The First Bancshares - Q1 2022

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the First Bancshares First Quarter 2022 Earnings and Proposed Deal Announcement. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

And if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Hoppy Cole. Mr. Cole, the floor is yours.

Speaker 1

Thank you, sir. Good afternoon, everyone. I'm Hoppy Cole, CEO and President of First Bancshares. We've got an awful lot of exciting things to talk about today. But before we get started, let me introduce some folks from First Bancshares and from Beach Bancorp that will be joining us on the call.

We have Dede Lowery, our Chief Financial Officer we have J. J. Fletcher, our Chief Lending Officer we have Finn McElwain, our Senior Credit Risk Officer From the Beach Bank Corp Company, we have Chip Reeves, CEO and President and Richard Muscari, their Chief Financial Officer. So we're excited to have everybody participate. And I thought from an agenda standpoint that we would talk about the transaction that was announced yesterday and then follow that with some comments about our Q1 earnings results.

So yesterday afternoon, we announced that FirstBank shares had entered into a definitive agreement to acquire Beach Bank Corp, which is a holding company of Beach Bank. Beach Bank is a $620,000,000 bank headquartered in Fort Walton, Florida. They operate 7 branches 6 in the Pensacola Fort Walton, Destin, Florida MSAs and 1 branch in Tampa, Florida. This transaction really goes back as far back as late 2017 early 2018 when Carl Chaney and Chip Reid's sponsored raised put together an institutional group to raise capital to recapitalize the Beach Bank franchise. Carl had reached out to us and wondered if we were interested in taking an equity position in the company.

We passed on the equity position at that time, but we did talk about

Speaker 2

and

Speaker 1

Carl and I talked at length about potentially this day coming about. So that's after 4 or 5 years here we are. I would call Carl like every April and say, hey Carl, are you interested in it? So finally last year I think Chip and I ran into each other at a couple of conferences, got to know each other a bit. And then in January invited me down and we began to talk about putting our 2 companies together, how they would complement each other, help accelerate both of our growth plans and how much our cultures we share similar cultures and similar visions about the community banking space.

So this transaction has elements of both the strategic and financial nature. From a geographic standpoint, we currently have significant market share in the Northwest Florida market. These have significant market share in the Northwest Florida market. It's building density in a market that both of us already have a meaningful presence in. And so from a financial standpoint, we will create a combined institution with a community banking institution with almost $7,000,000,000 in assets, probably $6,800,000,000 in assets.

As I mentioned earlier, it improves our market share in some very high growth markets in the Pensacola, Fort Walton, Destin, MSAs. Together, we'll have over $900,000,000 in deposits in that in those markets well over $500,000,000 of loans, 2 very complementary banking teams both of which have a lot of knowledge of each other, but also have a lot of customer knowledge and market knowledge. Because of that density, we project significant cost saves as 5 of the 6 branches that Beach operates in the Florida Panhandle are very close to 5 of our branches. So we will have significant consolidation opportunities. We'll have the ability to generate cost saves and efficiencies and additional synergies by combining those locations, taking the best of the best, which best serve the client and which operate the most efficiently.

It immediately improves for closing of the transaction based on threethirty one numbers. It immediately improves the combined or at least our FBMS' loan to deposit ratio from 56% at threethirty one. If you model in Beach's current loans, it moves us up to about 60%. As you know Beach has a 90% plus loan to deposit ratio. So the ability to combine those balance sheets, use up some of that, soak up some of that excess liquidity and then opportunities to deploy the liquidity as we move forward are substantial.

There are we also believe there are significant revenue synergies. We've not modeled, but certainly identified mortgage banking is 1. We have a little bit more volume than Beach, but very comparable mortgage volumes. They have a very active mortgage division headquartered in Destin. Day 1 by combining those will more than double essentially our mortgage volume.

And then the opportunity to lever that as we go forward and expand it across our footprint and their footprint, so particularly in the Tampa Central Florida market. And then another opportunity that we'll have is that as you all know we have an extremely low cost granular deposit base diversified across the Southeast. There'll be an opportunity to remix the funding side of Beach's balance sheet as there are still some legacy high cost CDs left and additional funding pieces. And as we move forward, we'll be able to supplement or remove those or reduce those costs by deploying a lot of our excess liquidity in their current balance sheet mix. And finally from a financial standpoint and we'll talk a little bit more in detail later as we discuss the transaction, a very acceptable pricing metrics in terms of dilution earned back and EPS accretion and internal rates of return.

From a strategic standpoint, I'll say this, Beach Bank is not your standard $600,000,000 bank that we've seen. The quality of the banking of the bankers that they have here, their expertise, their high level of performance, the systems, the platforms, the specialty lines of business are commensurate with a much larger institution than just simply a $600,000,000 bank. So, certainly $600,000,000 is a nice size for us, but really the story is about how do we take and how do they influence the overall company to elevate and accelerate our growth plans with some of the expertise that they have. It certainly from a strategic standpoint strengthens our Northwest Florida franchise. It moves us in the community banking space in terms of market share.

Number 2 in the Pensacola MSA. Number 1 in terms of deposit market share in the Crestview Fort Walton Destin MSA, again with over $900,000,000 deposits well over $500,000,000 of loans. It opens a high growth market in terms of the Tampa metro market and the surrounding Central Florida area. We don't have another market in our company like that. As a lot of you know, we primarily are well, we are a community bank that primarily operates in the suburbs around a lot of metropolitan centers, but we don't have a market and we have a meaningful presence in a metropolitan center of the size and with the growth opportunities that Tampa does.

