Seacoast Banking Corporation of Florida (SBCF) 2012 Q1 法說會逐字稿

Welcome to the Seacoast first quarter 2012 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 first-quarter 2012 conference call. Before we begin, as always, we direct your attention to the statement contained at the end of our press release regarding forward statements. During our 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 27-A of the Act.

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

We continued our progress this quarter with some of the best growth in new households and deposits that we've seen in quite some time. In fact, I believe, the growth we're now seeing is quite remarkable, given we're still in fairly tepid business conditions as we move forward. We also produced our third consecutive quarter of positive loan growth following several years of efforts devoted to liquidation of problem loans.

Our accelerating growth in new customer households, both business and consumer households, is now starting to translate into higher revenues, and I want to talk about that in a minute. But first, I want to comment on our earnings results for the quarter. But, well, before I do that, I think, I should probably comment on another milestone we achieved during the quarter and that was our exit from the TARP program.

As most of you know, the Treasury department is aggressively moving to wind down the TARP Capital Purchase Program and we were selected among with five other banks to participate in the first-ever auction of TARP preferred securities, which was concluded at the end of the quarter. The auction was very successful and our entire issue of preferreds was sold to a number of new private investors.

With our participation in the TARP program behind us, we consider our preferred stock outstanding to be an important part of our capital structure for now. As we move forward, we will view this Tier 1 capital from an entirely rational standpoint. Frankly, our exit from the program and the continued capital provided in the form of perpetual preferred stocks opens up tremendous flexibility for us to fund our growth plans and it strengthens our ability to take advantage of opportunities in the future. In the near term, it provides us with a capital cushion which protects common shareholders from dilution. As we move forward and our condition improves, we can consider various options with an eye [toward our] overall cost of capital and achieving a more balanced capital structure.

Earnings for the quarter were below our expectations and totaled just under $1 million. Impacting the quarter were higher cost related to the disposition of foreclosed properties. During the quarter, we moved a little more than half of our overall -- of our OREO portfolio into contracts with about half of the properties closing this quarter, Q1; and the rest are scheduled to close next quarter, Q2. This resulted in higher cost, both for legal and professional fees, and in losses on sale and other disposition cost. The assets sold included some of our largest and -- larger and more troublesome remaining properties.

Our decision to exit these exposures now at prices that sell somewhat below our carrying value, we think, made a lot of sense. As I said, these assets were troublesome and they were costly to maintain. We also saw an increase in our provisioning for loan losses this quarter compared to the last several quarters due to a larger troubled loan moving to non-accrual. Bill and a few others, I think, will be happy to weigh in the color on that later in the call.

And now, under our growth initiatives, I've been talking for some time about our focus on various growth initiatives. Our success continued this quarter with record-breaking growth in new consumer and business households, with over 3,000 new relationships added to our 68,000 household base. This was an acceleration of performance over last year and our progress is now building higher levels of funding, growth in net interest income and growth in fees. Non-interest-bearing checking deposits were up 21% over prior year and the DDA mix of deposits grew to almost 23%.

Our core customer funding grew overall 15% over the past year. And just about all of our fee categories grew this quarter, with particular performance in areas related to our household growth. I think, Bill's going to hit a few more details in his comments. So I'm going to turn it over to Bill now.

Thanks, Denny, and good morning. I will be referring to a few slides we have posted on our website during my comments. Net income for the first quarter totaled $938,000 compared to $358,000 for the first quarter of 2011. In general, the differences in performance compared to last year were increased non-interest income, higher net interest income and non-interest expenses, and increased credit cost in the form of loan loss provisions as a result of one larger loan that was transferred to non-accrual, as well as what Denny mentioned, the final disposition of approximately $12 million of OREO properties.

Revenues excluding security gains grew by 4.4% for the first quarter compared to last year's first quarter. In the quarter just ended, topline loan growth was up $8 million compared to the fourth quarter. However, accruing loans totaled $1.175 billion, $5 million lower compared to the sequential quarter but $16 million higher compared with last year. Notwithstanding the modest loan growth over the last 12 months in accruing loans, we continue to make progress and are encouraged by the increase in our active commercial pipeline to $98 million at quarter-end. Our commercial lending teams have achieved improved pricing on the new lending and this has resulted in our achieving our net interest income goals in spite of the drag of the new non-accrual loan I mentioned earlier.

