those opportunities kind of exhaust themselves? And do you start thinking about deals outside of the state at some point in time, given just how rapidly you guys generate capital internally?

[Chuck Shaffer, CEO]

Thanks, Stephen for the question. Our strategy is to remain in the state and in particular, the growing parts of the state. If you think about Florida, given the population growth, and in particular the acceleration of that population growth during COVID, and you sort of layer on top of that, the quality of the population growth coming into the state. It's fairly remarkable.

And I think our best strategic path forward is to get as concentrated as we can, and what is probably one of the most robust markets in the country. And that's going to generate the most franchise value.

[Stephen Scouten, Piper Sandler]

Yes. That makes all the sense. Okay. And then, in terms of talent acquisition, you guys noted a couple banker hires, a treasury management individual. How do you think about the pace of potential hires in 2021? I mean, do you have a target in mind? Do you have a fairly aggressive plan? Or is it just more opportunistic in nature?

[Chuck Shaffer, CEO]

We definitely have a plan to hire as we move forward, both in terms of banker talent and leadership talent and around the organization. And we'll continue to hire, but it'll be opportunistic. We're not going to sort of make hires just to hit a number. We're going to hire the right people in the right markets that fit into the culture well, and folks we can believe in. So it'll be opportunistic as we move through the year.

[Stephen Scouten, Piper Sandler]

Perfect. Thank you. And Denny, I know your role is changing, but I still expect to hear from you. But, congrats nonetheless on the transition.

[Dennis Hudson, Executive Chairman]

Okay. Thanks, Steve. Look forward to talking to you.

[Chuck Shaffer, CEO]

Thanks, Steve.

[Operator]

We have no further questions at this time. I'd like to turn the call over to Mr. Shaffer for closing remarks.

[Chuck Shaffer, CEO]

Thank you, Richard, and thanks, everybody for the questions. And we look forward to talking to you next quarter. Thank you.

[Operator]

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