Seacoast Banking Corporation of Florida (SBCF) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Seacoast Third Quarter Earnings 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.

Mr.

Hudson, you may begin.

Thank you very much and welcome to Seacoast's Third Quarter 2009 Conference Call.

Before we begin I will direct your attention to the statement at the end of our press release regarding forward statements.

During the call we are going to be discussing issues that constitute a forward looking statement within the meaning of the Securities and Exchange Act and accordingly our comments are intended to be covered within the meaning of Section 27A of the act.

With me today is Jean Strickland, our Bank President and the company's COO, as well as Russ Holland, our Chief Banking Officer and Bill Hahl, our Chief Financial Officer.

We reported a loss this quarter totaling $40.8 million or $1.21 per share including our preferred dividend an accretion applicable to our common shareholders.

The loss resulted from higher loan charge off loan sales during the quarter and a reserve bill, while core earnings, the net interest margin and deposit growth all showed signs of nice improvement.

While we remain disappointed with our results for the quarter given the loss we posted, we also made significant progress on a number of objectives that will ultimately lead us back to both improvements in the level of problem assets and positive earnings.

We believe we are now at or very close to an inflection point or peaking in the level of problem assets and in the level of loan charge offs.

As you know, we have been relentlessly focused on bringing down our credit risk profile over the past two years and this quarter we achieved a milestone by essentially completing our goal to eliminate our residential construction and development exposure.

This has been the source of our worst loan experience over the past two years.

We cut this portfolio in half this past quarter and at this point the category has been reduced to around 3% of loans, and the balance is being carried at an anticipated liquidation value.

Losses and non-performers coming out of this portfolio were down significantly as we said would happen last quarter.

Losses coming out of this portfolio are now expected to be quite modest and the level of non-performing loans will continue to fall as we move forward from here.

We have been pursuing a targeted liquidation plan for some time now and we have moved this quarter ahead of our liquidation schedule for the first time in this cycle.

And moreover we have positioned things to now achieve even more rapid progress, we think, in the next quarter.

At the end of this quarter our overall construction and development loan exposure fell below the 100% of regulatory capital threshold and our total commercial real estate exposure, including construction and loans, fell below 300% of our regulatory capital, the regulatory capital threshold.

This means we are no longer considered under regulatory guidance to have high concentrations in commercial real estate.

Unfortunately we do have a high level of non-performing assets, however, and so we are not suggesting that we now present a profile of low credit risk.

But what I am suggesting is that we have moved significantly to reduce concentrations.

And we have moved far deeper into the recognition of our problems than many have.

And this is the key in the current environment to making progress for the future.

For over a year now we have maintained a very intensive focus on our commercial real estate portfolio given the general stress we have seen in our markets.

Our team continuously reviews these credits to ensure that at all times we have properly recognized risk levels.

We perform continuous reviews using current financial information and at the end of this quarter our internal data would suggest all but a very small number of these reviews are up to date.

So we are very current in our understanding of our CRE portfolio.

We also this quarter following our capital raise took a deeper look at our internally classified CRE loans and kept its cash flows against our current outlook and the borrower's current condition and borrower/financial trends and moved a number of performing credits to a non-performing status.

These would represent borrowers that we believe will begin to exhibit deterioration as we move into the final stages of this downturn.

You can see this in our detailed table that reviews overall non-performing loans that is contained in our press release.

Total non-performing loans grew around $27 million over the prior quarter.

And this included a $30 million reduction in residential construction non-performers.

The largest growth came from the CRE category which grew $33 million and the commercial construction and development category which grew by $19 million.

We also charged down a number of loans in this portfolio and anticipate that many of these loans will either be restructured as trouble debt restructures in the next quarter or two or considered for sale in the next few quarters.

Taking this action has positioned us to more aggressively pursue both loss mitigation and loan sale strategies which together with the improvements in our residential acquisition and development portfolio will begin to move the ball back in the other direction as I stated earlier in my comments.

Now I am going to turn the call over to Bill for a few more comments on the quarter.

Bill?

Thanks Denny.

I will be referring to a couple of slides that we posted out on our website this morning.

Much like last quarter there is more to our earnings story than the reported loss.

And there are some reasons to be encouraged by the core business trends that have recently emerged and the prospect of an improving economy.

Specifically the expanded net interest margin and lower core operating expenses give us reason to be tentatively optimistic about the direction that the operating environment is headed and what it might mean for our future pre-tax pre-provision earnings.

As is typical in a recession, overall revenue has remained soft with relatively stable net interest income but lower non-interest income.

Net interest income was up modestly the last several quarters as net interest margin expanded due to an increase in core deposits as well as an improved mix that enables the reduction of higher cost sources of funding.

Disciplined expense management was also evident across controllable operating expenses again this quarter as we remained focused on continually covering efficiency improvement opportunities.

However expenses related to other real estate, FDIC insurance and credit and collection costs have remained high.

I believe we are doing a good job here controlling what we can control and taking advantage of opportunities that are out there even in this current environment.

Now turning to slide 6, non interest expenses, which are controllable, have declined by 11.1% when compared to the third quarter last year and by 1.4% compared to last quarter.

On this slide we have adjusted out some one-time items and credit costs that will decline as the level of non-performing assets decrease and the economy improves as expected over the next several quarters.

Now what we want you to understand is that sequential controllable expenses are declining but are being impacted by some one-time items in higher credit costs.

Overall core expense management continues to be strong as we move through this period of time.

Turning to slide 4, I would like to take a moment to review our capital position.

Slide 4 illustrates our improved capital position as a result of the successful common stock offering in the third quarter.

We maintain a solid capital level with the estimated Tier 1 ratio of 14.9% at quarter end.

Tangible common equity increased from 4.66% last quarter to 6.14%, and total risk-based capital ratio increased 13.4% to 16.2%.