Turning to slides seven and eight, and the deposit data in the earnings release for a discussion on deposits, our retail banking team has done a great job in adding large number of core deposit customers and dramatically improving the mix in profitability of our deposit base in recent years. That mix improved even further in the first quarter. Total deposits are up $51 million from a year ago and $19 million from last quarter. However, the real story for deposits is the favorable shift in mix towards lower-cost accounts, most notably by the DA growth of $70 million or 21% year over year.

Lower-cost deposits, including NOW, transaction accounts and regular savings, have increased $40 million to $28 million respectively over the last 12 months. The growth in lower-cost and no-cost accounts throughout the last 12 months has enabled us to manage down our higher-cost time deposits and helped protect the margins. Further, this has resulted in reductions 25% of total deposits to time certificates compared to 32% last year.

Slide nine covers the net interest margin. On a sequential basis, net interest income decreased $332,000, primarily the result of increase in nonaccruals but was up $186,000 over prior year's first quarter. The improvement year-over-year was due to a 37% decline in nonperforming assets and increased securities portfolio and modest loan growth I discussed earlier. The net interest margin declined 9 basis points, linked quarter, as a result of the sale of price-sensitive investments that had increasing prepayment trends, which were invested at lower yields. The increase in NPLs and partially offsetting with the better mix and the modest loan growth.

Interest-earning asset yields declined by 17 basis points linked quarter and were partially offset by a 9 basis point contraction in interest-bearing liability cost. Our current expectation for the margin has to be under pressure from the negative impact from lower asset yields offset by improving loan growth, lower NPAs and better deposit mix. In addition, we continue to believe that it's appropriate to remain conservative and position the balance sheet for higher interest rates in the future.

Turning to slide ten, non-interest income, excluding securities gains, increased $738,000 or 17.3% over the first quarter last year. Obviously, our growth in core deposit customers had and should continue to have favorable implications for income from deposit accounts related fees and has assisted in our overall total revenue growth.

Mortgage banking and marine finance fees increased by $228,000 and $32,000 respectively over last year's first quarter, as both are seeing better transaction flows as the general economic conditions improve in the markets we serve.

Now, let's turn to slide six for a review of expenses. As Denny mentioned, expenses were up and they were up nearly $2.1 million in the first quarter compared with last year as a result of higher OREO losses and expenses related to their disposal, legal and professional fees related to the Treasury's sale of their TARP investments, and higher commissions and incentives related to our improved performance. Salary and wages were also up in the quarter compared to the first quarter last year as a result of investments in additional Relationship Managers that have assisted in building our commercial pipeline. We expect a few additional CRMs for the Palm Beach market that will further help with loan growth in 2012, probably in the second quarter and third quarter.

Non-interest expenses in the quarters that are compared on slide six indicate that core operating expenses are being well managed and expenses have increased as a result of investments in further revenue improvement and in areas that vary with increased revenues but credit-related expenses, however, remained high. In addition, compared to the fourth quarter, reoccurring expenses are higher as a result of normal, cyclically higher payroll taxes and group insurance.

Now, switching gears to our credit trends, net charge-offs totaled $3.4 million, up slightly from the fourth quarter, but down 15% compared to last year. NPLs have declined by $24.5 million during the last l2 months, but increased linked quarter as the last large impaired commercial real estate loan participation, a $14.4 million credit moved to non-accrual. As a result, the provision for loan losses increased to $2.3 million for the quarter or $1.7 million higher than 2011, with $2.1 million attributable to the loan participations. The remaining impaired commercial real estate loans are much smaller and averaged $694,000.

We believe that credit costs will continue to trend down and that the - our overall risk profile has declined significantly over the last 12 months, allowing for the allowance for loan losses to decline to $24.5 million or 2.01% of loans. We are very pleased with the efforts of our Special Asset Group and the direction in which they have taken all of our credit metrics.

