Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-12669
SOUTHSTATE CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina
57-0799315
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
1101 First Street South, Suite 202
Winter Haven, Florida
33880
(Address of principal executive offices)
(Zip Code)
(863) 293-4710
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Common Stock, $2.50 par value
SSB
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
Accelerated Filer ☐
Non-Accelerated Filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date:
Class
Outstanding as of May 3, 2023
75,922,877
SouthState Corporation and Subsidiaries
March 31, 2023 Form 10-Q
INDEX
Page
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022
3
Condensed Consolidated Statements of Net Income for the Three Months Ended March 31, 2023 and 2022
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022
6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
82
Item 4.
Controls and Procedures
PART II — OTHER INFORMATION
Legal Proceedings
83
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
84
Item 5.
Other Information
Item 6.
Exhibits
2
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
March 31,
December 31,
2023
2022
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks
$
558,158
548,387
Federal funds sold and interest-earning deposits with banks
1,215,766
580,491
Deposits in other financial institutions (restricted cash)
222,738
183,685
Total cash and cash equivalents
1,996,662
1,312,563
Trading securities, at fair value
16,039
31,263
Investment securities:
Securities held to maturity (fair value of $2,227,612 and $2,250,168)
2,636,673
2,683,241
Securities available for sale, at fair value
5,159,999
5,326,822
Other investments
217,991
179,717
Total investment securities
8,014,663
8,189,780
Loans held for sale
27,289
28,968
Loans:
Acquired - non-purchased credit deteriorated loans
5,620,290
5,943,092
Acquired - purchased credit deteriorated loans
1,325,400
1,429,731
Non-acquired loans
23,750,452
22,805,039
Less allowance for credit losses
(370,645)
(356,444)
Loans, net
30,325,497
29,821,418
Other real estate owned
3,473
1,023
Bank property held for sale
16,724
17,754
Premises and equipment, net
517,146
520,635
Bank owned life insurance ("BOLI")
967,750
964,708
Deferred tax assets
165,161
177,801
Derivatives assets
159,287
211,016
Mortgage servicing rights
85,406
86,610
Core deposit and other intangibles
109,603
116,450
Goodwill
1,923,106
Other assets
596,021
515,601
Total assets
44,923,827
43,918,696
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
12,422,583
13,168,656
Interest-bearing
23,979,009
23,181,967
Total deposits
36,401,592
36,350,623
Federal funds purchased
233,354
213,597
Securities sold under agreements to repurchase
310,754
342,820
Corporate and subordinated debentures
392,182
392,275
Other borrowings
900,000
—
Reserve for unfunded commitments
85,068
67,215
Derivative liabilities
806,584
1,034,143
Other liabilities
545,289
443,096
Total liabilities
39,674,823
38,843,769
Shareholders’ equity:
Common stock - $2.50 par value; authorized 160,000,000 shares; 75,859,665 and 75,704,563 shares issued and outstanding, respectively
189,649
189,261
Surplus
4,224,503
4,215,712
Retained earnings
1,448,636
1,347,042
Accumulated other comprehensive loss
(613,784)
(677,088)
Total shareholders’ equity
5,249,004
5,074,927
Total liabilities and shareholders’ equity
The Accompanying Notes are an Integral Part of the Financial Statements.
Condensed Consolidated Statements of Net Income (unaudited)
(In thousands, except per share data)
Three Months Ended
Interest income:
Loans, including fees
393,366
233,617
Taxable
41,565
30,120
Tax-exempt
6,557
3,875
Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with banks
8,921
2,859
Total interest income
450,409
270,471
Interest expense:
Deposits
55,942
4,591
Federal funds purchased and securities sold under agreements to repurchase
2,853
269
5,735
4,093
4,616
Total interest expense
69,146
8,953
Net interest income
381,263
261,518
Provision (recovery) for credit losses
33,091
(8,449)
Net interest income after provision (recovery) for credit losses
348,172
269,967
Noninterest income:
Fees on deposit accounts
29,859
28,009
Mortgage banking income
4,332
10,594
Trust and investment services income
9,937
9,718
Correspondent banking and capital market income
13,594
27,950
SBA income
3,722
3,180
Securities gains, net
45
Other income
9,866
6,595
Total noninterest income
71,355
86,046
Noninterest expense:
Salaries and employee benefits
144,060
137,673
Occupancy expense
21,533
21,840
Information services expense
19,925
19,193
OREO and loan related expense (recovery)
169
(238)
Amortization of intangibles
7,299
8,494
Supplies, printing and postage expense
2,640
2,189
Professional fees
3,702
3,749
FDIC assessment and other regulatory charges
6,294
4,812
Advertising and marketing
2,118
1,763
Merger, branch consolidation and severance related expense
9,412
10,276
Other expense
23,353
18,849
Total noninterest expense
240,505
228,600
Earnings:
Income before provision for income taxes
179,022
127,413
Provision for income taxes
39,096
27,084
Net income
139,926
100,329
Earnings per common share:
Basic
1.84
1.40
Diluted
1.83
1.39
Weighted average common shares outstanding:
75,902
71,447
76,389
72,111
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(Dollars in thousands)
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during period
72,772
(362,120)
Tax effect
(9,501)
89,310
Reclassification adjustment for gains included in net income
(12)
Net of tax amount
63,304
(272,810)
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
203,230
(172,481)
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
Three months ended March 31, 2023 and 2022
(Dollars in thousands, except for share data)
Accumulated Other
Common Stock
Retained
Comprehensive
Shares
Amount
Earnings
Loss
Total
Balance, December 31, 2021
69,332,297
173,331
3,653,098
997,657
(21,146)
4,802,940
Comprehensive loss:
Other comprehensive loss, net of tax effects
Total comprehensive loss
Cash dividends declared on common stock at $0.49 per share
(33,822)
Cash dividend equivalents paid on restricted stock units
(100)
Stock options exercised
9,703
24
384
408
Stock issued pursuant to restricted stock units
128,302
321
(321)
Common stock repurchased - buyback plan
(1,012,038)
(2,530)
(83,928)
(86,458)
Common stock repurchased
(28,049)
(70)
(2,287)
(2,357)
Share-based compensation expense
8,486
Common stock issued for Atlantic Capital merger
7,330,803
18,327
641,445
659,772
Net fair value of unvested equity awards assumed in the Atlantic Capital acquisition
(1,980)
Balance, March 31, 2022
75,761,018
189,403
4,214,897
1,064,064
(293,956)
5,174,408
Balance, December 31, 2022
75,704,563
Comprehensive income:
Other comprehensive income, net of tax effects
Total comprehensive income
Cash dividends declared on common stock at $0.50 per share
(37,912)
(420)
23,516
59
1,114
1,173
Restricted stock awards
(2,233)
(5)
177,708
444
(444)
(43,889)
(110)
(3,306)
(3,416)
11,422
Balance, March 31, 2023
75,859,665
Condensed Consolidated Statements of Cash Flows (unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
15,015
16,178
(Recovery) provision for credit losses
Deferred income taxes
3,127
49,073
Gains on sale of securities, net
(45)
Accretion of discount related to acquired loans
(7,398)
(6,741)
(Gains) losses on disposal of premises and equipment
(65)
812
Gains on sale of bank properties held for sale and repossessed real estate
(514)
(624)
Net amortization of premiums on investment securities
5,358
7,767
Bank properties held for sale and repossessed real estate write downs
410
195
Fair value adjustment for loans held for sale
9
6,026
Originations and purchases of loans held for sale
(157,683)
(645,339)
Proceeds from sales of loans held for sale
160,808
702,505
Gains on sales of loans held for sale
(1,456)
(1,845)
Increase in cash surrender value of BOLI
(5,906)
(5,260)
Net change in:
Accrued interest receivable
(3,921)
(4,630)
Prepaid assets
2,406
3,309
Operating leases
72
33
Bank owned life insurance
(930)
Trading securities
15,225
3,455
Derivative assets
51,729
290,886
Miscellaneous other assets
(115,557)
(75,613)
Accrued interest payable
14,193
3,035
Accrued income taxes
36,423
(20,188)
(227,559)
119,608
Miscellaneous other liabilities
91,201
35,761
Net cash provided by operating activities
59,381
578,769
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale
125,298
414,438
Proceeds from maturities and calls of investment securities held to maturity
45,308
40,152
Proceeds from maturities and calls of investment securities available for sale
110,287
158,642
Proceeds from sales and redemptions of other investment securities
25,500
13,216
Purchases of investment securities available for sale
(980,298)
Purchases of investment securities held to maturity
(1,049,722)
Purchases of other investment securities
(63,773)
(19,890)
Net increase in loans
(518,335)
(243,652)
Net cash received from acquisitions
250,115
Recoveries of loans previously charged off
3,589
3,168
Purchase of bank owned life insurance
(80,000)
Purchases of premises and equipment
(7,642)
(4,983)
Proceeds from redemption and payout of bank owned life insurance policies
3,794
Proceeds from sale of bank properties held for sale and repossessed real estate
1,511
5,449
Proceeds from sale of premises and equipment
616
453
Net cash used in investing activities
(273,847)
(1,492,912)
Cash flows from financing activities:
Net increase in deposits
51,450
518,522
Net decrease in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings
(12,309)
(10,830)
Proceeds from FHLB borrowings
2,150,000
Repayment of FHLB borrowings
(1,250,000)
Common stock repurchases
(88,815)
Dividends paid
(38,333)
(33,922)
Net cash provided by financing activities
898,565
385,363
Net (decrease) increase in cash and cash equivalents
684,099
(528,780)
Cash and cash equivalents at beginning of period
6,721,571
Cash and cash equivalents at end of period
6,192,791
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest
54,953
5,956
Income taxes
2,400
1,231
Recognition of operating lease assets in exchange for lease liabilities
12,428
Schedule of Noncash Investing Transactions:
Acquisitions:
Fair value of tangible assets acquired
3,499,774
Other intangible assets acquired
20,791
Liabilities assumed
3,205,694
Net identifiable assets acquired over liabilities assumed
342,939
Common stock issued in acquisition
Real estate acquired in full or in partial settlement of loans
2,826
1,151
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, otherwise referred to as GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period information has been reclassified to conform to the current period presentation, and these reclassifications had no impact on net income or equity as previously reported. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements.
Note 2 — Summary of Significant Accounting Policies
The information contained in the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2023, should be referenced when reading these unaudited condensed consolidated financial statements. Unless otherwise mentioned or unless the context requires otherwise, references herein to “SouthState,” the “Company” “we,” “us,” “our” or similar references mean SouthState Corporation and its consolidated subsidiaries. References to the “Bank” or “SouthState Bank” means SouthState Corporation’s wholly owned subsidiary, South State Bank, National Association, a national banking association.
Loans
Loans that management has originated and has the intent and ability to hold for the foreseeable future or until maturity or pay off generally are reported at their unpaid principal balances, less unearned income and net of any deferred loan fees and costs, including unamortized fair value discount or premium. Unearned income on installment loans is recognized as income over the terms of the loans by methods that generally approximate the interest method. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. If the loan is prepaid, the remaining unamortized fees and costs are charged or credited to interest income.
Amortization ceases for non-accrual loans.
We place non acquired loans and acquired loans on nonaccrual once reasonable doubt exists about the collectability of all principal and interest due. Generally, this occurs when principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection, and excludes factored receivables. For factored receivables, which are commercial trade credits rather than promissory notes, the Company’s practice, in most cases, is to charge-off unpaid recourse receivables when they become 90 days past due from the invoice due date and the non-recourse receivables when they become 120 days past due from the statement due date. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
A loan is evaluated individually for loss when it is on nonaccrual and has a net book balance over $1 million. Large pools of homogeneous loans are collectively evaluated for loss and reserved at the pool level. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as nonaccrual, provided that
management expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay.
Allowance for Credit Losses (“ACL”) – Investment Securities
Management uses a systematic methodology to determine its ACL for investment securities held to maturity. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held to maturity portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the held to maturity investment portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. Management monitors the held to maturity portfolio to determine whether a valuation account should be recorded. As of March 31, 2023 and December 31, 2022, the Company had $2.6 billion and $2.7 billion, respectively, of held to maturity securities and no related valuation account.
The Company follows its nonaccrual policy by reversing interest income in the income statement when the Company determines the interest for held to maturity securities is uncollectible. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the investment securities and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023 and December 31, 2022, the accrued interest receivables for all investment securities recorded in Other Assets were $26.4 million and $28.2 million, respectively.
Each quarter, management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the Provision for Credit Losses in the Condensed Consolidated Statements of Net Income.
ACL – Loans and Certain Off-Balance-Sheet Credit Exposures
The ACL for loans held for investment reflects management’s estimate of credit losses that will result from the inability of our borrowers to make required loan payments. The Company makes adjustments to the ACL by recording a provision for or recovery of credit losses through earnings. Loans charged off are recorded as reductions to the ACL on the balance sheet and subsequent recoveries of loan charge-offs are recorded as increases to the ACL when they are received.
Management uses systematic methodologies to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses.
The Company’s ACL is calculated using collectively evaluated and individually evaluated loans. The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”) method is used for each loan in a pool, and the results are aggregated at the pool level. A periodic tendency to default and absolute loss given default are applied to a projective model of the loan’s cash flow while considering prepayment and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (e.g., default rates and prepayment speeds). The Company has identified the following portfolio segments: Owner-Occupied Commercial Real Estate, Non-Owner Occupied Commercial Real Estate, Multifamily, Municipal, Commercial and Industrial, Commercial Construction and Land Development, Residential Construction, Residential Senior Mortgage, Residential Junior Mortgage, Revolving Mortgage, and Consumer and Other.
In determining the proper level of the ACL, management has determined that the loss experience of the Bank provides the best basis for its assessment of expected credit losses. The Company therefore used its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks). For most of the segment models for collectively evaluated loans, the Company incorporated two or more macroeconomic drivers using a statistical regression modeling methodology.
Management considers forward-looking information in estimating expected credit losses. The Company subscribes to a third-party service which provides their quarterly macroeconomic baseline scenario and alternative scenarios for the United States economy. The baseline, along with the evaluation of alternative scenarios, is used by management to determine the best estimate within the range of expected credit losses. Management has evaluated the appropriateness of the reasonable and supportable forecast scenarios and has made adjustments as needed. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors within four quarters using a straight-line approach. The Company generally uses a four-quarter forecast and a four-quarter reversion period.
Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period, the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) Lending Policy; 2) Economic conditions not captured in models; 3) Volume and Mix of Loan Portfolio; 4) Past Due Trends; 5) Concentration Risk; 6) External Factors; and 7) Model Limitations.
When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company’s threshold for individually evaluated loans includes all non-accrual loans with a net book balance in excess of $1.0 million. Management will monitor the credit environment and make adjustments to this threshold in the future if warranted. Based on the threshold above, consumer financial assets will generally remain in pools unless they meet the dollar threshold. The expected credit losses on individually evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.
As of January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, prospectively that requires the elimination of TDR guidance. Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications. Longstanding TDR accounting rules were replaced as of January 1, 2023 with ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (See Note 3 Recent Accounting Pronouncements). In accordance with the adoption of ASU 2022-02, any loans modified to a borrower experiencing financial difficulty are reviewed by the Bank to determine if an interest rate reduction, a term extension, an other-than-insignificant payment delay, a principal forgiveness, or any combination of these has occurred.
10
Effective January 1, 2023, the ACL includes expected losses from modifications of receivables to borrowers experiencing financial difficulty. Losses on modifications of loans over $1 million to borrowers experiencing financial difficulty are estimated on an individual basis. Because the effect of the remainder of modifications made to borrowers experiencing financial difficulty is already incorporated into the measurement methodologies used to estimate the allowance, they are accounted for as pooled loans. The effects of reasonably expected TDRs are no longer considered in the measurement of expected credit losses. Prior to the adoption of ASU No. 2022-02, when determining the contractual term, the Company considered expected prepayments but was precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expected it would execute a TDR with a borrower. In the event of a reasonably expected TDR, the Company factored the reasonably-expected TDR into the expected credit losses estimate. For consumer loans, the point at which a TDR was reasonably expected was when the Company approved the borrower’s application for a modification (i.e., the borrower qualifies for the TDR) or when the Credit Administration department approved loan concessions on substandard loans. For commercial loans, the point at which a TDR was reasonably expected was when the Company approved the loan for modification or when the Credit Administration department approved loan concessions on substandard loans. The Company used a discounted cash flow methodology for a TDR to calculate the effect of the concession provided to the borrower within the ACL.
For purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e., allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition day, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the unpaid principal balance and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the Provision for Credit Losses in the Condensed Consolidated Statements of Net Income. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis.
The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023 and December 31, 2022, the accrued interest receivables for loans recorded in Other Assets were $109.4 million and $105.4 million, respectively.
The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the expected credit loss are recorded as a liability on the balance sheet. Management has determined that a majority of the Company’s off-balance sheet credit exposures are not unconditionally cancellable. Management completes funding studies based on historical data to estimate the percentage of unfunded loan commitments that will ultimately be funded to calculate the reserve for unfunded commitments. Management applies this funding rate, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. As of March 31, 2023 and December 31, 2022, the liabilities recorded for expected credit losses on unfunded commitments were $85.1 million and $67.2 million, respectively. The current adjustment to the ACL for unfunded commitments is recognized through the Provision for Credit Losses in the Condensed Consolidated Statements of Net Income.
11
Reclassification and Correction
Certain amounts previously reported have been reclassified to conform to the current quarter’s presentation. Such reclassifications had no effect on net income and shareholders’ equity.
During 2022, the Company determined the variation margin payments for its interest rate swaps centrally cleared through London Clearing House (“LCH”) and Chicago Mercantile Exchange (“CME”) meet the legal characteristics of daily settlements of the derivatives (settle-to-market) rather than collateral (collateralize-to-market). As a result, the variation margin payment and the related derivative instruments centrally cleared through LCH and CME are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position, the fair value is reported in Derivative Assets or Derivative Liabilities on the Condensed Consolidated Balance Sheets, as opposed to interest-earning deposits (restricted cash) within Cash and Cash Equivalents or interest-bearing deposits within Total Deposits. In addition, the expense or income attributable to the variation margin payments for the centrally cleared swaps is reported in Noninterest Income, specifically within Correspondent and Capital Markets Income, as opposed to Interest Income or Interest Expense. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument. As a result of the correction from collateralize-to-market accounting treatment previously applied by the Company to settle-to-market accounting treatment, the prior periods presented herein have been corrected, for what management has concluded to be an immaterial correction.
The table below discloses the net change (increase or (decrease)) included in all the Condensed Consolidated Statements of Net Income line items in this Form 10-Q, as a result of the change in accounting treatment. There was no impact to Net Income or Shareholders’ Equity as previously reported.
Three Months Ended March 31,
INCOME STATEMENT
Effect to interest income on federal funds sold and interest-earning
deposits with banks
Net effect to interest income
Effect to interest expense on deposits
(37)
Net effect to interest expense
Net effect to net interest income
44
Noninterest Income:
Effect to correspondent banking and capital market income
(44)
Net effect to noninterest income
Net effect to net income
Note 3 — Recent Accounting and Regulatory Pronouncements
Accounting Standards Adopted
In March 2022, FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the long-standing accounting guidance for Troubled Debt Restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, as it is no longer meaningful due to the introduction of Topic 326, which requires an entity to consider lifetime expected credit losses on loans when establishing an allowance for credit losses. Thus, most losses that would have been realized for a TDR under Subtopic 310-40 are now captured by the accounting required under Topic 326. The amendments in this ASU also require that an entity disclose current-period gross write offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses Measured at Amortized Cost. The Company adopted ASU No. 2022-02 effective January 1, 2023. We elected to apply a prospective transition method, which applies only to modifications occurring after the adoption date. For loans meeting the Bank’s materiality criteria, which includes loans in excess of $250,000, an assessment of whether a borrower is experiencing financial difficulty is made on the date of the modification. On the transition date, the former TDR loans as of December 31, 2022 were designated as individually evaluated loans on January 1, 2023 and retained the allowance for credit losses allocated to these loans at the adoption date as the credit risk of these did not change. Aside from the changes to the disclosures required by ASU No. 2022-02, the ASU did not have a material impact on our consolidated financial statements.
12
Issued But Not Yet Adopted Accounting Standards
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848 – Facilitation of the Effects of Reference Rate Reform on Financial Reporting and subsequently expanded the scope of ASU No. 2020-04 with the issuance of ASU No. 2021-01 and extended the sunset date to December 31, 2024 with ASU No. 2022-06. This update provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that will be discontinued. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The main provisions for contract modifications include optional relief by allowing the modification as a continuation of the existing contract without additional analysis and other optional expedients regarding embedded features. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that will be discontinued because of reference rate reform. The amendments in this update were effective for all entities as of March 12, 2020 and may be applied through December 31, 2022. An entity may elect to apply the amendments in this update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments in this update must be applied prospectively for all eligible contract modifications and hedging relationships.
