SouthState Corporation — Q1 2024 Form 10-Q
Business context and reporting period
SouthState Corporation is a bank holding company operating across Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia, with correspondent banking, capital markets, mortgage, trust and other financial services. This unaudited filing covers the three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Amounts below are U.S. dollars.
Financial results and position
| Metric | Q1 2024 | Comparison |
|---|---|---|
| Net interest income | $343.9 million | Down 9.8% from $381.3 million in Q1 2023 |
| Net interest margin | 3.40% non-tax-equivalent; 3.41% tax-equivalent | Down 52 basis points year over year on either basis |
| Noninterest income | $71.6 million | Nearly flat versus $71.4 million |
| Noninterest expense | $249.3 million | Up 3.7% from $240.5 million |
| Provision for credit losses | $12.7 million | Down from $33.1 million |
| Net income; diluted EPS | $115.1 million; $1.50 | Net income down 17.8%; diluted EPS was $1.83 in Q1 2023 |
| Efficiency ratio | 58.5% | Up from 51.4% |
| Operating cash flow | $277.7 million | Compared with $59.4 million in Q1 2023 |
- Total assets were $45.1 billion, up 0.5% from year-end; loans were $32.7 billion, up $278.8 million, and deposits were $37.2 billion, up $129.5 million.
- Cash and cash equivalents were $1.21 billion. Investment securities totaled $7.23 billion. Shareholders’ equity was $5.55 billion; accumulated other comprehensive loss was $623.0 million.
- Allowance for credit losses on loans was $469.7 million, or 1.44% of loans. Nonperforming loans were 0.53% of loans, and the allowance covered nonperforming loans 2.73 times. Quarterly net charge-offs were 0.03% of average loans, annualized.
- Short-term borrowings comprised $273.4 million of federal funds purchased and $281.3 million of repurchase agreements. Corporate and subordinated debentures were $391.8 million; no FHLB advances were outstanding at quarter-end.
- Regulatory capital ratios were above minimums. Note 16 reports consolidated CET1 of 11.95% and total capital of 14.32%, and Bank CET1 of 12.67% and total capital of 13.93%.
Material changes versus comparable periods
- Interest income rose $66.8 million year over year, but interest expense rose $104.2 million, mainly because deposit costs repriced upward. The average cost of interest-bearing liabilities increased 139 basis points to 2.53%; overall cost of funds rose to 1.83% from 0.75%.
- Average loan balances increased $2.1 billion year over year, supporting loan interest income. During the quarter, non-acquired loans grew $618.7 million while acquired loans declined $339.9 million.
- Correspondent banking and capital markets income fell $9.3 million, partly offset by higher deposit fees, mortgage banking, trust and other income. Other income included a $2.5 million vendor credit.
- Net interest margin compression and higher operating expenses contributed to lower earnings and a higher efficiency ratio. Return on average assets fell to 1.03% from 1.29%; return on average equity fell to 8.36% from 10.96%.
- Available-for-sale securities had net unrealized losses of $830.2 million, versus $776.6 million at year-end; held-to-maturity securities had unrealized losses of $430.0 million, versus $402.7 million. Management attributed the increase mainly to higher-for-longer interest-rate expectations and said it did not identify credit losses.
Outlook, risks and unusual items
- The filing gives no specific earnings or financial guidance. Management cited deposit competition, customer migration to higher-yield accounts, persistent inflation, interest rates and potential credit deterioration as important uncertainties. The company’s modeled one-year net interest income sensitivity was +1.1% for a 100-basis-point rate increase and -1.8% for a 100-basis-point decrease.
- Management’s credit-loss forecast used a 50% baseline, 25% upside and 25% more-severe scenario weighting. It highlighted projected commercial real estate price weakness as a source of modeled expected losses, while reporting stable asset-quality measures overall.
- Liquidity sources included $1.21 billion cash, approximately $6.6 billion available FHLB capacity, $1.8 billion Federal Reserve capacity and $300 million of federal funds lines. The filing estimated $13.3 billion of uninsured deposits; primary liquidity sources covered 112.9% of uninsured deposits, or 94.6% of uninsured and collateralized deposits combined. Management said liquidity was adequate and within policy limits.
- A cybersecurity incident was detected February 6, 2024. The company recorded approximately $4.4 million of incident-related costs in the quarter. As of the filing, 14 putative class actions had been filed; management could not reasonably estimate any potential loss and recorded no litigation amount. Further claims or regulatory inquiries may arise.
- The FDIC special assessment accrual increased by $3.9 million in Q1; the company’s estimated total assessment was approximately $29.5 million. The FDIC may impose further assessments.
- Effective January 1, 2024, the company adopted proportional amortization accounting for qualifying tax-credit investments. Adoption reduced retained earnings by $10.2 million; Q1 amortization was recorded in income-tax expense rather than noninterest expense, affecting period comparability.
- The company declared a $0.52-per-share quarterly dividend on April 25, payable May 17, 2024. It repurchased 100,000 shares under its buyback plan in Q1 at an average $79.85 per share.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize, and how that affects net interest margin and funding costs.
- Trends in commercial real estate, classified loans, nonperforming loans, charge-offs and allowance adequacy.
- Fair-value and potential liquidity impacts of the securities portfolio’s substantial unrealized losses, including the availability of pledged and unpledged collateral.
- Final costs, legal exposure and any regulatory developments related to the cybersecurity incident and resulting lawsuits.
- Actual FDIC special-assessment charges and any additional assessments.
- Regulatory capital figures: the MD&A and Note 16 report slightly different values for certain capital ratios; reconcile the figures against the filing’s underlying regulatory schedules.