Seacoast Banking Corporation of Florida (SBCF) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-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 S. Hudson, Chairman and CEO. Mr. Hudson, you may begin.

Thank you very much and I want to welcome everybody to our conference call this quarter. I would begin just by reminding everybody that we will be making a number of forward-looking statements in this call and those are intended to fall within the meaning of Section 27a of the Securities Exchange Act of 1933. And so as a result, everything we say is limited within the meaning of that part of the Act.

I want to just dive in and get into it this quarter. As you saw, we posted a loss of about $21 million this quarter and Bill is going to fill you in on some of the details later. But first, I want to address what we did this quarter in terms of our reserve build and our aggressive charge down related to our residential land exposures.

Further deterioration in market conditions were evident in the last few months and continued to build for us as the quarter unfolded. While residential transaction levels have improved actually in our markets recently, which is very encouraging, much of this improvement is coming from distressed sales, which continued to weigh on valuations. Moreover, we have begun to observe a more aggressive approach to liquidation with property auctions and loan sales. These activities will likely continue to affect valuation for residential real estate product in the near term.

As a result of recent market deterioration, we undertook an extensive review of our residential land exposures at the end of the quarter, particularly residential construction and development and land loans. This review rechallenged the performing status and collateral value assumptions we have used in other recent reviews. A number of performing loans were placed on nonaccrual due to increased doubt as to the willingness and ability of project sponsors to successfully pursue repayment.

The carrying value for nonperforming loans, particularly residential development and land loans, were reduced substantially this quarter to reflect current conditions including a number of cases which reflect a value associated with more aggressive liquidation activities. In some cases, we've even challenged assumptions used and appraisal data received as recently as 30 days ago.

We also increased our loan-loss reserve during the quarter to reflect the impact of higher loss rate assumptions reflective of the results of the review. These actions we took in terms of our reserve build and our valuation adjustments were not taken lightly. We have for some time now been carefully evaluating the market and our exposures while digging deep into every problem credit relationship and evaluating potential collateral value. We believe we've properly scoped out our overall exposure and appropriately and realistically responded to current market conditions observed at quarter end.

The write-downs and reserve build for this quarter did not so much result from growth in problem assets, but rather is intended to reflect a severe and probably realistic assessment of where values are today. As current transactions are completed in the marketplace over the coming months and observable data relating to a number of quarter-end transactions is produced, we think we will see a confirmation of our current view. We believe the actions taken today will place us in a stronger position as we accelerate our liquidation activities in coming months.

Now I would like to provide a few prospective comments. Please bear in mind that these comments are somewhat speculative; however, they are based on formal tracking analysis that has been in place since late 2006 as we have worked through what has unfortunately turned out to be a very serious and severe housing cycle. Our ongoing review of our many months and analysis of our entire residential development exposure along with past and present projections for a potential deterioration in our portfolio are starting to suggest we may be close to achieving a high watermark in terms of the level of problem assets.

We have a number of relationships that have begun to move forward into final stages of liquidation which is encouraging. We will continue to aggressively pursue liquidation opportunities over the balance of this year. We do not anticipate further significant amounts of growth in problem assets that are related to residential development loans. As a result, we may see credit costs begin to moderate in the coming months with a gradual improvement evident later in the year. Should this prove to be the case, we anticipate returning to profitability next quarter and for our profitability to gradually improve in the next few quarters.

Risks to this outlook include deterioration beyond current expectations including deterioration in our residential and consumer portfolios. However, these portfolios are quite diverse in terms of loan size and vintage and have never included any exposure to less than prime or any of the so-called exotic products including Alt-A or option ARM loans. Nor have we ever aggressively promoted home equity loans.

Another risk would be deterioration beyond our current expectations in our commercial real estate portfolio. We have been extraordinarily concerned about a weakened outlook for this sector for some time now and as a result, we have been very selective, which has affected our outlook for loan growth as described in our last two calls. Fortunately, our commercial real estate construction loan book is fairly diverse and spread out among a number of product types and geographies. Our amortizing commercial real estate mortgage portfolio is quite diverse, both in loan size and vintage. These factors will hopefully moderate any potential for deterioration should conditions worsen from here.

