Seacoast Banking Corporation of Florida (SBCF) 2012 Q4 法說會逐字稿

Welcome to the Seacoast fourth-quarter and year-end 2012 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 would now like to turn the call over to Mr. Dennis Hudson. Mr. Hudson, you may begin.

Thank you very much, and welcome to Seacoast's fourth-quarter 2012 conference call. Before, again, as always, I'd like to direct your attention to our statement contained at the end of our press release regarding forward statements. During the call, we'll be discussing a number of 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 the Act.

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

We continued to see progress this quarter with our initiatives, to build households, bring down credit costs, and build the bottom line. As you saw, our earnings for the quarter were impacted by the final charges related to our profitability improvement plan that we announced last quarter during this call, and as we absorb the cost associated with consolidating branches during the quarter and also at year-end.

As a reminder, during last year's call, we announced our profitability improvement plan. All totaled, our target is to reduce core operating expenses by $4.9 million in 2013, and problem asset costs -- reduce problem asset costs by at least $2.5 million next year. The overall reduction in total noninterest expenses is targeted to be approximately $7.4 million for 2013. And as we said last quarter, these targets are net of investments that we have projected into 2013 for new overhead associated with our growth initiatives.

In addition to the charges we took this quarter related to branch consolidations, we also absorbed a charge of $1.2 million related to the sale of a single $10.4 million nonperforming commercial loan that was held for sale, which was closed just after year-end. Bill will provide some additional detail later on this, later in the call. When we adjust for these charges and the loss on sale of OREO for the quarter, our pre-pre-income, pre-tax, pre-provision income as adjusted, was approximately $2.9 million for the quarter, which was up somewhat over the comparable number last quarter, which was approximately $2.8 million.

Core earnings have improved nicely when compared with the comparable numbers in the first half of the year, which averaged around $2 million per quarter. We do not expect one-time charges to impact us in the coming quarter, the first quarter, and we also expect our losses on OREO and asset disposition expense to be modest next quarter and throughout the year. And we expect our charge-offs to be much lower next quarter, and for the provision to be more modest throughout 2013 as compared to 2012. Said another way, we expect a better bottom line will begin to emerge next quarter and throughout the year in 2013.

Our profitability improvement plan, as I said, that we announced last quarter, remained on target during the quarter. As I said, we continue to project our noninterest expenses -- core noninterest expenses -- I'm sorry -- total noninterest expenses to be reduced $7.4 million or so in 2013 as compared to 2012, as a result of the actions we took last quarter and continue to execute on during the current quarter. As I said, this includes cuts to our core overhead as well as lower expected credit-related costs.

Our internal credit metrics improved substantially this quarter. Our classified assets to Tier 1 Capital and the allowance at the Bank fell to around 39% at year-end, when we include the loan sale, which closed in the first part of January. This is a substantial improvement over last quarter and we expect to see further improvement in the coming quarter. These improvements in credit quality continue to support our outlook for lower credit cost in the coming year, as well as improved earnings.

Revenue improvements continued during the quarter, with particular strong growth in fees, which resulted from our initiatives to grow households and expand relationships. We also saw continued strong results from our consumer mortgage production team. In commercial -- and commercial loan growth for the quarter continued to accelerate, as our improved pipeline of new business, which we mentioned last quarter, began to produce higher level of closings.

Bill will give us some better color on this in a minute, but suffice it to say that the investments we have been making to build our loan production teams is starting to build momentum.

I was also particularly pleased with our funding mix improvements and growth this quarter and really over the last couple of years. We've moved our DDA mix of deposits from 18% a couple of years ago to 24% today, which included a fairly substantial improvement during this most recent quarter, as a result of several new commercial relationships.

Much of the recent improvement has been helped by that growth in our commercial focus, and it is just starting to pay dividends, both in terms of loan growth as well as improved funding mix. We expect these trends to continue, as we build out over the next year or two.

I'm now going to turn the call over to Bill, who's going to give us a few details. And then we'll come back and answer a few questions. I'll turn the call over to Bill. Bill?

Thanks, Denny, and good morning, everyone. My remarks will reference a slide deck that we posted for this call on our website. And after that, then, as Denny said, we'll take some questions.

As Denny mentioned, we had a decent quarter after adjusting for a few noteworthy items I will discuss in a little more detail in a moment. Pretax, pre-provision earnings were $1.4 million, but after adjusting some final expenses related to the branch consolidation and the net loss on the loan held for sale, pre-pre-, excluding security gains, was $2.9 million, up $700,000 or 23% compared to a year ago.

