The First Bancshares - Q3 2022

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the First Faxares Incorporated Review of the Second Quarter 2022 Financial Results Conference Call. 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.

I would now like to hand the conference over to your host today, Mr. Hoppy Cole. Please begin.

Speaker 1

Well, again, welcome and good afternoon, everyone. I'm Hoppy Cole, President and CEO of FirstBank Shares. Gosh, we've got an awful lot of exciting news to talk about Today, we threw an awful lot out yesterday. It was a culmination of a lot of work on behalf of our team members. We've got a group today.

I'd like to introduce who else will be joining D. D. Lowery, our CFO J. J. Fletcher, our Chief Lending Officer George Moonen, our Chief Credit Officer Leonard Moorean, the CEO of Heritage Southeast Bank Brad Firk, Chief Banking Officer of Heritage Southeast Bank and Chip Reid, the CEO of Beach Bank.

At the end of the day, I thought that we would start with an overview of the transaction announced yesterday after close of business between First Bancshares and Heritage Southeast Bank Corporation of a potential merger and the signing and executing of a definitive agreement. And so Leonard and I will give our thoughts on high level overview of the transaction and what that means for both groups of shareholders and really all our stakeholders. Then we will transition to the quarterly results, and Didi will give us some financial highlights. JJ will provide some color on loan production and pipeline. George Meade will provide some information on the credit trends.

Chip Reid will give an update on the Beach Bank's Quarter and where we stand in terms of integration and the transaction that we're getting ready to close tomorrow after close of business with Beach Bank. And then finally, a little more will update us on Heritage Southeast's quarter. So We've got a lot to talk about, and let's go and jump right in. We are absolutely thrilled about the transaction That was announced again after close of business yesterday between First Bank shares and Heritage Southeast Bank. And as some of you know, Virtus Southeast is headquartered in Jonesboro, Georgia, which is just in the South Atlanta, but it's in the Atlanta MSA, they currently have $1,700,000,000 in assets and 23 branches in some of the most dynamic, robust growing markets, not only in the Southeast, but in the country, in that Atlanta MSA, Savannah, Georgia, Coastal Georgia down to St.

Mary's, Southeastern Georgia, that complements our Southern Georgia footprint very well. And then finally, Jacksonville, Florida. And so really, it's interesting. This transaction, in my mind, started really about, I guess, almost a year ago. January of 2021, Leonard Moore, who is the CEO, and I met for an afternoon casually.

At the time, no pending transaction. We're Beginning to get to know each other and talk about our companies and talk about our strategic visions, and I think both of us came away and Larry, you can opine that your

Speaker 2

comments, I think both of

Speaker 1

us came away feeling that our companies share an awful lot in terms of being culturally aligned, how we approach business, The values of our company, how we approach the communities that we serve, internal business models. And so we felt that we were credit culture. We felt we were very much culturally aligned. Then a transaction came up where Here at Southeast entered into a definitive agreement with Credit Union. And so we were very disappointed that we were not able to continue our talks, We stayed in touch over the last year over the last 15 months or so.

And so we were very excited when we heard that So that transaction was terminated. In fact, there'd be a process put together to explore Their strategic options and that they'd like us to participate. So really, the Heavy lifting started, I guess, a few months ago, but really a lot of important parts of getting to know each other started well over 15 months ago. So we're thrilled about that. I'd like to talk briefly about the strategic rationale.

We feel strongly that this is consistent with our strategy of building a high performing community bank franchise in the Southeast. Again, the overriding themes to our expansion strategy have been to seek markets where the overriding demographics were Positive and income growth was positive. So this franchise is accretive to our composite Build out in terms of population growth and income growth. We have a strong management team. And as you know, we've been Fairly disciplined about growing our company geographically contingent and so that we don't jump very far in terms of markets that we don't know.

We like to link them together geographically. We think it drives synergy. We also like to have strong management teams in place that understand those markets with a demonstrated ability Not only at growth but also at risk management because as you know, we've been a high growth bank and having folks that understand their markets And know what to do, but know what not to do is critically important to achieving that growth strategy in a safe, sound manner. And then again, they are true community bankers just like we are. They're heavily invested in the communities they serve.

They understand that the health of those that our company will reflect the health of those communities to the extent there are communities that lag. And everyone is familiar with our CDFI mission and the markets, some of the markets they serve will be complementary to that mission. And so to the extent we can raise the standard of living in those markets, it only reflects positively on the value of our company. So they're very invested in those markets And we're invested in that strategy. From a management standpoint, we're very pleased that We attract a very strong management team in Georgia.

On a composite basis, pro form a, the largest segment of our company will be in Georgia. Over 30% of our loans and deposits will be in the state of Georgia, and then 27% or 28%, I think, will be in Mississippi and about that Same number in Florida. So Georgia will be our largest partner. And with that amount of market share, obviously, we need a strong management infrastructure. Lynne and Moreland, Brad Sserve, Paul Herring, those guys bring and Kathy Green, is that all right, bring exceptional Executive leadership and management, and they bring a strong infrastructure for us to not only integrate this transaction, which will be critically important, Retain the talent, but then understand the synergies that this combination brings together and they've got the ability to lever that and continue to grow the organization On a combined basis.

So one other strategic item that we're Very pleased. And they have some platforms, some lending platforms that we don't have. We talked about Beach Bank's SBA platform last quarter and in Tampa, they have an SBA lending group. Heritage Southeast also has an SBA lending group. And so we're excited about the synergies of putting those two groups together, the ability to generate SBA loans not only in those metropolitan centers, but being able to roll that out and leverage our market share across our footprint.

They've also got a unique line of business, which was very interesting to us In terms of the cash and if you look at our deck, there's a slide in there about the cash surrender value life insurance business. And we think strongly and believe strongly that that's a line of business that we can generate acceptable very can be very profitable It generates high returns, but with very little risk associated with it. In addition to that, it's a diversification away from Traditional CRE real estate oriented lending, so it gives us a little bit of a diversification, not only in terms of product line, but also in terms of geographic Yes. And these loans are really it's a national platform. So we're excited about those opportunities.

Again, we have a wealth management business, Which we've talked a great deal about our wealth management rollout in our private banking area. So those are lines of business, again, that we'll be able to not only achieve scale In order to generate non spread related income in our Wealth Management business, but then lever that Wealth Management sector into the private banking format that we have, which is a product set that HSBI, our Heritage Southeast has not had, but they serve in markets that generate a lot of opportunity for that. So Again, very complementary, not only in terms of culture, in terms of the markets that we serve, The management team, the strong management team that will get it, but then also, we believe and we feel strongly that it creates A unique Southeastern franchise, it creates a sub-ten billion dollars community bank in the Southeastern U. S. With 8 plus essentially $8 plus 1,000,000,000 in assets.

Pro form a, we have extremely high performing company. Again, if you take the 2 transactions together, they're very complementary of each other. And the resulting company has, We believe with an ROA north of 1.3 percent, a return on tangible common of greater than 18%, The company remains and is and remains well capitalized. So capital ratios, PCE approximately pro form a 7%, 9% leverage and 17% total capital. So exposure to great markets, great management teams that can grow the franchise, Franchise a unique franchise that creates significance or it's a scarcity franchise that we're really not Familiar with any other franchise in the Southeast that sort of has those metrics, touches those markets, but yet has the sort of growth prospects that it has.

