Q2 2020 South State Corp Earnings Call
Good morning, and welcome to the South State Corporation quarterly earnings Conference call.
Today's call is being recorded and participants will be in listen only mode for the first part of the call.
Later, we will open the line for questions with the research analyst community.
I will now I'll turn the call over to will Matthews sell State Corporation, Chief Financial Officer. Please go ahead.
Good morning, welcome to sell state second quarter earnings call.
Well Matthews and joining me on this call or Robert Hill, John Corbett.
Weve young and of course.
For this call either we will provide prepared remarks, well open it up for questions.
Given our inability to travel to the Corona bars were each calling in from different locations. We thank you in advance for your patience with the difficulties presented by holding on teleconference with multiple speakers for multiple locations and thought a lot.
Yesterday evening, we issued a press release to announce earnings for Q2 2020.
We've also posted presentation slides that we will refer to on todays call on our Investor Relations website.
Before we begin our remarks I want to remind you. The comments. We make may include forward looking statements within the meeting of the private Securities Litigation Reform Act 1995, any such forward looking statements. We may make are subject to the safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today's press release.
Presentation for more information about risks and uncertainties, which may affect us.
Now I'll turn the call over to Robert Hill Executive Chairman.
Good morning, and thanks for being with us today.
Only 53 days into our merger and much has changed in the world.
What is not change this the speed at which we're moving to integrate to strong company.
None of our team and our board to a success.
And the opportunity to lay in front of us.
While the economic environment has its challenges prospects for south state are significant.
[noise] South state was built on the principal soundness profitability and growth.
The lead our balance sheet, the revenue and efficiency improvements that can be made and our solid market share and great markets have us well positioned for the long term.
Paul any quarter with a merger involved is more complex. Our revenues remained strong our expense plan on track and were able to take a lot of risk off the table as we combine the two loan portfolios.
While there are certainly industry headwinds that will persist in the near term I believe these challenges also present opportunities for stronger banks to prosper.
While 53 days as a very short period of time in many ways of deals like these teams have been together for years.
Team continues to rise to the occasion, we are open and honest with each other building trust and excited to be together as one team and focused on the same set of goals.
Ill now turn the call over to John for more insight into our quarter.
Thank you Robert good morning to all of US Thanks for joining us this morning I.
I hope you in your family's remain healthy and sorry.
2020 has done a transformative year for banking industry as a whole.
And it's been particularly transformative for south stake.
We announced our strategic merger of equals with Centerstate on January 27.
At the time, we saw an opportunity available executive team that could lead our company through the digital transformation over the next decade.
We also saw an opportunity to combine two of the southeast Premier deposit franchises.
In the best growth markets in the country.
Two months after the merger announcement, while we were actively pursuing regulatory and shareholder approval economy shutdown.
Like others, we shifted to a work from home environment and immediately focused on how we could assist our clients at the time update.
The two most powerful levers we can pull was first datas generous as possible and providing loan payment deferrals for borrowers.
And then second to inject as much cash flow stimulus as possible through the PPP loan program.
The $2.4 billion of PPP stimulus that south state provided.
Represents about 10% of our 24 billion dollar loan portfolio.
At the deferrals, we offer represents about 17% of our loan portfolio.
In retrospect I'm confident that we chose the right strategy is generous as possible with short term cash for remote.
Hi, working nights weekends of Easter holiday, our bankers deliver for our clients for the needed us for most of that loyalty will pay dividends for years to comp.
While only about half of a 90 day loan payment deferrals of mature through July.
Encouraging at the request for a second deferral significantly lower than the first round of less than we originally expected.
Despite the distractions from covered we were able to obtain regulatory and shareholder approval for the merger ahead of schedule.
We made a decision to close the transaction on June seven.
Which was earlier than planned.
Our mid quarter closing messier from a financial perspective.
But we wanted to put the closing in the rear view mirror. So we can move forward with the integration and so we can focus on our clients.
I would be remiss, if I did not pause to recognize thank our south state leadership team had bankers.
Closing the merger of equals a stable environment is a very tall order.
During the during a pandemic is heroic.
From a finance and legal team that close the books in the middle per quarter right. After they completed a 200 million dollar sub debt offering.
To our relationship managers and support teams the process nearly 20000 PPP loans for work ethic and professionalism the south state bankers gives me tremendous confidence in the power of this change.
I'm proud to be able to journey with them.
Well, it's going to walk you through our combined second quarter results, but I want to offer my own high level observations.
Most importantly, the underlying earnings power of the company is steady and strong.
The demonstrate steadiness of the combined company.
We produced a slide on page seven of the earnings deck.
Illustrates the PT at our trend assuming that Centerstate and South state were combined over the last year.
You can see that the PPNR for the second quarter would've been $157 million, which is consistent with prior quarters and actually slightly better than the same quarter last year.