An additional $13.5 million of equity will be added in the fourth quarter and help maintain these solid capital ratios at year end.

Moving on to deposits.

The pace of the growth of the deposits, excluding brokerage CDs, increased nicely during the quarter.

This is normally a seasonably week quarter for deposit growth.

Please note that like last quarter, this quarter's growth continued in core customer accounts which improved market share and services for households.

In addition we continue to manage our CD pricing carefully due to our strong liquidity position.

Now I will take a minute to cover the margin on slide 7.

The margin expanded again this quarter, increasing by a better than expected 9 basis points to 3.74%.

Lower deposit pricing and improved funding mix drove the expansion with increased core deposits facilitating a reduction in the higher cost broker deposits.

While we were expecting margin expansion, we were presently surprised by the level.

During the quarter we began shifting some of our CD product offerings to longer maturities as a hedge against future interest rate increases.

Interest rates are forecast to begin to rise when the Fed removes liquidity and other measures now utilized to jump start our economy.

Our view of the margin risks and opportunities in the fourth quarter is largely unchanged from last quarter.

Loan and deposit pricing will provide the primary opportunities for any margin expansion.

The primary risks include the possibility that loan balances will continue to decline and non-performing loan growth will be greater than expected.

In addition, seasonal funding growth, both deposits and repurchase agreements, are likely to be invested at low spreads improving that interest income but lowering the margin.

Adding the plusses and minuses, our guidance on future net interest margin are mostly largely unchanged from last quarter.

We believe the margin will remain relatively stable in the short run with modest additional expansion possible.

I really do want to emphasize the words "relatively stable" and "modest" in the fourth quarter outlook as the risk and opportunity parity balance at this time.

Let's move on to non-interest income.

Performance in most non-interest income categories was acceptable given the normal seasonal weakness versus the second quarter.

However, overall non-interest income continues to be soft in the investment related areas such as trust income and retail brokerage services.

Service charges on deposit accounts had a nice linked quarter growth of 10.9% as a result of over a year of improved core deposit customer relationship growth and the increased services for households and better account retention results.

In a recent market share report as of June 30, 2009, the company's (inaudible) market, it was reported that the company is now in second position in that very important market where 74% of the company's overall total deposits are maintained.

In summary, capital and liquidity positions are strong and have improved.

Net interest margin expanded.

And deposit growth improved and mix was further enhanced.

And deposit fee areas increased nicely.

These are the components of our results for the quarter which gives us encouragement as we move into the fourth quarter and into 2010.

Now with that I will turn the call back to Denny.

Thanks Bill.

As Bill didn't mention anything about our deferred tax asset, I think I will make a comment on that.

You can see that during the quarter we did not book a tax benefit.

Importantly we also did not recapture and expense any prior period of tax benefits either.

So we have been very careful and we have been carefully managing or conservatively managing our DTA.

And at an abundance of caution have not placed any reliance on our forecasted future taxable earnings projections.

And we have done this for fear that doing so could create surprises if our projections are later challenged.

And you have seen some of those surprises this quarter with a number of other issuers in the southeast.

We anticipate we will however begin to place greater reliance on our forward earnings estimates as we begin to see improvements in our credit trends which could result in a recovery of our DTA valuation allowance and a realization of future tax benefits.

Turning to local economic conditions, the real estate residential housing market continues to show signs of stabilization here in South Florida.

Inventories for existing homes continues to decline in most of our markets; it currently stands at a 7 to 8 month supply level, down from as high as 30 months at the peak.

Inventory of new homes has come down to an almost negligible level at this point.

Foreclosures continue to be a problem, but trends have stopped growing and will simply maintain or remain at a high level, I think, for awhile.

But affordability has returned as we said last quarter due to lower home prices and the foreclosures are being absorbed much better than I would have imagined.

Unemployment remains high throughout our markets and an increase over the last several quarters, although the rate of growth is now slowing.

So as I said last quarter, it is clear to me that the residential asset values are beginning to stabilize.

We continue to get reports of real buyer competition for selective properties, which is encouraging.

But we do, however, face the broader effects of the severe recession, including the high unemployment rate.

And this will continue to pose a challenge for us and everybody as we conclude 2009.

As we said in our last call, our focus for the year was going to be growing our core deposit franchise, which we have done, and growing our residential mortgage lending production in response to the favorable rate environment, which we have done.

We have seen tremendous progress this quarter in both of these areas, and this combined with the expense reductions that Bill spoke of continue to help us build core earnings momentum as it has all year, which will be important as we continue to work through our remaining credit issues, particularly in the next quarter.

Now we would be happy to pause and take a few questions.

We will now begin the question and answer session.

(Operator Instructions).

And our first question comes from Joe Fenech from Sandler O'Neill, please go ahead.

Good morning guys.

Hey Joe.

Denny, just to clarify on the DTA in terms of -- what is the total DTA and then what is the total allowance that you have established against that?

The total is around $22 million and we have a $5 million allowance.

Let me back up, into the second quarter we had a net DTA of $17 million, $22 million gross, $5 million valuation allowance.

We added about $15.7 million to both numbers in the quarter.

Okay, and so thinking about the tax line going forward here, is it fair to say that you are not going to be seeing a tax benefit?

Well as Denny mentioned, we do have forecast of future taxable earnings.

We are waiting to be more comfortable about those earnings estimates and projections.

So we are being more conservative right now in terms of not placing any reliance on those forecast and future earnings.

But as our provisioning begins to be more predictable and we believe we will emerge after this quarter, we will see future tax benefits being recorded.

And of course once we can identify, sort of rely on that, and we have sufficient reliance, this $15.7 million that we added to the valuation allowance would also reverse out.

Okay.