And so Tampa in itself will be its own region, self contained. It will be a nice diversification to our book, which as you know is mostly wonderful family construction, real estate oriented, CRE oriented. The Tampa piece of Beach's operation is heavily C and I oriented. That's a nice diversification in terms of our product lines and our portfolio mix. And then they offer a high quality seasoned team of bankers.

Both in Northwest Florida. And as I talked were complementary to our banking teams. And so they know each other very well. They've competed against each other, been very good competitors and now we get to join forces and really lever all that expertise and talent that we have in Northwest Florida. And then in Tampa, they've got an extremely accomplished commercial banking team that's well entrenched in the market.

They come from a lot of different backgrounds, but very sophisticated, very well tied into the Tampa market. And so, these will bring to us, will bring to our combined company expertise in areas that we currently don't have as a standalone business and platforms that they've built, which we were trying to build, but they're already ahead of schedule, ahead of us in that regard, particularly in terms of specialty lines. And so a couple of areas that we are really excited about is that they have developed a government lending an SBA, USDA platform. And we try to do that for a number of years in our bank. It's very difficult to do if you don't have the sort of self contained expertise.

It really I've learned that that is an entirely different product line. To try to take your general business bankers and turn them into SBA government system lenders is very difficult. You need a specialty division of that. And so they have accomplished that and have that operational in the Tampa market. They also have a healthcare practice specialties that works well.

Insight is another line of business that we can marry up with our private banking division where we offer general bank side products to our high net worth high income clients. We also offer a wealth management line to those clients. And then also this health care practice specialty will be complementary focusing on health care practices, veterinary practices, dental practice, podiatrist practice. So again, another complementary line of business that will help lever market share again across the whole Southeast. So we will bring to these in order to again to accelerate their strategic vision capacity, a much larger balance sheet, a much larger legal lending limit.

We'll bring much more pricing power in terms of we have substantial excess liquidity and we'll dig into that a little bit more when we talk about our earnings. We have no wholesale funding. And so we have the ability to vary our excess liquidity, our pricing power, our capacity in some of the highest growth markets in the Southeast and Northwest Florida and again in Tampa with a seasoned group of bankers who we're very confident can make use of that capacity and deploy excess liquidity. So as you all know, the most important part of any merger of any partnership is to make sure that the teams we're able to get the teams to work together to focus number 1 on the integration piece and making sure there's a minimal amount of impact on the clients so that we're successful in retaining all the business we have. And then 2 to work together to meet the and accelerate the growth plans that we have.

And so the senior leadership teams with these all will be essentially participating in joining the resulting company. And continuity of that leadership is very important. So Chip Reid's, currently serving as CEO and President of FEEDH will join our executive leadership team, Director of Corporate Strategy. Some of the initial things that Chip and I've talked about that he would like to focus on for our mortgage banking division and that we've got a large market share. We've got the opportunity to substantially increase our mortgage banking volumes and revenue.

That's an area of expertise that he has in his background and narrative experience that we're really excited to get and to join the company. Specialty lines, the platforms that they have built here in Tampa We'll continue to report up through Chip Reeves. Again, the government of USA SBA platform, the swap derivative business, which we don't have as a fee income source for us. And then the Healthcare Specialties will report it through the private banking division of our company. So those are some high level comments about where the transaction originated and some of the things that we see, why this transaction is so exciting as we move forward.

So, Chip, would you like to add any thoughts and observations?

Speaker 3

Hey, great. Thanks, Avi. And first, everyone, let me say just frankly from our entire team how excited we are to join the first. We've looked at the first for the last 4 years and we cannot imagine frankly a better partner to continue our transformation of this organization. And second, just for any of our team members on the line as well, I just want to to thank all of our team.

I'm proud of you for the transformation and growth since our July 2018 recapitalization. It's been a Herculean efforts to get to the point where we are today. I'm extremely proud of what we have accomplished. What I'd say is we entered this journey in 2018 to build ultimately a multibillion dollar business centric institution in the state of Florida. We entered 2022 with 2 main strategic priorities.

The first to become the dominant community bank market share wise in Northwest Florida and the second was to accelerate our outstanding Tampa region growth. And what we found in the partnership with the First is that we were able to accelerate and achieve those frankly overnight. The strategic rationale of this combination is just outstanding. Taking a look a little bit further just at the Tampa MSA on page 8 of your investor presentation, you'll see the economic momentum of the Tampa Bay region. It's frankly outstanding what has occurred over the last 5 years and the momentum only continues to increase now.

We see the number one emerging tech city in the United States according to Forbes and then the number 5 city in the U. S. For net inflow of residents in 2021. We now have the team and the talent. What we now have with the combination of the first is the scale and the balance sheet to take advantage of this region's opportunity.

And frankly, our team can't wait. We only announced this in the last 48 hours. We had some more conversations a week prior with our team. And we're already seeing the client impact as we continue to accelerate this growth. Quick combination or comments on loan growth.

Beach since recapitalization has averaged about 18% loan growth CAGR. That on a raw number ends up especially the last three quarters being about $20,000,000,000 or $20,000,000 I'm sorry of net loan growth. We believe we can accelerate that with this combination And you'll see as Didi and Hoppy walk through the future numbers here of the first of the power that the additional lending capacity can provide Beach, but the deployment of the excess deposits into the Florida marketplace will be an outstanding contributor to the future earnings of this corporation. With that one, Hopi, I'm going to turn

Speaker 1

it back to you. Thanks, Chip. Gosh, great comments. And again, system wide, Beach, you guys have done a Herculean job of building Beach back to where this day is possible. We look forward to joining forces and really getting to work.

So before we move on to earnings, just a couple of metrics regarding the pricing and structure of the transaction. It's 100% stock the consideration mix is 100% stock. It's a fixed exchange ratio of 0.1711 shares of FDMS to Beach. The price to tangible book value is 142%. Price to 2022 estimated EPS is 36.5 times.

