Q2 2024 SouthState Corp Earnings Call
Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the South State Corporation's second quarter 2024 earnings conference call.
Operator: At this time, I would like to welcome everyone to the South State Corporation's 2nd Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Operator: Your next question comes from the line of David Bishop of the Huff Group. Please go ahead.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Mr. Will Matthews, Chief Financial Officer. Please go ahead.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
David Jason Bishop: A question, you know, there's obviously been a lot of activity around the commercial real estate space within the markets here. You know, into the deal, any any subsegments or areas where you're consciously pulling back from and saying, hey, we're going to avoid this landmine, just not looking to grow this business and any areas where you might see some opportunities. Thank you.
If you would like to withdraw your question, press star 1 again.
I would now like to turn the call over to Mr. Will Matthews, Chief Financial Officer.
William E. Matthews: Good morning, and welcome to South State's second quarter 2024 earnings call. This is Will Matthews, and I'm here with John Corbett, Steve Young, and Jeremy LeClerc.
John C. Corbett: David, really, I don't think there's any difference in the philosophy of IBTX and South State. You know, I think we are wanting to manage our total CRE ratio well below 300 percent and see that decline over time. You are all cautious, naturally, on office, cautious on assisted living. IBTX has got a really good, solid retail, granular retail CRE book, and we're pretty bullish on that. So I don't anticipate a change in their lending practices or our lending practices, but I do anticipate, with the way we're going to accrete capital, that our CRE concentration ratio will drift down.
William E. Matthews: Good morning and welcome to South State's second quarter 2024 earnings call.
David Jason Bishop: Got it. Appreciate it. A housekeeping item.
William E. Matthews: This is Will Matthews, and I'm here with John Corbett, Steve Young, and Jeremy Lucas.
William E. Matthews: As always, John and I will make some brief remarks and then move into questions. We understand you can all read our earnings release and investor presentation, copies of which are on our investor relations website. We thus won't regurgitate all the information but try to make a few comments and point out a few highlights on items of interest before moving to Q&A. Before we begin our remarks, I want to remind you that the comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations.
John C. Corbett: As always, John and I will make some brief remarks and then move into questions.
William E. Matthews: We understand you can all read our earnings release and investor presentation, copies of which are on our investor relations website.
William E. Matthews: We thus won't regurgitate all the information, but try to make a few comments and point out a few highlights on items of interest before moving to Q&A.
William E. Matthews: 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 the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect you. Now, I'll turn the call over to John Corbett, our CEO.
David Jason Bishop: I know, obviously, the profitability will escalate in 2025 with the merger. How should we think about a go-forward tax rate once the merger is complete? Thanks. Um, you know, not forecasted.
William E. Matthews: Before we begin our remarks, I want to remind you that the comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations.
William E. Matthews: Any such forward-looking statements we may make are subject to the Safe Harbor rules.
William E. Matthews: 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.
John C. Corbett: Thank you, Will. Good morning, everybody.
William E. Matthews: Now I'll turn the call over to John Corbett, our CEO .
Steve: Um, you know, not forecasting a big change from where we are today, Dave. Um, uh, I'll probably have some more refined estimates as we move closer to closing and maybe build updates for you guys in the next couple of quarters. At this point, I don't have any major changes to project.
John C. Corbett: Thanks for joining us. It felt like South State was firing on all cylinders in the second quarter. We saw the long-anticipated inflection of our net interest margin. Non-interest income was up. Expenses were well controlled, and earnings per share were up 15% from last quarter.
David Jason Bishop: Got it. I appreciate the call. You know, if there are no further questions, I'm going to add one clarifying comment on the non-expiry expenses. I've seen some of you in your notes have noted the cost of the cyber event, which we have in the non-recurring line item. And that year-to-date has been about $8 million, about half of that in the first quarter and half in the second quarter. We have coverage for the cyber event.
John C. Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us.
John C. Corbett: We have not yet filed the insurance claim. We have a retention amount, and then there are some amounts related to some employee payments that weren't technically covered by the policy that will be borne by us. Those two combined total about $2 million. So I know some of you are adding that back as an operating expense in some of your models, but I wanted to just make that point. We have yet to file that claim and would expect to be reimbursed for all but about $2 million of the cost of that event.
Speaker Change: It felt like South State was firing on nearly all cylinders in the second quarter.
John C. Corbett: Okay, so yeah, there are no further questions. I will now turn the conference back over to Mr. John Corbett for closing remarks. All right, thank you, guys.
Speaker Change: We saw the long-anticipated inflection of our net interest margin.
Speaker Change: Non-interest income was up.
Speaker Change: Expenses were well controlled.
John C. Corbett: On the balance sheet, deposits are still a challenge, but loans grew better than forecast, and asset quality is in good shape, with only five basis points in charge off. The most impactful event of the second quarter was obviously the announcement of the independent financial transaction. We spent the month of June in town hall meetings with employees in Dallas, Denver, Austin, and Houston, and David and his team were incredibly welcoming and hospitable. They're all terrific.
Speaker Change: And earnings per share were up 15% from last quarter.
Speaker Change: On the balance sheet, deposits are still a challenge, but loans grew better than forecast, and asset quality is in good shape, with only five basis points in charge-offs.
Speaker Change: The most impactful event of the second quarter was obviously the announcement of the independent financial transaction.
John C. Corbett: Alright, thank you guys for joining us this morning. We know you've got a lot of calls to jump on, so if we can provide any other clarification for you, don't hesitate to give us a ring, and I hope you have a great day.
Operator: Ladies and gentlemen,
Speaker Change: We spent the month of June in town hall meetings with employees in Dallas, Denver, Austin, and Houston, and David and his team were incredibly welcoming and hospitable. They're all terrific.
John C. Corbett: With no branch overlap and no change to the geographic leadership structure, it makes this much easier to integrate and for our bankers to keep their focus on serving their clients and building the bank. We've already filed the proxy, and we've scheduled the shareholder vote for next month. We also filed the regulatory applications on July 1st, so things are progressing on schedule. We walked through the strategic rationale when we announced the deal in May. We're expanding into great markets. In fact, they're some of the only markets in the country that match the demographic growth profile of our current markets, both from people migration and income migration.
