SouthState Corporation

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to South State Bank Corporation Q3 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Will and Matthews. You may begin.

Thank you. Good morning, and welcome to South State'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 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 that may affect us. Now I'll turn the call over to you, John.

Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for South State. 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. Non-accruals 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 year and thinking about the banking landscape, deregulation, and the opportunities in front of us. Over the last 15 years, we've built a 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 South State 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.

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 APS, driven by 34 million in revenue growth and solid expense control. Our 406 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 191 were up seven 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 four basis points, all else equal. Our loan yields of 648 improved by 15 basis points from Q2 and were approximately eight basis points below our new origination rate for the second quarter. And loan yields excluding all accretion were up a basis point from Q2. Steve will give updated margin guidance in our Q&A. Not just 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 nine-month year-to-date ratio to 48.7%. Credit costs remain 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 nine 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 1st 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 independent financial merger. Our TCE ratio is also back to its year-end 2024 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.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one in your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Rose with Raymond James. Your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I guess I'll hit the margin question since you brought it up, Will. Steve, can you kind of walk us through, you know, the excess accretion, you know, this quarter? Looks like the core margin X accretion was down kind of high single-digit basis points. Can you just give some puts and takes here as we think about, you know, the contemplation of a couple rate cuts this quarter? And then if you can talk about some of the pricing dynamics both on the loan and deposit side, you know, new production yields, things like that. Just trying to better frame up the core versus the reported margin as we move forward. Thanks.

Sure, Michael. Yeah, I just, you know, 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. you know as you mentioned we had higher accretion than we expected and really you know a couple things around that um uh we saw the highest accretion in July and then and then then uh August and September it kind of tailed off a little bit and really due to some early payoffs of 2020 and 2021 vintage loans had you know kind of three handle coupons um with these big discounts that sold so those are you know not economic decisions but they're I mean they're 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. They're 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 have 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. You know, we talk about size, the assumptions of the interest earning asset size. The second is our interest rate forecast. The third is loan accretion. The fourth is deposit data in an environment where rates are going down. Interest earning assets, we've been saying $59 billion for quarter four average. That's no change. You know, for full year 2026, we're looking somewhere between $61 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 three rate cuts in 2025 and quarterly rate cuts three more in 2026, so that we would get 150 basis point cut in total and get the Fed funds up 3% by the end of 2026. That seems to be somewhere where the market is. You know, as it relates to the third assumption, loan accretion, you know, based on our accretion this quarter for the fourth quarter to be somewhere in the $40 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 radically. So I think that's a good run rate to use. For 2026, we did certainly pull some forward in 2025. So we did 25 million based on our prepayment forecast. But of course it can be lumpy based on the percentage loans. The last part is deposit data. You know, for the first hundred basis points of cuts, our deposit costs came down about 38 basis points from 229 to 191. So 38% data, you know, in our 2019 to 2020 easing cycle, our deposit cost beta was around 27%. So our expectation is with growth plans that our deposit beta would look a little similarly to 2019, 2020, so 27. Maybe we get to 30 over time with a lag, but I don't think it'll be as high as 38%. So based on all those assumptions, we'd expect them to continue to be in the 380 to 390 range with the set down of accretion this quarter and fourth quarter and for 2026. for it to be in that range, 380 to 390, as we kind of move forward. One of the questions you asked was our pricing dynamics. Our new loan production rate for the total company this quarter was 656. If you look at Texas and Colorado, that new loan rate was 679. So it's a little bit higher in Texas I know you have a few questions, a few puts and takes, but that's some guidance for you.

No, it'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 lean in 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, you know, at this point, given the fact that, you know, I think a lot of banks are, you know, kind of upping their hiring plans for loan officers, the pricing dynamics, and kind of maybe what we should expect as we, you know, move forward. Thanks.

