Ladies and gentlemen, thank you for standing by. Welcome everyone, to the South State Corporation conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If any teleconference participant would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. Thank you. I would now like to hand the call over to Will Matthews, Chief Financial Officer. You may begin your conference.
Good morning, and welcome to the South State Independent Bank merger call. This is Will Matthews, and I'm here with John Corbett, David Brooks, Steve Young, and Jeremy Lucas. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect us. Now, I'll turn the call over to John Corbett, our CEO.
Thanks, Will. Good morning, everybody, and thank you for jumping on the call on short notice. About 5 years ago, back in 2019, I went to Dallas to get to know David Brooks. What I came to learn is that David's got a pretty neat American success story. In 1988, he bought a tiny $50 million bank in Farmersville, Texas, just north of Dallas. At the time, he was just 29 years old, and he had the entrepreneurial guts to invest $4.5 million to buy a bank. He borrowed $3 million from a correspondent bank, and then he passed the hat around town and raised the other $1.5 million.
Over the course of the last 36 years, he grew that tiny $50 million bank into a $19 billion top Texas franchise, and he guided it through multiple recessions with one of the best asset quality track records in the country. He credits his brother, Dan, for being the steady hand that guided the credit culture over the entire 36-year period. Five years ago, David and I started down this journey that we're sharing with you this morning. Those of you that follow South State know that when we consider potential partners, we always focus our diligence on what I'll call the 3 M's: the map, the management, and the math. I'll start with the map. We are regularly asked on earnings calls about our ideal M&A partner.
We said we would be comfortable with a partner that would make up about a third of the company, and we wanted to invest in high-growth markets, and we specifically called out Tennessee and Texas. So why Texas? And the answer is not complicated. We believe it's wise to allocate capital to markets where the state governments encourage business growth, and they don't penalize it with tax and regulatory burdens. We also believe it's wise to allocate capital where people are moving to, not where they're leaving from. South State will operate in eight terrific states, but four of those states will make up 85% of our company, Florida, Texas, South Carolina, and Georgia. I can't imagine better states to grow a business or to grow our bank over the next decade. The second M is management. I've always thought of the management at Independent as stable but entrepreneurial.
I mentioned that David and his brother, Dan, have been at the helm for 36 years. That kind of tenure and stability is rare in our industry. While many banks change their business model as they grow to try to be like the big banks, Independent has stayed true to their geographic business model, built around the leadership of 4 regional presidents in Dallas, Houston, Austin, and Colorado. That regional president model is led by Dan Strodel, who will remain as our leader in Texas and Colorado. Since there's no overlap, the Independent banking model and leadership structure will easily assimilate into South State. As we turn to the math of the deal, Will's going to walk you through the deal assumptions and returns, but I'll offer a higher-level view.
We've been preparing for an opportunity like this for the last four years in a few different ways. First, we've invested heavily in what I'll call the technology chassis of the bank. We've increased our annual spend by $68 million or 76% over four years, and now we have 20 new systems that we can leverage with more volume. We've also invested heavily in our risk management infrastructure as we prepared for the OCC's heightened standards. Finally, we've been accumulating excess capital and building reserves above our peers so that we have the dry powder to invest when the time is right. So what are our options to invest our excess capital? One option is certainly organic growth.
We have, and we will continue to be, a healthy organic grower, but we've always viewed our company as a twin-engine plane that could generate capital with both the organic engine and the inorganic engine. Our second option is we could buy back our own stock, and we've done some of that to a limited extent, but we traded a premium versus our peers, and there's a limit to how much we want to pull that lever. Third, we could do a bond swap, and we don't think there's anything wrong with the bond swap, but we haven't done it yet because we view it as just a financial trade, just the timing of returns, rather than improving the fundamentals of the bank. But then finally, we could pursue an M&A transaction, which we believe achieves a combination of the things I've mentioned.
We currently enjoy a currency advantage versus our peers, which is a good time to issue shares in an acquisition. In addition to the currency advantage, the fair market value accounting of an acquisition allows us to do a basic large interest rate swap on both of Independent's investments and their loans. That swap brings both their loans and investments to market rates, which unlocks a sustainable earnings stream that would take Independent years to unlock on their own. And then finally, a partnership allows South State to gain economies of scale and efficiency by leveraging the major investments I mentioned that we've made in technology and risk management over the last few years. In short, we're doing for each other what neither of us could do alone.
