SouthState Corporation (NASDAQ:SSB) Q3 2023 Earnings Call Transcript

SouthState Corporation (NASDAQ:SSB) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning, my name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the SouthState Corporation Q3 2023 Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Will Matthews, Chief Financial Officer. Please go ahead.

William Matthews: Good morning, and welcome to SouthState’s third quarter 2023 earnings call. This is Will Matthews, I’m here with John Corbett, Steve Young, and Jeremy Lucas. John and I will make some brief prepared remarks and then we’ll open it up for questions. As always, a copy of our earnings release and presentation slides are on our Investor Relations 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 which may affect us. Now, I will turn the call over to John Corbett, our CEO.

A banker smilingly shaking hands with a customer in a commercial bank lobby.

John Corbett: Thank you, Will. Good morning everybody. Thanks for joining us. In the earnings release last night, you can see that SouthState delivered a solid quarter that was right in-line with our previous guidance. Will can cover the details but high level we continue to see steady growth in loans and customer deposits, liquidity is stable, capital ratios are growing, deposit funding is best in class and our net interest margin is settling in at a pretty good spot. One of the core values that we continually preach to our team is to keep our eye on the long-term horizon. So, we spent a lot of time talking about the big picture, talking about the economic cycle and where we have risks and where we have advantages. The stages of a banking cycle are simple and predictable.

The cycle risks move from liquidity, then to earnings, then to credit, and then finally to capital. But while the stages are easy to predict, predicting the speed and the severity of the cycle, that’s the tough part. Since March, we’ve clearly moved through the first phase, the liquidity tightening phase as deposits left the banking system for money market funds. Now the predictable and necessary response is that the industry trades away future earnings power as deposit costs rise. Now for SouthState, our granular deposit base has served as a ballast for our franchise and we’ve been able to continue to grow our deposits with a cumulative deposit beta of only 27% at a total cost of deposits of 1.44% for the quarter. Over on the asset side, we’re also about to benefit from a tailwind of loan repricing; 70% of our loans are based on a fixed or adjustable-rates.

So, we’re going to see a significant portion of our loan portfolio repriced by more than 300 basis-points as they renew and that should help offset any additional drift in deposit costs. It feels like the velocity of change for deposit is moderating and we’re now shifting to the credit risk portion of the cycle. In the last year, we set aside $151 million of reserves, with only $18 million in-charge offs. And as a result, we’ve built our reserves up by 28 basis points to 1.59%. That the cycle is more severe than many are predicting, those reserves plus our excess capital will allow SouthState to be opportunistic on the back side of the cycle where the opportunities to create shareholder value are the greatest. So, we’re cautious now. The lag effects of the rapid rise in rates are only just beginning to work their way through the system.

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Q&A Session

But at the same time, we’re excited. We think that there is a tremendous opportunity on the horizon for a bank of our size in our geography and with our deposit franchise. So, I want to close by thanking our team for keeping their eye on the long-term horizon of building a franchise that can weather the storm and come out stronger on the other side. I’ll pass it back to Will now to provide some color on the quarter.

William Matthews: Thank you, John. We had another solid quarter with deposit costs, margin and noninterest income ending up in-line with our expectations, solid PPNR and good credit costs outside of the one sizable charge-off that impacted us and some of our peers. I’ll touch on a few details before we move on to Q&A. On the balance sheet, our 6% annualized loan growth moderated from the first-half of the year in-line with our expectations. Deposits grew at a 2% annualized rate or 4% if you exclude the approximately $130 million in brokered CD maturities, we allowed to run-off without replacing. Though we continue to see a mixed shift in our deposits from DDA into money market accounts, the pace of the DDA shift moderated a bit this quarter.

DDAs represent 30% of total deposits at quarter-end, down from 31% last quarter. And as we mentioned previously, this figure was 28% to 29% before the pandemic. So, it continues to appear as if we’re moving towards those pre pandemic levels for DDA as a percentage of deposits. Turning to the income statement, our 3.50% NIM was down 12 basis points from Q2. Loan yields were up 14 basis points, but deposits were up 33 basis points, which was in-line with our 30-basis point to 35-basis point guidance bringing our cycle to date deposit beta to 27%. Our net interest income of $355 million was down $7 million from Q2 on one more day. Noninterest income of $73 million was down $4 million from Q2, though still a solid quarter. Correspondent revenue was $13 million after $12 million in interest expense on swap collateral for $25 million in gross revenue, down approximately $3 million from Q2.

Wealth had another solid quarter, but mortgage revenue of $2.5 million was down $1.9 million from Q2. We had another good quarter in deposit fees similar to Q2. Expenses came in a bit lower-than-expected this quarter largely due to a revaluation of SERP retirement plan liabilities due to higher interest rates reducing NIE by $5.9 million. We also made a $1 million donation during the quarter for which we received a dollar-for-dollar tax credit. So, NIE was higher by $1 million in the quarter and income tax was lower by the same amount. Excluding that, NIE was in-line with our expectations. Looking ahead, we expect NIE for Q4 in the mid-240s range subject to the normal variations in expense categories impacted by noninterest income and performance.