Speaker Change: With no branch overlap and no change to the geographic leadership structure, it makes this much easier to integrate and for our bankers to keep their focus on serving their clients and building the bank.
Speaker Change: We've already filed the proxy and we've scheduled for the shareholder vote for next month. We also filed the regulatory applications on July 1st, so things are progressing on schedule.
Speaker Change: We walked through the strategic rationale when we announced the deal in May.
Speaker Change: We're expanding into great markets. In fact, they're some of the only markets in the country that match the demographic growth profile of our current markets, both from people migration and income migration.
John C. Corbett: We also talked about the financial power, with 27% earnings per share accretion. I want to take a minute and drill down on how we're thinking about the deal from a capital management perspective. As an industry, we're on the back end of the fastest increase in interest rates in decades. Our industry currently suffers from loans and investments that are under-earning their potential because they're not yielding current market rates. That's a negative overhang that will last for years.
Speaker Change: We also talked about the financial power, with 27% earnings per share accretion.
Speaker Change: But I want to take a minute and drill down on how we're thinking about the deal from a capital management perspective.
Speaker Change: As an industry, we're on the back end of the fastest increase of interest rates in decades.
Speaker Change: Our industry currently suffers from loans and investments that are under-earning their potential because they're not yielding current market rates. That's a negative overhang that will last for years. But the positive is the industry enjoys the benefit of strong capital ratios.
John C. Corbett: But the positive is that the industry enjoys the benefit of strong capital ratios. So the question for every bank management team is how to utilize surplus capital to reposition the balance sheet and unlock the earnings potential of these assets rather than wait years. Many of our peers have chosen to execute a bond swap, and that's fine, but a bond swap never got us particularly excited as a capital management strategy. We looked at it as a dollar-for-dollar trade.
Speaker Change: So the question for every bank management team is how to utilize surplus capital to reposition the balance sheet and unlock the earnings potential of these assets rather than waiting years.
Speaker Change: Many of our peers have chosen to execute a bond swap, and that's fine. But a bond swap never got us particularly excited as a capital management strategy. We looked at it as a dollar-for-dollar trade. You invest a dollar of capital and you get a dollar of earnings, but you accelerate the timing of the cash flows.
John C. Corbett: You invest a dollar of capital, and you get a dollar of earnings, but you accelerate the timing of the cash flow. Again, that's fine from a financial engineering perspective, but it feels to us like a dollar for dollar trade. What we're doing with Independent is a more powerful use of capital. Just like a bond swap, we're unlocking the earnings power of the bonds at Independent Financial, but it's not just the bonds; we are unlocking the earnings potential of their entire loan portfolio. So including both loans and investments, it's about a $17 billion interest rate swap on all earning assets. But here's the key.
Speaker Change: Again, that's fine from a financial engineering perspective, but it feels to us like a dollar-for-dollar trade.
Speaker Change: What we're doing with Independent is a more powerful use of capital.
Speaker Change: Just like a bond swap, we're unlocking the earnings power of the bonds at Independent Financial, but it's not just the bonds.
Speaker Change: were unlocking the earnings potential of their entire loan portfolio.
Speaker Change: So including both loans and investments.
Speaker Change: It's about a $17 billion interest rate swap on all earning assets.
John C. Corbett: Rather than a dollar-for-dollar trade, the thing that makes this different is that we're utilizing the South State valuation and the Currency Advantage simultaneously with the investment of capital, which makes the swap much more powerful as a capital management approach. Consider both the normal economies of scale we gain in a transaction plus the currency advantage. And we see this as a far, far better use of capital than a vanilla bond swap. All $17 billion of earning assets move to market rates, and the rates are instantly locked in.
Speaker Change: But here's the key.
Speaker Change: Rather than a dollar-for-dollar trade, the thing that makes this different is that we're utilizing the South State valuation and currency advantage simultaneously with the investment of capital, which makes the swap much more powerful as a capital management approach.
Speaker Change: Layer in both the normal economies of scale we gain in a transaction plus the currency advantage.
Speaker Change: And we see this as a far, far better use of capital than a vanilla bond swap.
John C. Corbett: The Independence Net Interest Margin opens wide, and the only rate movement going forward will be deposit rates. As we move into a period of likely lower rates, South State should benefit as a more liability-sensitive balance sheet with independents. I want to thank David and Dan Brooks, Dan Strodel, and the entire independent team for making us feel so welcome and for their enthusiasm for what we're building together. I'll turn it back over to Will to provide more color on the court.
Speaker Change: Independence net interest margin opens wide and the only rate movement going forward will be deposit rates.
Speaker Change: As we move into a period of likely lower rates, South State should benefit as a more liability-sensitive balance sheet with Independent.
Speaker Change: I want to thank David and Dan Brooks, Dan Strodal, and the entire independent team for making us feel so welcome and for their enthusiasm of what we're building together.
Speaker Change: I'll turn it back over to Will to provide more color on the court.
William E. Matthews: Total revenue of $425 million for the quarter was a bit better than forecasted, with net interest income of $350 million and non-interest income of $75 million. That total revenue number was up $10 million from Q1 on an equal day count.
Speaker Change: Total revenue of $425 million for the quarter was a bit better than forecasted, with net interest income of $350 million and non-interest income of $75 million. That total revenue number was up $10 million from Q1 on an equal day count.
William E. Matthews: Our NEM of 344 rose three basis points and was in line with our expectations. Deposit cost increases slowed to six basis points at the lower end of our five to ten basis point guidance, for a cost of total deposits of 180 basis points for the quarter, and as loan yields increased nine basis points from the prior quarter, also within our guidance of seven to ten basis points. I'll note what appears to be something of an inflection point.
Speaker Change: for a cost of total deposits of 180 basis points for the quarter.
Speaker Change: and as loan yields increased nine basis points from the prior quarter, also within our guidance of seven to ten basis points.
William E. Matthews: This is the first quarter since Q4 of 22 where our improvement in loan yields exceeded our increase in the cost of deposit. That brings our total cumulative deposit beta to 34% and our cumulative loan beta to 39%. Confirming our expectations, our deposit mix shift appears to have slowed. In fact, for the quarter, average DDA balances were up slightly versus Q1, and the average mix of DDAs to total deposits was unchanged from Q1's 28.5%. Steve will give some color on our future margin guidance in the Q&A.