With the merger closing in the second quarter. However, there were two highly unusual accounting issues, even for those of us that are familiar with merger accounting.
The first.
Is that with the closing on June seven.
The first 68 days Centerstates earnings in the second quarter.
Our not included in.
The second quarter South state earnings.
The missing Centerstate earnings for the first 68 days in the quarter.
I would have added $75 million pre provision net revenue to south state. If the merger had occurred on April 1st.
The second highly unusual item is the $119 million see saw reserve applied to the Centerstate acquired loan portfolio.
This was the result of the new Cecil accounting standard.
That is affectionately known as the double count.
Whereby an acquired loan portfolio not only received a traditional mark.
But also simultaneously received a loan loss provision that runs through the income statement.
The quarter, but the merger closes.
There were like I'm, not an account, but it seems to me personally like a belt and suspenders approach to loan loss reserves.
The silver lining as of this new accounting approach gives the company a very strong loss absorption capacity.
And I know this is a GAAP accounting.
But if you add the acquired loan portfolio marks.
Together with the allowance.
It's as if you have a combined loan loss reserve of 2.66%.
Which is substantially higher than our peers.
With these two unusual accounting items in the quarter plus the normal merger related expenses.
The company recorded a net loss of $1.96 per share on a GAAP basis.
Now.
Let me take you back to the normalize view of the quarter as with South state of Centerstate had always been combined.
The combined company produced record revenue.
Driven by mortgage correspondent banking and capital market fees.
These fee based businesses really shine and this type of economic environment, and we've been very intentional over the years to build a balanced business model.
For the last five years, we built successful fee income businesses that performed well with net interest margins decline.
In addition to the normal balance sheet businesses that perform well where net interest margins rise. There is balanced business model is performed exactly as planned.
Both mortgage and correspondent banking enjoyed record revenues and a record profitability this quarter, even as the NIM came under pressure.
Loan growth was down slightly if you exclude the $2.3 billion of TPP loans.
And asset quality metrics improved across the board with lower past dues.
Non accrual that virtually no net charge offs.
Deposit growth build during the quarter and the combined balance sheet expanded by more than $4 billion. Clearly most of that growth was related to the PPP proceeds and short term government stimulus. So we anticipate that the balance sheet will shrink over time as the stimulus wears off.
And finally capital.
By combining the elevated Cecil reserves.
With the purchase accounting marks.
Plus the $200 million of sub debt that we raised from the second quarter.
Plus a strong and steady PPNR.
That will get even stronger after we complete the merger cost sites.
We feel that south state is well positioned to move forward. Despite the headwinds that the industry will experience over the next year.
Well I'll turn it over to you.
Thanks, John.
This is clearly an important quarter for the company with the closing of the merger of equals. Additionally, the size of this merger and the impact of seasonal merger accounting created a lot of moving parts.
When we announce demo in late January we have not expected to be the first emo we've sized to receive regulatory approvals and close in 2020, but we are and we're also the first one post Cecil and post pandemic outbreak. So we're going to attempt to give you information you'll find meaningful amidst all the accounting noise associated with the merger closing.
I want to start by recognizing and thanking our excellent finance team at South state as well as the credit and Cecil teams a mid month closing in the third month of a quarter add a lot of complexity and time pressure and I couldn't be prouder of the work dedication and collegiality exhibited by our team everyone from the reconcile commentary to the leaders of the department performed in an exemplary matter.
Not only do we closed the merger three weeks before quarter end. Shortly after completing a 200 million dollar subdebt offering, but we also completed a conversion of the general ledger system in a merger of the two companies departments and job selection process.
All finance and accounting personnel, the competency and work ethic of this team gave us confidence to push forward with the June 7th closing and their performance is I think a testament to one of the strength of this merger that is too great teams of high performers coming together to form one high performing team I am pleased and proud to be associated with these folks.
I'm going to cover the following items this morning.
The significant moving parts associated with the merger closing that impacted our earnings in our balance sheet this quarter.
The more significant purchase accounting entries in the resultant loss absorption capacity.
Our results both GAAP as reported an operating combined business basis, our capital position and an update on our merger efficiency realization.
Items associated with the merger closing first undersea so we placed a credit and rate mark on the Centerstate loan portfolio, including both PCD loans and non PCD loans the credit Mark on PD Lones resides in the allowance for credit losses, but does not include mobile as tier two capital the entire mark on non PC loans.
Credit in rate is a contrast that reducing the carrying balance of these loans and it is also not and clinical as tier two capital.
Second Cecil also requires us to record a provision for credit losses on the non PCD laws and this provision expense runs through the income statement in the quarter of closing.
This is the double count effect as these loans have both the credit Mark and an allowance for credit losses.