I'll ask Will to walk you through the deal math, but I first want to welcome David Brooks and ask him to share his thoughts on our partnership.
Thanks, John. We are quite pleased to be joining the South State team. As our board has considered the pathway forward for Independent Financial, we have always believed that scale matters in this business, and with the technology and regulatory requirements today, it is even more important. In selecting a partner for the next phase of our journey, four things were important. First, a strong company in growth markets that creates significantly more value for our shareholders than we can likely create on our own over the next few years. Both short-term profitability as well as mid- and long-range strategic value were critical. Secondly, a strong culture of highly capable leadership that attracts great employees who care for each other and the communities that they serve.
Third, a passion for the customers that we serve and commitment to providing strong service, great products, and technology that make it easy to connect with our bank. And finally, a commitment to building healthy and vibrant communities. John and I, as well as our teams, have been building this relationship for over five years now. I have long believed that South State Bank was the best possible long-term partner for us. This combination strongly answers all four of the criteria I have described, and we are excited about the incredible opportunities that this partnership will provide for our employees, customers, communities, and shareholders. Will?
Thanks, David. I'll go over key assumptions and modeled results, and then we'll move to Q&A. This is a 100% stock transaction with an exchange ratio of 0.6. Let me walk through the major modeling assumptions, which are shown on slide 13. We used consensus 2025 estimates for each company, growing them at 5% thereafter. We expect to achieve cost savings of 25%. I'll note that these are based on a thorough analysis conducted during due diligence, using transaction volumes, existing vendor contracts, et cetera, a true bottoms-up detailed analysis, and we're thus confident in our ability to achieve these. We estimate pre-tax merger costs, also the result of a bottoms-up analysis, to be $175 million.
For purchase accounting marks, we're modeling a credit mark of 1.42% or $207 million, with that being 50% PCD, 50% non-PCD. So with the day one double count provision, the total credit mark plus allowance for this portfolio will be approximately 2.13%, or twice the size of the current IBTX allowance. I'll note that we performed extensive credit due diligence using both internal and external resources. As most of you know, our credit leadership team has tremendous experience in reviewing loan portfolios in due diligence over many years, so we have a lot of confidence in their work. We have a rate mark of 2.62% or $383 million on the loan portfolio, estimated to accrete in over 3 years straight line.
We have a CDI of 3% amortized over 10 years using sum of the years' digits. I'll note that we engaged in extensive modeling with our independent third-party advisors on these marks, so we feel good about the level of detail and precision employed on the front end. Interest rate movement from here will, of course, impact the final marks, but the modeling is based on a thorough process. We also modeled marking the securities portfolio to market in the model, and we plan to sell that portfolio. The outputs of the modeling, which are summarized on slide 9, are attractive. EPS accretion of 27% with fully phased-in cost saves. TBV dilution of 9.6%, earned back in 2 years using the crossover method.
If rate marks and CDI are excluded, the TBV dilution would be 2%, with 20% EPS accretion and an earn-back period of less than a year. Pro forma capital will continue to be strong, with CET1 at closing of 10.4% and projected to exceed 11% by year-end 2025, and approaching 12% by year-end 2026. With this pro forma capital and reserve position, we'll continue to have a strong balance sheet and an enhanced capital formation rate. Operator, we'll now take questions.
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We'll pause for just a moment to compile the Q&A roster. Our first question comes on the line of Catherine Mealor of KBW. Please go ahead.
Thanks. Good morning.
Good morning, Catherine.
I wanted to start just to kind of think big picture about some of the EPS accretion assumptions that you laid out. You know, as we look at, I noticed from the slide that showed the EPS accretion, it looks like you're using consensus for IBTX, which is about a $4 number. You know, but there's a big ramp in earnings expected at IBTX, just assuming that deposit costs kind of stabilize, and then we get the benefit of their loans repricing over the next couple of years. So just kind of curious how you're thinking about that ramp in this kind of interest rate environment. And I mean, one, kind of higher for longer, how you're thinking about maybe potential risk to that.
But then also on the flip side, how you're thinking about maybe some potential benefits that South State's better funding base can provide to IBTX's margin and any kind of upside we could see in the margin from that? Thanks.
