Seacoast Banking Corporation of Florida (SBCF) 2007 Q3 法說會逐字稿

-- ladies and gentlemen, and welcome to the Third Quarter Earnings Release Conference Call. (OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr. Dennis S. Hudson. Mr. Hudson, you may begin.

Thank you very much. And welcome to Seacoast's Third Quarter 2007 Earnings Conference Call.

Before we begin, as always, we'd like to direct your attention to the statement contained at the end of our press release regarding forward statements. During the call, we're going to be discussing certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act. And accordingly, our comments are intended to be covered under the meaning of the Act.

We've also posted a few slides on our website that we're going to refer to in our comments. Feel free to visit seacostbanking.net, and click on Presentations at the bottom of the Investor Relations listing to view these 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; Jean Strickland, our Chief Operating Officer; and Russ Holland; our Executive Vice President, Commercial Real Estate Lending. All of us will be available to answer questions following our prepared remarks.

I'm going to begin by making a few comments about our credit quality, which obviously was the big news this quarter. Seacoast was one of the first banks in the country to express concern with regard to the residential real estate market back in the last half of last year, 2006. We did in fact begin to build reserves in the final quarter of 2006 based on what we saw as a decline in market conditions affecting residential real estate development. We reported to you at that time that we had undertaken a complete review of all of our exposures in this area; that is, loans with exposure to the residential real estate market.

Since that time, we have continued to very carefully and formally track market conditions in each market where Seacoast has exposure, and carefully and formally track the condition of each borrower with this exposure.

While there have been some differences between markets -- which I will address in a second -- in general, we have seen over the summer a further decline in sales activity. This occurred after some improvements earlier in the year, following some initial discounting by builders.

While this softer market condition has impacted our exposure to residential real estate development, it has not impacted any of our other portfolios. In fact, our residential mortgage loan portfolio, as well as our consumer and commercial portfolios, continue to perform well; better, in fact, than the national and paid averages in terms of our past-due, nonaccruals and so forth. So the deterioration in asset quality measures at Seacoast over the last few quarters -- and particularly this quarter -- are related to a relatively small portion of our total loan portfolio.

Now, I indicated earlier that we have continued to formally and carefully track the condition of our borrowers with exposure to the residential markets. This monitoring since January has been conducted on a monthly basis. This kind of discipline helps us deal aggressively with borrowers and ensures that both we and they face reality sooner rather than later.

Very late in the quarter, we began to see higher levels of contract fallouts, which, combined with an anemic overall level of sales activity, has impacted borrower cash flow. As a result, this quarter we placed an additional $30 million in credit relationships -- mostly residential development loans -- on a nonaccrual status. This includes borrowers with known cash-flow difficulties, as well as others we anticipate will exhibit difficulty shortly.

In taking this action, we have been appropriately conservative in our overall assessment. Further, we had assessed the likely current market values for the real estate that secures all of our nonaccruals, and where appropriate have created specific reserves needed to ensure that we carry these assets at what we believe are their net realizable values. For example, we assumed all existing sales contracts priced above our current estimate of value for an individual piece of real estate will fail to close, and instead will need to be re-marketed on a discounted basis.

In taking this action, this quarter -- in taking this action, we have this quarter taken an additional $8 million to our loan loss provision, largely driven by specific valuation reserves. To be clear, 100% of our nonaccruals are currently secured with first mortgage liens, and we believe we have appropriately reserved for the impact of current market conditions and the impact that could have on valuations.

Now I want to make a few comments on the conditions for specific market areas in which Seacoast operates.

Substantially, all of our lending, including residential development loans, is centered in our footprint. And that footprint stretches from Orlando across to the Space Coast, and down through the East Coast of Florida to Palm Beach. And more recently, we have established -- with a great group of bankers, I might add -- a new commercial office in Broward County, in Fort Lauderdale.

Our exposures across that footprint are quite diverse, including our exposure to residential development. The strongest market in our footprint continues to be Palm Beach County and Orlando, where we have increased our exposure in the last couple of years. Our weakest market in our footprint today is St. Lucie County, where have been reducing our exposure over the last couple of years.

We also, unfortunately, grew a small exposure outside of our footprint, in Lee County, on the West Coast of Florida in the Fort Myers area. This market area is arguably the single worst residential market today in Florida.

Included in this quarter's nonaccrual loans are loans totaling $19.3 million related to this market area. The balance of our entire exposure to Lee County totals approximately $8.5 million and consists of two relationships that are much further along -- in fact in the later phases of development -- which we currently expect to continue to perform.

That's about all I had to say about credit quality for now. I'm going to turn the call over to Bill, who will give us some more color on the quarter and the work we are doing to better control overhead in this very tough environment. Bill?

Thanks, Denny. Good morning.

