Seacoast Banking Corporation of Florida (SBCF) 2011 Q3 法說會逐字稿

Welcome to the Seacoast third-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 third-quarter conference call for 2011. Before we begin, as always, we direct your attention to the statement at the end of our press release regarding the forward statements we may make during this call.

Those statements constitute forward-looking statements within the meaning of the Securities and Exchange Commission 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 Operating Officer; Russ Holland, our Chief Lending Officer, and Bill Hahl, our Chief Financial Officer.

This quarter, our progress continued with significant improvement in earnings and further improvements in asset quality. Earnings for the quarter were well ahead of our plan, and reflected strong growth in revenues when compared to the prior year.

Our revenue growth resulted from further strengthening of our household build, something we've been talking about for quite some time now, as well as improved loan production and much improved asset quality. We expect these trends, trends that have been evident all year, to continue into next quarter.

Loan growth was positive for the quarter with loans growing at an annualized rate of 6.6%, and this marked our first quarter of positive loan growth since 2007. We believe we should continue to produce positive loan growth into the next quarter based on our current outlook. Much of this growth was felt in our residential book and we began to see good production in our small-business portfolio. And this the small-business growth was a result of our focused program to target business segments that have been less impacted by the difficult economic environment.

We continue to be pleased with our growth in new households. Our retail consumer household growth has been strong all year, and this quarter we also saw some strong growth in business households, something I talked about a couple of quarters ago. All in, we've seen a 27% pickup in new households year-to-date and a 37% growth in the number of new accounts opened year-to-date over the same period last year.

As many of you know, during the crisis period we retooled and we refocused our resources to produce better execution around growing households. We felt this was important in the post-crisis period, a period that would likely not produce much in the way of overall economic growth. As a result, our focus as a company is to continue growing revenues by gaining market share. We had a big win this quarter, it's been that way all year and we look for that to continue over the balance of the year and into 2012.

Frankly, we think the competitive environment has been so significantly transformed and changed that we are certain we will continue to achieve these improvements.

As we move into a potentially more difficult interest rate environment, we believe our core strategy will help us better support our margins. Our strategy as I've said is to produce higher core deposit growth, better loan growth, and this helps us offset the potential for lower yields over the next year. The focus here will be on continuing to improve our deposit mix and adding to our loan balances.

Our non-interest-bearing checking balances are up 17.2% compared with last year. Total transaction accounts grew by 6.2% and savings deposits were up 18% compared to the year-earlier numbers. In this quarter, we saw, as I said earlier, positive loan growth.

Clearly we believe our execution is working, the strategy is sound and we are beginning to see signs that our numbers are accelerating. Our credit quality was significantly improved during the quarter. Loans classified nonaccrual were reduced again and we are down to 2.7% of loans at quarter end. And I'll say that at this point we believe our asset quality is beginning to look quite favorable even compared to our peers in our size group, and they are significantly better than our peers in the state of Florida.

This marks two full years, eight quarters of consistent declines and brings NPLs to a level that we feel pretty good about going forward. We're going to have more to say about all this a little later in the call, but at this point I'd like to turn the call over to Bill, and Bill is going to give us a few comments on the quarter and then we'll complete the call with a few questions.

Thanks Denny, good morning. I'll begin my comments today with a high-level review of the income statement. I will be referring to a few slides we have posted on our website during my comments.

Net income available to common shareholders for the quarter was $1.7 million. This compares favorably to last quarter's profit of $176,000. The primary drivers of the sequential income growth were increased noninterest income across multiple categories, an additional day in the third quarter compared to the second, and slightly higher net interest income. Also adding to the improved performance were stable non-interest expenses and lower credit costs in the form of loan loss provisions.

These results compare very favorably to the prior year, driven by higher net interest income, a lower provision as a result of much lower nonperforming loans. I'll share additional color on performance in a moment after a few comments on the loan portfolio.

