Seacoast Banking Corporation of Florida (SBCF) 2010 Q2 法說會逐字稿

Welcome to the second-quarter earnings conference call. My name is John and I will be your operator for today's 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 Hudson. Mr. Hudson, you may begin.

Thank you very much and welcome to Seacoast's second-quarter 2010 earnings conference call. As always, before we begin, we would like to 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 forward-looking statements within the meaning of the Securities and Exchange Act. And accordingly, our comments are intended to be covered by the meaning of the act.

With me today is Gene Strickland, our Chief Operating Officer; Russ Holland, our Chief Lending Officer; and Bill Hall, our CFO.

This quarter we posted a loss of $13.8 million or $0.25 per share, much improved of course over the $63 million loss the prior year but greater than the $1.6 million or $0.04 per share loss produced in the first quarter of this year. I mentioned last quarter that our progress would likely be lumpy and it was this quarter as our loss increased somewhat.

However, our progress continued as we continue to muscle down the level of our nonperforming loans. Earnings were impacted by the sale of $24.5 million in nonperforming or soon-to-be nonperforming credits which contributed $9.3 million of our $16.7 million provision for the quarter. The balance of the provision was driven by valuation adjustments on the existing problem portfolio.

Overall, nonperforming loans declined by 5.6% during the quarter. Nonperforming loans now total approximately $90 million. This is down 41% from a high point in the third quarter of 2009 of $154 million and almost back down to the level of $88 million we posted at year-end 2008 when we were approved for our TARP investment.

Nonperforming assets were also reduced by approximately 5% during the quarter and were $109 million down from $115 million in the prior quarter.

We believe we have stabilized asset quality by continued work to reduce concentrations, particularly in construction and land loans. This exposure as well as our CRE exposure is now well below the regulatory concentration threshold. Construction exposure is now at approximately 40% of Tier 1 capital in the allowance and overall CRE exposure is now approximately 225%. Again, well below the 100% and 300% threshold established in regulatory guidance.

By focusing our liquidation efforts on our larger loan exposures and larger concentrations last year, we are now seeing problem loan inflows pay slower and the inflow is comprised generally of smaller loans than we saw last year. We still believe our problem loan exposure peaked in the third quarter of last year and we expect this exposure will continue to fall in the coming quarters. This belief is supported with a continued decline in the level of internally [cited] and classified assets in the portfolio.

To summarize, I think we feel we are making good progress in bringing down the level of problem loans. We expect to see moderation of new problems as we focus greater effort to reduce overall problem loan balances.

Now Bill is going to speak to the quarter in a little more detail and then I'm going to come back with a few additional remarks.

Like always, we have posted some slides on the website for this call and I will be referring to those occasionally.

There were certain items in the quarter which I will briefly highlight and then I will have further additional comments later. Most notable, the positive for the quarter was the continued improvement in credit trends and reduced concentrations from the prior quarter that Denny discussed.

Core deposit growth and a positive mix shift continued but were not significant enough to offset the negative impact from the decline in asset yields and asset mix shift which caused the net interest margin to decline. The continued improved deposit metrics reflect 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 have increased customer satisfaction and it showed up again in our deposit numbers in the second quarter.

Finally, we completed a capital raise during the quarter and the Company's capital ratios are stronger than at any time in the Company's history. Overall, fee revenue remained cyclically soft and reduced consumer spending resulted in a decline in many of the fee-related sources of income throughout the first half and the second quarter. This is impacted noninterest income excluding security gains, which declined by 4.2% compared to the second quarter last year. Results were marginally better compared to the first quarter. With increases in service charges on deposit accounts and debit card income, the result of improved client retention and acquisition of core personal deposits that I referred to earlier. Together, these revenues were up $185,000 or 8.9% linked-quarter and further demonstrates how we are benefiting from our retail core deposit strategy by increasing customer households and deepening their relationships by cross-selling other products.

Moving to noninterest expense slide on page six, like we have done in past calls, I've prepared a summary of our noninterest expense results and identified items which occurred in the quarters that were either nonrecurring or credit related. Where we are trying to control all costs during this extraordinary period, credit-related costs are not as controllable as we would like them to be.

This slide shows that we have been reducing overhead more than is visible in the normal income statement perspective. Expenses have been well managed and core operating expenses have been stable but credit-related expenses continue to impact results. However, on a year-over-year basis, these costs have declined by approximately 30%.

