Q4 2024 SouthState Corp Earnings Call
Speaker Change: Good morning and welcome to South State's 4th Quarter 2024 Earnings Conference Call.
Speaker Change: All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, please press star followed by number one on your telephone keypad.
Speaker Change: As a reminder, this conference call is being recorded. I would now like to turn the call over to Will Matthews, South State's Chief Pregnantial Officer. Thank you. Please go ahead.
Speaker Change: Good morning and welcome to South State's fourth quarter 2024 earnings call. This is Will Matthews and I'm here with John Corbett, Steve Young, and Jeremy Lucas.
Speaker Change: As always, John and I will make some brief remarks to highlight a few items of interest and then move into questions.
Speaker Change: Our comments will reference the earnings release and investor presentation, which you can find on our website under the Investor Relations tab.
Speaker Change: Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations.
Speaker Change: Any such forward-looking statements we may make are subject to the Safe Harbor rules.
Speaker Change: 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 Change: Now I'll turn the call over to John Corbett, our CEO.
John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us for South State's fourth quarter results.
John Corbett: For the quarter, we clearly felt the effects of the Federal Reserve's first rate cut in September.
John Corbett: In October, we started to see deposit growth across all our regions, and the growth occurred even as we were cutting deposit rates at the same time.
Speaker Change: Steve used some of the excess liquidity and he paid down our brokered CDs.
Speaker Change: So it's nice to feel like we've reached the end of the tightening cycle. Liquidity is improving and deposit pricing is becoming more rational.
Speaker Change: That improving backdrop led to a 9% pickup in PPNR for the quarter, led by a 6% increase in total revenue.
Speaker Change: For the year as a whole, I feel like our regional presidents did a great job managing the inverted yield curve.
Speaker Change: They were able to generate moderate, mid-single-digit growth, and they did it with an eye on maintaining our net interest margin.
Speaker Change: Earlier this month, we announced a sale-leaseback transaction on approximately 170 branches.
Speaker Change: We've looked at this type of transaction several times over the years and felt like the stars align now. We're able to harvest approximately $225 million of off-balance sheet capital, and the cost of capital is very attractive compared to the other sources of capital.
Speaker Change: We now have the option to convert this extra capital into future revenue growth.
Speaker Change: And finally, our biggest development was the regulatory approval of independent financial in December and the subsequent closing on January 1.
Speaker Change: When we announced the acquisition in May, we modeled a closing at the end of the first quarter, so things progressed a little faster than planned.
Speaker Change: We've got the conversion scheduled for Memorial Day, so we should have a relatively clean fourth quarter after cost saves.
Speaker Change: Our teams have spent a lot of time together over the last few months and I can sense both their excitement and their eagerness to finish the integration and keep building the company and serving our clients.
Speaker Change: Our strategy has been to build the company in the best geographies in the country, with the best scale and the best business model, and the independent franchise fits that strategy like a glove.
Speaker Change: The Census Bureau released their latest report in December and not surprising, Florida, Texas, and the Carolinas continue to lead the nation for growth.
Will Matthews: Will, why don't you go ahead and walk us through the moving parts of the balance sheet and the income statement.
Speaker Change: Thank you, John. As you said, the fourth quarter was a good end to the year in several respects.
Speaker Change: High-level, $24 million in revenue growth versus $7 million in expense growth, made for a solid quarter of operating leverage.
Speaker Change: Balance sheet growth was in line with our mid-single-digit guidance with loans up 4.2% annualized and deposits up four and a half percent annualized or over nine percent excluding brokered as John noted.
For the year, loans grew 5% and deposits grew 3%.
Speaker Change: On the income statement, a 15 basis point reduction in our cost of total deposits helped drive an 8 basis point improvement in our NIM to $348.
Speaker Change: Net interest income grew by $18 million over Q3 on the same day count.
Speaker Change: Non-interest income of $80 million was up almost $6 million from the third quarter on somewhat broad-based improvement, led by correspondent, which was up $3.7 million with flat variation margin expense.
Speaker Change: Mortgage income was up 1.6 million with wealth up 800,000 and I'll note that wealth had a record year with its 45 and a half million in revenue up 15% over the prior year.
Deposit service charge income was also at 1.1 million.
Speaker Change: Non-interest expenses were up $7.25 million to $250.7 million, which was at the high end of our guidance.
Speaker Change: The largest increase was in commission expense, which was up over $3 million due to higher performance in commission-based businesses.
Speaker Change: Even with the growth in expenses, our efficiency ratio improved quarter over quarter by 140 basis points to 54.4 percent.
Speaker Change: On credit and credit expense, we had $5 million in net charge-offs for the quarter, or six basis points annualized.
Speaker Change: which brought our full-year net charge-offs to $18 million, also six basis points.