A final factor to consider would be our core earnings power in the coming quarters. This will continue to support the potential for credit costs as it has over the past year. Our solid deposit franchise together with our work over the past year to enhance our retail strategy continues to perform well and we remain committed to making sure that our cost structure reflects current market conditions in order to maintain solid core earnings.

Now I would like to shift for a moment to capital and dividends. Our capital ratios remain very strong. As you recall, we raised a total of $52 million in new capital over the past couple of years -- few years -- during a period of much higher growth. In fact, our capital ratios prior to that period of higher growth were lower than the ratios we have reported this quarter. In short, we raised capital when it was reasonably priced, which fortunately provides our shareholders with protection from ownership dilution we would face today were our capital levels out of alignment with our risk levels. Our capital plan functioned well in 2005, 2006, and 2007 as capital was added in response to higher levels of growth.

At the end of this quarter, our capital ratios remain within range and in compliance with our Board-approved capital plan. Our total risk-based capital ratio stood at an estimated 11.5% and our tier 1 capital ratio was estimated at a little over 10%. Total equity to assets was 8.2%. These ratios were reduced by the net loss for the quarter on the order of 70 or 80 basis points compared with the prior quarter.

We have spoken in the last few calls about slowing loan growth and our outlook hasn't changed. Negative loan growth will result, as we said before, from reduced production opportunities. As a result, we expect our risk-based capital levels to grow significantly over the next six months. This expectation excludes the positive impact that could come from any liquidation activity.

We have also evaluated our dividend policy and we anticipate that we will reduce our cash dividend in the coming quarter to a de minimis amount until our earnings improved. As our earnings improve, we will consider an increase in the dividend to a level that will be clearly sustainable. In the meantime, our decision will further bolster our already strong capital position over the balance of this year. Should credit costs begin to moderate in the future, and should financial share price valuations in the marketplace remain depressed, our Board has said it would consider share repurchases at a later date as an alternative to increasing the cash dividend as a better way to increase shareholder value.

Now I'm going to turn the call over to Bill, who will briefly comment on our core earnings.

Thanks, Denny, and good morning. Obviously, this quarter's results on a GAAP basis were overwhelmed by the large provision for credit losses related to the housing market slowdown and elevated nonperforming assets. The fourth slide that we posted for this call shows that the net income pre-provision in the second quarter 2008 was generated from the core franchise and on an EPS basis, the pre-provision after tax earnings excluding security gains and losses were $0.23 per share for the second quarter of 2008, compared with $0.28 per share in the same quarter 2007, and $0.27 per share in the first quarter of 2008.

We reported in our earnings release that we added loans to nonperforming assets this quarter and that we believe we are in the home stretch and that hopefully we will be among the first to show improvement. So I believe it is important that I should note that the added non-accrual loans in the second quarter took about 8 basis points out of the margin and the net interest margin would have increased to 3.77%.

In the second quarter, total revenues excluding security gains and losses were $26.1 million, nearly unchanged from the first quarter 2008 and the fourth quarter of 2007. Over the past several quarters, revenues have been reduced as a result of the nonperforming loans and other real estate owned, offset by an improving net interest margin as explained, low cost deposit growth and substantial earning benefits from a large and valuable core deposit franchise.

I have posted two slides, number six and number seven, related to the growth in size of our core deposits. The Company has a strong core deposit franchise at the operating subsidiary bank consisting of approximately 86% of total deposits. The successful promotion and growth of these deposits in the second quarter aided in the margin improvement excluding credit factors and avoided the increased competition and higher cost, and higher rates on CDs, which were disproportionately high at many competitors.

