Seacoast Banking Corporation of Florida (SBCF) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Seacoast fourth-quarter year-end earnings release conference. 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 fourth-quarter 2009 earnings conference call. Before I begin, I'll direct your attention to the statement at the end of our press release concerning forward statements. During the call we will be discussing certain issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and accordingly, our comments are intended to be covered within the meaning of 27a of that act.

With me today is Jean Strickland, our Bank President and Chief Credit Officer; Russ Holland, our Chief Banking Officer; and also Bill Hahl, our Chief Financial Officer.

During last quarter's conference call, I stated that we believed we were at or very close to an inflection point or peaking in the level of problem loans. Well, this quarter we produced the first meaningful decline in the level of nonperforming loans thus far in the cycle.

I also said last quarter that we believed our credit costs, our charge-offs and our provisioning, were at or close to peaking. We had another tough quarter for credit costs, that's for sure, but we believe the charge-offs and loan provisionings will be significantly lower in the first quarter of 2010.

Now if I would like to tell you why we believe this, but before I do, I want to make a few comments about our loss for the quarter. We reported a loss for the quarter totaling $36.1 million. Including preferred stock dividends and accretion, the net loss applicable to common shareholders was $0.69 per share, an improvement over the $1.21 loss we recorded last quarter.

As with last quarter, we did not book any tax benefit this quarter. So our pretax loss fell straight to the bottom line. This is consistent with our statements last quarter in that we do not intend to increase our deferred tax assets until such time as we are comfortable that our credit losses are beginning to moderate and we can place stronger reliance on our forecast of future taxable earnings.

Simply put, we do not want to add to the DTA until we are comfortable that it will not be challenged. Now the tax benefit for the third and fourth quarters of 2009 totaled $29 million.

At some point in the future as our credit losses begin to stabilize and become less volatile, this entire benefit, totaling $29 million, will fall directly to our bottom line which will not only boost earnings for that quarter, but also tangible common equity. Now back to our credit outlook.

During last quarter's conference call, by stated that we were moving ahead of schedule in our targeted problem loan liquidation plan and I said we had positioned ourselves to achieve even more rapid progress in the quarter ahead. I said that we had charged down a number of loans that would either be restructured or considered for sale in the next few quarters.

Well, we achieved better performance than even I expected with the sale of around $68 million in non-performing loans which has helped us reduce the level of non-accrual loans by $56 million during the quarter. The non-accrual loans fell $56 million and stand at $98 million at year-end.

During the quarter, about half of our loan sales were residential home mortgages. We did this as we saw values in this part of the loan sale market improve early in the quarter, as buyers began to sense a bottoming.

This sale reduced our non-performing ratio for this portfolio which includes our home equity loans to a little over 2%. This accounted for a significant portion of our loss for the quarter, but we took advantage of an improvement in market conditions and we got a return and almost total cleanup of our home mortgage portfolio.

During the quarter, we also moved out a few larger balance exposures in the CRE portfolio and continued to write down the various components of the construction and development portfolios. Our relentless drive to muscle down our larger and most problematic exposures was largely completed this quarter.

The larger exposures that remain are in aggregate far less significant than they were two years ago. The number of remaining larger exposures were moved into -- a number of remaining larger exposures were moved into trouble debt restructures this quarter as we worked with borrowers who have experienced cash flow stress but have business plans and cash flow support that make sense to us.

Reducing risk by eliminating, liquidating or restructuring our larger exposures was the goal we achieved for 2009. For this reason, we expect lower loss severity and loss volatility going forward. And as I said earlier, we expect our loan provisioning for the upcoming quarter will be substantially lower. We believe the worst is behind us.

In the coming months, we're moving some of our smaller and less complex workout loans out of our market and into our special assets group to clear the way for more aggressive calling and business development efforts on the part of our market leaders. Our retail market leaders have done a terrific job caring for and building our retail customer franchise in the difficult period we have come through.

We now want to bring renewed focus to our commercial customer franchise. The economy is still very weak, demand for good credit is extraordinarily limited, but the competition is almost non-existent. As we see the economy starting to stabilize, we think the opportunities will be absolutely incredible. Now I will turn the call over to Bill for a few more comments before we open up for a few questions. Bill?

