Earnings Call Transcript
SouthState Bank Corp (SSB)
Earnings Call Transcript - SSB Q4 2020
Operator, Operator
Good morning and welcome to the SouthState Corporation Quarterly Earnings Conference Call. Today’s call is being recorded and participants will be in a listen-only mode for the first part of the call. Later, we will open the line for questions with the research analyst community. I will now turn the call over to Will Matthews, SouthState Corporation’s Chief Financial Officer. Please go ahead.
Will Matthews, CFO
Good morning and welcome to SouthState’s fourth quarter 2020 earnings call. This is Will Matthews. Joining me on this call are Robert Hill, John Corbett, Steve Young, and Dan Bockhorst. The format for this call will be that we will provide prepared remarks and we’ll then open it up for questions. Yesterday evening, we issued a press release to announce earnings for Q4 2020. We’ve also posted presentation slides that we will refer to on today’s call on our Investor Relations website. Before we begin our remarks, I want to remind you that the comments we make may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 risks and uncertainties, which may affect us. Now, I will turn the call over to Robert Hill, Executive Chairman.
Robert Hill, Executive Chairman
Good morning and thank you for joining us today. It’s a pleasure to be with you and a pleasure to have the opportunity to represent such a great group of people as we report our performance this quarter. In each quarter, each month, in each week, this team continues to make significant strides in creating a bank that John and I were only dreaming about a couple of years ago. I’m pleased with our performance in the areas of soundness, profitability, and growth, but I’m even more pleased with the leadership team and the culture that is being developed. I want to thank our team for a tremendous job in 2020. Great teams rise to the occasion in challenging times, and this team has certainly risen to the occasion. I will now turn the call over to John Corbett.
John Corbett, CEO
Thank you, Robert. Good morning, everyone. I hope you and your families are doing well and staying healthy. We continue to make significant strides integrating CenterState and SouthState, and it’s been gratifying to watch our teams gel together and watch their confidence grow. Since closing, we fully integrated the fee lines of business of wealth, correspondent, and mortgage. We’ve unveiled a new logo as well as launching a new website and a new mobile app. Recently, the Board formally adopted our combined core values and guiding principles. At the same time, we’re continuing to prepare for the upcoming systems conversion in May. For the fourth quarter, the company produced earnings per share of $1.21 on a GAAP basis. Adjusting for merger and other non-recurring items, earnings per share came in at $1.44 with a return on tangible common equity of 15.4%. For the entire year, the company produced a record PPNR of $629 million on a combined business basis with only two basis points of charge-offs. Asset quality remains strong, with special mentioned and classified loans remaining flat from third quarter levels, and payment deferrals continue to trend down. We ended the quarter with just 1% of loans on deferral, and two-thirds of those are making interest payments. On the revenue side, correspondent banking and mortgage continue to outperform in this low rate environment, and they helped to offset industry-wide margin compression and sluggish loan growth. For 2020, our profits in correspondent banking were double our 2019 profits. Mortgage was almost four times as profitable. Residential mortgage demand continues to be strong, but we intentionally slowed the mortgage pipeline in the fourth quarter so that we could integrate the CenterState and SouthState mortgage computer systems together. This resulted in a drop in mortgage income for the quarter, but we anticipate that mortgage will be a strong source of fee income in 2021, now that the systems consolidation is complete. We announced last quarter our agreement to acquire Duncan Williams, a broker dealer in Memphis, Tennessee. We’ve now received all regulatory approvals for the acquisition, and we anticipate closing the transaction on February 1. We’re very excited to welcome Duncan to our SouthState team and to expand our correspondent platform by adding a broker dealer. With record low mortgage rates, we continue to see runoff in a residential portfolio as our clients appropriately refinance into our secondary market product. However, excluding the residential runoff of $203 million and PPP forgiveness, the commercial loan portfolio did grow modestly in the fourth quarter. Commercial loan production increased 24% from third quarter levels and the pipeline now stands at $3.2 billion, which is close to the pipeline levels pre-COVID. Deposit growth continues to be strong with core deposits increasing over 12% annualized, and we used some of our excess liquidity last quarter to pay off a $700 million federal home loan bank advance, which will reduce our interest costs over the next few years. Meanwhile, our deposit costs continue to move down to 17 basis points, a 3% reduction during the quarter. Now, I’ll turn the call over to Will Matthews to provide additional detail.