Adjusting for the items, second-quarter overhead was pretty much stable with the first quarter and the fourth quarter. We expect that we will identify some additional expense savings measures and we will have more to report on those planned reductions over the remainder of the year in our third-quarter call.

Turning to slide four, I have a few comments on our capital position. Slide four illustrates that our capital position over the past 12 months with risk-based measures well above regulatory minimums. During 2009, we completed a successful common stock offering with gross proceeds of approximately $89 million in the third quarter and we completed another one in the second quarter this year of $50 million of gross proceeds.

We maintain a solid capital level with an estimated Tier 1 ratio of 17.6% and a total risk-based ratio of approximately 19% at quarter end. Tangible common equity to tangible assets is at 6.6%.

On a pro forma basis assuming the recapture of the deferred tax valuation allowance in future quarters, the ratio improves to approximately 8.4%. We believe this recapture will occur when we are able to place greater reliance on our forecast of future taxable earnings.

The level of loan-loss provisioning has declined significantly from the prior year's levels and it was at $19 million for the first six months of 2010 compared to approximately $38 million for the same period in 2009 and well below the $87 million that we provided in the last half of 2009 as a result --. This decline is the result of reduced problem loans and much lower net charge offs.

This is one of the final pieces of evidence needed to rely on our forecast of future earnings, future taxable earnings to support the realization of the Company's deferred tax assets.

We have on slide seven posted some information on the growth of deposits. The pace of the growth of the deposits excluding time certificates increased nicely during the second quarter with total average demand and savings for the quarter increasing on an annualized basis by 15.2%.

In addition, we continued to manage our CD pricing carefully due to our strong liquidity position, as shown on slide five. This has resulted in a decline in both brokered and single service time certificates and improved our deposit mix as shown on slide eight.

Total demand and savings balances now represent 67% of total deposits, up from 61% a year earlier. Overall cost of deposits declined 46 basis points to 0.94% compared to the prior year.

Our funding strategy remains centered on stable retail and commercial relationship deposits. At quarter end, deposits and customer repos comprised 94% of total funding. Broker time deposits declined by $44 million during the last 12 months and were offset by increases of $89 million in demand and savings deposits. Our combined available contingent liquidity from all funding sources pledge free securities and cash on hand at quarter end exceeds $700 million.

Now I will take a minute to cover the margin on slide nine. As we have discussed our view of the margin-related risks and opportunities for this year during last quarter's conference call, the margin decline this quarter is primarily due to lower loan balances and repositioning of the investment portfolio over the past six quarters and an increased level of interest-bearing cash which is accumulated over the past six months and now totals $283 million.

We have sold a portion of the investment portfolio with higher yields and higher effective durations that may have increased in a rising interest rate environment to monetize the gains and we believe this is the proper strategy. We have been careful not to add effective duration and to look for solid investments that will increase in yield when the curve flattens as forecasted.

Adding to the investment portfolio over the remainder of the year and reducing excess cash liquidity will support margin and net interest income improvements.

In summary, capital liquidity positions are strong and have been improved during the year. We are encouraged by our emerging asset quality trends and the related reduced provisioning compared to the prior year. We look forward to continue to improve financial results during the last half of the year.

With that, I will turn the call back to Denny.

Thank you, Bill. I want to conclude with a few more comments concerning our focused effort around strategic growth initiatives.

I mentioned last quarter that we had transferred all remaining workout loans including softer and smaller workouts into our special assets group. This was done for two reasons.

First, it completed the job of centralizing all workout and liquidation activities with our best workout talent. But equally important, it helped bring greater focus in the field around customer acquisition and our customer acquisition and growth plan. This was particularly important for our retail and business banking folks and our market leaders as we have seen considerable disruption with the largest competitors in our footprint.

Our market folks produced some incredible results this quarter. They undertook specific initiatives focused on gaining market share and bringing down deposit costs by changing our deposit mix. Achieving improved deposit mix allows us to grow the customer franchise while not growing the overall balance sheet so that we can continue to preserve capital. I think the results have been spectacular.

Average low cost now savings and money market balances grew by 16% annualized on a linked-quarter basis and average net interest -- non interest-bearing DDA balances grew by 11%. This improved deposit mix, as Bill pointed out, and helped drive down our deposit costs to below 1% this quarter. These results are accompanied with improved trends in new household acquisitions, improvements in average balances and improvements in the number of products per household.