My comments this morning will cover revenue growth, deposit costs and growth, credit quality impacts and the overhead.

Total revenues for the quarter were $27.2 million compared to $28.2 million in the second quarter 2007, and were lower than the same quarter a year ago, reflecting primarily the impact of nonaccrual loans.

Noninterest income decreases linked-quarter are due to lower mortgage banking production and normally seasonally weaker wealth-management and marine finance activities. Net interest income was increased by good loan growth, offset by the effects of nonaccrual loans. The net interest margin was pressured by continued unfavorable change in deposit mix and from negative impact on interest income as a result of the increased nonaccrual loans.

In spite of this, interest income and fees on loans were up $1.4 million, or 4.2% linked-quarter un-annualized, on loan growth of $80 million during the quarter, with total year-to-date loan growth of $160 million, for an annualized 12.3% increase for the first nine months of 2007.

Commercial loan production during the quarter was very good and totaled $146 million, compared to $151 million in production for the second quarter, with most of the production centered on income-producing commercial properties and other categories not related to residential development.

These loan-growth characteristics are better than our original forecast, where we suggested that we expected year-over-year loan growth for the year to be in the high single digits. We still anticipate, going forward over the next 12 months, that it is likely that loan growth will be lumpy quarter-to-quarter as a result of unpredictable loan paydowns on problem loan resolutions and completed residential construction loan projects.

Loan pipelines remain good, so we believe that the loan growth for 2007 should meet our forecast -- our original forecast that we gave to you, of 8 to 10%.

Moving on to deposit costs and deposit growth -- the total cost of deposits increased to 3.01%, which was up 13 basis points linked-quarter and slightly lower than the second quarter's increase of 19 basis points. Overall, the interest rate paid on interest-bearing liabilities increased nine basis points, to 3.88 in the quarter.

Deposit mix was more stable this quarter when compared to the first two quarters, with noninterest-bearing and core deposits as a percent of total deposits totaling 74%, compared to 75% last quarter. In addition, on September 18th, the Fed reduced interest rates 50 basis points, and the Company was able to reduce interest rates paid on many of its deposit products including CDs. While some competitors initially continued with aggressive CD offerings, most have reduced their rates more recently.

These deposit impacts likely will continue but will be offset by the lower rates due to the Fed cut. Therefore, net interest income growth in the fourth quarter will come from continued loan growth, seasonal deposit growth; offset by nonaccruing loans and lower yields on prime-based loans, as well as the decline in the costs of interest-bearing liabilities.

Also, it is important to note that we have always experienced seasonal deposit growth in the fourth and first quarters, which adds to net interest income growth, but at lower than current spreads.

Moving on -- a couple of comments on nonperforming assets -- as Denny mentioned, they increased by $30 million compared to last quarter, and totaled $46 million, or 2.42% of total loans and other real estate owned outstanding. As indicated last quarter, nonperforming balances will experience variability over the next few quarters and consequently will produce a drag on the net interest margin. This quarter's NPAs reduced net interest income by over $600,000.

We have posted a slide for this call disclosing pro forma operating results for the first three quarters, without the noncash provisions each quarter. What this slide indicates is that the Company is producing quarterly cash earnings of approximately $0.29 per share for the first nine months, and that much progress has been made in growing the franchise, and that our efforts to date will ultimately lead to improved performance as the credit cycle moderates.

Moving on to some comments on overhead -- noninterest expenses were impacted during the third quarter by one-time costs related to other professional fees, employee-recruitment expenses and severance costs; offset by the reversal of previously accrued management incentives and profit sharing.

After adjusting for these items, we believe the normalized overhead run rate for the third and fourth quarter can be approximately $19 million. Other cost savings have been identified as reported in our prior release and should total approximately $3.5 million annually, to be fully implemented by the beginning of the second quarter of 2008.

During the first and second and third quarters, we hired additional loan producers and other key personnel to take advantage of growth opportunities in our new markets and disruption in our existing markets. The overhead additions in 2007 have already improved loan and deposit growth, increased fee income generation and commercial loan growth exceeding our expectations.

We are now focused on the cost savings, as we have discussed, for 2008, and in reducing the overhead ratio, as total revenues should continue to improve from the growth opportunities in our markets as a result of continued market disruption from M&A activities.

Denny?

Thanks, Bill. As you just heard, while we're certainly disappointed with the impacts of credit costs this quarter, our underlying results remain solidly in place. We will likely see some seasonal improvement in those results in the coming quarters. And it's now clear that the moderating effects of lower ESCROW-related deposit balances -- which were related, of course, to the slowing residential real estate market -- have turned the corner.

