SouthState Corp

NYSE:SSB

Earnings Call Transcript 2019-Q1

[Operator]

Good morning and welcome to the South State Corporation Quarterly Earnings Conference Call. Today's call is being recorded all participants will be in 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 Jim Mabry, South State Corporation Executive Vice President in charge of Investor Relations and M&A. Please go ahead.

[James Mabry IV]

Thank you for calling in today to the South State Corporation earnings conference call. Before beginning, I want to remind listeners that the discussion contains forward-looking statements regarding our financial condition and results.

Please refer to slide number for cautions regarding forward-looking statements and discussion regarding the use of non-GAAP measures.

I would now like to introduce Robert Hill, our Chief Executive Officer, who will begin the call.

[Robert Hill Jr., Chief Executive Officer]

Good morning. I'll begin the call with summary comments about the first quarter of 2019 and offer insight on where we stand on our near-term and longer-term focus. John Pollok will review the quarter in more detail and we will conclude the call with questions from the research analyst community.

This quarter marked the one-year anniversary of integrating the second of two significant mergers and 60% growth in our company. A year into these mergers, I'm pleased with where we are and outlook for these investments over the long term is encouraging.

We've also made the shift of our team's focus from integration to execution in our three primary areas of success – soundness, profitability and growth.

With much opportunity for continued improvement, I'm pleased with our start to 2019. Adjusted net income was $44.8 million or $1.26 per diluted share and represents a 1.23% return on average assets and a 14.8% return on tangible equity.

Net income for the first quarter totaled $44.4 million or $1.25 per diluted share. This represents a return on assets and return on tangible equity of 1.21% and 14.66%, respectively.

The soundness of our company starts with our strong core-funded balance sheet and credit quality. It is a result of great teams operating in great markets.

Deposits grew 9.5% on an annualized rate, with much of this growth coming from non-interest-bearing accounts. This increase moved our loan-to-deposit ratio down to 93% with virtually no broker deposits.

This deposit growth, along with the balance sheet modifications John will address in a minute, meaningfully increased our liquidity and provides sizable funding for future loan growth.

Asset quality measures showed further improvement from last year's record levels with both non-performing assets to total assets and net charge-offs declining from year-end. Two basis points in charge-offs for first quarter and very low past due loans have us feeling very good that we are growing our company with solid customers and long-term relationships.

From an economic point of view, South State's markets continue to exhibit excellent growth and low levels of unemployment. The companies we bank are strong and growing and our local economies remain vibrant. We experienced good consumer and commercial loan demand in Q1.

Loan pipelines are solid and we recorded 4.7% annualized loan growth this quarter. Our enhanced team and our treasury platform have added momentum in our commercial banking line of business.

We also see and hear often from customers about our unique approach to banking and are pleased that we recently received a number of excellence and best brand awards in the surveys compiled by Greenwich.

We also continue to make investments for the future. These investments have helped produce good results in Raleigh, Richmond, Charlotte and Augusta. We added 13 new bankers to the team in Q1 and opened our first of two new offices in Raleigh and moved into a new headquarters for our expanded Virginia team.

These two markets both had excellent growth in the first quarter. Our Richmond team has now grown to 75 bankers and is operating well on all four lines of business. We also expanded our team in Charlotte, which has seen their pipeline grow to the largest in the bank over the last two quarters.

All of this ultimately leads me to how we are performing in revenue growth and expense management. Our revenue growth has been impacted over the last few years as accretable yield moved from 18% of interest income to 6% today. This, coupled with Durbin and an enhanced $10 billion spin [ph], has impacted our earnings growth in the short term. We begin to move past these headwinds in 2019 and returned to improving our operating leverage.

Adjusted expenses are down $5 million or 5% from the first quarter of 2018. We provided long-term operating targets at our Investor Day in December that are on page 3 of this presentation. We are focused on these targets and feel well-positioned to achieve these.

Finally, capital levels remain strong. Even with our share repurchase activity, our tangible book value increased 9% year-over-year. Total risk-based capital at quarter-end is over 13% and allows us to be opportunistic with capital management.

The company has declared a cash dividend of $0.40 per share. This represents a 17.6% increase in our dividend year-over-year.

I'll now turn the call over to John Pollok for more detail on the financial performance for the quarter.

