SouthState Corporation (NASDAQ:SSB) Q4 2022 Earnings Call Transcript

SouthState Corporation (NASDAQ:SSB) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Hello, and welcome to SouthState Corporation Q4 2022 Earnings Conference Call. I’d now like to turn the conference over to Will Matthews, CFO. Please go ahead.

Will Matthews: Good morning, and welcome to SouthState’s fourth quarter 2022 earnings call. This is Will Matthews, and I am here with John Corbett, Steve Young and Jeremy Lucas. John and I will make a few prepared remarks and then we’ll open it up for questions. As always, a copy of the earnings release and the presentation slides are located on our website on the Investor Relations tab. 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.

John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining our call. We’re really proud of our team and the momentum that’s been building throughout 2022. I think that 2021 is a year that we were taking the time to plant the seeds for the future, and 2022 was a year where those seeds began to take root and to grow, and that growth is reflected in the results that we announced last night. During the fourth quarter, PPNR per share increased 11% over the third quarter. That took us to a PPNR return on assets over 2% and a return on tangible equity of 20%. We set aside $47 million in reserves, but incurred less than $1 million in charge-offs. So credit quality metrics continue to be excellent and Will can walk you through the impacts of the Moody’s economic forecast later in the call.

Total loans grew 19% annualized in the quarter, and over the last few years, we’ve recruited some of the best middle market bankers in the Southeast and that team is doing a great job as C&I loans specifically grew at 27% annualized. In the period, deposits declined 6% annualized and we’ve still got balance sheet flexibility with an 83% loan to deposit ratio. Our total cost of deposits landed at 21 basis points, and so far this cycle, our cumulative total deposit beta is only 5%. If you step back and look at the full year for 2022, PPNR per share was up 36% over 2021. Loans grew 17%, deposits decreased 5%, and as we right sized the balance sheet, net interest margin expanded 120 basis points. Over the entire year, we set aside $82 million in loan loss provisions, but only incurred $4 million in charge-offs.

So we strengthened our reserves in 2022 to prepare for a likely economic slowdown in 2023. In addition to organic growth, our integration team successfully completed the Atlantic Capital conversion last summer, and our Atlanta bankers are doing a terrific job in a dynamic market. The Census Bureau released their latest population report last month. We updated a Census Bureau map on Page six of the deck that breaks out the four regions of the country. And since the pandemic began in 2020 $1.7 million people in the Western states, the Northeast and the Midwest, sold their homes, they packed their bags and they moved to the South, and of the 1.7 million people that moved to the South, two-thirds of them landed in our SouthState markets. Based on the latest census reports, SouthState continues to do business in four of the six rowing states in the country, with Florida ranking number one as the fastest growing state in the country last year.

As we think about the economy and the year ahead, it seems to us that the Fed is getting what it wanted. The economy is slowing and loan pipelines are shrinking. So we don’t know if 2023 will be a soft landing, a mild or a moderate recession, but what we believe is that regardless of the direction of the economy, based on the level of population migration, the South will outperform other areas of the country. We believe in the power of compounding over time, so our aspiration has always been to grow everything good in the bank at a compounded annual growth rate of 10% a year over a cycle. Three years ago this week, we announced the merger of equals of CenterState and SouthState and began the integration process, coincidentally right when the pandemic hit.

It’s obviously been a volatile three years of monetary policy since the merger announcement and our growth has been lumpy, but if you look back over the last three years, and if you smooth out the lumpiness of the cycle, we’ve grown at the pace that we planned. Deposits have grown at a compounded annual growth rate of 13% since the merger announcement and loans have grown at a compounded annual growth rate of 9% a year since the merger announcement. So our team is executing on our plan and we’re now witnessing the earnings power of their hard work. So I’ll close by congratulating and thanking all of our team members from our IT team that made big improvements to our digital offerings, to our risk management areas that have strengthened our defences, to our bankers that generated $13 billion of new loans during the year, and our branch employees that have cared for our clients through countless changes.

You’ve done a great job in a challenging environment. So Will, I’ll turn it over to you.

Will Matthews: Thank you, John, and I’ll echo your comments. The team’s really done a great job executing in this environment, leading to great results for the quarter and the year. We had another very strong quarter and net interest revenue with a tax equivalent NIM of 3.99% up 41 basis points from the third quarter and core net interest income up $36 million. Our loan yields improved by 45 basis points, and our cost of total deposits rose by 13 basis points versus the third quarter. As we noted last quarter, we expect our deposit beta to increase from this point forward. Non-interest income totalled $63 million down $10 million from Q3. A few items I’ll mention impacting non-interest income. We wrote down the value of our MSR asset by $3.2 million, which led to negative mortgage division revenue for the quarter.

We also wrote down our SBA servicing rights asset by $900,000 for a combined $4.1 million right down on servicing assets in the quarter. You’ll also note that we began applying settle to market accounting for a variation margin collateral on exchange cleared swaps to net against the swap asset or liability. That resulted in a decrease in deposits and swap assets on the balance sheet and a decrease in the corresponding interest expense and non-interest income with no effect on net income and to help with your models, we’ve adjusted prior periods accordingly as noted on Page 11 of the release. Mortgage production fell in the quarter to approximately $700 million with 81% of the volume being portfolio. Looking forward, expectations from mortgage production in 2023 remained muted at across the industry.