Hey, Catherine, this is Steve. Let me just kind of lay out a bigger picture for a second, and then I'll try to get down to your questions. You know, obviously, we spent a lot of time, our treasury analytics team, along with our outside vendors. I think we ended up running about 32 different NIM scenarios for IBTX. So we, we've done a lot of work over the last, I'd say, 3-4 months on this. And, you know, just a couple of talking points as we've gotten comfortable is the loan book for IBTX, about 90, a little bit more than 90% of the loan book matures or reprices within a 5-year period.
If you kind of think about the discipline that they had during when low rates were low, they kept that maturity, you know, right in line with what they had had already done. About 50% of those loans, not quite 50%, were originated in 2021 and 2022, which are the lowest, you know, rate years that were out there. And so if you think about a five-year term, those loans would mature by the end of 2027, which would be within the three-year period in which we close, at least our view. So, you know, I guess from a perspective of margin, if we mark the loans and investments, then really what you're talking about then for higher for longer would be deposit costs versus our own.
So, you know, from an overall balance sheet positioning perspective, South State's traditionally been an asset-sensitive bank. But over the last few quarters, been a little bit, I'd say modestly, liability-sensitive with deposit costs peaking and our fixed-rate loan book repricing. The combination of IBTX and this makes us a little bit more liability sensitive. And maybe two things to point to. The loan book for IBTX is 19% floating. At South State, our loan book is 30% floating. So combined, we would go from 30%-27%. And then as we think about the deposit betas on the way down, we're modeling, as we said on the earnings call, about 20%. IBTX is about 40%, so combined, we'd be roughly 25%.
So as you think about the overall balance sheet, it does become a little bit more liability sensitive out of those two kind of reasons. So I hope that's helpful.
That and that is. And then maybe just one more on the margin. And then is that you're going to sell the securities book. What's your plan to do with the excess liquidity? Would you bring that right back into bonds or just kind of save it for cash and loan growth?
I guess like anything else, we'd probably look at the rate environment and the particular point in time, but our view is to reinvest in the securities portfolio. And, you know, I think it's around $1.7 billion or so in securities. And, you know, I think we modeled maybe 2.5% or something higher than that $1.7 billion. So that gets you your $41 million pre-tax. So I think it's a pretty conservative assumption as we were thinking about the reinvestment at this point.
Okay, great. If that, if you, if you don't mind, just one more just bigger picture question on, from a regulatory perspective, you're going from $45 billion to $65 billion, so we're crossing the, the $50 billion dollar threshold. Any commentary on what you think you need to do to prepare for that? What regulators are asking for? I know there's been some discussions that there'll be more regulatory scrutiny for deals that cross 50. What do you think that means? And, just kind of any color you can give us on your preparations for that. Thanks.
Sure, Catherine, it's John. Fifty billion dollars as an OCC bank means what they term heightened standards or heightened expectations. And basically, that's heightened risk management, governance, those types of things, reporting to the board. So we've had a roadmap that's been well-defined for two and a half years now. And our—Beth DeSimone, our risk management team, have been working through a gap analysis for two and a half years. We have regular check-ins with the OCC. They do an audit on our progress. We've gotten positive feedback from the OCC that we are on track. Now, heightened expectations really doesn't come into play until 18 months after you cross $50 billion, so that's like late 2026. We're very confident with the feedback we've gotten from our regulators that we're on track.
Great. Great, thank you. Congrats on the deal!
Thank you.
Thank you. Our next question comes from the line of Michael Rose of Raymond James. Please go ahead.
Hey, good morning, guys. Congratulations on the deal as well. Maybe just, you know, touching on that regulatory theme, you know, I know IBTX was over 400% CRE to risk-based capital. Pro forma, you guys are going to be 285, and I would expect that number to continue to fall as you recoup the TBV dilution. But how should we think about where you want to operate as we move forward and as you get and prepare to cross that $100 billion? And then, you know, just as the follow-up, I mean, I know, John, you mentioned at the outset, it's in the slides, that you have spent a lot of time and money in systems and things like that. What other work do you think you need to do?
Is it just building upon that, or is there just, you know, more substantial investment that we should contemplate? Thanks.
