Q1 2025 SouthState Corp Earnings Call
Eric: Thank you for standing by. My name is Eric and I will be your conference operator today.
Eric: For over a year, we've been working on three strategic capital management moves that all culminated in the first quarter.
Eric: The first and the most significant was the closing of the independent financial transaction.
Eric: The second was the sale leaseback of bank branches.
Eric: And the third was the securities restructure that Steve will discuss.
Eric: So it was a big balance sheet reset the broader balance sheet closer to current market rates.
Eric: The result is a materially higher net interest margin of 385%.
Eric: Taken together these three moves propelled south state's earnings to an adjusted return on assets of 1.38%.
Eric: And return on tangible common equity of approximately 20%.
Eric: So the earnings power of the bank is running better than we expected and P. P and our per share has grown by 25% in the last year.
Eric: So that's the bright spot.
Eric: On the other hand balance sheet growth slowed.
Eric: After good growth last year.
Eric: Some of the slowdown this quarter was normal seasonality.
Eric: Some was the general economy slowing down.
Eric: And so it was just the result of stiff competition on loan pricing.
Eric: We're encouraged though that our pipelines have grown considerably in the last few months and the growth prospects look better in the second quarter.
Eric: Asset quality remains fine excluding day, one acquisition adjustments non accruals and substandard loans were stable and we only had four basis points of charge offs.
Eric: And like all of you we're trying to figure out the impact of tariffs on the growth trajectory for the rest of the year.
Eric: And it's gonna be a progressive revelation over the next few months.
Eric: Meanwhile, our credit team is working on a top down and a bottoms up analysis by.
By looking at impacted loan segments, and by meeting with and listening to our clients.
Eric: And our clients are not panicking.
Eric: But many of them wisely or taken a pause on capital projects.
Eric: Following the independent closing, we're fortunate to be starting with higher capital ratios than we modeled.
Eric: So between a better starting point and industry, leading returns, we're gonna be accumulating capital at a rapid pace.
Eric: So regardless of the tariff impact we're going to have flexibility to use the excess capital for either defense or for offense as we progressed through the year.
Eric: The South state teams in Texas, and Colorado are doing a great job.
Eric: We've only been working together for about a year, but it feels like we've been partners for much longer.
Eric: They are an exceptional team and theyre going to be a major driver of south state's performance in the years to come.
Eric: Everybody is ready to get the conversion in the rearview mirror next month. So we can hit the ground running in the back half of 2025.
Eric: I'll turn it over to will to walk you through the details of what was a noisy quarter of balance sheet marks and one timers tied to these three strategic moves will.
Will: Thanks, John I'll hit a few highlights and make some explanatory comments before we move to Q&A.
Will: The quarter had a lot of moving parts with the closing of the acquisition the sale leaseback in the securities portfolio restructuring, we added slide 10 to this quarter's deck, which should help you assess our operating performance versus the impact of each of these items on the quarter.
Will: For the remainder of my comments I'll address our operating performance in the adjusted metrics, excluding the unusual items.
Will: We had good revenue in Q1 led by the net interest margin.
Will: Our tax equivalent NIM improved 37 basis points from the fourth quarter a bit better than we modeled.
Will: A big part of the outperformance was our cost of deposits, which came in at 189, when we were modeling closer to 2%.
Will: Additionally, we benefited from bringing the independent assets to market rates through the acquisition with earning asset yields of 570, leading to a first quarter NIM of 385 or.
Will: Our loan yield improved to six and a quarter approximately 65 basis points below our new origination rate for the first quarter and very close to peer median loan yields as noted on slide 19.
Will: Loan yield in the quarter also benefited from early payoff on a couple of acquired loans, increasing loan yields by six basis points.
Will: Steve will give updated margin guidance in our Q&A.
Will: Noninterest income of $86 million was slightly below but generally in line with expectations, giving us total revenue of $630 million.
Will: On the expense side and I E. A 341 million was lower than anticipated in spite of the CDI valuation coming in higher than modeled and driving amortization expense 3 million higher than we had budgeted.
Will: I'd attribute this Q1 outperformance to a couple of primary factors.
Will: Delays in hiring budgeted staff and implementation of budgeted projects, which is not necessarily atypical in the first quarter of the year.
Will: But also earlier than planned realization of some cost saves from the merger.
Will: Strong revenue and cost saves caused our efficiency ratio to drop to 50% for the first quarter.
Will: As John noted credit costs, excluding the non PCT double count provision and acquired PCB charge offs, a closing remained low with only four basis points in net charge offs and an $8 million provision.
Will: The day, one PCT charge offs of $39 million were to bring these acquired loans into compliance with our charge off policy.
Will: For the acquired loans Accretable marks were 482 million, 20% of which was a non P. C D credit Mark with the remaining 80% being rate marks to bring the independent earning assets to market yields as of the acquisition date.
