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 June 30, 2024
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 New York Stock Exchange
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 July 31, 2024
76,246,721
SouthState Corporation and Subsidiaries
June 30, 2024 Form 10-Q
INDEX
Page
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets at June 30, 2024 and December 31, 2023
3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023
4
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023
5
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended June 30, 2024 and 2023
6
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2024 and 2023
7
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023
8
Notes to consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
81
Item 4.
Controls and Procedures
PART II — OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
82
Unregistered Sales of Equity Securities and Use of Proceeds
84
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
85
2
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(Dollars in thousands, except par value)
June 30,
December 31,
2024
2023
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks
$
507,425
510,922
Federal funds sold and interest-earning deposits with banks
338,829
236,435
Deposits in other financial institutions (restricted cash)
270,912
251,520
Total cash and cash equivalents
1,117,166
998,877
Trading securities, at fair value
92,161
31,321
Investment securities:
Securities held to maturity (fair value of $1,920,941 and $2,084,736)
2,348,528
2,487,440
Securities available for sale, at fair value
4,498,264
4,784,388
Other investments
201,516
192,043
Total investment securities
7,048,308
7,463,871
Loans held for sale
100,007
50,888
Loans:
Acquired - non-purchased credit deteriorated loans
4,253,323
4,796,913
Acquired - purchased credit deteriorated loans
957,255
1,108,813
Non-acquired loans
28,023,986
26,482,763
Less allowance for credit losses
(472,298)
(456,573)
Loans, net
32,762,266
31,931,916
Premises and equipment, net
517,382
519,197
Bank owned life insurance (“BOLI”)
1,001,998
991,454
Deferred tax assets
162,951
164,354
Derivatives assets
185,036
172,939
Mortgage servicing rights
88,904
85,164
Core deposit and other intangibles
77,389
88,776
Goodwill
1,923,106
Other assets
417,296
480,161
Total assets
45,493,970
44,902,024
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
10,374,464
10,649,274
Interest-bearing
26,723,938
26,399,635
Total deposits
37,098,402
37,048,909
Federal funds purchased
287,973
248,162
Securities sold under agreements to repurchase
254,430
241,023
Corporate and subordinated debentures
391,719
391,904
Other borrowings
300,000
100,000
Reserve for unfunded commitments
50,248
56,303
Derivative liabilities
955,347
804,486
Other liabilities
505,448
478,139
Total liabilities
39,843,567
39,368,926
Shareholders’ equity:
Common stock - $2.50 par value; authorized 160,000,000 shares; 76,195,723 and 76,022,039 shares issued and outstanding, respectively
190,489
190,055
Surplus
4,238,192
4,240,413
Retained earnings
1,841,933
1,685,166
Accumulated other comprehensive loss
(620,211)
(582,536)
Total shareholders’ equity
5,650,403
5,533,098
Total liabilities and shareholders’ equity
The Accompanying Notes are an Integral Part of the Financial Statements.
Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three Months Ended
Six Months Ended
Interest income:
Loans, including fees
478,360
419,355
942,048
812,720
Taxable
38,747
41,254
78,492
82,819
Tax-exempt
5,769
5,586
11,337
12,144
Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with banks
8,248
11,858
16,502
20,779
Total interest income
531,124
478,053
1,048,379
928,462
Interest expense:
Deposits
165,481
100,787
325,643
156,729
Federal funds purchased and securities sold under agreements to repurchase
4,983
3,535
9,710
6,388
5,999
5,823
12,008
11,558
4,402
6,165
6,823
10,781
Total interest expense
180,865
116,310
354,184
185,456
Net interest income
350,259
361,743
694,195
743,006
Provision for credit losses
3,889
38,389
16,575
71,480
Net interest income after provision for credit losses
346,370
323,354
677,620
671,526
Noninterest income:
Fees on deposit accounts
33,842
33,101
66,987
62,960
Mortgage banking income
5,912
4,354
12,081
8,686
Trust and investment services income
11,091
9,823
21,482
19,760
Correspondent banking and capital markets income
4,860
19,187
9,171
32,781
SBA income
3,955
2,885
8,318
6,607
Securities gains, net
—
45
Other income
15,565
7,864
28,744
17,730
Total noninterest income
75,225
77,214
146,783
148,569
Noninterest expense:
Salaries and employee benefits
151,435
147,342
301,888
291,402
Occupancy expense
22,453
22,196
45,030
43,729
Information services expense
23,144
21,119
45,497
41,044
OREO and loan related expense
1,307
(14)
1,913
155
Amortization of intangibles
5,744
7,028
11,742
14,327
Supplies, printing and postage expense
2,526
2,554
5,066
5,194
Professional fees
3,906
4,364
7,021
8,066
FDIC assessment and other regulatory charges
7,771
9,819
16,305
16,113
FDIC special assessment
619
4,473
Advertising and marketing
2,594
1,521
4,578
3,639
Merger, branch consolidation, severance related and other expense
5,785
1,808
10,298
11,220
Other expense
21,463
24,889
44,226
48,242
Total noninterest expense
248,747
242,626
498,037
483,131
Earnings:
Income before provision for income taxes
172,848
157,942
326,366
336,964
Provision for income taxes
40,478
34,495
78,940
73,591
Net income
132,370
123,447
247,426
263,373
Earnings per common share:
Basic
1.74
1.62
3.24
3.47
Diluted
1.73
3.23
3.45
Weighted average common shares outstanding:
76,251
76,058
76,276
75,981
76,607
76,418
76,630
76,394
Consolidated Statements of Comprehensive Income (unaudited)
(Dollars in thousands)
Other comprehensive income:
Unrealized holding gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during period
3,839
(64,741)
(49,737)
8,120
Tax effect
(1,056)
16,127
12,062
6,603
Reclassification adjustment for gains included in net income
(45)
12
Net of tax amount
2,783
(48,614)
(37,675)
14,690
Other comprehensive income (loss), net of tax
Comprehensive income
135,153
74,833
209,751
278,063
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
Three months ended June 30, 2024 and 2023
(Dollars in thousands, except for share data)
Accumulated
Other
Common Stock
Retained
Comprehensive
Shares
Amount
Earnings
Loss
Total
Balance, March 31, 2023
75,859,665
189,649
4,224,503
1,448,636
(613,784)
5,249,004
Comprehensive loss:
Other comprehensive loss, net of tax effects
Total comprehensive loss
Cash dividends declared on common stock at $0.50 per share
(37,962)
Cash dividend equivalents paid on restricted stock units
(613)
Employee stock purchases
9,562
24
623
647
Restricted stock awards (forfeits)
(120)
(1)
1
Stock issued pursuant to restricted stock units
181,076
453
(453)
Common stock repurchased
(54,204)
(135)
(3,471)
(3,606)
Share-based compensation expense
7,707
Balance, June 30, 2023
75,995,979
189,990
4,228,910
1,533,508
(662,398)
5,290,010
Balance, March 31, 2024
76,177,163
190,443
4,230,345
1,749,215
(622,994)
5,547,009
Cash dividends declared on common stock at $0.52 per share
(39,619)
AOCI reclassification to retained earnings from adoption of ASU 2018-02
(33)
9,092
23
707
730
Stock options exercised
1,099
47
50
(252)
9,299
(23)
Stock issued in lieu of cash - directors fees
1,148
90
93
Common stock repurchased - buyback plan
(1,826)
(5)
(140)
7,160
Balance, June 30, 2024
76,195,723
Six months ended June 30, 2024 and 2023
Accumulated Other
Balance, December 31, 2022
75,704,563
189,261
4,215,712
1,347,042
(677,088)
5,074,927
Comprehensive income:
Other comprehensive income, net of tax effects
Total comprehensive income
Cash dividends declared on common stock at $1.00 per share
(75,874)
(1,033)
23,516
59
1,114
1,173
(2,353)
(6)
358,784
897
(897)
(98,093)
(245)
(6,777)
(7,022)
19,129
Balance, December 31, 2023
76,022,039
Cash dividends declared on common stock at $1.04 per share
(79,217)
(1,196)
7,448
19
422
441
(316)
(2)
353,675
884
(884)
(100,000)
(250)
(7,735)
(7,985)
(97,363)
(243)
(7,850)
(8,093)
13,027
Cumulative change in accounting principle due to the adoption of ASU 2023-02
(10,246)
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
27,837
29,864
Deferred income taxes
9,221
19,990
Gains on sale of securities, net
Accretion of discount related to acquired loans
(8,673)
(12,878)
Gains on disposal of premises and equipment
(7)
(89)
Gains on sale of bank properties held for sale and repossessed real estate
(1,090)
(1,430)
Net amortization of premiums and discounts on investment securities
9,721
10,197
Bank properties held for sale and repossessed real estate write downs
52
1,231
Fair value adjustment for loans held for sale
(1,008)
(66)
Originations and purchases of loans held for sale
(553,362)
(422,596)
Proceeds from sales of loans held for sale
511,006
411,489
Gains on sales of loans held for sale
(5,755)
(2,810)
Increase in cash surrender value of BOLI
(13,444)
(12,135)
Net change in:
Accrued interest receivable
(5,462)
(2,636)
Prepaid assets
(4,177)
(829)
Operating leases
216
196
Bank owned life insurance
(840)
(976)
Trading securities
(60,840)
(25,317)
Derivative assets
(12,097)
36,536
Miscellaneous other assets
40,804
4,258
Accrued interest payable
(1,465)
25,573
Accrued income taxes
20,603
(9,601)
150,861
(58,426)
Miscellaneous other liabilities
25,351
28,174
Net cash provided by operating activities
404,480
371,656
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale
125,298
Proceeds from maturities and calls of investment securities held to maturity
136,746
95,566
Proceeds from maturities and calls of investment securities available for sale
241,844
255,808
Proceeds from sales and redemptions of other investment securities
85,517
146,625
Purchases of investment securities available for sale
(13,014)
(3,174)
Purchases of other investment securities
(94,989)
(163,636)
Net increase in loans
(857,537)
(1,361,435)
Recoveries of loans previously charged off
9,626
7,858
Purchase of bank owned life insurance
(5,966)
Purchases of premises and equipment
(14,999)
(15,034)
Proceeds from redemption and payout of bank owned life insurance policies
3,739
4,292
Proceeds from sale of bank properties held for sale and repossessed real estate
8,724
7,610
Proceeds from sale of premises and equipment
363
675
Net cash used in investing activities
(493,980)
(905,513)
Cash flows from financing activities:
Net increase in deposits
49,798
392,123
Net increase in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings
53,218
25,029
Proceeds from borrowings
2,550,000
4,850,000
Repayment of borrowings
(2,350,000)
(4,450,000)
Common stock issuance
823
Common stock repurchases
(16,078)
Dividends paid
(80,413)
(76,907)
Net cash provided by financing activities
207,789
735,043
Net increase in cash and cash equivalents
118,289
201,186
Cash and cash equivalents at beginning of period
1,312,563
Cash and cash equivalents at end of period
1,513,749
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest
355,649
159,883
Income taxes
42,186
62,170
Recognition of operating lease assets in exchange for lease liabilities
9,093
Schedule of Noncash Investing Transactions:
Real estate acquired in full or in partial settlement of loans
3,604
3,186
Notes to Consolidated Financial Statements (unaudited)
Note 1 — Basis of Presentation
The accompanying unaudited 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 and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
The consolidated balance sheet at December 31, 2023, 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, 2023, as filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2024, should be referenced when reading these unaudited 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.
In the second quarter of 2024, updates were made to certain estimates used in the Company’s current expected credit loss model, the most significant of which include expanding the number of macroeconomic variables used in the quantitative models, incorporating more granular loss data, and adjusting the reasonable and supportable forecast period from one to two years. We continue to update and expand our qualitative framework to further address factors not captured in the quantitative process.
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 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 monitors the held to maturity securities portfolio to determine whether a valuation account should be recorded. 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 at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The Company’s methodology on how the ACL is calculated is disclosed in Note 1 — Summary of Significant Accounting Policies, under the “ACL – Investment Securities” section, of our Annual Report for the year ended December 31, 2023. As of June 30, 2024, and December 31, 2023, the Company had $2.4 billion and $2.5 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 June 30, 2024, and December 31, 2023, the accrued interest receivables for all investment securities recorded in Other Assets were $25.8 million and $26.5 million, respectively.
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 estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term, as well as for changes in macroeconomic conditions, such as changes in unemployment rates, gross domestic product, property values, or other relevant factors. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected losses may result in a range of expected losses. The Company’s ACL recorded in the balance sheet reflects management’s best estimate within the range of expected losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected losses.
The Company generally uses an eight-quarter forecast period, based on a single forecast scenario or a blend of multiple forecast scenarios, using variables management believes are most relevant to each portfolio segment. For periods beyond which management is able to develop reasonable and supportable forecasts, the Company reverts to the average historical loss rate, reflecting historical default probabilities and loss severities, using a reversion speed that approximates four quarters. The forecast period and scenarios used are reviewed on a quarterly basis and may be adjusted based on management's view of the current economic conditions and level of predictability the forecast can provide.
10
While quantitative allowance methodologies strive to reflect all risk factors, any estimate involves assumptions and uncertainties resulting in some level of imprecision. Imprecision exists in the estimation process due to the inherent time lag between obtaining information, performing the calculation, as well as variations between estimates and actual outcomes. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors not captured in the quantitative model adjustments which include, but are not limited to, the following: imprecision or conditions not captured in economic scenario assumptions, emerging risks related to either changes in the internal or external environment that are affecting specific portfolios, trends in loan or portfolio level credit metrics not captured in quantitative modeling, or model imprecision adjustments. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each loan portfolio.
The Company’s ACL is calculated using collectively evaluated and individually evaluated loans. Even though portions of the allowance may be allocated to specific loans or pools of loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
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. 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 of non-accrual 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.
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 Consolidated Statements of 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 June 30, 2024, and December 31, 2023, the accrued interest receivables for loans recorded in Other Assets were $132.7 million and $127.0 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 internal 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 June 30, 2024, and December 31, 2023, the liabilities recorded for expected credit losses on unfunded commitments were $50.2 million and $56.3 million, respectively. The current adjustment to the reserve for unfunded commitments is recognized through the Provision for Credit Losses in the Consolidated Statements of Income.
11
The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As the Company’s portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to the Audit and Risk Committees of the Board of Directors for their review. The committees report to the board as part of the board's quarterly review of the Company’s consolidated financial statements.
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.
Note 3 — Recent Accounting and Regulatory Pronouncements
Accounting Standards Adopted
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this update allow the option for an entity to apply the proportional amortization method of accounting to other equity investments, in addition to the previously permitted low-income housing tax credit (“LIHTC”) structured investments, that are made for the primary purpose of receiving tax credits or other income tax benefits, if certain conditions are met. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line within income tax expense on the consolidated statements of income. Prior to this update, the application of the proportional amortization method of accounting was limited to LIHTC structured investments. Under this update, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. Also under this update, LIHTC structured investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. The amendments in this update also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including the nature of tax equity investments, the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations.
The Company adopted ASU 2023-02 effective January 1, 2024, and changed the accounting method of its LIHTC structured investments from the equity method to the proportional amortization method. The Company adopted ASU 2023-02 using the modified retrospective approach. Under this adoption approach, management was required to verify the LIHTCs met the conditions for proportional amortization method as of the date the investments were originally made by the Bank. In addition, management evaluated the actual tax credits and other income tax benefits received, as well as the remaining benefits expected to be received, as of the adoption date. The cumulative difference between the equity method and proportional amortization method resulted in a one-time cumulative effect adjustment recorded through retained earnings as of January 1, 2024. The cumulative effect resulting from the adoption of proportional amortization method was a net reduction to retained earnings of $9.4 million, which reflects the amortization expense in proportion to the tax credits and benefits realized on a life-to-date basis of all LIHTCs as of December 31, 2023. Additionally, the proportional amortization method does not require deferred taxes be tracked as was the case with the equity method; therefore, deferred taxes of $836,000 were written-off as an additional reduction to retained earnings effective January 1, 2024.
