Earnings Call Transcript
SouthState Bank Corp (SSB)
Earnings Call Transcript - SSB Q1 2021
Operator, Operator
Good morning, and welcome to the SouthState Corporation First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. I would now like to turn the conference over to Will Matthews, Chief Financial Officer. Please go ahead.
Will Matthews, CFO
Good morning, and welcome to South State's First Quarter 2021 Earnings Call. This is Will Matthews, and 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 will then open it up for questions. Yesterday evening, we issued a press release to announce earnings for Q1 2021. 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 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
Thank you, Will, and good morning, everyone. We appreciate you joining us today. The SouthState team continues to make excellent progress in many areas, and we are excited for the road ahead. 2021 will be the year where many significant events come together for SouthState. The integration is on track. Vaccination speed and the reopening of our markets are happening rapidly. And the differentiation in what we bring to the market continues to grow. 2021 is a year that sets us up well to focus on the future for our team, our customers, and our shareholders. Do challenges exist? Certainly, they do. But our team is focused on tackling these challenges very strategically and thoughtfully. I'll now turn the call over to John for more insight into the quarter.
John Corbett, CEO
Good morning. I hope you and your families are doing well and staying healthy. Each and every quarter over the past year, the economic backdrop changed considerably. With record levels of fiscal and monetary stimulus and a successful vaccine program, it appears clear that the banking industry dodged the bullet and will avoid a prolonged credit cycle. The industry, and SouthState in particular, are equipped with enormous amounts of liquidity, capital, and loan loss reserves. Our balance sheet has never been stronger. Given these positive developments and four consecutive quarters with net charge-offs of either zero or one basis point, we released $58 million in loan loss reserves, leaving us with ample reserves remaining of 1.8%. The reserve release, coupled with another strong quarter in mortgage and correspondent banking and stable net interest income produced earnings per share of $2.06. Adjusting for merger expenses, earnings per share came in at $2.17, resulting in a return on assets of 1.6% and a return on tangible common equity of 22%. With over one million deposit account holders and the additional government stimulus, our core deposits surged by 30% in the quarter, and our deposit costs fell to just 15 basis points. The result of the deposit surge is that we currently have over $5 billion in excess cash to deploy. On a positive note, commercial and industrial loan balances increased for the third consecutive quarter. But overall, loan balances declined as the bulk of our residential loan production was directed to the secondary market. After 1.5 years of dreaming, planning, and working, the integration of CenterState and SouthState is almost complete. Several of the departments and lines of business have already merged together, and the main system conversion will occur next month. The short-term tangible goal of the merger was to become more efficient in a revenue-challenged environment. But the longer term, and more important strategic goal was to create a new Southeast regional bank that could successfully compete head-to-head with the largest banks in the South, who control about two-thirds of the market share. By combining CenterState and SouthState, we've created a $40 billion regional bank in the most desirable markets in the country. In 2020, the pandemic allowed families the freedom to choose where they wanted to live and work, and population migration accelerated in the Southeast. Of the 10 cities in the United States with the most in-migration, five of the top 10 cities are core markets for SouthState: both Orlando and Tampa on the I-4 corridor in Florida, and then Atlanta, Greenville, and Charlotte on the I-85 corridor. As further evidence that SouthState is becoming the preferred alternative to the national banks, we announced last week the addition of 10 new commercial and middle-market bankers that were recruited from the large banks during the quarter. This follows recruiting success in the fourth quarter as well. The quality of the bankers we are attracting has never been better. Our competitors appreciate the strength of SouthState's balance sheet, our new technology and capital market solutions, and most importantly, the entrepreneurial culture that sets us apart. Our strategy is working. As we emerge later this summer from the recession, the pandemic, and our systems conversion, SouthState is poised to generate significant growth and shareholder value in the years ahead. I'll now turn it over to Will to walk you through the first quarter results.