Will: The marks and double count P. C L combined with our existing allowance solidified our strong loss absorption capacity.
Will: N P. As were 60 basis points of loans and O R E down three basis points from year end.
Will: Substandard and special mention loans were down 5% to 6% from combined year end levels using our loan grading methodology.
Will: As you'll note on slide 11, with a CET one of 11% in T. B V of just above $50.
Will: Our capital position remains very healthy and above the 10.4% level, we modeled at the time of deal announcement.
Will: Additionally, as John noted our returns on capital were also strong and higher than our original modeling.
Will: This healthy capital and reserve position and strong capital formation rate should allow us to maintain a position of strength and Optionality, which is of course valuable in uncertain times such as these.
Will: Operator, we'll now take questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Speaker Change: Your first question comes from the line of Michael Rose with Raymond James. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hey, good morning, guys. Thanks for taking my questions.
Speaker Change: Alright.
Speaker Change: Well can you just can you just give us some color on what drove the accretion income so high this quarter.
Speaker Change: It was just much higher than kind of I was expecting I think where where consensus was and just given how much you know accretable yield do you have left it seems like there'll be a bigger step down as we kind of contemplate the rest of the year. So we'd just love some color there. Thanks.
Speaker Change: Yes, I mentioned in my comments, we had.
Speaker Change: A component.
Speaker Change: Related to some early payoffs that drove it up about six basis points in the yield.
Speaker Change: And I'll remind you that.
Speaker Change: And as you know in purchase accounting you are taking.
Speaker Change: The loan book that was originated in different.
Speaker Change: Great environment, and bringing it to current market rates so.
Speaker Change: So in.
Speaker Change: And bringing the independent loans.
Speaker Change: You know to that rate you saw in our in our slide 19, we tried to show sort of where our total loan portfolio yield is versus where.
Speaker Change: We're originating new loans is still a little bit below.
Speaker Change: The.
Speaker Change: As the yield as those loans move towards maturity the component of the yield is represented by accretion of course goes down over time.
Speaker Change: And so we had a little bit of that early payoff and then the.
Speaker Change: The rest has been the traditional accretion.
Speaker Change: Just to chime in this is Steve you know, we put in slide 19 to sort of show a what a what we believe this to look like so if you think about the <unk>.
Speaker Change: The loan yield this quarter for the total loan yield is kind of how we think about it it's six in a quarter versus our peers. This quarter. So far is around 611, which makes sense because we've marked more to market than some of our peers there it.
Speaker Change: We are slightly higher.
Speaker Change: But we're putting on new loan production at 690 as I reflect upon our experience during the great financial crisis, and how we Mark credit there were times that we Mark credit, 25% and then we would outperform credit and then we would have these huge yields going forward at 15.
Speaker Change: 20%, but we were only putting on loans at 5% and so there was this idea that there was a cliff that was back in the 202017 2018 range in this environment. What we're trying to show on this slide is number one the marks are much lower so the.
Speaker Change: Great Mark in this case is about 2.9% so not anywhere near the other.
Speaker Change: But what what's going what's happening is our portfolio yields at six in a quarter, but our actual new production yield is higher than that and therefore, there should not be a cliff assuming rates states similar so that's kind of how we're thinking about it so that idea of Accretable is really the concept of PCI accounting.
Speaker Change: And big credit marks the way we're thinking about it is it's just like our investment portfolio. What we did this quarter was we took the independent investment portfolio that was yielding roughly 250 basis points, we sold it and now it's yielding five.
Speaker Change: That 250 basis points difference is the same thing that really happened to the fixed loan portfolio of independent and so anyway. That's I know that I know that we're probably at one of the first ones into the larger.
Speaker Change: A larger discussion here, but.
Speaker Change: The total loan yields should not change the accretive the accretion part might go down but the coupon will go up as you reprice.
Speaker Change: And one more point, maybe to clarify two of the of the total accretable yield Michael.
Mark: Just under 20% of it represents non PCB credit Mark.
Speaker Change: So.
Speaker Change: That's the only component of the Accretable yield that is credit related.
Speaker Change: Okay helpful.
Speaker Change: If I'm looking at this right I think the core margin was down about five basis points or Steve based on what you've just said.
Speaker Change: How should we think about the core margin of $3 41, assuming that's the right number.
Speaker Change: Moving forward just given some of the dynamics just spoke about.
Speaker Change: So the core margin to us that the reported margin from here on and the reason for that is because just like the securities book, We could have marked that book at 2% and accreted up to a 5% book.
Speaker Change: And actually I'll do what we did is we sold it at a 5% coupon and now we don't call out accretion. So so just just to be clear our reported versus core reported is going to be our core and then so maybe to your question. You are probably your real question is just around how solid is this NIM going forward and so if.
