Legacy Bank of Florida (SBCF) Earnings Call Transcript & Summary

Welcome to Seacoast Banking Corporation's call regarding the announcement of the acquisition of Legacy Bank of Florida. My name is Hilda, and I will be your operator. Before we begin, I have been asked to direct your attention to the statement contained at the end of the company's press release regarding forward-looking statements and the risks and uncertainties identified therein, which you should read carefully as such risks and uncertainties may cause results to differ from expectations. 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. Seacoast's ability to accurately project results or predict the effects of future plans or strategies, including the impact of the proposed merger with Legacy Bank of Florida, or predict market or economic development is inherently limited. Seacoast believes that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results or the success of the proposed merger. And its actual results, performance and integration of the Legacy Bank with and into Seacoast could differ materially from those set forth in the forward-looking statements. You should keep in mind that any forward-looking statements made by Seacoast speak only as of the date on which they were made, and that Seacoast undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Please note, this conference is being recorded. I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast and Seacoast Bank. Mr. Shaffer, you may begin.

Thank you all for joining us this morning. As we provide our comments, we'll reference the merger slide deck titled: Acquisition of Legacy Bank of Florida, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, our Chief Financial Officer; and David Houdeshell, our Director of Credit Policy and Analytics. We're very excited to announce the acquisition of Legacy Bank of Florida. This transaction provides meaningful earnings per share accretion with almost no tangible book value dilution, while expanding Seacoast's market share and scale in the fast-growing and dynamic markets of Palm Beach County and Broward County. Given the tremendous growth occurring in South Florida, we expect this transaction will produce strategic benefits beyond the simple merger math of the combination. What is happening in South Florida is remarkable with an impressive migration from the Northeast, bringing affluence, corporate relocations and meaningful population growth. This transaction further positions Seacoast to capture this significant market transformation, which will result in further accretive organic growth in the future ahead. We will add 5 locations and $533 million in assets, moving our market share up significantly in Palm Beach and Broward counties. We took a very detailed approach to credit diligence, reviewing 80% of the credit exposure and came away impressed with the quality of underwriting, project selection, low leverage and strength of sponsorship in the portfolio. We placed a very conservative mark on the portfolio of 3.71%, providing comfort that we have covered risks at acquisition. Our confidence is further supported by the low leverage in the portfolio, cushioning any future loss given default. Only 6.6% of total loans are in the construction space, which are predominantly centered on well-performing sectors of residential, medical and industrial and warehouse. The majority of the remaining CRE portfolio is focused on high-quality, stabilized income-producing properties. Credit national tenant properties, properties with loan to values less than 60% at origination, and strong cash flow make up 75% of the portfolio. The balance of the CRE portfolio is multifamily, residential and diversified local properties. We see well-structured loans and good customers in the portfolio, and we look forward to bringing these loans into the Seacoast portfolio. And lastly, there are only 8 borrowers with payment accommodations, and the hotel portfolio is well-seasoned with a weighted average loan-to-value at origination of 41%. We have great respect for the Legacy Bank team, and we will be adding Dennis Bedley as Broward County Market President and Legacy's entire commercial banking team to Seacoast. When you combine the talent acquired in the First Bank of the Palm Beaches transaction, including Jay Shearouse, with Dennis and the Legacy Bank team and the existing Seacoast team, we'll be operating in South Florida with an elite team of commercial bankers with significant scale. We believe this will further enhance our ability to generate disciplined, high-quality loan growth, further supporting the net interest margin and net interest income in the years ahead. And, while not included in the modeled merger benefit, there are significant revenue synergies with Seacoast bringing wealth management, mortgage banking, SBA and an array of consumer products to the existing Legacy Bank franchise. And to conclude, we are extremely excited about this acquisition and the talent joining Seacoast. Given the significant unparalleled growth in South Florida, we expect this transaction will generate tremendous strategic benefit to the Seacoast franchise. And lastly, I want to personally thank Dennis Bedley and the legacy bank team for their help over the past few months to put this transaction together. I'll now turn the call over to Tracey to provide further details on the combination.

