Earnings Call Transcript - SSB Q2 2025

Operator, Operator

Thank you for joining us. My name is Eric, and I will be your conference operator today. I would like to welcome everyone to the SouthState Corporation Q2 2025 Earnings Conference Call. I will now hand the call over to Will Matthews. Please proceed.

William E. Matthews, CEO

Good morning, and welcome to SouthState's Second Quarter 2025 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young, and Jeremy Lucas. We'll follow our typical pattern of brief remarks followed by Q&A. 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 the 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 you, John.

John C. Corbett, CEO

Thank you, Will. Good morning, everybody. As always, thank you for joining us. In January, we closed the independent financial transaction, a deal that we projected to be 27% accretive to our earnings per share. In the first quarter, the bank's earnings accelerated just as we forecast, but loan growth stalled with all the economic uncertainty. Remember, though, we mentioned in April that our loan pipelines were growing significantly in the spring. As you can see in the deck, the pipeline growth in the first quarter led to a 57% increase in loan production from around $2 billion a quarter to over $3 billion in the second quarter, and that led to solid loan growth. In Texas and Colorado, specifically, loan production increased 35% and non-PCD loans grew by about $200 million. The loan momentum in Texas and Colorado occurred in the same quarter that we successfully completed the conversion of the computer systems. I'd be remiss if I didn't recognize and thank our Texas and Colorado team for their great work navigating through the conversion. It was tremendous teamwork all around, including 400 people who left the Southeast for 3 weeks to serve as ambassadors to help with the transition. And a special thank you to all the operations, IT, risk, finance and HR teams that numbered over 1,000 people who made this conversion one of the best we've ever done. Now that the independent financial integration is complete, we've had some time to reflect on the progress that we've made. Our goal has always been to build the company in the best geography in the country with the best scale. And to build the best business model. We believe that those three priorities will ultimately yield the best shareholder value. By adding Texas and Colorado to the franchise, we're now firmly established in the fastest-growing markets in the country. And at $66 billion in assets, we've achieved a scale that's enabled us to make the necessary investments in technology and risk management while simultaneously producing top quartile financial returns. Just look at the second quarter. Adjusted for merger costs, SouthState's return on assets was 1.45% and our return on tangible common equity was nearly 20%. Finally, our entrepreneurial business model is producing a superior customer experience and a superior employee experience. Our retail bank ranks in the top quartile of J.D. Power's Net Promoter Score, and the scores are improving every year. Our commercial and middle market bank collectively ranked in the top 5% for award recognition in 2025 of the 600 banks tracked by coalition Greenwich, and our level of employee engagement ranks in the top 10% of financial institutions in America according to this year's employee surveys. So we've built a team of professionals that is talented and engaged with the heart for serving each other and serving our clients, and it's a team that's delivering top financial returns for our shareholders. We've now put the independent financial conversion in the rearview mirror. And as we look ahead to the prospects of an improving yield curve, we're in a great position to focus on and accelerate the bank's organic growth. Given the strength of our earnings growth and our capital levels, the Board of Directors felt comfortable this week to increase our dividend by 11%. Will, I'll turn it back to you to walk through the moving parts on the balance sheet and income statement.