Speaker Change: I'll note what appears to be something of an inflection point. This is the first quarter since Q4 of 22, where our improvement in loan yields exceeded our increase in cost of deposits.
Speaker Change: That brings our Total Cumulative Deposit Beta to 34% and our Cumulative Loan Beta to 39%.
Speaker Change: Confirming our expectations, our deposit mix shift appears to have slowed. In fact, for the quarter, average DDA balances were up slightly versus Q1, and the average mix of DDAs to total deposits was unchanged from Q1's 28.5%.
Speaker Change: Steve will give some color on our future margin guidance in the Q&A.
William E. Matthews: Non-interest income was up $4 million from Q1, a bit better than we expected. NIE, excluding non-recurring items, of $242 million, was up $1 million from Q1 and moderately above Q2 of 23 levels. Looking ahead to the remainder of the year, we have merit increases for most of the bank that were effective July 1st, so compensation expense will increase. There are also some project and related expenses we expect to hit in the second half of the year. So NIE in Q3 and Q4 is still likely to be in the $250 million range. As always, NIE is somewhat dependent on expense items that vary with revenue.
Stephen Dean Young: Non-interest income was up $4 million from Q1, a bit better than we expected.
Stephen Dean Young: NIE, excluding non-recurring items, of $242 million, was up $1 million from Q1 and moderately above Q2 of 23 levels.
Stephen Dean Young: Looking ahead to the remainder of the year, we have merit increases for most of the bank that were effective July 1st, so compensation expense will increase.
Stephen Dean Young: There are also some project and related expenses we expect to hit in the second half of the year. So NIE and Q3 and Q4 is still likely to be in the $250 million range.
Stephen Dean Young: As always, NIE is somewhat dependent on expense items that vary with revenue.
Operator: Our $4 million in provision expense essentially matched the quarter's net charge-offs, leaving the total reserve levels flat, and when combined with loan growth, caused the total reserve to loans to decline three basis points to 157. NPLs were up $21 million, centered on one loan where we have guarantors with substantial liquid capacity and where we expect to resolve this credit favorably. Past dues and payment performance has improved and is as strong as we've seen in recent memory.
Stephen Dean Young: Our $4 million in provision expense essentially matched the quarter's net charge-offs, leaving the total reserve levels flat, and when combined with loan growth, caused the total reserve to loans to decline three basis points to 157.
Stephen Dean Young: NPLs were up $21 million, centered in one loan where we have guarantors with substantial liquid capacity and where we expect to resolve this credit favorably.
Stephen Dean Young: Past dues and payment performance improved and are as strong as we've seen in recent memory.
Operator: And we continue to expect that we will not see significant losses in the loan portfolio based upon current forecasts. Lastly, on the balance sheet front, loan growth of 7% annualized brought year-to-date growth to a 5% annualized rate. Deposits were flat with Q1 levels, with ending deposits down slightly and average deposits up approximately 1%. Capital improved, with our TCE ratio growing to 8.4%, our CET1 to 12.1%, and our TBV per share ending at $47.96. The operator will now take questions.
Stephen Dean Young: And we continue to expect that we will not see significant losses in the loan portfolio based upon current forecasts.
Stephen Dean Young: Lastly, on the balance sheet front, loan growth of 7% annualized brought year-to-date growth to a 5% annualized rate.
Stephen Dean Young: And deposits were flat with Q1 levels, with ending deposits down slightly and average deposits up approximately 1%.
Stephen Dean Young: Capital improved with our TCE ratio growing to 8.4%, our CET1 to 12.1%, and our TBV per share ending at $47.90.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the queue. Your first question comes from the line of Michael Rose of Raymond James. Please ask your questions.
Speaker Change: Operator will now take questions.
Speaker Change: Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: If you are called upon to ask your question and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Stephen Dean Young: Again, please press star 1 to join the queue.
Speaker Change: Your first question comes from the line of Michael Rose of Raymond James.
Michael Edward Rose: Hey, good morning, guys. Thanks for taking my questions.
Speaker Change: Please ask your question.
Michael Edward Rose: And I just wanted to get a sense on, you know, just the loan growth expectations. You know, I know you guys had previously talked about, you know, kind of mid-single digits. But I think this quarter was a little bit better than what I was looking for.
Michael Edward Rose: Hey, good morning guys. Thanks for taking my questions.
Michael Edward Rose: And I just wanted to get a sense on, you know, just the loan growth expectations.
Speaker Change: You know, I know you guys have.
Speaker Change: previously talked about, you know, kind of...
Speaker Change: Mid-single digits, I think this quarter was a little bit better than what I was looking for. Just any sort of thoughts that you guys have and if you can just talk about from the business perspective what your customers are telling you.
Michael Edward Rose: Just any sort of thoughts that you guys have and, you know, if you can just talk about kind of, you know, from the business perspective, what your customers are telling you. You know, would you expect, you know, to see, assuming everything works out with the election deregulatory side, maybe there is some pent-up demand? Just trying to get a sense for kind of what customer activity looks like. Thanks. Yeah, great.
Speaker Change: You know, would you expect, you know, to see, assuming everything works out with the election deregulatory side, you know, maybe, is there any pent-up demand? Just trying to get a sense for what customer activity looks like. Thanks.
John C. Corbett: Yeah, good morning, Michael. It's John.
John C. Corbett: Yeah, good morning, Michael. It's John . Yeah, you're right. We referenced about mid-single-digit loan growth guidance early in the year, and really, that's what we're tracking. We've done about 5%.
John C. Corbett: Yeah, you're right. We referenced mid-single-digit loan growth guidance early in the year, and really that's what we're tracking. We've done about 5% loan growth, a little stronger in the second quarter. I think last quarter, Michael, we mentioned that our pipelines had grown significantly starting in November of last year, and that pipeline growth translated into loan production growth in the second quarter. Our loan production grew from $1.3 billion in the first to about $2 billion in the second quarter, so it's about a 50% increase in loan production.
Speaker Change: Lung growth a little stronger in the second quarter. I think last quarter, Michael, we mentioned that our pipelines had grown significantly starting in November of last year.