Thanks, Chuck. I'll start with a few comments on Legacy Bank. With $533 million in assets as of December 31, 2020, 5 branches across Broward and Palm Beach counties and its headquarters in Boca Raton, Legacy Bank is the largest community bank in Palm Beach County. Loans had an average yield in the fourth quarter of 2020 of 4.83%. Nearly 60% of the bank's deposit funding is made up of checking, savings and money market accounts, and noninterest-bearing checking represents 23% of the funding. Under the terms of the merger agreement, Legacy Bank of Florida shareholders will receive 0.1703 shares of Seacoast common stock. Based on Seacoast's closing price of $35.53 as of March 23, the transaction is valued at approximately $102.2 million in the aggregate. That's inclusive of the value of the rolled over Legacy options and its $6.05 per common share. The deal pricing translates to 1.67x Legacy's tangible book value, 13x 2022 earnings per share and 9x 2022 earnings per share when including expected cost savings. We're projecting 45% cost savings to be fully phased-in by the end of 2021. As a reminder, we have a very detailed plan on execution of cost savings and have demonstrated the ability to execute these in all prior transactions. On the loan portfolio, we estimate a 3.71% pretax mark, including a day 1 CECL reserve of $10.8 million. We have modeled forward loan growth conservatively in the mid- to high single digits in line with Seacoast's growth projections and our previously-stated outlook for the back half of 2021. We've forecasted a remix of the deposit base, running off higher cost time deposits and filling the funding with lower-cost funding at Seacoast, thereby improving the net interest margin on a go-forward basis. That's in addition to the lower deposit costs that Legacy Bank is already seeing. With a decline from 88 basis points for the fourth quarter of 2020, we understand that Legacy Bank's cost of deposit has already dropped to 60 basis points in the first quarter so far. We expect this to continue to decline between now and the closing of the merger. The acquisition will increase Seacoast's deposit share in South Florida by 41% to approximately $1.4 billion. Using the crossover method, we expect tangible book value dilution to be negligible at closing, to be earned back within 1 quarter and with an internal rate of return over 20%. Similar to our other acquisitions, this is an accretive, value-creating, in-market transaction that strengthens our foothold in key and growing MSA. Given the anticipated timing of the closing of the merger, we expect the deal to be accretive to earnings in 2021 by at least 2%, and 6% for the full year 2022. The assumptions used for modeling were developed following detailed due diligence, which included a review of 80% of credit exposures. Legacy has currently only 8 borrowers with active payment accommodations, which includes only 4 hotel loans on interest-only deferral. We took a conservative approach to modeling, placing loans in the purchased credit deteriorated classification that included standard metrics associated with any credit deterioration as well as all deferred loans and commercial real estate loans to borrowers in retail and hospitality sectors. This resulted in a day 1 PCD credit mark of 3.59%, bolstering the allowance. When combining this with the seasoning of this portfolio and across the board lower loan to values at origination, we believe the portfolio is conservatively marked and well positioned for the recovery we see ahead. As a reminder, Florida is outperforming much of the U.S. in its economic recovery from the pandemic, with the unemployment rate improving to 4.8%. We expect the acquisition to close in the third quarter of 2021 after receipt of approval from regulatory authorities, the approval of Legacy shareholders and the satisfaction of other customary closing conditions. I'll turn the call back over to Chuck.

Thank you, Tracey. And operator, we'll open the line for questions.

[Operator Instructions] We have a question from Steve Moss.

This is Gates Schwarzmann, Steve's associate, sitting on behalf today. First off, I just want to say congrats on the deal. The economics here are really attractive. I was curious if we can get an update on the loan pipeline, I guess, feeling a little bit more confident given the economics down in Florida?

Yes. I would reiterate the guidance we provided on the -- on our prior earnings call that we expect sort of mid- to high single-digit loan growth for Seacoast on the back half of the year, and expect the same thing from the Legacy Bank franchise. So their pipeline looks a lot like ours, kind of in line with our expectations headed for that mid- to high single-digit number in the back half of the year.

Okay. And I noticed that you guys had 8 loans on modification status that you guys are acquiring from Legacy, with 4 of those being hotels. Is there any way that we could get a little bit more detail behind those loans? How are they performing currently?

