Earnings call transcript: South State Corp beats Q4 2024 EPS estimates

South State Corp (NYSE:SSB), a regional bank with a market capitalization of $10.7 billion, reported impressive financial results for the fourth quarter of 2024, exceeding both earnings and revenue forecasts. The company posted an earnings per share (EPS) of $1.93, surpassing the anticipated $1.66. Revenue reached $450.32 million, beating the forecast of $435.94 million. Following these results, the stock surged by 4.22% in after-hours trading to $103.67 and continued to rise to $106.7 in aftermarket trading. According to InvestingPro analysis, the stock appears to be trading below its Fair Value, suggesting potential upside opportunity.

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Key Takeaways

• EPS of $1.93 beat estimates by 16.27%.
• Revenue grew to $450.32 million, exceeding expectations.
• Stock price increased by 4.22% post-earnings.
• Successful acquisition of Independent (LON:IOG) Financial bolsters market position.
• Anticipated mid-single digit loan growth in 2025.

Company Performance

South State Corp demonstrated strong performance in Q4 2024, with significant revenue and net interest income growth. The acquisition of Independent Financial positions the company strategically in high-growth markets such as Texas and the Southeastern U.S. The company reported a 5% loan growth and 3% increase in deposits for the year, highlighting its expanding customer base and operational efficiency.

Financial Highlights

• Revenue: $450.32 million, up by $24 million from the previous quarter.
• Earnings per share: $1.93, exceeding the forecast of $1.66.
• Net interest income increased by $18 million quarter-over-quarter.
• Non-interest income rose by $6 million to $80 million.

Earnings vs. Forecast

South State Corp’s Q4 2024 EPS of $1.93 outperformed the forecast of $1.66, a surprise of 16.27%. Revenue also exceeded expectations, coming in at $450.32 million against a forecast of $435.94 million. This marks a continuation of the company’s strong performance trend.

Market Reaction

Following the earnings announcement, South State’s stock rose by 4.22% in after-hours trading, reaching $103.67. The positive momentum continued, with the stock price climbing to $106.7 in aftermarket trading, reflecting investor confidence in the company’s financial health and strategic direction. The stock has demonstrated strong performance with a 33.5% return over the past year and a 6.1% gain year-to-date. Analyst consensus remains bullish, with price targets ranging from $109 to $135.

Outlook & Guidance

Looking ahead, South State Corp projects a net interest margin (NIM) between 360 and 370 basis points for Q1 2025, with an expectation to exit the year between 375 and 385 basis points. The company anticipates mid-single digit loan growth and a steady deposit cost of around 2% for Q1 2025. The strategic focus remains on expanding in high-growth markets and optimizing asset size.

Executive Commentary

CEO John Corbett emphasized the company’s strategic positioning, stating, "Our strategy has been to build the company in the best geographies in the country with the best scale and the best business model." Executive Steve Young highlighted margin expectations, saying, "We would expect NIM to be between 360 and 370 in Q1, and then we would exit Q4 of this year between 370 and 380."

Risks and Challenges

• Increased operational expenses could impact future profitability.
• Potential volatility from securities portfolio restructuring.
• Competitive pressures in high-growth markets.
• Macroeconomic factors, such as interest rate changes, could affect financial performance.

Q&A

During the earnings call, analysts inquired about the company’s M&A strategy, credit quality, and loan portfolio dynamics. Management addressed these concerns, highlighting opportunities for margin expansion and strategies for managing deposit pricing and brokered CDs.

Full transcript - South State Corp (SSB) Q4 2024:

Conference Operator: Good morning and welcome to South State’s 4th Quarter 2024 Earnings Conference Call. All participants are in a listen only mode. After the speakers’ remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Will Matthews, South State’s Chief Financial Officer.

Thank you. Please go ahead.

Will Matthews, Chief Financial Officer, South State: Good morning, and welcome to South States’ Q4 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 to highlight a few items of interest and then move into questions. Our comments will reference the earnings release and investor presentation, which you can find on our website under 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’ll turn the call over to John Corbett, our CEO.

John Corbett, CEO, South State: Thank you, Will. Good morning, everybody. Thanks for joining us for South State’s 4th quarter results. For the quarter, we clearly felt the effects of the Federal Reserve’s 1st rate cut in September. In October, we started to see deposit growth across all our regions and the growth occurred even as we were cutting deposit rates at the same time.

Now some of the growth is seasonal and it’s amplified by the normal pickup in municipal deposits during the tax collection cycle. So deposits normally get a little inflated in the Q4 anyway. Steve used some of the excess liquidity and he paid down our brokered CDs. But if you back out that decline in brokered CDs, customer deposits actually grew by 9% on an annualized basis. So it’s nice to feel like we’ve reached the end of the tightening cycle.

Liquidity is improving and deposit pricing is becoming more rational. That improving backdrop led to a 9% pickup in PPNR for the quarter, led by a 6% increase in total revenue. For the year as a whole, I feel like our regional presidents did a great job managing the inverted yield curve. They were able to generate moderate mid single digit growth and they did it with an eye on maintaining our net interest margin. Earlier this month, we announced a sale leaseback transaction on approximately 170 branches.