Hey, Michael, I'll hit the CRE concentration issue first, and you've followed us for a long, long time. We've always managed South State below the regulator's guidance on that concentration ratio, and we have no plans to change that, okay? We're currently at our lowest CRE concentration ratio that we've had in 3 years, and the pro forma CRE concentration ratio with Independent Financial is within the guidance, we call out 285%. So, at the rate we're going to accumulate capital with this deal, we believe our teams are going to continue to be able to grow loans as they have, and that ratio should continue to drift down over time. So, we're within the guidance.
We see it drifting down just like it has over the last few years, even though we've been growing loans in the 8%-10% compounded range. As for systems, you know, we've spent 3 or 4 years, and we've really rebuilt. I think I called out the technology chassis of the bank. There've been 20 different systems that we've replaced. Our teams are getting used to those systems now. Really, we don't have a long list of additional systems to add, Michael. It's really about adding scale to the investments we've already made, and that's exactly what this deal does for us.
Michael, I'll just throw in there as well, that if you look back at the time of the MOE, South State and CenterState, our pro forma CRE ratio then was about 280% or so, and we've brought it down to the, you know, mid-230s in the subsequent years. So not an unusual position for us to have been in.
I totally understand. Appreciate the response. And then just maybe separately for you, Will, you know, I think, you know, you talked about kind of a 5% annual long-term net income, you know, growth for the combined company. Can you just talk about like what kind of loan and deposit growth assumptions that you would assume or that are assumed under, you know, that dynamic to kind of get there? And then, you know, how should we think about the growth and overlap of some of the fee businesses into some of the Texas markets? Thanks.
Yeah, maybe I'll start, and then we can sort of tag team. I think, you know, what we ... From a modeling standpoint, we modeled 5% growth in the subsequent years over consensus. And that 5% EPS growth would generally tend to be close to what you expect in loan and deposit growth. I don't—that does not mean that that is our expectation, and that when the economy is doing well, that we wouldn't expect to exceed that necessarily. But it's also hard, the bigger you get, to continue growing at, you know, 10%+ . But that was, we thought, appropriately conservative modeling discipline in the deal to use a 5% growth rate for both, you know, off of consensus.
In terms of the fee businesses, Steve, do you want to jump in on?
Sure. I mean, I think there's leveraging points here in, you know, various platforms we have. Obviously, we didn't model any of those, you know, leveraging synergy points, but, you know, some of the capital markets, our international desk, you know, some of the middle market, our treasury platform. I think, you know, again, Independent's going to run the business just as they always have, but hopefully, we give some more tools out there that over a period of time will be more synergistic. But, you know, to Will's point, as you think about our modeling of 5%, you know, certainly, you know, we've always thought of ourselves, and David has always thought of himself as an 8%-10% long-term grower, and there's no difference in our thoughts there.
It's just from a modeling perspective, we want to be conservative at 5.
Great. Thanks again. Congratulations. Appreciate you taking my question.
Thank you, Michael.
Thank you. Our next question comes from the line of Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, everyone. Congrats on the deal. Looks like it will be well-received, which will be great for the industry as a whole, so that's great. I'm kind of curious, you know, John, you talked about the regulatory environment and the tightened standards not coming in for 18 months. So I just want to dig into that a little more and what kind of gives you some confidence that, you know, this deal can get approved kind of by that 1Q-2025 timeline? If there's any color into, you know, preliminary conversations with regulators, or again, what kind of gives you that confidence that that timeline can be met and achievable?
Yeah. Good morning, Stephen. We brought in the OCC and the Federal Reserve into our discussions, a couple months before we entered into a letter of intent. So they've been in very, very early in this process, Stephen, and we've been in regular contact with them throughout the process. So, you know, we've got a great track record. We've got a great partner with the OCC. We've been very transparent with them. They've been transparent with us. We've had conversations up and down the chain as late as last Friday, and we've got a great deal of confidence in our ability to work with them to get it approved. So lots of discussions, lots of transparency, no surprises.
That's fantastic. And then just kind of as maybe a little bit back to Michael's question around, you know, maybe a bank with a little bit more CRE focus than your own balance sheet, but not all that dissimilar. But would that lead you guys to look similar to what you've done in your own markets and bring on, you know, new talent, try to push further into C&I and corporate banking in those markets, much as you have in your legacy markets now?
