SouthState Bank Corporation (SSB) Earnings Call Transcript

Hello everyone. Thank you for joining us, and, welcome to the SouthState Bank Corporation Second Quarter 2026 Earnings Conference Call. After today's prepared remarks we will host a question-and-answer session. [Operator Instructions] I will now hand the conference call over to Will Matthews, Chief Financial Officer. Mr. Matthews, please go ahead.

Good morning. This is Will Matthews, and welcome to SouthState's Second Quarter 2026 Earnings Call. I'm here with John Corbett, Steve Young and Jeremy Lucas. We'll follow our typical pattern of brief prepared remarks and then move into Q&A. And I'll refer you to the Investor Relations tab of our website for the earnings materials. 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'll turn the call over to you, John.

Thanks, Will. Good morning, everyone, and thank you for joining us. SouthState delivered another strong quarter. We generated a return on assets of 1.36% and a return on tangible common equity of 17.6%, which extends the consistent high performance over the last several quarters. Our results reflect solid balance sheet growth, stable margins, improving efficiency and continued strength in credit quality. As we reach the midpoint of 2026, I'm encouraged by the progress we're making against the 4 priorities we outlined at the beginning of the year, attracting top talent, growing the balance sheet, creating value through disciplined capital allocation and building artificial intelligence capabilities throughout the company. Starting with talent. SouthState's culture continues to be a differentiator in a period of meaningful disruption across many of our markets, bankers are looking for a platform that empowers local decision-making, values long-term relationships and creates opportunities for growth. Our division presidents have successfully expanded our commercial banking sales force by more than 10% in just the last 3 quarters, and we continue to be impressed by both the quality and diversity of talent joining the franchise. These are experienced relationship managers, who understand our markets, fit our culture and position us for future growth. That recruiting success is an investment in the company's future, and it's directly supporting our second priority, meaningful balance sheet growth. Over the last year loans have grown 8% and and deposits have grown 5%, both within the range of guidance we provided. There's been considerable schedule this quarter around the balance between growth and incremental profitability. And that's an important conversation. And frankly, it's one that we have every quarter. Our responsibility as capital managers is to balance 3 objectives simultaneously, soundness, profitability and growth. We don't optimize for 1 quarter, we optimize for long-term shareholder value. That requires discipline, judgment, particularly when opportunities are abundant. One thing we're confident in is that we'd rather operate in vibrant growing markets that be forced to manufacture growth where it doesn't naturally exist. Strong markets give us options. They allow us to be selective compete where we have advantages and build profitable relationships that create value over many years. Our bankers and our footprint continue to provide those opportunities. Equally important, we're maintaining our commitment to soundness. Asset quality improved during the quarter with nonperforming assets declining 14% and net charge-offs remaining exceptionally low at just 6 basis points. Credit metrics continue to reflect the disciplined underwriting culture that has long been a hallmark of SouthState. Turning to capital allocation. We remain confident that SouthState represents an attractive investment at today's valuations. Over the last year, we've repurchased nearly 5% of our shares outstanding, while also increasing the dividend and maintaining a CET1 capital ratio above 11%. We view share repurchases as one of several tools available to create shareholder value. And when our stock trades at levels that we consider attractive relative to the long-term earnings power of the franchise, we intend to be opportunistic. While repurchase activity slowed a little during the second quarter, our philosophy hasn't changed. We expect to continue returning capital in a disciplined manner, likely at a pace more consistent with our previously communicated the 40% to 60% capital return framework. Finally, artificial intelligence remains an area of significant focus and opportunity. Our objective is to empower every department to identify opportunities where this technology can improve speed, quality and scale. Today, we're already seeing productivity gains in areas such as credit operations, fraud management, call center support and through the continued adoption of our internally developed small language model. When I step back and I look at the quarter, I see a team that's aligned and it's executing. We're growing. We're maintaining strong credit quality -- we're investing in talent and technology, and we're continuing to allocate capital in ways that we believe will create long-term shareholder value. I want to thank our teammates for what they accomplished this quarter, and I'm optimistic about the opportunities ahead. With that, I'll turn it back over to you, Will, to walk through the quarter in more detail.