Issued But Not Yet Adopted Accounting Standards
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, to improve disclosures about a public entity’s reportable segments and address requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. Segment information gives investors an understanding of overall performance and is key to assessing potential future cash flows. In addition, although information about a segment’s revenue and measure of profit or loss is disclosed in an entity’s financial statements, there is limited information disclosed about a segment’s expenses. The key amendments include annual and interim disclosures of significant expenses and other segment items that are regularly provided to the chief operating decision maker and included within each reported measure of profit or loss, as well as any other key measure of performance used for segment management decisions. This ASU also requires disclosure of key profitability measures used in assessing performance and how to allocate resources. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not anticipate this ASU will have a material impact on its financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which aims to address requests for improved income tax disclosures from investors, lenders, creditors and other allocators of capital (collectively, “investors”) that use the financial statements to make capital allocation decisions. The amendments in this ASU address investor requests for more transparency about income tax information, including jurisdictional information, by requiring consistent categories and greater disaggregation of information in both the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments are effective for annual periods beginning after December 15, 2024. The Company does not anticipate this ASU will have a material impact on its financial statements.
Note 4 — Mergers and Acquisitions
Announcement of Merger between SouthState and Independent Bank Group, Inc. (“Independent”)
On May 20, 2024, the Company and Independent, a Texas-based corporation, announced that the companies have entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Independent will merge with and into the Company, with the Company continuing as the surviving corporation in the merger. Immediately following the merger, Independent’s wholly owned banking subsidiary, Independent Bank will merge with and into the Company’s wholly owned banking subsidiary, SouthState Bank, National Association, which will continue as the surviving bank in the bank merger. The Merger Agreement was approved by the Boards of Directors of the Company and Independent by the unanimous vote of the directors present at the applicable meeting. The merger is subject to approvals by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (“Federal Reserve”), and the Company’s and Independent’s shareholders. Under the terms of the Merger Agreement, shareholders of Independent will receive 0.60 shares of the Company’s common stock for each share of Independent common stock they own. The transaction is expected to close during the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of required statutory approvals and approval by the shareholders of each of the Company and Independent. At June 30, 2024, Independent reported $18.4 billion in total assets, $14.6 billion in loans and $15.8 billion in deposits.
13
Note 5 — 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
June 30, 2024:
U.S. Government agencies
147,270
(24,781)
122,489
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,370,142
(243,434)
1,126,708
Residential collateralized mortgage-obligations issued by U.S. government
428,468
(73,856)
354,612
Commercial mortgage-backed securities issued by U.S. government
351,181
(74,117)
277,064
Small Business Administration loan-backed securities
51,467
(11,399)
40,068
(427,587)
1,920,941
December 31, 2023:
197,267
(24,607)
172,660
1,438,102
(227,312)
1,210,790
444,883
(68,139)
376,744
354,055
(71,327)
282,728
53,133
(11,319)
41,814
(402,704)
2,084,736
The following is the amortized cost and fair value of investment securities available for sale:
U.S. Treasuries
38,098
(153)
37,945
216,148
(21,025)
195,123
1,735,232
125
(286,429)
1,448,928
592,712
(102,173)
490,544
1,207,592
595
(199,225)
1,008,962
State and municipal obligations
1,124,430
(171,729)
952,702
379,899
64
(43,221)
336,742
Corporate securities
30,509
(3,191)
27,318
5,324,620
790
(827,146)
74,720
(830)
73,890
246,089
(21,383)
224,706
1,822,104
294
(264,092)
1,558,306
626,735
(99,313)
527,422
1,217,125
1,516
(194,471)
1,024,170
1,129,750
(152,291)
977,461
413,950
86
(42,350)
371,686
30,533
(3,786)
26,747
5,561,006
1,898
(778,516)
14
The following is the amortized cost and carrying value of other investment securities:
Carrying
Federal Home Loan Bank stock
32,336
Federal Reserve Bank stock
150,261
Investment in unconsolidated subsidiaries
3,563
Other nonmarketable investment securities
15,356
22,836
15,383
The Company’s 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 June 30, 2024, we determined that there was no impairment on other investment securities.
The amortized cost and fair value of debt securities at June 30, 2024, 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
14,365
14,057
143,274
141,624
Due after one year through five years
36,511
32,483
306,612
285,442
Due after five years through ten years
456,439
389,368
1,239,040
1,063,459
Due after ten years
1,841,213
1,485,033
3,635,694
3,007,739
During the three and six months ended June 30, 2024, there were no sales of securities available for sale and therefore, there were no gains or losses on sale securities available for sale. During the three and six months ended June 30, 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.
There were no sales of held to maturity securities during the three and six months ended June 30, 2024, or June 30, 2023.
15
Information pertaining to our securities with gross unrealized losses at June 30, 2024, and December 31, 2023, 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
24,781
243,434
73,856
74,117
11,399
427,587
Securities Available for Sale
U.S. Treasuries (1)
10,834
153
24,815
21,025
136
8,848
286,293
1,430,209
102,173
489,387
106
16,816
199,119
920,215
1,860
20,142
169,869
930,359
704
43,219
317,384
485
3,178
26,833
2,117
57,829
825,029
4,334,325
24,607
227,312
68,139
376,745
71,327
11,319
402,704
2,084,737
830
21,383
122
9,358
263,970
1,539,208
99,313
91
7,959
194,380
955,059
177
6,340
152,114
967,305
128
42,447
42,222
304,770
18
480
3,768
26,267
536
66,584
777,980
4,618,627
The Company’s valuation methodology for securities impairment is disclosed in Note 1—Summary of Significant Accounting Policies, under “Investment Securities” section, of our Annual Report on Form 10-K for the year ended December 31, 2023. All debt securities in an unrealized loss position as of June 30, 2024, continue to perform as scheduled and management does not believe there is a credit loss or a provision for credit losses is necessary. Management does not currently intend to sell the securities within the portfolio, and it is not more-likely-than-not that the Company will be required to sell the debt securities. Management continues to monitor all of the securities with a high degree of scrutiny. See Note 2 — Summary of Significant Accounting Policies for further discussion.
16
At June 30, 2024, investment securities with a market value of $2.3 billion and a carrying value of $2.5 billion were pledged to secure public funds deposits and for other purposes required and permitted by law (excluding securities pledged to secure repurchase agreement disclosed in Note 20 — Short-Term Borrowings, under the “Securities Sold Under Agreements to Repurchase (“Repurchase agreements”)” section). Of the $2.5 billion carrying value of investment securities pledged, $2.2 billion were pledged to secure public funds deposits, $196.7 million were pledged to secure FHLB advances and $108.0 million were pledged to secure interest rate swap positions with correspondent banks. At December 31, 2023, investment securities with a market value of $3.0 billion and a carrying value of $3.2 billion were pledged to secure public funds deposits and for other purposes required and permitted by law. Of the $3.2 billion carrying value of investment securities pledged, $2.4 billion were pledged to secure public funds deposits, $729.4 million were pledged to secure FHLB advances and $115.0 million were pledged to secure interest rate swap positions with correspondent banks.
Trading Securities
At June 30, 2024, and December 31, 2023, trading securities, at estimated fair value, were as follows:
20,500
10,220
1,537
Residential mortgage pass-through securities issued or guaranteed by U.S.
government agencies or sponsored enterprises
28,838
14,461
Other residential mortgage issued or guaranteed by U.S. government
1,865
2,782
26,134
14,620
Other debt securities
1,822
703
Net losses on trading securities for the three and six months ended June 30, 2024, and 2023 were as follows:
Net gains (losses) on sales transaction
170
224
(40)
Net mark to mark losses
(323)
(195)
(311)
(201)
Net losses on trading securities
(188)
(87)
(241)
17
Note 6 — Loans
The following is a summary of total loans:
Construction and land development (1)
2,592,307
2,923,514
Commercial non-owner-occupied
9,106,816
8,571,634
Commercial owner-occupied real estate
5,522,978
5,497,671
Consumer owner-occupied (2)
6,969,340
6,595,005
Home equity loans
1,471,384
1,398,445
Commercial and industrial
5,769,838
5,504,539
Other income producing property
624,957
656,334
Consumer
1,175,135
1,233,650
Other loans
1,809
7,697
Total loans
33,234,564
32,388,489
The above table reflects the loan portfolio at the amortized cost basis for the periods June 30, 2024, and December 31, 2023, to include net deferred costs of $77.8 million compared to net deferred costs of $68.0 million, respectively, and unamortized discount related to loans acquired of $42.7 million and $51.3 million, respectively. Accrued interest receivables of $132.7 million and $127.0 million, respectively, are accounted for separately and reported in other assets for the periods June 30, 2024, and December 31, 2023.
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.
The following tables present the credit risk profile by risk grade of commercial loans by origination year as of and for the period ending June 30, 2024:
Term Loans
Amortized Cost Basis by Origination Year
As of June 30, 2024
2022
2021
2020
Prior
Revolving
Construction and land development
Risk rating:
Pass
125,752
519,137
1,100,600
128,693
10,082
17,056
48,633
1,949,953
Special mention
733
1,682
30,311
48,402
341
81,469
Substandard
15,225
765
608
16,645
Doubtful
Total Construction and land development
126,532
520,819
1,146,136
177,860
10,083
18,010
2,048,073
Current-period gross charge-offs
74
2,088
2,162
346,456
849,321
2,566,851
1,932,908
620,771
1,995,747
96,578
8,408,632
247
17,986
54,393
92,173
8,646
12,503
92
186,040
39,486
43,684
139,358
77,253
82,625
129,737
512,143
Total Commercial non-owner-occupied
386,189
910,991
2,760,602
2,102,335
712,042
2,137,987
96,670
176
71
Commercial Owner-Occupied
261,676
574,218
1,024,957
1,044,146
608,433
1,622,413
73,759
5,209,602
2,123
13,806
51,635
6,445
1,017
21,362
5,167
101,555
10,043
27,888
35,338
36,984
21,518
71,331
8,708
211,810
Total commercial owner-occupied
273,846
615,915
1,111,930
1,087,575
630,968
1,715,110
87,634
Commercial owner-occupied
227
75
393
1,150,687
801,250
999,002
576,804
331,704
498,792
1,160,020
5,518,259
1,782
2,765
6,856
1,624
678
4,605
22,173
40,483
14,877
33,576
31,537
24,506
2,851
20,450
83,199
210,996
62
100
Total commercial and industrial
1,167,346
837,597
1,037,419
602,996
335,234
523,850
1,265,396
523
941
2,450
290
2,852
1,160
8,240
24,165
57,019
121,434
89,451
48,566
118,513
38,353
497,501
139
507
220
1,002
785
2,253
183
5,089
927
725
3,173
2,608
329
6,957
1,299
16,018
Total other income producing property
25,231
58,251
124,827
93,061
49,680
127,723
39,835
518,608
Consumer owner-occupied
2,101
18,493
6,585
3,920
644
712
29,386
61,841
20
229
264
493
1,080
1,075
1,257
Total Consumer owner-occupied
3,196
18,722
6,644
664
1,154
29,879
64,179
Total other loans
Total Commercial Loans
1,912,646
2,819,438
5,819,429
3,775,922
1,620,200
4,253,233
1,446,729
21,647,597
5,044
36,975
143,474
149,646
11,141
41,328
28,108
415,716
66,455
105,873
224,631
142,116
107,328
229,260
93,206
968,869
63
119
1,984,149
2,962,295
6,187,558
4,067,747
1,738,671
4,523,834
1,568,047
23,032,301
Commercial Loans
557
325
5,086
11,042
The following table presents the credit risk profile by risk grade of commercial loans by origination year as of and for the period ending December 31, 2023:
As of December 31, 2023
2019
480,860
1,036,691
503,433
19,626
5,585
19,200
49,191
2,114,586
1,683
35,790
2,922
458
40,853
390
46,311
4,285
767
52,518
482,933
1,118,792
507,120
19,629
9,870
20,430
2,207,965
204
206
759,501
2,501,611
1,878,889
674,470
706,794
1,535,248
104,698
8,161,211
3,376
38,854
19,899
10,044
9,872
12,976
95,114
73,282
11,928
35,692
61,893
78,976
53,388
149
315,308
836,159
2,552,393
1,934,481
746,407
795,642
1,601,612
104,940
51
253
304
556,192
1,015,236
1,088,976
635,694
648,082
1,176,796
88,298
5,209,274
1,976
31,484
15,777
1,435
7,776
22,551
690
81,689
24,240
37,922
26,810
26,308
20,310
63,220
7,890
206,700
582,411
1,084,642
1,131,563
663,438
676,168
1,262,571
96,878
126
1,187,836
1,140,702
669,188
367,668
182,519
413,271
1,313,978
5,275,162
2,395
7,624
2,762
3,870
898
18,300
39,453
26,780
29,515
23,423
4,001
5,472
15,226
85,409
189,826
68
98
1,217,013
1,177,852
696,283
374,432
191,861
429,408
1,417,690
7,272
3,171
13,169
429
1,637
1,144
27,587
58,012
129,858
96,743
51,615
40,988
105,810
39,701
522,727
517
266
347
69
288
2,296
203
3,986
693
5,062
2,634
588
630
5,772
2,121
17,500
59,222
135,186
99,724
52,272
41,906
113,878
42,025
544,213
18,908
4,509
2,746
1,293
287
315
25,635
53,693
236
339
41
271
905
1,560
182
150
2,843
19,168
4,848
2,764
2,261
2,118
498
25,786
57,443
3,069,006
5,828,607
4,239,975
1,750,366
1,584,255
3,250,640
1,621,501
21,344,350
10,183
114,357
42,567
14,351
22,077
39,179
19,286
262,000
125,409
130,738
89,324
93,717
111,233
138,555
95,719
784,695
117
3,204,603
6,073,713
4,371,935
1,858,439
1,717,565
3,428,397
1,736,510
22,391,162
3,297
13,220
633
1,892
28,223
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 and for the period ending June 30, 2024:
Days past due:
Current
351,049
1,034,667
2,262,299
1,616,397
601,949
1,011,015
6,877,376
30 days past due
2,451
1,766
1,827
3,022
12,453
60 days past due
2,115
1,799
975
109
1,033
6,031
90 days past due
1,726
2,331
2,402
451
2,391
9,301
351,672
1,041,272
2,268,880
1,621,540
604,336
1,017,461
6,905,161
190
379
4,762
6,246
4,585
1,716
1,495
12,018
1,432,868
1,463,690
42
31
392
306
336
4,701
5,821
35
243
228
514
36
208
522
267
1,359
Total Home equity loans
4,804
6,410
5,213
1,765
2,009
13,119
1,438,064
110
114,207
256,547
257,784
115,322
61,117
178,244
171,373
1,154,594
37
130
319
129
1,087
8,428
10,134
289
156
655
5,101
6,305
681
272
22
1,911
4,102
Total consumer
114,249
257,450
258,664
115,629
61,257
181,073
186,813
771
135
29
279
2,517
4,695
22,626
135,146
284,726
68,029
14,886
18,439
543,852
320
337
285,046
14,887
18,500
544,234
1,117
6,106
41,554
17,367
4,075
35,549
105,997
35,901
106,349
Total Consumer Loans
493,761
1,438,712
2,850,948
1,818,831
683,522
1,255,265
1,604,470
10,145,509
702
2,925
3,162
1,908
2,137
4,733
13,129
28,696
2,242
2,096
1,131
1,931
5,329
12,850
2,505
3,151
2,460
788
4,125
2,178
15,208
494,468
1,446,384
2,859,357
1,824,330
686,564
1,266,054
1,625,106
10,202,263
Consumer Loans
907
430
5,488
The following table presents total loans by origination year as of and for the period ending June 30, 2024:
Total Loans
2,478,617
4,408,679
9,046,915
5,892,077
2,425,235
5,789,888
3,193,153
546
1,848
3,885
692
366
5,516
3,677
16,530
21
The following table presents the credit risk profile by past due status of consumer loans by origination year as of and for the period ending December 31, 2023:
1,019,956
2,125,156
1,641,518
628,107
288,304
809,419
6,512,460
1,589
2,268
1,524
654
4,012
10,754
766
528
680
813
2,787
1,280
2,538
1,089
1,689
4,650
11,561
1,022,825
2,130,728
1,644,659
631,130
289,326
818,894
6,537,562
27
187
6,551
6,454
2,887
1,396
1,003
11,518
1,358,829
1,388,638
60
132
44
539
5,860
6,656
104
1,268
1,842
194
672
298
1,309
6,728
3,058
1,715
1,048
13,187
1,366,255
299,871
305,283
141,369
75,213
60,265
143,725
182,608
1,208,334
443
321
142
137
1,384
10,757
13,431
254
152
973
6,420
7,871
395
174
1,108
1,938
4,014
300,471
306,253
141,942
75,555
60,516
147,190
201,723
373
1,586
571
280
217
537
8,478
12,042
135,739
425,276
111,205
20,322
8,555
14,265
715,362
111
76
20,434
14,340
715,549
6,310
43,022
18,536
4,331
2,537
36,911
111,927
67
127
37,105
112,121
1,468,427
2,905,191
1,915,515
729,369
360,664
1,015,838
1,541,717
9,936,721
2,092
2,589
1,903
928
888
6,002
16,617
31,019
1,020
2,244
7,688
12,500
1,490
2,933
1,290
2,080
426
6,632
2,236
17,087
1,472,073
2,911,733
1,919,400
733,165
361,982
1,030,716
1,568,258
9,997,327
1,676
598
344
587
8,562
12,425
The following table presents total loans by origination year as of and for the period ending December 31, 2023:
4,676,676
8,985,446
6,291,335
2,591,604
2,079,547
4,459,113
3,304,768
7,713
4,973
13,818
977
982
2,479
9,706
40,648
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
June 30, 2024
46
2,590,977
1,284
2,246
510
2,816
9,082,664
21,336
4,863
1,237
475
6,575
5,462,683
53,720
9,305
682
9,987
6,929,207
30,146
4,812
1,459,643
6,929
22,597
5,891
5,656
34,144
5,668,946
66,748
578
65
118
761
621,043
3,153
9,861
5,928
15,789
1,153,601
5,745
53,850
14,321
6,759
74,930
32,970,573
189,061
December 31, 2023
624
2,921,457
1,433
2,194
123
1,378
3,695
8,546,630
21,309
3,852
1,141
988
5,981
5,446,803
44,887
7,903
552
920
9,375
6,560,359
25,271
6,500
1,326
7,826
1,385,687
4,932
7,194
9,193
41,618
5,399,390
63,531
569
570
1,139
651,993
3,202
13,212
7,370
20,582
1,207,411
5,657
60,085
18,276
12,479
90,840
32,127,427
170,222
The following table is a summary of information pertaining to nonaccrual loans by class, including loans modified for borrowers with financial difficulty as of June 30, 2024, and December 31, 2023:
Greater than
Non-accrual
90 Days Accruing(1)
with no allowance(1)
17,825
24,550
1,220
26,035
1,265
Total loans on nonaccrual status
70,895
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 descriptions 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
%
Church
4,631
12,700
274%
3,537
6,705
190%
Industrial
6,892
14,644
212%
7,172
15,273
213%
17,042
31,190
183%
12,231
23,747
194%
Commercial non-owner-occupied real estate
Retail
3,216
4,208
131%
12,607
29,182
231%
Office
19,095
107%
41,054
61,548
150%
44,116
46,114
105%
1-4 family investment property
3,286
260%
Residential 1-4 family dwelling
2,250
184%
Total collateral dependent loans
89,929
144,713
82,879
125,229
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 the 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 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 $7.1 million during the six months ended June 30, 2024.
