Name: SouthState Corp Q2 2020 Earnings Call
Start: 2020-07-31T10:01:00.000Z

Executive Summary

Reported a GAAP net loss of $84.9M and diluted EPS of ($1.96) due to Day 1 CECL provision on CenterState acquired Non‑PCD loans ($119M pre‑tax) and $40M merger costs; adjusted diluted EPS was $0.89 as underlying PPNR remained strong and fee businesses delivered record revenues on a combined basis .
Net interest margin compressed to 3.24% (tax‑equivalent), driven by excess liquidity, loan and securities marks, and rate actions; noninterest income surged to $54.3M on mortgage and correspondent/capital markets strength .
Credit metrics remained resilient: net charge‑offs were minimal (0.00% annualized), NPA/Assets at 0.38%; allowance for credit losses rose to $434.6M (1.70% of loans), with total loss absorption capacity at ~2.66% including unrecognized acquired loan discounts .
Integration ahead of schedule (closed June 7); management reaffirmed ~$80M cost saves (expected largely post core conversion in Q2 2021) and highlighted PPP fee tailwinds with $66.6M net unrecognized fees at quarter‑end .
Catalysts: PPP forgiveness timing and fee recognition, visible cost‑save realization post Q2’21 conversion, stable credit outcomes vs deferral normalization, and sustained mortgage/correspondent fee momentum .

What Went Well and What Went Wrong

What Went Well

“Record revenues” on a combined business basis; PPNR of $157M with PPNR ROAA of 1.68% despite PPP‑inflated balance sheet .
Fee engines performed: mortgage banking and correspondent/capital markets delivered record profitability; noninterest income rose to $54.3M (mortgage +$3.7M Q/Q; correspondent/capital markets +$9.6M Q/Q) .
Credit held up: minimal net charge‑offs (0.00% annualized) and NPA/Assets at 0.38%; allowance coverage of NPLs improved to 353% .
Management tone: “off to a solid start” post‑merger; “underlying earnings power steady and strong,” and “balanced business model” designed to counter NIM pressure .

What Went Wrong

GAAP loss driven by Day 1 CECL on acquired Non‑PCD loans ($119.1M provision) and $40.3M merger costs; efficiency ratio elevated at 80.5% (adjusted 61.9%) .
Net interest margin compressed 44 bps Q/Q to 3.24% (tax‑equivalent) due to excess liquidity (~$2.5–$3.0B), securities marks/sales, and lower loan yields; net interest income mix impacted .
Deposit fee income fell $1.5M Q/Q amid higher balances and lower NSF activity; bank‑owned life insurance down $1.1M vs Q1 (absence of Q1 death claim) .

Financial Results

Metric	Q2 2019	Q1 2020	Q2 2020
Total Interest Income ($000)	$149,982	$147,800	$180,564
Net Interest Income ($000)	$127,179	$128,013	$162,557
Noninterest Income ($000)	$37,618	$44,132	$54,347
Provision for Credit Losses ($000)	$3,704	$36,533	$151,474
Total Noninterest Expense ($000)	$109,407	$107,247	$175,112
Net Income (Loss) ($000)	$41,460	$24,110	($84,935)
Diluted EPS ($)	$1.17	$0.71	($1.96)
Adjusted Diluted EPS ($)	$1.40	$0.82	$0.89
NIM (Tax‑Equivalent, %)	3.82%	3.68%	3.24%
Efficiency Ratio (%)	66.87%	62.11%	80.52%
Adjusted Efficiency Ratio (%)	59.78%	59.72%	61.91%
ROAA (%)	1.08%	0.60%	(1.49%)
Adjusted ROAA (%)	1.28%	0.69%	0.68%

Noninterest income composition:

Category ($000)	Q2 2019	Q1 2020	Q2 2020
Fees on Deposit Accounts	$18,741	$18,141	$16,679
Mortgage Banking Income	$5,307	$14,647	$18,371
Trust & Investment Services	$7,720	$7,389	$7,138
Securities Gains (Net)	$1,709	$0	$0
Correspondent Banking & Capital Markets	$861	$493	$10,067
BOLI Income	$1,339	$2,530	$1,381
Recoveries of Fully Charged‑off Acquired Loans	$1,347	$0	$0
Other	$594	$3,955	$711
Total Noninterest Income	$37,618	$44,132	$54,347

Key performance indicators:

KPI	Q2 2019	Q1 2020	Q2 2020
Loans, Net ($000)	$11,167,979	$11,362,105	$25,064,539
Total Deposits ($000)	$11,922,280	$12,344,547	$29,957,285
Noninterest‑Bearing Deposits ($000)	$3,255,906	$3,367,422	$9,915,700
ACL ($000)	N/A	$144,785	$434,608
ACL / Loans (%)	N/A	1.26%	1.70%
NPA / Assets (%)	0.26%	0.42%	0.38%
Net Charge‑offs (Annualized, %)	0.02%	0.05%	0.00%
Book Value / Share ($)	$68.34	$69.40	$63.35
Tangible Book Value / Share ($)	$37.85	$38.01	$38.33
Dividend / Share ($)	$0.40	$0.47	$0.47
PPP Loans Outstanding	N/A	~$900M as of 4/17	~$2.3B; >19,000 loans; $7.3M fees recognized; $66.6M net unrecognized

