Q3 2022 SouthState Corp Earnings Call
Okay.
The format for the call will be that we will provide prepared remarks, and we will.
Then open it up for questions.
We've also posted a presentation slides that we will refer to in today's call on our Investor Relations website.
Any such forward looking statements, we may make are subject to the safe Harbor rules.
Now I will turn the call over to Robert Hill Executive Chairman.
I have just a couple of comments before I turn the call over to John .
I want to thank our shareholders for your patience for the last few years as we've moved through significant changes at South state.
The timing to make major changes or has turned out to be very good as we have enhanced our size, our scale and great businesses, our efficiency and rebuilt our technology platform as.
As the economy now approaches are more uncertain and turbulent time ahead.
Are the times when south state will really stand out.
The rebuilding of the company along with our core funding Conservative credit culture, and great markets have us well positioned for the road ahead.
And for your time today, I'll now turn the call over to John .
Yeah. Thanks, Robert Good morning, everybody I'll make some brief comments about the operating environment and our third quarter results. Afterwards, we will can share more detail about the financials and then we'll take your questions.
Before we talk about the bank, it's important to take a step back and reflect on the macro environment.
Over the last two years, the United States government flooded the banking system with excess deposits and basically provided a pandemic bail out with the PPP program and support for consumers.
And that pandemic environment.
Every bank in the country was deposit rich and had near perfect asset quality metrics.
Now suddenly.
<unk> hurt.
And as the fed dramatically raises rates and embarks on Q T. Good old fashioned relationship deposits liquidity and credit discipline will drive the distinctions and bank performance over the next two years.
This is an environment, where south state should shine.
Let me mention a few of our third quarter highlights.
We're pleased to have two sequential quarters of very strong revenue growth operating leverage and loan growth our earnings ramp has been steep and the momentum is obvious.
P P and our per share is up 47% from the same period last year.
In the third quarter, our NIM expanded significantly operating leverage improved 8% and that drove our efficiency ratio down to 50%.
We watched our NIM expand 43 basis points in the third quarter after expanding 35 basis points in the second quarter.
Its pretty dramatic 78 basis points of NIM expansion in just two quarters.
And to be clear that margin expansion is not the result of actions. We took in the last two quarters, but actions. We took in 2021 to retain more cash on our balance sheet. The many others. We took the long view and held onto plenty of dry powder to put to work in this higher rate environment.
As expected the significant NIM expansion was partially offset by weakness in our capital markets and mortgage business.
Mortgage production remained strong with our focused on purchase mortgages and our growing southeast markets.
But with low gain on sale margins, we decided to hold 78% of the production on balance sheet and only sold 22%.
Total loans grew 13% on an annualized basis and were evenly split between the commercial and retail bank.
Despite the recession fears our asset quality metrics remained very clean.
We had net recoveries in the quarter.
Hurricane in southwest, Florida last month is a fierce category four storm.
So that's an area of the state where we don't have branches.
After the Hurricanes devastated Fort Myers, it moves slowly through our franchise in Central Florida, Northern Florida and on up to Charleston, as a category one storm dumping over a foot of rain in some places.
So the primary impact to our customers and employees, where power outages and flooding in central and Northern Florida.
We sustained very little structural damage and the power was restored within a week.
As we examined our exposure to the hurricane we determined that less than 1% of our loans are located in the hardest hit areas of Lee Collier and Charlotte counties and so far we have received very few requests for payment deferrals.
As I mentioned, our granular deposits will be a differentiator for us in a rising rate environment.
With an abundance of cash on the balance sheet, we've lagged the fed on the way up.
Our deposit beta is 3% so far this cycle and our total deposit cost was only 11 basis points.
Average deposit balances declined about 4% annualized but that still left us with about $2 $5 billion in cash and $5 5 billion in available for sale Securities.
That's about 18% of the balance sheet that's liquid.
I'll point out three areas that drove the end of period change to our deposits.
First we mentioned on our last earnings call the predictable fluctuation of deposits in the payroll business.
If the calendar quarter ends on a Friday.
What drove the end of period change to our deposits.
<unk> sellers.
First we mentioned on our last earnings call the predictable fluctuation.
Boy, it's better to look at average deposit balances when comparing quarters.
<unk> quarter ends on a Friday.
Secondly, as we previously announced we consolidated a number of branches in the third quarter, which accounted for a portion of the.
Today and on a Friday.
<unk> third.
Today, that's why it's better to look at average deposit balances when comparing quarters.
Third the purchase about $275 million of treasuries.
<unk> consolidated a number of branches in the third quarter, which accounted for a portion of the reduction.
These are valuable relationship clients, while at the same time.
<unk>, we worked with some of our high net worth clients.
Time, Inc.
The purchase about $275 million of treasuries.
Quiddity was about the economy in 2023, and we share the concern of many.
<unk> one on one with our valuable relationship clients, while at the same time.
Many are to imagine a scenario where the federal reserve is moving this fast.
Time.
And something maybe something.
It's just about the economy in 2023, and we share the concern of many.
We don't see this.
And maybe around the corner.
<unk> been dealt on a relative basis.