Because our merger closed June 7th and due to the impact of cobot on various economic factors that drive Cecil loss estimates, we had a relatively high provision expense for acquired Centerstate non PCD loans of $120 million caused by the merger and only three weeks of Centerstate operations to help cover that expense.
Third as a true with any merger, we recorded a number of merger related costs and expenses, including legal counsel investment banking and employee and contract termination amounts that occur and a merger.
Credit marks and loss extortion capacity.
Note that want to speak of ratios of allowance and credit Mark coverage, excluding the PPP loans from the denominator due to their likely temporary existence, and they're 100% as BA guarantee.
To determine RPC loans, we had several screening criteria, including pass through status credit grades credit scores et cetera, and we also categorized any alone on deferral status and the entire lodging portfolio as PCD given cogan.
The total PCV portfolio is approximately $3 billion or roughly 25% of the centerstate loans acquired.
I'll remind you that the definition of PCD is not a problem loan.
Also note that the Marcia preliminary and will be finalized in the coming quarters.
The credit Mark or allowance on this $3 billion and PSD loans at quarter end was $150 million or approximately 5% of that portfolio. The remaining $9 billion approximately and non PC loans again, excluding PPP loans.
I see the credit mark of $109 million, which approximately 122 basis points.
Given the screening process for identifying loans to categorize as PCD, we believe the non piece of the portfolio to be claim.
Slide nine shows the total loss absorption capacity on the balance sheet at June Thirtyth.
$435 million in the allowance, which is 188 basis points of loans 173 man of which was at legacy South state.
The $21 million in the reserve for unfunded commitments, which is another nine basis points of loans.
And another $161 million and unrecognized discounts on laws equating to 69 basis points of loans, which brings the total to 616 million or approximately 2.66% of loans as John mentioned.
Well, we all see storm clouds on the economic Horizon, we had another quarter or very low net charge offs almost zero for the quarter and past dues continue to be low.
Ending npis were 38 basis points of assets.
That is available to answer further questions on credit during the Q and a section of the call.
Provision expense on the legacy South state portfolio was $31 million, bringing the quarter in allowance level to approximately 153 basis points of that portfolio plus another 10 basis points for the reserve for unfunded commitments at legacy South state.
Given the minimal charge offs and lack of growth in the quarter. The increase in the allowance was attributable to changes in economic forecasts.
The other key purchase accounting entry was the core deposit and tangible which received a mark of 114 basis points are $2.6 billion. CD book was marked the other direction as these yields were above market at closing date. So our cost on these will decline accordingly for approximately 134 basis points to approximately 29 basis points.
Let me now discuss results for the quarter for the quarter, we reported a loss of $85 million, excluding the $120 million in the provision for credit losses on the acquired non PCD loans, and excluding the $40 million and merger related expenses in the quarter adjusted earnings would have been $38.6 million or 89 cents per share.
The timing of the closing was a primary factor the loss with only 23 days of income production from legacy Centerstate and the impact of the full provision expense on the acquired non PCD loans as well as the merger related costs.
Our net interest margin with the reduction in rates to build up and liquidity and the sale of about half of the Centerstate bond portfolio pretty close we saw margin compression in percentage terms, although the production of net interest income and dollars showed less compression.
Loan yields were 4.25% for the quarter down 42 basis points from Q1.
Total cost of deposits was 29 basis points down 19 basis points from Q1, and we saw a nice growth in DTA balances.
We saw compression on securities due the purchase accounting marks applied on the Centerstate bonds and the shrinking of the total portfolio on a combined basis also led to compression.
Our reported net interest margin was 3.24% tax equivalent down 44 basis points from Q1.
Let me talk for a minute about the underlying financial performance, which was strong as John said.
Given the mid quarter close and associated merger accounting entries, we thought this information on a combined business basis would be useful to you. So we have included several slides beginning on page 17 of the presentation. These comments are on that basis, which are the GAAP historical numbers of each company without regard to purchase accounting entries or any efficiencies that may be realized.
Yes.
As John noted our PPNR of 157 million was very consistent with the prior four quarters and the PPNR Aro way of 168 basis points was strong in light of the expanded balance sheet due to PPP and liquidity.
We had a record combined revenue in Q2 up $22 million from the 2019 second quarter.
Slide 18 shows how the makeup of the revenue has changed over the last five quarters with noninterest income moving from 21% of total revenue and a year ago quarter to 28% and this quarter, providing the countercyclical benefit we expect.
Slide 20 shows the growth and combined non interest income from $74 million in a year ago quarter to $108 million in this quarter.
In a quarter with work from home and emotionally and emerging of two mortgage management groups. Our combined mortgage teams did 1.5 billion and production, which is impressive in that period with this many distractions.
Our net interest margin on a combined business basis was 3.38% down approximately 55 basis points from Q1 with net interest income on that basis down approximately $7 million.