However, if you place on there the cost save that we think will generate that's a number more like about 10.5 times earnings. Pay to trade ratio very acceptable at 86%, that's less than 1% day 1 tangible book dilution. The earn back less than 1.75 years. Internal rate of return substantially above our hurdle of 15% really in the mid-20s, high-20s. And the resulting corporation in addition to having substantial liquidity, substantial low cost funding and access to low cost funding winds up with an extremely good capital base From a potential common equity standpoint, it will be about 7.5%, leverage will be 8.5%, total risk based capital 17.5%.

In terms of impact to earnings, we forecast EPS accretion of 2.3% in 2023, but really the 1st full year when cost saves were fully realized would be in 2024. We believe that's approximately about 4 point 7% to 5% EPS accretion. And again that's based on cost saves of 50%. So we anticipate closing in the Q3 with systems integration in the 4th quarter. And so with that, those are some comments relative to the actual transaction.

And I think we'll transfer over to talking about our results for the Q1. Some high level comments and then Didi will pick up and do some give us some more color on the actual results of earnings. Then JJ Fletcher will give us some color on what our loan growth was for the quarter. Ben McElhin, our Senior Credit Risk Officer will talk about some of the credit metrics for the Q1 as well and then we'll open it up for questions. So net income for the quarter totaled $16,800,000 or $0.81 a share.

That's a 6% increase over the Q4 of 2021. Loans ex PPP grew about $32,000,000 or 4.4 percent on an annualized basis. We continue to see deposit growth $211,000,000 for the quarter, 4% on an actual basis quarter over quarter. Our net interest margin contracted a bit 36 basis points during the quarter, but you'll remember primarily the result of the Cadence branch acquisition, which was closed December 3 and that was a little more than $400,000,000 in new deposits that hit our balance sheet last month of last quarter. So we continue again that contributes to our excess liquidity on the balance sheet as well.

But if you remember the pricing was very attractive for that deposit base and we're very excited to get it. And again in the long run it puts or medium run short run it puts us in a great position to benefit substantially from the transaction we talked about earlier in the presentation, but then also for the increasing interest rate environment to help improve our earnings and improve our returns. And again, we have currently doing the quarter and Dede will dig into this a little more, but we were on average cash excess cash balance of around $800,000,000 again back to the substantial liquidity, highly refill oriented low cost granular deposit base. Our asset quality remains strong and non performing assets decreased 10% quarter over quarter and 25% year over year. We had net recoveries of 12 basis points during the quarter.

And we repurchased 600,000 of our common shares under our repurchase plan that was approved early in the Q1. And we also it was a busy quarter. We converted our charter from a national bank to a state chartered Fed member bank. So a lot of stuff going on during the quarter, a lot of hard work from all our team members on both sides of the company. And gosh, what we think is certainly a strong start to the year.

So, Didi would you like to dig into our earnings a little more?

Speaker 2

Sure. Thanks, Hoppy. As Hoppy mentioned on the net income for the quarter of $0.68 or $0.81 I want to talk a minute about our operating earnings and those were $0.72 for the quarter, which was right on top of consensus. And we had 3 items that were kind of one time items. And we'll go ahead and mention those, because a couple more of my comments later just refer to those one time items and we'll go ahead and get those out of the way.

So we did have 3 items. One was a grant that we received from the Department of Treasury, our Financial Assistance Award. If you recall, we've been getting those every year for the last several years. This quarter, it was $703,000 So after tax, it would be about $500,000 We did have during the quarter some acquisition charges related to Cadence and also some charter conversion expenses of about $400,000 and after tax it was 300,000 dollars We did have a one time income on our BOLI related to a debt that was $1,600,000 And so that net after tax is $1,600,000 So those items are 3 kind of one time items that brought that operating earnings down to $0.72 But one of the things that I want to mention kind of what we've been talking about for those of you that for the last really 2 years since we've had all this excess liquidity that we still have the excess liquidity, but to kind of keep looking at our spread and keep looking at our earnings not necessarily our margin just because of that excess liquidity. And we did for the last several quarters, you can see our net interest income ex PPP fees have increased over the last year.

Also this past quarter, it was an increase of 500,000 dollars the level of 1%. Our investment income on our investment portfolio increased over last quarter of $1,500,000 about 20%. And then also on our non interest income minus those one time items that increased $500,000 or about 6.5% over the 4th quarter. And that was particularly in 2 categories, interchange fees and our service charges on accounts. And part of that is due to the additional clients that we got through the Cadence branches back in December.

So you can see the impact of that during this Q1. Also on our expenses, they were down minus the one time items about $1,000,000 or 3 a little over 3.5 percent right at 3.5%. And if you recall last quarter as indicated in our press release, we did have some one time items about $1,000,000 that was in the 4th quarter that drove those expenses up during the Q4. And I believe that was about $1,000,000 last quarter. So kind of on par with last quarter if you exclude those items out.

As Hapi mentioned on our balance sheet, our deposits did increase 4% to $211,000,000 Generally in the past several years, we've talked about during this Q1, we usually have a big pickup in our public fund portfolio. But that was about $60,000,000 during the quarter. But so the remaining balance of about $150,000,000 dollars was related to retail and business customers. So that's a little bit of a change. And I know this kind of towards the end of the Q1 is when the public funds pick up.

So we should see some of that in the second quarter, but glad to see some of that in the retail and business customer during the quarter. Another positive note was on our interest bearing deposits. That cost decreased 2 basis points on 18 down to 18 basis points compared to the 4th quarter. As Hafi mentioned, the overall margin did decrease 36 basis points compared to last quarter. 2 of those part of that has been which we talked about with the excess liquidity.