Warner Imagine a scenario, where the federal reserve is moving this fast.
We operate in for that.
It's something we don't see now, but something doesn't break in the economy.
<unk> environment, our team will show up to work each day.
Let's see.
And we're going to continue to deliver exceptional client service and build franchise value.
Surplus capital.
Okay.
Little and we operate in four of the six fastest growing states in the country.
Financial results.
Regardless of the environment, our team will show up to work each day.
<unk> you noted it was another encouraging quarter for south state on several fronts.
Franchise value.
<unk> record P PNR and PPR per share driven by another solid margin increase.
<unk> alone the financial results.
<unk> beta with a very moderate decline in balance.
As you noted it was another encouraging quarter for south state on several fronts.
But some weakness in a couple of our noninterest income business lines.
They're driven by another sizable increase.
Lives.
We had a low deposit beta with a very moderate decline in balances.
Slide 12 shows our net interest margin over the last five quarters.
But some weakness in a couple of our noninterest income business lines.
Not entirely unexpected in this rate environment.
Core net interest income of $349 million up 47 million from the prior quarter.
Net interest margin over the last five quarters.
<unk> was $3 55.
<unk> got about $358 million was up 44 million from Q2.
Five points from Q2.
<unk> come a 349.
To 11.
From the prior quarter.
[noise] basis five basis points from the prior.
<unk> was $3 55.
<unk> continue to outperform.
Five six on a core basis.
<unk> of course expect our beta to rise over the cycle.
As deposit competition heats.
That's 11 basis points.
Interest income was down 11 billion.
Since the prior quarter.
Primarily driven by a $7 million decline in correspond.
<unk> metric, we do of course expect our beta to rise over the cycle.
Mortgage business.
Competition heats up.
The scene, we had production of almost.
Interest income was down 11 million from Q2.
Almost 22% of the volume was sold in the secondary.
And a $3 million decline in mortgage revenue.
Market I'll note that our retail mortgage production year to.
Teen we had production of almost $1 1 billion in the quarter.
To date of approximately 46% according to the MBA.
<unk> been very market, leading to a decline in secondary.
16.
I'll note that our retail mortgage production year to date.
Here's to pose a challenge for demand for fixed income securities.
Hey.
In spite of the attractive rates now available.
The MBA.
A couple of years.
So the correspondent division as noted on slide 16.
Quarter.
The sizable and rapid move in rates continues to pose a challenge for demand for fixed income securities.
<unk>.
Despite of the attractive rates now available.
Six one.
Over the years.
A bit better than anticipated.
Demand was also down a bit in the quarter.
That'd be flat and I E.
<unk>.
Our efficiency ratio.
Cool.
Drops to 2%.
Noninterest expense of $227 million was up 1 million from Q2.
Future.
To better than anticipated.
Two highest percentage growth was in single family residential up 34% annualized.
I did see ratio dropped to 50%.
Sure Seth.
At Investor CRE up 12% annualized.
At 3% annualized from Q2.
Across various loan types remained flat with prior quarter.
Residential up 34% annualized.
<unk>, 5% or more.
17%.
Laura discussed some of the items impacting our decline in ending deposits on an average basis.
Station across various loan types remained flat with prior quarter.
This is approximately 4% annualized.
<unk> was about 5% or more.
So we're slightly ahead of where we had budgeted them for September 30.
With respect to credit, we provisioned 24 billion for the quarter.
Since gnomic scenario weighting.
<unk> points of net recoveries.
Census would indicate.
<unk> 9 million of our charge offs were DVA losses.
At this point as noted on slide 24.
At this point.
Four remain cautious about the economy.
Although we continue to use a more negative economic scenario weighting.
Unfunded commitments.
Our consensus would indicate.
Sure.
Our asset quality metrics remained very good at this point as noted on slide 24.
Capital on slide 25.
Got.
Risk based ratios remained strong.
Plus reserve for unfunded commitments moved up five basis points in the quarter.
All hurdle of 12, 9%.
<unk> percent.
And our leverage ratio improved approximately 30 basis points.
Slide 25.
<unk> capital formation and slight reduction in the size of the balance.
Q1 of 11%.
She's the move in interest.
Yet based capital of 12, 9%.
Right.
To negatively.
Yet proved approximately 30 basis.
And our T V per share.
Since the formation and slight reduction in the size of the balance sheet.
Sure Seth.
And our T V per share declining from $37 97.
She.
Continues to negatively impact our TCE ratio.
Seven key ratio would've been eight 3%.
And our T V per share would've been $47.
No.
<unk>, 7% and our T V per share declining to $37 97.
And as always I want to thank our employees for their hard work.
Our TCE ratio would've been eight 3%.
Work.
Our T V per share would've been $47 44.
Please go ahead and open the line for.
Turn it back to you.
Yes, Thanks will.
Questions.
Well the way.
I want to thank our employees for their hard work.
Followed by one on your telephone keypad.
Work clients.
But any reason you would likely I mean that question.
Please press star followed by two again to ask a question. It is star followed by one.
<unk>.
It's Keith here.
If you would like to ask the question.
<unk>.