But it's also clear that our credit quality has not affected our underlying potential for growth. This is reflective of our remarkable and diverse franchise in Florida. Moreover, the concrete steps we are now taking to further improve overhead will help us build on that foundation for growth and improve our potential as we move forward. Credit quality will remain under pressure as we move forward, although we don't see significant changes like we saw this quarter when we look out in the next few quarters.

We will continue to aggressively monitor our exposures in light of market conditions. We believe that we may begin to see some liquidations occur which could moderate the effects of further market deterioration or the potential for an extended period of market softness. But overall pressure on credit quality will surely remain with us well into 2008.

While our highest priority will be to manage the issues related to asset quality, of equal importance will be our efforts to improve our underlying ability to produce core earnings, given the reality of the current environment.

We have made progress on that score this quarter with our overhead reductions. We need to do more. And as you just heard, that's what we plan to do.

Today, Seacoast is, like never before, on sale. Our valuation has produced a terrific dividend yield. We are the last sizable bank left in Florida with any real franchise value. Our multiples today are currently far below a level reflective of that franchise value.

We'd now be pleased to take a few questions.

(OPERATOR INSTRUCTIONS) Barry McCarver from Stephens, Inc.

Hey, good morning, guys.

Morning.

Denny, we know it's a very difficult environment out there. We appreciate the additional disclosure.

I guess my first question is for yourself and the credit team. You mentioned that you're going back to look at those credits that might be questionable in the future and trying to reassess the value of underlying property. I was wondering if you could provide us a little bit more detail on that process; I know it's got to be very difficult to value in this market right now.

Well, I think what we were attempting to say is that we've been doing just what you described, intensely, since really second half of last year. And that process continues. It's updated on a monthly basis. And our point was that this quarter, the lion's share of the provision expense was related to the creation of valuation reserves around nonaccrual loans. And I guess we've done the best job we can trying to assess where we are as of right now, at the end of September. And the results kind of speak for themselves.

So we think we've got our arms firmly around where we are, and just have to see how things progress in the marketplace as we go forward. I'm not sure that answers your question, but --

Well, I know it's a difficult question. I guess I'd ask it another way, is -- when you're looking at this property, how much are you baking in for the surrounding environment versus just the cash flow of maybe that individual developer? Are you taking into account the projects across the street and what's happening there?

This is Russ Holland.

What we've been doing is evaluating each project specifically. And to do that, we do look at the surrounding market. We get information on comparable projects. We have a staff appraiser, that's an MAI, that we use to support that. And it's a combination of all those things.

And we would also typically order independent new appraisals as we proceed forward with that process. And again, as Russ indicated, then we make our own internal assessment of what we think about that appraisal. And we take into consideration all of the things you talked about.

I mentioned one example in my comments, where we had a developer exposure with a number of pre-sold homes that continue to close, that -- we are assigning a 100% likelihood of fallout for any contracts that are currently priced above what we believe today's value is. And that's internal to us, and so we're trying to take a very thoughtful, but appropriately conservative, view of valuation in today's environment.

Okay. That's [what I was asking for]; it's very helpful.

Just secondly, quickly on the loan pipeline -- you mentioned it was -- still looked pretty good. Any specific comments as to what products that's coming from?

Yes, I think Bill made that pretty clear -- we're focusing all of our efforts and energies around anything other than having to do with residential real estate development. And to the extent that -- that creates a real challenge for us in terms of loan growth. But the focus is primarily directed around income-producing properties --

Okay.

-- in cash-flowing, income-producing properties.

And then just lastly, for Bill -- on the --

I think it's important for you to understand, Barry, that the work we've done over the last 18 months in some newer markets, and the work we've done to take further advantage -- for example, the Orlando market. We've added a lot of lending staff in that market, as an example. And that begins to build momentum as we expand forward. And we're using that to counter the very negative effect on volume that the environment has in some of the other categories.

But yes, we're focused on -- primarily on the commercial side, anyway -- on the income-producing type commercial projects.

Okay.

And then, just lastly, on the $1 million of nonrecurring -- Bill, could you break that out just a little bit between the severance and professional fees and whatnot?

I don't have it right in front of me, Barry. But as I recall, in terms of -- the legal fees are probably in the $500,000 to $600,000 range, and then the other two are about equally split.

Okay. Thanks a lot, guys.

Jennifer Thompson from Oppenheimer.

Hi, good morning, everyone.

Morning.

Morning, Jen.

One quick question on the net interest margin impact from the NPLs -- is that simply just backing out the impact of the reversal of accrued interest on the new NPLs? Or are you also including some estimate, as some of your peers do, in terms of lost income on existing NPLs?

Well, the $600,000 that I mentioned, Jen, would be the entire NPLs sort of lost --

Okay. So would include it, okay.

Right.

