SouthState Corporation — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021; annual comparisons are with 2020 unless stated otherwise. SouthState is a regional bank holding company operating 281 branches across six Southeastern states, with correspondent banking, capital markets, wealth and mortgage businesses. It reported approximately $42.0 billion in assets, $23.9 billion in loans, $35.1 billion in deposits and $4.8 billion in shareholders’ equity at year-end. The figures below are annual, not standalone fourth-quarter results.
Key financial metrics
| Metric | FY2021 / year-end | FY2020 / prior year-end |
|---|---|---|
| Net income | $475.5 million; diluted EPS $6.71 | $120.6 million; diluted EPS $2.19 |
| Net interest income | $1.033 billion | $826.5 million |
| Net interest margin | 2.89% | 3.25% |
| Total noninterest income | $354.2 million | $311.1 million |
| Total noninterest expense | $948.4 million | $797.6 million |
| Efficiency ratio | 65.6% | 67.5% |
| Return on average assets | 1.19% | 0.42% |
| Cash and cash equivalents, year-end | $6.84 billion | $4.61 billion |
| Total assets, year-end | $41.96 billion | $37.79 billion |
| Total loans, gross, year-end | $23.93 billion | $24.66 billion |
| Total deposits, year-end | $35.05 billion | $30.69 billion |
| Shareholders’ equity, year-end | $4.80 billion | $4.65 billion |
- Credit and asset quality: The company recorded a $165.3 million recovery of credit losses in 2021, compared with a $236.0 million provision in 2020. The allowance for credit losses was $301.8 million, or 1.26% of period-end loans, versus $457.3 million, or 1.85%, in 2020. Net charge-offs were 0.01% of average loans in both years. Nonperforming assets fell to $83.7 million from $119.1 million, equal to 0.20% of assets versus 0.32%.
- Cash flow: Operating activities provided $537.3 million; investing activities used $2.32 billion; and financing activities provided $4.02 billion. Cash and cash equivalents increased $2.23 billion during the year.
- Debt and liquidity: Year-end short-term borrowings were $781.2 million and corporate and subordinated debentures were $327.1 million. Deposits funded most assets; noninterest-bearing deposits were $11.50 billion, about 33% of deposits. The company reported $2.8 billion of available FHLB credit capacity, $981.1 million available at the Federal Reserve discount window and a $100 million unsecured U.S. Bank line, with no advances on these facilities at year-end.
- Capital: Consolidated CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 11.75%, 11.75%, 13.56% and 8.05%, respectively. The company and bank exceeded applicable well-capitalized standards.
Material changes versus the prior comparable period
- Net income rose 294.2%. The increase reflected a full year of contribution from the June 2020 CenterState acquisition, lower merger-related costs, higher interest and noninterest income, and the swing from credit-loss provisioning to a recovery. The recovery in credit losses was a significant contributor to earnings.
- Net interest income increased 25.0%, while net interest margin declined 36 basis points to 2.89%. Lower yields on earning assets outweighed lower funding costs.
- Deposits rose 14.2%, primarily attributed to stimulus-related liquidity and conservative consumer spending. Loans declined 3.0% overall: non-acquired loans grew $3.8 billion, while acquired loans fell $4.5 billion as of paydowns, payoffs and renewals.
- Investment securities increased 61.3% to $7.17 billion as the company invested excess deposit liquidity. Rising rates shifted the available-for-sale portfolio from a $62.6 million unrealized gain in 2020 to a $27.8 million unrealized loss in 2021.
- Noninterest expense rose 18.9%, mainly reflecting the full-year effect of CenterState. The company recorded $67.2 million of merger and branch-consolidation costs and an $11.7 million debt-extinguishment charge. 2020 included a $38.8 million swap-termination expense and a $31.5 million tax benefit from a CARES Act loss carryback.
Outlook, management commentary and risks
- Atlantic Capital merger: All required regulatory approvals were received by February 2022. Management expected the transaction to close in the first quarter of 2022; Atlantic Capital reported $3.8 billion in assets, $2.4 billion in loans and $3.3 billion in deposits at year-end 2021. Integration costs, customer or employee attrition, and failure to realize expected synergies remain risks.
- Interest rates and inflation: Management expected the Federal Reserve to begin raising rates during 2022 amid inflationary pressures, but the effects on net interest income and loan demand are uncertain. The company’s modeled one-year net interest income change was +9.41% under an instantaneous 100-basis-point rate increase and −7.58% under a 100-basis-point decrease; actual outcomes may differ.
- Credit and portfolio concentration: Approximately 80.4% of loans had real estate as a primary or secondary collateral component; commercial and commercial real estate loans represented about 76% of loans. CRE concentration measures were below cited regulatory guidance thresholds, but property-market or local economic deterioration could increase losses.
- COVID-19 and CECL: Management cited continuing uncertainty around the pandemic, supply chains, inflation and economic forecasts. The allowance estimate relies on judgment and could require future increases. COVID-related loan deferrals were $8.5 million, or 0.04% of the portfolio, at year-end; the company said it would offer deferrals through September 30, 2022.
- Other risks: The filing highlights cyber and third-party service-provider risks, competition and technology investment needs, regulatory scrutiny and acquisition integration. LIBOR-linked loans and derivatives also require transition management; the company stopped originating new LIBOR products by December 31, 2021 and selected SOFR-based alternatives.
- Legal and controls: Management said ordinary-course legal proceedings were not expected to materially affect consolidated results or financial position. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings increase is sustainable after separating the $165.3 million credit-loss recovery, acquisition effects and unusual expenses from ongoing operations.
- Whether deposit growth persists and how quickly deposit costs reprice if interest rates rise; also monitor liquidity and uninsured deposits, estimated at $12.4 billion.
- Loan growth and credit trends, particularly commercial real estate exposures, acquired-loan runoff, deferrals and future allowance requirements.
- Actual net interest margin and investment-portfolio values versus management’s rate-sensitivity assumptions, including the effect of unrealized securities losses.
- Completion and integration of the Atlantic Capital merger, including realized costs, synergies and any changes to capital, earnings or asset quality.
- Capital distributions and remaining share-repurchase authorization against capital needs, regulatory limits and the company’s acquisition plans.