Heartland Bancshares, Inc. (SBCF) Earnings Call Transcript & Summary

Welcome to Seacoast Banking Corporation's call regarding the announcement of the proposed acquisition of Heartland Bancshares, Inc. and its bank subsidiary, Heartland National Bank. My name is Dan, and I'll be your operator. [Operator Instructions] Before we begin, I have been asked to direct your attention to the cautionary statement contained at the end of the company's press release regarding forward-looking statements and the risks and uncertainties identified therein. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Thank you, and thank you all for joining us this morning. As we provide our comments, we'll reference the merger slide deck titled Acquisition of Heartland Bancshares, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, our Chief Financial Officer; Michael Young, our Treasurer and Director of Investor Relations and Corporate Development; and David Houdeshell, our Director of Credit Policy and Analytics; and James Stallings, our Chief Credit Officer. We are thrilled to announce the acquisition of Heartland Bancshares. This transaction continues our M&A strategy by providing Seacoast with a low-cost 26-year-old deposit base and deep relationships throughout Highlands County, including the cities of Sebring, Lake Placet and Avon Park. I would like to extend my gratitude to Jim Clinard, the Founding CEO of Heartland; Andrew Bible, President of Heartland; and the broader Heartland leadership team for their efforts over the past few months in preparing diligence materials and collaborating with Seacoast on this transaction. Heartland is a community bank in every sense, focused on building strong franchise value that is cycle-tested, long-term oriented and supported by loyal customers and employees. The bank holds 31% market share in Highlands County and has been dedicated to serving small businesses and consumers throughout the region. Heartland is also a significant home mortgage lender throughout Highlands County. This is a low-risk transaction characterized by a low loan-to-deposit ratio, solid credit position and consistent earnings generation fueled by top-tier low-cost funding. Additionally, Heartland is regulated by the OCC, which is also Seacoast's primary regulator. After careful and thoughtful diligence, we are confident in acquiring this franchise and believe our conservative modeling assumptions create the opportunity for meaningful upside. And lastly, this is a prudent use of capital. We have carefully built our capital position over the past few years, seeking the right opportunity to deploy it. At 50% cash, 50% stock, we believe this pricing structure and opportunity will generate solid earnings accretion with a reasonable earn-back period while expanding our franchise in Florida. And we'll continue to pursue similar opportunities throughout the rest of Florida. I'll now turn the call over to Tracey and Michael to discuss details of the transaction. Tracey will cover diligence and deal metrics, while Michael will address the collar, consideration mix and balance sheet restructure. Tracey?

Thanks, Chuck. Good morning, everyone. Heartland has approximately $641 million in deposits across 4 high-performing branches in Highlands County. With 47% transaction deposits and only 12% time deposits, Heartland's long-standing core deposit franchise has been built through local relationships and an outstanding reputation in the communities it serves. The quality of the deposit book is highlighted on Slide 10 of the investor materials. The cost of deposits is low, only 1.65% in the fourth quarter '24 with limited product migration and a very low deposit beta in this most recent cycle. Loans are locally focused with a conservative true relationship model, totaling approximately $161 million. With a loan-to-deposit ratio of only 25%, the transaction provides significant opportunity to deploy assets into higher yields and to grow the combined franchise. We conservatively modeled forward loan and deposit growth at 3% annually. Moving on to the transaction metrics with reference to Slide 11. Under the terms of the merger agreement, Seacoast will acquire 100% of Heartland's outstanding shares. Based on Seacoast's closing price of $27.83 as of February 26, the transaction is valued at $109.7 million, including options being cashed out for approximately $1 million. The deal pricing translates to 1.63x Heartland's tangible book value and 5.3x 2025 earnings per share when including expected cost savings and the balance sheet actions that Michael will cover shortly. Given the high-quality franchise nature of the company, we expect to keep all the branches open and preserve the high service level that Heartland is known for. We're projecting 25% cost savings for which we have a very detailed execution plan and have consistently demonstrated the ability to execute these in all prior transactions. Credit assumptions used for modeling were developed following detailed due diligence. Credit quality is strong, and we took a conservative approach to modeling, resulting in a total estimated purchase accounting mark of 4%, not including the CECL double count. That's a total estimate of $6.6 million pretax mark, which includes accretable loan rate mark of $3.7 million, accretable credit mark on non-PCD loans of $2.4 million and an additional $500,000 in day 1 allowance on PCD loans. We expect tangible book value dilution to be 2.4% at closing to be earned back in 2.25 years using the crossover method. This is an accretive value-creating transaction that brings us a very attractive low-cost deposit base and an expanded footprint across the state. We expect the merger to be accretive to earnings in 2026 by approximately 7%. We expect the acquisition to close late in the third quarter of 2025 after receipt of approval from regulatory authorities, the approval of Heartland shareholders and the satisfaction of other customary closing conditions. Next, I'll turn the call over to Michael to share more about the transaction structure and balance sheet actions. Michael?