Thanks, John. Our net interest margin of 3.78% was down 1 basis point from Q1 and and in line with our $3.75 to $3.80 guidance. Deposit costs were unchanged at $1.76, also in line with our guidance. Loan yields of 5.91% were down 5 basis points from Q1 and accretion of $33 million was down $6 million from Q1. Excluding accretion loan yields were up a basis point and NIM was up 4 basis points. One side note about accretion. We often get questions about that number, but rarely about core deposit intangible amortization, a noncash expense resulting from purchase accounting rules. Slide 11 in our deck shows quarterly margin, accretion income and CDI amortization expense. I'll note that our quarterly CDI amortization number of $21 million is getting close to our quarterly accretion number, and I expect those lines to cross in the next 4 to 5 quarters. Additionally, I'll point out that our Q2 2026 EPS, excluding both accretion income and CDI amortization expense was up 13% versus the second quarter of 2025. Net interest income of $576 million was up $14 million from Q1. And comparing to Q1, the $6 million positive impact of the extra day in the quarter matched the $6 million decline in accretion income. As John noted, we had a record quarter for loan growth and loan production with loan growth of $1.35 billion, equating to an 11% annualized rate, matching the growth rate in average loans. Over 76% of our loan production in the quarter had a floating rate. Our Florida Banking Group led the company and loan growth dollars this quarter and every one of our banking groups had good growth. Pipelines continue to be strong, though down slightly from March 31 levels. They remain well above other recent quarters. Noninterest income of $97 million or 57 basis points of average assets was within our guidance range of 55 to 60 basis points and $3 million below Q1's levels as higher deposit fees were offset by lower mortgage revenue. Noninterest expenses of $358 million were slightly better than guided. We had higher deferred loan origination costs offset due to the record quarter for loan production, but this was offset by higher incentive accruals and commission expenses, holding compensation costs flat with Q1 levels. Looking to the remainder of the year, we have no changes to our 2026 NIE guidance for the year. Consensus estimates for NIE are a bit above $1.46 billion, and this is in line with our 2026 guidance of 4% growth over 2025 levels. John noted the continuation of our successful record of low net charge-offs. This quarter's 6 basis points makes 8 out of the last 9 quarters where our net charge-offs have been below 10 basis points. Provision expense of $16 million was primarily driven by the quarter's loan growth. We had a nice reduction in nonperforming assets and in our classified loans and payment performance remains very good. We continue to feel good about our credit quality. Turning to capital. We repurchased 1 million shares in the quarter at a weighted average price of $97.62, for a 68% total payout ratio, including dividends. This brings our year-to-date total to 2.5 million shares repurchased for an 80% total payout ratio year-to-date. We continue to expect to generate solid growth. So our longer-term total payout ratio guidance remains in the 40% to 60% range, as John stated. Even with a higher capital return posture and 11% loan growth in the quarter, capital levels remained very healthy. CET1 ended at 11.1%, TCE was 8.7% and and our TBV per share ended at $58.72, which is up 13% from the year ago level, a period in which we repurchased over 4.9 million shares or approximately 5% of the company. Operator, we'll now take questions.

[Operator Instructons] Your first question comes from Stephen Scouten with Piper Sandler.

Maybe if I could start on NIM trends moving forward if you continue to grow loans at this kind of high single-digit, low double-digit pace and what you're seeing on deposit costs, specifically within that dynamic.