Will Matthews, CFO
Thanks, John. Our net interest margin was 3.14% on a taxable equivalent basis, down 8 basis points from Q3. Loan yields of 4.27% were down 8 basis points from Q3. Accretion was $12.7 million for the quarter, down $9.6 million and we recognized $16.6 million in deferred PPP fees in Q4 versus $8.5 million in Q3. So, if you consider the net change in the two reduced accretion income and increased PPP deferred fee recognition, they reduced interest income by approximately $1.5 million from Q3. NIM excluding accretion was 2.99%, up 4 points from Q3. NIM excluding accretion and total PPP declined 4 basis points to 2.92%. Our loan repricing mix excluding PPP loans is 48% fixed, 30% floating, and 22% adjustable. Loans declined by $573 million or $155 million excluding PPP loans in the quarter for a 2.7% annualized rate and non-PPP loan declines. As John noted, absent declines in the single-family residential portfolio, ex-PPP loans grew slightly in the quarter. We put some of our excess cash to work in the securities portfolio, which grew by $710 million during the quarter. Our total cost of deposits improved another three basis points to 17 basis points for the quarter. Our CDs are relatively short with 72% coming due this year. We continue to carry significant liquidity, $4.5 billion on average for the fourth quarter, weighing on our margin. We’ve paid off the $700 million FHLB advance in early December. So, we had a partial benefit in our liability costs this quarter. Turning to non-interest income, our non-interest income of $97.9 million was down $17 million from Q3, primarily due to a $23 million decline in mortgage banking revenue. Mortgage production of $1.41 billion was strong, down about 10% from Q3 levels and cash margins remained healthy at approximately 45 basis points from Q3. As John said, the decline in mortgage revenue was largely caused by a significant drop in the pipeline and loans held for sale in advance of the mid-January systems integration. We continue to be a purchase-oriented mortgage lender with purchase volume representing approximately two-thirds of our retail volume. Our correspondent banking division had another good quarter with revenue of $27.7 million. We expect the Duncan Williams acquisition to close February 1. So, we should see a partial quarter’s impact of this business in Q1. We again welcome that team to the company. Other non-interest income was up $4.5 million, approximately $3.5 million of which was a reduction in the CVA on SWAPs. Steve has responsibility for these non-interest income business lines and he’s available to answer questions on them during the Q&A session. On expenses, NIE for the quarter was $278 million, including $20 million merger-related expenses at $39 million and the FHLB payoff and related SWAP termination, for an operating NIE of $219.7 million, a couple of larger items of note in the quarter. We aligned the methodology for accrued FICA on the incentives to recognize them in a year earned rather than at payment, resulting in a $3.3 million accrual in Q4. We also spent $1.5 million with an outside vendor associated with an upgrade of our mobile banking app and related call center activity. So, outside of these two unusual items, operating NIE was approximately flat with Q3. We did spend a bit more on business development, and employee recruiting and recognition expenses were up about $1.2 million from Q3. Our efficiency ratio was 60.2%, excluding the merger-related expenses and the SWAP termination penalty. I’ll note that the $22 million hit to mortgage revenue from the pipeline decline impacted our efficiency ratio by a little over 350 basis points. We continue to be on track with our cost saves and our merger-related expenses; we recognized approximately 60% of the estimated $205 million to-date, some of which occurred on the CenterState side pre-closing. Turning to credit on slide 9. Deferrals are now down to a little over 1% and we expect them to range between 1% and 1.5% over the next several months. Our criticized and classified assets were approximately flat, down a few basis points from Q3 levels. As John said, net charge-offs remained very low and were again below $1 million for the quarter. Ending NPAs were 32 basis points of assets, down 1 basis point from Q3. Our provision for credit losses was $18 million for the quarter with another $200,000 for the reserve for unfunded commitments liability. In our CECL modeling this quarter, we weighted two Moody’s economic scenarios; the baseline and a downside S3 scenario in light of the worsening COVID statistics and the potential with stimulus PPP, forbearance programs, etc., possibly masking losses in the economy that are not yet realized. On slide 8, our reserve coverage excluding PPP loans grew to 2.2%, including the reserve for unfunded commitments or 2.01% just including the reserve for funded loans. Our loss absorption capacity ratio ended the quarter at 2.62%, similar to the Q3 level. For the effective tax rate, as noted in the release, we had a one-time benefit from an NOL carryback under the CARES Act. Excluding that, our effective tax rate for the quarter and year was approximately 19%. Turning to capital, our capital ratio has continued to grow in Q4 with our TCE ratio growing 27 basis points ending at 8.1%. Our CET1 and total risk-based ratios grew by approximately 30 basis points ending at 11.8% and 14.2%. Ending tangible book value per share was $41.16, up $1.33 from Q3 and up $2.03 from the year-ago quarter. I’ll turn it back to you, John.