William E. Matthews, CEO

Thank you, John. As always, I'll hit a few highlights focused on operating performance and adjusted metrics and then we'll move into Q&A. We had another good quarter with PPNR of $314 million and $2.30 in EPS. Net interest income grew by $33 million over Q1, only $2 million of which was due to higher accretion. We continued to perform well on cost of deposits, which came in at $1.84, a 5 basis point improvement from Q1. Our loan yields of 633 improved 8 basis points from Q1 and were approximately 22 basis points below our new origination rate for the second quarter. Loan yields in the quarter also benefited from early payoff on acquired loans, including some PCD loans. Excluding $14 million in early payoff accretion, loan yields of 620 were 1 basis point higher than Q1. Loan yields, excluding all accretion, were up 7 basis points from Q1. Additionally, the second quarter had a full quarter's benefit of the Q1 securities portfolio restructuring, driving the yield on securities 51 basis points higher. So, to recap, and you can see this in the waterfall slide in the deck, of the 17 basis points improvement in the NIM, approximately 5 basis points of NIM improvement was due to lower cost of deposits, 6 basis points was due to loan coupon yields, and 7 basis points was due to a full quarter of the securities portfolio restructuring. As always, Steve will give some updated margin guidance in our Q&A. Noninterest income of $87 million was similar to Q1 levels, with improvement in our correspondent business offset by a slight decline in our mortgage revenue. On the expense side, NIE of $351 million was at the low end of our guidance and our second quarter efficiency ratio of 49.1% brought the 6-month year-to-date ratio below 50%. Credit costs remain low with a $7.5 million provision expense, essentially matching our 6 basis points in net charge-offs. We had one additional day one PCD charge-off of $17 million on an acquired independent relationship. This is an as of acquisition date impairment, where there were conditions in existence at the January 1 closing date that we became aware of during the quarter. We continue to have strong loss absorption capacity. Asset quality remains stable and payment performance remains very good. Our capital position improved again with CET1 and TBV per share growing nicely. It's worth noting that tangible book value per share of $51.96 is up 8.5% from the year-ago level, even with the dilutive impacts of the IBTX merger. Our TCE ratio is also higher than its June 2024 level. Additionally, our strong capital and reserve position and the rate at which we're growing capital continues to provide us with good capital optionality. That includes this quarter's 11% dividend increase and other options, including the potential to repurchase shares opportunistically should we choose to do so. Operator, we'll now take questions.

Operator, Operator

Your first question comes from the line of Catherine Mealor with KBW.

Catherine Fitzhugh Summerson Mealor, Analyst

I would like to hear your outlook on the margin. It has been impressive across the board with securities yield deposits, and it seems we are achieving everything simultaneously. Do you believe there is still potential for margin expansion from this point, as we are now at the upper end of what I expected? I'm interested in your perspective on the margin for the latter half of the year.

Stephen Dean Young, CFO

Yes, of course, Catherine. This is Steve. The net interest margin for this quarter is very strong at 402, significantly exceeding our guidance of 380 to 390. About half of this improvement can be attributed to better-than-expected deposit costs and the other half to higher-than-anticipated loan accretion due to early payoffs, which you can see reflected in our PCD balances. As Will mentioned earlier, the changes in NIM quarter-over-quarter are primarily due to the increases in loan and security coupons, and deposit costs, totaling a 17 basis points change. Moving forward, we maintain our guidance with no significant alterations. While quarter-to-quarter assessments can sometimes appear noisy, we focus on the longer-term outlook over the next 18 to 24 months. Our assumptions include the size of interest-earning assets, rate forecasts, and loan accretion. We expect average earning assets to be around $58 billion for the full year in 2025, and to exit the fourth quarter at about $59 billion, reflecting mid-single-digit growth into 2026. Regarding rates, we don’t anticipate any cuts this year. For loan accretion, we project around $200 million for 2025, with $125 million already recognized this year, leaving about $75 to $85 million. We also expect approximately $150 million in 2026. Currently, we have about $393 million remaining in discounts. Based on these assumptions, we predict NIM will stay between 380 and 390 for the rest of the year, with potential increases in 2026 as the legacy SouthState loan book continues to reprice upward. Any changes to our guidance would only occur if our growth rate surpasses expectations, which would subsequently increase net interest income.

Catherine Fitzhugh Summerson Mealor, Analyst

That makes sense. Okay. It seems that within the $75 million to $80 million of expected accretion for the second half of the year, that figure represents your baseline level and does not take into account any accelerated accretion that we have experienced in recent quarters. Therefore, while we may reach that amount, it is essentially your expected baseline.

Stephen Dean Young, CFO

Yes. Our base level, it's hard to tell some of these things. Like last quarter, there was a fair amount of PCD. If you look at our PCD loans, they were down $225 million, that was higher than we expected, which is a good thing. It affects accretion certainly affects the allowance too. But ultimately, we would not expect those PCD. Some of that is just our people resolving some of those as we get our hands around the IBTX portfolio.

