EDGAR 10-K Filing

Company CIK: 764038
Filing Year: 2024
Filename: 764038_10-K_2024_0001558370-24-002302.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
SouthState Corporation (“We,” “Our,” “SouthState” or the “Company”) is a financial holding company headquartered in Winter Haven, Florida, that incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our wholly owned bank subsidiary, SouthState Bank, National Association (the “Bank”), a national banking association, from our headquarters branch in Winter Haven, Florida and, as of December 31, 2023, a 251-branch network located throughout Florida, South Carolina, Alabama, Georgia, North Carolina, and Virginia. In addition, the Company operates SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code. We do not engage in any significant operations other than the ownership of our banking subsidiary.
Through the Bank, we operate a correspondent banking and capital markets service division for over 1,200 small and medium sized community financial institutions throughout the United States. Based primarily in Atlanta, Georgia and Birmingham, Alabama, this division earns commissions on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities. In addition, the Bank operates SouthState|DuncanWilliams Securities Corp. (“SouthState|DuncanWilliams”), a full-service broker dealer headquartered in Memphis, Tennessee, which it acquired in February 2021. The services offered by SouthState|DuncanWilliams are complementary to the Bank’s correspondent banking and capital markets businesses and provide additional opportunities to the Bank’s client base. The Bank also operates SouthState Advisory, Inc., a wholly owned registered investment advisor, which offers support to the Bank’s Wealth line of business. The Bank owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. CBI Holding Company, LLC, Corporate Billing’s previous holding company, and its subsidiary, CBI Real Estate Holding, LLC, were merged into Corporate Billing effective November 30, 2023. In late 2023, the Bank formed SSB First Street Corporation, an investment subsidiary headquartered in Wilmington, Delaware, to hold tax-exempt municipal investment securities as part of the Bank’s investment portfolio.
At December 31, 2023, we had approximately $44.9 billion in assets, $32.4 billion in loans, $37.0 billion in deposits, $5.5 billion in shareholders’ equity, and a market capitalization of approximately $6.4 billion.
On March 1, 2022, the Company acquired all of the outstanding common stock of Atlantic Capital Bancshares, Inc., a Georgia corporation (“Atlantic Capital” or “ACBI”), in a stock transaction. Pursuant to the ACBI Merger Agreement, (i) ACBI merged with and into the Company, with the Company continuing as the surviving corporation (the “ACBI Merger”), and (ii) immediately following the ACBI Merger, Atlantic Capital Bank, N.A. (“ACB”) merged with and into the Bank (the “ACB Bank Merger” and collectively with the ACBI Merger, the “Merger”). The systems conversion was completed in July 2022.
Our principal executive offices are located at, and our mailing address is, 1101 First Street South, Suite 202, Winter Haven, Florida 33880. Our telephone number is (863) 293-4710.
Our revenue is primarily derived from interest on, and fees received in connection with, real estate and other loans, interest and dividends from investment securities and short-term investments, commissions on bond sales, fees from deposit accounts, hedging services, and gains from the sale of residential mortgage loans. The principal sources of funds for our lending activities are customer deposits, repayment of loans, and the sale and maturity of investment securities. Our principal expenses are interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, our operations are materially and significantly influenced by the real estate market, general economic conditions, and by the tax, monetary and fiscal policies of the U.S. and state government and regulatory agencies, including the Federal Reserve. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds, including tax rates and regulatory structure. We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans. See “Competition.”
Products and Services
Lending Activities
Our loan portfolio includes commercial real estate loans, residential real estate loans, commercial and industrial loans and consumer loans. The principal risk associated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower and the borrower’s market or industry. Attributes of the relevant business market or industry include the competitive environment, customer and supplier availability, the threat of substitutes and barriers to entry and exit.
Commercial Real Estate Loans. As of December 31, 2023, $17.6 billion, or 54%, of our loan portfolio consisted of loans secured by commercial real estate (including owner occupied and non-owner occupied commercial real estate, other income producing property and construction and land development lending). We offer construction financing, acquisition financing or refinancing of properties, commercial lines of credit and other loans that are secured by commercial real estate.
Residential Real Estate Loans. As of December 31, 2023, $8.0 billion, or 25%, of our loan portfolio consisted of residential real estate loans including home equity loans. We provide one-to-four family residential real estate loans with terms ranging from 10 to 30 years, with either fixed or adjustable interest rates and home equity lines. It is not our normal business practice to originate subprime loans. Our closed-end first lien loans are for purposes of property purchased, or for refinancing existing loans. The majority of our loans are owner occupied, full documentation loans.
Commercial and Industrial (“C&I”) Loans. As of December 31, 2023, $5.5 billion, or 17%, of our loan portfolio consisted of commercial and industrial loans. Our C&I loans include lines of credit, acquisition finance credit facilities and other types of commercial credit, and typically have maturities of five years or less. We also have a SBA 7(a) line of business whereby we routinely sell the government guaranteed portion of the SBA loans to investors with the unguaranteed portion of the loan and the servicing rights retained.
Other Consumer Loans. As of December 31, 2023, $1.2 billion, or 4%, of our loan portfolio consisted of other types of consumer loans. We offer consumer loans to our customers for personal, family and household purposes, including auto, boat and personal installment loans.
We believe we have a strong team of consumer and commercial bankers to execute on our client-centered, relationship-driven banking model. Our commercial banking team consists of experienced professionals that use an advisory approach that emphasizes understanding each client’s business and offering a broad suite of loan, deposit and treasury management products and services. Our consumer banking team consists of experienced professionals that focus on knowing their individual clients in order to best meet their financial needs, offering a full complement of loan, deposit and online banking solutions. We generally do business with clients located in the areas served by our branches, and we focus our marketing efforts on these areas.
Deposit Products, Treasury Services and Other Funding Sources
We offer our customers a variety of deposit products and services, including checking accounts, savings accounts, money market accounts, time deposit accounts and treasury and merchant services, through multiple channels, including our extensive network of 251 full-service branches, as of December 31, 2023, and our online, mobile and telephone banking platforms. As of December 31, 2023, our deposit portfolio was comprised of 29% noninterest-bearing deposits and 71% interest bearing deposits. We intend to continue our efforts to provide funding for our business from customer relationship deposits.
Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from depositors located around our branch footprint, and we believe that we have attractive opportunities to capture additional retail and commercial deposits in our markets. In order to attract and retain deposits, we rely on providing quality service, offering a suite of retail and commercial products and services and introducing new products and services that meet our customers’ needs as they evolve.
In addition to traditional banking activities and the other products and services specified above, we provide a broad array of financial services to our customers, including debit card and mobile services, funds transfer products and services, and treasury management services, including merchant services, automated clearing house services, lock-box services, remote deposit capture services and other treasury services.
Correspondent Banking and Capital Markets
We operate a correspondent banking and capital markets business division through the Bank and through SouthState|DuncanWilliams, the Bank’s broker dealer subsidiary acquired in February 2021. This line of business’s primary revenue generating activities are related to the capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities; and its correspondent banking division, which includes spread income earned on correspondent bank deposits (i.e., federal funds purchased) and correspondent bank checking account deposits and fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The fees derived from the correspondent banking services are less volatile than those generated through the capital markets group. The customer base includes small to medium size financial institutions located throughout the United States.
Wealth Management
Through the Bank and SouthState Advisory, Inc., we offer wealth management and other fiduciary and private banking services targeted to affluent clients, including individuals, business owners, families and professional service companies. In addition to fiduciary and investment management fee income, we believe these services enable us to build new relationships and expand existing relationships to grow our deposits and loans. Through our wealth management line of business, we offer financial planning, retirement services and trust and investment management for affluent clients as well as clients with more modest resources. We offer a wide range of investment alternatives, including certificates of deposits, mutual funds, annuities, individual retirement accounts, money market accounts and other financial products.
Mortgage Banking
We have a mortgage line of business that originates single-family home loans and either sells into the secondary market or holds in our portfolio those mortgages. We retain servicing rights for those loans we hold in our portfolio and for the majority of the loans that are sold.
Acquisition Strategy
Our business growth, profitability and market share have been enhanced by engaging in strategic mergers and acquisitions either within or contiguous to our existing footprint. Our acquisition strategy focuses on banking institutions that:
● are consistent with our guiding principles of soundness, profitability and growth and are a good fit with our culture;
● are strategically attractive by enhancing our footprint, allowing for cost savings and economies of scale, or providing market diversification, or otherwise strategically compelling;
● have been determined to meet our risk appetite and profile; and
● meet our financial criteria.
We expect to continue to assess future opportunities of financial companies using these criteria, based on market and other conditions.
Competition
Our profitability depends principally on our ability to compete effectively in the markets in which we conduct business. In the financial services industry, market demands, technological and regulatory changes and economic pressures have increased competition among banks, as well as other financial institutions. Competition may further intensify as additional companies enter the markets where we conduct business, and we enter mature markets in accordance with our expansion strategy.
We experience strong competition from both bank and non-bank competitors. We compete with national banks, super-regional banks, smaller community banks, nontraditional internet-based banks, credit unions, insurance companies and government sponsored entities. We also compete with other financial intermediaries and investment alternatives such as mortgage companies, credit card issuers, leasing companies, finance companies, money market mutual funds, brokerage firms, governmental and corporation bonds, and other securities firms.
We encounter strong competition in making loans and attracting deposits. We compete with other financial institutions to offer customers competitive interest rates on deposit accounts, competitive interest rates charged on loans and other credit products and reasonable service charges. In addition, we also compete based on the quality and scope of the services we provide and the convenience of our banking facilities, compared to our competitors. The larger national and super-regional banks may have significantly greater lending limits and may offer additional products. However, by emphasizing customer service and by providing a wide variety of services, we believe that our Bank has generally been able to compete successfully with our competitors, regardless of their size.
Technological advances have made it possible for our competitors, including nonbank competitors, to offer products and services that traditionally were banking products and for financial institutions and other companies to provide electronic and internet-based financial solutions, including online deposit accounts, electronic payment processing and marketplace lending, without having a physical presence where their customers are located. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. In many cases, our competitors have substantially greater resources and lending limits and offer certain services that we do not currently provide.
Legislation has continued to heighten the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly. To compete, we rely upon specialized services, responsive handling of customer needs, and personal contacts by our officers, directors, and staff.
Human Capital Management
We consider our relationship with our employees instrumental to the success of our business. We value our employees by investing in a healthy work-life balance, competitive compensation and benefit packages, and a team-oriented environment centered on professional service and open communication amongst employees. The Board of Directors oversees the strategic management of our human capital resources. The Human Resources Department’s day-to-day responsibility is managing our human capital resources.
Core Values and Culture
A strategic priority for the Company is to develop a dynamic, high performing team by, in part, facilitating a culture that increases employee engagement, devotes resources to recruiting, developing and retaining talent, and recognizes the benefits of different perspectives and experiences. The Company’s core values, an essential cultural cornerstone, set the course by which we intend to meet this goal through our interactions with each other, our customers and our suppliers:
● Local Market Leadership - Our business model supports the unique character of the communities we serve and encourages decision-making by a banker that is closest to the customer.
● Long-Term Horizon - We think and act like owners and measure success over entire economic cycles. We prioritize soundness over short-term profitability and growth.
● Remarkable Experiences - We will make our customers’ lives better by anticipating their needs and responding with a sense of urgency. Each of us has the freedom and responsibility to do the right thing for our customers.
● Meaningful and Lasting Relationships - We communicate with candor and transparency. The relationship is more valuable than the transaction.
● Greater Purpose - We enable our team members to pursue their ultimate purpose in life - their personal faith, their family, and their service to the community.
Because we recognize the importance of encouraging an environment that inspires our employees to act consistently with the Company’s core values, our management-level Culture Council is charged with overseeing the internal and external culture and values messaging, implementing a program for continuing to build and retain a diverse and inclusive employee base, developing a program to recruit, train and retain the leadership and talent necessary to deliver the Company’s vision, and maintaining an employee engagement program with clear objectives.