It's pretty stuff on it by one on your telephone keypad.
If for any reason you would like to leave that question.
And today comes from the line of Michael Rose from Raymond James.
Eastern followed by one.
As a reminder, if you are using a speaker phone.
Why.
But to pick up your handset before asking your question.
Okay.
Good morning, maybe we could just start on.
Michael Rose from Raymond James.
On kind of the rates.
And just now.
Since it's it's continued to kind of come down.
Good morning, everyone.
One little bit and sorry, if I missed this in the beginning but.
Yeah, just given the the the loan growth in the low deposit betas.
On the NIM and the kind of the rates.
It is now maybe some nearer term expectations for NIM and I'm, sorry, if I missed this but you know what outlook what rate outlook you guys.
And just given the loan growth in the low deposit betas.
Or because we are as we move through the next couple of quarters.
It is about you know maybe some nearer term expectations for NIM and Im sorry, if I missed this but you know what outlook what rate outlook you guys.
And about the next 15 months or so.
Or or something else just as we are as we move through the next couple of quarters.
And then sort of kind of give guidance at the end.
The assumption number one is just the size.
Through a couple of those assumptions and how we're thinking about the next 15 months or so.
It was a little over $40 billion.
Your assumptions and I'll walk through and then sort of kind of give guidance at the edge.
<unk> given you guidance that we wanted to try to keep.
In just the size.
Pete.
Of the deposits in interest earning assets.
I think this past quarter.
Wow.
<unk>, a little over $40 billion.
But reiterate that same guidance.
You'll remember we've given you guidance that we wanted to try to keep.
And.
Deposits flat through the end of 2023.
I'm from somewhere around 70.
Flat.
<unk>, 7%, where it is today.
To reiterate that same guidance.
Around 80%.
And the forecast our deposit forecast.
You know the size of the balance sheet management.
<unk> ratio.
Management $40 billion.
So it would from somewhere around 70, 677% where it is today.
You know last earnings call we did in July .
3%.
Since the forecast was for the fed funds.
<unk>.
The size of the balance sheet management somewhere in the $40 billion.
Theres been a big change there.
The second assumption is just around interest rates in the last earnings call. We did in July .
<unk> 2020.
Our forecast was for the fed funds.
And five per.
Three 5%.
Or softer than expectations in the.
<unk> been a big change there the new Moody's consensus forecast has the fed funds, peaking in 2023.
And what about this before but page 20.
So there was a large move in expectations in the.
Our previous cycle beta deposit beta.
And our modeling so that's all about building our modeling the deposit beta you know we've talked about this before but page 20.
<unk>.
<unk>.
Last cycle to date.
That's to both our previous cycle beta deposit beta.
Hey.
As well as our current cycle beta in it but what it shows on the investor deck on page 20.
<unk> way as last cycle, so it 20.
<unk> percent last cycle.
So we think about deposit costs, when we think about our interest rate forecast.
Oh three person.
In fact, our cost of deposits.
He used to be that this cycle will be.
The 10 to 120.
This way as last cycle so 24%.
<unk> same time next year.
Because we think about deposit costs, and we think about our interest rate forecast.
Here the increase in rates.
Our cost of deposits.
<unk> see that at our original.
The 110 to 120.
To get you somewhere in there.
<unk>.
If you think about the next four quarters.
So if you think about that.
Yeah that 1% change or so over the.
The next four quarters.
4% beta and at our original.
Worse.
Other costs that should get you somewhere in there.
Some of the assumptions of the balance sheet size interest rate forecast in our deposit beta.
Yeah that 1% change or so over the next four quarters, it's sort of a ratable change.
<unk> and.
<unk>.
This quarter of $3 55.
All up.
The margin would range somewhere between $3 60 and 380.
Our deposit beta.
<unk> 23.
Expect margin.
Margin expansion from here.
Three.
<unk> and.
Got to those.
Five we would think that the margin would range somewhere between $3 63 80.
Hello, a question.
D of 2023.
And you know you guys have held the correspondent.
Three gyms and sort of the.
Revenue stream pretty consistent over the past couple of quarters, but it did come off.
A lot of detail as usual, Steve maybe just as one follow up question.
Greater color there.
And with you guys had held the corresponding.
Or just maybe.
Got it.
Revenue stream pretty consistent over the past couple of quarters, but it did come off.
Again this quarter.
It did come up this quarter can you just give some greater color there.
Sure well, let me, let me take a big picture approach and then drill down in the correspondent and maybe I'll tie all that together.
There just isn't a business you would expect to work over the next couple of quarters.
About six 7% of average assets.
Sure Let me, let me take a big picture approach and then drill down in the correspondent and maybe I'll tie all that together.
Other fee income this quarter was $77 million or about 67% of average assets.
Hum.
Prior guidance that we had last quarter was between seven and eight.
We gave that guidance the terminal fed funds rate with three and a half.
Eight.
We said that we'd probably be at the lower end of the range until we got through some of those interest rate hiking.
Till the end of 'twenty two.
F like mortgage and correspondent.
At that point in time, when we gave that guidance of terminal fed funds rate with three and a half.
