Professional Holding Corp. (SBCF) Earnings Call Transcript & Summary

Welcome to Seacoast Banking Corporation's Conference Call regarding the announcement of its proposed Acquisition of Professional Holding Corporation and its bank subsidiary, Professional Bank. My name is Richard, and I'll be your operator. [Operator Instructions] Before we begin, I'd 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 its proposed merger with Professional Holding Corporation or predict market or economic developments 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 with and into Seacoast could differ materially from the expectations 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, Chairman and CEO of Seacoast and Seacoast Bank. Mr. Shaffer, you may begin.

Thank you, Richard, and thank you all for joining us this morning. As we provide our comments, we'll reference the merger slide deck titled Acquisition of Professional Holding Corporation, which you can find at the Investor Relations portions of our website seacoastbanking.com. With me today are Tracey Dexter, Seacoast, Chief Financial Officer; James Stallings, Chief Credit Officer; David Houdeshell, Director of Credit Policy and Analytics; Jeff Lee, Chief Digital Officer; and Michael Young, Treasurer and Director of Investor Relations. Also present is Abel Iglesias, Professional Bank CEO, who will say a few words. Earlier today, we announced the acquisition of Professional Holding Corporation and a subsidiary bank, Professional Bank. This outstanding transaction is a natural extension of Seacoast's franchise and strategy to accelerate our growth and expand our presence in the attractive South Florida market. Professional Bank was founded in 2008 to provide financial services to professionals, including doctors, lawyers and other high net worth individuals throughout South Florida. The bank's 9 branch footprint ranges from the northern part of Palm Beach County, South through Broward and Miami-Dade County's covering one of the United States' fastest growing and strongest markets. Professional Bank also has a loan production offices in St. Petersburg and Jacksonville, Florida. The bank is led by Abel Iglesias, a well-known, well-respected banker operating in South Florida for the last 30 years. He has built a team of outstanding bankers across each of Professional's markets. I'm excited that Abel will be staying on with Seacoast's as Regional President to lead our Miami-Dade Commercial Banking franchise when you combine the Apollo franchise with an [indiscernible] Abel and the broader team, we will have a premier team of bankers operating across the market. A unique component of this transaction, one that added to professionals' attractiveness to Seacoast is its digital innovation team. The team has a long history of digital development with KeyBank in Ohio and has built several valuable digital tools to drive a banker effectiveness and streamline client experiences. Longer term, there is upside to integrating this team into our forward lending technology and analytics focus. And let me provide more detail on Professional's loan book. The bank is focused primarily on Tri-County commercial enterprises, chiefly operating companies and stabilized income-producing commercial real estate in Florida. As of the prior quarter, commercial real estate and ADC represent 256% and 45% of capital with well-managed exposures. The bank has been disciplined in client selection with little exposure to nonresidential relationships which represent less than 5% of deposit loan balances and exposure to loan participation purchases is less than 2% of loans outstanding. In diligence, we reviewed 70% of outstanding commitments and determined that asset quality aligns well with Seacoast's portfolio. Underwriting is effective and loan-to-value and leverage ratios across the portfolio are in the low-50s on average, generally in line with Seacoast portfolio. Additionally, over 30% of the loan book is variable rate, providing upside and higher rates, and we've modeled the deal to reposition available liquidity on Professional's balance sheet into higher rates after the transaction closes. And let me explain the fundamental merits of this transaction. First, starting with the operating market. With this transaction, we will add significant scale in one of the best banking markets in the country that when combined with the pending Apollo transaction, will make us South Florida's most competitive community bank. The truth is that COVID's significantly accelerated the value of operating in Florida. We included a slide in the Professional presentation showing that Florida experienced substantial wealth migration, outperforming all other states