We’ve looked at this type of transaction several times over the years and felt like the stars align now. We’re able to harvest approximately $225,000,000 of off balance sheet capital and the cost of capital is very attractive compared to the other sources of capital. We now have the option to convert this extra capital into future revenue growth. And finally, our biggest development was the regulatory approval of Independent Financial in December and the subsequent closing on January 1. When we announced the acquisition in May, we modeled a closing at the end of the Q1, so things progressed a little faster than planned.

We’ve got the conversion scheduled for Memorial Day, so we should have a relatively clean Q4 after cost saves. Our teams have spent a lot of time together over the last few months, and I can sense both their excitement and their eagerness to finish the integration and keep building the company and serving our clients. Our strategy has been to build the company in the best geographies in the country with the best scale and the best business model. And the independent franchise fits that strategy like a glove. The Census Bureau released their latest report in December and not surprising, Florida, Texas and the Carolinas continue to lead the nation for growth.

Will, why don’t you go ahead and walk us through the moving parts on the balance sheet and the income statement?

Will Matthews, Chief Financial Officer, South State: Thank you, John. As you said, the Q4 was a good end to the year in several respects. High level $24,000,000 in revenue growth versus $7,000,000 in expense growth made for a solid quarter of operating leverage. Balance sheet growth was in line with our mid single digit guidance with loans up 4.2% annualized and deposits up 4.5% annualized or over 9% excluding brokered as John noted. For the year, loans grew 5% and deposits grew 3%.

On the income statement, a 15 basis point reduction in our cost of total deposits helped drive an 8 basis point improvement in our NIM to 348. Net interest income grew by $18,000,000 over Q3 on the same day count. Non interest income of $80,000,000 was up almost $6,000,000 from the 3rd quarter on somewhat broad based improvement, led by correspondent, which was up $3,700,000 with flat variation margin expense. Mortgage income was up $1,600,000 with wealth up $800,000 And I’ll note that wealth had a record year with its 45,500,000 in revenue, up 15% over the prior year. Deposit service charge income was also up 1,100,000.

Non interest expenses were up 7,000,000 in the quarter to 250,700,000,

Steve Young, Executive, South State: dollars which was at the high end of

Will Matthews, Chief Financial Officer, South State: our guidance. The largest increase was in commission expense, which was up over $3,000,000 due to higher performance in commission based businesses. Even with the growth in expenses, our efficiency ratio improved quarter over quarter by 140 basis points to 54.4%. On credit and credit expense, we had $5,000,000 in net charge offs for the quarter or 6 basis points annualized, which brought our full year net charge offs to $18,000,000 also 6 basis points. Our 4th quarter provision expense was $6,000,000 leaving reserve levels flat.

The ending total allowance to loans was healthy at over 1.5%. Our 30 to 89 past dues were 22 basis points, which is down $14,000,000 from Q3 and also down from year end 2023’s 24 basis points. NPAs ended the year at 63 basis points, up 6 basis points from year end ’twenty three levels. I’ll note that approximately 23% of our non performing loans are SBA (LON:SBA) loans with a 75% guarantee and 46% of our non performing loans are current on payments. Substandard loans were also up.

We continue to view these as transitional substandard loans for the most part with downgrades primarily due to interest rates rather than as indicative of expected losses. As to capital, we ended the year with healthy capital levels with CET1 at 12.6%. Our Q4 and full year ROAA of $127,000,000 and $121,000,000 respectively provided us with a healthy capital formation rate. Operator, we’ll now move to questions.

Catherine Mealor, Analyst, KBW: Thank you.

Conference Operator: Our first question comes from Catherine Mealor from KBW. Please go ahead. Your line is open.

Catherine Mealor, Analyst, KBW: Thanks. Good morning.

Gary Tenner, Analyst, D.A. Davidson: Hey, Catherine.

Catherine Mealor, Analyst, KBW: Really nice to see the higher NII this quarter and NIM expansion. I wanted to see if you could just update us on your thoughts on the margin moving forward, now that especially we’ve got the deal closed and what you’re thinking about, maybe 2 updates kind of where the margin is with updated thoughts on marks and then also with, kind of taking a couple of cuts out of the Fed’s projection versus the last time we spoke, maybe what that does to the margin projection over the course of the year? Thanks.

John Corbett, CEO, South State: Sure, Catherine. This is Steve. And yes, thanks for recognizing the NIM expansion. We were really happy about that this quarter, 8 basis points. The margin was up to 3.48%, which is higher than our guide of 4 to 5 basis points.

And really, as John mentioned, a lot of that was the deposit cost work that the regional presidents did and really did a really nice job of bringing that together. So now that we closed independent on oneone, I probably just need to update you on the NIM guidance for 2025 and kind of the moving parts and assumptions. Kind of the bottom line, not much has changed other than our closing date, but I think maybe walking you through the parts and pieces hopefully will help you. So as we think about the major assumptions for 2025 now that independent is closed on oneone, there’s the average earning assets as 1. 2nd is our rate forecast.

