Welcome to the Seacoast First Quarter 2012 Earnings Conference Call. My name is John, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Dennis Hudson. Mr. Hudson, you may begin.

Thank you very much, and welcome to Seacoast’s first quarter 2012 conference call. Before we begin, as always, we direct your attention to the statement contained at the end of our press release regarding forward statements. During our call, we will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and accordingly, our comments are intended to be covered within the meaning of Section 27A of the Act. With me today is Jean Strickland, our President and Chief Operating Officer; Bill Hahl, our Chief Financial Officer, Russ Holland, our Chief Lending Officer; and David Houdeshell, our Chief Credit Officer. We continued our progress this quarter with some of the best growth in new households and deposits that we have seen in quite some time. In fact, I believe the growth we’re now seeing is quite remarkable, given that we’re still in fairly tepid business conditions as we move forward. We also produced our third consecutive quarter of positive loan growth following several years of effort devoted to liquidation of problem loans. Our accelerating growth in new customer households, both business and consumer households, is now starting to translate into higher revenues and I want to talk about that in a minute, but first, I want to comment on our earnings results for the quarter. But well, before I do that, I think I should probably comment on another milestone we achieved during the quarter and that was our exit from the TARP program. As most of you know, the Treasury department is aggressively moving to wind down the TARP capital purchase program. And we were selected among with 5 other banks to participate in the first-ever auction of TARP preferred securities, which was concluded at the end of the quarter. The auction was…

Thanks, Denny, and good morning. I will be referring to a few slides we have posted on our website during my comments. Net income for the first quarter totaled $938,000 compared to $358,000 for the first quarter of 2011. In general, the differences in performance compared to last year were increased non-interest income, higher net interest income and non-interest expenses, and increased credit costs in the form of loan loss provision as a result of one larger loan that was transferred to non-accrual, as well as what Denny mentioned, the final disposition of approximately $12 million of OREO properties. Revenues excluding security gains grew by 4.4% for the first quarter compared to last year’s first quarter. In the quarter just ended, top line loan growth was up $8 million compared to the fourth quarter. However, accruing loans totaled $1.175 billion, $5 million lower compared to the sequential quarter but $16 million higher compared with last year. Notwithstanding the modest loan growth over the last 12 months in accruing loans, we continue to make progress and are encouraged by the increase in our active commercial pipeline to $98 million at quarter end. Our commercial lending teams have achieved improved pricing on the new lending and this has resulted in our achieving our net interest income goals in spite of the drag of the new non-accrual loan I mentioned earlier. Turning to Slides 7 and 8, and the deposit data in the earnings release for a discussion on deposits, our retail banking teams have done a great job in adding large numbers of core deposit customers and dramatically improving the mix and profitability of our deposit base in recent years. That mix improved even further in the first quarter. Total deposits are up $51 million from a year ago and $19 million…

Thanks, Bill. I guess to summarize the quarter, we continue to focus on organic growth and I think our people are producing some remarkable results. These results are now beginning to show up as revenue improvements across all markets and it’s strengthening our franchise value. We’ve significantly improved our credit quality and we’ve eliminated credit concentrations. Loan growth is beginning to return and we expect to see some acceleration in growth going forward over the next year as our business initiatives grow stronger. And as you’ve heard, our new business pipelines are very strong right now. We’ll continue to invest in growth, while we pay for it to the greatest extent possible with reductions in core overhead. Our expenses were higher than anticipated during the quarter, all of it related to credit. Going forward, these costs are expected to return to more reasonable levels. And with that, I guess we’ll open the call for a few questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question is from David Bishop from Stifel, Nicolaus.

I was - saw the positive trend in terms of the commercial loans funding in this quarter. In terms of the market on the commercial side for competition there and just from a VAR perspective, what are you seeing there in terms of signs of life or just the competitive environment, just overall?

Yes. It’s certainly a very competitive environment and having said that though, we have some very specific things we’re doing to - from a competitive standpoint that we think really makes -- positions us in a distinctive fashion. I think the most significant thing we’re doing is really attacking the very large banks, the mega-banks and we’re seeing some tremendous ability to begin to move some of that business over here. I guess my point is - central point is this is a market share acquisition delay, we’re not seeing tremendous growth in the market and for us -- Russ, did you have a comment?

Yes, that’s actually true in all of our markets with the opportunities to win business from the larger competitors some of our growth markets, Orlando and Palm Beach, we are seeing some signs of an economic growth and some loan demand increases?

