Seacoast Banking Corp. Q4 2008 Earnings Call Transcript

Jan.28.09 | About: Seacoast Banking (SBCF)

Seacoast Banking Corp. (NASDAQ:SBCF)

Q4 2008 Earnings Call

January 28, 2009; 09:00 am ET

Executives

Dennis Hudson - Chairman & Chief Executive Officer

Jean Strickland - President & Chief Credit Officer

Russ Holland - Chief Banking Officer

Bill Hahl - Chief Financial Officer

Analysts

Christopher Marinac - Fig Partners

Michael Rose - Raymond James

Matt Olney - Stephens Inc

Bill Young - Fox-Pitt Kelton

Matt Hutchison - SunTrust Robinson

Jefferson Harralson - KBW

Dave Bishop - Stifel Nicolaus

Edward Barr - ES Barr & Co.

Operator

Good morning ladies and gentlemen and welcome to the fourth 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 would now like to turn the call over to Mr. Dennis S. Hudson. Mr. Hudson, you may begin sir.

Dennis Hudson

Thank you very much and welcome to Seacoast fourth quarter and year end 2008 conference call.

Before we begin I’d like to direct your attention to the statement contained at the end of our press release concerning forward statement. During the call we will be discussing certain 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 Section 27A of that act.

With me today is Jean Strickland, our President and Chief Credit Officer; Russ Holland, our Chief Banking Officer; and Bill Hahl, our Chief Financial Officer. Today I’ll be spending a fair amount of time, again reviewing credit quality and then Bill will update us on some of the factors impacting our core earnings this quarter, before we break for a few questions.

2008 has been a challenging year for our industry and for the country. As most of you know, Seacoast entered this period of unprecedented housing market declines, with no exposure to many of the classes, the so called exotic sub-prime, Alt-A and pay option on mortgages and no exposure to business lines like wholesale mortgage productions, that have devastated both bottom lines and business models that produced significant earnings growth in prior years for the banking industry. We did however, have what turned out to be a larger than ideal exposure to residential construction and land development loans.

We first spoke about this exposure and our concern for the outlook in late 2006. We restricted our lending to this product type and we began to reduce our exposures. As conditions began to deteriorate more rapidly, more rapidly frankly than any of us thought possible, we dramatically accelerated our liquidation efforts. A dramatic reduction in our risk profile as a result of our comprehensive effort to reduce this exposure, together with the resulting painful impact on earnings, comprises the majority of the story for 2008.

While the year just ended marked our first ever loss as a company, which is very disappointing, we remain focused all year long on bringing to bear counter measures designed to reduce our exposures to market place deterioration as the year developed. Nothing good happens with the passage of time in an environment like this and so timely focus on the brutal reality we confronted at the start of 2008 was critical.

If you’ll now turn to the last few pages in our press release, you’ll see that we have again included supplemental tables, with an eight quarter detailed trending for end of quarter loan balances, as well as increases and decreases for each loan type. Also included is a further detail on residential construction and land development loans.

As you can see, by the end of 2008, our exposure to residential construction and land development loans residential construction and land development loans declined by 63% from early 2007. This exposure, which represented over 20% of loans in early 2007, has been reduced to a little more than 7% at the end of this quarter.

By rapidly reducing our exposure to this loan type and by focusing most of the reduction on larger and frankly more troublesome loans, we should see improvement in both loss severity and loss volatility coming out of this portfolio in the coming year.

We also saw internally criticized loans which grew significantly over the past two years. As conditions deteriorated, it began to the decline in the second half of 2008. This observation is not a function of any particular improvement in the outlook for the economy, but more a function of our efforts as I stated earlier to confront our problems head on and to deal with them as rapidly as possible, but it is again another indication that we expect lessening loss volatility as we look forward into 2009.

This quarter we took losses of around $7 million, on the sale of approximately $29 million on problem loans. This together with the write downs and charge-offs for another $25 million, drove a provision for the quarter of $30 million. These credit costs combined to create an overall loss for the quarter of around $19 million. Bill will speak more to the specifics of the quarter in a moment.

