Seacoast Banking Corporation of Florida (SBCF) 2010 Q4 法說會逐字稿

Welcome to the Fourth-Quarter and Year-End 2010 Earnings Conference Call. My name is Sandra 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, sir.

Thank you very much, Sandra, and welcome to our Seacoast Fourth-Quarter Conference Call.

As always before we begin, we'll direct your attention to the statement contained at the end of our press release last night regarding forward statements. During this call we will 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 within the meaning of Section 27A of that Act.

With me today is Jean Strickland, our President and Chief Credit Officer; Russ Holland, our Chief Lending Officer; and Bill Hahl, our CFO.

We're very pleased to report continued progress this quarter. And, in fact, we're very pleased with our revenue improvements and overhead improvements, which have been particularly strong in the second half of the year.

But before we discuss the factors that are producing these improvements, as well as our outlook for 2011, I want to comment on the year that just closed out and how our progress in 2010 will support our return to profitability in 2011.

Throughout 2010, we progressed forward in our effort to reduce aggregate credit risk in the balance sheet. Our targeted plan reduced loan concentration. And as I said in our July conference call, by focusing our liquidation efforts on our larger problem loan exposures, and larger concentration in 2009, we are now seeing problem loan inflows pace slower, and the inflow is comprised of smaller loans.

At the time of our call back in July, I also said that we believe our problem loan exposure peaked in the third quarter of 2009. And our belief was supported with a continued decline in the level of classified loans.

As a result, I also said that we expected to see a moderation of new problem loans. Well, our non-performing loans declined each quarter throughout the year in 2010. Non-performing loans declined by 23.5% in the third quarter, on a linked basis, to $69.5 million. And then fell to $68 million in the fourth quarter, compared with a peak level of $154 million in the third quarter of 2009.

Non-performing loans at year-end represented a decline of 56% from the peak, and a decline of 30% for the year.

Other real estate owned did, in fact, grow throughout the year as I said it would during our first-quarter call. But then declined 21% on a linked-quarter basis to $25.7 million at year-end, as we continued our problem asset liquidation effort.

In earnings results for the year 2010, we're lumpy. Again, something I said we should expect during our first-quarter call, including this quarter with our loss of $10 million. And the lumpy results were due, entirely as we predicted, to losses associated with the sale of OREO, other real estate owned, and asset dispositions, particularly in the first and final quarters of 2010.

Our success in managing down our credit risk will now begin to support our return to profitability. A reduction in aggregate credit risk, combined with signs of stability in the local economy, means fewer new problem loans and improved credit migration trends. And that's exactly what we are now seeing.

And I would say the real news here today is that what started out as hopeful signs of improvement in early 2010 have now emerged as real trends, trends we expect to continue.

As I now look at the liquidation work ahead of us, it will be very different than that of the past two years. First of all, our C&D loan exposure, which drove the bulk of our losses, has been all but eliminated. Second, further bulk loan sales are no longer needed to muscle down aggregate credit risk. And third, credit charge-offs primarily come from new problem inflows. And given that those inflows are now much reduced and are in asset classes with lower loss potential, we fully expect credit losses to continue to moderate.

The assets that remain have generally received credit marks that reflect current conditions. This doesn't mean we have eliminated the risk brought on by current conditions, because conditions remain weak. But we do expect to see improved credit costs and continued improvements in credit quality in the next quarter and throughout 2011.

Now back to my opening comments regarding revenues and overheads. We reported very positive improvements in revenue growth last quarter and this trend continued into the final quarter of 2010. This growth occurred across the board and is a result of our focused efforts to accelerate household growth and market share.

Bill's going to speak to some of the details, but I'm particularly pleased with the growth in fees given the new regulatory fee restrictions that were put in place and impacted our final quarter.

Moving up to overhead, core operating expenses, which totaled $19.3 million in the first quarter of 2010, were reduced 7% to $17.9 million in the final quarter of the year.