Like last quarter, average performing loans were nearly unchanged compared to the first two quarters at $1.15 billion. However, we continue to make great progress in improving loan production and total ending loans increased by approximately $20 million as we drove growth in targeted commercial and consumer areas.

Loan growth this quarter came from improved commercial production and continued strong residential lending.

Turning to slide seven and eight for a discussion on deposits, total deposits were up $24 million from the year-end 2010 at $1.66 billion. The favorable shift in the deposit mixed towards lower cost accounts continued, most notably as Denny mentioned, DDA growth of $47 million or 17% year over year. Higher cost time deposits have declined $57 million over the last 12 months and savings accounts, including NOW and money markets, have increased $33 million compared to the third quarter last year. Relative to the second quarter of 2011, deposits were lower by $20 million, all related to a decline of $19 million in certificates, offset by increases of $19 million in savings and DDA balances. Deposit growth continued in lower cost accounts primarily savings, money market and NOW, which increased by a combined $16 million. This growth in lower costs and no cost accounts has enabled us to continue to manage down our higher costs time deposits during the quarter and has helped protect the net interest margin.

Slide nine covers the net interest margin. The net interest income, which increased $363,000 sequentially, was primarily due to lower NPLs and increased securities portfolio and a new item, loan growth. The net interest margin after expanding each quarter since second quarter 2010 stabilized at 3.36 last quarter, but increased to 3.44 this quarter.

Interest earning asset yields were up 1 basis point linked quarter, while an 8 basis point contraction in interest-bearing liabilities costs primarily due to the favorable deposit mix shift. Relative to last year, third quarter net interest income increased $407,000 or 2.5%. Favorable deposit trends, a larger investment portfolio and loan growth were primary drivers from [proof] performance.

As we look to the fourth quarter, while we see both headwinds and tailwinds for the margins, our current expectation is for the margins to remain fairly stable to slightly improving, if we can continue to benefit from loan growth and lower NPLs.

Turning to slide 10, noninterest income, excluding security gains, increased $159,000 or 4% sequentially. Most prominent were the $129,000 increase in service charges on deposits or 8% sequentially, and wealth management fees from trust and brokerage relationships were up $122,000 or 16% linked quarter. Relative to the prior year noninterest income was up $174,000 or 4%, despite a decline in overdraft revenues as a result of Reg E implementation with the most prominent increases from service charges on deposits, interchange income and wealth management fees.

Let's now turn to slide six for a review of expenses. Expenses were down $911,000 in the third quarter compared with last year. Lower FDIC assessments accounted for $279,000, due to the new asset-based assessment methodology. We also saw a decline of $995,000 in legal and professional fees from the improved credit and fewer problem assets to be dealt with. Removing the unusual items in the quarters that are compared on slide six indicates that core operating expenses are being well managed, but remain elevated as a result of current negative economic environments.

As Denny mentioned our asset quality story is a good one again this quarter as shown on slide five, with net charge-offs declining. Therefore, no provision for loan loss was required. We continued and in some cases accelerated the multiquarter trend of improvement that we've seen for eight consecutive quarters.

Nonperforming loans and nonperforming assets were down 29.3% and 21.8% respectively. Net charge-offs declined to $2.8 million for the third quarter compared with $4 million for both the first and second quarters, and it significantly -- was significantly lower than the third quarter a year ago of $10.7 million.

In light of the improvement in the credit quality and the continued reduction in our risk profile, the allowance for loan losses declined by 9% in the third quarter to $28.4 million or 2.35% of loans. However, the coverage ratio for NPLs increased from 55% last year to 87% at September 30.

Overall, we are pleased with the direction in which our credit metrics are moving.

I'll continue my comments by focusing on capital on slide four. Capital ratios remained well above regulatory minimums, tangible common equity grew by an estimated 7 basis points to 5.91% while Tier 1 was stable at an estimated 17.4%. Tangible common equity ratio on a pro forma basis including recapture of the $46.2 million deferred tax valuation allowance would be about 8%.