The cost of deposits in the second quarter were priced lower and resulted in a decline all of 42 basis points from the first quarter to 2.22%. The cost of all interest-bearing liabilities declined 58 basis points. The Company had strong deposit growth in retail, savings, and transaction accounts as a result of its focused retail growth strategy with retail deposit balances increasing in the quarter. Total retail savings and transaction deposits increased over $22 million, up 16% annualized and now comprise over $570 million in low-cost retail balances.

This growth in deposits improved our favorable deposit mix, allowed us to avoid wholesale borrowings, and maintained strong liquidity position and generated a relatively stable net interest income compared with prior quarters, while absorbing the negative impacts of higher nonaccrual assets.

Positives for deposits, funding costs, and the net interest margin for the near-term will likely continue provided the Fed remains on hold and the continued success of our retail deposit growth strategy in the second half of 2008.

I have posted two slides, number 11 and 12 for the call, which show that met interest margin and net interest income have remained stable at approximately 3.7% and $20.5 million respectively over the past three quarters, while the Fed has reduced interest rates 275 basis points.

Non-interest income excluding security gains linked-quarter were essentially unchanged after removing the income we received last quarter from the redemption of Visa shares. Mortgage banking fees were also nearly unchanged, a good result given all of the uncertainties.

With the disproportionately high CD rates and a weak stock market, fees from our securities brokerage unit were lower but were offset by improved marine finance revenues.

On slide 10, I have included information on our overhead growth over the past five quarters. Non-interest expenses were $661,000 lower than the second quarter 2007 and $680,000 lower year-to-date compared with the first six months last year. We are pleased with these results and they are consistent with our expectations for nominal overhead growth this year. Expenses were modestly higher linked-quarter, mostly due to the reversal of a fourth-quarter 2007 accrual in the first quarter 2008 related to Visa litigation. We continue to evaluate our progress and success in growing revenues, loans, and deposits each quarter and we have been proactive in making overhead adjustments as necessary. And we will continue this.

Our liquidity remains strong, as demonstrated by a growing and peer-leading retail deposit base, which is a key source of liquidity. Deposits represent 90% of the Company's funding sources. The Company has very little wholesale funding and has a very high quality investment portfolio with no subprime, Alt-A, trust preferred, CDO, etc., and the portfolio's fair value exceeded costs and resulted in a net unrealized gain as of June 30, 2008.

Denny, let me turn it back to you.

Thank you, Bill. We are all very disappointed in our results for this quarter. We were fortunate, however, to have added to our capital base with strong earnings and fresh capital at a reasonable cost during the top of this cycle. We took on the added capital as our growth rates accelerated and credit risk as we now know was increasing.

In spite of a difficult quarter, our capital ratios today are higher than they were at the beginning of this cycle. Given a muted outlook for short-term growth, we will likely see our capital ratios grow by the end of this year to levels that were higher than they were in the first quarter.

I had said that our number one priority for 2008 has been asset quality, and it is. Our capital strength has afforded us with the ability to move forward on a more aggressive basis as we now turn to resolving some of those issues and bring improvements in the level of our asset quality.

As we move through the balance of this cycle, we will see an entirely new competitive dynamic develop in Florida. I find it instructive to see that many of our business customers across a number of industries are doing better today than anyone would have thought possible. The common factor, a dramatic change in their competitive environment. We are fast approaching that dynamic in our business as well. That is why it is important for us to maintain our focus on exiting out our weaknesses as quickly as possible as we also continue to build on our core earnings momentum.

Again, I want to thank our associates and officers who continue to work hard and long in a remarkably difficult environment. And to our customers, I wish to express my confidence in our Board, our management team, and our financial strength, which continues to ensure our safe and sound operation in this very difficult environment.

Now we will open the floor to a few questions.

(OPERATOR INSTRUCTIONS) Terry McEvoy, Oppenheimer.

Thank you, good morning. I was wondering if you could comment about July deposit trends, just given the concerns in the marketplace, whether you noticed any significant changes among your customer base or that of other financial institutions in Florida.

