SouthState Bank Corp (SSB) 2025 Q3 法說會逐字稿

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to South State Bank Corporation Q3 twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

I would now like to turn the conference over to Will Matthews. You may begin.

Thank you. Good morning, and welcome to South State's third quarter twenty twenty five earnings call. This is Will Matthews, I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, we'll make a few brief prepared remarks and then move into questions. I'll refer you to the earnings release and investor presentation under the Investor Relations tab of our 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 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 that may affect us. Now I'll turn the call over to you, John.

Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for South State. Earnings per share are up 30% in the last year and the company generated a return on tangible equity of 20%.

If you recall, we closed on the independent financial transaction in January. We converted the computer systems in May and now we're beginning to realize the full earnings power of the combined company. Loan production was up a little in the third quarter to nearly $3,400 million, and we saw moderate growth in both loans and deposits. Payoffs were about $100 million higher in the quarter. Loan production in Texas and Colorado was up 67% since the first quarter of the year. And loan pipelines across the company continue to grow and we feel like net loan growth will accelerate over the next few quarters.

Our charge offs were 27 basis points for the quarter, primarily due to one larger C&I credit acquired with Atlantic Capital that has been in the bank a number of years. Stepping back, however, the credit metrics in the bank are stable. Payment performance is good. Non accruals are down slightly, and we've only experienced 12 basis points of charge offs year to date. Our credit team is forecasting that we're going to land in the neighborhood of 10 basis points of charge offs for the year.

We're currently in the middle of strategic planning this time of year and thinking about the banking landscape, deregulation and the opportunities in front of us. Over the last fifteen years, we've built the company in the best markets with good scale and an entrepreneurial business model. And we've done the heavy lifting to build out the infrastructure of the bank. We're now in a perfect position to capitalize on the disruption occurring in our markets.

We've calculated that there are about $90 billion of overlapping deposits with South State that are in the midst of consolidation in the Southeast, Texas and Colorado. Our regional presidents understand the opportunity and they're laser focused on recruiting great bankers and organically growing the bank in 2026.

Will, I'll turn it back to you to provide additional color on the numbers.

Thanks, John.

I'll hit a few highlights focused on our operating performance and adjusted metrics and make some explanatory comments and then we'll move into Q&A.

We had another good quarter with PP&R of $347 million and $0.02 dollars $0.58 in EPS driven by $34 million in revenue growth and solid expense control.

Our 406 tax equivalent margin drove net interest income of $600 million up $22 million over Q2.

$19 million of that growth was due to higher accretion.

Cost of deposits of 191 were up 7 basis points from the prior quarter and we're in line with our expectations.

In addition to the cost of deposit increase, overall cost of funds was impacted by the larger amount of sub debt outstanding for much of the quarter.

We redeemed$405 million in sub debt late in the quarter. Going forward, that redemption will have a net positive impact on our NE of approximately 4 basis points, all else equal.

Our loan yields of 648 improved by 15 basis points from Q2 and we're approximately 8 basis points below our new origination rate for the second quarter.

And low yields excluding all accretion were up a basis point from Q2.

Steve will give updated margin guidance in our Q&A.

Net of $99 million was up $12 million driven by performance in our correspondent capital markets division and deposit fees.

On the expense side, NIE of $351 million was unchanged from Q2 and was at the low end of our guidance.

And our third quarter efficiency ratio of 46.9% brought the nine month year-to-date ratio to 48.7%. Credit costs remain low with a $5 million dollar provision expense.

As noted, we did experience one $21 million dollar loan charge off during the quarter, which is an abnormally large charge off for us.

This brings our year-to-date net charge off to 12 basis points. Absent that loss, net charge-offs would have been 9 basis points for the quarter.

Ethically remains stable and payment performance remains good.

Our capital position continues to grow with CET 1 at 11.5% and TBV per share growing nicely. As you'll recall, we closed the independent financial acquisition on January 1st of this year.

Our TBV per share of $54.48 is now more than $3 above the year-end 2024 level, even with the dilutive impact of the independent financial merger.

