SouthState Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. This is an annual filing, not a standalone fourth-quarter earnings report. SouthState is a regional bank holding company operating 251 branches across six Southeastern states, with approximately $43.9 billion in year-end assets.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Net income | $496.0 million | $475.5 million in FY2021; up 4.3% |
| Diluted EPS | $6.60 | $6.71 in FY2021 |
| Net interest income | $1.336 billion; net interest margin 3.35% (3.37% tax-equivalent) | $1.033 billion; margin 2.90% (2.92% tax-equivalent) |
| Noninterest income / expense | $309.2 million / $929.7 million | $354.3 million / $948.4 million in FY2021 |
| Efficiency ratio | 54.2% | 65.5% in FY2021 |
| Loans / deposits | $30.2 billion / $36.4 billion | $23.9 billion / $35.1 billion at Dec. 31, 2021 |
| Cash and cash equivalents | $1.3 billion | $6.7 billion at Dec. 31, 2021 |
| Shareholders’ equity | $5.1 billion | $4.8 billion at Dec. 31, 2021 |
- Net income benefited from higher interest income and lower noninterest expense. Interest income rose $312.2 million as rates increased and average loans and securities expanded; interest expense rose $9.7 million. Net interest income increased 29.3%.
- Noninterest income fell 12.7%, chiefly because mortgage banking income declined $46.8 million and correspondent banking and capital markets income declined $31.3 million. Lower merger-related costs helped reduce noninterest expense by 2.0%.
- Return on average assets was 1.12% versus 1.19%; return on average common equity was 9.84% versus 10.01%. Diluted EPS fell despite higher net income, in part as average diluted shares increased following the acquisition.
- Operating cash flow was $1.731 billion; investing cash outflow was $4.860 billion and financing cash outflow was $2.280 billion. Cash and cash equivalents declined $5.409 billion, primarily as funds supported loan growth and securities purchases and deposits declined during the second half.
- Year-end borrowings included $556.4 million in federal funds purchased and repurchase agreements and $392.3 million in long-term subordinated and junior subordinated debt. Deposits were the principal funding source. The company estimated uninsured deposits at $14.1 billion.
- Regulatory capital remained above well-capitalized thresholds: consolidated CET1 was 10.96%, total risk-based capital 12.97%, and Tier 1 leverage 8.72%. Total risk-based capital was 13.57% in 2021.
Material changes and unusual items
- SouthState acquired Atlantic Capital Bancshares on March 1, 2022, in a stock transaction valued at approximately $657.8 million. The acquisition added about $2.4 billion in loans and $3.0 billion in deposits at closing; systems conversion was completed in July. Integration work continued, and the acquisition added approximately $342 million of goodwill.
- Total loans grew 26.1% to $30.2 billion. Commercial, construction and commercial real estate loans were $22.4 billion, or 74% of total loans; management also reported that about 78.1% of loans had real estate as a primary or secondary collateral component.
- Deposits rose 3.7% including Atlantic Capital. Excluding acquired deposits, SouthState’s deposits declined about $1.2 billion, reflecting runoff of stimulus-related funds and increased competition as rates rose. Noninterest-bearing deposits were 36% of deposits at year-end.
- Available-for-sale securities had $889.3 million in net unrealized losses at year-end; held-to-maturity securities had $433.1 million in net unrealized losses. The decline in securities values contributed to a $655.9 million after-tax reduction in accumulated other comprehensive income. Management said it did not intend, and was not more likely than not required, to sell the securities; it reported no credit-loss provision on investment securities for 2022.
- The allowance for credit losses was $356.4 million, or 1.18% of loans, compared with $301.8 million, or 1.26%, a year earlier. FY2022 provision for credit losses was $81.9 million, versus a $165.3 million release in FY2021. Net charge-offs were 0.02% of average loans; nonperforming assets increased to $109.7 million from $83.7 million.
- SouthState consolidated 32 branches in 2022. Management estimated approximately $12 million of annual savings in 2023 and approximately $3.5 million of impact in 2022. The branch network declined to 251 locations from 281.
- Cash dividends were $1.98 per share for 2022, with a 29.54% payout ratio. The company repurchased $110.2 million of shares under its prior plan; it received supervisory non-objection for a new repurchase program but made no purchases under that program in 2022.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it expects further operating-cost savings and other synergies from the Atlantic Capital acquisition, but noted integration tasks remained. It also described ongoing investment in technology, digital banking, real-time payments, and talent.
- Management reported that rising rates improved net interest margin in 2022, while warning that deposit competition and funding costs were increasing and that margin gains may not continue. Loan demand remained strong but showed signs of declining.
- Key risks include economic slowdown, persistent inflation and higher rates; deposit outflows and liquidity pressure; real estate and commercial real estate concentration; credit deterioration and uncertainty in CECL estimates; securities valuation and accumulated unrealized losses; acquisition integration; and cyber, operational, regulatory and compliance risks.
- Liquidity sources included approximately $4.2 billion of available FHLB capacity, $782 million of Federal Reserve discount-window capacity, $300 million of federal funds lines, and a $100 million unsecured U.S. Bank line of credit; these facilities had no outstanding advances at year-end. Management characterized liquidity as adequate.
- The company reported no pending or threatened ordinary-course legal matters expected to materially affect its consolidated financial position or results. The independent auditor issued an unqualified opinion on the financial statements and internal controls; however, Atlantic Capital, representing 9.3% of year-end assets, was excluded from the internal-control assessment while integration continued. The allowance for credit losses was identified as a critical audit matter.
- An immaterial prior-period accounting correction related to derivative variation-margin presentation had no impact on net income or shareholders’ equity. FY2022 derivative variation-margin expense of $14.0 million was reported in correspondent and capital markets income.
Important facts for investors to verify
- Whether acquired-company integration proceeds as planned and the stated 2023 branch savings and other merger synergies are realized.
- Deposit trends excluding acquisition effects, deposit pricing and mix, uninsured-deposit levels, and the company’s available liquidity under stress.
- Commercial real estate and construction exposure, credit quality trends, and whether the $356.4 million loan allowance and $67.2 million unfunded-commitment reserve remain adequate as economic forecasts change.
- The effect of securities unrealized losses on capital, liquidity and flexibility to sell or pledge securities if funding needs rise.
- How higher rates affect net interest margin, borrower repayment, mortgage activity and derivative results, including the transition of remaining LIBOR-linked exposures.
- Progress integrating Atlantic Capital into internal controls and risk systems; the acquired business was excluded from the year-end internal-control assessment.