We had normally if you look at our average balances on our margin table, we've been running about $625,000,000 or so and that's been for several quarters into last year. But this quarter it was $825,000,000 averaged. And part of that was the continued from the Cadence acquisition, those funds being on there for the quarter. We did put about $350,000,000 on average into an investment portfolio during the quarter, but still ended with $825,000,000 on average. So that is a big driver in the decrease.

Part of that as well related to the differential from the 4th quarter was our PPP fees. So that was about 12 basis points of the decrease as well. And then that $225,000,000 that I mentioned kind of above where we have been running and liquidity was about 12 basis points. So that's about 25 basis points of that decrease in those two items. But overall as Hopi mentioned, the excess liquidity that we talked about $700,000,000 of that is about 40 basis points to the margin.

So we are still putting some of that to work in our investment portfolio. We have been purchasing very bonds with very conservative structures and structured solid cash flows coming in. Typically what we have been buying over the year nothing new, but just putting in the same type things that we have been, which has driven up our asset sensitivity a little bit going into year 2 just because we have we still have so much excess liquidity and then what's anticipated in our cash flows. So and then one more thing I want to mention about the margin was kind of looking at where what the future rate hikes might do to our earnings and to the margin. But we have with our modeling run, the company that does our modeling, they had 4 basis points, 4.25 hikes built in.

So we had some more runs done to have 6 hikes built in this year. And so for 2022. And so back in those taking that differential and looking at what just that 50 basis points increase would do over that and then keeping our current deposit costs the same. We feel like that we should be able to for 2022 keep our deposit costs where they are. And so that would impact about $5,000,000 after tax which would be about $0.25 on our EPS.

So that's kind of where we're looking at for that. I think that's all I have, Hoppy, on my prepared comments. So I'll turn it back over to you.

Speaker 1

Thanks, Stevie. Again, a strong start to the quarter. Liquidity continues to build. We expect margin expansion over the next several months due to interest rate increase and again continued growth in loan book and not only organically, but certainly the combination of our 2 companies. And quite frankly, we've already started levering some of that and feel free to do participations between our companies.

So we're getting a head start on that and excited about what that will mean to us in terms of improved growth and profitability. JJ would you like to give us a little a few comments about the loan growth for the quarter?

Speaker 4

Yes. Thank you, Hoppy. And you already mentioned we were very pleased to have a growth of about $32,000,000 ex PPP for the quarter. Very excited that came from really all regions of the company. Mississippi was very strong, standout region for us in the Q1 and really had a good blend of existing credit and new relationships to help drive that number.

March was a really outstanding month with about $200,000,000 in new originations and that was against about $360,000,000 for the entire quarter. One thing we've been looking at closely is unfunded commitments. That remain very strong about $338,000,000 at quarter end. And pipelines very healthy about $645,000,000 in total approved pending close and collecting information. Those totals were $5.87 in February and $5.07 in January, so really strong at the end of the quarter.

And in the 1st 3 weeks of this quarter continue to look positive. Origination is very strong and a lot of the large credits are moving through the pipeline. So really good quarter and a good start to this quarter.

Speaker 1

Thanks for those comments, JJ. Ben, again, strong credit metrics for the quarter, but if you give us a little color on credit performance, please?

Speaker 4

Yes. I would love to compare it to about a year, year and a half ago. This is a much easier conversation. Let me touch on past dues real quick. Finished this quarter at 39 basis points.

That was a very strong start for the year, up a little bit from the end of last quarter. We finished last year at 25 basis points. I would like to point out too that that was with 0 loans in any type of payment modification period or P and I deferrals at the end of the year. All loans had returned to the regular repayment terms. I would also like to mention last year we averaged under 54 basis points for past dues.

That's the lowest average since we've been tracking that metric in 2013. So really good year last year. And put that in perspective for this quarter, all 3 months of this quarter were below that 54 basis point average. So really good start to the year on past dues, classified loans. Now this is one where we have a little bit of heartburn going into the pandemic.

We all know this pandemic started in March of 2020. And classified loans really didn't increase a whole lot over 2020. They increased 18% through the year 2020, about $14,000,000 Let me touch on this quarter real quick. We finished this quarter out at $103,000,000 or 16.68 percent as a percent of capital. That compares well and is down from last quarter where we're at $110,500,000 or 18.34 percent of capital and compared to Q1 of last year down from $107,000,000 or 19.59 percent of capital.

And I started to give you some background, but let me now go back to give some background on Plattshot loan. The end of Q3 of 2020, we implemented a review process on any loan that was in some type of payment modification period or that was carrying a balance of deferred interest from the suspension of P and I payments. We saw through the end of 2020 or through the Q4 going into 2020 that our criticized loan, our special interest loan increased significantly. And the reason for that was in that review process, especially in the hospitality industry, hotels, restaurants and in the retail sector, if we didn't have any updated financials and we couldn't document the ability to repay on those loans, we went ahead and moved those loans mostly to special mention. So you saw a huge increase there.

But going into the first half of twenty twenty one, what can happen with those criticized loans, they can either get upgraded or downgraded. By May of 2021, we had reached our peak of flat side loans from downgrading those criticized loans and we did $121,500,000 or 21.53 percent of capital. That trend turned around and I would say in large part to that review process and getting updated financial statements and really documenting where our borrowers were at. By the end of the year like I said we were back down to $103,000,000 in classified loans from that one time high of 121.5 percent or 16.68%. That's 15.68 percent that has been since November of 2019.