We also have a very targeted approach as we’ve talked about before in terms of our focus and really understanding what adds value to the targeted group and that's very successful for us.

That’s a very - I guess, we won’t go into but we’ve a very specific direct marketing that we’re working and have been for the last quarter or so and that’s gaining some momentum and we’re finding that to be very effective.

You've been able to --a couple of years ago, obviously or actually more than a couple of years ago, the Scripps institute opening down there, we’ve been able to sort of call any sort of growth from the expansion from that campus?

Yes, we have, we have some relationships there. It’s a slow buildout though, and Jean, you have a comment?

Sure, we welcomed Scripps years ago with open arms, a very public celebration when the real estate controversy was going on, we differentiated ourselves by putting billboards up and coming out publicly in the newspapers welcoming them and aligning their value proposition with what we stood for and so since that time, we’ve had a very good close relationship with Scripps in that it has resulted in business for us and we hope to do more.

Like we’re working on something right now, later this year that would perhaps be good, not with Scripps though, but with some of the spin-offs and some of the new firms that have moved in just to update you, since several years ago when that all started, there have been 4 or 5 new companies that have literally are up and operating today in our market that are related to all of that focused on biotech. So, that’s continuing to come, it’ll be big a few years down the road, but it probably starts to accelerate now in the next couple of years, but been has been sort of slow to this point.

Our next question comes from Michael Rose from Raymond James.

Just a question as it relates to OREO balances, if they - looks like they came down pretty nicely this quarter. How should we think about the expense, the OREO expense going forward, as those balances continue to come down? I mean are we going to get to a point where that expense is pretty minimal on a quarterly basis?

Yes, boy, that’s the plan, isn’t it? And we’ve - I guess what we would say comment would be that the sales that occurred this quarter that will close next quarter have fully accounted for and so then the question is what about the remaining portfolio. The good news about the remaining portfolio is that it really gets small, the number or the trends - the properties that are left in that portfolio are more dominated with residential properties and that sort of thing and so we think the volatility, the thing that’s kind of hard to deal with are some of the larger exposures, is when you actually are negotiating a sale and it’s going to result in a, make perhaps an additional charge in an effort to get it out of here quicker than we might have anticipated. Sometimes, those numbers could be larger, but with the diversity that’s left in the portfolio, I think it starts to look a lot better as we move down the line.

Okay, and then, as a follow-up, how should we think about the loan loss reserve ratio? Historically, you guys had been a lot lower, but now that your portfolio mix has changed, could you actually see getting down closer to where you’ve been historically or do you think it’s still going to remain higher just because the regulators are going to force you have more reserves?

Okay, we’re not getting down to those historic levels anytime soon. And number two, I am not sure that’s where we will go in terms of - we certainly have lots of loss experience to help guide our thinking over the long term when we look ahead. But I think we’ll not immediately but over time you’ll see that drift lower as our credit quality continues to improve. And I think probably, we have specific reserves in that reserve that start to melt away as we start resolving the remaining credit then that pushes it down. But I wouldn’t expect that to happen immediately. It’s just going to happen over time.

Our next question comes from Mac Hodgson from SunTrust Robinson.

I wonder if you could give anymore color on the $40 million commercial real estate participation, maybe the type of commercial real estate, any sort of plans for resolution there?

We want to kind of avoid any specific information around that credit because we’re in the middle of some negotiations on that. The only thing I would say is it’s a cash flowing asset. It is commercial real estate, it’s actually currently performing. But you want to comment?

It’s just that it is a -- I was just going to point out it is a performing asset and just being conservative [indiscernible].

Yes, put it on non-accrual because we have an upcoming maturity date and we have some issues to work out with our participant, but I guess the long story short, it’s a cash-flowing asset, it’s - as Bill said earlier, it is our largest remaining troubled asset, it’s performed although it’s - there have been - it’s underperforming where we would like it to perform. But it’s - yes, I guess it’s not land, it’s something that has some value and we have something to work with there and we’ll continue to work forward with that.

Okay, great. What is the size of your total participation portfolio? You mentioned this is the largest participation is -

Well, I didn’t mean it that way. I meant it’s the only one, I think.

I think I said it was the largest remaining -

The largest - or I think what Bill meant to say the largest remaining troubled debt restructure -.

Yes, the impaired.