Will Matthews, CFO
Thanks, John. I'll cover some highlights on margin, non-interest income, and non-interest expense, as well as credit and the provision for credit losses. Let's begin by talking about NIM. Net interest income for the quarter totaled $262 million. And comparing with Q4 of 2020, remember that we had two fewer days in Q1, costing us approximately $6 million. I'll also note that we continue to operate with a significant cash and fed funds sold position, ending the quarter at almost $6 billion and averaging $5.1 billion versus a Q4 2020 average balance of $4.8 billion. Our net interest margin was 3.12% for Q1, down two basis points from Q4's 3.14%. On a core basis, excluding accretion and the impact of PPP loans, our NIM of 2.85% was down seven basis points from Q4's 2.92%. If you normalized for the buildup in cash and fed funds sold in the quarter, our reported NIM would have improved about 0.5 basis points versus Q4. We began to see rates on new loans improve in the first quarter, with first quarter new production weighted average coupons up four basis points from Q4 to 3.41%. We were still adding loans at rates below the portfolio yield, but the difference improved from the fourth quarter. Our non-PPP loan balances declined $185 million, a 3% annualized rate in the quarter, with the decline concentrated in single-family residential loans and HELOCS, down $130 million. Slide 18 in our presentation shows what we've done with our residential mortgage loan book in the last year. As gain on sale margins expanded and long-term rates on mortgage loans declined, our portfolio of adjustable-rate loans shrank, but our servicing book increased. Our total residential mortgage loans under management increased from $8.6 billion to $10 billion, or 16%, while our residential loans on the balance sheet declined by $600 million and our servicing for others increased approximately $2 billion. As gain on sale margins and loan yields change, ARM rates are likely to become more attractive to borrowers, and this portfolio trend is likely to reverse. Purchased credit deteriorated loans also declined by $242 million during the quarter. Our C&I loans grew by $28 million, offset by declines in consumer, construction, and CRE. With our commercial pipeline building back up to approximately $4.2 billion at quarter end, we feel encouraged about growth improving in the back half of the year. On the deposit side, we continue to show incremental reduction in the cost of deposits, down two basis points to 15 basis points for Q1, and our total cost of funds improved by five basis points. Deposit inflows continued to be significant, growing $1.7 billion in the quarter, benefited by the most recent round of PPP lending and stimulus payments received by customers. With the continuation of record levels of on-hand liquidity and the yield curve steepening in the quarter, we took the opportunity to invest a small portion of our cash in the investment portfolio, which grew by approximately $820 million versus year-end. We were careful not to deploy much cash into investments when we were at rate bottoms, with much of our investments in the quarter coming in the month of February and March after rates backed up. As you can see on Slide 13, investments moved up to 13% of assets, but we're still below our fed funds sold balances, which were at 14% of assets. We remain below peers in securities to assets and well above peers in cash to assets, so we continue to have extensive dry powder, giving us some leverage to additional earnings through deployment as well as to higher rates. Turning to non-interest income. Our non-interest income of $96.3 million was down slightly from Q4's $97.8 million. Mortgage banking income was up $1.7 million. As noted on Slide 15, we produced $1.3 billion in the quarter and we remain purchase-focused at 63% of our volume again this quarter. We did complete the integration of the one common mortgage loan origination system in mid-January. As we'd expected, our pipeline also improved after the loan origination system conversion, growing to $945 million this quarter, up from $674 million at year-end. Turning to Slide 16. Correspondent income was up $1 million with lower interest rate swap revenue in our capital markets business offset by higher fixed income revenue. Fixed income revenue grew due to better demand and the move in the yield curve, and the addition of Duncan Williams for two months of the quarter added $7.5 million of non-interest revenue. We're glad to have acquired Duncan Williams. The fixed income business was strong this quarter, and the outlook is good with the excess liquidity on bank balance sheets, including those with the over 1,000 correspondent banks we serve. On non-interest expense, total NIE, excluding merger-related expenses, was $219 million, down approximately $1 million from Q4. Duncan Williams represented approximately $6 million in NIE, which was a little over half of which was commissions, for the two months it was part of the company this quarter. Excluding Duncan Williams, our NIE was $212.5 million. We continue to be on schedule with our cost-saving realization. With our late May conversion date, we'll begin to see further expense savings in Q3 and Q4. At present, we expect Q4 NIE to be in the $210 million to $215 million range. This includes Duncan Williams for a full quarter, and is after inflationary merit increases across the company beginning July 1. However, I'll remind you of the expense variability inherent in commission-based revenue. Our total merger-related expenses are still on track to be within our original modeling, with approximately $75 million remaining, and most of that will occur in the second and third quarter of this year, with some trailing in subsequent quarters. I'll now discuss credit. With respect to CECL and the allowance, significant improvement in economic projections impacting our loss drivers led to a meaningful reduction in the allowance for credit losses. These improved economic forecasts caused us to record a negative provision for loan losses of $58 million. For this quarter's weighting of Moody's economic scenarios and our CECL modeling, we rated baseline and the more pessimistic S3 scenarios equally versus the two-thirds baseline, one-third S3 weighting in Q4. This quarter's weighting reflects uncertainty in the economic forecasts and vaccination penetration and success, which uncertainty should lessen over time. Looking ahead, as we obtain additional clarity and, therefore, confidence in the economic forecast, we would expect the weighting of the S3 scenario to reduce over time. Holding all other factors constant, that would result in additional future reserve releases if that were to occur. That would be incremental to any reserve releases caused by improvements in the economic forecast themselves. It's, of course, hard to predict the speed and the magnitude of such releases. We are pleased that our actual losses have thus far been well below modeled expectations, but the nature of the pandemic-driven recession and the fiscal response are not captured in the historical data driving these models. On that note, as shown on Slide 19, we had another quarter of excellent loss results with a small net recovery. Our past dues, criticized, and classified assets remained low. Our NPAs declined for the third consecutive quarter, and our deferrals dropped below 1%. Our ending reserve levels, excluding PPP loans, were 1.96%, or 1.8% excluding the reserve for unfunded commitments, still well above the approximately 115 basis point level at CECL adoption. Turning to capital. With a negative provision expense and higher net income, we formed capital at a higher rate this quarter with a 22% ROTCE. If the negative provision were removed, our ROTCE would have been almost 16% on a balance sheet with a very strong CET1 ratio over 12%. Ending tangible book value per share grew to $42.02, up $0.86 from Q4. Compared with a year ago, which was the last quarter prior to our MOE closing, tangible book value per share is up over $4, which is a 10.5% growth in a year of a pandemic and a significant merger. As noted in the release, we will be calling $25 million in 6% subordinated debt when the call window opens in June. Additionally, we will be redeeming this quarter some older trust preferred securities we inherited in various acquisitions. These TRUPs have a weighted average cost slightly above 6.5% and a fair value mark of approximately $11 million that will be accelerated in Q2. The payback of this hit to earnings will be around four to five years. Our strong capital position provides us with several opportunities for deployment, whether on organic growth, capital returns to shareholders, fintech investments, line of business acquisitions, or traditional M&A. With that, I'll turn it back to you, John.