These positive trends relating to revenues and positive trends relating to overhead, together with positive trends relating to asset quality and credit costs, support our belief that we can now begin to return to profitability in 2011, provided the overall economic outlook remains stable, as we think it will.

I'm now going to turn the call over to Bill for a few comments and then we'll conclude with some questions.

Thank you, Denny, and good morning, everyone. Thank you for joining us on the call today.

We posted a few slides for the call on our website for your reference. I'll quickly review some of the highlights from our results and then turn the call back to Denny and we'll take your questions.

Overall, our results for 2010 were driven by steadily improving credit trends that saw net charge-offs fall $70 million to $39.1 million, or 295 basis points of average loans, and provisioning for losses fell $93 million to $31.7 million. NPLs fell by 30% to $68.3 million, compared to the prior year.

Taken together, these two factors contributed significantly to our year-over-year earnings improvement. Encouragingly, fourth-quarter loan production in our consumer, residential, and commercial loan portfolios resulted in only a 1.8% decline in accruing loans linked-quarter.

Additionally, expansion of the net interest margin, coupled with good expense control, contributed to improving operating efficiencies in higher deposit households. And higher deposit household acquisitions enabled our retail bank to offset the reduction in consumer service charges that Denny mentioned during the mid-year implementation of changes to Reg E.

Included in GAAP earnings for 2010 were credit related expenses related to elevated non-performing asset management costs and direct costs to manage these assets, and combined, totaled $17.8 million for the year, compared to $6.3 million for 2009.

Additionally, non-core operating expenses for professional [fees], related to the assistance in developing the company's new strategic plan and new risk management system of $2.3 million are also included in GAAP non-interest expenses.

Without these costs, and on a comparable basis, overhead for the year 2010 declined by $2.7 million, compared to the prior year.

Next I'd like to cover a few highlights from the balance sheet and the income statement.

Taxable equivalent net interest income was $16.4 million for the fourth quarter, slightly lower than the third quarter. The net interest margin improved slightly during the fourth quarter, averaging 3.42%, up 7 basis points from 3.35% in the third quarter.

As we discussed on the earnings call in October, we held higher levels of cash on balance sheet during the third quarter and this continued in the fourth quarter. And this unusually low interest rate environment and the prospects for improved asset yields in 2011 and beyond, we remain opportunistic investors.

While this program negatively impacts the net interest margin, it is a temporary issue and it will allow for future margin expansion as the economy improves and loan growth returns, perhaps as early as late 2011.

Offsetting this has been improved deposit mix, which allows net interest deposit costs to decline 9 basis points to 0.92%, and overall costs of deposits to decline 8 basis points to 0.76%, compared to the third quarter.

As for the balance sheet, compared with the third quarter, residential real estate loans grew by an annualized 7.7% reflecting specifically the retaining of more mortgage loan production in the portfolio, while consumer loan production was largely offset by monthly amortization of principle.

While it seems clear that economic activity continues to improve, commercial loan growth is still weak and dependent on market share increases, as little new business is being started, expanded or opened.

With that said, we continue to see strong growth in core deposits. Average core customer deposits, which exclude CDs greater than $100,000, increased in the fourth quarter to 84.5% of total deposits, up from 80.5% a year ago.

Turning to non-interest income, excluding securities gains, non-interest income was $5.3 million for the recent quarter, compared to $4.8 million in the third quarter.

Mortgage banking fees were $580,000 for the quarter, down from $654,000 linked-quarter. As I mentioned earlier, this decline can be attributed to our decision to retain higher percentage of mortgage production, as [closed] production increased to $49 million in the quarter, up from $38 million in the third quarter, and sequentially was up every quarter. We started with first-quarter at $33 million.

Service charges on deposit accounts were $1.6 million during the quarter, compared with $1.5 million linked-quarter. This 20.9% annualized increase reflected the full impact of the implementation of the new Reg E, which Denny mentioned and I mentioned earlier, but it was largely offset, there were declines in those fees, but they were principally offset with increases in personal and business core deposit household growth.