Impaired and troubled debt restructure and it was kind of an outlier that we have been aware of obviously for a number of years and I think that was the point I was trying to make, we actually have a handful meaning 2 or 3 additional participation from the portfolio but there are very little tails that are left on those that they are paying down very rapidly and they are very, very small now. I mean like under - altogether under $3 million or $4 million probably or less that be just one.

And this was an accruing TDR?

Yes. And it was something we restructured a number of years ago - a couple of years ago, you know, has performed successfully, but now we have more decisions to make as that maturity date gets closer to the date this year.

Okay. Couple of expense-related questions. How many new CRMs have you hired and how long do you think it generally takes to get breakeven for those?

We’ve hired 10, between - in the last 12 months - 12 to 18 months and may take about 3 months to get the pipeline going and then another 3 months before you start seeing the results of that pipeline.

So some of the earliest guys that joined us and some of the earlier guys were small teams and that is just now starting to hit the books, I’d say. And it’s showing up in the pipeline and in the other. You may want to comment on our residential pipeline, kind of interesting -

Yes.

We’re seeing there.

Yes, both of our - both the commercial and residential pipelines are really at significantly historic levels. They are trying to see the results of our investments that we’ve made over the last 2 to 3 years on residential and that 1.5 years on the commercial side. So the production we’ve gained our number one market position in the Treasure Coast on the residential side. And as far as volume goes, unit volume, we’ve also regained that position on the commercial side.

Okay, great. Just one last one on expenses, what’s the - if can’t estimate it - if you have an estimate for the dollar amount of personnel expense related to credit admin or default management costs, something that will come down over time if the dollar amount is there in the quarter?

We don’t have that for you here. I will tell you, we’ve been reducing cost in the special assets area pretty significantly. And part of that was of course being redeployed into some of these growth initiatives. Sorry, I don’t have that number right now but it’s - well, I’ll --$600,000 annually and I will tell you we’ve got - we’ve been averaging - we don’t ever looking at this few days ago been averaging an additional that last was personnel cost. We’ve been averaging another $0.5 million a quarter plus in legal fees.

In legal and taxes in insurance.

Right. So it should be coming down a little bit of reduction in -

So that’s say, $2.5 million to $3 million annually. And it’s interesting this quarter when you look at our OREO cost, $0.5 million in legal cost, just general legal cost with that and expenses that we just talked about, the higher provision well over $5 million in drag just this quarter.

Our next question comes from Christopher Marinac from FIG Partners.

I just want to tick you on - match a lot of thinking on the expenses. I mean, Denny, if you look at big picture, yes, the investments you’re making this quarter, last quarter on new people, I mean, I know Russell would be able to comment on the 6-month timeframe, but just bigger picture, if you look at a year, year and a half, I mean, do you want that to be a 2 for one, 3 for one payoff, or can you give us anymore color kind of where you see the bigger picture on how these investments pay off?

Oh, yes. At least a 3-for-one, if not a 4-for-one payoff, probably higher. I means it’s - we know how those ratios work and we see that, that is our future, that’s where we’re headed. If we’re not headed there, we’re going to - that’s not what we want. So yes, we’re going to see that.

Okay. So you’re executing in the next couple of quarters, we ought to be seeing your net interest income and fee income slightly better to complement that?

Yes, the challenge we face is which we’ve mentioned several times over the last couple of quarters is that a very challenging interest rate environment and we also are being extremely careful in our investment decisions in the investment portfolio and these all we took some gains this quarter and those gains are related to restructuring that portfolio to perform well a year from now and if we rates start to creep up. And I believe that's probably the direction we’re headed in the future, so now is the time to be extremely careful on the interest rate front and interest rate risk front. So that’s challenging, the general environment is challenging, the thing that we can affect without undue risk is getting back in the market and growing the loan portfolio. And we think that what is happening to the extremely large banks right now is providing an incredible opportunity for us to gain market position and that’s what we’re - that’s where we’re focused on, that’s where a lot of these people are coming from, that we’re adding to our team and we’re seeing very, very good success with that. So that’s what we need to focus on here is growing the franchise, growing organically and positioning ourselves so that as these credit costs begin to finally moderate, we have this revenue growth that is punching up and a reasonable expense structure starts to develop at that point.

So from here, do the margins slip a little bit or is there some positive movement?