The Company’s Code of Ethics, which also addresses conflicts of interest and self-dealing, applies to all directors, officers and employees, each of whom are expected to adhere to it in every transaction. The Company believes that each employee is entitled to work in an atmosphere and environment free of discrimination and unlawful harassment. As a result, the Company has established and communicated to all employees a reporting structure for reporting incidents of harassment or discrimination. The Company’s Whistleblower hotline, which is located on our website and governed by our Whistleblower Policy, provides employees, customers, vendors and others with a confidential mechanism to express concerns or complaints regarding the Company’s accounting, internal accounting controls, auditing matters, securities law compliance, or any provision of federal law relating to fraud against shareholders. Other complaints or concerns, such as relating to human resources matters, may also be submitted confidentially through the whistleblower process, and any such matters are referred to our Human Resources Department or other departments, as appropriate, for resolution. Reporting on whistleblower complaints are reviewed by the Audit Committee of the Board.
Demographic Information
As of December 31, 2023, we had 5,070 full-time employees (compared to 4,921 as of the same date in 2022) and 214 part-time employees. Over 96% of our employees are located in the Bank’s 6-state branch footprint of South Carolina (33%), Florida (33%), Georgia (16%), North Carolina (7%), Alabama (6%) and Virginia (2%). To date, none of our employees are covered by collective bargaining agreements and all employees live in the United States. During fiscal year 2023, we hired 820 employees, and our voluntary turnover rate was 9.5% for all employees and 0.95% for management-level employees in 2023.
Additional workforce demographics by gender, race or ethnicity and generation are reflected in the graphics below.
Corporate Stewardship
We strive to build a powerful and diverse team of employees, knowing we are better together with our combined wisdom and intellect. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. Our Director of Corporate Stewardship reports to the CEO and bears primary responsibility for overseeing and directing strategic initiatives related to enterprise diversity, environmental and social governance, community development, management development, and the Employee Sunshine Fund.
In 2021, the Company adopted a three-year diversity and inclusion plan built around three goals:
In addition, the Company formed the Diversity and Inclusion Council to provide oversight to its diversity and inclusion strategy, support the implementation of diversity and inclusion initiatives that align with its vision and core values, and promote a diverse and inclusive workplace that represents the communities in which the Bank does business. The Diversity and Inclusion Council is responsible for identifying and addressing barriers that impact recruitment, retention and advancement of diverse candidates, defining benchmarks and metrics for diverse talent acquisition and retention, and identifying and implementing diversity and inclusion training for all Company employees and directors.
In 2022, we focused primarily on our implementation strategy for the three-year diversity and inclusion plan, which included discussing the diversity and inclusion plan with leadership throughout the Company to develop a mutual understanding and level of trust with local market leadership that would result in meaningful conversations and assist all stakeholders in viewing diversity from a number of perspectives. In addition, we established a small diversity and inclusion working group to help develop programs and initiatives in support of the action items outlined in the strategic plan. In collaboration with our Corporate Learning Department, in the fourth quarter of 2022, the Company engaged a third party to implement unconscious bias training throughout the Company. The unconscious bias training was first launched to the Board in late 2022, and as of December 31, 2023, it has been completed by over 600 leaders with plans to roll out the training to all team members through 2024.
As part of Corporate Stewardship's strategic plan, we announced several initiatives in 2023, including initiatives that continue to support the Company's Diversity & Inclusion plan. In the third quarter of 2023, the Director of Corporate Stewardship established several diversity metrics that would allow the Company to monitor its progress with recruitment, development, and retention of diverse talent, identify gaps, and allow us to focus our efforts accordingly. Beginning in 2024, SouthState's Diversity Metric Dashboard will track (i) Representation, (ii) Internal Talent Mobility, (iii) Voluntary versus Involuntary Turnover, and (iv) Recruiting Metrics. In addition to these metrics, to further support diversity and inclusion efforts within the Company, SouthState announced the addition of its first Corporate Social Responsibility Officer, who reports directly to the Director of Corporate Stewardship.
Talent Acquisition, Retention and Employee Development
Recruitment is an essential part of managing our human capital resources. We seek to hire well-qualified employees who are also a good fit for our value system. Through our commercial banking internships and management training programs, we recruit from a talented, diverse pool of students from local colleges and universities. To complement other recruitment efforts, our Talent Acquisition team is committed to attending job fairs hosted by Historical Black Colleges and Universities within our footprint. Additionally, the Talent Acquisition team partners closely with regional line of business leadership to network and recruit in-market, experienced and diverse talent in metropolitan markets within our footprint who bring with them a requisite skill set, professional background and aptitude to help grow the Bank and position our teams to support and lead a larger financial institution in the future.
We encourage and support the growth and development of our employees and, when possible, seek to fill positions by promotion and transfer from within the organization. We invest in the growth and development of our employees by providing opportunities to participate in continuing education courses that are relevant to the banking industry and their job function within the Company. Our internal Corporate Learning University offers a suite of leadership development programs to support various levels of leadership experience and expertise with graduated topics designed to engage and develop leaders by improving business acumen and offering 360 degree reviews, individual coaching opportunities and education on topics as varied as culture, communication styles and mentoring. Because the banking industry is highly regulated, we also require employees to complete annual compliance training, the classes for which are selected based on each employee’s actual job responsibilities. In 2023, employees completed on average 30 hours of Company-provided training.
Employee retention helps us operate efficiently. We believe that we offer competitive salaries, and many of our officers and key employees participate in the Company’s incentive program, which offers short-term cash incentives to reward annual performance and long-term incentives designed to reward sustainable shareholder value creation and encourage talent retention. In addition, we provide many of our employees with a comprehensive employee benefit program that includes: group life, health, dental and vision insurance; prescription benefits; flexible spending accounts; educational opportunities; an employee stock purchase plan; deferred compensation plans for officers and key employees; and a 401(k) plan with a Company match. The Company sponsors a broad leave plan that may be used for vacation, personal use and illness of employees and their immediate family members, and it awards paid leave based on tenure of service and title. The Company-sponsored Employee Stock Purchase Plan encourages our employees to invest in the Company by offering shares at a discounted price to participants.
Employee Health, Wellness and Safety
The safety and health of our employees is a top priority. While the COVID-19 pandemic has receded, allowing many of our employees that had worked remotely during that time to return to work locations, we value flexibility and approximately 26% of our employees continue to work effectively from remote locations.
In addition, to raise awareness of good health habits, the Company offers employees a robust wellness program that provides extensive wellness resources to include on-site biometric screenings and a health risk assessment program. The Company also provides support through wellness resources and the Employee Assistance Program for mental and financial wellness.
Oversight of Environmental, Social and Governance Issues
The Governance and Nominating Committee of the Company’s Board of Directors oversees the Company’s current and emerging environmental, social and governance matters. The Company issues a Corporate Social Responsibility Report on an annual basis, which highlights the Company’s environmental, social and governance initiatives, including the Company’s commitment to: building vibrant communities where we operate and where our customers live and work; fostering a strong culture that supports and encourages a diverse and inclusive workforce; promoting the highest ethical standards and acting as good stewards; and being environmentally resourceful as we support efficient and sustainable practices. Our commitment to our communities, colleagues, corporate stewardship and the environment will inform our Company’s actions as we strive to meet our vision: investing in the entrepreneurial spirit, pursuing excellence, and inspiring a greater purpose. During 2023, we continued to build out our Corporate Responsibility Programs, focusing on assessing our commitment to the environment by analyzing transition and climate risk within our loan portfolio and determining our Scope 1 and Scope 2 emissions using the expertise and resources of an outside expert consultant in climate matters. A copy of the Company’s 2023 Corporate Social Responsibility Report is available on the Bank’s website at 2023 Corporate Social Responsibility Report.
Effect of Governmental Policies
Our earnings and business are and will be affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, seeks to influence interest rates and the supply of money and credit within the United States. Among the traditional methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate for bank borrowings, expanded access to funds for non-banks and changes in reserve requirements against bank deposits. The Federal Reserve steeply increased the size of its balance sheet by buying securities in 2020-2021, and since then tapered such purchases and now is gradually reducing its balance sheet, and since the financial crisis has paid interest on excess reserves held by banks at the Federal Reserve. The Federal Reserve has also increased its target federal funds rate four times during 2023 to 5.25% to 5.50% to combat inflation. Both the traditional and more recent methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies, including whether and when the Federal Reserve will increase or decrease the federal funds rate and whether or at what pace it will reduce or increase the size of its balance sheet, and the effect of such policies on the future business and earnings of the Company and our subsidiary bank cannot be predicted.
Supervision and Regulation
We are extensively regulated under federal and state law. The following is a brief summary of certain aspects of that regulation that are material to us and does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. To the extent particular statutory and regulatory provisions are described, the description is qualified in its entirety by reference to the particular statute or regulation. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on the Company and the Bank, are difficult to ascertain. In addition to laws and regulations, bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to the Company or the Bank. A change in applicable laws, regulations or regulatory guidance, or in the manner such laws, regulations or regulatory guidance are interpreted by regulatory agencies or courts, may have a material adverse effect on the Company’s and the Bank’s business, operations, and earnings. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors and customers, the deposit insurance fund and the U.S. banking and financial system rather than shareholders.
Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years, initially in response to the financial crisis, and more recently in light of other factors such as the banking turmoil in early 2023 and technological and market changes. As described in further detail below, the Company and the Bank have become subject to additional regulatory requirements as a result of the growth of their assets. Regulatory enforcement and fines have also increased across the banking and financial services sector. Many of these changes occurred as a result of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its implementing regulations. While there have been some changes in the post financial crisis framework applicable to the Company, the Company expects that its business will remain subject to extensive regulation and supervision. The scope of regulation and the intensity of supervision will likely become higher under the current presidential administration, including increased scrutiny, supervisory discouragement or even possible denials of bank mergers and acquisitions by federal bank regulators.
We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC, as well as the rules of NYSE that apply to companies with securities listed on the New York Stock Exchange.
Regulation of the Company
We are registered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956 (the “BHC Act”) and have elected to be a financial holding company. As a financial holding company, we are subject to comprehensive regulation, examination and supervision by the Federal Reserve and are subject to its regulatory reporting requirements. Federal law subjects financial holding companies, such as the Company, to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
As a financial holding company, we are permitted to engage in, and be affiliated with companies engaging in, a broader range of activities than those permitted for a bank holding company. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve to be related closely to banking. Financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or complementary to financial activities, including certain insurance underwriting activities. We and the Bank must each remain “well-capitalized” and “well-managed” and the Bank must receive a Community Reinvestment Act (“CRA”) rating of at least “Satisfactory” at its most recent examination in order for us to maintain our status as a financial holding company. In addition, the Federal Reserve has the power to order a financial holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that financial holding company.
A financial holding company is required to act as a source of financial and managerial strength to its subsidiary bank and to maintain resources adequate to support its bank. The term “source of financial strength” has been defined as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress. The appropriate federal banking agency for the depository institution (in this case the Office of the Comptroller of the Currency or “OCC”) may require reports from the Company to assess its ability to serve as a source of strength and to enforce compliance with the source-of-strength requirements by requiring the holding company to provide financial assistance to the Bank if its capital were to become impaired. If the Company fails to provide such assistance within three months, it could be ordered to sell its stock of the Bank to cover the deficiency. Any capital loans by the Company to the Bank would be subordinate in right of payment to deposits and certain other debts of the Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment.
The BHC Act requires that a financial holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any additional bank or bank holding company, (ii) taking any action that causes an additional bank or bank holding company to become a subsidiary of the financial holding company, or (iii) merging or consolidating with any other bank holding company. The Federal Reserve may not approve any such transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider (1) the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including the companies’ performance under the CRA; and (4) the effectiveness of the companies in combatting money laundering. We are permitted under applicable federal and state law to make out-of-state acquisitions and mergers of other banks and bank holding companies, subject to the requirements summarized above. The guidelines issued by the Federal Reserve and the OCC with respect to mergers are undergoing a comprehensive interagency review and changes to these requirements may occur as a result.
Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Federal law also imposes restrictions on acquisitions of stock in a bank holding company or a national bank. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the OCC before acquiring control of any national bank, such as the Bank. Upon receipt of such notice, the bank regulatory agencies may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding company’s or bank’s voting stock, or if one or more other control factors set forth in the Act are present. As a result, a person or entity generally must provide prior notice to the Federal Reserve before acquiring the power to vote 10% or more of our outstanding common stock. Investors should be aware of these requirements when acquiring shares of our stock.
Regulation of the Bank
The Bank is a national bank subject to comprehensive regulation, examination and supervision by the OCC and is subject to its regulatory reporting requirements. The deposits of the Bank are insured by the FDIC and, accordingly, the Bank is also subject to certain FDIC regulations and the FDIC has backup examination authority and some enforcement powers over the Bank. The Bank also is subject to certain Federal Reserve regulations. These regulations include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; the disclosure of the costs and terms of such credit, requirements to maintain reserves against deposits and loans, limitation on the types of investment that may be made and requirements governing risk management practices.
The Bank also is subject to restrictions on its ability to lend to and engage in other transactions with the Company and the Bank’s other affiliates. Under these provisions, individual loans or other extensions of credit between the Bank and the Company or any nonbank affiliate generally are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and either the Company or any nonbank affiliate are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and any affiliate is required to be on arm’s length terms and conditions. The definition of “extension of credit” for these purposes includes credit exposures arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. Federal banking laws also place similar restrictions on loans and other extensions of credit by FDIC-insured banks, such as the Bank, to their directors, executive officers and principal shareholders. These restrictions have not had a material impact on the Company or the Bank.
Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts, primarily NOW and regular checking accounts. Effective March 26, 2020, the reserve was suspended with no reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is permitted under federal law to branch on a de novo basis across state lines where the laws of the state would permit banks chartered by that state to open a de novo branch.
The OCC has proposed a policy statement on the OCC’s substantive approach to evaluating bank mergers under the Bank Merger Act (“BMA”). The proposed policy statement outlines the general principles the OCC would apply when reviewing bank merger applications and clarifies how the OCC would consider the statutory factors under the BMA. The policy statement would also identify certain indicators consistent with approval and those that would raise concerns. The proposal lists certain indicators as generally consistent with OCC approval, which include, among others, appropriate capital and supervisory ratings, lack of enforcement or fair lending actions, lack of significant CRA or consumer compliance concerns or significant adverse effect on competition, and that the resulting institution would have total assets less than $50 billion. The Company is assessing the proposal and its possible impact on the Company’s strategy.
Supervision, Examination and Enforcement
The Federal Reserve, OCC and FDIC have broad supervisory, examination and enforcement authority with regard to bank holding companies and banks, including the power to impose nonpublic supervisory agreements, issue cease and desist or removal orders, impose fines and other civil and criminal penalties, initiate injunctive actions, terminate deposit insurance and appoint a conservator or receiver. In general, these actions may be initiated for violations of laws and regulations, as well as engagement in unsafe and unsound practices, and certain of these actions also may be taken against an “institution affiliated party” as defined in the law. Specifically, the regulators may direct a bank holding company or bank to, among other things, increase its capital, sell subsidiaries or other assets, limit its dividends and distributions, restrict its growth or remove officers and directors. Supervision and examinations are confidential, and the outcomes of these actions may not be made public.
We also are supervised and examined by the Consumer Financial Protection Bureau (“CFPB”) with respect to consumer protection laws and regulations.
FDIC Insurance Assessments and Depositor Preference
The deposits of the Bank are insured by the FDIC up to the limits under applicable law, which currently are set at $250,000 for accounts under the same name and title. The Bank is subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment system. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly. The FDIC has published guidelines on the adjustment of assessment rates for certain institutions.
The FDIC uses a performance score and loss-severity score to calculate the Bank’s initial FDIC assessment rate. In calculating these scores, the FDIC uses the Bank’s capital level and regulatory supervisory ratings and certain financial measures to assess the Bank’s ability to withstand asset-related and funding related stress, and make certain adjustments based on risk factors that are not adequately captured in these calculations.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. Deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against the institution, including federal funds and letters of credit, in the liquidation or other resolution of that institution by any receiver appointed by federal authorities. These priority creditors include the FDIC.
In response to the bank failures in early 2023, the FDIC implemented a special assessment to recover the losses to the FDIC’s Deposit Insurance Fund at an annual rate of approximately 13.4 basis points over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024. The base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. The full amount of approximately $25.7 million for the two-year special assessment period was recognized as of December 31, 2023. The FDIC may impose additional special assessments from time to time based on the actual losses incurred by the FDIC as a result of the March 2023 bank failures or future failures.
Dividend Restrictions
The Company is a legal entity separate and distinct from its banking and other subsidiaries and has in the past relied on dividends from the Bank as its primary source of liquidity. There are limitations on the payment of dividends by the Bank to the Company, as well as by the Company to its shareholders.
The OCC has the general authority to limit the dividends paid by the Bank if such payment may be deemed to constitute an unsafe and unsound practice. The Bank may not pay dividends from its paid-in surplus. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank, such as the Bank, is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been a transfer to surplus of no less than one/tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.
We and the Bank must maintain the applicable common equity Tier 1 (“CET1”) capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions, including dividends. For more information on the CET1 capital conservation buffer, see Part I Item 1 “Supervision and Regulation - Capital Requirements.”
In addition, Federal Reserve policy provides that bank holding companies, such as the Company, should generally pay dividends to shareholders only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition; and (iii) the organization will continue to meet minimum capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Bank holding companies also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.
Capital Requirements
We are required under federal law to maintain certain minimum capital levels at each of the Company and the Bank. The federal banking agencies have issued substantially similar risk-based and leverage capital requirements to banking organizations they supervise. Under these requirements, the Company and the Bank are required to maintain certain capital standards based on ratios of capital to total assets and capital to risk-weighted assets. The requirements also define the weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules. The required capital ratios are minimums, and the Federal Reserve and OCC may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.
Under the applicable capital rules, the Company and the Bank are subject to the following risk-based capital ratios: a CET1 risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities, if applicable.
Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, certain trust preferred securities, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The Company’s trust preferred securities and subordinated debentures qualify as Tier 2 capital. For institutions, such as us, that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values are also included in Tier 2 capital. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, “high volatility” commercial real estate, past due assets, structured securities and equity holdings.
The capital rules require a minimum CET1 risk-based capital ratio of 4.5%, a minimum overall Tier 1 risk-based capital ratio of 6.0%, and a total risk-based capital ratio of 8.0%. In addition, the capital rules require a capital conservation buffer of 2.5% above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which must be met for a bank or bank holding company to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without automatic restriction. The capital conservation buffer is 2.50%, so a banking organization needs to maintain a CET1 capital ratio of at least 7%, a total Tier 1 capital ratio of at least 8.5% and a total risk-based capital ratio of at least 10.5% or it would be subject to restrictions on capital distributions and discretionary bonus payments to its executive management.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total assets, less goodwill and other disallowed intangible assets. The required minimum leverage ratio for all banks and bank holding companies is 4%.
To be well-capitalized, the Bank must maintain the following capital ratios:
● CET1 risk-based capital ratio of 6.5% or greater;
● Tier 1 risk-based capital ratio of 8.0% or greater;
● Total risk-based capital ratio of 10.0% or greater; and
● Tier 1 leverage ratio of 5.0% or greater.
The Federal Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the current capital rules. For purposes of the Federal Reserve’s Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as the Company, must maintain a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater to be well-capitalized. If the Federal Reserve were to apply the same or a very similar well-capitalized standard to bank holding companies as that applicable to the Bank, the Company’s capital ratios as of December 31, 2023, would exceed such revised well-capitalized standard. The Federal Reserve may require bank holding companies, including the Company, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Company’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.
As of December 31, 2023, the Company’s and the Bank’s regulatory capital ratios were above the well-capitalized standards and met the fully phased-in capital conservation buffer. Please refer to the table below for a summary of the Company’s and the Bank’s regulatory capital ratios as of December 31, 2023 and 2022, calculated using the regulatory capital methodology applicable to us during 2023.
Minimum
Minimum Ratio +
Well-
Regulatory
Capital Conservation
Capitalized
Capital Above
Capital Ratio
Buffer
Minimums (1)
Actual
Minimums (2)
As of December 31, 2023
Tier 1 leverage ratio
Consolidated
4.00
%
N/A
N/A
9.42
%
$
2,393,892
Bank
4.00
%
N/A
5.00
%
10.03
%
$
2,659,730
CET 1 risk-based capital ratio
Consolidated
4.50
%
7.00
%
N/A
11.75
%
$
1,682,261
Bank
4.50
%
7.00
%
6.50
%
12.52
%
$
1,950,505
Tier 1 risk-based capital ratio
Consolidated
6.00
%
8.50
%
6.00
%
11.75
%
$
1,151,491
Bank
6.00
%
8.50
%
8.00
%
12.52
%
$
1,420,370
Total risk-based capital ratio
Consolidated
8.00
%
10.50
%
10.00
%
14.08
%
$
1,267,623
Bank
8.00
%
10.50
%
10.00
%
13.75
%
$
1,147,350
As of December 31, 2022
Tier 1 leverage ratio
Consolidated
4.00
%
N/A
N/A
8.72
%
$
2,051,115
Bank
4.00
%
N/A
5.00
%
9.39
%
$
2,337,715
CET 1 risk-based capital ratio
Consolidated
4.50
%
7.00
%
N/A
10.96
%
$
1,367,689
Bank
4.50
%
7.00
%
6.50
%
11.80
%
$
1,656,912
Tier 1 risk-based capital ratio
Consolidated
6.00
%
8.50
%
6.00
%
10.96
%
$
849,029
Bank
6.00
%
8.50
%
8.00
%
11.80
%
$
1,138,955
Total risk-based capital ratio
Consolidated
8.00
%
10.50
%
10.00
%
12.97
%
$
854,772
Bank
8.00
%
10.50
%
10.00
%
12.69
%
$
755,636
(1) Reflects the well-capitalized standard applicable to the Bank and the well-capitalized standard applicable to the Company under Federal Reserve Regulation Y.
(2) Amount greater than the highest of the minimum regulatory capital ratio, the minimum regulatory capital ratio plus the capital conservation buffer and the well-capitalized minimum, as applicable.
The Company has elected to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of benefit during the initial two-year delay for a total five-year transition. The estimated impact of CECL on regulatory capital (modified CECL transitional amount) is calculated as the sum of the impact on retained earnings upon adoption of CECL (CECL transitional amount) and the calculated change in the ACL relative to the ACL upon adoption of CECL multiplied by a scaling factor of 25%. The scaling factor is used to approximate the difference in the ACL under CECL relative to the incurred loss methodology. The modified CECL transitional amount was calculated each quarter for the first two years of the five-year transition. This amount was fixed as of December 31, 2021, and the Company began the three-year phase out period with 25% of the total CECL transitional amount being phased out in 2022 and 2023. At December 31, 2023 and 2022, approximately $30.5 million and $45.8 million, respectively, was added to Tier 1 capital at the Company and Bank as a result of the modified CECL transition. Had the Company elected not to apply the modified CECL transitional amount to its Tier 1 capital, the Company and Bank would have still been considered well capitalized as of December 31, 2023 and 2022.
On July 27, 2023, the banking agencies released a proposed rule to implement major changes to the capital rules for banking organizations with $100 billion or more in assets intended to bring the U.S. capital rules into conformance with the current international capital standards issued by the Basel Committee on Banking Supervision (“Basel Framework”). It is expected that the proposal, if enacted as proposed, would significantly increase capital requirements for banking organizations with $100 billion or more in assets, which could indirectly impact smaller institutions, such as the Company and the Bank, if larger banking organizations make changes in response to the increased capital requirements. The Company is monitoring the status of the proposed rule and is in the process of evaluating this proposed rulemaking and assessing the scale of its adverse impact on the Company and Bank if adopted as proposed.