Thanks, Denny. As in the past, we have posted some slides on our website and I'll be referring to a few of those during my comments this morning.

Like last quarter, although we've had a loss, there are certain positive operating trends which I will briefly highlight and then have further additional comments later. The most notable positive in the fourth quarter was improved credit trends from the prior quarter which Denny discussed.

Both non-performing loans and early-stage delinquencies declined. Further deposit growth and the positive mix shift continued but was not significant enough to offset the negative impact from the decline in asset yield and the asset mix shift which caused the margin to decline.

The continued improved deposit metrics reflects favorably on the tremendous effort being put forth by our team to improve client retention and acquisition capabilities for core personal deposits. As a result, we increased customer satisfaction and it showed up again in our deposit numbers in the fourth quarter and for the year.

Overall, fee revenue remained cyclically soft and reduced consumer spending resulted in a climb in many fee related sources of income throughout the year in the fourth quarter. This impacted non-interest income, excluding security gains, in the fourth quarter which declined by 1% compared to the fourth quarter last year.

Results were unchanged compared to the third quarter. Security gains totaled $2.2 million in the fourth quarter as we continue to reposition the portfolio and to take advantage of spread tightening that has occurred since the beginning of the year.

As a result, total revenues were up 8.7% in the fourth quarter compared to the prior year. Disciplined expense management was also evident across controllable operating expenses again this quarter.

However, expenses related to other real estate, FDIC insurance and and credit and collection costs have remained high. I believe we are doing a good job controlling what we can control and taking advantage of opportunities that are out there, even in the current environment.

Now turning to Slide 6, non-interest expense, it all comes down to this for expense management. Notably the economic and regulatory environment are ultimately out of our control. Expenses which are controllable have declined by 9.8% compared to the fourth quarter of last year and by 3% compared to last quarter.

On this slide, we have adjusted out some of the one-time items and credit costs that will decline as the level of non-performing assets decrease and the economy improves. As we have indicated, we believe non-performing assets may have peaked in the third quarter, so we are hopeful that credit costs will follow.

We saw some improvement with lower costs in this area in the fourth quarter. Turning to Slide 4, I have a few comments on our capital position. Side 4 illustrates our capital position throughout 2009 with risk-based measures well above the regulatory minimums. During 2009, we completed a successful common stock offering with gross proceeds of $76 million in the third quarter and another $13.5 million in the fourth quarter.

We maintained a solid capital level with an estimated Tier 1 ratio of 14% and the total risk-based capital ratio of 15% at year-end. Tangible common equity to tangible assets is at 4.9%.

On a pro forma basis, assuming the recapture of the tax benefits not provided in the third and fourth quarters, as Denny mentioned, the ratio would improve by about 130 basis point to 6.3%. And as Denny mentioned, we believe this recapture will occur as soon as -- we're hoping sometime in the next year as we will be able to place greater reliance on our forecast of future taxable earnings.

Moving to deposits, the pace of growth of deposits excluding brokered CDs increased nicely during the fourth quarter. Please note that like last quarter, this quarter's growth continued in core deposit customer accounts which improved market share and services per household.

While total deposits excluding brokered CDs grew by $31 million or 2% year-over-year, personal core deposit balances increased by $62 million or 9%. In addition, we continued to manage our CD pricing carefully due to our strong liquidity position as summarized on Slide 5, where in the fourth quarter we had on-balance sheet liquidity that averaged $197 million.

Happy to report that the add-on rates for CDs have been coming down and they were below 1% for the last two months of 2009. So we should be able to see some continued lowering of overall funding costs.

I'll now take a minute to cover the margin on Slide 7. We discussed our view of the margin related risks and opportunities for the fourth quarter of 2009 during last quarter's call. The margin decline this quarter was the result of negative loan growth, the loan restructures which decreased earning asset yields as well as an increase on balance sheet liquidity that I mentioned; offset by better funding costs, lower deposit costs and a better mix.

We've been cautious in our investment purchases not to increase our interest rate risk imprudently just to benefit margin improvement. At an appropriate time in 2010, investment of excess liquidity will support margin improvement.