Speaker Change: That's your question I'm happy to answer it if thats your question.
Speaker Change: Yeah, correct, Okay, alright, great alright, so so can I, maybe I'll just take a step back and I know, we spent a lot of time on it but it's a significant piece of the quarter.
Speaker Change: We'll talk about the NIM in the first quarter was 385 versus our guide of $3 60 to $3 70, and say, okay, well, what's the main difference.
Speaker Change: And that guide the difference of call it.
Speaker Change: Roughly 20 basis points. So the main drivers theres really four that happened in that in the quarter number one well mentioned it was the deposit costs were 11 basis points lower than our expectations. So that was a significant piece of it we we had a better.
Speaker Change: A better execution on the deposit strategy number two was the accelerated accretion on early payoffs, which was about five basis points to NIM. It was six basis points of loan yield of five basis points to them. So those two add up to be.
Speaker Change: 16 basis points and.
Speaker Change: And then the other two was the effect of the sale leaseback and the securities restructure we did on our own book that was about that happened in the February 1st of March that was two to three basis points. This quarter and then we have a bit of a smaller balance sheet. We thought it would be earning assets would be around $58 57, and a half. So so those are kind.
Speaker Change: The for the differences and where our guidance was and where it ended up in a lot of it was the positive outperformance, but as we think about the guidance going forward on NIM.
Speaker Change: Theres really two two big things, maybe that would be changing one is the interest earning asset size. So you know in our call last quarter. We originally expected our average interest earning assets to be 59 billion for the year and to exit the fourth quarter. This year and 2025 at around $60 billion.
Speaker Change: But based on our lower starting point in the in the first quarter at 57, and a half and then low slower growth projections of low to mid single digit growth for the remainder of 'twenty five we expect our average interest earning assets to be 58, or so for the year and exit 2025 out of 50.
Speaker Change: $9 billion. So those are the that's the change but relative to the forecast sources were forecasting no rate cuts were.
Speaker Change: And we can talk about that if somebody with a follow up.
Speaker Change: But based on all of those assumptions, we would expect the NIM to be pretty steady between $3 80, and $3 90 for the rest of the year.
Speaker Change: You know it will continue to drift a little higher into 2026, as we continue to reprice assets, but to summarize all of that in our guide last quarter, we expected the fourth quarter 2025, NIM to be in the $3 75 to 385 range we now.
Speaker Change: That NIM in the fourth quarter of 25 to be $3 80 to $3 90 with <unk>.
Speaker Change: Smaller, earning asset base, but.
Speaker Change: Essentially with a higher margin, but essentially the same net interest income dollars in the fourth quarter. So.
Speaker Change: I know that's a lot to say, but there's a lot of noise around the quarter I wanted to kind of just clarify it really the only changes higher margin a little bit less.
Speaker Change: Interest, earning assets same.
Speaker Change: Net interest income dollars as we see it today.
Speaker Change: Very helpful. I appreciate all the color guys. Thanks, a lot I'll step back thanks.
Speaker Change: Thank you Mike.
Catherine Mealor: Your next question comes from the line of Catherine Mealor with <unk>.
Speaker Change: Please go ahead.
Catherine Mealor: Thanks, Good morning.
Speaker Change: Hey, good morning.
Speaker Change: Next question on the expenses that Shannon also lower at least for me this quarter just curious.
Speaker Change: Maybe some of the cost savings to Kevin earlier.
Speaker Change: And then and that conversion is now well if you could just kind of help us think about what I said.
Speaker Change: Format expense base is listening in on the cost savings.
Catherine Mealor: Yes Catherine.
Catherine Mealor: Last quarter call I.
Catherine Mealor: Laid out of expected NII a range of 355 to $3 65 for the first few quarters and then drop it into the $3 40 to $3 50 range in Q4.
Catherine Mealor: And as I said in my comments, we did exceed our expectations in terms of NIH.
Catherine Mealor: In the first quarter for two.
Catherine Mealor: <unk> one if you look back at last year and other years, we we do have a tendency sometimes four hires and projects that are in the budget.
Catherine Mealor: For first quarter starts to get pushed back a little bit and that was part of the outperformance in Q1.
Catherine Mealor: That often catches up later in the year. If you look last year from Q1 to Q4, you saw NII move up about $10 million.
Catherine Mealor: Q1 to Q4 that was part of that effect.
Catherine Mealor: I'd say the other other factors, though was we did achieve some of the cost saves earlier than anticipated we have had some.
Catherine Mealor: Support positions leave earlier than anticipated and so we got some of those cost saves.
Catherine Mealor: A little ahead of schedule.
Catherine Mealor: All of that to be said I don't think the guide for the rest of the year is that different from what I said three months ago I think right now we would say for Q2 and Q3.
Catherine Mealor: The $3 50 to 360 range.
Catherine Mealor: And then we get.