Combined loan growth was 1.97 billion, but loans declined approximately $300 million, excluding the PPP loans year to date combined loan growth, excluding PPP loans is basically flat.
Combined deposit growth was 3.5 billion or 3.7 billion, excluding brokered Cds.
Noninterest expenses were $175 million for the quarter or earned $35 million, excluding the merger related expenses.
On a combined business basis for the full quarter. It would've been $225 million combine noninterest expenses grew by approximately half of the growth in noninterest income from Q1, and approximately 60% or the non interest income growth from Q4, reflecting the strength of the commission based businesses.
During the second quarter. We also had increased expenses associated with the pandemic.
On a combined business basis, our efficiency ratio in Q2 was 58% up slightly from 57% combined in Q1.
On capital, our ending TC ratio was 7.6%.
Expansion of the balance sheet through PPP reduce the ratio by approximately 50 basis points.
Our CE T. One was 10.7% and our total risk based capital ratio was 12.9%.
Any tangible book value per share was $38.33 up 32 cents from Q1.
As I noted, we also have solid loss absorption capacity on the balance sheet.
Let me finish by updating you on merger related expenses and cost saves.
Our cost save process is well underway and on target with numerous successful vendor negotiations operating model and staffing templates being constructed by business leads and cost targets reach.
Our core conversion schedule for the middle of the second quarter of 2021, and giving us ample time to prepare to ensure a good execution and we should begin to realize the bulk of the remaining cost saves at that point.
We will recognize some cost saves in the latter part of this year, but most will occur after the conversion.
Through June Thirtyth, we'd recognized $81 million and merger related expenses.
We continue to expect to be within our originally announced $205 million total with an estimate of approximately 20% the remaining amount in the last half of 2020 and the remainder occurring in 2021.
We expect the largest quarter for merger related expenses to be the second quarter of next year, when we complete our system conversion.
So a quarter with a lot of moving parts, but strong underlying performance healthy loss absorption capacity and solid credit results. Thus far I will turn it back to you John.
All right as a reminder, we're conducting this call remotely and I ask that you. Please direct your questions with the appropriate individual you'd like to respond.
This concludes our prepared remarks, and I would like to ask the operator to open the call for questions.
We will now begin the question and answer session.
You asked a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the Keith.
Withdraw your question. Please press Star then Q.
At this time, we will pause momentarily to assemble the roster.
Yes.
Your first question will come from Stephen Scouten US Piper Sandler. Please go ahead.
Hey, good morning, everyone.
So let me start again I guess is a will question primarily.
Im wondering if you could give us an idea just on the impact in excuse me if I missed that of the PPP, specifically on the NIM and maybe.
Some sort of base point estimate of what the excess liquidity and back to the NIM and kind of I guess relative to the 338 you put in the presentation, where you think the NIM could kind of normalized longer term.
Whenever that occurs.
I'll, let Steve start with that question Steve.
Hey, Steven its Steve.
Yes, that's just a couple of points on the NIM as we combined the company. Let me just kind of first of all.
To remind us that yeah. This is a very core deposit funded bank.
We have 1.1 million customers 800000 checking accounts.
If you see.
On page 23, new deck as will mentioned there was a lot of deposit growth over this past quarter on a combined business base is about four to 5 billion.
Second your accounts make up 54% at the deposits.
DTA make up 33%, so very very core funded.
Up if you want to have billion. We grew in deposits, we have about $4 billion sitting on the balance sheet and just excess liquidity not invested in short term funds normally we would probably have somewhere in the billions and billions of a half range. So we have about two and a half.
$3 billion more access to the than normal and that creates about 30 basis points upward pressure on the margins and that's why you see in the deck.
No reference base, you actually margin dollars didn't decline all that much but the margin percentage yeah. So hopefully that's helpful.
Just to build the bridge on a combined basis, we were at 338.
And a couple of things need to keep in mind number one.
We did do the sub debt offerings at the eye toward the middle we ended the clearly that creates a couple of basis page pressure that's not in that 338.
Also on the fair value chain mentioned around particularly the Securities book, which you that portfolio that are up to 60 favorable shift the securities book, we saw a chance of that in much. The other half so that creates another 10 basis points of pressure and then ultimately we did the fair value.
Thats on the loan book of course, we already have some discount them and then bookings just repeat as we noted that.
And then of course Prepays.
Yes.
That in the last piece is just on the PPP programs go to slide in the deck.
Toward the end of the presentation slide 34 that talks about.
The the amount of TPP other indices that we have at the end of the quarters to about 67 million and of course, depending on when that forgiveness time happens we expect most of that toward the end of the first of next year based on where we know today.
That would impact margin going forward. So I know a lot of moving parts, but hopefully you'll see that the 330 year MBS, Jeff the down from a percentage of less yes.
