Seacoast Banking Corporation of Florida (SBCF) 2012 Q2 法說會逐字稿

Welcome to the Seacoast second quarter 2012 earnings conference call. My name is Dawn 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 Dennis S. Hudson. Mr. Hudson, you may begin.

Thank you very much than welcome to Seacoast's second-quarter conference call. Before I begin, as always, we direct your attention to the statement contained at the end of our press release regarding forward statements. During the call we may be discussing issues that constitute forward-looking statements within the meaning of the Securities Exchange Act and, accordingly, our comments are intended to be covered within the meaning of 27-A of that Act.

With me today is Bill Hahl, our CFO; Russ Holland, our Chief Lending Officer; and David Houdeshell, our Chief Credit Officer.

Our progress this quarter continued on the problem asset front, which I want to talk about in a minute. But first I want to talk about our decision to wind down the remaining problem assets at a faster pace, and our decision to more aggressively execute cost reductions and accelerate growth initiatives designed to build revenue. I have in many ways been pleased with our progress.

We have been bringing down the level of problem assets consistently over the past couple of years while maintaining high levels of capital. We have in the past year significantly ramped up our performance in terms of our new household growth at a time when most banks, particularly large banks, are losing households. And we know they're losing them because they're showing up in our offices.

Over the past year we ramped up our lending production capacity and have produced now several consecutive quarters of net loan growth. Our residential mortgage production this past quarter was record-breaking and contributed to some of the best growth in total noninterest income we have seen in many years.

We expanded our household growth initiatives to include small business and have had great success over the past year, particularly in this quarter. And, finally, we emerged with positive profitability throughout 2011 and into the first quarter of this year. As proud as I am of the work by our associates to accomplish these tremendous improvements, we need to move faster to strengthen our results in the coming year.

As a result, we launched an internal project a couple of months ago with an objective to achieve faster improvement in our earnings in the coming year. The project has identified a number of actions we intend to take over the coming months. Some of these actions impacted the current quarter.

To be clear, our focus going forward will be in three -- on three main themes. First, we're going to pick up the pace in liquidating our remaining problem assets. Second, we are going to accelerate the execution of our very successful initiatives to grow personal and business relationships and the revenue that comes with that. And, third, we are going to be taking a number of actions to reduce our overall cost structure.

We intend to execute these actions quickly, and we have established goals and checkpoints to keep us on track. In the coming quarters we are going to be reporting our progress.

The results of this quarter were impacted by substantial write-downs and specific reserves taken on a certain loan assets that we determined could potentially be resolved more quickly over the balance of this year. This decision was made late in the quarter and it resulted from our project to accelerate performance. As a result, our provision for the quarter totaled $6.5 million, which contributed to our loss for the quarter which was $2.3 million.

After preferred stock dividends and accretion, the loss to common shareholders was $0.03 per share.

During the quarter we were pleased to complete all of the sales of foreclosed properties, OREO, which we projected last quarter during this call, and we picked up a few new sales which were also completed. As result, our Other Real Estate Owned balances fell to just over $7 million. This represents the lowest level we have seen since 2008, and it represented a 54% decline for the quarter and 72% decline for the year.

Our growth initiatives continue to perform well in the quarter. Customer funding was up $200 million or 16% for the year. Deposit mix continued to improve with noninterest-bearing deposits growing 22.3% for the year, and they now total 23% of total deposits. This compares with a mix of 19% one year ago.

Interest-bearing checking deposits were also up 9% for the year. Our growth in household is now improving our growth and fees as well. Debit card fees grew 16% year-over-year, which, of course, is directly related to our successful household growth.

Total fees, excluding security gains, grew by 15% in the quarter compared with the same quarter last year. This improvement came across a broad range of categories including trusts, mortgage and marine fees as well as service charges and other deposit fees that are associated with our household growth.