On it.
But because we've had this large move in interest rates really expectation up another one in the quarter.
One of the $8 million a quarter.
<unk> the businesses like mortgage and correspondent.
<unk> completed the $20 million to $25 million a quarter.
On it generation perspective.
<unk> through.
If you think about correspondent.
Due to raising.
Our guidance was $24 million to $28 million a quarter were lower in that guide.
Our arc, our interest rate swap revenue fell this quarter.
<unk>.
<unk> fixed income actually fell only about $1 million, but I.
<unk>.
Would expect fixed income to be more challenged.
If you think about.
No.
Yes.
And that you know short term rates and long term rate vol. You end up.
It fell this quarter.
This income will be a little more challenging I think the interest rate swap business will get better.
<unk> come to be more challenging as the fed continues to raise rates.
Or more between 20 and 25 until.
Rates in long term rates all ended up about the same.
So when we get into.
<unk> com will be a little more challenging I think the interest rate swap business will get better.
So a bit.
But.
With the next several quarters until the fed stops raising.
But no.
I would expect our noninterest income to average assets.
Leasing rates when we get into.
That's the 0.7%.
Environment so.
Sent to raising rates when we get into more normal environment sometime in 'twenty three.
Several quarters until the fed starts raising rates.
Free at that point.
In fact, our noninterest income to average assets to be between.
<unk> talked about today.
<unk>, 7%.
Interesting.
If the fed stops raising rates when we get into more normal environment sometime in 'twenty three.
We'd expect the NII to average assets to get back to 7%, 8% kind of act as a hedge as we talked about the net interest income so hopefully that.
Great.
Helpful guidance as you think through the puts and takes of.
Fitzsimmons from D. A Davidson. Please go ahead your line is now.
Very much so thanks for taking my questions guys.
Hey, good morning, everyone.
Just wonder.
Yes.
Just wondering if you can talk a little bit about loan growth how are you.
Please go ahead. Your line is now open.
Do you feel about growth.
Going forward.
Yeah.
In terms of boats.
What you're seeing in demand, but maybe what you're.
You can talk a little bit about loan growth how are you.
The bar on underwriting or stepping back from certain kind of loan segments any any color on that.
Sure.
In terms of both what you're seeing in demand, but maybe what you are.
Got it.
So implementing in terms of maybe.
Raising the bar on underwriting or stepping back from certain kind of loan segments any any color on that.
It takes time Theres, a lag effect, that's working through the psychology of our clients that our borrowers.
Big picture I would say that the feds rate increases are working.
Ours borrower standpoint, a lot of them.
It takes time Theres a lag effect.
And see approach.
That's the psychology of our clients that our borrowers.
<unk> replace existing equipment versus.
Yeah.
<unk> spending.
And from a C&I borrowers standpoint, a lot of them.
E discovery.
I'm fine, but theyre, taking kind of a wait and see approach.
<unk> slow to adjust to the yield curve.
But it's more to replace existing equipment versus.
Fred on CRE property, starting to widen out.
We're in a period here of price discovery.
Out boats.
The cap rates are.
So the merchant builder.
Or just to the yield curve.
<unk> become owner managers and what that's going to do it's been a slow pay that.
Third CRE property starting to widen out.
Sounds good.
I think theres a number of boats.
Sure.
So the development business the merchant builders.
And I was at 2500 dollar a month payment.
<unk>, our managers and what that's going to do it's been a slow pay downs.
Payment for 3%.
On the residential side.
The fundamental question.
Good.
Is what kind of house can I buy with a $2500 a month.
The rate lock so I.
Payments to be wary.
I think as having and seeing the desired effect of the rate increases so while loan originations are going to slow.
So I think that is going to cause a real slowdown in the residential side and we're seeing that in some of the rate lock So I think.
One pay off.
<unk> is having and seeing the desired effect of the rate increases.
Yes.
While loan originations are going to slow.
It's that we originated last two years that are still in the fund.
Current with growth.
I do think that.
Good.
The growth is not going to slow down as fast as new loan originations slow. So if we had to give some guidance, we'd say our fourth quarter estimate would be that we'd be growing loans in the upper single digits.
Yes, I do think that.
<unk> a recession in 2023, maybe mid single digit growth.
New loan originations slow.
Oh.
So let me give some guidance, we'd say our fourth quarter estimate would be that we'd be growing loans in the upper single digits.
All that gets us.
If we enter into a mild recession in 2023, maybe mid single digit growth.
So the balance sheet as deposits flat, but.
Both 23 is probably to put them on another one and a half.
You know, we're very very bullish on the market and the South East, we're going to outperform the rest of the country.
Steve talked about.
<unk> done that will talked about.
Worksheet and deposits flat, but.
But the nation.
That's the macro picture, we're very very bullish on the markets in the southeast we're going to outperform the rest of the country.
So that speaks.
And that will talked about.
So this job front.
In the residential numbers the nation.
But a lot of it's not just retirees are just great job and great economic activity.
We're only down about 6%.
Uh huh.
Thanks to the strength of the southeastern job.