with large outflows from New York, California and Illinois into Florida. Moreover, Florida is benefiting from an unemployment rate below 3%, and South Florida, in particular, has captured more than its share of corporate relocations. When you step back and look at South Florida, Miami is transforming into a financial and technology powerhouse. Financial industry giants, including Starwood Capital Group, Icahn Enterprises, Blackstone, Colony Capital, Goldman Sachs, Elliott Management Group and Citadel have relocated, announced or opened substantial office locations in the last 2 years in South Florida. And with respect to technology, Forbes recently ranked Miami #2 among cities developing into tech hubs. This backdrop of significant economic activity has built resiliency and strength in South Florida. And this growth, in turn, expands the smaller domestic industry segments we focus on, including health care, legal, engineering, scientific and technical services, wholesalers and B2B suppliers and smaller manufacturing. And as a result, we see an excellent opportunity to expand the Seacoast franchise in these markets by focusing on the same industry segments we serve today and complementing Professional's Banks focus on these same verticals. With the strength of the newly acquired teams in Apollo, Professional combined with the expanding business community of the Tri-County market, we will be in an incredible position to step in and outcompete the regional, super-regional and national banks who hold most of the market share. Second, let me discuss the modeling we completed. We are very deliberate in our M&A activity and especially careful on how we manage dilution and earn backs. We have modeled this transaction very conservatively assuming only 5% loan growth and 30% deposit growth. This allows for upside in growth rates while executing our conservative and disciplined credit playbook. And while this transaction has modestly higher dilution than prior transactions, a significant portion is driven by accounting-driven interest rate marks, which represent 2% of the dilution, and approximately 0.3 years of the earn back. This is simply accounting and all of it will earn back over a short period of time through income and into capital with 0 execution risk. Additionally, we took a conservative credit mark leaning heavily into the Moody's S3 scenario, thereby protecting downside risk and backstopping the deal. When you consider the impact of the CECL double mark, the loss absorption capacity of this deal is 5.2%. We believe this is a very conservative credit mark significantly reduces any downside risk in the transaction. And third, turning to cost saves. When you combine Apollo, Professional and Seacoast you can easily see that we have significant cost out opportunities, which will materially improve our efficiency ratio and drive further shareholder value creation. We modeled at least a 40% cost out ratio in the deal built from the bottom up using input from multiple department leaders across Seacoast to arrive at a very achievable cost out ratio, while also considering future investments to scale the franchise. Cost savings and balance sheet repositioning generate over 50% of the incremental earnings from the transaction with near 0 execution risk. And lastly, Professional is a highly compatible business with shared business values that importantly materially improve Seacoast scarcity value. With this transaction, Seacoast becomes the only pure-play Florida bank with market share in every primary metro market and what is arguably the best banking market in the U.S. And we included a slide on Page 9 that shows this positions uniqueness. In summary, when you look at this transaction, I believe it to believe one of the better transactions we have completed. This transaction is backstopped with a very conservative credit mark and growth assumptions. Approximately half of the earnings pickup is driven by cost saves and balance sheet repositioning, which carry minimal execution risk and we've modeled and structured this transaction to minimize downside risk and provide tremendous upside potential. And despite the conservatism modeled, it generates mid-teens earnings accretion within the first year. I want to thank Professional Bank's CEO, Abel Iglesias and Chairman, Herb Martens, and their leadership team for their help during diligence and their hard work bringing this deal together. We look forward to welcoming Professional's employees and customers to the Seacoast franchise, and I'd also like to especially thank the Seacoast M&A team for their hard work on this transaction. I'll now turn the call over to Abel to share his perspective on the transaction. Abel?