Safety and Soundness Guidelines
The federal banking agencies have adopted guidelines prescribing safety and soundness standards relating to internal controls, risk management, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. These guidelines in general require appropriate systems and practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer or employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize but do not require an agency to order an institution that has been given notice by the agency that it is not in compliance with any of the safety and soundness standards to submit a compliance plan. If after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types, including those that may limit growth or capital distributions.
Lending Standards and Guidance
The federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies.
The federal banking agencies have also jointly issued guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”), which defines commercial real estate loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third-party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. The required heightened risk management practices could include enhanced strategic planning, underwriting policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed compensation and incentive programs. Higher allowances for credit losses and capital levels may also be required. The Guidance states that the following metrics may indicate a concentration of commercial real estate loans, but that these metrics are neither limits nor a safe harbor: (1) total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. As of December 31, 2023, our total reported loans for construction, land development, and other land were 60% of the Bank’s total Tier 1 capital less modified CECL transitional amount plus the allowance for credit losses (excluding reserve for unfunded commitments) and our total reported loans secured by multifamily and non-farm nonresidential properties and loans for construction, land development, and other land were 237% of the Bank’s total Tier 1 capital less modified CECL transitional amount plus the allowance for credit losses.
Consumer Protection Laws
The Bank is subject to a number of federal laws designed to protect its customers. These consumer protection laws apply to a broad range of our activities and to various aspects of our business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use of and the provision of information to consumer reporting agencies, and the prohibition of unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products and services. Administration of many of these consumer protection rules are the responsibility of the CFPB, which has exclusive supervisory authority over insured depository institutions with more than $10 billion in total assets and any affiliates thereof. The CFPB also has authority to define and prevent unfair, deceptive and abusive practices in the consumer financial area, and expanded data collecting powers for purposes of determining bank compliance with the fair lending laws.
The CFPB has promulgated many mortgage-related final rules, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher priced mortgages. In addition, several proposed revisions to mortgage-related rules are pending finalization. The mortgage-related final rules issued by the CFPB have materially restructured the origination, servicing and securitization of residential mortgages in the United States. These rules have impacted, and will continue to impact, the business practices of mortgage lenders, including the Company. For example, under the CFPB’s Ability to Repay and Qualified Mortgage rule, before making a mortgage loan, a lender must establish that a borrower has the ability to repay the mortgage. “Qualified mortgages”, as defined in the rule, are presumed to comply with this requirement and, as a result, present less litigation risk to lenders. For a loan to qualify as a qualified mortgage, the loan must satisfy certain limits on terms and conditions, pricing and a maximum debt-to-income ratio. Loans eligible for purchase, guarantee or insurance by a government agency or government-sponsored enterprise are exempt from some of these requirements. Satisfying the qualified mortgage standards, ensuring correct calculations are made for individual loans, recordkeeping and monitoring, as well as understanding the effect of the qualified mortgage standards on CRA obligations, impose significant new compliance obligations on, and involve compliance costs for, mortgage lenders, including the Company.
Under applicable law, the Bank, as a debit card issuer, may receive a maximum permissible interchange fee equal to no more than $0.21 plus 5 basis points of the transaction value for many types of debit interchange transactions. Further, a debit card issuer may also recover $0.01 per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. In addition, the Federal Reserve rules governing routing and exclusivity require debit card issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
In March 2023, the CFPB issued the “Small Business Lending Rule” to implement Section 1071 of the Dodd-Frank Act for the stated purpose of increasing transparency in small business lending, promoting economic development, and combating unlawful discrimination. Under this rule, covered lenders, including the Bank, are required to collect and report information about the small business credit applications they receive, including geographic and demographic data, lending decisions, and the price of credit. As finalized, the Small Business Lending Rule requires compliance by covered lenders as early as October 2024. However, on October 26, 2023, a federal district court issued a nationwide injunction prohibiting the CFPB from implementing or enforcing the Small Business Lending Rule pending the U.S. Supreme Court’s decision in an appeal of a Fifth Circuit decision finding that the CFPB’s funding structure is unconstitutional. If the Supreme Court reverses the Fifth Circuit’s finding, the CFPB will be required to extend all compliance deadlines for the Small Business Lending Rule to compensate for the period in which its implementation and enforcement of the rule was stayed by the district court. It is anticipated that the Bank will be required to update its systems and train its lenders to comply with this small business data collection rule, although it is unclear at this time what impact this rule may have on the Company’s financial statements.
In October 2023, the Federal Reserve released a notice of proposed rulemaking that would lower the maximum interchange fee that a large debit card issuer can receive on a debit card transaction. Under the proposal, initially the base component would decrease from 21.0 cents to 14.4 cents, the ad valorem component would decrease from 5.0 basis points to 4.0 basis points multiplied by the value of the transaction, and the fraud-prevention adjustment would increase from 1.0 cents to 1.3 cents for debit card transactions performed from the effective date of the final rule to June 30, 2025. In addition, the proposal would adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered from large debit card issuers. We will continue to monitor the status of the proposed rule and are in the process of evaluating this proposed rulemaking and assessing the scale of its adverse impact on the Company and Bank if adopted as proposed.
In addition, in October 2023, the CFPB proposed a rule to implement Section 1033 of the Dodd-Frank Act, which would require certain entities, including the Company and the Bank, to, among other things, make available to a consumer, upon request, information in its control or possession concerning the consumer financial product or service that the consumer obtained from that entity. In general, the proposed rule also would require, among other things, data providers holding a consumer account, such as the Bank, to establish a developer interface satisfying certain data security specifications and other standards, through which the data provider can receive requests for, and provide, specific types of data covered by the rule in electronic, usable form to authorized third parties, including data aggregators. Under the proposed rule, data providers would be prohibited from, among other things, charging consumers or third parties fees for processing these consumer data requests. The proposed rule would also place certain data security, authorization and other obligations on third parties accessing covered data from data providers, which could include the Company and the Bank when acting in certain capacities. The proposed rule would also require third parties to limit their collection, use, and retention of the data received to only what is reasonably necessary to provide the consumers’ requested product or service. Under the proposal, the first compliance date would be effective six months after publication of the final rule. We continue to evaluate this proposal and the potential impacts, if adopted as proposed, on the Company and the Bank.
In January 2024, the CFPB issued two rule proposals as part of its approach to protect consumers by reducing so-called “junk fees”. The first proposal would remove an exception for overdraft lending services from longstanding provisions of the Truth in Lending Act (“TILA”) and other consumer financial protection laws by requiring banks with assets greater than or equal to $10 billion to treat overdraft loans like credit cards and other loans, including providing clear disclosures, to the extent the bank charges customer fees in excess of the direct costs of providing the service or in accordance with established benchmarks by the CFPB. While the Bank is still assessing the proposal, if adopted as proposed, this rule will likely have a material impact on the Bank by reducing revenue from overdraft lending services. The second proposal would prohibit nonsufficient funds fees on transactions that financial institutions decline in real time. These types of transactions include declined debit card purchases and ATM withdrawals, as well as some declined peer-to-peer payments. While the Bank is still assessing this proposal, with the Bank’s elimination of nonsufficient funds fees in 2022, this proposed rule, if implemented as proposed, will likely have limited impact on the Bank.
Community Reinvestment Act
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the institution, including low- and moderate-income neighborhoods. Furthermore, the relevant federal bank regulatory agency is required to consider a bank’s CRA assessment when considering the bank’s application to, among other things, merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution or open or relocate a branch office. The relevant federal banking agency, the OCC in the Bank’s case, examines each bank and assigns it a public CRA rating. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “unsatisfactory.” The Bank received a “satisfactory” rating at its most recent CRA evaluation.
On October 24, 2023, the Federal Reserve, the FDIC, and the OCC issued a final rule amending the agencies’ CRA regulations. In developing the final rule, the agencies’ objectives included the following: (i) update the CRA regulations to strengthen the achievement of the core purpose of the statute, (ii) adapt to changes in the banking industry, including the expanded role of mobile and online banking, (iii) provide greater clarity and consistency in the application of the regulations, (iv) tailor performance standards to account for differences in bank size, business models, and local conditions, (v) tailor data collection and reporting requirements and use existing data whenever possible, (vi) promote transparency and public engagement, (vii) confirm that CRA and fair lending responsibilities are mutually reinforcing, and (viii) promote a consistent regulatory approach that applies to banks regulated by all three agencies. The final rule is effective April 1, 2024. The Bank will be required to comply with operative provisions of the final rule’s new requirements beginning January 1, 2026, but will have until January 1, 2027, to comply with data and disclosure reporting requirements. It is anticipated that the Bank will require a material effort to update its systems as the new rule will impact several lines of business and require new compliance with data collection and reporting rules. This effort necessitates training for lenders and other stakeholders. Under the new rule, large banks will be subject to four tests versus the existing three tests, and performance evaluations will involve a more quantitative approach with complex data analytics. The Bank does expect increased expense to comply with the new rule, including expenses to enhance systems, training, and possible product enhancements.
Anti-Money Laundering Rules
The Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, (together, the “BSA”) and its implementing regulations require financial institutions to, among other duties, implement and maintain an effective anti-money laundering (“AML”) compliance program and file suspicious activity and currency transaction reports when appropriate.
The Anti-Money Laundering Act of 2020, enacted on January 1, 2021 as part of the National Defense Authorization Act (“AMLA”), amends the BSA but does not directly impose new requirements on banks. However, AMLA requires the U.S. Treasury Department to, among other things, issue National Anti-Money Laundering and Countering the Financing of Terrorism Priorities and implementing regulations, and conduct studies and issue regulations that may, over the next few years, significantly alter certain due diligence, recordkeeping and reporting requirements that the BSA and its implementing regulations impose on banks. AMLA also contains provisions that increase penalties for violations of the BSA and includes whistleblower incentives, both of which could increase regulatory enforcement against banks. Implementation of AMLA is ongoing and is anticipated to impact the Bank’s AML compliance program.
In an effort to increase transparency in the U.S. financial system and prevent shell entities from being used to launder money or hide assets, AMLA includes the Corporate Transparency Act (the “CTA”), which requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to, among other things, establish a national beneficial ownership information registry. In September 2022, FinCEN issued the final Beneficial Ownership Information Reporting Requirements rule (the “BOI Reporting Rule”), the first of three rulemakings that would implement the requirements of the CTA. Effective as of January 1, 2024, the BOI Reporting Rule requires certain “reporting companies” to file beneficial ownership information reports with FinCEN that will be stored in the national beneficial ownership registry and will detail the reporting company’s beneficial owners. In December 2023, FinCEN issued the final Beneficial Ownership Information Access and Safeguards rule-the second of three rulemakings that would implement the CTA-which governs access to the national beneficial ownership registry. FinCEN has not yet issued the third CTA-implementing regulation, which will amend the beneficial ownership requirements applicable to banks and other covered financial institutions under FinCEN’s existing Customer Due Diligence (“CDD”) rule. While it is not clear what impact the new rules will have on the Bank, our compliance costs will likely increase as we develop enhanced CDD procedures and recalibrate customer information collection and reporting systems to effectively respond to the CTA’s new requirements.
Violations of the BSA and its implementing regulations can result in substantial civil and criminal penalties, and the federal banking agencies are required to consider the effectiveness of a financial institution’s AML compliance program when reviewing bank mergers and bank holding company acquisitions. In addition to the federal banking agencies, FinCEN is authorized to impose significant civil monetary penalties for violations of the BSA and its implementing regulations and has recently engaged in coordinated enforcement actions with state and federal law enforcement agencies and banking regulators.
OFAC Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for administering U.S. economic sanctions, which can which prohibit certain transactions with designated foreign countries, nationals and others. OFAC-administered sanctions take on many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) blocking assets in which certain sanctioned foreign governments, entities or individuals have an interest, by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. OFAC also maintains a lists of designated persons, groups or entities that are the target of sanctions, including the “Specially Designated Nationals and Blocked Persons List.” The assets of designated persons, groups or entities are blocked and U.S. persons are generally prohibited from dealing with any such persons. Moreover, blocked assets, for example property and bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. If we find a name on any transaction, account or wire transfer associated with a sanctioned person, we must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities. Failure to comply with these sanctions could have serious legal and reputational consequences.
