Earnings Call Transcript - SSB Q3 2025

Operator, Operator

Hello, and thank you for being here. My name is Bella, and I will be your conference operator today. I would like to welcome everyone to SouthState Bank Corporation's Q3 2025 Earnings Conference Call. I will now turn the conference over to Will Matthews. You may begin.

William Matthews, CEO

Thank you. Good morning, and welcome to SouthState's Third Quarter 2025 Earnings Call. This is Will Matthews, and 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.

John Corbett, CEO

Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for SouthState. 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 $3.4 billion, 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 is 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. Nonaccruals 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 the year and thinking about the banking landscape, deregulation and the opportunities in front of us. Over the last 15 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 SouthState 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.

William Matthews, CEO

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 PPNR of $347 million and $2.58 in EPS, driven by $34 million in revenue growth and solid expense control. Our 4.06% 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 1.91% were up 7 basis points from the prior quarter and were 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 NIM of approximately 4 basis points, all else being equal. Our loan yields of 6.48% improved by 15 basis points from Q2 and were approximately 8 basis points below our new origination rate for the second quarter. And loan yields, excluding all accretion, were up 1 basis point from Q2. Steve will give updated margin guidance in our Q&A. Noninterest income 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 9-month year-to-date ratio to 48.7%. Credit costs remained low with a $5 million provision expense. As John noted, though, we did experience one $21 million loan charge-off during the quarter, which is an abnormally large charge-off for us. This brings our year-to-date net charge-offs to 12 basis points. Absent that loss, net charge-offs would have been 9 basis points for the quarter. Asset quality remains stable, and payment performance remains good. Our capital position continues to grow with CET1 at 11.5% and TBV per share growing nicely. As you'll recall, we closed the Independent Financial acquisition on January 1 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, we'll now take questions.

Operator, Operator

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

Michael Rose, Analyst

I guess I'll hit the margin question since you brought it up, Will. Steve, can you kind of walk us through the excess accretion this quarter? It looks like the core margin ex accretion was down kind of high single-digit basis points. Can you just give some puts and takes here as we think about the contemplation of a couple of 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 core versus the reported margin as we move forward.

Stephen Young, CFO

Sure. Michael, yes, just maybe kind of give you some explanation of where we think we're headed on margin, 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 accretion in July and 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 3 handle coupons with these big discounts that sold. So those are not economic decisions, but there— I mean, there are economic decisions in 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 prepayments are 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, had bigger discounts. So having said all that, as we think about the guidance for NIM 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 and the fourth is deposit beta in an environment where rates are going down. Interest-earning assets, we've been saying $59 billion for quarter 4 average. That's no change. For full year 2026, we're looking somewhere between $61 billion 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 cuts, 3 more in 2026, so that we would get 150 basis point cut in total and get the Fed funds at 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 fourth quarter to be somewhere in the $40 million to $50 million 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 ratably. So I think that's a good run rate to use. For 2026, 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 prepayment forecast. But of course, it can be lumpy based on these vintage loans. The last part is deposit beta. For the first 100 basis points of cuts, our deposit costs came down about 38 basis points from 2.29% to 1.91%, so 38% beta. In our 2019 to 2020 easing cycle, our deposit beta was around 27%. So our expectation is with the growth plans that our deposit beta would look a little similarly to 2019, 2020 to 27%. Maybe we get to 30% over time with a lag, but I don't think it will be as high as 38%. So based on all those assumptions, we'd expect NIM to continue to be in the 3.80% to 3.90% range with the step down in accretion this quarter in the fourth quarter and for 2026 to be in that range, 3.80% to 3.90% as we kind of move forward. But one of the questions you asked was our pricing dynamics. Our new loan production rate for the total company this quarter was 6.56%. If you look at Texas and Colorado, that new loan rate was 6.79%. So it's a little bit higher in Texas and Colorado, but it's in total, it is 6.56%. So I know you have a few questions, a few puts and takes, but that's some guidance for you.