The Company has established a LIBOR Committee and various subcommittees, which have evaluated the impact of adopting and implementing ASU 2020-04 on the consolidated financial statements, including the evaluation of all of the Company’s contracts, hedging relationships and other transactions that will be affected by reference rates that are being discontinued. The cross-functional LIBOR Committee and subcommittees have (1) assessed the Company's current exposure to LIBOR indexed instruments and the data, systems and processes that will be impacted; (2) established a detailed implementation plan; and (3) developed a formal governance structure for the transition. The Company is in the process of developing and implementing various proactive steps to facilitate the transition on behalf of customers, which include the adoption and ongoing implementation of fallback provisions that provide for the determination of replacement rates for LIBOR-linked financial products; the adoption of new products linked to alternative reference rates, such as adjustable-rate mortgages, consistent with guidance provided by the U.S. regulators, the Alternative Reference Rates Committee, and government sponsored entities; the cessation of quoting LIBOR and originating new products linked to LIBOR by December 31, 2021; and the selection of SOFR indices as the replacement indices, and successful completion of systems testing using the SOFR replacement indices.
The Company discontinued quoting LIBOR on September 30, 2021 and discontinued originating new products linked to LIBOR on December 31, 2021. The Company continues to evaluate its financial and operational infrastructure in its effort to transition all financial and strategic processes, systems, and models to reference rates other than LIBOR. The Company is in the process of developing and implementing processes to educate all client-facing associates and coordinate communications with customers regarding the transition.
ASU 2020-04 provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2022-06 extended the effective date through December 31, 2024. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at the instrument level on an ongoing basis. Management is adopting these option expedients beginning April 1, 2023 to coincide with the transition and modification of our Libor-exposed instruments beginning in the second quarter of 2023. These modifications have not had and are not expected to have a material impact on the consolidated financial statements.
13
In March 2023, FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The Proportional Amortization method was introduced by ASU No. 2014-01, but limited this amortization method to investments in low-income housing tax credit structures. The amendments in ASU 2023-02 will allow entities the option to elect whether they account for tax equity investments using the proportional amortization method if certain conditions are met, regardless of the program from which the income tax credits are received. The election would be on a program-by-program basis. The ASU would also require disclosures to be transparent about an entity’s investments that generate income tax credits and other income tax benefits. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years with early adoption permitted. The Company maintains investments in low-income housing tax structures and will evaluate whether it will change its current accounting treatment for low-income housing tax credits. The Company does not anticipate this ASU will have a material impact on its financial statements.
Note 4 — Mergers and Acquisitions
Atlantic Capital Bancshares, Inc. (“Atlantic Capital” or “ACBI”)
On March 1, 2022, the Company acquired all of the outstanding common stock of Atlantic Capital in a stock transaction. Upon the terms and subject to the conditions set forth therein, Atlantic Capital merged with and into the Company, with the Company continuing as the surviving corporation in the merger. Immediately following the merger, Atlantic Capital’s wholly owned banking subsidiary, Atlantic Capital Bank, N.A. (“ACB”) merged with and into the Bank, which continues as the surviving bank. Shareholders of Atlantic Capital received 0.36 shares of the Company’s common stock for each share of Atlantic Capital common stock they owned. In total, the purchase price for Atlantic Capital was $657.8 million.
In the acquisition, the Company acquired $2.4 billion of loans, including PPP loans, at fair value, net of $54.3 million, or 2.24%, estimated discount to the outstanding principal balance, representing 10.0% of the Company’s total loans at December 31, 2021. Of the total loans acquired, management identified $137.9 million that had more than insignificantly deteriorated since origination and were thus determined to be PCD loans.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805. The Company recognized goodwill on this acquisition of $342.0 million. The goodwill was calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date.
During three months ended March 31, 2023 and 2022, the Company incurred approximately $1.4 million and $5.6 million, respectively, of acquisition costs related to this transaction. These acquisition costs are reported in Merger and Branch Consolidation Related Expenses on the Company’s Condensed Consolidated Statements of Net Income.
The Atlantic Capital transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date.
14
Initial
Subsequent
As Recorded
Fair Value
As Recorded by
by Atlantic Capital
Adjustments
the Company
Assets
Cash and cash equivalents
250,134
(a)
250,158
Investment securities
717,332
(13,622)
(b)
703,710
Loans, net of allowance and mark
2,394,256
(18,964)
(c)
(5,614)
2,369,678
Premises and equipment
16,892
2,608
(d)
19,500
Intangible assets
22,572
(1,781)
(e)
74,613
Deferred tax asset
30,231
2,273
(f)
(1,025)
31,479
45,274
(1,277)
(g)
7,557
51,554
3,551,304
(30,739)
918
3,521,483
Liabilities
1,411,671
1,616,970
3,028,641
50,000
74,131
4,286
(h)
78,417
50,711
(2,075)
(i)
48,636
3,203,483
2,211
Net identifiable assets acquired over (under) liabilities assumed
347,821
(32,950)
315,789
(918)
342,021
Net assets acquired over liabilities assumed
309,989
657,810
Consideration:
SouthState Corporation common shares issued
Purchase price per share of the Company's common stock
90.00
Company common stock issued ($659,772) and cash exchanged for fractional shares ($19)
659,791
Stock option conversion
1,135
Restricted stock unit conversion
2,870
Restricted stock awards conversion (unvested awards)
(5,986)
Fair value of total consideration transferred
Explanation of fair value adjustments
(a)— Represents an adjustment to record time deposits with financial institutions at fair value (premium).
(b)— Represents the reversal of Atlantic Capital's existing fair value adjustments of $17.2 million and the adjustment to record securities at fair value (discount) totaling $30.9 million (includes reclassification of all securities held as HTM to AFS totaling $237.6 million).
(c)— Represents approximately 1.40%, or $34.0 million, net credit discount of the loan portfolio and 2.24% total net discount, or $54.3 million, including non-credit discount, based on a third-party valuation. Also, includes a reversal of Atlantic Capital's ending ACL of $22.1 million and $7.6 million of existing Atlantic Capital’s deferred fees and costs.
(d)— Represents the preliminary fair value adjustments of $2.6 million on fixed assets and leased assets.
(e)— Represents approximately $17.5 million, or 0.63%, of CDI amount and $3.2 million for SBA servicing asset based on a third-party valuation. Atlantic Capital’s pre-merger goodwill and servicing asset of $19.9 million and $2.6 million, respectively, were written-off.
(f)— Represents deferred tax asset related to fair value adjustments with marginal tax rate of 23.9%, which includes an adjustment from Atlantic Capital’s effective tax rate to the Company’s effective tax rate. The difference in effective tax rates relates to state income taxes.
(g)— Represents the fair value adjustment (decrease) for low-income housing investments of $1.1 million, write-off of prepaid assets of $233,000, adjustments to receivables of $154,000 and fair value adjustment for Small Business Investment Company (“SBIC”) investments of $7.4 million.
(h)— Represents the reversal of the existing Atlantic Capital’s issuance costs on subordinated debt of $0.9 million and recording the fair value adjustment (premium) of $3.4 million, based on a third-party valuation.
(i)— Represents the reversal of $2.8 million of unfunded commitment liability at purchase date and the fair value adjustment to increase lease liabilities associated with rental facilities totaling $1.4 million. Also includes the reversal of uncertain tax liability of $0.7 million.
15
Comparative and Pro Forma Financial Information for the Atlantic Capital Acquisition
Pro-forma data for the three months ended March 31, 2022 listed in the table below presents pro-forma information as if the Atlantic Capital acquisition occurred at the beginning of 2022. These results combine the historical results of Atlantic Capital in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022.
Merger-related costs of $5.6 million from the Atlantic Capital acquisition were incurred during the first quarter of 2022 and were excluded from pro forma information below. No adjustments have been made to reduce the impact of any OREO write downs, investment securities sold or repayment of borrowings recognized by Atlantic Capital in 2022. The core system conversion for the Atlantic Capital merger was completed during third quarter of 2022. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition, which are not reflected in the pro forma amounts below. The total revenues presented below represent pro-forma net interest income plus pro-forma noninterest income:
Pro Forma
March 31, 2022
Total revenues (net interest income plus noninterest income)
371,196
281,577
Net adjusted income available to the common shareholder
113,903
EPS — basic
1.49
EPS — diluted
1.48
The disclosures regarding the results of operations for Atlantic Capital subsequent to the acquisition date are omitted as this information is not practical to obtain. The majority of the fixed costs and purchase accounting entries were booked on the Company’s core system making it impractical to determine Atlantic Capital’s results of operation on a stand-alone basis.
Note 5 —Securities
Investment Securities
The following is the amortized cost and fair value of investment securities held to maturity:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
March 31, 2023:
U.S. Government agencies
197,264
(28,175)
169,089
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,553,373
(238,470)
1,314,903
Residential collateralized mortgage-obligations issued by U.S. government
468,794
(63,317)
405,477
Commercial mortgage-backed securities issued by U.S. government
360,962
(68,141)
292,821
Small Business Administration loan-backed securities
56,280
(10,958)
45,322
(409,061)
2,227,612
December 31, 2022:
197,262
(29,787)
167,475
1,591,646
(255,093)
1,336,553
474,660
(69,664)
404,996
362,586
(66,304)
296,282
57,087
(12,225)
44,862
(433,073)
2,250,168
16
The following is the amortized cost and fair value of investment securities available for sale:
U.S. Treasuries
273,035
(4,939)
268,096
246,001
(25,742)
220,259
1,951,725
(278,563)
1,673,162
689,575
(98,163)
591,412
1,180,323
(192,894)
987,437
State and municipal obligations
1,138,809
(171,856)
966,957
466,462
194
(41,164)
425,492
Corporate securities
30,571
(3,387)
27,184
5,976,501
206
(816,708)
272,416
(6,778)
265,638
245,972
(26,884)
219,088
1,996,405
(298,052)
1,698,353
708,337
(107,292)
601,045
1,196,700
2,542
(198,844)
1,000,398
1,269,525
1,210
(205,883)
1,064,852
491,203
302
(46,695)
444,810
35,583
(2,945)
32,638
6,216,141
4,054
(893,373)
During the three months ended March 31, 2023, there were gross gains of $1.3 million and gross losses of $1.3 million, a net gain of $45,000, realized from the sale of available for sale securities. During the three months ended March 31, 2022, the Company sold securities totaling $414.4 million that were acquired from ACBI on March 1, 2022. These securities were marked to fair value at merger and therefore resulted in no gain or loss on sale.
The following is the amortized cost and carrying value of other investment securities:
Carrying
Federal Home Loan Bank stock
53,335
Federal Reserve Bank stock
150,261
Investment in unconsolidated subsidiaries
3,563
Other nonmarketable investment securities
10,832
15,085
10,808
Our other investment securities consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of March 31, 2023, we determined that there was no impairment on other investment securities.
17
The amortized cost and fair value of debt securities at March 31, 2023 by contractual maturity are detailed below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Securities
Held to Maturity
Available for Sale
Due in one year or less
254,326
250,191
Due after one year through five years
101,073
94,058
309,053
295,225
Due after five years through ten years
382,261
337,412
1,148,155
1,001,653
Due after ten years
2,153,339
1,796,142
4,264,967
3,612,930
Information pertaining to our securities with gross unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is as follows:
Less Than
Twelve Months
or More
Gross Unrealized
Securities Held to Maturity
28,175
238,470
1,187
45,925
62,130
359,552
13,414
57,771
54,727
235,050
10,958
14,601
103,696
394,460
2,123,916
Securities Available for Sale
4,939
1,065
53,935
24,677
166,324
1,027
32,334
277,536
1,640,828
2,650
73,464
95,513
517,948
10,606
107,009
182,288
874,332
4,250
74,784
167,606
888,984
428
80,092
40,736
278,346
635
5,863
2,752
21,321
20,661
427,481
796,047
4,656,179
5,514
78,833
24,273
88,642
65,181
513,086
189,912
823,467
30,284
277,868
39,380
127,128
14,318
82,895
51,986
213,387
12,225
115,297
952,682
317,776
1,297,486
6,778
8,193
138,807
18,691
80,281
42,767
459,773
255,285
1,238,580
21,450
274,082
85,842
326,963
17,156
206,228
181,688
767,002
97,084
616,631
108,799
391,848
2,152
92,535
44,543
264,933
2,209
28,374
736
4,264
197,789
2,082,068
695,584
3,073,871
18
Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the extent to which the fair value has been less than cost, (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third-party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including securities issued by Ginnie Mae, Fannie Mae, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities in an unrealized loss position as of March 31, 2023 continue to perform as scheduled and we do not believe there is a credit loss or a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 2 — Summary of Significant Account Policies for further discussion.
Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.
At March 31, 2023, investment securities with a carrying value of $2.4 billion were pledged to secure public funds deposits and for other purposes required and permitted by law. The carrying value total of $2.4 billion investment securities pledged was comprised of $1.9 billion pledged to secure public funds deposits, $415.7 million pledged to secure FHLB advances, and $113.2 million pledged to secure interest rate swap positions with correspondents. At December 31, 2023, investment securities with a carrying value of $2.6 billion were pledged to secure public funds deposits and for other purposes required and permitted by law. The carrying value total of $2.6 billion investment securities pledged was comprised of $1.9 billion pledged to secure public funds deposits, $596.1 million pledged to secure FHLB advances, and $114.9 million pledged to secure interest rate swap positions with correspondents.
Trading Securities
At March 31, 2023 and December 31, 2022, trading securities, at estimated fair value, were as follows:
3,925
11,190
Residential mortgage pass-through securities issued or guaranteed by U.S.
government agencies or sponsored enterprises
3,439
1,304
4,589
7,122
13,993
Other debt securities
249
1,491
Net losses on trading securities for the three months ended March 31, 2023 and 2022 were as follows:
Net losses on sales transaction
(139)
(1,239)
Net mark to mark losses
(6)
(1,976)
Net losses on trading securities
(145)
(3,215)
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Note 6 — Loans
The following is a summary of total loans:
Construction and land development (1)
2,749,290
2,860,360
Commercial non-owner occupied
8,236,216
8,072,959
Commercial owner occupied real estate
5,522,514
5,460,193
Consumer owner occupied (2)
5,528,546
5,162,042
Home equity loans
1,332,285
1,313,168
Commercial and industrial
5,321,306
5,313,483
Other income producing property
721,291
696,242
Consumer
1,277,549
1,278,426
Other loans
7,145
20,989
Total loans
30,696,142
30,177,862
The above table reflects the loan portfolio at the amortized cost basis for the periods March 31, 2023 and December 31, 2022, to include net deferred costs of $55.3 million and $49.7 million, respectively, and unamortized discount total related to loans acquired of $64.7 million and $72.1 million, respectively. Accrued interest receivables of $109.4 million and $105.4 million, respectively, are accounted for separately and reported in other assets for the periods March 31, 2023 and December 31, 2022.
The Company purchased loans through its acquisition of ACBI, for which there was, at acquisition, evidence of more than an insignificant deterioration of credit quality since origination. The carrying amount of those loans, at acquisition, is as follows:
March 1, 2022
Book value of acquired loans at acquisition
137,874
Allowance for credit losses at acquisition
(13,758)
Non-credit discount at acquisition
(5,943)
Carrying value or book value of acquired loans at acquisition
118,173
As part of the ongoing monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators, including trends related to (i) the level of classified loans, (ii) net charge-offs, (iii) non-performing loans (see details below), and (iv) the general economic conditions of the markets that we serve.
The Company utilizes a risk grading matrix to assign a risk grade to each commercial loan. Classified loans are assessed at a minimum every six months. A description of the general characteristics of the risk grades is as follows:
Construction and land development loans in the following table are on commercial and speculative real estate. Consumer owner occupied loans are collateralized by 1-4 family owner occupied property with a business intent.
20
The following tables present the credit risk profile by risk grade of commercial loans by origination year as of March 31, 2023 and December 31, 2022:
Term Loans
Amortized Cost Basis by Origination Year
As of March 31, 2023
2021
2020
2019
Prior
Revolving
Construction and land development
Risk rating:
Pass
65,979
898,029
602,843
109,487
34,046
33,860
75,139
1,819,383
Special mention
2,022
1,193
264
20,255
7,671
31,405
Substandard
1,518
139
164
1,334
1,590
4,754
Doubtful
Total Construction and land development
67,497
900,190
604,200
109,760
55,635
43,127
1,855,548
Current-period gross charge-offs
144,211
2,339,057
1,964,957
799,333
892,806
1,834,435
89,240
8,064,039
95
9,442
708
12,167
5,423
60,130
87,965
2,875
5,697
38,180
1,405
10,164
25,637
253
84,211
1
Total Commercial non-owner occupied
147,181
2,354,196
2,003,846
812,905
908,393
1,920,202
89,493
51
Commercial Owner Occupied
165,248
1,052,756
1,154,709
712,735
702,606
1,437,016
70,057
5,295,127
342
3,576
24,689
3,285
4,397
37,842
1,020
75,151
1,916
14,645
34,913
19,882
12,394
68,401
80
152,231
Total commercial owner occupied
167,506
1,070,977
1,214,311
735,903
719,397
1,543,263
71,157
Commercial owner occupied
417,089
1,349,157
807,583
478,312
253,680
514,686
1,354,618
5,175,125
533
6,705
4,488
702
1,698
4,791
23,114
42,031
2,464
4,025
27,306
5,574
6,359
13,109
104,111
39
Total commercial and industrial
420,087
1,359,889
839,394
484,589
261,737
532,602
1,423,008
1,097
160
149
280
104
1,806
14,839
161,959
107,741
58,591
45,660
142,437
49,887
581,114
603
859
1,007
337
3,387
2,076
8,349
842
900
294
236
7,081
614
9,967
397
403
Total other income producing property
14,919
163,801
109,500
59,892
46,233
152,911
52,577
599,833
Consumer owner occupied
1,349
4,740
3,117
1,720
382
467
17,524
29,299
528
132
281
960
94
931
1,601
193
151
2,977
Total Consumer owner occupied
5,275
3,230
2,783
2,264
661
17,675
33,237
Total other loans
Total Commercial Loans
815,860
5,805,698
4,640,950
2,160,178
1,929,180
3,962,901
1,656,465
20,971,232
1,050
22,876
31,956
17,557
32,391
113,821
26,210
245,861
8,773
25,355
101,557
28,095
32,088
116,011
46,372
358,251
399
455
825,684
5,854,328
4,774,481
2,205,832
1,993,659
4,192,766
1,729,049
21,575,799
211
1,857
21
As of December 31, 2022
2018
875,751
742,985
134,996
63,439
14,521
29,442
65,656
1,926,790
1,643
988
268
76
7,219
2,068
12,262
214
10,409
2,326
4,282
17,242
877,608
754,382
135,275
65,841
21,740
35,798
1,956,300
2,245,943
1,849,079
816,791
959,707
506,350
1,417,397
108,759
7,904,026
7,579
4,225
936
11,036
24,067
32,110
5,000
84,953
13,256
25,557
609
9,383
6,472
26,366
2,257
83,900
79
2,266,778
1,878,862
818,336
980,205
536,889
1,475,873
116,016
360
368
1,046,562
1,136,289
725,040
709,669
446,497
1,080,522
75,506
5,220,085
3,620
25,263
3,383
7,934
7,160
34,724
1,294
83,378
12,861
34,210
19,962
16,502
9,487
62,808
895
156,725
1,063,043
1,195,762
748,386
734,105
463,144
1,178,058
77,695
1,143
833
1,976
1,566,203
895,368
506,655
274,446
212,522
333,286
1,386,678
5,175,158
5,885
3,782
3,401
1,859
3,378
1,316
24,347
43,968
6,308
27,974
4,770
6,591
6,783
8,476
32,876
93,778
155
422
579
1,578,396
927,124
514,826
282,896
222,838
343,500
1,443,903
2,825
198
630
2,214
2,589
1,742
10,202
149,793
92,887
60,473
46,189
47,155
107,436
46,179
550,112
952
957
1,257
378
190
3,652
2,328
9,714
876
359
1,281
300
11,214
15,309
401
136
537
152,022
94,203
63,011
46,867
47,559
122,438
49,572
575,672
46
50
96
5,947
3,124
1,811
418
68
332
15,910
27,610
284
66
1,043
1,614
202
2,087
6,497
3,239
1,959
2,316
69
534
16,127
30,741
5,911,188
4,719,732
2,245,766
2,053,868
1,227,113
2,968,415
1,698,688
20,824,770
20,216
35,235
9,381
21,567
42,014
73,870
33,035
235,318
33,528
98,604
26,645
36,716
22,956
113,348
37,244
369,041
156
568
1,208
5,965,333
4,853,572
2,281,793
2,112,230
1,292,239
3,156,201
1,768,969
21,430,337
1,773
3,828
1,792
12,642
22
For the consumer segment, delinquency of a loan is determined by past due status. Consumer loans are automatically placed on nonaccrual status once the loan is 90 days past due. Construction and land development loans are on 1-4 properties and lots.
