First Bancshares Inc (Mississippi) (FBMS) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to The First Bancshares First Quarter 2022 Earnings and proposed deal announcement. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Hoppy Cole. Mr. Cole, the floor is yours.

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. And we have: Dee Dee Lowery, our Chief Financial Officer; we have J.J. Fletcher, our Chief Lending Officer; we have Ben McIlwain, our Senior Credit Risk Officer. From the Beach Bancorp company, we have: Chip Reeves, CEO and President; and Richard Mascari, 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 first quarter earnings results.

So yesterday afternoon, we announced that The First Bancshares had entered into a definitive agreement to acquire Beach Bancorp, which is a holding company of Beach Bank. Beach Bank is a $620 million bank headquartered in Fort Walton, Florida. They operate 7 branches, 6 in the Pensacola, Fort Walton, Destin, Florida MSA and 1 branch in Tampa, Florida.

This transaction really goes back -- as far back as late 2017, early 2018 when Carl Chaney and Chip Reeves, sponsored -- raised -- put together an institutional group to raise capital, to recapitalize the Beach Bank franchise. Carl reached out to us and say, wondering 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, and Carl and I talked at length about potentially this day coming about. So after 4, 5 years, here we are.

I would call Carl like every April and say, "Hey, Carl, are you interested?" 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 culture -- 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. Beach 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 billion in assets, approximately $6.8 billion 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 million in deposits in those markets, well over $0.5 billion of loans, two 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 a significant consolidation opportunities. We 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 most efficiently.

It immediately improves, before closing of the transaction based on 3/31 numbers, it immediately improves the combined -- or at least our FBMS' loan deposit ratio from 56% at 3/31. If you model in Beach's current loans, it moves up to about 60%. As you know, Beach has a 90-plus percent 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 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. Mortgage banking is one. 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 and our 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, but very acceptable pricing metrics in terms of dilution, earn back and EPS accretion and internal rates of return.

From a strategic standpoint, I'll say this, Beach Bank is not your standard $600 million 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 platform, the specialty lines of business are commensurate with a much larger institution than just simply a $600 million bank. So certainly $600 million 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. #2 in the Pensacola MSA, #1 in terms of deposit market share in the Crestview, Fort Walton, Destin MSA. Again, with over $900 million of deposits, well over $0.5 billion 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 1-to-4 family construction, real estate oriented, CRE oriented. The Tampa piece of Beach's operation is heavily C&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 talk they're complementary to our banking team, and so they know each other very well. They've competed against each other. They've been very good competitors. And now they 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 Beach will bring to us, will bring to our combined company expertise in areas that we currently don't have as a stand-alone business and platforms that they've built, which we were trying to build, but they're already ahead of schedule or ahead of us in that regard, particularly in terms of specialty loans.

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 tried 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 health care practice specialties, that works well. Inside is another line of business that we can marry up with our Private Banking division, where we offer general bank side products to a high net worth, high end compliance. We also offer a wealth management line to those clients. And then also this health care practice specialties will be complementary, focusing on health care practices, veterinary practices, (inaudible) practices, podiatrist practices. So again, another complementary, lot of business that will help lever market share, again, across the whole Southeast.

So we will bring to Beach 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 [NAHU] self-funding. And so we have the ability to marry our excess liquidity, our pricing power, our capacity in some of the most highest growth markets in the Southeast and Northwest Florida. And again, in Tampa, with a seasoned group of bankers, 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 one, on the integration piece and making sure there's a minimal amount of impact on the client so that we're successful in retaining all the business we have. And then two, 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 and joining the resulting company, and continuity of that leadership is very important. So Chip Reeves, currently serving as CEO and President of Beach 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 their experience that we're really excited to get and to join the company.

Specialty lines, the platforms that they have built here in Tampa will continue to report up through Chip Reeves, and again, the government USA, SDA platform the swap derivative business, which we don't have is a fee income source for us. And then the health care specialties will report up 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 on observations?

Great. Thanks, Hoppy. First, very, 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 thank all of our team. I'm proud of you for the transformation and growth since our July 2018 recapitalization. It's been 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 a 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.