Well capital, so we have plenty of capital deployed, and the resulting loan to deposit ratio is still 60% or less. So substantial liquidity, again, to support the capacity. Liquidity and capital support organic growth opportunities that we think this franchise creates. This also is the most impactful transaction we've ever done in terms of earnings, particularly EPS accretion. When we think about Earnings impact balance sheet impact and really in terms of 2 ways.

We look at it on a GAAP basis, but we also look at it on a core basis. And Everyone knows right now, tangible book value multiples, fair value accounting, other comprehensive income marks are kind of All over the place. It's a very turbulent time given how quickly the interest rates have increased and the level to which they've increased. And so In thinking about that, if you look at the GAAP analysis, it has a high teens EPS accretion, it has less than 3 year earn back and has less than 8% day 1 tangible book value dilution. But as a shareholder, our Board, our management team has a significant Positioning the company in terms of ownership, we really think about it in terms of core analysis.

And so if you strip away The fair value marks and sort of accounting, for lack of a better word, I'll call it gymnastics. On a core basis, the dilution is really 4% to 5% day 1 tangible book value dilution, but still a 10 plus percent EPS accretion, if you remove the recovery of the fair value marks and the earnings over time. And the earn back stays roughly the same, still sub-three. So historically, that had those have been metrics that we've acquired and been a disciplined acquire around. Those metrics still work, and we think in this transaction Certainly very acceptable, particularly given the scarcity of the assets that we've acquired, the markets that they touch and the management team that helps support future organic growth.

Based on those metrics and a very reasonable Set of assumptions. We think there's a clear path, a very achievable path to a $4 plus EPS once we get all our cost saves in. And that's a significant increase in terms of where we are today. And so we think the resulting company on some very reasonable multiples, which is a significant amount of upside in our stock. So if you think about individually the transaction with HSP, HSPI is attracted to the franchise.

But boy, if you take HSCI compared to Southeast Bank and Beach Bank together, what we have accomplished this year, we're just we're extremely excited about. So we will accumulate $2,300,000,000 of assets centered in Panhandle, Florida, Building densely in the market, in a fast growing market that we already have significant market share. We'll open up the Central Florida market with an experienced management team And it has great market knowledge, has great contacts in the Tampa St. Pete area and then really all in Central Florida. And then the culmination of this, we opened up Atlanta, Savannah, Jacksonville with another extremely strong management team.

And so $2,300,000,000 of assets in those markets at what we think are reasonable prices with good financial metrics, We're really, really excited about all that this means for our company. So those are my thoughts. Leonard, sort of high level on the franchise, I would love to turn it over to you and get your insight. Thank you, Hafi.

Speaker 2

And I'm Leonard Moreland, the CEO of Heritage Southeast Bank Corporation and Heritage Southeast Bank. So pleased to be with you this afternoon. Give you a little bit 3 of Heritage Southeast Bank for those of you that may not be familiar with us. Our bank came together, 3 community banks in the state of Georgia and North Florida in the Q3 of 2019. Brad served Brian Smith and myself were the 3 CEOs of those banks.

And we came together for really one primary purpose, and that was to To create better opportunities, better opportunities for our shareholders, better opportunities for our employees and better opportunities for our customers. That was a huge success for us. We were able to create a balance sheet that was that allowed us to move up in priority list with our larger customers and to offer a broader array of services to our medium and smaller customers. So as we continued with the consolidation of our organization, We always kept an eye out for where are the opportunities to enhance shareholder value and create opportunities for the other two constituents, our customers and employees. So like Hapi said, we met in January, and I can remember that day very well.

After I left

Speaker 1

the meeting, I immediately called our

Speaker 2

Chairman, Ken Layman, and I said, I think I found the right person for us to really boost our franchise and to accelerate the process that we were looking to accomplish. We did get sidetracked most of 2021 and earlier into this year with the Credit Union transaction. But it was great to have Hoppy willing to come back to the table and talk with us And to put this deal together because this is who we are. We're community bankers, serving people in our communities and serving our employees. And this just gives us an opportunity to continue that mission.

Why do we really like the transaction? It increases the balance sheet for us. It gives us better opportunity. Now we can shift in the highly competitive, High growth markets of Atlanta, Savannah and Jacksonville from that number 2 or number 3 player in many of the larger customers portfolios to number 1 And number 2, so that's a real opportunity for our bankers to expand and to grow deeper relationships with an existing very, very good strong customer base. It also gives us an opportunity to expand our consumer line.

We have a very large consumer base in South Georgia and North Florida, some 50,000 plus customers In that market and with the array of products that the First brings to us, we'll be able to penetrate those households much better And to make them even more profitable for our company. It's important to us as bankers To be able to continue on the mission that we call our careers and the philosophy, the operating philosophy, The servant attitude of the first combines extremely well with our operating philosophy and the attitude that we approach our business with. So We feel like it is a great cultural fit and very little disruption to our bank and the mission that we've been on for our entire careers. For our shareholders, it's a great opportunity. One of our goals with combining our 3 banks was to increase liquidity on the stock.

Many of our shareholders have been investors for decades. And as you know, Community Bank stock is somewhat illiquid. And this gives some of our shareholders the opportunity as they move through life that they have the opportunity to add or subtract from their withholdings from their holdings. And we think that's something that a shareholder deserves. And you combine that along with a dividend that the first provides that is something we have not been able to provide our shareholder base because of our growth rate and the other areas that we have focused on the last few years.

And then again, for our employees, it's great because there's no overlap of markets. So employee retention will be maxed here, and that's great for us because these are loyal, Long term relationships that we've had with those employees and we want to reward them with the same opportunities that our customers and For sure, Steven. So it is just a win, win, win, all the ways that you look at it from top to bottom in our organization. And we just think that it's going to be a great organization that we'll be able to put together And continue to grow at a very rapid pace. And I'd like to touch a little bit on what we feel like we bring to the table.

Hock mentioned a couple of things like the SBA and cash value life insurance Programs, we do have a vertically integrated SBA program that carries it all the way from The hunt and the booking all the way through the maintenance and performance of the portfolio. We have a great relationship with SBA and USDA, and we feel like we'll be able to offer something to the combined company to help support those activities across the entire footprint. We also have the growth markets that I've mentioned and that Jaffi has mentioned. Our loan pipeline consistently extends $100,000,000 So far this year through June, we've thrown outstandings net $70,000,000 and that just does not appear to be slowing even though we hear in the national economy of weaknesses starting to appear. We have a very large poor funding base.

About 36% of our deposits are non interest bearing. That has always provided us a lot of stability in the changing rate environments, And it also produces a very high level of noninterest income, thanks to those many consumer households and large commercial base that we have. So most of all, we think we bring to the table a group of very strong seasoned bankers that know their markets that have worked In our environment and our culture for a long time and since those cultures align so well, we feel like they will thrive in the first environment as well. So just excited to be here and be a part of this transaction, and I see just great things ahead for our company.