John Corbett, CEO
All right. Thank you, Will. I would be remiss if I didn’t close by thanking our SouthState team for a remarkable year in 2020. It’s been exactly one year ago that we announced the merger of equals between CenterState and SouthState. Over our first year together, we faced the challenges of enduring a worldwide pandemic, the economic shutdown, the recession, the PPP stampede over Easter weekend, and the feelings of isolation of working from home. And the SouthState team overcame all these challenges while simultaneously navigating the most complex thing you can do in banking, integrating the merger of equals. They’ve done an outstanding job and I am very proud of them. The groundwork we laid in 2020 is going to pay big dividends in the years to come. I’ll now turn the call back to the operator, so we can open the line for questions.
Operator, Operator
Thank you. The first question today comes from Jennifer Demba of Truist Securities. Please go ahead.
Jennifer Demba, Analyst
Thank you. Good morning.
John Corbett, CEO
Hey, good morning.
Will Matthews, CFO
Good morning.
Jennifer Demba, Analyst
A question as we’ve talked to other management teams over the last week and a half or so. It seems like there are more and more opportunities to look at acquisition opportunities across the country. Just wondering what your interest is now, once you get past your systems conversion in May? Thanks.
John Corbett, CEO
Yes. Good morning, Jennifer. This is John, really nothing’s changed from our message that we’ve delivered in the past. We’re in the middle of a large transaction and things are going very, very well, but we’ve still got a large conversion ahead of us in May. So that’s where our focus is. That’s where our attention is. But having said that, this yield curve continues to stay low and flat that the whole industry is going to face these revenue headwinds, and I think we want to remain opportunistic as we get past the conversion and keep our options open. I’m continuing to have conversations with banks that we’ve talked to for many, many years, just haven’t gone to second base with any of those conversations until we get past the conversion.
Jennifer Demba, Analyst
Great. And you talked about the mortgage pipeline declining intentionally in the fourth quarter. What are you seeing here in the first quarter in terms of a production trend? And how strong do you think mortgage could be in 2021?
Steve Young, CRO
Jennifer, it’s Steve. As it relates to mortgage, just to kind of back up for a second upon, if we were a combined entity in 2019, the production of the mortgage bankers would have been about $3.2 billion. In 2020, on a combined business basis, we did about $5.5 billion; really good pickup there. In the fourth quarter, our closings were about $1.04 billion, so that annualizes about somewhere in that $5.5 billion, $5.6 billion range. We’re cognizant of the NBA forecast that says mortgage will be down 20%, 25% next year. Having said that, we do have a much higher mix as Will mentioned to purchase than most others. And so this quarter, it was close to two-thirds. And so as we got the systems converted and put in the middle of January of this month. It is very nice to see everybody on one system and to be able to manage it on one system. So, we’re seeing robust activity again. Mortgage is always hard to predict, but we would expect, because of our markets and others, we should be in good shape for 2021.
Jennifer Demba, Analyst
Thanks a lot.
Operator, Operator
The next question comes from Michael Rose of Raymond James. Please go ahead.
Michael Rose, Analyst
Hey, good morning. Hope you all are well. I guess the biggest question that I have; you guys built the reserve a little bit. This quarter, you talked about deferrals, ranging kind of around these levels, credit metrics, generally moved in the right direction. We’ve seen a lot of other banks talk about declining reserves or reserve releases as we move forward. Obviously, you guys are in really strong markets and then you kind of talked about some of the stimulus programs, masking some losses. So, I guess, I’m trying to reconcile all this and with the credit mark and everything, why not have a more positive kind of outlook on credit just given what we’re seeing in the metrics. Thanks.
Will Matthews, CFO
Sure. Michael, good morning. It’s Will and maybe, I’ll start, I think the – our thought is that as the Fed noted, the economy’s path is dependent upon the virus and our view at the end of the year was that there was enough uncertainty around the virus, whether it’s new strains the dissemination of vaccines, herd immunity, etc., that reserve or release at this point based on what we know would have been too early and would not have been appropriate. We also saw, at this point, December jobs reported after the day of the Moody’s forecast and I’d just say looking forward as the picture becomes clearer and forecasting improvement in economic factors becomes less difficult, that could reserve result in reserve leases at that time. If you look at our position relative to peers, we would argue that our credit quality is very good results, has been very good. And clearly, our reserve position is higher than many, which we think puts us in a very good position regardless of the economy we face.
