South State Corporation Stock: Well Executing Bank (NASDAQ:SSB)

As we all know, this rising rate environment has certainly hammered the markets. It had gotten particularly bad up until the last two weeks. For months the banks were hit hard. And yet, we think investors start to do some buying in this space for a nice turnaround in the sector through 2023. Regional banks in particular look set up to do well over the next few years after the market adjusts to the actions taken to counter inflation. We encourage our members and followers to put money into financials, and specifically regional banks on any further weakness. A higher rate environment will help banks in 2023 and 2024, and one that we think is performing very well and should be on your radar is SouthState Corporation (NASDAQ:SSB). Right now, the stock has started to make a run higher with some strength in markets here in October, and the company has been doing well, despite a tough macro environment in 2022. The company will benefit from this higher rate environment and that was evidenced in the just reported earnings that landed after hours tonight (10/24/2022). Further, the stock has been growing its dividend and currently yields 2.3%. We think this dividend can be raised further next year as we move forward in a higher rate environment. Buy on any weakness. Let us discuss the key banking metrics we follow.

South State Q3 headline strength

The bank’s operational results were mostly better than expected in Q3. South State saw revenues and earnings grow thanks to continued loan growth, despite some declines in deposits. The top line expanded from last year. The Q3 revenues were $435.4 million, rising 25.5% in this metric year-over-year, largely due to big net interest income gains, better asset quality, and high efficiency. The quarter was really strong.

Earnings were strong as well. While year-over-year revenues ripped higher due to new assets under management, margins were strong, which helped fuel earnings power. Due to a strong top line and increases in margins, the bottom line was better than expected. Net income was solid at $133.0 million or $1.75. Making some adjustments for items, net income was even higher at $143.7 million, or $1.89 per share, beating consensus by $0.02. That is pretty solid. Earnings should continue to grow as rates continue to rise and future loans are made at higher rates. Net interest margins should grow too. They already are as in Q3, net interest margins widened to 3.55%, from 3.12% in the prior quarter, all as a result of higher rates. Net interest income increased $47 million from the sequential quarter, to $358 million. We think 2023, will be even better based on the trends we are seeing for banks, thanks to this rising rate environment. The stock is a little expensive on a valuation basis however.

Valuation

The valuation of the stock is one issue here. While it is not super expensive on a valuation basis, that is, in terms of p/e, or on a price-to-book basis, it is not exactly cheap. SSB stock is somewhat expensive at $85 relative to the tangible book value per share at the end of the quarter which was $37.97. Now, premium performance commands a premium price, but we admit this is expensive relative to a lot of other banks. That said, general book value is a more reasonable $65.03. Overall, the stock is at a premium, but so long as growth continues, this premium is likely to continue. But keep in mind, it may be a risk for big declines if performance dips. But for now, loans are growing nicely.

South State loans and deposits

With all banks we care about growth in loans and deposits. These are critical metrics. Banks take in deposits and lend out at a high rate. The formula has worked for centuries. In Q3, deposits did dip, but this has been a common theme of many bank reports. Deposits are still a strong $37.7 billion. Total loans were a record too. Loans increased $901 million, or 13% annualized, led by consumer real estate loans, commercial and industrial loans, and commercial real estate loans. Total loans were $28.8 billion. This is the type of growth you want to see. Keep in mind, new loans are at higher rates, and that means better margins, and better income. Bodes very well for the future.

South State asset health

Now here is the thing. We love to see asset growth, but we need to make sure that there are not problematic loans on the books. One of the reasons this stock commands a premium is that the company maintained strong asset quality metrics in Q3 2022. The provisions for loan losses creeped up much like other banks in Q3 because the situation in the world is worrisome. The provision for credit losses was $23.9 million, up another $4.5 million from the sequential quarter.

That said, non-performing loans improved dramatically as well versus a year ago. Non-performing loans improved from 0.38% of all loans a year ago to 0.35% in Q3., We will be closely watching for trends on this key metric going forward. Net charge-offs were actually a credit this quarter (-0.02% of all loans), while net charge-offs were 0.03% of all loans in Q2. Always great to see recoveries in a terrible macro environment. Another reason this commands a premium valuation in our opinion.

One other thing that we would like to point out is that the bank has a strong efficiency ratio. This efficiency ratio improved to 53%. This led to a very strong return on equity of 19.4% in the quarter, while the return on average assets was 1.26%. Overall, the asset health is strong.

Final thoughts here

We think that this is an interesting regional bank with a premium valuation. The valuation is justified thanks to the growth, but is a bit of a risk. Asset quality is strong. Loans are growing, margins are improving, and so are earnings. We think that the dividend will continue to grow as well. This is a quality bank to own.