Our TCE ratio is also back to its year end 24 level.

As we've noted before, our strong capital levels and healthy capital formation rate provide us with good capital optionality.

Operator will now take questions.

(Operator instruction)

Michael Rose with Raymond James.

Hey, good morning, guys. Thanks for taking my questions. I guess I'll hit the the margin question, since you brought it up, Steve, can you kind of walk us through, the excess secretion, this quarter, looks like the core margin, excretion was was down, kind of high single-digit basis points. Can you just get some some puts and takes here as we think about, the contemplation of a couple rate cuts this quarter. Near term and then if you can talk about some of the pricing dynamics both on the loan and deposit side, new production yields, things like that, just trying to better frame up the the core versus the reported margin as we move forward. Thanks.

Sure, Michael, yeah, I just, maybe kind of, give you some explanation of where we think we're headed on March and maybe I can answer some of those questions in the middle of that.

As you mentioned, we had higher accretion than we expected and really, a couple of things around that.

We saw the highest decretion in July and then and then then August and September it kind of tailed off a little bit and really due to some early payoffs of 2020 and 2021 vintage loans that had, kind of three handled coupons with these big discounts that sold. So those are, not economic decisions, but they're, I mean they are economic decisions, the fact that they sold, but typically you keep those coupons also.

We had a 29% decline in PCD loans this quarter and of course those have larger marks. So anyway, all of that, we look at pre-payments, they're really not outside of our scope of what we thought. It's just that some of the vintages were different than we thought and therefore have bigger discounts. So, having said all that, as we think about the guidance for them going forward, really, Not a lot of change, a little bit of change, but not a lot. We talk about the size, the assumptions of the interest earning asset size. The second is our interest rate forecast.

The third is loan accretion. The fourth is deposit data in an environment where rates are going down.

Interest earning assets, we, we've been saying $59 billion for quarter 4 average. That's no change, for full year 2026, we're looking somewhere between 61 and $62 billion so. That's kind of a mid single-digit growth rate forecast. Last quarter we had no rate cuts in our.

Model.

This quarter we're thinking we get 3 rate cuts in 25 and quarterly rate rate cuts 3 more in 2026, so that we would get a 150 basis point cut in total and get the Fed funds up 3% by the end of 26. That seems to be somewhere where the market is.

As it relates to the third assumption, loan accretion, based on our models, we expect loan accretion this quarter for the 4th quarter to be somewhere in the $40 to $50 million dollar as expected prepayments fall, our October accretion so far is in line with these expectations and as I mentioned. August and September came down pretty radically, so I think that's a good run rate to use for 2026, we do, we did certainly pull some forward in 2025, so we expect instead of $150 million of accretion, we're looking at about $125 million based on our pre-payment forecast, but of course it can be lumpy based on these viage loans.

The last part is deposit data. For the 1st 100 basis points of cuts, our deposit cost came down about 38 basis points from 229 to 191 to 38% beta.

In our 2019 to 2020 easing cycle, our deposit cost beta was around 27%. So our expectation is with growth plans that our deposit data would look a little similarly to 2019, 2020, so 27, maybe we get to 30% over time with a lag, but I don't think it'll be as high as 38%. So based on all those those assumptions, we'd expect them to continue to be in the 380 to 390 range with the step down and accretion this quarter in the fourth quarter and for 2026 for it to be in that range, 380 to 390 as we kind of move forward. One of the questions you asked was are, pricing dynamics.

Our new loan production rate for the total company this quarter was 656. If you look at Texas and Colorado, that new loan rate was 679, so it's a little bit higher in Texas and Colorado, but it's in total of 656.

I know you have a few questions, a few puts and takes, but that's some guidance for you.

No, it's really helpful, Steve. I appreciate it. And then maybe just a broader one for John. I think you mentioned that loan production was up a little bit in the 3rd quarter. I think there's clearly going to be some dislocation in some of your markets from. Some of the deals that have been announced. I know you guys are obviously leaning a little bit more into Texas and maybe Colorado as well with some of that. Can you can you just kind of walk us through the loan growth environment, at this point, given the fact that, I think a lot of banks are kind of upping the hiring plans for for loan officers, the pricing dynamics and and kind of maybe what we should expect as we you know move forward.