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). See Note 2 — Summary of Significant Accounting Policies for how such modifications are factored into the determination of the ACL for the periods presented above.
The following tables present loans designated as modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2024, and 2023, respectively. The loans are segregated by type of modification and asset class, indicating the financial effect of the modifications. The amortized cost balance for the modified loans presented below exclude accrued interest receivable of approximately $119,000 and $68,000 as of June 30, 2024 and 2023, respectively.
Three Months Ended June 30,
Reduction in Weighted
% of Total
Average Contractual
Asset Class
Interest Rate
Interest rate reduction
398
0.01%
1.15%
Total interest rate reductions
Six Months Ended June 30,
1,321
0.02%
3.14%
Increase in
Weighted Average
Life of Loan
Term extension
1,255
0.04%
24 months
343
0.00%
60 months
11,050
0.20%
32 months
7,732
0.14%
22 months
1,047
3 months
20,529
0.36%
37 months
1,787
0.03%
6 months
Total term extensions
32,626
11,117
1,512
0.05%
8,096
281
2,700
7 months
12,932
There were no combination – term extension and interest rate reduction loans during 2024.
Three and Six Months Ended June 30,
Combination- Term Extension and Interest Rate Reduction
259
3.63 to 3.00%
20 months
25
The Bank on occasion will enter into modification agreements which extend the maturity payoff on a loan or reduce the interest rate, for borrowers willing to continue to pay, to minimize losses for the Bank. At June 30, 2024, the Company had $43,000 in remaining commitments to lend additional funds on loans to borrowers experiencing financial difficulty and modified during the current reporting period.
The following table presents the changes in status of loans modified within the previous twelve months to borrowers experiencing financial difficulty, as of June 30, 2024 and 2023, by type of modification. There were no subsequent defaults.
Paying Under
Restructured
Converted to
Foreclosures
Terms
Nonaccrual
and Defaults
1,320
540
13,191
33,946
The following table depicts the performance of loans modified within the previous twelve months to borrowers experiencing financial difficulty, as of June 30, 2024 and 2023:
June 30, 2023
Payment Status (Amortized Cost Basis)
30-89 Days
1,445
922
33,024
26
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 tables present a disaggregated analysis of activity in the allowance for credit losses.
Residential
Comm Constr.
CRE Owner-
Non-Owner-
Mortgage Sr.
Mortgage Jr.
HELOC
Construction
& Dev.
Multifamily
Municipal
Occupied
Occupied CRE
C & I
Three Months Ended June 30, 2024
Allowance for credit losses:
Balance at end of period March 31, 2024
87,484
1,230
11,724
4,552
60,860
23,353
17,012
876
72,597
134,698
55,268
469,654
Charge-offs
(36)
(687)
(2,198)
(393)
(176)
(5,100)
(8,590)
Recoveries
277
144
825
408
89
2,424
4,365
Net (charge offs) recoveries
56
(543)
(1,373)
(2,676)
(4,225)
Provision (recovery) (1)
(27,988)
(852)
6,928
5,458
16,902
(9,752)
2,708
903
18,811
(35,596)
29,347
6,869
Balance at end of period June 30, 2024
59,552
428
18,929
10,025
77,219
12,228
19,761
1,779
91,423
99,015
81,939
472,298
Three Months Ended June 30, 2023
Balance at end of period March 31, 2023
77,351
349
14,318
9,176
55,069
23,319
5,507
879
57,541
82,473
44,663
370,645
(37)
(3,017)
(35)
(4,487)
(7,578)
302
532
198
520
334
2,264
4,268
265
(2,497)
58
(2,223)
(3,310)
3,853
40
(638)
(329)
49
3,755
4,260
(134)
13,160
32,462
3,579
60,057
Balance at end of period June 30, 2023
14,212
8,869
55,314
24,577
9,767
745
70,759
115,269
46,019
427,392
Six Months Ended June 30, 2024
Balance at end of period December 31, 2023
78,052
10,942
5,024
65,772
23,331
13,766
900
71,580
137,055
49,406
456,573
(379)
(110)
(304)
(2,162)
(4,695)
(247)
(8,240)
(16,530)
215
1,151
1,950
66
511
99
4,954
(164)
459
(282)
(1,011)
(2,745)
(148)
(3,286)
(6,904)
Provision (benefit) (1)
(18,336)
(406)
7,528
5,283
12,458
(8,358)
5,929
19,725
(37,892)
35,819
22,629
Six Months Ended June 30, 2023
Balance at end of period December 31, 2022
72,188
405
8,974
45,410
22,767
3,684
849
58,083
78,485
50,713
356,444
(39)
(5,746)
(51)
(6,293)
(12,205)
596
777
94
456
1,104
386
440
3,996
7,857
Net recoveries (charge offs)
738
454
(4,642)
351
389
(2,297)
(4,348)
(21)
(1,412)
(199)
9,450
6,452
6,083
(104)
12,325
36,395
(2,397)
75,296
Note 8 — Leases
As of June 30, 2024, and December 31, 2023, we had operating right-of-use (“ROU”) assets of $103.7 million and $100.3 million, respectively, and operating lease liabilities of $111.8 million and $108.3 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 20 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
233
Interest on lease liabilities – finance leases
Operating lease cost (cost resulting from lease payments)
4,356
4,278
8,633
8,518
Short-term lease cost
184
323
Variable lease cost (cost excluded from lease payments)
956
840
1,753
1,475
Total lease cost
5,621
5,354
10,960
10,462
Supplemental Cash Flow and Other Information Related to Leases:
Finance lease – operating cash flows
Finance lease – financing cash flows
238
Operating lease – operating cash flows (fixed payments)
4,220
4,154
8,413
8,250
Operating lease – operating cash flows (net change asset/liability)
(3,300)
(3,321)
(6,667)
(6,608)
New ROU assets – operating leases
6,550
701
New ROU assets – finance leases
Weighted – average remaining lease term (years) – finance leases
3.93
4.93
Weighted – average remaining lease term (years) – operating leases
8.86
9.63
Weighted – average discount rate - finance leases
1.7%
Weighted – average discount rate - operating leases
3.3%
3.0%
Operating lease payments due:
2024 (excluding 6 months ended June 30, 2024)
8,613
2025
16,374
2026
15,866
2027
14,693
2028
14,030
Thereafter
61,212
Total undiscounted cash flows
130,788
Discount on cash flows
(18,947)
Total operating lease liabilities
111,841
As of June 30, 2024, 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 June 30, 2024, 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 June 30, 2024, we had no additional operating leases that have not yet commenced.
Equipment Lessor
SouthState has an Equipment Finance Group which goes to market through intermediaries. The Equipment Finance Group primarily focuses on serving the construction and utility segments. Lease terms typically range from 24 months to 120 months. At the end of the lease term, the lessee has the option to renew the lease, return the equipment, or purchase the equipment. In the event the equipment is returned, there is a remarketing agreement with the intermediary to sell the equipment. The Equipment Finance Group offers the following lease products: TRAC Leases, Split-TRAC Leases, and FMV Leases. Direct finance equipment leases are included in commercial and industrial loans on the Consolidated Balance Sheets.
The estimated residual values for direct finance leases are established by an approved intermediary who utilizes internally developed analyses, external studies, and/or third-party appraisals to establish a residual position. FMV and Split-TRAC leases have residual risk due to their unguaranteed residual value whereas TRAC leases have a guaranteed residual value. Expected credit losses on direct financing leases and the related estimated residual values are included in the Commercial and Industrial loan segment for the ACL.
28
The following table summarizes lease receivables and investment in operating leases and their corresponding balance sheet location at June 30, 2024, and December 31, 2023:
Direct financing leases:
Lease receivables
16,997
5,503
Unguaranteed residual values
2,837
501
Initial direct costs
505
Less: Unearned income
(3,503)
(1,165)
Total net investment in direct financing leases
16,836
4,994
The following table summarizes direct financing lease income recorded for the three and six months ended June 30, 2024, and remaining lease payment receivable for each of the next five years:
Direct financing lease income
Interest income
Remaining lease payments receivable:
1,755
3,556
3,555
2,070
Total undiscounted lease receivable
Less: unearned interest income
Net lease receivables
13,494
See Note 1 — Summary of Significant Accounting Policies, under the “Leases” section, of our Annual Report on Form 10-K for the year ended December 31, 2023, on accounting for leases.
Note 9 — Deposits
Our total deposits as of June 30, 2024, and December 31, 2023, are comprised of the following:
Noninterest-bearing checking
Interest-bearing checking
7,547,406
7,978,799
Savings
2,475,130
2,632,212
Money market
12,122,336
11,538,671
Time deposits
4,579,066
4,249,953
At June 30, 2024, and December 31, 2023, we had $960.4 million and $927.2 million in certificates of deposits greater than $250,000, respectively.
Note 10 — 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 18. 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 receive a 100% match of their 401(k) plan contribution from the Company, up to 4% of their salary. We expensed $4.4 million and $9.0 million, respectively, for the three and six months ended June 30, 2024, and $4.2 million and $8.8 million, respectively, for the three and six months ended June 30, 2023, 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 11 — 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
356
360
354
413
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
58,247
Range of exercise prices
87.30
to
91.35
69.48
Note 12 — 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 2020 plan was subsequently amended and restated during our annual meeting on April 24, 2024 to increase the number of shares of common stock available for future grants. The Company also assumed the obligations of Atlantic Capital Bancshares, Inc. (“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.
30
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 amended and restated 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 2,451,634 shares registered under the 2020 amended and restated 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, 2024
107,592
72.60
Exercised
(7,419)
59.30
Expired
(29)
39.12
Outstanding at June 30, 2024
100,144
73.60
2.31
1,123
Exercisable at June 30, 2024
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 six months of 2024. Because all outstanding stock options had vested as of December 31, 2023, there was no unrecognized compensation cost related to nonvested stock option grants under the plans or fair value of shares vested during the six months ended June 30, 2024. The intrinsic value of stock option shares exercised for the six months ended June 30, 2024, was $143,000.
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.
Nonvested restricted stock for 2024 is summarized in the following table.
Weighted-
Grant-Date
Fair Value
Nonvested at January 1, 2024
16,248
88.63
Vested
(10,187)
90.00
Forfeited
Nonvested at June 30, 2024
86.11
As of June 30, 2024, there was $267,000 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 0.53 years as of June 30, 2024. The total fair value of shares vested during the six months ended June 30, 2024, was
$858,000.
32
Restricted Stock Units (“RSUs”)
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 at target for the six months ended June 30, 2024, is summarized in the following table.
Restricted Stock Units
873,048
75.22
Granted
368,696
80.66
(353,675)
77.51
(10,762)
76.84
877,307
76.56
The nonvested shares of 877,307 at June 30, 2024, includes 69,349 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 2022, 2023 and 2024 Long Term Incentive performance-based RSU grants, an additional 132,486 shares in total may be issued by the Company at the end of the three-year performance periods.
As of June 30, 2024, there was $35.8 million of total unrecognized compensation cost at target related to nonvested RSUs granted under the plan. This cost is expected to be recognized over a weighted-average period of 1.32 years as of June 30, 2024. The total fair value of RSUs vested and released during the six months ended June 30, 2024, was $29.2 million.
