Seacoast Banking Corporation of Florida (SBCF) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter earnings release conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Chairman and CEO, Mr. Dennis S. Hudson. Mr. Hudson, you may begin.

Thank you very much, and welcome to Seacoast's third-quarter 2008 conference call. Before I begin -- before we begin, I'd like to direct your attention to the statement at the end of our press release regarding forward statements. During the call, we're going to be discussing a number of issues that constitute forward-looking statements within the meaning of the securities and exchange act, and our statements are intended to be covered within the meaning of Section 27A of the Act.

With me today is Jean Strickland, our President and Chief Credit Officer, Russ Holland, our Chief Banking Officer, and Bill Hahl, our CFO. Also with us today is Doug Gilbert, our Vice Chairman. Today, I'm going to be spending a fair amount of time talking about our credit quality, and then Bill is going to update us on some of the factors impacting our earnings this past quarter before we break for a few questions.

As most of you know, last quarter we aggressively marked down a number of our larger residential construction and land development exposures. We said at the time that taking aggressive action would place us in a stronger position as we moved to accelerate our liquidation activities in the coming months. We are pleased to report this quarter that we made significant progress, progress in bringing down those exposures through our ongoing liquidation work and through a successful sale of approximately $40 million in loan balances. We believe we have substantially lessened our risk profile over the past couple of quarters.

Seacoast was among the first in Florida to recognize the housing deterioration that began in mid-2006 with an initial reserve build that occurred in the final quarter of that year. Since that time, we have committed significant resources to aggressively manage and quantify our exposure, which has provided us with a realistic and, we think, timely understanding of evolving market conditions. This quarter saw significant progress. We intend to be among the first to show marked improvement as we move forward.

I'd like to direct your attention to some of the supplemental tables we included this quarter at the end of our press release. We have provided you with an eight-quarter detailed trending for end-of-quarter loan balances, as well as increases and decreases for each of these loan types. If you take a look at this table, you can see that construction and land development loans have been reduced by $125 million since year-end, with most of the decline occurring in the most recent two quarters.

If you take a closer look, you'll see that the residential component of our construction portfolio has declined the most. In fact, it has declined by 32% over the last two quarters.

This quarter, we also provided you with a further breakout of the residential construction and development book, split into five sub-categories. In this table, we have split each of those categories between larger loans, loans that are $4 million in size and greater, and smaller loans, under $4 million in size. In this table, you will see that most of the liquidation has occurred in the large loan categories. In fact, large residential construction loans have declined from $164 million in March of this year, March of 2008, to $98 million at the end of September. This represents a 40% decline in this exposure. And most of that occurred in the land and lot category, which is down by 53% over just the last two quarters.

So again, we believe we have made substantial -- we believe we have substantially reduced our exposure to residential land and land development loans over the past two quarters, and we remain committed to the execution of our systematic plan to reduce these exposures further in the coming months.

Now let's turn to nonperforming assets. We were pleased that our liquidation activities brought down the level of nonperformers this quarter. Nonperformers, however, remain unacceptably high. As we stated in late 2006, and as recently as last quarter, our problem assets are concentrated in our residential construction book.

Other parts of our loan portfolio are performing reasonably well, considering market conditions. This performance reflects our decision to stay away from all of the exotic mortgage products that currently plague our industry. We also chose not to participate in the aggressive programs to generate home equity loans and other consumer loans that now are showing signs of significant stress in the industry.

So again, let me restate -- our problem assets are concentrated in our residential construction book. That residential construction book has been under special scrutiny since late 2006. We understand the risk profile. We are focused on timely identification of loss potential and are in touch, real-time, with market conditions. If you turn again to the table at the end of our press release, you will see that most of our nonperforming loans are related to the residential development book. In fact, $55 million of our total $80 million in nonperforming assets are located there. The remainder, incidentally, includes $5 million in foreclosed properties, $10 million in consumer, which is primarily residential mortgages, and approximately $10 million in commercial real estate mortgages.

We have provided a breakout of our nonperformers in the residential construction book. And as you look at it, you will see that a substantial portion of the remaining larger exposures is currently classified as nonperforming. This certainly reflects the severe conditions that exist in the residential markets today. With a substantial portion, however, of our book -- of our residential book classified -- our residential construction book classified as nonperforming, we believe we will see incremental nonperforming asset growth moderate while we continue our efforts to aggressively pursue liquidation efforts and other opportunities.