Speaker Change: The ending total allowance to loans was healthy at over one and a half percent.
Speaker Change: Our 30-89 past dues were 22 basis points, which is down $14 million from Q3, and also down from year-end 2023's 24 basis points.
Speaker Change: NPAs end of the year at 63 basis points, up 6 basis points from year-end 23 levels.
Speaker Change: I'll note that approximately 23% of our non-performing loans are SBA loans with a 75% guarantee.
and 46% of our non-performing loans are current on payments.
Substandard loans were also up.
Speaker Change: We continue to view these as transitional substandard loans for the most part, with downgrades primarily due to interest rates rather than as indicative of expected losses.
Speaker Change: As to capital, we ended the year with healthy capital levels with CET1 at 12.6%.
Speaker Change: Our Q4 and full year ROAA of 127 and 121 respectively provided us with a healthy capital formation rate.
Operator will now move to questions.
Speaker Change: Thank you. As a reminder to ask a question please press star followed by the number one on your telephone keypad. To withdraw any questions press star one again.
Speaker Change: Our first question comes from Kathleen Mueller from KBW. Please go ahead, your line is open.
Thanks, good morning. Hey, Catherine.
Speaker Change: Really nice to see the higher NII this quarter and then expansion. I wanted to see if you could just update us on your thoughts on the margin moving forward now that especially we've got the deal closed and what you're thinking about.
Speaker Change: maybe two updates, kind of where the margin is with updated thoughts on marks and then also with kind of taking a couple of cuts out of the Fed's projections versus the last time we spoke, maybe what that does to the margin projection over the course of the year. Thanks.
Speaker Change: Sure Catherine this is Steve and yeah thanks for recognizing the NIM expansion. We were really happy about that this quarter. Eight basis points, the margin was up to 348 which is higher than our guide of four to five basis points and really as John mentioned
Yeah, a lot of that was
Speaker Change: the deposit cost work that the regional presidents did and really did a really nice job of bringing that together.
Speaker Change: Yeah, so now that we closed Independent on 1.1, you know, probably just need to update you on the NIM Guides for 2025 and kind of the moving parts and assumptions.
Speaker Change: You know, kind of the bottom line, not much has changed.
Speaker Change: other than our closing date, but I think maybe walking you through the parts and pieces hopefully will help you. So, you know, as we think about the major assumptions for 2025, now that independent is closed on 1-1, there's the average earning assets is 1, second is our rate forecast.
Speaker Change: The third is, you know, how the South State legacy loan, fixed rate loan reprices, and then the fourth.
is just around the merger marks, as you mentioned.
Speaker Change: You know, as we think about the expected average earning assets for the full year, we expect about $59 billion.
Speaker Change: That's based on a mid-single-digit loan growth rate for the year. We are assuming that we start the year somewhere around $58 billion, maybe a little less, and then ending the year a little over $60 billion.
Speaker Change: Second is our rate forecast. So we have no rate cuts in this guidance. We're holding rates flat from the 12, 31, 24 yield curve.
Speaker Change: And then the third part, which we've talked about many times, is just our legacy loan repricing book. We have approximately a billion dollars a quarter that's repricing from the high fours into the high sixes or early sevens. That's about a 200-basis point pickup, and that should increase the margin as time goes on about three basis points, so if you run that math, it's $20 million.
over that earning assets.
Speaker Change: And then the fourth one, the last one is what you mentioned, the merger marks. So, you know, our team is working to finalize the merger marks by March 31st.
Speaker Change: We originally modeled around a seven and a half percent discount rate So we would expect assuming spreads don't change a whole lot Something less, you know in that 30 to 35 basis point range something like that depending on as you know many moving parts
Speaker Change: So we'll have a little bit more capital day one and a little less earnings absent doing anything else.
Speaker Change: So based on all these assumptions, we'd expect NIM to be between $360,000 and $370,000 in the first quarter, and then we would exit the fourth quarter of this year because of the legacy loan repricing between $370,000 and $380,000.
Speaker Change: Having said all that, as I mentioned before, we're likely to have some excess capital from the last day one interest marks on independent, as well as some capital from our previously announced sale-leaseback transaction that will hopefully get done at the end of the first quarter.
Speaker Change: So we would expect we would take some of that excess capital and deploy it at a potential securities restructure at the end of the first quarter. Our expectation would be we would offset the additional lease expense of around $30-$35 million annually.
Speaker Change: This would equate to an additional five basis point margin expansion starting in the second quarter.
Speaker Change: In the summary of all of that, we would add 5 basis points to the 2nd quarter to 4th quarter margin in 25, and we would start at 360 to 370, in the 1st quarter, exit at 375 to 385.
as well as it gives us additional capital.
Speaker Change: to deploy in the future and the future revenue growth versus what we originally modeled.