Total revenue for 2012 was $86.3 million and was up $1.1 million from a year ago. On a linked quarter basis, revenues increased for the second consecutive quarter, as the margin improved and fees were mostly higher across all categories. Total revenues grew year-over-year for the first time since 2006.

We generated strong core deposit and loan growth, and we're in a much better position today than we were a year ago. Our balance sheet growth accelerated in the fourth quarter, with solid growth in loans and continued strong deposit growth. Our available for sale portfolio was increased by $53 million, and this occurred late in the quarter as rates rose and yields became a little more attractive. Our cash and cash equivalents remain nearly unchanged at approximately $175 million.

We look forward to taking advantage of all of the opportunities ahead of us and to positively leverage the strong customer -- core customer deposit base that we've built. Our focus has been on building strong quarterly and annual revenue performance, based on customer-focused business strategies that increase household profitability.

Let me spend some time discussing some noteworthy items that impacted the results this quarter and the year. Our asset disposition expense and net loss on OREO were $1.5 million and $3.5 million, respectively, for the year, but were only $200,000 and $157,000, respectively, in the fourth quarter. We believe these expenses will be lower -- will be at the lower fourth-quarter results going forward, as we've seen improvement over the year in all of our credit quality metrics.

The net loss taken for the fair value change in the quarter was entirely driven by one commercial participation, which was performing when it matured and was sold by the lead bank in January. We moved that loan to AFS in the third quarter of '12.

Turning to noninterest income, excluding security gains and the fair value change for the FS loan. We generated strong growth year over -- over the year, with fourth-quarter increasing 14.9% compared to a year ago fourth-quarter. And the entire year, noninterest income was up 16.9%, reflecting strong mortgage banking fees and increased fees related to our deposit franchise, as its growth in net new households increased by 9.4%.

We made progress this year to improve our efficiency on the cost side, and we begin to see some improvement on the revenue side that I spoke of earlier. Salaries and wages have been managed lower throughout 2012 as a result of organizational changes, and more recently branch consolidations, which will positively impact 2013. Likewise, over 2012, investments have been made in lending capacities and support staff, which resulted in increased mortgage banking fees and the total loan growth, and in particular, a much improved loan growth in the fourth quarter.

While we made progress in improving our efficiency, we believe our expenses are still too high. And we will continue to focus on opportunities to reduce expenses that do not impact our ability to grow revenue.

Let me now cover some of the key business drivers in more detail. As indicated in the earnings release, period end loans were up $23 million or 7.9% annualized in the fourth quarter. This is the largest linked quarter increase over the past four years.

Turning to slide 6, and the net interest margin, last quarter, we said loan growth would be a key for a stable to improving net interest margin. We also indicated that we would and could continue to lower our deposit costs to augment the NIM. Average cost -- average deposit costs were down in the fourth quarter 6 basis points from the third quarter, and down 36 basis points from a year ago.

Our ability to continue to grow deposits while reducing costs has been a real strength of our franchise. The increased deposits provide us with many opportunities to meet other financial needs of our deposit customers. And if loan demand continues as it has in the fourth quarter, we can use that strong deposit growth to fund our loan growth.

As shown on slide 6, the margin was up 5 basis points from the third quarter and led to the second consecutive quarter of net interest income growth. Growing our net interest income remains our focus, and we believe we can continue to generate growth even in this low rate environment. The primary opportunities remain loan growth and reduced funding costs.

Slides 10 through 13 show that we've had very strong core deposit growth, with noninterest-bearing deposits up 29% for the year, and continued favorable shift in mix, with noninterest-bearing demand increasing to 24% of total deposits compared to 19% a year ago, and with certificates of deposits [decline at] 18% of deposits from 27% a year ago.

Turning to credit quality, on slide 14, credit trends continue to show improvement with fourth-quarter net charge-offs at 0.69% of average loans. Net charge-offs were impacted by the implementation of the regulatory guidance related to consumer bankruptcies, issued by the OCC at the end of the third quarter, which increased our net charge-offs by about $1.2 million in the fourth quarter.

The provision and allowance trended lower consistent with improvements we see in all of our loan categories and a decline in net charge-offs. The coverage ratio for NPAs, NPLs was up slightly for -- from the third quarter.

As I've highlighted, much was accomplished in 2012. However, much remains to be accomplished. We generated loan and deposit growth. We reduced risk, and we grew total revenues. However, we are even more optimistic about all of the opportunities we have in 2013 to continue to benefit from our business momentum and the slowly improving economy.