No, we have not detected any increased activity or negative trends. We are moving into our summer months, which typically would see some deposit decline. We are pleased that we have not seen that occur. So I think perhaps we see funds that are moving out of other types of products back into bank deposits.

I was wondering if you could provide a breakdown of the charge-offs at $33.5 million, just provide a little bit more insight specifically where in the loan portfolio that was coming from.

Well, you can rest assured that it is all almost exclusively out of our developer and land exposures.

Slide four that we posted -- not slide four -- I'm sorry, but slide five, you could refer to that and you will see the declines in the various categories which would be somewhat indicative of where some of the write-downs occurred.

As well as pay downs, right.

A large majority in the residential construction?

No question about it.

Terry McEvoy. Okay, I just wanted that confirmed. Thank you.

Mac Hodgson, SunTrust Robinson.

Good morning. Just a quick follow-up on that. On slide five of the land and lot balance, the $95 million, how much of that is on nonaccrual?

A substantial portion of it. I don't think we have announced the number, but it is something we might do as we roll forward.

Can you disclose the write-downs that you took on the charge-offs for the quarter and what the loss rates were?

The loss rates on a particular credit?

Yes, on the $33 million in charge-offs, if that is on a basket of $60 million in loans --

I can tell you this. It was related primarily to our nonaccrual loans and if you relate the charge downs to total nonaccrual loans, you will come up with a write-down that is fairly massive on the order of 30%.

30%, okay. What were the OREO at the end of the quarter?

$4.5 million.

$4.5 million, okay. I'm curious in your assumptions for reserve, did you assume further declines in asset values? If so, what sort of declines are you assuming?

With respect to our reserves?

Yes, as you built the reserve this quarter, are you --?

We said in the press release that the reserve build was related to further review of our land exposures in this area and so I guess all I can tell you is we have kind of looked at the -- what we believe is a pretty serious further decline in market conditions affecting values this quarter particularly at the end of the quarter. And we tried to work that as best we can into some of those other exposures that are not nonperforming.

We have had to make various assumptions around that. But the reserve build relates to a great extent on assumptions related to valuation declines for collateral securing performing loans. It's a possibility that those could in the future be in default. And if that occurred, what would the loss rate look like based on June 30 assumptions on value?

Can you give any -- could you give the mix of your commercial real estate portfolio, maybe how much you have in retail, office, industrial?

If you go back and look at our Q for the third quarter, and we will soon be filing -- I mean the first quarter -- we will soon be filing our Q for the second quarter, you will see a very good description of that and we detail that out in a pretty good detailed fashion. That would probably be where you would want to look. And again, I don't know that we have any significant changes that have occurred in those portfolios since March.

Okay, thanks.

[Ted Limpini], Merrill Lynch.

In all of the things I -- press releases that I have read or heard from you today, there was no reference to your current book value. Could you give me an approximate figure on that?

Yes, we have it here. Bill? If you refer to the --

Tangible book is $6.97 and the book value per share is $9.90.

Thank you very much.

Jefferson Harralson, KBW.

On the 30% write down roughly of the current nonaccruals, could you disclose what you think the current nonaccruals are written down to? So does this go down from 70 to 40 or 80 to 50 or --?

In terms of related to their original balance?

Yes.

I can tell you it's a wide range of write-downs and those would range from anywhere from very little to as significant as a very large number. It is probably not a number we would want to talk about at this point.

How about the average of that? Do you have a feel for the average or is the average just so meaningless that it's not worth throwing out there?

It's fairly meaningless. I think the key point is that it was substantial enough on individual assets to cause the entire write-down relative to total nonperformers to be as high as 30% and actually a little more than 30%.

Okay, when you talk about the transactions happening in your marketplace and you talk about these transactions dictating the decline in value, what are you seeing in peak to trough valuation declines and land values that is driving this write-down? Or is that a fair question to kind of get at it from another way?