Speaker Change: And then lastly, as I think about 2026 and an upwardly, you know, sloping yield curve.
Speaker Change: We'd expect NIM expansion to continue to do it as the continued repricing of the legacy South State Backbook of three basis points per quarter So all of this is sort of in line, but there's a lot of moving parts and hopefully that helps you
Speaker Change: model as you think throughout the year? Yeah, and Captain, let me maybe jump in to this as well. Just say that, you know, that
Speaker Change: Potential securities portfolio restructuring is just potential at this point. We've made no decisions and we'll continue to evaluate that through the quarter, maybe see how the marks shape up as we get toward the end of the quarter and then make a decision at that point. So nothing's been decided in that regard thus far.
John Corbett, Stephen Young, John Corbett, Stephen Young, John Corbett, Stephen Young
John Corbett: That makes sense. And so, I mean, in your exit margin, as we talked about last quarter, was to 375 to 385, so it almost, if I can kind of simplify it, it almost feels like you had a little bit of a better margin this quarter, so maybe you're coming in kind of with a better core base.
John Corbett: and then kind of the impact of taking a few cuts out of the forecast is really offset by maybe that better base plus what you can do on the bond restructure to kind of to leave you at the same level exiting 25. Is that a fair way to?
John Corbett: Yeah, I think a fair way to say it, and I think we talked about the second and third quarter was independent, we thought would add 10 to 15 basis points.
John Corbett: of Margin Expansion to us, and I think, you know, with the rates down a little bit in that curve, probably adds 10, not 15.
John Corbett: and then you know of course that that additional gives us a little extra capital day one so we can decide how to deploy that yeah and even with rates flat you know we would expect to get a little bit of continue to pick up on cost deposits just as CDs mature and things like that
John Corbett: From where we where we start off in the first quarter that would help to even pray stay flat
Speaker Change: Okay. And I know you've also said in the past that each rate cut adds about three to five bits to your margin. Is that, as you think about the combined company, is that still a fair way to think about it, given this guidance is no cuts?
Speaker Change: Sure, yeah, I know this is interesting and you have to think through fair value accounting for a second. So the way I would think about it is...
Speaker Change: Absent, you know, if we continue to keep the normalized yield curve, meaning upward sloping, we would expect on the legacy loan repricing to be three basis points per quarter accretive.
Speaker Change: The combined basis, so it's there'll be accretive, but it wouldn't be as accretive. So it really makes our this transaction as we talked about a long time ago. It really makes our balance sheet much more neutral and kind of puts our.
Speaker Change: The other thing that that will continue to drive NIM will be the loan back book repricing from the legacy South State and then if we have rate cuts will probably get some more.
Speaker Change: From that we will get a little bit better than from the independent deposit franchise.
Speaker Change: Okay. All very helpful. Thank you and congrats on closing the deal early.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Stephen Scouten from Piper Sandler. Please go ahead. Your line is open.
Speaker Change: Yes, Thanks I appreciate it.
Speaker Change: I wanted to see if there was any kind of additional thoughts around the sale leaseback.
Speaker Change: John You said kind of thing things aligned here with the math and just the thought process, but can you walk us through kind of.
Why you felt like that was the right decision now and if let's say you want to do is securities restructure for whatever reason, what the other priorities for the excess capital might be.
Stephen Scouten: Sure Stephen Good morning.
Speaker Change: Yes so.
We we've kind of done a lot of branch repositioning over the last decade, and we're very comfortable with the branch network that we've got today. So.
Speaker Change: Entering into this long term.
Speaker Change: The sale leaseback.
Speaker Change: It kind of is.
Speaker Change: Nod to the fact that we plan on being in these branches for quite some time, so really it's really about harvesting capital off balance sheet capital that we're not getting any credit for it.
Speaker Change: And when we ran the numbers the cost of capital was more attractive than other sources of capital. So really it's more of a capital management exercise that will give us flexibility going forward and the other thing is as we've looked at it you know one of the things you want to look at is the spread of the cap rate versus the risk free rate and.
Speaker Change: It was it was pretty narrow so we felt like this was a good opportunity to do it.
Speaker Change: Got it okay.
Speaker Change: The math around a potential securities restructure I mean is that slightly more advantageous if rates remain high or what's kind of the puts and takes of that.
Speaker Change: Maybe the best mathematical environment for you to get something done if that becomes the past.
Stephen Scouten: Yes, Steven this is Steve I think probably work were.
Stephen Scouten: Probably the most important is landing where our capital markets are going to be and based on that we're going to decide.
Stephen Scouten: If we do a bond restructure with securities restructure and topics that so I think for US you know theres a lot of moving parts with the independent transaction, we have the sale leaseback, but by the end of the first quarter, we're going to know all of those answers and by the call. It in April we're going to be able to tell you all of those things.