And so, when you're thinking about the moving pieces to, say -- if you back that out, what you would consider the core net interest margin -- mention a few things that you see coming through the next quarter or so -- would you expect the core margin to kind of be flattish, expand -- how should we think about that?

Well, as you know from the past, in the fourth quarter, generally speaking, even when we're in a growth environment, that our margin would tend to flatten out from the third to the fourth because of the influx of seasonal deposits and the investing of those deposits in smaller spreads.

So I would expect something comparable happening this quarter as well, if you just -- if I got your question correctly. And that is not considering the impact to the --

Right.

Yes. Yes, I would think that it's still going to be rather flattish on that basis because of the influx of seasonal deposits that are invested at 2% and less spreads.

Though we may see some pickup in margin dollars.

Right. And net interest income ought to grow.

Just to be clear, the margin we reported this quarter is fully loaded with the effect of the nonaccrual loans.

[Right].

Right. Okay.

And then, just a final question -- are you guys willing to give some thoughts on how you're thinking about -- it's -- I guess it's -- to some extent, it's a bit of a guess at this point, but the potential for the net charge-off range you see over a cycle that is just starting to develop now, for you guys?

So your question is where do we see charge-offs going?

Right. Yes.

Well, we've created -- as I said before, a large component to the provision this quarter was the creation of valuation reserves. And the charge-offs will be a function of how effective we are as we move forward, resolving those credits. But probably little doubt that we're going to see higher levels of charge-offs. We don't believe they're going to be shocking or substantial, but we'll probably see that over time.

I think the first step is building reserves and appropriately recognizing the current valuation. And then as we go through and resolve things, and do our best to realize the greatest value we possibly can, we may see charge-offs increase.

Okay, great. Thanks very much.

[Isa Vaird], private investor.

Good morning.

Morning.

Of course, everybody would like to have a crystal ball. But I'd like you to share your thoughts for the future stock growth as related to the topics that you covered today, and the changes that you're making with your ongoing strategies.

Well, I appreciate the question. I guess what we're -- I don't have a lot of control over the growth -- or the change in value of the stock price. Just have to continue to listen to the call and get better information, I think, on where we see -- try to give some indication as to where we are. And hopefully, we'll continue to help answer that question as the call progresses. Thank you for your question.

Paul Connolly from Southwell Partners.

Good morning. Thank you for taking my question.

Could you provide a little more detail on the loan portfolio as of September 30th? I think your press release talks about $627 million of construction and land development loans. Could you break that down as to what's land and what's residential in nature; what's commercial in nature?

Well, if you -- very simply put -- if you look at our Q, which will be filed shortly, and look at the Q that we filed in June -- first of all, there's not been a substantial change since June in the sort of complexion of the portfolio. And what we've tried to do -- I'd like to direct you back to that -- because what we've tried to do in that discussion in the Q is provide you with exactly what you've said.

When you look at the construction portfolio, you find that while -- that probably less than half of that number you quoted is related to actual land development. The balance of it, and a good chunk of it -- roughly half of it -- maybe a little more than half -- is related to not development construction loans, but rather construction loans for the construction of office buildings, and that sort of thing; as well as a whole host of industrial properties and the like throughout our markets. Also included is loans to individuals to build houses.

So you kind of skinny it back, and you find that around $300 million or so is related to actual development projects. And of that amount, maybe 70% is residential-related; the balance is other kinds of development projects.

Okay. So looking at the Q, I think you had [fee] --

I think you come up with 12 or so percent of the whole portfolio is related to residential construction development projects and the like.

Okay. Just a further clarification -- in the Q, you record land -- last quarter, second quarter -- as being around $300 million. Is that all residential in nature, or is that commercial in nature?

No, that's exactly what it was speaking to. About 70% is the residential component, acquisition development; about 30% is commercial development --

Okay.

-- either improved or unimproved.

And then also, in the same Q, you have another line item for land that's separate from land development, just -- it's labeled land at $78 million. Can you just describe what that is, and how that differs from the $300 million?

That land category is the unimproved land, or land held for development, whereas the other land category is improved land, or land being developed.

Okay.

Just a little further clarification on the residential mortgage piece of your portfolio --

Yes?

-- can you just provide a little breakdown as to that piece as well, if you could?

And there, you're speaking of our one-to-four family residential loans to individuals?

That is correct.

Yes. It's -- as you all know, that's a little over $500 million, I believe, in size, comprised of very straightforward conforming loan product. We have absolutely no subprime, no Alt-A, no negative amortization, no exotics whatsoever.

We have -- a good chunk of that is committed to jumbo loans -- larger credits -- to individuals that would be slightly above the size -- Fannie Mae, Freddie Mac size. But it's all basically conforming, straightforward, plain vanilla mortgage loans. And we've seen, as I said earlier on the call, no real change in trend there in terms of problems.