Thank you, Tracey. We believe this will be a very low-risk transaction due to the dedication to a conservative operating model built by Heartland and its employees. Similarly, we have leaned on our acquisition experience to further derisk the financial outcomes associated with this acquisition through a pricing collar and proactive redeployment of the securities portfolio, which I'll address in a minute. Before we get into the collar dynamics, the consideration consists of 50% stock and 50% cash, as previously mentioned. The incorporation of the cash in the consideration mix represents an attractive opportunity to begin deploying our excess capital in favor of an improving ROA and ROTCE profile for the bank. Even with the cash consideration at 50%, we impressively maintain a sub-3-year earnback outperforming a lot of other capital deployment options at our disposal. We're really excited to add such a high-quality bank and deposit base and to continue to build our franchise value and support our accelerating commercial growth engine. This further evidences the balanced high-growth model as a strong organic growth company, combined with our preferred acquirer status in the state of Florida. Now to the collar. Each Heartland share will have the right to elect an exchange ratio of 4.9164 Seacoast shares for each Heartland share with a fixed cash amount of $147.10 per Heartland share or a 50-50 mix of both. The Heartland shareholder elections will be subject to proration, so that the final consideration mix will have 50% of Heartland shares receiving the exchange ratio and 50% receiving the cash payment. The exchange ratio portion of the consideration is subject to a 15% collar as illustrated on Page 14 of the deal deck. The anchor Seacoast price, as you can see, is $29.92. That was the stock price at the time of the signing of our LOI. Within the collar, the fixed exchange ratio remains fixed as does the announced 2.4% tangible book value dilution and 7% earnings accretion. Above or below the collar, the exchange ratio will begin to adjust as the price will become fixed and more or less shares may be needed to fill to the total consideration amount at that time. In the event of the Seacoast stock price dropping more than 20% below $29.92, Heartland has the right to fix the exchange ratio. And if they elect not to do so, Seacoast has a termination option. Now moving to the balance sheet repositioning that we took as a part of the acquisition and predeployment of some of the securities portfolio into a reinvestment. We took additional action, as I mentioned, to derisk the transaction through a tactical prepurchase of securities to reduce the asset sensitivity of the bank and create a durable earnings stream as a bridge towards maximizing franchise value over time and earnings as we deploy the liquidity into relationship lending consistent with our long-term model. Heartland's remained disciplined during the low rate environment with a very high degree of asset sensitivity, but we wanted to mitigate the risk of a decline in interest rates by prepurchasing securities and extending duration ahead of the acquisition close. The current balance sheet is a mix of 25% loans, 50% securities and 25% cash. We took the opportunity to prepurchase $412 million in securities in January and February at a 5.7% taxable equivalent yield, which we will short fund with FHLB borrowings until the date of acquisition close. At that time, we plan to liquidate the majority of the Heartland securities portfolio, which is very short in duration and repay the associated borrowings. This more appropriately aligns the nearly 9-year average deposit life at Heartland with longer-lived assets. And lastly, it derisks the deal, and we've -- remained enough liquidity in floating rate assets to withstand any pricing beta on the deposit side of the transaction as well. With that, I'll turn it back to Chuck.

Thank you, Michael. And operator, I think we're ready for Q&A.

[Operator Instructions] And your first question comes from the line of David Bishop with Hovde Group.

Mike, I was wondering if you could just go over that restructuring real quickly. I think I fell asleep in typing class, so I couldn't keep up with you here. But if you could just go over those details real quick, briefly, that would be appreciated.

Sure. So Heartland has $550 million in total cash and securities as of today, and we went ahead and prepurchased $412 million in securities in total notional amount, and that's at a 5.7% taxable equivalent yield and was really a mix of a bunch of different reinvestment options. But what we were very focused on was ensuring that the yield would remain constant over the life and not diminish in a downrate environment or an uprate environment. and also that the lives of the assets would extend beyond the earn-back window, so that we're sure to lock out the financial aspects of the transaction.

Got it. Did I hear you were funding that with FHLB borrowings? And maybe just curious on the average cost on those.

Yes. We'll do FHLB borrowings and maybe a little bit of brokered, but mostly FHLB just to keep it clean. And the cost on those is about 4.4%. We do get a dividend on those. So the net cost will be a little bit lower than that, but 4.4% is kind of the coupon on that.

So it's a little bit of leverage that we'll carry between now and when we reposition, but we will be positive to net interest income.