John Corbett, CEO
Yes. And Michael, it’s John. Let me just add on to what Will said about the reserve. Where we are with the reserve is due to national factors, not our franchise. I mean, we’re following these models – these national models, but if you look at the credit performance as you’ve mentioned, this bank has had three quarters in a row with only one basis point of charge-off. So, we think the underwriting is sound, deferrals are way down, we’re feeling – every day, we’re feeling better and more optimistic that we’ve turned the corner relative to credit. But there is a national phenomenon going on and we wanted that reflected in the loan loss reserve. But as far as our own book, every day, we feel better.
Michael Rose, Analyst
Okay. So, it sounds like maybe, just you guys are being conservative, just given, more of the macro at this point, as opposed to anything on your own portfolio. Okay. That’s helpful. And then maybe just one more from me, it looks like the pipelines were up a little bit. I know everybody’s having pay down issues, we had some – you talked about the mortgage issue. Would you expect kind of pay downs to slow as we move through the year and I guess ex-PPP in some of the runoff from the acquired book, what’s kind of the core loan growth outlook for the year? I assume it’s going to be a little bit slower in the front half, but probably, accelerating the back half, like others have talked about, any sort of initial stab at what growth could look like given the strong pipeline. Thanks.
John Corbett, CEO
Yes. I think that’s right and as I tried to articulate in the prepared remarks, we did see loan growth in our commercial loan portfolio a little bit this quarter. It’s really the residential payoffs that are creating such a headwind, but that residential payoffs is we’re controlling that product into the secondary market and making these fees. So, I do feel like we’re turning the corner on credit, getting more optimistic each day. If I had to guess, I think we head into 2021; we’re probably looking at low-to-mid single-digit growth and I do think it will pick up more on the back end of the year than the front. But encouraged pipeline wise, before the pandemic, the pipeline was about $3.4 billion. At the low last summer, it got down to $2.4 billion, and I looked at it this morning, we’re back at the $3.3 billion. So, it’s really, really close. I do want to be cautious however, from an underwriting standpoint. The world is awash with liquidity right now, and everybody’s trying to put this liquidity to work. And as I talked to Dan and others about credit, we are seeing some competitive forces, where there is some structure creep in deals, where people are becoming more aggressive as far as being willing to drop guarantees and lower down payments. So, we think there are opportunities, but we’re going to pass on some of them as well if the structures get too loose.
Michael Rose, Analyst
Thank you. I appreciate all the color.
Operator, Operator
The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.
Stephen Scouten, Analyst
Hey, good morning, everyone.
John Corbett, CEO
Good morning, Steve.
Stephen Scouten, Analyst
I was – I wanted just one clarifying question on the loan loss reserve and your answer was good there about the models versus your markets and your book. But Will, when you talked about kind of looking at two different scenarios, the base case and the S3, I think you called it, was that a change quarter-over-quarter? Is that kind of the same mix you had in the scenario waiting as the quarter before?
Will Matthews, CFO
Yes, Stephen. It was a change. We were baseline only before. And so we did weight in a more pessimistic scenario for part of the waiting this quarter. So, it was a change.
Stephen Scouten, Analyst
Perfect, thanks. And then I guess with the balance sheet, I think that mention was $4.5 billion give or take of excess liquidity and you noted $710 million in securities purchases this quarter. But as it looks like liquidity seemingly is going to hang around for a little bit longer. What could we continue to see in the securities book? And what are you seeing on new investment yields there?
Steve Young, CRO
Sure, Stephen. It’s Steve. You’re right. We still continue to have a fair amount of excess liquidity. When we did see the – after the election, rates rose, we took the opportunity to buy at a little bit higher yield. So, I thought yes, a little bit more of an opportunity. As we think about that portfolio, historically, the way we thought about it is as a percentage of assets. And so today, we’re not quite to 12% of assets, but we have tried to manage that 12% to 13% of assets. Obviously, we’re all not sure how all the excess liquidity is going to play out over the next few quarters, but – and we also want to make sure that we’re not locking into investments that really don’t give you a whole lot of yield at the lowest rates. But I guess from my perspective, I think the way to think about it and model it, it’s somewhere between 12% and 13% of assets until we change anything in the future. So, I hope that’s helpful. As far as going on yields, we’re pretty vanilla there. We’d like to put investments out for liquidity. So, our going on yields are somewhere between 1.25, 1.5 on new purchases.