We also announced that we have implemented annualized expense reductions of approximately $5 million and are in the process of completing another $2.6 million in annualized reductions that will be implemented in the next quarter. This means we are on track for $7.6 million or around 10% of overhead savings that should be fully implemented by midyear.

The restoration of FDIC presumes late last year together with an increase in the premium and our participation in the new unlimited guarantees of transaction accounts will unfortunately offset some of these savings. Overall however, we are projecting our expense structure will improve nicely throughout 2009, with even more significant improvements felt in the second half. We’re going to update you on this progress over the next quarter and we’re also working on additional reductions that could add to this number later in the year.

Our capital ratio has improved during the quarter as a result of our closing on the sale of $50 million in preferred stock as part of the capital purchase program. Actually, this additional capital improved are already well capitalized status and provides us with additional strength as we confront the difficult economy while maintaining our role as an important provider of credit in our community. At year end, our consolidated risk based capital ratio was estimated to be 13.8%, well in excess of the standards for remaining well capitalized.

Our liquidity also improved during the quarter. Our strong, local, consumer and business deposit franchise, built over many, many years and our careful avoidance of wholesale funding allowed us to maintain ample liquidity during all of 2008. Bill will give you more details, but our remarkable deposit franchise prevented our exposure to any real liquidity risks, during this period of continuous bad news concerning the banking industry. As you’ll see we’re actually seeing a fairly remarkable improvement in new household growth, which is very encouraging.

Now, I’m going to turn the call over to Bill, who will make a few comments. Bill.

Bill Hahl

Yes, thanks Denny. This morning we have a few slides that I’m going to be referring to that we posted on our website, under Investor Relations Presentations. Many of you may have gotten our press release off that site as well.

I’ll begin my comments today on slide one of that presentation, with a brief discussion of our funding profile and our liquidity positioning. Our funding strategy remains primarily centered on stable retail and commercial relationship deposits, which fund more than 100% of loans.

As a result of the anticipated increase in FDIC premiums, in November 2008 we contacted some of our largest public fund customers that maintained deposit accounts and switched them to sweep repo accounts, thus reducing our future FDIC premiums. This moved approximately $100 million from deposits in the fourth quarter to sweep repos.

The bank’s loans have always been funded primarily by retail and commercial deposits. Wholesale funding has been mostly used for seasonal fluctuations in deposits or to pre-fund known deposit increases and for other ALCO strategies. At quarter end, deposits from consumer and commercial clients comprised 96% of total deposits, while only 4% were brokered. For regulatory purposes, deposits from existing customers that are placed in to the Cedars program are required to be categorized as brokered. We treat these deposit balances in our slides as non-brokered.

The average daily overnight borrowing position is at zero at year end 2008, and this is consistent with our prior years as well. The bank can issue up to $40 million of FDIC guaranteed bank notes for terms up to three years should the need arise. Our combined available contingent liquidity from all funding sources pledge for these securities and cash on hand at year end exceeded $800 million.

Moving to slide two and a summary of our non-interest expense results and items occurring in the quarters presented that were nonrecurring or credit-related costs that will be lower as we move out of this extraordinary period. This slide shows that our overhead has been reduced more than is visible from the normal income statement perspective.

As we have indicated on prior calls, we have made good progress in reducing overhead and core underlying operating earnings have been improved, but are being offset by one-time charges and much higher credit and collection costs than will be ongoing with the lower risk profile in 2009 and beyond; adjusting for these items, the fourth quarter overhead actually declined by 4.6% over the prior year’s fourth quarter. Denny earlier outlined our overhead reduction efforts for 2009 and so I won’t go in to that.

I’ll move on and take a moment to cover the slide that we have, slide three on the margin. The margin declined this quarter relative to the last three quarters this year and last year’s fourth quarter. Industry factors, including competition for CDs, played a role as the NPAs and slower loan growth during the first nine months negatively impacting our earning asset mix.

