Seacoast Banking Corporation of Florida
Q3 2008 Earnings Call Transcript

Published: 27 Oct 2008

[Operator:]

Good morning ladies and gentlemen and welcome to the third quarter earnings release conference 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 Chairman and CEO, Mr. Dennis S. Hudson. Mr. Hudson, you may begin.

[Dennis Hudson:]

Thank you very much and welcome Seacoast third quarter 2008 conference call. Before we begin I’d like to direct your attention to the statement at the end of our press release regarding forward statements. During the call, we’re going to be discussing a number of issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and our statements are intended to be covered within the meaning of Section 27A of the Act. With me today is Jean Strickland, our President and Chief Credit Officer; Russ Holland, our Chief Banking Officer; and Bill Hahl, our CFO; also with us today is Doug Gilbert, our Vice Chairman. Today, I’m going to be spending a fair amount of time talking about our credit quality and then Bill is going to update us on some of the factors impacting our earnings this past quarter before we break for a few questions. As most of you know last quarter we aggressively marked down a number of our larger residential construction and land development exposures. We said at that time that taking aggressive action would place us in a stronger position as we moved to accelerate our liquidation activities in the coming month. We are please to report this quarter that we made significant progress, progress in bringing down those exposures through our ongoing liquidation work and through a successful sale of approximately $40 million in loan balances. We believe we have substantially lessened our risk profile over the past couple of quarters. Seacoast was among the first in Florida to recognize the housing deterioration that began in mid 2006, with an initial reserve build that occurred in the final quarter of that year. Since that time we have committed significant resources to aggressively manage and quantify our exposure, which has provided us with a realistic and we think timely understanding of evolving market conditions. This quarter saw significant progress. We intend to be among the first to show marked improvement as we move forward. I’d like to direct your attention to some of those supplemental tables we included this quarter at the end of our press release. We have provided you with an eight quarter detailed trending for end-of-quarter loan balances as well as increases and decreases for each of these loan type. If you take a look that the stable you can see the construction and land development loans have been reduced by a $125 million, since year-end with most of the decline occurring in the most recent two quarters. If you take a closer look you will see that the residential component of our construction portfolio has declined the most; in fact it’s declined by 32% over the last two quarters. This quarter we also provided you with a further breakout of the residential, construction and development book split into five sub-categories. In this stable we have split each of those categories between larger loans, loans that are $4 million in size and greater and smaller loans under $4 million in size. In this table, you will see that most of the liquidation has occurred in the large loan categories. In fact, large residential construction loans have declined from $164 million in March 2008 to $98 million at the end of September. This represents of 40% decline in this exposure and most of that occurred in the land and lot category which is down by 53% over just the last two quarters. So, again we believe we have substantially reduced our exposure to residential land and land development loans over the past two quarters and we remain committed to the execution of our systematic plan to reduce these exposures further in the coming month. Now I’ll turn to non-performing assets. We were pleased that our liquidation activities brought down the level of non-performers this quarter. Non-performers however remain unacceptably high. As we stated in late 2006 and as recently as the last quarter, our problem assets are concentrated in our residential construction book. Other parts of our loan portfolio our performing reasonably well considering market condition. This performance reflects our decision to stay away from all the exotic mortgage products that currently plague our industry. We also chose not to participate in the aggressive programs to generate home equity loans and other consumer loans that now are showing signs of significant stress in the industry. So, again let me restate our problem assets are concentrated in our residential construction book. That residential construction book has been under special scrutiny since late 2006. We understand the risk profile. We are focused on timely identification of loss potential and are in touch real-time with market conditions. If you turn again to the table at the end of our press release, you will see that most of our non-performing loans are related to the residential development book; in fact, $55 million of our total $80 million of non-performing assets are located there. The remainder incidentally, includes $5 million in foreclosed property, $10 million in consumer which is primarily residential mortgages, and approximately $10 million in commercial real estate mortgages. We’ve provided a break out of our non-performers in the residential construction book and as you look at it you will see that a substantial portion of the remaining larger exposures is currently classified as non-performing. This certainly reflects the severe conditions that exist in the residential market today. With a substantial portion however, of our residential construction book classified as non-performing we believe we will see incremental non-performing asset growth moderate while we continue our efforts to aggressively pursue liquidation efforts and other opportunities. To sum up all of this point to reduced exposure going forward with respect to the residential problem, we were on it early and we plan to be the first to show marked improvement. Now I’m going to turn the call over to Bill for a few more comments on the quarter; Bill.