Take 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 #1 emerging tech city in the United States according to Forbes and then the #5 city in the U.S. for net inflow of residents in 2021.

We now have -- we 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 the week prior with our team, and we're already seeing the client impact as we continue to accelerate this growth. Quick combination or our comments on loan growth, Beach, since the recapitalization, has averaged about 18% loan growth CAGR. That, on a raw number, ends up, especially the last 3 quarters being about $20 billion -- $20 million, I'm sorry, of net loan growth.

We believe we can accelerate that with this combination. And you'll see, as Dee Dee and Hoppy walk through the future numbers here of the first of the power that the additional lending capacity can provide Beach with 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, Hoppy, I'm going to turn it back to you.

Thanks, Chip. Gosh, great comments. And again, system-wide, Beach, you guys have done a Herculean job building Beach back to where this stage is possible. And 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 is a fixed exchange ratio of 0.1711 shares of FBMS to Beach. The price to tangible book value is 142%. Price to 2022 estimated EPS is 36.5x. However, if you place on there the cost saves that we think will generate, that's a number more like about 2.5x earnings. Pay trade ratio are 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 is essentially 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 lines up with an extremely good capital base.

From a tangible common equity standpoint, we'll be about 7.5%. Leverage will be 8.5%. Total risk-based capital is 17.5%. In terms of impact to earnings, we forecast EPS accretion of 2.3% in 2023. But really, the first full year when cost saves were fully realized would be in 2024. We believe that's approximately about 4.7% to 5% EPS accretion. And again, that's based on cost saves of 50%.

So we anticipate closing in the third quarter with systems integration in the fourth quarter. And so with that, those are some comments relative to the actual transaction. And I think we will transfer over to talking about our results for the first quarter.

Some high-level comments, and then Dee Dee will pick up and do some -- give us some more color on the actual results of earnings. And then JJ Fletcher will give us some color on what our loan growth was for the quarter. Ben McIlwain, our Senior Credit Risk Officer, will talk about some of the credit metrics for the first quarter as well, and then we'll open it up for questions.

So net income for the quarter totaled $16.8 million or $0.81 a share. That's a 6% increase over the fourth quarter of 2021. Loans ex-PPP grew about $32 million or 4.4% on an annualized basis. We continue to see deposit growth, $211 million 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 million 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 us -- or in the 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 an increasing interest rate environment to help improve our earnings and improve our returns.

And again, we have -- currently doing the quarter and Dee Dee will dig this a little more, but we were an average cash -- excess cash balance of around $800 million, again, back to the substantial liquidity, highly retail-oriented low-cost granular deposit base.

Our asset quality remains strong, and nonperforming 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 first quarter. 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 Dee Dee, would you like to dig into our earnings a little more?

Sure. Thanks, Hoppy. As Hoppy mentioned on the net income for the quarter of $16.8 million 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 onetime items. And I'm going ahead and mention those because a couple of more of my comments that will just refer to those onetime 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 is $300,000.

We did have a onetime income on our BOLI related to debt. That was $1.6 million. And so that net after tax is $1.6 million. So those items are 3 kind of onetime items that brought 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 -- 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 on 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, it was a little over 1%. Our investment income on our investment portfolio increased over the last quarter, [$1.5 million,] about 20%. And then also on our noninterest income minus those onetime items that increased $500,000 or about 6.5% over the fourth 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 first quarter.

Also on our expenses, they were down minus the onetime items about $1 million or 3 -- a little over 3.5 -- right at 3.5%. And if you recall, last quarter, as indicated in our press release, we did have some onetime items about $1 million that was in the fourth quarter that drove those expenses up during the fourth quarter. And I believe that was about $1.1 million last quarter. So kind of on par with last quarter if you exclude those items out.

As Hoppy mentioned on our balance sheet, our deposits did increase 4% to $211 million. Generally, in the past several years, we've talked about -- during this first quarter, we usually have a big pickup in our public fund portfolio but that was about $60 million during the quarter. But -- so the remaining balance of about $150 million 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 first quarter is when the public funds pick up. So we should see some of that in the second quarter, but we got 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 18 -- down to 18 basis points compared to the fourth quarter. As Hoppy mentioned, the overall margin did decrease 36 basis points compared to last quarter. Two 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 million or so, and that's been for several quarters into last year. But this quarter, it was $825 million average. And part of that was the continued -- from the Cadence acquisition. Those funds being on there for the quarter.