So we're real happy that those classified loans we work those back down. Like Havi mentioned a little bit ago NPAs down. They finished we finished this quarter up at $27,500,000 or 92.7 basis points of total loans in ORE. That was down from last quarter $30,500,000 or 1.03 percent of total loans in ORE and compared to the Q1 of last year down from $36,900,000 or 1.2 percent of total loans. Hopi also mentioned net charge offs.

He gave you an annualized figure. We were in a net recovery position of 3.3 basis points, which is the first time we've been in a net recovery position since the beginning of 2018. So hopefully that metric will continue turning that direction throughout this year throughout the end of 2022. Hoppy those are highlights. I think that kind of gives you a high level view of how well we've come through that pandemic.

Speaker 1

Thanks, Ben. Again, strong performance in terms of credit quality and credit metrics. So, appreciate the comments in regard to that. Well, that really concludes our prepared comments for the call today. Again, a really strong start to the year, not only in the posted results from First Bancshares, but the announcement of our combination with Beach Bank only accelerates what we think is going to be a good year in terms of growth and profitability.

So with that, I think we'll open it up for questions.

Speaker 0

Thank you. Our first question comes from Kevin Fitzsimons of D. A. Davidson. Your line is open.

Speaker 3

Hey, good afternoon, everyone. Hey, Kevin. Hey, Hoppy, I'm assuming this deal, it's been announced or proposed in anticipation of the Treasury's ECIT program, which you guys have been open about that you're eligible and you plan to participate. Number 1, what's your latest thoughts on timing when that's actually going to happen? And then a more broader question is, assuming that comes through, you got plenty of regulatory capital and this is gives you a boost of basically free capital.

Beyond this announcement with Beach, which I know you're going to focus on in Tollkett's integrated, but beyond that, do you see yourselves getting more active in additional deal opportunities and kind of when and where and what kind of size any kind of flavor you can give us on that? And particularly like does this deal change that dynamic? Like is it really all about Florida for the 1st now? Thanks.

Speaker 1

Thanks, Kevin. I'll answer a couple of points on that. Number 1, the ESIP capital, as you know, we're eligible and we're eligible and are eligible for $175,000,000 of debt capital from the U. S. Treasury.

The structure of that is contemplated to be a preferred issuance. However, we continue to analyze that. We continue to talk about some of the requirements around it. So I'm not certain and we're not committed at this point to actually closing on the capital. So that did not go into the modeling of this transaction and really that would be again extra sort of extra capital for us, extra low cost capital.

But we're a bit concerned about some of the treasury some of the requirements treasury has and some of the disclosures that would require us to make as a public company. So no certainty that we'll actually close on that. Secondly, this transaction is certainly accretive and in line with our strategic plan. As you know there's scarcity in Florida, but Florida remains a top priority in terms of expansion for us, not only in terms of acquisitions, but also in terms of organic growth. And Chip and his team will help us part of their role and part of Chip's role will be to continue to look for expansion opportunities, particularly in the Florida area, particularly in the Central Florida area.

And that can take the form of either if there are additional acquisition opportunities or if they're organic by organic means with team lift outs and the establishment of loan production offices and then potentially branches in some of the more attractive markets in Eastern and Central Florida. So, yes, this deal not only from a financial standpoint helps immediately in scale pricing capacity, but then also we acquire folks and team that has knowledge of certainly a high growth area in the Florida market, which has been very important to us. So as you know, we've done multiple deals. We've done in fact, we closed transactions both on the same day. We've done a couple of years where we've done 3 transactions in a year.

And so over the years, we've had the opportunity to have a team that's dedicated to acquisition integration. So we hope this is the start to a very active year. Valuations kind of are all over the place and that can be a headwind as you know. However, it seems like there's a lot of opportunity and we continue to have a lot of conversations. Florida is a high priority because of the overall demographics.

Tennessee is a market that we've not historically looked in very hard. But then you know we've been pretty geographically disciplined about how we build out our franchise. So with our expansion in Northeast Mississippi and then all of a sudden Tennessee begins to make a lot more sense in terms of geographic connectivity. And there's a lot of banks we think in Tennessee that are banks a lot of banks we think in Tennessee that

Speaker 2

are banks like we like to partner

Speaker 1

with in that sort of $500,000,000 to $1,000,000,000 to $1,500,000,000 range in some very nice markets again with overall good demographics. And so and then finally with our presence in Baton Rouge, we begin to think about Texas a bit. Again valuations are high there. But from a strategic standpoint, it would make a lot of sense because the ability to collect connect Florida and Texas and sort of all parts in between we think would be a unique franchise in the community bank space and would certainly hopefully drive a premium valuation. So we're excited about the year.

We've got a lot of optionality. We've got plenty of capital particularly you mentioned our TCE being roughly 7.5%. That for us historically we have never a long time we operated 6% or well under that. We don't want to operate under 6% anymore. However, in the 7% to 8% range is a comfort level.

I think that given the risk adjusted pretty risk or on a risk adjusted basis the relative conservative balance sheet that we have, but mid-7s or low-8s is certainly a reasonable level of tangible common equity. And then to be on the high side of total capital regulatory capital 17%, 18%, plenty of capital married with the earnings accretion that we'll enjoy going forward in order to support our acquisitive opportunities as we go forward. Again, that size range $500,000,000 or so on the low end to well over $1,000,000,000 on the high end is kind of the sweet spot we want to concentrate in.

Speaker 3

Great. Thanks, Hafi. And just you kind of alluded to it, but I just wanted to I did want to get into Tampa and you had kind of referred to it more broadly as Central Florida. So is kind of the near term opportunity really this getting more of a dense presence in Northwest Florida and then putting the excess liquidity to work there, it can be used. But then the longer term opportunity is using this Tampa presence as a springboard to a more broad presence in and throughout Central Florida, it sounds like what you're talking about.