Other factors we simply did not anticipate drove the margin this quarter, such as the fed lowering rates rapidly 175 basis points, but competitive pressures not allowing for immediate lowering of deposit rates. Additionally, new non-performing loans were larger than we anticipated and accrued interest reversal was greater as a result. We have listed some of the margin opportunities, such as better deposit mix as a result of our successful growth in retail deposit relationships in the last nine months, which we commented on in more detail in the earnings release.

A smaller balance, low cost retail deposit account relationships were acquired and have replaced the higher cost commercial money market deposits that have flowed out of the central Florida market, in the second half of this year, as described in more detail in the earnings release.

Deposit cost should be lower as competition has been more rational recently, allowing rate pay to creep down. While overall loan growth was negative, targeted areas such as plain vanilla residential mortgages, and low leverage income producing commercial mortgage exhibited growth in the quarter. Residential mortgage pipelines grew as well, as mortgage rates fell to their lowest levels this year. There should be some positive upward push on NIM, as we deploy the preferred stock proceeds as interest earned will go through the margin, but before tax cost of approximately 8% will not.

To summarize, we believe margin can improve in Q1 ‘09 as a result of the fourth quarter targeted loan growth which replaced the non-performing loans sold and due to lower deposit and repo costs, as a result of improved mix and our lowering of rates. I also list the risks for 2009 margin and many of the same issues that have impacted the margin during 2008 may again be concerns that will need to be considered.

Now I’ll move onto our last slide and let me talk about the prior quarter and the estimated fourth quarter capital ratios for a minute. Like many, we applied for the treasury’s CPP program and closed on $50 million in December 2008. Denny mentioned that all of the regulatory and other capital ratios were positively impacted by this capital, with the exception of the average equity to average asset ratios, as the funds was only received on December 22. Both the company and the bank have strong ratios and are classified by the respective regulators as well capitalized.

Tangible common equity declined from 5.99% in the third quarter to 5.37% at year end. We began the year with our tangible common equity ratio at nearly 7% and we appropriately reduced our dividend during the year as it became evident that non-performing assets were likely to grow, that collateral values were likely to decline and that charge-offs would result.

We believe we are at or near the end of a declining tangible common equity ratio, and as we look out in to 2009, our risks are quantified, our overhead reduced and our pros pets for better earnings are improved. If these prospects are not proven to be true, we will take appropriate actions as we deem necessary to maintain sufficient capital ratios.

Denny back to you.

Dennis Hudson

Thanks Bill. As we said at the beginning of 2008, our focus for that year would be asset quality and core franchise deposit growth. These again will be the theme as we move forward into 2009, along with meaningful improvement from residential market share and we’ve seen some pretty significant results in the last 30 days and following into January in this important business line.

All of this will build upon an already uniquely strong customer franchise in Florida markets that remain among the most attractive in the nation as we see the national economy recover. The residential real estate market is likely to recover first, and attractive markets, they began to struggle early in the cycle.

Our local markets along the east coast of Florida saw significant growth in existing home sales, evident, all during the second half of 2008, including our year-over-year growth of around 76% in the month of December. Existing inventory levels have declined over the past year and the distressed component of monthly sales by lenders and services appears to me to be falling; all hopeful signs to be sure.

The real key to our own performance however in 2009, will be the aggressive approach we took in 2008 to reduce our exposures to large residential construction and land development loans, our work late in the year to achieve meaningful reductions in overhead and our relentless focus on building core customer franchise in what will be a year of confusion and turmoil for commerce at Wachovia, National City and Washington Mutual.

Again, I want to thank our associates and officers who continue to work long and hard in a remarkably difficult environment and to our customers, I again wish to express our continued confidence in our board, management team and financial streams, which continues to ensure our safe and sound operation in this difficult environment.

