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Seacoast Banking Corporation of Florida (NASDAQ:SBCF)

Q2 2008 Earnings Call Transcript

July 25, 2008 10:00 a.m. ET

Executives

Dennis S. Hudson - Chairman and CEO

Bill Hahl - EVP and CFO

Jean Strickland - Senior EVP

Analysts

Terry McEvoy - Oppenheimer & Co

Mac Hodgson - Sun Trust Robinson

Ted Muncini - Merrill Lynch

Jefferson Harralson - KBW

David Bishop - Stifel Nicolaus

Rajiv Patel - Sinova Capital

Matt Olney -Stephens

Peyton Green - FTN Midwest Securities

Wilson Jaeggli - Southwell Partners

Tom Westerman - Westerman & Associates

Operator

Good morning, ladies and gentlemen and welcome to the second quarter earnings release conference call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Dennis S. Hudson, Chairman and CEO. Mr. Hudson, you may begin.

Dennis Hudson

Thank you very much and I want to welcome everybody to our conference call this quarter. I would begin just by reminding everybody that we will be making a number of forward-looking statements in this call and those are intended to fall within the meaning of Section 27A of the Securities Exchange Act of 1933.

And so as a result everything we say is limited within the meaning of that, part of the Act. I want to just dive in and get into it this quarter. As you saw, we posted a loss of about $21 million this quarter and Bill is going to fill you in on some of the details later.

But first I want to address what we did this quarter in terms of our reserve build and our aggressive charge down related to our residential land exposures.

Further deterioration in market conditions are evident in the last few months and continue to build for us as the quarter unfolded. While residential transaction levels have improved actually in our markets recently, which is very encouraging, much of this improvement is coming from distress sales, which continue to weigh on valuation.

Moreover, we have begun to observe a more aggressive approach to liquidation with property auctions and loan sales. These activities will likely continue to affect the valuation for residential real restate product in the near term.

As a result of recent market deterioration, we undertook an extensive review of our residential land exposures at the end of the quarter particularly residential construction and development and land loans. This review re-challenged the performing status and collateral value assumptions we have used in other recent reviews.

A number of performing loans were placed on non-accrual due to increased doubt as to the willingness and ability of project sponsors to successfully pursue repayment. The carrying value for non-performing loans, particularly residential development and land loans, were reduced substantially this quarter to reflect current conditions including a number of cases which reflect a value associated with more aggressive liquidation activity.

In some cases, we have even challenged the assumptions used in appraisal data received as recently as 30 days ago. We also increased our loan loss reserve during the quarter to reflect the impact of higher loss rate assumptions, reflective of the results of the review. These actions we took in terms of our reserve build and our valuation adjustment were not taken lightly.

We have for some time now been carefully evaluating the market and our exposures while digging deep into every problem credit relationship in evaluating potential collateral value. We believe we properly scoped out our overall exposure and appropriately and realistically responded to current market conditions observed at quarter end.

The write down in a reserve build for this quarter did not so much result from growth and problem assets but rather is intended to reflect a severe and probably realistic assessment of where values are today.

As current transactions are completed in the market place over the coming months in observable data relating to a number of quarter-end transactions was produced, we think we will see a confirmation of our current deal.

We believe the actions taken today will place us in a stronger position as we accelerate our liquidation activities in coming months.

Now, I would like to provide a few perspective comments. Please bear in mind that these comments are somewhat speculative, however they are based on formal tracking analysis that has been in place since late 2006 as we have worked through what has unfortunately turned out to be a very serious and severe housing cycle.

Our ongoing review over many months and analysis of our entire residential development exposure along with past and present projections for potential deterioration in our portfolio are starting to suggest we may be close to achieving a high-water mark in terms of the level of problem assets.

We have a number of relationships that have begun to move forward into final stages of liquidation which is encouraging. We will continue to aggressively pursue liquidation opportunities over the balance of this year.

We do not anticipate further significant amount of growth in problem assets as -- that are related to residential development loan. As a result we may see credit cost begin to moderate in the coming months with a gradual improvement evident later in the year.

Should this prove the case, to be the case, we anticipate returning to profitability next quarter and for our profitability to gradually improve in the next few quarters. Risks to this outlook include deterioration beyond current expectation, including deterioration in our residential and consumer portfolios.

However these portfolios are quite diverse in terms of loan size and vintage and have never included any exposure to less than prime or any of the so-called exotic products including Alt-A or option ARM loan nor have we ever aggressively promoted home equity loan.

Another risk would be deterioration beyond our current expectations in our commercial real estate portfolio. We have been extraordinarily concerned about a weakened outlook for this sector for some time now, and as a result we have been very selective, which has affected our outlook for loan growth as described in our last two calls.