I will continue my comments by focusing on capital on slide four. Capital ratios remained well above regulatory minimum. This quarter, our preferred stock, as Denny mentioned, were sold to a variety of investors and therefore, we're no longer faced with an overhang of a possible future common equity raise to repay Treasury. This, we believe, for now as cheap capital and we can now focus on deploying capital on growth and expansion. We believe we have a great opportunity to take market share from the mega-banks and the most immediate capital deployment opportunity is growth in our legacy loan portfolio, which we've seen signs of over the last three quarters. Down the road, we see traditional M&A opportunities as smaller community banks struggle with increased regulatory burdens.

That concludes my prepared remarks. I'll turn the call back over to Denny.

Thanks, Bill. I guess to summarize the quarter, we continue to focus on organic growth and I think our people are producing some remarkable results. These results are now beginning to show up as revenue improvements across all markets and it's strengthening our franchise value. We've significantly improved our credit quality and we've eliminated credit concentrations. Loan growth is beginning to return and we expect to see some acceleration in growth going forward over the next year as our business initiatives grow stronger.

And as you've heard, our new business pipelines are very strong right now. We'll continue to invest in growth, while we pay for it to the greatest extent possible with reductions in core overhead. Our expenses were higher than anticipated during the quarter, all of it related to credit. Going forward, these costs are expected to return to more reasonable levels.

And with that, I guess we'll open the call for a few questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from David Bishop from Stifel, Nicolaus. Please go ahead.

Hey, yes. Good morning, Denny.

Good morning.

Hey, I was - saw the positive trend in terms of the commercial loan funding this quarter. In terms of the market on the commercial side for competition there and just from a VAR perspective, what are you seeing there in terms of signs of life or just the competitive environment, just overall?

Yes. It's certainly a very competitive environment and having said that, though, we have some very specific things we're doing to - from a competitive standpoint that we think really makes -- positions us in a distinctive fashion. I think the most significant thing we're doing is really attacking the very large banks, the mega banks and we're seeing some tremendous ability to begin to move some of that business over here. I guess my point is - central point is this is a market share acquisition play, we're not seeing tremendous growth in the market and for us to gel.

Yes, that's actually true in all of our markets with the opportunity to win business from the larger competitors. Some of our growth markets, Orlando and Palm Beach, we are seeing some signs of economic growth and some loan demand increases.

We also have a very targeted approach as we've talked about before in terms of our focus and really understanding what adds value to the targeted group (inaudible).

That's a very - I guess, we won't go into it, but we have some very specific direct marketing that we're working and have been for the last quarter or so and that's gaining some momentum and we're finding that to be very effective.

We've been able to -

A couple of years ago, obviously or actually more than a couple of years, the Scripps Institute opening down there, we've been able to sort of call any sort of growth from the expansion from that campus?

Yes, we have, we have some relationships there. It's a slow buildout though, and Jean, you have a comment?

Sure, we welcomed Scripps years ago with open arms, a very public celebration when the real estate controversy was going on, we differentiated ourselves by putting billboards up and coming out publicly in the newspapers welcoming them and aligning their value proposition with what we stood for and so since that time, we've had a very good close relationship with Scripps in that it has resulted in business for us and we hope to do more.

Like we're working on something right now, later this year that would perhaps be good, not with Scripps though, some of the spin-offs and some of the new firms that have moved in. Just to update you, since several years ago when that all started, there have been four or five new companies that have literally are up and operating today in our market that are related to all of that focused on biotech. So, that's continuing to come, it'll be big a few years down the road, but it probably starts to accelerate at about the next couple of years , but has been sort of slow to this point.

Great. Thank you, guys.

Our next question comes from Michael Rose from Raymond James. Please go ahead.

Just a question as it relates to OREO balances, if they've - looks like they came down pretty nicely this quarter. How should we think about the expense, the OREO expense going forward, as those balances continue to come down? I mean are we going to get to a point where that expense is pretty minimal on a quarterly basis?