The 3rd is how the South State legacy loan fixed rate loan re prices. And then the 4th is just around the merger marks, as you mentioned. So as we think about the expected average earning assets for the full year, we expect about $59,000,000,000 That’s based on a mid single digit loan growth rate for the year. We are assuming that we start the year somewhere around $58,000,000,000 maybe a little less and then ending the year a little over $60,000,000,000 second is our rate forecast. So we have no rate cuts in this guidance.

We’re holding rates flat from the twelvethirty onetwenty 24 yield curve. And then the 3rd part, which we’ve talked about many times, is just our legacy loan repricing book. We have approximately $1,000,000,000 a quarter that’s repricing from the high 4s into the high 6s or early 7s. That’s about a 200 basis point pickup. And that should increase the margin as time goes on about 3 basis points.

So if you run that math, it’s $20,000,000 over that earning assets. And then the 4th one, the last one is what you mentioned is the merger marks. So our team is working to finalize the merger marks by March 31. Just kind of anecdotally from the announcement date, the 3 year treasury, which is really the approximate average life of the independent financial loans, that 3 year treasury fell by about 34 basis points. We originally modeled around a 7.5% discount rate.

So we would expect assuming spreads don’t change a whole lot, something less in that 30 to 35 basis point range, something like that, depending on, as you know, many moving parts. So we’ll have a little bit more capital day 1 and a little less earnings absent doing anything else. So based on all these assumptions, we’d expect NIM to be between 360 and 370 in the Q1, and then we would exit the Q4 of this year because of the loan the legacy loan repricing between 370 and 380. Having said all that, as I mentioned before, we’re likely to have some excess capital from less day 1 interest marks on independent as well as some capital from our previously announced sale lease transaction that will hopefully get done at the end of the Q1. So we would expect we would take some of that excess capital and deploy it at a potential securities restructure at the end of the Q1.

Our expectation would be we would offset the additional lease expense of around $30,000,000 to $35,000,000 annually. This would equate to an additional 5 basis point margin expansion starting in the Q2. So in the summary of all of that, we would add 5 basis points to the 2nd quarter to 4th quarter margins in 2025 and we would start at 360 to 370 in the Q1, exit at 375 to 380 excuse me, 375 to 385 as well as it gives us additional capital to deploy in the future revenue growth versus what we originally modeled. And then lastly, as I think about 2026 and an upwardly sloping yield curve, we’d expect NIM expansion to continue to do it as the continued repricing of the legacy South State back book of 3 basis points per quarter. So all of this is sort of in line, but there’s a lot of moving parts and hopefully that helps you model as you think throughout the year.

Will Matthews, Chief Financial Officer, South State: Yes. And Catherine, let me maybe jump into this as Will. Just say that potential securities portfolio restructuring is just potential at this point. We’ve made no decisions and we’ll continue to evaluate that through the quarter, maybe see how the marks shape up as we get toward the end of the quarter and then make a decision at that point. So nothing’s been decided in that regard thus far.

Catherine Mealor, Analyst, KBW: That makes sense. And so, I mean, in your exit margin, as we talked about last quarter, was to 3.75% to 3.85%. So it almost if I can kind of simplify it, it almost feels like you had a little bit of a better margin this quarter, so maybe you’re coming in kind of with a better core base. And then kind of the impact of taking few cuts out of the forecast is really offset maybe that better base plus what you can do on the bond restructure to kind of to leave you at the same level exiting 25. Is that a fair way to?

John Corbett, CEO, South State: Yes. I think a fair way to say it. And I think you talked about the second and the third quarter was independent we thought would add 10 to 15 basis points of margin expansion to us. And I think with the rates down a little bit in that curve probably adds 10, not 15. And then of course that additional gives us a little extra capital day 1, so we can decide how to deploy that.

Will Matthews, Chief Financial Officer, South State: Yes. And even with rates flat, we would expect to get a little bit of continued pickup on cost deposits just as CDs mature and things like that from where we start off in the Q1. That would help too even if rates stay flat.

Catherine Mealor, Analyst, KBW: Okay. And I know you’ve also said in the past that each rate cut adds about 3 to 5 bps to your margin. Is that as you think about the combined companies, is that still a fair way to think about it given this guidance is no cuts?

John Corbett, CEO, South State: Sure. Yes. No, this is interesting. You have to think through fair value accounting for a second. So the way I would think about it is absent if we continue to keep the normalized yield curve, meaning upward sloping, we would expect on the legacy loan repricing to be 3 basis points per quarter accretive.

And then from there, what would move it from the legacy independent book would be if we hit rate cuts, we would get another 1 to 2 basis points. So that would be 4 to 5 basis points. If they cut rates 25 because they’re a bit more liability sensitive as a company and conversely, if for some reason they raise rates from here, we would still get the 3 basis points increase in the margin from our back book, but we’d probably subtract a basis point or 2 from the legacy independent on a combined basis. So it’d still be accretive, but it wouldn’t be as accretive. So it really makes our this transaction, as we talked about a long time ago, it really makes our balance sheet much more neutral and kind of puts our the thing that will continue to drive NIM will be the loan back book repricing from the legacy South State.