Fortunately our commercial real estate construction loan book is fairly diverse and spread out among a number of product types and geography and our amortizing commercial real estate mortgage portfolio is quite diverse both on loan size and vintage.

These factors will hopefully moderate any potential for deterioration should conditions worsen from here. A final factor to consider would be our core earnings power in the coming quarters. This will continue to support the potential for credit cost as it has over the past year.

Our solid deposit franchise together with our work over the past year to enhance our retail strategy continues to perform well. And we remain committed to making sure that our cost structure reflects current market conditions in order to maintain solid core earnings.

Now, I would like to shift for a moment to capital and dividend. Our capital ratios remain very strong, as you recall we raised the total of $52 million in new capital over the past couple of years, few years during a period of much higher growth.

In fact, our capital ratios prior to that period of higher growth were lower than the ratios we reported this quarter.

In short, we raised capital when it was reasonably priced which fortunately provided our shareholders with protection from ownership dilution we would face today, where our capital levels out of alignment with our risk level.

Our capital plan functioned well in 2005, 2006, and 2007 as capital advantage in response to higher levels of growth. At the end of this quarter, our capital ratios remained within range and in compliance with our board-approved capital plan.

Our total risk-based capital ratios stood at an estimated 11.5% and our Tier 1 capital ratio was estimated at a little over 10% and total equity to assets was 8.2%. These ratios are reduced by the net loss for the quarter on the order of 70 or 80 basis points compared with the prior quarter.

We have spoken in the last few calls about flowing loan growth, and our outlook has not changed. Negative loan growth -- growth will result as we said before from reduced production opportunity. As a result, we expect our risk-based capital levels to grow significantly over the next six months.

This expectation excludes the positive impact that could come from any liquidation activity. We have also evaluated our dividend policy and we anticipate it will reduce our cash dividend in the coming quarter to a de minimis amount until our earnings improve.

As our earnings improve, we will consider an increase in the dividend to a level that would be clearly sustainable. In the mean time our decision will further bolster our already strong capital position over the balance of this year.

Should credit cost begin to moderate in the future and should our financial share price valuations in the marketplace remained depressed, our board has said, it would consider share repurchases at a later date as an alternative to increasing the cash dividend as the better way to increase shareholder value.

Now I'm going to turn the call over to Bill, who will briefly comment on our core earnings.

Bill Hahl

Thanks Danny, and good morning. Obviously this quarter's results on the gap basis were overwhelmed by the large provision for credit loses related to the housing market slowdown and elevated non-performing assets.

The fourth slide that we posted for this call shows that the net income pre-provision in the second quarter of 2008 which generated from the core franchise and on EPS basis, the pre-provision after tax earnings excluding security gains and loses were $0.23 per share for the second quarter of 2008 compared with $0.28 per share within the same quarter of 2007, and $0.27 per share in the first quarter of 2008.

We reported in our earnings release that we added loans to non-performing assets this quarter and that we believe we are in the home stretch and then hopefully will be among the first to show improvement.

So, I believe it is important that I should note that the added non-accrual loans in the second quarter took about 8 basis points out of the margin and the net interest margin would have increased to 3.77%.

In the second quarter, total revenue excluding security gains and losses were $26.1 million, nearly unchanged from the first quarter of 2008 and the fourth quarter of 2007.

Over the past several quarters, revenues have been reduced as a result of non-performing loans and other real state owned offset by an improving net interest margin as explained, low-cost deposit growth and substantial earning benefits from a large and valuable core deposit franchise.

I posted two slides, number six and number seven related to the growth and and size of our core deposit. The company has a strong core deposit franchise at the operating subsidiary bank consisting of approximately 86% of total deposit.

The successful promotion and growth of these deposits in the second quarter aided in the margin improvement excluding credit factors and avoided the increase competition and higher cost and higher rates on CDs which were disproportionately high at many competitors.

The cost of deposits in the second quarter were priced lower and resulted in a decline of 42 basis points from the first quarter to 2.22%. The cost of all interest-bearing liabilities declined to 58 basis point.

The company had strong deposit growth in retail savings and transaction account as result of its focused retail growth strategy with retail deposit balances increasing in the quarter. Total retail savings and transaction deposits increased over $22 million up 16% annualize and now comprise over $570 million in low-cost retail balances.

This growth in deposits improved our favorable deposit net, allowed us to avoid wholesale borrowing, and maintains strong liquidity position, and generated a relatively stable net interest income compared with prior quarters while absorbing the negative impacts of higher non-accrual asset.