Yes, boy, that's the plan, isn't it? And we've - I guess what we would say comment would be that the sales that occurred this quarter that will close next quarter have been fully accounted for and so then the question is what about the remaining portfolio. The good news about the remaining portfolio is that it really gets small, the number or the trends - the properties that are left in that portfolio are more dominated with residential properties and that sort of thing and so we think the volatility, the thing that's kind of hard to deal with are some of the larger exposures, is when you actually are negotiating a sale and it's going to result in a, make perhaps an additional charge in an effort to get it out of here quicker than we might have anticipated. Sometimes, those numbers could be larger, but with the diversity that's left in the portfolio, I think it starts to look a lot better as we move down the line.

Okay, and then, as a follow-up, how should we think about the loan loss reserve ratio? Historically, you guys had been a lot lower, but now that your portfolio mix has changed, could you actually [seek in] down closer to where you've been historically or do you think it's still going to remain higher just because the regulators are going to force you have more reserves? Thanks.

Okay, we're not getting down to those historic levels anytime soon. And number two, I am not sure that's where we will go in terms of - we certainly have lots of loss experience to help guide our thinking over the long term when we look ahead. But I think we'll not immediately but over time you'll see that [drift] lower as our credit quality continues to improve. And I think probably, we have specific reserves in that reserve that start to melt away as we start resolving the remaining credit and that pushes it down. But I wouldn't expect that to happen immediately. It's just going to happen over time.

Great, thank you for taking my questions.

Our next question comes from Michael Masters from SunTrust Robinson. Please go ahead.

Hi, good morning.

Morning.

Morning.

I wonder if you could give anymore color on the $14 million commercial real estate participation, maybe the type of commercial real estate, any sort of plans or resolution there.

We want to kind of avoid any specific information around that credit because we're in the middle of some negotiations on that. The only thing I would say is it's a cash flowing asset. It is commercial real estate, it's actually currently performing. But you had a comment?

It's just that it is (inaudible).

Yes, we put it on non-accrual because we have an upcoming maturity date and we have some issues to work out with our participant, but I guess a long story short, it's a cash-flowing asset, it's - as Bill said earlier, it is our largest remaining troubled asset, it's performed although it's - there have been - it's underperforming where we would like it to perform. But it's - yes, I guess it's not land, it's something that has some value and we have something to work with there and we'll continue to work forward with it.

Okay, great. What is the size of your total participation portfolio? You mentioned this is the largest participation is -

Well, I didn't mean it that way. I meant it's the only one, I think.

Okay.

I think I said it was the largest remaining participation-

The largest - or I think what Bill meant to say the largest remaining troubled debt restructure --

Yes, the impaired.

Impaired and troubled debt restructure and it was kind of an outlier that we have been aware of obviously for a number of years and I think that was the point I was trying to make, we actually have a handful meaning two or three additional participations on the portfolio, but they are very little tails that are left on those that they are paying out very rapidly and they are very, very small now. I mean like under - altogether under $3 million or $4 million probably or less [that be just one].

And this was an accruing TDR?

Yes.

Okay.

Yes. And it was something we restructured a number of years ago - a couple of years ago, you know, has performed successfully, but now we have more decisions to make as that maturity date gets closer to the plate this year.

Okay. Couple of expense-related questions. How many new CRMs have you hired and how long do you think it generally takes to get breakeven for those?

We've hired 10, between - in the last 12 months - 12 to 18 months and may take three months to get the pipeline going and then another three months before you start seeing the results of that pipeline.

Okay. Great.

Yes.

We're seeing there.

Yes, both of our - both the commercial and residential pipelines are really at significantly historic levels. They are starting to see the results of our investment that we've made over the last two to three years on residential and that 1.5 years on the commercial side. So the production we've gained our number one market position in Treasure Coast on the residential side. And as far as volume goes, unit volume, we've also regained that position on the commercial side.

Okay, great. Just one last one on expenses, what's the - if can't estimate it - if you have an estimate for the dollar amount of personnel expense related to credit, admin or default management costs, something that will come down over time if the dollar amount is there in the quarter?