We moved back the balance sheet the investments toward me.
Yes to the another billion dollar so hopefully that's helpful for you.
Yes.
Sorry.
I'm sorry.
With respect to the PPP question impacting the margin it really didn't have a very significant impact because we had some fee recognition in the quarters you see there on slide 34.
So the net impact of lower yield on that portfolio.
In terms of just base rate combined with the fees it really wasnt very impactful to the margin.
Okay, Great Great and then I don't know if you had talked about the land beforehand, but the large to sell in the half the securities portfolio and it looks like maybe there was a bet a $40 million gain on securities. There prior to the deal close what was the logic there I get the thought process, especially given all the excess liquidity in the systems kind of stuff.
Prized you would you would sell.
And in earning asset there.
Sure Steve and this is Steve.
And do a fair value accounting is we have to mark those securities to markets. So effectively you get those yields going into Oregon.
When we.
Completed the merger the security yields were in the one in a quarter range and we just decided to put some on the shelf and let's see how we progressed through the PTC and other things just to be conservative. So that we didn't end up all of our securities or have to security book in had been in the quarter.
Aseptic layer that back in over time.
Yes.
And if you think about as Steven.
You know, there's some great bonds that we sold but they were great bonds closer to par we don't like him as much with the kind of premium handle you have we're gonna have on them because as Steve said, you're effectively buying them and acquisition date. So.
Played into our thinking as well.
Perfect really helpful. And then just one last thing for me I guess.
And maybe that's it.
The question as well, but it looked like I try to run rate the.
Legacy Centerstate correspondent business looks like maybe 33 million.
For a full quarter based off that 8.3 million number given I'm wondering how do you think about that business moving forward. The trends there and then kind of I guess with slide 20, you gave the combined.
Non interest income of 108 million for this past quarter.
Which obviously, it's kind of a big jump from the back half a last year on a combined basis. If that is indeed apples to apples. So it just kind of frame up the trend that you could and especially that correspondent bank.
Sure, Steve and I'll take that question as it relates to.
John talked about in his prepared remarks, we've tried to.
Build that the business so that when rates go up of course, our core funding just yeah. The margin increase given rate decrease we have some counter cyclical businesses that has to be offset some of that thanks are you bought all set all of that it will offset some of it and you've seen that is our PPNR has been pretty flat yield.
Every year.
The high level, Tom it as it relates to that 108 million on.
Slide 20, I'll give you the breakout on a combined business basis for the quarter.
The mortgage banking income would have been about 43 million.
30 million would have been a rough numbers would have been the correspondent banking and then at about 70 <unk> to eight would have been the wealth management business. So those three add up to about 81 million at the center of made the other 27 would just be the ordinary.
Service charges priorities.
Kind of recurring fees.
As far as.
As our outlook on that on those businesses as I mentioned in mortgage had a blowout quarter and as John mentioned that you had mentioned in billion in half dollars due to production which was just.
Given that you know we've had less fewer than 10 employees in the office and to be able to do that just really speak to speaks highly of the team in time and Stephen Berman.
You know that business continues the pipelines continue to be stories and so it's as best we can tell that business continues to do well as it relates to the correspondent business.
Yes fixed income it ticked up in that business.
The interest rate swap business has been very good I would expect over time to the interest rate swap business and if the environment like this week.
I'm not the as good over the next few quarters still be strong, but just be less strong.
Just given the credit environment generally around so.
Hopefully that's helpful. We think that.
The business itself the non interest income fee businesses in the business owners, who own that you've done a great job and it's really helped out.
In the middle of a lot of margin pressure.
Great that is very helpful. Congrats on getting the deal closed and thank you got so much for all the combined data given the presentation. That's very useful so thank you.
Thank you.
Our next question is from Jennifer Demba of Suntrust. Please go ahead.
Thank you good morning.
Morning.
The question.
On your lending pipeline.
Your term loan growth are you expecting and what do you see in terms of interest from your borrowers right now thanks.
Yes.
Jennifer. This is this is John I'll take that you're watching.
This play out on the evening News every night as states open and then they close again and I've I've had the chance to travel around this quarter to five of our six states trying to get upholstered, what's going on a I've had calls with all of our presidents.
For the quarter or the last quarter, we did see the loan portfolios declined slightly in five or six stage, we actually saw some growth in the state of North Carolina generally the pipelines are down now about 25% to 30%.
And I think our approaches we really want to lean and take care of our existing clients through this process, but as far as new business is concerned we want to be prudent conservative.
Underwriting until there's more clarity.
Yeah, that's the virus so.
I do think that new loan growth will be somewhat muted in the next couple of quarters as we navigate through this.
Thank you and my second question is on cost savings will you said you have some cost savings in the second half of this year can you give us a sense of how much of that 80 million might be realized this year.