Seacoast remains a remarkable value today. Our risks are well understood and communicated and we have made significant process in reducing those risks, as we bring 2008 to a close. We continue to trade in a negative premium to core deposits, something remarkable to consider given our 80 year history and strong market penetration in what will likely be viewed as increasingly attractive markets as the national economy recovers.

Now we’d be happy to take a few questions.

Question-and-Answer Session

Operator

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

Christopher Marinac - Fig Partners

I wanted to ask about the statement you made in the press release about the internal critics of assets coming off. Can you give us I guess a little more thought about what may occur with that just in the next couple of months? Do you see that trend continuing? Is it a little bit early to make too much of it at this point?

Dennis Hudson

It’s possible it maybe too early. I think the central point is that we have been hard at work since late ’06, during all of ‘07 and during all of ‘08 to make certain that we properly identify our risk in the portfolio and as we undertook that activity and that monitoring, market conditions continue to deteriorate and they deteriorated frankly very rapidly in terms of the impact on some of our credit exposures.

Those internally identified issues grew rapidly over the last two years, as we brought to bear enhanced monitoring, and as the marketplace deteriorated significantly. Its effect was most severe on some of our largest exposures in the portfolio and our most troublesome exposures related to clearly, residential development loans. No surprise to anybody that we would see that.

What we have seen since the middle of this year is a clear cut stabilization and actually some decline in those numbers and I think that probably we believe, we hope that that is a function of our early indication; our realistic understanding of where those credits are and most importantly, a lack of additional credits coming in to that part of the portfolio. Said another way, if you’re aggressive on the front end, understanding where our problems are, we will likely deal with things far more realistically and up front as we try to resolve things.

So Chris, to answer your question, it’s uncertain as to whether it’s time to call that a trend. We debated whether to talk about it this quarter. It’s been two quarters now that we’ve seen it decline. It’s not a massive decline, but there’s a definite change in trend and I think it’s a function of the things that I just talked about and very clearly, lack of additional assets feeding into those buckets over the last six months. So that’s somewhat encouraging.

Having said that, market conditions remain very stressed and our outlook is that if you’re in the residential development business, there’s no end in sight in the near term for things turning around, so. I hope that answers your question.

Christopher Marinac - Fig Partners

That’s helpful and just two quick follow-ups. Where are the new lending opportunities for Seacoast this year if any?

Dennis Hudson

We’ve focused all of our efforts exclusively in the residential market. Residential conditions certainly are stressed in terms of values. It provides great challenges for quality customers who are paying their mortgages, who would like to refinance and have now found that their underwater in their home and we’re staying away from that obviously, unless they can bring equity to the table to right size the credit at the time it’s renewed or the time it’s financed, but we are seeing as I said earlier a very significant increase in transactions in the market.

Transactions have been up 50% to 60% to 70% every month over the last six months, with the exception of November. There was a decline or a pullback in November to maybe 20% growth, but it popped back nicely in December, 76% growth in our markets here of transactions. That suggests to us, when you have combine that improved opportunity with a significant reduction in the level of competition that is out there, we think we will regain what was a very leading position in the plain vanilla residential market. These are conforming loans as we go forward.

Add to that, the government intervention in markets to attempt to make sure that mortgage rates stay as low as possible, that will continue through the first half at least of this year and that combines to be a very positive environment. By the way, it’s helpful not only to our loan growth a little bit, but also fee revenues as we look out over the next couple of quarters.

Operator

Your next question comes from Michael Rose - Raymond James.

Michael Rose - Raymond James

I was wondering if you could speak a little bit about your coverage ratios here. You mentioned some evidence of stress in some other areas of the portfolio and ratios kind of declined from the prior quarter. Can you just tell me how you think about that at this point?

Dennis Hudson

Most of the rest of the portfolio performs fairly well. I think we noted some stress in the residential portfolio, an up-tick in non-performers there. The numbers are quite small relative to the things we’re dealing with in the residential development portfolio. If you looked at our gross numbers there, it includes just a handful of larger loans in that portfolio and those are on the verge of getting resolved and liquidated.