Loan production and loan pipelines continue to grow for the quarter as it has every quarter over the past year. Total production over the past 12 months has exceeded $240 million and our pipelines continue to be strong as we look forward.

Much of our production has been focused on the home purchase market, which has continued to show signs of strengthening here in our markets and across Florida. In fact, inventory levels for existing homes in many of our markets is now at a three- or four-month supply, some of the lowest levels we have seen since the bubble period. And they are being priced at price points that predate that bubble period.

I am going to turn the call over to Bill now for a few more comments on the quarter, and then we would be pleased to open the line for a few questions. Bill.

Thanks, Denny. Good morning. Thank you for joining us today. We posted some slides on our website for the call this morning that I will be referring to during my comments.

However, I will begin with a high-level review of the income statement.

The low rate environment continues to be challenging. While low rates are positive for the cost of funds, principal repayments will likely -- the low rate environment remains very challenging and the low rates are positive for cost of funds, principal payments will likely remain higher, creating tougher reinvestment decisions.

In addition, like last quarter, we sold some investments to reduce our price risk as a result of those accelerating prepayments of principal. So interest income from securities this quarter was lower, partially offset by lower funding costs while interest from loans was stable compared to the prior quarter.

However, higher revenue from noninterest income areas, excluding security gains, during the quarter allowed total revenue to remain flat at around $21 million for the second quarter, comparable to the first quarter of this year and last year's second quarter.

Core operating expenses were nearly unchanged for the quarter compared to the first quarter, as reduction in expenses have been reinvested to increase future earnings growth at an accelerating pace. More on this in a minute.

So as Denny mentioned, the accelerating resolution of nonperforming assets this quarter increased the provisioning for loan losses and other credit costs, and resulted in a bottom-line loss for the quarter and the six months.

Now let's take a look at some of our successful household growth over the last several quarters and how that is driving fee income improvement and loan growth. Looking at slide 5, you can see the increasing growth in households since 2009. We began a focus with retail households in 2008 and added businesses beginning late in 2010.

In 2011 we added new commercial relationship managers, and this has resulted in even better business household growth and both increased new loan balances and core deposit relationships. On a sequential basis, household growth is up 19.2% over the last 12 months compared to the same period for 2011. And over the first six months this year new checking household growth has doubled compared to 2011.

Loan growth over the past 12 months is up $32 million, but as Denny mentioned, new loan production was even much better. A total of $244 million of new loans were produced and added to the portfolio during the last 12 months ended June 30, with $196 million of consumer loans and $68 million of commercial loans.

On a sequential quarterly basis, loan production totaled $91.9 million and was up 25.2% in the second quarter. We expect to see increased loan growth, which will be additive to net interest income going forward. Although, as you are aware, most of the add-on rates are lower than the portfolio's current yield, but they are still better than the cash and securities.

Our securities balances declined somewhat this quarter as result of the sales I discussed earlier, as we didn't see many attractive alternatives in light of the continued low yield. We continue to look for opportunities to invest our excess liquidity, but believe the best current use is to fund loan growth. The key to improving net interest income and the margin will be the increased loan portfolio while continuing to improve the deposit mix at an accelerated pace.

Without the decline in net -- or interest income from investments sales, net interest income would have increased this quarter. Our expectation is for total revenue -- for total revenues is that the run rate will resume its growth in the third quarter 2012, and for total revenues to exceed the $21 million we earned this quarter.

Moving to slide 6 shows the impact that increases in households has had on revenues and fees. The on-boarding of new revenue from well-executed process to cross-sell additional products during and after the initial account opening has resulted in nearly 11% compounded annual growth rate for noninterest income since the second quarter of 2010.

Despite lower overdraft income, primarily the result of the implementation of Reg E, total interest income increased 5.7% linked quarter or 22.8% annualized compared to the first quarter of 2012, and is up 15% compared to last year's second quarter.