Data Privacy and Cybersecurity
Various federal, state and local laws, rules, regulations and standards contain extensive data privacy and cybersecurity provisions, and the regulatory framework for data privacy and cybersecurity is in considerable flux and rapidly evolving. For example, current federal law, including the Gramm-Leach-Bliley Act, requires financial institutions to, among other things, periodically disclose their privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. Current federal law also requires financial institutions to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
We also are subject to federal regulations that, among other things, require a banking organization to notify its primary federal regulators as soon as possible and within 36 hours after identifying a “computer-security incident” that the banking organization believes in good faith is reasonably likely to materially disrupt or degrade its business or operations in a manner that would, among other things, jeopardize the viability of its operations, result in customers being unable to access their deposit and other accounts, result in a material loss of revenue, profit or franchise value, or pose a threat to the financial stability of the U.S. Additionally, the federal banking regulators, as well as the SEC and related self-regulatory organizations, regularly issue guidance regarding cybersecurity that is intended to enhance cyber risk management among financial institutions. The federal government also is considering, and may pass, data privacy and cybersecurity legislation, to which we may become subject if passed. The Bank is also subject to rules and regulations issued by the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including with respect to data privacy and cybersecurity. Additionally, like other lenders, the Bank uses credit bureau data in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us and our subsidiaries.
Data privacy and cybersecurity are also areas of increasing state legislative focus. For example, the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act of 2020 (collectively, “CCPA”), among other things, gives California residents the right to request access to or correct personal information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of their personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including that many, but not all, requirements of the CCPA are inapplicable to personal information that is collected, processed, sold, or disclosed subject to certain federal laws. Similar laws have been or may be adopted by other states where we do business or collect personal information. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to individuals whose personal information has been disclosed as a result of a data breach.
For further information regarding the risks associated with data privacy and cybersecurity laws, please see Part I - Item 1A - Risk Factors - “We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and cybersecurity, which could increase the cost of doing business, compliance risks and potential liability” and “We face cybersecurity risks from cyber-attacks, information security breaches and other similar incidents that could result in the disclosure of confidential and other information (including personal information), adversely affect our business or reputation, and create significant legal and financial exposure.”
Broker Dealer and Investment Adviser Regulation
Our broker dealer subsidiary and investment adviser subsidiary are subject to regulation by the SEC. FINRA is the primary self-regulatory organization for our registered broker-dealer subsidiary. The broker dealer and investment adviser subsidiaries also are subject to additional regulation by states or local jurisdictions. The SEC and FINRA have active enforcement functions that oversee broker dealers and investment advisers and can bring actions that result in fines, restitution, a limitation on permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations also can affect the Company’s ability to issue new securities expeditiously. In addition, certain changes in the activities of a broker dealer require approval from FINRA, and FINRA takes into account a variety of considerations in acting upon applications for such approval, including internal controls, capital levels, management experience and quality, prior enforcement and disciplinary history, and supervisory concerns.
Future Legislation and Regulation
Banking statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us and our subsidiaries. We cannot predict the substance or impact of pending or future legislation or regulation or the application of those laws or regulations, although enactment of any significant proposal could affect how we operate and could significantly increase our costs, impede the efficiency of internal business processes or limit our ability to pursue business opportunities in an efficient manner, any of which could materially and adversely affect our business, financial condition and results of operations.
Availability of Reports Furnished or Filed with the Securities and Exchange Commission
We make available at no cost all of our reports filed electronically with the United States Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and the annual proxy statement, as well as amendments to those reports, through the Investor Relations page of our website at www.SouthStatebank.com. These filings are also accessible on the SEC’s website at www.sec.gov.
We also will provide without charge a copy of our Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to SouthState Corporation, Attention: Corporate Secretary, 1101 First Street South, Winter Haven, Florida 33880.
Information with respect to the Company’s Board of Directors, Executive Officers and corporate governance policies and principles is presented on the Company’s website, www.SouthStatebank.com, on the Investor Relations page. We encourage our employees to take initiative and be responsible for their actions. We have implemented a Whistleblower program and adopted a Code of Ethics, and information about both is available under Corporate Overview/Governance Documents on the Investor Relations page of our website located at www.SouthStatebank.com. We also adopted a formal corporate governance policy, a copy of which is available under Corporate Overview/Governance Documents/Corporate Governance Guidelines on the Investor Relations page of our website located at www.SouthStatebank.com.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our common stock. These risks include, but are not limited to, the following:
Risks related to our Business and Business Strategy:
● our ability to grow or to manage our growth effectively;
● our ability to adequately anticipate and respond to changes in market interest rates;
● a decrease in our net interest income due to the interest rate environment;
● the negative impact of inflation on our business, profitability and stock price;
● an increase in the cost of funds as a result of general economic conditions, FDIC insurance assessments, interest rates, and competitive pressures on deposits;
● the implementation of new lines of business or new products and services;
● our ability to realize the benefits expected from strategic initiatives;
● the impact of technological changes, including artificial intelligence and online and mobile banking, on our business model, and that we may have fewer resources than many competitors to invest in technological improvements;
● a significant portion of our loan portfolio being secured by real estate;
● our loan portfolio including commercial and commercial real estate loans that may have higher risks;
● our ability to effectively manage credit risk and interest rate risk;
● lack of liquidity or inability to effectively manage liquidity rate risk;
● the results of our most recent stress tests not accurately predicting the impact on our financial condition if the economy were to deteriorate;
● the impact of the Current Expected Credit Loss standard and global events on our allowance for credit losses;
● our size and continued pace of growth requiring us to raise additional capital in the future that may not be available when it is needed;
● our processes for managing risk not being effective to mitigate risk or losses;
● rising mortgage rates and adverse changes in mortgage conditions;
● our recent results not being indicative of our future results;
● environmental risks in our lending activities;
● appraisals used in deciding whether to make a loan that is secured by real estate not ensuring the value of the real property collateral;
● losses due to errors, omissions or fraudulent behavior by employees, clients, counterparties and third parties;
● the adoption of artificial intelligence tools by us and our third-party vendors and service providers;
● environmental, social and governance risks that adversely affect our reputation, the trading price of our common stock and/or our business, operations and earnings;
● our ability to maintain our culture and attract and retain experienced people;
● our ability to offer our key management personnel long term incentive compensation and our ability to retain such personnel;
● our reliance on the performance of highly skilled personnel and our ability to attract, retain, develop and motivate our human capital in the form of well-qualified employees;
● our ability to implement information technology and cybersecurity system enhancements and operational initiatives;
● changes and instability in global economic conditions and geopolitical matters;
● a failure of disruption to our operational or security systems or infrastructure, or those of our third-party service providers;
● risks from cyber-attacks, information security breaches, and other similar incidents;
● future expansion;
● the availability of attractive acquisition opportunities in the future;
● our disclosure controls and procedures not preventing or detecting all errors or acts of fraud;
● our accounting policies and processes;
● the value of the securities in our investment portfolio;
● consumers opting not to use banks to complete their financial transactions; and
● our ability to maintain our reputation.
Risks relating to the Regulatory Environment:
● government regulations that could limit or restrict our activities;
● recent regulatory proposals that may increase capital and liquidity risks;
● the heightened expectations of regulatory agencies exposing the Company to risk as it grows;
● our obligation to maintain capital to meet regulatory requirements;
● periodic examination and scrutiny by a number of banking agencies and any adjustments to our business resulting from such examination;
● our obligation to comply with the Bank Secrecy Act and other anti-money laundering statutes and regulations;
● our obligation to comply with numerous laws designed to protect consumers, including the CRA and fair lending laws;
● increases in FDIC deposit insurance premiums and assessments;
● changes to our requirement to commit capital resources to support the Bank;
● changes in tax laws, regulations, and interpretations or challenges to our income tax provision; and
● complex and evolving laws, regulations, rules, standards, and contractual obligations regarding data privacy and cybersecurity.
Risks relating to our Common Stock:
● state law and provisions in our articles of incorporation or bylaws that make it more difficult for another company to purchase us;
● shares of our Common Stock not being insured deposits and losing value;
● future capital needs resulting in dilution of shareholder investment;
● trading volume in our common stock and the sale of substantial amounts of our common stock in the public market that could depress the price of our common stock;
● our ability to pay dividends;
● rights of our holders of our junior subordinated debentures that are senior to those of our common shareholders;
● volatility of our stock price; and
● our institutional shareholders, which own approximately 29% of our common stock, exercising significant influence over us and having interests that differ from our other shareholders.
Risks relating to Economic Conditions and Other Outside Forces:
● changes to the political and economic environment and uncertainty surrounding the potential legal, regulatory, and policy changes resulting from a possible new U.S. presidential administration and congressional seat turnover;
● a slowdown in economic growth or a resumption of recessionary economic conditions;
● the soundness of other financial institutions;
● the success of the local economies where we operate;
● adverse weather or manmade events;
● physical and financial risks associated with climate change and other weather and natural disaster impacts;
● market volatility that could adversely affect our operations or ability to access capital;
● competition;
● changes in the fiscal and monetary policies of the federal government and its agencies; and
● suits, legal proceedings, information-gathering requests, investigations, and proceedings by governmental and self-regulatory agencies.
Risk Factors
An investment in our common stock is subject to risks inherent in our business. The following discussion highlights the risks that management believes are material for our Company, but do not necessarily include all the risks that we may face. You should carefully consider the risk factors and uncertainties described below and elsewhere in this Annual Report on Form 10-K (“Report”) in evaluating an investment in our common stock.
Risks relating to our Business and Business Strategy
Our business strategy includes continued growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue to pursue a growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in pursuing such growth strategies. Our ability to continue to grow successfully will depend on a variety of factors, including economic conditions in the markets in which we operate as well as in the U.S. and globally, continued availability of desirable business opportunities, the competitive responses from other financial and non-financial institution competitors in our market areas, our ability to continue to implement and improve our operational, credit, financial, management and other risk controls and processes and our reporting systems and procedures to manage a growing number of client relationships, and our ability to integrate any acquisitions and develop consistent policies throughout our various businesses. While we believe our market areas are among the highest growth areas in the country, and that we have the management and other resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed. In addition, if we are unable to manage future expansion in our operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any of which could adversely affect our business. Particularly in light of prevailing economic and competitive conditions, we cannot assure you we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.
We may not be able to adequately anticipate and respond to changes in market interest rates.
We may be unable to anticipate changes in market interest rates, which are affected by many factors beyond our control including but not limited to inflation, monetary policy, money supply, recessionary pressures, unemployment, and other changes that affect domestic and foreign financial markets. Our net interest income is affected not only by the level and direction of interest rates but also by the shape of the yield curve and relationships between interest sensitive instruments and key driver rates, as well as balance sheet growth, customer loan and deposit preferences, and the timing of changes in these variables. In the event rates increase, our interest costs on liabilities may increase more rapidly than our income on interest earning assets, thus resulting in a deterioration of net interest margins. As such, fluctuations in interest rates could have significant adverse effects on our financial condition and results of operations.
Our net interest income may decline based on the interest rate environment.
We depend on our net interest income to drive our profitability. Net interest income is the difference between the interest income we receive from interest earning assets (e.g., loans and investment securities) and the interest expense we pay on interest-bearing liabilities (e.g., deposits and borrowings). We are exposed to changes in general interest rate levels and other economic factors beyond our control, and an increase in our cost of funds could negatively impact our net interest income. Net interest income will decline in a particular period if:
● in a rising interest rate environment, more interest-bearing liabilities than interest earning assets re price or mature,
● in a declining interest rate environment, more interest earning assets than interest bearing liabilities re price or mature, or
● for acquired loans, expected total cash flows decline as our loan balances decline.