Okay. And just a further clarification -- the nonperforming assets that were taken this quarter -- that largely is related to what category of your loan portfolio?

Everything we've just been talking about, which is residential land development.

Okay. So specifically to the land component of construction?

The land development and land, yes.

Okay, great. Thank you very much.

And I would say that it includes a little bit of other kinds of development loans, where a borrower is heavily involved maybe in another project that is residential-related. And now, that's giving us concern about his ability to cash flow, and maybe dragging down his other exposures.

So we've looked -- in a very complete -- I guess my point is we've tried to look at the borrower level, at his cash flow and issues, and tried to appropriately recognize those challenges, not just in loans for residential development; at any other loans he might have that we might have exposure to.

Thank you very much. I appreciate it.

David Bishop from Stifel Nicolaus.

Hey, good morning, gentlemen.

Morning.

Hey, a question regarding -- you touched on the residential component side. Are you seeing any fallouts, given the slowdown from that side, impacting on the demand or credit quality you got on commercial real estate? Any signs of early delinquency there, or other things that give you pause?

Doug, you have any comments on that?

We haven't seen that at this point.

Yes. Yes, the answer is no, we haven't seen that. I think -- I would agree with that -- we haven't seen that yet.

Okay.

In terms of the NPAs -- I mean, in terms of the development loans --

And let me just comment. Our exposure in that area is largely related to number of owner-occupied type of exposures, other anchored retail centers -- a whole host of things that are kind of detailed out in the Q that -- remarkably diverse sort of collection of exposures in the commercial areas. And you'd have to see a -- I think -- a fairly dramatic slowdown of the economy in general to begin impacting those tenants and the like in those centers.

So that's a much longer-term sort of an issue that we want to look at. And as of this point, we have not seen any deterioration at all.

Okay. Okay.

In terms of the -- maybe the nonaccruals from the resi development side -- what -- just maybe some color there. Are these projects, in terms of stage of completion, projects that have -- developments that have built out that are standing vacant, or in the early stage of completion -- maybe some color there?

I don't know that any of them are stopped, that we're concerned out. It's more that they're experiencing stress and distress related to cash flow deficiencies. And that's a function of sales activity having slowed down well beyond some of the worst-case scenarios. Would you agree, Russ?

Yes. They're ongoing projects -- various stages of completion. Some are completing build-out of pre-sold units, and others were just getting started in the sales process.

Thanks.

Sure.

John Pandtle from Raymond James.

Good morning. Thank you.

Denny, did the valuation allowance -- the increase that you made this quarter -- did it include any input from your accountants or regulators?

No, not at all. None whatsoever.

Okay.

And then, the valuation of reserve that you've made -- what does that represent as a percent of the original carrying value of those loans?

Well, it --

Less than 20%.

-- yes, it varies significantly from loan to loan. But on an average, if you rolled it up, it would be less than 20%.

Okay.

And had there been any previous marks taken from those credits?

They were kind of rolled into our general reserves. And so there were, in a sense, marks taken as they deteriorated the last few quarters --

Okay.

-- but not nearly as substantial as the effect this quarter.

Okay.

At this point, I guess the key thing that we're communicating is that the provision this quarter was driven by valuation reserves related to specific credits. And what we're seeking to do is reserve those for their -- what we believe is their net realizable value, if we collect the -- rely on the mortgages that secure those credits.

Okay, Denny, and on those specific credits, do you have an average loan [to] cost -- where that stood before the mark?

You're going to see land loans -- the standard was 65% loan to value. And on development loans, you might see 65 to 70% of value on raw land, and maybe 80% of cost on vertical construction. Those are the kind of standards that we tried to stick to over the last several years. There's some variation there. But that, I think, kind of gives you a flavor for it.

So what we're basically saying in many of those is that we've seen valuation declines that have eaten away all of that equity, and then some.

Yes. Okay. Thank you.

It's a substantial decline in value, not frankly -- for the most part, we've stayed away from some of the late-stage valuation work that came in, that just was even worse than that. So these are loans that were originated in '04; some in '05.

Okay.

And they actually saw values improve, if you can believe it, beyond what I just described. And it's now fallen back down through that, and through the equity and, in some cases, created valuation reserves on top of that.

Yes. And Denny, do you guys -- have you calculated an estimate in your market? I don't know if this is possible in a projection -- it's just that -- subject to standard risk and uncertainties, of course -- but have you kind of calculated an estimate or projection on current sales base -- how long it's going to take to work all this excess real estate?

It varies widely from market to market.

Yes.

And we calculate that every month --

And --

-- and look at it, market to market. And as I said earlier, one of the strongest markets we operate in is Palm Beach County, which today might have -- gosh, been more focused on the individual credits and less on the market, so (inaudible) --

We have all that information.