Yeah, sure, Michael. Good morning. We kind of got it 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 paydowns in the third quarter than we did in the second. If we move into 2026, it could move Higher maybe the mid to upper single digits, but I have a better feel for that in January. But most of the loan growth is coming in 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. You know, our biggest pipeline build is in Texas. We had an $800 million pipeline there in the second quarter. 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 Florida's got a billion-dollar pipeline. Atlanta's got a $900 million pipeline. So those are our three probably largest markets. And as I said on the call, with that dislocation, and 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.

All right, great. I appreciate you guys taking my questions.

Thanks. Your next question comes from the line of Jared Shaw with Barclays. Please go ahead.

Hey, good morning, everybody.

Hi, Jared.

Maybe just if we could hit on credit. You know, you were listed as a creditor to First Brands. I'm guessing that's what the large charge was. Was there, for that charge, was there a prior, it looks like there was a prior reserve, was there also a prior charge taken against that? And I guess, how do you feel about the rest of the portfolio, you know, apart from that?

Yeah, 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, you know, unfortunate. We're going to use it as a learning lesson for our credit team and management associates.

And I'd say, Gerald, the reserve question, you know, based on what John just said, we would have had a reserve release but for that charge off in the quarter. i negative provision uh just based on the um underlying uh economic loss drivers uh and we just to be clear we did charge off the full amount of that balance in the third quarter okay all right uh thanks for that and then i guess um you know looking at capital um you know you just gave some great color on on sort of

really good growth opportunities over the coming years, but, um, you know, still seeing, still seeing growth in, in capital. And with, like you said, we'll decide improving backdrop on, on credit. Where do you feel like you would like to see, uh, C2 on optimally and how should we think about the buyback and capital management in general, uh, from here?

Yeah, Jared, it's a good question. We know we, we, um, You know, we're obviously 11 1⁄2 on CET and we're at about 10.8 if you were to incorporate AOCI. So very healthy capital ratios. And I'd 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.

Okay, great. Thank you.

Your next question comes from the line of Catherine Miller with KBW. Please go ahead.

Thanks. Just one follow-up back on the margin. It was helpful to have your guidance for next quarter. And is it fair to assume that – actually, this is the way to ask the question. Is there a way to quantify how much of the accretion this quarter was just accelerated versus just helping us to kind of model what a normal kind of base level would be for accretion going forward versus how much is accelerated from paydowns?

Yeah, Captain, you know, 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 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, you know, end of August, September is much more run rate type of thing. So I think, you know, this 40 to 50, you know, that's kind of what we expected in the fourth quarter of the back half of the year. That's sort of what we're, that's what we're seeing. So that sort of informs us going into 2026.

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

Sure. No, it was a really good quarter. You know, non-interest income was 99 versus 87. So it was nice to pick up 60 basis points of average assets, a little bit higher than our guide of around 50, 55. You know, two-thirds of that was capital market. things happened in correspondent number one, you know, we had, you know, we have changes in interest rates. And so when you have changes in interest rates, that business typically does a little bit better. Uh, it was sort of broad based a couple of million dollars was due to fixed income, um, maybe three, $4 million with higher interest rate swaps, another million and a half in, in sort of other trading. So I think, um, you know, uh, We had to get, I don't, I don't see that, you know, that, that number was around 25 minutes. That's a hundred million dollar run rate. So to put it in context, our best year ever was 110 million in revenue. Last year was 70. So this quarter was a really good quarter. So I don't expect that to, uh, we'll see, um, you know, to continue to repeat, but clearly we had a good quarter. Um, we'll see what the run rate, I think we get a couple of quarters behind us. We'll have a better view, but clearly it's higher than our run rate of 87. I'm not sure we're as high as 99. So I'd say it's probably, you know, as we kind of think about, um, 2026, you know, somewhere in that. three hundred and seventy three hundred eighty million dollar run rate that's probably not a bad place to start and then we'll just see how it progresses is the way i would think about it okay that's helpful thank you your next question comes from the line of janet lee with a td cowan please go ahead good morning good morning morning on a core basis i

