What it will take to make the Enterprise-Seacoast deal click

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Enterprise Financial Services in St. Louis is approaching its pending acquisition of Seacoast Commerce Banc Holdings in San Diego with one overarching goal: change as little as possible.

While ensuring continuity is important in most M&A, it’s especially crucial for the $8.4 billion-asset Enterprise, since it has sparse dealings in the $1.3 billion-asset Seacoast's wheelhouse operations — Southern California, Small Business Administration lending and banking homeowners' associations.

That means retaining top producers is the top priority for Enterprise when it integrates the $156 million acquisition. Executives said during a conference call to discuss the deal that they are confident they can minimize turnover.

“You don’t change things," Jim Lally, Enterprise's president and CEO, told analysts on the call. "You give them resources they don’t currently have in order to improve."

“We know the key differentiators and how to preserve them,” said Keene Turner, Enterprise's chief financial officer.

Nearly a third of Seacoast's $1 billion in deposits are tied to homeowners' associations. About 28% of its deposits are associated with property management firms, while 15% are tied to 1031 exchanges.

But SBA lending is where Seacoast Commerce has made its name. The company is one of the nation's 10 biggest lenders under the agency's 7(a) program, originating $304 million in loans in the last fiscal year, and it made $92.5 million in loans under the Paycheck Protection Program.

Loan losses in the $569 million SBA portfolio have been “historically nominal,” Turner said.

More than half of Seacoast's loans are in California, Andrew Liesch, an analyst at Piper Sandler, wrote in a note to clients. Thirteen percent are in Texas and 7% in Arizona.

SBA losses totaled just $56,000 over the past decade, Brian Martin, an analyst at Janney Montgomery Scott, wrote in a Friday note to clients. Adding a “robust SBA platform” and specialty deposit niches that have provided Seacoast Commerce with more than $750 million in low-cost funding makes the deal "strategically compelling and financially attractive,” he added.

So Enterprise is doing all it can to keep the SBA division intact. It plans to retain Dave Bartram, Seacoast's chief operating officer and the executive in charge of the SBA division, for about a year. After Bartram steps down, his deputy, Rick Visser, is set to succeed him.

Enterprise plans to retain all 19 of Seacoast’s SBA loan production offices, as well as its strategy of holding most of its SBA loans on the books, Turner said.

Enterprise also expects to keep all five of Seacoast's branches in San Diego and Orange County.

Despite the low level of loan losses, Enterprise raked over Seacoast’s books with an effort that included deep dives by its own internal credit team and a leading SBA consultant.

“Our internal team went in and put eyes on their portfolio, deep penetration with respect to how many credits we looked at,” Lally said. “Then with those that were in the SBA portfolio, we utilized a third party to go in and make sure [their] process was one that would preserve the guarantee, and we got great marks for that.”

Enterprise is assuming a credit mark of $18 million, equal to 3.5% of Seacoast’s held-for-investment loan portfolio.

Lally declined go into detail about the discussions that led to the deal, though he said they played out over a long series of contacts that began casually. In many ways, it was like a commercial banker working the phone lines to secure a lending relationship.

“I grew up on the commercial banking side of the business,” Lally said.

“You build long-term relationships through consistent calling," he added. "You don’t normally win much business by just bidding. The M&A process we utilize is geared to that. ... When a relationship is created, there’s comfort in talking about what might be. Those things just evolve. I think that’s the case here. It just evolved.”

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M&A Community banks SBA Credit quality