Seacoast Banking Corporation of Florida (SBCF) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the fourth quarter earnings release teleconference. (OPERATOR INSTRUCTIONS). Please note that this conference is being recorded. I would now like to turn the call over to Mr. Dennis Hudson. Mr. Hudson, you may begin.

Thank you very much, and welcome to Seacoast Banking Corporation's fourth quarter 2005 conference call. Before we begin I would like to direct your attention to a statement contained at the end of our press release regarding forward statements we may make today during this call. We will be discussing certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and our comments are therefore intended to be covered by the meaning of Section 27A of the Act.

We have also posted a few slides on our website that we're going to be referring to in our comments. Feel free to visit SeacoastBanking.net. Seacoast Banking, one word, .NET. And click on Presentations at the bottom of the Investor Relations listings to view the slides as we continue with our comments.

With me today is Bill Hahl, our Chief Financial Officer, as well as Doug Gilbert, Vice Chairman and Chief Credit Officer. All of us will be available to answer any questions you may have following our prepared remarks.

This quarter we are again reporting earnings on a cash operating basis, which exclude non-cash amortization expense and profit and losses on our interest rate swaps in prior periods. The non-cash swap adjustments have not impacted the current quarter and will not impact them going forward, but have affected prior quarters. We are discussing our performance in this manner to better demonstrate our operating trends. Most of our comments will therefore be based on this non-GAAP measure of operating performance. You should refer to our press release for a reconciliation of these non-GAAP measures.

Seacoast again reported record earnings for the quarter and for the full year. Operating earnings for the year totaled 21.3 million, or $1.27 per share. Operating earnings for the quarter were a record-breaking 5.9 million or $0.34 per share. The results produced in operating earnings growth for the year of 29.6% and earnings growth for the quarter of 30.8%. Our cash return on tangible equities stood at 18.4% for the year and 19.48% for the quarter.

Clearly, 2005 was an outstanding year for our Company. And I would like to pause and sincerely thank the many outstanding leaders at Seacoast and all of our associates for their tireless dedication to excellence and support for our culture of personal responsibility. Persistent and consistent application of this value, together with the right talent, has indeed produced great value for shareholders.

Our earnings improvement over the past year has been aided by a successful expansion into new markets. And we have also seemed an acceleration of business activity over the past year in our Treasure Coast markets. But a very important component of our improved earnings this year has been our consistent effort over the past couple of years to transform our operating earning asset mix, while maintaining our historical low-cost deposit mix. Over that period of time we have moved our mix of lower-cost residential loans down significantly, as we have increased our loan to deposit ratio. Add to this lower credit costs associated with our credit discipline, a discipline that I would remind you has not changed in over 15 years, and we believe we get a high quality earnings stream over the long run.

I'm going to repeat something I said during last quarter's conference call. And that is this, many banks and thrifts are now experiencing margin compression. Some companies in Florida have seen their loan to deposit ratios grow to well over 100%, and are now feeling the effects of a flat or even inverted yield curve. And others around the country have suggested that deposit growth was expected to slow as they struggle to control their funding costs. Many have had to reposition at great cost wholesale leveraging that was placed on the balance sheet when rates bottomed out a couple of years ago.

The actions taken by Seacoast over the past couple of years to reduce our exposure to long-term fixed-rate assets, including residential loans when rates were low, and to carefully build our exposure to shorter term, higher yielding commercial relationships, and our relentless focus on building our business around a relationship focused strategy rather than transactions, has significantly improved our ability, we think, to perform in the environment we now clearly find ourselves in.

We continue to operate with a very short duration investment portfolio and a loan to deposit ratio. These components, together with a continued positive local economy, give us great opportunity for further growth in the year ahead. I would like to invite you all now to pull up the slides we have posted on our website, SeacoastBanking.NET.

We have presented a number of slides that will better depict some of the recent growth trends impacting our business. You'll find them under Presentations at the bottom of the list under Investor Relations. Bill will now review a few of the highlights for the quarter. And following his comments and a few closing comments from me, we will open the call for a few questions.

As Denny mentioned, I will be referring to some of our slides that we have posted for this conference call in my remarks this morning. I won't necessarily go in the order of the slides, so I will warn you in advance, but I will start out with the first slide which shows total revenues have increased in the fourth quarter of 2005 compared to the prior year by 35%. Net interest income increased 42% as a result of increased loans and other earning assets in 2005. As Denny mentioned and I want to remind everyone, that about 2.5 years ago we decided to remix our loan portfolio by reducing the size of our fixed-rate residential loans held by the Company from about 50% to 30%, while increasing our capabilities to produce and book commercial and commercial real estate loans and consumer loans. The outstanding revenue and earning asset growth is a measure of our success, as well as the net interest margin improvement noted this year.