Sure. David, do you want to take one?

Yes, sure. This is David, I'll take that. So the hotel portfolio with Legacy Bank has really performed very well through this whole cycle. They have fairly diversified locations up and down major corridors, interstate highways and other locations, nothing around any urban or downtown business district, certainly no hotels around the Orlando or the theme parks and certainly nothing in Miami Beach at this time. But they really have performed. Very few of them have actually asked for any form of modification. They've been able to perform an interest-only payment. And the ones that do remain today, we're expecting to come back to full payment performance in the next quarter or 2. We've actually seen with the economy rebounding here, there are hotel businesses are recovering very nicely as people are traveling and certainly spring break throughout the state of Florida itself with recent occupancy levels.

Okay. Got you. Yes, that's helpful. And it seems that post consolidation here, you guys are still going to have pretty significant capital levels here and you guys will have capacity from maybe another acquisition. Is there any interest there or -- especially in the Miami, Fort Lauderdale area?

We remain just focused on the acquisition -- will remain focused on the markets we've been looking forward, which is primarily Broward County, up the East Coast to Jacksonville. And the whole, basically, I-4 corridor and then pretty much from Tampa down to Southwest Florida is kind of our key markets. And we certainly could accommodate another acquisition if something came up that made sense. There's plenty enough capital to do something there. We've done 2 deals at once prior. And we've done 3 deals in a year back in 2017. So we -- if we found the right opportunity, we certainly would -- we would look at it.

The next question comes from Michael Young.

Congrats on the deal.

Thanks, Michael.

Wanted to start maybe just on kind of the cost savings front? It actually looks like this is a nice extension of the branch footprint southward from where you've been. So there doesn't appear to be a significant amount of overlap there. So could you maybe just talk a little bit about how you came up with a 45% cost saves? And how you plan to achieve them?

Yes. Thanks. I can help there. We do expect some consolidation opportunities in terms of branches. We'll look to consolidate one existing Seacoast branch in Fort Lauderdale and also 2 loan production offices that Seacoast currently operates, Fort Lauderdale and Boca Raton. So from an occupancy and building standpoint, that represents probably 10% of the total cost saves. The majority of the cost saves really come from personnel and the rightsizing of the combined entity staffing resources. From there, you have what you might expect, savings associated with the integration of various systems and processes.

Okay. And just on the, I guess, kind of the pro forma EPS accretion, obviously, the cost save is a big piece of the step-up from 2% to 6%, as well as maybe the lower funding costs. But could you just talk about how kind of PPP played into that? And what you guys are modeling from that perspective?

Yes. Of the loan balances outstanding at Legacy at year-end, there's $52 million in PPP. We're estimating that less than $20 million of those original PPP balances will remain at closing. 85% of the PPP balances, we expect, will be gone by the end of 2021. So excluding PPP, we're modeling flat to slightly down in 2021. And then ex PPP, loan growth returns, like Chuck said, high single-digit growth in the second half and after that.

And as a reminder, Michael, the income gets accreted back through capital, which we considered in our model. And then what remains at close is a purchase accounting adjustment and a mark to goodwill for the net remaining unaccreted fees.

Okay. And then last one from me, maybe a question for Chuck. Just strategically, with this deal, it's going to put you up to about $9 billion in assets. So the next acquisition, unless it's fairly small plus a little loan growth, you're likely going to have $10 billion kind of in your sights. Can you maybe just talk about how you're thinking about that strategically?

Sure. I still think there's some room between $9 billion and $10 billion, obviously to put another small deal in before we approach the $10 billion. And we -- the way I'd describe it is we full well understand the math of delivering to our shareholders post $10 billion, the level of returns we have, which include low 50s efficiency ratio. And so if we were to cross $10 billion, it would be in a way that we delivered both the returns and the growth that we have historically. And so we're not there yet. We have to see an opportunity where that could continue before we'd crossed the $10 billion. But we full well understand what it takes to maintain the valuation and what that is, is maintaining our level of returns to shareholders despite the impact of Durbin and other costs for crossing. So we'll see what opportunities present themselves. For now, we'll focus on organic growth. Potentially, we could put another smaller deal in. And then anything we did beyond that would have to be at a size or at an efficiency level that we did not reduce the returns that we're providing to shareholders. When and if we cross, we will provide the same level of returns we have to date.