Positives for deposits funding cost and the net interest margin for the near term will likely continue provided the Fed remains on whole in the continued success of our retail deposit growth strategy in the second half of 2008.

I posted two slides, number eleven and twelve for the call which shows the net interest margin and net interest income have remained stable at approximately 3.7% and $20,500,000, respectively, over the past three quarters while the Fed has reduce interest rate 275 basis point.

Non-interest income excluding security gains linked quarter were essentially unchanged after removing the income we received last quarter from the redemption of VISA shares. Mortgage banking fees were also nearly unchanged, it could result given all of the uncertainty.

With the disproportionately high CD rates and a weak stock market, fees from our securities brokerage unit were lower but we are offset by improved marine (ph) finance revenue.

On slide ten, I have included information on our overhead growth over the past slide (ph) quarters. Non-interest expenses were $661,000 lower than the second quarter of 2007 and $680,000 larger year-to-date compared with the first six months last year.

We are pleased with these results and they are consistent with our expectation phenomenal overhead growth this year. Expenses were modestly higher linked quarter mostly due to the reversal of the fourth quarter 2007 accrual in the first quarter of 2008 related to VISA litigation.

We continue to evaluate our progress and success in growing revenues, loans, and deposits each quarter and we have been proactive in making overhead adjustments as necessary and we will continue this.

Our liquidity remains strong as demonstrated by a growing and pure leading retail deposit base which is the key source of liquidity. Deposits represent 90% of the company’s funding sources.

The company has very little wholesale funding and has a very high quality investment portfolio with no subprime, Alt-A, trust preferred, CDO, et cetera in the portfolio’s fair value exceeded cost and resulted in a net unrealized gain as of June 30, 2008.

Dennis, turn back to you.

Dennis Hudson

Thank you Bill. We are all very disappointed in our results this quarter. We were fortunate, however to have added to our capital basis with strong earnings in fresh capital that are reasonable cost during the top of this cycle.

We took on the added capital as growth rate accelerated in credit risk as we know was increasing. In spite of a difficult quarter, our capital ratios today are higher than they were at the beginning of this cycle.

Given a muted outlook for short-term growth, we will likely see capital ratios grow by the end of this year to levels that were higher than they were in the first quarter. I have said that our number one priority for 2008 has been asset quality and it is.

Our capital strength has afforded us with the ability to move forward on a more aggressive basis as we now turn to resolving some of those issues and bring imrrovements in the level of our asset quality.

As we move through the balance of this cycle, we will see an entirely new competitive dynamic developed in Florida. I find it instructive to see that many of our business customers across a number of industries are doing better today than anyone would have thought possible.

The common factor, a 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 maintain our focus on exiting out our weaknesses as quickly as possible as we also continue to build on our core earnings momentum.

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

And now we will open the floor to a few questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer portion. (Operator Instructions). Our first question comes from Terry McEvoy from Oppenheimer & Co, please go ahead.

Terry McEvoy - Oppenheimer & Co

Thank you, and good morning.

Dennis Hudson

Good morning.

Bill Hahl

Good morning.

Terry McEvoy - Oppenheimer & Co

I want to hear a good comment about July deposit trend just given the concerns in the market place whether you noticed any significant changes among your customer base or that of other financial institutions in Florida.

Dennis Hudson

No, we've not detected any increased activity or negative trends and now we are now moving into our summer month which typically would be some deposit decline. We are pleased that we have not seen that occurs, so, I think perhaps we see funds that are moving out of other types of products back in the bank deposit.

Terry McEvoy - Oppenheimer & Co

I was wondering if you could provide a breakdown of the charge also, $33.5 million. Just provide a little bit more insights specifically where in the loan portfolio that was coming from.

Dennis Hudson

Well, you can be rest assured that it is all, almost exclusively out of our developer and land exposures.

Bill Hahl

On slide 5 that we posted, you could refer to that and you’ll see the declines in the various categories which would be somewhat indicative of where some of the write downs occurred.

Terry McEvoy - Oppenheimer & Co

Okay.

Dennis Hudson

As well as pay downs, right.

Terry McEvoy - Oppenheimer & Co

A large majority in the residential construction?

Dennis Hudson

No question about it.

Terry McEvoy - Oppenheimer & Co

Okay, I just wanted that confirmed. Thank you.

Dennis Hudson

Thank you.

Bill Hahl

Thank you.

Operator

Our next question comes from Mac Hodgson from Sun Trust Robinson, please go ahead.

Mac Hodgson - Sun Trust Robinson

Hi, Good Morning.

Dennis Hudson

Good morning.

Bill Hahl

Good morning.

Mac Hodgson - Sun Trust Robinson

Just quick followup on that - on Slide 5 of the land and lot balance to $95 million. How much is that is on as a non-accrual?

