Seacoast Banking Corp – Time To Buy, After a Little Breather

Seacoast Banking Corp (NASDAQ: SBCF) is the holding company for Seacoast National Bank, a regional bank with over 40 branches in South Florida at the end of 2006. The bank primarily serves the Treasure Coast area (St. Lucie, Indian River, and Martin Counties) and has expanded its operations into the counties of Okeechobee, Orange, and Highlands.

Seacoast is trading at about a 50% discount to its 52-week high which was reached before the widespread mortgage panic hit the markets and on speculation of a buy-out, especially after National City (NYSE: NCC) bought out Ft. Pierce, Florida based Harbor Federal for a big premium.

SBCF and Harbor Federal were very similar banks – both with 70+ years of history and were serving essentially the same areas, though Harbor expanded more to the north than SBCF did. Many were expecting SBCF to be quickly scooped up by a larger bank following NCC’s acquisition of Harbor Federal, but it never happened and here are the compelling reasons why:

1. At the time. SBCF was trading at over 3x book value – indicating a buy out premium of 3.5x – 4.5x book value would have been required. Not good value.
   
2. If you have ever spent time on the Treasure Coast, you will see that many of the major banks are already here in the area, including Bank of America, Wachovia, and others. Citigroup has even begun to make strides into the area.
   

#2 is very important because who is left to buy SBCF? Perhaps a bank similar to NCC, but isn’t it the goal of every bank to sell out to another bank one day? The bottom line is, if a larger, branded bank were to come into the picture, it would not make sense in many ways. It would be like Walgreens buying CVS only to shut down the stores across the street from each other. Of course, banks are different than pharmacies, but the area that SBCF serves is already saturated by the larger banks. There is just not a lot of room.

Now, the landscape has changed somewhat. SBCF is at $16.80 after closing up 7.5%, mostly on a big bullish day for the markets, especially financials, and fueled by discussion that private equity firms are lining up smaller regional banks in Florida and California for a roll-up.

Here is what I see unfolding, for what it might be worth. Mind you, I do not have a fantastic track record when it comes to choosing banking investments.

Although the areas SBCF serves have grown tremendously, they are in large still ‘small, hometown’ type communities. I know this because I have grown up in the area and spent most of my life on the Treasure Coast. In this area and especially in the areas to the west where SBCF has expanded, people know each other and like to do business with people they know. Large companies are certainly in the area and doing well, but that being said, for the most part, the reputable local contractors get the construction jobs and the local banks tend to get the nod from local customers. I have even seen a handful of events, which I am not privy to share in full, that indicate local banker dislike for the larger banks that have come into the area. Honestly, I too, have been impacted by the transition from a small, local bank to a large, national bank – and in many ways, I do not like it.

I believe this factor will come into play. Short and simple, the area needs a local bank with a local face – where you see the leaders of the bank at the same restaurants and food stores you may frequent. Now, the Treasure Coast is not that small and SBCF is positioned in Orlando, but it is still a local bank and that has value in this area.

A handful of privately held, local/regional banks that serve the same area as SBCF have been able to continue to reward shareholders, despite the challenging environment, by growing book value per share, issuing stock and cash dividends, and maintaining or even raising the bank sponsored buy back price of its shares. SBCF, which is susceptible to the punishment the capital markets can dish out, has well, been punished.

One of two things will happen.

1. SBCF will be acquired…Most likely by a private buyer that wishes to have a banking establishment in this part of the country and perhaps even keep the familiar Seacoast name intact. A private buyer can likely buy out SBCF (either a majority stake or an all out acquisition) for $19-$25 per share (let’s say $22) and get a great bargain.
   
2. SBCF will remain independent…For the next several years and thrive as one of the few local banks servicing the area – it’s stock price may not do what long term holders want it to do, but ultimately, it will turn around. SBCF continues to build its cash position and stockholder equity numbers, despite an alleged challenging environment.

Either way, it spells a win for shareholders at these levels and I am willing to go out on a limb and suggest that SBCF’s NPAs (non performing assets), loan charge offs, and bad loans are a lot smaller than the stock market is suggesting. But, do not take my word for it – on hitting fresh new 52-week lows in August, 2007, the officers and directors have come out of the wood work purchasing shares on the open market. It has not been a ton of shares, but is enough to suggest to me that that from a stock market price standpoint, the worst is behind us.

Also noteworthy is SBCF’s expansion into Broward/Dade Counties and noting that many of the privately held local/regional banks have seen their shareholders retain their value, not have it diminish in these well publicized tough times. SBCF was expensive at $32 – it’s a bargain at $16. Anything under $17 is a buy and I am looking for a return to $22 per share within the next 12 months on a buy-out or getting their on its own steam.