We don't have that for you here. I will tell you, we've been reducing cost in the special assets pretty significantly. And part of that was of course being redeployed into some of these growth initiatives. Sorry, I don't have that number right now but it's - well, I'll -

(inaudible).

$600,000 annually and I will tell you we've got - we've been averaging - Bill and I were looking at this few days ago been averaging an additional [that last] was personnel cost. We've been averaging another $0.5 million a quarter plus in legal fees.

In legal and taxes in insurance.

Right. So it should be coming down a little bit of reduction in -

So that's say, $2.5 million to $3 million annually. And it's interesting this quarter when you look at our OREO cost, $0.5 million in legal cost, just general legal cost [with that and] expenses that we just talked about, the higher provision well over $5 million and drag just this quarter.

Okay. Appreciate the color. Thanks.

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

Hey, it's Chris Marinac. I just want to continue on -- Mac's line of thinking on the expenses. I mean, Denny, if you look at big picture, yes, the investments you're making this quarter, last quarter on new people, I mean, I know Russell would be able to comment on the six-month time frame, but just bigger picture, if you look at a year, year and a half, I mean, do you want that to be a two for one, three for one payoff, or can you give us anymore color kind of where you see the bigger picture on how these investments pay off?

Oh, yes. At least a three-for-one, if not a four-for-one payoff, probably higher. I means it's - we know how those ratios work and we see that, that is our future, that's where we're headed. If we're not headed there, we're going to - that's not what we want. So yes, we're going to see that.

Okay. So you're executing in the next couple of quarters, we ought to be seeing your net interest income and fee income slightly better to complement that?

Yes, the challenge we face is which we've mentioned several times over the last couple of quarters is that a very challenging interest rate environment and we also are being extremely careful in our investment decisions in the investment portfolio and these all we took some gains this quarter and those gains are related to restructuring that portfolio to perform well a year from now and if we rates start to creep up.

And I believe that probably the direction we're headed in the future, so now is the time to be extremely careful on the interest rate front and interest rate risk front. So that's challenging, the general environment is challenging, the thing that we can affect without undue risk is getting back in the market and growing the loan portfolio.

And we think that what is happening to the extremely large banks right now is providing an incredible opportunity for us to gain market position and that's what we're - that's where we're focused on, that's where a lot of these people are coming from, that we're adding to our team and we're seeing very, very good success with that. So that's what we need to focus on here is growing the franchise, growing organically and positioning ourselves so that as these credit costs begin to finally moderate, we have this revenue growth that is punching up and a reasonable expense structure starts to develop that way.

So, from here, do the margins slip a little bit or is there some positive movement?

No, it depends on how successful we are with everything I just said.

Okay.

And if we can - what our plan is is for it to not slip over time and to replace the challenging part of the margin with higher volumes and better funding. And real thinking we get our DDA mix even much higher than it is today over the next couple of years, as we continue to build this household machines and push deeper into some of our nearby markets. And a huge impact on that funding is going to be our success that we expect to see in the area of small business. And we mentioned earlier, we've very specific programs designed to improve our market penetration in the area of small business within our market. So, we think there's a great opportunity to do that with what is happening in the mega banks.

We also continue to focus overall on efficiency and expenses for the purpose of increasing our ability to service our customers because our focus generally on getting more efficient is to improve service, but it also has the outcome of lowering expense.

We have a number of issues - a number of initiatives around that.

And then, is there any update from you, Bill, on the DDA in terms of how that may play out here new and further out?

No real update. I think, we kind of stand by our prior comments and that is as we maintain a positive earnings stream and our forward projections continue to strengthen at some point that crosses the line and we move the reserve back off of that deferred tax asset. We're not sure when we haven't really made any strong comment about when, because we still have some uncertainty around that. But, nothing has changed in terms of our outlook.

Okay, great. Thanks very much for all the feedback.

Thank you, Chris.

Our next question comes from [Ken Publicis from San Mardeo Asset Management]. Please go ahead.

Good morning.

Morning, Ken.

Morning, Ken.