Catherine Fitzhugh Summerson Mealor, Analyst

Great. That makes sense. Okay. And maybe one more question regarding the growth outlook. The origination slide you shared indicates that there is significant momentum in origination volume, which is encouraging to see. I'm curious about your outlook. I know you mentioned that average earning assets are projected to approach $59 billion. Is it reasonable to expect an improvement in the bottom line organic growth rate in the latter half of the year, potentially reaching mid- to high single-digit levels?

John C. Corbett, CEO

Catherine, it's John. I think we guided to mid-single digits for the remainder of the year, and that's kind of where we wound up in the second quarter in the mid-single-digit range. But this kind of played out the way we talked about in April with that pipeline increasing as much as it did. It translated into a really big spike in production, and that led to the loan growth and I'd say going forward, we're getting more bullish, but we don't know for sure. The pipeline, loan pipeline increased 45% in the first quarter. But then in the second quarter, the pipelines increased another 31%. And on top of what it grew in the first quarter. So that tends to make us feel a little more bullish that mid-single digits is probably still appropriate for the next couple of quarters. But if the yield curve becomes more favorable, I think it's likely we could move to the mid- to upper single digits growth probably next year.

Operator, Operator

Next question comes from the line of John McDonald with Truist Securities.

John Eamon McDonald, Analyst

Just wanted to follow up on Steve's comments there on the NIM and NII. Inside of that, what surprised you about deposit costs, which were very strong this quarter? And what's your outlook for the deposit cost inside that NIM guidance?

Stephen Dean Young, CFO

Yes, that's a good question, John. This is Steve. To touch on the movie versus portrait comparison, if we look back a couple of quarters, when comparing IBTX and us together, the peak deposit costs were in the third quarter at 229, and last quarter they were 184, showing a 45 basis point improvement. That's a 45% beta on 100 basis points, while we only projected 27% since we anticipated a different outcome. Nevertheless, I believe we have optimized our deposit base. As we continue to grow loans, if we're in a mid-single-digit growth situation, those deposit costs will likely rise a bit on an incremental basis. So, we forecast those deposit costs to be in the 185 to 190 range over the next few quarters as we keep growing. Even with that, we would see a 40% beta, which is better than our expectations. Moving on to loan growth, in relation to the strong production translating to net loan growth, what changes are you observing in paydowns? Is there any shift in the paydown pace and activity that is impacting the gap between gross production and net loan growth?

John C. Corbett, CEO

Yes. The paydowns in the first quarter were actually lower than normal. We went back and looked at independent and South State combined for the last 4 or 5 quarters, even before we close. The second quarter paydowns returned to a little more normal. It was a little more elevated than the last 5-quarter run rate. So I think that the level of paydowns in the second quarter is probably appropriate to where we go from here. A lot of this has to do with not just paydowns, but how much the loan originations fund initially versus over time. And we're funding around about 60% of that production. So there is some additional funding that will occur over time.

Operator, Operator

Your next question comes from the line of Stephen Scouten with Piper Sandler.

Stephen Kendall Scouten, Analyst

Steve, if you could maybe talk a little bit about the interest rate sensitivity as well as you noted. Just kind of want to make sure that still the way I think about it. And I think you said you see the NIM going higher in '26, assuming that has some cuts baked in and that you guys are still kind of a net beneficiary if we get a little bit of rate cuts on the lower end, but the steepness of the curve?

