Q1 2023 SouthState Corporation Earnings Call

Speaker 2: Hello everyone and welcome to the South State Corporation Q1 2023 earnings conference call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you would like to register a question please press star followed by 1 on your telephone keypad.

Speaker 2: I want to hand over to our host, Will Matthews, CFO , to begin. Will, please go ahead.

Speaker 3: Good morning. Welcome to South States first quarter 2023 earnings call. This is Will Matthews. I'm here with John Corbett, Steve Young and Jeremy Lucas.

Speaker 3: John and I will make a few brief, prepared remarks before we open it up for questions.

Speaker 3: As always, a copy of our earnings release and our investor deck are located on our Investor Relations website.

Speaker 3: Before we begin our remarks, let me remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations.

Speaker 3: Any such forward-looking statements we may make are subject to the Safe Harbor rules.

Speaker 3: Please review the forward-looking disclaimer and Safe Harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect us.

Speaker 3: Now let me turn the call over to John Corbett, our CEO .

Speaker 4: All right, thank you Will. Good morning everybody. Thank you for making time to join us.

Speaker 4: In March, we passed the third anniversary of the pandemic shutdown of the economy. It also marked the third anniversary of the Fed's massive quantitative easing response.

Speaker 4: Last year, however, the Fed made a hard pivot from fighting the pandemic economy to fighting the inflation economy. And intuitively, we've all been worried that the speed and scale of that pivot would result in casualties.

Speaker 4: Well, those casualties showed up in the banking system on March 8th.

Speaker 4: In spite of the recent turmoil, the South State team delivered results that were right in line with our previous guidance.

Speaker 4: During the quarter, we produce growth in loans, deposits, liquidity, and our capital ratios.

Speaker 4: Earnings per share of $1.83 increased 32% from the same period last year and that yielded a return on tangible common equity of about 19%.

Speaker 4: In the weeks following March 8th, the market identified two immediate risks, liquidity and capital, and also two longer term risks.

Speaker 4: earnings and credit.

Speaker 4: I'll briefly touch on each.

Speaker 4: liquidity we've been building a diversified and granular deposit base for decades and we came into this rate hiking cycle with six billion dollars in cash a year ago.

Speaker 4: SouthState manages one and a half million deposit accounts with an average deposit size that is the lowest of our peer group at only $24,000 per account.

Speaker 4: So that granularity adds stability and a lower percentage of uninsured deposits.

Speaker 4: On page 26, we've itemized $19 billion of available liquidity sources to cover less than $11 billion of uninsured and un-collateralized deposits.

Speaker 4: And that provides a 176% coverage ratio. So there's ample liquidity.

Speaker 4: on capital.

Speaker 4: In the weeks following March 8th, there's been speculation about the regulatory response and whether unrealized losses will eventually be reflected in regulatory capital ratios.

Speaker 4: On page 27, we show a waterfall to illustrate that South State remains well-capitalized on all regulatory ratios if you include the impact of AOCI.

Speaker 4: Additionally, we calculated it to include the impact of both available for sale securities and held to maturity securities, and all of our regulatory ratios still exceed well-capitalized requirements.

Speaker 4: Those capital ratios should continue to build as the balance sheet grows at a more moderate pace.

Speaker 4: In fact, tangible book value per share increased 6% during the first quarter.

Speaker 4: On earnings, like most banks, the biggest risk to our earnings forecast are deposit costs.

Speaker 4: We finished the first quarter with a cumulative deposit beta of only 13%.

Speaker 4: and a total cost of deposits of 63 basis points.

Speaker 4: which came in right in line with our prior guidance.

Speaker 4: And that low beta helped our PPNR per share to grow 62% over the last year.

Speaker 4: Given the events in March 8th, that earnings growth ramp will moderate and Steve can share some updated thoughts in the Q&A on potential deposit betas moving forward.

Speaker 4: And finally, I'll credit.

Speaker 4: Asset quality metrics remain excellent and stable. However, we are conservatively building reserves. Over the last four quarters, we added $123 million in low-moss reserves compared to just $3 million in charge of.

Speaker 4: And with the increasing focus on the office segment, we added a new slide in the deck that Will can touch on in his remarks.

Speaker 4: Stepping back from current events, every shakeup like this presents new challenges and new opportunities.

Speaker 4: And this management team has been involved in nine FDIC transactions and knows what it's like to manage through a cycle.

Speaker 4: That's why our guiding principles of soundness, profitability, and growth start with soundness.