[John Pollok, Chief Financial Officer]

Thank you, Robert. My comments today will primarily focus on our margin, non-interest income and expense and capital management. I will also review a few steps taken this quarter that, when coupled with loan growth, should position the company for improved operating leverage.

Beginning with slide number five, you can see that our net interest margin decreased by 6 basis points linked quarter to 3.92%. The total yield on interest-earning assets increased 4 basis points, while the cost on interest-bearing liabilities increased by 11 basis points. The increasing yield on interest-earning assets is primarily due to the December rate hike, improving yields 9 basis points for both the acquired and legacy loans. A full quarter's impact of the December acquired credit-impaired release also added to the improved loan yields.

The increase in interest-bearing liabilities is primarily due to the higher rates on money market accounts and CDs as well as the small impact from additional long-term borrowings we secured towards the end of the quarter.

Our total cost of funds increased 10 basis points for the quarter to 67 basis points. Non-interest-bearing DDA average balances were down $105.5 million linked quarter, but period-end balances grew by over $158 million.

Net interest income was down $3.1 million in the quarter on approximately $500,000 lower interest income, $2.6 million in higher interest expense. Interest income was down on lower acquired loan balances and two fewer days in the first quarter.

Slide number six shows the higher yields on the acquired book, represent 23% of interest-earning assets in the first quarter compared to 25% in the fourth.

We also show you the difference between the average balance for the quarter and the period-end balance. You can see the period-ending balance of interest-earning assets is $600 million higher than the average and that the majority of this difference is in short-term investors. This is the result of a decision to lock in some longer-term attractive funding rates towards the end of the quarter.

Slide number seven shows loan accretion totaled $9.1 million in the first quarter or 6.4% of total interest income compared to 10.3% in the first quarter of 2018. You can also see the impact loan accretion has on our loan yields on the bottom of the slide.

As shown on slide number 8, we had $8.5 million in less non-interest income as compared to the first quarter of 2018, primarily due to the impact of the Durbin amendment on our fees on deposit accounts.

Mortgage banking was also lower partly due to the decline in mortgage servicing income. The sizable downward pressure on mortgage rates that occurred after the March debt announcement had a negative impact on the MSR value net of the hedge of about $1 million this quarter.

Much of this value has returned now that rates have increased since March quarter end. Acquired loan recoveries were also lower by $1.1 million year-over-year.

On slide number 9, you can see the net changes in all non-interest expense categories. We had good expense management in the first quarter with adjusted expenses of $97.1 million. This is $5 million below the first quarter of 2018, $4 million of which came from lower salaries and benefits.

Our efficiency ratio, as shown on slide number 10, increased to 63.2% from 59.4% linked quarter, primarily due to lower revenues. Total revenues were down $6.7 million linked quarter, which we think should represent a floor in the near future.

Tangible book value, as shown on slide number 11, shows an $0.85 increase to $37.15.

During the quarter, we repurchased 500,000 shares totaling $33.3 million and paid out dividend of $13.4 million.

Net income offset 95% of these payouts, and so the tangible book value increase came from an $11.5 million improvement in AOCI. Tangible book value grew year-over-year by $3.10 or 9.1%.

Earlier, Robert mentioned our long-term targets from our Investor Day in December. On slide number 12, we show you a few areas we are currently focusing on to help increase our operating leverage and, ultimately, meet these goals.

From a balance sheet perspective, we secured $500 million in longer-term funding. Of this amount, $150 million paid off on existing short-term advance. The remaining amount will be used to expand the size of the investment portfolio and support future loan growth.

Increasing the size of the investment portfolio will obviously lower net interest margin, but will provide a nice increase in net interest income. Our investment portfolio decreased from 11.3% of total assets at the end of the first quarter of 2018 to only 9.8% this quarter-end and is largely comprised of an amortizing product. The size of the investment portfolio could easily be reduced during periods of stronger loan growth.

We also utilized a gain on sale of Visa Class B stock to sell approximately $130 million in lower-yielding securities and repurchased about $100 million in similar securities with approximately 1% higher yields.

From an expense perspective, we have identified a total of $13 million in pretax cost savings, which includes the previously announced branch consolidation saves.

Of the total, we estimate that we will realize roughly 75% in 2019 with the remaining being realized in the first quarter of 2020. These saves are a combination of personnel expense and internal and external efficiencies.

We realized about $1 million of these cost saves in the first quarter. This should allow us to limit non-interest expense growth while still investing in future initiatives.