Stephen Dean Young, CFO

Sure, that's a great question. Regarding interest sensitivity, there's no change from our previous guidance. We expect an improvement of about 1 to 2 basis points in overall margin for every 25 basis point rate cut. If the Fed cuts rates by 100 basis points, we might see an increase of 4 to 6 basis points once everything settles. This is based on the fact that 30% of our loan portfolio, which is about $14.6 billion, is at a floating rate. That portion would be affected immediately. We also have over $14 billion in exception price deposits, where we anticipate receiving around 80% of the beta over time. Additionally, our CD book is at 7.7%, from which we expect to get 75% of the benefits. This has been our historical trend. As for loan repricing without rate cuts, we expect to see margins continue to increase. The underlying factor here is the repricing of fixed-rate loans from the legacy SouthState portfolio. Looking at the next 18 months until the end of 2026, the unmarked book of legacy SouthState has approximately $6.6 billion in loans that will reprice, averaging a coupon rate of about 5% during this period. Our new loan production last quarter was 654 million, and we are projecting an average rate of around 6.25%. This represents a 1% increase in that quarter. In addition, we have about $3 billion in independent loans maturing and repricing in the fixed book with a discount rate around 7.5%. If that assumption holds, we could see a negative impact corresponding to the same calculation. The positives would come from the $6.6 billion repricing up 1.25%, while the negatives would stem from the $3 billion pricing down at 1%. Overall, this leads to about a $50 million increase, or roughly 10 basis points, in loan yields. This summarizes our analysis of the moving parts as we move forward. Most of the interest rate sensitivity impacts have already been absorbed due to the independent marks, leaving us primarily with the legacy SouthState repricing and any potential rate cuts beyond that. I hope this clarifies things as you consider the situation.

Stephen Kendall Scouten, Analyst

Yes. No, that's great detail, especially about the puts and takes on legacy SaaS state versus BT. I appreciate that. I guess, maybe if we could touch on the deal that was announced last night, maybe not that specifically, but just M&A in your markets, even how do you think about how dislocation could benefit you all, would you have any governor to adding people and talent if they become available? Just kind of how you think about the dynamics of the market and your ability to take advantage of that moving forward.

John C. Corbett, CEO

Yes, I’m really pleased with our decision to enter the Texas market in early 2024 before competition intensified. That timing has provided us with an early advantage. Currently, we're not looking to pursue anything as our bank is performing well, and we can afford to be patient and selective regarding mergers and acquisitions. We believe our valuation is low. Our main focus right now is to excel in Texas and Colorado, where we saw a 31% growth in organic pipelines last quarter. With the recent M&A disruptions in the Southeast and Texas, there are always opportunities, and SouthState is well-positioned to capitalize on them.

Stephen Kendall Scouten, Analyst

Understood. However, nothing would prevent you from proceeding if, let's say, a group of 10 or 20 people came together; you should definitely move forward if it makes sense.

John C. Corbett, CEO

Absolutely. We added 47 revenue producers in the second quarter. So that's part of our DNA is constantly recruiting. And with all the disruption in Texas and Southeast, we'll continue to do that.

Operator, Operator

The next question comes from the line of Jared Shaw with Barclays.

Jared David Wesley Shaw, Analyst

I was wondering about the regulatory sweet spot you mentioned of $60 billion to $80 billion. How do you see that evolving? Are you currently positioned within that range? Do you believe that if regulations were to shift to $100 billion, your platform could grow beyond that without requiring significant additional investments? How should we anticipate changes in that regulatory sweet spot affecting your scalability over time?

John C. Corbett, CEO

Yes. I mean, it's in the news every day. You've got new regulators in place. They're making changes. But I mean, the way I think about it, we're a long way from $100 billion of $66 billion in size. So we've got a long time to continue building the infrastructure. Our Chief Risk Officer, Beth DeSimone has done a fabulous job managing the heightened expectations over the last 4 or 5 years as we cross $50 billion. We've got great relationships with our regulators. We'll just have to watch and see how the regulation evolves, but we've got a long time before we're faced with that.

Operator, Operator

Your next question comes from the line of Michael Rose with Raymond James.

Michael Edward Rose, Analyst

Will or Steve, just any updates on the expense outlook. It looks like you were at the lower end of the range for this quarter. Maybe just some color on what drove you to the lower end of the range? And any updates as we kind of think about what you previously said around the back half of the year just as a starting point.

