Seacoast Banking Corporation of Florida (SBCF) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter earnings release conference call. And 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. Mr. Hudson, you may begin.

Thank you very much, and welcome to Seacoast's second quarter 2009 earnings conference call. Before we begin we'll direct your attention to the statement contained at the end of our press release regarding forward statements.

During the call we'll be discussing certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and our comments are intended to be covered within the meaning of Section 27A of that Act.

Today, with me, is Jean Strickland, our President and Chief Credit Officer, Russ Holland our Chief Banking Officer, and Bill Hahl, our Chief Financial Officer.

Our earnings for hits quarter were impacted by a large reserve build related to our CRE and residential mortgage portfolios and loan charge offs as we achieved a significant runoff of our overall construction loan exposure.

Our construction portfolio, particularly the residential construction and development loan portfolio, has produced very significant losses over the past five quarters. By aggressively working this portfolio down we are reducing credit risk. This is the key to lower credit cost in the future.

Our net loss for the quarter totaled $13.2 million, which was down from the prior year's loss of $21.3 million and up from the $4.8 million in the first quarter of this year. Including the accrual of dividends and accretion associated with our preferred stock outstanding this resulted in a loss of $0.74 per share, down from a loss of $1.12 per share in the prior year.

While our earnings this quarter clearly remained under pressure with continued levels of high credit costs, we were pleased again this quarter to report for the second quarter in a row, to report some fairly significant and very real improvements in our core earnings, [pre CRE], that is pre credit costs and pre tax. This improvement was related to solid performance by our core deposit franchise which Bill will speak to in a moment.

Capital ratios remained strong for the quarter with a risk based capital ratio estimated at 13.4% at quarter end. This is well in excess of the 10% target for banks that are well capitalized, and 8% for banks that are classified as adequately capitalized.

And liquidity remained strong during the quarter with good growth in checking balances over the quarter, with core deposit improvement, with no overnight borrowings and more than -- and approximately $700 million of liquidity available.

This quarter we believe we arrived at an important progress point regarding our construction loan exposures. As you know, we've been working for two years now to reduce our construction loan exposures. We announced in the first quarter of 2007 that the residential market was turning, that we had undertaken a review of our residential construction and development exposures, and that we were building our reserves in response to early deterioration.

As a reminder, residential construction and development loans are loans to builders and developers for the development of lots and homes for sale. Taking this action early in the cycle allowed us to identify problems early and work to reduce exposures aggressively through loan sales, workout strategies with borrowers, and through foreclosure action.

Residential construction and development loans, which achieved a high point of over $350 million in 2007, have now this quarter been reduced by over 73% and stand at $97 million. Larger balance loans, that is loans that are $4 million and greater in size in this portfolio have been reduced even further, and stand today at only $44 million, most of which, $38 million, is currently on nonaccrual.

This quarter we can safely say this entire portfolio is now in the active process of liquidation, with formal workout plans in place that are designed to help achieve an orderly and substantial liquidation over the next few months.

Given that this portfolio which has produced our most significant losses to date is now fully covered with specific plans for liquidation, we believe aggregate loss exposure in this portfolio will moderate significantly in the second half of this year.

Simply put, we have liquidated over $250 million in this portfolio or 71% to date. The remaining balance is now much smaller, both in the aggregate and in terms of loan size, and the remaining portfolio has been well scrubbed and appropriately valued. It is in the final stages of workout and liquidation. Losses coming out of this portfolio going forward will simply be a function of final liquidation costs as the portfolio is fully eliminated.

Our commercial construction and development portfolio, which has performed fairly well, has also shown a significant reduction this quarter, declining by 17% on a linked quarter basis. Overall construction loan exposure, both our residential and commercial construction, has now been reduced to less than half of that reported at its high point in 2007.

And I would direct your attention to the press release where we've detailed out a lot of this reduction for both residential and commercial construction loans that has occurred this quarter and over the last year-and-a-half or so.

Nonperforming loans grew to 8% of loans this quarter, up from 7% last quarter, with most of the $17 million in growth coming from our residential home mortgage portfolio. Growth in nonperforming loans in the construction portfolios slowed considerably for the reasons I've just stated.

We said last quarter that we would be pursuing troubled debt restructures with our home mortgage customers, and about one-third of our nonperforming home mortgage loans are actually performing in accordance with their restructured term. These loans will move to a performing status provided they perform for a period of time.

