Southstate Bank Corp quarterly report, Q2 FY2022

SouthState Corporation — Q2 2022 Form 10-Q

Business context and reporting period

Unaudited results for the three and six months ended June 30, 2022; balance sheet comparisons are to December 31, 2021. SouthState is a regional bank operating across six southeastern states, with approximately $46.2 billion in assets at quarter-end. On March 1, 2022, it completed its acquisition of Atlantic Capital in an all-stock transaction valued at approximately $657.8 million. The quarter’s results include Atlantic Capital from the acquisition date; management cautions interim results are not necessarily indicative of full-year results.

Key financial metrics

• For the first six months, net interest income was $575.8 million versus $515.1 million; noninterest income was $174.4 million versus $175.3 million. Net income was $219.5 million versus $245.9 million, and diluted EPS was $2.96 versus $3.44. Six-month tax-equivalent net interest margin was 2.95%, compared with 2.99%.
• Six-month operating cash flow was $304.7 million, investing cash flow was negative $2.86 billion, and financing cash flow was positive $431.9 million. Cash and cash equivalents fell $2.12 billion from year-end to $4.72 billion, principally as funds supported loan growth and securities purchases.
• At June 30, total assets were $46.21 billion, gross loans $27.94 billion, net loans $27.62 billion, and deposits $38.88 billion. Loans grew 17.0% and deposits 10.9% from December 31, with acquisition effects contributing materially.
• Short-term borrowings (federal funds purchased and repurchase agreements) totaled $670.0 million; corporate and subordinated debentures were $392.5 million. Total shareholders’ equity was $5.04 billion. Regulatory capital ratios remained above minimums and the Bank remained well-capitalized; consolidated CET1 was 11.05% and Bank CET1 was 12.00%.
• The loan allowance was $319.7 million, or 1.14% of loans; nonperforming loans were $90.0 million (0.32% of loans), and nonperforming assets were $91.7 million. Net charge-offs were 0.03% of average loans in Q2.

Material changes versus prior periods

• Q2 net income increased 20.4% year over year, driven mainly by higher net interest income and lower noninterest expense. Net interest income rose $61.1 million; total noninterest expense declined $32.2 million. The prior-year quarter included $33.0 million in merger and branch consolidation expense and $11.7 million in debt extinguishment costs.
• The higher Q2 provision for credit losses—$19.3 million versus a $58.8 million recovery in Q2 2021—partly offset revenue and expense improvements. For the first half, provision was $10.8 million versus a $117.2 million recovery in 2021, a major factor in lower year-to-date earnings.
• Q2 mortgage banking income decreased $4.6 million year over year; first-half mortgage banking income fell $20.9 million, reflecting lower secondary-market mortgage activity. Deposit fees, card-related income, and correspondent banking and capital markets income increased.
• Loans rose $4.0 billion and investment securities rose $1.5 billion from year-end, while cash declined $2.1 billion. Total deposits grew $3.8 billion. These movements reflect Atlantic Capital, organic loan growth, and deployment of excess deposits into loans and securities.
• Available-for-sale securities recorded a $469.7 million after-tax other comprehensive loss in the first half. Accumulated other comprehensive loss increased to $490.9 million from $21.1 million at year-end, primarily reflecting interest-rate-driven declines in securities fair values. Combined unrealized losses on securities were approximately $969.3 million; management reported no identified credit loss and said it did not expect to be required to sell the securities before recovery.

Outlook, management commentary, risks and unusual items

• Management cited inflation, rising interest rates, supply-chain disruption, the Russia-Ukraine conflict, COVID-19 uncertainty, and increased recession risk. Its Q2 credit-loss forecast weighting shifted to 40% baseline and 60% more-severe scenario; management said neither scenario represented its view of the economy. A $42.2 million qualitative allowance adjustment addressed economic risks not fully captured by models.
• The Federal Reserve raised rates during Q2. Management’s modeled one-year net interest income sensitivity estimated a 4.7% increase for a 100-basis-point rate rise and a 7.6% decrease for a 100-basis-point decline; modeled results depend on assumptions and are not forecasts. Deposit repricing, loan growth, and interest-rate changes could alter actual performance.
• SouthState announced consumer overdraft-program changes for implementation beginning in Q3 2022, including eliminating NSF and overdraft-transfer fees and offering a no-overdraft-fee deposit product. Management estimated an annual diluted EPS reduction of approximately $0.08–$0.10.
• Management expected further cost savings and synergies from Atlantic Capital but did not quantify them; integration and systems-conversion costs were expected during 2022. Acquisition fair values remained preliminary, and Atlantic Capital standalone post-acquisition results were not practical to determine. Atlantic Capital’s controls were excluded from the quarter-end control evaluation as permitted during integration; management concluded disclosure controls were effective.
• The Board raised the quarterly dividend from $0.49 to $0.50 per share after quarter-end. A new repurchase authorization was approved, with 4.12 million shares authorized in total as of June 30. The Company repurchased $110.2 million of shares in the first half.
• Commitments to extend credit and standby letters of credit totaled $10.3 billion; the recorded reserve for unfunded commitments was $32.5 million. Management said ordinary-course legal matters were not expected to have a material effect. It reported no material changes to previously disclosed risk factors.
• The filing identifies LIBOR transition exposure, including approximately $5.9 billion of LIBOR-linked loans and related swaps; the Company had stopped originating new LIBOR-linked products and was implementing SOFR transition processes.

Most important facts for investors to verify

• Whether Atlantic Capital integration proceeds on schedule, achieves expected synergies, and avoids greater-than-expected costs, customer attrition, or control issues.
• Whether credit quality and loss reserves remain adequate as recession risks rise, especially across commercial real estate and other concentrated lending categories.
• How deposit costs, deposit retention, loan yields, and securities values respond to further rate changes; monitor the substantial unrealized securities losses and potential liquidity or capital effects if sales become necessary.
• The realized earnings impact of the overdraft-fee changes against management’s estimated $0.08–$0.10 annual diluted EPS reduction.
• Whether loan growth, capital ratios, liquidity sources, and shareholder distributions remain sustainable amid continued growth and integration.