I think we tried to be clear that -- I don't know what we've seen. I don't know that -- it's been hard to kind of get a handle on support for where values are right now. And we have extensive appraisal data and analysis of that appraisal data that is based on various sets of assumptions. And I think we just decided that this quarter the negative assumptions that support those values are getting more negative. And so we have gone through that data and made significant marks in those assumptions. That is what is driving us down.

So I don't know that we have begun to observe the true numbers yet. I think they are just now beginning to reveal themselves. I can tell you flipping all the way to the other end of the scale with residential properties, which of course is a component to understanding land values, we have continued to see pricing declines that were more severe this quarter than at any time in the cycle thus far.

The good news, which is running counter to the national trend, is that in many of the hardest hit markets in the state of Florida, we saw very dramatic increases in transactions occur beginning in March and April. Those continued to accelerate as we moved into the second quarter, so the year-over-year growth rates for transaction levels has improved. Inventories have -- used homes or -- I'm sorry -- new homes, inventories of new homes have come down dramatically. Used home inventory remains very high. But the transaction levels are really accelerating, which is encouraging news, I would say.

The bad news is a lot of that acceleration is coming from distressed sales and a lot of the sellers into that market are the big servicers who are in the final stages of foreclosure. I will tell you that the other sort of good news is most of those transactions, that acceleration of transactions where you see the most severe pricing adjustments seem to be some of the most egregious subprime and aggressive loans that were done two and three years ago.

So I think we are really beginning to clear some of the worst of the worst at this point. I think the good news for Florida is in some of the worst hit markets, you have seen some improvement in transaction levels. That does not mean we are necessarily at a bottom because prices have continued to be hit.

That's great. Thanks for that. One follow-up on the commercial real estate is what are you seeing in lease rates? What are you seeing in occupancy rates? What are you seeing that makes you relatively confident that the commercial real estate loss rates aren't going to follow some of the land loss rates?

First of all, we are seeing weakness in everything that you mentioned. It is not extensive but we are definitely seeing a change of trend and have been saying that for a year. And it is logical that we would begin to see some of that weakness occur.

I think the reason we can be cautiously optimistic that things are not going to be nearly as hard hit as we've seen in the residential side is the market was very, very different on the CRE side. We did not see the overbuilding nearly to the extent that you saw in the other part of the market. And the other point would be that specific to us, the vintages of those loans spread over a longer period of time generally and so you have I think a little less risk in that portfolio.

Okay, excellent.

David Bishop, Stifel Nicolaus.

Sort of a follow-up on Jefferson's question there, and maybe coming at it a different way, in terms of the loan write-downs and the haircuts you are taking there, I don't know if you can provide any disclosure in terms of maybe the vintages of those different collateral there and what's sort of the loss severity based on the vintage of those loans? Maybe -- I don't know if you can break down the actual vintage of the nonperforming loan category too on the resi construction side, and land loans as well. But sort of if you can segment that all?

It's really not something we want to go into because I am not sure how useful it would be and second of all, we are engaged in a number of discussions on these credits. All I can say is that we have had -- there was a wide variety, a wide swing in write-downs and it really depends on -- it's individual credit specific. It depends on kind of the outlook for that credit. It would be fair to say that the more vacant the land, the more severe the write-down, which would come as no surprise. And it would be fair to say that loans that were originated in '04 and '05 for example would be -- feel the most severe write-down.

Okay, turning to capital, in terms of -- I don't know if there is a Board-mandated target there, but in terms of maybe sort of threshold capital levels, is there a minimum regulatory either risk-based or tier 1 that the Board sort of manages to?

Well, as I said in the opening remarks, we are within range that we have established. We spent a lot of time over the last -- over many years trying to size an appropriate capital position for the bank, and we do a lot of work trying to understand and measure the risks particularly right now on the credit side of the organization.

And as I said in the outset, we are operating within that range and we have been aware of where the risk levels are and we have taken some dramatic action this quarter to certainly not clean things up completely, but to substantially reduce the risk going forward I think in terms of the risk of loss. And so we feel very confident with our capital positions.