John Corbett, CEO
All right. Thank you, Will. Between the merger, CECL adoption, and PPP, there are a lot of moving parts for you to analyze. We're firm believers, however, that the simplest test to performance is the growth of tangible book value per share over time. As Will said, we're pleased to have grown tangible book value per share by 10.5% during a challenging year. I'll now turn the call back to the operator so we can open the line for questions.
Operator, Operator
Our first question comes from Jennifer Demba with Truist. Please go ahead.
Jennifer Demba, Analyst
Question. Your thoughts on growing the securities book further while we're waiting for loan demand to improve. I know rates are up, so it's a little more attractive. But what are your thoughts on growing the securities book more over the short term?
Steve Young, CRO
Jennifer, it's Steve. We have a couple of slides in the deck that I'll point you to. Page 12 in our earnings deck kind of described the buildup of liquidity over the past five quarters as a combined company. Just a couple of comments there before I answer your question. You can see that right before we announced our merger in January 2020, we had about $4.7 billion of investable assets and the 10-year treasury was sitting at 192. If you fast forward to today, we have $10.9 billion of investable assets and the 10-year treasury, as it went through the trough, is now back to the 174 range. So I think your question is a timely question. As we managed the securities book over the last year, remember, when we put the two banks together, we had to fair market value accounting in the second quarter when the 10-year was at its lowest level, and so we sold off a portion of the old CenterState securities just to wait until there was a better time to reinvest. I think we're really glad that we did that and were strategic in that. So if you look at our portfolio today, our portfolio is around $5 billion. We have about $5 billion of excess cash over what we normally show. Page 13 shows where our peers are. And our peers, as a percentage of the investment to assets, are around 17% to 18%. We're only at 14%. So as we look forward over the next several quarters, we would like to get somewhere in the 16% to 17% of assets range. And just average it in over time, knowing that rates continue to change, they continue to move. And we want to be long-term focused but we also have, as we understand, more liquidity than we had originally filed, and you can see that in that graph. So that 16% to 17% of assets is roughly another between $1 billion to $1.5 billion of securities as we think and we'll continue to look at that every quarter.
Jennifer Demba, Analyst
Bob, one follow-up on asset quality. Your loan losses have been incredibly low recently and over the longer term. Can you just talk about what you think the right range of net charge-offs is that we should see for SouthState over a cycle? It looks like I'm guessing these losses have come in much better than you would get?
John Corbett, CEO
Jennifer, it's John. The level of charge-offs naturally is going to change in a cyclical business, depending upon where we are in the cycle. I think if you look back at the history of CenterState and SouthState, you'll see a consistency that both companies have been in the top quartile as it relates to charge-offs. And I do not see our underwriting standards changing. I would anticipate that to be the case going forward as well.
Jennifer Demba, Analyst
Thank you.
Operator, Operator
The next question is from Michael Rose with Raymond James. Please go ahead.
Michael Rose, Analyst
Will, I just wanted to get a sense for where we stand in terms of the cost savings that you've realized. I think it was $80 million. How much of that has been realized? And obviously, I understand your comments on the core expense base. I think you said 210 to 215 for the second quarter. But it does seem like on the fee side, with Duncan Williams and kind of strong activity in some of those fee lines of business, even mortgage, you just talked about pipelines being up, might you expect those expenses to maybe be a little bit higher? Thanks.