What these results show is that continued increases in households are restoring a major element of normalized earnings and that our goal to complete the process in 2013 is achievable. I will now turn to liability side and our deposit costs, mix and growth results.

As Denny mentioned, the real story for deposits is the favorable shift in mix towards lower cost accounts, most notably the DDA growth you mentioned of 22% year-over-year. Lower deposit costs, including NOW and regular savings, have also increased by $35 million and $30 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 the higher-cost time deposits and helped with the net interest margin. Deposit costs have also benefited from the higher-cost CDs maturing and rolling into lower rate products. As result, it has reduced the time certificates to 22% of total deposits compared to 31% last year.

Turning to slide 10 and a review of expenses, total non-interest expenses were lower linked quarter as a result of lower net losses on OREO and repossessed assets. Salaries and wages are up in the quarter compared to the second quarter of 2011, as the result of additional relationship managers that I mentioned have assisted us in building momentum leading to the increases in net new loan volumes.

In addition, commissions and incentives related to our revenue growth and various fee-based businesses have also been higher. Core operating expenses, we believe, are being well-managed, but we have areas that we are looking at, as Denny mentioned. And, in addition, credit-related expenses remain high. But we continue to expect those to trend lower, as they have, as we resolve our nonperforming assets.

In addition, we expect to add some additional commercial relationship managers over the balance of 2012 that will further help in increasing loan growth in 2013.

I will continue my comments by turning to slide 12 on capital. Capital ratios remain well above regulatory minimums. Our tier 1 and risk-based capital ratios remain very strong and at levels higher than before the bubble at 17.2% and 18.4% respectively. These ratios indicate that we have capacity to grow the balance sheet.

And in that respect we will continue to take advantage, we think, of the great opportunity to take market share from the megabanks. And our most immediate capital deployment opportunity is to grow our loan portfolio, which we have done over the last three quarters, as Denny has mentioned.

That concludes my remarks, and I will turn the call back to Denny.

Thanks, Bill. I guess, to sum things up, we are seeing good results with our growth initiatives. But we're in a tough environment. And as I see and look out over the next several quarters, I think we are going to remain in a tough environment, and the industry will face that environment and it will likely make it difficult for us to achieve spreads we would like to see.

So, as a result, we are adjusting our plan to meet this reality, and to achieve the earnings power this franchise is capable of producing.

I would be happy now to open the call for a few questions.

(Operator Instructions). Jefferson Harralson, KBW.

I was going to ask you a question on capital and how you think about it with the changes in the rules that are going on with your TARP auction and trust preferreds, possibly not being Tier 1, and OCI being most likely in the regulatory ratios. How does all that change how you think about your capital structure?

It is Bill. I will tell you what we have learned over the last couple of weeks as we have looked at the proposed regulations on capital. We have taken a look at our ratios post -- and as you know, the key is that they are risk-based or risk-weighted asset ratios. And we find that our ratios are quite strong, remain quite strong in spite of the fact that, as you pointed out, I think that there is some adjustments that they are proposing.

We will wait and see whether or not, from the comments, that all of those proposals go through in terms of how OCI is going to be impacted by the unrealized gains, losses, the securities book, et cetera. But long and short of it, we think we have plenty of capacity to grow the balance sheet under the new regulations as well.

Okay, thanks guys.

Michael Rose, Raymond James.

Just a question, your comments, Denny, on your more cautious outlook over the next couple of quarters. Some of your competitors or other Florida-based banks have actually expressed that banks are starting to turn up here, and pipelines are growing, particularly on the commercial and commercial real estate side. How do you couch that?

My caution was more related to the rather unusual interest-rate environment we find ourselves in. When you look -- and I think we made pretty clear in our comments -- that we are seeing, just as you are hearing, very healthy pipelines and we are anticipating loan growth. And we are having to work for it. We are having to go out and find those opportunities, but we are getting some good growth there.