Dennis Hudson

Substantial portion of it. I don't think we've announced the number but it is something we might do as we roll forward.

Mac Hodgson - Sun Trust Robinson

And can you disclose the right downs that you took on the charge-offs for the quarter and what the lost rates were?

Dennis Hudson

The lost rates on a particular credit?

Mac Hodgson - Sun Trust Robinson

Yes. On a $33 million charge-off, that is on a basket of $60 million in loan.

Dennis Hudson

Well, I can tell you this, it was related primarily to our non-accrual loans and if you relate the charge downs to total non-accrual loan, we'll come up with a write down that is fairly massive on the order of 30%.

Mac Hodgson - Sun Trust Robinson

30%, okay. And what were the OREO at the end of the quarter?

Dennis Hudson

$4.5 million.

Mac Hodgson - Sun Trust Robinson

$4.5, okay.

I am curious and you are assumptions for reserve. Did you assume further declines in asset values and if so, what were the declines did you assume?

Dennis Hudson

With respect to our reserves?

Mac Hodgson - Sun Trust Robinson

Yes, as you build - as you build the reserve this quarter.

Dennis Hudson

Yes. We said in the press release that the reserve build was related to further review of our land exposures in this area. And so I guess all I can tell you if we kind of looked at what we believe is a pretty serious further decline in market conditions affecting values this quarter particularly at the end of the quarter and we tried to work that as best as we can and to some of those other exposures that are not non-performing and we have to make various assumptions around that.

The reserve build relates to a great extent on assumptions related to valuation declines for collaterals securing performing loans, the possiblity that those in the future be a default. And if that occurred, what would be the lost rate look liked based on June 30 assumptions on value?

Mac Hodgson - Sun Trust Robinson

And can you give any - could you give mix of your commercial real estate portfolio maybe how much you have in a retail, office, and industrial?

Dennis Hudson

If you go back and look at the queue for the first quarter and we will be soon be filing our queue for the second quarter, you will see a very good description of that and we detailed that out in a pretty good detailed fashion.

Mac Hodgson - Sun Trust Robinson

Okay.

Dennis Hudson

That was probably where yo want to look and again, I do not know that we have any significant changes hat have occurred in those portfolios since March.

Mac Hodgson - Sun Trust Robinson

Okay. Thanks.

Operator

Our next question comes from Ted Muncini (ph) from Merrill Lynch. Please go ahead.

Ted Muncini - Merrill Lynch

Good morning, Dennis.

Dennis Hudson

Good morning, Ted.

Ted Muncini - Merrill Lynch .

How are you?

Dennis Hudson

Fine.

Ted Muncini - Merrill Lynch

In all in all -- in all the press releases that I read or heard from you today, there was no reference to your current book value. Could you give me a proximate figure on that?

Dennis Hudson

Yes, we have it here at bill.

Bill Hahl

The tangible book is 697 and the book value for share is $9.90.

Ted Muncini - Merrill Lynch

Thank you very much.

Dennis Hudson

Okay.

Operator

Our next questtion comes from Jefferson Harralson from KBW, please go ahead.

Jefferson Harralson - KBW

Thanks. On the 30% write down, roughly of the current non-accruals, can you disclose what do you think are current non-accruals are written down to, so does this goes down from 70 to 40 or 80 to 50 just or -

Dennis Hudson

In terms of related to their original balance?

Jefferson Harralson - KBW

Yes.

Dennis Hudson

I can tell you the wide range are the right down and those would range from - anywhere from very little to as significant as a very large number and it is probably not a number we so not want to talk about at this point.

Jefferson Harralson - KBW

And how about the average of that? Do you have a feel for the average or the average is just meaningless; that it is not worth throwing out there?

Dennis Hudson

It is fairly meaningless but I think the keypoint is that it was substantial enough on individual assets to cause the entire right down relatively to total loan performers to be as high as 30%, actually a little more than 30%.

Jefferson Harralson - KBW

Okay. You talked about the transactions happening in your market place and you talked about the transactions dictating the decline of value? What are you seeing in peak to trough valuation decline and the land values that are described in this right now? is that a fair question that kind a get from another way?

Dennis Hudson

I think we tried to be clear that I do not know what we have seen. I do not that it has been hard to kind of get a handle on support for where the values are right now.

Jefferson Harralson - KBW

Right.

Dennis Hudson

And we have extensive appraisal data and analysis of that appraisal data that is based on various steps of assumptions and I think we just decided that this quarter, the negative assumptions tot support those values are getting more negative.