Past due loans and early stage delinquency also improved in the residential portfolio, reducing to $3.7 million at the end of June from $10.6 million at the end of last quarter. Early stage and past due credits in our other portfolios remained modest and changed very little from the prior quarter. We are seeing some evidence that early stage delinquency is improving across the board.

Now, I'd like to turn the call over to Bill for a few comments on the quarter. Bill?

Thank you, Denny.

We've posted some slides on our website that I'll be referring to throughout my comments today, but first I have a few high level comments about the operating results.

Results for the quarter were reduced by a special assessment from the FDIC which totaled $0.03 per diluted share. This cost was offset by gains on the sale of securities which increased earnings by about $0.06 per diluted share.

We also recorded, as Denny mentioned, a $26.2 million provision for credit losses in the second quarter. The provision exceeded losses for the quarter by $11.1 million and increased the allowance to total loans to 2.75%, up 76 basis points from the first quarter.

The slide on page three shows some highlights for the quarter. Margin results for the second quarter were positive, increasing by 21 basis points to 3.65%, quite good considering the difficult economic conditions and the aggressive measures we have taken relating to the challenging credit environment. I'll have more to say on the margin in a later slide.

Next, I have some comments regarding our funding and liquidity position, and I refer you to the slide on page four. Our funding and liquidity levels have remained strong throughout this economic downturn with no change in borrowed funds.

Our funding strategy remains centered on stable retail and commercial relationship deposits which fund more than 100% of loans. Wholesale funding in the past has been mostly used for seasonal fluctuations in deposits or to prefund known deposit increases or for ALCO strategies.

At quarter end deposits and customers' [sweep] repos comprised 92% of total funding. Brokered time deposits declined by $35 million during the quarter and were partially offset by increases in demand in savings deposits which increased during the quarter. As Denny mentioned, our combined available contingent liquidity from all funding sources, pledge free securities, and cash on hand at quarter end was approximately $700 million.

Moving to the capital ratios slide on page five, since receiving $50 million in capital from the Treasury's CPP program in December 2008 and the resulting improvement in most capital ratios, the Company and the Bank have maintained strong regulatory capital ratios and are classified as well capitalized. As Denny mentioned, total risk based capital was 13.49% at June 30th, down 51 basis points from yearend.

Good progress has been made in adjusting our credit risk profile since yearend through reducing loan balances by $92 million, increasing the allowance for loan losses by $14.2 million, and reducing total assets by $128 million.

While regulatory ratios remain strong, we have filed an S-1 registration statement which replaces our shelf registration statement for future capital needs. The Company's 34 Act filings which are incorporated by reference in the S-1 are under review by the SEC. The S-1 is not effective so we are precluded from commenting further on any potential future capital raise.

Moving to the noninterest expense slide on page six, on past calls we have prepared a summary of our noninterest expenses resulting from items occurring in the quarters that were nonrecurring or are credit related.

While we are trying to control all costs during this extraordinary period, credit related costs are not as controllable as we would like. This slide shows that overhead has been reduced more than is visible from a normal income statement perspective. Expenses have been well managed and corroborating expenses are declining but credit related expenses continue to impact results. Adjusting for these items the second quarter overhead has declined by 2.7% when compared to the first quarter.

Increased credit related costs and FDIC Insurance compared to the first quarter has been partially offset by comprehensive reductions in operating expenses previously implemented. We expect that additional expense savings measures will improve earnings over the remainder of the year, will range between $800,000 to a million dollars.

I'll now take a moment to cover the margin on the slide on page seven. The margin increased this quarter and last quarter and has remained fairly stable the last four quarters given the pressure from factors, such as competition for CDs, increased nonperforming assets, and slower loan growth over the last 12 months, all of which have had negative impacts on the margin.

Clearly the margin opportunities I discussed in last quarter's call became reality during the quarter, such as better deposit mix as a result of our successful growth in retail deposit relationships over the past year, therefore, allowing us to have CDs run-off.

Deposit cost competition has been more rational which allowed us to be more aggressive in lowering rates paid. We believe that the impacts of negative loan growth on the competitors grabs hold and their liquidity grows, deposit costs will also be able to be lowered throughout the rest of the year.

While overall loan growth was negative, targeted areas, such as plain vanilla residential mortgages performed well. This added growth was positive, both to net interest income and the margin.

To summarize, we believe that the margin will be stable and may increase due to lower deposit and repo costs as a result of an improved mix and our ability to continue to lower rates as the competition liquefies and has lower loan growth.

Denny?

Thank you, Bill.