Thank you, Chuck, for this opportunity to say a few words about the transaction. I and the members of the Professional Bank's leadership are delighted to join forces with Seacoast to create not just South Florida's most competitive commercial bank, but the leading Florida-based bank in the state. Our Board of Directors believes this combination is very much in the interest of our shareholders. As Chuck has noted, our banks have compatible cultures, which will aid in successfully combining our organizations. Seacoast has a track record as an accomplished acquirer and value-creating integrator of other banks. Finally, Professional shareholders will own more than 15% of the expanded Seacoast following the close, giving them a meaningful opportunity to participate in the value created by forming this highly competitive banking organization. My leadership team and I look forward to the completion of this transaction and to serving our customers and keeping our bank a best place for our associates to work as part of the Seacoast team. Now let me turn the call over to Tracey Dexter, Seacoast's Chief Financial Officer, to provide other details about the transaction. Tracey?

Thank you, Abel. Good morning, everyone. Thanks for joining us. Professional Bank has 9 branches and had $2.4 billion in deposits on June 30. Loans of $2 billion at the same day had an average yield of 4.68%. Checking, savings and money market accounts comprised 91% of the bank's deposit funding and noninterest-bearing demand accounts represent 33% of total deposits. Moving to the transaction metrics with reference to Slide 12. Under the terms of the merger agreement, Seacoast will acquire 100% of Professional's outstanding shares. Based on Seacoast's closing price of $36.75 as of August 5, the transaction is valued at $488.6 million. The deal pricing translates to 2.16x Professional's tangible book value and 7.8x 2023 earnings per share when including expected cost savings. We're projecting at least 40% cost savings, for which we have a very detailed execution plan and have consistently demonstrated our ability to achieve these in our prior transactions. Following the transaction, Professional shareholders will own approximately 15% of Seacoast. Professional stock appreciation rights will be replaced with Seacoast shares at closing. As Chuck noted, the credit assumptions used for modeling were developed following extensive detailed due diligence. Given the economic uncertainty, we took a very conservative approach, resulting in a total estimated purchase mark on loans of 5.2%, including the CECL double count. That's a total estimate of $103.9 million pretax mark, which includes $33.6 million in day 1 CECL reserves through provision on non-PCD loans, another $6.6 million in day 1 CECL reserves on PCD loans, $33.6 million of growth credit mark, which is accretable and $30 million of interest rate mark, which is also accretable. We also conservatively modeled forward loan growth at 5% and deposit growth at 3%. Using the crossover method, we expect tangible book value dilution of 6.4% at closing to be earned back in approximately 2.3 years. Of note, AOCI and rate marks generated 2% dilution and impacted the earn back by approximately 0.3 years. So removing the AOCI and rate marks, the dilution is 4.4% with an earn back of approximately 2 years. We expect the merger to be accretive to earnings in 2023 by 11.8% and in 2024 by 15.4%. Our assumptions used the forward rate curve as of early July. We expect the acquisition to close early in the first quarter of 2023 after receipt of approval from regulatory authorities, shareholder approval and the satisfaction of other customary closing conditions. We look forward to your questions. Chuck, I'll turn the call back over to you.

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

[Operator Instructions] And our first question online comes from Mr. Christopher Marinac from Janney Montgomery Scott.

Tracey, you just mentioned the forward yield curve assumptions in early July. Is it meaningfully different if you use where we sit in early August?

I think the way to think about that is maybe a change in rate might impact the timing of the way the metrics work, but not the overall result, not meaningfully different.

Okay. That's great. And then for anybody, can you talk about the C&I lending that was done, particularly in the search fund space by Professional. Is that something that you will keep? Or will that change going forward?

Abel, do you want to take that one?

Yes. We took a good hard look at the search fund loans that are produced out of their loan production office in New England and we covered 90% of the total commitments from that facility. We found really well-structured leveraged transactions. In each case, the bank was in the senior debt position on the facilities. Overall EBITDA and cash flow leverage was generally less than 3x. So we're pretty pleased with what we saw there, the monitoring, the ongoing servicing was -- as expected. So very well booked. We will bring it into the portfolio when we'll work with the bank on further strategies as we get closer to the conversion.

Great. And that's all part of the credit mark, obviously, that you talk and outlined in the -- on today's discussion?

That is correct. Yes. We included that in the credit mark.

Great. And then final question for me is just the digital innovation team, Chuck, will they be kind of retained and integrated just like any other executives that you've brought on in the past deals?

Yes. So we're very excited about that. The key leader there has signed an employment contract. But Jeff, do you want to add any details there?

Yes. Really excited to have them join the team. Very impressive group of developers and also like kind of big idea folks as well. So we really look forward to integrating them with us. I think it's a really strong match. Their development expertise, our analytics expertise coming together, we're really enthused.

Our next question online comes from Brady Gailey from KBW.

I just wanted to start with loan growth. The assumed 5% loan growth for professional, they've been growing at a pace a lot faster than that. I think they were closer to like 30% annualized for the first half of the year. So do you really expect growth to slow that much at Professional or is it more just some conservatism in how you look at potential growth there?