Speaker 4: We will continue to have opportunities to recruit new bankers, and we're already seeing opportunities to command higher loan spreads as industry liquidity is becoming scarce. And it doesn't hurt to be located in the most vibrant markets in the country.

Speaker 4: The Southeast is known for its friendly business climate and capital flows where capital is treated well.

Speaker 4: It seems like every month there's an announcement of a new multi-billion dollar manufacturing facility with thousands of new jobs in the southeast.

Speaker 4: And those job opportunities are leading to population migration. Based on the latest census report, South State operates in four of the six fastest growing states in the country.

Speaker 4: Census job opportunities are leading to population migration. Based on the latest census report, South State operates in four of the six fastest growing states in the country. I'll conclude my remarks by thanking our team.

Speaker 4: You can never predict when a Black Swan event will occur.

Speaker 4: But those are the times when long-term client relationships matter the most.

Speaker 4: and South State's relationships run long and deep.

Speaker 4: And now I'll turn it over to Will to walk you through details on the quarter.

Speaker 3: Thanks, John .

Speaker 3: I'll speak briefly to a few measures before we open it up for questions.

Speaker 3: From a high-level perspective, our first quarter margin and deposit costs were at or slightly better than our prior guidance. After the events of March 8th, we decided to build a bit more liquidity on the balance sheet.

Speaker 3: Our tax equivalent NIM of $393 was down 6 basis points from the fourth quarter, although it was approximately 9 to 10 basis points better than we had budgeted.

Speaker 3: A 40 basis point increase in earning asset yields was offset by a 46 basis point increase in cost of funds.

Speaker 3: Cost of total deposits increased 42 basis points in line with our guidance of a 40-50 basis point increased from last quarter. Our interest-praying deposit costs remain slightly below 1% at 97 basis points.

Speaker 3: Loans grew at a 7% annualized rate in line with our expectations, predominantly in single-family residential up almost $400 million.

Speaker 3: Line of credit utilization remained flat.

Speaker 3: The CNI line usage actually down 2% from Q4 and HELOC usage flat.

Speaker 3: Deposits grew at a 1% rate. Included in that deposit growth is brokered CD issuance of $1.25 billion during the quarter.

Speaker 3: We had budgeted and planned to issue $1 billion, but went ahead and issued an additional $250 million late in the quarter in light of some of the industry concern.

Speaker 3: Excluding brokered CDs, our deposits declined approximately $1.2 billion in the quarter.

Speaker 3: But that amount, approximately $400 million, was normal public funds drawdowns after Q4 next collection season.

Speaker 3: We did see continued growth in the number of core banking deposit accounts, debit cards, and customers in the quarter.

Speaker 3: We had $900 million in FHLB borrowings outstanding as we elected to carry more cash on the balance sheet at quarter end.

Speaker 3: with cash and Fed funds balances up 700 million. Non-interesting income improved 8 million over the fourth quarter, led by Car Spundent and Mortgage, and steady performance in wealth management.

Speaker 3: Non-interest expenses continue to be well managed, with NIE of $231 million, up $3 million from the fourth quarter, and slightly better than expected for the quarter.

Speaker 3: We had another quarter of very low credit losses with net loan recoveries excluding overdraft losses and only 1 million in total net charge-offs.

Speaker 3: We added to the reserve levels again this quarter with a $33 million provision expense, 18 million of which was for unfunny commitments.

Speaker 3: The combined total of our allowance and reserve for unfunded commitments stood at $456 million at the end of the quarter, up 8 basis points to 1.48%.

Speaker 3: As John noted, that's 123 million in professional expense versus only 3 million in that charge of the last four quarters with net loan recovery before including overdraft charge offs.

Speaker 3: and we expanded our reserve coverage by 23 basis points over this period.

Speaker 3: Slide 22 shows asset quality trends over the last five quarters.

Speaker 3: These metrics continue to be very solid. NPL salons of 41 basis points were up slightly from Q4 and down slightly from the 2022 first quarter.

Speaker 3: NPAs were up $19 million.

Speaker 3: and criticized and classified assets were essentially flat.

Speaker 3: with substandard loans down 12 million and special mention loans up 10 million.

Speaker 3: Past dues were also down.

Speaker 3: Given the current interest in Office CRE, I'll mention a few highlights with respect to that portfolio.

Speaker 3: As noted on slide 21, Office CRE represents approximately 4% of our outstanding loans.

Speaker 3: And 97% of this portfolio is in market.

Speaker 3: The portfolio is very granular with an average loan size of less than one and a half million and the vast majority of the properties are smaller than 150,000 square feet and not located in a central business district.