And then if we have rate cuts, we’ll probably get some more from that. We’ll get a little bit better NIM from the independent deposit franchise.

Catherine Mealor, Analyst, KBW: Okay. All very helpful. Thank you and congrats on closing the deal early.

Samuel Vargas, Analyst, UBS: Thank you.

Conference Operator: Our next question comes from Stephen Scouten from Piper Sandler. Please go ahead. Your line is open.

Steve Young, Executive, South State: Yes, thanks. Appreciate it. I wanted to see if there was any kind of additional thoughts around the sale leaseback. I know, John, you said kind of things aligned here with the math and just the thought process. But can you walk us through kind of why you felt like that was the right decision now?

And if, let’s say, you weren’t to do a securities restructure for whatever reason, what the other priorities for the excess capital might be?

John Corbett, CEO, South State: Yes, sure. Stephen, good morning.

Will Matthews, Chief Financial Officer, South State: Yes, so

John Corbett, CEO, South State: we’ve kind of done a lot of branch repositioning over the last decade, and we’re very comfortable with the branch network that we’ve got today. So entering into this long term sale leaseback kind of is a nod to the fact that we plan on being in these branches for quite some time. So really it’s really about harvesting capital, off balance sheet capital that we’re not getting any credit for. And when we ran the numbers, the cost of capital was more attractive than other sources of capital. So really it’s more of a capital management exercise that will give us flexibility going forward.

And the other thing is as we’ve looked at it, one of the things you want to look at is the spread of the cap rate versus the risk free rate, and it was pretty narrow. So, we felt like this was a good opportunity to do

Steve Young, Executive, South State: it. Got it. Okay. And does the math around a potential securities restructure, I mean, is that slightly more advantageous if rates remain high or what’s kind of the puts and takes of the maybe the best mathematical environment for you to get something done if that becomes the best?

John Corbett, CEO, South State: Yes, Stephen, this is Steve. I think probably we’re probably the most important is landing where our capital marks are going to be. And based on that, we’re going to decide if we do a bond restructure or securities restructure and to what extent. So I think for us, there’s a lot of moving parts with the independent transaction. We have the sale leaseback.

But by the end of the Q1, we’re going to know all those answers. And by the call in April, we’re going to be able to tell you all those things. But I guess the way I would describe it is this is an attractive the sale leaseback is an attractive ability to get capital. And from here, we can deploy it in lots of different ways, whether it’s a securities restructuring, which certainly is one piece of it, certainly could be in lots of other places as well. So we’re just going to make those decisions as we go through.

Will Matthews, Chief Financial Officer, South State: And Stephen, I would add, if we were to consider a portfolio structure to your question, there are different philosophies around that. You can take your bonds that are deepest underwater and get rid of those or you can take ones that are more moderate but have a better earn back profile. And so we’ll think about all those things. I mean, we haven’t finalized our mark yet as we’ve said a couple of times and that process is ongoing. We hope to have a better idea by the end of Q1 and probably won’t be final, final, but be a lot closer to final.

And right now, seeing where we sit, we think our capital position is going to be better than the 10 point 4 CET loan we announced at the time of the merger announcement. I mean, it could be somewhere should be north of that, maybe closer to the 11% range at closing. So, again, a little more flexibility and optionality through that capital base than we probably modeled 9 months ago. Yes.

John Corbett, CEO, South State: And the last thing I’d say is that we love our as we forecasted and what I just told you about margin and so on, I mean, we really like our revenue profile and our PPNR profile. So this is just on top of that. We have extra capital to do whatever else we need to do. I think it’s a nice lever to have.

Steve Young, Executive, South State: Yes. Got it. Got it. And just last thing for me. I know the ink is barely dry here on IBTX closing, but everybody is getting kind of bulled up on M and A.

And if we do see a more active environment where more banks try to, let’s call it, like hit this 18, 24 month window that we think we have, would you guys think you’d be prepared to do another deal right now if it came to pass, if the right deal hit your desk? Or do you really want to just focus on the integration, the build out within the Texas markets and let that play out first more fully?

John Corbett, CEO, South State: A lot of our talk about our strategy is finding the best scale in the banking business model. And today, we feel like, Stephen, the best scale is somewhere in that $60,000,000,000 to $80,000,000,000 of assets. So for 2025, our focus is entirely on integrating IBTX and getting that team productive and growing and feeling good about the partnership. And then the second thing in 2025 is just going to be learning what the new regulations are under the Trump administration and getting a better understanding of what the hurdles at $100,000,000,000 would be. So until we know what those hurdles might be, we think the $60,000,000,000 to $80,000,000,000 in size is the best place to be, but we’re going to learn more as the year progresses.

