SouthState Corporation — Q1 2023 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are primarily with December 31, 2022. SouthState is a regional banking and financial services company operating across six southeastern states. It reported $44.9 billion in assets and approximately 5,085 full-time equivalent employees. Results are not necessarily indicative of the full year.
Key financial results
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net interest income | $381.3 million | $261.5 million, up 45.8% year over year |
| Net interest margin | 3.92% non-tax-equivalent; 3.93% tax-equivalent | 2.75% and 2.77%, respectively, in Q1 2022 |
| Provision for credit losses | $33.1 million | $8.4 million recovery in Q1 2022 |
| Noninterest income / expense | $71.4 million / $240.5 million | Income down 17.1%; expense up 5.2% |
| Net income / diluted EPS | $139.9 million / $1.83 | $100.3 million / $1.39; net income up 39.5% |
| Efficiency ratio | 51.4% | 63.0% in Q1 2022 |
| Operating / investing / financing cash flow | $59.4 million / $(273.8) million / $898.6 million | Cash and cash equivalents increased $684.1 million to $2.0 billion |
Balance sheet and funding. Total assets were $44.9 billion, up 2.3% from year-end; loans were $30.7 billion, up $518.3 million, and deposits were $36.4 billion, nearly flat. Shareholders’ equity was $5.25 billion. The allowance for credit losses was $370.6 million, or 1.21% of loans. Total liabilities included $392.2 million of corporate and subordinated debentures, $900 million of FHLB advances, and $544.1 million of federal funds purchased and repurchase agreements.
Cash rose primarily as the company added $900 million in FHLB advances and $1.2 billion in brokered time deposits to bolster liquidity. The loan-to-deposit ratio was 84%. Management reported approximately $12.9 billion of additional potential funding capacity from FHLB, Federal Reserve, federal funds lines, and remaining brokered-deposit capacity, plus $4.5 billion in unpledged securities. It described liquidity as adequate and readily available.
Material changes and management commentary
- Earnings and rates: Management attributed higher net interest income to higher rates and loan growth; asset yields repriced faster than funding costs. Average cost of interest-bearing liabilities increased 99 basis points year over year. Overall cost of funds, including noninterest-bearing deposits, was 0.75%, versus 0.10%.
- Deposit mix and market stress: Customers shifted funds toward higher-yielding time deposits and spread balances for insurance coverage. Noninterest-bearing deposits fell $746 million from year-end, while time deposits increased about $1.7 billion. Estimated uninsured deposits were $12.7 billion, including $1.8 billion of collateralized public funds; estimated uninsured and unsecured deposits were $10.8 billion. Management said approximately 70% of deposits were insured or collateralized.
- Credit quality: Nonperforming loans were $124.6 million, or 0.41% of loans, and nonperforming assets were $128.3 million, or 0.42% of loans and repossessed assets; both measures increased from year-end. The allowance covered nonperforming loans 2.97 times. Net recoveries were $1.0 million, compared with $2.3 million of net recoveries in Q1 2022. Management increased its allowance provision amid inflation, higher rates, and recession concerns, using a forecast weighting of 50% baseline, 25% upside, and 25% more severe scenario.
- Revenue mix and unusual items: Noninterest income declined mainly because correspondent banking and capital-markets income fell $14.4 million and mortgage banking income fell $6.3 million. The former included $8.4 million of expense related to variation-margin settlements on centrally cleared swaps. Other income included a $960,000 legal settlement. Noninterest expense included $8.1 million of severance costs: approximately $7.0 million related to eliminating an executive officer position and $1.1 million related to a mortgage-division reduction in force.
- Securities and interest-rate exposure: Available-for-sale securities had $816.7 million of unrealized losses and held-to-maturity securities had $409.1 million of unrealized losses at quarter-end. Management said the securities were performing as scheduled, it did not intend to sell them, and it did not expect to be forced to sell before recovery; future conditions could change that assessment. The investment portfolio’s effective duration was 5.89 years, above the 3–5 year target. Management’s one-year simulation indicated net interest income would rise 2.1% under a 100-basis-point rate increase and fall 2.9% under a 100-basis-point decrease.
- Capital and outlook: The Company reported CET1 of 11.13%, total risk-based capital of 13.30%, and a Tier 1 leverage ratio of 9.05%; the Bank’s respective ratios were 11.93%, 12.99%, and 9.70%. Both were classified as well capitalized. The filing provides no quantitative earnings or revenue guidance. Management cited expected additional Atlantic Capital cost savings and synergies, but did not quantify them. It also anticipated possible regulatory actions or FDIC special assessments following bank failures; the impact was not yet estimable.
Risks, contingencies, and other notable items
- Interest-rate changes, competition for deposits, deposit outflows, and the risk of selling securities at a loss could affect funding costs, liquidity, earnings, and capital. The company reported $4.9 billion of LIBOR-linked loans, including $4.8 billion maturing after June 30, 2023, and described its transition to replacement rates.
- Credit and real-estate risks include deterioration in borrower performance and property values. Commercial real estate is a notable concentration; the Bank’s CRE concentration ratio was 243.5%, below the cited 300% regulatory guideline.
- Commitments to extend credit and standby letters of credit totaled $11.4 billion; the recorded expected-loss liability on unfunded commitments was $85.1 million. Management did not expect pending ordinary-course litigation to have a material financial-statement effect.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
- After quarter-end, the Company declared a $0.50-per-share quarterly dividend, payable May 19, 2023. The 2022 repurchase program remained authorized, but no shares were repurchased under it during Q1.
Most important facts for investors to verify
- Deposit stability and the pace and cost of replacing noninterest-bearing and other core deposits with time and brokered deposits; confirm the uninsured-deposit estimates and liquidity capacity.
- Whether loan delinquencies, nonperforming assets, charge-offs, and the allowance remain consistent with management’s credit forecasts, particularly in commercial real estate.
- How quickly deposit costs rise relative to loan yields, and whether actual interest-rate sensitivity matches management’s simulations.
- Whether unrealized securities losses, portfolio duration, or liquidity needs lead to securities sales or additional capital effects.
- Actual realization and timing of Atlantic Capital synergies, the costs associated with restructuring, and any FDIC assessment or other regulatory actions.