Speaker 3: Our weighted average debt service coverage is 1.64 times

Speaker 3: and our weighted average loan to value is 59%. Credit metrics on this portfolio are also strong, with very low levels of delinquencies and only one basis point on non-accrual. Additionally, we've added some disclosures, began on slide 25, covering deposits, liquidity, and capital.

Speaker 3: Our capital position continues to be strong.

Speaker 3: As John noted, would remain so if regulatory ratios were changed to include AOCI.

Speaker 3: All in all, while the last month of the quarter was rather tumultuous for our industry, we believe we're well positioned for the strong capital base, granular deposit funding, continued strong revenue, and solid credit metrics.

Speaker 3: Operator, we'll now take questions.

Speaker 2: Of course, if you'd like to register a question, please press star followed by one on your telephone keypad now. If you'd like to withdraw your question, please press star followed by two. And, prepare into ask a good question, please ensure you are unmuted locally. As a reminder, that star followed by one on your telephone keypad now. Our first question comes from Catherine Meila, KVW, Catherine, you're...

Speaker 4: Yeah, okay, this is Steve. Good to talk to you, and of course John throws me the softball, so here I go. Let me just kind of first of all, you know, just talk through deposit data. Obviously, let me kind of put it in context of margin in general, and this may be a little longer winded than you want, but I think it's kind of described.

Speaker 4: You know, as we talk to you about margin, I'm going to give you the same guidance for 2023 with a few updates in the assumptions.

Speaker 4: And just with the caveat, when industry experienced toward the first of March, it really changed our thinking around how much liquidity to hold, as well as our customers' desire for more rate-sensitive products. So as we think about the three assumptions, those three assumptions haven't changed. Point number one, essentially, he doesn't 10%wit another sentiment,

Speaker 4: and we have no change to that. Two, we talked about interest rates. In January , the Moody's consensus forecast was for fed funds to move up to 5% and then be lowered 25 basis points by the fourth quarter of this year. But based on the new Moody's baseline forecast, we expect fed funds to move up to 5% and then be lowered 25 basis points by the fourth quarter of this year.

Speaker 4: to peak at five and a quarter percent here in about a week, and then stay there all the way through 2023.

Speaker 4: So on page 16, you know, the...

Speaker 4: Our graph shows our cycle debate data is at 13% versus our historical data at 24% in the last cycle. As a result of the banking industry turmoil in March, we are estimating that our deposit data will rise or the cost will rise.

Speaker 4: 45 to 50 basis points in the second quarter, bringing our cycle to date deposit data into the low 20s.

Speaker 4: versus our historical at 24%. If the Fed stops raising rates in the second quarter based on history, we'd expect the deposit cost to continue to move up at a much more gradual pace in the back half of the year.

Speaker 4: This could cause full cycle data to increase a few percentage points.

Speaker 4: to be honest and humble about the whole answer is we don't really know. It's been an unusual change in March, but having said all that, we're confident in our deposit base and it seems to be doing well.

Speaker 4: With all those new assumptions around interest rates and timing of deposit data

Speaker 4: we'd expect our full year 2023 NIM to stabilize in the 360 to 370 range.

Speaker 4: We expect our full year 2023 MIM to stabilize in the 360-370 range and end of 2024.

Speaker 4: So just one last point.

Speaker 4: over the next two years.

Speaker 4: Moody's baseline is correct and FedSun falls into the low 3s with a slightly upward sloping yield curve.

Speaker 4: You know the environment is very favorable for us as our interest sensitive deposit rates will be lowered while our assets are adjustable and fixed.

Speaker 4: will still reprice higher. Our deposit franchise continues to perform and provide real stable margin environment but really net interest income driven not by margin but by growth and interest earning assets. So it's a long-winded answer but hopefully that gives you time. I thought the beta was in there somewhere.

Speaker 5: That was awesome as it always is. Thank you. It's very helpful. So, just a few follow-ups to that. So, on your average-ready asset comment that this size is the same at $40 billion, is there a shift within that where you have a little bit more cash, maybe less loans, but with a more moderate loan growth outlook?

Speaker 4: That's right. I think we're, you know, back to the, you know, John mentioned the four things that everybody talked about on March 8th, liquidity, credit, capital, and earnings. You know, we're probably going to carry a little bit more liquidity just through this time.

Speaker 3: But I'd say, Katherine, not any dramatically bigger liquidity position. I think early on we all were trying to figure out what was.

Speaker 3: needed in light of all the uncertainty and we all spent a lot of time.

