South State (US:SSB)2022-10-25 19:00Financial Data and Key Metrics Changes - The company reported a significant increase in PPNR per share, up 47% from the same period last year [11] - Net interest margin (NIM) expanded by 43 basis points in Q3, following a 35 basis point increase in Q2, totaling a 78 basis point expansion over two quarters [12][13] - Net interest income reached $358 million, an increase of $44 million from Q2, with core net interest income at $349 million, up $47 million from the prior quarter [24] - Non-interest income decreased by $11 million from Q2, primarily due to declines in correspondent and mortgage revenue [24] Business Line Data and Key Metrics Changes - Total loans grew at an annualized rate of 13%, evenly split between commercial and retail banking [14] - Mortgage production was strong, with nearly $1.1 billion produced in the quarter, but only 22% was sold in the secondary market [25] - Non-interest expense was $227 million, slightly up from Q2, contributing to an efficiency ratio of 50% [27] Market Data and Key Metrics Changes - Average deposit balances declined by approximately 4% annualized, but the company maintained about $2.5 billion in cash and $5.5 billion in available-for-sale securities, representing 18% of the balance sheet [17] - The company experienced minimal impact from Hurricane Ian, with less than 1% of loans in the hardest-hit areas and few requests for payment deferrals [15] Company Strategy and Development Direction - The company is focused on maintaining strong funding, surplus capital, and operating in rapidly growing states, positioning itself well for future challenges [21] - Management emphasized a cautious outlook for 2023, acknowledging potential recession risks while expressing confidence in their operational strategy and market positioning [21] Management's Comments on Operating Environment and Future Outlook - Management noted that the current economic environment, characterized by rising interest rates and tightening liquidity, will differentiate bank performance [10] - The company plans to continue delivering exceptional client service and building franchise value, regardless of economic conditions [21] Other Important Information - The company has consolidated several branches, which contributed to the reduction in deposits [19] - The risk-based capital ratios remain strong, with CET1 at 11% and total risk-based capital at 12.9% [30] Q&A Session Summary Question: NIM and Rate Sensitivity - Management discussed expectations for NIM, forecasting it to range between 360 and 380 basis points through the end of 2023 based on deposit size, interest rate forecasts, and deposit beta assumptions [40] Question: Loan Growth and Underwriting - Management indicated that loan pipelines are slowing due to the Fed's rate increases, with expectations for upper single-digit loan growth in Q4 and potential mid-single-digit growth in 2023 [47] Question: Correspondent Business and Fee Income - Management lowered guidance for correspondent fee income to $20 million to $25 million per quarter until the Fed stops raising rates, reflecting challenges in the current interest rate environment [42] Question: Residential Mortgage Production - Management noted that residential mortgage production is expected to be around $4.5 billion for the year, with a shift towards holding more on the balance sheet due to lower gain on sale margins [54] Question: M&A Environment - Management expressed that the M&A environment is expected to be slow in the near term due to current P/E valuations and economic uncertainty, making it a low priority [59]