Our next question comes from David Feaster.

I just want to start on the -- maybe just your thoughts on the M&A landscape in Florida. I mean historically, it's been extremely competitive. But a lot of the acquirers have gotten significantly larger. Is there a lot of competition for the types of deals that you're looking at? And just your thoughts -- I mean, I got to believe that you're the acquirer of choice in most of these markets. Just your thoughts on the M&A landscape and your positioning as we go forward.

I think just given my view on that is, obviously, coming out of the pandemic here, significant governmental support, tremendous performance in Florida. I think there will be a fair amount more opportunities for us. There's a lot of deal conversations occurring in the marketplace. And I expect a lot of deals to be announced around the country as we move through time because I think the M&A market is strengthening. And as far as buyers, yes, I would agree, there are very few buyers. We are one of the few buyers. I would agree that we probably are the buyer of choice in many situations. We've had a history of delivering on well-performing integrations and also delivering what we promised at the outset of a negotiation. And so I think there are -- to answer your question directly, there are very few buyers in the marketplace.

Okay. And then maybe just can you talk about the credit review process? So you guys reviewed 80%, I believe that's a bit higher than what you've done in the past. Could you just talk about doing due diligence in this type of environment? It seems like they obviously have a bit higher concentration in some risk segments, but the credit market seems to more than take that in account. Just your thoughts on their underwriting and their overall credit.

Yes, this is David. So I'll take that. So knowing that they were CRE concentrated as well as we're all dealing with the PPP loan process, loan modifications and deferrals, and we really took a risk-based approach around those parameters. We really studied all the high-risk sectors in the portfolio, which would include the hotel hospitality sector, we spoke about previously. We looked at retail centers. We looked at office buildings. We looked at all the construction loans, restaurants and other sectors that we knew were sensitive or struggling with regard to the pandemic. C&I businesses, whether they [ ACL ] or other types of businesses, spas, athletic centers, things like that all came into our scope. We also really want to understand what was the process of granting loan deferrals. And what we saw was a well-underwritten, fully documented request for deferral. The bank was very strong and going to interest only, where many banks went to a full payment deferral. So that gave us some additional confidence with regard to customer selection performance, as well as by getting full documentation. We had more current information to look at within the files on how these customers were performing and could perform during a cycle. We also took a pretty good stance and looked at their PPP process, knowing that Seacoast would have to be involved in the forgiveness process, possibly have to rely on that guarantee. So we wanted to make sure that those processes were well designed, were thorough and would stand up to any SBA audit or other challenges that may come. So we went in knowing that there was certainly a very peculiar period of time and some risk categories we wanted to cover, we thought 80% was sufficient. And yes, it was more than we've done in the last few deals, but I think it was appropriate given the environmental issues that were around.

The only thing I'd add to that, David, I think that's a great summary, is we did it ourselves. We took in our own team and did it on-site and did a very detailed review. And David and his team did an incredible job coming back with a great deck of analytics for us to look at. So we feel very confident in our understanding of what we're acquiring. And we did, as David mentioned, a very detailed review given the environment we're in.

Okay. That's helpful. And then you've got one heck of a team down there. I got to imagine that there's -- it's pretty exciting what you guys are building. Just curious what you're seeing from the new hire standpoint. And conversely, what the lockup of lenders and keep talent at Legacy? And then just on the growth front, where do you see the most opportunity for growth? It seems like there could be an opportunity for cross-selling, some C&I and owner-occupied, but just curious where you're seeing opportunities for growth?