Speaker 3: increasing our contingent liquidity sources and we've got us filed out in the deck and I'll say we're continue to do that post quarter end and have increased it further from there.

Speaker 3: Having access to the liquidity is important, but I wouldn't say we're going to dramatically increase the size.

Speaker 3: And so having access to the liquidity is important, but I wouldn't say we're going to dramatically increase the size of balance sheet liquidity on balance sheet.

Speaker 5: by big numbers. Okay, and then back to the deposit conversation, so we're seeing a lot of remix out of non-interest bearing into interest bearing across the industry. So with your deposit data guide, and you're giving us total deposit base, that's gonna include that remix. How much of a...

Speaker 5: How much of a shift do you expect to continue to see out of noninterest bearing within that guide?

Speaker 4: Okay, Kevin, when we look back at history, our DBA is, you know, today is 34% of our total deposits. You know, pre-pandemic, it was in the high 20s. So, you know, not sure that it's going to go all the way back there. But, you know, you kind of have to assume that it's going to continue to drift.

Speaker 4: but we don't know. I would imagine that we would track pretty much the industry however that's going to play out.

Speaker 4: And I think one other thought around that is I do think it's around business deposits. And of course, as we talked about on this call, you know, 100 times is, you know, we have a pretty granular deposit base that's sort of between retail, small business and commercial.

Speaker 4: We have that slide that shows the granularity of each. Really, the remix is primarily in the commercial space and not in small business and retail. It's been pretty steady.

Speaker 5: Yeah, maybe just one thought just on that point is are you what kind of behavior have you seen that I agree? I think the deposit betas have mostly been driven on the commercial side really across the industry But as you look at your small business and retail piece, did you see any change in behavior pick up especially after the March volatility?

Speaker 4: Yeah, I think it's, you know, probably woke the entire customer base up just around excess deposits. So there was some excess deposits that were sitting and checking. But really, primarily, if you looked at it from March 8 on, you know, it's a very, very

Speaker 4: it was really more of a business remix than it really was any retail or small business. And then within business, there was more volatility with nonprofits where folks are managing other people's money. They were a little bit more sensitive to the issues of March 8th. Yeah, I'll give you an interesting statistic.

Speaker 3: We had our call center volume at two weeks following March 8th was a normal total volume. It was 66,500 and something calls and only 30 calls had anything to do with FBI and the insurance coverage. You know, five basis points.

Speaker 3: of the calls, which surprised me how little call center activity we had around that subject.

Speaker 5: For sure, that's interesting. I agree. That's all very helpful. I'll hop out of the queue. Thanks so much.

Speaker 6: All right, thank you, Kevin.

Speaker 2: Thank you. Our next question comes from Kevin Fitzsimmons of DA Davidson. Kevin, your line is open, please proceed.

Speaker 7: Hey, good morning, everyone.

Speaker 7: Good morning. I was just looking to drill down a little more into the comments about slowing balance sheet growth. From what I remember, I don't think you guys were guiding to rapid growth. I think you had last said mid-single digit. So if we're going even slower than that, maybe just…

Speaker 7: help us with, does that happen quickly? Does that happen steadily over the course of the year? And is that more driven by the demand and what the Fed has done, you know, the Fed's getting what it wants in the economy? Or is it more you guys really proactively tapping on the brakes just given...

Speaker 7: the economic cost of funding alone, the credit concerns, et cetera. Thanks.

Speaker 4: Yeah, Kevin, it's John . I think our previous guide for 2023 was that we would have mid single digit loan growth for the year. We came in at 7% in the first quarter. You know, I can imagine that that loan growth may be more heavily weighted to the first half of the year.

Speaker 4: mode before they make major capital expenditures. The M&A activity slowed down in C&I. CRE has slowed significantly and we're seeing some of our peer banks back out of that space and so we want to be selective there.

Speaker 4: Multifamily is still strong because a lot of folks are still priced out of a single family market and we've got a lot of population migration here. Industrial demand is still real strong near the ports particularly. We've got less than 1% vacancy rates in Savannah and Charleston on industrial. So I just doing more support for the other agencies across suburban.

Speaker 4: You know, I just I think there's a lag effect, Kevin with the Fed and interest rate increases. You know, we were growing loans in the mid teens in 2022, 7% in 2023 in the first quarter. I still think the mid single digits for the full year feels about right.

Speaker 7: Okay, great. Maybe just a quick check on expenses. I know I think last quarter – Is their suddenly justified or they have no

Speaker 7: You told us about a 950 million run rate for the year, run rate or for the year and now we're

Speaker 7: I think you said expenses came in a little better than your expectations. Is that still the outlook? Or given that things are getting tougher on the top line, is there going to be more scrutiny on the expense line? Thanks.