Steve Young, Executive, South State: Yes, makes perfect sense. Great. Congrats on another great year. Thanks guys.

Conference Operator: Our next question comes from Russell Gunther from Stephens. Please go ahead. Your line is open.

Russell Gunther, Analyst, Stephens: Hey, good morning guys. Good morning. I wanted to good morning. I wanted to start back on the legacy South State NIM if we could. The fixed repricing opportunity is strong and well understood.

But could you guys spend a minute in terms of how you’re thinking about the other side of the balance sheet, deposit cost trends and then just any kind of CV maturity and rate repricing opportunities embedded in the guide?

John Corbett, CEO, South State: Sure. No, that’s a good question, Russell. As we think about the pro form a company and we think about the Q1 deposit cost, I would kind of model around 2% would be a good way to think about it as a pro form a company after remember that in the Q4, the last rate cut came mid end December, so we didn’t really get that into our deposit costs until January. So if you took us as a pro form a company, it’d be a little higher if you looked at the Q4. But if you look at the Q1, we’d be around 2%.

And then as it relates to the CD repricing opportunity, there certainly is one there. But if you kind of looked at our beta and what we told The Street that our beta combined would be, our peak deposit pricing as a combined company was the 3rd quarter around 2.29%, 2.3%. And so there’s been 100 basis points of cuts. If we end up about 2%, that would be about a 30 percent beta. We were expecting kind of 20% on a standalone, 40 IBTX and 20, 25%, I think, on a combined.

So we’re doing a little bit better than we originally expected, originally modeled, but I would kind of use 2 as a guide. And maybe it drifts down a base point to over time, but I wouldn’t expect a huge change to that.

Russell Gunther, Analyst, Stephens: Okay, great. No, I appreciate that. Thank you. And then just switching gears, if you guys could give us a sense for how you’d expect the correspondent banking business to trend over the course of the year? And any update to your kind of pro form a fee to average asset guide?

John Corbett, CEO, South State: Sure. Yes, thanks, Russell. On Page 25, we look at the non interest income to average assets. And to Will’s point earlier, the non interest income increased really nicely, dollars 5,700,000 from the Q3. It was 69 basis points of average assets versus our guide of 65,000,000.

So it was a really great quarter. And really most of that is related to the correspondent bank. It increased about $3,500,000 And mainly most of it was due to the fixed income sales of which most of that was due to our new SBA securitization team we recruited earlier in the year in Houston. So they had a great quarter and it was glad to see that doing well. There was other increases in mortgage wealth.

Wealth had a really nice increase, really great year. But with the closing of IBTX, I don’t think our guidance has really changed in here. We mentioned kind of guiding 50 to 55 basis points of non interest income and we thought we’d be on the higher end of that range. That’s kind of where I think we were continuing to plan. And then I guess if what would improve that, so if we’re closer to 55 basis points, what would improve that would be if the Fed all of a sudden started cutting rates again, I think that would be attractive to some of our capital markets businesses.

And so you’d probably start seeing that trend towards $60,000,000 So that’s kind of the way I’d frame it up. We’re kind of if you look at the improvement in the correspondent bank this year, I think, we were around $70,000,000 of revenue in the Q4 annualized. I think we’re around $80,000,000 revenue. I think that’s probably a good starting point. And then if we get rate cuts from here, maybe you see it go higher towards the 2023 number of about $90,000,000 something like that.

That’s our expectation.

David Bishop, Analyst, Hovde Group: Okay. Got it. Very good.

Russell Gunther, Analyst, Stephens: All right guys. That’s it for me. Thanks for taking my question.

Will Matthews, Chief Financial Officer, South State: Thank you.

Conference Operator: Our next question comes from Michael Rose from Raymond (NSE:RYMD) James. Please go ahead. Your line is open.

Michael Rose, Analyst, Raymond James: Hey, good morning guys. Thanks for taking my questions. Hey, just wanted to get a sense on the lending environment right now, both in your core markets and then in Texas and just what we could expect as we move through the year, just looking at pipelines and it looks like the environment is a little bit more favorable, but I think most companies that have kind of reported are talking more of a back half acceleration in loan growth. Just wanted to see what you guys are seeing in your markets and on both sides of the table? Thanks.

John Corbett, CEO, South State: Yes, Michael, good morning. It’s John. Earlier in 2024, we guided to a mid single digit loan growth and that’s really where we landed. We had about 5% loan growth for the year, so in line with the guidance. In the Q4, loan production was up about 17%.

We did about $1,600,000,000 in originations in the 3rd quarter, dollars 1,900,000 in the 4th quarter. Some of that was seasonal lending that we see this time of year for we do a lot of business with storm repair companies after the hurricanes. Generally on the customer sentiment front, I’d say that clients are still adjusting to higher interest rates in their budgets both consumers and businesses. Along with other forms of inflation, it just makes things tighter in people’s budgets. So some folks are waiting to see if rates come down and they may not come down.