Netting pluses and minuses, our guidance on future net interest margin is for the margin to remain relatively stable in the short run with expansion possible from declining deposit costs, reduced pressure on loan yields as a result of lower level of new problem loans and an increase in higher yielding investments. We also had some positive growth in the loan portfolio as residential production totaled $36 million in the fourth quarter and it was up 28.6% compared to the third quarter and we are expecting that should continue in 2010 to support the margin.

In summary, it goes without saying that 2009 was a difficult year. However, capital and liquidity positions are strong and have been improved during the year. We are encouraged by the emerging asset quality trends and by elements within our operating performance and as such, we are looking forward to improving financial results in 2010. Now I'll turn the call back over to Denny.

Thanks, Bill. We appreciate those comments. I would invite you to take a close look at the tables we provided in the last two pages of our press release. There you will see in significant detail a trending of our loan balances by loan categories.

We provided tremendous amount of detail on that table and as you look at that, it's very clear and very evident that we have made remarkable progress in 2009 and that progress really started in late 2008 and actually began earlier than that. Our total construction and development loans related to residential development have been reduced to only 3% of total loans through this period of time down to almost a nominal number at this point.

The entire construction and development portfolio has been reduced down to only 11% of total loans and a substantial portion of that are loans to individuals. We have maintained our pretty solid stable growth in the CRE portfolio. But as we lay out the detailed trend for loan balances over the last two years at the end of the press release, and as those tables demonstrate, we have focused our integration efforts on the most problematic areas having the greatest loss potential. This has been our plan for 2009 and this is the path to restoring profitability hopefully in 2010 at some point.

We would now be happy to take questions and we will turn the call back over to our moderator.

(Operator Instructions) Christopher Marinac, FIG Partners.

Wanted to ask about your I guess conviction about just seeing the rate of inflows slowing, whether it's this quarter or the first half of the year, whatever timeframe you're comfortable speaking in.

The reason we are taking a little more optimistic tone is that we have been carefully monitoring a portfolio of larger exposures for the past two years and we have achieved this quarter, with the loan sales that occurred this quarter, some of which were written down last quarter and further written down this quarter, we have achieved a point where those large exposures are now down to a much more acceptable level. And I think in an aggregate sense, you see two things.

You are hearing from us that -- and we've seen in the last couple of quarters in some of the details that we have provided, clear-cut evidence that we're reducing the average size of loans in the portfolio. The other thing that comes out very clearly in the detail that we provide is that most of our liquidation effort -- and it's not just been loan sales, it's been a lot of hard work in terms of achieving sort of traditional liquidation through collection efforts and the like. But most of that effort has been in some of the problematic portfolios.

And those problematic portfolios today given where they started, have now come down to very, very low levels. And for those reasons, reduction in the largest credits and a clearer view of the remaining larger credits and what the condition of those credits are, combined with the dramatic reduction in varied classes and types of loans that have been most problematic down to a level that is quite small -- we're at the point now, Chris, where we just have a handful of loans of any size that we are continuing to monitor and have concerns about.

So for those reasons, we believe the credit costs and the inflow now has been and will continue to moderate and as we move into 2010. And we also have the backdrop of things beginning to more clearly stabilize in the state from a valuation standpoint on the residential side. I think we got -- we have some ways to go on the commercial side over this next year.

So market conditions are improving, stabilizing; probably more like stabilizing but not improving at this point. You add it all together and you begin to kind of get the payoff from the tremendous and gut wrenching work that we've done over the last 18 months.

And the question about inflows, we do say in the press release that early-stage delinquencies improved or remained stable for all portfolios during the last quarter. We continue to see that be the case.

And finally, we have seen since midyear kind of a continual reduction in the level of internal classifieds coming down now. And all of this that I've described is really -- the context of the last six months, kind of the first in cycle we're seeing now.

We have been through two quarters of kind of improving internal metrics. Now it's translating into some of the external metrics and certainly the gross numbers are just coming down. We're sitting here, like I said, at this point in the cycle with only a 3% exposure to residential construction loans. Most of the 3% that is left has been written down two, three, four times; analyzed six ways to Sunday. We are getting there.

That's very helpful color. I appreciate that. Just want to follow up just on the margin. Do you have any sense of kind of what a normalized margin, if that's the right term, could be? Just all things being equal, what type of margin lifts can happen over time?

