Panuwat Dangsungnoen
SouthState Corporation (NASDAQ:SSB), a Florida-based bank holding company, engages in the provision of banking products and services. It includes checking accounts, interest-bearing transaction accounts, money market accounts, time deposits, and savings deposits. It also offers loans for properties and installments, safety deposit boxes, investment products, brokerage services, and others. It caters to clients such as private individuals and companies.
Today, it continues to expand while remaining stable amidst inflationary pressures. Its solid performance allows it to realize more returns, enabling it to sustain its larger operating capacity. It is more capable of paying dividends and borrowings. There are growth prospects amidst headwinds, which may become more enticing once the economy stabilizes. Meanwhile, the stock price appears divorced from fundamentals, making it cheaper than expected.
The pandemic had caused massive disruptions in the last two years, especially for volatile industries. In essence, banks like SouthState Corporation are more susceptible to the risks of economic downturns. Yet, it remains unfazed amidst uncertainties and market turbulence. Its performance is even more robust and stable, matched with its continued expansion. It maintains an excellent positioning against headwinds and for future market growth in America.
As inflation goes up, the interest and mortgage rates increase to stabilize the economy. SSB continues to capitalize on the current trend to generate more returns. With its acquisition in the last two years, its earning assets have more than doubled, and so have its borrowings and deposits. So, the combination of market and operational changes had an impact on its operations. It is now evident in 2Q 2022.
Its interest income has been almost unchanged in the last year. Today, it amounts to $326 million, a 22% year-over-year increase from the comparative quarter. It is also a 22% increase from 1Q 2022 since interest income remained almost unchanged from 2021 to 1Q 2022. It is due to the acquisition of Atlantic Capital Bancshares, which was only completed in March. Now, its total loans are more than twice as much as in the previous year. Another driving force is its investment securities that bear interest. Despite the potential impact of interest rate hikes on the valuation of securities, their returns continue to increase. The thing is, interest income is not only driven by the increase in earning assets, but also by its prudent and efficient management. Even better, the quality and diversification strategy of its portfolio remains solid.
Meanwhile, interest expense remains almost unchanged at $11 million. This fact may tell the prudent handling of the company deposits. Also, 36% of the total deposits are not interest-bearing. In 4Q 2021, it was only 31% of the total deposits. So, Atlantic Capital may have a higher percentage of non-interest-bearing deposits than SSB. The M&A is indeed timely and relevant, given the sustained increase in interest rates. Also, borrowings are stable even after the acquisition. In 4Q 2021, cash decreased by 20% while borrowings increased by 2.5%. This quarter, cash levels are higher while borrowings are lower. So, we can say that the acquisition is paying off. The larger operating capacity of SSB, matched with interest rate hikes, is leading to more returns.
Interest Income and Interest Expense (MarketWatch)
The massive increase in interest income and almost unchanged interest expense raise their net value. The net interest margin of 97% is an increase from 95% in 2Q 2021. Meanwhile, the operating margin is 47% vs 64% in 2Q 2021. It is due to provisions for credit losses reported as a writeback. If we exclude the impact of provisions, the operating margin will increase to 53%. The operating margin in the previous quarters will decrease. Note that provisions may be reported more as an expense due to interest rate hikes. Either way, SouthState Corporation maintains its prudent portfolio management, making it more profitable.
Operating Margin (MarketWatch)
SouthState Corporation sustains its fundamental resilience and soundness. But, it must not be complacent. The banking industry is a dynamic market, especially now that the economy is more volatile. The important thing is to determine its preparedness for inflation headwinds.
Macroeconomic pressures remain a concern for banks. Although inflation appears to be in a summer lull at 8.5% vs 9.1% in the previous month, it may be higher and set new highs, given the pent-up demand and tension in Europe. The slow improvement in port congestion amidst potential shortages may also push prices upward. It is safe to assume higher rates at 9.6-9.8%. It is consistent with the projection of interest and mortgage rates this year. They may peak at 3-3.4% and 6.7-7%, respectively. The rates are already higher than the projections at the start of the year. So, the new projections may be logical. These may produce more returns and risks for banks. But, they must be more careful to balance the risks and opportunities.
Inflation Rate, Interest Rate, and Mortgage Rate (Author Estimation, Barron’s, Forbes)
Fortunately, SouthState Corporation has an excellent positioning against inflation headwinds. The quality of its assets is solid. It continues to capitalize on its core strengths and prudent acquisitions with its diversified portfolio. As such, its expansion is paying off as it coincides with interest rate hikes. It also optimizes its impressive liquidity position and stable financial leverage to keep its positioning in a stormy market environment.
Its loans of $27.52 billion is a 16% year-over-year growth. If we compare it to the increase in interest income, we can tell that it is paying off. The increased amount it loans out amidst interest rate hikes also translates into higher interest income. Even better, deposits are 18% higher than in the previous year. But as discussed, non-interest-bearing deposits comprise 36% of deposits, so interest expense remains manageable. The loan-to-deposit ratio is only 71%, which is lower than the maximum range of 80-90%. It shows that the company has not maximized its capacity to generate income. It has more reserves it may use should there be defaults and delinquencies.
Loans, Deposits, and Loan-to-Deposit Ratio (MarketWatch)
Investment securities are another driving force for the company. They comprise 29% of the total assets, and these are more liquid than loans and other assets. It makes the company well-positioned against external pressures. Meanwhile, cash levels are stable and higher, which makes the financial capacity of the company impressive. Its percentage of borrowings continues to increase from 44% to 52%. Borrowings are also lower despite the recent acquisition, showing that it does not have to raise its financial leverage to increase its operating capacity. Also, it is ideal, especially now that interest rates are elevated. So, interest expense may be more manageable. If the company maintains its positioning, it may still be stable if rates increase further. It may also yield more returns once the economy becomes more stable.
Cash and Equivalents and Borrowings (MarketWatch)
The stock price of SouthState Corporation continues to move sideways with a slight downtrend. It appears a bit divorced from fundamentals, given its solid performance. At $77.94, it is 5% lower than the starting price. Its PE Ratio of 12.53 and Price/Cash Flow Ratio of 9.93 shows potential undervaluation, while the PTBV Ratio of 1.17 conveys that the stock price is still reasonable.
Even better, it is consistent with dividend payments with an average growth of 9.8%. Its dividend yield is 2.57%, which is way higher than the S&P 400 and NASDAQ components of 2.06% and 1.51%. It may sustain dividends, given the Dividend Payout Ratio using net income and FCF at 32% and 42%. To assess the stock price better, we use the DCF Model and the Dividend Discount Model.
DCF Model
FCFF $420,000,000
Cash and Cash Equivalents $550,000,000
Borrowings $1,044,000,000
Perpetual Growth Rate 4.8%
WACC 9.8%
Stock Price $77.94
Derived Value $88.09
Dividend Discount Model
Stock Price $77.94
Average Dividend Growth 0.09855472417
Estimated Dividends Per Share $2.00
Cost of Capital Equity 0.1242154889
Derived Value $84.08132997 or $84.08
Both models show that the stock price is reasonable, with potential undervaluation. There may be an 8-12% potential upside in the next 12-18 months. So, investors must watch the stock price closely.
SouthState Corporation maintains a stellar performance with its solid and intact fundamentals. It maintains an excellent market positioning against inflation headwinds. It has more enticing growth prospects with the adequate financial capacity to cover dividends. Also, the stock price is reasonable, with potential undervaluation. The recommendation is that SouthState Corporation is a buy.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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