Stephen Scouten: But I guess the way I would describe it as this is an attractive sale leaseback as an attractive.
Stephen Scouten: The ability to get capital and from here, we can deploy it in lots of different ways, whether it's the securities restructure was certainly is one piece of it certainly can be in lots of other places as well. So we're just going to make those decisions as we as we go through.
And Stephen I would add.
Stephen Scouten: If we were to consider a portfolio structure to your question, yes, there are.
Stephen Scouten: There are different philosophies around that you can take your.
Stephen Scouten: Bonds that are deepest underwater there and get rid of.
Stephen Scouten: Those are you can take ones that are more moderate.
Stephen Scouten: More moderate but how do you have a better earn back profile and so we will think about all of those things.
We haven't finalized our mark shed as we've said a couple of times.
Stephen Scouten: That process is ongoing we hope to have a better idea by the end of the first quarter and probably won't be final final, but b b b a lot closer to final.
Stephen Scouten: And right now sitting where we sit with our capital.
Stephen Scouten: Position is going to be better than the 10 for CET, one we announced.
Stephen Scouten: At the time of the <unk>.
Stephen Scouten: Sure.
The merger announcement.
Stephen Scouten: It could be similar.
Stephen Scouten: Should be north of that maybe closer to the 11% range at closing so again, a little more flexibility and optionality to that capital base than we'd probably modeled.
Stephen Scouten: Nine months ago, and then the last thing I'd say is that we love. Our you know as we forecasted in what I. Just told you about margin and so on I mean, we have really like our revenue profile in our PPR profile. So this is just on top of that we have extra capital and do whatever else we need to do it I think it's a nice lever to have yeah.
Stephen Scouten: Got it got it and then just last thing for me I know the inks barely dry here on <unk>.
Speaker Change: Clothing, but.
Speaker Change: Everybody is getting kind of bold up on on M&A and if we do see a more active environment, where we're more banks try to let's call. It like hit this 18 to 24 month window that we think we have.
Speaker Change: Would you guys think you'd be prepared to do another deal right now if it came to pass is the right deal.
Speaker Change: Your desk or do you really want to just focus on the <unk>.
Speaker Change: Aggression to build out within the Texas markets and let that play out first portfolio yes.
Speaker Change: A lot of talk about our strategy is finding the best scale in the banking business model and today, we feel like Stephen the best scale, it's somewhere in that $60 billion to $80 billion of assets.
Speaker Change: For 2025, our focus is entirely on integrating <unk> and getting that team.
Productive and growing and feeling good about the partnership and then the second thing in 2025 is just going to be learning what the new regulations are under the Trump administration and getting a better understanding of what the hurdles at $100 billion would be so until we know what those hurdles might be we.
Speaker Change: Thank the $60 billion to $80 billion in size is the best place to be but we're going to learn more as the year progresses.
Speaker Change: Yes makes perfect sense, Greg Congrats on another great year. Thanks, guys.
Speaker Change: Our next question comes from Russell Gunther from Stephens. Please go ahead. Your line is open.
Russell Gunther: Hey, good morning, guys.
Russell Gunther: I wanted to good morning, I wanted to start back on the legacy South State NIM, if we could the fixed repricing opportunity is strong and well understood, but could you guys spend a minute in terms of how youre thinking about the other side of the balance sheet deposit cost trends.
Russell Gunther: Just any kind of CD maturity and.
Russell Gunther: Rate repricing opportunities embedded in the guidance.
Russell Gunther: Sure no that's.
Russell Gunther: Good question Russell.
Russell Gunther: As we think about the pro forma company and we think about the first quarter of deposit cost you know I would kind of kind of model around 2% would be a good way to think about it as a pro forma company. After remember that in the fourth quarter. The last rate cut came in.
Russell Gunther: The mid mid to end of December so we didn't really get that into our deposit costs until January.
Russell Gunther: So if you took us through the pro forma company would be a little higher if you looked at the fourth quarter, but if you look at the first quarter, we'd be around two and then.
Russell Gunther: As it relates to the CD repricing opportunity. The other certainly is one there.
Russell Gunther: But if you kind of looked at our beta and what we told the street that our beta combined would be.
Russell Gunther: Our peak deposit pricing as a combined company was the third quarter around 2.29% to 3% and so there's been 100 basis points of cuts. If we ended up about 2% that would be about a 30% beta we were expecting kind of 'twenty on a stand alone 40, <unk> and 'twenty 'twenty four.
Five I think on a combined so we're doing a little bit better than we originally expected originally modelled, but I would kind of used to as a guide and you know maybe it drifts down 10 basis points to over time, but I wouldn't expect a huge change to that.
Okay, Great no I appreciate that.
Speaker Change: And then just switching gears, if you guys could give us a sense for how you'd expect the correspondent banking business to trend.
