Merger With Independent Financial Will Lead To Operational Synergies

Key Takeaways

• Partnership with Independent Financial is expected to create synergies, boosting revenue and expanding margins through operational efficiencies.
  
• Strategic initiatives, including deposit cost reductions and SBA securitization, are set to enhance net interest margins and drive earnings growth.
  
• Economic uncertainty and rate movements could compress net interest margins, while integration challenges and natural disasters pose risks to profitability and operations.

Catalysts

Operates as the bank holding company for SouthState Bank, National Association that provides a range of banking services and products to individuals and companies.

• The partnership with Independent Financial is on track, and once finalized, it is expected to create synergies that could lead to long-term shareholder value, likely boosting revenue and potentially expanding margins as operational efficiencies are realized.
  
• The strategic reduction in deposit costs, effective from October 1, is likely to enhance net interest margins (NIM) in the subsequent quarters, supporting improved earnings.
  
• The successful launch and operation of the SBA securitization business are expected to generate higher-yielding assets, which could contribute to an increase in net interest income in the future.
  
• Anticipated improvements in the yield curve and potential rate cuts are expected to benefit the bank's NIM and generate incremental revenue and earnings growth over time.
  
• With the upcoming merger, there is a focus on holding certain positions open for Independent team members, resulting in lower non-interest expenses, which might contribute to improved net margins post-merger.

SouthState Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SouthState's revenue will grow by 25.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.8% today to 33.4% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $9.59) by about January 2028, up from $497.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, up from 14.7x today. This future PE is greater than the current PE for the US Banks industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 14.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

SouthState Future Earnings Per Share Growth

Risks

• The impact of recent and future rate movements on net interest margins could continue to compress margins, impacting net interest income and overall profitability.
  
• Rising deposit costs, which increased by 10 basis points this quarter, could outpace the growth in loan yields, potentially compressing margins and affecting net earnings.
  
• Economic uncertainty, such as fluctuations in treasury yields and the potential for further changes in the interest rate environment, presents a risk to their revenue projections and may lead to volatility in earnings.
  
• Potential integration challenges with Independent Financial could lead to unexpected expenses or operational disruptions, affecting net margins or profitability if anticipated cost synergies are not realized.
  
• Exposure to natural disasters, such as hurricanes, identified as a recent operational challenge, could impact revenue in the affected geographies and lead to increased costs related to disruptions and community support efforts.

Valuation

• The analysts have a consensus price target of $120.89 for SouthState based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $106.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of $96.1, the analyst's price target of $120.89 is 20.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.