Bert is aware of what's going on over the last several years and really the last couple of years with the automobile industry and the south.
City.
So we've had just a ton of announcements I mean in Georgia.
I don't know that many people.
$1 billion of Hyundai plant for electric vehicles.
For several years and really in the last couple of years with the automobile industry as it sounds.
Eight vehicles north of Atlanta.
So I mean in Georgia.
On a billion seven inverse.
$5 billion Hyundai plant for electric vehicles 8000, new jobs.
<unk>, South Carolina 1 billion seven.
John's to build the new batteries for electric vehicles north of Atlanta.
Kevin.
<unk> 2000 jobs 1 billion seven investments.
So the southeast is going to be.
<unk> BMW announced an expansion to their plant in Greenville, South Carolina $1 seven.
Boston on boss at all lender.
Kevin and plant in Huntsville, Alabama.
Abiding by our policies right now and where.
Peter is going to be.
So we're making.
Fine.
New interest rate.
On endpoint, we try not to be a faucet on boss at all lender.
We are.
Abiding by our policies right now and.
One quick follow up I was just wondering.
Sure.
It.
This new interest rate.
New interest rate environment. So hopefully that gives you a flavor of what we're seeing.
It's a deal being closed for a while now but if you can speak to any.
Thanks.
Observations on Atlanta capital in terms of any remaining savings.
Understandable.
<unk>.
That's about it.
<unk> being from them whether weather.
With for a while now but.
They're better or worse.
But.
Or less than expect.
So on Atlanta capital in terms of any remaining savings indoor contributions.
<unk> production in Georgia have been fantastic so.
<unk>.
Better or or.
No.
Or less than expected.
Ordinarily well you know we are still continue to work through the normal integration issues as the team members get accustomed to the new processes.
It's been fantastic so.
They haven't missed a beat from a.
In July .
They broke standpoint.
<unk> extraordinarily well.
I'll take it on the on the savings side, maybe I'll go ahead.
<unk> uses the team members get accustomed to the new process.
And Charlie can take further questions on that I as.
There's some production and growth standpoint.
As you know.
We.
I'll take it on the on the savings side, maybe ill Glenn.
The third quarter, there's still a few that will trickle in.
And the outlook.
Charlie can take further questions on NII.
In Q4.
Or yeah branch consolidations, we did there'll be a little bit more in Q4 than Q3, but.
Sure.
But no.
Bill a few that will trickle in.
Q4, it still.
And including Q4.
Yeah, I thought it would be and that's somewhere in.
The $2 30, and if we're lucky maybe done.
He's still.
That's somewhere in.
<unk>.
The <unk> and if we're lucky maybe done.
The correspondent business slower that drives down.
The commission compensation expense, there and so depending upon.
Moving.
That business that will impair.
Did a little better than we thought.
Q4, we would expect.
One.
This.
Our correspondent business lower that drives down.
For.
The commission compensation expense, there and so depending upon that.
And guiding towards.
That will impact.
So it may be hard to twenties.
<unk>.
Number.
This play continues.
Yeah, I'd say we're.
We will drive that number up.
We're still in the process of our budgeting cycle, which is a very thorough bottoms.
Low to mid thirties, maybe high to twenties.
<unk>.
It feels like a good number.
Put it in the form of.
I would say.
The dollars as well.
We're still in the process of our budgeting cycle, which is a very thorough bottoms.
And you know make decisions about.
Question.
Out west based on projected capital returns across the company.
Fixed asset dollars as well.
Now.
As well as.
Now a better guidance, we'll be able to give an idea when we get to our January call, but I'll just reiterate.
It was about.
That is very focused on trying to manage our expenses in every environment.
<unk>.
Including one that has got some inflationary pressures like this one.
And we'll have better guidance will be I'll give on NII, when we get to our January call, but I'll just reiterate.
Claims and hope to do so next year as.
So I'm trying to manage our expenses in every environment.
Well for all the color. Thank.
When discussing inflationary pressures like this one and we've done a good job I think this year with our incentive plans of keeping that front of mind with our teams and hope to do so next year as well.
Great. Thanks for all the color. Thank you guys.
Yeah.
Yeah.
Okay.
[noise].
You guys do you have any other questions in the queue.
Thank you.
The next question today comes from the line of Stephen Scouten from Piper Sandler. Please go ahead. Your line is now open.
Do we have any other questions in the queue.
Okay.
Thank you.
The next question today.
I guess it would be on mute.
<unk> from Piper Sandler.
I was curious around your residential mortgage production kind of how you're thinking about that in this rate environment, putting more of that on balance sheet.
And as you know Cai.
Around funding and rate paid on the red the mortgage.
I was curious around your residential mortgage production kind of how youre thinking about that in this rate environment.
Is that the dental portfolio on page 14 and 15.
Jack.
And rate paid on the mortgage.
Frame all that up.
Last quarter in the third quarter, we produced about 1 billion won and in production and 78%.
Page 14 and 15.
<unk>.
That.
Just a couple of points to make there and then I'll try.
Just so you know a lot of this.
Got it.
This is.
Last quarter in the third quarter, we produced about 1 billion won and production 78% of that was a portfolio of 22% with the secondary and of <unk>.