Will Matthews, CFO
Sure, Michael. Maybe I'll start by sort of giving you a reconcile, if you will. So second quarter of last year, the quarter we merged, our non-interest expense was $222 million, $223 million. So of our $80 million cost save estimate, that would be $20 million a quarter. And within that $8 million or $2 million a quarter is really an offset in the non-interest income line related to our debit card contracts that we negotiated. So it flows through up there as opposed to NIE. So if we took that $222 million, $223 million drop off $18 million, now about $204 million. That's before the addition of Duncan Williams, which as you saw in this quarter, their two months NIE were about $6.1 million. That's of course going to vary with the revenue. And they had a good revenue quarter as they are likely to have in this environment with interest rates and liquidity where they are. And then also, we have in July, annual merit increases for our staff, which is more of an inflationary type. That's about $2.5 million per quarter. So just reconciling that back, the $222 million, $223 million minus $18 million get you around the $204 million, $205 million. You got merit increases it gets you, say, $207 million. And then Duncan Williams, what their quarter looks like is somewhere in that range of $210 million to $215 million for the fourth quarter. We'll have a little bit more in cost save recognition in the second and third quarter. It gets you down to 210 to 215, and maybe it could be on the low end of that if commissions revenue is not as high on the higher end, if it's much better non-interest income.
Michael Rose, Analyst
Okay. I appreciate the reconciliation there. And maybe just on the margin front. Obviously, a lot of moving pieces with PPP and the PAA. But if we exclude both those items, would you expect the margin, the kind of core margin come down, just given the securities purchases that you made what appear to be later in the quarter and then future securities purchases and just repricing lower of loan yields as we move forward? Thanks.
Steve Young, CRO
Sure, Michael. It's Steve. And let me just take you through a couple of thoughts as we work through it. So Page 21 in our deck, we talk about our core deposit franchise. And I just think it's important to highlight that, particularly as rates continue to move and they certainly are moving higher. That's going to be the really key to our long-term success relative to our margin. But as you look at our core deposits, 33% of them are in DDA, and 56% of them are in checking accounts. And when you look at the graph to our peers, 56% versus our peers at 39%, that really should outperform in a higher rate environment. So as we think about the long-term, that's where we think there's a ton of value. To get directly to your question on Page 10, we show our core margin accretion over the last several quarters. And just things I would point out to you there, in core margin dollars, which is really what we're focused on, primarily just because of the growth in the balance sheet. But you'll see in the first quarter, there was $231.2 million. With two fewer days in the fourth quarter, if you normalize the number of days in the fourth quarter, the core margin or the core dollars would have been dead flat. And so as we think about the rest of the year, we're flattening off this quarter, next quarter in core margin dollars. And then as we think about deploying the cash into securities and cash, more importantly, into loans over the next six to 12 months, that's going to provide some tailwind to the core margin dollar. So hopefully, that gives you the framework to help you model.
Michael Rose, Analyst
It does. Thank you very much, Steve. And then maybe just finally for me, just on the M&A front. I know we got systems conversion coming up. You guys are going to build capital here pretty nicely, especially if you do have some more reserve releases and the PPP comes off. What would the combined organization now be looking for in a transaction, maybe both in terms of size and markets? I assume, would be in your expanded footprint, but would just love any color there.
John Corbett, CEO
Michael, it's John. I think we've been pretty consistent in our communication that 2021 is all about getting the foundation in place for the future. So we've been very internally focused on getting this MOE done right, and I believe we are. As we get past the conversion in the second quarter, we think about the future. There's a whole lot more clarity now about the economy. And to your point, we are generating a fair amount of capital. So the way we look at it, Michael, is we just want to be positioned to be opportunistic in deploying that capital. So we think in our markets, with the way the economy is coming back, there's going to be strong organic growth opportunities. We do think there's going to be M&A opportunities, and our preference would be to expand in the markets that we're currently already in. And then there's also opportunities, we believe, to invest in ourselves through buybacks. So I think we've got all three options on the menu. And so we'll just have to see quarter-by-quarter what's the best option for our company.
Michael Rose, Analyst
Great. I appreciate you taking all my questions.
Operator, Operator
The next question is from Stephen Scouten with Piper Sandler. Please go ahead.
Stephen Scouten, Analyst
I was just kind of curious maybe if you could talk to the kind of expected pace of new hires from here, assuming those expectations are already built into kind of that expense guidance, but just wondering what you see as the opportunity set as you look to continue to drive growth.
John Corbett, CEO
Yes. Thanks, Stephen. We've had good success in the fourth quarter and the first quarter in hiring. I mentioned we've hired 10 new middle-market and commercial bankers in the first quarter. And I wouldn't be surprised if that does continue in the five to 10 per quarter range for the next two or three quarters. There's just a lot of disruption with some of the biggest banks in our market, and look for that to continue. Fortunately, we've been able to continue to add and have not expanded the expense base greatly. So I don't know that it's going to be a big needle mover in terms of expense. But I'd love to see us continue at the current pace we're at of five to 10.