Thanks.

Yeah, sure, Michael. Good morning.

We kind of got it to mid single-digit growth for the remainder of 2025. I think we came in at 3.4% for the quarter, so a little bit less than mid single, but we still think mid single-digit growth for the remainder of the year feels about right.

As I said, we had about $100 million more in pay downs in the third quarter than we did in the second.

If we move into 2026, it could move. A higher maybe at the mid to upper single-digits, but we have a better feel for that in January. But most of the loan growth is coming in in the area of C&I. For the quarter we had 9% link quarter annualized growth in C&I. Resi growth was about 6%. And then if you combined CND and CRE, really we were flat for the quarter. There was a migration of construction loans that just migrated into CRE upon completion of construction.

Our biggest pipeline build is in Texas.

We had an $800 million dollar pipeline there in the second quarter in the second quarter.

Now it's up to $1.2 billion. So we kind of got past the conversion there and now we're starting to see the pipelines and the activity building. Florida's got a billion dollars dollar pipeline. Atlanta's got a $900 million dollar pipeline. So those are our three largest markets. And as I said on the call with that dislocation and really all the states we're in, we are kind of leaning in on the hiring front and we see opportunities to recruit bankers like Yesterday morning I was interviewing one from another bank, so that is where a lot of our focus and effort is right now.

All right, great, I appreciate you guys taking my questions. Thanks.

Jared Shaw with Barclays.

Hey, good morning everybody.

Hi.

Maybe just, if we could hit on credit, you were listed as a creditor to first brands. I'm guessing that's what the large charge was. Was there for for that charge, was there a prior it looks like there was a prior reserve. Was there also a prior charge taken against that and I guess how do you feel about the rest of the portfolio, apart from apart from that.

Yeah, you're correct, that's what that charge was.

There was not a prior reserve. I mean, that news happened pretty fast, but that was our only supply chain finance credit. So as we examine the portfolio, we don't have any more of that type of lending. So, unfortunate, we're going to use it as a learning lesson for our credit team and management associates.

And I, I'd say, Gerald, the reserve question, based on what John just said, we would have had a reserve release but before that charge off in the quarter, a negative provision just based on the.

Underlying economic loss drivers and we just to be clear, we did charge off the full amount of that balance in the 3rd quarter.

Okay, all right, thanks for that and then I guess, looking at capital.

You just gave some great color on on some really good growth opportunities over the coming years, but, still seeing growth in capital and like you said, we'll just start improving backdrop on credit. Where do you feel like you would like to see CT one optimally and how should we think about the buyback in capital management in general from here?

Yeah, it's a good question. We, we're obviously 11.5 on CET1 about 108 if you were to incorporate AOCI, so very healthy capital ratios. I say we don't articulate a particular target out there, but we do like this 11 to 12% range we're in, and we do like the optionality we've got with the ratios being strong and with the formation rate being so. So good. So we are hopeful that John said to take advantage of some of the disruption in the market through growth, but we also have the ability to use some of that capital to repurchase our shares. It's sort of a quarter to quarter decision we'll be making.

Okay, great, thank you.

Catherine Miller with KBW.

Thanks. Just want to follow-up back on the margin that it was helpful to have your guidance for next quarter. And is it fair to assume that actually this is the way to ask the question, is there a way to, quantify how much of the accretion this quarter was just accelerated, versus just helping us to kind of model what a normal kind of base level would be for accretion going forward versus how much is accelerated from pay downs.

Yeah, captain, there, there's a couple of things that I don't want to overcomplicate your answer, but it's complicated. There's a few things that go into it. One is full payoff we talked about and there's partial prepayment. So based on our models when we were looking at it and to give you that. Forecasts in the last quarter, it was based on our expected prepayments and our expected prepayments actually came in reasonably well. What we didn't get right was the vintage part of it, as well as other partial prepayments. So the bottom line is what we saw in July and early August was a little bit outsized. What we saw in, end of August, September is much more run rate type of thing. So I think, this 40 to 50, that's kind of what we expected in the 4th quarter of the back half of the year. That's sort of what we're, that's what we're seeing. So that sort of informs us going into 2026.