-- five, six months? Yes. Twelve months in Palm Beach County, yes. And some of the worst markets are 36 months-plus -- St. Lucie County, for example, a market that we've been concerned about for the last couple of years, and have actively reduced our exposures in.

And then Lee County is off the charts. I don't know how bad that is, but it's -- very bad.

Okay.

But the problem is, what sort of sales activity is a reasonable number to apply to come up with those absorption times? And is what is happening right now something you need to plug in? And sales activities are just zip in some of the markets.

Go ahead, Jean.

One comment -- I know on one of the projects I was involved in, reviewing the valuation reserve around the discounted cash flow analysis -- set a three-year time horizon before any absorption began. Then it was very slow from there. So as Denny pointed out earlier, we're being very conservative and appropriate in our estimations around these credits.

All right. Thank you for all the detail.

Sure.

Gary Tenner from Suntrust Robinson.

Thanks. Morning, guys.

Morning.

Morning, Gary.

Just a couple questions -- Bill, I think you'd mentioned, regarding your ESCROW deposits, that there seem to have been sort of -- I think you said turn the corner. So you've seen those [flying] out in terms of the runoff? Is that what you were --

Yes, I think Denny might have mentioned that in his comments, that -- if you recall, a year ago at this time, we were talking about a $70 million decline in deposits linked-quarter. And I think this -- on a comparable basis this year, it's like maybe less than $12 million. So I think we have -- we believe, anyways -- gotten our way through a large amount of that, if not all of it. And believe it or not, we actually see some signs of actual positive deposit growth.

Typical seasonal decline would also occur. I think we talked about it last year. And the fact that they've been hidden by a couple years of deposit growth, through hurricanes as well as the obvious increase in activity related to construction, and so forth. So we think we're through that point and are much more optimistic about deposit growth, say, over the next 12 months.

So the ESCROW funds and developers have run out of all the money, and we're not likely to see much more effect on that.

Okay.

And I think you may have addressed this from a previous question, to some extent. But I'm just curious -- you talk about the very sizable and positive pipelines in Broward County and Brevard. I'm curious, just generally, how you're viewing the economy in those markets. Obviously, I guess the concern with that -- there would be some impacts to the overall economy there from the residential issues. But generally, how are you viewing those markets?

Anecdotally, Broward's in pretty good shape, I think, from a residential standpoint. But believe me -- we're not doing any residential loans -- any residential development loans in Broward or anywhere else at this point.

But I guess to answer your question -- things continue to be strong. We've seen tremendous market disruption under our feet here, with the National City acquisition -- now more recently in Indian River County, the Royal Bank of Canada acquisition of ALAB, which had a very nice performing unit in Indian River County.

So that continues, and we see similar things further south. Russ, you had some thoughts?

Yes. Both in the Broward market and the Central Florida market, the teams we've brought on are very seasoned teams that have longstanding relationships with customers that are substantial, and also quite savvy. So the projects we've been financing have been related to those kinds of relationships. And also, as Denny pointed out, they're either existing income-producing properties or construction of pre-leased retail projects.

And a good amount of that is stuff we're just moving over here, as opposed to brand new stuff.

So -- but we feel pretty good about the direction we're heading. It was part of the plan a year ago that as we saw things slow, we needed to really refocus our efforts and energies to take advantage of the disruption in some of these markets that we've been talking about. And we continue to do that.

Guys, thank you.

Brett Villaume from FIG Partners.

Good morning, gentlemen.

Morning.

Morning.

Hi. I just wanted to ask you if you could provide me with a specific number of real estate owned or foreclosed assets for the quarter.

Real estate foreclosed assets?

Commercial --

Other real estate owned?

In the commercial portfolio, it's zero.

Okay.

In the -- the number disclosed is primarily just one-to-four family residential credit, smaller credits, that are just in various -- that have been foreclosed.

Okay.

(inaudible)

Can you quote me a 90 days past due? I didn't see that in the press release.

Yes. Hold on. Yes, I believe it's about -- 90 days past due?

Yes.

Oh, okay.

That should be in the attachments.

(inaudible)

It's very minor. Because they're all --

Don't know how we missed that.

Okay.

-- nonaccrual, basically.

Yes. Anything on 90 days is on nonaccrual. Here it is. So it's just included in --

Okay. It's included?

Ninety days is on nonaccrual -- very small balance.

So it's a $45.9 million in nonperforming assets -- you've seen at -- almost 100% of that is nonperforming -- or nonaccrual loans --

Right.

-- when compared to foreclosed assets or --

Oh, I see your point, I'm sorry. I'm sorry, yes --

I'm trying to get a handle on --

Yes, yes, yes.

-- breakdown.

Okay. The nonaccrual loans, I get -- (inaudible) -- what is our --

-- (inaudible) OREO.