Speaker 1

Thank you, Hoppy. Thank you, Louis. Again, real quick, in summary, we're thrilled about the transaction. We think what this CREATES is a Southeastern franchise with real scarcity value. It's an $8 plus 1,000,000,000 franchise with exposure to not only the best markets in the Southeast, But some of the best markets in the country, as you know.

As most of you know, we're shareholders first. And so When we think about strategic moves, we think about strategic moves that only enhance our optionality. That's been part of the strategy since we started. It continues to be part of the strategy today. So you look at this franchise, be it getting the attention of potential upstream We think it creates more value in that regard, just what I've talked about in terms of construct and structure of the franchise.

The opportunity for continued organic growth that we have with established community banking teams across, again, some of the most dynamic, robust, fastest growing markets in the country. And then finally, a company that has Superior return in terms of profitability, in terms of efficiency ratio, in terms of return On capital to shareholders in terms of dividend capacity and that we continue to increase our dividend, this only creates more capacity to do that as we think about how we demonstrate how we return or how we provide returns to our shareholders. So We're really excited about it. Again, we look forward to getting after it and look forward to joining forces with all the team at Heritage Southeast and then really with all their stakeholders. So with that, I'd like to transition to the quarterly results.

And Hey, I'll be brief in my quarterly results. I'll let everybody just be brief. But strong quarter, great improvement in terms of core profitability, Outstanding loan growth, pretty good expense management, Really excited about the results for the quarter. And Phoebe, if you'd like to give us a little more insight into that in terms of the financial highlights.

Speaker 3

Sure, Fathefi. Thank you. A couple of things on the note, provided in the release several of our one time items we had this quarter Just to kind of start off and get that out of the way. And the biggest piece of that was acquisition related charges and our charter change Some charges related to that. And so we kind of like to take those out and look at just core.

Like Hapi mentioned, we like to focus on our operating income and what can we do Core basis. And so several numbers I'm going to give is just really core. And our net income, the operating core net income for the quarter increased 10% this time from $15,000,000 up to $16,500,000 though we increased $1,500,000 or 10% in our core net income. Our operating return on assets increased for the quarter as well, 11 basis points up to 108. So very happy about and excited about several things this quarter, a lot of improving numbers for the quarter.

One of the things you noticed in the last Couple of times we talked over the past, I guess, 2 years now is all the excess liquidity. We actually had a decrease in our excess liquidity this quarter, so that's Very exciting. So we actually were down about $400,000,000 on average and so that was put into Work in the loan portfolio, as well as some in the securities portfolio. And then we had a small slight decrease in average deposits for the quarter. But loans one of the things I want to talk about too on our margin, Yes, we did have great improvement in our margin, 31 basis points.

That was up to 309 for the quarter. And one of the things to note, we did have loan growth ex PPP loans of $167,000,000 But if you look on our average balance table, we only recorded on average $67,000,000 of that showed up on average for the quarter. So when you look at our net interest income growth, it was I think $3,900,000 when you So the PPP fees, so it was a 10% increase as well. A large portion of that was from the securities Portfolio that got booked largely in the Q1 that really kind of showed up full count in the 2nd quarter. So which is going to be the impact of these loans in the next quarter since on average, we only had $67,000,000 So I think we'll see strong Strong net interest income from that into the next quarter.

The excess liquidity that we still have It's about $230,000,000 this quarter and that's probably about was about 13 basis points for the margin. So we Depressing the margin by 13 basis points there. Another note of improvement is our operating efficiency ratio. We improved that 71 basis points to 57.66 for the quarter. And then our average interest bearing costs on deposits, We improved by 3 basis points to 15.

So great improvement in all those areas for the quarter. Of the things I did want to mention as well was our deposit balances. We did show a decrease in deposit balances of 131,000,000 We do have a large public fund portfolio and we mentioned this a lot about the seasonality of that and we get a large increase in public funds at the beginning of the year, typically mostly in the Q1. And then they start spending those total funds, they start decreasing over the course of the year. So Deposit balances were down $130,000,000 About $70,000,000 of that was related to the seasonality of the public funds.

We did time deposits were down for the quarter about 36,000,000 But half of that was really related to the Cadence portfolio that we acquired in December and then some public funds CDs as well. So The positive on our deposit balances is that our net our non interest bearing deposits actually increased about $10,000,000 So we're excited about that as well. And I believe that wraps up all my comments

Speaker 1

Thanks, Didi. Appreciate it. J. J, would you like to give us a little color on loan production for the quarter and also what you see in terms of Warren?

Speaker 4

Yes. Thank you, Hafi. And to Dean's comments, June of the

Speaker 1

quarter was a Huge month

Speaker 4

for originations. We had about $220,000,000 but not until June. So the quarter is kind of back end Loaded. So I think the other thing that contributed to the net was our payoffs and paydowns. We've been looking for those to subside and they were down about $60,000,000 in the Q2 of the Q1.

So I think those two things together really combine for And that growth. Unplanned commitments on trailing 12 month originations, dollars 341,000,000 that's in line with consistent with Previous quarters, pipelines are good, in line with historical averages. Really looking forward to Beach Bank acquisition, Expanding the presence in Northwest Florida and then Tampa as well. I think Chip is going to talk about that in some 2 markets. So great quarter.

A lot of I think things led to that. We had a renewed focus on business development starting in January, had some organizational Changes, and I think we're seeing results of that,

Speaker 1

too. Great quarter. Great job. George, George, would you like to tell us a little bit about what you see in our credit trend?

Speaker 5

Thank you, Hoppy. Generally, we're seeing continued improvement, positive trends And a rebound in credit quality coming out of the pandemic years, if you will, where there were some slight upticks during that time. Leaving that charge really is what we're seeing in our hospitality and leisure and food and beverage segments. A lot of those businesses were obviously impacted with some disruptions during the pandemic, but both in our Tourism destination markets, and we have a number of those along the particularly the Gulf Coast, as well as our business Travel markets, we're seeing some real improvements there. And we're able to get Very timely reports in that segment, the STAR reports that give you month to month updates.

Improvements in ADRs, RevPAR, Occupancy trends have all been very favorable in the last really over the last couple of quarters. In terms of delinquency trends, continued improvement there. We've been trending in the 2nd quarter under 25 basis points in our delinquency trends, which has Certainly been a favorable improvement over the prior years as well. In terms of overall credit quality in our criticized and classified Loan segment, we've seen 9 months of continued improvement there coming out of the pandemic Related quarters and a lot of this improvement has really been attributable to Some upgrades that we were able to do in the hospitality and leisure segments, hotel properties, Other tourism related tourism transportation related businesses, so some nice recovery there. And we think we're likely positioned to see that continue for the balance of the year as well.

