Executive Summary / Key Takeaways

• SouthState Corporation has executed a significant strategic reset through the Independent Bank Group acquisition, a branch sale-leaseback, and a securities restructure, fundamentally reshaping its balance sheet and enhancing its earnings power.
• The Independent acquisition, completed in Q1 2025, is a cornerstone move, expanding SSB into high-growth Texas and Colorado markets and acting as a large-scale asset reset by bringing approximately $17 billion in earning assets to current market rates.
• These strategic actions have resulted in a materially higher net interest margin (3.85% in Q1 2025), exceeding expectations and positioning SSB for potential further NIM expansion even in a flat rate environment, driven by the repricing of its legacy loan book.
• SSB maintains a strong capital position (CET1 11%, TBV >$50 post-acquisition), better than initially modeled, with a healthy capital formation rate providing significant flexibility for future deployment, including potential balance sheet optimization, dividends, buybacks, or opportunistic M&A.
• While facing near-term economic uncertainties and competitive pressures on loan pricing, SSB's focus on integrating Independent, leveraging its regional service model, and maintaining strong asset quality provides a foundation for achieving mid-single-digit loan growth and realizing the full earnings potential of the combined entity.

Setting the Scene: A Regional Powerhouse Reshapes Its Future

SouthState Corporation, rooted in its 1985 South Carolina origins, has grown into a prominent regional financial holding company through a consistent strategy of organic expansion complemented by strategic acquisitions. Operating across a key eight-state footprint spanning the Southeast, Texas, and Colorado, SSB provides a comprehensive suite of banking services, from traditional deposits and lending to specialized areas like mortgage banking, wealth management, correspondent banking, and SBA lending. This diversified model is underpinned by a culture emphasizing relationship banking and local market expertise, a core tenet that management believes differentiates it in a competitive landscape populated by larger national players and agile regional banks.

In this environment, SSB finds itself competing directly with institutions like Regions Financial (RF), Truist Financial (TFC), Fifth Third Bancorp (FITB), and PNC Financial Services Group (PNC). While these larger competitors often benefit from greater scale, potentially achieving higher efficiency in areas like digital platform operating costs or loan processing speeds (with some peers reportedly demonstrating 10-25% greater efficiency in certain digital functions or 15-25% faster processing), SSB leverages its regional focus and service model. This approach has earned it notable recognition, including being named a top 3 bank nationally for Small Business and Middle Market Banking by Crisil Coalition Greenwich, highlighting its ability to combine high-quality day-to-day service with effective digital tools. SSB's investment in technology, while perhaps not always leading in raw innovation speed compared to peers with larger R&D budgets, focuses on enhancing customer experience and operational efficiency, supporting its service-oriented model. Its treasury management platform, for instance, is viewed as a foundational tool for expanding its commercial and industrial (C&I) banking capabilities, particularly in new markets. The operational efficiency gained through initiatives like the SBA securitization business, which pools and sells guaranteed loan portions, also contributes to its competitive positioning.

SSB's history of strategic M&A, including the significant 2020 merger with CenterState, has been instrumental in building its current scale and operational capabilities. This historical context is crucial for understanding the company's latest and most impactful strategic undertaking: the acquisition of Independent Bank Group (IBCP).

The Strategic Reset: A Bold Move for a New Cycle

The first quarter of 2025 marked a pivotal moment for SouthState, culminating a year-long effort across three key strategic initiatives: the closing of the Independent Financial transaction, the completion of a branch sale-leaseback, and a targeted securities portfolio restructure. These actions collectively represent a "big balance sheet reset," fundamentally altering SSB's financial profile and positioning it for the prevailing interest rate environment.

The centerpiece of this reset is the acquisition of Independent Bank Group, which closed on January 1, 2025. This all-stock merger was strategically designed to expand SSB's footprint into the dynamic, high-growth markets of Texas and Colorado, geographies that mirror the favorable demographic and economic trends of SSB's existing Southeast presence. Beyond geographic expansion, management views the Independent acquisition as a "more powerful use of capital" than traditional balance sheet optimization strategies like a simple bond swap. By acquiring Independent, SSB effectively executed a large-scale interest rate swap on approximately $17 billion of Independent's earning assets (loans and investments), bringing them to current market rates at the time of closing. This move is expected to unlock significant earnings potential from these assets immediately, leveraging SSB's valuation and currency advantage in the transaction.