Again, the caution that I talked about was more I'm afraid the spreads that we are going to book on that new volume may be less attractive than we would have thought they would have been even six or eight months ago. And, as a result, I think it is imperative that we adjust our plan to face that reality, and that leads us to some of the acceleration activities that I have mentioned, and also some of the looks at various things, including office consolidations and other ways to adjust our cost structure.

So we're it in the middle of that review. We are about halfway through it, and we are looking to make some pretty meaningful progress as we go forward.

Again, as I said at the end of the call, this franchise has an earnings power that is -- it is capable of producing. And we are committed to work faster to help the franchise achieve that result. So my caution is not so much related to the business environment as much as it is the interest-rate environment.

I will tell you the business environment is certainly stabilized, although it is still tough out there. We have focused our lending activities in areas where we think we are seeing some growth. Probably the most obvious of that is the good results we are getting with home purchase mortgages, and we have had some great results there are. And that market is frankly quite hot throughout the state, we think.

Okay, that is helpful. Then as a follow-up, now with other real estate balances at very low levels, how should we think about provisioning on a go forward basis? Now that most of the heavy lifting has been done, your loan loss reserve ratio is about 2%, where do you think that normalizes? And what should we expect in terms of inflows into nonperformers in future quarters? Thanks.

We had some inflows this quarter. They were around -- I think around $6 million in inflows that we produced, and those inflows were primarily local and half of them were related to retail and the other half office.

And when I look at that, the issue is how fast we wind down the classifieds. We came to the conclusion this quarter -- in fact, as we tackled our project -- that there are a number of our classified credits, frankly, that have not progressed forward, and these are performing classified credits that have not progressed forward with improvements that we would have expected to see by now. And, so, our judgment is that they will likely remain classified for a longer period of time than we maybe would have thought a year ago.

So we are adjusting our plans to seek resolution strategies for those assets to achieve more rapid improvement of our classified exposure. We think that is important, because it continues to cost us overhead and money to monitor and resolve those assets. And we just think we are at a point where things have stabilized, generally in the market, not getting worse. And we are now taking another look at the remaining problem assets that we are dealing with, and seeking ways to achieve resolution more quickly, perhaps, than we would have planned six months ago with some of those assets.

These are generally things that have some cash flow associated with them, but the cash flow hasn't improved enough to get it repaired to a better quality.

So would that include additional bulk sales?

We don't know. We think there is some of that. But I also think it is just adjusting our resolution strategies in a more aggressive fashion, and looking at several assets this quarter. We increased write-downs and reserves and the like on specific assets that we have adjusted our outlook on, in terms of creating a faster wind-down.

So your question, what does the provisioning look like going forward, we haven't completed our work, but we have done a lot of it. We think we got a lot of it behind us this quarter. We will have some provisioning next quarter. We don't think it is going to be nearly what it was this quarter, obviously, but our objective is to get all of this completed to position us in a much stronger fashion as we look -- as we enter 2013.

Okay, thanks for taking my questions.

David Bishop, Stifel Nicolaus.

A follow-up on Mike's question in terms of the inflows of the nonperforming loans this quarter, when we think about loss content relative to what we saw a couple years ago or so, how should we think about that in terms of the go forward basis in terms of the net charge-offs as well?

The loss content isn't anywhere near what it was several years ago, because we blew through a lot of land, and extreme high loss content assets. I think what we are dealing with now is the more traditional commercial real estate asset that is performing, perhaps, but not where we would like to see it or it is partially performing. David, any sort of general comments there?

I think you're right on. Good morning, David. This is David Houdeshell. Most of our emerging problems have been in our commercial real estate income portfolio, where we have seen continued economic conditions strain rental factors. And as they are adjusted and netting down, we are having to re-value -- reevaluate the cash flow and the workout strategies for these assets.

There is some good cash flow coming off these assets that we think we can work with to resolve these more quickly than we would a land loan or things we have struggled with in the past years.

Does that answer your question, David?