Speaker 3: Yeah, Kevin, it's Will. Hopefully we're always applying the appropriate level of scrutiny to our NIE base and everybody applying that ownership culture as they think through their NIE base. I did reference we're a little better than Target. I think we had in the first quarter maybe budgeted about a million dollars more, so pretty much on top of it.

Speaker 3: team of owners will think through that way. You know, there are factors, you know, that are harder to predict. You know, one is a loan production volume and the impact that has on the capitalization of loan origination costs, you know, which is an offset, and it's a lower production leads to lower.

Speaker 4: What cost offset in that regard are higher NIE, but sitting here through the first quarter, I'm pleased we're a little bit ahead of budget on NIE. I still think our guidance for the full year feels about right at this point. Yeah, and just what I would add to that, Kevin, is just the big picture is that we're continuing to work on our platforms and spend money on those to make sure that we've got a really good customer and employee experience.

Speaker 4: And we think that that's going to pay dividends out in 24, 25. And so, you know, to Will's point, we're always trying to manage expenses. You have to have the lowest common denominator and ultimately create. And there will always be opportunities again in environments like this.

Speaker 4: where there'll be teams of people and other things that will have the opportunity to hire and you wanna have the ability to do that. But I think within all that, we're gonna manage these kinds of things. Yeah, and one other point I'll make too, just as you're thinking about modeling, our typical, most of our employees...

Speaker 7: annual increase cycle. It's a July 1 increase. So you'll see that's a third quarter event every year. Okay, appreciate that. And then Steve, one thing I just, it was a nice rebound quarter for correspondent. Just wondering if that's

Speaker 4: a sustainable pace or how we should think about that. Yeah, no, to your point, you know, the correspondent had a great quarter this quarter, you know, kind of the way that we think about that business is, you know, the obviously the interest rate swap revenue.

Speaker 4: which should come in the next, maybe toward the back half of the year. These interest sensitive businesses like mortgage and correspondent probably will stay lower. So I wouldn't expect, I mean, the first quarter is really good and I would kind of go back to our original guide on that to be in that 55 to 65 basis points of assets.

Speaker 4: until the, not actually gonna be that, until the Fed stops raising rates and then we kinda go to 60 to 70 after that because we just need some stability for those purposes.

Speaker 4: until the non-instrumental be that until, you know, the Fed stops raising rates and then we kind of go to 60 to 70 after that because we just need some stability for those businesses. Thanks very much, guys.

Speaker 2: Thank you. Our next question comes from Steven Skelton of Piper Sandler. Steven, your line is open, please go ahead.

Speaker 4: Yeah, good morning, everyone. I was kind of curious at a high level, how do you think if in any way your business model has kind of changed with all the turmoil from March 8 and beyond? Everybody seems to think a regional banking model is somehow dead now. I'm just kind of curious. My name is

Speaker 7: what your views are on that at a high level and how you think your business model may or may not have changed.

Speaker 4: Yes, Stephen, it's John . I think about our business model and a couple of things come to mind. Number one is the local market leadership in our business model. We have 41 regional presidents and they manage their own balance sheet and their own income statement.

Speaker 4: And I think that has proved to be very valuable when it comes to managing deposit costs and deposit betas. In a headquarters-centric type of business model, you're making all of these interest rate decisions at the headquarters. And I think it's much, much better for the local market leaders to figure out where they need to shoot.

Speaker 4: of the deposit base. One third retail, one third small business, one third commercial treasury. And you go back to 2008-2009, what got the banks in trouble? It was concentration on the loan portfolio. You look at this cycle, what got banks in trouble was concentration on the deposit side.

Speaker 4: So I think our decentralized leadership model has proven to be very valuable and I think the diversity of our business mix has proved to be very valuable and kept some stability. So I don't know that we're thinking about this crisis as something that's going to change the way we do business. I think it's proven to be resilient.

Speaker 8: That's really helpful. Congrats on a really great stable quarter. Appreciate it.

Speaker 2: Thank you. Our next question comes from Michael Rose of Raymond James. Michael, your line is open. Please proceed. Hey, good morning, guys. Thanks for taking my questions. I just wanted to go back to mortgage for a second, the Gano sale margin.

Speaker 4: popped up, you had a better quarter if you back up the MSR gain. I think you just made some comments. I might have missed them, but just wanted to get the kind of the outlook there. And then on the balance sheet side, you've been portfolioing more of the mortgages, which obviously contributed this quarter's growth. Just wanted to get the outlook there for So here's my last question.

