SouthState Corporation (NASDAQ:SSB) Q4 2023 Earnings Call Transcript
SouthState Corporation (NASDAQ:SSB) Q4 2023 Earnings Call Transcript January 26, 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: Hello, and welcome to the SouthState Corporation Q4 2023 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. [Operator Instructions] I will now turn the conference over to Will Matthews. Please go ahead.
Will Matthews: Good morning, and welcome to SouthState's fourth quarter 2023 earnings call. This is Will Matthews, I'm here with John Corbett, Steve Young, and Jeremy Lucas. John and I will provide 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'll turn the call over to John Corbett, our CEO.
John Corbett: Thanks, Will. Good morning, everybody. Thank you for joining us. You can see in the earnings release that SouthState delivered a solid quarter that was consistent with our guidance. High level, it was another quarter of steady, loan and customer deposit growth with mid-single-digit growth in both. NIM did the couple basis points, but is leveling off and capital ratios are growing nicely. The end of the year is always a time for reflection. As we look back on 2023 and specifically the turmoil last spring, it was a period that demonstrated the resilience of SouthState, particularly the resilience of our granular deposit franchise, the resilience of our asset quality and the resilience of the high-growth markets where we operate.
The new census report was issued last month and not surprising, Florida, South Carolina, North Carolina and Georgia were all on the top five fastest growing states in the country during 2023. And since the pandemic, over one million people have moved to Florida. SouthState is a company that was forged during the Great Recession, during a decade of rapid consolidation. The culmination of that period was a merger of equals announced four years ago this month. That significant event in our history was an opportunity to catch our breath and spend a couple of years to retool the guts of the bank, specifically in the areas of technology and risk management. Our goal is to strengthen the infrastructure without sacrificing our decentralized and entrepreneurial culture.
It was painstaking work that affected every area of the bank. We upgraded 20 different technology platforms and increased our annual technology spend by 76%. Annual spending on technology in 2024 is estimated to be $68 million more than it was in 2020. On the risk management side, our program has matured to meet the heightened expectations of the OCC. We upgraded with experienced professionals from the big banks and strengthen the three lines of defense. Now during the first couple of years, those technology and risk management changes took a toll on our employees and impacted the customer experience, but it was short-term pain for long-term gain. So with a larger bank infrastructure in place, our focus pivoted in 2023 to making our employees and customers' lives better, we needed to refine the new technology so that it was serving us, rather than the other way around.
And I think we've been largely successful. Employee engagement is now back to the top quartile of our peers. And we're beginning to leverage the power of the new technology. Now in 2024, as we approach the end of the COVID era and hopefully, a more normal yield curve, we believe we can deliver outsized shareholder returns in the future. It's a future that's possible, because of the hard work over the last few years. So I'll close by thanking our team, for preparing us, for this next chapter. I'll pass it back to Will now, to walk you through the details on the quarter.
Will Matthews: Thank you, John. As you noted, the fourth quarter was a good finish to a year in which SouthState reported solid performance in Soundness, Profitability and Growth while facing a relatively volatile environment. I'll touch on a few details before we move to Q&A. On the balance sheet, fourth quarter annualized loan growth of 5%, brought our full year growth to 7%. Customer deposit growth, excluding the maturing brokered CDs we didn't replace, a 5% annualized approximately matched the loan growth rate. For the full year, total deposits grew 2%, with customer deposits essentially flat. DDAs represented 29% of total deposits at quarter end down another percent from 30% last quarter, leaves near the levels we were pre-pandemic for DDA as a percentage of deposits.
Turning to the income statement, our 3.48% NIM was down two basis points from the prior quarter and consistent with our 345 to 350 guidance. Loan yields in Q4 were up 12 basis points and deposits were up 16 basis points, in line with our 15 to 20 basis point guidance. This brings our cycle-to-date loan beta to 36% and our cycle-to-date deposit beta to 30%. Our net interest income of $354 million was essentially flat with the third quarter. For the full year 2023 margin comparison versus 2022, 2023's NIM of 3.63% was 26 basis points higher than 2022s, while the cost of deposits rose from 10 basis points in 2022 to 120 basis points in 2023, in a period of 500 basis points of Fed Rate Hikes not to mention the March crisis. While it's been a challenging period in which to manage a financial institution balance sheet, I think our margin performance during this period of rapid change really highlights the value of our core funding base.
Non-interest income of $65 million was down $8 million from Q3 and at 58 basis points of assets was in line with our 55 to 60 basis points guidance. Correspondent revenue was $3.4 million after $12.7 million in interest expense on swap collateral for $16 million in gross revenue, down approximately $9 million from Q3. Wealth had a record quarter with revenue exceeding $10 million. And we had a strong quarter in deposit fees similar to Q3 and last year's fourth quarter. Mortgage revenue continued to be weak, though I'll complement our leadership on their performance in this challenged environment. We track various metrics versus the Mortgage Bankers Association quarterly performance report and our team consistently outperforms the industry in several key metrics.
Operating expenses of $246 million which excludes the $25.7 million for the FDIC special assessment were in line with our expectations and were above Q3 levels due to some of the items we mentioned in our third quarter call. Looking ahead, we expect NIE for Q1 in the mid-to-high-240s, subject to normal variations in expense categories impacted by non-interest income and performance. With respect to credit, we recognized $7.7 million in net charge-offs in the quarter, bringing our year-to-date total to $25 million or 9 basis points for the quarter and 8 basis points for the full year. Of the year's net charge-offs, $7 million came from deposit accounts and $18 million from loans for approximately 6 basis points in loan net charge-offs. Our provision expense was $9.9 million for the quarter and $114 million for the year, leaving our ending total reserve to remain approximately flat at 158 basis points of loans.
And over the last two years, we've provisioned $196 million against only $29 million in net charge-offs. So we built our reserves appropriately under CECL in advance of potential credit deterioration. For overall asset quality trends, NPAs were up $8 million, driven by an increase in SBA loan non-accruals, which are 75% or more government guaranteed. Speciality loans declined and substandard loans increased. The increase in over 90s is due to utility company storm repair receivables in our factoring business. These typically turn slowly, and the majority of these have been collected since quarter end. Loan past dues were down quarter-over-quarter. 60% of our NPAs are current on payments and the past two NPAs are centered in the SBA, consumer and residential portfolios.
I'll reiterate that we do not see significant loss content in our portfolio. C&I line utilization was up 1% in the quarter and home equity line of credit utilization was down slightly. We continue to have very strong capital ratios with a CE Tier 1 of 11.8% or 10.2% if AOCI were included in the calculation. The move down in interest rates caused our AOCI to shrink, helping our ending TCE to grow to 8.2%. Our ending TBV per share grew to $46.3, up $6.23 for the year. During the fourth quarter, we purchased 100,000 shares at a volume-weighted average price of $67.45. We continue to believe risk-weighted asset growth and capital formation rate should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with great flexibility.
Operator, we'll now take questions.
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