Turning to expenses, operating expenses continued to be well controlled during the recent quarter. Excluding credit related costs and professional fees, as discussed earlier, core operating expenses were $17.5 million, down from $17.7 million in the third quarter.

Annualized net charge-offs, as a percentage of total loans, were 147 basis points, down from 329 basis points linked-quarter. The provision for credit losses was also down, at $4 million for the quarter, compared to $9 million in the linked quarter. The provision allowed for the allowance for loan losses to remain at a steady 3.04% of total loans at year-end.

Tangible common equity ratio was 5.81% at the end of the fourth quarter, 105 basis point increase from the 4.76% at December 31st, 2009.

We increased the deferred tax valuation allowance again this quarter and it now totals $47.8 million. The recapture of the valuation allowance will allow the [TCE] to increase by 137 basis points when we are able to rely on a forecast of future taxable earnings as support for the company's net deferred tax asset.

The outlook for 2011 is for the rate of recovery to remain slow with levels of economic activity improving. We expect the net interest margin for 2011 to be relatively consistent with the 3.42% we reported in the fourth quarter.

Overall, our goal for 2011 is to sustain the improvements that we've gained during 2010, and to further develop and implement strategies which achieve our long term objective of improving shareholder value.

That concludes my remarks. I'll turn the call back to Denny and we'll open for some questions.

Thank you, Bill.

We included a new slide this quarter, non-performing loan inflows, slide number 6. And if you take a look at that, it's very supportive of some of the comments I made earlier in the call. Again, we're seeing a very significant reduction level of inflows.

And I guess the final comment I'd make is we were very comprehensive in our look at year-end non-performing assets, with respect to credit marks needed and so forth to move those assets out as we look forward into 2011. So, probably will have some questions on that and happy to give you a little more detail around that.

But I think for now we'll just throw the floor open to questions and ask the operator to please announce our questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Brett Scheiner, FBR Capital Markets.

It's good to see credit improving. I understand about 140 basis points TCE recapture you'll have when the DTA comes back. TCE, though, still below 6%. Could you just give some color on how you're thinking about capital? Whether you think you'll need to access the capital markets?

I think our focus is on returning to profitability. And as we return to profitability the visibility of the deferred tax asset I think gets a little more clear. And we think it's important to do that.

So, we're comfortable with our capital positions right now. As I said, we're pretty aggressive in the fourth quarter looking at all of the credit marks throughout the portfolio and getting the portfolio now to a point where we can start to more rapidly reduce and liquidate, in an appropriate way, those assets.

So, as we do that, we continue to improve credit quality, number one, risk levels continue to improve, which we think is positive in terms of looking at capital. That is to say the credit impact on capital will become much less in 2011. And we think we've bottomed out in terms of some of the capital numbers there.

So, we fully expect to see that number improve over the next year.

Dennis, let me ask you a follow-up on that. Your intention would be for the at least partial DTA recovery, if not all, as you return to profitability, certainly you have plenty of time to use it. And then raise capital at a more favorable price or you believe at that point you'll be capitalized at a comfortable rate?

We believe we'll be capitalized at a comfortable rate given the improving risk profile of the organization, the growing revenues and increasing profitability. We'll start accreting capital in 2011.

Okay, great. Congrats on the improvements in the year.

Chris Marinac, FIG Partners.

I wanted to ask about your perception about the classified assets relative to capital and reserves at this juncture. Are you satisfied with the improvements there and do you think that there'll be further changes in that ratio coming lower in coming quarters?

Yeah, we're very pleased with the level of classified assets to capital. It's improved consistently, really for quite some time now. In fact, our classified assets peaked prior to the non-performing loans peaking in the third quarter. So, it would have been a couple of quarters earlier.

And ever since then, we've seen a continuous decline in the level of classified assets. When you relate that number to our capital, again the trends are positive, we are seeing those numbers get even more favorable as we hit the end of 2011, in terms of our outlook and projection.