I guess, to sum up, all of this points to reduced exposure going forward with respect to the residential problem. We were on it early, and we plan to be the first to show marked improvement. Now I'm going to turn the call over to Bill for a few more comments on the quarter.

Our third quarter 2008 net income and financial results declined when compared to 2007, driven by a $1.9 million in lower net interest income and approximately $900,000 lower in non-interest income, together with higher credit costs. Loan balances outstanding, compared to a year ago, are down $150 million, or 7.9%, and nonperforming assets have increased from a year ago by $34 million, accounting for the lower net interest income results, and the margin -- a margin decline of 37 basis points compared to the third quarter a year ago.

On a linked quarter basis, the margin declined 12 basis points to 3.57%, mostly due to the substantial competition for deposits, keeping deposit interest rates disproportionately high, even though the cut -- the Fed cut rates back in April of 2008, while our prime base loans have replaced lower.

In this environment, our focus has been on building customer relationships and organic transaction deposit growth, while avoiding the higher-cost certificates of deposit that the competition has been heavily promoting. Our progress this quarter in acquiring new-deposit households was much improved from a year ago, with deposits -- new-deposit relationship acquisitions up 25% compared to new relationships a year ago. Our year-over-year deposit growth, excluding the Orlando region, was $135 million, or 8.8%. As of June 30, 2008, we have regained our number-one market share position in Martin County for deposits in this legacy market, where nearly 50% of our total deposits reside.

The bank we acquired in Orlando in 2005 had a deposit base comprised of many large commercial relationships, which were dependent upon construction and sale of real estate, such as attorneys, title companies, construction companies, and others. Over the past year, these deposit relationships have declined as a result of the slowing of the real estate transactions, and have accounted for a decline of approximately $150 million in deposits in this market.

Going forward, we believe we will begin to see deposit growth in this market as our retail deposit strategy has effective there, as well as in the other markets.

As I mentioned earlier, we have experienced substantial certificate of deposit pricing pressure from competitors in all our markets. Our success in growing retail relationships and balances this quarter allowed us to rely less on certificate of deposits for deposit growth and liquidity, and avoid the higher rates paid by the competitors this quarter.

Our add-on rates for CDs in the third quarter averaged approximately 3.5%, versus the competitors' rates of a low of 4% to a high of 4.8% for the same maturities. As a result, the average cost of certificates for the third quarter were down 35 basis points to 3.64% compared to Q2 and the cost of all deposits declined six basis points to 2.6%, compared to 2.66% in the second quarter.

Looking at the non-interest income area, in light of the unprecedented economic challenges as a result of the deterioration in the housing market, fee-based revenues were lower when compared to 2007. Compared to a year ago, marine finance fees were off approximately $300,000, wealth management revenues were down $200,000, and merchant service revenues were off nearly $200,000, accounting for the majority of the decline in non-interest income. On a linked quarter basis, these same revenues were also down as a result of normal seasonal slowness that impacts these businesses, and the more general economic weakness impacting our markets. We expect some improvement in the next two quarters for these fee-based businesses as these are normally seasonally strong quarters.

Lastly, overhead was in line with expectations, with slightly higher legal fees as a result of the increased number of problem credits, both for the quarter and year-to-date. Year-to-date overhead was nearly unchanged from a year ago, and this is consistent with our prior guidance of no substantial increase or decrease in non-interest expenses for the year.

Going forward, management intends to continue with its cost reduction measures, and we will have more information on the size and the nature of those reductions in next quarter's call.

I want to end with a few comments on capital. As you saw, our capital ratios grew this quarter as risk-based assets declined. In fact, our risk-based capital ratio now stands at 11.7%, which is up from 11.4% last quarter. This is well in excess of the 10% levels being considered well-capitalized. Given the muted outlook for short-term growth, we will likely see our capital ratios continue to grow in the coming quarters -- and as -- in the coming quarters.

As I have said, our number one priority for 2008 has been asset quality. Our capital strength has afforded us with the ability to move forward on a very aggressive basis as we continue our liquidation efforts that'll bring the necessary improvements in asset quality.

As we move through the balance of this cycle, we will see, as I said last quarter, an entirely new competitive dynamic develop in Florida, and, boy, when you look at what has just happened over the last month or so, not a truer statement could be made. I find it instructive to see many of our business customers across a broad range of industries doing better today than anyone thought could be possible. And the common factor, as I said last quarter, is 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 continue to maintain our focus on exiting out of our weaknesses as quickly as possible, as we also continue to build on our earnings momentum.