Note 13 — 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 June 30, 2024, commitments to extend credit and standby letters of credit totaled $9.2 billion. As of June 30, 2024, the liability recorded for expected credit losses on unfunded commitments, excluding unconditionally cancellable exposures and letters of credit, was $50.2 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 June 30, 2024, any such liability is not expected to have a material effect on our consolidated financial statements.
33
In response to the bank failures in early 2023, the FDIC implemented a special assessment to recover the losses to the FDIC’s Deposit Insurance Fund at an annual rate of approximately 13.4 basis points over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024. The base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. As a result, approximately $25.7 million was recognized by the Bank as of December 31, 2023, for the two-year special assessment period. Due to additional losses to the Deposit Insurance Fund resulting from the 2023 bank failures reported by the FDIC in February 2024, an additional $4.5 million was accrued by the Bank during 2024, bringing the total estimated FDIC special assessment allocable to the Bank to approximately $30.2 million. The additional $4.5 million will be paid over two quarters after the initial two-year assessment period. The FDIC may impose additional special assessments from time to time based on the actual losses incurred by the FDIC as a result of the March 2023 bank failures or future failures.
Cyber Incident Litigation. On April 3, 2024, a putative class action lawsuit was filed against the Bank in the U.S. District Court for the Middle District of Florida, Tampa Division (the “Original Suit”). The plaintiff, who purports to represent the class of individuals harmed by alleged actions and/or omissions by the Bank in connection with the cybersecurity incident that was detected on February 6, 2024 (the “Cyber Incident”), asserts a variety of common law and statutory claims seeking monetary damages, injunctive relief and other related relief related to the potential unauthorized access by third parties to personal identifiable information. While the Original Suit has been voluntarily dismissed, additional plaintiffs have initiated litigation that names the Bank as a defendant. As of July 30, 2024, three putative class actions are pending against the Bank, including one case pending in the U.S. District Court for the Northern District of Georgia, and two cases pending in the Circuit Court for Polk County, Florida. An additional case pending in the Circuit Court for Broward County, Florida, that does not seek class certification requests a declaratory judgment that the Bank leaked sensitive data belonging to the named plaintiff (each such litigation, a “Cyber Incident Suit”). We anticipate that all putative class actions will be consolidated into one litigation.
At this time, neither the Bank nor the Company is able to reasonably estimate the amount or range of reasonably possible loss, if any, that might result from the Cyber Incident Suits. However, the Bank believes that it has defenses to the claims and intends to vigorously defend against the Cyber Incident Suits. Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for the Cyber Incident Suits. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Additional lawsuits and claims related to the Cyber Incident may be asserted by or on behalf of customers, shareholders, or others seeking damages or other related relief and additional inquiries from governmental agencies may be received or investigations by governmental agencies commenced.
Note 14 — 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.
34
A description of valuation methodologies used for assets recorded at fair value is disclosed in Note 25 — Fair Value of our Annual Report on Form 10-K for the year ended December 31, 2023.
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
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Derivative financial instruments
Securities available for sale:
Total securities available for sale
SBA servicing asset
6,307
4,970,679
4,875,468
95,211
Liabilities
5,952
5,130,652
5,039,536
91,116
Fair Value Option
The Company has elected the fair value option for mortgage loans held for sale primarily to ease the operational burden required to maintain hedge accounting for these loans. The Company also has opted for the fair value option for the SBA servicing asset, as it is the industry-preferred method for valuing such assets.
The following table summarizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale and the changes in fair value of these loans:
Fair value
Unpaid principal balance
97,136
49,025
Fair value less aggregated unpaid principal balance
2,871
1,863
Income Statement Location
Mortgage loans held for sale
1,152
1,008
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 six months ended June 30, 2024. A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the six months ended June 30, 2024, is as follows:
MSRs
Fair value, January 1, 2024
Servicing assets that resulted from transfers of financial assets
4,533
Changes in fair value due to valuation inputs or assumptions
3,214
Changes in fair value due to decay
(4,007)
Fair value, June 30, 2024
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 June 30, 2024, is as follows:
SBA Servicing Asset
1,113
(956)
There were no unrealized losses included in accumulated other comprehensive income related to Level 3 financial assets and liabilities at June 30, 2024.
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:
OREO
3,057
Bank properties held for sale
6,100
Individually evaluated loans
80,620
837
12,401
73,518
For an individually evaluated loan, the fair value of collateral is measured based on appraisal or third-party valuation when the loan is placed on nonaccrual. For OREO and bank properties held for sale, the fair value is initially recorded based on external appraisals at the time of transfer. These assets recorded at fair value on a nonrecurring basis are updated on at least an annual basis.
Quantitative Information about Level 3 Fair Value Measurement
Weighted Average Discount
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 June 30, 2024, and December 31, 2023. 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.
Methods and assumptions used to estimate the fair value of each class of financial instruments are disclosed in Note 25 — Fair Value of our Annual Report on Form 10-K for the year ended December 31, 2023.
The estimated fair value, and related carrying amount, of our financial instruments are as follows:
Financial assets:
Cash and cash equivalents
Investment securities
6,620,721
6,419,205
Loans, net of allowance for credit losses
31,609,083
159,862
25,803
134,059
Interest rate swap – non-designated hedge
182,802
Other derivative financial instruments (mortgage banking related)
2,234
Financial liabilities:
Interest-bearing other than time deposits
22,144,872
4,540,610
542,403
385,136
55,343
7,061,167
6,869,124
30,709,513
154,400
26,706
127,694
169,180
3,759
22,149,682
4,208,498
489,185
388,909
56,808
803,539
947
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Note 15 — Accumulated Other Comprehensive Income (Loss)
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
Unrealized Losses
Benefit
on Securities
Plans
Balance at March 31, 2024
627
(623,621)
Other comprehensive income before reclassifications
Net comprehensive income
Balance at June 30, 2024
(620,838)
Balance at March 31, 2023
(673)
(613,111)
Other comprehensive loss before reclassifications
Net comprehensive loss
Balance at June 30, 2023
(661,725)
Balance at December 31, 2023
(583,163)
Balance at December 31, 2022
(676,415)
14,723
Amounts reclassified from accumulated other comprehensive loss
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 June 30,
For the Six Months Ended June 30,
Accumulated Other Comprehensive Income (Loss) Component
Income StatementLine Item Affected
Gains on sales of available for sale securities:
Total reclassifications for the period
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Note 16 — 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
9,011
9,188
Not designated hedges of interest rate risk:
Customer related interest rate contracts:
Matched interest rate swaps with borrowers
Other Assets and Other Liabilities
11,830,647
33,645
11,327,419
60,145
Matched interest rate swaps with counterparty (1)
11,732,649
148,765
11,235,952
108,820
Economic hedges of interest rate risk:
Pay floating rate swap with counterparty
1,716,000
1,660,000
Not designated hedges of interest rate risk – mortgage banking activities:
Contracts used to hedge mortgage servicing rights
122,000
500
142,000
2,605
Contracts used to hedge mortgage pipeline
153,500
1,734
77,500
Total derivatives
25,563,807
24,452,059
Balance Sheet Fair Value Hedge
As of June 30, 2024, and December 31, 2023, the Company maintained loan swaps, with an aggregate notional amount of $9.0 million and $9.2 million, respectively, accounted for as fair value hedges. The amortized cost basis of the loans being hedged were $9.5 million and $9.7 million, respectively, as of June 30, 2024, and December 31, 2023. This derivative protects us from interest rate risk caused by changes in the SOFR 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 loan customers of respondent bank customers of the Correspondent Banking Division, in addition to loan customers of the Bank, that are classified as non-designated hedges and are not speculative in nature. These agreements are designed to convert customers’ variable rate loans with the Company and respondent bank customers 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 one-month SOFR floating rate plus a credit spread, with payments being calculated on the notional amount.
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 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 June 30, 2024, and December 31, 2023, the interest rate swaps had an aggregate notional amount of approximately $23.6 billion and $22.6 billion, respectively. At June 30, 2024, the fair value of the interest rate swap derivatives is recorded in Other Assets at $182.4 million and in Other Liabilities at $955.3 million. The fair value of derivative assets at June 30, 2024, was reduced by $774.0 million in variation margin payments applicable to swaps centrally cleared through LCH and CME. At December 31, 2023, the fair value of the interest rate swap derivatives was recorded in Other Assets at $169.0 million and Other Liabilities at $803.5 million. The fair value of derivative assets at December 31, 2023, was reduced by $635.3 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 Consolidated Statements of Income. There was a net gain of $273,000 and $386,000 recorded on these derivatives for the three and six months ended June 30, 2024, respectively. There was a net loss of $84,000 and a net gain of $12,000 recorded on these derivatives for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, we provided $270.4 million of cash collateral on the customer swaps, which is included in Cash and Cash Equivalents on the Consolidated Balance Sheets as Deposits in Other Financial Institutions (Restricted Cash). We also provided $96.4 million in investment securities at market value as collateral on the customer swaps which is included in Investment Securities – available for sale on the Consolidated Balance Sheets. Counterparties provided $59.9 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 Consolidated Balance Sheets.
Balance Sheet Economic Hedge
During the third quarter of 2023, management began executing a series of short-term interest rate hedges to address monthly accrual mismatches related to the Company’s Assumable Rate Conversion (“ARC”) program and its transition from LIBOR to SOFR after June 30, 2023. The Company is required to execute the correspondent side of its back-to-back swaps with customers with the central clearinghouses (CME or LCH). Term SOFR was not available to execute through CME and LCH, and therefore, management elected to convert to the CME-eligible daily SOFR. Because many of the respondent bank customers converted to Term SOFR, this created interest rate basis risk. To address this risk, monthly interest rate hedges were executed to minimize the impact of accrual mismatches between the monthly Term SOFR used by the customer and the daily SOFR rates used by the central clearinghouses.
As of June 30, 2024, the Company maintained an aggregate notional amount of $1.7 billion short-term interest rate hedges that were accounted for as economic hedges. As noted above, the derivatives protect the Company from interest rate risk caused by changes in the term and daily SOFR accrual mismatches. The fair value of these hedges is recorded in either Other Assets or in Other Liabilities depending on the position of the hedge with the offset recorded in Correspondent Banking and Capital Market Income, a component of Noninterest Income on the Consolidated Statements of Income. There was a net loss of $1,000 for these derivatives for the three and six months ended June 30, 2024. There was a net loss of $5,000 for these derivatives for the year ended December 31, 2023.
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. If there were foreign currency contracts outstanding at June 30, 2024, the fair value of these contracts would be included in Other Assets and Other Liabilities in the accompanying 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 and six months ended June 30, 2024 and 2023.
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 Consolidated Statements of 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 June 30, 2024, we had derivative financial instruments outstanding with notional amounts totaling $122.0 million related to MSRs, compared to $142.0 million on December 31, 2023. The estimated net fair value of the open contracts related to the MSRs was recorded as a gain of $500,000 at June 30, 2024, compared to a gain of $2.6 million at December 31, 2023.
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
122,560
65,051
Expected closures
107,901
54,993
Fair value of mortgage loan pipeline commitments
1,621
Forward sales commitments
Fair value of forward commitments
113
(947)
Note 17 — 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 required 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, 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 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 June 30, 2024, and December 31, 2023, 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
4,310,341
12.08
2,498,327
7.00
2,319,875
6.50
SouthState Bank (the Bank)
4,595,267
12.89
2,495,283
2,317,048
Tier 1 capital to risk-weighted assets:
3,033,683
8.50
2,855,231
8.00
3,029,986
2,851,752
Total capital to risk-weighted assets:
5,149,924
14.43
3,747,490
10.50
3,569,038
10.00
5,044,736
14.15
3,742,924
3,564,690
Tier 1 capital to average assets (leverage ratio):
9.72
1,774,222
4.00
2,217,778
5.00
10.36
1,773,701
2,217,126
4,159,187
11.75
2,476,926
2,300,003
4,424,466
12.52
2,473,961
2,297,250
3,007,696
2,830,773
3,004,096
2,827,384
4,983,012
14.08
3,715,389
3,538,466
4,858,292
13.75
3,710,942
3,534,230
9.42
1,765,295
2,206,619
10.03
1,764,736
2,205,921
As of June 30, 2024, and December 31, 2023, 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.
With the implementation of ASU 2016-13 in January 2020, 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 25% being phased out in 2024.
Note 18 — Goodwill and Other Intangible Assets
The carrying amount of goodwill was $1.9 billion at June 30, 2024, and December 31, 2023. 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.
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The Company last completed its annual valuation of the carrying value of its goodwill as of October 31, 2023, and determined there was no impairment of the Company’s goodwill. Management continues to monitor the impact of 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
275,108
274,753
Accumulated amortization
(197,719)
(185,977)
Amortization expense totaled $5.7 million and $11.7 million, for the three and six months ended June 30, 2024, compared to $7.0 million and $14.3 million for the three and six months ended June 30, 2023. 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.
The Company applies 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 fair value accounting treatment, the Company does not amortize the SBA servicing asset and therefore excludes the SBA servicing asset from the future amortization expense table presented below. The fair value of the SBA servicing asset was $6.3 million and $6.0 million, respectively, at June 30, 2024, and December 31, 2023. The fair value of the SBA servicing asset is included in Core Deposit and Other Intangibles on the Consolidated Balance Sheets.
Estimated amortization expense for other intangibles for each of the next five quarters is as follows:
Quarter ending:
September 30, 2024
5,327
December 31, 2024
5,326
March 31, 2025
5,100
June 30, 2025
4,836
September 30, 2025
4,419
46,074
71,082
Note 19 — Mortgage Loan Servicing, Origination, and Loans Held for Sale
The portfolio of residential mortgages serviced for others, which is not included in the accompanying Consolidated Balance Sheets the portfolio of residential mortgages serviced for others, was $6.7 billion and $6.6 billion, respectively, as of June 30, 2024, and December 31, 2023. 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 three and six months ended June 30, 2024, and June 30, 2023, were $4.3 million, $8.4 million, $4.2 million, and $8.3 million, respectively. Servicing fees are recorded in Mortgage Banking Income in our Consolidated Statements of Income.
At June 30, 2024, and December 31, 2023, MSRs were $88.9 million and $85.2 million on our 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 Consolidated Statements of Income. The market value adjustments related to MSRs recorded in Mortgage Banking Income for the three and six months ended June 30, 2024 and June 30, 2023 were gains of $830,000 and $3.2 million, compared with gains of $2.0 million and $688,000, 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 14 — 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.
Increase in fair value of MSRs
1,977
688
Decay of MSRs
(2,566)
(2,385)
(3,793)
Loss related to derivatives
(1,424)
(2,264)
(4,004)
(2,119)
Net effect on Consolidated Statements of Income
(3,160)
(2,672)
(4,797)
(5,224)
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 14 — 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
8.02
years
8.03
Constant Prepayment rate (CPR)
7.0
Estimated impact on fair value of a 10% increase
(504)
(522)
Estimated impact on fair value of a 20% increase
(1,022)
(1,014)
Estimated impact on fair value of a 10% decrease
504
551
Estimated impact on fair value of a 20% decrease
1,018
1,128
Weighted average discount rate
10.9
10.7
(3,081)
(3,270)
(6,173)
(6,458)
2,938
3,242
5,550
6,283
Effect on fair value due to change in interest rates
25 basis point increase
1,647
50 basis point increase
3,078
3,189
25 basis point decrease
(1,758)
(1,723)
50 basis point decrease
(3,623)
(3,501)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the residential MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by the Company would serve to reduce the estimated impacts to fair value included in the table above.