Stephen Scouten, Analyst
Okay, perfect. Very helpful. And then just last thing from me, thinking about the 3.5 million share repurchase; obviously, your stock's done very well. I think in this kind of recovery environment, we’ve seen in the group. But you’re also building capital extremely rapidly. So, how aggressive could you remain with the share repurchases from here?
John Corbett, CEO
Yes, Stephen. It’s John. I mean, I think what you’ve always heard from us is that we feel like our role is to be active capital allocators. This reauthorization from the board gave us yesterday, gives us 3.5 million shares, which is about 5% of the company. And as you noted, the capital formation rates are pretty strong mid-teens or TCE and with all the liquidity, it’s unlikely that we’re going to grow our balance sheet. So, we see that capital rate continue to build. So, all I would tell you is the buyback is in place to maintain maximum optionality. And it’s something we look at quarter-by-quarter; we don’t budget it in, and it’s not a budgeted item for us. We look at these facts and circumstances of how we can deploy capital every quarter, but we have been active in the past, and now, we have that flexibility going forward.
Stephen Scouten, Analyst
Got it. Thanks a lot for the color and I appreciate the time this morning.
John Corbett, CEO
You bet.
Operator, Operator
The next question is from Catherine Mealor of KBW. Please go ahead.
Catherine Mealor, Analyst
Thanks. Good morning.
John Corbett, CEO
Good morning.
Will Matthews, CFO
Good morning.
Catherine Mealor, Analyst
I wonder if you could just follow up on just your big picture thoughts on the outlook for the core net interest margins, pulling out PPP and pulling out the impact of accretable yield.
John Corbett, CEO
Yes. Hey, Catherine, it’s John. I’m going to let Steve answer that, but I’ll make a couple of comments about NIM before he does. It’s such an important driver of the performance of the bank. However, we benefited this past year, 2020 from having some diversified revenue beyond NIM and for 2020, even with the yield curve doing what it was, the company, we beat the consensus forecast for the calendar year. I think a year ago, before we announced the merger, it was $597 million. We actually, as a combined business company, had $629 million. So, it’s about a 5% beat on pre-tax pre-provision profits. And the yield curve, as we think about it, can go in two directions here. We could wind up in a prolonged recession and the yield curve could remain low and flat. If it does, our NIM is going to continue to compress. I mean, we’d hit the floor on deposit costs. We’ve got it down to 17 basis points. So, we can’t really push that lever anymore. But in that scenario, that prolonged recession, we’re going to continue to see fee income businesses outperform. If you go back to 2019, the fee income businesses on a combined basis did $309 million. This past year jumped to $421 million, so a big increase to offset the NIM. And what you’re going to get with SouthState in a prolonged recession is you’re probably going to get better asset quality performance. So, if you look at the last three quarters, one basis point of charge-offs, only 1% deferral and we’ve got a very strong reserve over 2%. On the flip side, if we flipped to a recovery mode where the yield curve steepens, and it’s sort of what we started to see here in the last month or two with the stimulus, probably what you’re going to see is our fee businesses are going to pull back. But our margin, we think, is going to open quite a bit faster than most in the industry, because our core deposits are so strong and that we’re going to get more than our fair share of loan growth because of the markets we’re in. In this recessionary environment, with that diversified fee income, it’s given us about 15% mid-teens TCE, or if the rates go up, if the yield curve steepens, we look for that return on equity to go back in the upper teens and maybe closer to 20. So that’s a big picture of how the business is performing as a whole and the puts and takes. But specifically, Steve, if we wound up where the yield curve stayed, where it is today, how does that look? Yes. It’s John. And to answer your question a little bit more direct, Catherine. If the rate forecast is similar to where we are now for the year 2021 and we assume the low-to-mid single-digit loan growth in 2021. And the last assumption as we assumed the fourth quarter, net interest income dollars is kind of the baseline, we would expect low-to-mid single-digit percentage decline in net interest income in 2021. Naturally, it will be better if the yield curve gets steeper and the rates rise. And just to further that last point, back to our core deposits, we – checking makes up 54% of our total deposits. We have about 800,000 checking accounts and a 17 basis point cost of deposits. So, as we think about NIM, that’s sort of how we think about it for 2021.
Catherine Mealor, Analyst
Great. That’s helpful. And in that scenario, back to your point, John, how do we think about this?
John Corbett, CEO
Catherine, I think we lost you, can you hear me?
Operator, Operator
Pardon me. It looks like Catherine’s line disconnected. The next question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
Kevin Fitzsimmons, Analyst
Hey, good morning, everyone.