Sure. Stephen, this is Steve. Yes, just a reminder, net interest margin this quarter was 3.78% versus our guide last quarter in the 3.75%, 3.80% kind of right in line. And last quarter, we grew $900 million of interest-earning assets with only 1 basis point of contraction. So I think that was a real win going forward. Deposit costs were flat at 1.76% and within that our guidance. So really, as we think about going forward, really, nothing has changed in our guidance. Our guidance going forward is stable, and we're going to continue to grow. So our -- the format we usually use around interest-earning assets same as last quarter. We see the growth that John talked about continuing on in that mid- to upper single-digit range. We have no rate cuts, no rate hikes in our forecast. -- and we sort of see a stable NIM, and we have some dynamics that are working there. Some of it is the repricing of our existing book that is for loans and securities and then on the new production rates. But all of that to say that we continue to expect NIM if we have flat rates through 2027 just to continue to be in that 3.75 to 3.80 range.

Okay. Helpful. And I know you guys talked about this ongoing conversation industry-wide and internally, the push-pull between growth and NII and NIM. And given your kind of 2026 focus of driving meaningful balance sheet growth, I would presume that you guys had to wait one more to the other would say, a couple of basis points of NIM compression would be okay as long as you're growing good customers, loans and NII. Is that fair in terms of your mindset?

Yes, that's exactly right, Stephen. We set out a plan for this year that we're going to expand the team and we're successfully doing that and they're producing for us. That new hires that we've had so far contributed $600 million of new loan production, and they got a nice big $1.5 billion pipeline coming behind that. So we've got lots of opportunities to grow. And every day when we make loan decisions, we're doing it based upon a risk-adjusted return on capital, and we see opportunities to continue to grow, and we'll make those trade-offs that make sense to us from a capital management standpoint.

Got it. And then just last for me, like from a deposit growth standpoint, do you think it seems like traditionally, there's a little bit more of a pickup in the back half of the year seasonally in terms of deposit growth. Would you expect that deposit growth would more closely match loan growth in the back half of the year? And just kind of how do you think about the pressure on deposit costs as you manage that balance?

Sure. Yes. And that's right. Obviously, there's seasonality that goes on in our book. And typically, second and third quarter, second quarter because of tax payments third quarter, just the rest of the public fund stuff kind of comes out before it starts moving back up. But underlying all those trends, there's been a lot of good deposit activity going on. So from our perspective, as we think about that mid- to upper single-digit loan growth, we're going to fund it for the rest of the year, somewhere in that mid- to upper single digits. I would say that probably as we continue to remix the deposits, it's probably going to be in the mid-single digits over the next quarter or so and then kind of move up towards the upper single digits, probably in the last part of the year based on the seasonality.

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

I was hoping to follow up on the last question around deposits. So inside of that outlook for the back half of the year, Steve, what do you see in terms of deposit mix in terms of noninterest-bearing versus interest-bearing. There were some different dynamics between kind of the end of period and average this quarter that I assume was kind of some seasonality. So just a little bit of color on maybe what happened this quarter on that mix and what you see for the back half.

Sure, John. Yes. As you mentioned, this quarter, we had 5% average deposit growth quarter-over-quarter. So that's sort of how we get paid as we all know. And then we also had 5% noninterest-bearing deposit growth quarter-over-quarter. And so from time to time, there's I don't know the seasonality things that happened on the last day of the quarter or whatever. We don't see that as a trend in a negative way. I just think that's a particular day. But as we think about deposit mix, clearly, the -- as we think about deposit costs and all within our guidance and then, we were able to keep deposit costs flat this quarter. Obviously, if we continue to grow loans at this pace, they'll move up a little bit. But it's really just about if we grow in that kind of mid-single-digit range over the next quarter or 2, we should be able to keep those pretty contained and that's all part of our guide of margin coming forward. So I think noninterest-bearing deposits, if you look at our treasury management kind of underneath the noise, we've grown treasury management accounts this year, about 16% annualized year-to-date. And our year-to-date balances annualized have grown 8%. So underneath all the things that you all don't get to see, there's a lot of good growth going on in those areas.

Great. Then maybe I could ask John for some color on loan growth. Maybe speak a little bit to the sustainability of the strength you saw this quarter and where it's coming from the new markets legacy markets? Any color on that would be helpful.