Whole loan sales were $282.6 million and $505.3 million for the three and six months ended June 30, 2024, compared to $249.3 million and $408.7 million for the three and six months ended June 30, 2023. For the three and six months ended June 30, 2024, $205.9 million and $366.6 million, or 72.9% and 72.6%, respectively, were sold with the servicing rights retained by the Company, compared to $201.1 million and $324.1 million, or 80.7% and 79.3%, respectively, for the three and six months ended June 30, 2023.
The Company retains no beneficial interests in these sales but may retain the servicing rights for the loans sold. The risks related to the sold loans with the retained servicing rights due to a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud, that should have been identified in a loan file review are disclosed in Note 1 — Summary of Significant Accounting Policies, under the “Loans Held for Sale” section, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The Company is obligated to subsequently repurchase a loan if such representation or warranty violation is identified by the purchaser. The aggregated principal balances of loans repurchased for the six months ended June 30, 2024, and 2023 were approximately $1.2 million and $975,000 respectively. There were approximately $52,000 in loss reimbursement and settlement claims paid in the six months ended June 30, 2024. There were no material loss reimbursement and settlement claims paid in the six months ended June 30, 2023.
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 $100.0 million and $50.9 million at June 30, 2024, and December 31, 2023, respectively. Please see Note 14 — Fair Value, under the “Fair Value Option”, section in this Quarterly Report on Form 10-Q for summary of the fair value and the unpaid principal balance of loans held for sale and the changes in fair value of these loans.
Note 20 — 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 Securities Sold Under Agreements to Repurchase on the Consolidated Balance Sheets. At June 30, 2024, and December 31, 2023, our repurchase agreements totaled $254.4 million and $241.0 million, respectively. All of our repurchase agreements were overnight or continuous (until-further-notice) agreements at June 30, 2024, and December 31, 2023. These borrowings were collateralized with government, government-sponsored enterprise, or state and political subdivision-issued securities with a carrying value of $389.3 million and $410.4 million at June 30, 2024, and December 31, 2023, 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 June 30, 2024, and December 31, 2023, our federal funds purchased totaled $288.0 million and $248.2 million, respectively.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Borrowing
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 June 30, 2024, and December 31, 2023, the Company had $300.0 and $100.0 million, respectively, of outstanding FHLB borrowings. Net eligible loans of the Company pledged via a blanket lien to the FHLB for advances and letters of credit at June 30, 2024, were approximately $11.3 billion (collateral value of $6.4 billion) and investment securities and cash pledged were approximately $196.7 million (collateral value of $166.8 million). This allows the Company a total borrowing capacity at the FHLB of approximately $6.6 billion. After accounting for letters of credit totaling $2.9 million and short-term FHLB borrowings of $300.0 million outstanding, the Company had unused net credit available with the FHLB in the amount of approximately $6.3 billion at June 30, 2024. The Company also has a total borrowing capacity at the FRB of $1.8 billion at June 30, 2024, secured by a blanket lien on $2.6 billion (collateral value of $1.8 billion) in net eligible loans of the Company. The Company had no outstanding borrowings with the FRB at June 30, 2024, or December 31, 2023.
Note 21 — 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 pursuant to the 2022 Stock Repurchase Program during the second quarter of 2024. During the six months ended June 30, 2024, the Company repurchased a total of 100,000 shares at a weighted average price of $79.85 per share. During 2023, the Company repurchased a total of 100,000 shares at a weighted average price of $67.48 per share pursuant to the 2022 Stock Repurchase Program.
The Company repurchased 97,363 and 98,093 shares at a cost of $8.1 million and $7.0 million, respectively, during the six months ended June 30, 2024, and 2023 under other arrangements whereby directors or officers surrender shares to the Company to cover the option cost for stock option exercises or tax liabilities resulting from the vesting of restricted stock awards or restricted stock units.
Note 22 — Investments in Qualified Affordable Housing Projects
The Company has investments in qualified affordable housing projects (“QAHPs”) that provide low-income housing tax credits (“LIHTC”) and operating loss benefits over an extended period. Effective January 1, 2024, the Company adopted ASU No. 2023-02 and began to apply the proportional amortization method of accounting for its QAHPs. Prior to the adoption of ASU No. 2023-02, the Company applied the equity method of accounting for its QAHPs. For the three and six months ended June 30, 2024, the Company recorded $3.8 million and $7.7 million, respectively, in tax credits and other tax benefits and $3.5 million and $6.9 million, respectively, of amortization attributable to the QAHPs within Provision for Income Taxes on its Consolidated Statement of Income. For the three and six months ended June 30, 2023, the Company recorded $3.6 million and $7.2 million, respectively, of tax credits and other tax benefits within Provision for Income Taxes and amortization of $2.1 million and $4.1 million, respectively, within Other Noninterest Expense on the Consolidated Statement of Income. At June 30, 2024, and December 31, 2023, the Company’s carrying value of QAHPs was $85.0 million and $101.8 million, respectively, recorded in Other Assets on the Consolidated Balance Sheet. The Company had $11.3 million and $12.5 million in remaining funding obligations related to these QAHPs recorded in Other Liabilities on the Consolidated Balance Sheets at June 30, 2024, and December 31, 2023, respectively. For the remaining funding obligations at June 30, 2024, approximately 91% are expected to be funded by 2026. For more information on the adoption of ASU 2023-02, refer to Recent Accounting and Regulatory Pronouncements under Note 3 — Recent Accounting and Regulatory Pronouncements.
Note 23 — Subsequent Events
On July 24, 2024, the Company announced that the Board of Directors of the Company increased its quarterly cash dividend on its common stock from $0.52 per share to $0.54 per share. The dividend is payable on August 16, 2024, to shareholders of record as of August 9, 2024.
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, 2023. Results for the three and six months ended June 30, 2024, are not necessarily indicative of the results for the year ending December 31, 2024, 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 Securities Corp., 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. SSB First Street Corporation, an investment subsidiary of the Bank headquartered in Wilmington, Delaware, holds tax-exempt municipal investment securities as part of the Bank’s investment portfolio. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code.
At June 30, 2024, we had approximately $45.5 billion in assets and 5,189 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 also operate Corporate Billing, a transaction-based division of the Bank headquartered in Decatur, Alabama, that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide.
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 three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, and also analyzes our financial condition as of June 30, 2024, as compared to December 31, 2023. 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
Independent Bank Group, Inc. (“Independent”) Proposed Merger
On May 20, 2024, SouthState and Independent announced that the two companies had entered into a Merger Agreement, which provides that upon the terms and subject to the conditions set forth in the Merger Agreement, Independent will merge with and into SouthState, with SouthState continuing as the surviving corporation in the merger and immediately following the merger, Independent’s wholly owned banking subsidiary, Independent Bank, will merge with and into the SouthState’s wholly owned banking subsidiary, SouthState Bank, National Association, which will continue as the surviving bank in the bank merger. The Merger Agreement was approved by the Boards of Directors of the Company and Independent by the unanimous vote of directors present at the applicable meetings and is subject to approval by SouthState’s and Independent’s shareholders, as well as regulatory approvals and other customary closing conditions.
Under the terms of the Merger Agreement, shareholders of Independent will receive 0.60 shares of SouthState’s common stock for each share of Independent common stock they own. The transaction is expected to close during the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of required statutory approvals and approval by the shareholders of each of the Company and Independent. At June 30, 2024, Independent reported $18.4 billion in total assets, $14.6 billion in loans and $15.8 billion in deposits.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with 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, 2023.
The following is a summary of our ACL critical accounting policy, which is highly dependent on estimates, assumptions and judgments.
Allowance for Credit Losses or ACL
The ACL reflects management’s estimate of the portion of the amortized cost of loans and unfunded commitments that it does not expect to collect. Management has a methodology determining 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 for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 7—Allowance for Credit Losses and “Allowance for Credit Losses (“ACL”) on Loans and Certain Off-Balance-Sheet Credit Exposures” in this MD&A.
One of the most significant judgments influencing the ACL is the macroeconomic forecasts from the third-party service provider. Changes in the economic forecasts may significantly affect the estimated credit losses which may potentially lead to materially different quantitatively modeled allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables, it is difficult to estimate the impact of a change in any one individual variable on the ACL. SouthState uses a third-party service provider to support the economic forecast assumptions under CECL forecast by providing various levels of economic scenarios. These scenarios are weighted in accordance with management assessment of scenarios as well as expectations of the general market and industry conditions. To illustrate the sensitivity of these scenarios, if a 100% probability weighting was applied to the adverse scenario rather than using the probability-weighted three scenario approach, this would result in an increase in the ACL by approximately $213.9 million (all other things equal, including no compensating adjustments to qualitative factor adjustments). Conversely, if a 100% probability weighting was applied to the upside scenario, this would result in a decrease in the ACL by approximately $98.2 million. The adverse scenario includes assumptions including, but not limited to, elevated interest rates weakening consumers and public confidence, inflation, the Russian invasion of Ukraine persisting longer than expected and conflict in the Middle East leading to a wider war, tensions between China and Taiwan interrupt trade, political risks, increased unemployment and the U.S. economy falling into recession in 2024. Conversely, the upside scenario includes assumptions such as a swift resolution of international conflicts, stabilization of consumer confidence, more than full employment, reduced political tensions, and other favorable assumptions. This sensitivity analysis and related impact on the ACL is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at June 30, 2024.
Results of Operations
We reported consolidated net income of $132.4 million, or diluted earnings per share (“EPS”) of $1.73, for the second quarter of 2024 as compared to consolidated net income of $123.4 million, or diluted EPS of $1.62, in the comparable period of 2023, a 7.2% increase in consolidated net income and a 6.8% increase in diluted EPS. During the six months ended June 30, 2024, we reported consolidated net income of $247.4 million, or diluted EPS of $3.23, as compared to consolidated net income of $263.4 million, or diluted EPS of $3.45, in the comparable period of 2023, a 6.1% decrease in consolidated net income and a 6.4% decrease in diluted EPS. The $8.9 million increase in consolidated net income for the second quarter of 2024 compared to the same period of 2023 was the net result of the following items:
Our quarterly efficiency ratio increased to 57.0% in the second quarter of 2024 compared to 53.6% in the second quarter of 2023. The increase in the efficiency ratio compared to the second quarter of 2023 was the result of an 3.1% decrease in the total of tax-equivalent net interest income and noninterest income along with a 3.0% increase in noninterest expense (excluding amortization of intangibles). This decrease was reflective of a 55.5% increase in interest expense as the repricing of interest-bearing liabilities caught up with the repricing of interest-earning assets in 2023 and 2024 resulting from the rising rate environment. The increase in noninterest expense was reflective of a 2.8% increase in salaries and employee benefits and a 220.0% increase in merger and branch consolidation related expense mostly related to the proposed merger with Independent.
Basic and diluted EPS were $1.74 and $1.73, respectively for the second quarter of 2024, compared to $1.62 for the second quarter of 2023. The increase in basic and diluted EPS was due to a 7.2% increase in net income in the second quarter of 2024 compared to the same period in 2023. The effects from the increase in net income were partially offset by an increase in average basic common shares of 0.3%. The increase in net income in the second quarter of 2024 was mainly attributable to a decrease in provision for credit losses during the second quarter of 2024.
Selected Figures and Ratios
Return on average assets (annualized)
1.17
1.11
1.10
1.20
Return on average equity (annualized)
9.58
9.34
8.97
10.14
Return on average tangible equity (annualized)*
15.49
15.81
14.57
17.27
Dividend payout ratio
29.93
30.75
32.02
28.81
Equity to assets ratio
12.42
11.77
Average shareholders’ equity
5,554,470
5,301,697
5,545,511
5,239,717
* 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 (“TE”) net interest income decreased $11.5 million, or 3.2%, to $350.3 million in the second quarter of 2024 compared to $361.7 million in the same period in 2023. Interest-earning assets averaged $41.0 billion during the three months period ended June 30, 2024, compared to $40.1 billion for the same period in 2023, an increase of $883.8 million, or 2.2%. Interest-bearing liabilities averaged $27.7 billion during the three months period ended June 30, 2024, compared to $26.0 billion for the same period in 2023, an increase of $1.7 billion, or 6.6%. Non-TE net interest income decreased $48.8 million, or 6.6%, to $694.2 million in the six months ended June 30, 2024, compared to $743.0 million in the same period in 2023. Interest-earning assets averaged $40.8 billion during the six months ended June 30, 2024, compared to $39.8 billion during the same period in 2023. Interest-bearing liabilities averaged $27.6 billion during the six months ended June 30, 2024, compared to $25.3 billion for the same period in 2023, an increase of $2.3 billion, or 9.0%.
The Federal Reserve made four 25 basis-point rate increases during 2023, starting early February 2023 with the last increase in late July 2023, resulting in a range of 5.25% to 5.50% at June 30, 2024. As a result, the Company operated under a higher rate environment for the three and six months ended June 30, 2024, while it operated under a comparatively lower rate environment in the same time periods in 2023. Some key highlights are outlined below:
53
The tables below summarize the analysis of changes in interest income and interest expense for the three and six months ended June 30, 2024, and 2023 and net interest margin on a tax equivalent basis:
Balance
Earned/Paid
Yield/Rate
Interest-Earning Assets:
732,252
4.53
947,526
5.02
Investment securities (taxable) (1)
6,426,206
2.43
7,187,390
2.30
Investment securities (tax-exempt) (1)
800,376
2.90
806,940
2.78
63,307
6.47
36,114
568
6.31
Acquired loans, net
5,373,383
84,263
6,759,859
102,446
6.08
27,616,138
393,079
5.72
24,390,007
316,341
5.20
Total interest-earning assets
41,011,662
5.21
40,127,836
4.78
Noninterest-Earning Assets:
443,686
470,209
4,440,959
4,401,003
Allowance for credit losses
(468,573)
(370,924)
Total noninterest-earning assets
4,416,072
4,500,288
Total Assets
45,427,734
44,628,124
Interest-Bearing Liabilities:
Transaction and money market accounts
19,653,436
120,722
2.47
17,222,660
65,717
1.53
Savings deposits
2,504,809
1,830
0.29
3,031,153
1,951
0.26
Certificates and other time deposits
4,286,950
42,929
4.03
4,328,388
33,119
3.07
270,028
3,621
5.39
215,085
2,690
Securities sold with agreements to repurchase
270,815
1,362
2.02
330,118
845
1.03
391,775
6.16
392,144
5.96
323,626
5.47
473,626
5.22
Total interest-bearing liabilities
27,701,439
2.63
25,993,174
1.79
Noninterest-Bearing Liabilities:
Demand deposits
10,566,529
11,939,022
1,605,296
1,394,231
Total noninterest-bearing liabilities (“Non-IBL”)
12,171,825
13,333,253
Shareholders’ equity
Total Non-IBL and shareholders’ equity
17,726,295
18,634,950
Total Liabilities and Shareholders’ Equity
Net Interest Income and Margin (Non-Tax Equivalent)
3.43
3.62
Net Interest Margin (Tax Equivalent)
3.44
Total Deposit Cost (without debt and other borrowings)
1.80
Overall Cost of Funds (including demand deposits)
1.90
1.23
54
700,301
4.74
853,903
4.91
6,539,593
2.41
7,251,296
806,565
2.83
861,502
2.84
53,089
1,699
6.44
29,655
970
6.60
5,565,904
173,826
6.28
6,958,595
207,851
6.02
27,168,966
766,523
5.67
23,815,623
603,899
5.11
40,834,418
5.16
39,770,574
4.71
451,261
491,715
4,396,492
4,469,132
(462,723)
(363,673)
4,385,030
4,597,174
45,219,448
44,367,748
19,598,727
238,013
2.44
17,049,745
106,232
1.26
2,547,030
3,648
3,163,949
3,707
0.24
4,284,850
83,982
3.94
3,724,725
46,790
2.53
263,268
6,989
5.34
204,232
4,877
4.82
275,744
2,721
1.98
351,721
1,511
0.87
391,822
392,191
5.94
247,802
5.54
433,702
5.01
27,609,243
2.58
25,320,265
1.48
10,548,563
12,352,722
1,516,131
1,455,044
12,064,694
13,807,766
17,610,205
19,047,483
3.42
3.77
3.78
Total deposit cost (without debt and other borrowings)
1.77
1.87
0.99
Investment Securities
The interest earned on investment securities decreased by $2.3 million and $5.1 million, respectively, in the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023. The average balance of investment securities decreased $767.7 million and $766.6 million, respectively, for the three and six months ended June 30, 2024, from the comparable periods in 2023. The yield on the investment securities increased 13 basis points and 10 basis points, respectively, during the three and six months ended June 30, 2024, compared to the same periods in 2023 due to the rising rate environment. While the Bank reduced the size of its investment securities portfolio, the yield on the investment securities increased due to higher interest rates in the three and six months ended June 30, 2024, compared to the same periods in 2023, resulting in higher interest income earned in 2024.