John C. Corbett: And that pipeline growth translated into loan production growth in the second quarter. Our loan production grew from $1.3 billion in the first to about $2 billion in the second quarter. So it's about a 50% increase.
John C. Corbett: You know, the growth is really broad-based. The biggest contributor we're seeing is C&I credits, largely middle-market companies, and we're seeing the strongest growth in the Carolinas. And in the last year, you know, we've benefited from the funding of construction loans that were made earlier in 21 and 22. That tailwind probably abates here in the coming quarter, so we may lose some of that benefit. But pipelines are currently stable, so we think our current guidance is still appropriate.
John C. Corbett: in loan production.
Speaker Change: You know, the growth is really broad-based. The biggest contributor we're seeing is C&I credits, largely middle market companies, and we're seeing the strongest growth out of the Carolinas.
Speaker Change: And in the last year, you know, we've benefited from the funding of construction loans that were made, you know, earlier in 21 and 22. That tailwind probably abates.
Speaker Change: And all of that is here in the coming quarters. So we may lose some of that benefit. But pipelines are currently stable, so we think our current guidance is still appropriate. But, as always, it can be lumpy from quarter to quarter. The payoffs are the wild card.
John C. Corbett: But, as always, it can be lumpy from quarter to quarter, but the payoffs are the wild card. They've been historically low in the last few quarters, but we're starting to see some multifamily sales activities, so payoffs might increase.
John C. Corbett: They've been historically low the last few quarters, but we're starting to see some multi-family sales activities, so payoffs might increase.
John C. Corbett: Very helpful. And then just switching to credit, you guys, for a bunch of quarters, built up the reserves pretty meaningfully. You did have some, you know, modest upward migration, understanding it's off of, you know, very low levels, but the reserve did come down. The provision was, I think, much less than I and others were looking for. Can you just discuss some of the puts and takes and maybe, you know, what drove the increase in the earlier stage, you know, special mention and substandard categories? Thanks.
Speaker Change: Very helpful. And then just switching to credit, you guys, you know, for a bunch of quarters.
Speaker Change: You know, built the reserves pretty meaningfully. You did have some, you know, modest upward migration. Understanding it's off of, you know, very low levels, but the reserve did come down. The provision was, I think, much less than me and others were.
Speaker Change: Can you just discuss some of the puts and takes and maybe, you know, what drove the increase in the earlier stage, you know, special mention and substandard categories? Thanks.
John C. Corbett: Yeah, yeah, Michael, it's John. So I think we talked about a few quarters ago that as the yield curve increases and rates rise, we'll probably see a migration and more of a normalization in the [inaudible]. But as we talk to the credit team that is analyzing these loans, they don't see material loss content, and we're not having really any significant payment performance issues. I think Will mentioned it in his open remarks: past dues are only 21 basis points.
John C. Corbett: Yeah, yeah, Michael, it's John . So I think we talked about a few quarters ago as the yield curve increases and rates rise, we'll probably see a migration and a more of a normalization in
John C. Corbett: particularly commercial real estate loans, and that's kind of manifested itself, although it's slowing down the last quarter or two, but it's primarily a rising rate story. I think our culture, as you know it to be, is one that's quick to downgrade and slow to upgrade.
John C. Corbett: But as we talk to the credit team that are analyzing these loans, they don't see material loss content, and we're not having really any significant payment performance issues. I think Will mentioned it in his open remarks, past dues.
John C. Corbett: And, you know, we're all focused on office, but office past dues are only 22 basis points. And if you take a step back, past dues on all commercial real estate loans are only six basis points. So, you know, I think as we move through this rate cycle, we've got lots of equity-strong guarantors. We'll upgrade loans accordingly as debt service coverage is improved, but we don't see lost content. Our credit folks aren't particularly concerned at this point. Yeah.
William E. Matthews: are only 21 basis points and you know we're all focused on office but the office past dues are only 22 basis points and if you take a step back
William E. Matthews: past dues in all commercial real estates.
William E. Matthews: loans are only fixed basis points so yeah I think as we move through this rate cycle we got lots of equity strong guarantors you know we'll upgrade loans accordingly as
John C. Corbett: As debt service coverage has improved, but we don't see lost content, our credit folks aren't particularly concerned at this point.
William E. Matthews: Yeah, Michael, it's Will. I'll maybe comment on the provisioning. You know, CECL is always a difficult and dangerous thing to predict, but, you know, the theory behind it, of course, is that you provision in advance and recognize losses in advance. And, you know, if you look at our build over the last eight quarters, you know, it's up about $171 million. Provision Expense, net of charge-offs. And so it's possible moving ahead, if you start to see improvements in economic forecasts, we and the industry, if others follow the same practice, would potentially see reserve levels continue to come down, even as, in some cases, you might see some folks' charge-offs tick up at the same time.
John C. Corbett: Yeah, Michael, it's Will. I'll maybe comment on provisioning. You know, CECL is always a difficult and dangerous thing to predict, but, you know, the theory behind it, of course, is that you provision in advance, recognize losses in advance.
Speaker Change: And, you know, if you look at our build over the last eight quarters, you know, it's up about $171 million.
John C. Corbett: provision expense net of charge-offs.
John C. Corbett: And so it's possible moving ahead, if you start to see improvements in economic forecasts, we and the industry, if others followed the same practice, would potentially see reserve levels continue to come down, even as, in some cases, you might see some folks' charge drops tick up at the same time. So...
William E. Matthews: You know, CECL is a forward-looking model; it does incorporate some other qualitative factors associated with things in your portfolio, but if economic forecasts improve from here, I wouldn't necessarily see our reserve moving up at all from where it is today.
John C. Corbett: You know, CECL is a forward-looking model. It does incorporate some other qualitative factors associated with things in your portfolio, but if economic forecasts improve from here, I wouldn't necessarily see our reserve moving up at all from where it is today.
Michael Edward Rose: It makes a lot of sense. Thanks for the caller. Maybe just one last one for me. I saw that you guys filed a fixed income, you know, presentation, and, you know, it looks like IBTX, to the extent that you can comment, has some sub-debt that's maturing in 24. Can you just talk about, you know, why this presentation was filed and then, you know, any sort of comments as to what the sub-debt... Do they expect it to just stay that low, or just any comments you can give? Thanks. Yeah, all I can say is
Speaker Change: It makes a lot of sense. Thanks for the caller. And maybe just one last one for me.