As we also said in our release and we said on I think the last call, we filed a shelf registration statement during the quarter. The shelf total, we had a registration of a total $40 million in capital and it's sitting there and if we had some belief that we needed it, we would certainly be the first to do it. But we feel very confident that the capital levels we have today are appropriately sized for the risks that we face in the future.

Remind us, what is the trust preferred capacity currently?

We are basically where we want to be with trust preferred. We have some capacity for additional tier 1 capital, but we are basically where we want to be.

Then in terms of current market rates, we have heard some stories, some of the other banks getting aggressive there in some of their CD offerings. Can you provide us some color what you are actually currently paying in terms of current market rate CDs out there?

Our current market rates are targeted under some of the high rates that are out there and those high rates have continued I guess this quarter. The issuers are principally some of the larger companies that are under more stress. Bill, you can kind of give us like a little representative flavor.

Yes, first of all, I guess one of the things that we have is a very diverse franchise and have been executing a relationship strategy for a number of years. So we are able and have been able and you can look at peer information going back and it really hasn't changed that much but we generally are in the 20 to 30th percentile ranking on overall cost of deposits, and it is because of that relationship strategy.

So while others in the market, as Denny mentioned, have had higher rates for CDs, we generally can negotiate with our customers anywhere from -- the very disproportionately high rates, it's been amazing we've been able to negotiate 50, 75 basis points on average lower than that with our customers. And we have been able to maintain CD deposits at growth rate.

Because we're really pleased this quarter as we stated. We've been working on some retail initiatives all year. I will give you an example of one that we have been using and that is a checking account offering for larger balanced checking customers, meaning several thousand dollars and up that pays today a rate of 2.5% with a relationship required and a number of other benefits associated with it. That has been very helpful to us. We actually saw our retail deposits grow pretty nicely over the quarter, which takes the pressure off the high rate CD type side of the market.

So we will continue to pursue that strategy over the coming months and be responsive to what happens probably with pricing on the retail side. But it's kind of the same environment today that we probably described 30 -- or 90 days ago.

Thanks.

Rajeev Patel, SuNOVA Capital.

Thanks for taking my question. Just quickly on commercial real estate, excluding anything regarding the resi and the homebuilder space, you guys said that that is an area you are concerned about, you are watching given the weakening overall economy. Have you started to see any signs of stress in any of those segments, whether it be retail, industrial, or office? Or are they more just kind of on the watch and keeping your eye out?

We've not -- we have seen stress in the market in that vacancies are up and the people I talk to say pipelines for new tenants is down, which is not good news, as an example. That would be more or less across the board. We have not seen any significant or concerning amounts of tangible deterioration on the part of our customers other than higher vacancies and that sort of thing. So cash flows are still there. We don't have any overall concerns, but we are clearly in a weakening environment and that should give all of us concern as we go forward.

But no, we haven't seen any particular credit specific major weakening that give us outsized concerns, with one exception, and that would be where you have project sponsors who have other exposures on the residential side. Where -- and we have seen that occur. We have one or two loans probably in nonperforming that are actually CRE loans, but in every case, they are hooked into a sponsor who has large residential exposure that looks ugly.

Right, okay. Great, thanks a lot.

Matt Olney, Stephens Inc.

Good morning, Denny and Bill. Denny, you mentioned some comments earlier about used home inventory numbers I believe increasing. Those are numbers that are tough for us to get outside of Florida. Are there any numbers that you can provide for us today regarding that?

Matt, I'm sorry. We will have to get back with you. I don't have those at my fingertips. I can tell you that looking at MLS listings, they are up, but they are not gigantically up. They've just been -- I would say they are high and they've remained high. I'm sorry I don't have those numbers and I would be scared to kind of give them to you. But again, the positive -- the only positive news I see out there is that we are clearing the foreclosures as they come into the market and that is causing prices to decline. The declining prices are bringing probably some fairly remarkable opportunities for buyers to get excited about, and you can see buyers coming off the sidelines.