Okay, got it.

That's cool.

And then, and I see any outlook into how you're thinking about fees at the end of the 4th quarter and then into next year it was really nice to see another quarter of higher correspondent and service charges.

Sure, no, it was a really good quarter, non-interest income was 99% versus 87%, so it might pick up 60 basis points of average assets. A little bit higher than our guide of around 50,55, 2/3 of that was capital markets.

A couple of things happened in correspondent number one, we had, we have changes in interest rates and so when you have changes in interest rates, that business typically does a little bit better. It was sort of broad-based a couple million dollars was due to fixed income, maybe 3 to $4 million with higher interest rate swamps, and other. $1.5 million in sort of other trading. So I think we had a, I don't see that that that number is around $25 million that's a $100 million dollar run rate. So to put it in context, our best year ever was $110 million in revenue. Last year was 70. So this quarter was a really good quarter. So I don't expect that to We'll see, to continue to repeat, but clearly we had a good quarter.

We'll see what the run rate, I think we got a couple of quarters behind us. We'll have a better view, but clearly it's higher than our run rate of 87. I'm not sure we're as high as 99, so I'd say it's probably. As we kind of think about 2026, somewhere in that $370 to $380 million dollar run rate, it's probably not a bad place to start and then we'll just see how it progresses, is the way I would think about it.

Okay, that's helpful.

Janet Lee with a TD Cowan.

Good morning. On a core basis I believe From your Second Quarter earnings call you talked about how every 25 basis point card would be a 1 to 2 basis point improvement overall margin. Is there any change in thoughts on that, or was that guidance or was that guidance based on the core name or was that including any accretion?

Yeah, that's a great question, and thanks for asking it.

A couple of things there. So if we get back to 6 cuts and we get 1 to 2, that would be, call it, let's just take the midpoint. That'd be 9 basis points. So I think our core n is somewhere as I think about coren, somewhere in the mid 380s. So what's changed there number one is the loan accretion forecast. So if we next year we are 125 versus 150 just because we pull forward, that's about 4 basis points of, decrease, and then the other is just on the deposit data, in the lag thereof, kind of where like I mentioned in our other question.

Our deposit data so far through the 1st 100 was 38%. But on the other hand, we didn't grow deposits more than, call it 2.5%. So as we contemplate the future and we look back at history at 2019 and 2020 during that easing cycle when we were growing a little bit faster, more mid single-digit-ish, our deposit data was more like 27%. So you know we're taking that model back down to 27%. We hope to outperform that, call it, there's a lag, the CDs and pricing and all that, but by the beginning of 27, our hope would be we'd be in that 30% range, but for right now what we're seeing in front of us, we don't see that really, we see that more of a lag and we're modeling 27 in our numbers.

So see, even when you translate what you're saying there to Janet's question about 1 to 2 basis points with each cut. That may take that away if the deposit.

Data is not as good on the way right.

And yeah, to finish that thought to your point, John, to finish that thought, if our deposit data, so we're guiding sort of the mid range of 380 to 390.

And so to the extent at the end of the year, next year we go through the cuts and we start moving our deposit data from 27 closer to 30, 31, that would get us in the high 380s, maybe 390 at the end of the year of 2026. That's how we're thinking about modeling it.

Got it. Thanks for the color and just a follow-up, if I am not making this up, hopefully, I believe that the IBTX bankers that that group will start adopting South state's business model and in a way, what would be the implication on or any implication on The expenses or or their incentives to bringing like prioritize, lower deposit costs or or loans or is there any sort of change that could be coming or whether an implication on on growth profile there? Could you explain, could you give us on any color on what that could Me.