Stephen Scouten, Analyst
Okay, great. And then, John, as you mentioned, you guys are in some of the best markets in the country from an immigration perspective. So I don't know that new markets are necessarily on the radar, but wondering if you're considering team lift-outs or otherwise to expand into any new MSAs across the footprint?
John Corbett, CEO
It's not a high focus right now, Stephen. Part of the rationale for SouthState and CenterState coming together is the six-state footprint that we're currently in. So you think about what's going on in Atlanta, Greenville, Charlotte, Orlando, Tampa, there's plenty of opportunities in the markets we're in. We've got some scale in those markets, but would love to continue to have greater density in those markets, and we're really going to focus our hiring efforts in those markets.
Stephen Scouten, Analyst
Great. Perfect. Well, thanks for the color. Appreciate it guys.
Operator, Operator
The next question is from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor, Analyst
Just wanted to circle back, maybe first on the expense conversation, Will, and wanted to clarify about mortgage expenses that you have mortgage commissions are net in fees. And so a decline in mortgage revenue perhaps won't necessarily result in a big change in the expense base. Is that the correct way to think about that?
Will Matthews, CFO
Yes. I mean, as I've talked about before, we do net identifiable costs associated with mortgage production against revenue produced properly, we think. But we do have the fixed income business, for example, is one that has a commission base. The same is true of our ARC business. Those are both commission-based business lines as well. And if fixed income demand changes, that's going to change the commission expense base there.
Catherine Mealor, Analyst
Got it. Okay. So more kind of think about the fixed income bend and mortgage, that makes sense. Okay. And then how about on loan growth. I know the loans declined a little bit this quarter. It seems like you're optimistic about growth to improve in the back half of the year. John, are you still kind of thinking about a low-to-mid single-digit growth rate? Or do you think that could be even better in the back half of the year, particularly just given the kind of population growth and economic trends you're seeing in some of your markets?
John Corbett, CEO
Yes. Catherine, I met with the Board yesterday, and I feel like we're operating an eight-cylinder engine that's been fired on about six cylinders because of the pandemic, the conversion, and the MOE. Once we get the conversion behind us in the second quarter. I really feel like we're going to be back to running on all eight cylinders. We're encouraged to see in the last three quarters, consecutive growth in C&I, although total commercial has been somewhat flat. The main headwind to loan growth has really been in the residential mortgage and HELOC area, not because of the lack of volume. We did $1.3 billion in residential last quarter. We just felt like it was a better use of capital to direct those loans to the secondary market, where we had record high gain on sales and low long-term rates. That's changing now. As rates start to move up, it's more likely that we're going to pull more of those ARM loans on to the balance sheet. Looking ahead, once we get past the conversion in the second quarter, our expectations in the second half of the year are for loan growth to return back to the mid-single-digit growth. You think about the companies historically have been 5% to 10% growers through the cycle. We're going to put more residential on our loan portfolio in the second half. We've had all these new hires that are building their pipelines, and they're going to start putting that production on the books in the second half. And there's been a lot of construction lending in the first half of the year that will fund up in the second half of the year. So you think about the future of the second half of this year, as you go into 2022, the economy is reopening, consumers, and businesses, we believe, are going to start spending their cash, and we think that loan growth can really accelerate from here.
Catherine Mealor, Analyst
Great. That's very helpful. Thank you.
Operator, Operator
The next question is from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Kevin Fitzsimmons, Analyst
Just obviously, it's been a long road with the MOE and the markets and the size and scale have been an obvious benefit from this, so not to get ahead of ourselves here, because you're still buttoning up this one. But when you come away from this deal, looking at the scale you have now, because we've seen a lot of merger activity and it seems like it's all about scale, it's all about spreading these IT investments out over a broader asset base. So how do you feel about the size scale you have now for going forward? And John, given what you said about all the growth opportunities you have in your footprint? Or would you ever entertain doing something like this again with the thought that if increased scale was this beneficial, it's even more beneficial to be that much bigger? Or is that just really out of the realm of possibilities? Thanks.
John Corbett, CEO
Yes, let me take it a step back. And if I think through the last decade, I think it was very critical that we built the company the way we did to build the scale that we have today in the markets that we're in. Having said that, I don't feel like there's the same urgency in the next decade to have to grow through M&A the way we felt that urgency in the last decade. I think where we're positioned now, we're just positioned. We can grow organically. There are M&A opportunities. There's opportunities to invest in our own stock. So I don't feel the urgency that we felt in the last decade, but we do feel like there will be opportunities, it's just not necessary for us to compete anymore with the big banks. We can compete today with the platform that we've built.
Kevin Fitzsimmons, Analyst
Great. Thank you. And just a quick follow-up. Will, you mentioned during your prepared comments the ACL ratio. And I just want to make sure I'm thinking about that correctly. So is that where we're at ex-PPP about 1.8 today? And that can come down day one was about 115. Is that what you said? I just want to make sure.
