SouthState Corporation (SSB) Q2 2025 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the SouthState Corporation Q2 2025 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Will Matthews. Please go ahead.

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.

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 3 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%. And 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 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.

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 lobs. Excluding $14 million in early payoff accretion loan yields of 620 were 1 basis point higher than Q1. And 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 1 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 Instructions]. Your first question comes from the line of Catherine Mealor with KBW.

I thought we could just start on your outlook for the margin. It was just really great across the board on securities yield deposits. We kind of got everything all at once. So just curious if you think there's still upward we're now at kind of the top end of the range that I would have expected. Is there the ability to still expand the margin from here? And just -- yes, just curious for your outlook for the margin in the back half of the year.

Yes. Sure, Catherine. This is Steve. Yes. Like you mentioned, the net interest margin this quarter is very strong at 402. I think we have a slide on Page 12 that talks about that. Our guidance this last quarter was between 380 and 390. So significant beat. Approximately half of that beat related to our expectations of loan coupon securities, deposit costs, as you mentioned, is higher than -- better than we thought. And then half of it related to our expectation of loan accretion, which was a little bit higher than we thought due to some higher PCD accretion from early payoffs, and you can see that in our PCD balances. Page 13, as Will mentioned in his opening comments, he described the change quarter-over-quarter in NIM. And just I think to highlight are all the loan coupon increase, security coupon increase and the cost of deposits. So that makes up the 17 basis points quarter-to-quarter. As we think about the guidance to be just simply, there's really no significant change to the guidance as we see it. Sometimes, as we look at these quarter-to-quarters and as it relates to accretion sometimes it's looking at the portrait versus look at the movie. And I think the portrait from quarter to quarter can get a little noisy, but the movie is kind of where we're going to continue to guide you towards, and that's over the next 18 to 24 months. But as we think about the assumptions, the main assumptions around that are the size of interest-earning assets, the rate forecast and then lastly, the loan accretion. For us, the interest-earning assets, we reiterate our guide from last quarter that we would have average earning assets to be roughly $58 billion for the full year in 2025. And then in the fourth quarter average, we'd exit somewhere in the $59 billion. That's a mid- single-digit growth rate, and we sort of see that going into 2026. But as John mentioned in his prepared remarks, we'll see how the growth outlook evolves over time. So really no change in guidance to the interest-earning assets. On the rate forecast, we just -- we don't see rate cuts this year. So we're trying to keep it simple and then we can talk later about interest sensitivity. And then accretion, loan accretion based on our models, we would expect loan rate accretion to total approximately $200 million, maybe slightly higher than that for 2025, of which we've recognized about we've recognized $125 million so far this year. So $200 million in total for 2025, but we recognized $125 million. So that indicates we have, I don't know, between 75, 80, 85 left or so for this year. And then we expect in our models based on prepayments and others, we expect about $150 million in 2026 of accretion. So as a reminder, we have about $393 million left of the discount. So anyway, based on all those assumptions, we'd continue to expect NIM to be between 380 and 390 for the remainder of the year and to drift higher in 2026 as the combination of the legacy SouthState loan book continues to reprice up. So no change to any of the guidance that we talked about, except that if obviously, if rates -- or if our growth rate got higher, then certainly net interest income would move higher.

That makes sense. Okay. And within that, it seems -- I guess, within that $75 million to $80 million of accretion left in the back half of the year. I guess that's just your base level, so it doesn't assume any accelerated accretion that we've gotten that in the past few quarters. So we may get at that, that's just kind of your base levels.

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.

Great. That makes sense. Okay. And maybe one more just on the growth outlook. The origination, the slide that you show originations, it seems like you've really got some momentum the origination volume, which is so great to see. So just curious for your gross -- I mean, I know you said average earning assets are still kind of heading towards $59 billion. But is it fair to assume an improvement in the bottom line organic growth rate in the back half of the year, maybe kind of closer towards that kind of mid- to high single-digit levels.

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.

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

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?