John Corbett, CEO
Hey, Kevin.
Kevin Fitzsimmons, Analyst
Most of my modeling questions have been asked and answered. Just maybe, taking a step back more of a bigger picture issue; now, we’ve been – as you all mentioned a year from the MOE getting announced, and now, you’ve had a little over half a year of being together and you’re coming up to the main conversion in May. I’m just curious if you take a step back and I know we’ve been dealing with a different environment than you guys envisioned when this was announced, but what have been some of the main positive takeaways or surprises and maybe, something that’s a little more challenging than you might have envisioned when you announced this deal, sitting in hindsight today?
John Corbett, CEO
Yes, Kevin. So, between our two companies, CenterState probably is involved in 20 acquisitions in the last decade or so, SouthState, a large number of acquisitions. There’s a lot of experience here, but an MOE is different. I would tell you looking back on it, what makes it different is the volume of decisions that have to be made and the volume of change that occurs. If you do it right, if you get in a room and you look at the best practices of both companies and you take the time to choose the best path forward, you’re going to wind up with a better company, better run company than either company would have been standalone, but it takes a lot of effort to have those discussions, objectively, make those decisions and that’s what we’re doing. I mean, the SouthState franchise had some processes in place with technology that CenterState bankers are just thrilled to take advantage of. One of them is the new mobile app that we put in place at legacy SouthState last month; we added 300,000 checking account users to that platform. The CenterState clients will go on it in May, SouthState has a great treasury platform; CenterState has great capital markets through the correspondent bank. So, the challenge in the work is taking the time to make the right decisions and it’s just a high volume, but the end product is every bit as good as we hoped it would be.
Kevin Fitzsimmons, Analyst
That’s great. Thank you. And just a quick follow-up on the question before on M&A and your potential interest there; on one hand, you guys have a very strong geographic franchise. So, how do you weigh the opportunities for more scale versus where exactly you want to be from a franchise perspective? Because I’m assuming there are probably some states or some markets, you don’t have interest in, but when you look at the Southeast in general, I would assume your primary interest would be in markets you're already in, but how – what’s high on your list of interests in terms of markets you’re not currently in? Thanks.
John Corbett, CEO
Yes, Kevin. Back to your comment, we don’t believe in M&A for the sake of scale only. I mean, that’s not the primary driver. It’s got to make financial sense to do a deal, but if we had our druthers strategically, we would love to continue to dial down and build density in these high growth urban markets in the Southeast. We love the markets we’re in and Charlotte, Greenville, Atlanta, Charleston, you get down to Florida in the Orlando, Tampa, Jacksonville markets, we would love to continue to build density in those markets. And if interest rates stay low and there continue to be expense pressures, I think we’ve got a track record of being able to consolidate banks that have branch overlap. If you look at the last decade, we’ve acquired over 400 branches and consolidated over 200, and that’s driven our average branch size from $27 million to now, it’s well over $100 million, I think it’s $108 million. So, now whether or not all those stars will line up, that would be what our preference would be.
Kevin Fitzsimmons, Analyst
That’s great. Thanks very much.
John Corbett, CEO
You bet.
Operator, Operator
The next question is Brody Preston of Stephens Inc. Please go ahead.
Brody Preston, Analyst
Hey, good morning, everyone.
John Corbett, CEO
Hey, Brody.
Brody Preston, Analyst
I’ve got a handful of questions. I’ll just ask some of them now and then maybe, hop back in the queue to see if Catherine got a chance to hop back on. But I just wanted to clarify something on the mortgage. So, I appreciate the color around the reduction in the closing. So, it looks about 12.5% of the quarterly run rate from earlier in the year on a combined business basis. But I’m assuming the slowdown more dramatically impacted the locked pipeline, given the swing in the fair value marks. So, I just wanted to get a sense for what the decrease was in the lock pipeline in Q4 relative to Q3 and then how that’s shaping up in Q1 now that you’ve got the conversion behind you?
Steve Young, CRO
Yes, Brody. This is Steve. You’re exactly right. It’s related to the locked pipeline. I believe the numbers that I have quite in front of me, but here it is $954 million at the end of the third quarter versus $674 million at the end of the fourth quarter, if you look at our cash gain on margin, if you just look at it from that perspective in the fourth quarter, we were in the 4.5% range versus the third quarter is a little over 4%. And that’s back to the intentional nature of what we were trying to do in order to convert the systems and we raised margins on our way into the system conversion. And so obviously, that’s going to bring less volume, less pipeline, but as we get the systems converted here in January, now we kind of get back to normal and more normal margins and more normal power locks. So hopefully, that’s helpful as you think about it.