The following table presents the credit risk profile by past due status of consumer loans by origination year as of March 31, 2023:
Days past due:
Current
240,632
1,748,552
1,587,281
657,794
309,618
939,645
5,483,522
30 days past due
438
451
323
672
2,242
4,126
60 days past due
243
97
620
746
1,706
90 days past due
676
853
683
3,475
5,955
1,749,909
1,588,097
659,590
310,973
946,108
5,495,309
4,563
7,084
5,367
3,733
1,141
17,773
1,287,131
1,326,792
273
89
1,003
2,424
3,789
221
494
774
162
277
121
349
930
Total Home equity loans
7,416
5,529
3,754
1,507
19,118
1,290,398
104,807
383,665
187,023
100,664
78,646
173,622
224,373
1,252,800
252
449
37
107
1,213
11,052
13,110
231
49
55
242
7,531
8,127
456
34
1,400
3,512
Total consumer
384,604
187,567
100,789
78,842
176,477
244,463
295
100
244
1,891
2,729
20,979
554,627
251,650
35,810
11,006
18,336
615
893,023
325
279
604
92
114
554,952
35,833
18,707
893,742
3,664
45,269
20,833
2,624
43,104
120,910
292
256
43,652
121,458
Total Consumer Loans
374,645
2,739,197
2,052,154
802,813
403,035
1,192,480
1,512,723
9,077,047
1,288
868
5,029
13,476
21,921
116
691
1,301
8,025
10,721
1,132
506
914
994
5,252
1,856
10,654
2,742,150
2,053,676
804,778
404,952
1,204,062
1,536,080
9,120,343
118
246
2,770
The following table presents the credit risk profile by past due status of total loans by origination year as of March 31, 2023:
Total Loans
1,200,329
8,596,478
6,828,157
3,010,610
2,398,611
5,396,828
3,265,129
890
524
311
526
1,995
4,627
23
The following table presents the credit risk profile by past due status of consumer loans by origination year as of December 31, 2022:
1,695,454
1,467,080
657,005
315,458
187,580
792,572
5,115,149
1,254
1,681
664
272
2,028
7,215
255
1,650
3,063
944
776
454
3,036
5,874
1,697,025
1,469,615
660,041
316,576
188,758
799,286
5,131,301
25
120
5,921
5,231
3,282
1,560
1,955
17,941
1,272,848
1,308,738
77
1,586
2,658
36
70
26
540
60
87
611
1,081
3,516
1,760
2,443
19,000
1,275,297
146
445
407,825
206,003
111,210
86,008
44,303
141,053
248,314
1,244,716
718
78
174
63
1,255
17,471
19,953
103
144
557
9,836
10,838
126
58
165
1,660
784
2,919
408,724
206,360
111,453
86,284
44,675
144,525
276,405
254
653
265
62
7,979
10,214
466,475
351,485
50,472
14,053
7,006
13,588
379
903,458
57
43
125
436
41
477
466,477
50,908
14,110
7,029
13,672
904,060
45,717
21,421
4,937
2,663
4,322
40,680
624
120,364
40,886
120,570
2,621,392
2,051,220
826,906
419,742
245,166
1,005,834
1,522,165
8,692,425
2,036
1,448
1,914
972
3,810
19,057
30,013
310
440
705
2,256
10,376
14,615
1,004
1,330
607
829
5,469
1,107
10,472
2,623,864
2,054,112
830,855
421,393
247,227
1,017,369
1,552,705
8,747,525
358
290
85
1,014
8,125
10,804
The following table presents the credit risk profile by past due status of total loans by origination year as of December 31, 2022:
8,589,197
6,907,684
3,112,648
2,533,623
1,539,466
4,173,570
3,321,674
291
3,478
556
2,063
2,299
4,842
9,917
23,446
The following table presents an aging analysis of past due accruing loans, segregated by class.
30 - 59 Days
60 - 89 Days
90+ Days
Non-
Past Due
Accruing
March 31, 2023
980
4,050
5,030
2,743,954
306
4,410
1,778
6,188
8,208,270
21,758
3,841
4,552
1,665
10,058
5,476,893
35,563
2,521
1,344
3,865
5,505,300
19,381
2,811
673
3,484
1,323,065
5,736
21,931
9,618
1,837
33,386
5,257,967
29,953
2,224
147
2,527
715,773
2,991
13,015
8,002
21,018
1,251,249
5,282
51,733
30,173
3,650
85,556
30,489,616
120,970
December 31, 2022
2,146
3,653
5,799
2,853,734
827
1,158
978
2,213
8,050,321
20,425
10,748
2,059
2,231
15,038
5,410,066
35,089
6,001
744
40
6,785
5,137,950
17,307
361
2,888
1,303,964
6,316
24,500
11,677
1,704
37,881
5,258,473
17,129
1,623
1,480
298
690,107
2,734
19,713
10,655
30,368
1,243,660
4,398
68,416
31,607
4,350
104,373
29,969,264
104,225
The following table is a summary of information pertaining to nonaccrual loans by class, including loans modified for borrowers with financial difficulty as of March 31, 2023 and the information pertaining to nonaccrual loans by class, including restructured loans as of December 31, 2023.
Greater than
Non-accrual
90 Days Accruing(1)
with no allowance(1)
11,338
15,034
1,489
6,252
Total loans on nonaccrual status
34,126
There is no interest income recognized during the period on nonaccrual loans. The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Loans on nonaccrual status in which there is no allowance assigned are individually evaluated loans that do not carry a specific reserve. See Note 2 — Summary of Significant Accounting Policies for further detailed on individually evaluated loans.
The following is a summary of collateral dependent loans, by type of collateral, and the extent to which they are collateralized during the period:
Collateral
Coverage
%
Industrial
8,166
9,344
114%
Other
6,868
17,012
248%
14,638
38,900
266%
Commercial non-owner occupied real estate
31,860
281%
6,450
10,900
169%
18,428
30,586
166%
4,808
5,591
116%
Residential 1-4 family dwelling
2,860
192%
1,523
1,671
110%
Total collateral dependent loans
46,289
91,662
27,419
57,062
The Bank designates individually evaluated loans on non-accrual with a net book balance exceeding the designated threshold as collateral dependent loans. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining ACL. Under ASC 326-20-35-6, the Bank has adopted the collateral maintenance practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for selling costs, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The Bank’s threshold for individually evaluated loans is $1.0 million. The significant changes above in collateral percentage are due to appraisal value updates or changes in the number of loans within the asset class and collateral type. Overall collateral dependent loans increased $18.9 million during the three months ended March 31, 2023.
For loans meeting the Bank’s materiality criteria, which includes loans in excess of $250,000, an assessment of whether a borrower is experiencing financial difficulty is made on the date of the modification. Longstanding TDR accounting rules were replaced with ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (See Note 3 Recent Accounting Pronouncements). In accordance with the prospective adoption of ASU 2022-02 effective January 1, 2023, any loan modified to a borrower experiencing financial difficulty is reviewed by the Bank to determine if an interest rate reduction, a term extension, an other-than-insignificant payment delay, a principal forgiveness, or any combination of these has occurred.
The allowance for credit losses includes losses from modifications of receivables to borrowers experiencing financial difficulty. Losses on modifications of loans over $1.0 million to borrowers experiencing financial difficulty are estimated on an individual basis. Because the effect of the remainder of modifications made to borrowers experiencing financial difficulty is already incorporated into the measurement methodologies used to estimate the allowance, they are measured for expected credit losses for as pooled loans.
Loans on nonaccrual status at the date of modification are initially classified as nonaccrual. Loans on accruing status at the date of modification are initially classified as accruing if the note is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the modification agreement. Nonaccrual loans are returned to accruing status when there is economic substance to the modification, there is documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
The following table presents loans designated as modifications made to borrowers experiencing financial difficulty during 2023 resulting from the adoption of ASU 2022-02, segregated by type of modification and asset class, and indicating the financial effect of the modifications. The amortized cost balance for the modified loans presented below exclude accrued interest receivable of approximately $12,000 as of March 31, 2023. There were no other types or combination of modifications other than term extensions for the three months ended March 31, 2023.
Three Months Ended and As of March 31,
Increase in
% of Total
Weighted Average
Asset Class
Life of Loan
Term extension
260
0.04%
12 months
2,105
0.02%
8 months
1,145
10 months
282
6 months
Total term extensions
3,792
The Bank on occasion will enter into modification agreements which extend the maturity payoff on a loan, for borrowers willing to continue to pay, to minimize losses for the Bank. At March 31, 2023, the Company had $3.4 million remaining in commitments to lend additional funds on loans to borrowers experiencing financial difficulty and modified during the current reporting period.
The following table presents loans designated as TDRs segregated by class and type of concession that were restructured, for the comparative period, prior to the adoption of ASU 2022-02.
Pre-Modification
Post-Modification
Number
of loans
Interest rate modification
187
99
497
119
Total interest rate modifications
1,290
Term modification
141
2,356
Total term modifications
2,497
3,787
At March 31, 2022, the balance of accruing TDRs was $12.4 million. The Company had $768,000 remaining availability under commitments to lend additional funds on restructured loans at March 31, 2022. The amount of specific reserve associated with restructured loans was $4.2 million at March 31, 2022.
The following table presents the changes in status of loans modified within the previous three months to borrowers experiencing financial difficulty, as of March 31, 2023, by type of modification. There were no subsequent defaults.
Paying Under
Converted to
Foreclosures
Restructured Terms
Nonaccrual
and Defaults
The following table presents the changes in status of TDR loans within the previous twelve months as of March 31, 2022 by type of concession, for the comparative period, prior to the adoption of ASU 2022-02. There were no subsequent defaults that resulted in a change to reserves on the individually evaluated loan.
Foreclosures and
Defaults
Recorded
of Loans
Investment
1,783
2,806
The following table depicts the performance of loans modified within the previous three months to borrowers experiencing financial difficulty, as of March 31, 2023.
Payment Status (Amortized Cost Basis)
30-89 Days
27
Note 7 — Allowance for Credit Losses (ACL)
See Note 2 — Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance for credit losses.
The following table presents a disaggregated analysis of activity in the allowance for credit losses as follows:
Residential
CRE Owner
Non-Owner
Mortgage Sr.
Mortgage Jr.
HELOC
Construction
C&D
Multifamily
Municipal
Occupied
Occupied CRE
C & I
Three Months Ended March 31, 2023
Allowance for credit losses:
Balance at end of period December 31, 2022
72,188
405
14,886
8,974
45,410
22,767
3,684
849
58,083
78,485
50,713
356,444
Charge-offs
(2)
(39)
(2,729)
(51)
(1,806)
(4,627)
Recoveries
245
258
584
293
106
1,732
Net (charge offs) recoveries
(2,145)
(74)
(1,038)
Provision (recovery) (1)
4,871
(61)
(774)
130
9,401
2,697
1,823
30
(835)
3,933
(5,976)
15,239
Balance at end of period March 31, 2023
77,351
9,176
55,069
23,319
5,507
879
57,541
82,473
44,663
370,645
Quantitative allowance
Collectively evaluated
77,982
350
12,229
8,994
49,865
5,369
731
49,297
78,013
35,355
341,504
Individually evaluated
197
2,285
6,812
2,721
4,612
16,782
Total quantitative allowance
78,179
14,514
50,020
56,109
80,734
39,967
358,286
Qualitative allowance
(828)
(1)
(196)
182
5,049
138
148
1,432
1,739
4,696
12,359
Three Months Ended March 31, 2022
Balance at end of period December 31, 2021
47,036
13,325
4,997
37,593
23,149
4,921
565
61,794
79,649
28,167
301,807
Initial Allowance for PCD loans acquired during period
86
1,479
7,569
9,218
Initial Allowance for Non PCD loans acquired during period
352
1,887
426
2,519
5,605
13,697
(58)
(19)
(218)
(4)
(2,661)
(371)
(2,159)
(5,490)
394
257
234
532
314
1,309
3,167
336
230
(2,129)
(57)
(850)
(2,323)
(87)
175
(14,438)
828
(1,444)
42
(16,641)
13,945
(3,191)
(22,003)
Balance at end of period March 31, 2022
46,002
586
13,671
5,616
25,358
21,899
3,903
49,094
96,360
37,300
300,396
45,805
12,301
24,770
45,302
95,051
32,476
288,316
168
1,357
588
2,960
3,358
8,431
45,973
13,658
48,262
35,834
296,747
29
832
1,466
3,649
Note 8 — Other Real Estate Owned and Bank Properties Held for Sale
The following is a summary of information pertaining to OREO and Bank Properties Held for Sale:
OREO
Bank Properties Held for Sale
18,777
Additions, net
Write-downs
(409)
Sold
(376)
(621)
(997)
20,197
At March 31, 2023, there were a total of six properties included in OREO compared to six properties at December 31, 2022. At March 31, 2023, there were a total of 16 properties included in bank properties held for sale which compares to 17 properties included in properties held for sale, at December 31, 2022. At March 31, 2023, we had no residential real estate included in OREO and $3.0 million in residential real estate consumer mortgage loans in the process of foreclosure.
28
Note 9 — Leases
As of March 31, 2023 and December 31, 2022, we had operating right-of-use (“ROU”) assets of $104.7 million and $108.0 million, respectively, and operating lease liabilities of $112.4 million and $115.6 million, respectively. We maintain operating leases on land and buildings for some of our operating centers, branch facilities and ATM locations. Most leases include one or more options to renew, with renewal terms extending up to 21 years. The exercise of renewal options is based on the sole judgment of management and what they consider to be reasonably certain given the environment today. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to us if the option is not exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.
Lease Cost Components:
Amortization of ROU assets - finance leases
117
Interest on lease liabilities - finance leases
Operating lease cost (cost resulting from lease payments)
4,240
4,333
Short-term lease cost
109
143
Variable lease cost (cost excluded from lease payments)
634
437
Total lease cost
5,111
5,043
Supplemental Cash Flow and Other Information Related to Leases:
Finance lease - operating cash flows
Finance lease - financing cash flows
110
108
Operating lease - operating cash flows (fixed payments)
4,097
4,181
Operating lease - operating cash flows (net change asset/liability)
(3,287)
(3,303)
New ROU assets - operating leases
New ROU assets - finance leases
Weighted - average remaining lease term (years) - finance leases
5.18
6.17
Weighted - average remaining lease term (years) - operating leases
9.88
10.47
Weighted - average discount rate - finance leases
1.7%
Weighted - average discount rate - operating leases
3.0%
Operating lease payments due:
2023 (excluding the quarter ended March 31, 2023)
12,226
2024
15,011
2025
13,548
2026
13,135
2027
12,172
Thereafter
66,550
Total undiscounted cash flows
132,642
Discount on cash flows
(20,233)
Total operating lease liabilities
112,409
As of March 31, 2023, the Company held a small number of finance leases assumed in connection to the CenterState merger completed in 2020. These leases are all real estate leases. Terms and conditions are similar to those real estate operating leases described above. Lease classifications from the acquired institutions were retained. At March 31, 2023, we did not maintain any leases with related parties, and determined that the number and dollar amount of our equipment leases was immaterial. As of March 31, 2023, we had no additional operating leases that have not yet commenced.
Note 10 — Deposits
Our total deposits are comprised of the following:
Noninterest-bearing checking
Interest-bearing checking
8,316,023
8,955,519
Savings
3,156,214
3,464,351
Money market
8,388,275
8,342,111
Time deposits
4,118,497
2,419,986
At March 31, 2023 and December 31, 2022, we had $658.5 million and $464.9 million in certificates of deposits greater than $250,000, respectively. At March 31, 2023 and December 31, 2022, the Company held $1.4 billion and $150.0 in traditional, out-of-market brokered deposits, respectively.
Note 11 — Retirement Plans
The Company sponsors an employees’ savings plan under the provisions of the Internal Revenue Code Section 401(k). Electing employees are eligible to participate in the employees’ savings plan after attaining age 21. Plan participants elect to contribute portions of their annual base compensation as a before tax contribution. Employer contributions may be made from current or accumulated net profits. Participants may elect to contribute 1% to 50% of annual base compensation as a before tax contribution. Employees participating in the plan received a 100% match of their 401(k) plan contribution from the Company, up to 4% of their salary. We expensed $4.5 million for the three months ended March 31, 2023 and $4.0 million for the three months ended March 31, 2022 related to the Company’s savings plan.
Employees can enter the savings plan on or after the first day of each month. The employee may enter into a salary deferral agreement at any time to select an alternative deferral amount or to elect not to defer in the plan. If the employee does not elect an investment allocation, the plan administrator will select a retirement-based portfolio according to the employee’s number of years until normal retirement age. The plan’s investment valuations are generally provided on a daily basis.
Note 12 — Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding during each period, excluding non-vested restricted shares. Our diluted earnings per share is based on the weighted-average shares of common stock outstanding during each period plus the maximum dilutive effect of common stock issuable upon exercise of stock options or vesting of restricted stock units. Stock options and unvested restricted stock units are considered common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive.
The following table sets forth the computation of basic and diluted earnings per common share:
(Dollars and shares in thousands, except for per share amounts)
Basic earnings per common share:
Weighted-average basic common shares
Basic earnings per common share
Diluted earnings per common share:
Effect of dilutive securities
487
Weighted-average dilutive shares
Diluted earnings per common share
The calculation of diluted earnings per common share excludes outstanding stock options for which the results would have been anti-dilutive under the treasury stock method as follows:
Number of shares
57,169
Range of exercise prices
87.30
to
91.35
Note 13 — Share-Based Compensation
Our 2004, 2012, 2019 and 2020 share-based compensation plans are long-term retention plans intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options, restricted stock, and restricted stock units (“RSUs”). Our 2020 plan was adopted by our shareholders at our annual meeting on October 29, 2020. The Company also assumed the obligations of ACBI under various equity incentive plans pursuant to the acquisition of ACBI on March 1, 2022 and the obligations of CenterState under various equity incentive plans pursuant to the merger with CenterState on June 7, 2020.
Stock Options
With the exception of non-qualified stock options granted to directors under the 2004 and 2012 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than a year following the grant date, incentive stock options granted under our 2004, 2012, 2019 and 2020 plans may not be exercised in whole or in part within a year following the date of the grant, as these incentive stock options become exercisable in 25% increments pro ratably over the four-year period following the grant date. The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and expire ten years from the date of grant. No options were granted under the 2004, 2012 or 2019 plans after January 26, 2012, February 1, 2019, and October 29, 2020, respectively, and the plans are closed other than for any options still unexercised and outstanding. The 2020 plan is the only plan from which new share-based compensation grants may be issued. It is the Company’s policy to grant options out of the 2,072,245 shares registered under the 2020 plan.
Activity in the Company’s stock option plans is summarized in the following table.
Weighted
Average
Aggregate
Remaining
Intrinsic
Price
(Yrs.)
(000's)
Outstanding at January 1, 2023
161,832
66.20
Exercised
(19,011)
51.01
Expired
(929)
33.09
Outstanding at March 31, 2023
141,892
68.45
3.03
1,534
Exercisable at March 31, 2023
The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options’ vesting periods. There have been no stock options issued during the first three months of 2023. Because all outstanding stock options had vested as of December 31, 2022, there was no unrecognized compensation cost related to nonvested stock option grants under the plans or fair value of shares vested for the year ended March 31, 2023. The intrinsic value of stock option shares exercised for the three months ended March 31, 2023 was $510,000.
Restricted Stock
From time-to-time, we grant shares of restricted stock to key employees. These awards help align the interests of these employees with the interests of our shareholders by providing economic value directly related to increases in the value of our stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. We recognize expenses equal to the total value of such awards, ratably over the vesting period of the stock grants. Restricted stock grants to employees generally vest ratably over a two to four-year vesting period.
All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. Prior to vesting of the shares, as long as employed by the Company, the employees will have the right to vote such shares and to receive dividends paid with respect to such shares. All restricted shares will fully vest in the event of change in control of the Company or upon the death of the recipient.
31
Nonvested restricted stock for 2023 is summarized in the following table.