Over the course of the year and any update to your kind of pro forma b.
Speaker Change: Average asset Guy.
Russell Gunther: Sure Yeah. Thanks Russell.
Speaker Change: On page 25, we look at the noninterest income to average assets to Will's point earlier, the noninterest income increase really nicely $5 7 million from the third quarter. It was 69 basis points of average assets versus our guide of 65. So it was a really great quarter and really most of that is related to the core.
Speaker Change: Despondent banka increased about $3 5 million and mainly most of it was due to the fixed income sales of which.
Speaker Change: Most of that was due to our new SBA securitization team, we recruited earlier in the year in Houston. So they had a great quarter that was glad to see.
Speaker Change: Doing well.
Speaker Change: Yes, there was other increases in mortgage wealth.
Speaker Change: <unk> had a really nice increase really great here, but you know with the closing of <unk> I don't think our guidance is really changing here we mentioned.
Speaker Change: Guiding $50 to 55 basis points of noninterest income and we thought we'd be on the higher end of that range, that's kind of where I think we we're continuing to plan and then I guess, if what would improve that so if we're closer to 55 basis points, what would improve that would be.
Speaker Change: If the fed all of a sudden started cutting rates again, I think that would be.
Speaker Change: <unk> attractive to some of our capital markets businesses, and so you'll probably start seeing that trend towards 60. So that's kind of the way I'd frame, it up where kind of.
Speaker Change: If you look at the improvement in the correspondent Bank this year I think.
Speaker Change: Yeah, we were around $70 million of revenue in the fourth quarter annualized I think we're around $80 million revenue I think that's probably a good good starting point and then if we get rate cuts from here you maybe youll see it go higher towards the 2023 number of about $90 million something like that that's our expectation okay.
Speaker Change: Got it very good alright, guys Thats. It for me thanks for taking my questions. Thank.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Michael Rose from Raymond James. Please go ahead. Your line is open.
Michael Rose: Hey, good morning, guys. Thanks for taking my questions.
Michael Rose: Hey, just wanted to get a sense on the lending environment right now both in your core markets and then in Texas and just what we could expect as we move through the year just looking at pipelines in.
Michael Rose: Looks like the environment is a little bit more favorable but.
Michael Rose: I think most companies that have.
Michael Rose: Kind of per quarter are talking more of a back half acceleration in loan growth just wanted to see what you guys are seeing in your markets.
Michael Rose: On both sides of the table. Thanks.
John Corbett: Yes, Michael Good morning, it's John.
Speaker Change: Earlier in 2024, we guided to a mid single digit loan growth and that's really where we landed we got about 5% loan growth for the year. So in line with the guidance.
Speaker Change: In the fourth quarter loan production was up about 17%, we did about $1 six in originations in the third quarter of 1 billion nine in the fourth quarter.
Speaker Change: Some of that was seasonal lending that we see this time of year for we do a lot of business with storm repair companies after the hurricanes.
Generally on the customer sentiment front I'd say that clients are still adjusting.
Speaker Change: Two higher interest rates and their budgets, both consumers and businesses.
Speaker Change: Along with other forms of inflation. It just makes things tighter in peoples budget. So some folks are waiting to see if rates come down and they may not come down. So I think theres a lot of optimism from our clients about the Deregulatory pro growth agenda here, but sometimes theres a lag effect.
Speaker Change: From that optimism until you see it in the pipeline. So as we head into 2025, I think continuing with that mid single digit growth as appropriate.
Speaker Change: It might be a little bit slower to begin with and pick up later.
Speaker Change: You asked about the pipelines of <unk> and South State South State, we had good closings in the fourth quarter and our pipelines are a little softer as we start the first quarter down about 10%, but I talked with the Dan Brooks yesterday in Texas in the.
Speaker Change: The pipelines in Texas, and Colorado actually picked up some so there they are feeling good about that.
Speaker Change: There are pipeline growth headed into the year.
Stephen Scouten: Great and then maybe one for Steve any updated expectations as it relates to expenses to average assets or assets.
Speaker Change: On a pro forma basis. Thanks.
Wes: Yeah, Hey, Michael it's Wes I'll take that one.
Speaker Change: First off I guess, a couple of assumptions to keep in mind, we are.
Speaker Change: Currently assuming that the sale leaseback closes March 1st which would give you a 10 minute 10 months of the.
Speaker Change: The higher lease expense net of foregone depreciation, so thats roughly $30 million or so in nia to add to the year for that 10 month period.
Speaker Change: We're also assuming that we achieve approximately 50% of the cost saves in 2025 sets $45 million or.
Speaker Change: So because our conversion date, even though we closed earlier conversion date remains the end of May Morial day weekend.