Now, some of the deposit growth for the quarter was seasonal for sure, but the numbers far exceeded our expectation and the supporting data including household growth suggests we are winning the battle for customers' disruption.

Our priorities one year ago were first, to provide capital strength needed to meet the challenge of this economic crisis. Second, a year ago, our goal was to aggressively reduce credit risk in our portfolio. And third and finally a year ago, our goal was to maintain sufficient liquidity throughout our core deposit franchise. I think we met these goals.

Today our priorities are principally twofold. First, we must continue to bring down our problem credit exposures and finish the job to reduce credit risk to a more acceptable level as quickly as possible. And second and equally important, we will grow our most valuable asset or our core customer franchise in response to significant opportunities developing in our market as we gradually return to profitability.

Now we would be happy to take a few questions.

(Operator Instructions) Matt Olney, Stephens, Inc.

Good morning, guys. Can you give us an idea of the [NPL] inflow that we've been seeing the last few quarters and [where did] this quarter? And I understand you've done a good job of kind of selling off and charging off some of the inflow as it comes in. I'm looking for more of a gross NPL inflow number.

It's not something we have actually published, Matt. And thanks for the question. I guess just to give you color, when we look back in just about every quarter last year in 2009, we saw tremendous inflow coming into the portfolio. It would have been very significant numbers particularly in the second half or in the mid-part of the year last year as we saw the NPAs grow pretty dramatically.

The inflow in the first and second quarter of this year was dramatically less than last year with a little less inflow in Q1, a little more in Q2. But the numbers, the gross number in the first half of the year were probably less than half of what we had seen in the comparable periods last year.

But we did see a little bit of pickup in inflow from Q1 to Q2. You know, the delta may have been $15 million or so.

What about the mix shift within the inflow? Anything different in Q2 versus Q1?

You know, the inflows in late '08 and most of '09 were obviously concentrated on a lot of our construction portfolios, a lot of land, that sort of thing. And the more recent inflows which we have been talking about for a year have been more on the CRE side. Would you agree?

Okay, thanks guys.

I guess I'd point out that also we've talked for several quarters now about a tactic of using troubled debt restructures to deal with some of the credit stress in the CRE portfolio. And though we didn't have much of an increase -- in fact we had a decline in TDR this quarter coming out of the CRE portfolio, in the context of the last 12 months, most of the TDR growth has come out of the CRE portfolio.

So our thoughts are to be very proactive where appropriate, where we have cash flow to working with borrowers in the TDR area. That has been helpful, although we didn't have any -- actually had a small decline in the portfolio this quarter out of the CRE portfolio, had an increase, a little increase from the consumer portfolio this quarter.

Thank you.

Christopher Marinac, FIG Partners.

Yes, good morning. I wanted to ask about sort of I guess overall valuations on new appraisals and write-downs and [how you are looking] for the portfolio. I guess if you want to talk about a CRE or the whole portfolio, however you want to break it down, I was curious on kind of what you think run rates and valuations are and how different they may be if at all from the last 90 days?

Let me -- some others can weigh in here, but let me just give you a backdrop here in our markets. Interestingly on the residential real estate side, there were just some material that came out last night that suggested we had in spite of what you are seeing nationwide, we had an actual pickup over a year ago in sale of residential homes in our markets. It was up I think 12% from a year ago. It is the 22nd consecutive month of increasing sales in our markets on the residential front. And the average price of a home sold or a median home price climbed I think for the sixth or seventh month in a row or it may have been a little longer than that.

So we are seeing clear signs of stabilization both in values and in volume on the residential side. And that I think is a good sign for the next 12 months or so in terms of valuations decline.

Just to give you color, the issue for the state I think right now is valuation decline is being felt in the CRE area. And that's primarily driven by changes, negative changes in NOI in those properties. And that's very property-specific. So it's hard to give you any benchmark or anything on valuation other than we remain in a stressed environment. Russ, any comments?

Yes, you are absolutely right. It depends on the asset and the cap rate varies by asset. It is public shopping centers, anchored centers are still trading at 7% cap rates and then you can have anchored store centers that are much higher than that. It really depends on the property.

Right, and then I guess separately, Bill, so is there a conclusion on the BGA? Is it possible that you can recapture something soon? I just wanted to clarify what you were saying in your earlier remarks.