So, yeah, we feel pretty comfortable with where we are there. The trends are great and the numbers are down to levels that we find a lot more acceptable than they were two years ago. And again, the inflows and migration trends are very favorable as well. We're now seeing, I think I said last quarter, we're starting to see more upgrades than we are downgrades and that continued into the fourth quarter.

So, we're seeing things clearly stabilized, Chris, on that front, and kind of back to the earlier question on capital, that's one reason we feel comfortable with the current capital position. We're seeing all the risk metrics improve very nicely.

Denny, is there any rule of thumb on if we see [NPAs] and other performance metrics improve, is there any relationship to how classifieds drop? Do classifieds actually fall faster than NPAs or is there any rule of thumb there?

I don't have that number off the top of my head, but I'd say as the NPAs come down we do see some probably modest even further improvement in the level of classifieds and it's because of performing classified loans, again, improving.

The other thing I said last quarter was the quality of the classified loans that are not on non-accrual, that is to say they continue to perform, the quality of that classified asset continues to improve.

We're seeing a relationship that two years ago were headed, trends were very negative, and now we're seeing the trends improve. It's still a classified asset, still got stress, we're still concerned about it, but the falling trends have now stabilized in just about all cases, in many cases, have actually improved. And we can begin to start seeing how the borrower is returning to better health.

So there's some of that going on and that would tend to increase the improvement beyond that that you're seeing in NPL.

Just one quick one last question, Denny, on OREO costs, how much change should we expect in that? I know the score was a large one, but just curious on how that number is going to fluctuate.

This quarter was a very large impact. And again, as the inflows have now moderated and our projected inflows continue to moderate as we look forward, we felt this quarter we needed to look very carefully at current market conditions and try to achieve credit mark, particularly in the OREO portfolio that would allow us to continue to liquidate those assets over the next several quarters.

And so, we feel pretty good about that. And we think we've got things marked more aggressively now than they probably ever have been. And it's the right time to do that. Russ, did you have any comments on --

Well, sort of confirming what you've said, that we've written the assets down to where we're seeing increased market activity, which has been reducing our days in ORE, so we've been able to start to see more movement in the assets.

Right. We're seeing good activity there on the OREO side and things are moving, and actually probably a little ahead of where we thought we would be in the fourth quarter on OREO. Again, with all of the migration that occurred in 2010 into OREO, it's pretty amazing we actually saw no growth from year-end to year-end in OREO balances.

And so, we're feeling pretty good about our ability to move the stuff out and we believe that will continue next quarter and into 2011.

We're more optimistic today than we were last quarter. And we were very optimistic about the trends last quarter. So, we're feeling pretty good now that things have really turned, clearly stabilized. Locally things are stabilizing and we're seeing much better numbers out ahead of us.

Great, thanks very much for the color.

Dave Bishop, Stifel Nicolaus.

Circling back to the OREO costs, in terms of the expenses this quarter, how deep of a dive was it? Were there any sort of larger credits impacting that? Actually, what was moved out of there? What flowed in, in terms of the size and depth, or was it a little bit more granular in terms of some of the write downs?

I'll make a general comment and then turn it over to Russ and Jean to give it a little more color.

Generally speaking, again, my earlier comments several quarters back, we focused our liquidation efforts in late 2008 and all of 2009 on our largest, biggest, baddest, nastiest stuff. And as a result of that, the inflows that we're seeing now are much smaller in size, now meaning during 2010, tends to be smaller in size, more granular, and more able, things that are easier to liquidate.

And that was the plan back in late 2008 and we executed on that plan and now we're seeing it come to fruition with these improvements in 2010. Those improvements continue on into 2011 and the negative impacts are driven down by the increased granularity and increased liquidity associated with it.

Any other comments, Russ or Jean?

As far as the nature of the write downs, we're fairly diverse across the portfolios. And it was, again, valuation driven and is enabling us to move the assets more quickly.

We had a conscience thought that we wanted to take a hard look so that we could make sure of our ability in this year to continue moving things out.