Complementing the acquisition, SSB completed a sale-leaseback transaction on 165 bank branches in February 2025. This move generated $467.2 million in cash, resulting in a $229.3 million gain (net of transaction costs), and added $361.1 million in Right-of-Use (ROU) assets to the balance sheet. The primary objective was to harvest off-balance sheet capital at an attractive cost relative to other funding sources, providing additional financial flexibility.

Finally, SSB executed a securities portfolio restructure in Q1 2025. This involved selling approximately $1.8 billion of available-for-sale securities, realizing a loss of $228.8 million, and reinvesting the proceeds into new securities. The strategic intent was to improve the portfolio's yield and risk weightings while shortening its duration, further aligning the balance sheet with the current rate environment and enhancing future net interest income generation.

Performance and Operational Impact: Realizing the Reset's Potential

The immediate impact of these strategic moves was evident in SouthState's first-quarter 2025 financial performance. Net income decreased to $89.1 million from $115.1 million in Q1 2024, primarily driven by a significant increase in the provision for credit losses ($100.6 million vs. $12.7 million), largely attributable to the initial provision for non-PCD loans and unfunded commitments acquired from Independent ($80 million and $12.1 million, respectively), and a substantial increase in noninterest expense ($408.8 million vs. $249.3 million), heavily influenced by $66.5 million in merger-related costs.

However, the core earnings power, particularly the net interest margin, demonstrated the intended benefits of the strategic reset. Net interest income surged by $200.6 million (+58.3%) to $544.5 million, and the non-tax equivalent net interest margin expanded by 44 basis points to 3.84% (3.85% tax-equivalent). This margin expansion was better than modeled, partly due to deposit costs coming in lower than expected (1.89% average cost of deposits in Q1 2025). Earning asset yields stood at 5.70%, with the total loan yield improving to 6.25%, benefiting from the acquired Independent loan portfolio being marked to market rates and a slight lift from early payoffs.

Noninterest income also saw a notable increase, rising by $14.5 million (+20.3%) to $86.1 million, driven by contributions from the acquired Independent businesses, including service charges on deposit accounts, trust and investment services (Private Capital Management), and bank-owned life insurance income. Correspondent banking and capital markets income also increased significantly, partly due to income from customer swap hedges and lower variation margin expense compared to the prior year. The new SBA securitization business contributed to this segment's performance, although overall SBA income declined year-over-year due to lower gains on sale.

Noninterest expense increased substantially, as expected, due to the inclusion of Independent's operating costs and significant merger-related expenses. Excluding these non-recurring items and amortization of intangibles, the efficiency ratio increased to 61.0% in Q1 2025 from 58.5% in Q1 2024, reflecting the initial integration phase costs. Management anticipates noninterest expense to remain elevated in Q2 and Q3 2025 ($350-$360 million range) due to project catch-up, merit increases, and the full impact of sale-leaseback expenses (approximately $6 million incremental per quarter), before declining in Q4 2025 ($345-$350 million range) as cost saves are fully realized post-conversion.

Balance sheet growth slowed in Q1 2025, with total assets increasing to $65.1 billion from $46.4 billion at December 31, 2024, primarily due to the Independent acquisition. Excluding acquired balances, loans declined slightly, and deposits saw modest organic growth, offset by a decrease in noninterest-bearing deposits. Management attributed the slowdown in organic growth to typical seasonality, the general economic environment, and stiff competition on loan pricing, particularly for high-quality, long-term fixed-rate deals priced aggressively by competitors. Encouragingly, loan pipelines have grown considerably (up 44% since year-end), and loan balances showed growth in April 2025, suggesting improved prospects for Q2.

Asset quality remains a key focus. Total nonperforming assets increased to $280.4 million (0.60% of loans and repossessed assets) at March 31, 2025, from $213.4 million (0.63%) at December 31, 2024. Nonperforming loans increased to $272.2 million (0.58% of total loans). Excluding day-one acquisition adjustments, nonaccruals and substandard loans were stable. Management continues to view increases in criticized assets, particularly in commercial real estate, as largely transitional and rate-driven rather than indicative of significant loss content, citing strong equity and guarantors. Net charge-offs were 0.38% annualized in Q1 2025, including acquisition date charge-offs on PCD loans, compared to a very low 0.03% in Q1 2024. The allowance for credit losses stood at $623.7 million (1.33% of total loans), reflecting the initial provision for acquired loans and the CECL model's output, which incorporates economic forecasts and qualitative factors like the potential impact of tariffs. Management believes the current reserve level adequately captures potential risks and does not foresee a need for significant increases unless the economic outlook deteriorates substantially.

