Seacoast Banking Corporation of Florida (SBCF) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the first-quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Thank you very much and welcome to Seacoast's first-quarter 2008 earnings conference call. Before we begin, we'd like to again direct your attention to the statement contained at the end of our press release regarding forward statements. During the call, we are 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 within the meaning of that Act.

I have also posted a few slides on our website as usual and we would refer all of you to the site and the site is www.seacoastbanking.net, or actually our ticker simper symbol, SBCF.com. If you click on the presentations listing at the bottom of the investor relations portion of the listing, you can view those slides as we continue along with our comments.

With me today again is Bill Hahl, our Chief Financial Officer, as well as Doug Gilbert, our Vice Chairman, and Jean Strickland, our Chief Operating and Chief Credit Officer, and Russ Holland, our Chief Banking Officer. All of us will be available to answer your questions following our prepared remarks.

Seacoast earnings this quarter were again affected by the very soft residential market in Florida. GAAP earnings for the quarter were $0.09 a share compared with $0.10 a share in the fourth quarter of 2007 and $0.14 a share one year ago. Earnings in the prior year -- in the quarter in the prior year included a securities restructuring charge of approximately $0.16 per share. Bill is going to give further color on our earnings performance for the quarter in just a minute.

Overall, however, our core earnings before credit cost remained strong this quarter on a slightly stronger net interest margin and previously communicated expense reductions that were implemented during the quarter. Our core consumer and small-business focus continued to perform well in spite of difficult market conditions and our expense reductions have certainly helped support our earnings as credit costs have continued to weigh on our results.

Our capital position increased during the quarter with our total risk-based capital ratio growing to 12.3% at quarter end compared to 12.1% at year-end and 11.7% one year ago. Over the past few years, we fortunately undertook three separate capital raises totaling a little over $50 million including a $12 million raise as recently as June 30, 2007. These activities have helped us increase our capital base at a reasonable cost in response to growth and in response to higher levels of problem assets.

Moreover, given the weakened conditions in our markets, we now project modest declines in our loan balances which should result in higher capital ratios as the year progresses.

As part of our capital planning activities for 2008, we will be filing a shelf registration statement covering a variety of securities in order to provide us with additional flexibility in the future should we see opportunistic situations develop around us or should we later determine a need for additional capital.

Nonperforming assets fell this quarter to 3.47% from 3.57% last quarter but remain unacceptably high. Most of our nonperforming assets are land and acquisition and development loans related to the residential real estate market. We have posted a chart comparing our nonperforming assets in the last cycle, 1989 through 1992, to our more recent performance. As you can notice, we are seeing similar results this cycle. Nonperforming assets will remain under pressure all year and could grow as we continue to closely monitor our exposures and move through the collection process.

This quarter we continued to bring down our overall exposures to residential real estate development which should continue throughout the rest of the year. A good part of our credit costs this quarter was the result of additional charge downs relating to deteriorating collateral valuations associated with loans classified as non-accrual. In addition, we continued to build our reserve for loan losses which stood at 1.22% of loans at quarter end.

Now I am going to turn the call over to Bill for a few comments on the quarter and then I will come back for a few concluding comments. Bill?

Thanks, Denny. As Denny mentioned, this quarter's results on a GAAP basis continue to reflect elevated credit costs related to the housing market slowdown and the impact on revenues of the Company's nonperforming assets. Denny mentioned a slide and right behind his slide on the nonperformers posted for this call shows that net income on a pre-provision Q1 '08 was generated from the core franchise and the successful completion -- successful completion of overhead cost reductions and that it increased compared to the fourth quarter 2007.

On an EPS basis, pre-provision after-tax earnings were $.27 per share for the quarter compared to $0.30 same quarter 2007 and a 17% increase compared to the $0.23 per share for the fourth quarter of 2007. Over the last 12 months, pre-provision after-tax cash earnings totaled $1.06 per share compared to the cash dividend of $0.64 per share.

Another example of the solid core performance in a difficult environment is that total revenues for the first quarter at $26.7 million were unchanged from the fourth quarter 2007 and were only modestly lower compared to the same quarter a year ago. Over the past several quarters, revenues have been reduced as a result of the $62 million in nonperforming loans. The revenues lost have been offset by annual loan and deposit growth as well as substantial earnings benefit from the large and valuable core deposit franchise.

We have posted a slide for this call showing that the core deposit compounded annual growth rate over the past four years for the core deposits has been 13.9%. Core deposits for the operating subsidiary have consistently comprised about 86% of total deposits. The cost of core deposits in the first quarter were priced lower and resulted in a decline of 17 basis points from the fourth quarter to 1.43%. The cost of all interest-bearing liabilities declined by 45 basis points.