So the highlights of what I've discussed this morning are that one, our earnings improved; two, no provision expense this quarter due to improving asset quality; three, the margin improved as forecast last quarter, with loan growth returning, continued deposit mix improvement, resulting in lower cost of funds; four, noninterest income improved versus last year's third quarter in part due to new household and business account growth. Finally, non-interest expenses have declined as cyclically sensitive expenses are lower and we have managed all other expenses tightly. At this time, we are looking forward to continued improvement in our fourth-quarter results.

With that, I'll turn the call back to Denny for some final comments.

Thanks, Bill. As you can see, I think we achieved a key inflection point in this quarter in our continued progress. Credit issues, I think it would be safe to say at this point, are not expected to have any significant impact on earnings as we look forward over the next several quarters. And our revenue growth is occurring across the franchise in just about every category. We expect those trends to continue based on execution we are rolling out around our strategy as we look forward again in a market and in an environment that doesn't have a lot of growth in it. So we feel good about that.

Finally, we see no need for our core operating expenses to increase as we go forward and continue to execute that strategy. All of this, I think, points to continued improvement in our performance as we look forward.

I would like to just take a minute and pause and thank our hard-working associates, most especially our executive team, particularly Russ and Jean and Bill, for all the hard work over the last couple of years that got us to this point. We are very excited, we look forward with great optimism to the balance of this year and into 2012.

And with that, I'll open the call to questions.

(Operator Instructions). Kevin Roth, Stark Investments.

Hi guys. Congrats on a good quarter and good trend. Can you talk for a minute about the Florida -- the trends in Florida housing market?

We'll make a few comments. I'll just say that, first of all, inventory levels are down substantially this quarter. The slowdown in the foreclosure process by the megabanks has had a positive impact on inventory. And that's been the result of continued strong sales activity. Sales activity throughout our markets I would say are back to kind of the pre-bubble solid numbers as you look around.

Having said that, valuations remain under pressure. We see valuation continuing to slide, although nothing like they slid some time ago. Interestingly as you're seeing across the country, multifamily is back, and rental housing is hot.

And that's somewhat concerning when you look at the significance of that to we are at a point here in Florida where the cost to rent is depending on what markets you look at, and what kind of index you're using, cost to rent is 15% to 20% greater than the cost to own. So we are out of balance now on the other side of the equation and I think that, in my mind, portends better stability and pricing and continued growth hopefully enough that [they] absorb the foreclosures as they kind of get back in business.

And on that rent to own comment you just made, what do you guys -- or what needs to happen to get people back into owning versus renting?

Obviously the rental bubble that is forming is the result of folks that cannot qualify for conventional financing. They have no choice but to turn to rentals. And that's a really tough, tough question to answer. So I think that's going to be with us for quite some time. Unless -- you know, financial innovation is not a very positive word these days in our industry, and I'm not sure you're going to see much innovation to help those folks.

But I think for Florida, we are clearly past the turning point. Things have stabilized, we are worried about the surge in foreclosures coming. I think we were hit so hard so early, I'm not sure that surge is going to be as significant as it is in other states, but it's going to be meaningful.

So we still have a couple of years of tough sledding here in the residential market. We are seeing better performance. Some of the higher quality markets, higher waterfronts and so forth, it continues to stabilize. So I think if you were looking to buy a house in Florida, you better get down here pretty quick.

Thank you, guys.

Ben [Belisi from Agler and Neill].

Good morning. Nice quarter, guys. I wonder if you could give us a little more color on the decline in nonperformers. They were down about $16 million, but charge-offs only account for about $2.8 million of it. I'm wondering what happened with the rest?

Jean maybe can comment a little bit on that.