Yes.

The only OREO we have at all, at this point, is [six] -- five loans in July [and] four mobile homes --

Okay.

-- (inaudible) of our [OREO], at this point.

So it's very minimal?

Very minimal, yes.

Okay.

There's zero delinquency 90 days or over --

Great.

-- because it's not all nonaccrual.

Right.

Terrific.

And then, my question, other than the credit quality, is -- I wanted to find out what you've been hearing about the competition. Just a couple quarters ago, it was a [wee] topic of conversation -- the burgeoning competition from the [North today], and through some of the acquisitions made. What are you hearing about how they're weathering this storm?

Are you speaking, like for example, of Commerce moving into Florida, that sort of thing?

That's correct.

Yes. Well, I don't know what's going on at Commerce. They're now part of Toronto Dominion. They -- branches are still under construction; they haven't stopped. With that, I just have no idea. I know that they haven't -- that when you look at market share data, which recently came out even for June of '07, you didn't see a lot of movement -- or improvement, I guess you'd say -- with some of those guys. So I -- you'll have to ask them; I don't know.

Okay.

But in terms of deposit competition -- we've made some comments on that. Continues to be intense. I think there are a handful of higher-rate paying companies, that are experiencing liquidity challenges, that will continue to challenge us. One is Countrywide, which, as you know, has opened up a few offices across Florida to raise deposits. But they tend to be on the fringe. And by and large, competition remains relatively rational.

We were pleased this quarter to see, after the rate cut, people begin to kind of bring rates down, although there are still outliers out there.

Okay, thank you, gentlemen.

Al Savastano from Fox-Pitt Kelton.

Morning, guys, how are you?

Morning, Al.

[Hey].

Just three topics -- if we can first just start on the deposit mix -- looking at the average balance sheet, the NOW accounts seem to really come down a lot in the quarter, and money market's gone up significantly. Can you talk to me about the change in there?

Al, that really relates to -- we changed vendors, in terms of the movement. We can move NOW accounts --

That's a reclassification issue --

Yes.

-- that is probably a little misleading --

Right.

-- where you've reclassified some deposits.

Okay. Fair enough.

And then, just on credit -- not to beat it to death; I just want a little clarity -- when you guys are looking at slower home sales activity, are you using kind of what today's activity levels are, or future activity levels -- what you expect?

Using it in what sense? To do valuation work?

Yes.

Jean just gave, I thought, a great example in one of the credits. We looked at today's levels of activity persisting for three years, which I think is pretty damned conservative.

Okay. So you are kind of forecasting what you expect sales to be going forward?

Yes. You need to.

Yes, inasmuch as, Al, we are not counting on any near-term improvement.

Okay.

And then, second question, just on reserves -- you mentioned that charge-offs, though -- expect them to kind of rise going forward. Does that mean that the reserves-to-loans ratio would come in at that point, after you recognize a charge-off? Or you anticipate it flattish to upwards?

Well, it would come in, unless we increase the provision to offset it. And that will be a function of kind of where credit quality goes.

Okay.

Think [it may be a] combination of that.

Okay.

What we tried to be clear and say is that, at least looking out in the near term here, we don't see gigantic jumps coming in terms of other issues. But this was a tough quarter for us, as we recognized all the stuff we've been talking about. And it's hard to see major changes happening, at least in the near term.

Got you. Yes. Thank you, that's helpful.

Thank you.

Lastly, one question?

Yes.

I just want to follow up -- last quarter, you had comments about a potentially -- your decision on [to remain] dependent or not. I just wanted to see if there's any change in that status.

If there is, we'll certainly let you know. And all I got to say is, they need to bring a big checkbook.

Okay, fair enough. Thank you.

Peyton Green from FTN Midwest Securities.

Yes, Denny. I was just wondering if you could kind of characterize this cycle with past cycles that you've been through, and maybe how far of the way do you feel like we're through it? And what are the -- what's the biggest difference this time, compared to what would have been comparable in the past?

That's a good question. And we don't have an answer for the second part.

But in my view, it's certainly comparable to what was happening in Florida in the early '90s. And you saw a very significant slowdown in construction spending from '89 through '90, '91.

And I guess my only other comment in terms of where we are in the cycle -- it's hard to say. We are -- we've waded in pretty deep, though, I would say, in terms of recognizing where we are. The question on all of our minds is, when will we begin to see some moderation on the sales end -- the front end of that pipeline? And that's hard to say. Couldn't get a whole lot worse than it is right now. And the question really is how persistent it's going to be. We really don't have a flavor on that.

Anybody else have any comments? Doug?

