SouthState Bank Keeping Its Foot Firmly On The Accelerator (NYSE:SSB)

krblokhin If the ups and downs of growth-oriented banks aren’t for you, you’re not going to like SouthState (NYSE:SSB) all that much. Between competitive hire-aways and M&A, SouthState management has made it clear that they see a real opportunity in building the bank’s presence across the fast-growing Southeast, and they’re willing to pay the price in the short term to realize the long-term benefits of meaningful share in some of the most attractive banking markets in the United States. A lot has happened since I last wrote about SouthState, including a liquidity panic that shook investor confidence in regional and small banks, clear evidence that at least some regulators are not thrilled about the idea of ongoing M&A in the banking sector, and a challenging rate cycle that has sapped net interest income momentum. While these shares are lower than when I last wrote about them, the 15% decline is actually better than most regional banks, including those in the bank’s Southeast operating area. The shares have sold off some since the announcement that SouthState will acquire Independent Bank (IBTX), but the decline hasn’t been much greater than the overall sell-off in the sector, so I’d say the Street is taking the news of the deal well. While I do think there are elevated risks with the Independent deal, there’s also elevated growth potential in IBTX’s markets and I do think SouthState shares look undervalued today. Another Big Swing To Add More Fast-Growing Markets SouthState hasn’t historically been shy about doing deals, and with Independent Bank only about 10% larger than CenterState when SouthState did that deal in 2020, I’m not that concerned about the bank’s ability to integrate the deal. It also helps that Independent is a relatively concentrated operation with two-thirds of its 92 branches in three metro areas (Dallas, Denver, and Houston). Offering 0.60 shares of SSB for each Independent Bank share, a deal worth $48.51 per IBTX share at the time of the announcement, I wouldn’t say SouthState is getting IBTX on the cheap at 1.5x tangible book, and tangible book dilution of 10% and a two-year earnback seems steep. Then again, 12.3x FY’25 earnings isn’t bad for a growing small-cap bank in attractive markets, and I previously thought that IBTX was worth something in the low-to-mid-$40’s on the basis of mid-single-digit long-term core earnings growth potential. SouthState is getting a bank with a top-10 presence (by deposit share) in Dallas, and a top-20 presence in Houston and Denver. Texas remains an attractive market, with above-average population growth (and significant net migration to the state) and the economy is becoming increasingly diversified as non-energy companies relocate to the state. For its part, Independent has grown its loan book by almost 6% a year since 2019, growing about a point faster than the overall banking sector, and I believe Independent has at times been hampered by its funding (non-interest-bearing deposits are only 21% of deposits). Although SouthState’s loan/deposit ratio isn’t exactly low at 88%, I believe SouthState can improve Independent’s funding, expand its business, and profitably grow the business from its current size. I do see risks with this deal, and not just in whether regulators will approve it – while I don’t take regulator approval of bank mergers for granted anymore, I think this is small enough to get through. I see more risks in Independent’s loan book, as 57% of the book is in commercial real estate and another 11% is in construction. Within that, about 7.5% is “pure” office (office properties not combined with a warehouse), and the office markets in Dallas, Denver, and Houston are among the worst now for vacancy rates. Not all office properties are the same, though, and my understanding is that IBTX doesn’t do a lot of central business district lending (where the pressure is greatest). Looking at credit metrics, charge-offs have been steadily minimal, and while the non-performing loan ratio has been growing (from 0.27% in Q1’23 to 0.40% in Q1’24) it’s still comfortably below the average for Texas banks, which in turn is below the national average. Waiting For Rates To Drop And Staying Active In Organic Growth SouthState’s cumulative betas for the cycle have not been bad, with a cumulative total beta around 33% and an interest-bearing deposit beta of 45% that compares well against peer averages about 700bp to 1000bp above those levels. SouthState has also reaped the benefit of a strong earning asset beta (44%) that has helped drive net improvement of over 60bp in the bank’s net interest margin since the rate hike cycle began. Even so, rates are limiting the business now, and I expect SouthState to be a beneficiary of eventual rate cuts, as funding costs are likely to decline faster than loan yields and SouthState will reap a tailwind from assets that repriced at higher rates over the last two years. The bank is also not limiting itself to the rate cycle or inorganic growth, as the company continues to target hires from competitors to grow its lending operations. A recent press release highlighted the hiring of seven bankers in Georgia, with four of them coming from competing in-region banks (Truist (TFC), because seemingly everybody hires bankers from Truist now, Regions (RF), Synovus (SNV), and Ameris (ABCB)). With many banks pulling back to preserve capital, credit, or margins, SouthState is taking share. Loan growth of 1% qoq in Q1’24 may not look so special, but it was still comfortably above the national average, as was the 6% yoy figure, and SouthState likewise did a little better than average for in-footprint loan growth. The Outlook I’m not “officially” remodeling SouthState until the IBTX deal is approved, but I think that SouthState is undervalued on a standalone basis and I don’t see the IBTX deal as value-destroying. I do see some risks with the IBTX loan book, but I also see back-office synergies and opportunities to improve IBTX’s long-term funding profile and net interest margins. I also think it’s worth noting that SouthState has done deals before in “risky” markets (from a credit standpoint) and didn’t really have any outsized credit issues, so I’m inclined to trust that management has looked over IBTX’s loan book and finds it adequately reserved. I’m expecting around 7% long-term core earnings growth from SouthState, and that supports a fair value in the low $80’s, as does an 11.75x multiple on my ’25 EPS estimate; that multiple is still about 10% to 15% below the typical historical multiple for the sector, so there’s still room for rerating as investors gain more confidence on the outlook for bank earning recoveries. I will note, though, that SouthState’s return on equity and return on tangible equity is still more “okay, I guess” than “good”, and I do think improved profitability will be an important part of the story down the road. Growth is important, but margins matter too. The Bottom Line I think today’s price likely undervalues SouthState’s organic growth potential, as well as the gains to be had from successfully acquiring, integrating, and building upon the IBTX deal. It’s not a risk-free opportunity by any means, but I think investors looking for a story that could perform better than average as rates decline should take a closer look.

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