SouthState Corporation — Q1 2022 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. SouthState is a regional financial holding company operating in six southeastern states. On March 1, 2022, it completed its all-stock acquisition of Atlantic Capital Bancshares for approximately $657.8 million.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior date |
|---|---|---|
| Interest income | $270.5 million | $278.5 million, Q1 2021 |
| Net interest income | $261.5 million | $262.0 million, Q1 2021 |
| Net interest margin | 2.75%; 2.77% tax-equivalent | 3.10%; 3.12% tax-equivalent, Q1 2021 |
| Noninterest income | $86.1 million | $96.3 million, Q1 2021 |
| Noninterest expense | $228.6 million | $228.7 million, Q1 2021 |
| Net income / diluted EPS | $100.3 million / $1.39 | $146.9 million / $2.06, Q1 2021 |
| Efficiency ratio | 63.0% | 61.1%, Q1 2021 |
| Total assets | $46.2 billion | $42.0 billion, December 31, 2021 |
| Loans, net | $26.3 billion | $23.6 billion, December 31, 2021 |
| Deposits | $38.8 billion | $35.1 billion, December 31, 2021 |
| Cash and cash equivalents | $6.0 billion | $6.8 billion, December 31, 2021 |
| Shareholders’ equity | $5.2 billion | $4.8 billion, December 31, 2021 |
- Net income declined 31.7% year over year. The largest factor was a smaller credit-loss reserve release: $8.4 million in Q1 2022 versus $58.4 million in Q1 2021. Mortgage banking income also fell $16.3 million, partly offset by lower interest expense and higher deposit fees.
- Net cash provided by operating activities was $172.2 million, compared with $299.0 million in Q1 2021. Investing activities used $1.49 billion, including securities purchases and loan growth; financing activities provided $510.2 million. Cash and cash equivalents decreased $810.5 million during the quarter.
- Loans grew 11.0% from year-end, including $2.4 billion acquired with Atlantic Capital. Excluding PPP impacts and acquisition-date balances, management reported loan growth of $381.3 million, or 6.3% annualized.
- Nonperforming loans were $114.4 million, or 0.43% of loans, and nonperforming assets were $118.0 million. The $300.4 million allowance for credit losses equaled 1.13% of loans and 262.5% of nonperforming loans. Net charge-offs were $2.3 million, or 0.04% annualized of average loans.
- At March 31, regulatory capital ratios were above minimums: consolidated CET1 and total capital ratios were 11.37% and 13.31%; the Bank’s were 12.37% and 12.99%. Management said both remained well capitalized.
- Borrowings included $770.4 million of federal funds purchased and repurchase agreements and $405.6 million of corporate and subordinated debentures. The loan-to-deposit ratio was 68%. Management described liquidity as adequate and cited unused Federal Reserve, correspondent-bank, and FHLB facilities.
Material changes, outlook and risks
- Atlantic Capital added approximately $3.5 billion in assets, $3.0 billion in deposits, $2.4 billion in loans, $78.4 million in subordinated debt and $342.9 million in goodwill. Integration costs and systems-conversion expenses were expected during 2022; management anticipated additional cost savings and synergies, but did not quantify them.
- Rising long-term interest rates drove significant securities valuation declines. Available-for-sale securities recorded a $272.8 million after-tax unrealized loss in Q1, taking accumulated other comprehensive loss to $294.0 million. Management said the securities continued to perform as scheduled, it did not intend to sell them, and it did not expect to be forced to sell before recovery; future impairment or sale-related losses remain possible.
- Management’s credit-loss forecast used equal weighting for the baseline and more-severe economic scenarios, citing inflation and uncertainty related to Russia’s invasion of Ukraine. It reported an $8.4 million net reserve release for the quarter, including acquisition-related day-one provisions. Future credit costs remain exposed to economic deterioration, pandemic developments and other shocks.
- In April 2022, SouthState announced changes to its consumer overdraft program, including eliminating NSF and overdraft-transfer fees and offering an account without overdraft fees. Implementation was planned to begin in Q3 2022; management estimated an annual diluted EPS reduction of approximately $0.08–$0.10.
- Interest-rate simulations estimated that an immediate 100-basis-point increase would raise one-year net interest income 8.0%, while a 100-basis-point decrease would reduce it 9.2%. These are model-based estimates, dependent on assumptions and not forecasts.
- SouthState had approximately $7.2 billion of LIBOR-linked loans, $21.4 billion of LIBOR-indexed swaps intended to offset one another, and LIBOR-linked trust preferred securities and subordinated debt. The company had stopped quoting LIBOR and originating new LIBOR products and was transitioning to alternative rates.
- Other disclosed risks include successful integration and retention of Atlantic Capital customers and staff, inflation and interest-rate effects, credit quality, deposit retention, competition and margin pressure, cybersecurity, litigation, and operational or regulatory risks. The filing reported no pending material legal proceeding beyond ordinary-course matters and no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether Atlantic Capital integration costs, customer retention and anticipated synergies develop as management expects.
- How net interest margin, deposit pricing and loan yields respond to further rate changes, relative to the filing’s model assumptions.
- Whether the large unrealized securities losses recover, and whether any securities sales or credit-loss provisions become necessary.
- Trends in nonperforming loans, past-due factoring receivables, charge-offs and reserve adequacy; management noted over half of the cited $22.6 million past-due factoring receivables were collected after quarter-end.
- The realized earnings impact of the overdraft-program changes and the company’s announced EPS estimate.
- Capital and liquidity after acquisition, share repurchases and the phase-out of transitional CECL regulatory capital relief.