Weighted-
Grant-Date
Nonvested at January 1, 2023
50,506
89.12
Vested
(18,380)
Forfeited
Nonvested at March 31, 2023
29,893
88.51
As of March 31, 2023, there was $1.8 million of total unrecognized compensation cost related to nonvested restricted stock granted under the plans. This cost is expected to be recognized over a weighted-average period of 1.11 years as of March 31, 2023. The total fair value of shares vested during the three months ended March 31, 2023 was $1.5 million.
Restricted Stock Units (“RSU”)
From time-to-time, we also grant performance RSUs and time-vested RSUs to key employees, and time-vested RSUs to non-employee directors. These awards help align the interests of these employees with the interests of our shareholders by providing economic value directly related to our performance. Some performance RSU grants contain a three-year performance period while others contain a one to two-year performance period and a time-vested requirement (generally two to four years from the grant date). The performance-based awards for our long-term incentive plans are dependent on the achievement of tangible book value growth and return on average tangible common equity relative to the Company’s peer group during each three-year performance period. Grants to non-employee directors typically vest within a 12-month period. We communicate threshold, target, and maximum performance RSU awards and performance targets to the applicable key employees at the beginning of a performance period. Due to the merger with CenterState on June 7, 2020, all legacy and assumed performance-based restricted stock units converted to a time-vesting requirement. With respect to some long-term incentive awards, dividend equivalents are accrued at the same rate as cash dividends paid for each share of the Company’s common stock during the performance or time-vested period, and subsequently paid when the shares are issued on the vesting or settlement date. The value of the RSUs awarded is established as the fair market value of the stock at the time of the grant. We recognize expense on a straight-line basis typically over the performance or time-vesting periods based upon the probable performance target, as applicable, that will be met.
Outstanding RSUs for the three months ended March 31, 2023 is summarized in the following table.
Restricted Stock Units
940,512
73.82
Granted
328,343
76.05
(177,708)
86.81
(3,604)
75.92
1,087,543
72.37
The nonvested shares of 1,087,543 at March 31, 2023 includes 89,682 shares that have fully vested but are subject to a two-year holding period, which commenced at the end of their respective vesting period. These vested shares will be released and issued into shares of common stock at the end of their respective two-year holding period, the last of which will end by March 31, 2025. If maximum performance is achieved pursuant to the 2021, 2022 and 2023 Long Term Incentive performance-based RSU grants, an additional 147,601 shares in total may be issued by the Company at the end of the three-year performance periods.
As of March 31, 2023, there was $39.2 million of total unrecognized compensation cost related to nonvested RSUs granted under the plan. This cost is expected to be recognized over a weighted-average period of 1.22 years as of March 31, 2023. The total fair value of RSUs vested and released during the three months ended March 31, 2023 was $15.4 million.
32
Note 14 — Commitments and Contingent Liabilities
In the normal course of business, we make various commitments and incur certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At March 31, 2023, commitments to extend credit and standby letters of credit totaled $11.4 billion. As of March 31, 2023, the liability recorded for expected credit losses on unfunded commitments, excluding unconditionally cancellable exposures and letters of credit, was $85.1 million and recorded on the Balance Sheet. See Note 2 — Summary of Significant Accounting Policies for discussion of liability recorded for expected credit losses on unfunded commitments.
We have been named as defendant in various legal actions, arising from its normal business activities, in which damages in various amounts are claimed. We are also exposed to litigation risk related to the prior business activities of banks acquired through whole bank acquisitions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, as of March 31, 2023, any such liability is not expected to have a material effect on our consolidated financial statements.
Note 15 — Fair Value
GAAP defines fair value and establishes a framework for measuring and disclosing fair value. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale and trading securities, derivative contracts, mortgage loans held for sale, SBA servicing rights, and mortgage servicing rights (“MSRs”) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, OREO, bank properties held for sale, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
FASB ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1
Observable inputs such as quoted prices in active markets;
Level 2
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The following is a description of valuation methodologies used for assets recorded at fair value.
The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the Condensed Consolidated Balance Sheets but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the Condensed Consolidated Balance Sheets, the fair value was determined by broker price indications of similar or same securities.
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and The NASDAQ Stock Market. Level 2 securities include mortgage-backed securities and debentures issued by government agencies or sponsored entities, municipal bonds and corporate debt securities, or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of FHLB and FRB stock approximates fair value based on the redemption provisions.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at fair value with changes in fair value recognized in current period earnings. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale are recurring Level 2.
We do not record loans at fair value on a recurring basis. However, from time to time, a loan may be individually evaluated for expected credit losses if it no longer shares similar risk characteristics with other pooled loans. Once a loan is identified as an individually evaluated loan, management measures expected credit losses using estimated fair value methodologies. The fair value of the individually evaluated loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those individually evaluated loans not requiring an ACL represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2023, approximately two thirds of the individually evaluated loans were evaluated based on the fair value of the collateral because such loans were considered collateral dependent. Individually evaluated loans, where an allowance is established based on the fair value of collateral, requires classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, we consider the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we consider the individually evaluated loan as nonrecurring Level 3.
Other Real Estate Owned (“OREO”)
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is typically reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, and adjusted for estimated selling costs (Level 2). However, OREO is considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ACL. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO Expense and Loan Related Expense in the Condensed Consolidated Statements of Net Income.
Bank Property Held for Sale
Bank property held for sale consists of locations that management has identified as no longer needed and reclassified from bank properties. These properties are typically reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, and adjusted for estimated selling costs (Level 2). However, bank property held for sale is considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, restrictions and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time a property is identified as held for sale, any excess of the book balance over the fair value of the real estate is treated as a charge against earnings. Gains or losses on sale and generally any subsequent write-downs to the value are recorded as a component in Other Expense in the Condensed Consolidated Statements of Net Income.
Derivative Financial Instruments
Fair value is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back; and accordingly, these derivatives are classified within Level 2 of the fair value hierarchy (See Note 17 — Derivative Financial Instruments for additional information).
Mortgage Servicing Rights (“MSRs”) and SBA Servicing Asset
The estimated fair value of MSRs and SBA servicing asset is obtained through a third-party vendor analysis of future cash flows. In early 2022 and in connection with the SBA servicing asset acquired through the Atlantic Capital acquisition, the Company began using a third-party vendor analysis of future cash flows to determine the fair value of the SBA servicing asset. Previously, the SBA servicing asset was recorded at amortized cost. The valuations for the servicing assets use assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements. MSRs and SBA servicing asset are classified as Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis:
Quoted Prices
In Active
Significant
Markets
for Identical
Observable
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Derivative financial instruments
Securities available for sale:
Total securities available for sale
SBA servicing asset
6,521
5,454,541
5,362,614
91,927
6,068
5,690,747
5,598,069
92,678
35
Changes in Level 1, 2 and 3 Fair Value Measurements
When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.
There were no changes in hierarchy classifications of Level 3 assets or liabilities for the three months ended March 31, 2023. A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the three months ended March 31, 2023 is as follows:
MSRs
Fair value, January 1, 2023
Servicing assets that resulted from transfers of financial assets
1,494
Changes in fair value due to valuation inputs or assumptions
(1,289)
Changes in fair value due to decay
(1,409)
Fair value, March 31, 2023
In 2022, the Company elected to prospectively apply fair value accounting to the Company’s SBA servicing asset, which is considered a Level 3 asset. A reconciliation of the beginning and ending balances of the SBA servicing asset recorded at fair value on a recurring basis for the period ending March 31, 2023 is as follows:
SBA Servicing Asset
334
(236)
355
There were no unrealized losses included in accumulated other comprehensive income related to Level 3 financial assets and liabilities at March 31, 2023.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis:
Bank properties held for sale
Individually evaluated loans
28,650
20,802
Quantitative Information about Level 3 Fair Value Measurement
Valuation Technique
Unobservable Input
Nonrecurring measurements:
Discounted appraisals and discounted cash flows
Collateral discounts
OREO and Bank properties held for sale
Discounted appraisals
Collateral discounts and estimated costs to sell
Fair Value of Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2023 and December 31, 2022. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value.
Trading Securities — The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the Consolidated Balance Sheets but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.
Investment Securities — Securities available for sale are valued at quoted market prices or dealer quotes. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of FHLB and FRB stock approximates fair value based on the redemption provisions. The carrying value of our investment in unconsolidated subsidiaries approximates fair value. See Note 5 — Investment Securities for additional information, as well as page 33 regarding fair value.
Loans held for sale — The fair values disclosed for loans held for sale are based on commitments from investors for loans with similar characteristics.
Loans — The fair value of loans is based on an exit price. To estimate an exit price, all loans (fixed and variable) are being valued with a discounted cash flow analyses for loans that includes our estimate of future credit losses expected to be incurred over the life of the loans. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are estimated using discounted cash flow analyses based on our current rates offered for new loans of the same type, structure and credit quality. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses-using interest rates we currently offer for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using a discounted cash flow analysis.
Deposit Liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase — The carrying amount of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values.
Other Borrowings — The fair value of other borrowings is estimated using discounted cash flow analysis on our current incremental borrowing rates for similar types of instruments.
Accrued Interest — The carrying amounts of accrued interest approximate fair value.
Derivative Financial Instruments — The fair value of derivative financial instruments (including interest rate swaps) is estimated using pricing models of derivatives with similar characteristics or discounted cash flow models where future floating cash flows are projected and discounted back.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees — The fair values of commitments to extend credit are estimated taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
38
The estimated fair value, and related carrying amount, of our financial instruments are as follows:
Financial assets:
7,567,328
7,387,611
Loans, net of allowance for credit losses
29,646,800
138,515
26,888
111,627
Interest rate swap - non-designated hedge
157,014
Other derivative financial instruments (mortgage banking related)
Financial liabilities:
36,333,275
544,108
556,417
380,925
20,411
Off balance sheet financial instruments:
Commitments to extend credit
(255,022)
7,756,707
7,576,990
29,329,499
134,594
28,449
106,145
210,216
800
36,264,401
377,360
6,218
3,345
1,033,980
163
(184,801)
Note 16 — Accumulated Other Comprehensive Income (Loss)
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
Unrealized Gains and
Benefit
(Losses) on Securities
Plans
Balance at December 31, 2022
(673)
(676,415)
Other comprehensive income before reclassifications
63,271
Amounts reclassified from accumulated other comprehensive loss
Net comprehensive income
Balance at March 31, 2023
(613,111)
Balance at December 31, 2021
(21,203)
Other comprehensive loss before reclassifications
Net comprehensive loss
Balance at March 31, 2022
(294,013)
The table below presents the reclassifications out of accumulated other comprehensive income (loss), net of tax:
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31,
Accumulated Other Comprehensive Income (Loss) Component
Income StatementLine Item Affected
Gains on sales of available for sale securities:
Total reclassifications for the period
Note 17 — Derivative Financial Instruments
The Company uses certain derivative instruments to meet the needs of customers as well as to manage the interest rate risk associated with certain transactions. The following table summarizes the derivative financial instruments used by the Company:
Balance Sheet
Notional
Estimated Fair Value
Location
Gain
Fair value hedge of interest rate risk:
Pay fixed rate swap with counterparty
Other Assets and Other Liabilities
12,186
12,289
414
Not designated hedges of interest rate risk:
Customer related interest rate contracts:
Matched interest rate swaps with borrowers
10,701,004
28,580
805,749
10,480,171
8,539
Matched interest rate swaps with counterparty
10,606,749
128,227
835
10,400,733
201,263
Not designated hedges of interest rate risk - mortgage banking activities:
Contracts used to hedge mortgage servicing rights
67,500
35,000
Contracts used to hedge mortgage pipeline
Other Assets
100,500
1,115
51,000
Total derivatives
21,487,939
159,286
20,979,193
Cash Flow Hedge of Interest Rate Risk
The Company is exposed to interest rate risk in the course of its business operations and manages a portion of this risk through the use of derivative financial instruments, in the form of interest rate swaps. We account for interest rate swaps that are classified as cash flow hedges on the balance sheet at fair value. We had no cash flow hedges as of March 31, 2023 and December 31, 2022. For more information regarding the fair value of our derivative financial instruments, see Note 15 — Fair Value to these financial statements.
For derivatives designated as hedging exposure to variable cash flows of a forecasted transaction (cash flow hedge), the derivative’s entire gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedged instrument and related swap are terminated before maturity. For derivatives that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately. Historically, for designated hedging relationships, we have had a third-party perform retrospective and prospective effectiveness testing on a quarterly basis using quantitative methods to determine if the hedge is still highly effective. Hedge accounting ceases on transactions that are no longer deemed highly effective, or for which the derivative has been terminated or de-designated.
The Company did not maintain any cash flow hedges on the balance sheet throughout the three months ended March 31, 2023 and year ended December 31, 2022 (See Note 16—Accumulated Other Comprehensive Income (Loss) for activity in accumulated comprehensive income (loss) and the amounts reclassified into earnings).
Credit risk related to the derivative arises when amounts receivable from the counterparty (derivatives dealer) exceed those payable. We control the risk of loss by only transacting with derivatives dealers that are national market makers whose credit ratings are strong. Each party to the interest rate swap is required to provide collateral in the form of cash or securities to the counterparty when the counterparty’s exposure to a mark-to-market replacement value exceeds certain negotiated limits. These limits are typically based on current credit ratings and vary with ratings changes. With the Company not maintaining any cash flow hedges at March 31, 2023 and December 31, 2022, there was no collateral pledged.
Balance Sheet Fair Value Hedge
As of March 31, 2023 and December 31, 2022, the Company maintained loan swaps, with an aggregate notional amount of $12.2 million and $12.3 million, respectively, accounted for as fair value hedges. This derivative protects us from interest rate risk caused by changes in the LIBOR curve in relation to a certain designated fixed rate loan. The derivative converts the fixed rate loan to a floating rate. Settlement occurs in any given period where there is a difference in the stated fixed rate and variable rate and the difference is recorded in net interest income. The fair value of this hedge is recorded in either other assets or in other liabilities depending on the position of the hedge with the offset recorded in loans.
Non-designated Hedges of Interest Rate Risk
Customer Swap
The Company maintains interest rate swap contracts with customers that are classified as non-designated hedges and are not speculative in nature. These agreements are designed to convert customer’s variable rate loans with the Company to fixed rate. These interest rate swaps are executed with loan customers to facilitate a respective risk management strategy and allow the customer to pay a fixed rate of interest to the Company. These interest rate swaps are simultaneously hedged by executing offsetting interest rate swaps with unrelated market counterparties to minimize the net risk exposure to the Company resulting from the transactions and allow the Company to receive a variable rate of interest. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR plus credit spread, with payments being calculated on the notional amount. The Company is in the process of implementing a plan to transition these interest rate swap contracts to a reference rate other than LIBOR. For discussion related to reference rate reform, please refer to Issued But Not Yet Adopted Accounting Standards within Note 2—Summary of Significant Accounting Policies. The interest rate swaps are settled monthly with varying maturities.
The variation margin settlement payment and the related derivative instruments fair value are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position of the swaps with LCH and CME, the fair value, net of the variation margin, is reported in Derivative Assets or Derivative Liabilities on the Condensed Consolidated Balance Sheets. In addition, the expense or income attributable to the variation margin for the centrally cleared swaps with LCH and CME is reported in Noninterest Income, specifically within Correspondent and Capital Markets Income. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.
As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of March 31, 2023 and December 31, 2022, the interest rate swaps had an aggregate notional amount of approximately $21.3 billion and $20.9 billion, respectively. At March 31, 2023, the fair value of the interest rate swap derivatives is recorded in other assets at $156.8 million and in other liabilities at $806.6 billion. The fair value of derivative assets at March 31, 2023 was reduced by $650.0 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. At December 31, 2022, the fair value of the interest rate swap derivatives was recorded in other assets at $209.8 million and other liabilities at $1.0 billion. The fair value of derivative assets at December 31, 2022 was reduced by $824.3 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. All changes in fair value are recorded through earnings within Correspondent and Capital Markets Income, a component of Noninterest Income on the Condensed Consolidated Statements of Net Income. There was a net gain of $96,000 recorded on these derivatives for the year ended March 31, 2023. There was a net gain of $41,000 recorded on these derivatives for the quarter ended March 31, 2022. As of March 31, 2023, we provided $222.7 million of cash collateral on the customer swaps, which is included in Cash and Cash Equivalents on the Condensed Consolidated Balance Sheets as Deposits in Other Financial Institutions (Restricted Cash). We also provided $113.2 million in investment securities at market value as collateral on the customer swaps which is included in Investment Securities – available for sale on the Condensed Consolidated Balance Sheets. Counterparties provided $100.3 million of cash collateral to the Company to secure swap asset positions that were not centrally cleared, which is included in Interest-bearing Deposits within Total Liabilities on the Condensed Consolidated Balance Sheets.
Foreign Exchange
The Company may enter into foreign exchange contracts with customers to accommodate their need to convert certain foreign currencies into U.S. Dollars. To offset the foreign exchange risk, the Company may enter into substantially identical agreements with an unrelated market counterparty to hedge these foreign exchange contracts. At March 31, 2023 and December 31, 2022, there were no outstanding contracts or agreements related to foreign currency. If there were foreign currency contracts outstanding at March 31, 2023, the fair value of these contracts would be included in Other Assets and Other Liabilities in the accompanying Condensed Consolidated Balance Sheets. All changes in fair value are recorded as other noninterest income. There was no gain or loss recorded related to the foreign exchange derivative for the three months ended March 31, 2023 and 2022.
Mortgage Banking
The Company also has derivatives contracts that are not classified as accounting hedges to mitigate risks related to the Company’s mortgage banking activities. These instruments may include financial forwards, futures contracts, and options written and purchased, which are used to hedge MSRs; while forward sales commitments are typically used to hedge the mortgage pipeline. Such instruments derive their cash flows, and therefore their values, by reference to an underlying instrument, index or referenced interest rate. The Company does not elect hedge accounting treatment for any of these derivative instruments and as a result, changes in fair value of the instruments (both gains and losses) are recorded in the Company’s Condensed Consolidated Statements of Net Income in mortgage banking income.
Mortgage Servicing Rights (“MSRs”)
Derivatives contracts related to MSRs are used to help offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts provide a basis for calculating payments between counterparties but do not represent amounts to be exchanged between the parties and are not a measure of financial risk. On March 31, 2023, we had derivative financial instruments outstanding with notional amounts totaling $67.5 million related to MSRs, compared to $35.0 million on December 31, 2022. The estimated net fair value of the open contracts related to the MSRs was recorded as a gain of $1.2 million at March 31, 2023, compared to a loss of $163,000 at December 31, 2022.
Mortgage Pipeline
The following table presents our notional value of forward sale commitments and the fair value of those obligations along with the fair value of the mortgage pipeline related to the held for sale portfolio.
Mortgage loan pipeline
107,831
40,850
Expected closures
90,737
37,210
Fair value of mortgage loan pipeline commitments
1,848
Forward sales commitments
Fair value of forward commitments
(734)
276
Note 18 — Capital Ratios
The Company is subject to regulations with respect to certain risk-based capital ratios. These risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted based on the rules to reflect categorical credit risk. In addition to the risk-based capital ratios, the regulatory agencies have also established a leverage ratio for assessing capital adequacy. The leverage ratio is equal to Tier 1 capital divided by total consolidated on-balance sheet assets (minus amounts deducted from Tier 1 capital). The leverage ratio does not involve assigning risk weights to assets.
Under current regulations, the Company and the Bank are subject to a minimum ratio of common equity Tier 1 capital (“CET1”) to risk-weighted assets of 4.5% and a minimum required ratio of Tier 1 capital to risk-weighted assets of 6%. The minimum required leverage ratio is 4%. The minimum required total capital to risk-weighted assets ratio is 8%.
In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of CET1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer became fully phased-in on January 1, 2019 and consists of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets.
The Bank is also subject to the regulatory framework for prompt corrective action, which identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and is based on specified thresholds for each of the three risk-based regulatory capital ratios (CET1, Tier 1 capital and total capital) and for the leverage ratio.
The following table presents actual and required capital ratios as of March 31, 2023 and December 31, 2022 for the Company and the Bank under the current capital rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations.
Required to be
Minimum Capital
Considered Well
Actual
Required - Basel III
Capitalized
Ratio
Capital Amount
Common equity Tier 1 to risk-weighted assets:
Consolidated
3,891,155
11.13
2,446,483
7.00
2,271,735
6.50
SouthState Bank (the Bank)
4,165,577
11.93
2,443,212
2,268,697
Tier 1 capital to risk-weighted assets:
2,970,730
8.50
2,795,981
8.00
2,966,757
2,792,242
Total capital to risk-weighted assets:
4,647,783
13.30
3,669,725
10.50
3,494,976
10.00
4,532,206
12.99
3,664,818
3,490,303
Tier 1 capital to average assets (leverage ratio):
9.05
1,719,404
4.00
2,149,255
5.00
9.70
1,718,633
2,148,291
3,788,106
10.96
2,420,417
2,247,530
4,074,045
11.80
2,417,133
2,244,481
2,939,077
2,766,190
2,935,090
2,762,438
4,485,397
12.97
3,630,625
3,457,738
4,381,336
12.69
3,625,700
3,453,047
8.72
1,736,991
2,171,239
9.39
1,736,330
2,170,412
As of March 31, 2023 and December 31, 2022, the capital ratios of the Company and the Bank were well in excess of the minimum regulatory requirements and exceeded the thresholds for the “well capitalized” regulatory classification.