Total assets have increased 32% as a result of our prior DeNovo expansion into Palm Beach and Brevard Counties, and this year's acquisition of Century National Bank in Orlando. In addition, the Company's net interest margin improved each quarter in 2005, increasing a total of 16 basis points for the year as a result of the improving earning asset mix and the maintaining of a very favorable deposit mix, emphasizing low-cost interest-bearing core deposits and non-interest-bearing DDA deposits.

Noninterest income grew 14% compared to last year's fourth quarter. Several revenue categories were negatively impacted by Hurricane Wilma, but still improved over the prior year, which was also impacted by two hurricanes that hit our markets.

Another slide we have posted shows the overhead ratio over the past eight quarters. In 2004 we opened branches in Palm Beach County and expanded into Brevard County with a loan production office. The overhead investments initially increased our ratio into the mid '60s, consistent with our expectations and past experience. Also consistent with expectations, the overhead ratio has declined as revenues from these new markets have increased. In addition, the acquisition of Century in April, which had a ratio in the mid-40s, further aided in lowering this ratio.

If we achieve our strategies and planned income objectives in 2006, where we plan to open an additional two to three branches. One in approximately March or April, one in July, one in November, and we successfully integrate our Big Lake acquisition, which is scheduled to close in the second quarter, we believe the overhead ratio will continue to move lower throughout the next two years.

We have a slide that shows loan growth with the new and existing markets contributing about 32% of last year's growth of 43% overall, which also included Century's acquired loans. Our markets are some of the most desirable in the state of Florida and continue to grow producing strong lending opportunities. Commercial loans and commercial real estate loan originations for the year by quarter are shown in another slide, and totaled a record 429 million. As I mentioned before, we were impacted by Hurricane Wilma, and the decline in the fourth quarter commercial real estate originations is more of the result of projects being delayed rather than any significant decline in activity.

Total deposits were up 30% for the year, with around 8% attributable to organic growth of the Treasure Coast franchise, and the remainder from the acquisition of Century. The deposit mix consisting of 90% lower core deposits and DDA was unchanged as a result of this outstanding growth.

The value of our relationship banking strategy we believe can be measured by the low-cost of deposits. The Company has a long history of the lowest quartile of ranking compared to peers for cost of deposits. We have a slide that shows the cost of deposits over the last seven quarters has increased a remarkably low 56 basis points, while the Fed funds rate has increased 300. This metric, along with the increasing loans as a percent of earnings asset assets and deposits, has allowed for an improving net interest margin during each quarter of 2005, while mitigating the negative impacts of the flat yield curve environment.

We have a couple of slides that show how our floating-rate loans and assets have grown over the last year, and that they now comprise 34% of earning assets. We have benefited over the last 12 months from the Fed raising rates 200 basis points, thus increasing the yields on these assets. With the Fed nearing the end of their increases, this source of margin improvement we believe can be overcome by further growth of loans as a percent of earning assets and deposits.

In summary 2005 was a very good year, and we believe the prospects for continued earnings growth for the next several years looks bullish from our viewpoint.

As Bill just said it, the year we just completed was a record year for Seacoast. And again we think concentrating our resources exclusively in some of the top growth markets and highest growth wealth markets in the state of Florida uniquely positions us to benefit in the coming years.

At this point this concludes our prepared remarks, and we would be pleased to take a few questions.

(OPERATOR INSTRUCTIONS). Barry McCarver from Stephens.

Great quarter. Denny or Bill, which ever, in your comments I know you talked about cost of deposits, cost of funding coming up. I just noticed on the chart and in the press release, looking at the fourth quarter was really the biggest jump you have had thus far. Was there in the quarter in terms of the mix that you guys did that may have caused that, or was it really more competition?

I think as the quarters progressed along throughout there have been more and more movement out of maybe some of the lower cost core deposit categories into certificates, sort of the kind of typical disintermediation. And we have seen that pick up a little more speed -- the higher interest rates got on a relative basis versus let's money market accounts, etc. I think that is all that is.

Just playing devil's advocate (ph) here, but is it fair to guess that that trend could continue more likely in the future quarters?

Yes, I think it is fair to say that we're going to continue to see -- obviously it is going to stop at some point because all the people that want to move into a CD, or a higher CD, will get there.