The question is will that continue? And I think as we go through the summer, it might moderate a little bit and then we have another chunk of foreclosures as you know coming out of subprime and Alt-A that have been hitting the last few months foreclosure, and those will turn into Oreo and sales late this year and early in '09. Then as we get beyond that, as you are aware, things start looking a lot better.

Denny, we have been comparing this credit cycle to previous cycles in the early 90s, but given these recent 2Q results, NPAs and charge-offs, do you still think that is still a fair comparison comparing it to the cycle of the early 90s?

It would be fair to say it is every bit as bad as that and it might be instructive to look back in the 70s at the little more severe cycle that occurred at that time and it hit housing a little more significantly at that time too. So it is a very, very tough cycle.

I think the negative impact nationally continues to build and be felt, and there's a little bit of hope because of the things I've just been talking about that some of the harder and earlier hit areas are beginning to see things hit bottom and so forth. So I think there's a growing belief that at least here in some of the higher growth markets in Florida you are beginning to see transactions improve and that is probably a beginning of a bottom. Now we need to see prices which are declining hit a level that is sustainable, and we might be there.

Thanks, guys.

Peyton Green, FTN Midwest securities.

Good morning. Denny, I was just wondering if you could talk a little bit about what the workout process is for the basket of loans that are on the nonperforming list? How long would you expect it to take to either get deeds in lieu or do you think this will have to go through the court system for a while?

It takes -- if you are doing a foreclosure, it takes a year, 18 months. It can even in some cases where there's a bankruptcy involved take two years or more.

Yes, I mean we have been working this since late '06 and you saw the NPAs grow in '07 toward the end of the year, so that's what you're looking at. There are certainly other alternatives that many banks are using including more aggressive ways to sell some of those credits and we look at all of that. We have done a small amount of that liquidation work over the last couple of quarters and we will continue to pursue it.

But if you take it all the way to foreclosure and out the other end, Jean is right.

Okay. I guess to what degree have sponsors really walked from these deals and where have to really push the issue? Or is there still some ability to work through things?

There are some borrowers that we do -- we have relationships with where we try to work with them and if they choose to walk, those are represented in our nonperforming numbers and we push through collection aggressively.

But I think we're at a point, I guess to kind of answer your question, we are at a point where the level of stress just continues to be very, very high with these guys. We've worked our way through a good chunk of those is all I've got to tell you. There's not a whole lot left.

Okay, then I guess this is a little longer-term question, but in terms of shaping Seacoast over the next three to five years, what do you see as the biggest change resulting from what is going on now?

I think the biggest change for us going forward is we are probably moving into a very different environment, with much less amount of intensity for competition in all areas. I think you'll see other players in the market you know reducing cost and infrastructure cost. It provides us with some opportunity to potentially do the same. It goes without saying that we have had and maintained a larger exposure to residential development than we should have and that is something we feel would be a change going forward.

But I think the good news is there's probably going to be very slow growth in some of those commercial areas, but I think the good news is the overall competitive environment gets a lot more positive. Jean, did you have anything to say?

Yes, we pointed out before I think, Denny, unlike some of the very largest banks, our fundamental operation is still intact and our residential line of business, our wealth management line of business, our retail line of business is very strong and getting stronger. We see it getter stronger for the improvement in the competitive environment that is getting referenced.

In fact that is already occurring, I would say. On the retail side, we think our success over the last -- since the beginning of the year in particular has been because of very significant changes in the competitive environment. So probably the scope of the competition will be very different and the nature of that competition will be very different as we go forward in the next three to five years.

No, I think you all ought to be commended on the job you have done on the deposit side. I guess my question would be going forward, to what degree do you think you could keep your funding advantage? And then secondly, without charge-offs, to what degree do you think the loan book will naturally shrink?