Jennifer you won't be a significant amount the bulk of it will come in 2021 and the largest of course once we do our system conversion, but there are savings we realize along the way both through.
Some headcount reduction.
And some vendor renegotiations, but the vast majority of it will come in 2021 I don't have a good good good hard number to give you progress this year, but I didn't want you to think we hadn't.
Achieve some already won't be achieving some more this year.
And did you have some unusual expenses in the second quarter that might not reoccur in third quarter.
Example related to PPP Lindsay.
That kind of thing.
We have we know that on the.
Under Fas 91, we capitalize costs associated with the origination of loans and so on the PPP side specifically.
That's in there, but we do have an.
And the deck in here about $3 million in expenses, where we were paying extra to branch employees, who are working in the branches in an extra.
Staff expense associated with with the virus about $3 million.
You said one of the page the deck I just don't have right in front of me.
Yeah.
Thank you.
Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
Hey, good morning, guys.
Hey, Kevin good morning.
Just.
I appreciate all the comments and all the detail on how you're looking at the loss absorption just between.
The the traditional reserve build and all that complexity accounted complexity with the deal. But then also the fair value discounts on the acquired loans. So all that being said how how do you all think about reserve building going forward or we're obviously going to learn new information.
One.
September Thirtyth got a new update on on the duration of what we're looking at and get new forecasts, but.
I have to think given that 2.66, it's it's a fair statement that if you agree with it but the bulk of reserve building is behind you, but if that's true I'm just trying to get a sense for how youre going to look at the reserve.
Or provisioning over the back half the year in particularly as it relates to the.
The 67 million in PPP fees coming due will most of that fall to the bottom line or will you look to take a chunk of that.
Throw more to the reserve or are there other things. Thanks.
Thank you Kevin I'll take a stab at that and it's Dan wants to elaborate he can if if needed.
You know like everyone our seasonal model.
Has a number of loss drivers in it and the loss drivers are or based upon economic forecasts given the forward looking nature of seasonal so.
So as of June Thirtyth, we feel like our.
Process led to the appropriate level or reserves based upon economic forecast at that time.
Should they worsen from here, we and the industry as a whole will need to build reserves further from this level.
So I think if I were to convey to you a great deal of confidence about where I thought provisions were heading for us or anyone else at this point that would be misleading, there's just too much too many unanswered questions in too much unknown about how this.
Pandemic and its impact on the economy.
Goes, but you know we feel very good about the reserves we have on the balance sheet today very good about that the capital position and that degree of unrecognized capital.
We have unlike like we think I referenced in my comments, but also in the deck.
A portion of that doesn't make its way into our capital ratios the.
The allowance on the P.C.D. loans of about 150 million is not in capital and of course, the discounts R&D. This about 300 million of that number does not appear in our capital ratios, but anyway, it's a bit of an on answer because frankly, we just don't have a good crystal ball at this point about future economic forecasts.
Got it alright. Thank you will one just additional question.
Deferrals I guess, it looks like declined to I'm, a little under 12% Onyx buying basis and I know.
A lot of banks are seeing a lot of moving parts over there in coming weeks between more round one deferrals maturing.
And.
Additional new entrance to brown to extensions and just curious based on what you're seeing now where you think about 11.7% or so of deferrals settles when when you get toward the end of August or so.
Yes, Kevin It's John Dan Bockhorst is on the line as our Chief Credit Officer, and he's got pretty good handle that Dan.
Thank you John.
Yeah. If you look at that slide 32 that back so far approximately 40% of the deferrals have expired.
And that percentage of the loans on deferral has declined from.
Proximately jumping in there half percent through that I love and then a half percent number.
As another 50% of deferrals expire over the next several weeks, we expect that trend to continue and we estimate and up in the mid single digit percentage of loans on deferral.
The future still somewhat unknown.
What the continued impact of kind of in 19 will be and there is the potential for a W.
Deferrals long term.
But we like where the trends are going right now.
And Kevin and as well just John Let me. Let me also just remind you won one thing it's not unique but somewhat unique to us and that is that with the acquisition.
You know we did you see on the deck, we articulated the categories with the screening process for determining PCD loans and all of the lodging portfolio from Centerstate and all of the loans on deferral from Centerstate.
Reclassifies classified as P.C.D. and as you saw.
The P.C.D. book as about a 5% mark on it. So we thought we think we have some an appropriate.
Capital set aside hopefully for the for those as well.
And on the second Tafaro John to your comment earlier about you thought it was the right approach to be generous I'm, assuming the when folks ask for a second there's much more of a rigorous credit driven process being applied to them.
Yes, that's exactly right Dan you want to comment on the credit process when someone asked for a second renewal.
Yes that for the second the renewal there is much more rigorous process. We are updating you know financials really determine.