We expect ours to also be down significantly from 2022, but we expect our percentage of secondary market production to increase. Correspondent income continued to be somewhat challenged in this rate environment. Service charge income showed a seasonal lift in our wealth management division closed out another strong year. Non-interest expenses of $228 million were up slightly from Q3 with no big swings versus the prior quarter. Looking to 2023, we currently estimate NIE in the $950 million range with the first quarter being in the low $230 million. That would represent an increase of approximately 5% from 2022 if normalized for 12 months of Atlantic Capital. I will note that there are of course factors in our business lines and in loan production that can cause the NIE number to increase or decrease through the year due to the impact on commissions, incentives and deferred loan costs.

On the balance sheet, the $1.3 billion in loan growth John mentioned, was centered in single family residential CRE and CRE construction and C&I loans. Although we’re starting to see some slight increased usage on commercial lines, line of credit utilization remains about 5% below pre-pandemic levels. Expectations for loan growth in 2023 are in the mid-single digit percent range as we’re seeing pipelines and pre-flight discussions declined and a general sense of cautiousness amongst borrowers. Deposits declined approximately $600 million in the quarter. So coupled with loan growth, our cash and fed funds position declined $1.6 billion to end the quarter at $1.3 billion. We continued to have very little wholesale funding with only $150 million in brokerage CDs and no FHLB advances at year end.

Our risk-based regulatory capital ratios were essentially flat compared to Q3 and our TCE ratio improved approximately 40 basis points to 7.2%. Ending TBV per share rose back above $40 to end the year. Turning to credit, as John noted, we continue to have excellent credit results, though we recorded a higher provision expense due to economic forecast changes. We had minimal net charge off for the quarter in the year one and two basis points respectively, and in fact, excluding DDA overdraft charge-offs, we had net loan recoveries for both the quarter and the year. NPLs were up $8 million ending at 36 basis points of loans caused by a $9 million increase in acquired SBA NPLs, which are generally 75% government guaranteed. So net unguaranteed NPLs were almost flat.

As John mentioned, criticized and classified assets were down significantly with a $12 million decline in substandard loans and an $85 million decline in special mention loans. Our $47 million in provision expense was up $23 million from Q3 and was not due to a deterioration in credit, but rather due primarily to changes in economic forecast with growth a secondary factor. $33 million of this provision expense was for loan losses and $14 million was for the reserve for unfunded commitments. As noted on Slide 31, the ending reserve was 118 basis points of loans with another $67 million in the reserve for unfunded commitments. The combined total was a percentage of loans is up approximately nine basis points from Q3. Finally, I’ll note that we’ve included some additional credit information on loan categories of interest and Slides 33 and 34.

Operator, we’ll now take questions.

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Q&A Session

Operator: Our first question today comes from Stephen Scouten from Piper Sandler. Your line is now open.

Stephen Scouten: Thank you. Good morning, everyone. I guess maybe if I could start just with a question around resi mortgage and what you would expect to see that do on balance sheet, and that’s been a nice additive portion of growth, but I think you just said, will you might have more mortgage going to the secondary market next year. What’s the driver of that? Is that pricing or is that more that you’re reaching more of a concentration limit on your balance sheet or how can we think about that, the interplay there on mortgage?

Steven Young: Yeah. Hey, it’s Steven. Steve yeah, it’s been a really nice year for residential mortgage and if you think about the volatility in that in that business, particularly with the rates, it’s changed a lot since the beginning of the year. I think at the beginning of the year, the 30-year fixed rate mortgage was somewhere in the 3% to 3.25%. It hit a high of about 7% I think 7%, 7.5%, in the late third quarter. We have a slide in the deck which talks, I think its Page 15 in the deck, and it describes sort of the balance sheet growth over the last three years in residential mortgage. And what you’ll see in that graph if you look at it is, when rates were very low in 2020 and early ’21, we strength the residential portfolio and then and sold a lot of our production in the secondary market when rates or when gain on sale margins were high.

And then you can see as rates started rising, we started putting more of that on our balance sheet. So if you kind of looked at our three-year cycle, we grew about $950 million, but we shrink some and we grew some depending on the balance sheet management side. So it was about 6% CAGR over the course of a three-year period. As we sort of normalize that, I would think that, our residential mortgage will grow about the same as the rest of our loan book, and I think we’ve got to mid-single digits. So, just to kind of give you some perspective, we’ve grown 6% CAGR over the course of a three-year period. But clearly, residential rates have come down and the secondary market is a little bit more attractive than it was a few months ago.

Stephen Scouten: Okay, that makes a lot of sense. Thanks Steve. And then I think last quarter you said an 80% to 85% kind of loan-to-deposit ratio by year end ’23. Obviously, we’re already that 83% level. So do you think that moves higher than that 85% range at this point. And then is the 24% cycle deposit beta still the right number to think about or given how much outperformance you’ve had to date do you think it’s better than that?

Steven Young: Yeah, this is Steve again. I guess from a loan-to-deposit ratio, let’s talk about our guidance and really — it really hasn’t changed a whole lot. I think our starting point changed a little bit on the deposit side and that’s why we had a little bit higher deposit rate. But what we were — our goal is for 2023 is to grow loans mid-single digits and keep deposits roughly flat or maybe slightly up, but somewhere in that area. We have that page, but let me take a bigger picture just for a second. And I think you’re trying to get to the question about margin. So let me kind of just talk to that a little bit. John mentioned it on the call, but we had a great year on margin expansion and I think we have a Page 12 in the deck that talks about kind of the progression of net interest margin from the fourth quarter of last year to the quarter this year and NIM’s up 120 basis points.