And so we gone through that data and made significant marks in those assumptions and that what's driving this down so I do not that we began to observe the true numbers yet. I think they are just now beginning to reveal themselves.

I can tell you, flipping all the way to the other end of the scale with residential properties which of course is the component to understanding land value. we have continued to see pricing declines that were more severe in this quarter than you know at any time in the cycle this far.

The good news, which is running counter to the national trend, is that in many of the hardest hit markets in the state of Florida, we saw very dramatic increases in transactions occurred beginning in March and April and those continued to accelerate as we move in to the second quarter.

And so the year-over-year growth rates per transaction level has improved, inventories of new homes has come down dramatically, used home inventory remains very high but the transaction levels are really accelerating which is encouraging news I would say.

The bad news is a lot of that acceleration is coming from distress sales. And a lot of the sellers into that market are the big servicers who are in the final stages of foreclosure.

I will tell you that the other sort of good news is most of those transactions that are acceleration transaction received the most severe pricing adjustments, seemed to be some of the most egregious subprime and aggressive loan that were done two and three years ago.

So, I think we're really beginning to clear some of the worse of the worst at this point. And I think the good news for Florida is in some of the worse-hit markets you've seen some improvement in transaction levels. That doesn't mean we're not certainly at the bottom because prices have continued to be hit.

Jefferson Harralson - KBW

Great! Thanks for that, one followup on the commercial real estate and what do see in lease rates? What do you see in occupancy rates? And what do you see that makes you relatively confident that the commercial real estate loss rates aren't going to follow some of the land loss rates?

Dennis Hudson

Well, first of all you know, we're seeing weakness in everything that you've mentioned. It is not extensive but we're definitely seeing change in trends and they have been saying that for a year.

And it's logical that we would begin to see some of that weakness occur. I think the reason we can be cautiously optimistic that things are not going to be as nearly as hard hit as we've seen in the residential side is the market looked very, very different, on the theory side.

We did not see the over building as nearly to the extent that you saw in the other part of the market. And the other point would be that specific to us, the vintages of those loans spread over a longer period of time generally and so you have a, I think a little less risk in that portfolio.

Jefferson Harralson - KBW

Okay, thanks a lot.

Operator

Our next question comes from David Bishop from Stifel Nicolaus, please go ahead.

David Bishop - Stifel Nicolaus

Hey, good morning Denny.

Dennis Hudson

Good morning.

David Bishop - Stifel Nicolaus

Hey, sort of a follow up on Jefferson's question there and maybe coming at it at different way, in terms of the loan write down and the haircuts you’re taken there. I don't know if you could provide any disclosure in terms of the vintages of the different collateral there and what sort of loss severity based on the vintage of those loans and maybe if you could break down the actually vintage of the non-performing loan category too on the remedy (ph) construction side land, loans as well, if you could segment that all.

Dennis Hudson

It's really on something we want to go in to because I'm not sure how useful it would be and second of all, we're engaged in a number of discussion on this credit and all I can say that we've had, it was a wide variety of wide swing and write downs, and it really depends on individual credit specific, depends on kind of the outlook for that credit.

It would be fair to say that, the more vacant the land, the more severe the write down, which would come as no surprise and it would be fair to say that loans that were originated in '04 and '05 for example would be -- feel the most severe right down.

David Bishop - Stifel Nicolaus

Okay. Turning to capital, in terms I don't know if there's a board-mandated target there, in teams of fresh hold capital levels, is there a sort of minimum regulatory risk-based or Tier 1 that board sort to manages to.

Dennis Hudson

Well, as I said in the opening remarks, we're within the range that we've established, we spent a lot of time over many years trying to size an appropriate capital position for the bank.

And we do a lot of work trying to understand and measure the risk of -- particularly right now on the credit side of the organization, and as I’ve said in the offset, we're operating within that range, and we've been aware of where the risk levels are.

And we've taken some dramatic action this quarter too, certainly not to clean things up completely, but to substantially reduce the risk going forward I think, in terms of the risk of loss.

And so we feel very confident with our capital position as we also said in our release and as we said on, I think the last call -- we filed a shelf registration statement during the quarter, and shelf total, we had a registration of a total $40 million in capital and it's sitting there.

And if we had some belief that we needed it, we would certainly be the first to do it, but we feel very confident with the capital levels we have today are appropriately advised for the risk that we face in the future.

David Bishop - Stifel Nicolaus

Remind us, what’s the trust preferred, currently?

Dennis Hudson

We were basically where we want to be with trust preferred. We have some capacity for additional Tier 1 capital, but we're basically where we want to be.