So the valuation allowance, the DTA is $37.7 million and the valuation allowance against it at the end of the quarter was $20.7 million.

So it stayed stable at $17 million, at a net $17 million.

Okay, and then Denny can you comment at all as to whether I guess the regulators as a part of your formal agreement had imposed any type of deadline for you to get below the concentration thresholds for commercial real estate and construction or would it be fair to say that the decision to really try and get below the threshold this quarter was entirely yours and more function of just you got the capital in the door and you are deciding on your own to really take a good whack at some of these problem assets?

The latter.

The latter.

They have had no -- the agreement simply states that thou shall try to have appropriate controls around concentration and has no targets or anything like that.

So it was entirely our thought that we have been on this tear to bring down on our concentrations that are particular in the residential development area.

And you are right -- we have strengthened our capital significantly this quarter and we move forward aggressively.

And Jean?

The threshold is our guidance, not the [end date].

And they are not mandates in the guidance; it is just a guidance.

And I just thought it was a key accomplishment this quarter to have here in the middle of a pretty severe recession actually brought those, having brought those numbers down to a level below those thresholds expressed in the 05/06 guidance.

Okay.

And then two more here.

Denny, you said in the release that you expect charge offs to moderate in the fourth quarter and then more so going forward after that.

I know you had the big spike this quarter, the 10% from just under 4% in the second quarter.

I know it might be difficult to say for sure, but would you say that we should look for a number in the fourth quarter closer to the 10% or closer to the 4%?

In other words, do you get back to that 4% range, or might it even be a number lower than that from what you can see now?

Any kind of range you can give us would be helpful there.

If you put a gun to my head, because that is really getting speculative, but I would say it is, worst case, going to be in the middle.

In the middle of that range?

Middle of that range, and in best case a little below the low end of the range.

We will have undoubtedly, and the reason I say that is we have more liquidation that we are pursuing right now.

To be frank, kind of some of the final liquidation we see out there -- we did a lot of this quarter, we will do a little more next quarter.

And we at that point have made substantially all the progress we set out to make.

I guess that is fair to say.

So we have had a plan in place, to some degree it has been an evolving plan, over the past two years.

And it's overall, an overriding objective was to recognize the severe conditions in our market that we saw coming; unfortunately we didn't see it two years prior to that, but once we recognized it we got on board and developed a plan to bring down these exposures.

And for the first time in this cycle we are now ahead of that plan and actually fairly substantially ahead of that plan.

And have made tremendous progress and will kind of complete that work I think in the next quarter.

Okay, so it would be fair to say, I guess, when thinking about provisioning levels, and again I know this speculative, but since you do feel like you are at the tail end that provisioning levels should more closely match charge offs rather than us seeing more significant reserve build ahead?

That's hard to say.

As we move forward, but that would be our objective, yes.

Okay, and then last question --

And just to be clear, as we said in the release, we anticipate the provisioning will be down substantially in the quarter, but it will have some provisioning.

And then we believe it will start to really begin to moderate as we approach 2010.

And this is more of a goal as opposed to a prediction, but our goal is to position ourselves to operate in a much more comfortable position, let's say, in 2010.

Okay, I appreciate the color on that.

And then just lastly Denny, we saw the 8-K the other day which seemed to cement the transaction with CapGen, are we right to assume that that transaction is now completely behind you and that you have the $14 million or so in additional capital?

We have not closed yet, Joe, but we filed a definitive agreement, the stock purchase agreement as you saw on the 8-K, and we are awaiting final Fed approval which is required for that investment, not of us -- it is Fed approval of the private equity firm, CapGen, and we anticipate that to occur momentarily.

We anticipate that closing during fourth quarter, yes.

Thanks you guys.

Our next question comes from Christopher Marinac from FIG Partners, please go ahead.

Hey, it is Chris Marinac at FIG Partners; how are you Denny?

Hey Chris.

I wanted to ask about the difference between your non-performers including the restructured credits here at the end of September and sort of what your classified loans look like, just for directionally would there be a smaller gap now between classifieds and non-performers given some of your judgments this quarter?

No question.

In fact, it is a fairly substantial closure of our gap.

We are in the later stages of that whole migration thing.

And this Chris, and I don't know, I guess it is somewhat dangerous what we said this quarter, but this was the first time in the cycle we have begun to talk about this, about the migration beginning to reach that inflection point.

And we think we were very aggressive this quarter in an effort to be able to demonstrate that as we go forward.

So we will see.

But again, not something I've said yet, until now.

But Denny is there a way to sort of dissect the quarter in terms of inflows and outflows on the non-accrual side, particularly if we were going to exclude some of the CRE credits that you mentioned?

Well, I guess to give you color on that, we had significant inflow this quarter into MPAs.

But it was not significant inflow into [cited] and classifieds.

We are seeing and have been seeing some stability there.

but we did see significant inflow into the MPAs and the other news headline associated with that is that a lot of the inflow came in the CRE area as you can see.

And it was offset by outflows, pretty substantial outflows, in the residential construction/development area.

So the good news is we have essentially completed the liquidation work on the residential side, and the bad news is we have these inflows on the CRE.

What we are trying to say is that these were largely, and I will say a good chunk of the inflow and for the CREs, were if not 75% of them or so were performing loans.

But they are performing loans that we have concerns about and we are actively engaged with various borrowers in discussing various options with them.

The good news about this asset class is in every case there are cash flows that are there.

And so it is a very, very different animal than what we have lived through over the last two years.

And so we are working with borrowers to achieve trouble debt restructures and for that sort of thing.

And for two quarters, Chris, we have been saying that we are going to see an increase in trouble debt restructures.

And I would predict we will see a more substantial increase in trouble debt restructures next quarter as a result of work that we have ongoing right now.