Speaker 1

Yes. I think you're definitely right Kevin. Chip and I had that discussion last night as we were riding around a bit talking about strategically his thoughts and our thoughts about where to go from here. Would you Chip, would you like to spell that a little bit? Or just but yes, our thoughts are kind of both Kevin to build density in the Tampa market.

I mean, we've got a meaningful presence now, but certainly the capacity to increase that. And then the markets up I-ninety five, I-seventy five, some very attractive markets Bradenton, Sarasota over on the east side as you go up to Fort Pierce and Port St. Lucie and up that way and then in Central Florida up in Central Florida area and Lakeland and up towards Gainesville and Ocala. Those are all high growth markets, markets that we compete well in. So we'll be opportunistic.

Chip and I discussed this last night looking for if there are potential acquisition opportunities, but also in terms of organic growth opportunities there.

Speaker 3

Okay, great. Thanks very much.

Speaker 1

Thanks, Kevin.

Speaker 0

Thank you. Our next question comes from Catherine Mealor of KBW. Your line is open.

Speaker 2

Thanks. Good afternoon and congratulations.

Speaker 1

Thanks, Catherine.

Speaker 2

I wanted to start on the growth. And I thought it was helpful to think about it in dollars. And I thought it was pretty telling that Poppy at SG and A Steel grew about $32,000,000 this quarter. And then at Beach, it looks like you're growing at about $20,000,000 a quarter. And it looks like that kind of quarterly growth rate is going to accelerate from here.

So although this is relatively a smaller deal for you in terms of asset size, is it fair to think about that this acquisition can almost more than double your current loan growth rate? Or am I being too optimistic on

Speaker 1

that? No. Well, that depends, Catherine. We like to run it from us. But absolutely we were talking and in fact modeling out and we spent some time around this.

And what you're seeing there is look from our sort of historical community bank suburb sort of loan portfolio, we're in that sort of mid single digit growth rate and that's fairly consistent, excepting this last year where just payoffs have been crazy, particularly in CRE space. But I think that's right. I think if you look at what Beach can bring, particularly in the Tampa area, together we can definitely accelerate that growth rate. So it feels like we think there's an opportunity to do just that to essentially look at a high single digits growth rate on a combined basis as we move forward. We think that's reasonably achievable.

We don't think it will be taken in an ordered amount of risk, but we think the markets particularly the Tampa area will help support that.

Speaker 2

Okay. Great. And then now Deedee thinking about the $5,000,000 in asset sensitivity that you talked about, I just want to make sure I'm thinking about that right. So the additional $5,000,000 in after tax net income that you get, does how much of that is that just kind of shocking your portfolio for fixed rate hikes? Or does it also include the deployment of some excess some of your excess capital for cumulative liquidity into loan?

How do we think about kind of those 2 components of asset sensitivity? So it is not necessarily deploying it, it's kind of taking the balance sheet where we were at the end of February and then building on the 2 hikes, because they the original model already had full hikes in it. So we added the 2 more just to kind of see the dollar volume of that based kind of having a baseline to work off of. But it was really just maintaining the current deposit cost and then increasing that 50 basis points. So, it's really not deploying it more into loans or above what our growth our normal growth, because we budget the 4%.

So, it's not going above that, in the model. Got it. Okay.

Speaker 1

So, if

Speaker 2

you're putting the 50 basis points on that excess liquidity, that cash is sitting there. Got it. Okay. And so then and that's just $0.25 on 50 basis points of hikes. So but I would but to your point that doesn't include any I guess it's a 0 deposit beta.

So as we kind of think about the impact of full hikes and as you kind of continue on, don't run rate or annualized at $0.25 because deposit data at some point will catch up and start to move. Is that a fair way to think about that? Yes. That's fair. Okay.

Okay, great. And then maybe one last thing on just as we model also this growth coming on, how should we think about maybe between now year end before the deal closes, how active you'll be in deploying excess liquidity into the bond book versus just holding on to the liquidity so you can put it into loans as soon as the deal closes? We're not holding back to for the loan growth as far as we have enough liquidity in that portfolio that bond portfolio and the cash flows coming off of it for that loan growth. So we're still investing in the portfolio. So I don't we're not going to sit back and wait for loan growth.

We're going to continue at the kind of the moderate pace we've been just putting some of the work as we go.

Speaker 1

Okay. Catherine outside of deploying the $400,000,000 that we had that came to us from the Cadence branches and you saw that Q1 where I think we put about that much and held a maturity security. I think the way I think about it is as a percentage of assets and in terms of dollar size, I don't know that the portfolio will grow materially over the rest of the year. But the cash flows coming off of that portfolio certainly will be reinvested and interest rates have been timed to us a bit here. So there's substantial and Didi, I think there's coming out of the bond portfolio, am I right?

There's about $250,000,000 of cash of maturities coming out of that portfolio?

Speaker 2

That's correct.

Speaker 1

So I don't know that materially we'll increase the size of the bond portfolio, but we will do some investing and we'll pick our spots. So there is some opportunity to take some of that excess liquidity and stay relatively short given its magnitude and get some nice yield

Speaker 0

pickup. Great.

Speaker 2

Well, very helpful. Thank you for all the commentary this afternoon and looks like a great deal, so congratulations.

Speaker 1

Thanks, Catherine. Appreciate it.

Speaker 0

Thank you. And next we have Matt Olney of Stephens. Your line is open.

Speaker 5

Thanks. Hey, guys. Good afternoon.

Speaker 1

Hey, Matt. How are you?