So I think there’s a lot of optimism from our clients about the deregulatory pro growth agenda here, but sometimes there’s a lag effect from that optimism until you see it in the pipeline. So as we head into 2025, I think continuing with that mid single digit growth is appropriate, might be a little bit slower to begin with and pick up later. You asked about the pipelines of IBTX and South State. South State, we had good closings in the Q4 and our pipelines are a little softer as we start the first quarter down about 10%. But I talked with Dan Brooks yesterday in Texas and the pipelines in Texas and Colorado have actually picked up some.

So they’re feeling good about their pipeline growth headed into the year.

Michael Rose, Analyst, Raymond James: Great. And then maybe one for Steve. Any updated expectations as it relates to expenses to average assets or assets on a pro form a basis? Thanks.

Will Matthews, Chief Financial Officer, South State: Hey, Michael, it’s Will. I’ll take that one. First off, I guess a couple of assumptions to keep in mind. We are currently assuming that the sale leaseback closes March 1, which would give you 10 months of the higher lease expense net of the foregone depreciation. So that’s roughly $30,000,000 or so in NIE to add to the year for that 10 month period.

We’re also assuming that we achieve approximately 50% of the cost saves in 2025, that’s $45,000,000 or so because our conversion date even though we closed earlier, conversion date remains the end of May, Memorial Day weekend. And as John noted earlier, you’ll have some folks stick around through post conversion and then you really have more of a clean quarter in Q4. And we still have to finalize, of course, the marks, as Steve noted, and that includes the CDI mark, which is amortized on an accelerated basis. So depending on how that shapes up, it could have an impact as well. So with all that, high level, I would say for the earlier part of the year, the Q1 or 2, a range of $355,000,000 to $365,000,000 in NIE per quarter.

And then as we exit the year and the last quarter, the range would be more in the $340,000,000 to $350,000,000 And that would be after any sort of inflationary pickup in $25,000,000 over $24,000,000 levels, the mid year raises, things like that.

Michael Rose, Analyst, Raymond James: Okay, great. And then maybe just finally for me, I know broker deposits were down both for you and at IBTX this quarter. Any more to kind of do there? We all you kind of feel like you’re in a good spot at this point from a go forward basis? Thanks.

John Corbett, CEO, South State: Yes, Michael, this is Steve. I guess, as you think about what happened this past quarter, for both us and independent, we had really good customer deposit growth in the Q4. I think ex brokered CDs, I think our deposit growth was around 9%. So I think we use brokered as a bit of a lever depending on the growth in customer deposits. So our expectation is that customer deposits are kind of mid single digit growth next year and we’ll use kind of brokered as sort of a lever in order to fund the loan growth.

So that’s kind of how we’re thinking about it.

Gary Tenner, Analyst, D.A. Davidson: All right, great.

Samuel Vargas, Analyst, UBS: Thanks for taking my questions. Thank you.

Conference Operator: Our next question comes from Samuel Vargas from UBS. Please go ahead. Your line is open.

Samuel Vargas, Analyst, UBS: Hey, good morning. I wanted to start off actually on the credit front, with the deal close. I wanted to see if you could give us some data thoughts around the sort of combined loss rate, just given how impressive 2024 was?

John Corbett, CEO, South State: Maybe I can start and Will you can chime in here. But client payment performance has been very good throughout 2024. I mean our past dues, Will mentioned, were only 22 basis points at the end of the quarter. Charge offs were in the 6 basis point range. So our clients are doing really, really well.

We have seen a tick up in classified assets, our classified loans and it’s really a floating rate issue and a debt service coverage issue. It’s not really a payment performance or client performance issue. So as I talk to our credit team really in our CRE book, they really don’t see any loss visibility there. I mean substandard loans have a 56% loan to value. So there’s lots of equity and great institutional sponsors.

Most of the classifieds we’re seeing are CRE loans that are projects and stabilization. And I’ll give you an example where Will talked about some of these being substandard loans in transition. 64% of our commercial real estate loans have a floating rate and that may have a slightly negative debt service coverage. But if you use today’s permanent interest rate in the permanent market, they would have a positive debt service coverage. So that’s part of this transitionary type thing that we’re going through here.

So when the loans mature, the property sell. We’re seeing plenty of liquidity in the market, particularly multifamily. Those loans mature and they’re gone. So anyway, I think as you head into 2025 to the extent we have charge offs and losses, it’s really we don’t see it in the CRE side. It will probably be in the C and I area either in the middle market space because of higher interest rates or more likely in the SBA or small business area where they’re still feeling the effects of higher interest rates, labor costs and general inflation.

So I think that’s true both for both the independent book and for the South State book as well.

Will Matthews, Chief Financial Officer, South State: Yes. And Sam, I’ll just add, if you look at the Q4 for independent, they had pretty flat production similar to what they had in the Q3, but they had a little higher level of pay downs and many of those were in some of their criticized credits. So the kind of pay downs you like to see occur. In terms of loss rate, 6 basis points is a great year. And I think we would while we would love to operate at that level, that’s probably not sustainable at that very low level going forward.