David Bishop - Stifel Nicolaus

Then in terms of current market rates of -- we've heard some stories, some of the other banks getting aggressive there in some of their CD offerings. Can you provide us some color, what you're actually currently paying in terms of current market rate CDs out there?

Dennis Hudson

Our current market rates are targeted under some of the high rate that are out there, and those high rates has continued, I guess this quarter and the issuers are principally some of the larger companies that are under more stress and Bill can you kind of give us a little representative flavor.

Bill Hahl

Yes, first of all one, I guess of the things that we have is very diverse franchise and has been executing a relationship strategy for a number of years so, we're able and have been able, and you can look at pure information going back and it really hasn't changed that much, but we generally are in the 20th to 30th percentile ranking on overall cost of deposits and it's because of that relationship strategy.

So, while others in the market as Denny mentioned have had higher rates for CDs, we generally can negotiate with our customers anywhere from -- the very disproportionately high rate, it's been amazing we've been able to negotiate, 50 to 75 basis point on average lower than that with our customers. And we've been able to maintain CD deposited growth rate.

Dennis Hudson

We're really pleased this quarter as we stated, we've been working on some retail initiative all year giving example of one that we've been using and that is a checking account offering for larger balance checking customers, meaning several thousand dollars now, as it pays today a rate of 2.5%.

And with a relationship required and a number of other benefits associated with it, and that's been very helpful to us, we actually saw our retail deposits grow pretty nicely over the quarter which take the pressure off in the high rate CD-type side of the market.

So we'll continue to pursue that strategy over the coming months and be responsive to what happens probably with pricing on the retail side. But it's kind of the same environment today that we probably described 90 days ago.

David Bishop - Stifel Nicolaus

Thanks.

Dennis Hudson

Thank you.

Operator

Our next question comes from Rajiv Patel from Sinova Capital, please go ahead.

Rajiv Patel - Sinova Capital

Hey guys, thanks for taking my question. Just quickly on commercial real estate, excluding anything regarding the rentee and the homeowner space. You guys said that, that's an area that you're concerned about, you’re watching, given the weakening overall economy. Have you started to see any signs of stress in any of those segments, whether it be retail, industrial, or office, or are they more just kind of - on the watch and keeping our eye out?

Dennis Hudson

We have not. We have seen stress in the market and that vacancies are up and the people I talked to say pipelines for new tenants is down which is not good new as an example. That would be more or less across the board.

We have not seen any significant or a concerning amount of tangible deterioration on the part of our costumers other than higher vacancies and that sort of thing. So, cash flows are still there, we don’t have any overall concerns but we are clearly in a weakening environment and that should give all of us concern as we go forward.

But, no, we haven’t seen any particular credit-specific major weakening that give us outside concerns with one exception and that would be where you have project sponsors who have other exposures on the residential side where -- and we’ve seen that occur and we have one or two loans probably in non-performing that are actually CRE loans but in every case, they are hooked in to a -- sponsor that has a large residential exposure that looks ugly.

Rajiv Patel - Sinova Capital

Alright. Okay. Great, thanks a lot.

Dennis Hudson

Thanks.

Operator

Our next question comes from Matt Olney from Stephens, Inc. Please go ahead.

Matt Olney - Stephens, Inc

Good morning Den and Bill.

Dennis Hudson

Good morning.

Bill Hahl

Good morning.

Matt Olney - Stephens, Inc

Den, you mentioned some comments earlier about the used home inventory numbers, I believe increasing - those are numbers that are tough for us to get outside of Florida, are there numbers that you can provide for us today regarding that?

Dennis Hudson

Matt, I’m sorry I will have to get back with you, I don’t have those at my fingertip. I can tell you that looking at MLS listings, they’re up but they’re not gigantically up. They’re just been there - I would say they’re high and they’ve remained high.

I am sorry I don’t have those numbers and I’d be scared to give them to you. But again, the positive - the only positive news I see out there is that we are clearing as the foreclosures as they come in to the market and that is causing prices to decline and the decline in prices are bringing probably some fairly remarkable opportunities for buyers to get excited about and that the buyers coming on finally.

Question is, will that continue and I think as we go through the summer, it might moderate a little bit and then we have another chunk of foreclosures that coming out of the sub-prime in all day that hit - that have been hitting the last few months foreclosure and those will turn into OREO and sales late this year and early in '09. Then as we get beyond that, as you’re aware, things start looking a lot better.

Matt Olney - Stephens, Inc

Denny, we’ve been comparing this current cycle with the previous cycle in the early 90s, but given this recent Q2 results, NPAs, and charge-offs, do you still think that still a fair comparison comparing it to the cycles early 90s?

Dennis Hudson

Well, it would be fair to say it’s never been as bad as that. It might be instructive to look back in the 70s with the little more severe cycle that occurred at that time and it hit housing a little more significantly at that time too.