In accordance with ASU No. 2016-13, the Company applied the provisions of the standard using the modified retrospective method as a cumulative-effect adjustment to retained earnings. Related to the implementation of ASU 2016-13, the Company recorded additional allowance for credit losses for loans of $54.4 million, deferred tax assets of $12.6 million, an additional reserve for unfunded commitments of $6.4 million and an adjustment to retained earnings of $44.8 million. Instead of recognizing the effects from ASU 2016-13 at adoption, the standard included a transitional method option for recognizing the adoption date effects on the Company’s regulatory capital calculations over a three-year phase-in. In March 2020, in response to the COVID-19 pandemic, the regulatory agencies provided an additional transitional method option of a two-year deferral for the start of the three-year phase-in of the recognition of the adoption date effects of ASU 2016-13 along with an option to defer the current impact on regulatory capital calculations of ASU 2016-13 during the first two years (“5-year method”). Under this 5-year method, the Company would recognize an estimate of the previous incurred loss method for determining the allowance for credit losses in regulatory capital calculations and the difference from the CECL method would be deferred for two years. After two years, the effects from adoption date and the deferral difference from the first two years of applying CECL would be phased-in over three years using the straight-line method. The regulatory rules provided a one-time opportunity at the end of the first quarter of 2020 for covered banking organizations to choose its transition option for CECL. The Company chose the 5-year method and is deferring the recognition of the effects from adoption date and the CECL difference from the first two years of application. This amount was fixed as of December 31, 2021, and that amount began the three-year phase out in the first quarter of 2022 with 50% being phased out in 2023.
Note 19 — Goodwill and Other Intangible Assets
The carrying amount of goodwill was $1.9 billion at March 31, 2023 and December 31, 2022. The Company’s other intangible assets, consisting of core deposit intangibles, noncompete intangibles, and client list intangibles are included on the face of the balance sheet.
The Company last completed its annual valuation of the carrying value of its goodwill as of October 31, 2022. We determined that no impairment charge was necessary for each period end. We will continue to monitor the impact of the market conditions on the Company’s business, operating results, cash flows and/or financial condition.
The following is a summary of gross carrying amounts and accumulated amortization of other intangible assets:
Gross carrying amount
275,321
274,869
Accumulated amortization
(165,718)
(158,419)
Amortization expense totaled $7.3 million for the quarter ended March 31, 2023, compared to $8.5 million for the quarter ended March 31, 2022. Other intangibles are amortized using either the straight-line method or an accelerated basis over their estimated useful lives, with lives generally between two and 15 years.
In early 2022 and in connection with the SBA servicing asset acquired through the Atlantic Capital acquisition, which was recorded at fair value on acquisition date, the Company elected to prospectively apply fair value accounting to the Company’s SBA servicing asset. The change in fair value of the SBA servicing asset is recorded in SBA Income, a component of Noninterest Income on the Consolidated Statements of Income, during each applicable reporting period. As a result of the change in accounting treatment, the Company will no longer amortize the SBA servicing asset and therefore excluded the SBA servicing asset from the future amortization expense table presented below. The fair value of the SBA servicing asset was $6.5 million and $6.1 million, respectively, at March 31, 2023 and December 31, 2022.
Estimated amortization expense for other intangibles for each of the next five quarters is as follows:
Quarter ending:
June 30, 2023
7,028
September 30, 2023
6,616
December 31, 2023
6,615
March 31, 2024
6,003
June 30, 2024
5,739
71,082
103,083
Note 20 — Mortgage Loan Servicing, Origination, and Loans Held for Sale
The portfolio of residential mortgages serviced for others, which is not included in the accompanying Condensed Consolidated Balance Sheets the portfolio of residential mortgages serviced for others, was $6.6 billion as of both March 31, 2023 and December 31, 2022. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts and disbursing payments to investors. The amounts of contractually specified servicing fees we earned during the year ended March 31, 2023 and March 31, 2022 were $4.1 million and $3.8 million, respectively. Servicing fees are recorded in Mortgage Banking Income in our Condensed Consolidated Statements of Net Income.
At March 31, 2023 and December 31, 2022, MSRs were $85.4 million and $86.6 million on our Condensed Consolidated Balance Sheets, respectively. MSRs are recorded at fair value with changes in fair value recorded as a component of Mortgage Banking Income in the Condensed Consolidated Statements of Net Income. The market value adjustments related to MSRs recorded in Mortgage Banking Income for the year ended March 31, 2023 and March 31, 2022 were losses of $1.3 million, compared with gains of $12.8 million, respectively. The Company has used various free standing derivative instruments to mitigate the income statement effect of changes in fair value resulting from changes in market value adjustments, in addition to changes in valuation inputs and assumptions related to MSRs.
See Note 15 — Fair Value for the changes in fair value of MSRs. The following table presents the changes in the fair value of the MSR and offsetting hedge.
(Decrease) increase in fair value of MSRs
(1,290)
12,827
Decay of MSRs
(2,230)
Gain (loss) related to derivatives
145
(11,838)
Net effect on Condensed Consolidated Statements of Net Income
(2,554)
(1,241)
The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third-party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if applied at a different time. See Note 15 — Fair Value for additional information regarding fair value.
The characteristics and sensitivity analysis of the MSRs are included in the following table.
Composition of residential loans serviced for others
Fixed-rate mortgage loans
100.0
Adjustable-rate mortgage loans
Weighted average life
8.24
years
8.37
Constant Prepayment rate (CPR)
6.6
6.4
Weighted average discount rate
10.0
Effect on fair value due to change in interest rates
25 basis point increase
1,012
50 basis point increase
1,888
1,428
25 basis point decrease
(1,146)
(902)
50 basis point decrease
(2,422)
(1,938)
The sensitivity calculations above are hypothetical and should not be considered predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. The effects of an adverse variation in a particular assumption on the fair value of the MSRs as disclosed in the table above is calculated without changing any other assumptions. In reality, changes in one factor may result in adjusting other factors, which may magnify or contract the effects of the change.
Whole loan sales were $159.4 million for the year ended March 31, 2023, compared to $700.7 million for the year ended March 31, 2022. For March 31, 2023, $123.0 million, or 77.2%, were sold with the servicing rights retained by the Company, compared to $530.5 million, or 75.7%, for March 31, 2022.
Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 15 to 45 days. Loans held for sale were $27.3 million and $29.0 million at March 31, 2023 and December 31, 2022, respectively.
Note 21 — Short-Term Borrowings
Securities Sold Under Agreements to Repurchase (“Repurchase agreements”)
Repurchase agreements represent funds received from customers, generally on an overnight or continuous basis, which are collateralized by investment securities owned or, at times, borrowed and re-hypothecated by the Company. Repurchase agreements are subject to terms and conditions of the master repurchase agreements between the Company and the client and are accounted for as secured borrowings. Repurchase agreements are included in federal funds purchased and securities sold under agreements to repurchase on the condensed consolidated balance sheets. At March 31, 2023 and December 31, 2022, our repurchase agreements totaled $310.8 million and $342.8 million, respectively. All of our repurchase agreements were overnight or continuous (until-further-notice) agreements at March 31, 2023 and December 31, 2022. These borrowings were collateralized with government, government-sponsored enterprise, or state and political subdivision-issued securities with a carrying value of $435.5 million and $443.2 million at March 31, 2023 and December 31, 2022, respectively. Declines in the value of the collateral would require us to increase the amounts of securities pledged.
Federal Funds Purchased
Federal funds purchased are generally overnight daily borrowings with no defined maturity date. At March 31, 2023 and December 31, 2022, our federal funds purchased totaled $233.4 million and $213.6 million, respectively.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Borrowings
The Company has from time-to-time entered into borrowing agreements with the FHLB and FRB. Borrowings under these agreements are collateralized by stock in the FHLB, qualifying first and second mortgage residential loans, investment securities, and commercial real estate loans under a blanket-floating lien.
As of March 31, 2023, the Company had $900.0 million in outstanding FHLB borrowings with a weighted average interest rate of 5.07%. As of December 31, 2022, there were no outstanding FHLB borrowings. Net eligible loans of the Company pledged via a blanket lien to the FHLB for advances and letters of credit at March 31, 2023, were approximately $6.5 billion in collateral value and investment securities and cash pledged were approximately $355.0 million in collateral value. This allows the Company a total borrowing capacity at the FHLB of approximately $6.9 billion. After accounting for letters of credit totaling $2.1 million and $900.0 million of FLHB advances, the Company had unused net credit available with the FHLB in the amount of approximately $6.0 billion at March 31, 2023. The Company also has a total borrowing capacity at the FRB of $2.5 billion at March 31, 2023 secured by a blanket lien on $2.5 billion in net eligible loans of the Company. The Company had no outstanding borrowings with the FRB at March 31, 2023 or December 31, 2022.
Note 22 — Stock Repurchase Program
On April 27, 2022, the Company’s Board of Directors approved a stock repurchase program (“2022 Stock Repurchase Program”) authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the Company’s 2021 stock repurchase program (“2021 Stock Repurchase Plan”) for a total authorization of 4,120,021 shares. The Company did not repurchase any shares through the 2022 Stock Repurchase Program during 2022 or during the first quarter of 2023. During the first quarter of 2022, before the approval of the 2022 Stock Repurchase Program, the Company repurchased a total of 1,012,038 shares at a weighted average price of $85.43 per share pursuant to the 2021 Stock Repurchase Plan.
Note 23 — Subsequent Events
On April 27, 2023, the Company announced the declaration of a quarterly cash dividend on its common stock at $0.50 per share. The dividend is payable on May 19, 2023 to shareholders of record as of May 12, 2023.
47
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to the financial statements contained in this Quarterly Report beginning on page 3. For further information, refer to the MD&A appearing in the Annual Report on Form 10-K for the year ended December 31, 2022. Results for the year ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any future period.
Unless otherwise mentioned or unless the context requires otherwise, references to “SouthState,” the “Company” “we,” “us,” “our” or similar references mean SouthState Corporation and its consolidated subsidiaries. References to the “Bank” means SouthState Corporation’s wholly owned subsidiary, SouthState Bank, National Association, a national banking association.
Overview
SouthState is a financial holding company headquartered in Winter Haven, Florida, and was incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our Bank. The Bank operates SouthState|Duncan-Williams, a registered broker-dealer headquartered in Memphis, Tennessee that serves primarily institutional clients across the U.S. in the fixed income business. The Bank also operates SouthState Advisory, Inc., a wholly owned registered investment advisor, and CBI Holding Company, LLC (“CBI”), which in turn owns Corporate Billing, a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code.
At March 31, 2023, we had approximately $44.9 billion in assets and 5,085 full-time equivalent employees. Through our Bank branches, ATMs and online banking platforms, we provide our customers with a wide range of financial products and services, through a six (6) state footprint in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. These financial products and services include deposit accounts such as checking accounts, savings and time deposits of various types, safe deposit boxes, bank money orders, wire transfer and ACH services, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, loans of all types, including business loans, agriculture loans, real estate-secured (mortgage) loans, personal use loans, home improvement loans, automobile loans, manufactured housing loans, boat loans, credit cards, letters of credit, home equity lines of credit, treasury management services, and merchant services.
We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located in Atlanta, Georgia, Memphis, Tennessee, Walnut Creek, California, and Birmingham, Alabama. This division’s primary revenue generating activities are related to its capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities; and its correspondent banking division, which includes spread income earned on correspondent bank deposits (i.e., federal funds purchased) and correspondent bank checking account deposits and fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services.
We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisitions of select financial institutions, or branches in certain market areas.
The following discussion describes our results of operations for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 and also analyzes our financial condition as of March 31, 2023 as compared to December 31, 2022. Like most financial institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we may pay interest. Consequently, one of the key measures of our success is the amount of our net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
Of course, there are risks inherent in all loans, as such, we maintain an allowance for credit losses, otherwise referred to herein as ACL, to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for credit losses against our operating earnings. In the following discussion, we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion.
The following sections also identify significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Recent Events
Regulatory Considerations
In the aftermath of the recent bank failures, we expect that the banking agencies will propose certain actions, including special assessments to repay losses to the Federal Deposit Insurance Corporation (“FDIC”)’s Deposit Insurance Fund. It is not yet possible to quantify the impact of these potential actions.
Liquidity and Capital
During the current quarter, the financial markets experienced some volatility in response to a small number of regional bank failures resulting from deposit runs generally related to high concentrations in particular customer segments, high levels of uninsured deposits and failures in interest rate risk management.
Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from depositors located around our branch footprint, and we believe that we have attractive opportunities to capture additional retail and commercial deposits in our markets, in addition to having access to brokered deposits. At March 31, 2023, we had $36.4 billion in total deposits, of which approximately 70% were insured or collateralized. Our deposit base is comprised of 1.5 million accounts with an average deposit size of $24,000. Our top 10 and 20 deposit relationships represent 3% and 4%, respectively, of total deposits.
In addition to deposits, we have other contingency funding sources available to the Bank. At March 31, 2023, our Bank had a total FHLB credit facility of $6.9 billion, with $900.0 million in FHLB advances and $2.1 million in FHLB letters of credit outstanding at quarter-end, leaving $6.0 billion in availability on the FHLB credit facility. In addition, our Bank had $2.5 billion of credit available at the Federal Reserve Bank’s discount window and total federal funds credit lines of $300.0 million with no balances outstanding at quarter-end. The Bank also has an internal limit on brokered deposits of 15% of total deposits which would allow capacity of $5.5 billion as of March 31, 2023. The Bank had $1.4 billion of outstanding brokered deposits at the end of the quarter leaving $4.1 billion in available capacity. All of these resources would provide an additional $12.9 billion in funding if the Bank needed additional liquidity. In addition, the Bank also has $4.5 billion in unpledged securities at March 31, 2023 that can be pledged to obtain additional funds, if necessary. The Company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at March 31, 2023. We believe that our liquidity position continues to be adequate and readily available.
In addition to adequate liquidity, the Company and Bank are considered well capitalized by all regulatory capital standards as it was significantly above the required capital levels as of March 31, 2023. The Company’s tier 1 leverage ratio, common equity tier 1 (“CET 1”) risk-based capital ratio and total risk-based capital ratio were 9.05%, 11.13% and 13.30%, respectively, at March 31, 2023. The Bank’s Tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 9.70%, 11.93% and 12.99%, respectively, at March 31, 2023. As permitted, we elected to exclude accumulated other comprehensive income related to available for sale securities from Tier 1, CET 1 and total risk-based capital; however, even if our unrealized losses as of March 31, 2023 in our available for sale and held to maturity investment portfolios were recognized by selling the portfolios for liquidity purposes, all else being equal, our regulatory capital ratios would remain well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.
Atlantic Capital Bancshares, Inc. (“Atlantic Capital”) Merger
On March 1, 2022, the Company acquired all of the outstanding common stock of Atlantic Capital in a stock transaction. Upon the terms and subject to the conditions set forth therein, Atlantic Capital merged with and into the Company, with the Company continuing as the surviving corporation in the merger. Immediately following the merger, Atlantic Capital’s wholly owned banking subsidiary, Atlantic Capital Bank, N.A. (“ACB”) merged with and into the Bank, the surviving bank in the bank merger.
Shareholders of Atlantic Capital received 0.36 shares of the Company’s common stock for each share of Atlantic Capital common stock they owned. In total, the purchase price for Atlantic Capital was $657.8 million.
In the acquisition, the Company acquired $2.4 billion of loans, including Paycheck Protection Program (“PPP”) loans, at fair value, net of $54.3 million, or 2.24%, estimated discount to the outstanding principal balance, representing 10.0% of the Company’s total loans at December 31, 2021. Of the total loans acquired, management identified $137.9 million that had more than insignificantly deteriorated since origination and were thus determined to be PCD loans. Additional details regarding the Atlantic Capital merger are discussed in Note 4 — Mergers and Acquisitions.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with Generally Accepted Accounting Principles (“GAAP”) and follow general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Differences in the application of these policies could result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 2 — Summary of Significant Accounting Policies and Note 3 — Recent Accounting and Regulatory Pronouncements of our consolidated financial statements in this Quarterly Report on Form 10-Q and in Note 1 — Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended December 31, 2022.
The following is a summary of our critical accounting policies that are highly dependent on estimates, assumptions and judgments.
Business Combinations
We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which now requires us to record purchased financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no provision for credit losses affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit loss expense (or recovery of credit losses) in subsequent periods as they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted into interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or premium shall be accreted into interest income using the effective yield method.
For further discussion of our loan accounting and acquisitions, see Note 2—Summary of Significant Accounting Policies, Note 4—Mergers and Acquisitions, Note 6—Loans and Note 7—Allowance for Credit Losses.
Allowance for Credit Losses or ACL
The ACL reflects management’s estimate of expected credit losses that will result from the inability of our borrowers to make required loan payments. Management used the systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded on the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 2 — Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 7 — Allowance for Credit Losses in this Quarterly Report on Form 10-Q, and “Allowance for Credit Losses” in this MD&A.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed in a business combination. As of March 31, 2023 and December 31, 2022, the balance of goodwill was $1.9 billion. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
We evaluated the carrying value of goodwill as of October 31, 2022, our annual test date, and determined that no impairment charge was necessary. We continue to monitor the impact of current economic conditions and other events on the Company’s business, operating results, cash flows and financial condition.
Core deposit intangibles and client list intangibles consist primarily of amortizing assets established during the acquisition of other banks. For the period ending March 31, 2023 and December 31, 2022, the core deposit intangibles totaled $109.6 million and $116.5 million, respectively. This includes whole bank acquisitions and the acquisition of certain assets and liabilities from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the correspondent banking and wealth and trust management business. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes and Deferred Tax Assets
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including loans, available for sale securities, ACL, write downs of OREO properties and bank properties held for sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, mortgage servicing rights, and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded in situations where it is “more likely than not” that a deferred tax asset is not realizable. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred tax assets as of March 31, 2023 were $165.2 million which was down slightly from $177.8 million as of December 31, 2022. The decrease in deferred tax assets during the first three months of 2023 was mostly attributable to a decrease in the unrealized losses in the securities portfolio, an increase in deferred loan fees and costs, partially offset by an increase in the allowance for credit losses.
The Company and its subsidiaries file a consolidated federal income tax return. Additionally, income tax returns are filed by the Company or its subsidiaries in the states of Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, South Carolina, Tennessee, Texas, and Virginia and city of New York City. We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves at March 31, 2023 or December 31, 2022.
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Results of Operations
We reported consolidated net income of $139.9 million, or diluted earnings per share (“EPS”) of $1.83, for the first quarter of 2023 as compared to consolidated net income of $100.3 million, or diluted EPS of $1.39, in the comparable period of 2022, a 39.5% increase in consolidated net income and a 31.7% increase in diluted EPS. The $39.6 million increase in consolidated net income was the net result of the following items:
Our quarterly efficiency ratio decreased to 51.4% in the first quarter of 2023 compared to 63.0% in the first quarter of 2022. The decrease in the efficiency ratio compared to the first quarter of 2022 was the result of the 29.8% increase in the total of tax-equivalent net interest income and noninterest income being greater than the increase in noninterest expense (excluding amortization of intangibles) of 6.0%. The increase in income was mainly due to a 45.1% increase in tax-equivalent net interest income reflective of the rising rate environment where our interest-earning assets repriced more quickly than our interest-bearing liabilities.
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Basic and diluted EPS were $1.84 and $1.83, respectively, for the first quarter of 2023, compared to $1.40 and $1.39, respectively for the first quarter of 2022. The increase in basic and diluted EPS was due to a 39.5% increase in net income in the first quarter of 2023 compared to the same period in 2022, partially offset by an increase in average basic common shares of 6.2%. The increase in net income was mainly due to the increase in net interest income resulting from the rising rate environment in the first quarter of 2023 compared to the first quarter of 2022.
Selected Figures and Ratios
Return on average assets (annualized)
1.29
0.95
Return on average equity (annualized)
Return on average tangible equity (annualized)*
18.81
13.97
Dividend payout ratio
27.09
33.71
Equity to assets ratio
11.68
11.23
Average shareholders’ equity
5,177,048
4,937,165
* - Denotes a non-GAAP financial measure. The section titled “Reconciliation of GAAP to non-GAAP” below provides a table that reconciles GAAP measures to non-GAAP measures.
