Southstate Bank Corp quarterly report, Q3 FY2022

SouthState Corporation — Q3 2022 Form 10-Q

Business context and reporting period. SouthState Corporation is a regional banking and financial services company operating across six states. This unaudited quarterly report covers the three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. The March 1 acquisition of Atlantic Capital materially expanded the business and affects year-over-year comparability.

Key financial results

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Net interest income	$358.2 million	$260.0 million	$934.0 million	$775.1 million
Noninterest income	$77.2 million	$87.0 million	$251.6 million	$262.3 million
Provision for credit losses	$23.9 million	$(38.9) million recovery	$34.7 million	$(156.1) million recovery
Net income	$133.0 million	$122.8 million	$352.5 million	$368.7 million
Diluted EPS	$1.75	$1.74	$4.71	$5.19

• Q3 net interest margin was 3.53% on a non-tax-equivalent basis and 3.55% tax-equivalent, compared with 2.85% and 2.86%, respectively, a year earlier. The efficiency ratio improved to 53.1% from 64.2%.
• For the first nine months, operating cash flow was $584.2 million; investing activities used $3.69 billion and financing activities used $926.8 million. Cash and cash equivalents fell to $2.81 billion from $6.84 billion at year-end 2021, principally as funds supported loan growth and securities purchases.
• At September 30, total assets were $45.18 billion, loans net of allowance were $28.51 billion, deposits were $37.67 billion, total liabilities were $40.26 billion, and shareholders’ equity was $4.92 billion. Loans grew 20.5% from year-end; deposits grew 7.4%. The loan-to-deposit ratio was 77%, versus 68%.
• Borrowings included $557.8 million of federal funds purchased and repurchase agreements and $392.4 million of corporate and subordinated debentures. The company and bank remained well capitalized: consolidated CET1 was 11.02%, total capital 12.96%, and leverage 8.33%; bank CET1 was 11.91%.

Material changes and notable items

• Q3 net income rose 8.4% year over year, but diluted EPS rose only slightly, reflecting the higher average share count following Atlantic Capital share issuance. Nine-month net income and diluted EPS declined, largely because 2021 included substantial credit-loss recoveries while 2022 recorded provision expense.
• Higher rates and larger average loan and securities balances lifted Q3 interest income; management reported a 73-basis-point increase in interest-earning asset yield. The cost of interest-bearing liabilities rose more slowly, by 7 basis points year over year. Management cautioned that deposit costs may accelerate as rates continue to rise.
• Noninterest income declined 11.3% in Q3, chiefly as mortgage banking income fell $13.3 million and correspondent banking/capital markets income fell $4.6 million. Noninterest expense rose 3.5%; higher operating, technology, regulatory and other costs partly offset lower merger-related expense.
• Atlantic Capital was acquired for approximately $657.8 million in stock. It contributed approximately $2.4 billion of loans and $3.0 billion of deposits at acquisition, and $341.4 million of goodwill was recognized. Core-system conversion was completed in Q3; management expected further cost savings and synergies but provided no quantified forecast.
• SouthState consolidated 31 branches during Q3; costs associated with closures were approximately $8.0 million through September 30. Nine-month merger and branch-consolidation expense was $29.3 million.
• Accumulated other comprehensive loss increased to $716.5 million from $21.1 million at year-end, primarily reflecting interest-rate-driven declines in securities values. The nine-month comprehensive loss was $342.8 million despite net income of $352.5 million.

Outlook, risks and contingencies

• The filing gives no formal earnings or revenue guidance. Management highlighted inflation, rapid rate increases, higher energy costs, supply-chain disruption, the Russia-Ukraine conflict, and increased recession risk. It warned these conditions could cause additional credit-loss provisions.
• For its credit-loss forecast, management weighted the baseline economic scenario 60% and a more severe scenario 40%, changing from 40% and 60% in the prior quarter. Q3 provision included $20.5 million for unfunded commitments; the related reserve was $53.0 million at quarter-end. Total loan allowance was $324.4 million, or 1.12% of loans.
• Nonperforming assets were $102.4 million, up from $83.7 million at December 31, 2021; nonperforming loans were $100.0 million, or 0.35% of loans. Management identified an $11.1 million commercial owner-occupied loan as a principal factor in increased non-acquired commercial nonaccrual loans. Potential problem loans also increased.
• Available-for-sale securities had $953.4 million of gross unrealized losses and held-to-maturity securities had $439.7 million. Management said securities were performing as scheduled, losses were not credit-related, and it did not expect to be required to sell them before recovery; future impairment or sale cannot be ruled out.
• Commitments to extend credit and standby letters of credit totaled $10.9 billion. Management said liquidity was adequate and cited $2.8 billion of cash, $3.4 billion of FHLB facility availability, $839.2 million of Federal Reserve discount-window availability, and other borrowing lines. Funding alternatives could raise funding costs and pressure margins.
• One-year net interest income simulation estimated a 2.5% increase for a 100-basis-point rate rise and a 4.1% decrease for a 100-basis-point decline. These are model-based estimates dependent on assumptions, not forecasts.
• Management said ordinary-course legal matters were not expected to have a material financial effect; it also reported a $2.6 million lawsuit-settlement expense in the nine-month period. No material changes to the previously disclosed risk factors were reported. A two-basis-point increase in initial FDIC assessment rates was finalized for 2023; updated debit-card routing requirements take effect July 1, 2023.

Most important facts for investors to verify

1. Whether loan growth and acquisition integration translate into sustainable earnings, cost savings and synergies, and how the higher share count affects per-share results.
2. Deposit retention and repricing, funding costs, and the durability of net interest margin gains as rates and competition evolve.
3. Credit quality trends, including nonperforming and potential problem loans, unfunded commitment exposures, and management’s economic scenario assumptions.
4. The effects of unrealized securities losses on capital and liquidity if the company needs to sell assets, despite management’s stated intent and ability to hold them.
5. Capital and liquidity headroom after growth, dividends and repurchases, and the impact of future regulatory, deposit-insurance and integration costs.