We had a fairly large credit on a relative basis, given what we have left in that category. We moved out of nonperforming into trouble debt restructure, it had a significant pay down; we saw some significant improvement in the credit, and we are thinking that after a couple of quarters we'll actually remove the TDR status. And the quality of what we have left in terms of the classified, Denny and I were just talking about that earlier this morning, is much higher than what we were dealing with over the last couple of years.

So, we are very optimistic that some of these credits now can be rehabilitated and actually be upgraded versus migrate to nonperforming in ORE and charge-offs.

Having said that, that didn't account for the entire decline, but it was a portion of it. We also had just a continued flow of positive liquidation occurring with some of the credits that we are moving through foreclosure and so forth.

And so, we look for that to continue in Q4. We have a stack up of a number of credits that are anticipated to be liquidated in Q4, so we just continue to see the trends move in a positive direction. And I think what Jean said about the quality of the remaining classified assets in the portfolio, we are down to the point now where virtually everything we've got left that we have any concern about is cash flowing. It may not be cash flowing at a level that gets us totally comfortable, but it's cash flowing type assets that are performing and the quality of what is left in that classified portfolio is substantially improved over two years ago and a year ago. That's why we feel more confident today than ever, because when you look at the quality of what we continue to worry about, it's not that.

Thank you.

Bill Young, Macquarie.

Good morning, guys. Could you just talk a little bit about how you think about the reserve. Obviously it's still at elevated levels at 2.35% of loans. What level would you feel would be kind of more comfortable towards the long term, or put another way, where would you think a normalized reserve would be for you guys?

It's really hard to make money when you're reserving 1% or more of the portfolio. Banks need to operate at very minimal levels lost in order to be profitable, obviously, because our spread is so thin.

But we see it continuing to decline in terms of the allowance level because of the substantial improvements in the credit quality. And you're seeing that I think in the industry as well. The recapture of reserves -- and we haven't gone that far, but we are seeing lower positions, and we have historically high level of allowance because of what we've been through both as a company and an industry.

I think if you were to look at banks that have performed better in the cycle, you'll see lower levels of reserves and I think that's probably where we are headed. I don't know what the time frame is as we get there, and --. But I think the trends speak for themselves, and those kind of translate into the reserve over time.

I will tell you we are being very cautious and very conservative, we are not interested in bringing that reserve down in a substantial way without being completely comfortable with the remaining credit risk in the portfolio. So we believe we are being very conservative and careful and over time we'll see that trend continue.

We also believe that as our loan growth, net loan growth begins to stand up here, and again we are not looking for any kind of crazy loan growth but a more normalized loan growth picture, that kind of offsets to some degree the reserve -- the positive impact that provision might have. So we'll have to look and see how our loan growth looks over the next year and how the continued improvement in credit quality and synthesize all that to come up with the reserve levels.

Got you. Could you -- speaking of loan growth, C&I growth was very nice this quarter. Could you just talk a little bit about whether -- is that mostly small-business driven, and then is that representative of any kind of new demand or is it more market share gains? Thanks.

It's market share gains, it's not necessarily increase in demand, it's a lot of refinance opportunity. Some new money for equipment purchases, it's almost exclusively C&I to the business segments that we're focusing on as part of our deposit growth strategy. The business accounts, mostly professionals.

We've also had some residential growth over the last couple of quarters. Again I've described earlier the strength in the residential market, the strength in the number of transactions, and we are back in that market in a pretty significant way in our top -- our three largest counties where we have the largest market share, we are in a number one position in terms of residential mortgage lending from a market share standpoint. So we are back out there pretty aggressively, back in business, supporting our markets. And we're doing that in an environment where the competition has been completely decimated. And so, it is grabbing market share and doing it in a sensible way, and I think we've had a great group. Also Russ, we've had some owner-occupied, I would say that in the CRE (multiple speakers).

Their CRE growth is exclusively owner-occupied. And then we have, on the residential side, those market share gains have been achieved through our delivery of service, exceptional levels of service to the brokerage community.