Yeah. So David has been on that journey at Independent over the last few years. South State, we've definitely been on that journey as well. Some of this was investing in a new treasury management platform a few years ago that our bankers just rave about, and that's become a recruiting tool for middle-market bankers out of the largest regional banks. So I know David has started down that path. We've added, I think it's like 14 or 15 middle-market bankers in 8 different markets over the last few years. We're going to continue to do that and be there to support them as they recruit in that area as well. And I think these tools that we've got, capital markets tools, interest rate swap tools, treasury tools, all those will be additive to the ability to recruit.
Fantastic. Then maybe just last one for me. I'm wondering how you think about the mortgage warehouse business and how I'd assume maybe that fits in the correspondent banking group moving forward, and just kind of how you think about that business in particular?
Sure, Stephen. Of course, we did diligence on the entire loan portfolio, and that was certainly a piece that we looked at. We've, you know, trying to, you know, manage the bank, to, you know, get to the returns that we're looking at. So we really are, continuing to preliminary look at that business, work with David and see how we can, best utilize that business in the future.
Great. Thanks for the time this morning. Again, congrats.
Thank you.
Thank you. Thank you. Our next question comes from Brandon King of Truist Securities. Please go ahead.
Hey, good morning. Congrats on the deal.
Hi, Brandon.
So the first question, could you give us, you know, some insight into how you're thinking about your funding strategy in the Texas and Denver market with this acquisition? You know, there is a disparity between the cost of deposits versus, you know, South State versus Independent, Independent Bank. So just want to get a sense of how you're thinking about the funding strategy and potentially to kind of improve the deposit mix or deposit costs in the, in the Texas and Colorado franchise.
Sure, Brandon, this is Steve. I guess, first of all, you know, we're in a bit of an unusual environment with a highly inverted yield curve. And so as you think about a commercial bank, you know, that David is, you know, I think the cost of deposits last quarter is around 3.15%. Yeah, if you kind of look at peers, around some of the larger commercial banks, that's not all that unusual, in that regard. If you put us together, pro forma, we showed it on page 25. It shows our cost of deposits together is at 2.13%, which is still well below our peers from a median perspective.
You know, I think all of us right now, in an inverted yield curve, is challenged to grow deposits in a meaningful way, without sacrificing margin. And I think that's what the Fed's plan is. If you look back in history and you think about the last 10 years for both South State and Independent, when we have a normalized yield curve, we grow at 10%, and we grow funding, and we grow loans to match that funding, and we get a spread on top of it. Today, where we are is the IBTX, because of the inverted yield curve, I think everybody's deposit growth is a little bit challenged, but that'll, you know, move around over the years.
If you looked at, you know, the margin, the net interest margin of IBTX over a long period of time, you probably have, since you follow them, it's somewhere between 3.5 and 4. Sometimes when rates are 0%, it's, you know, probably in the 3.75%. When rates are a little bit higher towards 3%, it can get up to 4%. So, you know, I guess the way we're thinking about that long term is some of the platforms that we are going to help provide, hopefully will be helpful for the teammates. But some of this is just a macro environment issue that we're all, the whole banking industry is dealing with right now, and that'll solve itself over time.
Okay. Very, very helpful color there. And, and then on, on the credit review, you know, Independent Bank has had pristine credit quality for a long time now, and just want to get more insights into, you know, what you saw in your credit review. And then also, you know, the repricing risk of that portfolio, you know, a lot of fixed-rate loans that are, you know, increasing their rates materially over the next couple of years, and just how your view is of, you know, will borrowers be able to absorb that, and if there's any risk there?
Sure. Brandon, it's John. The work the team did here was incredibly thorough. I mean, we did the work over about a 5-month period. David and I decided to knuckle down on this and, right around Christmas time, and it was probably frustrating to David, how long and thorough the diligence process was. But we spent probably the first couple of months focusing on the net interest margin and the treasury analytics before we entered into a letter of intent. Then we spent a couple months here working on credit. Our Chief Credit Officer, Dan Bockhorst, highly experienced in diligence. He's performed 46 diligence assignments since 2010 with the team of Johnson Kibler and others, that helped him.
We worked with the third party, reviewed, I think, 1,450 files, so very, very deep, deep diligence. So, you know, as far as the repricing risk, you know, if you look at how they've underwritten across commercial real estate, they've, they've underwritten with a, with a large margin of cushion, larger than most banks. The debt service coverages are in the 1.65-1.75 range. Loan to values are in the 58% range. So even with some repricing, and there's also repricing naturally of rental rates, we've kind of shocked that and feel confident that the commercial real estate portfolio is going to perform fine throughout this period of repricing.