Speaker Change: As John noted earlier, you'll have some folks stick around through post conversion and then you really have more of a clean quarter in Q4.
Speaker Change: And we still have to finalize a course the marks as Steve noted and that includes the CDI, Mark which is amortized on an accelerated basis, so depending on how that shapes up it could have an impact as well so with all that.
Speaker Change: High level I would say for the earlier part of the year, the first quarter to a range of $355 million to $365 million.
Speaker Change: NIH per quarter.
Speaker Change: And then as we exit the year in the last quarter the range would be more in the $3 40 to $3 50, and that would be after any sort of inflationary pickup in 25 over 24 levels.
Speaker Change: You raised is things like that.
Speaker Change: Okay, Great and then maybe just finally for me I know.
Speaker Change: Broker deposits were down both for you and <unk> this quarter.
Speaker Change: Any more to do there we are you kind of feel like they're in a good spot at this point from a go forward basis. Thanks.
Speaker Change: Yeah. Michael This is Steve I guess as you think about what happened this past quarter.
Speaker Change: For both us and independent we had really good customer deposit growth in the fourth quarter I think.
Speaker Change: X X brokered Cds I think our deposit growth was around 9%. So I think we use brokered as a bit of a lever depending on the growth in customer deposits. So yeah. Our expectation is that customer deposits are kind of mid single digit growth next year, and we will use kind of brokered as sort of a lever.
Speaker Change: In order to fund the loan growth. So that's kind of how we're thinking about it.
Speaker Change: Alright, great. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Question comes from Sandra <unk> from UBS. Please go ahead your line is open.
Speaker Change: Hey, good morning.
Speaker Change: Wanted to start off actually on the credit front.
Speaker Change: With the deal close.
Speaker Change: Wanted to see if you could give us some data thoughts around the sort of combined loss shape.
Speaker Change: Just given how impressive 'twenty 'twenty four it was.
Speaker Change: And maybe I can start and will you can chime in here, but.
Will Matthews: Client payment performance has been very good throughout 2024, I mean, our past dues will mentioned early 'twenty two basis points at the end of the quarter.
Speaker Change: <unk> Jos.
Speaker Change: We're in the six basis point range. So our clients are doing doing really really well.
Speaker Change: We have seen a tick up in classified assets are classified.
Speaker Change: Loans, and it's really a floating rate issue in a debt service coverage issue, it's not really a.
Payment performance, our client performance issue, so as I talked to our credit team really in our CRE book, They really don't see.
Speaker Change: Any loss visibility there I mean sub standard loans have a 56% loan to value. So theres lots of equity in the great institutional sponsors.
Speaker Change: Most of the classifieds were seeing are our CRE loans that are projects and stabilization.
Speaker Change: And I'll give you an example.
Speaker Change: We'll talked about some of these be in subsea.
Speaker Change: Substandard loans in transition.
Speaker Change: 64% of our commercial real estate loans have a floating rate.
Speaker Change: And that May have a slightly negative debt service coverage, but if you use today's permanent interest rate in the permanent market. They would have a positive.
Speaker Change: Debt service coverage. So that's part of this transition Aerie type thing that we're going through here so when when the loans mature.
Speaker Change: The property sale, we're seeing plenty of liquidity in the market, particularly multifamily those loans those loans mature and they're gone.
Speaker Change: So anyway, I think as you head into 2025 to the extent, we have charge offs and losses, it's really we don't see it in the CRE side, it will probably be in the C&I area either in the middle market space because of higher interest rates or more likely in the SBA or small business area, where there is.
Speaker Change: Still feeling the effects of higher interest rates labor cost and general inflation. So.
I think that's true both for both the independent book and for the South State book as well.
Speaker Change: And I'll just add if you look at the fourth quarter for independent they had pretty flat production similar to what they had in the third quarter, but they had a little higher level of Paydowns and many of those were in.
Speaker Change: Some of their criticized credits so the kind of pay downs you liked to.
Speaker Change: To see occur.
Speaker Change: In terms of loss rate six basis points is a good.
Speaker Change: At year end I think we would while we would love to operate at that level, that's probably not.
Speaker Change: Sustainable at that very low level going forward.
Speaker Change: But also remind you too that on a combined basis, we will when we when we do the purchase accounting marks of course, we will have the PCE non PCB split will have the.
Speaker Change: The credit Mark.
Speaker Change: On the <unk> that goes into the allowance, but they also have a credit mark on non PC that is booked plus the day, one provision or the double count as we affectionately call it.
Speaker Change: So a lot of loss.
Speaker Change: Absorption capacity created through that that exercise as well.
Great. Thanks for the color for tenants to both of you and then in <unk>.
Speaker Change: Perhaps just on the revenue synergy side I understand that the when you do the Dms.
Speaker Change: Actually youre, not assuming anything there, but but if you could just give us some updated thoughts, especially on the fee income side.