William E. Matthews, CEO

Yes, Michael. The short answer is that there is no change to our prior guidance. Looking at consensus, we believe you have a solid estimate for the remainder of this year and 2026. Therefore, there is really no change to our guidance. There are always some variables regarding revenue-based compensation in various business lines, including loan origination volumes that affect our deferred loan costs. There are many factors that fluctuate, including incentive compensation. Any variability relates to the last thing I mentioned, which was between 350 and 360 this quarter. We were at the lower end of that range, but all these factors can play a role. We have effectively executed on cost savings, so we remain optimistic about that aspect of the integration with independent and are committed to our guidance on NIE.

Michael Edward Rose, Analyst

And then maybe just...

William E. Matthews, CEO

One comment I forgot to mention. Just a reminder, I've said it before, but July 1 is when much of our team across the company gets their merit increases. So that's also factored into my guidance that the third quarter will reflect that too.

Michael Edward Rose, Analyst

Perfect. Appreciate it. And maybe just as my follow-up. I know it's still early days, but anything on the revenue synergy front that we should be contemplating now that we're another 90 days past the deal? And then just from a retention standpoint, how has that held up relative to kind of your original expectations?

John C. Corbett, CEO

Yes, it's performed exceptionally well. As I mentioned earlier in these calls, we consulted with all the geographic leaders prior to the announcement, and they all agreed to significant partnerships beforehand. Following that, we engaged with revenue producers who were offered retention packages, and they all participated. We are very pleased with the results so far. Our leader in Texas and Colorado, Dan Strodal, is well-respected within the bank and has done an excellent job alongside his team. Additionally, we are in the process of hiring. We recently added two new revenue producers in Houston, two in Colorado, and one in Dallas, and they are actively recruiting.

Michael Edward Rose, Analyst

And then just on the fee side, the synergy side anything that should be late.

John C. Corbett, CEO

One thing that's been a real positive, independent was a really good CRE lender, and we've got the interest rate swap product, Michael, the capital markets product where we make a fee and they've been quick adopters to that. So that's been a nice source of fee revenue.

Operator, Operator

Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Peter Tenner, Analyst

I wanted to ask about the deposit rates. I know you mentioned a range of 185 to 190 for the second half of the year. However, on the CD side, the growth this quarter was quite significant compared to the previous quarter. I'm curious about the factors driving that growth. Additionally, the rate paid hasn't decreased as much as I expected, so I'm wondering how the market is evolving in terms of pricing.

Stephen Dean Young, CFO

Yes. Gary, this is Steve. When we closed the independent transaction, our CD balances were just over $7.5 billion as of December 31. This was part of our strategy to manage the balance sheet. There were various factors involved in this process. In the first quarter, we saw a slight increase in deposits, but our CDs actually decreased. This was the first time we reported these figures together, so that decline wasn't visible. Currently, we're observing a growth rate trend. In the first quarter, we didn't grow loans, but this quarter we did, and we expect this trend to continue, which will impact new deposits at a higher funded rate until interest rates are reduced. If our balance sheet were stable, we might remain at this level. However, with incremental growth as we reach 6.5% loans, we will need to fund these new loans with additional deposits, and those rates will be somewhat higher on the incremental margin.

Gary Peter Tenner, Analyst

Okay. I appreciate it. And then a follow-up question just on the loan yields. The 7 basis points expansion kind of ex accretion, I know I think, Will, you've kind of offered some reasons why that moves around. But was the normalization of prepays this quarter a notable driver of that expansion? Or is it more mix and production yields?