Yes, that's a good question, John. This is Steve. Just to kind of pick you back up to the movie versus portrait or [ polo right. ] I think if we go back a couple of quarters, if you looked at IBTX and us together, the peak cost of deposits was in the third quarter at 229 and of course, last quarter, it was 184, so a 45 basis point improvement. So 45% beta on 100 basis points. And we only modeled 27% just because we thought it would be a bit different. Having said all that, I think we've optimized the deposit base, and I would kind of look at it that as we continue to grow loans if we -- if we're in a situation where we're in the mid-single digits, maybe even a little higher than that, those deposit costs on an incremental basis will go up a little bit. So our forecast is that those deposit costs to be in the 185, 190 range over the next few quarters just as we continue to kind of grow on that. But even at that, that would be a 40% beta or something like that, which is which is better than we thought. And then just on the loan growth, another follow-up. In terms of the pull-through of the strong production to net loan growth, what are you seeing on paydowns? Any change in the paydown pace and activity that's affecting the difference between the gross production and what you're seeing in terms of net loan growth?

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 pay downs, 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.

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

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?

Sure. No, a good question. As it relates to the interest sensitivity, I think we talked about it last quarter, but really no change from our guidance as we model it, and our team models it. We expect somewhere in the 1 to 2 basis point improvement to overall margin for every 25 basis point cut. So I guess if the Fed ends up cutting rates 100 basis points, maybe that's 4, 5, 6 basis points on the run rate when all that's finished. And sort of the math behind that is we have about 30% of our portfolio -- loan portfolio is a floating rate portfolio. So that's $14.6 billion. Of course, all of that gets cut immediately. We have about a little over $14 billion in exception price deposits that we think that over time, we get about 80% of the beta on that. And then we have the CD book is 7.7%. We think we get 75% of that. So that's sort of been our history. We'll have to see. But that's sort of the math behind that 1 to 2 basis points. And then on the loan repricing piece without any rate cuts, we should continue, as I mentioned in my remarks that margin should continue to increase. And really, the math behind that is the fixed rate loan repricing of the legacy SouthState. So if you think about over the -- if you kind of look at the 18-month period from here to the end of 2026, the legacy SouthState, the unmarked book has about $6.6 billion of loans repricing that on average, over that period of 18 months is about 5 -- the coupon is about 5%. And we think obviously, our new loan production this past quarter was 654. But yes, we're modeling sort of a 6.25% over that period of time. So you pick up 1% in the quarter on that. And then, of course, on the independent portfolio, we have about $3 billion over the next 18 months that will mature reprice on the fixed book -- and of course, that discount rate is somewhere in the 7.5% range. So if that's true, that would be negative by about if we want to use the same number, [ 6.25% by 1%. ] So the positive would be have $6.6 billion repricing up 1.25%, and the negative would be $3 billion pricing down at 1%. The net of all that is about $50-ish million or about 10 basis points positive on loan yields. So that's how we're kind of thinking about the moving parts from here. a lot of the sensitivity of the interest rates have already been taken out because of the independent marks. What's left is the legacy SouthState repricing book and then any rate cuts on top of that. hopefully, that's helpful as you think about it.

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.

Yes. I mean look about where we are. I'm really glad we made our move in Texas when we did in early 2024. That was really before the competition heated up, and I think that timing gave us an early mover advantage. For us, we're not pursuing anything now. We -- the way the bank is performing, the bar is high for us, and we can afford to be patient and selective on M&A plus we think our multiple is cheap. But our top priority now is that we're firing on all cylinders in Texas and Colorado. The conversion was great and the organic pipelines in Texas and Colorado grew by 31% last quarter. That's what we're focused on. And with all the disruption of M&A in the Southeast and Texas, that always creates opportunities in SouthState is positioned in the right spot.

Got it. But nothing that would deter you from adding -- if a theme of, let's just say, 10 or 20 people came around, you go ahead and do that if it was right I mean -- yes.

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.

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

I guess just looking at -- you called out the regulatory sweet spot of $60 billion to $80 billion, how do you see that trending? You're in there right now? How do you see that trending over time? Do you think if we see some concrete change in regulation for $100 billion that your platform can naturally grow above that without any more big investments? Or how should we think about that regulatory sweet spot changing over time for you in scale?

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.

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

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.