Speaker Change: I saw that you guys filed a fixed income, you know, presentation and...
Speaker Change: It looks like IBTX, to the extent that you can comment, has some sub-debt that's maturing in 2024. Can you just talk about why this presentation was filed, and then any sort of comments as to what the sub-debt is?
John C. Corbett: Yeah, all I can say on that, Michael, is that, you know, IBTX is a stand-alone entity that has debt maturing shortly, and they may or may not be opportunistic in the market to refinance.
John C. Corbett: You know, do they expect it to just stay that down or just any comments you can give? Thanks
Speaker Change: Yeah, all I'm saying on that, Michael, is that, you know, IBTX as a standalone entity that has debt maturing shortly, and they may or may not be opportunistic in the market to refinance it.
Michael Edward Rose: All right, I'll step back. Thanks. Thank you.
Michael Edward Rose: All right, I'll step back, thanks.
Operator: Your next question comes from the line of Catherine Mealor of KBW. Please go ahead.
Michael Edward Rose: Thank you.
Speaker Change: Your next question comes from the line of Catherine Mealor of KBW. Please go ahead.
Catherine Fitzhugh Summerson Mealor: It was great to see the margin come right in line with your guidance. I wanted to see what you're thinking about the back half of the year, particularly as we push the likelihood of cuts back to, likely to, December. Thanks.
Catherine Fitzhugh Summerson Mealor: Thanks, good morning.
Catherine Fitzhugh Summerson Mealor: Good morning.
Catherine Fitzhugh Summerson Mealor: It was great to see the margin come right in line with your guidance. Wanted to see what you're thinking about the back half of the year particularly as we push the likelihood of cuts back to the likely to December . Thanks.
Steve: Sure, Catherine. This is Steve.
Catherine Fitzhugh Summerson Mealor: Sure, Captain. This is Steve. This is probably a longer answer than you're ready for, but I thought maybe I would spend a little time on this, because in April , I guess the headline is, there's really no real changes to our guidance, but
Catherine Fitzhugh Summerson Mealor: We did have, as we said, a material announcement in May.
Catherine Fitzhugh Summerson Mealor: that we're thinking about the transaction with IBTX and it's 27% accretive. So it is a bit of a game changer as we kind of think about post the end of this year. So.
Steve: This is probably a longer answer than you're ready for, but I thought maybe I would spend a little time on this because in April, I guess the headline is there were really no real changes to our guidance, but we did have, as we said, a material announcement in May that we were thinking about, you know, the transaction with IBTX, and it's 27% accretive. So, it is a bit of a game changer as we kind of think about, you know, post the end of this year.
Catherine Fitzhugh Summerson Mealor: You know, I guess the first point is there's really no change to our guidance. I think we said 340 to 350 for the full year, and that's sort of where we are. Let me kind of try to build a bridge from where we are and kind of where we're modeling we're headed.
Steve: So, you know, I guess the first point is there's really no change to our guidance. I think we said $340 to $350 for the full year, and that's sort of where we are. Let me kind of try to build a bridge from where we are and kind of where we're modeling we're headed, and, you know, it's really the three assumptions around interest-earning assets at $41 billion for 2024. That's no change. Nothing's changed there.
Catherine Fitzhugh Summerson Mealor: And, you know, it's really the three assumptions are, you know, around interest-earning assets at $41 billion for 2024. That's no change. Nothing's changed there.
Steve: You know, our rate forecast that we talked about in April is the same. It was Moody's baseline. It was two cuts in 2024 and four cuts in 2025. So, that has not changed.
Catherine Fitzhugh Summerson Mealor: You know, our rate forecast that we talked about in April is the same. It was the Moody's baseline. It was two cuts in 2024 and four cuts in 2025. So that has not changed.
Steve: And then the third big assumption is around deposit beta. We're 34% on the way up, and we're modeling on a standalone company as 20% on the way down, and then as a pro forma company with IBTX, 25% on the way down. So for the stand-alone company, for us, we would expect NIM to be flat in the third quarter with the loan yields and funding costs offsetting each other.
Catherine Fitzhugh Summerson Mealor: And then the third big assumption is around deposit beta. We're 34% on the way up, and we're modeling on a standalone company as 20% on the way down, and then as a pro forma company with IBTX, 25% on the way down.
Catherine Fitzhugh Summerson Mealor: So for the standalone company, for us...
Speaker Change: We would expect NIM to be flat in the third quarter with the loan yields and funding costs offsetting each other.
Steve: And if we get a rate cut in September, as the market seems to indicate, we would expect a three to five basis point improvement in the fourth quarter. And then for each rate cut thereafter, as we talked about before, we would expect a three to five basis point NIM increase for each of those rate cuts. Now, as we think about adding IBTX to the company, when IBTX closes, which we still expect that to happen in the first quarter, I'm not sure early or late, but we would expect a 10 to 15 basis point increase in the margin run rate for us as we mark to market the fixed rate loans and fixed rate security of IBTX.
Speaker Change: And if we get a rate cut in September , as the market seems to indicate, we would expect a 3 to 5 basis point improvement in the fourth quarter. And then for each rate cut thereafter, what we talked about before, we would expect a 3 to 5 basis point NIM increase for each of those rates.
Catherine Fitzhugh Summerson Mealor: Cuts.
Speaker Change: Now as we think about adding IBTX into the company,
Catherine Fitzhugh Summerson Mealor: When IBTX closes, which we still expect that to happen in the first quarter, I'm not sure early or late
Catherine Fitzhugh Summerson Mealor: But we would expect a 10 to 15 basis point increase in the margin run rate for us as we mark to market the fixed rate loans and fixed rate securities of IBTX.
Steve: So, to just kind of conclude, as we kind of think forward from the bridge from here to, you know, the end of 2025, so by the fourth quarter of 2025, with these rate assumptions and our modeling assumptions that we announced during the merger that we would approximately have about $50 billion in loans, we'd have about $55 billion in deposits. And our exiting fourth quarter NEM would be in the 375 to 385 range.