Now, I thought I would give you an update regarding the residential housing markets here in Florida, and make a few comments on the commercial real estate market.

We are now seeing clear evidence that home prices in the harder hit markets in Florida are, indeed, stabilizing. In fact, for the Treasure Cost in Palm Beach County we have seen a right angle turn in median home price declines, along with continued strong year-over-year growth in sales activity.

Home prices, which had been falling month after month started reporting a flat result earlier this year. For the past six months median home prices have flattened out and stopped falling in every one of our markets.

Foreclosures still represent a large portion of sales but overall inventory is declining in every one of our markets. Most importantly, affordability has returned to the market. Today in Florida you can buy a home at pre-boom prices and finance it with a mortgage rate last seen in the 1940s. If you are a first time homebuyer you get an 8,000 tax credit to boot.

The combination yields an improvement in affordability at a level well prior to that seen in the year 2000, prior to the bubble. So it is clear to me that residential home values are becoming stable. We are now receiving reports of real buyer competition for selected properties which is encouraging. We still, however, face the broader affects of this severe recession, including unemployment, and this will pose a challenge for us and everyone as we continue forward in 2009.

Commercial real estate, as we said last quarter, is showing signs of stress, higher vacancies, higher cap rates, for example, which undoubtedly will impact value. But deterioration in this portfolio is unlikely to produce either the default levels or the loss content that we have seen in our construction portfolios.

We said in our last call that our focus for the year would be growing our core deposit franchise and growing our residential mortgage lending production in response to the favorable interest rate environment. We have seen tremendous progress this quarter in both of these areas. This combined with expense reduction should continue to help us build our core earnings as it did in the first half of the year, which will be important as we continue to work through our remaining credit issues in the second half of 2009.

Seacoast remains our marketable value today, our risks are well understood and communicated, and we have made significant progress in reducing our risk over the past year or more, particularly in this most recent quarter, as we discussed earlier.

We continue to trade at a negative premium to our growing core deposit franchise, something remarkable to consider given our 80-year history of strong market penetration in what will be likely viewed as an increasingly attractive market as housing continues to stabilize.

Now, we'd be happy to take a few questions, and so I'll turn the call back over to our Moderator.

Thank you. We will now begin the question and answer session. (Operator instructions.)

And our first question comes from Dave Bishop from Stifel Nicolaus. Please go ahead.

Hey, good morning, Denny.

Good morning.

Hey, this quarter you alluded to a lot of the losses continuing being driven by the residential A&D portfolio, it looks like cumulative loss content from the peak through the first quarter was about 13%. In terms of second quarter losses I don't know if you have a dollar amount sort of allocated to that book specifically?

No, we don't have that. I'll have to follow-up with you maybe and give you some color on that, but the losses this quarter came primarily out of that portfolio and perhaps another chunk out of the residential home mortgage portfolio.

And in terms of loss, in terms of the residential mortgage versus the construction portfolio, especially on the residential, how have those trended thus far? And I assume loss mitigation, early loss mitigation is helping dampen that relative to the residential A&D and lot development?

Well, first of all, our loss -- I'm not quite sure I understood the question. But the loss mitigation work has been focused in two areas. One, primarily the residential home mortgage portfolio. This is loans to individuals, you know, kind of a conventional prime mortgage portfolio. With the stress that we've seen we've instituted loss mitigation pretty aggressively in that portfolio.

And as we stated in the press release, we've had about 100 mortgages a quarter getting modified, at least for the first and second quarter. We see that possibly moderating at this point. As we said, early staged delinquencies are down rather significantly in that portfolio at the end of June. So we're again I think we kind of got -- we went through a bubble, if you will, began to grow in December and hasn't shown any tremendous growth recently. We've seen some early stage improvement, actually, in that portfolio.

The losses in the residential portfolio that impacted us this quarter, and I'd say probably close to half of our losses in the quarter probably came out of that portfolio, had more to do with our approach to valuation in that portfolio. Given the severe declines that have occurred for residential homes in the market, you know, when a homes goes -- either is acknowledged as going into default or at the very least by the time it hits 90 days we are writing down the value of that mortgage based on what we think has happened to values in that vintage of appraisal and what the submarket is.

And I will tell you in ST. Lucy County, for example, where we've seen the most severe price declines that number in terms of the value decline off an appraisal could be as high as 50% or 60%, and we're actually taking most of that as an actual loss that day, when that loan goes to 90 days and is clearly headed for foreclosure and we've exhausted mitigation techniques and that sort of thing.