Speaker Change: Around perhaps cross sell opportunities or enhancing any of the products that you might have and how that might impact the.
Speaker Change: 2025 and potentially beyond.
Speaker Change: Samuel.
Speaker Change: As John.
Speaker Change: We're we want to keep the independent bank bankers doing what they've been doing they've been doing a great job they've been growing a great bank and they've been doing it with quality clients and have one of the best asset quality histories in the country. So.
Speaker Change: We really want them to continue doing what theyre doing and comfortable doing overtime, we see opportunities there.
Speaker Change: We see opportunities to layer in a treasury management platform that could be attractive to more C&I clients in those markets and they're great. They're great markets I think.
Brooks: And Brooks told me yesterday.
Stephen Scouten: Texas had the number one job creation in the country last year, which occurs frequently so we think theres tremendous C&I opportunities to layer on top of the great CRE work that they've done historically and then this is Steve I guess this kind of more immediate pieces and parts.
Brooks: Would be.
Steve Young: Our capital markets product, particularly our interest rate swap I know.
Steve Young: In January I think we've already done a transaction or two there from our capital markets group just to help facilitate some lending at RBC, Alex I think.
Speaker Change: The mortgage platform the retail platform and then probably just as we think about the wealth platform private capital management, which is the independent wealth advisers I think that continues to grow and hopefully get some lift from some of the partnerships.
Steve Young: Partnerships and platforms that we can provide but I'd say probably in the immediate.
Steve Young: It would be in the capital market space and then over time, it's going to be as John mentioned Treasury mortgage wealth retail.
Speaker Change: Got it thank you for taking my questions.
Speaker Change: Our next question comes from Gary Tenner from D. A Davidson. Please go ahead your line is open.
Gary Tenner: Thanks, Good morning, everybody.
Gary Tenner: I wanted to ask just about the <unk> loan book just looks like based on what you had in your deck that their loans declined by something approaching a $1 billion since announcement I don't recall, there being any kind of targeted runoff portfolios. There, but can you kind of give us a sense of maybe where that's come for a minute there was anything behind the scenes dry.
Gary Tenner: Living in particular.
Gary Tenner: Part of that runoff.
Gary Tenner: Yeah, Hey, Gary as John sure. So if you'll recall back in our prior calls over the summer and spring, we talked about the mortgage warehouse business and that was a business that we were going to wind down and exit so that is the bulk of that change.
Gary Tenner: And then.
Gary Tenner: In the fourth quarter.
Gary Tenner: The loan production at <unk> was roughly the same as the third quarter, but they did have some elevated pay downs they had about $158 million of commercial real estate sales of properties.
Gary Tenner: There was a collection of apartment properties in Colorado $95 billion debt refinanced into the permanent market with Fannie Mae and they were fortunate to kind of exit $75 million of watch list credits. So so between the mortgage warehouse exit that we had telegraphed over the summer and some of these paydowns in the fourth quarter.
Gary Tenner: <unk>.
Gary Tenner: That's the difference, yes, and then just Steve to add.
Steve Young: On the mortgage warehouse, we modeled that in our transaction. So that's why our NIM guidance really isn't changing but we modeled that upfront. We just didn't certainly talk about it.
Gary Tenner: In may but that was certainly modeled.
Speaker Change: Okay I appreciate the reminder, on the mortgage warehouse business.
Gary Tenner: <unk> Silver mine.
Speaker Change: And then.
Speaker Change: As it relates to the sale leaseback potential entrees is it fair to say.
Speaker Change: Well, if I if I interpreted your comments correctly that at a minimum anything you do would serve to offset.
Speaker Change: The incremental lease costs that should be kind of the <unk>.
Okay.
Speaker Change: Minimum threshold of activity.
Speaker Change: Well I would say the minimum goal that we don't do anything at all like I said before we have we have not made any firm decisions that would be a reasonable a reasonable model to use though if we did something like that.
Speaker Change: If you said that the.
Speaker Change: Higher.
Speaker Change: Higher non interest expense from the sale leaseback net of the interest on the cash that we receive that you could one one reasonable approach would be to do a small restructure to neutralize that but again nothing has been decided at this point and we're waiting determined after we've done all the marks and everything and if we to the point we wouldn't do.
Speaker Change: Thing until later in the first quarter. So it wouldn't wouldn't go into effect and when we get on the call.
Speaker Change: In the second quarter, you'll you'll know exactly what we did.
Speaker Change: Alright, thanks, guys.
Thank you Gary.
Speaker Change: As a reminder to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from Daniel <unk> from Citi. Please go ahead. Your line is open.
Daniel: Hey, good morning, guys.
Speaker Change: Good morning.
Speaker Change: So I know you said in terms of a relative size. The sweet spot is 60 to 80 as the rules currently stand.