Has there been any change in terms of the depth of the market there for secondary, for buyers there in terms of dipping their toe in the market? Has it been becoming a little bit more rational, a bit more professional driven where people are getting [something] more optimistic, but a little bit more rational in terms of the pricing there? It's like okay, it's more acceptable in terms of the marks that you're taking.

We are actually seeing improved volumes. First of all, for example, residential home sales accelerated back up in December and were actually surprisingly strong in the month of December. We're seeing pricing, the valuations now on the residential side of things are at a, I wouldn't call them bargains, because it is the market price, but they are very reasonably priced and their priced, as I've said for several quarters, to match income levels. Everything has come back into balance. And that is what is driving the volume up in those areas.

We're also seeing some stability, I would say, just across the board in commercial as well.

We commented earlier, I think you and Russ both did, about the activity that we're seeing. We're seeing a more active market, which speaks for a little bit more demand.

So, to your point about are the pricing expectations of sellers and buyers getting closer together, I would say yes, we're seeing that now.

And I think the price capitulation on the part of the seller, which was driven by a lot of short sales and distressed asset sales and that sort of thing, have really come into better balance with the buyers' expectations. So we're again seeing things move. We have a much more positive outlook today than we would have a year ago.

(Operator Instructions). Mac Hodgson, SunTrust Robinson Humphrey.

On the margin, I know you mentioned that the excess cash liquidity, [$200 million] or so, is a drag in that you hope to obviously re-deploy it. Can you help us think through long term where the margin could go when that sort of turns around and loan growth comes back?

As Bill pointed out, the higher levels, and it's not just cash, it's also higher levels of short term investments. In the portfolio they make it, it restricts our ability to produce a better margin. And as that liquidity in short term investment portfolio is reinvested into loans, we're projecting some very nice margin expansions over time.

And I think the key there is what's the pace of that? We've been very disciplined with respect to our forward projections for interest rate risk and we're very concerned over where yields may be going over the next year. So we've been, as I said, very disciplined in trying to manage that price risk very diligently.

And so we've put more of our efforts into growing the loan portfolio. There are kind of two things that happen that lay out over the next couple of years, Mac.

First thing would be the redeployment of the liquidity into the loan portfolio, and that's worth a lot of money. That would have a significant impact on net interest income. It would actually, probably have a very significant impact on bottom line performance. We see that occurring over the next 12 to 18 months.

And then beyond that, the continued growth in market share and household growth that we talked about this quarter and last quarter particularly, starts expanding the balance sheet in a very low cost way. And again, that worked its way back into earning assets, which is kind of the secondary source of margin growth over the next, which will be more of an impact in 2012 and beyond.

But all of those things are stacking up to improve margin growth. And it might be good for somebody to comment on what effort we have underway to grow loan portfolio.

On the commercial side, we've been recruiting heavily commercial lenders from our competitors in various markets. And we've seen some activity of bringing those relationships over from our competitors.

We are focused on small business lending, owner-occupied type financing, and have seen an increase in the fourth quarter in the number of transactions.

Residential mortgage, we've had a significant increase in volume and bringing us back to improve our market share in our core markets and increase our volume in those areas.

We're also working heavily with our retail branches in originating additional consumer credit.

So a lot of irons in the fire, Mac, to grow that loan portfolio in an appropriate way. We have seen great success in the residential and a little bit in the consumer area. That's working very well. And those are market share gains that are driving that success.

And so we want to see similar market share gains driving success in the small business owner-occupied areas, as Russ said. And that led us to recruiting. And what are we seeing out there with our recruiting efforts?

And this is all fairly recent, something we started last quarter and talked about. We actually landed some folks in the fourth quarter. Those folks are beginning to produce, but the real impact starts to get felt in 2011 with growing revenues out of that.

The interesting thing in our market is there's still quite a bit of disruption with some of our larger competitors that are in transition. And that transition is causing disruption, not only with their customers, but also with their line production folks.

And so, we're able to attract them because of what Seacoast has to offer. It's fairly unique in our market. And it's attracting not only the customers, but the originators as well.

How many bankers did you hire?