Brody Preston, Analyst
Yes, that’s very helpful. I appreciate that. And then just on the incentive expense that you called out, I wanted to ask if that was more of a true-up for the year that maybe, won’t reoccur moving forward, or is that something that will stay in the run rate?
Will Matthews, CFO
Yes, Brody. It really reflects two different methodologies. One company expensing it at the time of payment, and one company accruing it in the year of being earned. And so we are – we moved to the methodology, where we are accruing it in a year earned. So, it’s a catch-up in the fourth quarter. But of course, we’ll be paying for like expense on all incentives going forward. But one half the company, I guess, would have expensed it in the first quarter when it paid out for last year’s incentives.
Brody Preston, Analyst
Okay. Understood. Core C&I growth on the quarter was actually pretty strong, about 12% annualized. And so I wanted to ask, was there anything specific that drove that?
John Corbett, CEO
Yes. We continue to see great activity in our middle market bank that we’ve been building. We’ve had great luck from a recruiting standpoint. We – I think we issued a press release sometime in the fourth quarter, where we’ve hired nine commercial bankers, two middle market bankers that were in Jacksonville. So, some of them are up in Charlotte. So, just the activity, the energy, and our C&I middle market bank are very, very strong. So, I would look for that to continue.
Brody Preston, Analyst
Okay, great. And then last one for right now and I’ll hop back into the queue. John, thanks for the color on how the pipeline is backing up. It’s good to see it sort of back up almost a year-ago levels. I wanted to ask what’s the sort of historic pull-through rate on the pipeline?
John Corbett, CEO
Yes. That’s a good question. And I don’t have that stat right in front of me, Brody, I ought to get back to you on that.
Brody Preston, Analyst
Okay.
Will Matthews, CFO
And I would also add just as well that with the pull-through rate too, the other thing that’s one has to factor in, of course, is the payoff rate as well. And that fluctuates, of course, in different environments, Brody, as you know.
Brody Preston, Analyst
Yes, I understand. All right. Thank you. I’ll hop back in the queue.
Operator, Operator
Next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Christopher Marinac, Analyst
Hey, thanks. Good morning. I know Will talked a little bit about the cost of sort of new hires or just the expenses related to that. I was just curious, John or whomever. What’s your outlook for that in general? How competitive is it? And do you have a sort of an, I guess, an internal goal of new producers that you’d like to recruit this next year?
Will Matthews, CFO
Yes. I talk to Greg Lapointe, who is our Chief Banking Officer the other night, and the opportunity set for hiring commercial bankers, middle market bankers from some of the largest banks in the country is better than we’ve ever seen. And these are not the BNC bankers. These are folks that have spent their entire careers at some of these banks and their 20, 30-year veteran bankers. So, we’re going to continue to pursue those. And again, it’s kind of like the buybacks, Chris, it’s not something you really budget. You just take advantage of it when the opportunity is there. Greg said the other night; I think he’s talking to another nine people in Atlanta, the Carolinas, and Florida. So, there’s – occasionally, there’s retirements and turnovers and those kinds of things, but we’ll just update you every quarter, and we’re not putting a limit on how many great bankers we’re going to add to the company.
Christopher Marinac, Analyst
Now, I appreciate that. That all makes sense. Just a quick one for Steve, on the correspondent banking business, can you remind us on seasonality either, in the third and fourth quarter that with your most recent success or just what happened with the next couple of quarters in the seasonal standpoint?
Steve Young, CRO
Sure. So, let me kind of take a step back and maybe, because we have the Duncan Williams acquisition and so on, let me try to help frame that up for you and maybe, help frame up the entire fee income businesses. As it relates to correspondent, this year was just a record year. Brad Jones, who leads the content’s phenomenal job. Our fee income was approximately $110 million on a combined business basis this year, last year, around $60 million, $65 million; I think, $50 million. Most of that increase was driven our interest rate swap product, and of course, fixed income got a little bit better. As we think about how that rolls into our forecast for fee income, really – our guidance really hasn’t changed from the last quarter. And then we talked about mortgage and the potential declines there, and we really don’t see anything changing for 2021 based on what happened in the fourth quarter. But we would expect the total fee income to decrease from the whole 2020 levels, which was around $420 million, but to approximate the fourth quarter levels, which is about 10% below the 2020 levels. So, as we think about the entire bucket of fee income, we’ve got some puts and takes in there. We went from $309 million to $420 million. Mortgage is going to be a little bit more challenging. The interest rate swap environment will not be probably as robust, but it will be offset by our acquisition of Duncan Williams and the fixed income there. So hopefully, I know there are a lot of moving parts in there, but hopefully, that helps frame up how we’re thinking about it.
