Seacoast Banking: Prudent Management Pays Off

Seacoast Banking Corporation (SBCF) is a strong, conservative banking institution based in Martin County, Florida, boasting Florida's highest per capita income. The Hudson family controls over 22% of the Company and has over 80 years of successful banking experience. The Hudsons, along with their board of directors, control over 25% of the outstanding shares of Seacoast, which is exactly why they will maintain the dividend. Their directors and stockholders have earned a return for their time and investment in Seacoast. At Friday's close of $10.51, the dividend yield is a strong 6%, but this is less than their book value of $11.22. Seacoast is not like many of the larger financial institutions that are seeing major losses because of the subprime crisis. Traditionally, Seacoast has traded in the 2.5 to 3 times book range over the years.

At $27, Seacoast would be at 2.5 times its $11.22 book value, and the subsequent yield would be about 2.3%. This is more in line with traditional banking yields and shows how prudent the directors have been in the management of the bank. Additionally, if you study the company's income statement, you will see that they had a big increase in loan loss provisions of $9.46 million, and another large charge for investment securities losses of $5.1 million or $.26 per share. The good thing about such reserves is that as their troubled loans are worked through, these loan loss reserves quite often find their way back to the bottom line in the form of profits. Banks have the responsibility to plan for the worst, and can then manage their portfolios to work with borrowers for the benefit of the institution. Banks also maintain large investment portfolios in bonds and treasuries, but when we have shakeups in the bond markets like we have had, federal regulators again force banks to plan for the worst, which I would guess is where the investment securities losses that Seacoast suffered have come from.

Looking at Seacoast's revenue, they have more than adequate earnings to continue their dividend. Their investment securities losses are one time charges, and their earnings on their investments have historically been in the $18 to $22 million range, which is approximately $1.00 per share. Management also announced cost savings measures of $3.5 million, or $.18 per share. Seacoast announced that these cost savings will come from staff reductions and realignment of branches. Management announced in their conference call on January 24th, 2008 that they saw no need to adjust the dividend.

Over the past few years, Seacoast has traded anywhere from 2.24 to 3.14 times book value, which would give them a value of $25 to $35 per share. Seacoast's tier 1 capital is at 10.99%, which is a very healthy ratio for a community bank to make more loans. Management is comprised of seasoned professionals who reiterated on their conference call that they have never been in the subprime lending business and that their loans tied to real estate projects all have personal guarantees.

In light of all of these positive attributes, I can see Seacoast's short interest (at 18%) becoming tired of the losses that they will begin facing as investors wake up to realize what value there is in Seacoast. When the shorts realize that almost 15 million of the 19 million shares outstanding are held by large block owners (79%), and that the few shares around won't help them out of their positions, there will be a squeeze as the fast money guys try to make a quick buck, but the value investors such as myself will be happy to maintain our positions. Seacoast is not a Citigroup (C), Washinton Mutual (WM) or National City (NCC). They are nothing but traditional conservative community bankers. They do business the old fashioned way: low loan to value loans and traditional banking products. They were never part of the subprime crisis that we are facing caused by the Bear Stearns (BSC), Countrywides (CFC), and New Century Financials of the world. While there are many great small institutions that have been unfairly beaten down by Wall Street, I believe that we will look back on 2008 and see just what a great opportunity Seacoast was. Their dividend payments continue quarter by quarter and I think that we will awaken in 2009 to realize that their earnings for 2008 were at $1.00 per share. By the way, I'm long Seacoast and I'm a large investor of Florida Community Banks.

Disclosure: Author has a long position in SBCF

Comments

[Jolly Roger:]

Tough situation for SBCF. Management may be prudent, but competitors made tons of bad loans, foreclosures are increasing, and home prices are declining. No one is buying, no one is borrowing. Even a prudent loan can force a homeowner under water if all real estate values are declining.

2008 Feb 26 08:50 AM

[Eric Fox:]

This bank has $74 million in loans that are more than 30 days past due - of these $74 million about $65 million are in non accrual status. When the bank takes title to these assets, they will see offers of only 40-50 cents on the dollar for them so I hope you are right about the low LTV's. They do have a high capital cushion with total tier one capital of $207 million and a ratio of 10.88%.

2008 Feb 26 08:56 AM

[Florida Banker:]

Payments of Dividends:The Company is a legal entity separate and distinct from its bank subsidiary and other subsidiaries. The prior approval of the OCC (office of controller of the Currency) is required if
the total of all dividends declared by a national bank (such as Seacoast National) in any calendar year will exceed the sum of such bank’s net profits for
that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits any national
bank from paying dividends that would be greater than such bank’s undivided profits after deducting statutory bad debts in excess of such bank’s
allowance for possible loan losses.
In addition, the Company and its banking subsidiary are subject to various general regulatory policies and requirements relating to the payment
of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority may
prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The OCC and the Federal Reserve have indicated that The Ratios of Seacoast National are in line with their regulations.

2008 Feb 26 10:25 AM

[Eric Fox:]

Your point? That they are fine as long as the govt says they can pay dividends up to the holding company?

2008 Feb 26 11:40 AM

[Florida Banker:]

The Dividend is Sound! Besides, Don't be surprised if they don't announce a Stock Buyback plan with their shares trading for less than book value! Makes sense when you can buy Back your own stock for less than cost!

2008 Feb 26 12:05 PM

[Eric Fox:]

They should save their capital just in case things turn our worse than expected.

2008 Feb 27 09:06 AM