Catherine Fitzhugh Summerson Mealor: So, to just kind of conclude, as we kind of think forward from the bridge from here to, you know, the end of 2025, so by the fourth quarter of 2025, with these rate assumptions,
Catherine Fitzhugh Summerson Mealor: and our modeling assumptions that we announced during the merger, that we would approximately have about $50 billion in loans, we'd have about $55 billion in deposits, and our exiting fourth quarter NEM would be in the $375 to $385 range.
Steve: And then as we think about 2026, if Moody's baseline is correct, there are three more rate cuts in 2026, which would add to our margin, that same three to five basis points. So, in theory, we'd be in the 390s in 2026, potentially.
Catherine Fitzhugh Summerson Mealor: And then as we think about 2026, if Moody's Baseline is correct, there's three more rate cuts in 2026.
Catherine Fitzhugh Summerson Mealor: which would add to our margin, that same 3-5 basis point, so in theory we'd be in 2026.
Steve: You know, if we don't get fewer cuts than six that we're expecting, we would expect margin to continue to expand, but it would be lower by two to four basis points for each rate cut that we have that we don't get if it's less than six rates. So hopefully, you know, that kind of helps your modeling as you think about us as a standalone through the end of the year and then us together with IBTX through 2025.
Catherine Fitzhugh Summerson Mealor: get in the 390s potentially.
Catherine Fitzhugh Summerson Mealor: If we get fewer cuts than six that we're expecting, we would expect margins continue to expand, but it would be lower by two to four basis points for each rate cut.
Catherine Fitzhugh Summerson Mealor: that we don't get if it's less than six rate cuts.
Catherine Fitzhugh Summerson Mealor: So, hopefully, you know, that kind of helps your modeling as you think about.
Catherine Fitzhugh Summerson Mealor: us on a standalone through the end of the year, and then us together with IBTX through 2025. Just two other comments on that. You know, as we think about liability sensitivity,
Steve: Just two other comments on that, you know, as we think about liability and sensitivity in a low-rate environment, you know, our pre-floating rate loans percentage is 30%. Post, it'll be 27%, so a little less floating in a post-IBTX world. And then our deposits, as we mentioned, our beta was 20% pre-IBTX, and post-IBTX, it would be 25%. So that all kind of adds up to all of those assumptions to get to that guidance. So I hope that it's helpful.
Catherine Fitzhugh Summerson Mealor: In a low-rate environment, you know, our pre-floating rate loans percentage is 30 percent.
Catherine Fitzhugh Summerson Mealor: Post, it'll be 27%, so a little less floating in a post-IBTX world.
Catherine Fitzhugh Summerson Mealor: And then our deposits, as we mentioned, our beta is 20% in a pre-IBTX and post-IBTX would be 25%. So that all kind of adds up to all of those assumptions to get to that guide. So I hope that's helpful.
Catherine Fitzhugh Summerson Mealor: Yeah, that was awesome, Steve, as always. And one thing, you mentioned last quarter that you still thought, before we get to cuts, that your deposit cost would probably peak somewhere in the mid-$180s. It feels like we're nearing, we're $178 now, so we're nearing that. Is that still how you think about the deposit?
Catherine Fitzhugh Summerson Mealor: Yeah, that was awesome, Steve, as always. And one thing on, you mentioned last quarter that you still thought that before we get to cuts, that your deposit cost would probably peak somewhere in the mid-180s. It feels like we're near, you know, we're 178 now, so we're nearing that. Is that still how you're thinking about the deposit cost peak?
Steve: Yes, no change. Since the interest rate forecast didn't change, oh, this quarter we were 180, I think is what's in our press release, was our deposit cost. We still expect that to peak in the mid-180s. Probably in the third quarter; they cut in the fourth quarter, or late in the third quarter.
Speaker Change: Yes, no change. Since the interest rate forecast didn't change, oh, this quarter we were 180, I think is what's in our press release, was our deposit cost. We still expect that to peak in the mid-180s, probably in the third quarter if they cut in the fourth quarter, or late in the third quarter, excuse me.
Catherine Fitzhugh Summerson Mealor: Great, okay. And then your three, the guidance you gave for next year, ending at 375 to 385 that you mentioned, that, of course, includes the credible
Speaker Change: Great, okay. And then your three, the guidance you gave for next year ending that 375 to 385 that you mentioned, that of course includes the credible yield, correct?
Steve: I wouldn't call it a credible yield. I would call it the market rate on the interest rate swap, but that's correct.
Speaker Change: I wouldn't call it a credible yield. I would call it market rate on interest rate swap, but that's correct.
Catherine Fitzhugh Summerson Mealor: [inaudible] We will back you out of Corps. Yeah, yeah, please don't. Yes.
Steve: Yes, but still, but that includes the impact of his remarks. Great. Very helpful, Steve. Thank you.
Speaker Change: Yes, but still, but that includes the impact of his remarks.
Speaker Change: Great, very helpful, Steve, thank you.
Operator: Your next question comes from the line of Brandon King of Truist Securities. Please go ahead.
Speaker Change: Your next question comes from the line of Brandon King of Truist Securities. Please go ahead.
Brandon Thomas King: So, fees came in stronger this quarter as well. So, just wanted to get an update on what you think about fees going forward. I believe the range is kind of at 55 to 65 basis points, but I wonder if that's 55 to 60 basis points, or has that changed at all given the strength we've seen so far?
Brandon Thomas King: Hey, good morning.
Brandon Thomas King: Morning!
Brandon Thomas King: So, fees came in stronger this quarter as well. So, just wanted to get an update on what you think about fees going forward, I believe.
Brandon Thomas King: The range is kind of at 55 to 65 basis points, but I wonder if that's, 55 to 60 basis points, but has that changed at all given the strength we've seen so far?
Steve: Sure. Thanks, Brandon. This is Steve.
Brandon Thomas King: Sure. Thanks, Brandon. This is Steve. Yes, you know, we showed you a slide on page 29, but our fee income, it shows sort of a trend line on our fee income of $75 million or 67 basis points on assets.
Steve: Yes, we showed you a slide on page 29, but our fee income, it shows sort of a trend line for our fee income of $75 million or 67 basis points on assets, which was higher than our 55 to 60 basis point guide. We did have interest on an IRS tax refund payment that added about $5 million to the second quarter total. So if you kind of, you know, I would say that basically there's not a lot of change to this guidance based on the interest rate forecast and the first cut expected late in the third quarter.