55
Interest earned on loans held for investment increased $58.6 million to $477.3 million and increased $128.6 million to $940.3 million, respectively, during the three and six months ended June 30, 2024, from the comparable periods in 2023. Interest earned on loans held for investment included loan accretion income recognized during the three and six months ended June 30, 2024, and 2023 of $4.4 million, $8.7 million, $5.5 million and $12.9 million, respectively, a decrease of $1.1 million and $4.2 million, respectively. Some key highlights for the quarter ended June 30, 2024, are outlined below:
Interest-Bearing Liabilities
The quarter-to-date average balance of interest-bearing liabilities increased by $1.7 billion, or 6.6%, in the second quarter of 2024 compared to the same period in 2023. The cost of interest-bearing liabilities increased by 84 basis points to 2.63% and the overall cost of funds, including demand deposits, increased by 67 basis points to 1.90% in the second quarter of 2024, compared to the same period in 2023. Some key highlights for the quarter ended June 30, 2024, compared to the same period in 2023 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, Interest on Lawyers’ Trust Accounts (“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 decreased $1.4 billion, or 11.5%, to $10.6 billion in the second quarter of 2024 compared to $11.9 billion during the same period in 2023. The decrease in the average balance of noninterest bearing deposits was due to customers moving funds from noninterest bearing checking accounts to interest bearing checking accounts seeking higher yields resulting from the rising rate environment, along with customers having less excess cash as funds from government support programs related to the COVID-19 pandemic began to decline.
57
Noninterest Income
Noninterest income provides us with additional revenues that are significant sources of income. For the three months ended June 30, 2024, and 2023, noninterest income comprised 17.7%, and 17.6%, respectively, of total net interest income and noninterest income. For the six months ended June 30, 2024, and 2023, noninterest income comprised 17.5%, and 16.7%, respectively, of total net interest income and noninterest income.
Service charges on deposit accounts
22,889
22,257
45,559
42,868
Debit, prepaid, ATM and merchant card related income
10,953
10,844
21,428
20,092
Bank owned life insurance income
7,372
6,271
14,264
13,084
8,193
1,593
14,480
4,646
Noninterest income decreased slightly by $2.0 million, or 2.6%, during the second quarter of 2024 compared to the same period in 2023. This quarterly change in total noninterest income resulted from the following:
Noninterest income decreased by $1.8 million, or 1.2%, during the six months ended June 30, 2024, compared to the same period in 2023. The categories and explanations for the fluctuations year-to-date, except the items discussed below, are similar to the ones noted above in the quarterly comparison.
Noninterest Expense
Business development and staff related expense
6,220
6,672
12,019
12,629
Supplies and printing
759
853
1,668
1,737
Postage expense
1,767
1,701
3,398
3,457
15,243
18,217
32,207
35,613
Noninterest expense increased by $6.1 million, or 2.5%, in the second quarter of 2024 as compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:
Noninterest expense increased by $14.9 million, or 3.1%, during the six months ended June 30, 2024, compared to the same period in 2023. The categories and explanations for the fluctuations year-to-date, except the items discussed below, are similar to the ones noted above in the quarterly comparison.
Income Tax Expense
Our effective tax rate was 23.42% for the three months ended June 30, 2024, compared to 21.84% for the three months ended June 30, 2023. The increase in the effective rate for the quarter, when compared to the same period in the prior year, is driven by amortization of LIHTCs as a result of the adoption of the proportional amortization under ASU 2023-02 effective January 1, 2024, as well as an increase in disallowed interest expense, and non-deductible merger expenses recorded during the current period. This was partially offset by a decrease in disallowed executive compensation.
Our effective tax rate for the first six months of the year was 24.19% compared to 21.84% for the first six months of 2023. The increase in the year-to-date effective tax rate compared to the same period of 2023 was primarily driven by amortization of LIHTC investments, an increase in disallowed interest expense, partially offset by an increase in tax-exempt interest income and an increase in federal tax credits available. In addition, the Company recorded approximately $2.8 million in income tax provision during the first quarter of 2024 related to the revaluation of its deferred income taxes and other tax adjustments.
Analysis of Financial Condition
Summary
Our total assets increased approximately $591.9 million, or 1.3%, from December 31, 2023 to June 30, 2024, to approximately $45.5 billion. Within total assets, cash and cash equivalents increased by $118.3 million, or 11.8% and loans increased $846.1 million, or 2.6%, while investment securities decreased $415.6 million, or 5.6%, during the period. Within total liabilities, deposit grew $49.5 million, or 0.1%, and federal funds purchased and securities sold under agreements to repurchase increased by $53.2 million, or 10.9%. Total borrowings increased by $199.8 million, or 40.6%. Total shareholder’s equity increased $117.3 million, or 2.1%. The increase in cash and cash equivalents was primarily due to the increase in borrowings of $199.8 million along with decline in investments of $415.6 million from maturities and pay downs of mortgage-backed securities. The increase in borrowings was due to a net increase in FHLB advances of $200.0 million from December 31, 2023. These increases in funding sources were mostly offset by the increase in loans which was due to normal organic growth. Our loan to deposit ratio was 90% and 87% at June 30, 2024 and December 31, 2023, respectively, while our percentage of noninterest-bearing deposit accounts to total deposits was 28% and 29%, respectively at June 30, 2024, and December 31, 2023.
61
We use investment securities, our second largest category of earning assets, to generate interest income, provide liquidity, fund loan demand or deposit liquidation, and to 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 June 30, 2024, investment securities totaled $7.0 billion, compared to $7.5 billion at December 31, 2023, a decrease of $415.6 million, or 5.6%. At June 30, 2024, approximately 63.8% of the investment portfolio was classified as available for sale, approximately 33.3% was classified as held to maturity and approximately 2.9% was classified as other investments. During the six months ended June 30, 2024, we purchased $95.0 million of capital stock of the Federal Home Loan Bank of Atlanta classified as other investment securities on the balance sheet of which we sold back $85.5 million. The net decrease to the capital stock holding for the Federal Home Loan Bank of Atlanta of $9.5 million during the six months of 2024 was due to the decrease in Federal Home Loan Bank borrowings. During the six months ended June 30, 2024, the Bank purchased $13.0 million of available for sale securities. There were maturities, paydowns, and calls of investment securities totaling $378.6 million during the six months of 2024. Net amortization of premiums was $9.7 million in the first six months of 2024.
At June 30, 2024, the unrealized net losses of the available for sale securities portfolio was $826.4 million, or 15.5%, below its amortized cost basis, compared to an unrealized net loss of $776.6 million, or 14.0%, at December 31, 2023. At June 30, 2024, the unrealized net losses of the held to maturity securities portfolio was $427.6 million, or 18.2%, below its amortized cost basis, compared to an unrealized net loss of $402.7 million, or 16.2%, at December 31, 2023.
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
363,418
317,612
(45,806)
agencies or sponsored enterprises*
3,105,374
2,575,636
(529,738)
3,105,281
1,021,180
845,156
(176,024)
1,558,773
1,286,026
(272,747)
20,767
1,538,006
(171,728)
1,121,881
2,549
431,366
376,810
(54,556)
7,673,148
(1,253,943)
1,975,623
5,697,525
* 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 June 30, 2024, we had 1,232 investment securities including both available for sale and held to maturity, in an unrealized loss position, which totaled $1.3 billion. At December 31, 2023, we had 1,232 investment securities, including both available for sale and held to maturity, in an unrealized loss position, which totaled $1.2 billion. The total number of investment securities with an unrealized loss position remained unchanged, while the total dollar amount of the unrealized loss increased by $73.5 million. The level of unrealized losses for each period is due to an overall increase in short- and long-term interest rates in 2022 and 2023 and the expectation that interest rates will not fall until late 2024 or 2025.
All investment securities in an unrealized loss position as of June 30, 2024, 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 and intent to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is more likely than not that we will not 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 Accounting 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 June 30, 2024:
Due In
Due After
1 Year or Less
1 Thru 5 Years
5 Thru 10 Years
10 Years
Yield
Held to Maturity (amortized cost)
2.32
132,905
153,774
1.97
1,216,368
1.82
428,467
2.48
0.94
169,759
1.49
144,911
1.58
1.47
1.24
Total held to maturity
456,438
1.72
1.93
2,348,527
Available for Sale (fair value)
U.S. Government treasuries
3.13
95,550
2.65
21,675
1.63
77,898
1.69
2.11
2.55
2.26
144,035
2.40
1,301,690
1,448,929
5,814
2.51
10,340
2.29
474,213
2.18
2.20
5.93
206,902
2.81
560,781
241,255
1.78
1,008,961
2.06
State and municipal obligations (1)
4,428
3.61
31,025
3.19
131,770
2.56
785,479
2.79
2.77
3,064
16,772
3.67
112,565
3.97
204,341
3.21
486
8.22
26,071
3.96
4.50
4.05
Total available for sale
141,213
285,852
1,063,460
2.24
Total other investments (2)
4.63
155,578
322,363
2.60
1,519,898
2.14
5,050,468
2.22
7,048,307
2.23
Percent of total
72
Cumulative percent of total
Yields on tax exempt income have been presented on a taxable equivalent basis in the table above.
FRB, FHLB and other non-marketable equity securities have no set maturity date and are classified in “Due after 10 Years.”
Approximately 85.6% 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. Approximately 13.9% 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% of the municipal bond portfolio has ratings in the Double A or Triple A category.
Through June 30, 2024, the Company did not sell any securities that are available for sale or held to maturity. As of June 30, 2024, the portfolio had an effective duration of 5.89 years. 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
6.18
5.03
6.11
6.40
5.83
6.24
3.50
4.06
6.85
6.95
5.69
0.13
0.35
3.41
5.87
6.12
3.53
3.73
10.54
8.62
3.83
3.81
2.45
5.98
5.65
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 June 30, 2024, we determined that there was no impairment on our other investment securities. As of June 30, 2024, other investment securities represented approximately $201.5 million, or 0.44% of total assets, and primarily consists of FHLB and FRB stock which totals $182.6 million, or 0.40% of total assets. There were no gains or losses on the sales of these securities for three and six months ended June 30, 2024, and 2023, respectively.
We have a trading portfolio associated with our Correspondent Banking Division and the Bank’s 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 Markets Income in our Consolidated Statements of 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 $92.2 million and $31.3 million, respectively, at June 30, 2024, and December 31, 2023.
Loans Held for Sale
The balance of mortgage loans held for sale increased $49.1 million from December 31, 2023, to $100.0 million on June 30, 2024. Total mortgage production was $552 million in the second quarter of 2024. This compares to $429 million in the first quarter of 2024 and $696 million in the second quarter of 2023. Mortgage production has declined in 2024 as mortgage rates have continued to remain high. The percentage of mortgage production sold into the secondary market increased in the second quarter of 2024 to 59% from 53% in the first quarter of 2024. 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.
The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
LOAN PORTFOLIO
% of
Acquired loans:
Acquired - non-purchased credit deteriorated loans:
81,708
0.2
135,819
0.4
1,558,942
4.7
1,730,990
5.4
1,017,917
3.1
1,115,539
3.4
467,878
1.4
496,674
1.5
203,407
0.6
227,789
0.7
726,030
2.2
863,584
2.7
129,785
148,361
0.5
Consumer non real estate
67,450
77,930
Total acquired - non-purchased credit deteriorated loans
12.8
14.8
Acquired - purchased credit deteriorated loans (PCD):
6,361
9,506
379,957
1.1
445,270
300,499
0.9
349,755
158,566
169,923
25,572
0.1
27,239
28,782
39,951
28,959
35,358
28,559
31,811
Total acquired - purchased credit deteriorated loans (PCD)
2.9
Total acquired loans
5,210,578
15.7
5,905,726
18.2
Non-acquired loans:
2,504,238
7.5
2,778,189
8.6
7,167,917
21.6
6,395,374
19.7
4,204,562
12.7
4,032,377
12.5
6,342,896
19.1
5,928,408
18.3
1,242,405
3.7
1,143,417
3.5
5,015,026
15.1
4,601,004
14.2
466,213
472,615
1,079,126
3.2
1,123,909
1,603
7,470
Total non-acquired loans
84.3
81.8
Total loans (net of unearned income)
Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), increased by $846.1 million, or 5.3% annualized, to $33.2 billion at June 30, 2024. Our non-acquired loan portfolio increased by $1.5 billion, or 11.7% annualized, mainly driven by organic growth. Commercial non-owner-occupied loans, consumer owner-occupied loans, commercial and industrial loans, commercial owner-occupied real estate, and home equity loans led the way with $772.5 million, $414.5 million, $414.0 million, $172.2 million and $99.0 million in year-to-date loan growth, respectively, or 24.3%, 14.1%, 18.1%, 8.6% and 17.4% annualized growth, respectively. The acquired loan portfolio decreased by $695.1 million, or 23.7% 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, which decreased by $237.4 million, $148.7 million and $146.9 million, respectively, year-to-date. Acquired loans as a percentage of total loans decreased to 15.7% and non-acquired loans as a percentage of the overall portfolio increased to 84.3% at June 30, 2024. This compares to acquired loans as a percentage of total loans of 18.2% and non-acquired loans as a percentage of total loans of 81.8% at December 31, 2023.
Total commercial non-owner-occupied loans of $9.1 billion, approximately 27.4% of the total loans held for investment, was the largest category of the loan portfolio as of June 30, 2024. As of June 30, 2024, approximately 94% of the commercial non-owner-occupied portfolio was located within the Company’s footprint. Of the $9.1 billion, approximately $1.3 billion, or 4% of the total loans, represented our office segment. Approximately 95% of the office segment was located in the Company’s footprint and approximately 10% was located within the metropolitan or central business district. The weighted average Debt Service Coverage (“DSC”) was 1.47x and the loan-to-value was 58%. For additional discussion around classified commercial non-owner-occupied loans, refer to the “Nonperforming Assets” section in this MD&A.
The following table presents the top eight loan segments of the commercial non-owner-occupied loan category (excluding loans held for sale). The loan segments in the table below are determined by the call code, used for the Bank’s regulatory reporting requirements issued by the FDIC for the FFIEC 041, also referred to as the Call Report.