I think I tried to cover that, Chris, on my comments. I think that in the short run --

You stopped short of saying what the margin was going to be though, I noticed that. Well I said it was going to be stable from the fourth quarter, again because of the inflows slowing that impact in the fourth quarter and we're seeing continuation of CD rates, the new rates coming on at below 1%.

I think we were at -- overall CD rates were north of 2%. So we've got some room for improvement there going forward. We also had very successful build on core personal deposits and then Denny mentioned we are now looking towards doing the same thing in the small business in 2010.

So that's going to have improved mix. So we're hopeful we'll get some left from the margin -- or to the margin. But asset yields are pretty low. So there's going to be some potential pressure on that without some loan growth at higher rates that the investments are at right now.

I think the key point we were making was the excess liquidity which Bill just mentioned again, some point we would begin to feel comfortable bringing that back in.

Right.

[Paul Connelly], Southwell Partners.

Could you talk little bit about what trends you are seeing in the commercial real estate arena in Florida and then specifically talk about your portfolio? You talked about maybe having some additional ways to go there and I'm just wanted to understand the TDR situation in the most recent quarter.

Sure, sure. First of all, just kind of a global comment, commercial real estate is continuing to be under stress given the levels of unemployment and the whole market here. As I said, last quarter we have been concerned about that for over 12 months now, roughly beginning in really in the fourth quarter 2008.

We began to look very, very carefully at all of our commercial real estate exposures, working with borrowers trying to identify non-monetary defaults to begin to talk with them about additional collateral and other things that we can do to improve the position of the bank going forward. So we have been on that portfolio for quite a while now. So we have a pretty deep understanding of where we are with it.

And you know again, it's a stressed environment as we said. Vacancies have grown all year generally speaking across most markets. Most of our exposure is in some markets here that have had a little better vacancy, but it's still not a positive sort of position for us. Specifically looking at our [theory] TDRs, there was a significant growth this quarter as you saw.

They were worked on for months.

Yes, and those were things that we had worked on probably the last two quarters; very, very significantly focused on trying to provide some sort of restructuring opportunities to provide some assistance to commercial real estate borrowers that we feel are viable that have positive cash flows that are suffering with higher levels of vacancies and the like in this period but have a good business plan and they have cash flow support, most importantly, for the troubled debt restructuring. For those reasons, we have been I guess very proactive in seeking opportunities to move things into a TDR status where it makes sense. And again, we are supported with cash flow coverage.

And we started talking about that strategy a few quarters ago.

A couple of quarters ago. And I think last quarter, we said we expected that number to increase.

And we have seen decline in value across our markets. In Florida that's the case generally. We've been talking about it for quite a while. I think we have said historically that we saw the loss potential in the CRE a lot less than in the residential construction portfolio and we've been working, as Denny mentioned, on identifying leverage to bring us to the table with the borrowers and shore up positions.

We've done a lot of that along with one of the toolsets being troubled debt restructures. And a couple of things came together in fourth quarter that caused the increase in the number there. But we have been working on all types of strategies for really two years.

In your earlier comments, you said that you thought real estate was stabilizing and that credit losses were peaking. Would you say the same is true for the CRE space? Are you seeing the trends regionally outside of your bank and your portfolios specifically to be stabilizing in the CRE or is it continuing to worsen?

I don't think, Jean, we would say it's stabilizing at this point. (multiple speakers) we don't see clear evidence of stabilization on the CRE side. I would say it would be fair to say we don't see a lot of additional inflow at this point out ahead of us.

Right, we've done a lot of work on that portfolio anticipating decline. So, we think we are ahead of the problem.

We've been anticipating it. It's been talked about for quite a while. But, no, we do see continued decline in approaching even the troubled debt restructures. We also considered the fact that there might be some further slippage and so we approached it in a way that there is some cushion there for further decline.

Ken Puglisi, Sandler O'Neill.

Denny, I think a lot of people were surprised by the size of the loan sales and the size of the losses. Any you say in your press release that you were more successful with the loan sales than you had anticipated. I was just wondering, what was your original expectation for both the amount of sales and the amount of loss?