Brandon Thomas King: which was higher than our 55 to 60 basis point guide. We did have interest on an IRS tax refund payment that added about $5 million to the second quarter total.
Speaker Change: So if you kind of, you know, I would say that basically there's not a lot of change to this guidance based on the interest rate forecast and the first cut to happen late in the third quarter, we would sort of expect that NII to average assets to be maybe in that 55 to 65 basis point range.
Steve: We would sort of expect that NII's average assets to be maybe in that 55 to 65 basis point range. Before it starts climbing, you know, as they start cutting rates and the capital markets businesses start coming back mortgage, maybe in that 60 to 70 basis point range. Maybe toward the first of next year. And then, you know, as we look at the pre-look and as we run rate perspective when we add IBTX, which has a little less non-interest income, we would expect NII's average assets to be somewhere in that 50 to 55 basis points combined range as we get a full run rate after close.
Brandon Thomas King: Before it starts climbing, you know, as they start cutting rates and the capital markets businesses start coming back mortgage, maybe in that 60 to 70 basis point range.
Speaker Change: Maybe toward the first of next year and then you know as we look at the pre look and as we Run rate perspective when we add IV TX which has a little less
Brandon Thomas King: Non-interest income, we would expect NII to average assets to be somewhere in that 50 to 55 basis points combined range as we get a full run rate after close.
Brandon Thomas King: All right, that's very helpful. And then, John, you mentioned in your prepared remarks that the deposit environment is still challenging, and deposits decline on a spot basis quarter over quarter. So could you just further elaborate on kind of what you're seeing in the deposit environment and kind of the expectations for growth going forward?
John C. Corbett: All right, that's very helpful. And then, John , you mentioned in your prepared remarks that the deposit environment is still challenging and deposits decline on a spot basis quarter over quarter. So could you just further elaborate on kind of what you're seeing in the deposit environment and kind of the expectations for growth going forward?
Steve: This is Steve. I think we're where we are in the cycles kind of right at the end of a rate pause cycle. And I remember from other cycles that liquidity is kind of hard until the rate cutting cycle goes into place. And we're trying to manage, obviously, you know, deposit costs with growth. And right now, we have the ability to fund our loans with our deposits and our securities balances. So I would expect that, in a rate-cutting environment, that, you know, liquidity typically comes back, and money market funds, there's alternatives, and other things.
Stephen Dean Young: Sure, Brandon, this is Steve. I think where we are in the cycle is kind of right at the end of a rate pausing cycle, and I remember this from other cycles, that liquidity is kind of hard until
Stephen Dean Young: The rate-cutting cycle goes into place, and we're trying to manage, obviously, deposit costs with growth, and right now we're having the ability to fund our loans with our deposits and our securities balances. So I would expect...
John C. Corbett: that I'll call it a rake-cutting environment.
Brandon Thomas King: That, you know, liquidity typically comes back and money market funds, there's alternatives and other things as people are in the Treasury, they typically, you know, go back into bank deposits or some portion of it. So, you know, in this environment, we've been really focused on managing our own capital.
Steve: As people are in the treasuries, they typically, you know, go back into bank deposits or some portion of it. So, you know, in this environment, we've been really focused on managing our own capital and trying to remix the balance sheet without growing the overall balance sheet and the overall funding structure. We try to remix within it. So, I would expect the team to be certainly focused on it, but we're also focused on PP&R, and so we're trying to balance those.
Brandon Thomas King: and trying to remix the balance sheet without growing the overall balance sheet and the overall funding structure and try to remix within it. So I would expect the team certainly focused on it, but we're also focused on PP&R, and so we're trying to balance those two things.
Brandon Thomas King: Okay. And just lastly, a clarification point on NIM guidance. What is your embedded mix, deposit mix, expectations, or assumptions within that, especially for non-interested?
Brandon Thomas King: Thanks.
Speaker Change: Okay, and just lastly, a clarification point on MIM guidance. What is your embedded mix, deposit mix expectations or assumptions within that with especially for non-experienced?
Steve: Yeah, so our non-interest bearing this quarter is around 28 percent. I think it was, I think it rounded to 28 percent last quarter, so I think we're seeing sort of a flattening off on a stand-alone basis. IBTX is a little less than that, but I think they saw a nice, you know, moderation there too, so I wouldn't expect there to be a huge mixed shift from here absent, you know, a rate change or something like that, but right now, we've seen the sort of the trends, and I think maybe it was down, yeah, 40 or 30 basis points, but hardly sitting around at all. And this is around All right.
Speaker Change: Yeah, so our non-interest bearing this quarter is around 28%. I think it was...
Speaker Change: I think it rounded to 28% last quarter, so I think we're seeing sort of a flattening off on a stand-alone basis.
Steve: IBTX is a little less than that, but I think they saw a nice, you know, moderation there too. So I wouldn't expect there to be a huge mix shift from here, absent, you know, a rate change or something like that. But right now we've...
Brandon Thomas King: We've seen sort of the trends, and I think maybe it was down, yeah, 40 or 30 basis points, but hardly been around at all. And this is around where we were pre-COVID, so, you know, it's hard to predict when the environment we went through is different, but this is pretty close to where we were pre-COVID, Brandon.
Brandon Thomas King: All right, thanks for taking my questions. Thank you.
Brandon Thomas King: All right, thanks for taking my questions.
Operator: Your next question comes from the line of Gary Tenner of D.A. Davidson. Please go ahead.
Brandon Thomas King: Thank you.
Speaker Change: Your next question comes from the line of Gary Tenner of D.A. Davidson. Please go ahead.
Gary Peter Tenner: Thanks, good morning.
Gary Peter Tenner: Well, you've made some comments, I think, regarding, you know, construction projects, you know, obviously they've funded out, and you're going to maybe see that moderate or decline a little bit. I'm curious, as it relates to completed projects, are you seeing any...
Speaker Change: Any extension in terms of dwell times on your balance sheet before maybe there's a sale transaction or before the project moves to the secondary market or the permanent market?
Gary Peter Tenner: Yeah
Operator: You know, in some segments, we're seeing them to be a little slower to lease up, self-storage particularly. We're seeing a little slowness there, but on the flip side, Gary, we are seeing the capital markets start to fall.