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

Before I open it up for questions, let's summarize. Our success on the problem asset liquidation front was very successful this quarter, in fact, more successful than we anticipated. And this liquidation success was focused on our largest credit exposures. As a result, our credit profile has improved significantly over the past six months.

Our capital and liquidity both improved this quarter. Our capital levels increased and are expected to continue to grow in the coming months. Our sources of liquidity were doubled this quarter to over $800 million, and we did not draw on any of those sources during the quarter due to, as Bill just said, very strong consumer deposit growth, much better, in fact, than any of us anticipated over this summer. Our strong and diverse consumer funding base actually improved during the quarter, and we don't rely on any external sources of wholesale funding at all.

So as I see it, Seacoast remains a remarkable value today. Our risks are well-understood and well-communicated with the street. We have made remarkable progress in reducing those risks, and moreover, we're committed to continue our progress in the coming quarters. And we trade today at a negative premium to core deposits. So with that, I'm going to open up the line to questions and we will be glad to answer any questions you have.

(Operator Instructions). Christopher Marinac, FIG Partners.

Just wanted to ask a question about your feeling about commercial real estate and to what extent it follows other issues into trouble, whether it be for you or for others, and just kind of wanted an update on sort of how that feels to you, both from a Seacoast perspective as well as the market in general.

We have been saying for several quarters that we're seeing weakness in the commercial real estate markets in terms of vacancies and the like. And it's pretty broadly felt, pretty significantly. Most significant would be in some of the retail areas. Having said that, we see very -- while we see that weakness that is there and we're very concerned about it, we don't see it affecting, at this point, our portfolio in any significant way.

And if you think about it, those exposures are very, very different than the exposures we're dealing with on the residential side. The common risk that is there on the residential side is the sale of residential product. And most of our commercial real estate exposures are developed properties that are occupied and not dependent on the sale of product and the like. So I'm sure we will see some weakness as we go through time, but I don't anticipate it being anywhere nearly as significant as the problems we've seen develop on the residential side over the last year. And I think that's probably true for the whole industry.

Having said all of that, as we said several quarters ago, we have restricted our lending in those areas due to very, very difficult market conditions, and we have been under that restriction for a year. Or more. So I guess that's my comment.

Just to follow up on the statistics you gave in the press release about the various property types and loan types, how much more change do you see these coming down -- obviously, there's more to go, but I just want to get a gauge of how much through the sort of decline of these balances do you think we are?

Now we're speculating, because we're not sure how -- what those liquidation efforts are going to look like over this coming quarter and the next quarter. But we have moved significantly through it, is all I can tell you, and we're probably halfway there. We have made remarkable progress in the last two quarters, as you have heard, and we have some more to go, but I would also tell you that we have focused first on the biggest, nastiest problems. And as we move forward, they get smaller and less nasty.

Would that mean that the loss content is a little bit different in your favor as they get less nasty?

That would be the implication. I hesitate to say that because we're just not sure what kind of market we're moving into.

Understand. Great. Thank you.

Dave Bishop, Stifel Nicolaus.

I was just getting some -- maybe some color in terms of the marks, maybe, you took in terms of the loans that were sold there. Maybe give us a sense of what pricing is looking like in the market there and how that's trended over the past 30 to 90 days.

Russ can weigh in here, but I think the general comment we probably make is that the marks are very wide in terms of the original principal balance. It's going to range from $0.30 to $0.90, and Russ, what did we say our average was?

We averaged $0.52.

$0.52, something like that. Consistent with what you're hearing from others. Markets got squirrelly at the end of September, there's no question about it. We were fortunate that we had concluded most of our negotiating prior to that period.

Were there any fall-throughs as a result of the market turmoil?

Not really. I would say we had some other credits that were -- we were very close to selling, and you couldn't say it fell through because we never quite got there. But we probably had others we were ready to pull the trigger on, and are probably going to push those into this quarter.

Got you.

The numbers weren't that huge, though. Another $10 million-plus.

As we look at the -- sort of turn the page here, in terms of the net interest margin, as it relates to the Fed and the most recent rate cut, and maybe prospective rate cut, the ability to hold the margin at these levels here?

Generally, I think that we're in pretty good shape there. The whole -- I think the whole competitive deposit environment is changing now very rapidly as a result of what happened over the last couple of weeks. Comments, Bill?

It's probably too early to tell, but even though -- over the last couple of weeks, just the number of ads for these -- it was extraordinarily high rates being paid in the market -- have disappeared down to one or two now. And I've seen recently that they have come off their rates -- not by the 50 basis points, but at least they have lowered them down. We took immediate action on our rates and began lowering some of our product rates and so forth.