Yes, John, we've guided this year to mid- to high single digits, and we kind of communicated last quarter that we thought based on the pipeline strength that we could wind up on the higher end of that guide, and we did. We've grown 8% year-over-year. This year, we've grown 9% annualized. So I just feel like we're on track for the prior guidance we gave you. The growth is really broad-based across all of our markets. From a dollar standpoint, naturally, as you think, the greatest contributors are the states where we have the largest presence, which is Florida, Texas, and South Carolina from a dollar standpoint. But from a percentage standpoint, Atlanta saw really nice growth in C&I in the second quarter, so did Virginia and so do Alabama. As we think about the first half of the year, John, versus the back half of the year, we saw a little higher and more elevated C&I seasonal paydowns in the first half. and saw more CRE growth. We look for that possibly to shift in the second half where we would have more of a pickup in C&I and we've got more planned CRE payoffs in the back half. So that's kind of the underlying mix shift that we see in our pipelines.

Your next question comes from the line of Han Win with KBW.

Stepping in for Catherine Mealor. I wanted to start off on expenses. Your expenses came in strong this quarter. And I know you guys are working on hiring initiatives as well and kept your guide at 4%. I was wondering where you're seeing the pricing of these new hires as markets become more competitive and where you expect expenses to trend for the back half of the year as you guys have been relatively flat so far in the first half to 4% for the full year would be a pretty big ramp.

Yes, Anna, it's Will. Yes, you're right. We have, as John said, had success in recruiting folks. And of course, it's a competitive market in which we operate. We do think we offer a value proposition beyond just the compensation package in terms of our culture, our operating structure, the ownership culture, et cetera, which is helpful in our recruiting efforts with some of the disruption we see. In terms of the NIE itself, as I mentioned in my prepared remarks, the one factor that did help on the compensation line is with loan production, you, of course, have a deferred origination cost to offset you book that has been amortized over the life of that loan. So as production picks up, that offset the comp expense increases. That was a help in the second quarter, somewhat offset by incentive accruals and a little bit higher commission expense in the quarter 2. We do expect good production in the back half of the year. We also have these folks that we've hired throughout the first and second quarter that will be in the run rate for full quarters. We also have in the third quarter beginning July 1 when is our merit increases for most of the company beyond the executive staff kick in. So that's an inflationary number there for the comp expense. So all that baked in is why in my prepared remarks, I was sort of holding steady with the 4% year-over-year, which is pretty much where consensus has it, I think, in the $1.460 billion be $1.465 billion range. So we still feel good with that guide. There are obviously a lot of factors that change as you get near the end of the year in terms of incentives and other things like that, that can -- and the loan production number that can cause it to vary a little bit, but that's really how we think about it.

Great. And then my other question is on -- I know you mentioned in your opening remarks keeping capital return in the 40% to 60% range. And I was just wondering if you could give a little more color on the timing and expectations for share repurchases that you see for the rest of the year.

Yes, that's a good question. I'm going to stick with our 40% to 60% guide. We have to make decisions as we serve in the environment from us. We do think we're blessed to have the ability to invest in growth, and we expect to continue to be able to do that. We have taken advantage of weaker share prices over last year and been more active. If you look back over the last year, trailing 12, our payout ratio is 75% and that includes the third quarter of last year where we only bought back 440,000 shares. So the last 3 quarters, the trailing 9 months payout ratio is much higher that's not sustainable if we want to maintain a CET1 in the 11% to 12% range and still expect high single-digit -- mid- to high single-digit loan growth. So -- but other than that, that's about as specific as we can get.

Your next question comes from Michael Rose with Raymond James.

Maybe just on the loan pipeline and growth in generation, can you just talk about how some of the newer bankers that you've hired over the past year or 2 have performed versus expectations? Just trying to get a sense of the momentum levels and how that translates or compares to kind of what's going on in your legacy markets versus the expansionary markets.