The outlook is not significantly deteriorated I guess at this point. We stayed away from all of the exotic consumer loans and residential loans and as a result we just don’t have the big exposure to home equity loans and some of the exotic mortgage products that have given horrific trouble to some of the larger lenders out there.

Coverage ratios, this is the time when the driver this quarter and really since June of this year has been charge-offs for us, and those charge-offs have been related to residential land development. Again, we’ve gotten substantially through that portfolio. It’s also interesting if you look at the last few pages of the press release and you look at the remaining residential development and construction portfolio, unfortunately a large portion of that remaining portfolio, 50% maybe, is classified non-accrual and most of that is concentrated in some of our large exposures; all that is very disappointing to all of us and has driven higher levels of losses for the company.

There’s not a whole lot left that we see that is going to produce tremendous volatility as we go forward. We’ve been realistic and brutally honest with ourselves with respect to this portfolio and that’s going to serve us well as we come through this period.

Jean Strickland

Denny, I would also just add that we are very aggressive in our reappraisals and our valuations are current.

Michael Rose - Raymond James

If I may follow-up, what’s your outlook for unemployment and how would that change if it’s materially higher given your previous comments?

Dennis Hudson

Well again, fortunately our consumer exposures are relatively small compared to many if not most. Our actual consumer portfolio is extremely small if you look on our detail. In fact, our absolute consumer portfolio of automobile and that sort of thing is $70 million and our home equity lines another $58 million. I mean, just a very small exposure. We have not seen significant deterioration in that portfolio.

Unemployment rates in these markets are already high. We have double digit employment in St. Lucy County at 10.5% right now and some of the other countries, it’s in a high single digits. That’s been a doubling of unemployment over the last year and a half or so, so it’s felt significantly in these markets.

We’ve noted other banks that we compete with locally in these markets who have much larger consumer exposures and were much more aggressive, particularly in the home equity area. In the installment loans to individuals have had much worse results in terms of credit issues in these portfolios. So, I think the fortunate thing for us is our exposure is fairly small and it was never exotic and it was never aggressive in these markets and that’s going to hold us in good faith.

Jean Strickland

And we’re fortunate both in the demographics of our markets and with our penetration in to those markets, with a significant part of our customer base being retired individuals.

Dennis Hudson

Sort of in the upper end of the democratic, as opposed to the lower end. Again, just to reiterate, our problems and our exposure have been in the construction and land-development portfolio. That portfolio peaked at 20% of total loans and is now been brought down to a little over 7% of total loans at the end of the year.

Operator

Your next question comes from Matt Olney - Stephens Inc.

Matt Olney - Stephens Inc

I want to circle back about some of the prepared comments, the tarp capital deployment, if I heard it correctly, could actually benefit margin. Could you give us some more thoughts there in terms of what types of loans or securities you want to deploy those into and what type of match funding you were thinking of?

Dennis Hudson

Before Bill answers that, I would just reiterate our focus is on conforming residential growth. That is coming along nicely. As Bill said, we had some growth at the end of the quarter that looks like it will continue in the first quarter and I think that’s a primary driver to that comment. Other comments Bill?

Bill Hahl

Yes, I think you hit it on the head that we’ve seen in those targeted areas which is primarily the residential. Some growth occurring, replacing, non-performing loans and the such and then the other comment was just that anything on the proceeds and how they’re deployed will have a positive impact on the net interest margin, because those revenues will go through the margin as opposed to the cost of the tarp, which will not. So that was the primary reason for that comment. So whatever we wind up deploying it in, but as Denny said, the targets are the residential area.

Matt Olney - Stephens Inc

Okay and secondly, in terms of the loans sold during the quarter, I think you said on the press release about $20 million. The pricing on some of these loans, I think third quarter you mentioned a range of between 30% and 80%. Is that about where the range was the discount in Q4?

Dennis Hudson

Yes Russ, you want to comment. We don’t want to give out the details but just kind of a general…

Russ Holland

We actually did better in the fourth quarter than the third quarter on the proceeds. The net proceeds were towards the higher end of the third quarter range.