Speaker Change: and seeing more transactions in multifamily. We, just the last month, we saw a multifamily project trade at a, I think it was a five and a quarter cap rate. So that tells you that there's activity out there and the ability to transact business and get these projects.
Gary: I'll pop the books.
Gary Peter Tenner: I appreciate the color there. And then I was just curious about the intracorner volatility on the DDA balance. It seemed particularly large this quarter, the average balance almost $2 billion above the March 31 over 630 balance. So just curious about that intracorner volatility and how to think about it.
Speaker Change: Yeah, our DDAs as a percent of overall deposits really flat on an average basis Q1 to Q2. I'm not sure, I may have misunderstood your question.
Gary Peter Tenner: I guess I'm just querying the the Delta between I've got your you know average DDA for the quarter over 12 billion versus
Speaker Change: You know about 10.3 at period end and about 10.5 as of March 31 So I'm just curious about that inch and quarter volatility of average versus the period end. Yeah, I think you may have a Blip in your your model. We've got you know average for Q1 was 11.957
Speaker Change: and Q2 is 12.171, so...
Operator: Yeah.
Speaker Change: And a year ago June , 13,333 for average non-interest, a year ago quarter two.
Speaker Change: Maybe an input error in the spreadsheet. And that's on page 5 of the earnings release. No, I've got those numbers, guys. Again, I was just trying to... I could talk to you offline about it. It's not a major factor. Thanks.
Speaker Change: Thank you.
Operator: Your next question comes from the line of David Bishop of Hough Group. Please go ahead.
Gary Peter Tenner: Yeah, good morning, gentlemen.
Gary Peter Tenner: A question, you know, there's obviously been a lot of object around the commercial real estate space within the markets here. You know, into the deal, any sub-segments or areas where you're consciously pulling back from?
Gary Peter Tenner: saying hey, we're going to avoid this landmine, just not looking to grow this business, and any areas where you might see some opportunities. Thanks.
David: David, really I don't think there's any difference in philosophy of IBTX and and South State. You know, I think we are wanting to manage our total CRE ratio well below the 300 percent and and see that decline over time. You were all cautious naturally on office.
Speaker Change: Cautious on Assisted Living. IBTX has got a really good solid retail, granular retail CRE book, and we're pretty bullish on that. So I don't anticipate a change.
Speaker Change: and their lending practices or our lending practices, but I do anticipate with the way we're gonna accrete capital that our CRE concentration ratio will drift down.
Gary Peter Tenner: Got it. Appreciate that. A housekeeping item. I know, obviously, the profitability will escalate in 2025 with the merger. How should we think about a go-forward tax rate once the merger is complete? Thanks.
Dave: You know, not forecasting a big change from where we are today, Dave. I'll probably have some more refined estimates as we move closer to closing and maybe build up to it, you guys.
Speaker Change: next couple of quarters, but at this point I don't have any major changes to project.
Gary Peter Tenner: Got it. Appreciate the color.
Speaker Change: If there are no further questions, I'm going to make one clarifying comment on the Ninerx expenses. I've seen some of you in your notes have noted the cost of the cyber event, which
Speaker Change: We have in the non-recurring line item, and that year-to-date has been about $8 million, about half of that in the first quarter and half in the second quarter. We have coverage for the cyber event. We have not yet filed the insurance claim.
Speaker Change: We have a retention amount and then there's some amounts related to some employee payments that weren't technically covered by the policy that'll be borne by us. Those two combined total about two million, so I know some of you are adding that back as a...
Speaker Change: operating expense in some of your models but I wanted to just make that point we have yet to file that claim and would expect to be reimbursed for all but about two million of the cost of that event so
Operator: So just FYI. Okay, so yeah, there are no further questions.
Speaker Change: Just FYI.
John Corbett: I will now turn the conference back over to Mr. John Corbett for closing remarks. All right. Thank you guys for joining us this morning. We know you've got a lot of calls to jump on. So if we can provide any other clarity for you, don't hesitate to give us a ring, and I hope you have a great day.
Operator: Okay, so yeah, there are no further questions. I will now turn the conference back over to Mr. John Corbett for closing remarks.
Gary Peter Tenner: [inaudible]
Speaker Change: All right, thank you guys for joining us this morning. We know you've got a lot of calls to jump on, so if we can provide any other clarity for you, don't hesitate to give us a ring, and I hope you have a great day.
Operator: Ladies and gentlemen, that concludes the conference. Thank you for joining. You may not disconnect.
Gary Peter Tenner: I'm curious, as it relates to completed projects, are you seeing any extension in terms of dwell times?
John C. Corbett: Thank you. Yeah
Gary Peter Tenner: You know, in some segments, we're seeing them be a little slower to lease up, self-storage particularly. We're seeing a little slowness there, but on the flip side, Gary, we are seeing the capital markets start to fall and seeing more transactions in multifamily. Just the last month, we saw a multifamily project trade at a, I think it was, a five and a quarter cap rate. So that tells you that there's activity out there and the ability to transact business and get, you know, these projects off the books.
Gary Peter Tenner: I appreciate the color there. And then just, I was just curious about the intracorporate volatility on the DDA balance, it seems, you know, particularly in the largest quarter, the average balance, almost 2 billion above the, you know, March 31 over six.
Gary Peter Tenner: I'm just curious about that intracorner volatility and what to think about it.
John C. Corbett: Yeah, you know our DDAs as a percent of overall deposits were really flat on an average basis from Q1 to Q2. I'm not sure I may have misunderstood your question.
Gary Peter Tenner: I guess I'm just querying the delta between your average DDA for the quarter over $12 billion versus about 10.3 at period end and about 10.5 as of March 31, so I'm just curious about that intracorporate volatility of the average versus the period end.
John C. Corbett: Yeah, I think you may have a blip in your model. We've got, you know, the average for Q1 was 11.957 and Q2 was 12.171, so. Yeah. Thank you. And a year ago, June, 13,333, for an average of 9 inches. A year ago, a quarter. Maybe an input error in the spreadsheet.
Gary Peter Tenner: And that's on page 5 of the earnings release. No, I've got those numbers, guys. Again, I was just trying to... I could talk to you offline about it. It's not a major factor. Thanks.