It's sort of like the beatings will continue until morale improves. We will just have to continue to work our way through it at -- I don't think we have a lot to say on it. Bill, what are your --?

Yes, I think Denny is correct. But I do think that one of the key elements that has been troubling let's say in terms of relying on a forecast of future taxable earnings would be the provisioning and that's coming down as we've talked about. It was a little lumpy this quarter. But trend-wise, I think it is down substantially.

So you can begin to make a case at some point we're going to turn profitable in a quarter in the future here and when that happens, I think we will be able to get that recaptured.

Chris, we've been saying for a year that the soonest we would be profitable would be the last quarter of this year and possibly the first quarter of next year. We are kind of still standing by that. The challenge would be further portfolio deterioration. We have had sort of in the middle right now of another review of future possible deterioration.

I would say just on hold we are sort of encouraged by what we are seeing and we're still feeling good about those statements in terms of the return to profitability, but I guess we could be off a quarter or so but we are sort of beginning to see the light at the end of the tunnel although there's still a lot of risk out there.

So feel a lot better today than we did a year ago, dramatically different, what we are facing in terms of potential new problems and that sort of thing.

Great, I will yield the floor. Thank you very much, guys.

Marc Heilweil, Spectrum Advisory.

Thanks. I guess I would like a little clarification on your capital status vis-a-vis what the regulators think about that? That would be the first part. Are they satisfied? Is there any possibility that you would be able to deal with the overhang of the preferred dividends from TARP before you return to profitability?

I think it's going to happen kind of at the same time. We are -- I guess all I can tell you is we are engaged in conversations about that subject. How do our regulators feel about our capital position? They are very pleased generally with our response to the stress in terms of our capital raises.

And when you look at a Tier 1 capital ratio of almost 18%, that's a pretty darn strong ratio for us. So we are far in excess of the capital minimums that they think we should keep and we are projecting that we will maintain that position.

So I guess the question is if you are far in excess of what they think you should keep, it is your decision to hold on to the TARP money including just clearing up the arrears?

Yes, and let me just say when we are completely since then and we are very close to this point of being convinced that's we have credit stability and improvement, I think those conversations become more significant with them and we will see. But the first step is to come out of deferral and we plan to do that as quickly as possible.

I would say in terms of repaying TARP, that's going to be down the road as we are very are solidly profitable. But we are -- again all I can say is we are seeing light at the end of the tunnel. We're beginning to see some improvement, but we are still concerned about the overall risk in the marketplace and the economy and we are not quite there yet but we are very close.

And also one capital position, has -- [Cap General] indicated that they are considering to sell the shares that were registered this week before the year-end. Have they given you any indication of their intention on that regard?

Yes, well I am glad you brought that up. There's been a little confusion in the market over our registration statement that have been -- went effective last night. We filed a registration statement to register shares previously unregistered shares that were sold to a variety of investors in the most recent $50 million rate including shares that were sold to Cap Gen in April. They took down a significant portion of that $50 million.

They have not sold, nor do they have any intent to sell any of their investment and they have confirmed that to us. And we included a quote from one of the partners, Bob Goldstein, who sits on our Board indicating yesterday that he's very pleased with their investment and they take a long-term view and so forth.

There was confusion in the market however for those that were reading those registration statements because they were technically registered on behalf of selling shareholders and -- but they have no intent of selling their shares. It was simply us registering the shares which we committed to do when the unregistered shares were sold to the new investors and Cap Gen.

Thanks a lot for the clarification. Goodbye.

[Ken Usdin], Sandler O'Neill.

Good morning, Denny. Denny, the 20 -- I guess it was $23.5 million worth of loan sales during the quarter, you indicated that those were NPAs and soon-to-be NPAs?

Yes.

I wonder if you could tell us what -- how much of that were not on nonperforming at the time of the sale?

They all were at the time.

Well, they were, but in the context of the prior quarter probably half of them were not on nonaccural.

So one half were not on nonaccrual at the end of March?

Right.

Okay, and then I guess you took $9.3 million of losses on those credits. That's almost a 40% write-off, pretty hefty severity rate. I wonder if you can just comment on why it was so high, because I assume that some of those credits were already written down.

Actually it was fairly high, but half of them were not written down at all. And it was -- I believe it was a fairly decent anomaly that occurred in the quarter with some performing credits that we turned very negative on for very well-defined reasons that happened very quickly.