Speaker 4: how much you might plan on a quarterly basis to the portfolios going forward. Thanks. Sure, Michael. This is Steve. Yeah, you're right. The gain on sales did come back a little bit this quarter. I think our total production was around five hundred and fifty six million, of which.

Speaker 4: We portfolioed about 400M of that. So. You know, not quite, I think it's 70, 72% portfolio. You know, the adjustable arms, and that was 78% of that. So most of it's just we're putting on an arm, adjustable rate mortgages.

Speaker 4: As we kind of think about the future, you know, we don't see a huge run-up in that business for a while until things stabilize a little bit. I think what we're seeing most and why we have so much portfolio production is we have an owner.

person who is building out, there's just not enough inventory and so they're doing a kind of a CP loan that perms out into an arm on our balance sheet. Typically, these are professional doctor, I think most, I think the number was in the mid 40% of our portfolio production with that in the first quarter. So we're seeing a lot of those types of opportunities, which obviously sees in the wealth management and so on.

But we're not seeing any huge pickup in sort of the traditional secondary business, at least right now. Certainly, it's come off the lows a little bit. My sense is, like anything else, like all these fee businesses, fees are opportunities for us.

to build to continue to rebuild and build these businesses and yes, so we're actively recruiting mortgage bankers. We're actively recruiting some of our correspondent group. Yeah, we're actively doing all those things not because it's going to pay off in the next three to six months.

but because it will pay off in the next 12 to 24. And so that's kind of how we're thinking about investing those businesses.

Very helpful. Maybe just going back to deposits, just wanted to kind of talk about flows. So obviously you guys added some broker this quarter. He had the seasonal decline in public funds. Just excluding those two kind of impacts, you know, the core deposits obviously went up there.

Can you just talk about trends, kind of since everything happened in early March, and have you seen balances stabilized and maybe perhaps grow, and then what is the plan going forward to grow core deposits? Thanks.

Hey Michael, it's Woodall, I'll start and maybe John or Steve can jump in and elaborate. You know, I'd say we, the events of March 8 probably caused us to be a little more focused on deposits within our market and within our various markets. So, thank you for joining us today, and we'll see you next time.

So our sales hat on the deposit side.

became a little more important from that point forward. And so I think what you'll see from this point forward, I think, is a lot more activity in that regard. If you look at the March 8 to March 31 activity, essentially in that period, you saw our commercial deposits down. And it Did

about 400 million. Our other deposits, the rest of the bank is up about 100 million. So net net over that period, you're down about 300 million. You know, we have a lot of swings in the various categories obviously from period to period depending on what's going on. So that's not a real precise measure, but like I said, we...

We were surprised how few calls we had at the call center. Maybe John can touch on some of the activity we had with the outreach we did with some of our customers right around that time.

Yeah, you know, I go back to January , even before the March 8th event, and we were seeing some drawdowns of deposits in January , and I don't know that a lot of that was the public funds piece that's seasonal.

things stabilized in February . So we were feeling really, really good about the stability of the deposit portfolio in February , and then naturally things picked up, and the run-off picked up in March.

April , we started this deposit campaign and things stabilized again until you get to tax day. So that's kind of the ebbs and the flows the last few months. But for us, Michael, the important thing was after March 8th that we instilled confidence in our frontline bankers. And we met with probably 100 or more of our leaders on that Monday morning.

And, you know, I think the market correctly identified the risk to the system for uninsured deposits and the size of deposit accounts. And we had some great data Monday morning to share with our bankers that South State had the lowest average deposit size of any of our peers.

we had one of the lowest uninsured percentages of total deposits. I think that gave our bankers a lot of confidence and that confidence in turn translated to our customers confidence.

One other data point too, I mentioned the commercial deposits. Our commercial line of credit utilization fell by roughly 2% during the quarter. It looks like businesses tend to use their cash before they use their credit.

our cash so to speak. That makes a lot of sense. Thanks for the insights. Maybe just finally for me, I know capital is a precious commodity at this point, but the stock has definitely come in. You guys have a buyback in place. Any thoughts on using it and if not,

You know kind of near term what what we kind of change the calculus for you. Thanks Yeah, I think in the near term Michael we think capital continue to allow capital to accrete and build is wise and You know that having capital as a strength will allow us to be more optimistic should some opportunities develop

coming out of this and as John mentioned in his prepared remarks, we've got a history of doing that. So in our view for the foreseeable future, we continue to plan to let capital accrete. It'd be good to get some guidance, you know, some clarity on regulatory changes and even the regulatory changes that don't necessarily affect banks below 100 billion dollars. Statutorily, regulation wise, that kind of guidance often flows downhill. So we'll want to, you know, be able to understand and digest that as well.

do so by pressing star followed by one on the telephone keypad now.