So this is a very, very tough cycle. I think the negative impact nationally continues to build and be felt and with a little bit of hope because of the things that just been talking about that some of the harder and earlier hit areas are beginning to see things hit bottom.

I think there’s a growing belief that at least, hearing some of the higher growth markets in Florida, you’re beginning to see transactions improve and that’s probably a beginning of the bottom. Now we need to see prices which are declining hit a level that is sustainable. We might be there.

Matt Olney - Stephens, Inc

Thank s guys.

Dennis Hudson

Sure.

Operator

Our next question comes from Peyton Green from FTN Midwest Securities. Please go ahead.

Peyton Green - FTN Midwest Securities

Yes. Good morning.

Dennis Hudson

Good morning.

Peyton Green - FTN Midwest Securities

Denny, I’m just wondering if you can talk a little bit about what the workout process is for the basket of loans that are on the non-performing list. How long would you expect it to take to you to get deeds at low or do you think this will have to go through the court system for a while?

Jean Strickland

So it takes that they’re doing a foreclosure, it takes a year or eighteen months, it can even in some cases where there is a bankruptcy involved it takes two years or more.

Dennis Hudson

Yes, I mean we’ve been working this since late '06 and you saw the NPAs grow in ’07 for the end of the year so I mean if that is what you are looking at they’re all -- there are certainly other alternatives that many banks are using including more aggressive ways to sell some of those credits.

We look at all of that, we’ve done a small amount of that liquidation that worked over the last couple of quarters and we’ll continue to pursue it but if you take it all the way to foreclosure and out the other end, Jean is right.

Peyton Green - FTN Midwest

Okay, and I guess I mean, to what degree have sponsors really walked from these fields and we have to really push the issue, I mean is there still some ability to work through things?

Jean Strickland

Yes, there are some borrowers that we do, -- we have relationships with where we try to work with them and if they choose to walk, I mean those are represented in our non-performing numbers and we push to collection aggressively.

Dennis Hudson

But you know, I think we’re at a point, I guess to kind of answer your question, we’re at a point where the level of stress just continues to be very, very high with these guys, and we work a way through a good chunk of them -- all I got to tell you, there’s not a whole lot left.

Peyton Green - FTN Midwest

Okay, and then I guess this is a little longer term question but in terms of shaping Seacoast over the next three to five years, I mean, what do you see as the biggest change resulting from what is going on now?

Dennis Hudson

I think the biggest change for us going forward is we’re probably moving into a very different environment with a much less amount of intensity for competition in all areas. I think you’ll see other players in the market in a reducing cost and infrastructure cost, it provides us with some opportunity to potentially do the same.

It goes without saying that we have had and maintained a larger than, larger exposure to residential development than we should have. That is something we feel would be a change going forward.

But I think the good news is that there are going to be a probably very slow growth in some of those commercial areas but I think the good news is the overall competitive environment gets a lot, a lot more positive, and Jean did you have anything to say?

Jean Strickland

Yes, we -- as pointed out before I’ve been telling that unlike some of the very largest banks, our fundamental operation is still -- still in cash and our residential line of business as well as management line of business, our retail line of business is very strong and getting stronger. We keep getting stronger for -- improvement in the competitive environment, if that’s any reference.

Dennis Hudson

But that is already occurring I would say. In the retail side, we think our success over the last - beginning of the year, in particular has been because of very significant changes in the competitive environment so probably the scope of the competition would be very different and the nature of that competition would be very different as we go forward in the next three to five years.

Peyton Green - FTN Midwest

No, I mean, I think you ought to be commended on the job you have done on the deposit side and I guess my question would be, going forward, to what degree do you think you could keep your funding advantage and then secondly without charge-offs to what degree do you think the loan book would naturally shrink?

Dennis Hudson

First of all, with regard to keeping our funding advantage, I think that’s the given. We have our entire infrastructure is built around supporting that advantage and growing it and back to the loan book I think we’ve kind of standby some of our previous statements and Bill, those were what - for the balance of this year I think we’ve said -

Bill Hahl

Yes, we - I think we in the last call -- and perhaps we’re looking at maybe even lowering that but we’re negative of probably 8% to 10% -- for the year --

Dennis Hudson

Yes

Bill Hahl

And then pushing that out, could be a little bit lower than that, even in the 2009 early - expecting production to be -

Dennis Hudson

So we think loan growth this year would be a negative high single-digit kind of number.

Peyton Green - FTN Midwest

Okay, great. Thank you very much.

Dennis Hudson

Thank you Peyton.