From a capital planning perspective, we have increased our dividend payout ratio target from 25% to 30% to 30% to 35%. As I mentioned earlier, we continued to be active in the repurchase of shares this quarter. The amount of, and the timing of, future repurchases will depend upon the careful evaluation of many factors, but in the near-term environment we expect to continue the systematic repurchase of shares.

The combination of more growth, a higher dividend payout ratio and continued share repurchase activity should have us moving closer to our longer-term target of 8% to 9% tangible common equity to tangible assets.

I will now turn the call over to Robert for some summary comments.

[Robert Hill Jr., Chief Executive Officer]

Thank you, John. We look forward to the rest of 2019. A strong core deposit base, solid capital position, excellent asset quality and a sizeable presence in vibrant markets are significant advantages that South State enjoys.

We remain focused on growing organically and making investments in people and systems that should position South State for improved operating leverage.

This concludes our prepared remarks and I would like to ask the operator to open the call for questions.

[Operator]

[Operator Instructions]. And our first question comes from Catherine Mealor of KBW. Please go ahead.

[Catherine Mealor, Keefe, Bruyette & Woods Inc.]

Thanks. Good morning.

[Robert Hill Jr., Chief Executive Officer]

Good morning, Catherine.

[Catherine Mealor, Keefe, Bruyette & Woods Inc.]

I thought we could start with the margin. A lot of moving parts here as always. But wanted to see if you could just kind of give us a big-picture view on where you think the quarter – just strip out accretable yield and just kind of look at the core margin, where you feel like some of the puts and takes of that are and if there is a scenario where we could see that core margin moving higher? I know we've got a mix of liquidity that's going to weigh on that coming into the next quarter. And then, as we grow the securities book that too will weigh on the margin. But, really, I guess the crux of that is going to be on the deposit cost and where that goes moving forward. So, just any commentary on that would be great. Thank you.

[John Pollok, Chief Financial Officer]

Sure, Catherine. This is John. I'm going to start. I think the answer – I'm going to start with the answer and then talk about some of the detail. Our margin kind of ex-accretable yield, I feel like you're clearly seeing some stability there. I think on the funding cost side, with the lack of rate hikes that we're seeing now, we're going to see some stability in funding. That doesn't mean there still won't be some catch up. As you know, we grew deposits 9.5%. So, we're out chasing a lot of really good relationships. And then, ultimately, I think you're going to begin to see our net interest income grow.

So, if you kind of go back to slide number 5, I think that's a really good place to start. And you kind of look at the first quarter of 2019, we had about $123 million of net interest income. And as you know, the accretion made up a little bit over $9 million of that. If you go back to the first quarter of 2018, so if you kind of go to the left-hand side of the slide, we had $129 million of net interest income, but we had accretion of a little over $14 million. So, if you think about the core, back to the beginning of your question is we're seeing pretty good stability in that core net interest income dollars. So, I feel really good about that.

As you know, we're chasing good deposits. And, clearly, good deposits with – what we're doing in the middle market space, it's competitive, but clearly those lead to a lot of good loans. And so, I think if you think about our strategy over the years, Catherine, is go after good deposits, continue to grow that. It clearly, clearly leads to good loans.

As I mentioned earlier, the lack of the rate hikes, I do think, brings stability to funding. But as you know, we're building this middle market commercial bank. We've built our treasury platform, we've gotten past all those conversions. So, we're out generating a lot of business. so, we want to be opportunistic clearly on the deposit side.

If you shift to slide number 6, which is the next slide in the deck, I think that's the next place you have to go as you think about our margin and the funding that you mentioned. And so, when you look at this and you go over to the right-hand side of the page, clearly, we've done some things. We took our short-term investments up about $475 million at period-end. And if we keep these funds more in the investment portfolio, not able to put them over in the loan side initially, that will probably have about a 10 basis point impact on the core margin.

The other thing we've done, obviously, is we've been very participatory in buybacks. Clearly, that has – from a cash need, we've needed more cash. I think as we mentioned in the release, we continue to see systematic repurchases in the future.

If you also shift and think about, all right, we'll look at the loan growth, as Robert mentioned, we had right below 5% loan growth. That was a pretty solid quarter, I think for the first part of the year and you typically see some seasonality. But I think our long-term view has always been, after a period of M&A, first, we've got to get the balance sheet the way we want. We've got to get back to mid-single digit loan growth. And as you know, in our longer-term targets, we would like that to grow higher. We're out of integration mode. So, we're really focused on the customer and I feel really good about the loan pipeline.