Most of my questions have already been asked, but just a couple of others points of clarification. On the auction of the TARP, the original TARP had a step-up in the dividend from 5% to 9%, is that still a feature of this? And if it is, what would your plans be at the time that happens?

Yes, the terms of the investment, of course, didn't change at all. And the new owners now have assumed all of those terms and so forth. And you're absolutely right and for us in February of 2015, the rate steps up to 9%, and as I said in some of my remarks, for now with a 5% rate, we believe it belongs on our balance sheet as we begin to improve our condition and better opportunities open up for us to consider alternatives, we'll look at that. And certainly that's - that will be - if it's still outstanding when it tops to 9%, that's going to be a real important discussion for us to have.

(inaudible) where rates are at that time, I guess?

It would and what alternatives we have, what our need for capital is, what our growth rates are looking like, what the alternatives cost, so on and so forth. One thing I do know is, right now, for us to get past to go away would require common equity and a lot of dilution and none of us want that.

Yes, okay. And just a point of clarification on the OREO sales, 40% of what's left is scheduled to close in the second quarter?

That's right.

And I heard you say that the expenses were already in the first quarter numbers, that then includes the loss, correct?

That's right.

Okay. So in the second quarter, OREO goes down, but the loss for OREO have been -?

That's precisely correct.

That's great. Okay. And just one of the things I just noticed on Bill's slides that service charges have declined for the last couple of quarters, even though DDA I think going up, and I was just wondering what was happening there.

They're up over a year ago, but eventually they're down and I think it's seasonal, but go ahead, Bill, sorry.

Yes, seasonal and you've got the lumpiness of overdrafts, but I think you see in the fourth quarter of people spent a little bit more probably in the Christmas season or whatever and so that kind of - it always goes up in the -

I would say our business, it really kind of swings back and forth on the business side, and if balances get larger in Q1 -

Charges drop.

Drop. We are still offering free checking for across the franchise. And so, it's really more driven by some of the other fees as opposed.

I see. Okay, all right. Thank you very much.

Yes.

Our next question comes from [Mark Burden from Spectrum Advisors]. Please go ahead.

Hello.

Moving in - your line is open, sir, go ahead.

Okay. Am I being heard now?

Yes.

Okay. My question is - hello?

Yes.

Yes, my question - I'm sorry about that. My question is - and this is [Mark Heilweil].Can you give us some more color around the auction of the preferred, the TARP preferred, for example, in the memorandum? There was a discussion that you might participate in the auction. Will you deny permission to participate in the auction and also would you discuss what information, whether there was any due diligence by the people who were buying it with you that was not in your public information, that it was disclosed in your public information, because it looks as though it sold quite a discount, which raises questions as to what the value of the common stock is, if the preferred is being sold as a discount. So if you -

Okay. Well, let me answer your questions. First of all, we did not state in the material - offering materials that we might participate or intended to bid. Quite the contrary, we stated that we did not intend to bid. And the reason we did not intend to bid is because we felt this was an important part of our capital structure for now as we continue to improve our condition, I think those - our ability to redeem or purchase the market transactions that preferred changes. And I think, we've made that clear. And then, on the second point, in terms of the discount.

You had previously said that you might bid on those, I read that somewhere, so some discount should material.

Okay. Well, it was in the materials that were filed with the deal. We made it pretty clear we were not going to bid. I think for us to have been able to bid what have required us to probably address - raise additional capital, that where I think it just didn't make any sense for us.

Okay. Well, it was in the materials that were filed with the deal. We made it pretty clear we were not going to bid. I think for us to have been able to bid would have required us to probably address - raise additional capital that sort of things, it just didn't make any sense for us.

On your second question on the discount, I'd just point out that some of the largest most well-heeled issuers in America in the banking world have dividend rates - market dividend rates on their preferreds that are substantially higher than 5%.

So I think everybody anticipated a discount and I think the buyers got a very good deal at the pricing when it went up, but I think it was a very successful auction and when you look at the other banks with the exception of the two that we were able to bid and bid that aggressively, they were in fairly tight range.

And the other point was did you have discussions with these buyers and was there any information?