And it sort of coincided with our rethinking of valuation on a performing credit, some performing credits. So again, Ken, we are just trying to very aggressively -- we are now at a point in our processes where we are really looking much more further ahead in terms of potential stress and really getting ahead of those things. But I do view that as somewhat of an anomaly this quarter. That was a pretty unusual event.

I shouldn't read anything into the rate of loss and add that to the risk of --?

No.

-- nonperforming loan portfolio?

No, no, no. We did have some valuation write-downs though. We had a provision was -- was $16 million and the balance was related to essentially existing write-downs on that portfolio. With some of that being reappraisal work on a whole host of loans.

Kind of along the same lines there, you indicated that non-performers probably peaked in the third quarter, that they should continue to come down. We talked a little bit about inflow rates earlier and if you just take the very simple measure and add charge-offs and the change in nonperformers together, your nonperformers would have still gone up without the charge-offs.

When do you see that turning? When do you think we're going to get to the point where nonperformers are coming down not just because of charge-offs where they have -- through your mitigation efforts the levels are coming down and the charge-offs have already been taken on those credits?

That's a very good question. We -- I would say we have believed for a while that this year you would see that occurring and we have said for a while that it would more likely occur in the second half than in the first half. And we still stand by that. I think we are right at about that point where we're at the breakpoint, where that's beginning to occur.

We had something occur this quarter that we earlier spoke about with a performing credit that was a little bit of a surprise. But when you adjust for that, when we adjust for that in our internal look, we were making pretty decent progress this quarter.

Was that one credit included in the loan sale?

Yes, it was.

The only other question I had is on the margin. It was down I guess about 20 bps during the quarter. How much of that was due to interest accrual reversals or the loan sale or whatever?

Almost none.

No, there was some impact on that. But most of it related to the cash liquidity of 283 --

Ken, we are behind where we thought we would be in terms of investing cash. And we had sort of wacky bond market. I hope it's wacky -- developed during the quarter late last third of the quarter. And we are just behind where we though we would be in terms of our investment. So we are carrying more liquidity than we had expected at this point.

And the other thing is our -- as you saw on the deposit side, we are sort of -- as I mentioned earlier, some of that is seasonal. So everything kind of converts this quarter. We ended up with a lot more cash than expected.

And I suspect it's going to stay that way until loan demand revives, no?

Right, we will have a -- (multiple speakers)

Yes and no, but I think we want to roll forward with some investment of that cash and lower yield in the bond portfolio. That's something we're working on right now.

Thanks, guys.

(Operator Instructions) Dave Bishop, Stifel Nicolaus.

You touched a little bit on the restructured -- on the TDR balances this quarter, some improvement there. What's sort of been the success rate there? I guess you're still working along the process, but I guess the cure rate versus the redefault rate there. Have you seen much (multiple speakers)?

We have had almost no redefault in the whole portfolio, but when we do a TDR, we fully underwrite the credit. And on the commercial side, we don't move into a TDR unless we are 100% certain that the cash flows that are supportable and that they are appropriately support the debt service we are creating in the TDR.

So we have had almost no default for anything that you've seen classified TDR and held TDR. On the consumer side, you know, in about, Jean, I think about a third of our TDR is our consumer. And most of that of course is residential mortgage. We have the same approach and you may want to just comment on the approach, Jean.

Sure, we underwrite fully the borrowers and make sure that whatever structure we are putting in place we have a high level of confidence around the ability to perform under that. And there are government programs where the approach is more of a trial, where the default rate we are seeing publicly are huge.

Yes, 40%, 50%. Our redefault rate, Bill, I think is 5% or something like that.

On the consumer, right on the consumer.

On the consumer side, so it's very --

None on the commercial, because that's the same approach. We have a very high confidence level when we do that around the ability to perform.

And you bring up a good point. We really believe our troubled debt restructures have a pretty high quality associated with them particularly on the commercial side. Again, the tact that we talked about for a year is to more aggressively approach TDR work to keep borrowers committed to projects and to balance things with cash flows temporarily over the kind of stress period.

Great, thank you.

And at the time, I show no questions.

Great, thank you very much for your attendance today. We hope to report continued progress over the next quarter. Thank you.

Thank you, ladies and showman. This concludes today's conference. Thank you for participating. You may now disconnect.