We are also, as an alternative, looking and we don't have any loans held for sale in this category at this point, so we are not that far along, but we have some work underway in terms of loan sales and we are kind of competing, TDR direction against loan sales in some cases to determine what we think is the best outcome for us.

And that is going to all get concluded, a chunk of it, probably in the coming quarter and perhaps a small amount of it in the following quarter.

And when you look at that and you look at the cited and classified and you look at the trends, our conclusion is that we think there is a good chance that we are probably at the high water mark for this cycle.

Great Denny.

And then just one quick question for Bill.

Bill, on the other expenses closure on the slides, the credit costs, the 960 and 886 last quarter, are those all maintenance related costs or are some of those included from some write downs and losses in there?

Mostly legal and taxes, delinquent taxes, that type of -- and then some management expenses.

We have a few OREO properties.

But most of it is delinquent taxes and legal costs.

Okay, very good.

Thank you very much guys.

Thank you Chris.

Our next question comes from Mac Hodgson from SunTrust Robinson.

Please go ahead.

Hey, good morning.

Good morning.

What was the total amount of loan sales in the quarter?

It was not a huge number.

It was $25 million, something like that.

And what were the charge offs related to that?

Well, they were pretty big in this quarter because it was some nasty stuff that we sold, and it was $17 million?

No, a little less than that.

$13 million to $15 million of that was included in charge offs.

Okay, so $25 million was the book balance before the charge off?

You got it.

And these were assets that we were pursuing workouts on and we just ultimately concluded we were going to blow them out of here.

I guess they were all residential land development construction?

Yes, they were.

Pretty much.

And then on the commercial real estate review that you all did, can you give anymore color on kind of which property types you saw a weakness, and what were the types of weaknesses that you saw and how you plan to restructure around that?

Sure, well first of all we did not conduct a new review of CRE.

We have been intensely, first of all we always review the entire portfolio and so forth, but we have been intensely reviewing the CRE portfolio for well over a year; very concerned about the latent effects of the real estate crash that has occurred in Florida and how that would ultimately affect our CRE exposures and the likes.

We were particularly concerned about our commercial construction exposure, for example, and so we have been expending considerable effort over the past 12 to 18 months on that entire portfolio.

We saw this quarter, and last quarter, and particularly this quarter that the in migration of internally identified problems or potential problems began to moderate.

And so at the end of this quarter we kind of reoriented our attack on that portfolio and determined that we wanted to more aggressively pursue liquidation and pursue trouble debt restructures.

And in particular we wanted to proactively reach out and identify, in particular, a number of larger, generally large credits in the portfolio that were experiencing stress but were continuing to perform [late] in accordance with payments.

They may be in some default, non-payment type default.

So we tackled those this quarter and we got those behind us.

And we took some marks in some cases with very large charge offs and it kind of frees us up now to kind of bring that to a conclusion in the next quarter.

And color on what they are?

I wouldn't particularly say there is a particular area of focus; it is just kind of a general weakness generally throughout that category and unfortunately most of it is performing very well and is in good shape.

But we have identified what we think are the areas of greatest concern and have proactively gone forward and addressed them this quarter.

Okay, so it sounds like I think you said the in migration in the commercial real estate segment and the potential problem has slowed, but you just decided to take a more aggressive stance with problems that are already identified?

That is precisely correct.

And as a result of that there was a significant inflow of non-performing loans this quarter.

And of course they flow out of what was our internally identified cited and classified [and the like].

And so when I was talking about some stability, I'm talking about the cited and classifieds.

But you saw some migration from that end to non-performers this quarter that was significant.

And it might help just to explain that we have an annual review process that at a minimum the credits are reviewed annually in the commercial real estate portfolio.

And as a result of getting updated financial information, although the loans were performing, we identified the stress with the borrower and so we dealt with it very aggressively.

Right.

Great.

One last question.

While you still have obviously an elevated level in GA, you mentioned potentially getting into the high water mark here.

And I know you have raised capital as well.

And with that in mind, what is the company's willingness and ability to do an assisted transaction in the near term?

Well, that's something we look at very carefully.

It is a challenge for us in many ways but all I can say is it is something that we look at very carefully.

And I think as -- I guess it is sufficed to say that it is important and imperative for us to get behind us some of these issues that we have been working on getting behind us for a long period of time here, over the last year in particular has been very, very brutal for us and for our shareholders.

But we are gaining on it and we are beginning to see some light at the end of the tunnel I would say at this point.

And because we can see that we think it is imperative for us to get this behind us sooner rather than later because you are absolutely right -- the opportunities out ahead of us are significant, particularly with regards to assisted transactions.

And if we can take advantage of those, having ourselves in a stronger position to take advantage of those is going to serve all shareholders very well as we look at over the next six months.

Given the kind of agreement you all are, with the regulators, is there an understanding that you would be able to bid on a transaction?

Well, we think under certain circumstances that could happen, and under other circumstances that would be very difficult.

But sufficed to say that as we continue to focus on the things we have been talking about on this call, all of which are designed to improve our performance out a quarter or so, that is important for us.

And so that is what we are doing and we will continue to pursue that.

So to answer your question, under certain circumstances we probably could participate and under others we probably couldn't.

Great.

Appreciate it.

Yes.

Our next question comes from Dan Bandi from Integrity Asset Management.

Please go ahead.

Great.

Thank you.

I have really kind of two follow-up questions or clarifications on a couple of your earlier answers.

One was on the deferred tax asset -- the $17 million net.

Now if I understand that right, is that $17 million net then included in your GAAP capital?

Yes.

And what about in your regulatory capital?

We have another haircut on a regulatory basis.

It's more like about $14 million I think.

The fact that we did not book a tax benefit this quarter had no impact on our regular capital ratios because of that limitation.