Nonperformings, we have good improvement there with our NPAs In nonaccruals, OREO and other assets, continued improvement below 100 basis point mark as we hit the midyear point and we think that will continue to improve As well, we have some relationships that once we get year end financials in from some of these additional accounts that are in some of those Sectors we've talked about, we think we can see some likely continued improvement there. And loan related net charge offs, We're continuing to be in a negative position, which is positive. We've got A nice net recovery for the year, and we think sometimes you kind of eat away at that over the course The year, but it's been maintaining pretty well. So I think we're positioned well. We know with inflationary trends out there and that likely will be a major point of focus for Us as well as all of our peer banks as we end the year in the next two quarters.

But We believe like our I think our emphasis, we kind of approach it as a 4 legged stool, if you will. We've got Good debt service coverage in our loan base. We've got a good primary, secondary social repayment Culture and how we underwrite good collateral positions and liquidity and guarantor support, All those things kind of combined to, I think, give us the general notion that we're positioned pretty well to Whether any recessionary headwinds that we might encounter along the way. So I think we're in a good place.

Speaker 1

Good deal. Thank you, George. Well, as early as I know we talked about it a little earlier, but we will be closing the Beach transaction Tomorrow, after close of business, we're really very pleased that from we continued our trend. From the time we announced The pending transaction was beat in late April until closing. What will be August 1 will be in that 90 day time period.

And In this environment, we were very pleased with our efforts on both sides there to get this transaction approved and through the regulatory requirements. So Chip, would you update us on Beach's quarter? And then where we stand in terms of integration?

Speaker 6

Sure. Thanks, Hoppy. So, one, everybody. Welcome to the call and to Leonard and Brad and the team coming together. What an Sanding transaction.

Hoppy, first for everyone on the phone call, I do owe Hoppy a steak dinner because when he said we could get this done in 90 to 100 and I wasn't quite certain, but a huge congratulations to all of the teams to close this transaction in an accelerated timeline. It's been outstanding. And well, I think the our quarter results truly begin to show the strategic rationale for Our combination with a first, and I'll be brief, but go through a couple of these. Loan growth for Beach Bank in the 2nd quarter continued to expand. We're at $29,000,000 of net growth for the quarter, which is a 26% annualized percentage.

And as we enter the Q3, our pipelines, frankly, are more robust than they were going into the Q2 of the year. Non interest bearing demand deposit account growth was a raw number of $12,000,000 increase, which is 37% annualized. And many of you know this was a Beach Bank was a recapitalization story from July 2018. At that point, Non interest bearing demand is about 9% or 10% of the overall deposit balance sheet. That now is at 29%.

So So the investment that we've had in our treasury management initiatives that will be carrying through to the first as well are beginning to show increased velocity. And then as we look at our asset sensitive balance sheet and as we began to lean into the first Liquidity position. Our net interest income growth just on a late quarter basis increased 19% or annualized at 76 Percent. The quarterly NIM average moved 44 basis points to 3.49%. And just in the month of June, that was actually $369,000,000 So you see the combination that we spoke of in April's earnings call of merging these balance sheets Together, and we're already taking advantage of the first liquidity position and size of balance sheet.

Credit quality, NPLs We're only $171,000 or 3 basis points, 30 day to 89 day past dues remain subdued at only 19 basis points. And then the story of Beach again and the recapitalization and turnaround, there was a significant amount of ORE assets. Those are now down to only $9,000,000 with $6,750,000 of that under contract to close here in the Q3. So the job is Almost effectively done there as well. And then, Hoppy, in terms of the integration, I can't tell you what, our teams have been extremely excited And so have our client base as we begin to move and take advantage, frankly, of the additional products As well as the size of the balance sheet of the first two specific examples, 1, an expansion of 1 of our larger clients that we were able to work together with J.

P. Fletcher, George Noonan and the First Team, and then we were able to move to overall credit Relationship of just north of $20,000,000 And even more importantly, with that expansion, the operating entity moved Their entire primary business to us, which is about $6,000,000 of non interest bearing deposits and full treasury management relationship. And then another success story, frankly, tomorrow, with an institutional CRE company, we close on a $20,000,000 Central Florida acquisition loan. And again, both of these would not have been possible without our combination with the first. And we look forward To frankly being the first on Monday morning and continuing some of the success we just spoke of.

Speaker 1

Thanks, Chip. And in addition, obviously, the spread related income generated by the loan growth, we were able to make use of your swaps, derivative business and one of those transactions for a pretty significant swap fee. So we're excited, obviously, working together with synergies, the for growth in terms of loan production, but then also in terms of increasing our fee income. So great job for the quarter. Appreciate it.

And I will shift over to Leonard now. Leonard, if you would update us on HSPI's quarter, please.

Speaker 2

Thank you, Hoppy. So Chip, I'm a little scared if you owe you a Steak dinner for 90 days. I've been in 15 months of regulatory limbo. So No telling what I'll owe him if we get closed in 90 days, but I hope that's the case. As Phil Resch, our CFO, and I often say each quarter, There's just a lot of noise in the numbers.

As you can imagine, going through 15 months of

Speaker 1

a pending

Speaker 2

transaction, It's hard to identify what core is on the outside looking in, so we try to tell you from the inside looking out. For the quarter, we earned $3,300,000 which was $0.46 a share, and that did have noise in it. We had 2 executive retirements that we accrued retirement benefits for the quarter and also transaction related expenses. So earnings per share, Excluding those items was $0.61 which is in line with the prior quarter of $0.59 And $0.57 of 1 year earlier. So we basically feel our core run rate is in that low $0.60 range.

Net interest margin did increase, exclusive of PPP, in all periods, increased to 3.31%, And that compared to $320,000,000 in the prior quarter and $326,000,000 in the prior year. 2nd quarter noninterest Sum increased to $4,300,000 That's up from $4,100,000 in the Q1 of 'twenty 2. Noninterest That was noninterest income excuse me. Noninterest expense increased $1,400,000 and that was related to the retirement and separation packages Those two individuals, the current quarter reflected that was $1,200,000 charge that we took in $315,000 of transaction related expenses. So excluding those items, our efficiency ratio for the quarter was 65.3%.

Total deposits increased this increased to 1,490,000,000 and that was up slightly from the prior quarter, and noninterest bearing deposits continue to make up just shy of 36% of total deposits. Classified assets, which include nonperforming assets and accruing classified loans, is 3,200,000 And nonperforming assets, which exclude those accruing classified loans, totaled $2,900,000 or 17 basis points of assets. The loan loss allowance for loan loss reserves is $15,300,000 represents 1.38 percent Total loans, and we still carry some merger marks from our consolidation. So a very consistent solid quarter for HSBCI And still plenty of liquidity to expand on that.

Speaker 1

Thanks, Leonard. Great quarter. Great quarters, great performance, everyone, all around. So we talked about the transactions. We talked about how confident these transactions are.

We talked about Strategic impact, we talked about the financial impact. One thing and when I say these transactions are complementary, I don't want to lose sight of the fact that Because of the Beach transaction, we were able to be more competitive in the process for Heritage Southeast. If you guys remember, Beach was over had excess capital, okay? So we view this when we were doing our model, we were looking at this transaction as an immediate deployment of their excess capital. And so if you think about it, that allowed us on a pricing basis to be more competitive and to win these assets, so to speak, because of what we've been structured with these.