But also remind you too that on the combined basis, when we do the purchase accounting marks, of course, we’ll have the PCD, non PCD split. We’ll have the credit mark on the PCD that goes into the allowance, but then we’ll also have a credit mark on non PCD that is booked plus the day 1 provision or the double count as we affectionately call it. So a lot of loss absorption capacity created through that exercise as well.

Samuel Vargas, Analyst, UBS: Great. Thanks for the color to both of you. And then John perhaps just on the revenue synergy side, I understand that when you do the DLMS, obviously you’re not assuming anything there. But if you could just give us some updated thoughts, Yes, Samuel, it’s John.

John Corbett, CEO, South State: Yes. Samuel, it’s John. We want to keep the independent bank bankers doing what they’ve been doing. They’ve been doing a great job. They’ve been growing a great bank and they’ve been doing it with quality clients and have one of the best asset quality histories in the country.

So we really want them to continue doing what they’re doing and comfortable doing. Over time, we see opportunities there. We see opportunities to layer in a treasury management platform that could be attractive to more C and I clients in those markets. And they’re great markets. I think Dan Brooks told me yesterday, Texas had the number one job creation in the country last year, which occurs frequently.

So we think there’s tremendous C and I opportunities to layer on top of the great CRE work that they’ve done historically. Yes. And then this is Steve. I guess this kind of the more immediate pieces and parts would be our capital markets product, particularly our interest rate swap. I know in January, I think we’ve already done a transaction or 2 there from our Capital Markets group just to help facilitate some lending at IBTX.

I think the mortgage platform, the retail platform And then probably just as we think about the wealth platform, private capital management, which is the independent wealth advisors, I think that continues to grow and hopefully get some lifts from some of the partnerships and platforms that we can provide. But I’d say probably in the immediate sense, it would be in the capital market space. And then over time, it’s going to be, as John mentioned, treasury, mortgage wealth, retail.

Samuel Vargas, Analyst, UBS: Got it. Thank you for taking my questions.

Conference Operator: Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead. Your line is open.

Gary Tenner, Analyst, D.A. Davidson: Thanks. Good morning, everybody. I wanted to ask just about the IBTX loan book. It just looks like based on what you had in your deck that their loans declined by something approaching $1,000,000,000 since announcement. I don’t recall there being any kind of targeted runoff portfolios there, but could you kind of give us a sense of maybe where that’s come from and if there’s anything behind the scenes driving a particular part of that runoff?

John Corbett, CEO, South State: Yes. Hey, Gary, it’s John. Sure. So if you’ll recall back in our prior calls over the summer and the spring, we talked about the mortgage warehouse business. And that was a business that we were going to wind down and exit.

So that is the bulk of that change. And then in the Q4, the loan production at IBTX was roughly the same as the Q3, but they did have some elevated pay downs. They had about $158,000,000 of commercial real estate sales of properties. There was a collection of apartment properties in Colorado, dollars 95,000,000 that refinanced into the permanent market with Fannie Mae (OTC:FNMA). And they were fortunate to kind of exit $75,000,000 of watch list credit.

So between the mortgage warehouse exit that we had telegraphed over the summer and some of these pay downs in the 4th quarter, that’s the difference. And then just Steve to add, on the mortgage warehouse, we modeled that in our transaction. So that’s why our NIM guidance really isn’t changing. But we modeled that upfront. We didn’t certainly talk about it in May, but that was certainly modeled.

Gary Tenner, Analyst, D.A. Davidson: Okay. I appreciate the reminder on the mortgage warehouse business that it’s still my mind.

Steve Young, Executive, South State: And then as it relates

Gary Tenner, Analyst, D.A. Davidson: to the sale leaseback and a potential on trade, is it fair to say that well, if I interpreted your comments correctly that at a minimum anything you do would serve to offset the incremental lease costs that should be kind of the minimum threshold of activity?

Will Matthews, Chief Financial Officer, South State: Well, I would say the minimum, Gary, would be that we don’t do anything at all. Like I said before, we have not made any firm decisions. That would be a reasonable model to use though if we did something like that where you if you said that the higher non interest expense from the sale leaseback net of the interest on the cash that we receive that you could one reasonable approach would be to do a small restructure to at least neutralize that. But again, nothing has been decided at this point and we’ll wait and determine after we’ve done all the marks and everything.

John Corbett, CEO, South State: Yes. And if we and to the point, we wouldn’t do anything until later in Q1. So it wouldn’t go into effect. And when we get on the call in the second

Gary Tenner, Analyst, D.A. Davidson: quarter, you’ll know exactly what we did. All right.

Steve Young, Executive, South State: Thanks, guys. Thank you, Gary.

Conference Operator: Our next question comes from Ben Gurlinger from Citi. Please go ahead. Your line is open.

Samuel Vargas, Analyst, UBS: Hey, good morning guys.

Will Matthews, Chief Financial Officer, South State: Good morning.