Got it. Appreciate that additional color. And then Chuck, Tracey, I think you said you expect I think somewhere around 3% growth in loans and deposits there. They've got that lower cost of funds. Do you foresee any need to sort of reprice upward in the market? I don't know if you expect to accelerate that growth over time. Would that imply maybe having to raise the cost of funds? Just curious how you sort of see that funding base holding off as maybe you try to accelerate the rate of growth over time.

No, we have no plans to change their pricing strategy in the market. We expect to maintain what they've done.

And David, you can see in the chart that shows their deposit costs over time, it's been really stable.

A very granular relationship-oriented deposit base that is incredibly valuable. Just to kind of elaborate a little bit on this bank. It is a true gem in the nature of it's been managed very carefully over 27 years, built very conservatively and built solely on relationships. It is truly a community bank in every sense of the word. It has been amazingly well executed and amazingly disciplined in how they put this bank together. And so it is a really high-quality franchise.

Yes, it definitely shows up in the numbers. And it sounds like then, Chuck, from a lending perspective, it doesn't sound like you'd probably tweak the operating model still going to figure -- focus more on small business, consumer and the residential side.

Yes, that's right. We'll continue to operate the market exactly as they have and what excess liquidity exists there, we'll lend probably throughout the rest of the state.

Your next question comes from the line of Wood Lay with KBW.

A couple of times, you all mentioned very conservative assumptions, which could help drive upside. I guess in you all's view sort of where are these sources of upside? Any color would be great.

Woody, I think really the principal source of upside is we built this bridge with the securities portfolio initially to lock out their earnings metrics. But then over time, we want to redeploy that into the franchise value growth of the bank, and that would be through redeployment of that into lending in the markets where the bank operates, but also across the broader footprint.

Yes. And we also haven't modeled any revenue synergies. Obviously, we'll be able to bring some of the unique aspects Seacoast has in terms of wealth management and other product lines that we operate that we'll be able to introduce to that customer base over time.

Got it. And with this deal, it sounds like the idea of redeploying those -- that liquidity into the loan portfolio is more of a longer-term target. I mean do you expect it to impact your loan growth outlook in 2025?

Yes. I think I'd continue to model as in line with the guidance we've provided previously. And as we move into the '26, et cetera, it will certainly provide the opportunity to push up our loan growth in the outer years as we start to put that liquidity back to work. I mean, obviously, we'll want to move it from securities and cash over into loans, but that will take some time.

Yes. And then last for me, just on expenses. I think this past earnings, you were talking about sort of legacy expense growth is going to be somewhat of a function of operating leverage. I mean this deal is nicely accretive to profitability levels. Does it impact your view on the investments that need to be made on the legacy side in 2025? Or is it not really impacting your view there?

No change. I think about this as our organic model and the stand-alone Seacoast continues to operate as it is, and this is bolt-on on top of that.

Next question comes from the line of David Feaster with Raymond James.

One thing I wanted to touch on is you've had a lot of success recruiting and attracting talent. And if I look at kind of the deposit market share, again, the folks that you're taking are taking a lot from the larger banks. And when you look at exclusive of you and South State, it's a lot of those larger banks. How do you think about opportunity to continue to [indiscernible] and deepen the team there and continue to expand?

Yes. They've got a phenomenal team at Heartland. We expect to continue to leverage that team to do what they do so well in the market. And obviously, the additional liquidity that's provided will give us the opportunity to bolt-on teams, not just in the Highlands County market but throughout the state of Florida to allow us to redeploy that. So we'll see what opportunities present themselves. But at the outset, we'll continue to leverage that team and what they've done so incredibly well. Like I said, they've built just a remarkable franchise, and we'd love to see that continue as we move through the coming years.

That's great. And you alluded to some of the additional opportunities through cross-selling. You've also got a lot more -- just a larger balance sheet, different capabilities. Where do you see the most opportunity to leverage your existing capabilities and product offerings and maybe even technology, given your data analytics and everything to help improve the franchise from an already impressive level?

Yes. That is the huge upside here. There's 22,000 accounts in this bank, and it is very granular, and it is primarily a mix of consumers in that market and small businesses. And so just like we've done in prior transactions, we typically see penetration of product set increase. And so bringing in that type of franchise into the Seacoast model is very accretive to our forward sort of look on what value can be sort of driven out of that. As we've talked in the past, a bit unique about our franchise is the success we've had in the retail side of the business. And so there will be opportunities to expand throughout that market as well. On the mortgage side, they have a really solid mortgage program there, really solid mortgage lenders. They're one of the higher market share mortgage lenders in the market. And so that will be an opportunity as well. And so I think there's just a lot to be done here with a really high-quality group of people and a high-quality bank.

That's great. And then last one for me. Just -- I know, look, Highlands County in that area has a decent ag component to it. And look, I mean, Heartland has got a relatively small portfolio, but they do play in that. And you've got experience in ag. It's not a huge focus. But just kind of curious how you think about their ag portfolio, the types of things that they're focused on and just your comfort with that book.