As the portfolio residential growth and shrinkage over the past two and a half years.
Course, the refi business is pretty much done.
And on sale spreads and mortgage.
On page 15, we show a historical look.
<unk> is.
Look portfolio residential growth and shrinkage over the past two and a half years.
When rates are low and gain on sale margins were high.
Sure.
Hi, good in 'twenty, and 'twenty, and 2020 one.
The way when you look at that slide is.
On the income.
Residential is a balance sheet management tool.
The gain on sale margins have declined we've grown the portfolio balances over the last couple of quarters.
<unk> 20 in 2021.
<unk> you kind of take a cycle look at since the December of 2019 were at only 450 million in total or 8%.
The decline we've grown the portfolio balances over the last couple of quarter.
<unk> produced about $825 million of portfolio production.
For December of 2019 were at only $450 million in total for 8%.
<unk>.
We think that's an appropriate place to put it.
<unk> this quarter, we produced about $825 million a portfolio of production.
Residential production workflow.
Along with.
<unk>, we like that credit.
We think thats, an appropriate place to put.
Yes, we're.
And to put on our balance.
Our billion dollar.
Sheep that.
Relative.
<unk> Prudential production will slow.
Long with.
The period, we'll do about 70% of that'll be portfolio.
Probably do somewhere.
You know our preliminary forecasts that will continue.
Our range relative.
But it's probably more like $3 billion, which is about what we did in 2000.
90, a pandemic.
<unk>.
<unk>.
<unk> next year.
Our preliminary forecast and we'll continue.
The portfolio of 40% secondary.
The more like $3 billion, which is about what we did in 2019.
Three four as we get into 'twenty 'twenty three.
<unk>.
The shock and rates and we have to kind of work through that period.
Per cent portfolio, 40% secondary.
Or whatever before rates.
Think about the balance sheet, we're going to probably produce more as we get into 2023.
Starting with.
Because the shock and rates and we have to kind of work through that period.
Extremely helpful. Thanks, Steve.
And maybe.
Great start.
A quick one.
Start by then.
On your question around.
And production.
Round deduction and in asset sensitivity is that primarily.
<unk>.
<unk> a reduction just if you've deployed more excess liquidity than you do expect.
And then maybe.
Quick follow up on Michael's earlier question around.
Back to change in the model.
Round and asset sensitivity is that primarily.
It doesn't.
The main driver in that is our assumption around deposit beta.
You do expect.
If you looked at it.
Here, what's the main driver around that kind of quarter over quarter change in the modeling.
To seven 7%.
Yes. The main the main driver in that is our assumption around deposit beta.
Deposit betas only.
We looked at it.
Just run the math and say you know based on history, our deposit beta is going to be 24 person.
7%.
Sent tire cycle versus where we are.
Firefox and were up 78.
Are driving that.
That's a deposit beta of only three.
The pivot from here.
<unk> math and say you know based on history, our deposit beta is going to be 24%.
<unk>, what is deposit beta going to do over the.
<unk> is where we are.
The next thing that we.
That's really what's driving that.
Picked up a lot of asset sensitivity from here.
Can.
Your question really that is going to be difficult to answer for anybody.
C L.
What is deposit beta going to do over the next 12 months the best thing that we can.
Given that as a static balance sheet model.
Yes.
That's the reason.
It was in the mix or anything like that.
And then we'll see how.
Then.
Now that he performs over the next year or so.
And also remind you Steve that as a static balance sheet model.
You know things have been trending phenomenally well for you guys.
I mean like that.
Obviously.
Peter rather than.
But dime as well, but the stock has outperformed significantly year to date.
And then last question I guess for me.
Hey, ne.
Just you know things have been trending phenomenally well for you guys I think.
Especially coupled with the rate environment marks et cetera, how should we think about the likelihood of you guys.
It outperformed significantly year to date, how does that make you all think about the M&A environment.
Given the value your currency.
Slow for the next.
The rate environment March et cetera, how should we think about the likelihood of you guys.
Exploration, where they are.
Our uncertainty around inflation in a recession. So I think we've got a little more work to do internally to continue to refine our processes and our technology. So.
With.
M&A in the short term is not a high crime.
With our uncertainty around inflation in a recession so.
On the call today appreciate it everyone.
Do internally to continue to refine our processes and our technology.
Okay.
No.
Question today comes from the line of David Bishop compulsory great. So please go ahead. Your line is now open.
Great color on the call today appreciate.
And for earnings.
Sticking with the and.
And Steve said I appreciate all the guidance there.
The next question today comes from the line of David Bishop from Husky grip.
There are your view of excess cash.
Just curious maybe what you view as a floor for that doesn't get.
And Steve and I appreciate all the guidance.
Back to the purview of sort of excess cash and liquidity at the staff.
They're curious.
Exiting the quarter your view of excess cash.
Two quick questions.
Cash.
Yeah, that's right around 2.5% of assets give or take.
Back to the pre pandemic level of about $1 2 billion.
Hey, Kash.
Your view of sort of excess cash and liquidity standpoint.