So we are under the regulatory capital limitations we will continue to be limited in counting any of the deferred tax.

Okay, and from a GAAP basis I'm just curious on the conversations that you had with your auditors and the justification to keep the $17 million, again relative and I think you had mentioned, relative to some of the other folks who have ended up reversing all of their deferred tax assets.

Some having quarters like yours and maybe being more aggressive, having larger than expected losses resulting in auditors kind of forcing them to take a reserve against the whole asset.

Just curious the conversations you are having there and the confidence that you have that the $17 million is justifiable.

There's always a risk on a deferred tax asset, its realized ability is based on two things.

You can support it with future tax strategies, and that is what that $17 million is supported by.

And so as long as those tax strategies can be executed in the carry forward period of 20 years, that supports the realized ability of those.

On the future earnings, the only thing I can say is, and not knowing the other folks and what happened, we have not placed reliance on, as I stated earlier, on future taxable earnings forecast for this point because of the uncertain economic conditions that have been around.

It appears to me that the difference between what we have done and what others have done in the past anyway is that they were supporting their DTAs which is the second way you can support them is by forecast of future taxable earnings; and given the fact that they have had more weakness and losses that they no longer could rely on that for support.

And that is why they had to reverse theirs.

They weren't supporting theirs based on tax planning strategies.

And can you give just a flavor for the types of strategies you are talking about?

Well it is as simple as our investment portfolio has unrealized gains, that would be one strategy.

And we have a number of others, but it would be essentially --

Built in gains --

In assets that we have basic, right.

And I also just wanted to make sure that I understood that when you were talking with Joe from Sandler about kind of the provision going forward and I think you had mentioned talking about that some of the [rain] is going to depend on how successful you are with some of the dispositions of assets going forward in the next quarter.

And if you are more successful do I understand correctly that a provision would be higher?

Yes.

That would take us to the higher end of the discussion, the color that we gave.

And I'm not trying to put a forecast out there, but I am just curious as to, maybe as you are looking at those assets that you are looking to dispose, and if you could give us a feel for kind the marks that are in the reserve that are already against them and why you think then if there would be say a charge off relative to unwinding the asset or selling it or however you would dispose of it, why wouldn't that asset be marked to that level today?

That's a difficult question to answer because the market for those assets is volatile and varies widely.

And so we carry our assets that are problems at the very least at a value that is supported by the cash flows associated with the asset, for example, or other more subjective appraisal work that is done independent of us and reviewed by us by a professional in-house [MIA] appraiser who often takes marks against those appraisals.

Actually recently we haven't, but we will say over the last year we have taken marks.

So we try to come up with a reasonable basis that we can rely upon for valuing these assets and it is resulting in a very substantial write-down in them.

Our MPAs I think have an average mark taken overall, which is a big portfolio, around 34%, 35%, maybe a little higher than that right now.

But specific assets in that portfolio, some of them would be marked down much more substantially than that.

But the question you asked is how do you reconcile that out with the "market value", external loan sale, well it is not a very efficient market and we will market things that two quarters ago get ridiculous prices and maybe the same assets we market today and we get what we think is an acceptable price.

So it is really hard to kind of judge where that number is.

Could you maybe give just some flavor on the loan sales that you talked about for this quarter, the $20 million to $25 million where you took the $13 million to $15 million in charge offs and just sort of how the valuation was so disparate on that and then maybe compare those assets to the ones that you are seeking to dispose of going forward?

Those were the aggregate write-downs on those assets that we sold.

But it is impossible to answer that question.

I will tell you I am aware of an asset we are selling today that we going to book a gain on because we have written it down further than we are going to sell it in the fourth quarter -- it's not a big number, by the way, but a pretty decent gain.

And on another -- they are all over the board.

That's all I can say.

One of the assets that we sold last quarter, a substantial part of that $25 million was probably a very significant write-down.

But it was a very unusual asset.

And I just can't go into all the details.

If I spent an hour with you though you would kind of see it and understand it.

I guess ultimately what I am trying to get to is how do we as investors get a sense of confidence that what you are marked at is sort of some type of conservative or appropriate level and then should you be more successful as you say in terms of moving some of these out that success doesn't necessarily always equal pain?

I think to answer that question under accounting rules and under regulatory rules there are pretty darn straight-forward processes that we follow to support the carrying value of the assets that we hold.

And there is great scrutiny on the part of us internally first of all over that work and our external accountants as well who review our work and are called upon to challenge us if they believe we do not have adequate support for what our carrying value is.

The problem is, we are in a volatile environment that is, and the market for these assets, these are whole loan assets and every one of them is unique in the CRE portfolio, if you can appreciate that, for example.

And even the residential assets are somewhat unique.

And so there is no market out there for those assets that you could rely upon in terms of value.

So all we do is the best job that we can and we have ample support, I will tell you that, in terms of the confidence for why we came up with values for particular assets.

But we follow all of the impairment rules under FAS 114 that require us to do that.

So we follow GAAP and give great confidence that we are carrying assets at what we believe are proper GAAP values.

I appreciate that color.

Thanks guys.

Yep.

Our next question comes from Jim Agah from Millennium Partners.

Please go ahead.

Hi guys, good morning; thanks for taking the questions.

Mac was asking you about your ability or your inability to do assisted transactions, and Denny I think you said under certain circumstances you believe you still would be able to.

What does that mean?

Do certain circumstances mean with respect to certain institutions, or what are you alluding to there?

Well, it could be that or it could be the condition of the institution.

It has to do with a myriad of things -- the size versus of our size.

It also could have to do with the nature of the acquisition.

Anything from whole bank to deposit only.

So it just depends.

And I'm just getting way to speculative, I guess, weighed into this discussion.

Okay, let me ask about what Chris Marinac was alluding to and that was the non-interest expense and how much it has been impacted by OREO and other types of asset workout costs.