Stephen Dean Young, CFO

Yes, this is Steve. If we remove all accretion, as shown in our waterfall chart, our loan yield increased from 571 million last quarter to 578 million. That’s an increase of about 7 basis points in the loan yield, which includes a repricing component. As we noted, some of that accretion was related to PCD, which came in higher than expected because we strengthened some of those relationships. Accelerating it back into individual quarters can create some fluctuations in the results. To revisit our previous guidance, we anticipated total loan yield this year to fall between 6.15% and 6.25%. If we consider my earlier comments about a flat rate environment and the repricing of our loans from both legacy SouthState and legacy independent, we could see an additional increase of 10 basis points over time, bringing us to approximately 8 to 10 basis points annually. A research analyst recently published a report attempting to depict the total loan yield as we see it. In a stable rate environment, we project our total loan yield to increase by around 20 basis points over the next two years, although I doubt we’ll experience a completely stable rate environment, and I expect variability in results. Our core outlook for loan yield this year remains between 6.15% and 6.25%. We’ve slightly outperformed, partly due to PCD and other factors, but long-term, we expect it to continue increasing in a flat environment.

Operator, Operator

Your next question comes from the line of Samuel Varga with UBS.

Samuel Varga, Analyst

I just wanted to ask a question on the allowance. Well, you gave some great color last quarter around not shifting the scenario weightings, but having a Q factor adjustment there for tariffs. Can you touch on where that adjustment is today and sort of how you're trying to bake that and moving forward and where the allowance might go as a result?

William E. Matthews, CEO

Sure. Sure, Sam. Good question. I'd say this about the reserve level. A couple of things. One, if you look at Slide 21 of the deck, you can see, obviously, our charge-off history is very low. 51 basis points came into over 10 years plus a quarter. So at some point, that data seeps its way into the regression analysis that drives loss estimates and reserve balances. We've been through a pretty uncertain period in the economy these first couple of quarters, obviously, with the tariff uncertainty, et cetera, et cetera, which has driven some of those factor items that we mentioned last quarter. Those continued this quarter. We did actually adjust our scenario wanting this quarter a little bit more pessimistically than it was in the first quarter. But I'd say, stepping back, if you look at the reserve level, if we see stability in the economy and economic forecast, I think it is reasonable to say that we could see reserve levels decline as a percentage of loans. If you look back when we adopted season, of course, the company was smaller than, but the reserve was down the 115, 120 basis point range. Other thing to keep in mind, too, Steve referenced that the PCE loans declined that are more operated in the second quarter. That's really like a 25% annualized decline rate PCD loans, not only are they marked a little bit higher in interest rate, but they carry a higher reserve. So the reduction in PCD loans is also going to put downward pressure on reserve levels. So all that being said, it's always difficult to predict. I think it's reasonable to expect that over time with a stable economy, you see our reserve levels probably move down.

Samuel Varga, Analyst

Great. And then, John, could you just touch on capital allocation from here? The buyback word came up? Just curious on how you think about it over the next 18 months.

John C. Corbett, CEO

Yes. With the earnings improving the way they have, you saw our PPNR per share increasing substantially in the last year. The Board felt comfortable to move the dividend rate up. We moved the rate of 11%, and we think we're in a position to annually consistently see that dividend rate increase. So that's naturally a priority. We do believe there's opportunities on the buyback. I mentioned that I feel like our currency is cheap right now. So there could be some opportunities there. And then we're watching these loan pipelines continue to grow and opportunities to recruit. So that would be the other main priority as well as organic growth.

William E. Matthews, CEO

Yes. I'll just lay in Sam, a couple of comments. One, I think I previously said that we saw our CET1 growing 20, 25 basis points a quarter. Yes. So if we do some buyback, maybe that number drops down to the 10%, 15%, 15% to 20% range. We, in the first quarter, did some capital actions with respect to the sale leaseback and then restructuring the bond portfolio, which as we saw with the impact of that on the margin, but if you look at our CET1 today with AOCI included in the calculation, we're actually above where we were a year ago. We were at almost 10.5% at the end of the second quarter on CET1 with AOCI. So a healthy position for CET1, as calculated and if you calculate it with AOCI included, that's about 12 basis points above where we were a year ago. So that does give us some good optionality and some opportunity to think about different options.

Operator, Operator

I will now turn the call back over to John Corbett for closing remarks.

John C. Corbett, CEO

All right. Well, thank you guys for spending some time with us this morning. As always, if you have any follow-up questions, feel free to give Will and Steve a ring. And I hope you have a great weekend.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.