Year-over-year in a very competitive deposit market, many competitors were paying rates in excess of wholesale funding. Our core deposit growth increased by 2.5% and total deposits grew by 3%. The growth of deposits while maintaining this favorable deposit mix has allowed us to avoid large wholesale borrowings, maintain strong liquidity and produce a stable net interest margin. Please refer to a slide for this call which shows the net interest margin and net interest income on a comparative basis over the past five quarters.

As Denny mentioned, the net interest margin improved by 3 basis points in the first quarter compared to the fourth quarter. Net interest income this quarter as a result of the lower funding costs and year-over-year loan growth remained relatively stable compared to the five previous quarters at $20.6 million.

The cost of total deposits on a linked-quarter basis has declined to 2.67% or 26 basis points lower and was slightly lower compared to the first quarter of 2007. The overall rate paid for interest-bearing liabilities declined 48 basis points to 3.26% compared to the prior quarter a year earlier -- I mean compared to the first quarter a year earlier.

Competitors have marketed aggressive CD offerings during the first quarter 2008 but it has been less consistent and there have been fewer participants. Positives for deposit funding costs in the near term will likely continue but will be limited primarily to repricing of maturing CDs as the demand for other interest-bearing deposit products declines with lower interest rates. Net interest income growth in the coming quarters will be dependent upon primarily our success in growing loans and core deposits and less on the declines in price -- or deposit rates paid as the Fed nears the end of lower interest rates.

Moving onto noninterest income on a linked-quarter basis due to the better mortgage banking production deposits service fees in a large growing retail customer deposit base, noninterest income increased. The Company began executing in 2008 a new retail deposit growth strategy in February and has seen better retail customer deposit account growth over the past two months and has focused commercial lenders on growing low-cost commercial deposits. While the mortgage banking business is still weak, the Company has noticed an increase in applications and loan closings during the first quarter of 2008 compared with the fourth quarter.

The increased opportunities for mortgage banking during the next nine months will be dependent upon increased capture of market share and the implementation of a more efficient and effective new mortgage origination system.

Now I am going to refer to a slide showing our overhead over the r five quarters. As Denny mentioned, non-interest expenses were $1.1 million lower than the fourth quarter 2007 and were modestly lower than the first quarter a year ago. This is consistent with our goal to reduce overhead as communicated last quarter. The overhead ratio for the first quarter was still high at 68.9% but lower than the fourth quarter's 73.2% and was slightly above a year ago which came in at 66.7%.

Expenses this quarter were increased for legal fees year over year impacted by the increase in nonperforming asset and foreclosure litigation. Also somewhat of an unusual increase were the expenses this first quarter for our self-funded healthcare claims which were higher than a year ago by approximately $338,000. However we believe the total expense for our healthcare plan claims should be approximately the same as prior year primarily because of the lower number of average participants in the plan as a result of staff reductions and these we believe will offset increases in healthcare costs.

We are going to continue to evaluate our success in growing our revenues, the loans and deposits each quarter in 2008 and we are prepared to make further overhead adjustments as necessary. Denny?

Thank you, Bill. As you just heard, we continue to experience disappointing earnings results due to elevated credit costs. But we did make some progress this quarter in adjusting down our overhead. This combined with a stable margin in non-interest income has provided us with solid underlying earnings support reflective of our very strong banking franchise here in Florida.

In today's environment, deposit franchise is the key driver of value, for it is our solid low-cost core deposit funding built upon our stable and growing customer franchise that will distinguish us among other companies also experiencing higher levels of problem assets.

We are not pleased with our current level of problem assets but our asset quality issues are well defined and fairly straightforward in terms of complexity. It will take some time to work through these issues but as we do we will emerge with robust earnings as evidenced in the call today.

Over the coming year, we will continue to focus a significant amount of our attention on asset quality but we will also pursue continued development of our strong deposit franchise as we continue to manage our overhead in light of business conditions.

So as I said last quarter, the industry is returning really to good old-fashioned blocking and tackling and so it is important for us to stay focused on what we do best and that is building solid long-term relationships with our customers.

I appreciate the job that all of our associates are doing in this difficult period. They are working long and hard hours under challenging circumstances and again, they deserve all the credit for the improvements we will begin to deliver in the months ahead.

And with that, I will open the call to any questions.

(OPERATOR INSTRUCTIONS). Barry McCarver, Stephens Inc.