With respect to credit, we recognized the $13 million in net charge-offs in the quarter, bringing our year-to-date total to $17.5 million or 8 basis points annualized year-to-date. The one sizable [indiscernible] loan charge-offs that received a lot of attention earlier in the quarter accounted for all of the loan net charge-offs as we experienced net loan recoveries before overdraft losses absent that credit both for the quarter and year-to-date. We continue to build loan loss reserves with a $33 million provision, bringing the total reserve to 159 basis points of loans. For overall asset quality trends, NPAs were down slightly. Past dues were flat. Substandard loans increased and special mentioned loans declined. Line utilization continues to be flat, except on construction loans as we are not originating many new construction loans and existing projects moved towards completion.

We continue to have very strong capital ratios with CE Tier-1 of 11.5%, were 9.25% if AOCI were included in the calculation. TCE ended the quarter at 7.5%. With loan growth expectations continuing to moderate, risk-weighted asset growth should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with flexibility. Operator, we’ll now take questions.

Operator: Thank you. [Operator Instructions] We’ll go first to Stephen Scouten at Piper Sandler.

Stephen Scouten: Hi, good morning, everyone. I was curious if you could talk a little bit about what you’re expecting on the NIM side moving forward in deposit trends from a cost perspective. Obviously it’s catching-up a little bit, but still extremely, extremely strong. So just kind of wondering what you’re expecting in the months ahead?

Steven Young: Sure, Stephen, this is Steve. We, as Page 12 shows kind of a summary of our NIM over the last four quarters and you can see it 3.5% this past quarter, which was within our guidance and our deposit costs were up 33 basis points this past quarter, which was in that 30 basis points to 35 basis points guidance. So, we’ve so far sort of been where we thought we were. As we look-forward, our guidance really is around three things; interest earning assets, the rate forecast and deposit beta and really our interest-earning assets are, well, pretty flat, I would expect going into the fourth quarter. As we think about Moody’s consensus forecast, the only change, it really forecasts no new rate hikes, but then has four cuts starting in the late second quarter and for the Fed funds rate to end at 4.5% at the end of 2024.

And so with all that, our deposit beta, the third component Page 18 shows our cycle to date deposit beta is 27%, we continue to expect the high-20s total beta by the end-of-the year. So, with that, we would expect deposit costs to increase 15 basis points to 20 basis points in the fourth quarter. And so with all of that kind of all those assumptions baked together, we’d expect NIM to bottom in the fourth quarter somewhere in the 5 basis points lower, maybe, maybe around 3%, 3.45% to 3.50%, somewhere in there. So that’s sort of what we’re looking for in the fourth quarter. As we look into 2024 on based on the Moody’s forecast and our growth assumptions, we would expect our interest-earning assets averaged $41 billion and that our NIM would stabilize in the 3.50% to 3.60% range, which is really no change to our guidance.

If I take a step back and thinking about 2023 versus 2024, it’s been such a volatile year relative to rates in NIMs and deposit betas and so on, but it looks like our NIM for the full year 2023 will be in the low 3.60% if — and 2024 it is in the mid 3.50%. And we’ll just have a little bit more growth offset it. So, anyway those are kind of the ways we’re thinking about NIM one quarter out and sort of how we’re thinking about it for next year with these assumptions.

Stephen Scouten: Yes, that’s helpful. And, and the stability that’s created there, and I know John, John spoke to this a little bit, is that, lot of that come in from the asset side re-pricing on that 70% of loans and have you guys given any detail around the pace of those re-pricings and kind of when we can kind of ratably see that benefit?

John Corbett: Sure. I think the last quarter we talked about on the call, but it’s roughly about $1 billion a quarter in loan re-pricings. So, whether that $4 billion a year and, and that step-up is around 300 basis points or so. And then of course, we have some securities come in — coming in. That’s probably $700 million, $800 million but we will likely use that to fund loan growth. So maybe that helps you kind of just frame-up, it’s about $1 billion a quarter over the next I don’t know five, six quarters and it’s roughly a 300-basis point to pick up, the yields are somewhere in the 4.25% to 4.5% range.

William Matthews: And that’s the adjustable and fixed repricings.

Stephen Scouten: Right, yes, understood. Okay, great and then, I guess, lastly from me, any sort of, as you think about that Moody’s expectation, we start thinking about the presumably some rate cuts any kind of higher arching balance sheet strategies to protect the NIM when rates presumably do go down and anything around a potential bond restructuring. I think the ACLs maybe near $816 million year-to-date. So I’m just kind of wondering with the capital build, is that something you guys are thinking more about?