Net Interest Income and Margin
Non-tax equivalent net interest income increased $119.7 million, or 45.8%, to $381.3 million in the first quarter of 2023 compared to $261.5 million in the same period in 2022. Interest earning assets averaged $39.4 billion during the three months period ended March 31, 2023 compared to $38.6 billion for the same period in 2022, an increase of $844.7 million, or 2.2%. Interest bearing liabilities averaged $24.6 billion during the three months period ended March 31, 2023 compared to $24.9 billion for the same period in 2022, a decrease of $236.2 billion, or 0.9%.
The Federal Reserve continued to raise rates in 2023 with two increases of 25 basis points, the most recent in early March 2023, resulting in a range of 4.75% to 5.00% at March 31, 2023. As a result, the Company operated under an increasing rate environment for the first quarter of 2023 while it operated under a much lower rate environment in the first quarter of 2022. Some key highlights are outlined below:
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The tables below summarize the analysis of changes in interest income and interest expense for the quarter ended March 31, 2023 and 2022 and net interest margin on a tax equivalent basis.
Balance
Earned/Paid
Yield/Rate
Interest-Earning Assets:
759,239
4.77
5,715,785
0.20
Investment securities (taxable) (1)
7,315,911
2.30
7,115,894
1.72
Investment securities (tax-exempt) (1)
916,671
2.90
779,387
2.02
23,123
402
7.05
110,542
869
3.19
Acquired loans, net
7,159,538
105,405
5.97
8,429,730
90,562
4.36
23,234,858
287,559
5.02
16,413,323
142,186
3.51
Total interest-earning assets
39,409,340
4.64
38,564,661
2.84
Noninterest-Earning Assets:
513,460
572,765
4,538,020
4,078,472
Allowance for credit losses
(356,342)
(308,630)
Total noninterest-earning assets
4,695,138
4,342,607
Total Assets
44,104,478
42,907,268
Interest-Bearing Liabilities:
Transaction and money market accounts
16,874,909
40,516
0.97
17,471,805
2,180
0.05
Savings deposits
3,298,221
1,756
0.22
3,408,129
0.02
Certificates and other time deposits
3,114,354
13,670
1.78
2,848,829
2,281
0.32
193,259
2,187
4.59
354,899
111
0.13
Securities sold with agreements to repurchase
373,563
666
0.72
438,258
158
0.15
392,238
5.93
354,133
4.69
393,333
4.76
Total interest-bearing liabilities
24,639,877
1.14
24,876,053
Noninterest-Bearing Liabilities:
Demand deposits
12,771,019
12,266,028
1,516,534
828,022
Total noninterest-bearing liabilities ("Non-IBL")
14,287,553
13,094,050
Shareholders' equity
Total Non-IBL and shareholders' equity
19,464,601
18,031,215
Total Liabilities and Shareholders' Equity
Net Interest Income and Margin (Non-Tax Equivalent)
3.92
2.75
Net Interest Margin (Tax Equivalent)
3.93
2.77
Total Deposit Cost (without debt and other borrowings)
0.63
Overall Cost of Funds (including demand deposits)
0.75
0.10
The yield and interest earned on investment securities increased in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. This is a result of the Bank carrying a higher average balance in investment securities in 2023 compared to the same periods in 2022. The average balance of investment securities for the three months ended March 31, 2023 increased $337.3 million from the comparable periods in 2022. The yield on the investment securities increased 62 basis points during the three months ended March 31, 2023 compared to the same periods in 2022. Both the average balance and the yield on the investment securities increased as a result of the Bank increasing the size of its investment securities portfolio in the first nine months of 2022 as interest rates rose, as well as the Bank retaining a portion of the investment securities portfolio acquired from Atlantic Capital on March 1, 2022.
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Interest earned on loans held for investment increased $160.2 million to $393.0 million in the first quarter ended March 31, 2023 from the comparable period in 2022. Interest earned on loans held for investment included loan accretion income recognized during the quarters ended March 31, 2023 and 2022 of $7.4 million and $6.7 million, respectively, an increase of $657,000. Some key highlights for the quarter ended March 31, 2023 are outlined below:
Interest-Bearing Liabilities
The quarter-to-date average balance of interest-bearing liabilities decreased $236.2 million, or 0.9%, in the first quarter of 2023 compared to the same period in 2022. The cost of interest-bearing liabilities increased by 99 basis points to 1.14% and the overall cost of funds, including demand deposits, increased by 65 basis points to 0.75% in the first quarter of 2023, compared to the same period in 2022. Some key highlights for the quarter ended March 31, 2023 compared to the same period in 2022 include:
We continue to monitor and adjust rates paid on deposit products as part of our strategy to manage our net interest margin. Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, and other borrowings. Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.
Noninterest-Bearing Deposits
Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds. Average noninterest-bearing deposits increased $0.5 million, or 4.1%, to $12.8 billion in the first quarter of 2023 compared to $12.3 billion during the same period in 2022. The increase in average noninterest-bearing deposits was primarily due to the assumed noninterest-bearing deposit balances from Atlantic Capital, which only affected the average balance for the last 30 days of the first quarter of 2022. The noninterest-bearing deposit balances from Atlantic Capital on the acquisition date were approximately $1.4 billion in total. Actual noninterest-bearing deposits declined $746.1 million from December 31, 2022. This decline was due to both the rising rate environment as customers seek higher yields, in addition to some customers spreading deposit funds amongst institutions to achieve full deposit insurance coverage.
Noninterest Income
Noninterest income provides us with additional revenues that are significant sources of income. For the three months ended March 31, 2023 and 2022, noninterest income comprised 15.8% and 24.8%, respectively, of total net interest income and noninterest income.
Service charges on deposit accounts
20,611
18,894
Debit, prepaid, ATM and merchant card related income
9,248
9,115
Bank owned life insurance income
6,813
5,260
3,053
1,335
Noninterest income decreased by $14.7 million, or 17.1%, during the first quarter of 2023 compared to the same period in 2022. This quarterly change in total noninterest income resulted from the following:
Noninterest Expense
OREO expense and loan related expense
Business development and staff related expense
5,957
4,276
Supplies and printing
884
602
Postage expense
1,587
17,396
14,573
Noninterest expense increased by $11.9 million, or 5.2%, in the first quarter of 2023 as compared to the same period in 2022. The quarterly increase in total noninterest expense primarily resulted from the following:
Income Tax Expense
Our effective tax rate was 21.84% for the three months ended March 31, 2023 compared to 21.26% for the three months ended March 31, 2022. The increase in the effective rate for the quarter, when compared to the same period in the prior year, is driven by an increase in pretax income, an increase in stock based compensation, an increase in disallowed interest expense, and an increase in non-deductible FDIC premiums, partially offset by a decrease in non-deductible merger expenses associated with the Atlantic Capital transaction that closed during the first quarter of 2022.
Analysis of Financial Condition
Summary
Our total assets increased approximately $1.0 billion, or 2.3%, from December 31, 2022 to March 31, 2023, to approximately $44.9 billion. Within total assets, cash and cash equivalents increased $684.1 million, or 52.1%, investment securities decreased $175.1 million, or 2.1%, and loans increased $518.3 million or 1.7% during the period. Within total liabilities, deposits grew $51.0 million, or 0.1%, and federal funds purchased and securities sold under agreements to repurchase decreased $12.3 million, or 2.2%. Total borrowings increased $899.9 million, or 229.4%. Total shareholder’s equity increased $174.1 million, or 3.4%. During the first quarter of 2023, the Company took in $900 million in short-term FHLB borrowings and $1.2 billion in brokered time deposits to increase our liquidity. The increase in FHLB borrowings contributed to the increase in cash and cash equivalents. The increase in loans was due to normal organic growth. Deposit growth remained flat for the quarter as noninterest bearing, interest bearing checking and savings and money market accounts declined $746.1 million, $639.5 million and $262.0 million, respectively. The declines were replaced by growth in time deposits of $1.7 billion including $1.2 billion in brokered time deposits. Our loan to deposit ratio was 84% and 83% at March 31, 2023 and December 31, 2022, respectively while our percentage of non-interest bearing deposit accounts to total deposits was 34% and 36%, respectively at March 31, 2023 and December 31, 2022.
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We use investment securities, our second largest category of earning assets, to generate interest income, provide liquidity, fund loan demand or deposit liquidation, and pledge as collateral for public funds deposits, repurchase agreements, derivative exposures and to augment borrowing capacity at the Federal Reserve Bank of Atlanta, and the Federal Home Loan Bank of Atlanta. At March 31, 2023, investment securities totaled $8.0 billion, compared to $8.2 billion at December 31, 2022, a decrease of $175.1 million, or 2.1%. At March 31, 2023, approximately 64.4% of the investment portfolio was classified as available for sale and approximately 33.0% was classified as held to maturity. During the three months ended March 31, 2023, we purchased $63.8 million of capital stock with the Federal Home Loan Bank classified as other investment securities on the balance sheet of which we sold back $25.5 million. The net increase to the capital stock holding for the Federal Home Loan Bank of Atlanta of $38.3 million during the quarter was due to the increase in Federal Home Loan Bank borrowings. During the first quarter of 2023, the Bank did not purchase securities for the core investment portfolio. There were maturities, paydowns, and calls of investment securities totaling $155.6 million and sales of totaling $150.8 million. Net amortization of premiums was $5.4 million in the first three months of 2023.
At March 31, 2023, the unrealized net loss of the available for sale securities portfolio was $816.5 million, or 13.7%, below its amortized cost basis, compared to an unrealized net loss of $889.3 million, or 14.3%, at December 31, 2022. At March 31, 2023, the unrealized net loss of the held to maturity securities portfolio was $409.1 million, or 15.5%, below its amortized cost basis, compared to an unrealized net loss of $433.1 million, or 16.1%, at December 31, 2022. The decrease in the unrealized net loss in the available for sale investment portfolio of $72.8 million and $24.0 million for the held to maturity portfolio during the first three months of 2023 was mainly due to a decrease in interest rates during the quarter and other dynamic market factors.
The following is the combined amortized cost and fair value of investment securities available for sale and held for maturity, aggregated by credit quality indicator:
Net Loss
AAA - A
Not Rated
443,265
389,348
(53,917)
agencies or sponsored enterprises*
3,505,098
2,988,065
(517,033)
3,505,003
1,158,369
996,889
(161,480)
1,541,285
1,280,258
(261,027)
16,919
1,524,366
(171,852)
522,742
470,814
(51,928)
8,613,174
(1,225,563)
2,394,865
6,218,309
* Agency mortgage-backed securities (“MBS”), agency collateralized mortgage-obligations (CMO) and agency commercial mortgage-backed securities (“CMBS”) are guaranteed by the issuing government-sponsored enterprise (“GSE”) as to the timely payments of principal and interest. Except for Government National Mortgage Association securities, which have the full faith and credit backing of the United States Government, the GSE alone is responsible for making payments on this guaranty. While the rating agencies have not rated any of the MBS, CMO and CMBS issued, senior debt securities issued by GSEs are rated consistently as “Triple-A.” Most market participants consider agency MBS, CMOs and CMBSs as carrying an implied Aaa rating (S&P rating of AA+) because of the guarantees of timely payments and selection criteria of mortgages backing the securities. We do not own any private label mortgage-backed securities. The balances presented under the ratings above reflect the amortized cost of the investment securities.
At March 31, 2023, we had 1,244 investment securities, including both available for sale and held to maturity, which totaled a $1.2 billion unrealized loss position. At December 31, 2022, we had 1,311 investment securities, including both available for sale and held to maturity, in an unrealized loss position, which totaled $1.3 billion. The total number of investment securities with an unrealized loss position decreased by 67 securities, while the total dollar amount of the unrealized loss decreased by $96.8 million. The level of unrealized losses for each period is due to an overall increase in short- and long-term interest rates during 2022 and 2023. Short- and long-term U.S treasury rates did decline slightly in the first quarter of 2023, which caused the unrealized loss to decline slightly during the quarter.
All investment securities in an unrealized loss position as of March 31, 2023 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is not more likely than not that we will be required to sell these securities prior to recovery. We continue to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of our securities may be sold or would require a charge to earnings as a provision for credit losses in such periods. Any charges as a provision for credit losses related to investment securities could impact cash flow, tangible capital or liquidity. See Note 2 — Summary of Significant Account Policies and Note 5 — Investment Securities for further discussion on the application of ASU 2016-13 on the investment securities portfolio.
As securities held for investment are purchased, they are designated as held to maturity or available for sale based upon our intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Although securities classified as available for sale may be sold from time to time to meet liquidity or other needs, it is not our normal practice to trade this segment of the investment securities portfolio. From time to time, the Bank may execute transactions to reposition the investment portfolio. Such activity has not expanded the broad asset classes used by the Bank. While management generally holds these assets on a long-term basis or until maturity, any short-term investments or securities available for sale could be converted at an earlier point, depending partly on changes in interest rates and alternative investment opportunities.
The following table presents a summary of our investment portfolio by contractual maturity and related yield as of March 31, 2023:
Due In
Due After
1 Year or Less
1 Thru 5 Years
5 Thru 10 Years
10 Years
Total(12)
Yield
Held to Maturity (amortized cost)
U.S. Government agencies (1)
64,365
2.11
107,899
1.62
25,000
2.20
1.86
agencies or sponsored enterprises (2)
213,847
1.99
1,339,526
1.81
agencies or sponsored enterprises (3)
2.51
agencies or sponsored enterprises (4)
36,708
0.94
60,515
1.13
263,739
1.47
Small Business Administration loan-backed securities (7)
1.20
Total held to maturity
1.69
1.75
1.91
1.88
Available for Sale (fair value)
U.S. Government treasuries (9)
244,184
1.71
23,912
2.05
1.74
122,996
2.63
97,263
1.68
2.21
2,477
2.28
137,054
2.13
1,533,549
1.97
1.98
11,137
2.55
14,706
2.26
565,569
2.19
5.20
88,326
2.32
493,595
1.92
405,512
1.77
1.89
State and municipal obligations (5)(6)
2,386
26,454
3.42
83,520
2.70
854,597
2.61
2.64
3,535
19,923
149,110
3.74
252,924
2.60
3.00
Corporate securities (8)
26,405
3.98
779
4.50
3.99
Total available for sale
1.70
2.58
2.18
Total other investments (10)
4.46
Total investment securities (11)
396,298
2.36
1,383,914
2.16
5,984,260
2.00
Percent of total
75
Cumulative percent of total
Approximately 86.5% of the investment portfolio is comprised of U.S. Treasury securities, U.S. Government agency securities, and U.S. Government Agency Mortgage-backed securities. These securities may be pledged to the Federal Home Loan Bank of Atlanta or the Federal Reserve Bank of Atlanta Discount Window or Bank Term Funding Program. Approximately 13.1% of the investment portfolio is comprised of municipal securities. A portion of the municipal bond portfolio may be pledged to the Federal Home Loan Bank of Atlanta subject to their credit approval. Approximately 98.9% of the municipal bond portfolio has ratings in the Double A or Triple A category.
In March 2023, we sold approximately $125.3 million of municipal securities given advantageous market conditions. The primary rationale for the sale was to reduce municipal and portfolio duration/price risk at an opportune moment in fixed income markets. As of March 31, 2023, the portfolio had an effective duration of 5.89 years. Our target for effective duration is 3 to 5 years. The portfolio duration is currently outside of the target range due to portfolio repositioning and extension in the mortgage-backed securities due to the historic rise in rates. We continue to monitor duration risk and seek to align actual duration with the target range.
The following table presents a summary of our investment portfolio duration for the periods presented.
(Dollars in thousands, duration in years)
Duration
5.53
5.81
6.48
6.13
6.61
6.52
4.92
6.59
6.76
6.22
6.04
0.87
4.06
4.27
6.06
5.80
6.05
5.95
4.35
4.34
9.00
8.74
3.60
3.55
3.28
2.94
5.73
5.66
Other Investments
Other investment securities include primarily our investments in FHLB and FRB stock with no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of March 31, 2023, we determined that there was no impairment on our other investment securities. As of March 31, 2023, other investment securities represented approximately $218.0 million, or 0.49% of total assets, and primarily consists of FHLB and FRB stock which totals $203.6 million, or 0.45% of total assets. There were no gains or losses on the sales of these securities for three months ended March 31, 2023 and 2022, respectively.
We have a trading portfolio associated with our Correspondent Bank Division and its subsidiary SouthState|Duncan-Williams. This portfolio is carried at fair value and realized and unrealized gains and losses are included in trading securities revenue, a component of Correspondent Banking and Capital Market Income in our Consolidated Statements of Net Income. Securities purchased for this portfolio have primarily been municipal bonds, treasuries and mortgage-backed agency securities, which are held for short periods of time and totaled $16.0 million and $31.3 million at March 31, 2023 and December 31, 2022, respectively.
Loans Held for Sale
The balance of mortgage loans held for sale decreased $1.7 million from December 31, 2022 to $27.3 million at March 31, 2023. Total mortgage production was $556 million in the first quarter of 2023. This compares to $693 million in the fourth quarter of 2022. Mortgage production has continued to decline as mortgage rates have increased. The percentage of mortgage production booked to portfolio instead of being sold into the secondary market decreased to 72% compared 81% in the prior quarter. The secondary pipeline increased to $107 million at March 31, 2023 compared to $39 million at the end of last quarter. The allocation of mortgage production between portfolio and secondary market depends on the Company’s liquidity, market spreads and rate changes during each period and will fluctuate over time.
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The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
LOAN PORTFOLIO (ENDING BALANCE)
% of
Acquired loans:
Acquired - non-purchased credit deteriorated loans:
221,673
0.7
258,481
0.9
1,919,440
6.3
1,991,947
1,276,719
4.2
1,332,942
4.4
564,847
1.8
586,252
1.9
288,828
316,019
1.1
1,048,983
3.4
1,128,280
3.7
187,933
0.6
195,265
Consumer non real estate
111,640
0.4
133,679
227
Total acquired - non-purchased credit deteriorated loans
18.3
19.7
Acquired - purchased credit deteriorated loans (PCD):
38,350
0.1
46,464
0.2
513,694
1.7
553,058
411,117
1.3
435,650
1.4
188,784
194,779
35,282
38,961
57,132
66,891
43,278
52,827
37,763
41,101
Total acquired - purchased credit deteriorated loans (PCD)
4.7
Total acquired loans
6,945,690
22.5
7,372,823
24.4
Non-acquired loans:
2,489,267
8.1
2,555,415
8.5
5,803,082
18.9
5,527,954
3,834,678
12.5
3,691,601
12.2
4,774,915
15.6
4,381,011
14.5
1,008,175
3.3
958,188
3.2
4,215,191
13.7
4,118,312
13.6
490,080
1.6
448,150
1.5
1,128,146
1,103,646
6,918
20,762
Total non-acquired loans
77.5
75.6
Total loans (net of unearned income)
Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), increased by $518.3 million, or 7.0% annualized, to $30.7 billion at March 31, 2023. Our non-acquired loan portfolio increased by $945.4 million, or 16.8% annualized, driven by organic growth. Commercial non-owner occupied loans, commercial owner occupied loans and consumer owner occupied loans led the way with $275.1 million, $143.1 million and $393.9 million in year-to-date loan growth, respectively, or 20.2%, 15.7%, and 36.5% annualized growth, respectively. The acquired loan portfolio decreased by $427.1 million, or 23.5% annualized. This decline in acquired loans was due to paydowns and payoffs in both the PCD and Non-PCD loan categories along with renewals of acquired loans that were moved to our non-acquired loan portfolio. The main categories that declined were commercial non-owner occupied loans, commercial and industrial loans and commercial owner occupied loans with $111.9 million, $89.1 million and $80.8 million in year-to-date loan growth. Acquired loans as a percentage of total loans decreased to 22.5% and non-acquired loans as a percentage of the overall portfolio increased to 77.5% at March 31, 2023. This compares to acquired loans as a percentage of total loans of 24.4% and non-acquired loans as a percentage of total loans of 75.6% at December 31, 2022.
Allowance for Credit Losses (“ACL”)
The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company established the incremental increase in the ACL at adoption through equity and subsequent adjustments through a provision for credit losses charged to earnings. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. Please see Note 2 — Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL.
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As stated in Note 2 – Significant Accounting Policies under the caption Allowance for Credit Losses, management uses systematic methodologies to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”) method is used for each loan in a pool, and the results are aggregated at the pool level. A periodic tendency to default and absolute loss given default are applied to a projective model of the loan’s cash flow while considering prepayment and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (e.g., default rates and prepayment speeds). The Company has identified the following portfolio segments: Owner-Occupied Commercial Real Estate, Non Owner-Occupied Commercial Real Estate, Multifamily, Municipal, Commercial and Industrial, Commercial Construction and Land Development, Residential Construction, Residential Senior Mortgage, Residential Junior Mortgage, Revolving Mortgage, and Consumer and Other.