Matt Olney - Stephens Inc

So the discounts were…?

Dennis Hudson

Were less, but I will tell you, we included in that sale some performing loans that were problem loans; that were potential problems down the road, and they had good collateral coverage and that sort of thing. So we got some good pricing and aggregates for the portfolio, but there was a wide range of pricing as you dug in to it.

Operator

Your next question comes from Albert Savastano - Fox-Pitt Kelton.

Bill Young - Fox-Pitt Kelton

This is actually Bill Young. We’ve been seeing a number of banks take goodwill impairments related to their Florida subs this quarter. Could you just update us on your thoughts there and how you feel about your current goodwill balances? Thanks.

Dennis Hudson

We feel pretty good about it and that’s something we’ll continue to look at every quarter, and have to retest and rethink. I think the guys that you’re seeing taking the hits are running Florida operations as a particular segment and that’s a little different. We operate as one segment here, a unified segment and when we look at it comprehensively to-date, at this point, as of today, we don’t see that as needed. Bill, any other comments?

Bill Hahl

Yes, I think you basically hit it on the head, that being one segment, we have all our various lines of business as opposed to one individual line of business and our comprehensive and very deep relationship deposits that we have are very valuable when you get to valuation; but we work with outside independent sources to prepare our step-one test for impairment and all of that is reviewed by our external auditors and so there’s been no impairment noted so far.

Operator

Your next question comes from Matt Hutchison – SunTrust Robinson.

Matt Hutchison – SunTrust Robinson

I was curious if you could give us some more detail on reappraisal trends and how values might have changed in the fourth quarter relative to the third quarter?

Dennis Hudson

I’ll begin by saying that that was a significant impact in the fourth quarter. We focused a lot of our attention on some of the harder hit areas in Florida where we have exposures. Now, the vast majority of our exposure is right under our noses here in the East coast of Florida.

We’ve been talking for several quarters, but we’re now down to two exposures only and on the West coast of Florida, these result from our following good customers over to that market and we took write downs on some of that early last year. We just saw a terrific collapse in value over the last several months in that market. We recognize that this quarter for those, but we saw broad based declines in values during the quarter for all of our land exposures and that contributed significantly to the write downs this quarter.

So it’s real time, sort of stuff that we’re working with. We also have put forth tremendous resources in the whole area of valuation for these credits. Again, the sooner we recognize and realize where we are with these, the quicker it’s going to move into liquidation and I probably stole everything you were going to say. Jean any other….

Jean Strickland

You said it very well.

Matt Hutchison – SunTrust Robinson

Any specifics like when you talk about significant drops in value, is it another 20% decline?

Dennis Hudson

Let me just comment on that in general. The driver to decline begins with home prices, and it ends at the end and it trickles down in to all of the components that make up home prices and at the very end of that process is the raw land value and of any piece of improved real estate, the raw land component is the most volatile for reasons that we all kind of intuitively understand, but the driver to the whole thing begins with home prices.

What I see in these markets has been a very significant reduction in home prices over the last year and a half, but what we also see is improving volumes in terms of home sales, initially being driven in the middle of this year with a tremendous surge in distressed sellers, which is now beginning to moderate a little bit in these markets and yet transactions continue to grow.

The percentage of stressed sellers continues to become a lesser component of that, but when I look at those home prices, in the hardest hit area we have here in the East coast in our markets, St. Lucy County, for some of the more modest priced homes, we have seen an average of a probably 45%, 50 % decline in value.

That decline was felt pretty clearly in the second quarter and I’ve not detected any significant change in that trend as we hit year end. I’ve looked at December transactions, November transactions and in that hard-hit market they are 30%, 40%, 50% declines over the same house selling three year, four years ago, but we haven’t seen any further declines. So I think things are stabilizing a little bit, but it’s working its way down in to land values here.

Matt Hutchison – SunTrust Robinson

What about lastly just commercial properties; how the value is holding in there and I was just curious if you can comment on unemployment rates in your market? Thanks.