We had, just to give you some color, we had brief, and I mean very brief, phone calls with groups of - with buyers, potential buyers and you'd really need to talk with the underwriters that worked with Treasury on the deal to dig into that. But we had very brief conversations. Everything that we disclosed and talked about was in our filings, of course.

Okay. Would you consider - since these were purchased at a fairly steep discount in the judgment of a lot of people in the market, would you consider trying to buy back some of those at a discount? Is that something that you had thought about?

Sure, we would look at that. But again, I think my earlier remarks made it pretty clear that for now this is a good piece of capital on our capital structure, and I think as we move forward and our condition continues to improve, a variety of options open up including other forms of capital. And included in all of that thought process would be the thought that we would potentially repurchase some of this at a discount.

And finally, do you have a near-term target for what you view as an acceptable return on assets of the bank? I think your return on assets was 26 basis points which most banks would consider to be pretty unacceptable. Do you have a near-term target that you would consider acceptable?

We have not disclosed our targets and our future specifics around that, but there's no question that the performance that we've had in the last several years has been entirely unacceptable. I understand that. But we've a plan in place to improve our performance and included in that plan is a continued resolution of the asset quality issues and unfortunately that doesn't happen without cost. And that's where we're working very hard to get behind us.

We've made tremendous progress. We returned to profitability about a year ago. The level of profitability we returned to a year ago is not at a level that we wanted it to be. But when we look ahead as we complete our process and grow and continue to execute our growth initiatives, our overwriting objective is to get our return on assets up to what anybody would consider to be a respectable and appropriate level and we want to do that as quickly as possible.

And my last question would be on legal costs which seem to be pretty high. What is being done in terms of managing those costs and perhaps bringing in some more legal help in-house with paralegals or attorneys?

We think those are expenses that are going to melt away fairly rapidly as we continue to tackle the issues that we've been talking about. And I don't think that's the issue. We just need to get the utilization way down. And the way we get the utilization down is to eliminate the issues that are leading to the higher legal costs.

So, I think that's coming. That's a very big part of our plan going forward, is to bring those costs down over the next year. And I think you'll see - you have seen them come down pretty substantially from a year ago.

Thank you very much.

Thank you.

(Operator Instructions) And our next question comes from [Kevin Parker from FBR].

Good morning, everyone.

Good morning.

Good morning.

I had a question on the securities portfolio. (inaudible) this quarter and you saw all the yield on your securities portfolio come down pretty hard. How much further do you expect that to come over the next year as you set yourself up for higher rates in the future?

Well, that's going to be dependent on how active we are in really changing the complexity of the portfolio. Currently the portfolio is going to have an effective duration of a little less than 3%, about 2.7% and with the sale that really drops it down even further to 2.3%.

And so, we've got some room to add some duration back into the portfolio. But frankly, the yields right now, even the ten-year as we sit here as of yesterday below 2%, more like in the 1.92% is putting pressure on the investment portfolio.

And just the principal paydown that we get every month and just reinvesting those, and as Denny mentioned we want - key thing for us is interest rate risk. So we're going to - we expect to see the investment portfolio overall yield trend down. Looking out over a year or so, you could probably see into the probably mid 2%s, lower than that.

Okay. And then finally, my next question was on mortgage banking, what percentage of your origination this quarter were FHA loans? And are you seeing an impact from the increase and insurance rates from FHA?

[I don't have] percentage.

Yes, we don't have that percentage although I think it's real significant. Yes.

Typically it's about a third, right?

No, flat with many comments stated (inaudible).

I don't have the number either.

Yes.

It's fairly small.

Yes. It's fairly small and - so we haven't had any real impact in terms of the insurance cost.

Okay. Are you seeing an impact from [March] or is that not really affecting your book?

Not really affecting us. We've talked about that quite a bit and as of now we're not really participating.

We have our own programs for loss negation.

For our own portfolio, but we're not really pursuing the TARP program.

Okay. Thank you.

Thanks.

We have not further questions at this time.

Great. Well, thank you very much for your attendance today. We look forward to next quarter. Thank you.

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