We brought on four in the fourth quarter. And we're going to continue that trend throughout 2011.

That's great color, thanks. Just a couple others.

And by the way, I'll just remind you, in the second quarter call in July, I talked about we had moved all of the softer workouts back into special assets and the like. So what was frenetic in the prior year 2009, has now clearly turned into just a, I think I call it a mop up operation, by the time we hit mid-year.

And so, the focus was in the second half of the year really press forward to drive revenue growth in that second half of the year, so that we could set ourselves up for some more impressive revenue growth in 2011 and beyond.

And so, a lot of our existing production folks are now devoting greater amounts of their time, in fact full-time now, on new loan growth. And we think the timing was good because the economy is stabilizing and the local economy is starting to repair itself now.

Unemployment is still very, very high in our markets. In most of our markets it's going to be 12% and 13% or even a couple of them almost 14%. So, I'm not kidding you. Conditions are still very, very soft, but we think the timing was very appropriate for us to be back out in the market now looking at this.

And what we have to focus on is that we're not seeing any new production, new business, new expansion going on, it's all market share acquisition. So we are lasering in on particular market segments that are very attractive in the current environment and are likely to show improved performance over the next couple of years.

We're lasering in on those areas and we're seeking production folks in other markets with other competitors who have specialty in those targeted segments. And it's beginning to work. We saw volume increase very nicely in the commercial side in the fourth quarter and pipelines are starting to build.

So, we did this a year ago on the residential side and it's now paying dividends big time. And we believe by the time we get to the end of 2011, we'll have some very nice overall loan growth beginning to materialize and that driving net interest income throughout 2011, but even more aggressively in 2012.

Just one last one. What's the liquidity at the holding company and when do you expect to go back to, unless I missed it already, go back to paying the (inaudible) [trust-preferred] dividends?

That's something that's kind of a current topic. And we have over $20 million of liquidity at the parent. And we believe we're very fast approaching a point when that makes sense for us to come out of deferral.

So, it's something that is a current topic. And as we get better visibility on that, we'll be letting you know what our thoughts are.

Bill Young, Macquarie Research Equities.

Could you just quickly remind us how much you expect to achieve from cost savings with the efficiency plan next year?

We don't have anything that we've announced in terms of what that looks like, but we'll have something to say I think in the first quarter.

We are looking at working with an outside firm to assist with an overhead review. So, it will be a significant saving (multiple speakers).

It will be a significant deep look. And we're looking for operating efficiencies. We've been through a very tumultuous period. And as we begin to kind of now stabilize the organization and see these trends emerge, I think it's very important and very timely for us to refocus our attention on our structural overhead and match that overhead to the opportunities out ahead of us and begin to increase our efficiencies as we look forward.

So, our efficiency ratio today is completely unacceptable. It is not where it needs to be. And by that, it is not entirely due to the operational side and the cost side, it's also very, very much a function of the revenue side of the equation, given what we've been through here.

I remind you that not only are we hearing very high levels of liquidity, but we are also continuing to carry higher levels of non-performing assets. And as those assets are liquidated and reinvested, all of that continues to drive revenue up.

And we think the combination of a look at overhead combined with this focus on revenue begins to get our overhead ratios back, in a year from now, up to a level that we're going to find a lot more acceptable.

Part of focusing on efficiency has to do with improving customer service. So, that's another benefit that we expect to achieve through the look we will do this year.

Dave Bishop, Stifel Nicolaus.

Just had one follow-up, Jean, I think you talked about this before and it doesn't look like there was too much movement in or out either way, but on the restructured loan portfolios, have you have much experience there in terms of, I think you were assuming it was like 20% on the residential side, no re-defaults on the commercial real estate side? Is that still holding true?

That is still holding true. We have no re-defaults on the commercial side. And on the residential side, we are experiencing half of what the industry sees, in terms of us having a 20% re-default rate versus 40%.

(Operator Instructions). At this time, there are no further questions.

Okay, well thank you very much for your attendance today. And we look forward to talking with you after the first quarter results. Thank you.

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