Will Matthews, CFO
Yes, Kevin. And keep in mind, the two companies were not in buying, we both adopted CECL. That's an approximation. I mean, I guess the way to think about it is we are at levels well above where we were when we adopted CECL. The economy changed a lot over the last year. We're still about climbing this, and the economic forecast that we had an appropriately conservative economic forecast mix in our provision model this quarter. There's a lot of ifs. But if one were to do this economy were to return back to the level it was when the industry adopted CECL, absent other changes in portfolios or whatnot, it's reasonable to expect that the industry would return back to levels about where it was when it adopted CECL on an allowance perspective, and we're still well north of that.
Kevin Fitzsimmons, Analyst
Great. And I would just assume, given the uncertainties you talked about, you would go out of your way to maybe make that a more measured return as opposed to a fast return.
Will Matthews, CFO
Yes. I don't want to finer manage because that's not what we're doing. But there is enough uncertainty in the economic picture. If you look at the forecast changes from Q3 to Q4, Q4 to Q1, they're very large magnitude in a short period of time. And the models are training on an economic scenario which is really unlike what we experience today and a fiscal response one like that. So we're being thoughtful about that and making sure that we do see greater clarity. But it looks like every day things do seem to be improving. So we'll have more information as time goes on to hope it will allow us to feel more comfortable that the economy really is getting back to where we like it to be.
Kevin Fitzsimmons, Analyst
Okay. There have been a few questions about bank M&A. But taking a step back, looking at like the Duncan Williams deal, are there businesses that you would really be interested in doing kind of business line or fee income related acquisitions like that as they become available?
Steve Young, CRO
Yes, Kevin, this is Steve. We're always on the lookout for those things that would bolt on to businesses we understand. And I think, for us, Duncan Williams was a great complement to both our Correspondent business and our Fixed Income business. It gave us several hundred more clients. So now we have over 1,000 new client banks, which just gives us more products to sell, more clients to talk to. We would also look for wealth management opportunities, things that we're already in. But from a standpoint of deploying capital, that's just one of the levers we're always looking for.
Kevin Fitzsimmons, Analyst
Okay, thanks, guys.
Operator, Operator
Next question is from Brody Preston with Stephens Inc. Please go ahead.
Brody Preston, Analyst
I just want to start on fees, particularly on mortgage. The pipeline's up here and gain on sale was up from Q4 levels. And so I guess maybe just starting to understand a little bit why it was pretty flattish quarter-over-quarter.
Steve Young, CRO
Sure, Brody. We reference Page 15 in our deck, maybe I can just take that and give you the overall picture. We went through our systems conversion in January. And remember, we intentionally slowed down the pipeline in December in order to get that accomplished. And that's exactly what happened. Our pipeline was down to $674 million at the end of the fourth quarter and grew up to $945 million, so significant growth in the pipeline. Production this quarter was $1.3 billion. If you go back a year ago, the same quarter, just to take some of the seasonality, it was about $1 billion. So it's up 30%. So yes, the production is really working there. And as you think about the comment around secondary versus portfolio, we have about two-thirds of our production was sold and then about a third of it was portfolio lending. A lot of that portfolio lending was construction that will fund up over time. As we go through this change of rates, we're continuing to be bullish on the actual production just because we do 63% purchase. But as we think about the mix, it might be, and we'll just have to see, that we get a little bit more into the portfolio and a little less to secondary. So if you look at the seesaw between non-interest income and loan growth, that's the thing you've got to look at. And for us, we're just trying to produce at the level where we've been producing it, and we're pretty bullish about that. But from a standpoint of where that production goes, I would think that over the next several quarters, we might see a little bit more in the portfolio and a little less to the secondary, if I had to guess.
Brody Preston, Analyst
Okay. Got it. And I guess just then as I think about the fee guidance that you gave last quarter, I think you guided down about 10% from the 420 combined level for the year. But with mortgage presumably getting tougher for everybody throughout the year and it sounds like you're going to portfolio a little bit more of it. Could you maybe help me better understand how you're going to get to that 10%, call it, I think it's like 380 or so, 375 to 380. How you get there via other fee income lines?
Steve Young, CRO
Sure, Brody. I mean, I guess if you take this quarter and annualize it, that's probably a little higher than that 380, it's probably close to 390 number for the year. The way we think about it and the way we've always thought about it is we want to make sure that our target, our goal, is to have 1% of our fee income to average assets. And of course, we've had a lot of bloating in the average assets over the last quarter; we had about $2 billion worth of growth. But if you look at that during normal times, that's where we want to be where we think that between service charges, between correspondent, between mortgage, all of those things, average out around 1%. And in times when it's volatile, and rates are moving all over the place, you'll see our percentage non-interest income to average assets to be much higher. And I think last year, we probably hit somewhere between 115% and 120%. But in a more normal environment, we would look to see that number to manage toward the 1% over a long period of time.