I think the way we thought about it, Brady, is we wanted to have very -- we wanted to be very deliberate in our output metrics, and we wanted them to be very achievable. And so we modeled the deal very conservatively to make sure we're laser-focused on delivering what we've modeled. And so, we took a conservative look on and a conservative approach to that as well as when we merge in the portfolios, the size of the loans they're doing won't have as much impact on the aggregate growth of the combined company. But more than anything, we just wanted to make sure we achieved what we put together as part of the model and wanted to also make sure we have the ability to execute our conservative credit play book and as we put the banks together.

Yes. All right. And then, Chuck, just on M&A, and you guys now have 3 deals pending. And you've been very successful at acquiring over the years. But it feels like the regulatory backdrop is changing a little bit. I think it's more on the larger bank M&A. But do you get any feeling that these deals are going to be harder to get regulatory approval just under the current backdrop? Or do you think given the size that Seacoast did, you kind of fly into the radar of Washington?

Yes. What I addressed it is we've gotten approval on Apollo from both the OCC and the Fed, and we expect our approval to come in on Drummond here in -- probably this week. And we don't anticipate any issues here with getting Professional approved. We carry strong capital. We have an outstanding CRA rating. We have a very clean approach. We're a very conservative bank, and we generally have no issues getting any regulatory approvals done. So we don't anticipate any here. And I'd say we have a very strong diligence team here. This will be the 16th transaction we've done. We prepare a very detailed granular look at our targets, and it goes a long way in building credibility with our regulators. And so I think they have a lot of belief in us and support for us. I don't view that to be an issue. And then another thing I'd add there as we move through this; we're going to be laser focused on integrating these things successfully. It's -- we've had a slide in the deck that lays out the timing around these transactions that you can see there, but we've spaced this in a way to where we think we can very much focus on very successful integrations over the coming 12 months, let's call it.

All right. That makes sense. And then finally for me, as Seacoast gets bigger and as there's not as many Florida targets left anymore, does it become to the point where you think about expanding outside of the state? Or do you still really consider Seacoast to be kind of a Florida pure play going forward for the next few years?

We remain focused on Florida, Brady. I think these markets are extremely strong. I think the growth profile is amazing. I think what's going on in South Florida is transformative. And when you look at the amount of domestic companies relocating into South Florida, it's building an incredible economy that we can be a part of without having to leave the state. And so, it build depth in the type of clients we want to bank. And so I think we can be very much remain focused on Florida. If you step back to a lot of banks in Florida have gotten bigger. There's actually 18 banks greater than $750 million across the state, and there's 9 banks greater than $1 billion. So there's -- there's still a fair amount of banks that are out there that would be potential targets in the long run. But in the near-term, it's -- we're focused on integrating this. And we are focused on Florida.

Our next question online comes from Mr. Stephen Scouten from Piper Sandler.

Congrats on the deal, both Seacoast and Professional. I think there's a deal a lot of people wanted to see and not often those deals come together. So congratulations. I guess following back up on the loan growth status thing. Just -- I know, Chuck, you said that 5% is definitely layering on a lot of kind of legacy conservatism, which I think will bode well. But I'm wondering, as you look at the Professional loan book. Is there anything there that doesn't fit with the way you guys think about credit? Are their credits are little less granular or anything of note that would drive you to maybe to do business a little differently than they had on a legacy basis?

No, not at all. I mean, I think we came away with -- it's a well-positioned portfolio. It's diverse and it's a mix between operating companies and commercial real estate. And we came away pretty impressed. David, do you have anything you'd add to that?

No, I'd just amplify that. We had -- we saw -- if you look in the slide deck and look at the loan mix is very comparable. Just given the size of the bank, their individual loan positions are very comparable. Lots of C&I businesses. We've looked at other portfolios that were commercial, real estate heavy. We saw a lot of diversity there. A lot of their CRE book is residential, lower-risk type transactions. So we found customers, client selection and transactions, very comparable to how we like to execute our playbook across the board.