John, maybe I'll just add in a little bit, Brandon, just with respect to the office portfolio. You know, in our modeling, we are estimating that about roughly $1.5 billion of their loan portfolio will be classified as PCD. And our current modeling assumes that all of the office portfolio, which is about half of that $1.5 billion, goes into PCD. Our PCD credit mark's about $103 million, which is just under 7% of that $1.5 billion. And so with office being roughly half of the PCD book, the office credit mark's going to, you know, depending on the property, end up being in that 7%-10% range, probably on average for the office, some more, some less, depending on the individual loans.
So, we feel like we've ring-fenced that office exposure too.
Yeah, that's right.
All right. Thank you for taking my questions.
You bet.
Thank you. Our next question comes from the line of Russell Gunther of Stephens. Please go ahead.
Hey, good morning, guys. I appreciate the color you just provided on the office marks. Maybe just given the exposure to retail, I think about 16% of loans. Can you talk about specific due diligence there and any specific color around that process and those marks?
Sure. I mean, the retail CRE portfolio is one of the better- performing sectors right now. If you look at the underwriting at Independent, their focus historically has been on grocery-anchored retail and smaller neighborhood strip centers, less than 30,000 sq ft. So not big box, no regional mall type of stuff. And they've done it in high- growth neighborhoods with density. It's a granular portfolio. Average size of retail is about $2.5 million. The tenant mix is good tenant mix. Loan- to- value, 58%. Debt service coverage, 1.75x, and there are no nonaccruals, and there are no substandards in the retail book. It's a clean book.
That's very helpful. Thank you. And then how about with regard to the energy portfolio at IBTX and the appetite for pro forma growth?
Sure. So the energy book's about $640 million. If you look at our combined balance sheet right now, that'll be less than 1.5% of our combined loan portfolio. The thing that attracts us is the team that leads that for Independent is a very seasoned team with over 20 years of experience. They've been with IBTX for about six years, and they've even got an in-house petroleum engineer with 40 years of experience that does the monitoring of the collateral. So, I think there, there could be some room there to expand that book, given the fact that we've got a balance sheet now that's triple the size.
Excellent. Very good. And then last one for me. You guys gave us some good color around the implications of crossing $50 billion, at $65 billion in assets pro forma. You know, still plenty of ways to $100 billion, but I guess where you sit today, does that enter into your, you know, thought process planning? Is there anything from a balance sheet or back office perspective that you would start to consider, upon deal close with regard to $100 billion specifically?
Yeah, I feel like we're in the sweet spot between $60 billion and $70 billion, where we've got scale, but we're far enough away from that $100 billion to where the rules are not likely to affect us anytime in the near future. So anything we do over the next several years, we're going to be slow to approach that. These rules look like they're going to change, so we'll continue to monitor it, but we think that that's several years away.
All right. Great, guys. That's it for me. Thanks for taking my questions.
Yep.
Thank you. Our next question comes from the line of Gary Tenner of D.A. Davidson. Please go ahead.
Thanks, guys. Good morning. Just had a couple questions, one of which was about your pro forma or your deal accretion and earn back the tangible book. It looks like that assumed it full cost save phase-in in 2025. I just want to make sure I'm interpreting that correctly, in that of your 25% cost saves, 50% of which are expected to actually occur in 2025, the pro forma is assuming a 100% phase-in. Is that the right interpretation?
Yeah, that pro forma look is to show, sort of on a normalized full year basis, but the earn back is two years based on actual expected achievement, which is not that, that we get 100, 100% in 2025. So, so we, we do have a two-year earn back in the model. But we also wanted to show what it looked like with a full year of cost saves in there for 2025. So sorry, sorry, that's a little confusing.
Okay, I got you. The tangible book is, as you expect, the accretion was based on accelerated basis and effectively. Okay. And then just from a-
Gary, let me make sure we're on the same page.
Yeah.
We illustrated the model with a full year of cost saves 25, just to show that number. Set that aside.
Right.
Actual, actual TBV, earn back with expected actual timing of cost saves, which would be, you know, phased in. We have a, you know, closing, and you have the, integration with computer systems, when you begin to realize more of the cost saves. With the actual expected timing of those, it's a two-year earn back.