Commercial Non-Owner-Occupied Loans
Net Book
Weighted-Average
% of Substandard &
Balance (1)
Loan Size
Average DSC (2)
Loan-to-Value (3)
Non-Accrual
Special Mention
Loan Type:
2,115,553
1,697
1.76
0.58
0.40
Warehouse / Industrial
1,324,195
1,775
1.67
3.06
1,276,172
1,427
1.42
8.24
4.73
1,156,222
2,652
1.46
0.02
9.36
Hotel
953,716
4,721
2.07
0.01
Medical
620,184
1,885
1.68
1.38
0.84
509,152
1,221
1.56
0.03
1.22
9.60
Self Storage
459,888
3,565
1.51
10.35
1.04
Allowance for Credit Losses (“ACL”) on Loans and Certain Off-Balance-Sheet Credit Exposures
The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. Please see Note 1 — Summary of Significant Accounting Policies, under the “ACL – Loans” section, of our Annual Report on Form 10-K for the year ended December 31, 2023, and 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 on loans.
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 and unrest in middle east, 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 an eight-quarter forecast and a four-quarter reversion period.
In spite of the rapid interest rate hikes experienced cycle-to-date, the U.S. has thus far avoided a recession, although an inverted yield curve such as observed in the current interest rate environment often portends a coming recession. Management continues to use a blended forecast scenario of the baseline, upside, and more severe scenario, depending on the circumstances and economic outlook. For the quarter ending June 30, 2024, management selected a baseline weighting of 40%, a 30% weighting for an upside scenario and a 30% weighting for the more severe scenario. In the prior quarter, scenario weightings were 50% on baseline and 25% each on the upside and downside scenarios. The scenario weightings were changed to align to best practices for probability weighted forecast scenarios and do not represent a significant shift in management’s economic outlook. Scenario weightings are generally expected to remain stable but are reviewed on a quarterly basis. The scenario weightings reflect continued recognition of downside risks in the economic forecast from persistent levels of inflation, high interest rates, and tightening credit conditions conducive of a mild recession. While employment figures still show resilience and actual loan losses remain at low levels, continued projected borrower weakness related to high interest rates result in elevated modeled expected losses. The resulting provision was approximately $3.9 million during the second quarter of 2024.
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. Please see MD&A, under the “Financial Condition”, “Allowance for Credit Losses (“ACL”)” section, of our Annual Report on Form 10-K for the year ended December 31, 2023, and 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 on certain off-balance-sheet credit exposures.
As of June 30, 2024, the balance of the ACL was $472.3 million or 1.42% of total loans. The ACL increased $2.6 million from the balance of $469.7 million recorded at March 31, 2024. This increase during the second quarter of 2024 included $6.9 million provision and $4.2 million net charge-offs. During the first six months of 2024, the Company recorded a provision for credit losses based on loan growth and current forecasts applied to our modeling to adequately capture potential economic recessionary risks.
As discussed in Note 1 - Summary of Significant Accounting Policies, in the second quarter of 2024, updates were made to certain estimates used in the Company’s current expected credit loss model. While the total allowance and coverage of total loans remain the same, reserves at the loan segment level were updated due the expansion of macroeconomic variables. Although portions of the allowance may be allocated to specific loans or pools of loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
At June 30, 2024, the Company had a reserve on unfunded commitments of $50.2 million, which was recorded as a liability on the Consolidated Balance Sheet, compared to $53.2 million at March 31, 2024, and $56.3 million at December 31, 2023. During the three and six months ended June 30, 2024, the Company recorded a decrease in the reserve for unfunded commitments of $3.0 million and $6.1 million, respectively. For the prior comparative period, the Company recorded a decrease in the reserve for unfunded commitments of $21.7 million and $3.8 million, respectively, during three and six months ended June 30, 2023. 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 six months of 2024.
The ACL provides 2.41 times coverage of nonperforming loans at June 30, 2024. Net charge-offs to total average loans during three and six months ended June 30, 2024, were 0.05% and 0.04%, respectively, compared to net charge-offs to total average loans of 0.04% and 0.03%, respectively, during the three and six months ended June 30, 2023. We continued to experience solid and stable asset quality numbers and ratios as of June 30, 2024.
The following table provides the allocation, by segment, for expected credit losses as of June 30, 2024:
%*
Residential Mortgage Senior
22.2
Residential Mortgage Junior
Revolving Mortgage
Residential Construction
1.6
Other Construction and Development
6.1
2.3
Owner-Occupied Commercial Real Estate
16.6
Non-Owner-Occupied Commercial Real Estate
24.1
Commercial and Industrial
15.4
* Loan balance in each category expressed as a percentage of total loans.
The following table presents a summary of net charge off ratios (annualized) by loan segment, for the three and six months ended June 30, 2024, and 2023:
Net Recovery (Charge Off)
Average Balance
Net Recovery (Charge Off) Ratio
7,333,141
6,261,400
16,582
1.21
11,290
0.11
1,530,256
0.07
1,410,768
0.15
558,301
873,295
1,921,052
(0.11)
1,889,613
0.04
1,173,471
(0.47)
1,267,823
(0.79)
1,163,221
841,501
752,849
732,666
5,522,455
5,559,762
0.00
8,002,132
7,566,746
5,016,061
(0.21)
4,735,002
(0.19)
32,989,521
(0.05)
31,149,866
(0.04)
7,226,647
6,050,441
15,515
1.15
11,801
0.14
1,512,240
0.06
1,397,477
597,545
(0.09)
871,178
2,016,056
(0.10)
1,912,617
0.05
1,186,592
1,264,717
(0.74)
1,069,726
796,291
747,058
724,862
5,501,020
5,518,458
7,895,020
7,497,055
4,967,451
(0.13)
4,729,321
32,734,870
30,774,218
(0.03)
The following tables present summary of ACL for the three and six months ended June 30, 2024, and 2023:
Non-PCD
PCD
Balance at beginning of period
439,188
30,466
327,915
42,730
Loans charged-off
(6,332)
(2,258)
(7,516)
(62)
3,411
954
2,850
1,418
Net (charge-offs) recoveries
(2,921)
(1,304)
(4,666)
1,356
Provision (recovery) for credit losses
11,361
(4,492)
61,047
(990)
Balance at end of period
447,628
24,670
384,296
43,096
Total loans, net of unearned income:
At period end
31,536,785
Net charge-offs as a percentage of average loans (annualized)
Allowance for credit losses as a percentage of period end loans
1.36
Allowance for credit losses as a percentage of period end non-performing loans (“NPLs”)
241.19
251.86
Allowance for credit losses at January 1
423,876
32,697
309,606
46,838
(14,050)
(2,480)
(12,032)
(173)
6,386
3,240
5,177
2,680
(7,664)
760
(6,855)
2,507
(Recovery) provision for credit losses
31,416
(8,787)
81,545
(6,249)
Nonperforming Assets (“NPAs”)
The following table summarizes our nonperforming assets for the past five quarters:
March 31,
September 30,
Non-acquired:
Nonaccrual loans
102,295
106,189
110,467
105,579
104,491
Accruing loans past due 90 days or more
5,843
2,497
11,305
783
3,620
Restructured loans - nonaccrual
8,479
Total non-acquired nonperforming loans
116,617
108,686
121,772
106,639
108,392
Other real estate owned (“OREO”) (1) (6)
2,555
1,035
Other nonperforming assets (2)
554
483
331
Total non-acquired nonperforming assets
119,493
110,275
122,483
107,088
108,619
Acquired:
Nonaccrual loans (3)
71,549
62,612
58,916
57,464
59,821
916
1,174
1,821
6,738
839
913
Total acquired nonperforming loans
79,203
63,586
60,929
59,285
61,305
Acquired OREO (1) (7)
502
609
316
962
Other acquired nonperforming assets (2)
96
103
Total acquired nonperforming assets
79,801
64,241
61,641
59,663
62,286
Total nonperforming assets
199,294
174,516
184,124
166,751
170,905
Excluding Acquired Assets
Total nonperforming assets as a percentage of total loans and repossessed assets (4)
0.43
0.41
0.46
0.42
Total nonperforming assets as a percentage of total assets (5)
0.27
Nonperforming loans as a percentage of period end loans (4)
Including Acquired Assets
0.60
0.53
0.57
0.52
0.54
0.44
0.39
0.37
0.38
0.59
0.56
Total nonperforming assets were $199.3 million, or 0.60% of total loans and repossessed assets, at June 30, 2024, an increase of $15.2 million, or 8.2%, from December 31, 2023. Total nonperforming loans were $195.8 million, or 0.59%, of total loans, at June 30, 2024, an increase of $13.1 million, or 7.2%, from December 31, 2023. Non-acquired nonperforming loans decreased by $5.2 million from December 31, 2023. The decrease in non-acquired nonperforming loans was driven primarily by a decrease in commercial nonaccrual loans of $16.1 million, a decrease in accruing loans past due 90 days or more of $5.5 million, offset by an increase in consumer nonaccrual loans of $7.9 million and restructured nonaccrual loans of $8.5 million. The accruing loans past due 90 days or more decreased by $5.5 million at June 30, 2024, compared to December 31, 2023, due primarily to a decrease in accruing loans past due 90 days or more of factored receivables, which are trade credits rather than promissory notes loans that are deemed to be low risk. The increase in restructured nonaccrual loans of $8.5 million was due to one commercial loan that was modified under a term extension agreement. Acquired nonperforming loans increased $18.3 million from December 31, 2023. The increase in the acquired nonperforming loan balances was due primarily to an increase in commercial nonaccrual loans of $13.9 million, an increase in restructured nonaccrual loans of $5.9 million, offset by a decrease in consumer nonaccrual loans of $1.3 million and a decline in accruing loans past due 90 days or more of $300,000. The increase in commercial nonaccrual loans of $13.9 million was primarily due to one commercial non-owner-occupied real estate loan for $12.5 million.
As discussed previously under the “Loans” section in this MD&A, commercial non-owner-occupied loans represented the largest category of the loan portfolio as of June 30, 2024. We continued to experience solid and stable asset quality for these loans as of June 30, 2024 as approximately 0.2% of the total commercial non-owner-occupied loans were on non-accrual. In addition, approximately 5.4% and 2.0% of the total commercial non-owner-occupied loans were classified as substandard and still accruing, and special mention, respectively. Majority of these classified assets are mainly related to debt service coverage policy violations as interest rates have risen. However, most of these loans are still performing, are strongly collateralized and have strong borrowers supporting the loans. For additional information on the Company’s monitoring process for classified loans and a description of the general characteristics of the risk grades, refer to Note 6 — Loans in this Quarterly Report on Form 10-Q.
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, Interest on Layers’ Trust Accounts (“IOLTA”), and Market Rate checking accounts.
Total interest-bearing deposits increased $324.3 million, or 2.5% annualized, to $26.7 billion at June 30, 2024, from $26.4 billion at December 31, 2023. This increase mainly driven by growth in money market accounts of $583.7 million, including $189.7 million in reciprocal insured money market deposits and in time deposits of $329.1 million. This increase was partially offset by declines in interest-bearing checking accounts of $431.4 million and savings deposits of $157.1 million. Customers continue to move funds from lower yielding deposit products seeking higher yields in money market accounts and time deposits. Federal funds purchased related to the Correspondent Banking Division and securities sold under agreements to repurchase were $542.4 million at June 30, 2024, a $53.2 million increase from December 31, 2023. Other borrowings, consisting of FHLB borrowings, increased to $300.0 million at June 30, 2024 from $100.0 million at December 31, 2023. Corporate and subordinated debentures declined by $185,000 to $391.7 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 June 30, 2024, the period end balance of noninterest-bearing deposits of $10.4 billion declined slightly compared to the balance at December 31, 2023, of $10.6 billion. Average noninterest-bearing deposits were $10.6 billion for the second quarter of 2024 compared to $11.9 billion for the second quarter of 2023. This decrease in the average noninterest bearing deposits from the quarter ended June 30, 2023, was mainly due to customers seeking higher yields in the rising rate environment. Also, customers have less excess cash as funds from government support programs related to the COVID-19 pandemic began to decline, as well as the resulting effects of higher costs related to inflation.
Uninsured Deposits
At June 30, 2024, and December 31, 2023, the Company had approximately $13.2 billion and $14.2 billion, respectively, in estimated 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.
Capital Resources
Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As of June 30, 2024, shareholders’ equity was $5.7 billion, an increase of $117.3 million, or 2.1%, from December 31, 2023.
The following table shows the changes in shareholders’ equity during 2024:
Total shareholders' equity at December 31, 2023
Cumulative adjustment pursuant to adoption of ASU 2023-02
Dividends paid on common shares ($1.04 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 pursuant to stock repurchase plan
Common stock repurchased - equity plans
Total shareholders' equity at June 30, 2024
The Company did not repurchase any shares under the 2022 Stock Repurchase Plan in the second quarter of 2024. The Company repurchased 100,000 shares, at an average price of $79.85 per share for a total of $8.0 million under the 2022 Stock Repurchase Plan during the first quarter of 2024. 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. As of June 30, 2024, a total of 3,920,021 authorized shares remains available for repurchase.
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%. Refer to Note 17 — Capital Ratios for more information regarding Company and Bank’s regulatory capital compliance requirements.
In response to the COVID-19 pandemic in 2020, 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 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 fixed as of December 31, 2021, and that amount began the three-year phase out in the first quarter of 2022 with 25% phased out in 2024. At June 30, 2024, approximately $15.3 million was added to Tier 1 capital at the Company and Bank as a result of the modified CECL transition. Had the Company elected not to apply the modified CECL transitional amount to its Tier 1 capital, the Company and Bank would have still been considered well capitalized as of June 30, 2024.
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 improved compared to December 31, 2023. All of these ratios mainly improved due to net income recognized during the first half of 2024 of $247.4 million. Tier 1 capital increased by 3.6% and 3.9% at both the Company and Bank, respectively, with the increase in equity from the net income recognized. Total risk-based capital increased by 3.4% and 3.8% at both the Company and Bank, respectively, with the increase in equity resulting from net income along with the increase in the allowance for credit losses and unfunded commitments includable in Tier 2 capital. Both regulatory risk-based assets and quarterly average assets remained reasonably flat compared to the fourth quarter with average assets for both the Company and Bank increasing by 0.5% and risk-based assets increasing by 0.9%. Our capital ratios are currently 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.
The ALCO has established key risk indicators to monitor liquidity and interest rate risk. The key risk indicators are reviewed and approved by the ALCO on an annual basis. The liquidity key risk indicators include the loan to deposit ratio, net noncore funding dependence ratio, On-hand liquidity to total liabilities ratio, the percentage of securities pledged to total securities, and the ratio of brokered deposits to total deposits. As of June 30, 2024, the Company was operating within its liquidity policy limits.
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.
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:
Overall, total loans increased $846.1 million, or 5.3% annualized in first six months of 2024. Our non-acquired loan portfolio increased by approximately $1.5 billion, or approximately 11.7% annualized, compared to the balance at December 31, 2023. The increase from December 31, 2023 was mainly related to organic growth and renewals on acquired loans that are moved to our non-acquired loan portfolio. The acquired loan portfolio decreased by $695.1 million from the balance on December 31, 2023, through principal paydowns, charge-offs, foreclosures and renewals of acquired loans.