And then secondly on slide six where you showed a commercial origination, fourth quarter was by far the lowest. What was affecting that number?

I think that -- I mentioned in my comments I think that the hurricane definitely was impactful. But I think it was primarily, and Doug, you probably can speak to this, more just delays in projects getting to the point where we needed to act on them.

That is absolutely the case, because the hurricanes did have that definite effect of slowing down projects, both for approval and ability to get the materials needed to start jobs. That is really what caused it.

I would say, just commenting on our overall loan growth, we are -- as we look at our pipelines, I would not say that any of us see any particular significant change in trend in terms of pipeline of stuff. That is pretty predictive out about six months. And so we're still seeing pretty strong numbers out there.

The other thing that the hurricane will have an impact and did, at least we're hearing this, is that the construction period -- the funding periods have been pushed out by about 12 months. Is that right, Doug?

Yes.

Because of the same thing, materials, etc. The fundings won't be quite as impactful you might say, but they will be longer. Ultimately it will all get funded. I guess they will be with us a little bit longer though.

Fair enough. And then just lastly, can you give us an update on how the Big Lake acquisition is going? If I'm reading correctly in that recent filing it looks like you lowered the purchase price by just a little bit. Can you give us an idea of what is going on there?

The adjustment in purchase price as described in S4 resulted from the completion of our diligence work. Nothing particularly significant there. I just think it had to do with us looking more carefully at what we could expect out of the acquisition going forward. Doug, do you have any comment?

No, not really. I think it is just basically after the due diligence we recognized a little bit of risk in maybe some customer losses, but that price was adjusted for that.

I wouldn't say it was anything remarkable or overly concerning to us. It was just part of the overall process.

It sounds like it was an issue maybe on the loan portfolio?

Not really. No. Their loan portfolio was reasonably clean. I think it is more of a matter of us overlaying our credit culture on theirs and what potential possible effect that may have. We had some slight concerns about that.

I would again reiterate that part of the overall process includes diligence and that includes further negotiation. And we think the deal was properly priced and fairly priced, and looking forward to modest accretion this year and more substantial accretion in the out years as we carefully put reorganizations together.

That's very helpful. Thanks guys.

I think we said in our announcement at the time that we expected accretion to continue indefinitely in the out years.

Lauren Johnson from SunTrust Robinson.

I've got two related questions. The first being if you could share what the mortgage originations were in the third quarter versus the fourth quarter? And secondly, if you could just give us color on what we should expect going forward. In that mortgage banking fee line I know in your press release you discussed that you were keeping more of the loans on the books, and therefore had less gain on the sale.

I don't think, Bill, we have those numbers to disclose, do we?

No, I don't. Needless to say, the fourth quarter originations were a little bit less due to the hurricane impacts, certainly less than what we had anticipated.

You know, we also have a number of open positions that existed in the fourth quarter on the origination side. And I think that probably helped contribute to that decline. I would say our outlook is for originations to continue to be strong. It is probably somewhat speculative, but somewhat stronger than we saw in the fourth quarter for the reasons Bill just indicated.

The thing I can tell you the full originations, and I don't know whether we disclosed this in the first three quarters, and you can back into the fourth quarter. I believe it was 185, 187 million.

187 million.

In total originations for the mortgage.

For '05?

Yes.

[Terry Maltise] from Sandler O'Neill Assets.

Nice quarter. Two quick questions. Could you give us -- your margin -- you talked a little bit about it held up very well, and then you talked about some of the factors affecting it going forward. What should we be thinking about in terms of the margin outlook over the next few quarters?

There is various speculation as to what the Fed is going to do over this next twelve months. I guess the consensus is at least one more rate hike and maybe another, and some people believe maybe even one after that. I think as I mentioned, with 34% of our assets being in floating-rate prime based, etc., that we would continue to actually benefit from further rate hikes by the Fed. And so under that scenario we see the margin improving more substantially than what we really believe, I guess, or what we are sort of in that camp of maybe one more rate hike. But given the fact that we continue to see strong production capabilities and growth in the loan portfolio in the range of 15 to 20%, that we see the margin consistently improving quarter to quarter.

It is all going to be a function of how well we control core deposits cost and growth and so forth, on how much it will be. But we see, provided that we do continue to expand loans as a percent of earning assets, that the margin does improve throughout the year.

Just on the line loss reserve, what are your thoughts there? Obviously relative to your losses it is very high because you have almost no losses. Relative to loans it looks sort of low at 70 basis points. What is the thought there? Are we going to see that reserve trend down any more or should we be expecting it to grow from here?