What do you guys estimate, and you specifically mentioned some of those expenses in the quarter, but what do you estimate the core run rate of expenses to be once you work through the OREO?

Well I think that the slide that we did post, slide 6, that was the intent to work it down to, it's about $16.3 million a quarter is the run-rate.

Controllable.

Well you would have to add back the FDIC expense.

That is going to probably be elevated.

So it is about $17.3 million a quarter.

I put the FDIC expense in there because it was jumping around so much.

Okay, so wait --

So it is about $17.4.

Versus $20.5 million reported, right?

Right.

Okay, so it is about $3 million lower.

Right.

Okay, so your in verbiage, in your text, you say income before taxes in the provision for loan loss for the third quarter of '09 totaled approximately $4.6 million, right?

Right.

So $4.6 million and then you add back $3 million gets you to $7.6 million and maybe we can take away the $1 million of Securities gain.

Right.

So you are at about a $6 million core quarterly run rate for pre-tax, pre-provision?

Right.

Okay, when we get through.

Okay, fine.

So that's good.

So let's cheap on that.

Let me ask about, I think the gentleman before me, his questions are regarding how much of a loss do you guys expect to take on your ballooning portfolio of non-performers, and that is what I am trying to sort of ascertain as well.

When a couple of the analysts -- excuse me one second -- a couple of the analysts that follow stock have estimated certain losses over the cycle for not just Seacoast but a number of other banks, right?

The numbers that I have seen are around $250 million.

If you take a look at what you have charged off, including this quarter's high level of charge offs, you are at about $180 million cumulative since the beginning of 2008, which suggests you are about 70% through, and you are one of the higher percentages.

So that would leave about $80 million left of over the cycle losses with your portfolio, right?

And if you just married that up to your $153 million of non-accruals --

Yep.

That would suggest that you have a fair amount of cushion against that $153 million portfolio.

What do you guys think the inherent losses are in that portfolio?

Gee, I don't know.

A lot less than that I would say.

Well you said you already mark it down 35% on average, right?

So the gross amount of those MPAs is 35% higher right?

Yep.

Is that for the current as well as the non-current?

Yes.

Yes.

In those two categories?

Yes, it includes both.

Okay.

Okay.

So the gross number is more like, it's about $220 million, right?

Okay, I don't have my calculator, but yes, that's about it.

Okay, and if you had $80 million of further sort of like burning through credit that would be a 40% loss on those outstanding balances which seems, that seems high.

Yes, it does.

So when you guys raise capital, I'm going to tie that back to the recent capital raise.

And not just for the public but for CapGen as well, when you guys raised capital you came out with your own sort of stress test on analysis, right?

Is there something that has changed over the last 60 or 90 days, I can't even remember when the deal was, but is there something that has changed with respect to the low quality or your view of the market and/or realization rates and values which makes you less comfortable with the sort of top end of loss estimates?

No, nothing has changed in any of that that you described.

The only thing that has changed is we have accelerated our efforts.

The top end was always perceived by us to be a very stress scenario which we still do not expect to achieve.

Which you still do not expect to achieve?

Correct.

Even with these accelerated efforts?

Correct.

And what was the number that you guys used for your top end?

I can't go back and get to it now because --

It was $167 million of additional from that point, a quarter old now.

$167 million, but that would have meant what?

Is that Bill speaking?

That was going forward.

Going forward from a large --

That wasn't the large cycle.

It was the new loss.

Cycle number was close to the $250 million.

Exactly.

So that would have been about $250 million.

And when you started this whole -- when the cycle stated -- not you -- but when the cycle started you were at about $2 billion in loans, right?

I think so.

Yes, that's correct.

Good, other than that you guys did a pretty good job growing deposits in the quarter.

Is there anything to suggest that -- and you cyclically had or seasonally had down 3Q deposit growth.

Right.

Is there any sort of tactics or strategies or promotions that led to the good account growth and the good deposit growth?

We don't spend a lot of time talking about it because we have to spend a lot of time talking about the problems here.

But 50% of our energy, easily, is devoted to growing the core deposit base.

And it resulted, we have seen a fairly massive turnaround in new households and in some of the metrics associated with those new households over the last twelve months.

And that results from work, quite frankly, that we started back in '07 to kind of re-energize our entire retail system.

We are now morphing that success into small business and we are focusing on small business opportunities, cash rich small business opportunities which tend to not come with a lot of loan opportunities.

But in this environment that is where we are focused here in these markets and that is just gearing up right now.

So we see continued momentum on the retail deposit growth strategy and plugging in some improvement on the small business as we go forward over the next year or so.

It's been a huge thing.

It has also been hidden to some degree by some deposit losses we have had because the recession came a little late in our Orlando region and we saw some small business balances decline pretty dramatically up there and we had a very high concentration of small business in that market.

That is now behind us and we are now internally seeing the internal deposit rates really start to ratchet up for the whole company.

So we think that is going to be a key positive thing as we go forward.

And as Bill said earlier in his comments, we have backed away in terms of mix from -- we've been doing that for two years now but we are really continuing to back away from some of the higher rate CDs and that sort of thing.

And again, I just remind you, we have essentially no broker CDs or any wholesale funding whatsoever.

And your loan to deposit ratio is down from roughly $100 a year ago to --

Like $80.

$85.

So you are ramping up liquidity, that's good.

One last question for you guys -- it's regarding the commentary on the early stage delinquencies.

I'm trying to find it here.

I think you said it was down in all asset classes except for residential mortgage.

That's right.

And that is plain vanilla, prime, fully underwritten, fully documented residential mortgage portfolio.

And it was up but it was up off an extraordinarily low number, I think it was 70 basis points or, no, 40 basis points last quarter and it is up now to 1.2%, 1.3%.