We think it's a natural extension of our strategy, and we also think it creates significant value for our shareholders. One final highlight on the prepared comments before we move to questions. You may have also seen today an 8 ks announcing that John Levy would be I joined the Board of Directors of the First Bank shares. We're thrilled to have John, excited about him coming on board. John is a native of Youngstown, Ohio, he's been in the real estate business for 30 plus years as a real estate developer in the construction industry.

He currently lives in Tampa, Florida. I think he's been in Tampa some 20 plus years. So he's very connected. He gives us representation in Central Florida and really throughout the country and throughout the Southeast and part of his business acumen and his relationships and interaction. But he also served on the Huntington Bayshore to share his board for 11 years.

And so he served on their executive committee. He served on their risk oversight committee. And so we're excited to have John join our board as we approached $10,000,000,000 we're going to lean hard on him about his experiences that he saw serving on the Board of a much larger organization. In addition to that, I think you all should know that Chip Reid has a background in larger organizations. He served as President of a company that was north of $10,000,000,000 comes from a background of a good 3rd.

In addition to, there are a number of folks in Luna's organization that have experience at larger banks. And so We talked about strategic, we talked about financial, we talked about the management impact, but we also talked about accretive to management talent. So With that, I think we'll open it up for questions.

Speaker 0

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

Speaker 7

Hey, good afternoon, everyone. Hope everyone's doing well.

Speaker 1

Yes, please, Kevin.

Speaker 7

Happy, can I maybe just You kind of touched on it right at the end there, and I was going to ask and you can answer it any way you'd like? But I guess I'm Wondering your intentions with the $10,000,000,000 mark. On the one hand, you're going to be right on the doorstep. And I know the regulators start treating differently when you're approaching that doorstep. On the other hand, you mentioned At some point during the presentation about still having optionality and still being able to I forget your exact wording, but being attractive to upscale partners, I thought was the wording.

So Just curious what your thoughts are on that front. And then depending on when this closes, say it closes in early 2023, can you or would you manage the balance sheet in such a way that maybe you don't cross it until early 2024? Thanks.

Speaker 1

Got it. The first part of it is it really doesn't change Our thinking in those terms, Kevin, of what you're used to and I know we're getting closer to it, but we've talked about maintaining and enhancing our optionality. And so if you remember, we talked over the last couple of years as we approach $5,000,000,000 we begin to think about, okay, What is going to be your expectation? What areas of our company do we need to upgrade as we approach 10? And so we lean on our regulator and you saw a number of strategic moves, not the least of which And quite frankly, the state of Mississippi, based upon where we were previous the district and our former regulator we were Regulated, Ian, there are not any banks like us.

There are certainly not even $10,000,000,000 banks, but there are no other banks even of our size. If you think about State Banking part in Mississippi, they supervise some of the largest community banks in the Southeast. And so leaning on them in terms of best practices when we We're talking about what is the expectation and how do we get ready for $10,000,000,000 They'll be an integral part of that as well as the Federal Reserve Because historically when we approached 5, the Federal Reserve was the first to come out and say, Hey, look, We love what you guys are doing, but here are some things as you get to Tim that we're going to be that we want to see improve. The audit function, which you know we've improved that in terms of process procedure platform, has been the leader of that The vision, Emily Agostinelli came from a larger bank, and so she has that perspective of how The audit function of a $10,000,000,000 plus bank should look. We upgrade our BSA software platform and the leadership of the BSA department.

We hired A young lady from First Interstate, so that's a $15,000,000,000 plus company, and she was in a management role there. And over the last two and a half years, She's revamped our BSA department in terms of not only process procedure, but also software platform. We've installed a new Software platform, which is Vericam, which is used by a number of banks, particularly banks, dollars 10,000,000,000 We've upgraded our enterprise risk system. We hired a young man in terms of model management from the Federal Reserve Bank of Dallas, and he's been a great addition To our risk management department, we've upgraded our enterprise risk system to a program called Risk Connect, again, which is a 10 plus $1,000,000,000 solution. And we've upgraded our MIS systems internally, particularly in terms of loan portfolio and loan production to do away with some manual processes, improve data integrity and have more automated efficient processes.

So We've got all that on the board. And look, in terms of integrated this is like this transaction announced yesterday is like buying 3 Community Bank at once, really. So it's not different in terms of business model and integration risk, we don't think, because the business model has aligned so much. But it is larger. And so We'll be very disciplined, and we'll take our time making sure we've got the integration right.

That's how we think about it. And again, we talked about it or I talked about it here and you know us well and know how we think about the value of our company and how we maximize that value for shareholders. So continuing to look for opportunities to grow Profitability, return metrics, continue to increase our dividend, those are all forms of shareholder return management. Looking at who might be our upstream partners and when it's time to join a larger organization, And when that makes sense for our shareholders, we continuously evaluate that. We do that at least twice a year, if not more often.

So we're always cognizant. We're always looking for that. And we think that these two transactions this year, if you think about where we started the year at a roughly $6,000,000,000 company. Still the majority of our business in Mississippi and the assets that we will have accumulated this year And what that means in terms of franchise scarcity and what we think is long term franchise value. And quite frankly, we think that, that gets on the radar screen of What might have been a handful of potential upstream partners at $5,000,000,000 to $6,000,000,000 when we approach $8,000,000,000 to $10,000,000,000 with that sort of market share, with that sort of Structure across the Southeast, we think it just makes it more valuable to someone.

So again, we We continue the same thought process. We're shareholders first. We look upstream. We look downstream. We look for opportunities to grow our business, all with the right thing of how do we improve our shareholder Return.

Speaker 7

That's great. Thank you. And one just follow on, With this deal, you enter Atlanta, Savannah, Jacksonville. So those are bigger markets and they've got a nice growth profile. But can you talk about What that position in those markets is and what your intention there is?

In other words, do you need to do you need more scale? And do you need it soon to be able to really grow and do what you want in those markets? Or do you feel it will be more gradual, you got A good running start with what HSBC is bringing.

Speaker 2

Leonard, would you like to address that? Sure. Kevin, this is Leonard Moreland. When you're a $1,700,000,000 bank and you have Atlanta, Savannah And Jacksonville, you have to give a lot of thought to where you're putting your resources into the organic growth. It has been our belief That North Atlanta area that Brad Surf is so familiar with and where his bank was headquartered gives the greatest bang for the buck.

We love the suburbs of Savannah, and of course, we love Jacksonville. So Having a balance sheet and capital position of the first, it gives us an opportunity to do more in more places than we could do as an independent bank. So we do plan to continue the organic push in the Georgia market, But also with our connections and relationships that we have with other banks in Georgia that Brad and I especially have, We know there are a lot of other banks in Georgia that are looking for alternatives and because they approached us as to ask what the opportunities were of joining forces with us. So

Speaker 1

I think Georgia will continue to be

Speaker 2

a very fertile target rich environment, And we're excited to be able to continue on the hunt.