Our next question comes from Brody Preston of UBS. Brody, your line is open, please go ahead. Hey, good morning everyone, thanks for taking the questions. Note that Series 1 GO is eligible byaying all following events and the event date is scheduled. For any property anything similar, Range Rover will not fulfill your fin likes and

Steve I wanted to follow up just on on the line of thought on the non interest-bearing I know it's I know it's really hard to predict using information to highlight people, to resilience then Energy is important to understand

You know, but you did give expectations for margin for the rest of the year. And so it sounded like you were expecting some further mix there based on the other comments you gave. So just wanted to ask, within your margin guidance, what are you guys expecting for a non-interest bearing deposit mix?

Yeah, I don't know that we would say that publicly, although we just don't know honestly. But we have some, we definitely think there's some movement from 34% into the high 20s. I don't know if all that happened.

in the next two quarters or it happens over the next 18 months. We're just not really sure. So I would just assume that we're going to be a lot like the industry and seeing the Continue to Remix, I think this quarter is about 7%. So I would assume that that probably trends maybe another quarter or so. And then after that, stabilizes. Because I think what's happening right now is that we're going to be able to get a lot of people to be able to get their

is there's a wake-up moment in March 8th, and that probably, I would expect, until the Fed stops raising rates, let's assume they stop raising rates in May, that there's some remix over this next quarter, and then we probably get the most of that remix out of the picture, I would think, but it'll dribble in over the next, you know, about two to four quarters after that.

There's a wake-up moment in March 8th, and that probably, I would expect until the Fed stops raising rates, let's assume they stop raising rates in May, that there's some remix over this next quarter, and then we probably get most of that remix out of the picture, I would think, but it'll dribble in over the next two to four quarters after that. Got it. That's helpful. Yeah, that's helpful. Thanks. Thanks. Thanks. Thanks. Thanks. Thanks. Thanks.

I did also want to ask this on the correspondent bank. Could you give us a sense for what amount of your deposits come from from your correspondent relationships and how those trended from 1231 to 331?

Yeah, you know, that correspondent business, we have a couple hundred million dollars in DDA, a few hundred million dollars in money market accounts, maybe a couple hundred million and I'm going to guess 600 million maybe. We've always been pretty intentional about that business relative to being a fee income business versus a deposit gathering business.

And we do gather deposits. We have about a billion and a half dollars since it sits off balance sheet with our, with the EBA, which we, you know, sort of all their wires and ACH has come through us. But instead of us put that billion and a half on our balance sheet, we send it to the Fed. So we've always been pretty.

around how much of that we wanted to put on our balance sheet at any point in time. So hopefully that's helpful. No, that is, that is, I appreciate that. And I had two last questions. Appreciated the office slide. I did want to ask is that, is there owner occupied office included?

within that 4% of the total portfolio that you put out there. And if there is, do you have a sense for what that portion is?

That's the non-owner occupied office space, Brody. Got it. Got it. Thank you very much for that clarification. And then I did just want to ask again on the non-owner occupied portion, I guess maybe I should have triangulated the office exposure before I asked that question, but you did give the other non-owner occupied CRE portfolio.

higher substandard and special mention ratios than the rest of the book. I'm particularly interested in in the nursing home just wondering if there's anything you know special going on there. Yeah you bet. The hotels is a carryover from COVID and as we get financial statements on these hotels we're continually upgrading those and we see that trend.

continuing. That's just a hangover from COVID. Actually, hotels are performing very, very well right now. The convention business is about back to normal. Tourism in Florida is about back to normal. So we do not forecast problems in the near term in the hotel space. On the assisted living space, it's less than 1% of our loans.

But we had a couple of new facilities that came online during COVID. And basically, it's healthcare costs, the fear of COVID, and the facilities are a little slower to become occupied.

Got it. Do you, I guess, I know it's really small portion of your book, but is that, is that a trend, I guess, when you kind of look across, you know,

assisted living facilities and the deals that kind of come across your desk, are you seeing kind of that slowness and lease up or an occupancy across some of the newer facilities that are being built versus maybe some of the older ones that already had higher occupancy rates? Yeah, I just think that that is a challenge space because of COVID and I think it'll be

slow to come back to what it was prior to COVID. So I mean, I think it's just an overall COVID issue. Yeah, Brody, we saw them also have problems with labor inflation and labor shortages. We kind of got it from all ends.