I know some of our service standards include quick turnaround. You may want to comment on that.

The processing times that we have achieved under Chick Acosta's leadership have been astounding, really, and we're able to deliver the approvals in certainly under 10-day time frame. In many cases we're achieving six days or less.

Great. Thanks a lot, guys.

Michael Rose, Raymond James.

Good morning, guys. How are you? Just had a question on the competition front. Are you starting to see any competition? Denny, I know you've mentioned in the past there's virtually no competition. Is that starting to change at all in your view?

Probably overplayed it. There's actually substantial competition, particularly in some of the things we've just spoken about. And it's been out of some of the larger, newer megabanks that kind of benefited from the meltdown that occurred. Any comments, Russ?

We are seeing competition in all the credit segments. It's mostly driven around pricing. We are all going after the same high-quality credit borrowers, and therefore the pricing is where the competition comes in. And if there is competitive pressures from these megabanks and these regional banks.

As I look at your loan yields quarter to quarter, I think they were flat. Should we think about those potentially falling from here, kind of as your mix shifts a little bit, maybe a little bit more C&I? It seems like the construction runoff is probably near or has probably run its course. How should we think about loan yields?

They are under pressure, for sure. That's where we are seeing competition.

That's our biggest struggle is holding the line on that.

We are working to offset any pricing pressures with the deposit products and other fee-driven type of opportunities with the customers to -- we are not just lending them money, we are bringing in entire relationships. So we are trying to offset any competitive pricing pressures with other product sales.

We have a competitive advantage with interchange income, and we are seeing continued strong growth in the fees on deposits, and we expect that to be helpful to us going forward, and we are seeing huge competitive advantage in the marketplace around deposit products. And just the whole issue around free and what the large banks are doing relative to charging customers, it's making people very angry. And we stand out as being very different. We stand for value, not just free.

Thanks. Just one follow-up question and I don't know if you addressed this in your prepared remarks, I'm sorry if I missed it. But on the TDRs, they increased this quarter, the performing TDRs, is that more a function of the accounting change or just doing more mods?

No, Jean commented on it earlier. It was a transfer of -- well, it was a variety of things, but it included a larger credit that shifted out of NPLs into TDRs, the result of a substantial pay down as part of our process with that borrower, and the dramatic improvement in his financial condition as a result of some changes that occurred.

Sorry to make you repeat that. Thanks a lot, guys.

The more important thing is we expect it over a couple of quarters to come out of TDR too.

(Operator Instructions). [Frank Peroki, Indy] Capital.

Hi guys, great quarter. Denny, given the number of problem financial institutions in your markets, are there any opportunities for you to gather up some quality commercial bankers that could hit the ground running and help your loan demand or accelerate the improvement in your loan demand?

Russ can comment on that. That's something we've been focused on. I wouldn't say we are focused on the problem bank, but go ahead.

We have been focusing on recruiting commercial lenders, it's part of our strategy, in particular in the larger metro markets that we operate in, Orlando and Palm Beach County. But we are going after the relationships, the relationship managers, at the banks that are stronger, that are going through some transition on their own.

Mainly I would say the megabanks.

Yes. The megabanks that have transition occurring through restructures, reorganizations or simply mergers and consolidations.

How successful have you been to date, how many net new additions if you will?

Net new, we have -- net new about 10, and we are still actively recruiting.

Good. Thank you.

The challenge is are we going to build that pipeline ratably? Over time we are seeing good numbers, obviously Russ, pipelines are up substantially, we talked about that last quarter. And you saw some of the results beginning to hit the balance sheet this quarter. We see that momentum continuing.

Again, we are not trying to overpromise here. We're talking about nice growth but not crazy growth. And these are smaller loans, so it requires a lot of work.

Thank you, guys.

Thanks.

We have no further questions at this time.

Great, well, we appreciate your attendance today and we look forward to talking with you next quarter. Thank you.

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