Michael Rose, Analyst

No, that'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 third 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 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 loan officers, the pricing dynamics and kind of maybe what we should expect as we move forward?

Stephen Young, CFO

Yes. Sure, Michael. We kind of guided 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 paydowns in the third quarter than we did in the second. If we move into 2026, it could move higher, maybe in 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 the area of C&I. For the quarter, we had 9% linked quarter annualized growth in C&I. Resi growth was about 6%. And then if you combine C&D 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 pipeline there 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 has got a $1 billion pipeline. Atlanta has got a $900 million pipeline. So those are our 3 probably largest markets. And as I said on the call, with that dislocation in really all the states we're in, we are kind of leaning in on the hiring front, and we see opportunities to recruit bankers. Yesterday morning, I was interviewing one from another bank. So that is where a lot of our focus and effort is right now.

Operator, Operator

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

Jared Shaw, Analyst

Could you provide insights on the credit situation? I see that you were noted as a creditor to First Brands, which seems related to the significant charge. For that charge, was there a previous reserve and was any prior charge accounted for? Additionally, how do you view the rest of your portfolio aside from this situation?

John Corbett, CEO

Yes, 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.

William Matthews, CEO

And I'd say, Jerry, on the reserve question, based on what John just said, we would have had a reserve release, but for that charge-off in the quarter, i.e., a negative provision just based on the underlying economic loss drivers. And just to be clear, we did charge off the full amount of that balance in the third quarter.

Jared Shaw, Analyst

Okay. All right. And then I guess looking at capital, you just gave some great color on sort of really good growth opportunities over the coming years, but still seeing growth in capital and like you said, Will, just that improving backdrop on credit. Where do you feel like you would like to see CET1 optimally? And how should we think about the buyback and capital management in general from here?

William Matthews, CEO

Yes, Jared, it's a good question. We're obviously 11.5% on CET1, about 10.8% if you were to incorporate AOCI. So very healthy capital ratio. Not to 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 good. So we are hopeful, as 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.

Operator, Operator

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

Catherine Mealor, Analyst

I have a follow-up regarding the margin. Your guidance for next quarter was helpful. Can you quantify how much of the increase this quarter was due to acceleration versus what would be considered a normal base level for future increases, as opposed to how much was accelerated from paydowns?

Stephen Young, CFO

Yes, Catherine, 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 payoffs. We talked about and there's partial prepayments. So based on our models, when we were looking at it and to give you that forecast 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 fourth quarter, the back half of the year. That's sort of what we're seeing. So that sort of informs us going into 2026.

Catherine Mealor, Analyst

Okay. Got it. That's helpful. And then on fees, any outlook into how you're thinking about fees moving into the fourth quarter and then into next year, it was really nice to see another quarter of higher correspondent and service charges.

Stephen Young, CFO

It was a really good quarter. Noninterest income reached $99 million compared to $87 million, reflecting a 50 basis point increase on average assets, slightly above our guidance of around 50 to 55. Two-thirds of this was from capital markets. There were a few factors affecting correspondent trade; mainly, changes in interest rates, which typically enhance that business's performance. This improvement was broad-based, with a couple of million dollars attributable to fixed income, around $3 to $4 million linked to higher interest rate swaps, and another $1.5 million from other trading activities. Overall, that number was roughly $25 million, setting a $100 million run rate. To provide some context, our best year was $110 million in revenue, while last year's figure was $70 million. This quarter was indeed strong, but I don't anticipate this level will continue consistently. However, we've certainly had a solid quarter, and we'll get a clearer picture as we move forward. It's evident that this performance surpasses the previous run rate of $87 million, though I'm uncertain if it will sustain at $99 million. As we consider 2026, aiming for a run rate around $370 million to $380 million seems reasonable, and we'll observe how it unfolds from there.

Operator, Operator

Your next question comes from the line of Janet Lee with TD Cowen.