Speaker Change: We agree.
Speaker Change: Right.
Speaker Change: I'd say the rules don't change here and we're playing with the status quo is there a deal size that would be too small for you guys to entertain it wouldn't be 5 billion or something not worth it I'm just trying to think from a kind of philosophical question. If something came up the numbers words, but is just now the juices that worth the squeeze.
Speaker Change: No I think I think if there was the right opportunity and the right market and a 5 billion dollar opportunity came along we would definitely look at that.
Speaker Change: So you think about the markets that we're in if they are in these really really attractive markets. There is a limited inventory and if we could deepen our market share in one of these great markets.
Speaker Change: We would consider that.
Speaker Change: Got it Okay. That's helpful. And then I know you gave in the expense numbers to kind of for this year with.
Double systems conversion, our run rate for the fourth quarter. When you think about 2006, or possibly 27, obviously youre not going to give any numbers, but we think just behind the scenes are there any other material investment grade or upgrades that need to be made over the next 18 24.
Speaker Change: Take months or.
Speaker Change: I'm just trying to think of them like you are a bigger bank now and the cost of doing business. Although you will make more money. How do you think about just investments in the back office.
Speaker Change: Yes I'll.
Speaker Change: I'll start then maybe John and Steve can elaborate I'd say, we have made a lot of these significant investments in that regard over the period from the MLP in 2020 really up through last year.
Speaker Change: And we've been sort of finishing the drill if you will more more.
Speaker Change: In that regard I'll also remind you that we are our rate of inflation on our tech spend our digital spend continues to exceed the rate of inflation for our other expenses and probably will.
Speaker Change: But hopefully along with that we get some degree of efficiency through automation and things like that but in terms of.
Speaker Change: Brian as you know Steve runs our strategic planning effort, Steve how would you yes. So we just got done this.
Speaker Change: Weak on bringing our strategic plan to the to the board and getting that approved and no way I would describe it is there are clearly expenses and other things that are.
Speaker Change: As you crossover 50 and things that we've been working on for a long time there'll be incremental expense, but that's all included and will guide and so so theres nothing extraordinary that I would say that we have not talked about already.
Speaker Change: As you think about 2026 and think about the kind of the pluses and minuses to 2025 of course youre going to get inflation pick up in 2026, you know whatever the inflationary expenses are 3%, but you're also going to get.
Speaker Change: As it relates to the full year 'twenty five.
Speaker Change: The.
Speaker Change: $45 million or so in cost saves, we've modeled 90 million half of it this year half of it next year and so those should for the most part offset each other in 2026.
Speaker Change: Got you Okay. That's really helpful. Thank you.
Speaker Change: Our last question will come from David Bishop.
Speaker Change: Please go ahead your line is open.
Yes, good morning, gentlemen.
Speaker Change: Curious John maybe as it relates to the legacy <unk> deposit book.
Speaker Change: Just curious how you're going to approach that from a repricing perspective would be sooner leaving rates alone for.
Speaker Change: The near term and then get more get more aggressive issue.
Speaker Change: Farther away from the close date, just maybe curious how you're approaching repricing that.
Speaker Change: David This is Steve the way we approach it at South State is will be how we approach. It independent we have local market leaders that run on both the loan and deposit pricing for and we set goals.
Speaker Change: I'll call it freedom within a framework from the company level and then they decide how the.
Speaker Change: Push that deposit pricing out so I wouldn't say that we're going to push a button or corporate or anything else.
Speaker Change: To change the pricing in.
Speaker Change: Independent the way I would describe it as hopefully create a little more alignment on the ownership of both loan and deposit pricing over time to the various president in the markets. So I wouldn't I wouldn't expect there to be a huge change.
Speaker Change: Other than.
Speaker Change: Yes.
Speaker Change: The way the President's will be instead of just will be just like us as it relates to Pee PNR less charge offs.
Speaker Change: Got it and then one housekeeping question obviously the.
Speaker Change: The income statement.
Speaker Change: We got a little bit bigger here or will be in the first quarter any change to the effective tax rate as a result of that.
Speaker Change: Yes.
Speaker Change: There is no no big permanent items that will be added this year sort of so.
Speaker Change: What we're where we're running right now is probably a good place to model.
Speaker Change: Great I appreciate the color.
Speaker Change: Thank you.
Speaker Change: We have no further questions I would like to turn the call back over to John Corbett for closing remarks.
John Corbett: Alright, Thanks, a lot and thanks for joining us this morning, and given the January one close that independent I just want to extend a special welcome to all of our partners and team members from independent.
We know the investment community here, you're jumping around and covered a lot of companies. So thanks for calling in and if you have any follow up questions don't hesitate to give us a ring.
Speaker Change: Dave Thanks.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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