Speaker 7

Just a quick follow-up to that. So that Leonard, you mentioned the potential for expanding further in Georgia. And I know deals can change the overall direction, but it Seemed like when the Beach deal was announced, it was there was a lot of excitement about Florida and making Florida a much bigger part of the company and what it was going to do for the growth Profiles. How do you balance that further scale, whether it's a community bank coming in Georgia coming to you And getting cost savings versus having that having more Florida and maybe in turn getting That attention of the larger upscale partners that you talked about, Hoppy?

Speaker 1

Well, Georgia and Florida both have demographics that are accretive to the franchise. So There are high growth markets in both of those. And so optical people are moving there, as we've talked about, Kevin. So I guess we've got a lot more recent. We've got a company that pro form a is a loan deposit ratio less than 60% to 17% total capital.

So When Leonard talked about allocating resources, those can be allocated to those larger growth markets in Florida I mean in Georgia, but we don't have to we're not sacrificing Growing market share and additional opportunities in Florida. We've got given the capital that we currently have, given the earnings That we the earnings ramp that we'll see from these two transactions, given our relatively modest is the right word, but we have a conservative payout We continue to increase that, but as a percentage of earnings, it's below peers in terms of our dividend payout ratio. There's a lot of excess capital, a lot of resources, liquidity and capital to be invested. So I don't think we sacrifice one for the other. I think That as Leonard has talked about the opportunities for him to grow and expand his management team, his leadership in Georgia, it's the very same scenario in Florida that we talked about last quarter with Chip.

He's got a team of folks that know the Florida market. They know bankers in Florida. And we've talked about the lift out strategies organically of hiring teams, really, I guess, in both these markets, but particularly in the Florida market where Beach was such a small The $600,000,000 it was difficult to attract folks from larger institutions when you had resources of $600,000,000 bank. I feel strongly this will bear some fruit in the near term in terms of team lift outs and Additional management in Lending Cowen in Florida, but I don't think we have to sacrifice those. And so kind of Tied into your $10,000,000,000 question, we have to manage and we've talked about this.

We manage our company. We make the decisions about our company. And we do it through the lens of shareholders because we are. I mean, we, being the Board and the management team and us, We think about we have to make the decisions that we're going to run our company independently forever. And so we can't Hold back on, well, let's not do this because we might cost $10,000,000,000 or let's not take this opportunity.

It's not that we don't consider it and what it might entail in terms of a different structure and different support levels, but we really have to manage, At least in our view, like we're going to be independent forever. Now as we do that, we think that Pet It is obviously supportive of creating value for potential upstream partnership. So when we exercise that, when that gets exercised, we can't know. But we feel if we continue to create value franchise scarcity, high performing returns that Whether we do that as a $10,000,000,000 $15,000,000,000 bank or Somebody recognized that and is willing to realize the value for our shareholders and then we can accomplish something together that we couldn't do standalone. That's always part of our plan.

But day to day, we look at it, hey, we've got to operate, we've got to manage like we're going to be independent in order to create the value that could be recognized from the upstream partnership. That's kind of how we think about It's not common. It's exactly how it felt.

Speaker 7

All right. That makes perfect sense. Thank you very much.

Speaker 1

Thanks, Kevin.

Speaker 0

One moment for our next question. And our next question will come from Catherine Mealor of KBW. Your line is open.

Speaker 8

Thanks. Good afternoon.

Speaker 1

Good afternoon, Catherine.

Speaker 8

Hey. So At the first, you had a lot of excess liquidity, which you deployed $40,000,000 of that this quarter. Didi, so congrats on that, but still have a lot sitting on balance sheet. And It looks like if I look at Heritage, Southeast, you've got another 17% of your balance sheet sitting in cash. So which was amazing to you that that's not even part of your 10% accretion number.

So maybe just kind of big picture, how do you think I feel like we've got our arms around the Beach's loan growth. How do we kind of think about what you're expecting For heritage loan growth and

Speaker 3

how quickly we should be

Speaker 8

able to deploy this excess liquidity?

Speaker 1

So Catherine, in our modeling, we use what We believe, given their markets and what we've diligence, looking at their loan portfolio and their lending platforms and the quality of their The quality of their lives, what we thought was a very reasonable growth. We budgeted about, I believe, 87% loan growth in order in our modeling assumptions. And so given Atlanta, Savannah, Jacksonville, we think that's very conservative. So to your point, I think there's a lot of upside. Now, I'm sitting at home with that.

I

Speaker 8

Under comments that we delivered, he doesn't know the hockey way yet.

Speaker 1

Well, it's obviously way, yes, managing expectations. So but you had a great point in that for modeling purposes and pricing purposes, There are some revenue synergies here and growth assumptions that we think are very reasonable And we hope to overachieve. So when we talk about high teens on a GAAP basis EPS accretion For low teens on a core basis, that's under those what we've determined to be fairly Conservative assumptions. And I just you all have talked about this and Dewey talked about this a lot of times, but If you look at this company pro form a, what it creates in terms of return metrics, and I know we talked about it, but you've got a company That will have a what we believe to be and Didi is pretty good at making her numbers. I know you're shopping now.

She's pretty good at making them. And So this pro form a company will have a greater than 130 ROA, greater than 18% return on tangible common. But to your point about the liquidity, we didn't include that in any of those metrics. And so the ability to deploy that is, again, just And now you're getting all my found money. We talk about the found money all the time.

We kind of keep that back. But now she's bringing out the found money part of our plan. So we told the world, this is why you don't have a call. This is why you have this 1 on 1. She's exposing our found money, but additional revenue to be generated from deploying that excess cash, which is not in this modeling And the markets that they serve, they not only I mean, but beach as well.

And I think about the beach markets in Tampa, St. Pete, Central Florida. I mean, those are high growth markets, again, where that excess liquidity can be deployed. So we talked about our thinking How these transactions are complementary, what it creates, the ability to take Beach's excess capital, immediately deploy that, be more competitive in this process, win the bid And then secondarily, it take not only our excess liquidity, but some of the excess liquidity that HSPI has and be able to deploy that across the whole footprint. I'm leaving out some other We talked an awful lot about Georgia and Florida, but we've got some very nice markets in other areas as well, again, which is really not in our modeling.

We think that's an ability to, To your point, overachieve.

Speaker 8

And then how do you think about the so much of the margin expansion That you can build into your model. It's just the deployment of excess liquidity. But as we look at Heritage, how are they positioned on an asset sensitivity perspective? Excess liquidity aside, how kind of their percentage of loans that are variable versus fixed? And just by Putting the balance sheet together, does this make you more asset sensitive or less, again, excess liquidity aside?

Speaker 2

So this is Leonard. We are very asset sensitive. We have about 280,000,000 in overnight funds, which greatly contributes to that. Our portfolio mix is 51.49, 51.6, 49 floating and overall asset sensitive in all periods. So

Speaker 1

we are benefiting from the increasing rate environment,

Speaker 2

But we just have a lot of liquidity to deploy, as you mentioned. And picking up on Hoppy's comments, we grow loans 10% plus a year typically, but we've had extraordinary deposit growth over the last couple of years as well, which has not allowed for loan to deposit ratio to increase as much, whether it's through any of the government stimulus programs or Just the health of our customers, just average deposits across the board, both commercial and personal, throughout our footprint are much higher today than they were 2 years ago. I don't think that's a different story than you're hearing from any other bank right now. But even with good solid loan growth, it still This doesn't allow that loan to deposit ratio to creep

Speaker 9

up as quickly as we'd like for it to.