I think one of -- the big variance was the sale of the residential portfolio. We were not -- that was something we thought that came along and we could take advantage of. And as we said in the press release, that's accounted for about half of the loan sale that occurred this quarter. So it ended up being double maybe what we thought it would be. But I think it was the right thing to do.

What about the size of the loss? What was that relative to what you had anticipated?

It was about double or more than double than -- slightly more than double than we anticipated. And again, it's all driven by the residential sale, I would say. Again, that residential allowed us to probably take the next two years worth of residential losses and put them behind us on that portfolio.

It allows us to free up resources and redeploy some of our management resources back in the commercial area. It was just an opportunity to really kind of complete a lot of work in the residential mortgage area.

Now that portfolio has performed for us generally much better than the state as a whole. I think our NPAs before we did all this were in the high single digits in that portfolio versus 15, 16% or more for the state.

This is a prime portfolio so it performed okay, but we also saw some stabilization occurring in the residential markets. We saw the level of inflow coming into that portfolio slowing the last two quarters of problems. And we have a lot of action on that portfolio. We had more interest in that than we thought we would get so (multiple speakers)

So the losses that you took on the resi portfolio that you sold, was that a function of not having these loans marked down enough (multiple speakers) real aggressive with the prices you would [accept]?

No, when you sell a note, you are selling all the future collection activity that goes along with that and all the risk and so forth. It's a very different valuation than looking to the underlying collateral and most of our work in sizing the residential carrying values up until that sale were based on bona fide understanding of where value was on an asset-by-asset basis given that a loan had become collateral dependent and that's where our repayment was coming from. What I said is we took probably the next two years worth of losses out of that portfolio and shoved it out the door in one quarter.

Yes and just a little curious about the timing of the sales. Were they throughout the quarter? Did any of them occur after the end of the quarter and then were put into the fourth-quarter numbers or what?

Most of them got closed during the quarter. They occurred in the second half. The residential was sort of a contingent thing we were looking at and we didn't make the -- pull the trigger on that until later in the quarter.

And finally, I think we have $10 million or so in loans held for sale, involved a commercial real estate loan that was written down and sold at the end of the quarter. That actually closed in January. So at 12-31 we had about 10, $11 million in our held for sale that represented a loan that was sold.

This is Russ Holland. I just wanted to add that it's more a factor, as Denny pointed out, that we were able to sell more and that's what was driving the loss. We monitor the loan sales market as you know and it wasn't the values that were a surprise to anyone, it was just a matter of we were able to sell more because we were able to get better pricing.

I see. So the $10 million CRE sale that took place after the end of the quarter, was that size of the loss or the size of the loan?

(inaudible) loan balance.

That was the ledger loan balance after it had been written down to the contracted price.

Dave Bishop, Stifel Nicolaus.

I apologize if I missed this in the release, but in terms of the charge-off activity this quarter, I don't know if there was a way to allocate that specifically to the tranches of the loan sales, resi versus the commercial, what sort of haircuts that you had to accept via the loan sales?

Maybe just some color?

There was really -- it's pretty consistent, the resi and the commercial. We got a little better pricing on the resi than the commercial.

The aggregate marks on the sale I would say were generally consistent with what we've seen all year. The market is -- I've read a couple of people commenting they felt the market was improving. We did see some improvement I think in the residential sale numbers, which is why we pulled the trigger on that.

But generally speaking, we've not seen any dramatic change in pricing expectation on the part of buyers in that loan sale area. The other thing I just want to make clear to everybody is that we have been on a mission for two years and particularly during 2009 to reduce the aggregate level of risk, credit risk, in the loan portfolio.

This quarter we stated that we now are firmly below the targets or guidance provided by regulators in 2006 regarding CRE concentrations. And that guidance that came out in 2006 said that if a bank has greater than 100% of capital and reserves in construction loans or greater than 300% of capital and reserves in CRE loans, including construction, we think you have a bit of a concentration and you need to do something about it.

Today, 12-31, the construction piece is down to 65% of capital on reserves and the CRE total is down to 295%. We're firmly below those numbers really for the first time in the cycle. That is what we have been seeking to achieve over the last 12 months and it does not happen without losses and it does not happen with a lot of gut wrenching decisions along the way.