Speaker 5

I'm great. Congrats on the deal first off. And I'd love to hear more about the ownership on the Beach side. It sounds like the pro form a ownership of FBMS is going to be around 15% when the deal closes. It sounds like Beach is some retail, some institutional.

Any more background you can give on the Beach side? And it sounds like there was a recap a few years ago.

Speaker 1

It was and we have there's a lot of commonality in our shareholder base. So I'm hopeful they're going to really applaud this transaction. Chip, would you like to talk about the Beach shareholder base?

Speaker 3

Sure, Matt. This is Chip Reeves. So the 2018 recap was completed in July of 2018. About $100,000,000 was raised at that time primarily from institutional shareholders. So honestly, it's a little bit of the who's who of the bank space institutional investment community.

And with that, I think we have approximately 40 shareholders. So not very retail, very institutional.

Speaker 5

Got it. Okay. And then the Tampa team, love to hear more about this team. How long they've been with the bank? Where were they previously?

I guess what types of credits are they focused on? And I assume they're locked up. Just any details you details you can give on that? Thanks.

Speaker 3

Thanks, Matt. This is Chip Reese again. So I'll give a little detail on the group. And we have Hopi and the First did an amazing job over the last couple of weeks in what I call socializing this combination and the benefits of that with our Tampa team as well as a number of folks in Northwest Florida. All of our team members that have been essentially offered agreements to continue retention agreements have executed those.

So the team is intact. And I mentioned in the prepared comments, we have actually already seen just in the last week or so, some significant opportunities that frankly we would not have been able to accomplish on our own. But with the assistance of the first in this combination, we've been able to continue to handle the relationship and satisfy the client need. 2 main individuals that lead our Tampa market, one is Henry Gonzalez. Henry was a long time Bank of Tampa team member and then also was the Florida Region President for Mutual of Omaha before joining Beach Bank at recapitalization essentially about 3.5 years ago.

Another Chip amazingly enough, 2 Chips in the bank, Chip Falk, who was formerly BB and T's Commercial Market President here in Tampa, another long time champion, leads our middle market banking and all of our specialty lines of business. And so those two individuals are frankly outstanding and compete at a level against regional institutions as well as the trillionaire banks. And so and then our treasury management capabilities, our lead treasury management officer joined us from Valley Bank approximately the same time, 3 to 3.5 years ago and is one of the best treasury sales officers that I have worked with in my career. And so that group is all with us, all staying, excited about the opportunity as just in the last 24 hours is our client base.

Speaker 1

And they have Matt they have signed contracts and or retention agreements.

Speaker 5

Very helpful. Thanks for the update there. And then I guess looking at the disclosures in the deck, it looks like Beach's possibility has been mediocre more recently. What else can you tell us about the ROA, the efficiency levels that have been more depressed over the last few quarters? Thanks.

Speaker 3

Yes, Mitch. So I'll actually go ahead. This is Chip Reid again. Sorry to grab this one and then we'll let Jaffee hit and Didi hit the cost save piece of this. But again, when we go from a strategic standpoint and what this transformation of Beach was set out to accomplish from July 2018 till now, if you look at our Board of Directors and the institutional shareholders, frankly, what we were looking to create was a $2,000,000,000 to $3,000,000,000 business centric franchise in the state of Florida, especially as M and A activity had left what we thought a void in opportunity.

So we have invested at the levels and scale both within team, but also even more significantly likely in platform to accomplish such. So our efficiency ratio is obviously higher than frankly even our Board would say is appropriate, but it's appropriate for the evolution of our company. The significant operating leverage that we've created within this institution is outstanding. We've taken the deposit franchise from 10% DDA to 27%. We spoke about the loan CAGRs previously.

And so if you follow that and just add 1 more year frankly of the 20% loan growth and our expenses have stayed the same. So and we have $100,000,000 in cash that we did not put into the markets. And so we had no essentially no AOCI at the end of the Q1. So you can put those together and then the 50% cost saves. And I think you can frankly easily begin to model a return here that is probably even more than conservatively modeled in our combined organization.

Speaker 1

Matt, as I mentioned earlier, Chip certainly alluded to in his comments, Beach Bank is not your average $600,000,000 bank. Now, if you have a little more overhead that certainly affected their earnings on their growth path. But again, they set the bank up with a group of bankers, a group of systems that are competing in some high growth markets. So the ability to scale that up takes a little time as we talk about being better together and being able to accomplish our goals in a much shorter time period than what either of us could have done alone. So again, the combination will certainly accelerate that profitability as a combined company, growth and profitability.

Speaker 5

Yeah. Well, I think I heard that the loan growth CAGR has been more in that 18% to 20% level over the last few years. And in order to hit the EPS accretion you guys have outlined, can we assume that's the expectation that it's a similar level over the next few years from the Beach side?

Speaker 1

We expect our loan growth to be consistent with what they've achieved and that was what we used in our modeling. But anecdotally, I must tell you, I feel pretty confident that given the increase in capacity removing some of the restrictions of a smaller bank in both markets and together in Northwest Florida and all the opportunities there. But the scale, the capacity, the pricing power combined with their market expertise in Tampa, certainly we did not model that, but we certainly feel strongly we would be very hopeful we could accelerate that growth rate.

Speaker 5

Okay. Congrats on the deal. Thanks for taking my question.

Speaker 1

Thanks, Matt. Appreciate it.

Speaker 0

Thank you. Our next question comes from Christopher Marinac of JMS. Your line is open.

Speaker 1

Hey, good afternoon, Hapi, and thank you for hosting the call today. Just a quick one just to delve a little bit further into the loans versus deposits at Beach. Is the mix of loans a lot different than what we see on the mix of deposits in the presentation last night? Not sure what you're asking, Chris. Well, if we look at the Pensacola, Crestview and Tampa on deposits, would we see the loan portfolio kind of split along the same lines?