We have consistently applied a methodology to creating that number, and we will continue to do that. The only driver today to the provisioning is the growth, and the growth has been substantial in the portfolio. We expect that to continue. I don't know that we would expect the relative size of the reserve to decline substantially. But if we did, we would be saying that. If there were credit issues that came up, which we do not expect nor do we see, you can see some additional provisioning. We think it will continue to side along about where it is in terms of provisioning. And I don't see any other factors I think that will come into play here.

The current reserve is supported by the long, consistent history of very low losses, and a long and very consistent history of very low past dues, and internally identified issues in the portfolio. And we continue to see a very strong environment here, and don't have any present thoughts on that changing substantially.

Great. Thanks very much. Nice quarter.

Bret Villaume from Fig Partners.

This is Bret Villaume. Chris could be on the call, but I wanted to ask you about the Big Lake acquisition about -- I wanted to see whether or not -- well it is, one, sort of a general question about acquisitions, and that is Big Lake and also Century National were acquired with relatively good deposit bases, a lot of free funds, and also on the cheap, in my opinion.

And I thought -- I wanted to see if you could give me some color on what you think is out there still, and what your appetite for more acquisitions in 2006 would be? And then also, in Big Lake how seasonal do you think the deposits are, because the footprint doesn't seem to be as -- Treasure Coast and Orlando sort of winter resident prone.

Starting with your second question, Doug and all the [troop folks or] Doug have spent a fair amount of time out in the Big Lake region in the last couple of months. I would say you're absolutely right. We don't anticipate them being as seasonal as they are on the coast. Would you agree, Doug?

Oh, absolutely. You don't have the same cyclical behavior there.

And so I think you're right on, on that. As to your earlier comment about the two acquisitions we did over the last two months, we think they were fairly priced from both shareholders' prospective. I think the execution of business in the Orlando market has gone extremely well, and is an absolute credit to the high-quality management team in place there lead by Mike Sheffey. His whole team has done an excellent job continuing to grow the bank. And we have seen come, as we said, some very nice margin expansion come out of that. So it has been a great, I think, thing for both shareholders.

I would remind you that their shareholders are now part of our overall shareholder base. And I would point out that in the case of the Big Lake acquisition that deal will be closed with 100% stock. And again those shareholders, I think, viewed this as a nice trade into a high-quality Company with a great future associated with it. I think they were both fairly priced and are good for both shareholder bases.

As to your final comment about more acquisitions, it remains to be seen what we will see out there. It is kind of interesting that a lot of the more disruptive buyers are kind of on the sidelines, although you continue to see whopper deals being announced in the last few months. Particularly on the West Coast of Florida I have seen some and the like. I think we have a great story and a great future, and with the right kind of opportunity we would like to do more. But the requirements would be having a good management team in place, which both of these did; having high-quality folks that can continue to lead in those markets; and priced in a way that is fair to both sides as we go forward. Those are very hard to come by, I will tell you. Not a lot of opportunities out there that meet those requirements. But we will continue to look and really be more opportunistic in our approach rather than -- I mean we will remain very disciplined I guess is my point, if we were to do anything. Good question though.

Peyton Green from FTN Midwest Securities.

If I could just get an update on what your thought for the loan to earning asset mix might be? I think Bill mentioned that you all would hope that loan growth can stay in the 15 to 20% range for '06, excluding the Big Lake transaction. Is that correct, number one? And then also would you reduce the size of the securities book or do you see more as just maintaining a consistent balance over the year?

Bill can weight in, but I would just like to point out -- and you're right -- we're looking at loan growth I think in that area, Bill, 15 plus percent. And I would point out to everybody that that is a decline in growth from what we produced the last couple of years as the surge in new market impact kind of works its way through the portfolio. And, Bill, do you have any other --?

Yes. I think that we are -- I think we have said in the past more or less, I guess, in terms of the loan to deposit ratio that we would be comfortable with that in the high '80s. So we do have quite a ways to go from the 72% that we're at right now. I think that we're still -- share that comfort. And I think the 15 to 20% growth will make a nice dent in 2006 into that, provided what our deposit growth can get to.

Doug, any comments on the outlook for loan growth?

I think the 15 to 20% is a reasonable number. And we still see a great deal of activity in our markets. We have yet to experience a slowdown that maybe some of the other parts of the country are starting to experience. That doesn't mean that we won't see some slowdown, but from what we can see today out to at least the next six months, we see some very robust things happening.