And is that primarily from unemployment just remaining high?

No, I think we just had an extraordinarily low ratio last quarter.

I think in the 1% range is not a bad number in this environment.

Do you have, I'm waiting on the call report, but do you have the total dollar amount of 30 to 89 day pass dues?

Not in front of us but you will see it momentarily when we get the call report filed.

That comes out when, you guys?

Monday.

Monday.

All right, thanks for your time.

Have a good weekend.

And our next question comes from Jefferson Harralson from KBW.

Please go ahead.

Hey, thanks guys.

Hey there.

I wanted to make sure I just understand the regulatory DTA.

Last quarter I think you had $17 million DTA and a $3 million allowance for $14 million net counting towards the regulatory ratios.

How did those numbers change this quarter?

Not at all.

We didn't do anything with it.

All we did was add the tax benefit, the DTA, and then we added an equal amount, exactly equal amount to the valuation allowance.

Okay, so you have $14 million counting towards regulatory ratios now?

Correct.

Okay, thanks.

On the capital raise, was a (inaudible) exercised on your recent capital raise?

Yes.

Next question is, is there any risk you think to this fourth quarter investment at $2.25 given that the stock is done some from there?

No.

Does the change of strategy at all given the loss of a tax shield and that you are going to have, from whatever model you had before, you are going to have a lower trough tangible book value and a lower trough TCU ratio?

We already took that into consideration when we looked forward at those ratios as we were considering the capital raise.

All right, excellent.

On the commercial real estate performing, commercial real estate that went into the MPAs, is it debt service coverage, is it bad appraisals, or what is the typical thing that is bringing performing loans into the MPAs?

Debt service coverage and appraisals and --

Not bad appraisals, but just values are going down and also companies are experiencing some deterioration in their financial performance.

So as we get the current information we are addressing it.

Being new MPAs or these new commercial real estate loans marked to market this quarter as they went into MPA?

Or do you have to kind of wait on time or appraisals to down mark these to market?

I don't understand the question.

New --

Well, from the transition of the performing CRE loans that were criticized last quarter and now they are an MPA --

Right.

How hard were they marked, if any?

Some were marked substantially I will tell you.

It just depends -- every darn one of them is unique and different and it depends on all of those circumstances.

And I would tell you they were not necessarily placed as criticize assets last quarter.

They may have been criticized for a year, Jefferson, and we have just again continued to monitor them and made a decision to move a substantial number into the MPA category because we think that's where they may be headed.

And on the transition from here to -- you were saying that more TDRs were going to be created.

That would not be from (inaudible) because they are already in an MPA, that would be from new, non-performing?

Both.

Okay.

But mainly out of the MPAs.

Again, we said these were performing loans and so we have placed them on non-accrual for now and we are going to pursue a variety of ways.

We are in the middle of pursuing a variety of issues with some of these guys and there may be some of those that look out of MPAs into TDRs.

And the most typical offer I guess you give these guys would be [faster] maturity and a lower payment in exchange for some collateral, or in this case do you think it is just based on we are going to give them maturity a little bit, we are going to lower your payment and we are not going to ask for more collateral?

Just a general strategy and getting mentioned that a lot of these now are -- there's some cash flow to work with.

So it is matching up the cash flow with payment stability.

So the structure is all generally designed around that.

And the very last one.

Of those that become TDRs, they will definitely be subject to the FAS 114, but I think they are already subject now.

Do you think that once they become TDRs and you change these terms should we expect I guess more write-downs as these MPAs are restructured?

No.

You are right; they are currently subject to the 114.

And so at the moment they become impaired, and they are impaired now, even though they may be performing on technically, we perform an impairment work.

And we have taken some marks and generally speaking if they were to move into TDR they would not need additional marks generally speaking.

Having said that, there may be other smaller loans that we will move directly into TDR and we might take some marks on those.

Right, somebody just was asking for some payment relief, and all we have to do is reduce the rate somewhat.

Those might be performing loans that move into a TDR.

All right.

Hey guys, thanks for taking the questions.

Thank you Jefferson.

Moving along we have Dave Bishop from Stifel Nicolaus.

Please go ahead.

Hey, thanks Denny.

Most of my questions have been answered but in terms of the charge offs this quarter, I think you mentioned $13 million to $15 million from the loan sales there, of the remainder, was the bulk of that related to the commercial real estate write-downs?

Or maybe you could sort of break out the remainder of this as a charge off?

I would say the bulk of it came from CRE which shows you the seriousness with which we have attached the problem.

Gotcha.

And just a follow-up in terms of that portfolio, just looking at some of the schedules you provide there.

On the loan detail schedule it looks like on the commercial side, the retail trade, on the construction land development declined about $22 million or so, like adjustment on the permanent commercial real estate too.

Did that just go permanent?

Generally speaking yes, and our policy for moving it into permanent Russ is?

The property need to have obviously been completed and the tenants in place to support an amortizing loan at the level we move into be permanent status.

So in other words they don't move out of construction into the CRE portfolio until they are supported with proper cash flow.

When you get tenants in place.

Right, with tenants in place.

We have some stress in that retail category for sure, but we are not seeing massive problems there at this point.

Great, thank you.

And our next question comes from Ken Eckersley from Sandler O'Neill.

Please go ahead.

Good morning guys.

Ken Puglisi .

Yeah, close.

Most of my questions have already been answered.

I just have two others.

The margin improved by 9 bits during the quarter, but I assume you had some significant interest accrual reversal given that you moved a lot of loans into non-accrual.

And I'm wondering how much those reversals might have impacted the margin?

We actually didn't because they were current.

Okay.

A substantial portion of the loans we moved in were current.

So we didn't have that problem.

We had some but it wasn't as large as you might think.

So there was some impact.