Sun Young Lee, Analyst

On a core basis, I believe from your second quarter earnings call, you talked about how every 25 basis point cut would be a 1 to 2 basis point improvement overall margin. Is there any change in thoughts on that? Or was that guidance? Or what was that guidance based on the core NIM? Or was that including any accretion?

Stephen Young, CFO

No. Great question, and thank you for asking. A couple of points here. If we return to six cuts and get one to two, that would average around nine basis points. I think our core net interest margin is roughly in the mid-3.80s. What's changed? First, the loan accretion forecast. Next year, we expect $125 million instead of $150 million, resulting in about a four basis point decline. Additionally, there's the issue of deposit beta and the lag in where we stand. So far, our deposit beta for the first hundred was 38%, but we only grew deposits by about 2% to 2.5%. Historically, during the easing cycle in 2019 and 2020, when we experienced a bit faster growth in the mid-single digits, our deposit beta was around 27%. We're adjusting our model back to 27%. We hope to exceed that, but there's a lag with CDs and pricing. By the beginning of 2027, we aim to be in the 30% range. For now, what we're observing suggests a lag, and we are modeling 27% in our projections.

John Corbett, CEO

So Steve, when you translate what you're saying there, to Janet's question about 1 to 2 basis points with each cut may take that away if the deposit beta is not as good in a way down.

Stephen Young, CFO

Right. To finish that thought, if our deposit beta is guided in the midrange of 3.80% to 3.90%, and by the end of next year, if we go through the cuts and our deposit beta moves from 27% closer to 30% or 31%, that would position us in the high 3.80% range, possibly reaching 3.90% by the end of 2026. That's how we are approaching our modeling.

Sun Young Lee, Analyst

Got it. Just to follow up, I believe that the IBTX bankers will begin adopting SouthState's business model. What would that mean for expenses or their motivation to prioritize lower deposit costs or loans? Are there any changes anticipated that might affect the growth profile? Can you provide any insight into what this transition could mean for SouthState?

John Corbett, CEO

Yes, sure. 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 at IBTX the same as it had been in prior years. In 2026, it will move to the more of the SouthState approach where we allocate P&Ls to the regional presidents. So their incentive will be based on both loan growth but predominantly on their PPNR growth. One of the things that we're contemplating, making an adjustment for to incent additional recruiting and hiring is not to penalize those regional presidents for the first year compensation of new hires to encourage recruiting efforts into 2026, both with the existing SouthState plant and the IBTX plan. A good question. Hope that helps you. Is there another question?

Operator, Operator

Yes, one moment please. Mr. McDonald, your line is open.

John McDonald, Analyst

Sorry, I didn't hear anything. Sorry, just one more follow-up, Steve, on the margin. I think your prior outlook was to be in the 3.80%, 3.90% and then drift higher in 2026. Just want to make sure that the '26 outlook 3.80%, 3.90% includes the rate cuts and about $125 million of accretion, if I heard that right. Anything has changed from prior? What are some of the puts and takes?

Stephen Young, CFO

I believe I addressed that in the previous question. The accretion number has changed from $150 million, which we had estimated last quarter for 2026, to $125 million, indicating a decrease of about 4 basis points. Regarding the deposit beta, it's currently at 38%, compared to 27% in 2019. We believe it will ultimately settle in the low 30s, but there will likely be some delay. Therefore, we anticipate focusing on diligent loan growth. By 2026, we expect to model around the 27% range for deposits. As CDs begin to reprice and other factors come into play through 2027, we could see an increase. To summarize, we expect to start in the mid-380s and gradually rise towards the end of 2026 and into early 2027.

William Matthews, CEO

And John, this is 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 marketing that balance sheet properly. And then two, the portfolio restructuring we did in connection with the sale leaseback. So we have a relatively stable looking margin under most reasonable scenarios.

John McDonald, Analyst

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

Stephen Young, CFO

Yes, that's right, yes.