But it is the path to restoring profitability for the Company sooner rather than later and that is what we have been about over this last year. We think it is the last sort of gut wrenching loss we're going to have for the cycle.

We think going forward, things are much more manageable. That's what we have been seeking to achieve is get our arms around this credit problem to the point where we can more carefully now kind of move ourselves forward and bring final resolution to this as we go out beyond the end of the cycle.

So that's been the key to reduce credit risk. That doesn't happen without pain and that's unfortunately what we were facing in late '08 as it was apparent that we were in just this remarkable valuation decline on the residential side.

In some of our markets, we have seen home prices from the peak to today down 65%. The good news is it seems to have stabilized and it's stabilizing on increasing sales volume. That sales volume continued even into the December months, although we have seen some fall-off nationally. It continued here, not as strong as it was in November, but it did continue and we are pleased with that. So I'll shut up and take another question.

Al Savastano, (inaudible) Financial.

Just a couple of questions here. Can you give us a little color on the decision to lower reserves as a percentage of loans this quarter? I assume that would be due to the lower classified assets.

As Denny was just commenting on, we made significant headway in reducing the risk in the portfolio and we of course, like all institutions, have methodologies around establishing our level of allowance for loan and lease losses. It came in and reflecting the lower risk of the portfolio.

First of all, the decline in the ratio was not too terribly significant. The decline of dollars certainly reflected, among other things, the reduced size of the portfolio; the impact to the loan sales and all of that. And you're right, now there was some decline in level of classifieds that would've had some impact on that. But it's everything.

I'm just more worried -- I'm not worried. That's the wrong word. Just trying to figure out what would happen in 2010, if you guys expect that ratio to continue to decline.

I don't know that we expect it to decline in the near term, but as we continue to work our way through these issues and see numbers come down and improve and loss rates improve; we may see it decline but it isn't going to happen overnight.

Do you have any sense of what the construction charge-offs were in the quarter as a percentage of charge-offs or dollar amount?

I'm sorry, we don't have that in front of us. We will get back with you on that. I will tell you generally speaking, the charge-offs were probably heavier and they have been for I would say the first half of this year, 2009 and the last part of '08, the construction charge-offs clearly dominated the numbers. That twisted probably midyear and began to more be impacted by the CRE portfolio. And again, it's sort of evidence that we have been working the CRE problem for well over a year.

Gotcha, just trying to gauge how much (multiple speakers)

It's kind of hard to say because so much of this is overwhelmed by the impact of the loan sales. And particularly in the recent quarter, that was impacted as you know by residential credits.

Just trying to figure out how much charge-offs could drop in the next couple of quarters.

And then on the CDs, can you (technical difficulty) guys give a little color on how much is coming off or due to reprice in the first quarter and at what rate or first couple of quarters?

No, I don't really have that. I don't know what -- it's a short portfolio, probably averages around seven, eight months is the weighted average life. So you can basically judge it that way. And we've got about $700 million, so you have roughly $10 million -- right, around $10 million a month coming off (multiple speakers)

You did say they were going to reprice it about 100 basis points lower or current rates about 100 basis points lower than where the yield is?

I said they were repricing at sub 1%, repricing at sub 1% and I thought the CD overall portfolio was at about (multiple speakers) 20, yes; right.

Matt Olney, Stephens Inc.

Going back to the potential recapture of that tax benefit, it sounds like we need to see some signs in the bank and in the markets. So can you give us any specifics, what you're looking for? Is it something like earnings visibility the next two years or is it more something like just overall stabilization of the CRE portfolio?

Well, number one, do we believe we're going to return to profitability sometime in the carry forward period of 20 years; answer, yes. Are we permitted to take that into consideration in support of our deferred tax asset; yes we are.

The greatest amount of evidence needs to be not at the end of the 20 years obviously, but in the near term over the next couple of -- two or three years. Do we have internal projections showing us returning to profitability over the next couple of years, absolutely we do. Do we believe it? Yes we do.

The problem has been that our actual performance, and you all can certainly appreciate this, has been very volatile. And so we are just now I think becoming more comfortable with our ability to accurately project kind of where our return to profitability comes.

We are increasing every quarter our confidence. Why is that confidence increasing? Because we are reducing risk in the loan portfolio. We're reducing risk by reducing large balance problems and our largest most problematic most loss potential assets and getting them behind us.