Yes, thank you. Then, Denny, maybe just some commentary in terms of the overall commercial pipeline, what you are seeing.

Yes.

This is Russ Holland. Our pipeline is pretty broad. We cover -- we have teams from Orlando down through the Treasure Coast into Palm Beach, and generally our focus is on the small business segment. Owner-occupied real estate is our primary pipeline right now.

But we also have some small balance investor real estate opportunities, and lines of credit, equipment loans. It is a pretty general community bank type commercial pipeline.

And Russ (multiple speakers)

Average loan we have originated this year is $500,000. That is the loan type.

On the commercial.

On the commercial side. On the residential side, as Denny described, it is [purchased loan] financing.

And, Russ, comments on where that production is coming from. It is not --.

It is very balanced throughout our footprint. It is -- Orlando is about a third of it. A third to half is coming out of the Treasure Coast, and the balance is out of Palm Beach County.

Yes, and a lot of this production is a result of our growth in commercial households. We're focusing on acquiring those deposit relationships, and in so doing, moving credit relationships over.

We have hired a number of lenders, as you well know, over the last year. We are continuing to recruit in that area, which is adding to our cost. But we think it is important as we ramp up our production capacity, particularly in the small business area, and we are having some great success with it.

So we are very pleased. And, again, whether it be on the consumer side of the bank or the business -- small business side of the bank -- just really a lot of interest, I think, out there on the part of individuals and businesses and getting away from some of the megabanks that have really struggled from a service standpoint over the last year.

Great, thanks for the color.

Mac Hodgson, SunTrust Robinson Humphrey.

This is Michael Young in for Mac. Just wanted to ask a question regarding DTA recapture timing. We have seen some other banks take about five quarters of profitability. Do you feel that this quarter acts as a reset to that timeline?

I don't think it resets it. I don't think the fundamentals have changed. And I think the challenge we have had, and as you probably are aware, there is no rule that follows recapture after five consecutive quarters, anything like that. It is really more of a focus on what the forward earnings, near-term earnings look like. And I think that we are still looking at probably the earliest would be late this year and more likely sometime in 2013.

Bill, any other comments? We commented on that before good. It is a very complex discussion, and we are confident it happened. I will state that again. It absolutely happens and I think it's just a question of timing.

Right. I think that the whole thought process of acceleration of our earnings back to a more normalized earnings is the key, and that is why we are focused on 2013. And as soon as that can be revealed in a way that can be objectively looked at by the external auditors, we will be there.

Okay. And I was just going to also see if you could provide some color on some of the cost-cutting initiatives you mentioned, potentially, considering with office consolidations and things of that nature.

Yes, we are not prepared to talk about that today, but we will be in the next call. We are focused on a whole host of issues, and it covers the gamut across the organization. And I think we will push that off until next quarter.

It does include the possibility of office combinations. I don't know that we are looking at a significant number there, but we have been doing some modeling over the past two months on that score. We consolidated one office this quarter with a nearby office. It happened like this quarter.

And we will just have to see. We are looking at a couple more, probably in the next quarter or two. But we would like to get all of this completed by year-end.

Thanks.

Timothy Orkins, FIG Partners.

My first question is could you all tell me ultimately what percentage of the charge-offs this quarter had specific reserves against them?

Say that again. What percentage? Say that again.

Of the charge-offs had specific reserves against them.

I'm not sure that there -- David, I think most of the charge-offs, for the most part, were adding specific reserves to certain credits. Not (multiple speakers)

Yes, our charge-offs (multiple speakers)

(multiple speakers) provisioning.

We did -- we charged off individual or loans -- charged down loans I think.

I would say, generally speaking, most of the charge downs tend to have additional reserves associated with those assets, generally speaking.

Right.

Right?

Yes.

Hope that answers your question.

At this time I am showing no further questions.

Thank you very much for attending today, and we look forward to reporting further progress when we next speak together in the coming quarter. Thank you.

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