We had a lot of discussion last year about the remix of the balance sheet. Well, the remixing is done. We've done all of that. That doesn't mean we don't have some larger construction and CRE payouts. I think you're seeing that throughout the industry. So, you continue to see that. And as you know, we're chasing bigger relationships, and that surely has created a little bit more volatility, both on the loan and the deposit side.

And then, finally, I think you've got to look at the interest rate environment. And, clearly, I guess I was fooled four years in a row thinking the 10-year was going to stay above 3%. It didn't happen again. And so, we saw a very unusual opportunity in the quarter with the inverted yield curve to really harvest some of the optionality from our balance sheet. We went out and borrowed this $500 million and put a synthetic hedge on it and we really were able to lock in, what I would say, shorter-term funding costs out a little bit further, four, five years. And so, our focus right now is to get that deployed, some in the investment portfolio in the short term, but, clearly, we've got tremendous amount of loan opportunities.

In fact, Catherine, if rates stay where they are today, once we've deployed this, I could see us going in and doing another one of these transactions to boost liquidity. So, I feel really good where we are. I think that we've bottomed out on the margin, and so I really feel good about the increase.

And then the last thing I would mention is, if you turn to slide number 7, as Robert mentioned in his comments, just the accretable yield. The accretable yield as a percentage of total interest income has come down significantly. We continue to see that. I think the caveat there is, is once you get into the CECL world, our belief is you're going to see an increase in accretable yield on the front end. So, it might put a few more dollars into that bucket.

But, Catherine, I think I feel really good where we're positioned. I feel really good about some of the balance sheet optionality we use for the quarter and we're really excited about what we're seeing in our markets on the loan side.

[Catherine Mealor, Keefe, Bruyette & Woods Inc.]

That's good. Thank you so much. That was really helpful. And maybe one follow-up on the accretable yield comment you just made. I know you and I have talked about this, but can you dig into a little bit as to why you think accretable yield will increase on the front end as we go into 2020 versus fall off in 2020?

[John Pollok, Chief Financial Officer]

Sure. So, I know there's a lot of views out there in CECL today. Our view today, when you look at our accretable yield, as you know, the majority of that comes from our acquired credit-impaired bucket. And today, the way we look at that acquired credit-impaired bucket is we remeasure the cash flows every quarter. And so, our weighted average life is typically on that book of business about three years. So, as you do renewals, you reset those loans up, you have a tendency to extend the weighted average life, which pushes the accretion out. Our view today in the CECL world is it's going to work more like a FAS 91 instrument, is you're not going to be remeasuring cash flows every quarter to decide what the weighted average life is, you really go to the maturity of that credit. So, you're not going to have the accretable yield continue to extend out at the beginning of time. It's going to more accrete more into the income stream like a normal loan where you're not having to predict what the life is. So, you've really shortened up the time frame.

[Catherine Mealor, Keefe, Bruyette & Woods Inc.]

Great. That's very helpful. Thank you so much.

[Operator]

Our next question comes from Stephen Scouten of Sandler O'Neill. Please go ahead.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Good morning.

[Robert Hill Jr., Chief Executive Officer]

Good morning.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Just maybe follow-up on that last line of questioning there. I think what we've been hearing from some of the other banks is that there's a belief that this PCI accretion will go away in 2020. And for you guys, I guess, maybe that was $5.9 million. I guess what portion of that $5.9 million is like a credit mark versus an interest rate mark, if you have that? And is that accurate as you guys view it that PCI accretion will predominately move into the loan loss reserve in 2020?

[John Pollok, Chief Financial Officer]

Well, I think there's two pieces there. Whatever has turned from non-accretable to accretable is going to stay in the discount. Whatever has not – whatever is still there from the credit mark is actually going to stay with those credits. So, if you had credit improvement in the future, you would not see that roll over into the accretable yield bucket, Stephen. That would come back – basically, just come back through the provision through the income statement. So, I think that's kind of the big piece.