That there is a need that the deferral request is coming from a a company that has been impacted by the current economic.
Environment, and we're also really pushing strong.
For those that do get inspecting for older second deferral is interest only as opposed to a full principal and interest deferral on round one.
About 26 of the deferrals interest only and then round two it's still a little bit early.
About 37% right now are on.
Interest only so we like the way that trend is heading in it and it's going in the right direction.
Alright, Thank you very much does.
And again, if you would like to ask your question. Please press Star then one.
And our next question comes from Catherine Mealor of KBW. Please go ahead.
Thanks, Good morning.
Good morning.
I'm quite a lot of great color on that PPNR forecast I think we follow up on that it's just on the the combined expense base well I think he said that combine you're right about 225 million and.
It is here to stay it doesn't feel like there a lot of one time in kind of in that number it feels like you probably have a little bit of elevated from.
Mortgage better and the fee income that assuming that that all stays fairly strong near term you should probably has extensive stay around that level and then it feels like.
The 3 million you mentioned with pay for extra staff, maybe that's offset by the Fas 91 thing you're kind of a wash there and so if I just big picture that to 25 kind of that good core number to grow from here from the back half the year before we start layering on cost savings.
Kevin Let me, let me start that maybe Steve can can talk a little bit about the efficiency ratios in those businesses, but it is you.
Given the the strength of our non interest income business lines.
You know that does make the job of forecasting any more difficult because those business lines.
Compensation structures as you know are largely incentive based or commission based and so when we see growth in and revenue those besides obviously, we see growth and expenses.
I mentioned in my comments that you.
You know the relative in how you growth from prior quarters relative to the.
Non interest income growth in prior quarters, but that doesn't make a little more of a challenge. So you know.
Your question is at current levels of.
Non interest income production.
That you know you levels would probably be a good good estimate where we'll be if those were to fall or or rise from here.
Then it would accordingly react well, Steve you mentioned something about the efficiency of those business is a bit.
Sure well, yes, thanks, Catherine I think there's a back the slides in the deck toward the end of the presentations.
You have the historical perspective of the financial statements and it looks at the trend rate for non interest expense in four.
Non interest income and one of the things a notice as the for instance is in the fourth quarter.
Non interest income was around $87 million.
Adjusted noninterest expense within the 212 million. So if you kind of run that math or do you can kind of see that.
Yeah. We've had additional noninterest income was $22 million last couple of quarters and about you know additional noninterest expense of about 13, so that it's really running an additional 60%.
Efficiency ratio on the additional noninterest income and of course, that's blended across all those commission businesses, but I think thats. It's just a general good way to model that depending.
Yes, that's really helpful. Yep. Thank you said they see that's great.
And then this is a diesel question since this is the new restaurant.
And so my question is it will you mentioned that you put it.
Most of those are all the lines are in the Wattenberg and then I'll note that are statement that Ron just roll into PCT and so.
Those roll off deferral.
Does that change anything with with your reserve and the way they think about your board expected losses, or because you just kind of categorize that as PCB, you'll have to make any kind of quarter quarter changes has to quality. This morning.
Good perhaps get better west.
Catherine once alone is BCD its P.C.D. unless we make unless we have a another decision event around a re underwriting if you will so they're piece the forever.
As we determine the need for the allowance overtime, if the economy improves and forecast and the dictates a lower reserve needed them. We have then you know it comes back in via reduced provisioning or I guess in some circumstances negative provisioning.
So.
That's how it works.
Okay. That's typically just coming off the deferral wouldn't necessarily generate a large reserve release in that in that estimate I guess no no it really be more more.
That might be a good credit factor about our thoughts about that the collectively that loan of course, but that in of itself no.
Okay, Alright, great and then it gets what can I just big picture question, but just your markets I mean.
Do you like last we spoke.
Your coastal markets, where you.
Do you actually relatively better than any other markets in the country and of course now we're hearing a lot more and the cases in Florida and along the coast. Instead, just can you provide just some kind of broad general.
Color around what you're hearing from your customers any local businesses in any.
Specific markets or kinda types of credits that you're more worried about now than you might have then last quarter.
Okay.
Sure. Catherine this is John as I mentioned I have traveled to five of the six states and I've had calls with all the market presents the last two weeks and got a lot of feedback from them. So let me kind of described for you what I'm seeing as the new cobot economy, because there's winners and losers in the new.
Good economy.
Anything that's related to your home improvement.
As slide there just as busy as they've ever been.
Residential is performing very good residential construction is performing very good there's not a lot of residential product on the market. So I'm hearing of cases of multiple offers on homes I'm hearing of cases, where people are purchasing homes through video chat.
From a recreation standpoint, where people are so to dump at home.
Businesses that are connected to the boating business so the RV business.