And a lot of the names in the portfolio, we know well, a lot of similar clients and a lot of familiarly with the portfolio and the clients look.

Got it. Got it. And how can we think about what might -- what the Jacksonville market might look like over time? Do you guys both have recently kind of expanded through an LPO there? I mean, does that look like adding some additional branches there? Or might that be over the next couple of years of focus for incremental M&A? Or how should we think about that MSA?

Yes. We will be opening a branch up there, probably right around January of the coming year. We're actively negotiating a lease in that market. We've got a great team and we've continued to build out the market. It's a great market. With the team we've put in place in that market has been incredible. And I mean it's been a remarkable team. I couldn't be more excited with what they've gotten done. They're continuing to bring strong operating companies to the bank, and we've got a great, great group of people up there. So we'll be investing to support them with branching and other support as we move through time.

Got it. Got it. And then just last thing for me. I think some reading some of the comments in the deck appropriately, you're looking to deploy the Professional excess liquidity out of the gates, presumably into the securities book. How do you think about what that excess equity looks like pro forma and kind of how deposit growth will play in that? I think maybe you guys said you're modeling 3%. So how you feel about that ability to continue to fuel the bank's growth through deposits?

Yes. We'll -- I think deposit growth from here is where we modeled 3%. Obviously, we've seen deposit outflows across the industry. But I think given the market growth in Florida, and operating, in particular, in the Tri-County market, which continues to see significant expansion, significant population growth. I think deposits return for us in that market. And we'll reinvest in securities at the time of whatever the reasonable rate profile is when we get there with a reasonable duration. But we do plan to reposition. And just to remind you, we were planning to reposition the securities book at Apollo and Drummond, and then ultimately, we'll reposition this book as well, depending on what rates of like when we get there. But all that will be additive to the aggregate corporate margin. And one of the benefits of doing these transactions is the ability to sort of reposition the securities portfolio close, which we modeled in, in all of our deals.

Our next question online comes from Mr. Steve Moss from B. Riley Securities.

Maybe just following up on here. Just in terms of the rate mark, do you look at the priority reference the 5-year treasury or a little shorter, a little longer, just kind of as we get closer to the close here, Tracey?

Yes. I mean the rate mark on the loan portfolio, is that right? We set the 1.5% rate mark in the loan portfolio based in part on our own review of the structures, but also with input from our third-party valuation support firms. We look at the context of recent deals, and we feel like that's a good estimate at this point. Did I answer your question, Steve?

That's exactly take a little more off-line, but that's helpful. And just 1 more question for me here. In the deck, you guys referenced the nonresidential alien loans and outside counsel for legal support. Just kind of curious how you're planning on managing international exposure?

We'll continue to take a limited approach to it. Steve, on the deposit side, we're probably -- we've had -- we'll have some NRA related deposits associated with just operating in South Florida. But it's not a business we're going to rapidly expand. We're going to manage it carefully and appropriately. And as a reminder, we have a very strong built-up BSA/AML team that operates out of Miami that we've built up over the last 4 years. And so we're very confident in our ability to manage it, but it's not something we plan to sort of grow from here. But we will take in our clients where they make sense. And their loan book was primarily 1 to 4 family mortgages in South Florida and our related clients. We looked at it, loan-to-values were low, solid portfolio, well performing. No concerns there.

Our next question online comes from Mr. David Bishop from Hovde Group.

So I'm just curious in terms of the 40% cost saves, how should we think about maybe the outlook for the branch system down there, obviously, some overlap in South Florida. Assume that could be a key component in achieving some of those states?

Yes, that's right. We do expect there will be opportunities to consolidate branches without disrupting the customer experience. There is meaningful geographic overlap. We'll work through the specifics and the timing of those here in the near-term and overall planned cost saves just over 40%. Those are identified really in a number of areas. It definitely includes consolidation of activities, locations, some back-office roles also savings in data and transaction processing, the integration of the various systems that those also contribute to the planned cost savings as does the consolidation of other operational expenses, things like legal and audit fees. So certainly, the branch consolidation will be something that we look closely at, and that's part of the plan.