Yep, I got you. Thank you for that clarification. And then just as it relates to the kind of longer-term thoughts around the Texas franchise, specifically, you know, you've got the branch counts here between, you know, DFW, Houston, and, you know, Central Texas market. What are your thoughts about the need or desire for any, you know, additional density in any of those markets from a kind of branching perspective? I know, you know, certainly a commercial focus, but just thoughts around how you see that part of the franchise developing over time.
It's a pretty nice branch network that David has built over the last 36 years, so we'll get in there and take a look at the branch network. But I feel like David's done a good job building the branch network the way it is. I think we just added a branch, too, or David did, in San Antonio last month, so that would be the newest addition.
All right. Thank you, guys. Appreciate it.
Thank you. Our final question comes on the line of Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Hey, thanks. Good morning, and thanks for hosting us all. Wanted to ask about liquidity on a pro forma basis. Do you have to do anything different in terms of issuing long-term debt? And does that liquidity kind of play into your cost of funds as you were talking in an earlier question?
Yeah, yeah, Chris, it's Will. We do not have to do anything different with respect to issuing any long-term debt. And, you know, so obviously, their liquidity position is a little bit lighter than ours is. And so we, but we've modeled all that in, and all that's factored into our margin modeling. You know, the same question on capital. I mean, we, you know, our pro forma capital is about a 10.4% CET1. And, you know, I'll say after the UMB deal, we did get multiple inbound calls from investors we like and respect, who, you know, mentioned that if we wanted to do something like that and it included a capital raise, they'd love to participate. And of course, those calls are always flattering.
We're pleased to receive them, but in this deal, we just didn't need the capital based upon our capital ratios as they are and as they're expected to be pro forma. So we don't currently plan to make any changes to in terms of capital issuance either.
So if we look at the South State liquidity today and kind of match that with where or match that with the on a pro forma basis, is that the way to think? We, you don't see that you'll net build liquidity further?
Yeah, Chris, this is Steve. I think we'll, you know, continue to run, you know, the balance sheet as we have. And I think, you know, typically from a cash liquidity perspective, we usually look at it as, you know, maybe depending on the rate cycle and all that, somewhere between 2% and 5% of assets. You know, I think we're closer to 2-2.5 now. And then as, you know, we think about the build of liquidity and deposits and all those things, I think the modeling of 5% growth in the near term to close is pretty conservative, and I think we can hit those numbers. So I don't think there's any huge rewrite of the balance sheet here.
Got it. And then do you think that you'll be able to kind of reprice down some of the funding at IBTX over time? Or is that kind of competitively difficult at this point?
Yeah, Chris, I. You know, when we studied it, and we looked at it a lot of different ways, you know, I think obviously we need, you know, some rate cuts to come through. I think, from our perspective, you know, the deposit beta on the way up, for them was about 55%. You know, we're modeling, 40% on the way down versus our 20, so there's certainly more opportunities there. I think about 41% of the deposits, at IBTX are closer to that 5% range. So my sense is, when rates start getting cut, that those will be the first ones to get cut, and I think that'll be market.
Yeah, I think from our perspective, as we looked at the deposits, we feel comfortable on the down beta of about 40, based on the up beta at 55.
Yeah, I'll just throw in, Chris, as Steve mentioned earlier, if you look back historically in different rate environments, their margins performed very well. It's just the speed and magnitude of this rate change didn't allow the loan book to catch up. But you know, loans they're booking today are coming in with you know, high 7, low 8 yields. And as those loans reprice and the asset side of the balance sheet catches up, you know, their margins should return to a more normal basis. It's just been this weird period we've been through with the really rapid and really violent rate increases.
Great. Thanks again for taking our questions this morning.
Thank you, Christopher.
Thank you. There are no further questions at this time. I'll now turn the call back over to John Corbett for closing remarks.
All right. Thank you, guys, for calling in on such quick notice this morning. We're obviously excited. This has been something that's been five years in the making, and we're excited to share the news with you. I just want to take just a minute and take the opportunity to speak to the employees at Independent Financial. We've had the pleasure of getting to know your executive team at Independent over the last five years, and we feel like we've grown to become friends, and we're looking forward to getting to know you as well. We want you to know we're committed to serving you, helping you serve your clients, and making you feel welcome here at South State. We'll see you soon, and that concludes our remarks, and I'll turn it back to the operator.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.