These are better loans that we are now starting to charge off.

The only other question I had was the reserve.

How much of the current loan loss reserve are specific reserves?

How much of the loan loss reserve are specific reserves?

We haven't -- did we disclose that in the Q?

Not yet we haven't.

That will be in the Q.

And I will tell you it jumps around from quarter to quarter and this quarter --

But generally speaking --

It has not been a huge number.

Yes, it disposable cost basically.

About 10%.

Okay, so most of the reserves that you have there are for the whole loan portfolio rather than for specific MPAs.

Correct.

And in this whole cycle, we didn't have 114 the last time we went through this.

And so the protocol is you charge down the darn balance to really what it is worth the day you realize you have got the problem.

Is that just by the regulators at all Denny?

I have heard from a couple of banks in Florida that the regulators are encouraging them to just write-down loans that they have specific reserves.

Well, no, that is not coming from regulators.

That is just coming from GAAP.

And GAAP says --

Well either way.

You could have a policy, you could put valuation allowance in (inaudible).

There are two ways of doing it.

We have chosen to do it by charge downs.

Right.

All right.

Or tax deductions.

Okay, that's all I had.

And just to reconfirm, CapGen doesn't have an [escape patches] given that stock has got to move up 50% just to be --

Right, no they don't.

There are no contingencies.

If you go read the stock purchase agreement that we just filed, there are no contingencies and not even a material adverse events clause.

Okay, thanks guys.

The whole objective that they had was to participate in the offering.

And that is when they made their purchase decision and that is the price [they'll] pay.

Okay, thank you.

Our next question comes from Michael Rose from Raymond James.

Please go ahead.

Good morning guys.

Good morning.

Just going back to the FDIC assisted transaction discussion, let's just say there was an institution that was roughly your size, do you think you, (a) would have the interest in taking something that large on, and (b), if so, do you think you have enough capital at this point or would you have to raise more?

And what role potentially would CapGen play in that?

I really think we are getting way too speculative, and there are some of those animals floating around out there and I'm hesitant to really dive into the pool at this point because I just don't want to, I just think we are getting way too speculative.

We really don't want to talk about those kinds of things.

Generally speaking something that large would potentially require some capital.

And we made clear during the offering that CapGen's appetite is larger than their current investment.

But I know there are lots of other folks that participated in the offering on the public side that have an increased appetite if it is for a good reason.

And if we had some reason to do something like that we would be talking to a lot of people about it.

But there are no present plans; there are no present deals on the table.

And we have no intention of taking any further dilution.

And I guess that is all I will say about that.

We just don't have anything currently to talk about and if had to issue capital it would be for a good reason.

And for god's sakes I would hope it wouldn't be at this price levels.

Fair enough.

And just going back onto the loan sale question earlier, how do you think that is going to play out over the next quarter or two particular as the pace of bank failures start to ramp up and there is more distressed properties and inventory hitting the market.

Any color there would be helpful.

Well now you have hit on why we have been so relentless in our focus on liquidating over the last year or year and a half.

We believe that the level of assets being marketed are going to increase substantially as we close in on the final stages of the cycle.

And that is probably not a good thing.

We already have evidence of assets we have sold 6, 7 months ago that are clearly not worth what we sold them for 6, 7 months ago.

Having said that, certain parts of the asset sale market seem to be improving, for example the residential part, residential homes have improved considerably over the last six months and so we are on top of that.

We understand what those markets look like and they are very volatile.

They will remain volatile.

And yes, we think the level of inventory or available assets are going to increase and the market is going to get potentially bigger.

Russ, you do it all day long.

The only other comment I have is there still is a lot of liquidity in the loan purchase market, especially on the residential side, and the product is still not at the level that is satisfying all of the demand, especially for fully underwritten first mortgage products like we have.

Okay, so what gives you confidence that you have taken the appropriate marks on the property that you are holding at current that play out?

Well, we have sort of talked about that a couple of times on the call, and all I can say is we have done the best job we can.

And the only thing we are certain of is probably not right.

We are doing the best job we can and we think it is probably in the ballpark.

Fair enough.

I appreciate the color.

And we have a question from Charles [Houghton]; he is a private investor.

Please go ahead.

Hello.

Hello.

I've been an investor in your stock through my company [USEA] for some time.

Number 1, on the sale of the private August 19 of 29 million of shares of stock, why didn't you put out any notice to the private investors that I could buy more shares in that offering?

Well, I appreciate the comment.

We are required to file all of that stuff publicly and it is in the public domain so every private investor has the opportunity to participate.

I'm sorry you didn't know about it.

And probably a good thing because you ought to be buying it today.

Okay, does your company have a -- since I hold the stock in [street] name only, in the future how can I find out if anything -- I have to go to the computer all the time to find out anything that happens with your company like new stock offerings?

Yes, I'm afraid that is basically right.

But pick up the phone and call me if you have a question.

I'd be glad to talk to you.

And I really mean it.

It was actually a good thing that you missed it because you can guy the shares today for less than we sold them.

Right.

That's true.

My final question is -- hello?

Yes.

One more fast question.

Is it too early to ask at what probable date you may resume paying dividends?

I know it is contingent upon earnings.

And then you have the $50 million that you obtained from the US Treasury which I believe you informed the public that you were prevented from paying dividends?

Right, well you answered the question.

When we return to some profitability we will be able to turn some of the stuff back on and I would say the soonest we do that would probably be late next year or something like that.

But we will have to see.

It is not around the corner but it is in sight.

That's all I would say.

And I appreciate your questions and I really mean it -- feel free to give me a call any time if you have some thoughts.

Okay, thank you very much.

You are welcome.

At this time I show no questions.

Well thank you very much for your attendance today.

We appreciate your support and we look forward to talking with you in January.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.