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

Great question and thanks for asking it. You know, a couple things there. So, you know, if we get back to six cuts and we get one to two, that would be, you know, call it, let's just take the midpoint, that would be nine basis points. So I think our core NIM is somewhere, as I think about core NIM, somewhere in the mid-380s. So what's changed there? Number one is the loan accretion forecast. So if we, next year, we are 125 versus 150, just because we pulled forward, that's about four basis points of NIM. you know, decrease. And then the other is just on the deposit data, you know, and the lag thereof, kind of where, you know, like I mentioned in our other question, our deposit data so far through the first 100 was 38%. But on the other hand, we didn't grow deposits more than, you know, call it two, two and a half percent. So as we contemplate the future and we look back at history at 2000 when we were growing a little bit faster, more mid single digit-ish, you know, our deposit beta was more like 27%. So, you know, we're taking that model back down to 27. We hope to outperform that, you know, call it, you know, there's a lag, the CDs and pricing and all that. But, you know, by the beginning of 27, you know, our hope would be we'd be in that 30% range. And we see that more of a lag, and we're modeling 27 in our numbers. So Steve, when you translate what you're saying there to Janet's question about one to two basis points with each cut, that may take that away if the deposit beta is not as good on the way down. Right. And yeah, to finish that thought to your point, John, to finish that thought, if our deposit beta, so we're guiding sort of the mid-range of 380 to 390, And so to the extent at the end of the year, next year, we go through the cuts and we start moving our deposit data from 27 closer to 30, 31, you know, that would get us in the high 380s, maybe 390 at the end of the year of 2026. That's how we're thinking about modeling it.

Got it. Thanks for the color. And just a follow-up, if I am not making this up, hopefully, I believe that the um, IBTX bankers, that group will start adopting South States business model. And in a way, what would be the implication on, or any implication on the expenses or, or their incentive to bringing like prioritized, you know, lower deposit costs or, or loans, or is there any sort of change that could be coming or whether an implication on growth profile there. Could you give us any color on what that could mean for South State, that transition?

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 IVTX the same as it had been in prior years. In 2026, it will move to more of a South State approach where we we allocate P&Ls to the regional presidents. So their incentive will be based on both loan growth, but predominantly on their P&R 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 new hires to encourage recruiting efforts into 2026, both with the existing South State plan and the IVTX plan? Good question. Hope that helps you.

Thank you.

Go ahead.

Is there another question?

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

Okay, thank you. Sorry, I didn't hear anything. Hey, guys. Sorry, just one more follow-up, Steve, on the margin. I think your prior outlook was, you know, to be in the 380, 390, and then drift higher in 2026. I just want to make sure that the 26 outlook 383.9 includes the rate cuts and about 125 million of accretion. Have I heard that right? Anything's changed from prior? What are some of the puts and takes?

Yeah, I think I was trying to answer that in the prior question. It's really the accretion number from 150 is what we all a decrease, and then the rate, and then on the deposit data, you know, we have 38%, 2019 was 27. You know, we were thinking, we think ultimately we'll get to somewhere in the low 30s, but it just is probably a bit of a lag. So, you know, it's probably not going to, we're going to be very diligent on growing, you know, for the loan growth we think is coming. and then hopefully as the CDs reprise and all those kind of things through 2027, we could see it uptick. So I think, you know, back to the guidepost or how this would work is you start out in the mid-380s and then move higher into the end of 26, early 27.

And, John, as well, I would add, you know, our margin position is – as neutral as we've seen it in in years just based upon the actions we took in 2025 the the number one the merger and marking that balance sheet properly and then two um you know the portfolio restructuring we did in connection with the sale lease back so you know we have a relatively stable looking margin under most reasonable scenarios

Got it. And the delta between having a four-handle this quarter and moving into 380s next quarter is really accretion going from 80 this quarter and cut in half to 40 next quarter in your outlook?

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

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?