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Cost Saves	Run‑rate post conversion	~$80M	~$80M, “on track”; full realization expected post core conversion	Maintained
Core System Conversion	Timing	Q2 2021 target	Q2 2021 confirmed; cost saves largely thereafter	Maintained
PPP Fee Recognition	Timing	N/A	Most forgiveness/fee recognition expected late 2020/early 2021	New timing color
CD Cost of Funds	$2.6B CDs	~1.34%	~0.29% expected post marks	Lowered cost
Dividend	Quarterly	$0.47	$0.47 declared	Maintained

No formal revenue/EPS guidance provided; management emphasized NIM pressure near‑term with offset from fee businesses and cost‑save trajectory .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q2 2019, Q1 2020)	Current Period (Q2 2020)	Trend
NIM trajectory	3.82% TE in Q2’19; 3.68% TE in Q1’20	3.24% TE; ~30 bps drag from excess liquidity; securities/loan marks added pressure	Down
Fee businesses (Mortgage, Correspondent)	Noninterest income $37.6M (Q2’19); $44.1M (Q1’20)	$54.3M; record mortgage and correspondent/capital markets	Up
Credit/Deferrals	Strong asset quality in Q2’19; CECL adoption & early PPP/deferrals in Q1’20	Deferrals trending to mid‑single digits as rounds mature; strict criteria for second deferrals	Improving (with caution)
PPP program	~$900M as of 4/17/20 (Q1)	~$2.3B outstanding; $66.6M net fees unrecognized	Up (tailwind on forgiveness)
Integration & cost saves	Merger planned Q3 (Q1 deck)	Closed June 7; ~$80M cost saves affirmed; core conversion Q2’21	On track
Deposits & liquidity	DDA up in Q2’19/Q1’20	Total deposits $30.0B; strong core growth; excess liquidity elevated	Up (liquidity)
Capital & loss absorption	Routine	Combined loss absorption ~2.66%; sub‑debt $200M raised pre‑close	Strengthened
Market/macro color	N/A	Leisure hotels improving; business hotels lag; strong home improvement, logistics, medical recovery; Florida markets vary on restrictions	Mixed

Management Commentary

CEO on underlying earnings power and balanced model: “Most importantly, the underlying earnings power of the company is steady and strong… mortgage and correspondent banking enjoyed record revenues and record profitability this quarter even as the NIM came under pressure.”
CEO on CECL “double count” and capital strength: “It’s as if you have a combined loan loss reserve of 2.66%… substantially higher than our peers.”
Executive Chairman on integration: “53 days into our merger, we are off to a solid start… building a sound, profitable, and growing company.”
CEO on COVID economy winners/losers and demand dynamics across segments and MSAs (leisure hotels vs business hotels; strong residential, logistics, medical, retail tenant specificity) .
CFO on NIM drivers and PPP fees timing: excess liquidity (~$2.5–$3.0B) weighs ~30 bps; PPP fees likely late 2020/early 2021 .

Q&A Highlights

NIM bridge: Excess liquidity compresses ~30 bps; securities marks and pre‑close sales add ~10 bps pressure; PPP net impact modest in Q2 given fee recognition .
Securities portfolio: Sold roughly half pre‑close; logic driven by fair value resets and avoiding premium bonds at acquisition yields; referenced ~$40M gain at CSFL pre‑close .
Fee run‑rate: Combined noninterest income ~$108M; mortgage ~$43M, correspondent ~$30M, wealth ~$7.5–$8M; swap revenue may moderate .
Loan growth/pipeline: New production muted; pipelines down ~25–30%; focus on existing clients; North Carolina outperformed .
Cost saves phasing: Majority in 2021; largest quarter of merger expense expected at core conversion; some vendor and headcount savings in H2’20 .
Reserves outlook: Provision path highly dependent on macro forecasts; ~2.66% total loss absorption (incl. ~$300M components not in regulatory capital) .
Deferrals: Trending toward mid‑single‑digit percentage; rigorous underwriting for second deferrals; preference for interest‑only terms .

Estimates Context

Wall Street consensus (S&P Global) for Q2 2020 EPS and revenue was unavailable at time of analysis due to data access limitations. Accordingly, comparison vs estimates cannot be provided; results should be contextualized against adjusted EPS of $0.89 and combined PPNR performance .
Note: S&P Global consensus data was intended but was not retrievable at time of request; if needed, we can update once access is restored.

Key Takeaways for Investors

CECL “Day 1” provision and merger costs masked strong core PPNR and fee momentum; adjusted EPS of $0.89 and record combined revenues support underlying earnings power .
Near‑term NIM pressure likely persists until liquidity normalizes and securities/loan marks season; PPP fee forgiveness represents a potential multi‑quarter offset .
Credit quality remains resilient with minimal losses and robust allowance/NPL coverage; total loss absorption ~2.66% provides cushion against macro uncertainty .
Cost save realization (~$80M) is a medium‑term driver, with visibility increasing post core conversion in Q2 2021; expect efficiency ratio improvement thereafter .
Deposit franchise strength (DDA/noninterest‑bearing growth) and diversified fee businesses (mortgage, correspondent, capital markets) mitigate rate headwinds and support returns .
Watch deferral normalization and segment‑specific exposures (lodging, restaurant, retail CRE); current trends indicate improving deferral metrics with rigorous second‑round criteria .
Tactical: Position for PPP fee realization, stabilization of NIM as liquidity declines, and merger synergies; medium‑term thesis rests on fee resilience, credit durability, and cost saves execution .

SouthState Corp (SSB)·Q2 2020 Earnings Summary