For Janet, it's John. So we went through this transition year in 25 when we did the conversion and we kind of kept the incentive system and IBTX the same as it had been in prior years. In 2026 it'll move to the more the South state approach where we we allocate P&Ls to the regional Presidents, so their incentive will be based on both loan growth. But but predominantly on their PP&R growth. One of the things that we're contemplating making an adjustment for to in additional recruiting and hiring is not to penalize those regional Presidents for the 1st year compensation of new hires to encourage recruiting efforts into 2026, both with the existing South State plan and the IBTX plan. Good question. Hope that helps you.

Thank you.

Go ahead.

Is there another question?

Yes, one moment please.

Mr. McDonald,

Okay.

Thank you. Sorry, I didn't hear anything.

Hey guys, sorry, just one more follow-up, Steve on the margin. I think your prior outlook was, to be in the 380,390 and then drift higher in 2026.

I just want to make sure that the 26 Outlook 38,390 includes rate cuts and about $125 million of accretion if I heard that right, anything's changed from, prior, what are some of the puts and takes?

Yeah, no, I think I was trying to answer that in the prior question. It's really the accretion number that you know from 150 is what we like about 2026 last quarter to 125. That's about 4 basis points of decrease and then the rate and then on the deposit data, we have 38%, 2019 was 27%. We were thinking, we think ultimately we'll get to somewhere in the low 30s, but it's just it's probably a bit of a lag. So, it's probably not going to, we're going to be very diligent on growing, for the loan growth we think is coming and so we think we should in 2026 model more in the 27% range and then hopefully as the CDs repriced, all those kind of things through 2027, we could see it uptick. So I think. Back to the guidepost or how this would work is you start out in the mid 380s and then move higher into 2020, the end of 2026, early 2027.

And John, this will, I would add, our margin position is as neutral as we've seen it in years just based upon.

The actions we took in 2025, the number one, the merger and marking that balance sheet properly, and then two, the portfolio restructure we did in connection with the sale lease pack. So you know we have a relatively stable looking margin under most reasonable scenarios.

Got it. And the delta between having a 4 handle this quarter and moving into 380s next quarter is really accretion going from 80 this quarter and cutting half to 40 next quarter in your outlook.

Yeah, that's right, and that's what we're currently seeing.

Okay. And then one just follow-up again on the on the next quarter's average earning assets in the 59. It seems like that's kind of where you were this quarter. Are there some kind of puts and takes of what you expect in terms of growth in the fourth quarter?

Yeah, typically in the 4th quarter we have some seasonal deposit growth and some of we let, depending on how we manage it, we get some of the seasonal wholesale stuff out of the bank at the same time. So we sort of manage it towards that level.

But kind of year over year, I call it the single-digit growth is is kind of how we're thinking about it from an average earning.

Okay, thank you.

Ben Gerlinger with City.

Hi, good morning.

I was wondering if we kind of stepping back to correspondent banking. I understand that a rate cut or rate movement kind of sparks it, but you know we're looking kind of, I don't know, 3, you said roughly 3 to 6 cuts over the next 12-ish months.

How long is the tail for that kind of tailwind, I guess you could say. So if there's 2 cuts in December, ex 2 cuts in the 4th quarter, would the 1st quarter also see a benefit or is it fairly short-lived?

Yeah, like I was trying to explain before, you kind of think about that business, that put the highs and lows of it.

Back in 2020 when things went, crazy on rates, I think our best year was 110. I think we did that in 2020, 2021. Last year was our worst when rates were the highest and sort of out there, so that was about $70 million, as I kind of think about that business. You're going to have a fixed income, we'll do better in rate cuts lower because particularly for our bank clients, they'll want to take their excess cash and bar and buy bonds because there'll be a yield curve. Interest rate swap side depending on the shape of the yield curve, it may not be as good as it is today. Today it's deeply inverted. That's really good for that business. So I kind of see those businesses sort of offsetting each other but maybe creating some stability, at that level.

Yeah, okay, that's helpful. And then from a follow-up perspective, it seems like you have a lot of op opportunity for you. I think that's, it'd be hard to disagree, especially with the other disruption in the markets that you operate in.