Catherine Mealor: More some more of the cost saves in Q4, so it's in the $3 45 to $3 50 range would be our guide today.
Catherine Mealor: Also keep in mind.
Catherine Mealor: July one is when most of our team is up for a merit increase so that factors in between the Delta when you get some more of the cost saves in.
Catherine Mealor: In Q2 to Q3, you also have that factored in as well but.
Catherine Mealor: Anyway, that's where we are on our NII guidance.
Catherine Mealor: And maybe just to add one other thing to what will said we are in.
Catherine Mealor: Of course, we talked about the sale leaseback.
Catherine Mealor: In February or at the end of February So we will have two three.
Catherine Mealor: <unk> three months of that versus one month of additional expense, which yes. So that's about an incremental versus Q1 incremental roughly $6 million a quarter thats in there too thanks, Steve for that reminder.
Catherine Mealor: Okay.
Catherine Mealor: The incremental six nine adds an extra cumulus.
Catherine Mealor: Yes, yes.
Catherine Mealor: It's roughly three minutes or less agreement for about that.
Catherine Mealor: And as you know gas is also a lot of variable things that are hard to predict flux.
Catherine Mealor: Fluctuate with revenue in terms of incentive compensation or loan origination volume might increase your Fas 91 cost deferral offset so there's things like that so of course, you understand move around quarter to quarter, but.
Catherine Mealor: But that should give you a good guide.
Catherine Mealor: Yes, that's what I was thinking.
Catherine Mealor: The loan origination with chunk of it so it's a net loan growth is a little bit slower. So I was wondering if that with carnival, what's going on.
Catherine Mealor: Sure.
Catherine Mealor: Okay.
Close to what we were expecting.
Catherine Mealor: Okay, Okay great.
Catherine Mealor: And then maybe just one back to Jesse.
Catherine Mealor: Oscar value accretion.
Catherine Mealor: Yes.
Catherine Mealor: Where are your loan discount is lastly, accretion that we already saw this quarter it looks like the loan mark on.
Speaker Change: I think Jeff was a little bit higher.
Speaker Change: As I was thinking it was going to come in a little bit lower with the move in rates My math right or is there any way you can just update us on what.
Mark: Hello, Mark.
Speaker Change: On that book.
Speaker Change: Okay.
Speaker Change: I think the total mark for non PCB and on the credit side as well as the rate Mark ended up at 482% or 480, something co located with <unk> 480 283.
Speaker Change: Of the rate Mark art.
Speaker Change: A portion of that was roughly 80% of that so I don't know it was a 380 something I don't have in front of me, but then the 300 <unk> I think.
Speaker Change: Okay.
Speaker Change: That's the rate marks versus the credit Mark Youre, saying.
Speaker Change: Yes, yes, yes, the credit Mark would be then PCT double count, which was with $96 million I believe something like that.
Speaker Change: Yes got it okay that's sustained.
Speaker Change: Okay.
Speaker Change: Okay, Great and then just.
Speaker Change: Just to kind of recap.
Speaker Change: Ken.
Speaker Change: Question earlier, Michael said, it's weird.
Speaker Change: The way to think if we were just to kind of forecast as the accretion piece.
Speaker Change: Al you want again lets just talk.
Speaker Change: The level of accretion we had this quarter back out the accelerated.
Speaker Change: And that should be kind of any here doing this ever straight line over the last two lines like that should be.
Speaker Change: Then for the next three.
Speaker Change: Three years and then it may fluctuate because we have accelerated paydowns, but theres no reason to really assess that.
Speaker Change: Coming down significant role.
Speaker Change: Again versus discounted.
Speaker Change: Cash can be accelerated.
Speaker Change: About $7 million. So we're kind of good accretion income being about $55 million a quarter for the rest of the year and maybe if we get accelerated paydowns.
Speaker Change: Yes, the way I the way I would describe it.
Speaker Change: Looking at it from the bottoms up we're looking at it from the top down just like we did in investment yield this quarter. So we're looking at it from a total loan yield perspective.
Speaker Change: And so that loan yield has two components most of its coupon and some of it is accretion so this quarter or whatever the the loan income was was 800 million or whatever the number was a portion of that was accretion over time, what will happen as every month goes by we will reprice those coupons up as they mature.
Speaker Change: The accretion part will come down, but if rates didn't move that total loan yield shouldn't move from a perspective of the acquisition that makes thats effective yield method as opposed to straight line Catherine so.
Speaker Change: So yes.
Speaker Change: Got it okay. That's very helpful. All right. Thank you.
Speaker Change: Next question comes from the line of Stephen Scouten.
Speaker Change: With Piper Sandler.
Speaker Change: Please go ahead.
Speaker Change: Hey, good morning, everyone.
Speaker Change: And maybe one more follow up on the NIM.