The second piece of that is on your acquired non-credit impaired book, you're going to have to put a credit mark up. And so, as you think about that book, remember it's paying down. You're not putting new loans into that book. So, we're going to have to put a credit mark on that piece. And as you know, charge-offs continue to be extremely low. So, you're going to set up, what I'd call, another reserve. It won't be accretion. But I think our view is a lot of that money will begin to come back into the income stream.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Okay. And if I'm looking at the detail you all give in the release, the kind of $107 million remaining accretable balance, the $46 million versus the $60 million, is that credit mark versus the interest rate mark? Is that the right way to think about it? Am I way off base there?

[John Pollok, Chief Financial Officer]

When you look at that $107 million, you've got two pieces on that. That $46 million is principal that – it's the credit release is in that bucket. And then, the $60 million piece that's going to come back, what you had to remember there, today that depends on how long you think that life of the loan is. So, if you were to extend that out, you'd actually add more interest into that category.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Okay. Perfect, perfect. Okay. And then, just thinking about maybe new loan yields in the quarter, obviously, the average, I think, went up on non-acquired to 4.30% from 4.21%. Could we see any natural lift on that with new loan yields or are they coming on kind of close to that 4.30% average?

[John Pollok, Chief Financial Officer]

No. Stephen, this is John again. Our new loan average is starting to push up in the high 4s now. So, in that 4.70% to 4.80% range is what we're seeing new loan yields come on at.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Perfect, perfect. And then, maybe just last one for me. On the investments into securities with this liquidity, can you give us an idea of how much of that maybe $450 million that's kind of unallocated today would be truly put into investment securities here in the second quarter? And is the 3.14% kind of average yield that you saw this quarter, is that a good kind of proxy for what the new investments might look like as well?

[John Pollok, Chief Financial Officer]

We're not totally sure how it'll all be deployed by the end of the quarter. The 3.14% is a little high from where it is today, but it's a little hard to tell exactly how we'll have it all deployed. We're trying to be opportunistic. Again, if we feel like there are some good opportunities there, we can get it out. We're going to go ahead and invest that. I think, as you know, we have a lot of amortizing product in our investment portfolio. So, we're throwing up about $35 million a month in cash flow. So, I think it's just going to depend some, Stephen. I think we've got to work through that. But I think, in this environment, our view is deploy that and maybe go get a little bit more, if we're still where we are.

[Stephen Scouten, Sandler O'Neill & Partners LP]

Perfect. Thanks for the color, guys. Appreciate it.

[Operator]

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

[Jennifer Demba, SunTrust Robinson Humphrey]

Thank you. Good morning.

[Robert Hill Jr., Chief Executive Officer]

Good morning.

[Jennifer Demba, SunTrust Robinson Humphrey]

You hired 13 bankers during the quarter. Could you give us a sense of where those hires were and in what capacities? And what's your budget for new hires in the year 2019 and 2020, given I'm sure there's a lot of disruption opportunities out there?

[Robert Hill Jr., Chief Executive Officer]

So, Jennifer, this is Robert. As we build a company over the last couple of decades, recruiting of new people has always been a standard part of what we do. Last year, I can't remember the exact number, but it seems like it was 25 to 30 new revenue producers that came on. Q1 was 13. A lot of those new hires are a result of relationships that we've been building and getting people over a long period of time. It's pretty spread out. But I'd say the concentrated areas are Richmond, Raleigh, Charlotte would be the three primary, but they're Charleston, Augusta, they're many across the franchise. But the three where they were the heaviest was Richmond, Raleigh, Charlotte.

In terms of a budget or estimate, we're pretty selective on who we hire. We just don't take all comers, and so the recruiting process can sometimes take a very long period of time. We don't always know when that window is going to open for us. So, I'd say it's just a constant pursuit. In some quarters, there'll be more or less. We don't just specifically have a number that we're shooting for every quarter. It's just more getting the quality bankers where we have an opportunity to move bankers and, therefore, move business.

I will say this, we did have some rebuilding to do in Richmond and Charlotte. And as you know, Park Sterling was more CRE focused. We had to shift focus. We had to make some changes on talent. Today, those teams are in really good shape. I was in Richmond a couple weeks ago. Unbelievable how that team has come together really in all four lines of business. We've really rebuilt the focus and efforts of our Charlotte team. Charlotte now, as I said earlier, has the largest pipeline in our company. So, if you look at North Carolina, roughly, a little less than 40% of our pipe – our commercial pipeline comes out of South Carolina and North Carolina is about 33%. A year ago, they weren't even close to that number. So, you're just seeing North Carolina really ramp up with quality business and quality bankers. And Richmond, Richmond led the company this quarter in terms of overall growth. So, those investments are paying off and we'll continue to look for opportunistic hires across the franchise.