Or doing phenomenally, well I heard a store you cannot buy a bicycle in the city of Charlotte because that those businesses. It performed so well trucking and logistics do you think about what's going on with the distribution channels right now they are performing very well I'm hearing that at a Lakeland, Florida hearing that out as Charlotte.
Medical medical has bounced back interesting note as somebody said the cosmetic surgery business has performed very well because you're going to cosmetic surgery now and recover at home and privacy. So dental business is the dental business is basically shut down in the month of April.
They're all back in the dental businesses that asked for a deferral none of them are asking for a second deferral. So those are all very positive elements of the new hope that economy. The negatives are kind of hobbies, it's anything event, driven whether that's conferences or catering those business.
Mrs are suffering.
Hotels.
Tells it's kind of a tale of two stories Theres leisure hotels, and then there's business hotels. The leisure hotels are really coming back and that represents about two thirds of our hotel book your more leisure oriented if you can get these hotels up to about four.
I'd to 50% occupancy they can start carrying the PNR payments on a breakeven basis, and we're seeing that with the leisure side. The business side. However is a different story, that's going to be a lot longer recovery cycle and then on the retail side clearly longer term, we know that there's the secular trends in retail.
But for our book, it's very tenant specific the single tenant businesses seem to performing better anything with the drive-thru seems to be performing better. So we don't see near as much loss content in the retail side as we would in the restaurant space.
So I hope that give you some color of what we're seeing as far as the new cope with economy.
Yes really helpful. John Thank you. So much you congrats on a great quarter, guys and closing the deal.
Thank you thank you Catherine.
Our next question comes from Christopher Marinac as Janney. Please go ahead.
Hey, Thanks, I wanted to follow up from a credit perspective as it pertains to the deferrals at what point do those get risk rated to either special mention or sub standard is that coming up on the fall or is that already happening.
For you now.
Dan.
Yes, yes that is happening now that that is.
Primarily third quarter of that.
In the in the second quarter, we so and migration.
In two into watch and this quarter for those.
Mrs that are seeking.
Second round the deferrals, we're evaluating those those risk ratings.
Most of them would probably end up in a criticized type.
Category as.
As we go through this quarter.
So Dan we'll probably see some adjustment in the 10-Q coming up in November is that fair.
Yes.
Okay, great. Thanks for that and then just a follow up on what happens to alone that has been acquired it has a fair value marks and then it pays off and perhaps its renewed as a new loan how do you reserves for that.
Does the reserves, but before the fair value Mark become a guidepost kind of how you treat that new loan.
Yeah, Chris My answer would be the data.
A.
A separate discrete decision at that point, it's and at the past.
Mark or allowance required for that loan.
Would be would not be necessarily be a guide for what the future be admit they may work very well be correlated but that wouldn't be be they've got and my view.
Okay. It just gets back to Kevin's question on reserves and overall kind of how that goes is kind of why asked.
Sure sure and.
I know all of us have a very cloudy economic crystal ball hopefully what we in the industry are doing in terms of building reserves ultimately just setting aside capital that does not get charged off in losses, but at this point. It's just it's just too hard to know what's going to happen in the economy.
So.
No I appreciate it thanks for all the background this morning.
Certainly thank you.
Our next question is a follow up from Stephen Scouten as taper Sandler. Please go ahead.
Hey, guys. Thanks to let me throw one more in here on Jan I. Appreciate all your comments about the new Cobot economy I was incredibly helpful. I was wondering just in particular you guys noted the exposures around your retail.
Loan being primarily in three of the Florida markets and I'm just curious in particular those those markets that you're seeing I think it was.
Can't find that buyback it was Tampa, maybe Orlando and one other market and just kind of curious again, maybe be backing off Catherine's question, just what you're seeing in terms of new shutdowns or fear down there in those markets.
Yeah. Good question Steven.
Florida has been kind of on the forefront of opening the economy and it does not seem like there's political will to close the economy.
Things have opened up considerably.
I would tell you the markets in Miami Dade County, Broward and Palm Beach, they're gonna be the more restrictive economies, whereas tampa and Orlando or not as restrict.
Got it very helpful. Thanks.
You bet.
This concludes our question and answer session I would like to turn the conference back over to John Corbett for any closing remarks.
Thanks, a lot. These are great questions and I hope that we've been able to ride some clarity on a quarter with a lot of moving parts and hats off to wheel Matthews for putting this deck together. The show you what the combined company. It looks like it's been helpful to me I hope and hope to you.
I Hope you also get a sense for how well our teams are performing together at South state. Our goal is to seek to become one high performing team that creates a lot of value for our shareholders. Since we're not traveling to any investor conferences over the next quarter and we can't see you face to face just want you to feel free to reach out to Steve.
Lever will if you need any follow up to clarify on your models. Thanks for joining us This morning, and I Hope you have great day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.