Brody Preston, Analyst
Okay. Understood. And then just on the margin, I wanted to ask, I'm sorry if I missed it, you said earlier, what new origination yields were for the loan portfolio?
Will Matthews, CFO
Yes. They were 3.41%, and that's coupon only, 3.41% in the first quarter, and that's up four basis points from Q4's 3.37%.
Brody Preston, Analyst
Okay. Understood. So when I back out the PPP, the PAA, the core loan yield was down about eight basis points or so this quarter. And so I just wanted to get a sense for what you thought the quarterly rate of compression on the loan yield would be moving forward at the core number.
Steve Young, CRO
Yes, Brody, this is Steve. To your point, our loan yield ex-PPP, ex-accretion is right around 4%. I think it might be 3.99%. So we did have eight or nine basis points of compression. And I would expect that probably to continue until we get the equilibrium between loan yield and loan production, and that's where in the excess cash. Just as you all think about modeling, maybe from a longer-term perspective, John mentioned it in his opening comments, that we have this $5 billion of excess liquidity that's sitting on our balance sheet, more than we would normally use. And as we think about the deployment of that excess liquidity, we already spoke about the securities, that we would move that up over time to closer to peer levels, maybe $1.5 billion. And then by the end of 2022, maybe there's a couple of billion dollars that we've deployed in loans, and so that leaves us still $1.5 billion to $2 billion worth of just dry powder that gives us the ability to, if some of the deposits shrink a little bit or we have faster loan growth that we can deploy. So that's kind of how we're thinking medium to long-term about this excess liquidity.
Brody Preston, Analyst
Okay. Understood that. And to that point, just with the capital you're building, the excess liquidity you have. I can appreciate what you're doing in the second quarter with some of the sub-debt and the TRUPs redemptions. I just want to maybe better understand, when can you call the rest of the sub-debt? I guess what's stopping you from just taking down the whole $390 million just because it's costing you about $5 million a quarter?
Will Matthews, CFO
Yes. So the sub-debt issues, in general, and the biggest one that we did last year, it's non-callable for five years from issuance, and then once you to within five years of maturity, 10-year maturity five-year, non-call. The capital treatment begins to amortize radically within five years of maturities. That's when you generally want to call sub-debt just because you start to lose the capital treatment. So the $25 million piece I referenced is one that we inherited in the INCOM acquisition that was issued back in 2016. The others are smaller pieces. I mean, we've got a handful of them, that were inherited acquisitions that really weren't issued as sub-debt or were actually issued as trust preferred. But they have Tier two capital treatment given our size, and they were marked to fair value versus our fair value marks, and those were yielding north of 6.5%. So we took the ones that would be the obvious ones where the payback being reasonable to go ahead and like those out this quarter. But the larger piece sub-debt, it was issued last year in May. So May of 2020, so five years from there would be our call date there.
Brody Preston, Analyst
Okay. Got it. And then just on the capital front. I hear you on the bank M&A, but, John, you have mentioned investing in SouthState and buying back stock. And so I know you got the new authorization from last quarter. And so I wanted to ask, I know the multiple is higher than some, but it sounds like you think it should be even higher from here. So I guess, when should we expect you to start buying back stock?
John Corbett, CEO
Yes, we think the stock is attractive by where it is today. So as we get more clarity about the economy, more clarity about the tax code, look for us to be more bullish on ourselves. And we'll have to evaluate that every quarter with other opportunities. But we're feeling much more bullish about investing in ourselves than we have when there was less clarity.
Brody Preston, Analyst
Okay. Got it. And then just on the loan growth. The pipeline is up to $4.2 billion, I heard you say on the commercial front, and that's up from $3.3 billion last quarter's call. And so it sounds like that's up nicely. What should we expect for a pull-through rate on that? I'm just trying to better understand when we should expect to see CRE growth return and C&I growth pick up from this quarter's run rate?
John Corbett, CEO
Yes. So the pull-through rate in the last two or three quarters has been about 35%. It fluctuates actually up and down from there. So we've been seeing commercial loan, this is commercial loan only production in the $1.3 billion range, $1.4 billion range. So as the pipeline grows, we're up to $4.2. It's likely that we'll see a third or more of that convert to commercial loan production in the second quarter. The variable here that's uncontrollable is payoffs. And we have had some payoffs in April. But we think that pipeline continues to grow as the economy reopens. And with that pull-through rate, we think we could easily see mid-single digits in the back half of the year.
Brody Preston, Analyst
All right. And then last one for me. I heard the Duncan Williams expense number. Did you guys give a revenue number for what they did this quarter?
Will Matthews, CFO
Yes. Their non-interest revenue for the quarter was $7.5 million, Brody.
Brody Preston, Analyst
Okay, great. So that mix of the $6.1 million versus $7.5 million on the expenses to revenues, does that kind of ratio remain consistent?