Yeah, typically in the fourth quarter, we have some seasonal deposit growth, and depending on how we manage it, we get some of the seasonal wholesale stuff out of the bank at the same time. So we sort of manage it towards that level. But, you know, kind of year over year, I'd call it mid-single-digit growth is kind of how we're thinking about it from an average earning ethic.

Okay, thank you.

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

Hi, good morning. Hi. I was wondering, kind of stepping back to correspondent banking, I understand that a rate cut or rate movement kind of sparks it, but we're looking kind of, I don't know, three, you said roughly three to six cuts over the next 12-ish months. How long is the tail for that kind of tailwind, I guess you could say? So if there's two cuts in December, or excuse me, two cuts in the fourth quarter, would the first quarter also see a benefit, or is it fairly short-lived?

Yeah, like I was trying to explain before, you know, as you kind of think about that business that put the highs and lows of it back in, out there, so that was about $70 million. As I think about that business, you're going to have fixed income will do better and 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. You know, on an 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 creating some stability, you know, at that level.

Gotcha. Okay, that's helpful. And then from a follow-up perspective, it seems like you have a lot of opportunity for you. I think that's be hard to disagree especially the other disruption in the markets that you operate in is it fair to think you're going to think organically like you're hiring individuals obviously and growing loans or could you potentially see a small bolt-on deal or something like that yeah it's john um you know with our particular fact pattern uh kind of our view is to invest in south states

more interesting right now than doing an M&A deal. And that investment at South State comes in two 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 South State shares through our PIBAC 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.

Roger, I appreciate it. Thank you.

Your next question comes from the line of Gary Tanner with DA Davidson. Please go ahead.

Thanks. Good morning. I just wanted to go back to the NIM related discussion for a minute. You know, 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 you know, bring in some new deposits with anticipation of stronger growth over the next year or just, you know, maybe comment on kind of the driver there. Yeah, you know, back in July when we had the call, Gary, we talked about our expectation of deposit costs and third quarter is 185 to 190 so we were it was 191 so we were on the higher end of the range missed a basis point but you know really what drove that um was and our expectation was that um particularly in the in the cd book uh we if you looked at the second quarter the third quarter uh excuse me the first quarter second quarter our cds went from i don't know 7.1 level than you know others so as we kind of think about that's kind of what's part of our guidance um it's you know frankly a tough environment right now with uh deposits but you know we expect that as we get rate cuts and the curve gets a little bit more steady we could continue to see better that's why a little bit why we're guiding down on the uh you know guiding on the 27 deposit because ultimately we need to fund the loan growth that we think is in front of us And then as a follow-up on that beta, since you just mentioned it 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. Right. That's right. That's a great way to say it. Yeah, so you're right. If we had to average them, it'd probably be somewhere in the, you know, whatever, low to mid-30s. But yes, that's right. It's the next incremental. Okay, great. And if I could stick in the last question, just on the NIE, I think you had guided previously to a bit of a step down the fourth quarter, I think, to the 340, 350 range. Any change to that outlook for the fourth quarter?

Yeah, Gary, I think our guidance for Q4 is still in that 345 to 350 range. You know, there's always some variability that's hard to predict with respect to how some of the commission compensation businesses perform. A loan origination volume can impact your FAS 91 cost deferral. But somewhere in that roughly $350 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. And yet things were flat. So we've done a good job of getting the costs out and getting them out pretty early. You know, looking ahead to 26, we haven't talked about that, but I might as well address that. You know, our planning is obviously still underway. We still think for 26, that mid-single business is a good guy. Maybe it's an inflationary sort of 3% plus another percent or so for some of the investments in organic growth initiatives like that John addressed earlier. So, you know, 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.

Thank you.

Your next question comes from the line of Gary Tanner with Davidson. Please go ahead.

That was Gary we just spoke with.

Oh, I'm so sorry. That concludes the Q&A session. I will now turn the call back over to John Corbett for closing remarks.

All right. 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.

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