Operator

Our next question comes from Wilson Jaeggli from Southwell Partners. Please go ahead.

Wilson Jaeggli - Southwell Partners

Yes, thank you Wilson Jaeggli here. Could you help us here? We're talking about deposits here. What is the amount of brokered CDs if any?

Dennis Hudson

We don't have any brokered CDs.

Wilson Jaeggli - Southwell Partners

Great! And could you tell me what your past dues here are, 30 to 89 days?

Dennis Hudson

They're up slightly, but not substantially from last quarter. Last quarter they were very, very low,-- $10 million.

Wilson Jaeggli - Southwell Partners

Right. And they're just up slightly from that?

Dennis Hudson

Yes.

Wilson Jaeggli - Southwell Partners

And when you say − you made a statement here you're going to pursue liquidation opportunities − opportunities in the sense that you'll be able to shrink your balance sheet?

Dennis Hudson

Well that would be one side effect. I think the objective is more oriented to reducing the level of non-accrual loans and problem assets. But that would be one result, yes, if we were successful.

Wilson Jaeggli - Southwell Partners

Right. And talk about the liquidation process here. Have you gone to auction with any of your properties?

Dannis Hudson

We've done all of the above and we'll continue to do so, and we believe the action we took to date, put us in a stronger position to be able to move forward and to as we’ve said, a little more aggressive focus on liquidation.

Wilson Jaeggli - Southwell Partners

Thank you.

Operator

Our next question come from Tom Westerman from Westerman & Associates. Please go ahead.

Tom Westerman - Westerman & Associates

Hi Dennis. Just -- I have it in my mind that your worst loans must have come from banks that you acquired, could you tell me if that's accurate or not, and then secondly could you just elaborate a little bit on what you mean by de minimis regarding your dividend? Thanks.

Dennis Hudson

Well, first of all I would say no, our worst loans did not come from banks that we acquired. The loans that we've been most concerned about have been, as we've been saying for over a year, are loans related to residential real estate development, and those are loans that we've originated here, so we understand and know them.

And we’re not happy about it. With regard to the statement on the de minimis dividend, our Board does not yet determined exactly what the dividend would be in the next quarter but, suffice it to say it would be sufficiently small as to be insignificant. So, it'll be a penny or two.

Tom Westerman - Westerman & Associates

Thanks.

Dennis Hudson

And the reason we've taken that action is that we obviously are looking to reserve capital and avoid any diluted capital transactions. And I think the decision on the dividend was an appropriate one, the decision that is coming up on the dividend which will be in August issue is an appropriate one given the desire to maintain and avoid diluted capital transaction.

Tom Westerman - Westerman & Associates

Thank you.

Operator

Our next question comes from David Bishop from Stifel Nicholas, please go ahead.

David Bishop - Stifel Nicholas

Hey Denny, a quick follow up here, obviously market clearing prices are impacting carrying (ph) values too as well, but I was curious if the examiners have been on -- in recently, and that there is any sort of compulsion there from that front to cheer up some of this loans too as well?

Jean Strickland

No, we're in control.

Dennis Hudson

No. These are decisions that we've made this quarter and that's all we can say on that.

David Bishop - Stifel Nicholas

Thank you.

Operator

The next question comes from Wilson Jaeggli from Southwell Partners, please go ahead.

Wilson Jaeggli - Southwell Partners

Sorry for the silence, I got cut off here.

Dennis Hudson

No problem.

Wilson Jaeggli - Southwell Partners

Could you give us the feel for the properties that have gone, (inaudible) either foreclosure or short sale or liquidation or whatever? Can you give us a feel for the different valuation (inaudible)?

Dennis Hudson

I'm sorry, we really couldn't understand you, you were breaking up. I think your question was, could we give you a feel for the valuations on properties that are selling in short sales and it's really hard, there is no standards for that. You really can't come up with anything that globally you can say other than there’s pressure on prices down.

I can find you examples, horrific example of declines versus a trade that occurred two years ago on a particular house that may have been grossly overpriced two and 3 years ago. I think we have said in the past on raw land, we’re seeing value decline very clearly in the 40% to 60% levels. Those are the numbers that we have talked about in the past appraisal

Wilson Jaeggli - Southwell Partners

Thank you very much.

Dennis Hudson

Thank you.

Operator

Den, I’m showing no further questions

Dennis Hudson

Okay, well thank you very much for your attendance today. We hope to report a little better situation over the next quarter.

Thank you.

Operator

Thank you ladies and gentlemen. This concludes the second quarter earnings release conference. Thank you for participating, you may all disconnect.

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Source: Seacoast Banking Corporation of Florida Q2 2008 Earnings Call Transcript

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