Management considers forward-looking information in estimating expected credit losses. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline outlook and alternative scenarios for the United States economy. The baseline, along with the evaluation of alternative scenarios, is used by management to determine the best estimate within the range of expected credit losses. Management evaluates the appropriateness of the reasonable and supportable forecast scenarios and takes into consideration the scenarios in relation to actual economic and other data, such as gross domestic product growth, monetary and fiscal policy, inflation, supply chain issues and global events like the Russian/Ukraine conflict, as well as the volatility and magnitude of changes within those scenarios quarter over quarter, and consideration of conditions within the Bank’s operating environment and geographic area. Additional forecast scenarios may be weighted along with the baseline forecast to arrive at the final reserve estimate. While periods of relative economic stability should generally lead to stability in forecast scenarios and weightings to estimate credit losses, periods of instability can likewise require management to adjust the selection of scenarios and weightings, in accordance with the accounting standards. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors within four quarters using a straight-line approach. The Company generally uses a four-quarter forecast and a four-quarter reversion period.
It is widely acknowledged that the chances of recession are still high. Accordingly, management continues to use a blended forecast scenario of the baseline and more severe scenario, depending on the circumstances and economic outlook. For the quarter ending March 31, 2023, management selected a baseline weighting of 50%, a 25% weighting for an upside scenario and a 25% weighting for the more severe scenario compared to a baseline weighting of 75% and the more severe scenario of 25% at the end of the fourth quarter of 2022. The shift in weightings among the three scenarios reflects recognition of downside risks in the economic forecast from persistent levels of inflation and rising interest rates, geopolitical tension and the Russian invasion of Ukraine, and global supply chain, energy and commodity issues. The more severe scenario reflected a moderate increase in severity from the prior quarter and was viewed as less likely by management. While employment figures still showed resilience and actual loan losses remain at very low levels, moderate downward shifts in forecasted commercial real estate price index, national house price index and GDP in the more severe scenario increased expected loss rates, primarily for Commercial Construction and Commercial Real Estate loans. The resulting provision was approximately $33.1 million during the first quarter of 2023, including a provision for unfunded commitments of $17.9 million.
Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: (1) lending policy; (2) economic conditions not captured in models; (3) volume and mix of loan portfolio; (4) past due trends; (5) concentration risk; (6) external factors; and (7) model limitations.
When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company’s threshold for individually evaluated loans includes all non-accrual loans with a net book balance in excess of $1.0 million. Management will monitor the credit environment and make adjustments to this threshold in the future if warranted. Based on the threshold above, consumer financial assets will generally remain in pools unless they meet the dollar threshold. The expected credit losses on individually evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and the repayment terms were not considered to be unique to the asset.
Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications. In the course of resolving issues where the borrower is experiencing financial difficulties, the Bank may choose to modify the contractual terms of certain loans. Longstanding TDR accounting rules were replaced with ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (See Note 3 Recent Accounting Pronouncements). The Company adopted the retirement of TDR guidance, effective January 1, 2023. In accordance with the adoption of ASU 2022-02, any loans modified to a borrower experiencing financial difficulty are reviewed by the Bank to determine if an interest rate reduction, a term extension, an other-than-insignificant payment delay, a principal forgiveness, or any combination of these has occurred.
The ACL includes expected losses from modifications of receivables to borrowers experiencing financial difficulty. Losses on modifications over $1 million to borrowers experiencing financial difficulty are estimated on an individual basis. Because the effect of the remainder of modifications made to borrowers experiencing financial difficulty is already incorporated into the measurement methodologies used to estimate the allowance, they are accounted for as pooled loans.
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For purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e., allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition day, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the unpaid principal balance and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired credit-impaired loans (i.e., ACI or Purchased Credit Impaired) were treated as PCD loans. As a result of the merger with Atlantic Capital on March 1, 2022, the Company identified approximately $137.9 million of loans as PCD and recorded an allowance for credit losses of $13.8 million on acquisition date.
Atlantic Capital was acquired and merged with and into the Bank on March 1, 2022, requiring that a closing date ACL be prepared for Atlantic Capital on a standalone basis and that the acquired portfolio be included in the Bank’s first quarter ACL. Atlantic Capital’s loans represented approximately 8% of the total Bank’s portfolio at March 31, 2022. Given the relative size and complexity of the acquired portfolio, similarities of the loan characteristics, and similar loss history to the existing portfolio, reserve calculations were performed using the Bank's existing CECL model, loan segmentation, and forecast weighting as the first quarter end reserve. The acquisition date ACL totaled $27.5 million, consisting of a non-PCD pooled reserve of $13.7 million, PCD pooled reserve of $5.7 million, and PCD individually evaluated reserve of $8.1 million. It represented about 8% of the combined Bank’s ACL reserve at March 31, 2022. The acquisition date reserve for unfunded commitments totaled $3.4 million, or 11% of the combined Bank’s total at March 31, 2022.
The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023, the accrued interest receivable for loans recorded in Other Assets was $109.4 million.
The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the expected credit loss will be recorded as a liability on the balance sheet. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. Management completes funding studies based on historical data to estimate the percentage of unfunded loan commitments that will ultimately be funded to calculate the reserve for unfunded commitments. Management applies this funding rate, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. As of March 31, 2023, the liability recorded for expected credit losses on unfunded commitments was $85.1 million. The current adjustment to the ACL for unfunded commitments is recognized through the Provision for Credit Losses in the Condensed Consolidated Statements of Net Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during 2023 and 2022.
As of March 31, 2023, the balance of the ACL was $370.6 million or 1.21% of total loans. The ACL increased $14.2 million from the balance of $356.4 million recorded at December 31, 2022. This increase during the first quarter of 2023 included a $15.2 million provision, in addition to $1.0 million in net charge-offs.
At March 31, 2023, the Company had a reserve on unfunded commitments of $85.1 million which was recorded as a liability on the balance sheet, compared to $67.2 million at December 31, 2022. During three months ended March 31, 2023, the Company recorded an increase in the reserve for unfunded commitments of $17.9 million. This amount was recorded in Provision (Recovery) for Credit Losses on the Condensed Consolidated Statements of Net Income. For the prior comparative period, the Company had a reserve on unfunded commitments of $30.4 million recorded at March 31, 2022. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financial asset during the first three months of 2023.
The ACL provides 2.97 times coverage of nonperforming loans at March 31, 2023. Net charge-offs to the total average loans during three months ended March 31, 2023 were 0.01%, compared to 0.04% during the three months ended March 31, 2022. We continued to show solid and stable asset quality numbers and ratios as of March 31, 2023. The following table provides the allocation, by segment, for expected credit losses. Because PPP loans are government guaranteed and management implemented additional reviews and procedures to help mitigate potential losses, management does not expect to recognize credit losses on this loan portfolio and as a result, did not record an ACL for PPP loans within the C&I loan segment presented in the table below.
The following table presents a summary of the allowance for credit losses by loan segment, for the three months ended March 31,2023:
%*
Residential Mortgage Senior
Residential Mortgage Junior
0.0
Revolving Mortgage
4.6
Residential Construction
2.8
Other Construction and Development
6.1
4.1
2.7
2.4
Owner Occupied Commercial Real Estate
18.0
Non-Owner Occupied Commercial Real Estate
24.3
Commercial and Industrial
15.3
* Loan balance in each category expressed as a percentage of total loans, excluding PPP loans.
The following table presents a summary of net charge off ratios (annualized) by loan segment, for the quarters ended March 31, 2023 and 2022:
March 31,2023
March 31,2022
Net Recovery (Charge Off)
Average Balance
Net Recovery (Charge Off) Ratio
5,851,428
4,114,487
0.03
0.17
14,450
1.01
1,387,299
0.06
1,231,574
0.01
866,661
641,834
1,912,705
1,479,769
1,262,393
(0.69)
994,117
(0.87)
760,375
474,929
719,003
643,679
5,485,976
5,095,063
7,418,486
6,488,637
4,717,885
(0.01)
3,664,514
(0.09)
30,394,397
24,843,053
(0.04)
The following tables present a summary of the years ended March 31, 2023 and 2022:
Non-PCD
PCD
Balance at beginning of period
309,606
46,838
225,227
76,580
ACL - PCD loans for ACBI merger
Loans charged-off
(4,516)
(111)
(4,124)
(1,366)
2,327
1,262
2,289
878
Net (charge-offs) recoveries
(2,189)
(1,835)
(488)
Initial provision for credit losses - ACBI
20,498
(5,259)
(9,260)
(12,743)
Balance at end of period
327,915
42,730
227,829
72,567
Total loans, net of unearned income:
At period end
26,556,427
Net charge-offs as a percentage of average loans (annualized)
0.04
Allowance for credit losses as a percentage of period end loans
1.21
Allowance for credit losses as a percentage of period end non-performing loans (“NPLs”)
297.42
262.50
Nonperforming Assets (“NPAs”)
The following table summarizes our nonperforming assets for the past five quarters:
September 30,
June 30,
Non-acquired:
Nonaccrual loans
67,894
40,517
30,076
20,383
19,174
Accruing loans past due 90 days or more
2,667
2,358
1,371
22,818
Restructured loans - nonaccrual
4,154
4,298
333
Total non-acquired nonperforming loans
70,843
47,029
36,732
22,087
42,400
Other real estate owned (“OREO”) (1) (6)
Other nonperforming assets (2)
129
93
212
Total non-acquired nonperforming assets
71,030
47,274
36,846
22,180
42,864
Acquired:
Nonaccrual loans (3)
51,650
55,808
58,064
60,897
983
1,992
1,430
4,418
12,768
1,144
3,746
3,802
2,629
3,325
Total acquired nonperforming loans
53,777
61,546
63,296
67,944
72,035
Acquired OREO (1) (7)
3,415
882
2,102
1,431
3,038
Other acquired nonperforming assets (2)
Total acquired nonperforming assets
57,223
62,468
65,530
69,521
75,153
Total nonperforming assets
128,253
109,742
102,376
91,701
118,017
Excluding Acquired Assets
Total nonperforming assets as a percentage of total loans and repossessed assets (4)
0.30
0.21
0.18
0.11
0.25
Total nonperforming assets as a percentage of total assets (5)
0.16
0.08
0.09
Nonperforming loans as a percentage of period end loans (4)
Including Acquired Assets
0.42
0.36
0.35
0.33
0.44
0.29
0.23
0.26
0.41
0.43
Total nonperforming assets were $128.3 million, or 0.42% of total loans and repossessed assets, at March 31, 2023, an increase of $18.6 million, or 16.9%, from December 31, 2022. Total nonperforming loans were $124.6 million, or 0.41%, of total loans, at March 31, 2023, an increase of $16.0 million, or 14.8%, from December 31, 2022. Non-acquired nonperforming loans increased by $23.8 million from December 31, 2022. The increase in non-acquired nonperforming loans was driven primarily by an increase in commercial nonaccrual loans of $23.6 million, an increase
in consumer nonaccrual loans of $3.8 million, an increase in accruing loans past due 90 days or more of $300,000, offset by a decline in restructured nonaccrual loans of $3.9 million. The increase in commercial nonaccrual loans at March 31, 2023 was primarily due to two relationships, one commercial owner occupied consisting of 3 loans, totaling $11.7 million, and one commercial and industrial consisting of 3 loans, totaling $12.3 million. Acquired nonperforming loans decreased $7.8 million from December 31, 2022. The increase in the acquired nonperforming loan balances was due primarily to a decrease in commercial nonaccrual loans of $2.1 million, a decrease in consumer nonaccrual loans of $2.0 million, a decrease in restructured loans of $2.6 million and a decline in accruing loans past due 90 days or more of $1.0 million. The decline in restructured loans over both the nonacquired and acquired loan portfolios was due to the adoption of ASU 2022-02 effective January 1, 2023, which extinguishes the former troubled debt restructuring (TDR) guidance and issues new requirements for determining modified loans to borrowers experiencing financial difficulty.
At March 31, 2023, OREO totaled $3.5 million, which included $58,000 in non-acquired OREO and $3.4 million in acquired OREO. Total OREO increased $2.5 million from December 31, 2022. At March 31, 2023, non-acquired OREO consisted of two properties with an average value of $29,000. This is compared to three properties with an average value of $47,000 at December 31, 2022. During the first quarter of 2023, we a did not add new property into non-acquired OREO, while selling one property during the quarter with an average value of $83,000. At March 31, 2023, acquired OREO consisted of four properties with an average value of $854,000, compared to three properties with an average value of $294,000 at December 31, 2022. In the first quarter of 2023, we added two new properties into acquired OREO, while selling one property with an aggregate value of $293,000 during the current quarter. On the properties sold, we recorded a net gain of $5,000.
Potential Problem Loans
Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately $17.1 million, or 0.07%, of total non-acquired loans outstanding, at March 31, 2023, compared to $15.8 million, or 0.07%, of total non-acquired loans outstanding, at December 31, 2022. Potential problem loans related to acquired loans totaled $20.0 million, or 0.29%, of total acquired loans outstanding, at March 31, 2023, compared to $23.1 million, or 0.31% of total acquired loans outstanding, at December 31, 2022. All potential problem loans represent those loans where information about possible credit problems of the borrowers has caused management to have concern about the borrower’s ability to comply with present repayment terms.
Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, securities sold under agreements to repurchase and other borrowings. Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.
Total interest-bearing deposits increased $797.0 million or 13.9% annualized to $24.0 billion at March 31, 2023 from $23.2 billion at December 31, 2022. This increase was mainly driven by growth in time deposits of $1.7 billion including an increase in brokered time deposits of $1.2 billion. During the three months ended March 31, 2023, core deposits decreased $1.6 billion. These funds exclude certificates of deposits and other time deposits and are normally lower cost funds. Core deposits declined as customers moved their funds seeking higher yields as interest rates have risen along with some business customers moving funds for deposit insurance purposes. Federal funds purchases related to the correspondent bank division and repurchase agreements were $544.1 million at March 31, 2023, decreasing $12.3 million from December 31, 2022. Other borrowings, consisting of FHLB borrowings, increased to $900 million at March 31, 2023 from $0 at December 31, 2022. Corporate and subordinated debentures declined by $93,000 to $392.2 million. Some key highlights are outlined below:
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Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds. At March 31, 2023, the period end balance of noninterest-bearing deposits was $12.4 billion, a decrease of $746.1 million compared to $13.2 billion at the December 31, 2022. The decrease was mainly due to both customers seeking higher yields in the rising rate environment and deposit insurance coverage amid the financial turmoil during the quarter. Average noninterest-bearing deposits were $12.8 billion for the first quarter of 2022 compared to $12.3 billion for the first quarter of 2022. This increase was mainly related to deposits acquired through the Atlantic Capital transaction. The Atlantic Capital acquisition was completed on March 1, 2022, therefore the acquired noninterest-bearing deposits were only outstanding for 30 days during the first quarter 2022 which resulted in a lower effect on the average balance.
Uninsured Deposits
At March 31, 2023 and December 31, 2022, the Company had approximately $12.7 billion and $14.1 billion, respectively, in estimated uninsured deposits. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements issued by the FDIC for the FFIEC 041, also referred to as the Call Report. The estimated balance of uninsured deposits of $12.7 billion at March 31, 2023 includes $1.8 billion of collateralized public funds bringing the net amount of estimated uninsured and unsecured deposits to $10.8 billion.
The following table provides a maturity distribution of uninsured time deposits for the next twelve months as of March 31, 2023 and December 31, 2022:
% Change
Within three months
88,768
57,302
54.9
After three through six months
77,906
71,261
9.3
After six through twelve months
165,022
91,785
79.8
After twelve months
43,351
42,361
2.3
375,047
262,709
42.8
Capital Resources
Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As of March 31, 2023, shareholders’ equity was $5.2 billion, an increase of $174.1 million, or 3.4%, from December 31, 2022.
The following table shows the changes in shareholders’ equity during 2023.
Total shareholders' equity at December 31, 2022
Dividends paid on common shares ($0.50 per share)
Dividends paid on restricted stock units
Net increase in market value of securities available for sale, net of deferred taxes
Equity based compensation
Common stock repurchased - equity plans
Total shareholders' equity at March 31, 2023
In January 2021, the Board of Directors of the Company approved the 2021 Stock Repurchase Plan, which authorized the Company to repurchase 3,500,000 common shares. During the first quarter of 2022, we repurchased 1,012,038 shares, at an average price of $85.43 per share (excluding cost of commissions) for a total of $86.5 million under the 2021 Stock Repurchase Plan.
In April 2022, the Company’s Board of Directors approved a new stock repurchase program (“2022 Stock Repurchase Program”) authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the 2021 Stock Repurchase Program for a total authorization of 4,120,021 shares. The Company did not repurchase any shares through the 2022 Stock Repurchase Program during 2023. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, general business conditions, regulatory requirements, the market price of our common stock, and the availability of alternative investment opportunities.
We are subject to regulations with respect to certain risk-based capital ratios. These risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted based on the rules to reflect categorical credit risk. In addition to the risk-based capital ratios, the regulatory agencies have also established a leverage ratio for assessing capital adequacy. The leverage ratio is equal to Tier 1 capital divided by total consolidated on-balance sheet assets (minus amounts deducted from Tier 1 capital). The leverage ratio does not involve assigning risk weights to assets.
Specifically, we are required to maintain the following minimum capital ratios:
Under the current capital rules, Tier 1 capital includes two components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock and Tier 1 minority interests. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt, trust preferred securities and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in CET1 capital and often would operate to reduce this category of capital. When the current capital rules were first implemented, the Bank exercised its one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI, allowing us to retain our pre-existing treatment for AOCI.
In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital), resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
The federal banking agencies revised their regulatory capital rules to (i) address the implementation of CECL; (ii) provide an optional three-year phase-in period for the adoption date adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. CECL became effective for us on January 1, 2020 and the Company applied the provisions of the standard using the modified retrospective method as a cumulative-effect adjustment to retained earnings. Related to the implementation of ASU 2016-13, we recorded additional allowance for credit losses for loans of $54.4 million, deferred tax assets of $12.6 million, an additional reserve for unfunded commitments of $6.4 million and an adjustment to retained earnings of $44.8 million. Instead of recognizing the effects on regulatory capital from ASU 2016-13 at adoption, the Company initially elected the option for recognizing the adoption date effects on the Company’s regulatory capital calculations over a three-year phase-in.
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In 2020, in response to the COVID-19 pandemic, the federal banking agencies issued a final rule for additional transitional relief to regulatory capital related to the impact of the adoption of CECL. The final rule provides banking organizations that adopt CECL in the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by the aforementioned three-year transition period to phase out the aggregate amount of benefit during the initial two-year delay for a total five-year transition. The estimated impact of CECL on regulatory capital (modified CECL transitional amount) is calculated as the sum of the adoption date impact on retained earnings upon adoption of CECL (CECL transitional amount) and the calculated change in the ACL relative to the adoption date ACL upon adoption of CECL multiplied by a scaling factor of 25%. The scaling factor is used to approximate the difference in the ACL under CECL relative to the incurred loss methodology. The Company chose the five-year transition method and is deferring the recognition of the effects from the adoption date and the CECL difference for the first two years of application. The modified CECL transitional amount was calculated each quarter for the first two years of the five-year transition. This amount was fixed as of December 31, 2021, and that amount began the three-year phase out in the first quarter of 2022 with 50% being phased out in 2023.
The well-capitalized minimums and the Company’s and the Bank’s regulatory capital ratios for the following periods are reflected below:
Well-Capitalized
Minimums
SouthState Corporation:
Common equity Tier 1 risk-based capital
N/A
Tier 1 risk-based capital
6.00
Total risk-based capital
Tier 1 leverage
SouthState Bank:
The Company’s and Bank’s Common equity Tier 1 risk-based capital, Tier 1 risk-based capital and total risk-based capital and Tier 1 leverage ratios all increased compared to December 31, 2022. These ratios increased mainly due to net income during the quarter of $139.9 million. Tier 1 capital increased 2.7% and 2.2% at both the Company and Bank, respectively, with the increase in equity from net income. Total risk-based capital increased 3.6% and 3.4% at both the Company and Bank, respectively, with the increase in equity from net income along with the increase in the allowance for credit losses and unfunded commitments. Both regulatory risk-based assets and quarterly average assets remained reasonably flat compared to the fourth quarter with average assets for the Company and Bank decreasing 1.0% and risk-based assets increasing 1.1%. Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification. Should the Company need to sell its available for sale and held to maturity securities for liquidity purposes and recognize the unrealized losses as of March 31, 2023 through earnings, all else equal, our capital ratios would remain well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.