First of all, with regard to keeping our funding advantage, I think that is a given. We have -- our entire infrastructure is built around supporting that advantage and growing it. And back to the loan book, I think we kind of stand by some of our previous statements. Bill, those were -- what for the balance of this year I think we said?

We -- I think we on the last call and perhaps we're looking at maybe even lowering that, but we were at a negative probably 8% plus 10% for the year. And then pushing that out it could be a little bit lower than that even into 2009 early. (multiple speakers) I am expecting production to be --

So we think loan growth this year will be a negative high single-digit kind of number.

Okay, great. Thank you very much.

Wilson Jaeggli, Southwell Partners.

Could you help us here? We're talking about deposits here. What is the amount of brokered CDs if any?

We don't have any brokered CDs.

Great. And could you tell me what your past dues here are at 30 to 89 days?

They are up slightly, but not substantially from last quarter. Last quarter they were very, very low.

$10 million.

$10 million.

Right, and they are just up slightly from that?

Yes.

When you say -- you made a statement here you are going to pursue liquidation opportunities. Opportunities in the sense that you will be able to shrink your balance sheet?

Well, that would be one side effect. I think the objective is more oriented to reducing a level of nonaccrual loans and problem assets. But that would be one result, yes, if we were successful.

Right. And talk about the liquidation process here. Have you gone to auction with any of your properties?

We have done all of the above and we will continue to do so. And we believe the action we took to date puts us in a stronger position to be able to move forward into as we said, a little more aggressive focus on liquidation.

Thank you.

[Tom Wasserman], Wasserman & Associates.

Hi, Dennis. I have it in you my mind that your worst loans must have come from banks that you acquired. Could you tell me if that is accurate or not? Secondly, could you just elaborate a little bit on what you mean by de minimis regarding your dividend? Thanks.

Sure, first of all I would say no, our worst loans did not come from banks that we acquired. The loans that we have been most concerned about have been as we have been saying for over a year, are loans related to residential real estate development. And those are loans that we have originated here. So we understand and know them and we are not happy about it.

With regard to the statement on the de minimis dividend, our Board has not yet determined exactly what the dividend would be in the next quarter, but suffice it to say, it would be sufficiently small as to be insignificant. So it will be $0.01 or $0.02.

And the reason we are -- we have taken that action is that we obviously are looking to preserve capital and avoid any dilutive capital transactions. And I think the decision on the dividend was an appropriate one. Or the decision that is coming up on the dividend, which will be an August issue, is an appropriate one given the desire to maintain and avoid dilutive capital transactions.

Thank you.

David Bishop, Stifel Nicolaus.

Denny, a quick follow-up here. Obviously, market clearing prices are impacting carrying values, too, as well. But I was curious if the examiners have been in recently and if there was any sort of [compulsion] there from that front to true up some of these loans too as well.

No, we are in control.

No, these are decisions that we made this quarter and that's all we can say on that.

Thank you.

Wilson Jaeggli, Southwell Partners.

Sorry for the silence. I got cut off here. Could you give us a feel for the properties that have gone (technical difficulty) here either foreclosure or short sale or liquidation or whatever? Can you give us a feel for the different valuations (technical difficulty)

I'm sorry, we really couldn't understand you. You were breaking up. I think your question was could we give you a feel for the valuations on properties that are selling in short sales, and it is really hard. There is no standard for that. You really can't come up with anything that globally you could say other than there is pressure on prices down. I can find you examples, horrific examples of declines versus a trade that occurred two years ago on a particular house but it may have been grossly overpriced two and three years ago.

So I think we said in the past on raw land, we are seeing value declines that are clearly in the 40% to 60% level. So those are numbers that we've talked about in the past, I know. Appraisals, yes.

Thank you very much.

(OPERATOR INSTRUCTIONS) I am showing no further questions.

Okay, thank you very much for your attendance today. We hope to report a little better situation over the next quarter. Thank you.

Thank you, ladies and gentlemen. This concludes the second-quarter earnings release conference. Thank you for participating. You may all disconnect.