Cash you know we have very little.
Hey, David It's a good question. This is Steve Yes, that's right around two 5% of assets give or take.
<unk> 150 million or said that we did during the pandemic.
<unk> cash.
They make good long term Cds, we have no federal home loan bank borrow.
Cash so we have very little.
Owing suffers relative.
<unk>.
Okay.
Ill have drawn any of that down so I think our brokered Cds are about $150 million or so that we did during the pandemic.
Modeling in.
We because we have no federal home loan bank borrowings.
That's probably an 80% loan to deposit ratio.
<unk> I'll, let <unk>.
To the.
And it's been roughly around two and a half.
She too.
<unk> of asset.
Cash but.
Asset if we.
But that's a good way to think about the modeling and Thats. If you kind of run that out that's probably an 80% loan to deposit ratio at the end of 'twenty three.
Do.
And roughly around two 5%, 3% of assets and cash if we do well.
Yeah.
No.
Yes.
Factoring higher unemployment rate outlook, just curious, maybe what sort of drove that elevated provision.
In terms of the loan loss provision this quarter.
Vision.
Just curious how much of that was sort of deterioration in maybe the model driven inputs is at.
Yeah.
In our and of course as you know lets see so you have.
What drove that elevated provision.
Have drivers that are.
Moving into two.
Our statistical correlation with prior loss events and in our case dates back to 2000.
Okay.
In our <unk>.
As you know with Cecil you have.
Los drivers that.
At.
Based on statistical correlation with prior.
At a pretty thorough analysis of not only the.
<unk> thousand.
The output they have in these various.
South state with the exception of failed banks.
This assumption is behind them and from that we make a judgment about whether.
Thanks.
We believe Moody's is right on the money or maybe a little too optimistic or pessimistic.
Not only the.
Now we have viewed.
And these various.
More optimistic.
Yes.
The underlying assumptions behind them and from that we make a judgment about whether.
And so we have been.
Maybe a little too optimistic or pessimistic for several quarters now we have viewed.
Then we did find Moody's did move more pessimistic really between Q2 and Q3.
<unk> baseline is pretty similar to consensus.
Hum.
And so we have been waiting more pessimistic Lee.
Indicate indicative of higher losses.
<unk>.
Did find Moody's did move more pessimistic between Q2 and Q3.
As Wade in the recession scenario, which is S. Three.
Hi.
And for a decent portion of our allowance so yeah, the the Los drive.
It was still a bit based on that as you saw.
We.
Or are you know we had net recoveries in the quarter.
Wait wait in the recession scenario, which is S. Three.
And for a decent portion of our allowance so yeah, the Los driver.
Moody's really drove our provision.
Yes.
Expenses.
In the quarter are we had net recoveries in the quarter.
Great. Thank.
Pretty consistent asset quality metrics.
Thank you.
Tricks.
So really the Los drivers.
Our next question today comes from the line of.
Bob.
I mean, that's from K B W. Please go ahead. Your line is now open.
Border great. Thank you.
Thanks, Good morning.
Thank you.
What do you want.
Yeah.
Our next question today comes from the line.
How did the data, but just wanted to get your thoughts.
So I understand that.
On loan yields.
Increasing your linear this quarter what are you thinking about for.
Good morning.
Our new loans are coming on and then what ultimately lend data.
I call it.
And I'm not in the deposit data that just wanted to get your thought.
Thanks Catherine.
Pretty much the same we have a slide in our deck.
And how you're thinking about for.
That's fair.
Where new loans are coming on and then what ultimately mundane is maintained for the cycle at launch.
What that basically says there's about 30% of our loan portfolio re prices on a daily basis.
Our deck that speaks.
Basis.
Speaks to.
I think it would be.
It goes.
<unk>.
We also have another 11%.
<unk>.
Since that re prices.
He says it's about 30% of our loan portfolio re prices on a daily basis whenever.
So.
<unk>.
All right.
It goes up.
Next.
And then we also have another 11%.
Just how do we think about beta on the short end it's rough.
<unk> will reprice in the next year so.
Roughly from that and then over time as you produce more.
Folio.
Sure adjustments.
Prices in the next 12 months.
<unk>.
It's really a good indication.
That will reprice.
On the short end, it's roughly 30%.
And that's for sure.
And then over time as you produce more.
Great you know loan yield continued.
And the.
The.
The festival rate book.
In the quarter was over 5%.
Book.
That will reprice.
Of course, some of that floating and then as they raise rates a little.
Interest rates.
Go over.
In the third quarter.
Because I hopefully that's a good characterization of how we're thinking about loan betas.
<unk> I think by the end of the quarter was over 5% for new production.
It is.
<unk>.
Of course, some of that floating and then as they raise rates that'll go over six.
On the loan side to us as the market.
That's a good characterization of how we're thinking about loan betas.
Maybe to rising rates, particularly ones moving as fast as these have.
That's a benefit.
So out there that take a little bit to close so.
The lag effect on the positive side, there is a little bit of a lag effect on the loan side too as the market.
Yeah.
Acclimate to rising rates, particularly ones moving as fast as these have.
Maybe for the month of September .