Liquidity
Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses. Liquidity risk is the risk that the Bank’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations. Our Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring policies designed to ensure acceptable composition of our asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. We have employed our funds in a manner to provide liquidity from both assets and liabilities sufficient to meet our cash needs.
Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally, changes in the earning asset mix are of a longer-term nature and are not used for day-to-day corporate liquidity needs.
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Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase, interest-bearing deposits at other banks and other short-term borrowings. We engage in routine activities to retain deposits intended to enhance our liquidity position. These routine activities include various measures, such as the following:
Our non-acquired loan portfolio increased by approximately $945.4 million, or approximately 16.8% annualized, compared to the balance at December 31, 2022. The increase from December 31, 2022 was mainly related to organic growth and renewals on acquired loans. The acquired loan portfolio decreased by $427.1 million from the balance at December 31, 2022 through principal paydowns, charge-offs, foreclosures and renewals of acquired loans.
Our investment securities portfolio (excluding trading securities) decreased $175.1 million compared to the balance at December 31, 2022. The decrease in investment securities from December 31, 2022 was a result of maturities, calls, sales and paydowns of investment securities totaling $306.4 million as well as a reduction from the net amortization of premiums of $5.4 million. These decreases were partially offset by an increase in the market value of the available for sale investment securities portfolio of $72.8 million and purchases of FHLB stock of $63.8 million. There were no purchases of available for sale or held to maturity securities during the quarter. Total cash and cash equivalents were $2.0 billion at March 31, 2023 as compared to $1.3 billion at December 31, 2022. This increase was due to the Company increasing its brokered time deposits by $1.2 billion and borrowing $900 million in FHLB borrowings during the quarter to increase liquidity.
At March 31, 2023 and December 31, 2022, we had $1.4 billion and $150.0 million of traditional, out–of–market brokered time deposits, respectively. At March 31, 2023 and December 31, 2022, we had $765.5 million and $637.0 million, respectively, of reciprocal brokered deposits. Total deposits were $36.4 billion at March 31, 2023, an increase of $51.0 million from $36.4 billion at December 31, 2022. This increase was driven by an increase in time deposits of $1.7 billion including an increase in brokered time deposits of $1.2 billion. The increase in time deposits was mostly offset by declines in noninterest bearing deposits of $746.1 million, in interest bearing checking deposits of $639.5 million and savings deposits of $308.1 million. As customers moved funds from noninterest bearing checking, interest bearing checking and savings accounts, seeking higher yields in the rising rate environment and deposit insurance coverage, the Company increased its balance in brokered time deposits and in in-market time deposits. The Company raised interest rates on most interest-bearing deposit products (in particular time deposit specials) during the quarter due to competitive pressures to retain deposits. Total corporate and subordinated debentures and other borrowings at March 31, 2023 were $1.3 billion and consisted of trust preferred securities and subordinated debentures of $392.2 million and FHLB borrowings of $900.0 million. The Company borrowed $2.2 billion during the quarter and repaid $1.3 billion prior to quarter-end in FHLB borrowings to increase liquidity. Total short-term borrowings at March 31, 2023 were $544.1 million, consisting of $233.4 million in federal funds purchased and $310.8 million in securities sold under agreements to repurchase. To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to take in shorter maturities of such funds. Our current approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise.
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers. In addition to commitments to extend credit, we also issue standby letters of credit, which are assurances to third parties that they will not suffer a loss if our customer fails to meet its contractual obligation to the third-party. Although our experience indicates that many of these standby letters of credit will expire unused, through our various sources of liquidity, we believe that we will have the resources to meet these obligations should the need arise.
Our ongoing philosophy is to remain in a liquid position, as reflected by such indicators as the composition of our earning assets, typically including some level of reverse repurchase agreements, federal funds sold, balances at the Federal Reserve Bank, and/or other short-term investments; asset quality; well-capitalized position; and profitable operating results. Cyclical and other economic trends and conditions can disrupt our desired liquidity position at any time. We expect that these conditions would generally be of a short-term nature. Under such circumstances, we expect our reverse repurchase agreements and federal funds sold positions, or balances at the Federal Reserve Bank, if any, to serve as the primary source of immediate liquidity. We could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks and/or the FHLB. At March 31, 2023, our Bank had a total FHLB credit facility of $6.9 billion, with $900.0 million in FHLB advances and $2.1 million FHLB letters of credit outstanding at quarter-end, leaving $6.0 billion in availability on the FHLB credit facility. At March 31, 2023, our Bank had $2.5 billion of credit available at the Federal Reserve Bank’s discount window and federal funds credit lines of $300.0 million with no balances outstanding at quarter-end. The Bank also has an internal limit on brokered deposits of 15% of total deposits which would allow capacity of $5.5 billion at March 31, 2023. The Bank has $1.4 billion of outstanding brokered deposits at the end of the quarter leaving $4.1 billion in available capacity. All of these resources would provide an additional $12.9 billion in funding if we needed additional liquidity. The Bank also has $4.5 billion in unpledged securities at March 31, 2023 that can be pledge to attain additional funds if necessary. We can also consider actions such as deposit promotions to increase core deposits. The Company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at March 31, 2023. We believe that our liquidity position continues to be adequate and readily available.
Our contingency funding plan describes several potential stages based on stressed liquidity levels. Liquidity key risk indicators are reported to the Board of Directors on a quarterly basis. We maintain various wholesale sources of funding. If our deposit retention efforts were to be unsuccessful, we would use these alternative sources of funding. Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged. This could increase our cost of funds, impacting our net interest margin and net interest spread.
Asset-Liability Management and Market Risk Sensitivity
Our earnings and the economic value of equity vary in relation to the behavior of interest rates and the accompanying fluctuations in market prices of certain of our financial instruments. We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment.
Our interest rate risk principally consists of reprice, option, basis, and yield curve risk. Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepayment options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.
We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.
Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as the terms of contractual agreements, investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. Equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. Key simulation assumptions are subject to sensitivity analysis to assess the impact of assumption changes on earnings at risk and equity at risk. Model assumptions are reviewed by our Assumptions Committee.
Earnings at risk is defined as the percentage change in net interest income due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons.
Equity at risk is defined as the percentage change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity. Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time.
The earnings simulation models take into account our contractual agreements with regard to investments, loans, deposits, borrowings, and derivatives as well as a number of behavioral assumptions applied to certain assets and liabilities.
Mortgage banking derivatives used in the ordinary course of business consist of forward sales contracts and interest rate lock commitments on residential mortgage loans. These derivatives involve underlying items, such as interest rates, and are designed to mitigate risk. Derivatives are also used to hedge mortgage servicing rights. For additional information see Note 28—Derivative Financial Instruments in the consolidated financial statements.
From time to time, we execute interest rate swaps to hedge some of our interest rate risks. Under these arrangements, the Company enters into a variable rate loan with a client in addition to a swap agreement. The swap agreement effectively converts the client’s variable rate loan into a fixed rate loan. The Company then enters into a matching swap agreement with a third-party dealer to offset its exposure on the customer swap. The Company may also execute interest rate swap agreements that are not specific to client loans. As of March 31, 2023, the Company did not have such agreements. For additional information on these derivatives refer to Note 28—Derivative Financial Instruments in the consolidated financial statements.
Our interest rate risk key indicators are applied to a static balance sheet using forward rates from the Moody’s Baseline Scenario. The Company will also use other rate forecasts, including, but not limited to, Moody’s Consensus Scenario. This Base Case Scenario assumes the maturity composition of asset and liability rollover volumes is modeled to approximately replicate current consolidated balance sheet characteristics throughout the simulation. These treatments are consistent with the Company’s goal of assessing current interest rate risk embedded in its current balance sheet. The Base Case Scenario assumes that maturing or repricing assets and liabilities are replaced at prices referencing forward rates derived from the selected rate forecast consistent with current balance sheet pricing characteristics. Key rate drivers are used to price assets and liabilities with sensitivity assumptions used to price non-maturity deposits. The sensitivity assumptions for the pricing of non-maturity deposits are subjected to sensitivity analysis no less frequently than on an annual basis.
Interest rate shocks are applied to the Base Case on an instantaneous basis. Our policy establishes the use of upward and downward interest rate shocks applied in 100 basis point increments through 400 basis points. We calculate smaller rate shocks as needed. At times, market conditions may result in assumed rate movements that will be deemphasized. For example, during a period of ultra-low interest rates, certain downward rate shocks may be impractical. The model simulation results produced from the Base Case Scenario and related instantaneous shocks for changes in net interest income and changes in the economic value of equity are referred to as the Core Scenario Analysis and constitute the policy key risk indicators for interest rate risk when compared to risk tolerances.
During the second quarter of 2022, management revised its deposit beta assumptions higher due to the rapid increase in interest rates and expected further increases. From the beginning of the upward rate cycle, our deposit costs have increased from five basis points to seventy basis points. During this period, the federal funds rate has increased 475 basis points. Accordingly, our cycle to date beta has been approximately 14.7%. Management recognizes the difficulty using historical data to forecast deposit betas in the current environment. For internal purposes, we are assuming a beta of 28.0% with a terminal federal funds rate of 5.25% and a corresponding cumulative rate increase of 500 basis points.
The following interest rate risk metrics are derived from analysis using the Moody’s Consensus Scenario published in April 2023 as the Base Case. As of March 31, 2023, the earnings simulations indicated that the year 1 impact of an instantaneous 100 basis point increase / decrease in rates would result in an estimated 2.1% increase (up 100) and 2.9% decrease (down 100) in net interest income.
We use Economic Value of Equity (“EVE”) analysis as an indicator of the extent to which the present value of our capital could change, given potential changes in interest rates. This measure also assumes a static balance sheet (Base Case Scenario) with rate shocks applied as described above. At March 31, 2023, the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 1.6% decrease and 0.7% decrease, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 4.3% decrease and 3.8% decrease, respectively. The interest rate shock analysis results for EVE sensitivities are unusual as the benefits of repricing assets are mitigated by increasing deposit costs, and downward shocks are constrained on various balance sheet categories due to the inability to price products below floors or zero. This is particularly meaningful given the cost of deposits as of March 31, 2023.
The analysis below reflects a Base Case and shocked scenarios that assume a static balance sheet projection where volume is added to maintain balances consistent with current levels, except for PPP loans that are not assumed to be replaced. Base Case assumes new and repricing volumes reference forward rates derived from the Moody’s Consensus rate forecast. Instantaneous, parallel, and sustained interest rate shocks are applied to the Base Case scenario over a one-year time horizon.
Percentage Change in Net Interest Income over One Year
Up 100 basis points
2.1%
Up 200 basis points
3.9%
Down 100 basis points
(2.9%)
Down 200 basis points
(6.8%)
LIBOR Transition
While most LIBOR settings ceased to be provided or were no longer representative after December 31, 2021, for the most common tenors of U.S. dollar LIBOR, the administrator of LIBOR extended publication until June 30, 2023.
The Alternative Reference Rates Committee proposed Secured Overnight Financing Rate (“SOFR”) as its preferred rate as an alternative to LIBOR and proposed a paced market transition plan to SOFR from LIBOR. Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to LIBOR. As noted within Part I - Item 1A. Risk Factors of the Form 10-K for the year ended 2022, we hold instruments that may be impacted by the discontinuance of LIBOR including floating rate obligations, loans, deposits, derivatives and hedges, and other financial instruments but is not able to currently predict the associated financial impact of the transition to an alternative reference rate.
We have established a cross-functional LIBOR transition working group that has (1) assessed the Company's current exposure to LIBOR indexed instruments and the data, systems and processes that will be impacted; (2) established a detailed implementation plan; and (3) developed a formal governance structure for the transition. The Company has developed and continues to implement various proactive steps to facilitate the transition on behalf of customers, which include:
We intend to use the provisions of the Adjustable Interest Rate (LIBOR) Act passed by Congress and signed in to law by the President in March 2022 for certain contracts referencing LIBOR. The Act provides for the use of SOFR as the replacement index with a spread adjustment when the remaining LIBOR indices are discontinued. The Act applies when there is no contract provision addressing the loss of LIBOR and may be used otherwise as well, provided the contract does not provide for a specific replacement index. This aligns with the plan of action currently under implementation by the Company. The final rule implementing the Act was released on December 22, 2022.
The Company continues to evaluate its financial and operational infrastructure in its effort to transition all financial and strategic processes, systems, and models to reference rates other than LIBOR. The Company is in the process of developing and implementing processes to educate client-facing associates and coordinate communications with customers regarding the transition. A townhall meeting with commercial relationship managers was held in advance of letters to commercial borrowers regarding LIBOR retirement. Letters to consumer and mortgage borrowers were also mailed. Training and other resources for use by lenders and customer care representatives have been provided.
As of March 31, 2023, the Company had the following exposures to LIBOR:
Deposit and Loan Concentrations
We have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our loans concentrated within a single industry or group of related industries. Furthermore, we attempt to avoid making loans that, in an aggregate amount, exceed 10% of total loans to a multiple number of borrowers engaged in similar business activities. As of March 31, 2023, there were no aggregated loan concentrations of this type. We do not believe there are any material seasonal factors that would have a material adverse effect on us. We do not have any foreign loans or deposits.
Concentration of Credit Risk
Each category of earning assets has a certain degree of credit risk. We use various techniques to measure credit risk. Credit risk in the investment portfolio can be measured through bond ratings published by independent agencies. In the investment securities portfolio, the investments consist of U.S. government-sponsored entity securities, tax-free securities, or other securities having ratings of “AAA” to “Not Rated”. All securities, with the exception of those that are not rated, were rated by at least one of the nationally recognized statistical rating organizations. The credit risk of the loan portfolio can be measured by historical experience. We maintain our loan portfolio in accordance with credit policies that we have established. Although the Bank has a diversified loan portfolio, a substantial portion of our borrowers’ abilities to honor their contracts is dependent upon economic conditions within our geographic footprint and the surrounding regions.
We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25% of total Tier 1 capital plus regulatory adjusted allowance for credit losses of the Company, or $1.1 billion at March 31, 2023. Based on this criteria, we had seven such credit concentrations at March 31, 2023, including loans to lessors of nonresidential buildings (except mini-warehouses) of $5.9 billion, loans secured by owner occupied office buildings (including medical office buildings) of $1.9 billion, loans secured by owner occupied nonresidential buildings (excluding office buildings) of $1.8 billion, loans to lessors of residential buildings (investment properties and multi-family) of $2.0 billion, loans secured by 1st mortgage 1-4 family owner occupied residential property (including condos and home equity lines) of $7.2 billion, loans secured by jumbo (original loans greater than $548,250) of $2.1 billion, and loans secured by business assets including accounts receivable, inventory and equipment of $2.1 billion. The risk for these loans and for all loans is managed collectively through the use of credit underwriting practices developed and updated over time. The loss estimate for these loans is determined using our standard ACL methodology.
After the adoption of CECL in the first quarter of 2020, banking regulators established guidelines for calculating credit concentrations. Banking regulators set the guidelines for construction, land development and other land loans to total less than 100% of total Tier 1 capital less modified CECL transitional amount plus ACL (CDL concentration ratio) and for total commercial real estate loans (construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) to total less than 300% of total Tier 1 capital less modified CECL transitional amount plus ACL (CRE concentration ratio). Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total Tier 1 capital less modified CECL transitional amount plus ACL. At March 31, 2023 and December 31, 2022, the Bank’s CDL concentration ratio was 60.6% and 64.8%, respectively, and its CRE concentration ratio was 243.5% and 249.0%, respectively. As of March 31, 2023, the Bank was below the established regulatory guidelines. When a bank’s ratios are in excess of one or both of these loan concentration ratios guidelines, banking regulators generally require an increased level of monitoring in these lending areas by Bank management. Therefore, we monitor these two ratios as part of our concentration management processes.
Reconciliation of GAAP to Non-GAAP
The return on average tangible equity is a non-GAAP financial measure that excludes the effect of the average balance of intangible assets and adds back the after-tax amortization of intangibles to GAAP basis net income. Management believes these non-GAAP financial measures provide additional information that is useful to investors in evaluating our performance and capital and may facilitate comparisons with other institutions in the banking industry as well as period-to-period comparisons. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, are not audited, and may not be comparable to other similarly titled financial measures used by other companies. Investors should not consider non-GAAP measures in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under GAAP.
Return on average equity (GAAP)
Effect to adjust for intangible assets
7.85
Return on average tangible equity (non-GAAP)
Average shareholders’ equity (GAAP)
Average intangible assets
(2,036,661)
(1,831,250)
Adjusted average shareholders’ equity (non-GAAP)
3,140,387
3,105,915
Net income (GAAP)
(1,594)
Net income excluding the after-tax effect of amortization of intangibles (non-GAAP)
145,631
107,017
Cautionary Note Regarding Any Forward-Looking Statements
Statements included in this report, which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are based on, among other things, management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the acquisition of Atlantic Capital. Words and phrases such as “may,” “approximately,” “continue,” “should,” “expects,” “projects,” “anticipates,” “is likely,” “look ahead,” “look forward,” “believes,” “will,” “intends,” “estimates,” “strategy,” “plan,” “could,” “potential,” “possible” and variations of such words and similar expressions are intended to identify such forward-looking statements. We caution readers that forward-looking statements are subject to certain risks, uncertainties and assumptions that are difficult to predict with regard to, among other things, timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:
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For any forward-looking statements made in this report or in any documents incorporated by reference into this Report, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not undertake any obligation to update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements. All subsequent written and oral forward-looking statements by us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by our forward-looking statements may also be included in other reports that we file with the SEC. We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about market risk as of March 31, 2023 from those disclosures presented in our Annual Report on Form 10-K for the year ended 2022.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
SouthState’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of SouthState’s disclosure controls and procedures as of March 31, 2023, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that SouthState’s disclosure controls and procedures as of March 31, 2023, were effective to provide reasonable assurance regarding our control objectives.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended March 31, 2023, that has materially affected, or is likely to materially affect, our internal control over financial reporting.
Item 1. LEGAL PROCEEDINGS
As of March 31, 2022 and the date of this Quarterly Report on Form 10-Q, we believe that we are not party to, nor is any of our property the subject of, any pending material legal proceeding other than those that may occur in the ordinary course of our business.
Item 1A. RISK FACTORS
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2. of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2022, the Company’s Board of Directors approved a new stock repurchase program (“2022 Stock Repurchase Program”) authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the 2021 Stock Repurchase Program for a total authorization of 4,120,021 shares. The Company did not repurchase any shares through the 2022 Stock Repurchase Program during 2022 or 2023. Of the 4,120,021 shares authorized under the 2022 Stock Repurchase Program, we may repurchase up to 4,120,021 shares of common stock. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, general business conditions, regulatory requirements, the market price of our common stock, and the availability of alternative investment opportunities.
The following table reflects share repurchase activity during the first quarter of 2023:
(d) Maximum
(c) Total
Number (or
Number of
Approximate
Shares (or
Dollar Value) of
Units)
(a) Total
Purchased as
Units) that May
Part of Publicly
Yet Be
(b) Average
Announced
Purchased
Price Paid per
Plans or
Under the Plans
Period
Share (or Unit)
Programs
or Programs
January 1 ‑ January 31
29,835
*
76.57
4,120,021
February 1 - February 28
11,268
80.69
March 1 - March 31
2,786
79.70
43,889
For the months ended March 31, 2023, totals include 29,835, 11,268, and 2,786 shares, respectively, that were repurchased under arrangements, authorized by our stock-based compensation plans and Board of Directors, whereby officers or directors may sell previously owned shares to the Company in order to pay for the exercises of stock options or for income taxes owed on vesting shares of restricted stock. These shares were not purchased under the 2022 Stock Repurchase Plan to repurchase shares.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated by reference.
Exhibit Index
Exhibit No.
Description
Exhibit 10.1
Separation Agreement between SouthState Corporation and its Subsidiaries and Robert R. Hill, Jr.
Exhibit 31.1
Rule 13a-14(a) Certification of Principal Executive Officer
Exhibit 31.2
Rule 13a-14(a) Certification of Principal Financial Officer
Exhibit 32
Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer
Exhibit 101
The following financial statements from the Quarterly Report on Form 10-Q of SouthState Corporation for the quarter ended March 31, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Net Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statement of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.
Exhibit 104
Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: May 5, 2023
/s/ John C. Corbett
John C. Corbett
President and Chief Executive Officer
(Principal Executive Officer)
/s/ William E. Matthews, V
William E. Matthews, V
Senior Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ Sara G. Arana
Sara G. Arana
Senior Vice President and
Principal Accounting Officer