We did put about $350 million on average into the investment portfolio during the quarter but still ended with $825 million on average. So that is a big driver in the decrease. Part of that as well related to the differential from the fourth quarter was our PPP fees. So that was about 12 basis points of the decrease as well. And then that $225 million that I mentioned kind of above where we have been running in liquidity was about 12 basis points. So that's about 25 basis points of that decrease in those 2 items.

But overall, as Hoppy mentioned, the excess liquidity that we talked about, $700 million 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 flow coming in.

Particularly what we have been buying of the year, nothing new, but just putting in the same type of 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 in what's anticipated in our cash flows.

So -- and then 1 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 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 million 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.

Thanks, Dee Dee. 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 and -- but certainly, the combination of our 2 companies. And quite frankly, we've already started levering some of that and the ability 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?

Yes. Thank you, Hoppy. And you already mentioned, we were very pleased to have a growth of about $32 million 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 first quarter. And really had a good blend of existing credit and new existing -- or new relationships that help drive that number.

March was a really outstanding month with about $200 million in new originations, and that was against about $360 million for the entire quarter. One thing we've been looking at closely is unfunded commitments. That remained very strong, about $338 million at quarter end and pipelines very healthy, about $645 million in total approved pending, close and collecting information. Those [soles] were [5 87] in February and [5 07] in January. So really strong at the end of the quarter.

And in the first 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.

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

Yes, I would love to compare it to about a year, 1.5 years ago, this is a much easier conversation to have. 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&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 a really good start to the year on past dues.

Classified loans. Now this is one where we had a little bit of heartburn going into the pandemic. We all know that the 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 million.

Let me touch on this quarter real quick. We finished this quarter at $103 million or [15.68%] as a percent of capital. That compares well and is down from last quarter where we're at $110.5 million or 18.34% of capital and compared to first quarter of last year, down from $107 million or 19.59% of capital. And I started to give you some background, but let me now go back and give some background on classified loans.

The end of the third quarter of 2020, we implemented a review process on any loan. That was in some type of payment modification period or there was carrying on balance of deferred interest from the suspension of P&I payments. We fall through the end of 2020 -- or through the fourth quarter going into end of 2020 that our criticized loans, our special mix loans increased significantly. And the reason for that was in that review process, especially in 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 special mention. So you saw a huge increase there.

Going into the first half of 2021, what can happen with these criticized loans is they can need to get upgraded or downgraded. By May of 2021, we had reached our peak of classified loans from downgrading those criticized loans. We did $121.5 million or 21.53% of capital. That trend turned around, and I would say, in large part, to the 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 million in classified loans from that onetime high of 121.5 or 15.68%. That 15.68%, that has been since November of 2019. So we're real happy those classified loans, we worked those back down.

Like Hoppy mentioned a little bit ago, NPA is down. They finished -- we finished this quarter up at $27.5 million or 92.7 basis points of total loans and ORE. That was down from last quarter, $30.5 million or 1.03% of total loans and ORE and compared to the first quarter of last year, down from $33.9 million or 1.2% of total loans.

Hoppy 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 trending 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.

Thanks, Ben. Again, strong performance in terms of credit quality and credit metrics. So I 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.

(Operator Instructions) Our first question comes from Kevin Fitzsimmons of D.A. Davidson.

Hoppy, I'm assuming this deal, it's been announced or proposed in anticipation of the Treasury's ECIP program, which you guys have been open about that you're eligible and you plan to participate. Number one, 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 until it's integrated. But beyond that, do you intend -- 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 First now?

Thanks, Kevin. I'll answer a couple of points on that. Number one, the ECIP capital. As you know, we're eligible and were eligible and are eligible for $175 million of that 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 -- or 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 there are organic -- by organic means the team lift out in 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, it helps immediately and 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 a start to a very active year. Valuations are kind of 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 -- and you know we've been pretty geographically disciplined about how we build out our franchise. So with our expansion in the Northeast Mississippi then all of a sudden, Tennessee begins to make a lot more sense in terms of geographic connectivity.