A little bit to close so there's there's a lag effect on both sides.
Sure.
Yeah, but I don't I don't know exactly right in front of me, but it was it was just north of 5% I don't have the number but.
For.
It was north of five.
Maybe for the month of September .
September .
Great. Okay no that's helpful.
Sure.
Kevin I don't know exactly right in front of me, but it was it was just north of 5% I don't have the number but.
For this quarter, just any any commentary on what dress.
It was.
Great. Okay no that's helpful.
Okay. I mean, we did have some growth in our unfunded commitments in the quarter and just sort of how the math worked out.
Okay.
When we think about the reserve and our allowance can be if we do sort of think about it as a whole so that the 131 basis point number.
We did have some growth in our unfunded commitments in the quarter and just sort of how the math worked out.
When we think about the reserve and our allowance can be reduced sort of think about it as a whole so that the 131 basis point number.
Okay.
<unk> versus the 113 basis points.
Kind of think of it in terms of the combination of the two.
Credit losses, the Contra asset.
It it does swing quarter to quarter, but I kind of think of it in terms of the combination of the two.
Oh, I'm, sorry, I got everything else was answered. Thank you very much great quarter guys.
Great. Okay. Thanks for that one.
You'd be aware of in terms of this change.
Hi.
We'd like to ask a question. Please press star followed by one on your telephone keypad.
Everything else was answered thank you very much great quarter.
Pat.
Tomorrow Night Janney Montgomery Scott. So please go ahead. Your line is now live.
Yes.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Tariff on prior questions I noticed that the seasonal reserve for unfunded commitments went up pretty good about this quarter that the unfunded commitments themselves grew a lot.
Hey, Thanks, very much John I know you gave a lot of details on the reserve on prior questions I noticed that the seasonal reserve for the unfunded commitments went up a pretty good amount this quarter and that the unfunded commitments themselves grew a lot.
And with the question Katherine just asks you know that drove that was some of the reason for the.
It was more of that sort of line growth possible in the future.
Being more towards unfunded commitments.
Sure.
Unusual question Dovetailing with the question Katherine just ask that drove that was some of the reason for the.
The unfunded commitments really he locks in C&I as have been relatively flat.
<unk>.
We refer to the funding levels, we had pre pandemic were about 5% to 10%.
Other than just to say that the unfunded commitments really HELOC and C&I has have been relatively flat.
As we've seen with some of our other releases there are.
Pre pandemic were about 5% to 10% under the funding we had before the pandemic.
Below pre pandemic levels across.
Some flexibility going into if there is a recession.
Okay.
It's interesting Chris as you've seen with some of our other releases there are.
June to September .
I'm sure we will at some.
No.
Thus far we are still below pre pandemic levels across pretty much across the board.
I guess my follow up question, just relates to kind of what you're seeing from your clients on the fixed income side as it pertains to kind of absorb these wholesale funds do you expect them to be that borrowers and does that possibly spillover in additional business.
The guidance that you gave earlier, which is very helpful. Just kind of want to get more.
Board on the fixed income side as it pertains to kind of absorb these wholesale funds.
You expect them to be at borrowers and does that possibly spillover in additional business.
<unk> gave earlier and which is very helpful. Just kind of want to get more context in terms of their behavior changes that might be happening.
Because of loan growth and maybe the fed doing quantitative tightening.
<unk> very very interesting move.
To your point.
Bank clients.
There was a lot of liquidity out of the system.
So those two.
Probably nine months ago, because of loan growth and maybe the fed doing quantitative tightening.
<unk> sales.
Liquidity.
That's there.
Is down for our correspondent bank client.
There has been.
Hey.
Community Bank client.
Inc.
Ryan.
For fixed income we are seeing.
Some borrowers from the brokerage market.
I mean bases and so most of.
Systems.
There.
And then.
<unk>.
But most of our clients and I'll speak to the community bank clients.
<unk>.
Lower loan to deposit ratios than they are.
The ratios.
You know buying.
Is that a good funding basis, and so most of them.
Clearly theres been an uptick on our debt.
Then.
Sure is true.
Because there's a fixed income because they have excess liquidity.
For.
The lower loan to deposit ratio then they are buying brokered CD.
<unk> are issuing brokerage Cds.
But clearly there's been an uptick on our desk.
For all the information this.
Hi, everybody just because.
Certain clients are using it more than call it a year.
Cause if anything at this time, so I'd like to pass the conference over to John Corbett for closing remarks.
So thanks again for all the information this morning.
Alright. Thank you barely thank you all for calling in today and thank you for your interest in South State. If you have any follow up questions don't hesitate to give us a ring.
So I'd like to pass the conference over to John Corbett for closing remarks.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Thank you for your interest in South State. If you have any follow up questions don't hesitate to give us a ring and I hope you have a great.
<unk>.
Yeah.
Right.
Okay.
Yeah.
Okay.
Okay.
Yeah.
Okay.
Uh huh.
Uh huh.
Yeah.
Okay.
Uh huh.
Mhm.
Yeah.
Okay.
[music].
Yeah.
Sure.
Okay.
Okay.