Speaker Change: It makes a lot of sense I think we're all have like PTSD from the old legacy credit accretion back into 'twenty again.
Speaker Change: Yes.
Speaker Change: You mentioned that your guide has no no cuts in there is it fair to assume that the NIM would.
Speaker Change: Accelerate a little more beyond what youre, assuming if we get a couple of cuts.
Speaker Change: The cut move through and stabilized.
Steve: Yeah, Good question, Steve and.
Steve: Clearly after this whole balance sheet reset we've looked at it model that and now that we have all the data together, we've seen it a little different way I would kind of describe our balance sheet today.
Steve: Our balance sheet positioning is much more neutral to rates and here is the first reason why is in the first quarter, we accelerated the deposit rate improvement from independent and and so we ended up 11 basis points better than we expected and if you kind of look.
Steve: At it if we were a combined company.
Steve: From the time they start.
Steve: Lowering rates to now our deposit beta down would be 40%, that's 40 basis points on a 100 basis points of cuts, which is much higher than we modeled.
Steve: We don't expect from here to get that 40%, we expect it to be much more muted in that 25, 26, 27% range and so as we think about kind of the puts and takes to all of this but.
Steve: The three things I would say that our moving number one we have the legacy South state billion a quarter loans that are moving up every quarter as we reprice them.
Steve: Because the yields are higher than our coupon.
Steve: We have.
The legacy independent loan that will because rates have come down 50 basis points since the mark when they mature they will likely come down a little bit from that perspective, and then we have the floating floating rate loans versus floating rate deposits all that being said when we run the math on the new balance sheet, we think we're pretty new.
Steve: Troll, maybe a basis point or two increase on the.
Steve: You know on a 25 basis point cut, but we've sort of hit a pretty we think are reasonably steady state at this level.
Steve: Okay that makes sense I think it's almost like you've already extracted a lot of that asset sensitivity, just obviously with market and balance sheet and then being ahead of schedule on on the deposit cost with that.
Steve: Yes, Thats fair to say it okay, great that's fantastic.
Speaker Change: And I guess, maybe at a very high level is there anything you guys could speak to either positively or negatively kind of development since the closing of the IBD X transaction surprises or our learnings or anything that would.
Speaker Change: Give us some visibility into how the combination is going especially from a production standpoint, and what that potential of the combined franchise it really looks like.
Speaker Change: Yes.
Speaker Change: Social blend of these two organizations has gone as well as any that I've ever been involved with Stephen So we think alike. We're both aiming for the same goals.
Speaker Change: We've just got to get this conversion behind us but.
Speaker Change: <unk>.
Speaker Change: <unk> was on the same kind of growth markets, we were very entrepreneurial approach to their business model.
Speaker Change: David and I spent five years talking about this working about this learning about each other's company. So there really are not a lot of surprises because we spent so much time.
Speaker Change: Building that relationship for years ahead of time.
Speaker Change: Yes that makes sense John I appreciate that and then as I think about kind of the potential to do this low mid single digit growth. After as you noted.
Speaker Change: A quarter that was kind of.
Speaker Change: Obviously light around growth this time around what do you need to do from an original production origination standpoint to kind of get the growth unique because obviously the balance sheet a lot bigger so.
Speaker Change: Production was up this quarter, but not enough on the larger balance sheet. So does that need to be $3 to $4 billion a quarter in new loan production or how do you think about that ramp up and do you need to hire more people in those new markets to kind of hit whatever target better.
Speaker Change: Yes, and the production that you see in that chart on the slide there includes the IV, TX production of about $550 million. So we work.
Speaker Change: Ladies and gentlemen.
Speaker Change: The conference will resume in just a moment.
Speaker Change: Please remain on the line we thank you for your patience.
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Speaker Change: Sure.
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Speaker Change: Okay.
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Speaker Change: Yes.
Speaker Change: Thank you.
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Speaker Change: Ladies and gentlemen, we thank you for your patience.
Speaker Change: Now he is in the conference.
Speaker Change: Steve are you in there.
Speaker Change: Hello, Steven are you there.
Speaker Change: Steven you there.
Speaker Change: Hi can you hear me.
Speaker Change: Yeah, Hey, Steven you there.
Speaker Change: Yes, Sir.
Speaker Change: I have no idea what happened when we got a gremlin and the phone.
Speaker Change: Anyway, we were talking about the growth dynamic and talking about some of the.
Speaker Change: Competitive pricing dynamics, so we had.
Speaker Change: Some deals high quality medical deals 10, or 15 years that the competition was pricing at $4 99.
Speaker Change: Fixed on balance sheet, we just saw that as capital.
Speaker Change: Capital destructive kind of pricing, so we werent going to getting paid to grow. So we didnt. Good news Stephen is that our pipeline is up 44% since.
Speaker Change: Since the beginning of the year, which is.
Speaker Change: Kind of surprising given all the tariff noise and our loan portfolios are growing in April. So we've had $173 million of loan growth in the first few weeks, so we're optimistic but.
Speaker Change: We continue to hire we had a lot of hirings in the first quarter.
Speaker Change: So I don't know that we need to change a whole lot about how we're thinking about the business to continue to get back to normal growth rates when the economy settles down.
Speaker Change: Okay. That's really helpful and just to clarify I think you had said I think it kind of cut out as you were saying that but maybe $500 million of that $2 1 billion in production with kind of legacy.
Speaker Change: <unk> footprint.
Speaker Change: It was 550 $550 million.
Speaker Change: Great Fantastic. Thanks for all the color and congrats on a new bed.
Russell Gunther: Your next question comes from the line of Russell Gunther with Stephens.
Speaker Change: Please go ahead.
Russell Gunther: Hey, good morning, guys.
Russell Gunther: Wanted to ask on capital.
Russell Gunther: 111% came in better than the original guide you mentioned the flexibility it gives you.
Russell Gunther: From both a defensive and offensive.
Russell Gunther: <unk> I guess just thinking about the.
Russell Gunther: The ability to go on offense, if the macro environment would allow how are you thinking about capital deployment from here.
Russell Gunther: Yes, so we've got a little bit of uncertainty right now.
Russell Gunther: With the economy, So I think first and foremost we need to kind of plot.
Russell Gunther: Claude through the next two or three months and make sure.
Russell Gunther: Let things settle down from a from a loan portfolio asset quality standpoint.
Russell Gunther: But then we're going to have options, we're going to have options.
Russell Gunther: To potentially look at our dividend to look at the buyback.
Russell Gunther: We could look at M&A in the back half of the year So right now.
We don't have any clear direction on how we're going to deploy the capital we wanted to stick the landing on the closing of <unk> and make sure that our capital position was what we forecast we wound up a little bit better. So I think I think we're going to have a better clear view in the back half of the year versus what we do today and Russell as well I'll just add a couple of things one is <unk>.
Russell Gunther: John said, we do expect to see growth resume although we didn't grow in Q1 pipelines are up materially from in the year. So we expect to.
Russell Gunther: And to grow and use some of the capital that we also though are in a position where we would see our CET one are creating probably 20 to 25 basis points a quarter from here through the rest of the year. So.
Russell Gunther: That optionality, John referenced should continue to build.
Speaker Change: That's very helpful.
Speaker Change: Thank you guys and then maybe just the other side of that question should defense be required you mentioned, taking a look at your portfolio and some particular sectors.
Speaker Change: Maybe you can just share where you're taking a closer kind of incremental look today.
Speaker Change: Sure we've had a lot of conversations with our clients and we're trying to learn from them. They are trying to learn from us.
Speaker Change: And at the end of the day the customers as I said are not panicking, but some of them are putting a pause on some of these capital projects.
Speaker Change: On our first pass from the credit team, we don't see a lot of direct exposure to importers from China in our portfolio just a handful.
Speaker Change: So we think the risks of the C&I portfolio are probably more second order effects on.
Speaker Change: On the CRE side, we're taking a hard look at the industrial warehouse exposure, particularly in the port cities.
Speaker Change: We've identified about $200 million of exposure, specifically near the ports, we've got about $50 million in spec industrial which is pretty small in Jacksonville, Savannah, and Charleston, So it's not that much our credit folks today think the biggest risk is just a widespread recession.
Speaker Change: Rather than a specific segment of our portfolio. So we've got more work to do and we'll be in a better position to assess the risk in the next quarter.
Speaker Change: Okay.
Speaker Change: That's really helpful. And then just last one for me switching gears would be on your fee income expectations, just how you'd expect that to trend relative to the first quarter and any change to your guide relative to the average assets.
Steve: Yes, no. Thanks Russell this is Steve yes.
Speaker Change: Noninterest income was 86 million 54 basis points of assets Our guide was.
Between 50 and 55 on the higher end so pretty.
Speaker Change: Pretty close to where we thought at 54, where it was within the guidance.
Speaker Change: The main.
Speaker Change: As we kind of look forward there.
Speaker Change: Correspond it was down a little bit on the capital market side on the interest rate swaps that just because it's less.
Speaker Change: Volume going through the <unk> loan.
Speaker Change: Loan growth and so on so there was there was that effect on the other side of that wealth management had a really great quarter. Some are new partners private capital management had a great quarter and all the team. So that really grew this quarter, but if I kind of take it on balance our guidance really hasn't changed.
Speaker Change: It's kind of flat, we think it's going to be flat until we sort of see.
Speaker Change: The loan volume at the capital markets and other things come back. So I don't know when that is but clearly with the tariff and that target's probably got pushed it out a little bit.
Speaker Change: Okay.
Speaker Change: Okay guys. That's it for me. Thanks, so much for taking my questions you bet Russell.
Jared Shaw: Your next question comes from the line of Jared Shaw with Barclays.
Speaker Change: Please go ahead.
Speaker Change: Hey, everybody good morning, Greg.
Speaker Change: Hey, good morning.
Speaker Change: Yes.
Speaker Change: I don't know not too.
Speaker Change: Not to beat a dead horse with the accretion but.
Speaker Change: Just as we're trying to build out.
Speaker Change: NII guide going forward is there sort of a dollar of accretion that we can.
Speaker Change: Be basing it on I think Catherine trying to get to the.
Speaker Change: Yes.
Speaker Change: The $385 million.
Speaker Change: Gross number from the deal and then we take out the 61 million $61 $8 million from this quarter.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: But that $50 million a quarter, a good run rate or a good range to assume.
Speaker Change: Apart from accelerated accretion.
Speaker Change: Any benefit from accelerated accretion sure. So maybe let me say it another way so.
Speaker Change: If you take out the accelerated accretion our loan yields this quarter would have been $6 19 versus six in a quarter is what you reported.
Speaker Change: So as we think about total loan yield.
Speaker Change: We think it's you know and the forward receivable feature the puts.
Speaker Change: And takes are between $6 15, and six in a quarter.
Speaker Change: That the accretion in the early stages are going to be higher. So if you pull out that $7 million that we talked about early payoffs.
Speaker Change: That's going to continue to decrease over time, but to your point, it's pretty steady for a while.
Speaker Change: And then the coupons are going to replace that accretion.
Speaker Change: And so that total loan yield somewhere in that $6 15 to six and a quarter range is kind of the way.
Speaker Change: We're modeling internally based on what we see in a flat rate environment.
Speaker Change: And then of course in the early years or in the early periods of time, the accretion I think schedule would've been probably in the $50 million range give or take.
Speaker Change: That's probably not a bad place to start but if here.
Speaker Change: To kind of land I would I would look at total loan yield.
Speaker Change: Okay alright. Thanks.
Speaker Change: And then maybe shifting a little bit just to to credit.
Speaker Change: Clearly a lot of a lot of noise in the provision and allowance with with the deal but as we go forward from here.
Speaker Change: Is there any yes.
Speaker Change: What's the sensitivity I guess to a weakening Moody's baseline or are you internally using more of an adverse scenario at all in your.
Speaker Change: In your seasonal calculation as we as we go forward from here, how should we be thinking about the movement of.
Speaker Change: Allowance as a ratio and sort of provision.
Speaker Change: Yes.
Speaker Change: We hold our scenario weightings constant our belief thats little better statistically.
Speaker Change: In terms of modeling, but what we did do this quarter was two <unk>.
Speaker Change: Add in a <unk>.
Speaker Change: Q factor associated with <unk>.
Speaker Change: Business conditions external factors et cetera associated with tariffs.
Speaker Change: That kind of.
Speaker Change: That combined with the weightings, we have incorporates forecast uncertainty.
Speaker Change: Hey.
Speaker Change: A couple of things on the reserve level so.
Speaker Change: That and that allowed our provision to be $8 million for the quarter.
Speaker Change: Absent that we would have had a.
Speaker Change: A provision that would have been negative so that didn't seem appropriate.
Speaker Change: I guess a couple things one if you think back to when we adopted C sold back in 2020, our reserve level would have been about 30 basis points below where we are today at that timeframe.
Speaker Change: A lot of calls for other banks have focused on their unemployment rate assumption. If you look at the scenarios and our weightings of them baseline <unk> three the average unemployment rate weighted average unemployment rate for 2026 would be about $5. Two on those but I'll also caution you there are a lot of other fact.
Speaker Change: <unk> that our loss drivers that are important and our CSO model commercial real estate price index housing price index things like that in addition to unemployment that helped drive.
Speaker Change: The level of required reserve.
Speaker Change: If we get a.
Speaker Change: A serious.
Speaker Change: Change to the negative and expectations for all those loss drivers and you will see our and other banks provisions need to go up but if things are pretty stable.
Speaker Change: I don't see our vision moving up this level and can.
Speaker Change: And see if we could move down from here, if things improve a little bit because as you know it's a forward looking life of loan.
Speaker Change: Loss model and generally the provision expense is going to precede the charge offs.
Speaker Change: Experience.
Speaker Change: Great. Thanks for that I appreciate it.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of David Bishop with hub group.
Speaker Change: Please go ahead.
Speaker Change: Hi, gentlemen, good morning, this is actually Jon on for <unk>.
Speaker Change: Hey, John.
Speaker Change: So I appreciate the color on the conversion just to confirm is that still slated for memorial day weekend.
Speaker Change: It is.
Speaker Change: Wonderful and I guess just ahead of that date.
Speaker Change: As to how youre thinking about any potential deposit nutrition within the <unk> deposit base.
Speaker Change: Yeah.
Steve: John This is Steve you know from a standpoint of.
Speaker Change: Movement within that book, we're really not thinking there's going to be much in the conversion.
Steve: The main reason for that of course is.
Steve: Hopefully, we're given better technology, but more importantly, we're keeping all of the frontline bankers, who deal with the clients. So in our model its local market driven so I would think our commercial and treasury and others should be good and our platforms from what we're hearing from the independent folks on average is getting better.
Steve: Of course, Theres always turmoil in that first few months afterwards, and so we have roughly 500 legacy South state people.
Steve: Going to the independent markets during May and June to help out the teammates there to make sure that this transition as seamless as it can be but to your point. These things are always hard it's a heavy lift but we believe we've got everything we are doing in place to get this done in wealth. So we don't we.
Steve: We're not modeling any we don't expect it.
Steve: But we will see and we've done we've done.
Speaker Change: Three practice mock conversions already and Renee Brooks leads this effort for US she has done a ton of these conversions. So everything appears to be on track, but it's a lot of change for the bankers and they're experienced they've done this as buyers so and we'll get through it in a couple of months.
Steve: Fantastic great to hear.
Steve: And maybe just to follow back up on Steven's questions on loan growth.
Speaker Change: Appreciate the specifics on the pipeline progression since the beginning of the year I guess I'm just curious if there's any color around if there are any.
Speaker Change: Discernible changes in size or complexion in the pipeline.
Speaker Change: Immediately before and immediately after tariff day earlier this month.
Speaker Change: Yeah.
Speaker Change: Again, I was kind of surprised that the pipeline was building during all of this turmoil over the last few months, but it is up 44% you look at where it's growing.
Speaker Change: We've seen a 55% increase in our CRE pipeline, a 43% increase in our C&I pipeline only about a 2% increase in our owner occupied CRE.
Speaker Change: The biggest growth markets in the pipeline or our Atlanta, they're up 46% since the beginning of the year in Florida, Florida is up 28% so.
Speaker Change: That's kind of where we're seeing the growth.
Speaker Change:
Speaker Change: But.
Speaker Change: Some of the steps of the pipeline and some of it will be kind of tariff.
Speaker Change: Tariff dependent whether it pulls through or not.
Speaker Change: Fantastic Thats all I had appreciate you guys, taking my questions and congrats on a great quarter. Thank.
John: Thank you John.
Your next question comes from the line of Chris Meramec with Janney Montgomery Scott.
Speaker Change: Please go ahead.
Chris Meramec: Thanks, Good morning, John just curious on new hires and in Texas, and Colorado, and where that falls on both timing and priority for you.
Chris Meramec: Yes, we had a great recruiting.
Chris Meramec: Core here and and we're open for business to recruit great bankers in Texas and Colorado.
Chris Meramec: I think we want to get through the conversion, Chris and implement the new Treasury management software and get the bankers used to that and then we look to layer on some additional middle market bankers.
Chris Meramec: Once we put that in the rearview mirror, but.
Chris Meramec: We had a we had a big quarter and starting with an addition in Nashville, Tennessee.
Chris Meramec: Tennessee.
Chris Meramec: We're able to recruit the president market President of <unk> Bank in Nashville, Cameron Wells, and we're building the team around him and starting a loan production office in Nashville.
Chris Meramec: We've hired commercial and middle market bankers this quarter in Tampa, Jacksonville, Athens, Georgia, Raleigh, North Carolina.
Chris Meramec: Big adds to the wealth area in Atlanta, Jacksonville, Hilton head Charleston, So.
Chris Meramec: Anyway, we had a great great recruiting quarter, but as far as adding the middle market team and the new markets, we'd like to get the treasury piece in place first.
Speaker Change: Great that helps a lot and thanks for sharing all the other background that's super Thank you.
Chris Meramec: Sure.
Chris Meramec: I will now turn the call back over to John Corbett for closing remarks. Please go ahead.
Speaker Change: Alright, Thanks, Thank you Eric and <unk>.
Chris Meramec: Thank you all for calling in.
So moving parts here during the quarter and you had great questions and hopefully we provided some clarity.
Chris Meramec: For you, but we're real pleased that we've kind of stuck the landing.
Chris Meramec: As it relates to the closing of <unk>, we feel like the balance sheets in great spot the earnings profiles in a great spot.
Chris Meramec: But if you are building your models and you got some extra questions just don't hesitate to reach out to will or Steve Hope you guys have a great day and this will end the call.
Chris Meramec: Okay.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Chris Meramec: Yes.
Chris Meramec: [music].
Chris Meramec: Sure.
Chris Meramec: [music].
Chris Meramec: Okay.
Chris Meramec: [music].