And there are a lot of banks, we think, in Tennessee that are banks like we'd like to partner with, and that's sort of $500 million to $1 billion to $1.5 billion 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 and being roughly 7.5%. That for us, historically, we -- and that was a long time, we operated 6% or well under that. We don't operate at 6% any more. However, in the 7% to 8% range is a comfort level, I think that given the risk -- just the pretty risk -- or on a risk-adjusted basis, the relative conservative balance sheet that we have, the mid-7s, 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 or to support our acquisitive opportunities as we go forward.

Again, that size range, $500 million or so on the low end to well over $1 billion on the high end is kind of the sweet spot we want to concentrate in.

Great. 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 that's getting more of a dense presence in Northwest Florida and then putting the excess liquidity to work there? You know 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.

Yes. I think 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 say to that a little bit? Or just -- but yes, we -- 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 market's up 95 by 75, some very attractive markets, Bradenton, Sarasota, over on the east side as you go up to Fort Pierce and Port St. Lucie up that way. And then in Central Florida area in Lakeland and up towards Gainesville and (inaudible). 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.

Our next question comes from Catherine Mealor of KBW.

Congratulations. 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, Hoppy, FBMS grew about $32 million this quarter. And then at Beach, it looks like you're growing at about $20 million 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 side, 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 that?

No. Well, that's the pitch, Catherine. We like to underpromise. 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 banks, suburb sort of loan portfolio, we're in that sort of mid-single-digit growth rate, and that's fairly consistent accepting this last year where these payoffs have been crazy, particularly in the CRE space.

But I think that's right. I think if you look at what Beach can bring, particularly in the Tampa area that 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 would be taking inordinate amount of risk, but we think the markets, particularly the Tampa area will help support that.

Okay. Great. And then do you think about the $5 million in asset sensitivity that you talked about. I just want to make sure I'm thinking about that right. So the additional $5 million in after-tax net income that you get, how much of that -- is that just kind of shocking your portfolio for fixed rate hikes? Or does it also include the deployment of the next -- or your excess capital or to [an asset] liquidity into loan? How do we think about those two components of asset sensitivity?

So it is the -- it is not necessarily deploying 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 virginal model already had 4 hikes in it. So we added 2 more just to kind of see the dollar volume of that base kind of having a baseline to work off of, but it was really just maintaining the current deposit costs 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. 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 -- to your point, that doesn't include any -- I guess this [sees 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 annualize that $0.25 because deposit beta 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 and 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 and 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 to work as we go.

Catherine outside of deploying the $400 million that we had that came to us from the Cadence branches. And you saw that first quarter where I think we put about that much and held-to-maturity securities. I think the way I think about it is as a percentage of assets 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 come to us a bit here. So there's substantial -- and, Dee Dee, I think there's coming out the bond portfolio. Am I right, there's about $200 million or $250 million of cash -- maturities coming out of that portfolio?

That's correct.

So I don't know that materially will 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 pickup.

And next, we have Matt Olney of Stephens.

Congrats on the deal first off, and I'd love to hear more about the ownership on the Beach side. Sounds like the pro forma 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.

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?

Sure, Matt. This is Chip Reeves. So the 2018 recap was completed in July of 2018, about $100 million was raised at that time primarily from institutional shareholders. So honestly, it's a little bit of the who's who of the bank-based institutional investment community. And with that, I think we have approximately 40 shareholders. So not very retail, very institutional.

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 deals because you can give on that?

Thanks, Matt. This is Chip Reeves, again. So I'll give a little detail on the group. And we have Hoppy in 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 see 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.

Two main individuals that lead our Tampa market, one is Henry Gonzalez. Henry was a longtime Bank of Tampa team member and then also was the Florida Region President for Mutual of Omaha before joining Beach Bank at recapitalization, essentially that 3.5 years ago. Another Chip amazingly enough, 2 Chips in the bank, but Chip Falk, who was formerly BB&T's Commercial Market President here in Tampa, another long time Tampanian, leads our middle market banking and all of our specialty lines of business. And so those 2 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 at the same time, 3 to 3.5 years ago. And as 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.