Jean Strickland

Commercial has not felt the same impact as the residential, but with the drop in consumer, of course it affects everything and bleeds in to everything. So we are seeing some decline in valuations from the commercial side that’s not nearly as severe.

Dennis Hudson

There wasn’t as severe a run up in value in that marketplace, so we’re anticipating any valuation issues there are going to be a lot more modest. To kind of step forward, we’re seeing higher levels of vacancy in some of the commercial projects around, but our exposures to that market are far less concerning when you look at it.

We have our eye very keenly and have all year long on the retail projects, making certain that we understand where we are there, but again, those projects are cash flowing and there are some increases in vacancies that hasn’t resulted in any real impairment that we can see at this point, but it’s something that we’ll continue to watch and monitor very carefully as we get deeper in to 2009.

Jean Strickland

And on the unemployment, we are seeing unemployment go in to the double digits in a lot of places in our markets, but again I would point to the overall demographics of the areas we serve and the fact that a large component is a retiree population and within the base of customers we serve, we have penetrated that segment very heavily.

Operator

Your next question comes from Jefferson Harralson - KBW.

Jefferson Harralson – KBW

I was going to follow-up on Matt question on the commercial real estate, the income reducing piece of it. Do you have the MPAs and the net charge-offs of that portfolio this quarter handy versus last?

Dennis Hudson

No we don’t, but we’ll get that to you. The MPAs are primarily focused though in the construction development portfolio as we stated earlier. We have some MPAs in the residential area and it’s really relatively modest in the commercial real estate area and I will tell you, as I said two or three quarters ago, a substantial portion of that is related to residential developers who also had commercial exposures. When you kind of haircut that out, it’s very modest in the commercial real estate areas.

So it’s something we continue to focus on, remain concerned about, but if you look at the detail at the end of the release in the quarterly loan trends, you’ll see that it’s a far more diverse portfolio, when you look at the commercial real estate portfolio. The area we remain most concerned about and focused on which is no surprise is the retail trade and we have some exposure there. It’s not nearly what it was in the residential construction loans, but it’s a something we’ll continue to monitor and stay on top of in terms of rent rolls, vacancies and cash flows in those cash flowing properties.

Jefferson Harralson – KBW

Maybe one for Bill. Do you happen to have handy the risk rated assets from this quarter to last, the decline in that number?

Bill Hahl

No, I don’t have that. I have the decline; it’s about $65 million, $66 million.

Operator

(Operator Instructions) Your next question comes from Dave Bishop - Stifel Nicolaus.

Dave Bishop - Stifel Nicolaus

Bill, I sort of jumped on late in terms of your discussion about the outlook for the NIM, maybe some stabilization here. What were some of the things that maybe started to give you some comfort there that might have found a bottom there, might see some improvement?

Bill Hahl

Well as you know the Fed rapidly reduced rates in the fourth quarter by 175 and that’s kind of trickled over in to the first of the year with a much more rational competitor out there, in terms of we’re seeing CD rates more in the low 2% and 2% and lower. So we have a portfolio that averages 359 in the fourth quarter and it’s a short portfolio.

We’ve concentrated the last 12 months on shorter terms suspecting rates were coming down. So we get a push from that, as well as the fact that with a more rational competitor we’ve been able to lower our other core savings rates and the like, money markets, our accounts, our repo balances that we have as relative to some very, very low rates and so that should help.

In addition, as I mentioned, we did get some loan growth in the targeted areas with the residential portfolio and the pipelines expanded by about $8 million in December over the third quarter. So we’re expecting or we’re anticipating that we should have continued growth in the first quarter.

Dennis Hudson

And I would point out that many of our competitors over the last two quarters have had severe liquidity issues and they have looked to our markets as a solution to those liquidity issues and as you know, just about all of those in our market now have been resolved and are in a much more stable condition from a liquidity standpoint. Add to that the fact that the FDIC stepped in with some significant changes in coverage over the last two quarters, particularly with the temporary liquidity guarantee program.