We remain focused on reducing expenses, and we believe we have further opportunities to improve our efficiency ratio. We are optimistic that loan growth can continue in 2013, and we believe we will be able to grow net interest income, even if rates remain low. We have opportunities throughout our consumer and commercial businesses to continue to grow market share and increase our cross-sell.

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

Thank you, Bill. So, to sum it up, I think we're pleased to see our revenue initiatives are continuing to build momentum. Our core earnings should improve, continue to improve, as our investments in people and improved processes continue to build revenue, and further cost reductions start to kick in, in the coming quarter. And our improved outlook for credit costs as well should assist us in building a much better bottom line and a more consistent bottom line, as we look forward into 2013.

So with that, I'll open the call for any questions, and happy to take them.

(Operator Instructions) Dave Bishop, Stifel Nicolaus.

When you noted the expectations and declining credit costs, and obviously, that implies some improvement in charge-offs, what are you thinking there in terms of maybe sort of a normalized run rate for charge-offs as sort of -- you know, you got out of some of the larger, chunkier real estate credits. What can you envision this level stabilizing at?

I don't think we've said, and we're probably not going to say. We just haven't published that yet, but I think we were pretty clear that, as we reduced the level of some of the larger problems, which we're pretty well done with at this point, it's just down to the remaining credit issues, which are smaller. And I would tell you what we see is values firming today on impaired assets. And I'd say virtually all of our impaired assets have been written down over time that remain on the balance sheet.

We just have a pretty good handle on where that is right now, in terms of where values are. So, as a result, we just don't see a lot of lumpiness ahead of us. And haven't -- you know, David, just haven't published that. I think after the quarter, this first quarter, we'll probably have a better visibility of that.

Okay.

But that's -- I think we were pretty clear we're looking for it to be substantially improved.

Got you. And then on the loan front, loan demand side, just curious what you're hearing from your borrower base there? Saw commercial mortgages up a nice amount this quarter. You seeing a little bit more optimism from the small business client base?

Well, Russ can weigh in on this, but it's not so much demand as it is us getting out in the market and finding the opportunities. Russ?

Yes. The investment that Denny and Bill were referring to in our teams, is what's driving it. We've been recruiting heavily in 2012, and we'll continue doing so in 2013. And those individuals are seasoned lenders in the market and they're bringing strong relationships with them, and going out and finding new ones (technical difficulty).

So, what is our outlook? I think things continue to stabilize in the market. It's a net plus kind of outlook for sure, but not substantially improved over the last quarter, I would say. So most of our success this quarter is just the culmination of a lot of the production work that we've been building, really, over the last nine months. And we see that continuing as we continue to build that out.

Our pipelines are strong. It's just not driven much by economic conditions. It's more driven by hunting, more hunting.

Right. It's also kind of a refinance, positive refinance environment out there, obviously.

Great, thank you.

Michael Rose, Raymond James.

Just one question as it relates to the housing market in Florida. I noticed that construction loans to individuals have actually increased a little bit. Is that a sign that the real estate markets, in your mind, are firming a little bit more?

Yes, no question. I mean, residential market's arguably on fire right now. And not the kind of fire we had a couple of years ago. (laughter) But it's definitely strengthened. We're now fairly routinely running into appraisal issues where houses are being sold at higher levels than comps would indicate.

And that's the first time in the cycle we've started dealing with the flipside of the appraisal problem. Not big numbers here, but we're seeing nice single-digit, low double-digit adjustments in prices. Large builders now that scarfed up a lot of the improved lots are really starting to build on those lots today.

So we're seeing very clear signs that the residential market is improving. The time on market in our communities surrounding us right now for most of the moderately to medium-priced homes are down in some communities at three months, four months. Kind of broadly speaking, four to five months, you know, supply out there. So that's clearly back to very healthy sort of numbers.

And the transaction levels are back to transaction levels that existed prior to the final run-up of the bubble. So I'd say it's a very strong housing market, frankly, right now. Not seeing the price increases get ahead of themselves, but we are seeing pressure up on prices. So I think that's very -- and that's one reason I think we feel more confident about the credit cost issue is the uncertainty over values is pretty well behind us, and things have kind of bottomed out.

Okay, that's helpful. And then, secondarily, it says in the press release, you added about 11 commercial loan officers last year, six in the second half. First, where do they come from? Do they come from larger banks? Do they have existing books? And if so, what do you think the embedded capacity of loans that they could bring over from existing relationships would be? Just trying to couch loan growth opportunities from those hires. Thanks.