Yes. We looked at it. We're very comfortable. It's pretty -- it's small. It's less than $20 million in outstandings. It's primarily fairly solid relationships with various agricultural operators in the market, but fits well within the Seacoast model, and we have no -- I mean, 0 concerns there. We think it's well heeled, well operated. What's -- just to kind of reiterate and not to be repetitive, but what's unique about this franchise is the discipline executed by the team over almost 3 decades to pick the right borrowers, the right relationships, people they know, people that are well heeled, people that know how to operate these businesses. And so it is a very crafted portfolio of customers and credit exposure. We have a lot of confidence in what we're acquiring here. This is the cleanest from a regulatory standpoint bank in all of 17 deals we've ever looked at, David.

Congratulations on the deal.

Thank you, Dave.

Next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

Chuck and team, I wanted to go down the topic of the low loan-to-deposit ratio and sort of the low-cost deposits, too. Do you think this could be a new angle for Seacoast? And looking at additional transactions down the road, do you see other opportunities like this in the big picture in the next couple of years?

Well, we're always looking for high-quality franchises, right? So when we're out looking for opportunities, we're looking for well-diversified, granular franchise-focused organizations. There's certainly more of them out there in the state of Florida, and we will look for opportunities to deploy our capital into those banks when we find them. But yes, this is a really high-quality franchise. And if we find others that are similar, we certainly would be interested in.

Is the idea of looking at slower growth areas or even rural areas where you could get low-cost deposits and then lend it out, can that also be a sort of substrategy within the big picture?

We've talked about our M&A strategy in the past, just to kind of reiterate, we want to focus on primarily private banks sort of $500 million to, call it, $3 billion or $4 billion only in the state of Florida. And so whether it's rural or urban, it really just depends on the opportunity, the pricing dynamics, the quality of the franchise, and there's a lot of attributes that go into looking at a deal. So I don't think this changes any of our acquisition strategy over time. And importantly, we've been pretty disciplined over the last few years. We've looked at a few things. We've passed on a few things where it just didn't make sense from a pricing standpoint. And so we'll continue to look for opportunities. We'll stay disciplined and where good value shows up, we'll take our shots.

And your last question comes from the line of Russell Gunther with Stephens.

Maybe, just, stepping back big picture, could you give us a sense for kind of how this deal came together, how long you guys have been getting to know each other and whether this was a negotiated transaction?

Great question. It was a negotiated transaction. I've been meeting with the Heartland team going back almost 5 years. So it's been a long conversation that we've had together. I would say we both chose each other very carefully over a lot of conversations over a lot of years. And I think both organizations have tremendous respect for each other. And that's how the deal came together, Russell. It's been a long conversation and something I'm very excited to finally put together.

I appreciate that, Chuck. And then maybe just following up on a prior line of question. So you guys mentioned you guys are both OCC regulated. There's an efficient time to close assumed. Would you guys be willing to announce another transaction while this one is still pending? And then perhaps based on the overall level of M&A discussions today, what's the likelihood we could see another deal from Seacoast in '25?

Sure. It's hard to say about likelihood because obviously, we'll be opportunistic as things come up. But I don't think this transaction stops us from looking at or announcing another transaction if it comes along. So I think it's small, something we can integrate pretty easily. And like I said, regulatory-wise, this is a bank that's in incredible shape. So we think this deal closes and converts pretty quickly. And if something else comes along, we'll look at it.

Got it. Okay. Appreciate it. Helpful. And then just last one for me in terms of margin expectations, given the securities prepurchase, how would you guys amend your first quarter margin guidance? And then where would you expect this to shake out from a NIM perspective upon deal close?

Russell, this is Michael. Yes, in the first quarter, it could put a little bit of pressure on the NIM, a basis point or 2. But again, NII dollars will be higher. So I think that's really the key focus. I don't want to get myopically focused on NIM over the short term on that. But we still feel really good about all the other guidance items and kind of where we're headed. The momentum is building, and we're excited about it.

Yes. We'll be able to provide more updates on that at the end of the first quarter's call.

And that concludes our question-and-answer session. I will turn the call back over to Chuck Shaffer for closing remarks.

Okay. Thank you all for joining us this morning. Again, I just want to reiterate my thanks and appreciation for the Heartland leadership team, Board and employees for giving us the opportunity to work with that organization moving forward. I think it is an incredible opportunity for Seacoast. And I also want to say thank you to the Seacoast team that's worked on diligence. You guys did an incredible job, a lot of experience here inside the company doing that and looking forward to migrating to the integration plan. So thank you all for joining us this morning, and we're around if anybody has any further questions. Operator, that will conclude our call.

This concludes today's conference call. Thank you all for joining. You may now disconnect.