No, it depends on how successful we are with everything I just said. And if we can - what our plan is for it to not slip over time and to replace the challenging part of the margin with higher volumes and better funding. And we're thinking we get our DDA mix even much higher than it is today over the next couple of years, as we continue to build this household machine and push deeper into some of the nearby markets. And a huge impact on that funding is going to be our success that we expect to see in the area of small business. And we mentioned earlier, we’ve very specific programs designed to improve our market penetration in the area of small business within our market. So, we think there’s a great opportunity to do that with what is happening in the mega-banks.

We also continue to focus overall on efficiency and expenses for the purpose of increasing our ability to service our customers because our focus generally on getting more efficient is to improve service, but it also has the outcome of lowering expense.

We have a number of issues - a number of initiatives around that.

And Denny, is there any update from you or Bill, on the DDA in terms of how that may play out here new and further out?

No real update. I think, we kind of stand by our prior comments and that is as we maintain a positive earnings stream and our forward projections continue to strengthen at some point that crosses the line and we move the reserve back off of that deferred tax asset. We’re not sure when we haven’t really made any strong comment about when, because we still have some uncertainty around that. But, nothing has changed in terms of our outlook.

Our next question comes from Ken Puglisi from Sandler.

Most of my questions have already been asked, but just a couple of others points of clarification. On the auction of the TARP, the original TARP had a step-up in the dividend from 5% to 9%, is that still a feature of this? And if it is, what would your plans be at the time that happens?

Yes, the terms of the investment, of course, didn’t change at all. And the new owners now have assumed all of those terms and so forth. And you’re absolutely right and for us in February of 2015, the rate steps up to 9%, and as I said in some of my remarks, for now with a 5% rate, we believe it belongs on our balance sheet as we begin to improve our condition and better opportunities open up for us to consider alternatives, we’ll look at that. And certainly that’s - that will be - if it’s still outstanding when it tops to 9%, that’s going to be a real important discussion for us to have.

If it doesn't where rates are at that time, I guess?

It would and what alternatives we have, what our need for capital is, what our growth rates are looking like, what the alternatives cost, so on and so forth. One thing I do know is, right now, for us to get past to go away would require common equity and a lot of dilution and none of us want that.

Yes, okay. And just a point of clarification on the OREO sales, 40% of what’s left is scheduled to close in the second quarter?

That’s right.

And I heard you say that the expenses were already in the first quarter numbers, that then includes the loss, correct?

That’s right.

Okay. So in the second quarter, OREO goes down, but the loss for OREO have been -?

That’s precisely correct.

That’s great. Okay. And just one of the things I just noticed on Bill’s slides that service charges have declined for the last couple of quarters, even though DDA I think going up, and I was just wondering what was happening there.

They’re up over a year ago, but eventually they’re down and I think it’s seasonal, but go ahead, Bill, sorry.

Yes, seasonal and you’ve got the lumpiness of overdrafts, but I think you see in the fourth quarter people spent a little bit more probably in the Christmas season or whatever and so that kind of - it always goes up in the -

I would say our business, it really kind of swings back and forth on the business side, and the balances get larger in Q1 -

Charges drop.

Drop. We are still offering free checking for across the franchise. And so, it’s really more driven by some of the other fees and as opposed to [indiscernible].

Our next question comes from Mark Burden from Spectrum Advisors.

Okay. Am I being heard now?

Yes.

Okay. My question is - hello?

Yes.

Yes, my question - I’m sorry about that. My question is - and this is Mark Heilweil. Can you give us some more color around the auction of the preferred, the TARP preferred, for example, in the memorandum? There was a discussion that you might participate in the auction. Were you denied permission to participate in the auction and also would you discuss what information, whether there was any due diligence by the people who were buying it with you that was not in your public information, that it was disclosed in your public information, because it looks as though it sold quite a discount, which raises questions as to what the value of the common stock is, if the preferred is being sold as a discount. So if you -

Okay. Well, let me answer your questions. First of all, we did not state in the material - offering materials that we might participate or intended to bid. Quite the contrary, we stated that we did not intend to bid. And the reason we did not intend to bid is because we felt this was an important part of our capital structure for now as we continue to improve our condition, I think those - our ability to redeem or purchase the market transactions that preferred changes. And I think, we’ve made that clear. And then on the second point, in terms of the discount.

You had previously said that you might bid on those, I read that somewhere, so it's in some disclosure material.

