SouthState Corporation (NASDAQ: SSB) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022. Amounts below are in U.S. dollars. SouthState is a regional bank holding company operating across six southeastern states.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $355.4m | $362.3m | $1,098.4m | $939.7m |
| Provision for credit losses | $32.7m | $23.9m | $104.2m | $34.7m |
| Noninterest income | $72.8m | $73.1m | $221.4m | $245.9m |
| Noninterest expense | $238.2m | $240.4m | $721.3m | $700.2m |
| Net income | $124.1m | $133.0m | $387.5m | $352.5m |
| Diluted EPS | $1.62 | $1.75 | $5.07 | $4.71 |
- Q3 net income fell 6.7% year over year; nine-month net income rose 9.9%. Q3 diluted EPS declined 7.4%, while nine-month diluted EPS increased 7.6%.
- Q3 net interest margin was 3.49% (tax-equivalent 3.50%), versus 3.55% (3.58% tax-equivalent) a year earlier. The company attributed margin pressure to funding costs rising faster than asset yields. For the nine months, net interest margin was 3.67% (3.68% tax-equivalent), versus 3.14% (3.16% tax-equivalent).
- Q3 efficiency ratio was 54.0%, versus 53.1%. Return on average assets was 1.10% and return on average equity 9.24%, versus 1.17% and 10.31%, respectively.
- For the first nine months, operating cash flow was $821.1m, compared with $1,576.5m in 2022; investing cash outflow was $1,226.0m, compared with $3,690.9m. Financing provided $421.5m, versus $1,683.0m used in 2022. Cash and cash equivalents ended at $1.329bn, little changed from year-end.
Balance sheet, funding and capital
- Total assets were $45.0bn, up 2.4% from year-end. Loans were $32.0bn, up 6.1%; deposits were $36.9bn, up 1.6%. Shareholders’ equity was $5.23bn, up 3.1%.
- Loan growth was primarily organic: non-acquired loans increased about $3.0bn, while acquired loans declined about $1.1bn. The loan-to-deposit ratio rose to 87% from 83%.
- Deposit mix shifted toward higher-cost funding. Noninterest-bearing deposits fell $2.0bn to $11.2bn and represented 30% of deposits, versus 36% at year-end. Interest-bearing deposits increased to $25.8bn; time deposits rose to $4.45bn from $2.42bn. Estimated uninsured deposits were $13.0bn, down from $14.6bn.
- At quarter-end, the company had no FHLB or Federal Reserve borrowings outstanding. It reported $513.3m of federal funds purchased and repurchase agreements and $392.0m of corporate and subordinated debentures. Management cited approximately $14.4bn of additional funding capacity across FHLB, Federal Reserve discount window, federal funds lines and brokered-deposit capacity, plus $3.7bn of unpledged securities; it considered liquidity adequate.
- Regulatory capital remained well above minimums: consolidated CET1 11.47%, total capital 13.76%, and Tier 1 leverage 9.34%; bank ratios were 12.25%, 13.44%, and 9.96%, respectively.
Credit quality, securities and material changes
- Allowance for credit losses was $448.0m, or 1.40% of loans, versus $356.4m and 1.12% at year-end. The nine-month provision was $104.2m; net charge-offs were $17.5m. Q3 net charge-offs included an $11.6m charge-off on one commercial and industrial relationship.
- Nonperforming assets increased to $166.8m from $109.7m at year-end; nonperforming loans were 0.52% of loans, versus 0.36%. Management cited rising commercial nonaccrual loans as a principal driver. The allowance covered nonperforming loans about 2.7 times.
- Investment securities totaled $7.34bn, down 10.3% from year-end. Available-for-sale securities had $1.09bn of net unrealized losses; held-to-maturity securities had $521.3m of unrealized losses. Total accumulated other comprehensive loss was $815.9m. Management said securities remained current, losses were not credit-related, and it did not expect to be required to sell before recovery; future sales or credit provisions remain possible.
- Q3 interest expense rose sharply as deposit and other funding costs repriced amid higher rates and competition. Interest-bearing deposit cost was 2.08%, compared with 0.13% a year earlier; overall cost of funds, including noninterest-bearing deposits, was 1.52%, versus 0.14%.
- Q3 noninterest income was nearly flat, but nine-month noninterest income fell 9.9%, mainly from lower correspondent/capital-markets, mortgage-banking and SBA income. Nine-month noninterest expense increased 3.0%, despite lower merger-related costs; salaries, regulatory assessments and other costs increased.
Outlook, contingencies and notable items
- The filing provides no specific earnings or financial guidance. Management said results to date are not necessarily indicative of full-year or future performance.
- Credit-loss estimates reflect inflation, higher rates, tightening credit and recession uncertainty. For Q3, management used forecast weights of 50% baseline, 25% upside and 25% more severe scenario; it noted worsening commercial real-estate price forecasts.
- The FDIC proposed a special assessment related to recent bank failures. SouthState estimated a quarterly charge of about $3.0m, or $23.9m over the proposed two-year period; the final amount and timing were not settled. A proposed Federal Reserve reduction in debit-card interchange fee caps could also adversely affect results; the company was still assessing the impact.
- Commitments to extend credit and standby letters of credit totaled $10.6bn; the related unfunded-commitment reserve was $62.3m. Management said ordinary-course litigation was not expected to materially affect the financial statements.
- Management disclosed an immaterial accounting correction for centrally cleared swap variation-margin treatment, with no impact on previously reported net income or equity. LIBOR-indexed loans, derivatives and trust preferred securities had migrated to SOFR or other replacement indices by September 30, 2023.
- A quarterly dividend of $0.52 per share was declared October 26, payable November 17, 2023. No shares were repurchased under the public repurchase program during the first nine months.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and how quickly asset yields reprice.
- Trends in nonperforming loans, commercial and industrial charge-offs, commercial real-estate exposures and required credit-loss provisions.
- The market value, duration and liquidity implications of securities unrealized losses, particularly if deposit outflows require asset sales.
- The final FDIC special-assessment rule and potential debit-interchange regulation, including their financial impact.
- Liquidity and funding capacity assumptions, uninsured-deposit estimates, and the evolution of brokered and reciprocal deposits.