Speaker 1

So, Catherine, I think we're going to mess up I thought about a couple of other things since we're bearing our soul and found money here. In the modeling, and I know we may have touched on it briefly in the Beach Transaction. But repositioning their balance sheet is something we do model as well. And I believe it was Chip, is it close to $100,000,000 or so of High cost CDs over the next couple of years, I mean, CDs that are like in the 4% price range, is that right? 2.5 percent?

Okay.

Speaker 3

What's that kind of line?

Speaker 1

2% to 2.5 percent. My point is with the excess liquidity repositioning that because they were at 90 plus Loan deposit ratio, that's not something we modeled either. So I think Chip touched on it a little

Speaker 2

bit, but I did want

Speaker 1

to emphasize, there's an opportunity there to Generate additional revenues that were or additional income that was not modeled in. And then if you look at Headless Southeast Balance sheet, they've got about $40,000,000 $35,000,000 in holding company lines of credit and debt Okay. It's $40,000,000 that I believe the pricing is prime based there. It is. So we're 5 of the 1 that I might have and one that's prime or so somewhere around 5% money happened that we did not model Paying off, but we'll pay off.

We won't need that given our capital position, our liquidity position. There's another

Speaker 3

what? Just tell them it all.

Speaker 1

I know. We're giving it all.

Speaker 3

Can I add you want me to add to that since you're telling Okay?

Speaker 1

I guess so. We're going

Speaker 3

to do it. We also had debt that we're repaying off as well. So How much, Marlene? I think it was down to $40,000,000 this month as well on how long I get my answer. So but

Speaker 1

Those are the things we take into consideration when we're thinking about it, But we don't model that in, in the numbers that we present to the market per se.

Speaker 8

Well, it gives you a lot of Fidelity, which is important right now. Yes, that's great. It's really great. And then on expenses, I know you had a couple of And temporary items this quarter in heritage, what is your cost savings number based off of? I

Speaker 3

was going to say, I'm digging here for the number, but we did back out. We No, it shows 30%, but we did back out those one time items. I think it was about $5,000,000 on a run rate. Do you know Leonard, I'm inclined to Catherine, but yes, I believe it's net of that and then we took 30%. $5,000,000 is ringing a bell.

$48,000,000 Okay, yes.

Speaker 2

Our monthly expense run rate is about 4,000,000

Speaker 8

And in the modeling, you say 50% realized in 'twenty three and 100% thereafter. I feel like typically you all are pretty quick on realizing cost savings. Are you being conservative there or is there a conversion date or something that's kind of pushing some of those cost savings back?

Speaker 3

Yes. We're looking at I think we're being a little conservative there, but the Conversion date we have right now penciled in is the end of March. And so typically, we'll have some of the staff We will stay on about 60 days post conversion. So you don't really realize complete staffing until 60 days post. So that Would be end of May.

So that's why we gave you 6 the 50%, but it could be a little more than that

Speaker 8

Great. And then I'll ask one more question and then I'll get off just on buybacks. I mean, you've got this down today And it typically happens when yields are announced. But how active or ready would you be willing to step in and buy back shares just given where your stock is trading?

Speaker 1

Well, the Board was we just had a little social gathering for Leonard and Brad, who are here with us today in Hattiesburg with our Board. And the very first question they walked in is from being, hey, when can we buy shares? When can we buy shares? It seems like we're in a perpetual blackout Because we seem to always have something going. I think if you look at our trading policy, both company and, hey, we'll direct this to those people, We would have announced earnings, I think, it's 3 business days post that.

However, with the shareholder vote Coming up for the announced transaction, Counsyl is pretty adamant about the company not being in there influencing the share price before the shareholder votes were held. So we may have a little place to go there before we can actively. But as you know, historically, that has been as again, we've wrapped up earnings, which has supported capital. That's been one of the methods we've used to improve shareholder return, and we will use it when we can.

Speaker 8

Great. So wait for the shareholder to do the trading and go from there.

Speaker 3

You saw we will have to have a vote as well on this transaction due to the size. So both companies will have to have a vote.

Speaker 8

Great. Well, congrats on the transaction and the quarters, and

Speaker 0

And our next question will come from Brett Rabatin of Holt Group. Your line is open.

Speaker 9

Hey, good afternoon, everyone.

Speaker 1

Hey, Brett. How are you? Hi, Brett.

Speaker 9

I'm good. I wanted to, I guess first to stay on the topic of expense savings and maybe just given that it's new markets, kind of get A better flavor for it, if you can, where the what the expense statements are coming from and one, just Talk about the conversion and what systems the various banks are on against all that flying up here in the next year.

Speaker 3

Judy? Sure. I'm getting my page over here, but I've turned them down Before the meeting, now I can't find it. One second, let me get there. Okay.

So yes, we had projected a model 30% cost save, and we were using and here's my number, what we were running off of, Catherine, if you're still listening, showing 23 projected expenses of 48,500,000 And so really the big piece of that would be salary and benefits would be about $5,500,000 of that and then basically other the other Probably $5,000,000 and that's going to come in your core conversion data processing piece is always your largest piece. You'll have a lot of smaller things, but that's the 2 things that will drive that number up.

Speaker 9

And what systems are all these banks on? Just kind of seeing what you're going through in terms of conversion processes.

Speaker 1

They're both on FIS. And of the 13 transactions we've done over the years, I'm going to guess that Probably 10 of those or 9 or 10 were on FIS. Well, let me take that back. No, it may be a little short, I guess, a couple on Jack Henry. But we have done a number.

In fact, it's the majority of the conversions we've done have been from FIS to Jack Henry. So the folks at Jack Henry and IS and us know each other well.

Speaker 9

Okay. And then wanted to get

Speaker 2

back to early in the

Speaker 9

call, There was discussion about the excitement around the SBA businesses for both the banks that are being added here. And we've seen this quarter some volatility with SBA gain on sales spreads being compressed considerably. So wanted just to make sure I understood the opportunity in SBA and maybe any thoughts on What you're thinking about the gain on sale margins of that business?

Speaker 1

From a strategic standpoint, one thing that We may not have highlighted or emphasized as much as we should. And you're aware of our CDFI status. And there's part of that mission is creating, again, improving standard of living in underserved markets. Part of that is increasing homeownership, and we've talked a lot about that and the things we're doing around that and how and probably need to visit with me in a minute about how Great, SBI, complimentary of that. But SBI loans, it's about small business creation.

And so we have, our company, culturally tried to do SBA loans Since we've since I've been here, it's just we cannot it's a different operating segment. It takes a focused Team could do it. It's just hard to take your general lenders given the uniqueness and the administrative focus that it takes in VA Lending could be successful at it. So as we talk about in Beach's call, they have a service that they platform that they were scaling up, But Heritage Southeast is already there to include an administrative support function, which Beach did not have. Beach uses a third party administrator.