Yes, Michael. And I guess the short answer is really no change to our prior guidance. I mean honestly, looking at consensus, you guys have, we think, a good number in there for the remainder of this year and 2026. So I'd say really no change to our guidance. There are always some moving pieces, as you well know, relative to revenue-based compensation in some of the business lines. You've got loan origination volumes that impact our deferred loan costs, all those kind of things that move in and out, you've got incentive comp, all that sort of stuff. But -- so any variability between what I -- last thing I think I said between 350 and 360 this quarter. So we were at the low end of that range. But all those kinds of things can factor in. We've done a good job in executing on the cost saves. So we still feel very good about that part of the integration with independent and really sticking with our guidance on NIE.

And then maybe just...

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 as well that the third quarter will be -- will reflect that too.

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?

Yes. It's held up great. As I've mentioned previously on these calls, we went to all the geographic leaders before the announcement, and they all signed up with important agreements before the announcement, and then we went to the -- it was revenue producers with retention kind of packages and all of them joined up and did that. So we've been very, very pleased and the leader we've got in Texas and Colorado Dan Strodal highly respected in the bank with that team, and he's done a great job, and the bankers are doing a good job. So and we're hiring. I think in I mentioned those revenue producers we've added. We added 2 in Houston. We added 2 in Colorado. We added 1 in Dallas. So they're out recruiting.

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

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.

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

Wanted to just ask a question about kind of the deposit rates. I know you gave kind of 185 to 190 range for the back half of the year. But on the CD side, I guess I'm curious, a, the amount of growth there this quarter was pretty notable. -- just from a sequential quarter comparison. So wondering about kind of the push there. And then the rate paid didn't come down maybe quite as much as I would have assumed. So I'm just wondering kind of how that market is shaping up from a pricing perspective.

Yes. Gary, this is Steve. When we closed -- and you didn't have the benefit of seeing this, but when we closed the independent transaction, if you looked at our 12/31 numbers, I think our CD balances would have been a little over $7.5 billion or so. And a lot of that has to do with -- we're trying to balance sheet manage this. Of course, there's a lot of moving parts and putting it together. And so in the first quarter, even though I think we grew deposits a little bit. Our CDs actually shrunk, although that was the first time we reported together, so you didn't see that. What is happening now is just the growth rate phenomenon. And in the first quarter, we didn't -- as we mentioned before, didn't grow loans. This quarter, we did, and we think we will, and so it's going to be on the incremental new deposit side. It's just going to be at a higher funded rate until they cut rates. And so that's all I would say about that. I think if our balance sheet was flat, we would probably stay here. But on the incremental growth, as we record 6.5% loans, and we're going to have to fund those incremental loans with incremental deposits, and those rates will be a little bit higher on the incremental margin.

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?

Yes, this is Steve. I guess if you take all accretion out, and we show this on the waterfall, our loan yield went from 571 last quarter to 578 million. So 578 or -- yes, something like that, 7 basis points or so on the loan yield. And so there's a repricing component to that. But obviously, as we mentioned on the accretion and some of that was the PCD accretion, it was higher than we thought. And that's because I think we worked some of those relationships out or did -- so any time you accelerate some of that back to the individual quarters, there's going to be some noise in that. But if I had to kind of kind of bring you back to what we said last quarter and thinking about total loan yield. We sort of said it should range this year in the $6.15 to 6.25% range. And then if you kind of think about the comments I just made in a flat rate environment and the repricing of our loans from legacy SouthState as well as legacy independent, you would see another 10 basis points higher over now almost kind of in the 8 to 10 basis points a year range. So I know one of the research analysts put out a report a few weeks ago, just trying to show the total loan yield, which is kind of how we think about it. In a flat rate environment, our total loan yield in the next 2 years would be, call it, 20 basis points higher than it is today. But I doubt we'll be in a flat rate environment, and I doubt everything will be similar, but that's core kind of how we're thinking about loan yield this year. 15 to 6.25%, we've overperformed a little bit and because of some of the PCD and other things. But long term, it continues to march higher in a flat environment.

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

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?

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 interest rate, but they carry a higher reserve. So 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.

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.

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.

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.

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

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.

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