So that was with us the last two quarters. It accelerated a little bit this quarter. And then we've been at loss mitigation for well over a year in the commercial construction or the residential construction portfolio. Here we're dealing with business borrowers and, again, we have three strategies for getting through that portfolio to liquidate it.

Number one, not necessarily in this order, number one would be note sales to speculators and investors. We've been pretty successful in that over the last year. Number two is a specific workout plan with a borrower to achieve better liquidation value of the collateral. We have a lot of that in place right now. In fact, most of the balance of that portfolio is currently under workout or well over half of it under that strategy. And the third strategy is to liquidate post foreclosure and actually get our hands on the property and liquidate it in a more conventional fashion. So we're approaching all of that with that portfolio.

A key thing this quarter, though, was that that entire portfolio has now been completely either liquidated or a plan well underway to liquidate what's left of the portfolio. I hope that answered your question.

And in terms of the debt restructuring there, I think you alluded to there's a certain period of time that they'll pay under these modified terms when they go back to an accrual status. I guess two questions. Is that sort of a standard workout period or is that sort of loan by loan?

There, David, we were talking primarily about consumer loans, in other words, consumer mortgage loans.

Yes.

If the guy has the capacity to pay the restructured payment we typically would place him on nonaccrual, enter into the restructure, and if he performed for a period of six months successfully then he would move out of nonaccrual loan and into accruing restructured loans.

And in the case of most of our commercial borrowers there is in most cases insufficient evidence to place that loan back on accrual, even though we may be pursuing a restructured process to achieve liquidation that we're working with them on, and he may be making his interest payments out of pocket and that sort of thing, very typically we're not going to put that back on accrual, they're just going to liquidate on out.

Okay.

David, just on the residential restructures, we are fully re-underwriting those, so despite the fact that we wait for some performance in some cases we expect to achieve very good results in terms of not having the typical re-default rate that are discussed publicly in our restructures. And we're also able to keep up with the requests of people before they go into default for modification. So I know there's been a lot of publicity around the lack of success there on a national level, but we feel very good about what we're doing.

And, thus far, I mean this has been a fairly short period of time, you know, four or five months that we've been or six months that we've been working on the restructures, and we've seen very little re-defaults so far.

One final question in terms of the restructurings, the interest payments, is that -- it's on a cash basis rather than accrual?

Some of them are on a cash basis, yes.

Yes, by and large, though, they're on nonaccrual, and the ones that would be on a cash basis we disclosed in the -- well, the accruing restructured, it's not cash accruing but those are all current.

Great, thank you.

Thank you, David.

Our next question comes from Michael Shamer from Raymond James. Please go ahead.

Good morning.

Good morning.

I was wondering if you could talk a little bit about the margin and where you see that headed over the next couple of quarters? And also if you continue to run-off, plan to run-off CD balances?

Yes, well, I guess probably in summary what I said was that we think that the margin has possibility for improving throughout the remainder of the year, but that'll be more dependent upon our ability to lower interest rates on existing balances. And that'll be a function of the competition, as well.

On the case of CDs, that's kind of been the strategy is to, at least as it relates to the brokered CDs and just to remind everyone, you know, we did -- a year ago we executed sort of a liquidity contingency test and raised about $70 million of brokered CDs. We've never done any of that and we didn't have any relationships, and so we did that with the intent that if we didn't need the money or we could grow our core franchise over the next 12 months we'd allow that to run-off.

We are fairly maintaining our overall good core customer CDs, and those are re-pricing nicely, and I think we talked about that last quarter, 3.25 was the average yield, it's down to 2.80 this quarter and kind of the average add-on rate is anywhere from on a weekly basis from a low of 1.40 to a high of 1.90 depending on the mix of the products.

Okay, great, that's helpful. And just switching gears a little bit, could you provide a breakdown of nonaccrual loans by category?

Well, if you look in the press release you'll see a pretty robust breakdown in a table that we included this quarter, and when you look at that you can see that of the 126 in nonaccrual, you know, the big chunks would be $63 million in residential, construction, and land development, another $33 million in residential mortgage, and $19 million in the CRE portfolio. And there's some other dogs and cats there you can look at, but it's on the third or fourth page of the press release.

Oh, sorry about that, missed that.

That's quite all right.

And did you, I may have missed this, as well, but did you provide the total amount of 30 to 89 day past due loans?

Yes, we referenced it in the text and, again, as I said, that was reduced fairly significantly during the quarter.