Yes. Like other markets that we've done M&A in, there's great opportunities for driving operating leverage by doing acquisitions in markets with overlap. And as we've seen, we've driven up deposits per branch to $160 million in the Seacoast franchise, I think when you put these 3 organizations down together down in South Florida will even be higher than that. And so all of that operating leverage drives the stronger efficiency ratios and stronger returns to shareholders here as we move through this deal. And that's one of the real upside to this deal. As I mentioned in my prepared comments is that the earnings delivery of the deal is pretty given, given the overlap in the market. So there's not a lot of execution risk in executing these cost saves. And so that's going to drive, operating leverage is going to drive benefit to efficiency ratio and it's going to drive up our return on tangible common equity.

Got it. And then 1 follow-up, just curious how maybe average loan size and Professional compares to Seacoast, maybe on the commercial -- commercial real estate loan?

David, do you want to take that one?

Yes. I would say there's not much difference. So as a whole, the loans are a little bit larger than Seacoast on average. But when we look at it, doesn't really provide any meaningful change in how we would view them. We're running a commercial average loan size about $550,000. Theirs was larger admirers but still less than $1 million. So not much of a change, something we can certainly accommodate with regard to all of our portfolio analytics and all of our forecasts.

And importantly, if you look at our commercial real estate and ADC percentages as of capital, when you combine the 2 organizations and Drummond and Apollo, we really don't see it moves up a little bit, CRE ratios, but then it starts to come back down with capital growth. And so still well, well, well within more tolerances and well within regulatory tolerances.

[Operator Instructions] Our next question online comes from Mr. Joe Yanchunis from Raymond James.

Have you sized potential revenue synergy opportunity from this deal? And which business lines do you feel will be most effective in cross-selling in the near-term?

Well, at the outset, there's an incredible opportunity for wealth, and we're already seeing opportunities to put wealth clients in Seacoast just due to the relationships we've developed. And so there's great opportunity to bring wealth to the table here. Ultimately, we'll bolt on a bit more mortgage capability, they have an SBA Group that will bring SBA in a bigger way. And then uniquely, when we get Drummond closed and put together, we'll have insurance as another revenue potential synergies. So a lot we can bring to the table, but I'm actually super excited about the fact that we're already starting to bring wealth clients together, which is really cool.

Got it. And then how should we think about new lender hires from here? You guys have been pretty active on the hiring front. But does this give you more opportunities or provide those new hires with a better platform for growth?

We're still very focused on it. We'd like to add another 15 to 20 over the next, say, 9 to 12 months as we continue to build out the portfolio. But the exciting thing of what has gone on for us here at Seacoast is what we've built organically in some of these markets and then you combine it with M&A and just the excitement of the build, the company and being a combined company when you pull this together, it will be somewhere north of $15 billion. We have a lot of balance sheet to bring to market that brings more digital products, it brings more tools, and it's bringing stronger and a larger group of bankers to us that, that market wasn't available prior. And so they can now bank some bigger operating companies, and that's opening up the lower end of middle market to us. And so all of this continues to bring scale to the company. Scale brings further leadership in the market, and we got a lot of room to keep going here.

Perfect. And then lastly, I was hoping you could discuss kind of the background of this deal and kind of how it came together?

Yes, I can give a little bit of color, but -- the Professional received an unsolicited bid sometime earlier in the year that initiated a process, a full auction process was run, the Board brought in multiple bidders. Seacoast was brought in, and we ultimately -- the Board, I think, chose Seacoast given our history and reputation of integration and the upside of the investment in the combined company. And so we couldn't be more pleased. We're excited to work with the Board and the team at Professional. And I think ultimately, when this is all said and done, we're going to be 1 a bank here in Florida. And so everybody is very excited about that. The Board is excited about it. We're excited about it, and we can't wait to get going here.

Great. Well, congratulations on the deal.

We have no further questions at this time. I'll now turn the call over to Chuck Shaffer for closing remarks.

Okay. Thanks, Richard, and thank you all for your questions. We're excited here to get going on this deal and excited to see what we can get done in the coming years. So thank you all for being on the call, and we're available if anybody wants follow-up calls, just reach out to any of us, and we'll set that up. Okay. Thank you.

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