Will Matthews, Chief Financial Officer, South State0: So I know you said in terms of a relative size, the sweet spot is 60 to 80 as the rules currently stand, and I totally agree. But let’s say the rules don’t change here. We’re playing with the status quo. Is there a deal size that would be too small for you guys to entertain? Like would be $5,000,000,000 or something not worth it?

Samuel Vargas, Analyst, UBS: I’m just trying to think from a kind

Will Matthews, Chief Financial Officer, South State0: of philosophical question if something came up. The numbers worked, but

Gary Tenner, Analyst, D.A. Davidson: it’s just not the juice isn’t worth the squeeze.

John Corbett, CEO, South State: No, I think if there was the right opportunity in the right market and a $5,000,000,000 opportunity came along, we would definitely look at that. So you think about the markets that we’re in, if they’re in these really, really attractive markets, there’s a limited inventory. And if we could deepen our market share in one of these great markets, we would consider that. Got you. Okay, that’s helpful.

And then

Will Matthews, Chief Financial Officer, South State0: I know you gave the expense numbers kind of for this year with the double systems conversion or run rate for

John Corbett, CEO, South State: the Q4.

Will Matthews, Chief Financial Officer, South State0: You think about 26 or possibly 27, obviously you’re not going to give any numbers, but when you think just behind the scenes, are there any other material investment grade or upgrades that need to be kind of made over the next 18, 24 or beyond type months? Or I’m just trying to think of like because you are a bigger bank now and the cost of doing business, although you will make more money, how do you think about just investments in the back office?

Will Matthews, Chief Financial Officer, South State: Yes. I’ll start, Ben, and maybe John and Steve can elaborate. I’d say we have made a lot of these significant investments in that regard over the period from the MOE in 2020, really up through last year. And we’ve been sort of finishing the drill, if you will, more in that regard. I’ll also remind you that we our rate of inflation on our tech spend, our digital spend continues to exceed the rate of inflation for our other expenses and probably will.

But hopefully along with that, we get some degree of efficiency through automation and things like that. But in terms of projects, Steve runs our strategic planning efforts. Steve, how would you Yes.

John Corbett, CEO, South State: So we just got done

Samuel Vargas, Analyst, UBS: this week

John Corbett, CEO, South State: on bringing our strategic plan to the Board and getting that approved. And the way I describe it is there are clearly expenses and other things that are as you cross over 50 and things that we’ve been working on for a long time, there’ll be incremental expense, but that’s all included in Will’s guide. And so there’s nothing extraordinary that I would say that we have not talked about already. As you think about 2026 and think about the pluses and minuses to 2025, of course, you’re going to get inflation pickup in 2026, whatever the inflationary expenses are, 3%. But you’re also going to get, as it relates to the full year 2025, the $45,000,000 or so in cost savings.

We modeled $90,000,000 half of it this year, half of it next year. And so those should, for the most part, offset each other in 2026.

Samuel Vargas, Analyst, UBS: Got you. Okay. That’s really helpful. Thank you.

Conference Operator: Our last question will come from David Bishop from Hovde Group. Please go ahead. Your line is open.

David Bishop, Analyst, Hovde Group: Yes. Good morning, gentlemen. Just curious, John, maybe as it relates to the legacy ABTX deposit book. Just curious how you’re going to approach that from a repricing perspective, maybe sort of leaving rates alone for the near term and then get more and more aggressive as you get farther away from the close date? Just maybe curious how you’re approaching repricing that.

John Corbett, CEO, South State: David, this is Steve. The way we approach it at South State is we’ll be how we approach it at independent. We have local market leaders that run both loan and deposit pricing for and we set goals, kind of I’ll call it freedom within a framework from the company level and then they decide how to push that deposit pricing out. So I wouldn’t say that we’re going to push a button at corporate or anything else to change the pricing at independent. The way I would describe it is hopefully create a little more alignment on the ownership of both loan and deposit pricing over time to the various presidents in the markets.

So I wouldn’t expect there to be a huge change other than the way the presidents will be incentives will be just like us as it relates to PPNR less charge offs.

David Bishop, Analyst, Hovde Group: Got it. And then one housekeeping question. Obviously, the income statement has gotten a little bit bigger here or will be in the Q1. Any change to the effective tax rate as a result of that? Thanks.

Will Matthews, Chief Financial Officer, South State: No, we really there’s no big permanent items that will be added this year sort of so what we’re running right now is probably a good place to model.

David Bishop, Analyst, Hovde Group: Great. Appreciate the color.

Will Matthews, Chief Financial Officer, South State: Thank you.

Conference Operator: We have no further questions. I would like to turn the call back over to John Corbett for closing remarks.

John Corbett, CEO, South State: All right. Thanks a lot and thanks for joining us this morning. And given the January 1 close at Independent, I just want to extend a special welcome to all of our partners and team members from Independent. We know the investment community here, you’re jumping around and covering a lot of companies. So thanks for calling in.

If you have any follow-up questions, don’t hesitate to give us a ring. Have a great day. Thanks.

Catherine Mealor, Analyst, KBW: This concludes today’s conference call.

Conference Operator: Thank you for your participation. You may now disconnect.

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