[Bill Hahl:]

Thanks Denny. Our third quarter 2008 net income and financial results declined when compared to 2007 driven by a $1.9 million in lower net interest income and approximately $900,000 in non-interest income together with higher credit costs. Loan balances outstanding compared to a year ago are down $150 million or 7.9% and non-performing assets have increased from a year ago by $34 million accounting for the lower net interest income results and a margin decline of 37 basis points compared to the third quarter a year ago. On a linked quarter basis the margin declined 12 basis point to 3.57% mostly due to the substantial competition for deposits keeping deposit interest rates disproportionately high, even though the FED cut rates back in April of 2008, while our prime base loans have replaced lower. In this environment our focus has been on building customer relationships and organic transaction deposit growth while avoiding the higher cost certificates of deposits that the competition has been heavily promoting. Our progress this quarter in acquiring new deposit households was much improved from a year ago with new deposit relationship acquisitions up 25% compared to new relationships a year ago. Our year-over-year deposit growth excluding the Orlando region was $135 million or 8.8%. As of June30, 2008 we have regained our number one market share position in Martin County for deposits in this legacy market where nearly 50% of our total deposits reside. The bank we acquired in Orlando in 2005 had a deposit base comprised of many large commercial relationships which were dependant upon constructions and sale of real estate such as attorneys, title companies, construction companies and others. Over the past year these deposit relationships have declined as a result of the slowing of the real estate transaction and have accounted for a decline of approximately $150 million in deposits in this market. Going forward we will begin to see deposit growth in this market as our retail deposits strategy has been effected there as well as in the other markets. As I mentioned earlier we have experience substantial certificate of deposit, pricing pressure from competitors in all our markets. Our success in growing retail relationships and balances this quarter allowed us to rely less on certificate of deposits for deposit growth and liquidity and avoid the higher rates paid by the competitors this quarter. Our add-on rate for CDs in the third quarter averaged approximately 3.5% versus the competitor’s rate of a low of 4% to a higher 4.8% for the same maturities. As a result the average cost of certificates for the third quarter were down 35 basis points to 3.64% compared to Q2 and the cost of all deposits declined six basis points to 2.6% compared to 2.66 in the second quarter. Looking at non-interest income area in light of the unprecedented economic challenges as a result of the deterioration in the housing market, fee based revenues were lower when compared to 2007. Compared to year ago Marine finance fees were up approximately 300,000, wealth management revenues were down 200,000 and merchant service revenues were up nearly 200,000 accounting for the majority of the decline in non-interest income. On a linked quarter basis the same revenues were also down as result of normal seasonal slowness that impacts these businesses and the more general economic weakness impacting our markets. We expect some improvement in the next two quarters for these fee based businesses as these are normally seasonally strong quarters. Lastly, overhead was inline with expectations, with slightly higher legal fees as a result of the increased number of problem credit both for the quarter and year-to-date. Year-to-date overhead was nearly unchanged from a year ago and this is consistent with our prior guidance of no substantial increase or decrease in non-interest expenses for the year. Going forward management intends to continue with its cost reduction measures and will have more information on the size in the nature of those reduction in next quarters call; Dennis.

[Dennis Hudson:]

Thank Bill, I want to end with a few comments on capital. As you saw our capital ratios grew this quarter as risk-based assets declined. In fact, our risk-based capital ratio now stands at 11.7% which is up from 11.4% last quarter. This is well in excess of the 10% levels being considered well capitalized. Given the muted outlook for short-term growth, we’ll likely see our capital ratios continue to grow in the coming quarters. As I have said, our number one priority for 2008 has been asset quality. Our capital strength has reported us with the ability to move forward on a very aggressive basis as we continue our liquidation efforts that will bring the necessary improvement in asset quality. As we move through the balance of this cycle we will see as I said last quarter an entirely new competitive dynamic developed in Florida and boy when you look at what has just happened over the last month or so not a truer statement could be made. I find it instructive to see many of our business customers across the broad range of industries doing better today thought could be possible and the common factor as I said last quarter is the dramatic change in their competitive environment. We are fast approaching that dynamic in our business as well. That is why it is important for us to continue to maintain our focus on exiting of our weakness is quickly as possible as we also continue to build on our earnings momentum. I want to again thank this quarter our associates and officers who continue to work long hours in hard and remarkably difficult circumstances and to our customers I wish to express my confidence in our Board, our management team and in our financial strength which continues to insure our safe and sound operation in this difficult environment. Before I open it up for questions, let summarize. Our success on the problem asset liquidation front was very successful this quarter; in fact more successful than we anticipated and this liquidation success was focused on our largest credit exposures. As a result our credit profile has improved significantly over the past six month. Our capital and liquidity both improved this quarter. Our capital levels increased in our expected to continue to grow in the coming months. Our sources of liquidity were double this quarter to over $800 million and we did not draw on any of those sources during the quarter due to as Bill just said, very strong consumer deposit growth, much better in fact than any of us anticipated over the summer. Our strong and diverse consumer funding base actually improved during the quarter and we don’t rely on any external sources of wholesale funding at all. So as I see it, Seacoast remains a remarkable value today. Our risks are well understood and well communicated with the streets. We’ve made remarkable progress in reducing those risks and moreover, we’re committed to continue our progress in the coming quarters and we trade today at a negative premium to core deposits. So with that I’m going to open up the line to questions and we’ll be glad to answer any questions you have.