So it’s a very different environment, I think as we move in to ‘09 from liquidity risk, and as a result we’re going to see more rational competition, and we are already as Bill just mentioned, bringing those rates down pretty substantially and will continue to do so.

Dave Bishop - Stifel Nicolaus

Yes, I think there was comment regarding about tangible capital levels, tangible equities maybe funding for here at the 5.3%. How should we think about just overall balance sheet growth next year in terms of the loans in which we continue to see a little bit of a shrinkage?

Dennis Hudson

Probably so and that’s a function of liquidation activities as much as anything. Liquidation will occur a little more slowly as we move in to ‘09 probably, and it will be more a function of resolving existing MPAs. So while we’ll net-net continue to see probably though a decline in risk-based assets and all this talk about banks pulling back credit availability.

I mean for God sakes with your banker, there are some real problems with borrowers and banks always pull back in recessions, because they’re recessions and our borrowers are stressed and it’s a very difficult environment to lend in to. So we’re just not expecting to see any growth really. We are looking to improve our residential growth and so that component will get relatively larger, and that’s going to be somewhat protective of the margin if we’re successful.

Operator

Your next question comes from Edward Barr - ES Barr & Co.

Edward Barr - ES Barr & Co.

Your non-performers increased $11.2 million net quarter-to-quarter. Could you walk us through what the gross inflows were and then how you got to that net basis?

Dennis Hudson

Well, you can pretty well figure it out given what we had. I think we mentioned about $19 million of our loan sales were non-performing assets. So you add that to the net growth and that’s what the inflow was.

To give you some color on that Ed, again, back to residential construction and land development exposure, we had a number of large exposures that we were working with borrowers on, that we were performing during the early part of the fourth quarter. We had workout strategies in place with those borrowers and I think the national news and the national economy and bailout nation thinking crept into the minds of many of those sponsors. That combined with continued, very difficult conditions resulted in our decision to place those loans on non-accrual and to move far more aggressively with those borrowers and that’s exactly what we’re doing with them.

It was very disappointing for me personally to see a good number of borrowers that we thought were going to kind of work with us through this period, decide not to work with us in this period and I think it was a function of the reasons that I just stated, but at some point Ed, you get through all of that and we’re getting there. We think we’re pretty well there. Very disappointed in the inflow, but we continue to realistically value and approach this.

Operator

Your next question comes from Christopher Marinac - Fig Partners.

Christopher Marinac - Fig Partners

To sort of follow-up about the new FDSC restrictions on things, you slipped below the well capitalized status on deposit rates. Will that make a meaningful impact right away do you think and will that be possibly be another sort of addition to the margin stabilization comment earlier?

Dennis Hudson

I’m not sure I understand the question.

Christopher Marinac - Fig Partners

Well, the FDSC is putting in a rate restriction if the bank goes below well capitalized status; meaning that they can no longer pay some of the exorbitant CD rates that they’ve been in the past year.

Dennis Hudson

Are you referring to competitors then?

Christopher Marinac - Fig Partners

Correct, exactly.

Dennis Hudson

Geez, we don’t know how that’s going to (Multiple Speakers)

Bill Hahl

Yes, I think that was just announced a day before yesterday or yesterday. So I’m not sure we’ve got an inventory of who in the market is not well capitalized at this point and then I read that they can refute that by showing that the local market rates are higher or something along that line.

Dennis Hudson

Yes, I guess it’s hard to say Chris, how that will do it.

Bill Hahl

I can say that right now, that we’ve seen a tremendous drop in rates since the 175 rate cut in January. We started out early in January doing daily competitive surveys and we’ve gone to weekly and I’ll you on the daily ones it was dropping 100 basis points, 50 basis points, a lot of the competitors were dropping their higher rate offering.

Operator

At this time there are no further questions.

Dennis Hudson

Well thank you very much for attending today and we look forward to talking with you again in April.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!