Description

Investment Thesis:

We are long Seacoast Banking Corporation of Florida (SBCF). SBCF is a $3B community bank that maintains a highly coveted footprint in South Florida.  It is one of the few remaining publicly traded banks based in Florida.  We think the company is an attractive strategic asset for a community bank looking to expand its footprint in a growing region.  We believe there is minimal downside in the event SBCF remains independent, but there is material upside in the event SBCF sells itself.    

Overview:

The company is headquartered in Stuart, Florida (south Florida). SBCF has $3.1bn in assets and $2.4bn in deposits. It currently has 43 traditional branches and 5 commercial banking centers. Its offices stretch from Fort Lauderdale, Boca Raton, and West Palm Beach north into Orlando and Central Florida. The company has $1.8bn in loans primarily in residential and commercial real estate. Credit quality is solid with nonperforming assets to assets under 1%. SBCF is well capitalized with a tangible common equity ratio of 9%.

Table 1: SBCF’s key regions

Source: Google Maps

Consolidation in the community bank space

Community banks are struggling to grow profits robustly after the credit improvement profit story has largely played out for the sector. Now, many community banks face relatively modest loan growth and higher regulatory costs (i.e. compliance, etc) weigh on profitability. A 2014 Wall Street Journal article highlighted this issue http://www.wsj.com/articles/SB10001424052702304157204579473912995008016. We believe consolidation is going to accelerate going forward, especially as the Fed and other regulatory bodies are encouraging small banks to merge in an effort to become more efficient.  (http://www.wsj.com/articles/fed-moves-to-ease-mergers-among-small-banks-1422569786). Put simply, the long term trend (Table 2) highlights the consolidation in the bank sector over time. We believe this trend is going to accelerate. In 2015, we estimate there were 8 small banks deals announced in February alone (Table 3).

Table 2:

Table 3:

Source: Bloomberg

SBCF has a very attractive franchise

We believe SBCF is one of the most attractive franchises in the community bank space due to the banks’ favorable geographic location in Florida. Florida is experiencing population growth almost 2x the US growth rate. The housing market in most of SBCF’s core regions is strong. As shown the tables below, single family homes sales are increasing and home prices continue to improve. Our fund is based in Florida, so we see first-hand the improvement in the economy and housing market in the state.

Table 4: Population Growth

Table 5: 2014 Single Family Homes – Florida

Source: Florida Realtors

Table 6: 2014 Single Family Homes in Florida – Median Sales Price

Source: Florida Realtors

Table 7: Florida Annual Housing Starts Historical and Forecast

Source: Florida and Metro  2014 Market Study

Significant opportunity to improve profitability

SBCF is known for being a poorly run bank. The bank went “all in” during the Florida housing boom and had several challenging years as it worked through the financial crisis. Capgen, a private equity firm, bought 6 million newly issues shares of SBCF for $13.5mn in 2009 to inject capital into the bank.

Post the financial crisis, SBCF has improved its balance sheet quality and has good liquidity. However, the bank’s expense structure remains very bloated. The combination of not taking aggressive enough actions to reduce costs and spending in various “growth” initiatives (i.e. mobile banking, etc) means the bank’s efficiency ratio is well above peers. Based on our conversations with various regional bank management teams, we believe there is a significant opportunity for a larger and better run bank to improve SBCF’s profitability.

Table 8:

Source: Bloomberg, company filings

Table 9:

Source: Bloomberg, company filings

The catalyst: SBCF's largest shareholder needs an exit

Capgen is currently SBCF’s largest shareholder with a 24% ownership. Capgen invested in 6 small banks during financial crisis. The firm currently owns approximately 8 million shares of SBCF.  

Capgen is now six years into their investment with SBCF.  They will likely need to exit this position in the near future.  We note that Capgen owned The BANKshares, Inc. based near Orlando, Florida. The BANKshares was recently bought by SBCF as Capgen looked to consolidate its Florida bank assets and focus on a potentially large scale monetization event in the future.  

Based on our due diligence, we believe there are many interested buyers for SBCF including Iberia Bank, TD Bank, and Valley National Bancorp.  Valley National recently bought First United (based in south Florida). At the KBW small bank conference in March, Valley’s management team said they wanted to grow their presence in Florida significantly over the next few years. We believe SBCF is a prime candidate.

Valley National commentary about 1st United Bancorp Acquisition

“This transaction will provide Valley an entree into one on the fastest growth markets within the

United States and augment Valley's current franchise.” - Gerald Lipkin - Valley National Bancorp - Chairman, President, CEO

“Valley's decision to diversify geographically was additionally enhanced by both the current and prospective economic conditions of each region. In large part, as a result of Florida's business-friendly environment, over the last three years the growth in gross metro product of Valley's new Florida footprint is triple that of the current market in which Valley operates. Further, the growth prospects continue to be favorable, both from a corporate and consumer perspective” - Gerald Lipkin - Valley National Bancorp - Chairman, President, CEO

SBCF CEO Dennis Hudson has stated that he intends to “improve profitability” and has noted the improved economic environment is driving attractive growth opportunities.  We think he is on a short leash given SBCF abysmal efficiency ratio and return characteristics.  We think any hiccup operationally will only accelerate an inevitable sale process.  Interestingly, many small bank activist funds have been increasing their ownership in SBCF.

What is it worth in a take out?

SBCF’s tangible book value is $8.51. We believe tangible book value should grow to over $9 by year end driven by loan growth, cost saves from its BANKshares acquisitions, and improved efficiencies. We estimate relatively comparable bank transactions (Table 10) are being done around 1.7x-1.8x price/tangible book value. However, given SBCF’s highly attractive footprint, potential for meaningful cost improvement, and scarcity value, we believe it will be acquired for at least 2x tangible book value – implying at least $17 per share based on 4Q14 financials. If SBCF is able to grow deposits and tangible book value to over $9 per share by year end, we believe a takeout will be at least $18 per share, if not higher.  

Table 10:

Source: Bloomberg, company filings

Table 11: Valuation Scenario Analysis (based on 4Q14 data)

In summary, we think SBCF has minimal downside with significant potential upside in the event a transaction occurs.  

Catalyst

Earnings improve

Bank is sold