Will Matthews, CFO
Well, it's like any business where you have some component of fixed expenses and some component variable. So that as revenue moves up, the percentage of expenses will go down. And then conversely, the opposite is true. A little over half of that $6.1 million was commission, though. So that helps you do a framework.
Brody Preston, Analyst
All right. Thank you.
Operator, Operator
Your next question is from Christopher Marinac with FIG Partners. Please go ahead.
Christopher Marinac, Analyst
Steve answered one of my questions just about the percentage of assets on the fee income side. But if we kind of take that another step, Steve or John, and look at the spread relative to average assets, you're roughly, I think, 200 basis points. As you put the liquidity to work, does that spread naturally rise? Or is there an issue with just having overall margins and spreads getting wider to kind of affect that? I'm just trying to break down the pre-tax ROA and kind of where it's going to go over time.
Steve Young, CRO
Sure, Chris. This is Steve. I think as it relates to the margin, it's really difficult because of all the excess liquidity. At the end of the first quarter, our interest-earning assets were significantly higher than the average earning assets for the quarter because all the liquidity piled in in February and March. So I would expect just from a margin perspective for the actual percentage to go down from this past quarter just because we ended up with such an influx of liquidity toward the end of the quarter. But what you'll see over time is that margin will bottom out, and as we deploy the cash into the loans, and we deploy the cash into securities, assuming that rates don't fall from here, they'll start gradually increasing from that level. So I would expect that as we continue to do that toward the end of the year, you would start seeing that inflecting in the third quarter, fourth quarter, and hopefully, it goes into 2022 at a higher level.
Christopher Marinac, Analyst
Okay. Great. And then back to the fees. We know the volatility in the mortgage business over time. But do you think the capital markets business will be as volatile? Or do you think you'll be able to manage that to where it's more steady, maybe more wealth management-like in terms of the returns and just building that over time?
Steve Young, CRO
Sure. Page 16, we put in the deck this time, that showed sort of where the revenue came from. And it's kind of interesting to look at. On the top right graph, it shows the difference between sort of what we call our ARC revenues, our interest rate swap revenues, and our fixed income revenues. And you can see in 2020, it was much more weighted toward our interest rate swap revenues, and that was because the shape of the yield curve was flat and it's low. What you saw in the first quarter was the curve got steeper, and so our ARC revenue fell a little bit just because it's not as advantageous to hedge. But because of all the liquidity, the fixed income revenue went up. And so the way I kind of think about that business just particularly because we've been talking about it is, there has been massive liquidity put into the banking system and a lot of deposit growth. We're seeing this not only for ourselves, our peers, but also for our correspondent banks. So as you think over the next two years what's going to happen to that liquidity, either they're going to loan it or they're going to invest it. And so for us, I think we're positioned well in the correspondent bank to help them do both. When they invest it, we'll do it on the fixed income revenue side. And when they loan it, there'll be a certain amount of hedging that we do for our clients as they continue in loan growth because they already have the deposit growth.
Christopher Marinac, Analyst
That's helpful, Steve. And I appreciate the disclosure on 16. So thanks for walking through that.
Operator, Operator
Your next question is a follow-up from Brody Preston with Stephens, Inc. Please go ahead.
Brody Preston, Analyst
I have one last question regarding the efficiency ratio. If you exclude purchase accounting accretion and PPP from the efficiency ratio, it was lower this quarter. As we consider the phasing out of PPP and the ongoing reduction of PAA in 2022, how do you plan to improve that efficiency ratio once you move beyond the core conversion? How do you intend to trend it back to previous levels?
Steve Young, CRO
Brody, this is Steve. I'll follow up with just a portion on the PPP before I turn it over to Will on that efficiency piece. And I think you all caught this in the release, but just from a more technical perspective. There's $33 million worth of PPP accretion left in the book. We think the rough numbers, 75% of that will come in this year, depending on the forgiveness, but that's kind of how we're thinking about it. And then 2022, we'll get the remainder. So that will maybe help you in your modeling. And then also on the loan accretion, just because you mentioned it in the release, we have $87 million of that left in the release. But as we think about efficiency ratio, we've always thought about it in terms of core, and so much of this is driven by the yield curve. I mean, we just talked about it, as we continue to grow core net interest income, that efficiency ratio will naturally fall. It's really a revenue issue, more than it is an expense issue.
Will Matthews, CFO
Yes. I'd also say the same thing, Brody. To me, the efficiency ratio story is much more about our revenue. And obviously, we've got $5 billion on our balance sheet that earned eight basis points last quarter. And doing something with that will do far more for our efficiency ratio going forward.
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, thank you for joining us this morning. We appreciate your interest in SouthState and your investment in the company. If you have any follow-up questions for your models, please feel free to reach out to Steve and Will, and we hope you have a great day.
Operator, Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.