Our net interest income may decline based on our exposure to a difference in short-term and long-term interest rates. If the difference between the interest rates shrinks or disappears, the difference between rates paid on deposits and received on loans could narrow significantly resulting in a decrease in net interest income. In addition to these factors, if market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thus reducing our net interest income. In addition, certain adjustable rate loans re price based on lagging interest rate indices. This lagging effect may also negatively impact our net interest income when general interest rates continue to rise periodically.
The Federal Reserve’s interest rate increases have impacted the rates we charge borrowers and depositors and our net interest margin. We cannot predict the nature or timing of future changes in monetary policies or the precise effects that they may have on our activities and financial results.
In addition, our net interest income may be adversely affected by resurgent inflationary pressures and new global supply chain challenges, geopolitical matters, weather events or other developments. While the rate of inflation for 2023 was lower than that experienced in either 2021 and 2022, it continued to exceed the Federal Reserve’s two percent (2%) annual target. There is a risk that inflation may become higher or persist for longer periods of time and not decrease. We have increased rates in response to the Federal Reserve’s interest rate increases, and loan demand has subsequently decreased. As interest rates have risen, competition for deposits has increased, leading to higher deposit costs and reduced liquidity. Any further increase in interest rates to address inflationary pressures could result in declines in demand for our banking products and services and could negatively impact, among other things, our liquidity, regulatory capital, goodwill and our growth strategy.
Inflation could negatively impact our business, our profitability and our stock price.
Continued inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions. These inflationary pressures could result in missed earnings and budgetary projections causing our stock price to suffer.
Our cost of funds may increase as a result of general economic conditions, FDIC insurance assessments, interest rates and competitive pressures.
Our cost of funds may increase as a result of increases in interest rates, competitive pressures, general economic conditions and FDIC insurance assessments. We have traditionally obtained funds principally through local deposits and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a less expensive and more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected, if and to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.
In addition, recent events impacting the banking industry, including the bank failures in early 2023, have resulted in significant disruption and volatility in the capital markets, reduced current valuations of securities portfolios and bank stocks, and decreased confidence in banks among depositors and other counterparties as well as investors. These events occurred in the context of rapidly rising interest rates which, among other things, have resulted in unrealized losses in longer duration debt securities and loans held by banks, increased competition for deposits and potentially increased the risk of a recession. A decrease in the supply of deposits or significant increase in competition for deposits could result in substantial increases in costs to retain and service deposits. Increased adoption of consumer banking technology can result in reduced deposit stickiness due to the relative ease with which depositors may transfer deposits to a different depository institution in the event that confidence is lost in the Bank. The cost of resolving the bank failures in early 2023 has also prompted the FDIC to issue a special assessment to recover costs to the Deposit Insurance Fund, and such special assessments may continue to be imposed. Please see Item I - Part 1 - “Supervision and Regulation - FDIC Insurance Assessments and Depositor Preference” for further information.
The implementation of new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services within existing lines of business in new sales channels such as online and mobile banking in the future. There are substantial risks and uncertainties associated with these efforts. In developing and marketing new lines of business and/or new products and services, we undergo a new product process to assess the risks of, and resources needed for, the initiative and invest significant time and resources to build internal controls, policies and procedures to mitigate those risks, including hiring experienced management to oversee the implementation of the initiative. Initial timetables for the introduction and development of new lines of business and/or new products or services and/or new sales channels may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service and/or sales channels. Furthermore, any new line of business and/or new product or service could require the establishment of new key and other controls and have a significant impact on our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
We may not realize the expected benefits from our strategic initiatives, either in whole or in part, which could negatively impact our future profitability.
Our current strategic plan contains growth, investment, risk management and efficiency initiatives in order to create a better and more profitable Company and remain competitive with other bank and non-bank financial services providers. To achieve our strategic goals, we must successfully execute these initiatives. Our current initiatives include, but are not limited to, building upon our digital banking initiatives, implementing real time payments, growing our middle market and larger corporate banking and correspondent divisions, and continuing to enhance our technology and cybersecurity infrastructure. While we have met our strategic initiatives in the past, there is no guarantee that these initiatives will be successful in supporting growth or achieving the expected efficiencies and revenue enhancements that we anticipate.
Furthermore, our strategic initiatives may result in an increase in expense, divert management attention, take away from other opportunities, negatively impact operational effectiveness or impact employee morale. In addition, management expects to continue to make strategic investments in technology and talent that are expected to improve our client experience and support future growth which will require an increase in our expenditures. There can be no assurance that we will ultimately realize the anticipated benefits of these strategic initiatives, or that these strategic initiatives will not negatively impact our organization. These initiatives may fail to meet our own or our clients’ expectations and may fail to keep pace with bank and non-bank competition and we may realize significant losses as a result.
Technological changes, including artificial intelligence and online and mobile banking, have the potential of disrupting our business model, and we may have fewer resources than many competitors to invest in technological improvements.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services, including artificial intelligence tools to enhance efficiencies, as well as mobile and online banking services. Changes in customer behaviors have increased the need to offer these options to our customers. The past several years accelerated technological change as our employees and the customers and communities to which we provide products and services converted to remote work, shopping and banking as we experienced supply chain interruptions.
In addition to serving clients better, investments in, and the effective use of, technology, including artificial intelligence, may increase efficiency and may enable financial institutions to reduce costs. Although we are making focused investments in automation and other technology solutions to improve both our customer facing and back-office services and have strategically introduced artificial intelligence tools for internal efficiencies, investments may not be sufficient or provide the anticipated benefits or desired return. We can make no assurance that investments will be sufficient to increase efficiencies, retain existing customers or attract new customers in the future.
Our future success will depend, in part, upon our ability to invest in and use technology to provide products and services that provide convenience to customers and to create additional efficiencies in operations. One of our strategic goals is to continue to focus on technological change and digital transformation of our product and service channels, which will impact how we deliver our products and services in the future as well as make our internal processes more efficient. We need to make significant additional capital investments in technology in the future to achieve this strategic goal, and we may not be able to implement effectively new technology-driven products and services in a timely manner in response to changes in customer behaviors, thus adversely impacting our operations. Many competitors have substantially greater resources to invest in technological improvements than the Company.
A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.
A significant portion of our loan portfolios are secured by real estate. As of December 31, 2023, approximately 79.2% of such loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. There can be no assurance that our local markets will not experience another economic decline. A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of other financial institutions whose real estate loan portfolios are more geographically diverse. Any weakening of the real estate market may increase the likelihood of default of these loans, which could negatively impact our loan portfolio’s performance and asset quality. Such a determination may lead to an additional increase in our allowance for credit losses, which could also adversely affect our business, financial condition, and results of operations.
Our loan portfolio includes commercial and commercial real estate loans that may have higher risks.
Our commercial industrial, construction and land development and commercial real estate loans at December 31, 2023 and 2022 were $23.2 billion and $22.4 billion, respectively, or 71% and 74%, respectively, of total loans. Commercial and commercial real estate loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Any formal or informal action by our supervisors may require us to take increased reserves on these loans and could affect our share price.
As a result, banking regulators give greater scrutiny to lenders with a high concentration of commercial real estate loans in their portfolios, and such lenders are expected to implement stricter underwriting, internal controls, risk management policies and portfolio stress testing, as well as maintain higher capital levels and loss allowances. Concentrations in commercial real estate are monitored by regulatory agencies and subject to especially heightened scrutiny both on a public and confidential basis. The Guidance states that the following metrics may indicate a concentration of commercial real estate loans, but that these metrics are neither limits nor a safe harbor:
1) total reported loans for construction, land development, and other land equal 100% or more of total risk-based capital (as of December 31, 2023, our bank ratio was 60%); and
2) total reported loans secured by multifamily and non-farm nonresidential properties and loans for construction, land development, and other land equal 300% or more of total risk-based capital (as of December 31, 2023, our bank ratio was 237%).
Regulators may require banks to maintain elevated levels of capital or liquidity due to commercial real estate loan concentrations, and could do so, especially if there is a downturn in our local real estate markets. See Part I Item 1 “Supervision and Regulation - Lending Standards and Guidance” for further details on the Guidance.
Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flows from the project are reduced, a borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, we may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy.
If we fail to effectively manage credit risk and interest rate risk, our business and financial condition will suffer.
We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may adversely affect our business, financial condition, and results of operations.
We must also effectively manage interest rate risk. Because mortgage loans typically have much longer maturities than deposits or other types of funding, rising interest rates can raise the cost of funding relative to the value of the mortgage loan. We manage this risk in part by holding adjustable rate mortgages in portfolios and through other means. Conversely, the value of our mortgage servicing assets may fall when interest rates fall, as borrowers refinance into lower rate loans. Given current rates, material reductions in rates may not be probable, but as rates rise, this risk increases, as evidenced by the March 2023 bank failures. There can be no assurance that we will successfully manage the lending and servicing businesses through all future interest rate environments.
A lack of liquidity and/or ineffective liquidity management practices could affect our operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include core deposits, federal funds purchased, securities sold under repurchase agreements, non-core deposits, and short- and long-term debt. Other sources of liquidity are available to us should they be needed, including our ability to acquire additional non-core deposits, the issuance and sale of debt securities, a secured line of credit we have with U.S. Bank, advances from the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, and the issuance and sale of preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, as evidenced by the March 2023 bank failures. Our ability to borrow could be impaired by factors that are not specific to us, such as further disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
Further, effective management of liquidity risk includes, among other practices, establishing liquidity key risk indicators and related risk tolerances, maintaining a portfolio of high-quality liquid assets, building and maintaining loan collateral at the Federal Home Loan Bank of Atlanta and Federal Reserve Discount Window, cash flow forecasting, diversifying funding sources, designing and using stress testing scenarios, and implementing an operational contingency funding plan. Our failure to effectively manage our liquidity risk through one or more of these practices could lead to operational disruptions, financial losses, and reputational damage, resulting in an adverse effect on our business, financial condition, and results of operations.
The results of our most recent stress tests may not accurately predict the impact on our financial condition if the economy were to deteriorate.
We perform capital stress testing on an annual basis using the stress testing assumptions provided by the regulators for the CCAR stress tests. We perform liquidity stress testing and credit stress testing on a quarterly basis. Under the capital stress test, we estimate our loan losses (loan charge-offs), resources available to absorb those losses and any necessary additions to capital that would be required under the “severely adverse” stress test scenario. The results of these stress tests involve many assumptions about the economy and future loan losses and default rates and may not accurately reflect the impact on our financial condition if the economy were to deteriorate. Any deterioration of the economy could result in credit losses significantly higher, with a corresponding impact on our financial condition and capital, than those predicted by our internal stress test.
The Current Expected Credit Loss (“CECL”) standard may result in increased volatility and further increases in our allowance for credit losses (“ACL”).
The measure of our ACL is dependent on the interpretation of applicable accounting standards, as well as external events, including the amount and pace of interest rate increases, market conditions, including recession risk and the possible impact on the unemployment rate and the performance of our loan portfolio, and other factors including the conflict in Ukraine, the escalating conflict between Israel and Hamas, supply chain disruptions, and pandemics such as the COVID-19 pandemic, among others. We adopted the Financial Accounting Standards Board’s Current Expected Credit Loss, or CECL standard, in the first quarter of 2020. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held to maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount and certain management judgments over the life of the loan. This initial measurement took place as of January 1, 2020 at the time of our adoption of CECL.
The CECL model has resulted in and may continue to result in more volatility in the level of our ACL, as compared to the “incurred loss” standard that we previously applied in determining our ACL. The CECL model requires us to estimate the lifetime “expected credit loss” with respect to loans and other applicable financial assets, which may change more rapidly than the level of “incurred losses” that would have been used to determine our allowance for loan losses under the prior incurred loss standard. The potentially material effects of the continuation of the COVID-19 pandemic on lifetime expected credit loss, and the challenges associated with estimating lifetime credit losses in view of the uncertain ultimate impacts of the pandemic, has resulted and may continue to result in increased volatility and significant additions to our ACL in the future, which could have a material and adverse effect on our business, financial condition and results of operations. The Company’s estimate of its ACL involves a high degree of judgment; therefore, the Company's process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. Further, if management’s assumptions and judgments prove to be incorrect and the allowance for credit losses is inadequate to absorb losses going forward, or if bank regulatory authorities require us to increase the allowance for credit losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.