As we do that, the lines start to cross and we become far more confident in our ability to accurately project exactly when we are returning to profitability and at a certain point when we all get comfortable that that can now start to be relied upon more acutely in every quarter, you drop off a quarter and add a quarter, we will be ready to book that asset and we think that it is not inconceivable that that would happen in 2010. As a matter of fact, that is our goal.

(Operator Instructions) Dave Bishop, Stifel Nicolaus.

Denny, I had a follow-up in terms of restructured loans, maybe the legacy restructured loan performance and the third-quarter balance. How have they generally performed in terms of the modified terms?

We sold some of those (multiple speakers) residential (multiple speakers)

I think your question is how have the modified loans performed. And generally speaking, they would not be on a troubled debt status unless they were performing. But we have proactively gone in and made some adjustments.

And in return for something from the borrower that strengthens our position, and in return may be given something back that would increase their comfort in continuing to handle debt service going forward in this stressed environment. That's kind of what triggers a troubled debt restructure.

If we had one that wasn't performing, then it would be classified as non-accrual, maybe troubled debt. But at some point, it would move over there if they perform for a period of time. But they're more likely to be in the non-accrual category.

Yes, I see it says looking in terms of flow. In terms of the legacy (multiple speakers)

The flow was big this quarter and again, we explained it by saying that there were several larger commercial real estate projects. These would be cash flowing type deals that we moved to troubled debt restructure as a result of work we did with a borrower.

Generally speaking, they were all performing credits that moved over into troubled debt restructure. And we'll continue to monitor them in the coming quarters to see. But when they get there, they have been completely evaluated for valuation. They have valuation support for the asset and they second of all have cash flow support for the payment structures that are in place.

The re-default risk I know is talked about heavily, especially on the residential side (multiple speakers)

That's why it's troubled debt and that's why it's in that category.

That's also why we look to sell a lot of that residential.

Yes, the commercial is supported by cash flow from tenants and operating businesses.

The additions this quarter were more along the lines of the commercial that we were working on for a while. But I just want to also point out that we do trouble debt restructures also in the non-performing category and we keep those loans on non-accrual when we don't have the high confidence levels that we do with the ones that we have accruing. So we make that distinction ourselves.

A substantial portion of the current non-performing loans that we described in the body of the press release would represent troubled debt restructures that are currently classified non-accrual.

When we take out the payments, we get to principal and reduced principal.

Christopher Marinac, FIG Partners.

Just wanted to ask about I guess your availability or interest in doing an FDIC deal in the near term or would that be something you would want to do later in the year as you get a few more initiatives on the credit side behind you?

Well one reason that we're working so aggressively to clean up the credit side and improve the overall condition of the bank is to better position ourselves to take advantage of those opportunities that are clearly coming towards us throughout the state and we think they're going to be significant and it's something we definitely have as a key element of our strategic planning that we are currently operating under.

So, yes, it's something that is there. There are not a lot of banks in the state. Well first of all, there's not a lot of banks -- if you look at kind of what's gone on in the state, I'm not sure there's going to be a lot of banks that survive this whole thing.

But those that do have a much different environment out ahead of them. So it's a key element, something that we're looking at very, very carefully; something we have communicated with regulators about and we have a very keen interest in. We will continue to update you as we go through time on that.

Ken Puglisi, Sandler O'Neill.

This is kind of a follow-up on that question I guess. You raised a fair amount of capital last few quarters and after the asset quality cleanup of the last two quarters, the tangible common ratio is pretty much back to where it started. So I'm wondering if you feel a need to raise capital in order to be able to participate in these deals.

Well as Bill said, when you adjust TCE back for the tax benefit, which we know at some point will happen, we actually come out ahead of where we were, substantially ahead of where we were before we started the capital raise. So we think that's something to consider when you look at our book value and you look at our TCE numbers.

The question about raising capital, if we had a substantial opportunity and were awarded a bid on something sizable, it may indeed require capital and we will just have to see. We think that could be a really good new story if that were to happen.

At this moment, we show no further questions in queue.

Okay, thank you very much for your attendance today and we look forward to talking with you in April. Bye bye.

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