Matt, they have signed contracts and/or retention agreements.

Very helpful. And then I guess looking at the disclosures in the deck, it looks like Beach's profitability has a 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?

Yes, Matt, so I'll actually go ahead. This is Chip Reeves again. Sorry to grab this one, and then we'll let Hoppy hit and Dee Dee hit the cost safe 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 until now, if you look at our Board of Directors and the institutional shareholders, frankly, what we were looking to create was a $2 billion to $3 billion business-centric franchise in the State of Florida, especially as M&A activity had left what we thought a void and opportunity.

So we have invested at the levels and scale, both within team, but also even more significant 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 million in cash that we did not put into the markets. And so we had no -- essentially no AOCI at the end of the first quarter.

So you can put those together and then the 50% cost saves I think you can, frankly, easily begin to model a return here that is probably even more than conservatively modeled in our combined organization.

Matt, as I mentioned earlier, Chip certainly alluded to in his comments, Beach bank is not your average $600 million bank. Now we did 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 are competing in some high-growth markets. So the ability to scale that up takes a little time as we talk and 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 on loans. So -- and again, the combination will certainly accelerate that profitability as a combined company, growth and profitability.

Yes. Well, I think I heard that the loan growth CAGR has been more in that 18% to 20% level over the last few years 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?

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 I'm 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 of the capacity, the pricing power, combined with their market expertise in Tampa, and certainly, we did not model that, but we certainly feel strongly and would be very hopeful we could accelerate that growth rate.

Our next question comes from Christopher Marinac of JMS.

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 line? So 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&I-oriented as like us in Northwest Florida, that's heavily oriented towards wonderful family residential construction and CRE. 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.

Chris, just a little added color. This is Chip Reeves. And so in the North Florida commercial loan side is approximately $200 million at the -- at 3/31. And then also in Northwest Florida, our mortgage business, our on balance sheet resi is $55 million-ish or so. If you go to Tampa at 3/31, we were slightly over $200 million in loan outstandings. And again, that's been built in the 3-year time period since recapitalization.

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

What I'd say is I'm excited about both regions, and I say that because -- and Hoppy and I were discussing this last night is we're planning world domination. And with that, we said in a target of dominant Florida -- dominant community bank market share in Northwest Florida, and I think Hoppy 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 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 in 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 the percentages are high. But I believe we can grow Tampa's marketplace that $100 million a year. And frankly, with the combined combination here and the increased balance sheet, we may be able to exceed that.

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 million bank, the resource level is more constrained in a $6.8 billion 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. 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, we'll 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&I business is something that we don't currently have.

And we have Taylor Brodarick of Hovde Group.

Great. Just a couple for me. I think, firstly, on the credit quality review, you've all done a lot of deals over 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 interested to hear about.

Well, number one, 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 (inaudible) relatively smaller banks, sometimes, the credit expectations in terms of level and detail of underwriting and then the expectation around compliance, performance 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 2 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 the 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. Deals is only confirmed what we suspected and what we indeed saw. So no, we're very pleased with the loan diligence. And again, actually, in this -- 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.

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. Overall shares have trended down. Does any of that get changed for the time being, especially with industry-wide seeing tangible books coming down over the last quarter? Or is it just steady from the last few quarters?

I think we think about continuing to be a steady grower and capital accretive. 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 accreting capital pretty quickly. Plus we've got plenty of capital today. So it doesn't change our strategic plan and continue to be opportunistic in deploying that capital when it makes sense, either through organic means and/or through acquisitive means. So again, can't control the market, valuations go where they go. We never step -- or 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.

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.

Well, thanks so much. We appreciate everybody's participation today. We appreciate the support that we received from all of our stakeholders. Again, exciting -- we're so excited to be combining with Beach and what that means for us together as a company going forward. They have great work model by all our team members for those of you on the phone, exceptional performance on both sides from Beach and from First Bank here. So with that, we'll close the call out, and you guys have a safe and a happy weekend.

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