I can make a couple. One is, I think if you look back [into] all the (inaudible) so-called recessions we've had, this one -- probably the difference is that I don't think there's been a time in history that property has appreciated -- other than the great land boom back in the '20s -- as fast as it appreciated. And over such a short period of time, I don't think there's been a time in history in any of these -- whether it's '91, '82 or '74, or the middle '60s -- where it has fallen as rapidly as it has fallen now.

I don't know any of that for absolute certainty, but that's -- I've lived (inaudible) I just spoke to. That's the way I view it.

Okay.

Well, I think also, the information flow, and visibility and transparency --

Right.

-- is very different today -- very, very different today than it was even back in 1990, '91. And I really think that's the big difference. I think banks are probably quicker to recognize problems than they were in the past, and probably more on top of issues. And the media is -- because all the changes in technology that have occurred the last 15 years -- are in a far better position to be able to report realtime on what's happening out there.

Okay. And then --

That can be good, and it couldn't be bad. It certainly affected the consumer in his forward belief about where real estate values are going.

Okay. So I guess that --

And until people believe we've hit bottom, they're going to continue to sit on their hands.

Okay. So it's probably intensified the buyer strike --

Yes.

-- some degree.

Yes.

In the projects that you all look at, and took kind of a hard pill to swallow on, what is happening at the closing table on these projects? Or have they gotten to the closing table yet, in terms of deals that were previously under contracts being sold? Or is this really deals that are not quite at that step?

Well, there's a lot of them that are continuing to operate in selling -- closing every week. And Russ, you want to comment on --

-- as the sales volume slows significantly, some of the contracts that were early-price contracts, and relatively low prices compared to the peak, are closing and delivering units. Others had not gotten to that stage yet.

Okay.

And others we identified because they're homebuilders that -- other projects that we are not financing had significant fallout. And that affected the borrowers' overall cash flow.

Okay. Okay. So you'd say it's still -- there's -- the negotiation aspect of contract price change is really still in the future?

Yes. And we've taken that into consideration as we've looked at where we are in these things.

Okay. Good enough. Thank you very much.

David Bishop from Stifel Nicolaus.

Yes, Denny, just one follow-up. Maybe some more color on the anticipated additional savings of $3.5 million. I think you had identified some consolidation of branch offices -- maybe some color there in terms of maybe what regions you're targeting there, or more specifics on that?

Yes, that's a good question. We pretty well laid out in our press release what it consists of. It's been identified, and we are moving forward to realize those savings. With regard to -- and we said it was in the area of branch consolidation and the other issues that we talked about --

Marketing.

Marketing dollars that kind of make some sense for us to pull back on, and some personnel reductions, and some specific areas that we've already addressed.

With regard to the branch consolidations -- I think we have a total of four offices we've identified. They've been under review for more than six months, and will be effective. They tend to be in our core markets as opposed to our new markets, and just have to do with just a lot of good sense around just consolidating offices that are close to one another, and the like.

Relatively, we feel like there's relatively little impact on the customer. And again, it's something we've been talking about actually for more than six months.

Thanks.

Jefferson Harralson from KBW.

Thanks. My questions have been answered.

Thank you.

Richard Lashley from PL Capital.

Good morning.

Morning.

Can you drill down a little further on the valuation reserve methodology? I head the term "net realizable value" used. And then I think someone described a specific loan that had a discounted cash flow methodology. In other words, are you carrying these construction projects at the value that you would be able to sell them for or take them over and move them to someone else, like basically an as-is value? Or are they strictly all projected discounted cash flows, assuming the borrower stays in place?

Kind of a combination of the two. It would depend on the project and what our intent was, and how we saw the forward direction of the borrower. I think both are conservative sort of approaches. Hope that answers your question.

I guess it's hard to say specifically, sitting here today, but what percentage of the loans that you have taken specific reserves on were done on a as-is sale basis, NRV basis, as opposed to the borrower staying in place with a discounted cash flow?

I don't have that for you. But again, as I said, it just depends on the individual credit, and what our intent is, and how we see things out in the next few years.

Okay. Thank you.

I can add a little clarity to that.

Even when you look at the bulk-sale approach to something, you still need to go through a discounted cash flow analysis. If you're just looking at real estate collateral -- if it's got any type of savings component to it, you need to look at it, and back it down into a discounted cash flow, or if it's got any breakable parts to it that we sell off in pieces. That's one of the approaches that you use to valuate.

Yes, I guess what I was thinking of is there's an additional market haircut, I assume, if you have to bulk-sale it. Because the --

Yes.

-- potential buyer's going to want the discounted cash flow plus some.

Right. We did all the appropriate -- yes, we did all the appropriate discounting.

Okay. Thank you.

At this time, I show no further questions.

Great.

Well, thank you very much for your attendance today. And we look forward to talking with you at the next quarter.

Thank you, ladies and gentlemen. This concludes today's conference --