Head of Southeast has that support function in place. So we think again, Catherine, put your finger here, We'll found money, the ability which we've not modeled in, but essentially have that administrative support in place, but be able to lever the volumes coming out of Beach Over that and what we generate across the footprint over that administrative function. So SBA, not only from a profitability standpoint As a line of business, but also as further to our CDFI mission, making sure we stay tuned to that in small business lending. So That's kind of how I well, I failed to emphasize that. But, Larry, if you could talk a little bit about the specifics of the business.

Speaker 2

Yes. We saw 2021, especially Late Q3, a lot of demand in the SBA arena because of the payment assistance program from SBA and the 90% guarantee, which made it even more attractive for the lender. So we feel like some of the demand from early 2022 was Pulled into 2021 so that the customers could take advantage of those payment assistance. And of course, it did balloon up A little bit. And I think we had $3,000,000 of premium income in 2021 compared to $2,000,000 in 2020.

And this year appears to be more in line with the $2,000,000 to $2,500,000 range halfway through the year. So we are seeing A full pipeline at this point. Some are SBA can be construction type projects. And so sometimes premiums are a little lumpy from quarter to quarter. But overall, on a pretty consistent basis, We see the originations at certainly 2020 most of 2021 levels with the exception of that 3rd Q4 when everything got Please.

So the yield curve shift earlier this year have an effect on premiums as well. But we've seen premiums come back now more in line with the 10% to 12% range. Last year, we saw premiums, in Some cases above 15%. So there is influences to the program, but a lot of good folks They're hunting deals and have quite a large network that they work every day. So we do see the volume remaining steady.

Sometimes the influences outside of the company affect the premium dollars year to year.

Speaker 9

Okay. That's great. Appreciate all the color.

Speaker 1

Thanks, Brett.

Speaker 0

One moment for our next call. Our next question will come from Matt Olney of Stephens. Your line is open. Mr. Olney, your line is open.

If your line is muted, please unmute your line. There's no response from Max Munson. Moving forward, Our next question will come from Christopher Marinac with Janney Montgomery Scott. Your line is open.

Speaker 9

Hey, good afternoon. Hoppy and team, I wanted to ask about the price paid for Heritage Southeast. It's higher than the original Vistar deal 1.5 years ago. And I guess I wanted to see if I can't tie back that There has been an increase of equity, particularly if you exclude out the AOCI in Heritage Southeast. So should we simply look at that difference in price Related to the buildup of equity that Leonard and his group have had the past 15, 16 months.

Speaker 1

Well, it's that Chris, no, you're right. You're hitting it on here. The company has grown, again, a mild AOCI mark, which It's kind of got tangible book value, both his and ours all over the board. But also the earnings stream has improved, The core earnings stream, that's what we really focused on when we thought about pricing was in order to get the metrics that we liked and the metrics that we think are very acceptable, the company was in a different position today, particularly on a pro form a basis than it was 15, 18 months ago. Larry, am I hitting about right there?

When we think about it, I know you and I have had a lot of conversation about pro form a run rate.

Speaker 2

Yes. I think coming out of 2020 is a real hard pandemic year. We built reserves significantly in 2020, which Significantly impacted earnings per share. I think the credit union saw through that and saw the potential of the earnings machine. And then as we moved into 2021, we started to prove the existence of that machine.

So I just think it was a lot less risk today and what the future earnings look like compared to where we were 18 months ago. So I think we're just being paid For what we've produced and what our potential is.

Speaker 9

Okay, great. And Dean, could you remind us as you close Beach This quarter, what happens with the AOCI marks? I know there's a small loss position that they had last quarter. Maybe it's better at the end of June, but just curious kind of how that It's washed out because I guess it also gets applied when Heritage Southeast is closed here in a few months.

Speaker 3

Right. That was just what that will just wash through capital, but in your modeling, technically, you pick that back up because that's just a Paper loss because we're not selling them, we mark them to market and we'll have them on our books at current market value. And there's no

Speaker 1

Chris, that return of that mark and that stream of income, there's really no risk, Particularly if you look at it in where the market heavier in the Heavy Southeast transaction, that's There's no risk to that. That's locked in when we fair value that at close. And so getting that back over, I think we modeled some of the year's digits over about 5 years, which is about the average life of the bonds portfolio. Again, we're back to that core versus GAAP. We can even do it GAAP and look at it, Kind of the same numbers, although often, you may say, oh, I got 8% dilution, 17% -plus EPS accretion on a GAAP basis.

But if you back it down accord, it's kind of optically or at least at the end of the day, you're kind of the same place in terms of earn back. So we'll also think about hedging that position to be sure there's no additional or we're not paying that review, hedge that Markdown in terms of Air Bond portfolio from now to a close, so that we don't take an additional mark on that. We've seen some other transactions there That significantly impacted the day 1 dilution in terms of moving the bond portfolio.

Speaker 9

Got it. But back to your earlier point, Hafi, at the very beginning of the call to that, you kind of just said it here a second ago. I mean, the price of book gets Skewed by virtue of this AOCI market. Those complicate the just the pay to trade ratio as well as just the traditional metrics people Again, the earn back is what it is. Your point is well taken.

Speaker 1

That's absolutely true. Chris, one other thing, and you and I talked about this multitude of times I don't know how what time you've had to study the deck. But when we were thinking about And when I talk about these transactions being complementary to each other and the fact that Beach put us in a very good position to win this transaction, Page 19 in the deck, when we talk about it, and I hope this represents kind of what we think about The tangible book value is and what it shows is, I mean, if you think about it at the end of and hey, here we are at the end of 2nd quarter, our tangible book is $18.32 And look, you go across what the Financial impact will be from both of these transactions. What we think the financial impact will be, both these transactions are tangible book value, we end up at 1809 So you I'm not going to say I don't understand. At least we can think about it in terms of me as a shareholder, what is that what really is the impact of these two transactions Put together on my tangible book, well, it's not I mean, the practicality of the entries on the page, You could argue that's 1.5% taken together.

Speaker 9

Yes. A follow-up on Slide 19 was very helpful. So thank you for doing that. And I think we all would appreciate having that updated in future quarters. So it's a good look back.

Speaker 1

Thanks,

Speaker 9

Bruce. Thank you very much.

Speaker 0

And I'm showing no further questions. I would now like to turn the conference back over to your speaker, Poppy Cole, for closing remarks.

Speaker 1

Well, Thanks, everyone. Again, very exciting times for our company. We're absolutely thrilled with the transactions that we've been able Transactions that we have upcoming, the closing of Beach this weekend and then our upcoming transaction with Heritage Southeast. Also the strong performance for the quarter, great drop around everybody's quarter was extremely good. And we're just absolutely thrilled of the opportunities to continue to grow our company and create value for our shareholders.

So with that, appreciate everybody's attendance today and have a great weekend.

Speaker 0

And this concludes today's conference. Thank you for participating. You may now disconnect.