Our size and continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise capital, if needed, in the future to meet capital requirements or otherwise will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, there is no assurance as to our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
Our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. Rising interest rates, disruptions in financial markets, negative perceptions of our business or our financial strength, or other factors may impact our ability to raise additional capital, if needed, on terms acceptable to us. For example, in the event of future turmoil in the banking industry or other idiosyncratic events, there is no guarantee that the U.S. government will invoke the systemic risk exception, create additional liquidity programs, or take any other action to stabilize the banking industry or provide liquidity. Any diminished ability to access short-term funding or capital markets to raise additional capital, if needed, could subject us to liability, restrict our ability to grow, require us to take actions that would affect our earnings negatively or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely.
Our processes for managing risk may not be effective in mitigating risk or losses to us.
The objectives of our risk management program and processes are to mitigate risk and loss to our organization. We have established an enterprise risk framework and program that are intended to identify, measure, monitor, report and analyze the types of risks to which we are subject across the organization and business lines, including liquidity risk, credit risk, strategic risk, market risk, interest rate risk, operational risk (including payments risk, BSA/AML risk, and model risk), cybersecurity risk, corporate governance and legal risk, compliance risk, strategic risk, and reputational risk (including environmental and social risks), among others. We also assess new and emerging risks on our existing programs. However, this framework will evolve as we expect to become subject to heightened expectations from the OCC as we grow above $50 billion in assets. In addition, as with any risk management process, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. The ongoing developments in the financial institutions industry continue to highlight both the importance and some of the limitations of managing unanticipated risks. Any potential new regulations or modifications to existing regulations would also likely necessitate changes to our existing regulatory compliance and risk management infrastructure. If our risk management processes prove ineffective, we could suffer unexpected losses and could be materially adversely affected.
Rising mortgage rates and adverse changes in mortgage market conditions could adversely impact our mortgage line of business.
Our mortgage line of business contributes significantly to our results of operations. The residential real estate mortgage lending business is sensitive to changes in interest rates, especially long-term interest rates. As interest rates increased during 2022 and 2023, the demand for mortgages has decreased materially, and our mortgage volume has substantially decreased as well. While we have adjusted our business model to sell a larger percentage of our originations into the secondary market, the gain on sale opportunities have been smaller than in previous years. Further, the portion of our mortgage loans that are originated for our portfolio subjects the Company to increased interest rate risk. Additionally, the fair value of our mortgage servicing rights is sensitive to changes in interest rates and interest rate volatility. Any change in the fair value of our mortgage servicing rights may negatively impact earnings. As a result of these and other factors, our price and profitability targets for this business may not be met, reducing our results of operations in the line of business and our net income. Further, risk in the mortgage business is heightened due to external factors, such as compliance with regulations, historically low housing inventories restraining home sales, competitive alternatives, changing tax rates and strategies, economic conditions, and shifting market preferences, which could impact the profitability of these lines of business and have a material adverse effect on our businesses, and, in turn, our financial condition and results of operations.
Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.
We are subject to environmental risks in our lending activities.
Because a significant portion of our loan portfolio is secured by real property, we may foreclose upon and take title to such property in the ordinary course of business. If hazardous substances were discovered on any of these properties, we may be liable to governmental agencies or third parties for the full costs of remediation, as well as for related personal injury and property damage. Environmental laws might require us to incur substantial expenses, materially reduce the property’s value, or limit our ability to use or sell the property. Although our management has policies requiring environmental reviews before loans secured by real property are made and before foreclosure is commenced, it is still possible that environmental risks might not be detected and that the associated costs might have a material adverse effect on our financial condition and results of operations. Many environmental laws impose liability regardless of whether the Company knew of, or was responsible for, the contamination. In addition, banks’ credit and underwriting policies that result in funding fossil fuel projects may impact climate change and lead to increased greenhouse gas emissions. Banks have very limited control over the actions of their clients, and while banks can monitor client emissions and environmental profiles, information currently available is insufficient to assess both climate risk and the financial risk inherent in making lending decisions. Accordingly, the Bank may be unable to assess how our lending decisions affect both our risk profile and our profitability as well as our clients’ efforts to address climate change.
While we use appraisals in deciding whether to make a loan that is secured by real estate, they do not ensure the value of the real property collateral.
In deciding whether to make a loan secured by real property, we generally require an appraisal. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal amount does not reflect the amount that may be obtained upon a sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.
We are subject to losses due to errors, omissions or fraudulent behavior by our employees, clients, counterparties or other third parties.
We are exposed to many types of operational risk, including the risk of fraud by third parties, customers and employees, clerical recordkeeping errors and transactional errors. Like the financial services industry overall, we have seen an increase in fraudulent attempts on accounts, online transactions, and debit cards during 2023, and these attempts may continue to accelerate with the increased use of artificial intelligence to produce sophisticated malware, phishing schemes, and other fraudulent activities. While (i) our procedures are designed to follow customary, industry-specific security precautions, (ii) we provide employees with ongoing training, table-top exercises and regular communications and guidance to combat fraud, and (iii) we have adopted additional cybersecurity tools and solutions designed to identify fraudulent attempts, our efforts might not be successful in mitigating or reducing fraudulent attempts resulting in financial losses, increased litigation risk and reputational harm.
Our business also is dependent on our employees as well as third-party service providers to process a large number of increasingly larger and more complex transactions. These risks will increase as we implement a real time payments platform. We could be materially and adversely affected if employees, clients, counterparties or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation or purposeful damage to any of our operations or systems.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with GAAP or are materially misleading.
The adoption of artificial intelligence tools by us and our third-party vendors and service providers may increase the risk of errors, omissions, unfair treatment or fraudulent behavior by our employees, clients, or counterparties, or other third parties.
Our adoption of artificial intelligence, including generative artificial intelligence, machine learning, and similar tools and technologies that collect, aggregate, analyze or generate data or other materials or content (collectively, “AI”), for limited internal use has increased our efficiency, and we expect to continue to adopt such tools as appropriate. In addition, we expect our third-party vendors and service providers to increasingly develop and incorporate AI into their product offerings faster than we are able to do so independently. There are significant risks involved in utilizing AI and no assurance can be provided that our or our third-party vendors’ or service providers’ use of AI will enhance our or our third-party vendors’ or service providers’ products or services or produce the intended results. The adoption and incorporation of such tools can lead to concerns around safety and soundness, fair access to financial services, fair treatment of consumers, and compliance with applicable laws and regulations. Such risk can result from models being poorly designed or faulty data being used, inadequate model testing or validation, narrow or limited human oversight, inadequate planning or due diligence, inappropriate or controversial data practices by developers or end-users, and other factors adversely affecting public opinion of AI and the acceptance of AI solutions. We have implemented an AI governance function and risk management framework that includes a risk assessment of internal and vendor AI solutions, due diligence, model validation, and controls. However, given the pace of rapid adoption of such tools by vendors and service providers, we may not be aware of the addition of AI solutions prior to such tools being introduced into our environment. Failure to adequately manage AI risks can result in erroneous results and decisions made by misinformation, unwanted forms of bias, unauthorized access to sensitive, confidential, proprietary or personal information, and violations of applicable laws and regulations, leading to operational inefficiencies, competitive harm, reputational harm, ethical challenges, legal liability, losses, fines, and other adverse impacts on our business and financial results. If we do not have sufficient rights to use the data or other material or content on which the AI tools we use rely, or to use the output of such AI tools, we also may incur liability through the violation of applicable laws and regulations, third-party intellectual property, privacy or other rights, or contracts to which we are a party.
In addition, regulation of AI is rapidly evolving as legislators and regulators are increasingly focused on these powerful emerging technologies. The technologies underlying AI and its uses are subject to a variety of laws and regulations, including intellectual property, data privacy and cybersecurity, consumer protection, competition, equal opportunity, and fair lending laws, and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations. AI is the subject of ongoing review by various U.S. governmental and regulatory agencies, and various U.S. states are applying, or are considering applying, existing laws and regulations to AI or are considering general legal frameworks for AI. We may not be able to anticipate how to respond to these rapidly evolving frameworks, and we may need to expend resources to adjust our operations or offerings in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions. Furthermore, because AI technology itself is highly complex and rapidly developing, it is not possible to predict all of the legal, operational or technological risks that may arise relating to the use of AI.
We are subject to environmental, social and governance (“ESG”) risks that could adversely affect our reputation, the trading price of our common stock and/or our business, operations, and earnings.
Governments, investors, customers, and the general public are increasingly focused on ESG practices and disclosures. For us and others in the financial services industry, this focus extends to the practices and disclosures of the customers, counterparties, and service providers with whom we choose to do business. In addition, certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies based upon ESG metrics. Currently, there are no universal standards for such scores or ratings, and views about ESG are diverse, dynamic, and rapidly changing. If we were to fail to maintain an appropriate ESG program, practices and disclosures, we could face potential negative ESG-related publicity in traditional and social media, including based on the identity of those we choose to do business with and the public’s view of those customers. In addition, certain states, including Florida, have enacted laws that would impair our ability to conduct certain business in the state if the Bank’s policies were to result in account closures due to factors that could be seen as promoting an ESG framework. If we or our relationships with customers, vendors and suppliers were to become the subject of negative publicity due to a perception of our ESG program, our ability to attract and retain customers and employees may be negatively impacted and our stock price may also be impacted.
Additionally, investors have begun to consider how corporations are addressing ESG matters when making investment decisions. For example, certain investors incorporate the business risks of climate change and the adequacy of companies’ responses to climate change and other ESG matters as part of their investment theses. During 2022, the SEC issued a proposal that would require disclosures regarding the Company’s climate risk management, and would require various reporting on the Company’s direct and indirect emissions, including what is called Scope 1, 2 and 3 emissions, as well as transition risk, which proposal is still pending. California has passed a similar disclosure law applicable to companies (such as the Company) that have more than $1 billion in annual revenues and operations in California. While the Company has established an ESG program and a climate risk steering committee and is in the process of determining its Scope 1 and 2 emissions, these rules will require material investment by the Company to fully implement. Any negative publicity regarding ESG or shifts in investing priorities or in required disclosures may result in adverse effects on the trading price of our common stock and/or our business, operations and earnings if investors, shareholders or other stakeholders determine that we have not adequately considered or addressed ESG matters.
Our business could suffer if we fail to maintain our culture and attract and retain experienced people.
Our success depends, in large part, on our ability to attract and retain competent, experienced people. Our strategic goals in particular require that we be able to attract qualified and experienced retail, commercial and corporate banking officers, mortgage loan officers, and SBA lenders in our existing markets as well as those markets in which we may want to expand who share our relationship banking philosophy and have those customer relationships that will allow us to grow successfully. We also need to attract and retain qualified and experienced technology, risk and back-office personnel to operate our business. Many of our competitors are pursuing the same relationship banking strategy in our markets and are looking to hire and retain qualified technology, risk and back-office personnel, which increases the competition to identify, hire and retain talented employees.
The Company’s recent mergers and the continued integration of the Company’s operations and employees into one bank creates an additional risk to the Company’s culture. If we fail to consider and account for corporate cultural differences across the companies due to various mergers, we will face increased difficulty in creating a cohesive culture.
We have focused, and will continue to focus, our strategic attention on our employees and our corporate culture, including enhancing our employee orientation, ongoing general credit and management training, leadership training and mentoring, and employee work environment as well as diversity and employee advancement. Our failure to maintain our culture and attractive working environment, through competitive compensation packages that reward initiative, as well as mentoring, training, and advancement opportunities in order to successfully compete for experienced, qualified employees may have an adverse effect on our ability to meet our financial goals and thus adversely affect our future results of operations.
If we are unable to offer our key management personnel long term incentive compensation, including restricted stock units and performance share units, as part of their total compensation package, we may have difficulty retaining such personnel, which would adversely affect our operations and financial performance.