[Jennifer Demba, SunTrust Robinson Humphrey]

Thank you.

[Operator]

[Operator Instructions]. And our next question will come from Tyler Stafford of Stephens. Please go ahead.

[Andrew Terrell, Stephens Inc.]

This is actually Andrew Terrell on for Tyler this morning. Good morning.

[Robert Hill Jr., Chief Executive Officer]

Good morning.

[Andrew Terrell, Stephens Inc.]

Hey, sorry Tyler couldn't make it. He's traveling on a flight right now. But just a couple of questions for me. First, just on the expenses, how should we be thinking about this incremental $10.5 million just relative to your expense growth target of 0% to 3%? Does this essentially allow you guys to stay at the bottom end of that target in 2019 before normalizing towards just an inflationary type of expense growth in 2020?

[John Pollok, Chief Financial Officer]

This is John. I think that's a fair assessment. I think our view of it is, especially with the long-term targets is, we tend to do better over time if, over a long period of time, we can manage our expenses kind of that 0% to 3%. So, yeah, you're going to have a little bit of noise of when you get the expense saves, do we find some opportunistic hires that we make, but, ultimately, Andrew, we want to – over the long period of time, we want to be in that 0% to 3%. So, clearly, it helps some there. I will tell you, though, that we're not done on that side. We're continuing to work on efficiencies. We'll have more announcements next quarter on a number of things that we're working on.

[Andrew Terrell, Stephens Inc.]

All right. That's great color. Thanks. Maybe just to dig in more, I think the 13 branch closures were originally estimated to be a $2.5 million expense reduction.

[John Pollok, Chief Financial Officer]

Correct.

[Andrew Terrell, Stephens Inc.]

Just wondering where you guys are – I guess, I know you noted the personnel and equipment costs, but hoping you can provide just some more color on what you've identified is going to drive the incremental savings from here and just where the fallouts would be.

[John Pollok, Chief Financial Officer]

The incremental savings over and above the branch saves, is that your question?

[Andrew Terrell, Stephens Inc.]

Correct, yes.

[John Pollok, Chief Financial Officer]

Yeah. So, I think as you know, as you try to drive to a 0% to 3% expense base, you come off all the growth that we've had is – we've been very internally focused. So, I'd say, number one, just in general we got better expense management. So, overall, we're just doing a better job. This is a small thing, but more video conferencing and less people traveling.

We've done a very good job in our vendor management area. We've continued to look at contracts, we've renegotiated a number of those contracts. I think as we've mentioned before, as the mortgage business begin to change, we've clearly gotten much more efficient in the mortgage business. So, there's bits and pieces kind of all over the company that we've been able to do that. The branch piece, obviously, is just kind of easier to see. We're closing the majority of those branches that we announced last quarter this quarter. But it's really sprinkled kind of throughout the different line items within the company

But, overall, Andrew, to be able to not – if you think back a year ago, we were focused on integration, could we get the cost saves, how much do we have in merger expense. Clearly, taking the merger expense out of our numbers is just creating more capital, right? But just a bigger expense focus throughout the company.

[Andrew Terrell, Stephens Inc.]

Great, thanks. That's it for me.

[Operator]

Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.

[Christopher Marinac, FIG Partners LLC]

John and Robert, the risk-weighted assets have grown a lot slower than the total up balance sheet, as you know, and I'm curious to what extent that gives you flexibility on buybacks and does that enter into kind of your thresholds for how low you can take the share count this next couple quarters?

[John Pollok, Chief Financial Officer]

Chris, this is John. I'll start. Clearly, our risk-weighted assets are down a lot because we've got a lot in cash, right? And so, I think you'll begin to see that begin to kick back up, the percentage of risk-weighted assets. But, as you know, Chris, we're still generating a significant amount of capital. We bought back 500,000 shares this quarter. We have another 500,000 shares left on our authorization. If the environment kind of stays where it is, we're going to continue to do buybacks. In fact, once we exercise this last 500,000 shares in authorization, our plan is to put up a 2 million share authorization after that.