Lots of opportunity. As you can imagine, we were already operating with a fairly significant amount of commercial banking talent in the Broward County market. We did not have much of a retail network down that way. One of the strategic benefits of this transaction is it gives us a retail franchise to support that commercial banking team, the legacy Seacoast commercial banking team and we bring to the market with that, and we picked up a -- and I know you know the market well, David, but we picked up a location in Boca Raton, a location in Delray Beach, a location in Pompano Beach. These are all fantastic, deep, dense, growing markets, markets we wanted to be in more deeply for some of our other lines of business. So it brings us a flag to put in those markets. And we'll launch into those markets with our wealth management business. As you know, it's been growing meaningfully. We'll bring the mortgage business. We bring SBA. We bring a number of retail products to the market. And importantly, for our commercial banking teams, it brings a few flags to allow us to do better on the deposit gathering side. So it's a nice fill-in for the marketplace for us and gives us a lot of scale. If you look at banks under $20 billion, we'll be the largest bank under $20 billion in Palm Beach County, with 11 locations, $1.2 billion in deposit market share. It really moves the needle for Seacoast, and that was kind of the exciting thing. And you look back at what we did with the First Bank of the Palm Beaches deal, we did with the Legacy deal. A lot of great talent joined Seacoast through those transactions in a great market. And I think in the long run, is going to build meaningful growth for us, high-quality growth as we move through time.

That's terrific. Congrats on the deal.

Thank you, Dave.

[Operator Instructions] Our next question comes from Stephen Scouten.

Congrats on the deal. It looks like something we want to see every bank out there do if they could. So that's using your currency, putting it to good work. I guess, first, maybe following back around on growth for Legacy Bank. It seems with their 112% loan-to-deposit ratio that, that may have restricted their potential to do loans that were out there in those markets. Do you think it's possible that over time, you guys utilizing your excess liquidity in those markets produces even faster growth that maybe they weren't able to take advantage of?

Yes. I would describe it like this. I think that the team there, particularly Dennis and Marcia, have come from larger banks in their experience in the past, great lenders, do a great job with their clients. The client selection there was fantastic. A lot of clients we know in our own portfolio, and we're excited to give them a bigger balance sheet over time. That being said, when we modeled this, we modeled it in the sort of mid- to high single digits conservatively. We'll continue to be very disciplined in our approach, focusing on high-quality commercial real estate, lower leverage, stronger cash flow, stabilized, et cetera. I think they bring that to the table. And what's fantastic about that bank and the team there is the portfolio of clients they've had, they've banked in the market for more than a couple of decades. And so they know these clients extremely well. They're clients that come back to them significantly because of their strength of execution. And we're really excited to bring them on.

That's great. And I know you've been asked a bunch of questions about incremental M&A. But I'm curious, particularly if you start to think about larger deals to the extent they are possible, and you guys have done a great job of doing these kind of $500 million to $1 billion in asset adjustable deals. But do you start -- at $9 billion in assets, start to think about a need to do larger deals to move the needle a little bit more?

I think preferably, most of the things we would look at are going to be under $2 billion, smaller deals. Anything outside of that is going to probably not hit the radar given the geography we're focused on. But we prefer the smaller deals, the execution risk is lower. We prefer the infill type situations where we find them. And like I said, as we approach $10 billion, if we were to cross $10 billion, the deal would have to deliver in a way that keeps our shareholder returns where they are today. We would not allow Durbin or other things to back that up. We're very cognizant of valuation and what drives valuation, and it's something that we'll remain very focused on as we get near the $10 billion.

Got it. And then one last question from me. And you just mentioned, Chuck, geographies. And I feel like you guys have said maybe Miami is not a market you'd really want to target in the past, but I may be wrong. And you have this chart on Page 7 of the presentation, which I think is the phenomenal representation of kind of how you've grown. But from here, do you look at Naples or Jacksonville? Or where are the markets you could potentially focus on now that you've achieved some nice density in these other 4 MSAs?

Yes. I think we still are focused on the markets we have been, primarily Broward off the JAX, I-4 corridor, anywhere in and around the I-4 Central Florida market. And the whole Southwest Coast of Florida is very attractive to us. A great market. Naples all the way to Tampa, it's growing, much like the East Coast. Solid economic drivers there. And so anywhere around those type of locations we'd be focused on.

Got it. Got it. Perfect. Congrats again, guys.

Cool. Thanks, Steve.

And at this moment, we have no further questions. I will turn the call back to Mr. Shaffer for final remarks.

All right. Well, thank you, operator, and thank you, everybody, for joining us. Really appreciate it. And this concludes our call.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.