Yes, Michael, I go back to kind of the goal to kind of take advantage of some of the disruption occurring in our markets. We laid out the opportunity for our division presidents to increase the commercial relationship manager specifically team by 15% to 20% and be opportunistic over the next couple of years. We're up now over 10% in just 3 quarters. And as I think I mentioned earlier, we're tracking the loan production and pipelines of those specific hires. And through 3 quarters, they've contributed $600 million of loan production. They've got a $1.5 billion pipeline. The most success we've seen, and we're very pleased with the team in Texas led by Dan Strudel, they've had the most success as far as expanding the sales force. They're actually up 25% as far as the number of commercial RMs in Texas. And as we work through the next few quarters, we look for the Southeast continue to kind of pick up on the hiring front. But to be able to produce $600 million for that new team, I feel like they've hit the ground running.

Okay. Very helpful. And then maybe just one. I hear you on the return of the 40% to 60% total payout ratio. I did notice that the cash to assets is kind of low. I think it's like 2.5%. Any concerns around the ability to fund ongoing buybacks? And obviously, nice to see the dividend increase.

Yes, Michael, this is Steve. No. That's -- there's nothing around that. We've typically -- if you looked over our history, we run somewhere in that 2% to 3% range on the cash assets. So that's normal. So as it relates to the buyback, that's not a limiting factor.

Yes, cash is not a component of that decision-making process. No.

Your next question comes from the line of Janet Lee with TD Cohen.

Good to see your deposit cost being relatively stable. So are you suggesting that your NIM guide is assuming deposit cost increase a little bit from here or stay relatively stable through the year end? I just want to clarify your comments there.

Sure. Yes, this is Steve. Yes, we think that deposit costs would move up a little bit here over the rest of the year, depending on how long rates stay flat and we're as we think about the opportunity of growth, your incremental deposit cost is going to be marginally higher, which is going to, over time, add to it. But as you kind of look at what happened this past quarter, we also have repricing of the old. So Yes, I would expect it to move up a little bit. But from a standpoint of it's well within the guidance of being able to reprice some of the other assets on our balance sheet, and that's why we get stable NIM.

Right. And is NIM having up upward bias or could come in at the high end, if we get a hike, is that a fair assumption? .

Yes. No, it's a really good question. So if you think about it, it really depends upon the curve. But if -- the way we kind of characterize our interest rate position as we are asset sensitive, if they hike rates, let's say, every 25 basis points, but the curve doesn't change, then it's probably reasonably neutral -- but if there's an upward -- if everything goes up 25 basis points, everything goes up 50 basis points, then it is very accretive to our NIM. That's the asset sensitivity. So we still continue to get the asset repricing, which is very beneficial. At the same time, we get to get a better curve. So if it's the way I would kind of characterize it, we're pretty stable around whether rates go up or rates go down. If there's a bare flattener, it's probably pretty much a wash, but if it's a shock up, then that would be positive to the NIM.

And if I can just squeeze in one more. Fee income trajectory, it's been down a past couple of quarters. How should we think about the growth trajectory here? And where do you see the most upside in terms of growth? What's like a good growth rate for fee income in '26 and perhaps beyond '26?

Sure. Yes. On Page 12, we have a summary of our noninterest income over the last 4 quarters. And you can kind of see it's a little bit bumpy. The $97 million this quarter was 57 basis points of assets. Our guide has continued to be 55 to 60 basis points. And if you look at it a year ago, second quarter a year ago were up 11%. And a lot of that is because of the correspondent revenue on the right-hand side of that page, you'll see that gross revenue has increased about $5 million. So how we kind of look at it, really nothing's changed on that guidance. 55 to 60 basis points is the right number. And as we grow assets, we're trying to continue to there's going to be continued growth. But from a percentage perspective, I'd see us somewhere in the middle of that range. So no change there.

Right. So correspondent banking is it relatively stable based on what you're seeing the markets?