[Operator:]

(Operator Instructions) Your first question comes from Christopher Marinac - FIG Partners.

[Christopher Marinac:]

Just want to ask a question I guess about your feeling about commercial real estate and to what extent it follows other issues into trouble? Whether be for your or for others, I just kind of wanted an update on sort of how that feels to you both for Seacoast’s perspective as well with the market in general?

[Dennis Hudson:]

Well, we’ve been saying for several quarters that we’re seeing weakness in the commercial real estate market in terms of vacancies and the like and that’s pretty probably broadly felt, it’ll most significant would be in some of the retail areas. Having said that, while we see that weakness that is there and we’re very concerned about it, we don’t see it affecting at this point our portfolio in any significant way and if you think about it Chris, those exposures are very, very different than the exposures we’re dealing with on the residential side. The common risk that is there on the residential side is the sale of residential product and most of our commercial real estate exposures are developed properties that are occupied and not depended on the sale of product and the like. So, I’m sure we’ll see some weakness as we go through time, but I don’t anticipate it being anywhere nearly as significant as the problems we’ve seen developing the residential side over the last year and it’s probably true for the whole industry. Having said all of that as we said, several quarters ago we’ve restricted our lending in those areas due to very, very difficult marketing conditions and we’ve been under that restriction for a year or more. So, I guess that’s my comment.

[Christopher Marinac:]

That’s great and then just to follow-up on the statistics you gave in press release about the various property types or loans types, how much more change do you see these coming down? Obviously, there’s more to go, but I just want to get a gauge of how much through the sort of decline of these balances do you think we are?

[Dennis Hudson:]

Now we’re speculating, because we’re not sure, what those liquidation efforts are going to look like over this coming quarter and the quarter, but we’ve moved significantly through it, that’s all I can tell and we’re probably halfway there. We’ve made remarkable progress in the last two quarters as you’ve heard and we have some more to go, but I would also tell you that we’re focused first on the biggest nastiest problems and as we move forward, they get smaller and less nasty.

[Christopher Marinac:]

And would that mean that the lost content is a little bit different in your favor as they less nasty?

[Dennis Hudson:]

That would be the implication I hesitate to say that, because we’re just not sure what kind of market we’re moving into.

[Operator:]

Your next question comes from Dave Bishop – Stifel Nicolaus.

[Dave Bishop:]

I was just getting maybe some color in terms of the marks maybe you took in terms of the loans that were sold there. Maybe give us a sense of what pricing is looking like in the market there and how that’s trended over the past 30 to 90-days?

[Dennis Hudson:]

Well, Russ can weigh in here, but I think the general comment we’ll probably make is that the marks are very wide in terms of the original principal balance that’s going to range from $0.30 to $0.90 and Russ what the fair average was?

[Bill Hahl:]

We averaged $0.52.

[Dennis Hudson:]

$0.52 something like that, consistent with what you’re hearing from others. Markets got squirrelly at the end of September; there is no question about it. We were fortunate that we had concluded most of our negotiating prior to that period.

[Dave Bishop:]

Were there any fall-through as a result of market turmoil?

[Dennis Hudsons:]

Not really, I would say we had some other credits that we were very close to selling and we couldn’t say it fell through, because we never quite got there, but we probably had others we were ready to pull the trigger on and probably going to push those into this quarter. The numbers weren’t huge though; another $10 plus million.

[Dave Bishop:]

As we look at the sort of turn on the page here in terms of the net interest margin and it relates to the FED and the most recent rate cut and maybe prospective rate cuts, the ability to hold the margins at these levels here?

[Dennis Hudson:]

Generally, I think that were in pretty good shape there. I think the whole competitive deposit environment is changing now very rapidly as a result of what happened over the last couple of weeks. Comments, Bill?

[Bill Hahl:]

Yes, it’s probably too early to tell, but over the couple of weeks just a number of add, it was extraordinarily high, rates being paid and the market have disappeared down to a one or two now and I’ve seen recently that they’ve come off their rates, not by the 50 basis points, but at least they’ve lowered them down. We took immediate action on our rates and began lowering some of our product rates and so forth, but as Dennis said it’s going to be probably a little bit more time before we can really see whether or not -- let’s say the market conditions will improve such that we can continue to have those lower rates and so that will be the margin. We’re still forecasting being loan repayments and reductions, probably somewhere $50 million to $60 million in the fourth quarter and we’ve sold out new loan growth; that’s going to put some pressure on margins as well.