It was 3 point --

I think it was at $3.5 million or so, it's in the press release.

I thought that was just for residential mortgage loans, though?

Yes, the very modest balance is in the other portfolio.

Okay, all right. Thank you very much.

And our next question comes from [Chris Minerk] from FIG Partners. Please go ahead.

Hey, Denny, Bill, good morning.

Good morning.

Just wanted to ask, and you may have had this in the press release and I missed it, is there a way to get back to a cumulative number on OREO write downs beyond what you just took in the second quarter?

We have not disclosed much in the way of OREO right now. I think last quarter we disclosed the aggregate loss so far for the cycle for the entire loan portfolio, and it was a little over 6%. And that number grew obviously this quarter.

We haven't distinguished out OREO because we haven't had a lot of OREO losses yet, but that's a good point and we'll continue to see. As we said this quarter we believe as we move into the final stages of liquidation through all this work we've been doing over the last two years really, but particularly over the last year or so, we'll see OREO balances increase. Hopefully, we'll see nonperforming loans decrease as it moves into -- migrates into OREO, and as that occurs, you know, we'll just see how good our valuations were, as we went into that.

We think, as we stated in the discussion, that the remaining residential construction development loan, which has been producing virtually the lion's share of all of our loss exposure for the last year-and-a-half is now in full liquidation mode and is moving very rapidly toward over the next year or so towards final liquidation, and that's when the rubber finally hits the road, when you turn it all into cash. And some of that will occur as it flips into OREO.

We actually had some of that happen this quarter, right, Russ?

Yes, there was movement from the [MPA] to the ORE in the commercial.

Yes, right.

Great, that's helpful. And I guess as a follow-up, I mean the LTVs on the commercial real estate that you put in the press release, is there any anecdotal evidence of properties that you have reappraised, just to compare how that acts if you have something with a fresh appraisal, say?

Yes, I mean we definitely would see property values declining and it really is all over the board, but is going to be in the low double digits to 20% or something like that probably. And it depends on the property, it's a function of cash flow on the property.

The good news about the CRE portfolio is we have some cash flow to work with even with higher levels of vacancies and that sort of thing, and we're if needed we'll pursue troubled restructures with those guys. Have not done a lot of it yet, we've done some in the CRE portfolio.

But, again, a key point is we just don't see the aggregate portfolio loss severity in that portfolio that we have just -- that we have observed within the construction portfolio, and it's a function of the different types of assets. A very diverse portfolio in the CRE portfolio, as we stated, very diverse and with each component performing a little differently based on what's going on in the economy.

Again, up at the top on that construction portfolio, you know, the residential construction portfolio was very concentrated in this nasty asset called a home, or worse, vacant land or a lot associated with the building of a home. And so we've had horrific loss exposure there, but we think that's getting behind us, and we think given that the entire portfolio is now in liquidation mode the severity loss going forward will begin to moderate significantly. Just the balance being as low as it is is going to cause that to occur, but you add another quarter or two and we pretty well are through that.

Russ, didn't mean to cut you off. Any comments on value?

No, I think that, you know, it is a factor of the area where the rents are and what vacancy rates are.

Right, right.

The leverage is also something that's helping us in that portfolio.

Right, the lack of leverage.

Right.

Right. Other thoughts, Chris?

Sounds good. Thank you very much, guys, appreciate it.

Thank you.

And we have a follow-up question from Dave Bishop from Stiefel Nicolaus. Please go ahead.

Hey, a couple follow-up questions, and I want to make sure I heard Bill right. Bill, you said the S-1 has not been declared effective, right?

Correct.

Okay, and don't know if you can provide any color? It sounded like not, but in terms of any sort of instrument you're targeting are we thinking more potentially common, preferred? I don't know if there's any sort of guidance you can give there in terms of amount we're looking? Anything you can comment there in terms of--?

I really wish we could, and we'd like to be able to talk about it because we think it's exciting, but we can't.

Got you.

Hopefully, we'll get with you soon and talk about that.

Sure. And then, finally, just a procedural, in terms of the [TARP] dividend, we saw the elimination of the cash dividends, is that something that still has to be accrued and accounted for in the P&L going forward on a go-forward basis?

Yes, yes.

Okay, that's a good run rate. Okay, got you. Great, thanks, guys.

Thanks.

(Operator instructions.)

And, at this time, I show no questions.

Thank you very much. We appreciate your attendance and look forward to talking with all soon.

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