And then in terms of expense growth going forward, what is the baseline number in terms of the three branches that you have already got in the works, and then just overall growth measures that continue on?

I think you can sort of look back over what occurred in 2004 when we had a similar type of branch expansion or additions, and go by that. I will point out that part of the growth will occur in the lending area as well on the Brevard market where we do plan, I believe, to open one branch this year. And I think that was like a July type opening. It is not a great deal of additional overhead being added, but we have some catch-up overhead from an expansion that occurred in 2004 and 2005 as well.

Excluding Big Lake, 10 to 12%? Is that fair?

Yes. I think that is probably reasonable.

Cory Shipman from Stanford Group.

I've got two unrelated questions. And the first one is very simple is just kind of give us an update on the duration securities portfolio?

You know, down below two years providing about 15 to 20 million a month in runoff.

Okay. Second, now that it has been the fold for about two quarters, a little more than two quarters, can you give us kind of a status report on how Century National is doing? Specifically kind of the opportunities you are seeing in Orlando, particularly on the commercial lending front? And how the deposit retentions are going with that acquisition, and what you have been able to do thus far with the underutilized balance sheet that you acquired?

Generally it is going extremely well. All of the factors you just questioned, each one of them I would say is going as good or greater than maybe our expectations at the beginning. Again, we attribute that back to the management team and the commitment they have for moving forward and building things together.

I think loan growth has been better since the acquisition than it was prior to. It has been incrementally better, which is what our goal was and what their goal was. I would point out if you look very carefully at Century, historically you would see that their loan growth was accelerating in the last year or so prior to the announcement. And that acceleration continued out beyond the announcement, and certainly all the way through this year. We're very pleased with the progress. We think the longer-term opportunities in the market have clearly yet to be realized. And we expect those trends to continue. The key to that will be the right people and recruiting additional help over time. And we're in the process of working on that right now.

Thank you and good quarter.

Al Savastano from Jamie Montgomery.

Just a question, with your length of deposit ratio where it is, what is your outlook for deposit growth, since you really don't need them?

It is kind of the lifeblood though, I would say, of the organization. I think one of our challenges over the next couple of years is going to be to better rationalize our entire footprint that we have, and there is really a lot of opportunities. I think that goes for deposit growth as well. As I mentioned, the Brevard market we are going to be opening an office there. If we have any kind of experience like we did down in Palm Beach County that could be and should be very positive. The Orlando market is very, very competitive right now with a lot of new DeNovo branches up there and so forth, but that team is doing remarkably well against all that competition. And then Treasure Coast markets, we do have the biggest, or nearly the biggest, footprint and market share down here.

We are sort of looking at somewhere in the probably 4 to 8% deposit growth for 2006. It just depends on how certain of these things come out. Some of the down draft on that is that as these large commercial construction projects where we have taken in quite about a bit of deposit money on the sale of the units when these complete, some fairly large deposit relationships go away. They're not relationships, but just overall deposits.

Escrowed deposits begin to decline. We're saying that in this last quarter some declining large escrowed deposits. It is not a huge number, and again that is being replaced with new stuff coming in the front end. I think we feel comfortable overall on our gross number that Bill just talked about.

Does that impact your pricing at all on deposits?

No, we are relationship bankers. That is our strategy. And we really don't compete for deposits on a price basis.

I would say that with the current position we are in, with the liquidity that we have in the balance sheet, we will stick to our discipline in terms of how we grow the deposit portfolio. We're not feeling any pressure to replace any of those deposits due to liquidity concerns. And you see that in a lot of other companies. That is not something that is here. It gives us an advantage and an ability to respond to more -- carefully to the market and where the pricing is going. We will continue to remain disciplined on the deposit side. We will grow as best we can grow in these low-cost deposit categories.

(OPERATOR INSTRUCTIONS). Bill McCrystal from McConnell Budd Roman.

Just one question. You mentioned 34% of assets tied to prime, or at least floating rate. Do you have any loans that have caps written into them? And does that create an issue as we look forward to some more rate increases in '06?

Generally speaking we don't have loans that have caps tied to them.

Probably the bigger issue is whether those things get refinanced at some point, and that depends on the twists and turns in the curve as we move out over the next year. And at this point I don't think we see any pressure.

There are no further questions at this time.

Great. Thank you very much for your attendance today. We look forward to reporting good things in the first quarter. And thank you for attending.

This does conclude today's conference. Thank you for participating. You may now disconnect.