Capital Strength and Future Flexibility

SouthState exited the first quarter of 2025 with a robust capital position, with a CET1 ratio of 11.0% and tangible common equity (TCE) per share just above $50. These levels are better than initially modeled at the time of the Independent acquisition announcement, providing significant strategic flexibility. The company's strong adjusted return on assets (1.38%) and return on tangible common equity (approximately 20%) in Q1 2025 indicate a healthy capital formation rate, expected to build CET1 by 20-25 basis points per quarter going forward.

This accumulating capital, combined with the proceeds from the sale-leaseback transaction, positions SSB for potential future deployment. While management is currently assessing economic uncertainties, particularly the potential impact of tariffs on growth and credit quality, options for capital deployment in the latter half of 2025 could include increasing the dividend, executing share buybacks under the newly authorized 2025 program (up to 3 million shares), or pursuing opportunistic M&A that aligns with its strategy of building scale in attractive markets.

Liquidity remains adequate, although the primary liquidity to uninsured deposits including collateralized deposits coverage ratio temporarily dipped below the 80% policy threshold at March 31, 2025, due to operational timing related to collateral movement post-acquisition, a situation expected to normalize in Q2 2025. SSB maintains ample borrowing capacity with the FHLB ($9.8 billion available) and the Federal Reserve ($1.8 billion available), along with $2.3 billion in unpledged securities and significant capacity within its brokered deposit limit ($5.9 billion available under the 15% internal policy limit), providing substantial contingent funding sources.

Outlook and Guidance: Building on a Stronger Base

Management's outlook for the remainder of 2025 is optimistic, built upon the foundation of the strategic reset. Assuming a base case of no further Federal Reserve rate cuts, the net interest margin is expected to remain "pretty steady" between 3.80% and 3.90% for the rest of the year, potentially drifting higher into 2026. This stability and potential expansion are primarily driven by the ongoing repricing of SSB's legacy fixed-rate loan book, which is expected to contribute approximately 3 basis points of margin expansion per quarter. While the acquired Independent loan portfolio was marked to market, its contribution to future NIM expansion will be more muted in a flat rate environment compared to the legacy book. Management expects the combined company's balance sheet to be "much more neutral to rates" going forward, with a deposit beta on the way down expected to be in the 25-27% range.

Loan growth is projected to be in the mid-single digits for 2025, potentially starting slower in the first half and accelerating later in the year as economic conditions stabilize and the yield curve normalizes. Management expects customer deposits to also grow in the mid-single digits, with brokered deposits used as a flexible funding lever.

Noninterest income is expected to remain relatively flat going forward until loan volume and capital markets activity pick up, with the potential impact of tariffs adding uncertainty to the timing of this recovery. Post-merger, noninterest income to average assets is expected to be on the high end of the 50-55 basis points range.

The primary focus for 2025 remains the successful integration of Independent, scheduled for conversion in May. Management is confident in achieving the modeled cost saves and leveraging the combined platform, including rolling out SSB's treasury management platform to the Independent markets to support C&I growth. Beyond integration, SSB will focus on understanding the regulatory landscape as it approaches the $100 billion asset threshold, which will inform its long-term strategic planning and capital deployment decisions.

Conclusion

SouthState Corporation has proactively reshaped its balance sheet and strategic trajectory through a series of bold capital moves culminating in the first quarter of 2025. The Independent acquisition, sale-leaseback, and securities restructure have fundamentally enhanced the company's earnings power, most notably reflected in a significantly expanded net interest margin. With a strong capital base, healthy capital formation, and a strategic focus on integrating its new partner while leveraging its proven regional model and service-oriented technology, SSB is positioned to capitalize on potential improvements in the economic environment. While near-term uncertainties and competitive dynamics persist, the successful execution of the Independent integration and prudent capital management will be key determinants of SSB's ability to realize the full potential of its strategic reset and drive long-term shareholder value. Investors should monitor the progress of the conversion, trends in asset quality, and management's decisions regarding the deployment of its growing capital surplus.