[Dave Bishop:]

Can you quantify the pressure from NPAs this quarter?

[Bill Hahl:]

No, not really. I can’t quantify that.

[Dennis Hudson:]

I would say though, that we had some accrued interest reversals and the like. It was probably comparable to what we saw last quarter and as you saw non-performing assets stabilize; this quarter didn’t grow, it went down slightly. So, we had a lot of movement in them as you can appreciate given that we sold almost $40 million in non-performers and as that movement occurs, there’s some adjustments to accrued interest and that sort of thing. So, we continue to feel the pressure I guess that we felt last quarter when they increased and as we go forward we’re looking for that to maintain the stability and begin to come down, we hope.

[Operator:]

(Operator instructions) Our next question comes from Paul Connolly - Southwell.

[Paul Connolly:]

I didn’t hear you clearly, was it a $0.62 on the dollar or $0.52 on the dollar on the average loan sold?

[Dennis Hudson:]

We said 52 and just to be clear there were many assets sold at a higher price, probably as high as 90 and the others are lower and that was kind of an average. So, it’s very dangerous to talk in those numbers because every asset is different and it has a great range and I will tell you the bids we get and the offers we get for purchase are very wide between buyers and so they can be significant.

[Paul Connolly:]

Along those lines, the provisions that you took previously on those loans were pretty much inline with market as and when you sold these, you didn’t take additional marks, did you?

[Dennis Hudson:]

Yes, that’s generally true, although we sold a little more than we though we would. We were a little more successful, that created some credit cost and again we were pretty aggressive in pushing more of those residential credits into a non-performing status and as we did that we took some marks in terms of reserve build and that sort of thing associated with those new credits.

[Paul Connolly:]

The $38 million sold in the third quarter; how does compared to the second and the first quarter?

[Bill Hahl:]

Yes, there was significantly greater activity in the third quarter than the first and second. We’re doing maybe $5 million to $10 million at the most in the first and second quarter.

[Paul Connolly:]

Okay and then could you comment just on 30 to 89 days past due?

[Dennis Hudson:]

Bill is going to grab it here. Didn’t see a lot of movement there in most of the categories and there was maybe a couple of million.

[Paul Connolly:]

I think last quarter it was like 17.5 at the end of the quarter?

[Dennis Hudson:]

Yes and that’s maybe a couple of million higher or something like that.

[Paul Connolly:]

Okay. So, just call it 20 today.

[Dennis Hudson:]

A little under that

[Paul Connolly:]

Okay. So when like this quarter basically you had $38 million of loans that split into NPAs as you sold $38 million roughly. What are the trends that you’re seeing or you expect to see going forward?

[Dennis Hudson:]

Well, we provided at some pretty granular information at the bottom of our press release. When you look carefully at those tables, you can begin to kind of see what the trends are looking like there and I guess I would just state that we’ve seen some very dramatic reductions in larger exposures in the residential development book and as those numbers come down, the potential for NPA growth becomes a little less and then second of all, you can see that at this point in the cycle we’ve got a substantial portion of that book on non-accrual today. So, when you understand that the problems are coming from the larger credits, which is no surprise to anybody and they are concentrated in the residential book, it stands to reason that we’ll begin to moderate in terms of that growth and that’s what we believe where we are. Also we’ve been at this for a good long while, really since the middle of ’06 and super intensively over the last 12, 13 months. So we think we have a pretty good handle on what is good and what is not and I think we’re consciously optimistic that we’re going to see less flowing-in, in the next couple of quarters and we have the last couple of quarters.

[Paul Connolly:]

Okay and last question you have a shelf out there, which have been drawn anything down under; any comments toward the TARP program your desire to participate in that?

[Dennis Hudson:]

Yes, we’re looking at it. We haven’t got anything to say about that, other than we’ll carefully explore it. It would appear to be very reasonably constructive and priced and it’s something we’ll just look at very, very carefully.

[Operator:]

Your final question comes from [Jim Delightful] - Cambridge Place.

[Jim Delightful:]

It was asked and answered on the last question, thank you.

[Operator:]

(Operator Instructions) And I’m showing that we have no further question.

[Dennis Hudson:]

Thank you all for attending today. I think we made some remarkable progress this quarter. We’re committed to continue those efforts and as we do so we’ll hopefully begin to see some of our numbers improve in the next few quarters. Thank you for your attendance.

[Operator:]

Thank you ladies and gentlemen. This concludes the third quarter earnings release. Thank you for participating. You may all disconnect.