Christopher Marinac, Analyst
Okay. And again, 10% applies to the whole fee income, not just in correspondent. Is that right?
Steve Young, CRO
That’s right.
Operator, Operator
The next question is from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor, Analyst
Thanks. I’m back. I’m sorry. My call was dropped to challenges of working from home. And actually, Chris Marinac just got my second question. So, Steve, you answered that perfectly. I might ask just one other on just PPP and the next round. What so far, are you seeing is activity and what are your expectations for – what type of PPP levels you may see this year? Thanks.
John Corbett, CEO
Yes. Good question, Catherine. You remember last year, our numbers, we did almost 20,000 loans for $2.4 billion. We turned the portal on a little over a week ago for round two. And right now, we’ve got 5,200 applications for $600 million. So, right now, where we stand after about eight or nine days of having the portal open, we’re at about 25% of what we actually did last year. But talking to Richard Murray, who’s driving the program for us, the applications were really strong the first couple of days and they’ve started slowing down somewhat. So, if you had to ask him about the crystal ball, where we wind up, we’re guessing that we might wind up in the 40% to 50% of what we did last year in round one, which would mean maybe, it winds up in the $1 billion to $1.02 billion range.
Steve Young, CRO
And Catherine, this is Steve. Let me just add to that on the round one forgiveness and that estimate question, and the timing and model there. In the fourth quarter, we had about $400 million forgiven in the fourth quarter. And as John mentioned, we’re really focused on helping our clients with PPP round two and putting forgiveness a little bit back on the back burner, just because we need to get the new funds into our clients’ hands. And so we would expect there to be forgiveness, that’s probably similar in the first quarter versus the fourth quarter that it should be heavier in the second and third quarters. So hopefully, that helps you from a modeling as we think about the forgiveness. And then the last thing, I know Chris asked me and I did not actually answer was just around the seasonality of our fee income and he’s right, there is some seasonality, typically in the first quarter, and it’s a little lighter generally, around mortgage and correspondence historically has been that way and always work out that way. But typically, it’s a little bit strong – a little bit weaker, and then it strengthens during the year. Hopefully, that’s helpful?
Brody Preston, Analyst
Yes, thanks, guys. I just wanted to ask a couple follow-up questions on the NIM. Core loan yields, ex-PPP, and accretion continue to hold up fairly well following the combination. And so I wanted to ask if you could give us a sense for what the roll-on, roll-off looks like right now, what a new origination yields versus what’s rolling off the back book?
Steve Young, CRO
Hey, Brody. It’s Steve. If you look at our loan yield and look at ex-accretion, ex-PPP loans. For the fourth quarter, our loan yield was 408. Our new production yields in the fourth quarter came on around 337. And so that’s the two numbers, I think in the third quarter, our new production yields were around 350. So, the yield curves moved back up. So, we’ll probably – if you think about 2021, I would think that the loan yields would probably be in that 3.5% range for the year, depending on where the yield curve is of course?
Brody Preston, Analyst
Okay, understood. I guess I just look – I was looking back, at sort of legacy CenterState and SouthState exclusive, and looking back a couple of years ago at what our origination yields looked like. And they were 4.5%, 5% somewhere in that range sort of consistently. And so I want to – that’s sort of what I was getting at. Is there sort of a higher yielding back book that might be rolling off in the near-term or was there a repricing that occurred, since that time just given the fixed versus floating nature of the book that is mitigating that?
Steve Young, CRO
No huge difference. I mean, typically, we’re putting on five-year duration instruments and so, what we’re rolling out today is what we rolled off or put on in 2016 or repricing today. So 2016, the environment was totally different than it was in 2019 and 2021 rates were higher. So, no significant difference to the overall average, I would say at this point.
Brody Preston, Analyst
Understood. Thank you all for taking my questions this morning. I appreciate it.
Will Matthews, CFO
Thanks, Brody.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to John Corbett for any closing remarks.
John Corbett, CEO
All right. Well, these are very great questions. Thank you, guys and if you have any follow-up questions, as you’re working on your models, don’t hesitate to call Steve and Will. Thank you for your continued interest in our company and I hope you have a great day.
Operator, Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.