So, Chris, I would think in the next quarter or so, assuming everything stays where it is, we're going to put up another authorization to continue to buy back shares. So, I think our view is, we've generated a lot of capital. Clearly, we've had accretion generate a lot of capital. We haven't – in a less than 5% growth rate. Clearly, we need to give some of that -- or put some of that back to our shareholders. So, if you look at our total payout ratio for the quarter, between dividends and buybacks, our net income covered about 95% of that. So, I think we're going to continue to be active. We're not going out and retiring capital that we're going to need for future growth. But, incrementally, I think in the environment that we're in, we're going to continue to be active in that market.

[Christopher Marinac, FIG Partners LLC]

Great, John. Thanks very much for the background here.

[Operator]

Our next question comes from Nancy Bush of NAB Research. Please go ahead.

[Nancy Bush, NAB Research, LLC]

Good morning, gentlemen. The 4.7% annualized loan growth, how do you view that? Is that a sustainable rate? And if you can give us some color from both a product and geographic perspective, that would be helpful.

[Robert Hill Jr., Chief Executive Officer]

Nancy, this is Robert. Overall felt pretty good about where we landed for Q1. Q1 typically is a little seasonally slower loan growth quarter for us and we saw more of the growth on the back end of the quarter than the front of the quarter. But the pipelines across the board have continued to build over the last three or four quarters. I think some of that is a result of the new talent that we've brought on and a lot of it goes back to just focus. We've now not announced a merger in two years, and we've been past $10 billion now for two years. And so, it's really redirected the focus of the company. And I think you're seeing that in our own loan growth. So, felt really good around the 5% number. Obviously, we said our long-term targets is 5% to 10%. We'd like to see that number move higher. We think we certainly have the potential to do that.

Geographically, I think the nice thing is, a year ago, I felt like we were hitting on about two of four cylinders and now I feel like we're almost hitting on all four. South Carolina was up around 8% loan growth, which really felt good. Georgia, especially Augusta, had a really strong quarter. They were up – Georgia was up around 8%, Virginia was up 19%. The Richmond expansion and additions to the team have really been very effective. North Carolina is really the only one that, in Q1, did not have the level of loan growth that we saw across the company. I think that's mostly related to some large CRE deals because the part book [ph] just more CRE concentrated. And you know that we've just had a little bit more churn there. But we've continued to add to that team. And as I mentioned to Jennifer a few minutes ago, the Charlotte pipeline now is the largest in the bank.

So, we feel like, as the year progresses, that flattish growth that we've had in North Carolina really begins to pick up. From a line of business standpoint, overall commercial is going to -- is where the majority of our new loan production is coming from, about 60% of our new production. Our consumer business, though, has been very strong.

The Park Sterling branches have now been engaged. About 10% of our new volume is now – new consumer loan volume is now done digitally. I think that number can even move higher. But our mortgage loan growth was around 7% year-over-year; and consumer banking, a little bit less than that. But some of that is just some of the reduction in our overall equity loans during Q1. So, really, the geographic spread and the product line spread is pretty robust and pretty diverse.

[Nancy Bush, NAB Research, LLC]

Yeah. You mentioned Charlotte. If you could just speak to sort of the changing competitive environment, you're going to have a new bank headquarters there. Do you see opportunities there to pick up teams? How are you guys looking at this sort of mega shift that's going to be happening?

[Robert Hill Jr., Chief Executive Officer]

Well, we are number five in market share with 22 offices and a great team and all 4 lines of business working. And when we've got that, we tend to do better because it just all feeds on each other. I would say the thing that I'm most pleased with today is just overall the quality of the banker that's joining our team. Our culture is very different than the others in the market. We've got size and scale in the market. We're effective in all four lines of business. They enjoy working together and they're winning. And so, I think the – we're just so unique in that market because, obviously, it's dominated by very large banks and then you'll have another very large bank headquartered in that market. But we're able to compete in that middle market private banking mortgage consumer space very effectively. It's a market where John and I started our careers. It's been a part of our franchise now for 10 years. We just didn't have the scale until Park Sterling. Now, you take the Park Sterling platform with what they've done with capital markets, with treasury, it's the whole reason we did that deal. So, I think what's happening now in the marketplace with some of the larger banks and some the turbulence that they are going through or will go through, it only enhances that competitive position.

[Nancy Bush, NAB Research, LLC]

Okay, great. Thank you.