As you said, it's not a big space for us, nor is it much of an appetite for us.

And we've had those on downgraded status really for a good while now. We've got two non-accrual assisted living facilities. Both of them are current on their payments. We don't anticipate a loss there.

Thank you. 59% of our non-performing loans are kernel payments. Okay. That's good to know.

All right guys, well thank you very much for taking my questions. I appreciate it.

final reminder if you wish to submit a question via the telephone line so you can do so by pressing star followed by one on your telephone keypad now. Our next question comes from Brandon King of Truist Securities. Brandon your line is open please go ahead.

Hey, good morning.

So, I just wanted to know if you could help us how we think about with loan yields and how they could increase from current levels, maybe the benefit from fixed rate loan repricing. And Steve, I know you mentioned that 45 to 50 basis points increase the profit costs in the second quarter, but lungs

How much can you offset that with loan yields, with pricing, and then how does that kind of trend towards the later half of the year when the Fed pauses? Yeah, Brandon, it's a good question, and that's kind of why we think there's stability in the back half of the year with margin.

If you look at our book, we've got about, we have a slide in the deck that talks about our fixed rate books. So, call about half of it is fixed rate. We've got about, so that's about 15 billion or so. We've got about 8.7 billion that's floating daily, so that probably has one more rate hike in it.

And then we have about 3.6 billion that is going to be adjustable here in the next 12 months. And its weighted average rate is 4.07%. So, you know, if it's based on a one-year Treasury, what have you, likely that's going to reprice into six or somewhere. And then we have some other adjustable little reprice about 2.6 billion.

15 to 20 over the next couple of quarters and maybe we crest out at the you know end of the year somewhere between 550 and 575 somewhere there. Got it very very helpful. And then on the deposit side what is kind of the continued appetite for broker deposits.

And could you share kind of what the rate in maturity broke or departed square that you raised in the quarter?

Yeah sure Brendan, you know if you kind of, I'm going to give you a short answer and a long answer. The short answer is we did about a billion 250 at about, is right at a 5% coupon and it's got a three quarters of a year duration.

So that's the short answer. The longer answer is if you kind of look back at these times of stress, times when, you know, like I'll go back to March of 2020, we sort of did the same thing. We borrowed, I think, about a billion, one or two of broker deposits because it was really uncertain in March of 2020 about, you know, small businesses pandemic. So the way we think about it.

is, you know, that's a source that we can get to quickly that we sort of bolster the balance sheet, but over time we would expect that to probably continue to add down. You know, if you went to pre-cycle, pre-pandemic in December of 2019, I think we had about three and a half percent of our assets were in either.

home loan bank or Broker deposit, so that's probably a good long-term average today. We're at five you know my guess is we'll dress go back down over time

or broker deposits. So that's probably a good long-term average today. We're at five. You know, my guess is we'll go back down over time.

It makes sense. And then lastly, on credit, net charge-offs continue to be very low. And some of your peers have already seen some normalization of lips. I'm just curious, how long do you think you can keep net charge-offs at this level? And when do you think that pace of normalization will start to begin?

Yeah, good question. And we'll have to just see how this cycle unfolds. But for the quarter, we actually have net loan recoveries. And I think we mentioned in the prepared remarks, we've set aside 123 million in reserves for only 3 million in the last year. But you know, I think if you look at the loan portfolio, we've got a lot of detail in the appendix there about

Thanks for taking my questions.

You bet.

Thank you. Our next question comes from David Bishop of HOVT Group. David, your line is open, please go ahead.

Good morning gentlemen and had to jump on later. Good morning. I apologize if this question has been asked and answered. Just noticed the run up in short-term liquidity here and borrowings here. Is that just a modicum of cautiousness given the dislocation this quarter and how should we think about that cash and short-term investments.

trending through the rest of the year. Thanks. Yeah, David, this is Steve. You know, what we really reiterated earlier was, you know, kind of that mid single digit loan growth, we reiterated a $40 billion interest earning asset base. So we would expect I think we ended up a little bit higher than that if you look at the spot basis on interest earning assets at the end of the quarter.

Thank you. At this stage, we currently have no further questions, so I'll hand back over to the management team for any final remarks.

Thanks for joining us this morning. I know there was a lot of earnings releases yesterday. It's a busy morning. I appreciate you joining us. If you have any questions on your modeling, don't hesitate to give us a ring. Hope you have a great day. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.