But as Dennis said, it's going to be probably a little bit more time before we can really see whether or not, let's say, the market conditions will improve such that we can continue to have those lower rates. So that will be the margin with the -- we're still forecasting loan repayments and reductions probably of somewhere $50 million to $60 million in the fourth quarter. And we've stalled out new loan growth. That's going to put some pressure on the margin as well.

Can you quantify the pressure from NPAs this quarter?

No, not really. I can't quantify that (multiple speakers)

I would say, though, that we had some accrued interest reversals and the like. It was probably comparable to what we felt last quarter. And as you saw, nonperforming assets stabilized this quarter, didn't grow, went down slightly, so we had a lot of movement in them, as you can appreciate, given that we sold almost $40 million in nonperformers. And as that movement occurs, there is some adjustment to accrued interest, that sort of thing. So we continue to feel the pressure, I guess, that we felt last quarter when they increased. And as we go forward, we're looking for that to maintain its stability and begin to come down, we hope.

Thank you.

(Operator Instructions). Paul Connolly, Southwell Partners.

Could you just -- I didn't hear you clearly. Was it a $0.62 on the dollar or $0.52 on the dollar on the average loans sold?

We said five two, 52.

Five two, okay, great. Thank you. And so --

And just to be clear, there were many assets sold at a higher price, probably as high as 90. And others, lower, and that was kind of an average. So it's very dangerous to talk in those numbers because every asset is different. And it has a great range.

But along those lines --

And I would tell you the bids we get and the offers we get for purchase are very wide between buyers. And so they can be significant.

But along those lines, the provisions that you took previously on those loans were pretty much in line with market as when you sold these. You didn't take additional marks, did you?

Yes, that's generally true, although we sold a little more than we thought we would. We were a little more successful. That reduced -- that created some credit cost, and again, we were pretty aggressive in pushing more of those residential credits into a nonperforming status, and as we did that, we took some marks in terms of reserve build and that sort of thing associated with those credits. New credits.

The $38 million sold in the third quarter, how does that compare to the second and the first quarter? (multiple speakers)

Very little, right?

Yes, there was significantly greater activity in the third quarter than the first and second. We were doing maybe $5 million to $10 million at most in the first and second quarter.

Right.

Okay. And then, could you comment just on 30 to 89 days past due?

I think they were -- Bill is going to grab it here. Didn't see a lot of movement there -- in most of the categories. There was maybe a couple of million.

30 to 89 --

I think last quarter, it was like 17.5 at the end of the quarter.

Yes, and it's -- maybe a couple of million higher, something like that.

Okay, so just call it 20 today.

A little under that.

So when -- like this quarter, basically you had $38 million of loans that slid into NPAs as you sold $38 million, roughly. What are the trends that you're seeing or you expect to see going forward?

We provided some pretty granular information at the bottom of our press release. When you look carefully at those tables, you can begin to kind of see what the trends are looking like there. And I guess I would just state that we have seen some very dramatic reductions in larger exposures in the residential book -- residential development book. And as those numbers come down, the potential for NPA growth becomes a little less. And then, second of all, you can see that at this point in the cycle, we've got a substantial portion of that book on nonaccrual today. So when you understand that the problems are coming from the larger credits, which is no surprise to anybody, and they are concentrated in the residential book, it stands to reason that we will begin to moderate in terms of that growth. And that's what we believe -- where we are.

Also, we've been at this for a good long while, really since the middle of '06. And super-intensively over the last 12, 13 months. So we think we have a pretty good handle on what is good and what is not. I think we're cautiously optimistic that we're going to see less flowing in in the next couple of quarters than we have the last couple of quarters.

Last question, you have a shelf out there, which you have not drawn under -- drawn anything down under. Any comments toward the TARP program and your desire to participate in that?

Yes, you know, we are looking at it. We haven't got anything to say about that, other than we'll carefully explore it. It would appear to be very reasonably constructed and priced, and it's something we will just look at very, very carefully.

Thank you.

Jim [Delayful], Cambridge Place.

It was asked and answered on the last question. Thank you.

(Operator Instructions). I'm showing that we have no further questions.

Thank you all for attending today. I think we've made some remarkable progress this quarter. We continue -- we're committed to continue those efforts, and as we do so, we will hopefully begin to see some of our -- numbers improve in the next few quarters. Thank you for your attendance.

This concludes the third-quarter earnings release. Thank you for your participation. You may all disconnect.