SouthState Corporation (NASDAQ:SSB) Q1 2024 Earnings Call Transcript April 27, 2024

SouthState Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I’d like to welcome everyone to the SouthState Corporation First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] And I would now like to turn the conference over to Mr. Will Matthews. You may begin.

Will Matthews: Good morning, and welcome to SouthState's First Quarter 2024 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, John and I will make some brief remarks and then move into questions. We understand you can all read our earnings release and the Investor Presentation, copies of which are on our Investor Relations website. We thus won't regurgitate all of the information, but rather we'll try to point out a few key highlights and items of interest before moving on to Q&A. 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 us. As you have seen in our earnings release, SouthState delivered a solid and steady quarter that was consistent with our guidance. At a high level, it was another quarter of positive but modest growth for both loans and deposits. Asset quality continues to be good with past dues, non-accruals and charge-offs, all declining in the quarter. Net interest margin dipped to the low-end of our guidance but should be at or near bottom. And capital ratios are on the higher-end of our peer group and have grown every quarter over the last year. Like every other banker and investor, we are trying to understand the broader macro picture, the risk of recession and what the yield curve is going to look like.

At the same time, we believe the dynamics will be different in every region of the country. As we study our bank and our markets, commercial loan pipelines took a sharp drop of about 25% following the banking turmoil last spring, and they stayed low through the summer and early fall. But by November, pipeline started growing again and the last few months have now returned to the same level they were before the banking turmoil, and the momentum seems to be building, which is encouraging. But with rates where they are, CRE activity not surprising, is much slower. So nearly all the pipeline growth and momentum has been in the C&I portfolio. In fact as it relates to commercial real estate, our concentration ratios for both CRE and construction are at the lowest levels they have been in three years.

Dan Bockhorst and our credit team are doing a great job servicing and analyzing our loan portfolio. And while rising interest rates are putting pressure on debt service coverage ratios, the South is disproportionately benefiting from net migration, and we clearly see that in the rental rate trends on all types of commercial real estate. In the last three years, rental rates in our markets have increased 16% for office compared to 3% outside our markets. Rental rates are up 21% in multifamily versus 14% outside our markets and rents are up 38% in industrial compared to 24% outside our markets. On fee income, we were up for the quarter. We saw some improvement in mortgage, as the gain on sale margin opened up. Wealth management continues to be a reliable and growing contributor and we now have assets under management over $8 billion.

And our correspondent division recently expanded with the addition of a new team that specializes in the packaging and sale of the government guaranteed portion of SBA loans. This is a long-standing and experienced team based in Houston, and Steve can give you more information. And finally, as we think about capital management. Over the last year we've maintained a level balance sheet, it is $45 billion in assets, while earning a return on tangible common equity in the mid-teens. As a result, we have seen our capital ratios increase every quarter. Our CET1 currently sits at about 12%. We have also significantly increased our loan loss reserves, which currently sit at 1.6%. And I mentioned earlier that we are all trying to play economists and forecast the yield curve.

And obviously, we don't have a crystal ball, and the only thing we know for sure is that all of our forecast will be wrong. So our goal is flexibility and optionality. And with these higher levels of capital and reserves, we are in a perfect position to be opportunistic regardless if we have a soft-landing, a hard-landing or no landing at all. I will pass it back to Will now to walk you through the details on the quarter.

Will Matthews: Thank you John. Total revenue for the quarter was in-line with forecasts as NIM came in at the lower-end of our guidance range at 3.41% and non-interest income to average assets came in above guidance at 64 basis points. Deposit costs increased 14 basis points, which was 2 basis points less than last quarter's increase and the cost of deposits at 1.74% was in-line with our guidance. Loan yields increased 8 basis points. That brings our cumulative total deposit beta to 33%, and our cumulative loan beta to 37%. Deposit mix shift was part of that deposit cost increase, though the shift appears to have slowed. The average mix of DDAs to total deposits at 28.5% in Q1, was down from Q4's average 29.9%. However, Q1's beginning, ending and average mix were all in the 28.5% range.

Steve will give some color on our future margin guidance in the Q&A. Relative to Q4, our net interest income declined $10 million with one fewer day. Non-interest income was $6 million higher. Total revenue declined by $4 million sequentially. The non-interest income [beat] (ph) was driven by better mortgage revenue and lower interest on swap variation margin collateral. [NIE] (ph) excluding non-recurring items, was down $4.9 million versus Q4, but that's partially due to the adoption of the proportional amortization method for low income housing tax credits. This adoption shortens the period over which these credits amortize and essentially reduced NIE by a net $2.1 million and moved about $3.5 million in passive losses to the income tax-line.

Thus, in comparing NIE and PPNR for Q1 versus Q4 on a normalized basis, if you adjust for this accounting method adoption, Q1 NIE would have been down $2.8 million compared with Q4 and Q1 PPNR, would have been down $1.5 million from Q4. We had some positives and negatives in NIE. The first quarter had the usual higher FICA and 401(k) expense, which was offset by lower professional fees associated with projects, as well as lower business development and travel expense. For the full year, we still think NIE in the $990 million to $1 billion area is a good estimate, dependent of course on expense items that vary with revenue. With respect to income taxes, in addition to the impact of the accounting method adoption I mentioned, we had two non-recurring items related to a state DTA revaluation and amended state tax returns driving our tax expense up by $3 million.

For future quarters, we expect to see an effective tax rate in the 23.5% range, absent any other unanticipated discrete or non-recurring adjustments. Our $12.7 million in provision for credit losses versus $2.7 million in net charge-offs caused our total reserve to grow by 2 basis points to 1.6%. NPAs were down slightly. We saw some continued loan migration into substandard, as we monitor and downgrade credits due to higher interest costs. With many of these being floating rate borrowers that could reduce their rate by 150 basis points or so, if they fix their rate using the swap curve, but many are reluctant to do so at this point due to expectations of lower rates or a sale. I will note that the largest addition to the sub-center list from Q4 paid off in Q1 with the property selling for an amount that was approximately 134% of our loan balance.

That was clearly a substandard loan with very little risk of loss, as evidenced by the margin of safety and the sale price versus our loan balance only one quarter after our downgrade. I will note that our expectation continues to be that we will not see significant losses in the loan portfolio based upon current forecast. Lastly, on the balance sheet front, growth was moderate with loans up 3.5% annualized and deposits up 1.4% annualized with brokered CDs essentially flat. We repurchased another 100,000 shares in the quarter, and our capital ratios remain very healthy, putting us in a good position with plenty of optionality we believe. Operator, we will now take questions.

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