William Matthews, CEO

And that's what we're currently seeing. Yes.

John McDonald, Analyst

Okay. And then one just follow-up again 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?

Stephen Young, CFO

Yes. Typically, in the fourth quarter, we experience some seasonal deposit growth and manage to reduce some of the seasonal wholesale activities at the same time. Overall, we're looking at mid-single-digit growth year-over-year in terms of average earning assets.

Operator, Operator

Your next question comes from the line of Ben Gerlinger with Citi.

Benjamin Gerlinger, Analyst

I was curious about correspondent banking. I understand that a rate card or rate movement can trigger this. You mentioned around three to six cuts over the next year. How long can we expect that tailwind to last? With two cuts in December, will the first quarter also benefit from this, or is it likely to be short-lived?

Stephen Young, CFO

Yes. I was trying to explain before, as you kind of think about that business that puts the highs and lows of it, back in 2020 when things went crazy on rates. I think our best year was $110 million. I think we did that in 2020, 2021. And 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 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 buy bonds because there'll be a yield curve on the 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 trading some stability at that level.

Benjamin Gerlinger, Analyst

Got you. Okay. That's helpful. From a follow-up perspective, it seems you have a lot of opportunities ahead. It's difficult to disagree with that, especially considering the disruptions in the markets you operate in. Is it reasonable to expect that you will grow organically by hiring individuals and increasing loans, or could you also consider a small acquisition or something similar?

John Corbett, CEO

Yes, Ben, it's John. With our particular fact pattern, kind of our view is to invest in SouthState is more interesting right now than doing an M&A deal. And that investment in SouthState comes in 2 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 SouthState shares through our buyback 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.

Operator, Operator

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

Gary Tenner, Analyst

I just wanted to go back to the NIM-related discussion for a minute. The big delta as I look at the average 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?

Stephen Young, CFO

Yes. Back in July, during our call, we discussed our expectations for deposit costs. For the third quarter, we anticipated a range of 185 to 190 basis points. The actual figure was 191, which is at the higher end of our range, so we missed it by one basis point. The main factor influencing this was our expectations regarding the CD book. If you compare the first and second quarters, our CDs increased from around 7.1 or 7.2 to approximately 7.7. This change was linked to funding and loan growth, which adjusted the balance sheet accordingly. As we think about future guidance, it's a challenging environment for deposits. However, we believe that with rate cuts and a more stable yield curve, there could be improvements. This is why we are adjusting our guidance downward on the 27% deposit beta since we ultimately need to support the loan growth we are anticipating.

Gary Tenner, Analyst

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

Stephen Young, CFO

Right, that's right. That's a great way to say it. Yes. 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. Yes.

Gary Tenner, Analyst

Okay. Great. And if I could sneak in a last question. Just on the NIE, I think you had guided previously to a bit of a step down in the fourth quarter, I think, to the $345 million, $350 million range. Any change to that outlook for the fourth quarter?

William Matthews, CEO

Yes, Gary, I think our guidance for Q4 is still in that $345 million to $350 million range. There's always some variability that's hard to predict with respect to how some of the commission compensation businesses perform, loan origination volume could impact your FAS 91 cost deferral. But similar in that roughly $350 million 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, but yes, things were flat. So we've done a good job of getting costs out, getting them out pretty early. Looking ahead to '26, we haven't talked about that, but I might as well address that. Our planning is obviously still underway. We still think for '26 that mid-single digits is a good guide. Maybe it's an inflationary sort of 3% plus another 1% or so for some of the investments in organic growth initiatives like John addressed. So maybe 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.

Operator, Operator

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

Stephen Young, CFO

That was Gary we just spoke with.

Operator, Operator

That concludes the Q&A session. I will now turn the call back over to John Corbett for closing remarks.

John Corbett, CEO

Sorry. 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.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you for joining, and you may now disconnect. Everyone, have a great day.