Is it fair to think you're going to think organically, like you're hiring individuals obviously and growing loans, or could you potentially see a small bolt on deal or something like that?

Yeah, and it's John, with our particular fact pattern, kind of our view is to investing in South states more interesting right now than doing an M&A deal, and that investment in South State comes in two forms. The first way is just to increase our sales force and accelerate our organic growth because of all this dislocation that's going on in the markets. The second way, as Will described, is in purchasing South State shares through our IBAC authorization.

The capital formation rate is pretty strong right now and the valuation is pretty attractive, so that's kind of how we're thinking about priorities on capital.

Got you. I appreciate it. Thank You.

Gary Tanner with DA Davidson.

Thanks. Good morning.

I just want to go back to the NIM related discussion for a minute. The big delta as I look at the balance sheet was really the cost on the transaction and money market accounts, up 11 basis points, quarter over quarter. Can you kind of talk about the dynamics around that? Is it an effort to bring in some new deposits with the anticipation of stronger growth over the next year or just, maybe comment on kind of the driver there.

Yeah, back in July when we had the call, Gary, we talked about our expectation of deposit cost and we talked about, the range this next quarter, the third quarter is 185 to 190, so we were, it was 191, so we were on the higher end of the range, a basis point. But really what drove that was and our expectation was that particularly in the in the CD book, we, if you looked at the second quarter, the third quarter, excuse me, the first quarter, the second quarter, our CDs went from, I don't know, 7.1 or 2 or something, 7.7, I think, and that was, back to funding and loan growth and getting the balance sheet where it needed to be. And so, those obviously transacted at a higher rate level than, others. So as we kind of think about, that's kind of what part of our guidance. It's, frankly a tough environment right now with deposits, but, we expect that as we get rate cuts and the curve gets a little bit more steady, we could continue to see better. That's why, a little bit why we're guiding down on the guiding on the 27% deposit because ultimately we need to fund the loan growth that we think is in front of us.

Right, and then as a follow-up on that data since you just mentioned as well, to be clear that 27 to 30% data is relative to the next phase of easing as opposed to cumulative, including last year's.

Right, yeah, that, that's right, that's a great way to say it. Yeah, so you're right, if we had to average them, it'd probably be somewhere in the, whatever, low to mid-30s, but yes, that's right. It's the next incremental.

Okay, great. And if I could sneak in the last question, just on the NIE, I think you had guided previously to a bit of a step down the fourth quarter I think to the 340 350 range. Any change to that to that outlook for the 4th quarter?

Yeah, Gary, I think our guidance for Q4 is still in that 345 to 350 range, there's always some variability that it's hard to predict with respect to how some of the commission compensation businesses perform, a loan origination volume can impact your your FA 91 cost deferral, but somewhere in that roughly $350 million dollar range, we're pretty clean now in terms of Recognizing the cost saves on independent, if you look at Q3 to Q2 was flat even though we had the annual merit increases for most of the company except for executives July 1, and yet things were flat, so we, we've done a good job of getting costs, getting them up pretty early. Looking ahead to 206, we haven't talked about that, but I might as well address that.

Our planning is obviously still underway. We still think for for 26 that mid single business is a good guy, maybe it's an inflationary sort of 3% plus another percent or so for some of the investments in organic growth initiatives like the John John address, so, maybe that maybe that, that's what 26 will look like. We're still, as I said, finalizing. Our planning there, but that's kind of what we're thinking right now.

Thank you.

Your next question comes from the line of Gary Tanner with Davidson. Please go ahead.

That was Gary we just spoke with.

Oh, I'm so sorry. That concludes the Q&A session. I will now turn the call back over to John Kerbet for closing remarks.

All right, thank you, Bella.

Thank you all for calling in this morning. We, as always, appreciate your interest in our company, and if you have any follow-up questions on your models, don't hesitate to give us a ring.

Have a great day.

Thank you.

Ladies and gentlemen, that concludes today's call.

Thank you all for joining and you may now disconnect. Everyone have a great day.