Hey, good morning guys. I guess first off, Denny, looking at the loans in the pipeline there, are we still just seeing very, very light loan demand in your market? Has there been any change over the quarter in that respect?

Well there is no demand for residential real estate development I can tell you that. You know, Russ, do you want to make a brief comment about that?

On the commercial side, yes, you are right the loan demand is significantly off as you would expect. There is some moderate consumer and residential demand but the commercial loan demand is down.

Right. And we are projecting at this point I think we are holding by maybe a comment we made last quarter that we are going to see loan growth I think we said, Bill, in the sort of negative 5% area maybe -- 6% something like that over the next year or through the balance of '08.

And then I guess the second question revolves around the loan loss provision. Certainly applaud the higher reserve ratio kind of given your comments on the outlook for some of the asset quality metrics in the rest of the year, should we expect to see that reserve ratio continue to move up slightly or are you comfortable where it is at?

Well probably not going to move down. It may move up slightly. I think the big wild card for us and the industry is we where valuations are going and how changes in valuations could affect carrying values for problem assets, that sort of thing. That is what we are probably going to struggle with as we move through the rest of the year.

As I said though, we have a pretty good understanding of where we are and we will just continue to track that very, very closely and you know our -- the good news is it is a fairly simple equation.

And then just lastly if I may, trust revenue off again in 1Q. How much of that is seasonal? It seems like it has been down for I guess a couple, two or three quarters in a row. What is going on in that division?

We have had a -- when you look at the change that has been driven by the state revenues being off, which are very hard to get a handle on often. And number two, more recently, there has been market declines or lack of market growth that directly affects revenues.

Okay, guys. Thanks a lot.

Brett Villaume, FIG Partners.

Good morning, gentlemen. On page five, you give a good breakdown of residential construction and land development loans and I was hoping that you wouldn't mind giving me the level of nonperformers per category if you could?

Well that is not something we have published. I think last -- not much has changed since the last call and if you read our transcript we gave you kind of a little better flavor for that. You know most of it is in single-family resident land and lots. You know is where a lot of that is going to be and we have some in -- a small amount in condos, I think $7 million in condos. So anyway, we haven't published that. We might do that in the future.

Okay, so I guess asking you about some -- about LTVs is probably not going to -- not worth asking either then? Thank you very much.

Well just to sort of give you some color there, you know with all of our nonperformers we have performed very realistic I think current appraisal information as it is placed on non-accrual. So we believe those are appropriate carrying values.

All of the nonperformings get evaluated very closely carefully each quarter and the assets that are booked are fully supported by collateral or we charge down the assets.

I hope that helps.

Thank you very much.

Terry McEvoy, Oppenheimer.

Hi, good morning. Since I am relatively new to your company and the page three where you talk about NPAs 89 to 92 and then where we are today, if you had to do that same graph for let's say net charge-offs, do you think the relationship holds true this cycle versus last cycle? Because I really don't know what the last cycle looked like for you guys in terms of charge-offs or do you think it would be better or worse?

Thus far it is fairly close, the same, maybe a little bit better but you know, we are just getting into this I would say.

Yes, our highest net charge off ratio in 1990 was 0.9 for the whole year.

For the year.

Yes, for the whole year.

0.9?

Yes. And that was the highest in the cycle.

Okay, so below where the first-quarter charge-offs were at 93?

Right.

Yes but it's -- (Inaudible - microphone inaccessible) for the whole year.

And then just another question on the average rates paid on your core deposits. How much did it come down in the first quarter? You know you talked a little bit about market competition being maybe not as intense in the first quarter but can you compare that to say the fourth quarter how much of the Fed rate cuts were you able to pass on to your depositors?

I mentioned that the core rates came down by about 17 basis points from the fourth quarter so that really was partially implementing some of the Fed cuts. And as I mentioned as kind of those core deposits and I am talking about your money market accounts and things like that, as you begin to drop below a 2% level, customers have a tendency then to migrate to your CDs anyway. So you kind of get into this situation of is it better to have 2% money or 3.5% CDs? And so you can't -- it is diminishing returns as you start to cut rates in those products further.

So we don't anticipate as I said in the call, that we are going to see much of the margin improvement coming from lower overall deposit rates other than we are repricing CDs $90 million a month or so and those are down about 1% on average right now.

Great. Thanks for the color.

(OPERATOR INSTRUCTIONS). And we have no further questions at this time.

Well thank you very much for your attendance today. We appreciate it and we look forward to speaking with you again next quarter.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect.