SouthState Corporation (NASDAQ:SSB) Q1 2023 Earnings Call Transcript

SouthState Corporation (NASDAQ:SSB) Q1 2023 Earnings Call Transcript April 28, 2023

SouthState Corporation misses on earnings expectations. Reported EPS is $1.93 EPS, expectations were $1.96.

Operator: Hello, everyone, and welcome to the SouthState Corporation Q1 2023 Earnings Conference Call. My name is Charlie and I’ll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I will now hand over to our host, Will Matthews, CFO, to begin. Will, please go ahead.

Will Matthews: Good morning. Welcome to SouthState’s first quarter 2023 earnings call. This is Will Matthews. I’m here with John Corbett, Steve Young and Jeremy Lucas. John and I will make a few brief prepared remarks before we open it up for questions. As always, a copy of our earnings release and our investor deck are located on our Investor Relations website. Before we begin our remarks, let me remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties, which may affect us. Now let me turn the call over to John Corbett, our CEO.

John Corbett: All right. Thank you, Will. Good morning, everybody. Thank you for making time to join us. In March, we passed the third anniversary of the pandemic shutdown of the economy. It also marked the third anniversary of the Fed’s massive quantitative easing response. Last year, however, the Fed made a hard pivot from fighting the pandemic economy to fighting the inflation economy and intuitively we’ve all been worried that the speed and scale of that pivot would result in casualties. Well those casualties showed up in the banking system on March 8. In spite of the recent turmoil, the SouthState team delivered results that were right in line with our previous guidance. During the quarter, we produced growth in loans, deposits, liquidity and our capital ratios.

Earnings per share of $1.83 increased 32% from the same period last year, and that yielded a return on tangible common equity of about 19%. In the weeks following March 8, the market identified two immediate risks, liquidity and capital and also two longer-term risks, earnings and credit. I’ll briefly touch on each. On liquidity, we’ve been building a diversified and granular deposit base for decades. And we came into this rate hiking cycle with $6 billion in cash a year ago. SouthState manages 1.5 million deposit accounts with an average deposit size that is the lowest of our peer group at only $24,000 per account. So that granularity adds stability and a lower percentage of uninsured deposits. On Page 26, we’ve itemized $19 billion of available liquidity sources to cover less than $11 billion of uninsured and uncollateralized deposits and that provides a 176% coverage ratio.

So there’s ample liquidity. On capital, in the weeks following March 8, there’s been speculation about the regulatory response and whether unrealized losses will eventually be reflected in regulatory capital ratios. On Page 27, we show a waterfall to illustrate that SouthState remains well capitalized on all regulatory ratios if you include the impact of AOCI. Additionally, we calculated it to include the impact of both available-for-sale securities and held-to-maturity securities and all of our regulatory ratios still exceed well-capitalized requirements. Those capital ratios should continue to build as the balance sheet grows at a more moderate pace. In fact, tangible book value per share increased 6% during the first quarter. On earnings, like most banks, the biggest risk to our earnings forecast are deposit costs.

We finished the first quarter with a cumulative deposit beta of only 13% and a total cost of deposits of 63 basis points, which came in right in line with our prior guidance. And that low beta helped our PPNR per share to grow 62% over the last year. Given the events on March 8, that earnings growth ramp will moderate, and Steve can share some updated thoughts on the Q&A on potential deposit betas moving forward. And finally, on credit. Asset quality metrics remain excellent and stable. However, we are conservatively building reserves. Over the last four quarters, we added $123 million in loan loss reserves compared to just $3 million in charge-offs. And with the increasing focus on the office segment, we added a new slide in the deck that Will can touch on in his remarks.

Stepping back from current events, every shakeup like this presents new challenges and new opportunities. And this management team has been involved in 9 FDIC transactions and knows what it’s like to manage through a cycle. That’s why our guiding principles of soundness, profitability and growth start with soundness. We will continue to have opportunities to recruit new bankers and we’re already seeing opportunities to command higher loan spreads as industry liquidity is becoming scarce. And it doesn’t hurt to be located in the most vibrant markets in the country. The Southeast is known for its friendly business climate and capital flows where capital is treated well. It seems like every month, there is an announcement of a new multibillion-dollar manufacturing facility with thousands of new jobs in the Southeast.

And those job opportunities are leading to population migration. Based on the latest Census report, SouthState operates in four of the 6 fastest growing states in the country. I’ll conclude my remarks by thanking our team. You can never predict when a black swan event will occur. But those are the times when long-term client relationships matter the most and SouthState’s relationships run long and deep. And now I’ll turn it over to Will to walk you through details on the quarter.

Will Matthews: Thanks, John. I’ll speak briefly to a few measures before we open it up for questions. From a high-level perspective, our first quarter margin and deposit costs were at or slightly better than our prior guidance. After the events of March 8, we decided to build a bit more liquidity on the balance sheet. Our tax equivalent NIM of 3.93 was down 6 basis points from the fourth quarter, although it was approximately 9 to 10 basis points better than we had budgeted. A 40 basis point increase in earning asset yields was offset by a 46 basis point increase in cost of funds. Cost of total deposits increased 42 basis points in line with our guidance of a 40 to 50 basis point increase from last quarter. Our interest-bearing deposit costs remained slightly below 1% at 97 basis points.

Loans grew at a 7% annualized rate in line with our expectations, predominantly in single-family residential up almost $400 million. Line of credit utilization remained flat with C&I line usage actually down 2% from Q4 and HELOC usage flat. Deposits grew at a 1% rate, included in that deposit growth is brokered CD issuance of $1.25 billion during the quarter. We had budgeted and planned to issue $1 billion but went ahead and issued an additional $250 million late in the quarter in light of some of the industry concern. Excluding brokered CDs, our deposits declined approximately $1.2 billion in the quarter. Of that amount, approximately $400 million was normal public funds drawdowns after Q4 tax collection season. We did see continued growth in the number of core banking deposit accounts, debit cards and customers in the quarter.

We had $900 million in FHLB borrowings outstanding as we elected to carry more cash on the balance sheet at quarter end, with cash and Fed funds balances up $700 million. Non-interest income improved $8 million over the fourth quarter, led by correspondent and mortgage and steady performance in wealth management. Non-interest expenses continued to be well managed with NIE of $231 million, up $3 million from the fourth quarter and slightly better than expected for the quarter. We had another quarter of very low credit losses with net loan recoveries excluding overdraft losses and only $1 million in total net charge-offs. We added to the reserve levels again this quarter with a $33 million provision expense, $18 million of which was for unfunded commitments.

The combined total of our allowance and reserve for unfunded commitments stood at $456 million at the end of the quarter, up 8 basis points to 1.48%. As John noted, that’s $123 million in provision expense versus only $3 million in net charge-offs over the last four quarters with net loan recoveries before including overdraft charge-offs and we expanded our reserve coverage by 23 basis points over this period. Slide 22 shows asset quality trends over the last five quarters. These metrics continue to be very solid. NPLs to loans of 41 basis points were up slightly from Q4 and down slightly from the 2022 first quarter. NPAs were up $19 million, and criticized, classified assets were essentially flat with substandard loans down $12 million and special mention loans up $10 million.

Past dues were also down. Given the current interest in office CRE, I’ll mention a few highlights with respect to that portfolio. As noted on Slide 21, office CRE represents approximately 4% of our outstanding loans and 97% of this portfolio is in market. The portfolio is very granular with an average loan size of less than $1.5 million and the vast majority of the properties are smaller than 150,000 square feet and not located in the Central Business District. Our weighted average debt service coverage is 1.64x and our weighted average loan-to-value is 59%. Credit metrics on this portfolio are also strong with very low levels of delinquencies and only one basis point on nonaccrual. Additionally, we’ve added some disclosures begin on Slide 25, covering deposits, liquidity and capital.

Our capital position continues to be strong. And as John noted, would remain so if regulatory ratios were changed to include AOCI. All in all, while the last month of the quarter was rather tumultuous for our industry, we believe we’re well positioned with a strong capital base, granular deposit funding, continued strong revenue and solid credit metrics. Operator, we’ll now take questions.

Q&A Session

Operator: Our first question comes from Catherine Mealor of KBW. Catherine your line is open, please go ahead.

Catherine Mealor: Thanks, good morning.

John Corbett: Hey, Catherine.

Catherine Mealor: Hello John, you keep Steve up for the deposit beta question and I thought I’d start there and just wanted to get your thoughts, Steve, on how you are thinking about the acceleration of deposit beta over the next couple of quarters?

Steve Young: Yes, Catherine this is Steve. Good to talk to you, and of course, John throws me the softball. So here I go. Let me just kind of – first of all just talk to deposit beta. Obviously, let me kind of put it in context of margin in general. And this may be a little longer window than you want, but I think it kind of describes the overall perspective. John and Will both mentioned, we had a really good NIM in the first quarter, 3.93. Our guidance was somewhere for the year between 3.70 and 3.90. Deposit costs were within our guidance, which we were really excited about. As we talk to you about margin, I’m going to give you the same guidance for 2023 with a few updates in the assumptions. And just with the caveat, when the when industry experienced toward the first of March, it really changed our thinking around how much liquidity to hold as well as our customers’ desire for more rate-sensitive products.

So as we think about the three assumptions, those three assumptions haven’t changed. Number one, it’s the size of our interest-earning assets. Number two, the assumption of interest rates. Then number three is the deposit beta question you asked. So first, around interest earning assets in January, we talked about on the call, our guidance of an average $40 billion interest-earning asset base in 2023, and we have no change to that. Two, we talked about interest rates. In January, the Moody’s consensus forecast was for Fed funds to move up to 5% and then be lower 25 basis points by the fourth quarter of this year. But based on the new Moody’s baseline forecast, we expect Fed funds to peak at 5.25% here in about a week and then stay there all the way through 2023.

So on Page 16, our graph shows our cycle-to-date beta is at 13% versus our historical beta at 24% in the last cycle. As a result of the banking industry turmoil in March, we are estimating that our deposit beta will rise – or our deposit costs will rise 45 to 50 basis points in the second quarter bringing our cycle-to-date deposit beta into the low 20s versus our historical 24%. If the Fed stops raising rates in the second quarter based on history, we would expect deposit costs to continue to move up at a much more gradual taste in the back half of the year. This could cause full cycle beta to increase a few percentage points. To be honest and humble about the whole answer is we don’t really know, it’s been unusual change in March. But having said all that, we’re confident in our deposit base and it seems to be doing well.

With all those new assumptions around interest rates and timing of deposit betas, we’d expect our full year 2023 NIM to stabilize in the 360 to 370 range and into 2024. So just one last point, over the next two years, Moody’s baseline is correct and Fed funds falls into the low threes with a slightly upward sloping yield curve. The environment is very favorable for us as our interest-sensitive deposit rates will be lowered, while our assets are adjustable fixed will still reprice higher. Our deposit franchise continued to perform and provide real stable margin environment with really net interest income driven not by margin, but by growth in interest-earning assets. That’s a long-winded answer, but hopefully, that gives you time.

John Corbett: I thought, the deposit beta was in there somewhere .

Catherine Mealor: That was awesome as always. Thank you, very helpful. Maybe a few follow-ups to that. So, on your average asset comment that the size is the same at $40 billion. Is there a shift within that where you have a little more cash, maybe less loans with a more moderate low growth outlook?

Steve Young: That’s right. I think we’re back to the – as John mentioned, the four things that everybody talked about on March 8, liquidity, credit, capital and earnings. We’re probably going to carry a little bit more liquidity just through this time, just prudently.

Will Matthews: Yes. But I’d say, Catherine, not any dramatically bigger liquidity position. I think early on, we all were trying to figure out what was needed in light of all the uncertainty. And we all spent a lot of time increasing our contingent liquidity sources and we’ve got to file that in the deck. And I’ll say we’re continuing to do that post quarter end and have increased it further from there. And so having access to the liquidity is important, but I wouldn’t say we’re going to dramatically increase the size of balance sheet liquidity on balance sheet by big numbers.

Catherine Mealor: Okay. And then back to deposit conversation, so there’s – we’re seeing a lot of remix out of noninterest-bearing into interest-bearing across the industry. So with your deposit beta guide, and you are giving us total deposit days, that’s going to include that remix. How much of a shift do you expect to continue to see out of net interest bearing within that guide?

Steve Young: Yes. Hey Catherine, when we look back at history, our DDA today is 34% of our total deposits. Pre-pandemic, it was in the high 20s. So, I’m not sure that it’s going to go all the way back there, but you kind of have to assume that it’s going to continue to drift, but we don’t know. I would imagine that we would track pretty much the industry, however, that’s going to play out.

Catherine Mealor: Okay.

Steve Young: And I think one other thought around that is I do think it’s around business deposits. And of course, as we’ve talked about on this call, 100 times is we have a pretty granular deposit base sort of between retail, small business and commercial. And we have that slide that shows the granularity of each, really, the remix is primarily in the commercial space and not in small business in retail, and that’s been pretty steady.

Catherine Mealor: Yes. Maybe just 1 follow-up just on that point. What kind of behavior have you seen that – I agree, I think, the deposit betas have mostly been driven on the commercial side, really across the industry? But as you look at your small business and retail piece, did you see any change in behavior or pick up, especially after the March volatility?

Steve Young: Yes, I think it’s probably look the entire customer base up just around excess deposits. So, there were some excess deposits that were sitting in checking. But really, primarily, if you look at it from March 8 on, it was really more of a business remix than it really was in a retail or a small business. And then within business, there was more volatility with nonprofits where folks are managing other people’s money. They were a little bit more sensitive to the issues of March 8.

Will Matthews: Yes. Catherine, I’ll give you an interesting statistic. We had our call center volume in the two weeks following March 8 was a normal total volume. It was 66,500 and something calls and only 30 calls had any to do with FDIC insurance coverage, so five basis points of the calls, which surprised me how little call center activity we had around that subject.

Catherine Mealor: For sure that’s interesting. Well that’s all very help. I’ll hop out of the queue. Thanks so much.

John Corbett: Great, thank you Catherine.

Operator: Thank you. Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Kevin your line is open, please proceed.

Kevin Fitzsimmons: Hey good morning everyone.

John Corbett: Good morning.

Kevin Fitzsimmons: I was just looking to drill down a little more into the comments about slowing balance sheet growth. So, from what I remember, I don’t think you guys had – we’re guiding to rapid growth. I think you had last said mid-single digit. And so if we’re going even slower than that, maybe just help us with – does that happen quickly? Does that happen steadily over the course of the year? And is that more – is that more driven by the demand and what the Fed has done – the Fed’s getting what it wants on the economy? Or is it more you guys really proactively tapping on the brakes just given the economic cost of funding the loan, the credit concerns, et cetera? Thanks.

John Corbett: Yes, Kevin, it’s John. I think our previous guide for 2023 was that we would have mid-single-digit loan growth for the year. We came in at 7% in the first quarter. I can imagine that, that loan growth may be more heavily weighted to the first half of the year and things would maybe slowdown in the back half of the year. As you have a lack of liquidity in the system and just price discovery between buyers and sellers. So from our C&I borrower standpoint, I think that business is still good, but a lot of them are kind of in a wait-and-see mode before they make major capital expenditures. The M&A activity slowed down in C&I. Our CRE has slowed significantly, and we’re seeing some of our peer banks back out of that space.

And so we want to be selective there. Multifamily is still strong because a lot of folks are still priced out of a single-family market, and we’ve got a lot of population migration here. And industrial demand is still real strong near the ports, particularly, we’ve got less than 1% vacancy rates in Savannah and Charleston on industrial. So, I just – I think there’s a lag effect Kevin, with the Fed interest rate increases, we were growing loans in the mid-teens in 2022, 7% in 2023 in the first quarter. I still think the mid-single digits for the full year feels about right.

Unidentified Analyst: Okay. Great. And maybe just a quick check on expenses. I know I think last quarter, you told us about a $950 million run rate for the year, and now we’re – I think you said expenses came in a little better than your expectations. Are we – is that still the outlook? Or given that things are getting tougher on the top-line, is there going to be more scrutiny on the expense line? Thanks.

Will Matthews: Yes, Kevin, it’s Will. Hopefully, we’re always applying the appropriate level of scrutiny to our NIE base and everybody applying that ownership culture as they think through their NIE base. I did reference we’re a little better than target. I think we had in the first quarter maybe budget about $1 million more, so pretty much on top of it. We still think the $950 million is a good number. Obviously, in an environment like this, though, you do rethink, do we need to necessarily make this higher or that higher that we may have had approved in the budget, is that something we can hold off on and make sure that we need to do it. Those kind of decisions that hopefully, our team of owners will think through that way.

There are factors that are harder to predict. One is loan production volume and the impact that has on the capitalization of loan origination costs, which is an offset NIE still lower production leads to lower cost offset in that regard are higher NIE. But sitting here through the first quarter, I’m pleased we’re a little bit ahead of budget on NIE. I still think our guidance for the full year feels about right at this point.

Steve Young: Yes. And just what I would add to that, Kevin, is just big picture is that we’re continuing to work on our platforms and spend money on those to make sure that we’ve got a really good customer and employee experience. And we think that that’s going to pay dividends out in 2024, 2025. And so to Will’s point, we’re always trying to manage expenses as the lowest confident denominator and ultimately create. And then there’ll always be opportunities again in environments like this where there’ll be teams of people and other things that will have the opportunity to hire and you want to have the ability to do that. But I think within all that, we’re going to manage the expense base.

Will Matthews: Yes. And I wanted to point out, I’ll make, too, just as you think about modeling, our typical – most of our employees’ annual increase cycle is a July 1 increase. So you’ll see that’s third quarter event every year.

Unidentified Analyst: Okay. I appreciate that. And then, Steve, one thing I just – it was a nice rebound quarter for correspondent. Just wondering if that’s a sustainable pace or how we should think about that line?

Steve Young: No, to your point, correspondent had a great quarter this quarter. Kind of the way that we think about that business is, obviously, the interest rate swap revenues had a good – really good quarter. Fixed income is difficult right now just because of the way the yield curve shape and cash on bank’s balance sheet. But I kind of – the way I kind of describe it is until the Fed has done hiking rates and we get some stability, which should come in the next maybe towards the back half of the year. These interest-sensitive businesses like mortgage and correspondent probably will stay lower. So, I wouldn’t expect – I mean the first quarter is really good, and I would kind of go back to our original guide on that to be in that 55 basis points to 65 basis points of assets until that until the Fed starts raising rates, and then we kind of go to 60% to 70% after that because we just need some stability for those businesses.

Unidentified Analyst: Got it. Thanks very much guys.

Operator: Thank you. Our next question comes from Stephen Scouten of Piper Sandler. Stephen your line is open. Please go ahead.

Stephen Scouten: Yes. Good morning everyone. I guess I was kind of curious at a high level, how do you think, if in any way, your business model has kind of changed with all the turmoil from March 8 and beyond. Everybody seems to think a regional banking model is somehow dead now. I’m just kind of curious what your views are on that at a high level on how you think your business model may or may not have changed?

John Corbett: Yes, Stephen, it’s John. I think about our business model and a couple of things come to mind. Number one is the local market leadership in our business model. We have 41 regional presidents, and they manage their own balance sheet and their own income statement. And I think that has proved to be very valuable when it comes to managing deposit cost and deposit betas. In a headquarter-centric type of business model, you’re making all of these interest rate decisions at the headquarters. And I think it’s much, much better for the local market leaders to figure out where they need to shoot the bullets on pricing deposits for their very best customers rather than someone guessing hundreds of miles away. So, I think that part of our model has been very, very valuable.

The other piece of the model is – it’s a diversified model. You heard Steve talk about the diversity of the deposit base, one-third retail, one-third small business, one-third commercial treasury. And if you go back to 2008, 2009, what got the banks in trouble, it was concentration on the loan portfolio. You look at this cycle, we’ve got banks in trouble with concentration on the deposit side. So, I think our decentralized leadership model has proven to be very valuable. And I think the diversity of our business mix has proved to be very valuable and kept some stability. So, I don’t know that we’re thinking about this crisis is something that’s going to change the way we do business. I think it’s proven to be resilient.

Stephen Scouten: Great. That’s really helpful. Congrats on a really great stable quarter. Appreciate it.

Operator: Thank you. Our next question comes from Michael Rose of Raymond James. Michael your line is open. Please proceed.

Michael Rose: Hey good morning guys. Thanks for taking my questions. Just wanted to go back to mortgage for a second. The gain on sale margin popped up. You had a better quarter if you back out the MSR gain. I think you just made some comments, I might have missed them. But – just wanted to get the kind of the outlook there. And then on the balance sheet side, you’ve been portfolioing more of the mortgages, which obviously contributed to this quarter’s growth. Just wanted to get the outlook there for how much you might plan on a quarterly basis to portfolios going forward? Thanks.

Steve Young: Sure, Michael. This is Steve. Yes, you’re right. The gain on sales did come back a little bit this quarter. I think our total production was around $556 million of which we portfolio about $400 million of that. So not quite. I think it’s 72% portfolio. The adjustable arms on that was 78% of that. So most of it is just we’re putting on in our adjustable rate mortgages. As we kind of think about the future, we don’t see a huge run-up in that business for a while until things stabilize a little bit. I think what we’re seeing most and why we have so much portfolio production is we have an owner person who is building a house was just on that inventory, and so they’re doing a kind of a CP loan that firms out into an arm on our balance sheet.

Typically, these are professional doctors. I think most – I think the number was in the mid-40% of our portfolio production with that in the first quarter. So we’re seeing a lot of those types of opportunities, which obviously sees in the wealth management and so on. But we’re not seeing any huge pickup in sort of a traditional secondary business. At least right now, certainly it’s come off the lows a little bit. But my sense is, like anything else, like all these fee businesses these are opportunities for us to build – to continue to rebuild and build these businesses. And so we’re actively recruiting mortgage bankers. We’re actively recruiting some of our correspondent group. We’re actively doing all those things, not because it’s going to pay off in the next three to six months, but because it will pay off in the next 12 to 24, and so that’s kind of how we’re thinking about investing in those businesses.

Michael Rose: Very helpful. Maybe just going back to deposits, just wanted to kind of talk about flows. So obviously, you guys added some broker this quarter. You had the seasonal decline in public funds. Just excluding those two kind of impacts, the core deposits obviously went down. Can you just talk about trends kind of since everything happened in early March and have you seen balances stabilize to maybe perhaps grow? And then what is the plan going forward to grow core deposits? Thanks.

Will Matthews: Hey Mike, its Will. I’ll start and maybe John or Steve can jump in and elaborate. I’d say we – the events on March 8th probably caused us to be a little more focused on deposits within our market and within our various markets. And so our sales hat on the deposit side became a little more important from that point forward. And so I think what you’ll see from this point forward, I think is a lot more activity in that regard. If you look at the March 8th to March 31st activity, essentially in that period you saw our commercial deposits down about $400 million. Our other deposits, the rest of the bank is up about $100 million. So net-net, over that period, you’re down about $300 million. We have a lot of swings in the various categories, obviously, from period-to-period depending on what’s going on.

So that’s not a real positive measure. But like I said, we were surprised how few calls we had at the call center. Maybe John can touch on some of the activity we have with the outreach we did with some of our customer’s right around that time.

John Corbett: Yes. I go back to January, even before the March 8th events. And we were seeing some drawdowns of deposits in January. And I don’t know that a lot of that was the public funds piece, that’s seasonal. Things stabilized in February. So we were feeling really, really good about the stability of the deposit portfolio in February and then naturally things picked up and the runoff picked up in March. April, we started this deposit campaign and things stabilize again until you get the tax day. So that’s kind of the ebbs and the flows in the last few months. But for us, Michael, the important thing was after March 8th that we instilled confidence in our frontline bankers and we met with probably 100 or more of our leaders on that Monday morning.

And I think the market correctly identified the risk to the system were uninsured deposits and the size of deposit accounts and we had some great data Monday morning to share with our bankers that SouthState had the lowest average deposit size of any of our peers and we had one of the lowest uninsured percentages of total deposits. I think that gave our bankers a lot of confidence and that confidence in turn translated to our customers’ confidence.

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

Michael Rose: That makes a lot of sense. Thanks for the insights. Maybe just finally for me, I know capital is a precious commodity at this point, but the stock has definitely come in, you guys have a buyback in place. Any thoughts on using it? And if not, kind of near-term, what would kind of change the calculus for you? Thanks.

Will Matthews: Yes. I think in the near-term, Michael, we think capital – continue to allow capital to accrete and build is wise. And that having capital as a strength will allow us to be more opportunistic should some opportunities to develop coming out of this. And as John mentioned in his prepared remarks, we’ve got a history of doing that. So in our view for the foreseeable future, we continue to plan to let capital accrete. It’d be good to get some guidance, some clarity on regulatory changes and even the regulatory changes that don’t necessarily affect banks below $100 billion statutorily or regulation-wise, that kind of guidance often flows downhill. So we’ll want to be able to understand and digest that as well. Longer term, you have a clearer picture on credit, growth, et cetera we’ll allow us to figure out what’s the best way to use what’s hopefully still a very good capital formation rate.

Michael Rose: Great. Thanks for taking my question, appreciate it.

Operator: Our next question comes from Brody Preston of UBS. Brody, your line is open. Please go ahead.

Brody Preston: Hey. Good morning everyone and thanks for taking the questions.

Will Matthews: You bet.

Brody Preston: Steve, I wanted to follow up just on the line of thought on the non-interest-bearing. I know it’s really hard to predict. But you did give expectations for margin for the rest of the year. And so it sounded like you’re expecting some further mix there based on the other comments you gave. So I just wanted to ask, within your margin guidance, what are you guys expecting for non-interest-bearing deposit mix?

Steve Young: Yes. I don’t know that we would say that publicly. We just don’t know, honestly. But we have some – we definitely think there’s some movement from 34% into the high-20s. We don’t know if all that happens in the next two quarters or it happens over the next 18 months, we’re just not really sure. So I would just assume that we’re going to be a lot like the industry and seeing the continued remix. I think this quarter was about 7%, so I would assume that that probably trends maybe another quarter or so. And then after that stabilizes because I think what’s happening right now is there’s a wake-up moment in March 8th and that probably I would expect until the Fed stops raising rates, let’s assume they stop raising rates in May that there is some remix over this next quarter, and then we probably get the most of that remix out of the picture, I would think that it will dribble in over the next two to four quarters after that.

Brody Preston: Got it. That’s helpful. I did also want to ask as some on the correspondent bank, could you give us a sense for what amount of your deposits come from your correspondent relationships and how those trended from 12/31 to 3/31?

Steve Young: Yes. That correspondent business, we have a couple of hundred million dollars in DDA, a few hundred million dollars in money market accounts, maybe a couple of hundred million in – I’m going to guess $600 million maybe. We’ve always been pretty intentional about that business relative to being a fee income business versus a deposit gathering business and we do gather deposits. We have about $1.5 billion sits off balance sheet with our – with the EBA , which we sort of all their wires and ACH has come through us but instead of us putting that $1.5 billion on our balance sheet we send it to the Fed. So we’ve always been pretty disciplined around how much of that we wanted to put on our balance sheet at any point in time. So hopefully, that’s helpful.

Brody Preston: No. That is I appreciate that. And then I had two last questions. I appreciated the office slide. I did want to ask, is that – is their owner-occupied office included within that 4% of the total portfolio that you put out there? And if there is, do you have a sense for what that portion is?

Steve Young: That’s the non-owner-occupied office space, Brody.

Brody Preston: Got it. Got it. Thank you very much for the clarification. And then I did just want to ask again on the non-owner-occupied portion, I guess, maybe I should have triangulated the office exposure before I ask that question, but you did give the other nonowner-occupied CRE portfolios. I did just want to ask, on the hotel in the nursing home, I know the nursing home is a very small portion for you. But I did want to ask what’s kind of – what causes those two loan portfolios to have higher substandard and special mention ratios than the rest of the book, particularly interested in the nursing home? Just wondering, if there’s anything special going on there.

John Corbett: Yes, you bet. The hotels is a carryover from COVID. And as we get financial statements on these hotels, we’re continually upgrading those, and we see that trend continuing. So that’s just a hangover from COVID. Actually, hotels are performing very, very well right now. The convention business is about back to normal. Tourism in Florida is about back to normal. So we do not forecast problems in the near term in the hotel space. On the assisted living space, it’s less than 1% of our loans. But we had a couple of new facilities that came online during COVID. And basically, its health care costs, the fear of COVID and the facilities are a little slower to become occupied.

Unidentified Analyst: Got it. Do you – I guess, I know it’s really a small portion of your book. But is that a trend, I guess, when you kind of look across assisted living facilities and the deals that kind of come across your desk? Are you seeing kind of that slowness in lease-up or an occupancy across some of the newer facilities that are being built versus maybe some of the older ones that already had higher occupancy rates?

John Corbett: Yes. I just think, that is a challenged space because of COVID, and I think it will be slow to come back to what it was prior to COVID. So I mean I think it’s just an overall COVID issue.

Will Matthews: Yes, Brody, we saw the most have problems with labor inflation and labor shortages. They kind of got it from all ends. As you said, it’s not a big space for us, nor is it a big – much of an appetite for us. But – and we’ve had those on downgraded status really for a good while now.

Steve Young: Yes. We’ve got two nonaccrual assisted living facilities; both of them are current on and other payments. So we don’t anticipate a loss there.

Unidentified Analyst: Got it. Thank you.

Will Matthews: On that note, it’s 59% of our nonperforming loans are current on payments.

Unidentified Analyst: Okay, that’s good to know. All right guys. Thank you very much for taking my questions. I appreciate it.

Operator: Thank you. Our next question comes from Brandon King of Truist Securities. Brandon, your line is open. Please go ahead.

Brandon King: Hey good morning.

John Corbett: Good morning, Brandon.

Brandon King: So I just wanted to know if you could help us how we think about with loan yields and how they could increase from current levels, maybe get benefit from fixed rate loan repricing? Steve, I know you mentioned that 45 to 50 basis points increase in deposit costs in the second quarter. But how much can you offset that with loan yields repricing? And then how does that kind of trend towards the latter half of the year went to deposits?

Steve Young: Yes, Brandon, look it’s a good question, and that’s kind of why we think there’s stability in the back half of the year with margin. If you look at our book, we’ve got about – we have a slide in the deck that talks about our fixed rate book. So call about half of it is fixed rate. We’ve got about – so that’s about $15 billion or so. We’ve got about $8.7 billion that’s floating daily, so that probably has one more rate hike in it. And then we have about $3.6 billion that is going to be adjustable here in the next 12 months and its weighted average rate is 4.07%. So if it’s based on a one year treasury or what have you, likely that’s going to reprice in the sets it somewhere. And then we have some other adjustable that will reprice up $2.6 billion, they’ll reprice out past further than the year.

So as we think about loan yields, we had a pretty significant move in loan yields, I think it’s 41 basis points for the portfolio in the first quarter. I would say that probably will be 15 to 20 over the next couple of quarters and maybe we crest out at the end of the year somewhere between 5.50 and 5.75, somewhere in there.

Brandon King: Got it. Got it. Very, very helpful. And then on the deposit side, what is kind of the continued appetite for broker deposits? And could you share kind of what the rate and maturity to broker deposits were that you raised in the quarter?

Steve Young: Yes, sure, Brandon. If you kind of – I’m going to give you a short answer and a long answer. The short answer is we did about $1.25 billion at about – is right out of 5% coupon and it’s got three quarters of the year duration. So that’s the short answer. The longer answer is, if you kind of look back at these times of stress times when – like I’ll go back to the March of 2020, we sort of did the same thing. We borrowed, I think, about $1.1 billion or $2 billion of broker deposits because it was really uncertain in March of 2020 about small businesses, pandemic. So the way we think about it is that’s a source that we can get to quickly that we’d sort of bolster the balance sheet. But over time, we would expect that to probably continue to ebb down.

If you went to pre-cycle, pre pandemic in December of 2019, I think we had about 3.5% of our assets were in either home loan bank or broker deposits. So that’s probably a good long-term average. Today we’re at five. My guess is we’ll get back down over time.

Brandon King: Makes sense. And then lastly, on credit, net charge-offs continue to be very low, and some of your peers have already seen some normalization of blips. I’m just curious just how long – much longer do you think you can keep net charge-offs at this level? And kind of when do you think that pace of normalization will start to begin?

John Corbett: Yes. Good question, and we’ll have to just see how this cycle unfolds. But for the quarter, we actually have net loan recoveries. And I think we mentioned in the prepared remarks, we’ve set aside $123 million of reserves for only $3 million in the last year. But I think if you look at the loan portfolio, we’ve got a lot of detail in the appendix there about our loan to values they’re in the high 50s. So we feel like we’ve got great equity and great sponsorship with our clients. We’re just going to have to see how this cycle plays out. This is unlike anything we’ve – we face in our careers from a liquidity standpoint, but we like our hand in the book that we’ve got.

Brandon King: Got it. Thanks for taking my questions.

John Corbett: You bet.

Operator: Thank you. Our next question comes from David Bishop of Hovde Group. David, your line is open. Please go ahead.

David Bishop: Yes, good morning gentlemen and I had to jump on – so I apologize if this question has been asked and answered. But here just noticed the runoff in short-term liquidity here and borrowings here. Is that just the mode of come of cautiousness, given the dislocation this quarter? And how should we think about that cash and short-term investments trending through the rest of the year? Thanks.

Steve Young: Yes, David, this is Steve. What we reiterated earlier was kind of that mid-single-digit loan growth. We reiterated a $40 billion interest-earning asset base. So we would expect – I think we ended up a little bit higher than that if you look at the spot basis on interest-earning assets at the end of the quarter with a little bit more cash. I’d imagine that cash would come down a little bit. But that’s sort of our guide. So I don’t think it’s a huge move either way.

David Bishop: Great. Thank you.

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

John Corbett: Yes. Thanks for joining us this morning. I know there was a lot of earnings releases yesterday. It’s a busy morning. I appreciate you joining us. If you have any questions on your modeling, don’t hesitate to give us a ring. Hope you have a great day.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.