Yes, this is Russ Holland. We've been recruiting exclusively from the larger banks where there's disruption, there's -- both with the customer base and the lending teams. And the recruiting has been primarily in the Central Florida and South Florida markets. And the teams that we've recruited do have books of business, certainly, but they're also very experienced lenders, and have, more importantly, sources of business, centers of influence that they draw from, that provides more of a recurring sources of new loan opportunities.

Okay, thank you for taking my questions.

(Operator Instructions). Scott Huntington, Bodell Overcash Anderson.

I first want to compliment you on bailing the boat and getting things looking very forward-looking positive fashion here. I'm going to touch on an old issue, I think. You'll probably be bringing out the reverse split issue again for the third year in the proxy statement. And I think, as evidenced by your extremely hard work, that you know that probably your evaluation will be affected by your performance. And again, we're pleased on that.

We might be able to agree that a forward or reverse split is just a, very simply, a mathematical equation. And that it's probably difficult to stress that a reverse split that there's anything positive with a reverse split. And I just wondered if you have any thoughts that maybe the value of your share price to move up could very well be this cloud that's been hanging out there, likely for the third year on this reverse split proposition. And if that doesn't go against the grain of all the hard, heavy lifting you're doing.

So I'd just like your overview on that. And I thank you very much.

Thank you, Scott. And I don't think we've made any announcements or final decisions on whether to include that in the proxy next -- this coming season. You know, here are arguments on both sides of the issue, as you well know. And it is just a mathematical calculation. I hear you. I understand, following reverse split, you see price declines typically for reasons we understand. And over time, there are other arguments that suggest, over time, it has really no effect on value. And I hear what you're saying.

I guess the alternative I also hear the positive, the other side of the story, though, are there are lots of potential buyers that can't own the stock at a nominal low price. And we understand the reasons behind that as well. So, it's something the Board will have to decide, and we'll look at it. I hear your comments. And I will make sure those comments make their way into our discussion. Thank you.

We thank you for that, Dennis.

Yes. Thanks.

(Operator Instructions). Ken Puglisi, Sandler O'Neill.

I wonder if you can give us just a little more color on the loss on the held for sale loan. The way I read it in the press release, it sounded like that loan had already been written down, based on market bid. So I was wondering why there was an additional loss?

Yes. A good question, and you're absolutely right. It had been written down substantially prior to being marked held for sale. And that write-down occurred earlier this year -- this past year.

And I guess the simple answer is we had multiple bids, and worked in the quarter with the high bidder and had a deal, and then the deal fell apart. And that's just what happened. And we ended up having to make kind of a hard decision during the quarter to proceed forward with -- actually ended up with several other bidders in kind of a rebid situation. And the net result was, unfortunately, an additional mark. And it wasn't something we were anticipating, I will tell you, in the prior quarter. And it was a disappointment.

It was complicated by the fact that this was our last participation that we have in the portfolio. And we had very little influence over the direction this was taking. And that's one of the downsides to having participations in a portfolio when you have a problem.

So, I'm not sure we would have handled it the way the participant did over the last six months or so, but the good news, it's gone and it had a material impact on the credit improvement this quarter, along with a host of other improvements. And it's behind us, and it helps us stabilize and improve our earnings in 2013.

Okay, so both the initial write-down and the loss were based on negotiations that the lead bank engaged in?

Yes. So we certainly had our ability to influence that and weigh our views, but it was -- as Bill said, it was a loan that had a hard maturity date. It was performing, although it was clearly a substandard credit, and the lead bank acquired it. And one of the failed banks -- or failed bank type acquisitions, they had a kind of a different view. (multiple speakers)

Okay, I get it. (multiple speakers)

(multiple speakers) -- a little credit than we did. And we probably would have handled it a little differently. But anyway, it's gone.

Okay, that's helpful. And any new thoughts on either the DTA recovery or repayment of TARP?

Well, on the DTA recovery, I think our progress this quarter was pretty significant in many ways, and in support of a DTA recovery. And I guess all I would tell you is we're getting closer. And we're feeling increasingly more comfortable with their arguments. And that will be a very key point of discussion and analysis as we get a little deeper into this year, in the next quarter or two.

So. So, we'll see. And you'll know when we know. But I think things are lining up sort of in accordance with our plan, and we feel we're sort of hitting our numbers. And we're getting closer every day that goes by.

And on TARP repayment, or you know, as you know, we have a ratchet up to a 9% that occurs in February of next year.

Right.

And we will be addressing that later this year. And we've looked at a whole host of options and we'll continue to do so. And I think it's critical and important that we first focus our attention on the deferred tax asset issue.

Okay, thank you.

(Operator Instructions). At this time, we have no additional questions.

Thank you very much for your attendance today. We look forward to speaking with you next quarter.

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