[Operator]

Our next question comes from Blair Brantley of Brean Capital. Please go ahead.

[Blair Brantley, Brean Capital]

Good morning, everyone.

[Robert Hill Jr., Chief Executive Officer]

Good morning.

[John Pollok, Chief Financial Officer]

Good morning., Blair.

[Blair Brantley, Brean Capital]

Hey. A question on capital. Just given kind of your targeted ranges and your increased payout ratio on the dividend side, how does that impact your view on future external growth possibilities?

[John Pollok, Chief Financial Officer]

Blair, this is John. I think as I mentioned, I feel like we're retiring capital that we generated over the short run. I don't think we're – I think as growth begins to pick back up more, our strategy will adjust there some. But I think, over time, we've kind of derisked the balance sheet, right? If you go back and look at how much we've brought down construction and land development from when we closed the Park Sterling transaction, we kind of delevered a lot of that risk out of there, and so it feels really good where we are. But I think, ultimately, we've got a lot of options.

If we begin to grow, I don't see us in the share buyback business forever. But over the next 18 months, I see us continuing to play in that market. And so, I think as it begins to grow, as our loans begin to grow more, we're going to adjust our capital ratios there. Being in that 8% to 9% range from a TC standpoint, I'm very comfortable with. Clearly, I think that range could adjust some depending on where all the CECL answer lands, right? You're going to basically take capital and put it over in a loan loss reserve. My view, it's still capital. So, if I have to move some over for that acquired non-credit impaired, maybe I'll operate on a little bit lower end of that TC range because I think that'll be the only other issue there. But we have a lot optionality around our capital position.

[Robert Hill Jr., Chief Executive Officer]

Blair, this is Robert. Just to add on, I think your question is one that we've discussed a lot with our board. And our company has always been opportunistic and always wanted to be in the position to be able to take advantage of an opportunity when it arises and you don't always know when it arises. And, obviously, having the capital to be able to execute on it is very important. And so, trying to strike that balance, but clearly we've been building excess capital now for a couple years. We're not just going to hoard excess capital, but we're also not going to put our company in position where we can't be opportunistic when the time's right.

[Blair Brantley, Brean Capital]

And then, talk about fee income here, kind of give me your – what are your thoughts versus what you're seeing over the last few quarters versus kind of what maybe internal expectations are?

[John Pollok, Chief Financial Officer]

This is John. I'll start. Clearly, I'd say the first thing that stands out, right, is a year ago, we didn't have Durbin impact. So, when we get to the third quarter, everything will kind of marry back up again, right? We won't be able to see that impact. I think on the mortgage banking side, not that we are where we were a couple of years ago, but we love the momentum there. We had, like most companies, from an MSR perspective, we had a little bit of a hit there on the valuation of that asset. But I think that's timing. I think you're seeing that come back. Our MSR asset is comprised of loans that we generated organically. We're not buying a lot of wholesale loans there. So, I think that's going to rebound nicely.

Recoveries on acquired loans, it's kind of hit or miss, right? That has a tendency to be fairly volatile. And we continue, I think, just kind of go steady on the wealth management side. So, clearly, be glad to get back to the third quarter of this year. I think that'll give you a much better comparison. Couple less days in the first quarter compared to the fourth. And so, I think overall, I think you'll continue to see we do pretty well on the fee side.

[Robert Hill Jr., Chief Executive Officer]

Blair, this is Robert. Just to add on, this isn't just a comment around fee income, but just I guess profitability in general. It kind of goes back to our investor day and how we saw all our lines of business, being fee lines of business or margin lines of business, is they just have to continue to transform, and that's not one quarter or one year. I think it'll be a continuous transformation to drive more efficiency in these businesses and, at the same time, make investments that over time are going to give us good returns, and then manage our capital well.

I think fee income, obviously, is an important part of that, margin is an important part of that, expenses. But if you think philosophically how we view it, I think it's the efficiency piece, making investments that pay off and managing our capital.

[Blair Brantley, Brean Capital]

Okay, great. Thank you.

[Operator]

This concludes our question-and-answer session. I will now turn the call back over to John Pollok.

[John Pollok, Chief Financial Officer]

Thanks, everyone, for your time today. We will be participating in the SunTrust Robinson Humphrey Annual Financial Service Conference in New York beginning on May the 21st. We look forward to reporting to you again soon.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.