Our investment securities portfolio (excluding trading securities) decreased by approximately $415.6 million compared to the balance at December 31, 2023. The decrease in investment securities from December 31, 2023, was a result of maturities, calls, sales and paydowns of investment securities totaling $464.1 million, a reduction from the net amortization of premiums of $9.7 million, and a decrease in the market value of the available for sale investment securities portfolio of $49.7 million. This decrease was partially offset by purchases of available for sale investment securities totaling $13.0 million and other investment securities of $95.0 million. There were no purchases of held to maturity securities during 2024. The purchases of other investment securities were related to capital stock with the Federal Home Loan Bank of which we sold back $85.5 million during 2024. The activity in the purchases and sales of the Federal Home Loan Bank Capital Stock was due to activity with FHLB borrowings during the year. The Bank pledges a portion of its investment portfolio for a variety of purposes, including, but not limited to, collateral for public funds and credit with the Federal Home Loan Bank of Atlanta. As of June 30, 2024, the bank pledged 41.2% of the market value of its available-for-sale and held-to-maturity investment portfolios. As of June 30, 2024, the Bank had unpledged securities with a market value of $3.8 billion. These securities included Treasury, Agency, Agency MBS, Municipals and Corporate securities.
Total cash and cash equivalents were $1.1 billion at June 30, 2024, as compared to $1.0 billion at December 31, 2023. Liquidity has tightened starting in 2023 with the rising rate environment and turmoil in the financial markets occurring in early 2023. Competition for in-market deposits has increased throughout 2023 and 2024 resulting in increases in deposit rates to retain local deposits. The Bank supplements its in-market deposits with brokered deposits. While the Bank has a policy limit for brokered time deposits of no more than 15% of total deposits, it has operated well below this policy limit. At June 30, 2024, the percentage of brokered time deposits to total deposits was 2.7% compared to 1.9% at December 31, 2023. During the second quarter of 2024, the Company also borrowed funds from the FHLB on a short-term basis of $300.0 million. The outstanding borrowings from the FHLB were $100.0 million at December 31, 2023. See below for further discussion around brokered deposits and FHLB borrowings.
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. The Bank may also access funds from borrowing facilities established with the Federal Home Loan Bank of Atlanta and the discount window of the Federal Reserve Bank of Atlanta.
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. Of the $37.1 billion in total deposits at June 30, 2024, approximately 70% were insured or collateralized. The Bank has a granular deposit base comprised of over approximately 1.4 million accounts, with an average deposit size of $27,000. The top ten and twenty deposit relationships comprise approximately 3% and 4% of total deposits, respectively, and approximately 28% of total deposits are non-interest bearing. The Bank’s deposit beta, which represents the change in the Bank’s cost of deposits over the change in the federal funds target rate, during this cycle (from March 2022 through June 2024) is approximately 34%.
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At June 30, 2024, and December 31, 2023, we had $991.4 million and $719.7 million of traditional, out–of–market brokered time deposits, respectively. At June 30, 2024, and December 31, 2023, we had $2.3 billion and $2.2 billion, respectively, of reciprocal deposits. Total deposits were $37.1 billion at June 30, 2024, an increase of $49.5 million from $37.0 billion at December 31, 2023. This change in deposits from December 31, 2023, was driven by an increase in money market accounts of $583.7 million, including $189.7 million in reciprocal insured money market deposits and in time deposits of $329.1 million. This increase was partially offset by declines in interest-bearing checking accounts of $431.4 million and savings deposits of $157.1 million. As customers moved funds from noninterest-bearing deposits, interest-bearing checking and savings accounts, seeking higher yields in the rising rate environment, the Company has seen an increase in its balance of higher yielding money market accounts and time deposits during the first quarter of 2024. The Company raised interest rates on most interest-bearing deposit products (in particular money market accounts and time deposit specials) due to competitive pressures to retain deposits.
Total short-term borrowings at June 30, 2024, were $542.4 million, consisting of $288.0 million in federal funds purchased and $254.4 million in securities sold under agreements to repurchase. The Company also held $300.0 million is short term daily rate FHLB advances at June 30, 2024. Total long-term borrowing at June 30, 2024, were $391.7 million and consisted of trust preferred securities and subordinated debentures. 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.
In addition to deposits, we have other primary contingency funding sources available to the Bank. At June 30, 2024, our Bank had a total FHLB credit facility of $6.6 billion, with $300.0 million in FHLB advance outstanding and $2.9 million in FHLB letters of credit outstanding at quarter-end, leaving $6.3 billion in availability on the FHLB credit facility. In addition, our Bank had $1.8 billion of credit available at the Federal Reserve Bank’s discount window and had $2.9 billion in market value of unpledged securities at June 30, 2024, that can be pledged to obtain additional funds, if necessary. All of these resources provide $12.0 billion of additional funding for the Bank.
As discussed previously and presented below, the table below compares Primary Funding Sources to uninsured deposits as of June 30, 2024.
(Dollars in millions)
Available Capacity
Federal Home Loan Bank of Atlanta
6,255
Federal Reserve Bank of Atlanta Discount Window
1,783
Fair value of securities that can be pledged
2,865
Total primary sources
12,020
Uninsured deposits, excluding collateralized deposits
11,068
Uninsured and collateralized deposits
13,224
Coverage ratio, uninsured deposits
108.6
Coverage ratio, uninsured and collateralized deposits
90.9
Ratio of uninsured and collateralized deposits to total deposits
35.6
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 June 30, 2024. The Bank had $991.4 million of outstanding brokered deposits at the end of the quarter leaving $4.6 billion in available capacity. The Bank has federal funds credit lines of $300.0 million with no balances outstanding at quarter-end and the holding company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at June 30, 2024. 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 the Company and the Bank were significantly above the required capital levels as of June 30, 2024. The Company’s tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 9.72%, 12.08% and 14.43%, respectively, at June 30, 2024. The Bank’s Tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 10.36%, 12.89% and 14.15%, respectively, at June 30, 2024. 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 June 30, 2024 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.
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. The assumptions for loan prepayments, deposit decay, and nonstable deposit balances are derived from models that use historical bank data. These models are independently validated. 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. While the Bank is continuously refining its modeling methodology, the core principles of the methodology have remained stable over the past two years.
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 consider 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 16 — 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 June 30, 2024, the Company had a series of short-term interest rate hedges to address monthly accrual mismatches related to the Company’s ARC program and its transition from LIBOR to SOFR after June 30, 2023. For additional information on these derivatives refer to Note 16 — 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. As of June 30, 2024, the Company was operating within its interest rate key risk indicator policy limits.
During 2023 and the first half of 2024, the beta assumption applied to total deposits increased to reflect changes in deposit mix. From the beginning of the upward rate cycle, our deposit costs have increased from five basis points to one hundred and seventy-four basis points. During this period, the federal funds rate has increased 525 basis points. Accordingly, our cycle to date beta has been approximately 34%. Management recognizes the difficulty in using historical data to forecast deposit betas in the current environment. For internal purposes, and based on the deposit mix as of June 30, 2024, the total deposit beta assumption was 34.5%. For internal forecasting, management will apply overlays to certain assumptions to adjust for current market conditions rather than use assumptions modeled over longer periods of time.
The following interest rate risk metrics are derived from analysis using the Moody’s Baseline Scenario published in July 2024 as the Base Case Scenario. As of June 30, 2024, the earnings simulations indicated that the year 1 impact of an instantaneous 100 basis point parallel increase / decrease in rates would result in an estimated 0.9% increase (up 100) and 1.6% 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 June 30, 2024, the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 2.5% decrease and 0.9% increase, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 6.1% decrease and 0.2% 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 June 30, 2024.
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. Base Case assumes new and repricing volumes reference forward rates derived from the Moody’s Baseline 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
Up 200 basis points
Up 300 basis points
1.7
Up 400 basis points
Down 100 basis points
(1.6)
Down 200 basis points
(4.3)
Down 300 basis points
(8.3)
Down 400 basis points
(12.5)
Deposit Concentrations
As of June 30, 2024, and December 31, 2023, we have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our deposits concentrated within a single industry or group of related industries. We do not believe there are any material seasonal factors that would have a material adverse effect on us. The total deposit balances held by top ten and 20 deposit holders were below 5% of the Company’s average total deposit balances at June 30, 2024. We do not have any foreign 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 $1.2 billion at June 30, 2024. Based on this criteria, we had seven such credit concentrations at June 30, 2024, including loans to lessors of nonresidential buildings (except mini-warehouses) of $6.1 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 $2.7 billion, loans secured by 1st mortgage 1-4 family owner-occupied residential property (including condos and home equity lines) of $9.4 billion, loans secured by jumbo (original loans greater than $548,250) of $2.6 billion, and loans secured by business assets including accounts receivable, inventory and equipment of $2.4 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.
77
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 June 30, 2024, and December 31, 2023, the Bank’s CDL concentration ratio was 50.6% and 59.7%, respectively, and its CRE concentration ratio was 231.0% and 236.5%, respectively. As of June 30, 2024, 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
5.91
5.60
7.13
Return on average tangible equity (non-GAAP)
Average shareholders’ equity (GAAP)
Average intangible assets
(2,003,930)
(2,029,747)
(2,006,789)
(2,033,185)
Adjusted average shareholders’ equity (non-GAAP)
3,550,540
3,271,950
3,538,722
3,206,532
Net income (GAAP)
(1,345)
(1,535)
(2,840)
(3,129)
Net income excluding the after-tax effect of amortization of intangibles (non-GAAP)
136,769
128,940
256,328
274,571
78
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 proposed acquisition of Independent. 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:
Risks relating to our Business and Business Strategy
79
Risks relating to the Regulatory Environment
Risks relating to our Common Stock
Risks relating to Economic Conditions and Other Outside Forces
80
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 June 30, 2024, from those disclosures presented in our Annual Report on Form 10-K for the year ended 2023.
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 June 30, 2024, 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 June 30, 2024, 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 June 30, 2024, that has materially affected, or is likely to materially affect, our internal control over financial reporting.
Item 1. LEGAL PROCEEDINGS
On February 9, 2024, the Company disclosed that it detected what was determined to be a cybersecurity incident on February 6, 2024 (the “Cyber Incident”). The Bank notified banking regulators and law enforcement and, based on its investigation and findings, notified individuals whose personal information may have been compromised in the Cyber Incident. Further, the Bank has taken other actions, such as offering credit monitoring services. While the Company is unable to estimate the total cost of any remediation that may be required, as of June 30, 2024, the Company has not incurred material litigation costs as a result of the Cyber Incident.
On April 3, 2024, a putative class action lawsuit (the “Original Suit”) was filed against the Bank purportedly on behalf of a class consisting of those persons impacted by the Cyber Incident. While the Original Suit was voluntarily dismissed, as of the date of this Quarterly Report on Form 10-Q, three putative class action lawsuits are pending. For more information about the Original Suit and other litigations filed in connection with the Cyber Incident, please refer to Note 13 — Commitments and Contingent Liabilities, in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Other than the Cyber Incident Suits (as defined in Note 13 — Commitments and Contingent Liabilities), as of June 30, 2024, 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, 2023, 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.
The Company is providing this additional risk factor to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023.
We may face risks with respect to future expansion, including our proposed acquisition of Independent.
Our business growth, profitability and market share have been enhanced by us engaging in strategic mergers and acquisitions and de novo branching either within or contiguous to our existing footprint. We have entered into a Merger Agreement with Independent, and we may acquire other financial institutions or parts of those institutions in the future and engage in additional de novo branching. We may also consider and enter into or acquire new lines of business or offer new products or services. As part of our acquisition strategy, we seek companies that are culturally similar to us, have experienced management and are in markets in which we operate or close to those markets so we can achieve economies of scale. We also may receive future inquiries and have discussions with potential acquirers of us or potential companies in which we may engage in a so-called “merger of equals.” Acquisitions and mergers, including our proposed acquisition of Independent, involve a number of risks, including:
We also face litigation risks with respect to potential mergers and acquisitions, and such litigation is common.
We expect to continue to evaluate merger and acquisition opportunities that are presented to us in our current and expected markets and conduct due diligence related to those opportunities, as well as negotiate to acquire or merge with other institutions. If we announce a transaction, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions. As a result, holders of our common stock may have a reduced ownership and voting interest in the Company after a transaction and may exercise less influence over management.
We also may issue debt to finance one or more transactions, including subordinated debt issuances. Generally, acquisitions of financial institution involve the payment of a premium over book and market values, resulting in dilution of our book value and fully diluted earnings per share, as well as dilution to our existing shareholders. We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There is no assurance that, following any future mergers or acquisitions, including our proposed acquisition of Independent, that our integration efforts will be successful or our Company, after giving effect to the acquisition, will achieve increased revenues comparable to or better than our historical experience, and failure to realize such expected revenue increases, cost savings, increases in market presence or other benefits could have a material adverse effect on our financial conditions and results of operations.
We may not be able to successfully integrate Independent or to realize the anticipated benefits of the merger with Independent.
We entered into a Merger Agreement with Independent on May 17, 2024. If the proposed acquisition of Independent is completed, we will also integrate the systems and operations of Independent.
A successful integration of Independent’s operations with our operations so that the Company operates as one entity depends substantially on our ability to successfully consolidate operations, management teams, corporate cultures, systems and procedures and to eliminate redundancies and costs. While we have substantial experience in successfully integrating institutions we have acquired, we may encounter difficulties during integration, such as:
Integration activities could divert resources from regular operations. In addition, general market and economic conditions, governmental actions, natural and human disasters or other international or domestic calamities affecting the financial industry generally may inhibit the Company’s successful integration of these Independent. In connection with the proposed acquisition of Independent, we will assume Independent’s outstanding debt obligations, and the surviving corporation’s level of indebtedness following the completion of the merger could adversely affect the Company’s ability to raise additional capital and to meet its obligations under existing indebtedness.
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In addition, we have proposed to acquire Independent with the expectation that this merger will result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened and expanded market position for the combined company, technology efficiencies, cost savings and operating efficiencies. Achieving the anticipated benefits of these mergers is subject to a number of uncertainties, including whether we integrate the institution in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in a reduction in the price of our shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy and could materially and adversely affect the Company’s financial condition, results of operations, business and prospects.
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 repurchased a total of 100,000 shares at a weighted average price of $79.85 per share shares through the 2022 Stock Repurchase Program during the first half of 2024. During 2023, the Company repurchased a total of 100,000 shares at a weighted average price of $67.48 per share pursuant to the 2022 Stock Repurchase Program. As of June 30, 2024, there is a total of 3,920,021 shares authorized to be repurchased. 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 second quarter of 2024:
(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
April 1 ‑ April 30
*
79.73
3,920,021
May 1 - May 31
168
80.85
June 1 - June 30
1,263
74.75
1,826
For the months ended April 30, 2024, May 31, 2024 and June 30, 2024, totals include 395, 168, and 1,263 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 SouthState 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 repurchased under the 2022 Stock Repurchase Program.
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
Incorporated by Reference
Exhibit No.
Description
Form
Commission File No.
Exhibit
Filing Date
Filed Herewith
2.1
Agreement and Plan of Merger, dated as of May 17, 2024, by and between SouthState and IBTX (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on May 20, 2024).†
8-K
001-12669
5/20/2024
Amended and Restated Bylaws of SouthState Corporation dated April 26, 2023
10-Q
8/4/2023
31.1
Rule 13a-14(a) Certification of Principal Executive Officer
X
31.2
Rule 13a-14(a) Certification of Principal Financial Officer
Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer
101
The following financial statements from the Quarterly Report on Form 10-Q of SouthState Corporation for the quarter ended June 30, 2024, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statement of Cash Flows and (vi) Notes to consolidated Financial Statements.
Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).
† Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The registrant hereby agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the SEC upon request.
* Denotes a management compensatory plan or arrangement.
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: August 2, 2024
/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
Executive Vice President and
Principal Accounting Officer