Okay. Well, it was in the materials that were filed with the deal. We made it pretty clear we were not going to bid. I think for us to have been able to bid what have required us to probably address - raise additional capital, that where I think it just didn’t make any sense for us. On your second question on the discount, I’d just point out that some of the largest most well-heeled issuers in America in the banking world have dividend rates - market dividend rates on their preferreds that are substantially higher than 5%. So I think everybody anticipated a discount and I think the buyers got a very good deal at the pricing when it went out, but I think it was a very successful auction and when you look at the other banks with the exception of the 2 that we were able to bid and bid that aggressively, they were in fairly tight range.

And the other point was did you have discussions with these buyers and was there any information?

We had, just to give you some color, we had brief, and I mean very brief, phone calls with groups of - with buyers, potential buyers and you’d really need to talk with the underwriters that worked with Treasury on the deal to dig into that. But we had very brief conversations. Everything that we disclosed and talked about was in our filings, of course.

Okay. Would you consider - since these were purchased at a fairly steep discount in the judgment of a lot of people in the market, would you consider trying to buy back some of those at a discount? Is that something that you'd thought about?

Sure, we would look at that. But again, I think my earlier remarks made it pretty clear that for now this is a good piece of capital on our capital structure, and I think as we move forward and our condition continues to improve, a variety of options open up including other forms of capital. And included in all of that thought process would be the thought that we would potentially repurchase some of this at a discount.

And finally, do you have a near-term target for what you view as an acceptable return on assets of the bank? I think your return on assets was 26 basis points which most banks would consider to be pretty unacceptable. Do you have a near-term target that you would consider acceptable?

We have not disclosed our targets and our future specifics around that, but there’s no question that the performance that we’ve had in the last several years has been entirely unacceptable. I understand that. But we’ve a plan in place to improve our performance and included in that plan is a continued resolution of the asset quality issues and unfortunately that doesn’t happen without cost. And that’s what we’re working very hard to get behind us. We’ve made tremendous progress. We returned to profitability about a year ago. The level of profitability we returned to a year ago is not at a level that we want it to be. But when we look ahead as we complete our process and grow and continue to execute our growth initiatives, our overwriting objective is to get our return on assets up to what anybody would consider to be a respectable and appropriate level and we want to do that as quickly as possible.

And my last question would be on legal costs which seem to be pretty high. What is being done in terms of managing those costs and perhaps bringing in some more legal help in-house whether that be paralegals or attorneys?

We think those are expenses that are going to melt away fairly rapidly as we continue to tackle the issues that we’ve been talking about. And I don’t think that’s the issue. We just need to get the utilization way down. And the way we get the utilization down is to eliminate the issues that are leading to the higher legal costs. So, I think that’s coming. That’s a very big part of our plan going forward, is to bring those costs down over the next year. And I think you’ll see - you have seen them come down pretty substantially from a year ago.

[Operator Instructions] And our next question comes from Kevin Barker from FBR.

I had a question on the securities portfolio. You took the securities gain this quarter and you saw all the yield on your securities portfolio come down pretty hard. How much further do you expect that to come over the next year as you set yourself up for higher rates in the future?

Well, that’s going to be dependent on how active we are in really changing the complexity of the portfolio. Currently the portfolio is going to have an effective duration of a little less than 3%, about 2.7% and with the sale that really drops it down even further to 2.3%. And so, we’ve got some room to add some duration back into the portfolio. But frankly, the yields right now, even the tenure as we sit here as of yesterday below 2%, more like in the 1.92% is putting pressure on the investment portfolio. And just the principal paydowns that we get every month and just reinvesting those, and as Denny mentioned we want - a key thing for us is interest rate risk. So we’re going to - we expect to see the investment portfolio overall yield trend down. Looking out over a year or so, you could probably see into the probably mid 2%s, to lower than that.

Okay. And then finally, my next question was on mortgage banking, what percentage of your origination this quarter were FHA loans? And are you seeing an impact from the increase and insurance rates from FHA?

I don’t have that percentage.

Yes, we don’t have that percentage although I don't think it’s real significant. Yes.

Typically it’s about a third right?

No, flat with many comments stated [indiscernible].

I don’t have the number either.

Yes.

It’s fairly small.

Yes. It’s fairly small and - so we haven’t had any real impact in terms of the insurance cost.

Okay. Are you seeing an impact from HARP or is that not really affecting your book?

Not really affecting us. We’ve talked about that quite a bit and as of now we’re not really participating.

We have our own programs for loss negation.

For our own portfolio, but we’re not really pursuing the HARP program.

We have not further questions at this time.

Great. Well, thank you very much for your attendance today. We look forward to next quarter. Thank you.

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