Or would there be a skewing towards Tampa? There would be a skewing towards Tampa and a very different mix in terms of lines of business. Tampa is heavily C and I oriented as like us in Northwest Florida that's heavily oriented toward 1 to 4 family residential construction and CRE. So Tampa has definitely been one of the higher growth rate market and the lines of business here in Tampa and the portfolio mix is very different.

Speaker 3

Hey, Chris, just a little added color. This is Chip Reeves. And so in Northwest Florida, the commercial loan side is approximately $200,000,000 at threethirty 1. And then also in Northwest Florida, our mortgage business, our on balance sheet resi is $55,000,000 ish or so. And if you go to Tampa at threethirty one, we're slightly over $200,000,000 in loan outstandings.

And again, that's been built in the 3 year time period since recapitalization.

Speaker 1

Sure. So Chip, do you think that this mix will be more Tampa as you fast forward say 24 months just big picture?

Speaker 3

What I'd say is, I'm excited about both regions. And I say that because and Hapi and I were discussing this last night as we're planning world domination. And with that, we set a target of dominance Florida dominant community bank market share in Northwest Florida. And I think Compu had the same goal. Separately, we weren't there and it was going to take us both a few more years.

Together, we're already there. And so that the power of our teams there and we're strong on the retail side, we're strong on the mortgage side in a combined basis and on the commercial banking side and that region now, far better together than apart. Now what I'd say is that region will likely be slower growth than Tampa. I mean, we've been growing Tampa at obviously, it's a lower book, so that the percentages are high. But I believe we can grow Tampa's marketplace that $100,000,000 a year.

And frankly with the combined combination here and the increased balance sheet, we may be able to exceed that.

Speaker 1

Chris and that's one of the things that Chip and I talked about just early on as we started looking at what this combination would mean. And look in a $600,000,000 bank, the resource level is more constrained in a $6,800,000,000 bank. So when Beach had to allocate its resources, obviously, it had to pick and choose about where it could compete heavily and where it should point those resources. Now together sort of with the resources that we have, there's no limitation really. There's not much limitation in there.

We can certainly compete at a high level and a high dollar volume in Tampa. But again, as we talked, a dominant market share in Northwest Florida will have ample resources to continue to grow that market. And both of those are recipients of post pandemic population relocation. We see it in both areas. We see it accelerating.

The nice piece about Tampa is it has the C and I business is something that we don't currently have. Nope. That all makes sense. Thank you both for the color. Look forward to hearing more progress.

Thanks, Chris. Appreciate it.

Speaker 0

Thank you. And we have Taylor Bratk of Hovde Group. Your line is open.

Speaker 5

Great. Just a couple for me. I think firstly on the credit quality review, you all have done a lot of deals over the last few years. Anything different when reviewing Beach's credit quality? I know it's like 70% of the loan book was looked at.

But I don't know if there's any other additional detail of note that would be of interest to hear about.

Speaker 1

Well, number 1, we were certainly very pleased at the quality and depth of underwriting. And so that's one of the things. As you know, as we've gone across the Southeast lineup, relatively smaller banks, sometimes the credit expectations in terms of level and detail of underwriting and then the expectation around compliance conformance and documentation is maybe a little different than what it would be in a larger organization. Here, the quality, the depth of underwriting, the quality of the customer base, very pleased with that, very excited about that. So, no.

And I'll tell you this what they we do two levels of loan diligence. We look at our internal group and then we bring in CRM who comes in and does a really deep dive into the portfolio. And exactly what and they confirmed classifications and our loan marks came out exactly what was originally modeled and was provided by us to Beach independently from Beach to independently CRM in the beginning. So there was really no adjustment as we want. The deals only confirmed what we suspected and what we indeed saw.

So, no, we were very pleased with the loan diligence. And again, actually in this book, we got a little more in terms of percentage penetration. A lot of times we're around the 60% range, but here we dove a little deeper into the portfolio.

Speaker 5

That's great. And last one for me. Obviously, having been a serial acquirer and probably this won't be the end for you all, how does this change maybe other sort of capital deployment thoughts? Like you've been a regular dividend hiker, the share overall shares have turned it down. Does any of that get changed for the time being, especially with industry wide seeing tangible books coming down from the last quarter?

Or is it just steady from the last few quarters?

Speaker 1

I think we think about continuing to be a steady grower in capital accrual. And obviously with the our earnings continue to ramp and then with this combination, we have a relatively low payout ratio in terms of retained earnings retention. So we will be accretive capital pretty quickly. Plus we've got plenty of capital today. So it doesn't change our strategic plan of continuing to be opportunistic and deploying that capital when it makes sense either through organic means and or through accretive means.

So again, can't control the market valuations go where they go. We never or we have not stepped we've not tried to necessarily step back and say we're going to do this and do that. We continue to be consistent. We continue to be opportunistic and look for areas to grow our business.

Speaker 5

Great. Thanks very much. Congrats.

Speaker 1

Thank you. Appreciate it.

Speaker 0

Thank you. And speakers, I see no further questions in the queue. I will turn the conference back over to Mr. Cole for closing remarks.

Speaker 1

Well, thanks so much. We appreciate everybody's participation. We appreciate the support that we received from all of our stakeholders. Again, exciting news. We're so excited to be combining with Beach and what that means for us together as a company going forward.

And again, great work by all our team members for those of you on the phone, exceptional performance on both sides from Beach and from First Banks here. So with that, we'll close the call out and you guys have a safe and happy weekend.

Speaker 0

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.