We have a management team that has substantial experience in banking and financial services in the markets we serve. We rely on our management team to achieve and sustain our profitability. Our future success and profitability are substantially dependent upon this management and banking abilities of our senior executives. Although we currently have employment agreements in place with our executive management team and our regional presidents, we cannot guarantee that our executives will remain with us. Changes in key personnel and their responsibilities may be disruptive to our business because of their skills, customer relationship and/or the potential difficulty of promptly replacing them with successors.
We have historically granted equity awards under an equity compensation plan, which includes granting performance share units and restricted stock awards or restricted stock units, to key management personnel as part of a competitive compensation package. Our ability to grant these awards has been vital to attracting, retaining and aligning shareholder interest with a talented management team in a highly competitive marketplace.
Shareholder advisory groups have implemented guidelines and issued voting recommendations related to how much equity companies should be able to grant to employees. The factors used to formulate these guidelines and voting recommendations include the volatility of a company’s share price and are influenced by broader macroeconomic conditions that can change year to year. The variables used by shareholder advisory groups to formulate equity plan recommendations may limit our ability to adopt new equity plans in the future. In addition, the federal banking regulators have issued guidance on executive compensation and have also, along with the SEC, proposed rules that would prohibit certain incentive compensation arrangements. We do not believe that the guidance or proposal will impact our current compensation arrangements.
If we are limited in our ability to grant equity compensation awards, we would need to explore offering other compelling alternatives to supplement our compensation, including long-term cash compensation plans or significantly increased short-term cash compensation, in order to continue to attract and retain key management personnel. If we used these alternatives to long-term equity awards, our compensation costs could increase, and our financial performance could be adversely affected. If we are unable to offer key management personnel long-term incentive compensation, including stock options, restricted stock or restricted stock units, or performance share units, as part of their total compensation package, we may have difficulty attracting and retaining such personnel, which would adversely affect our operations and financial performance.
We rely on the performance of highly skilled personnel and if we are unable to attract, retain, develop and motivate our human capital in the form of well-qualified employees, our business and results of operations could be harmed.
We believe our success has depended, continues to and in the future will depend, on the efforts and talents of our management team and our highly skilled employees and workers. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. The loss of any of our senior management or key employees could materially and adversely affect our ability to build on the efforts that they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. Despite our current efforts, we cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or developing, retaining, and motivating our employees, our business and results of operations could be harmed.
We may not be able to successfully implement current or future information technology and cybersecurity system enhancements and operational initiatives, which could adversely affect our business operations and profitability.
We continue to invest significant resources in our information technology and cybersecurity systems, including by deepening and expanding our use of cloud-based applications, in order to provide enhanced functionality and security at an appropriate level, improve our operating efficiency, and streamline our client experience. These initiatives significantly increase the complexity of our relationships with third-party service providers, and such relationships may be difficult to unwind. We may not be able to successfully implement and integrate such system enhancements and initiatives, which could adversely impact our ability to enhance our product and service offerings and meet the expectations of our customers. In addition, these projects could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations. Failure to properly adopt system enhancements could result in impairment charges that adversely impact our financial condition and results of operations, could result in significant costs to remediate or replace the defective components and could impact our ability to compete. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expense during and after implementation, and any such costs may continue for an extended period of time. As such, we cannot guarantee that the anticipated long-term benefits of these system enhancements and operational initiatives will be realized.
A failure of or disruption to our operational or security systems or infrastructure, or those of our third-party service providers, could disrupt our business, damage our reputation, increase our costs and cause losses.
The potential for operational risk exposure exists throughout our business and, as a result of our interactions with, and reliance on, third parties, is not limited to our own internal operational functions. We depend on our ability to process, record and monitor a large number of client transactions on a continuous basis. Further, third parties provide key components of our business infrastructure, such as our core processing, underwriting and servicing software, data collection and analysis, loan and deposit documents, compliance and risk software, product and service offerings, and internet connections and network access. As client, public and regulatory expectations regarding operational and information and cyber security have increased, we and our third-party service providers must continue to safeguard and monitor our operational and security systems and infrastructure for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing, or other operating systems and facilities, or those of our third-party service providers, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. Although we have information and cybersecurity policies and procedures, business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread failure of or disruption to our operational and security systems and infrastructure that support our businesses and clients. Any disruption or failure in our operational or security systems or infrastructure or the services provided by third parties, or any failure by us or these third parties to handle current or higher volumes of use, could adversely affect our ability to deliver products and services to our clients, process transactions and otherwise to conduct business.
For example, our financial, accounting, data processing, backup or other operational or security systems or infrastructure, or those of our third-party service providers, may fail to operate properly or become disabled or damaged as a result of a number of factors, including: sudden increases in customer transaction volume; electrical, telecommunications or other major physical infrastructure outages; cyber-attacks, information security breaches or other similar incidents; natural disasters such as earthquakes, tornadoes, hurricanes and floods; pandemics; and events arising from local or larger scale political or social matters, including wars and terrorist acts. In addition, we rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, expose us to risk. Moreover, technological or financial difficulties of one of our third-party service providers or their sub-contractors could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. In the event that backup systems are utilized, they may not process data as quickly as our primary systems and some data might not have been saved to backup systems, potentially resulting in a temporary or permanent loss of such data. Further, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our business recovery plan may not be adequate and may not prevent significant interruptions of our operations or substantial losses. While we have policies and procedures designed to prevent or limit the effect of a disruption to or failure of the operation of our operational and security systems and infrastructure, there could be no assurance that any such disruptions or failures will not occur or, if they do, that they will be adequately addressed. Any failure or interruption in the operation of our communications and information systems and networks could impair or prevent the effective operation of our customer relationship management, general ledger, deposit, lending or other functions. We frequently update our systems to support our operations and growth and to remain compliant with all applicable laws, rules and regulations. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Implementation and testing of controls related to our computer systems, security monitoring and retaining and training personnel required to operate our systems also entail significant costs.
We may not be insured against all types of losses as a result of disruptions to or failures of our operational and security systems and infrastructure or those of our third-party service providers, and our insurance coverage may not be available on reasonable terms, or at all, or may be inadequate to cover all losses resulting from such disruptions or failures. Disruptions or failures in our business structure or in the structure of one or more of our third-party service providers could interrupt the operations or increase the cost of doing business. The occurrence of any disruptions or failures impacting our or our third-party service providers’ operational or security systems or infrastructure could damage our reputation, result in a loss of customer business, and expose us to additional regulatory scrutiny, civil litigation, and possible financial liability, any of which could have a material adverse effect on our liquidity, financial condition and results of operations.
We face cybersecurity risks from cyber-attacks, information security breaches and other similar incidents that could result in the disclosure of confidential and other information (including personal information), adversely affect our business or reputation, and create significant legal and financial exposure.
Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to cybersecurity risks and could be susceptible to cyber-attacks, information security breaches and other similar incidents. Our business relies on the secure processing, transmission, storage, retrieval and other processing of confidential, proprietary, personal and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.
We, our customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks, information security breaches, and other similar incidents. These may include hacking, terrorist activities, identity theft, computer viruses, malicious or destructive code, phishing attacks, denial of service attacks, ransomware, improper access by employees or third parties, social engineering, attacks on personal email of employees, or other information security breaches or similar incidents that could result in the unauthorized release, gathering, monitoring, misuse, misappropriation, loss, disclosure or destruction of confidential, proprietary, personal and other information of ours, our employees, our customers or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cyber-attacks, information security breaches or vulnerabilities or other similar incidents. Despite efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate or detect all cyber-attacks, information security breaches or other similar incidents, nor may we be able to implement guaranteed preventive measures against such security breaches. Cyber threats are increasing and rapidly evolving, and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Cybersecurity risks for banking organizations have significantly increased in recent years, in part because of the proliferation of new technologies and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile payment and other internet-based product offerings and expand our internal usage of web-based products and applications and as artificial intelligence tools are increasingly used for purposes of cyber-attacks, information security breaches, and other similar incidents, including for targeted social engineering attacks. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees, service providers, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. For example, targeted social engineering attacks and “spear phishing” attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of our systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently and may not be recognized until launched or until well after a breach has occurred.
The risk of a security breach caused by a cyber-attack at a service provider or by unauthorized service provider access has also increased in recent years. Additionally, the existence of cyber-attacks, information security breaches, or other similar incidents at third-party service providers with access to our confidential, proprietary, personal and other information may not be disclosed to us in a timely manner. While we have processes in place to monitor our third-party service providers’ data and information security safeguards, we do not control such service providers’ day to day operations and a successful cyber-attack, information security breach, or other similar incident at one or more of such third-party service providers is not within our control. The occurrence of any such cyber-attacks, information security breaches, or other incidents could damage our reputation, result in a loss of customer business, and expose us to additional regulatory scrutiny, civil litigation, and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. Further, in some instances we may be responsible for the failure of such third parties to comply with government regulations.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators, and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack, information security breach or other similar incident that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack, information security breach, or other similar incident could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our business. In addition, we, our employees, and our customers are increasingly transitioning our and their computing infrastructure to cloud-based computing, storage, data processing, networking and other services, which may increase our cybersecurity risk.
Cyber-attacks, information security breaches, and other similar incidents, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Hacking or other unauthorized disclosure of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including our loss of customers and business opportunities, significant business disruption to our operations and business, misappropriation or destruction of our confidential, proprietary, personal or other information and/or that of our customers or other third parties, or damage to our or our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable data privacy and cybersecurity laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition. We may not be insured against all types of losses as a result of cyber-attacks, information security breaches and other similar incidents, and our insurer may deny coverage as to any future claim or insurance coverage may not be available on reasonable terms, or at all, or may be inadequate to cover all losses resulting from such incidents.
Although to date we have not experienced any material losses related to cyber-attacks, information security breaches, or other similar incidents, there can be no assurance that we will not suffer such losses in the future.
We may face risks with respect to future expansion.
Our business growth, profitability and market share has been enhanced by us engaging in strategic mergers and acquisitions and de novo branching either within or contiguous to our existing footprint. We may acquire other financial institutions or parts of financial institutions in the future and engage in lift outs of our banking teams or de novo branching. We may also consider and enter into or acquire new lines of business or offer new products or services, which may also use new sales channels, such as online and mobile banking. As part of our acquisition strategy, we seek companies that are culturally similar to us, have experienced management, and are in markets in which we operate or close to those markets so we can achieve economies of scale.
We expect to continue to evaluate merger and acquisition opportunities that are presented to us in our current and expected markets and conduct due diligence related to those opportunities, as well as negotiate to acquire or merge with other institutions. If we announce a transaction, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions. We also may issue debt to finance one or more transactions, including subordinated debt issuances. Generally, acquisitions of financial institutions involve the payment of a premium over book and market values, resulting in dilution of our tangible book value and fully diluted earnings per share, as well as dilution to our existing shareholders. We also face litigation risks with respect to potential mergers and acquisitions, and such litigation is common. We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek.
Given the OCC’s recent proposed policy statement on bank mergers and continued uncertainty around the regulatory approval process generally, there is no assurance that bank regulators will consider applications along historic timelines or will affirmatively act on an acquisition proposal, increasing the risk that market conditions will adversely affect the financial feasibility of completing an acquisition, obtaining cost savings and operational efficiencies, or realizing merger synergies upon integration. Failure to achieve or delays in achieving anticipated benefits could result in a share price reduction as well as increased costs, decreases in the amount of expected revenues, and diversion of management’s time and energy and could materially and adversely affect the Company’s financial condition, results of operations, business and prospects. Further, there is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or our Company, after giving effect to the acquisition, will achieve increased revenues comparable to or better than our historical experience, and failure to realize such expected revenue increases, cost savings, increases in market presence or other benefits could have a material adverse effect on our financial conditions and results of operations.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we anticipate continuing to evaluate merger and acquisition opportunities presented to us in our core markets, contiguous markets, and beyond. The number of financial institutions headquartered in our market areas in the Southeastern United States and across the country continues to decline through merger and other activity. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition, as the number of appropriate merger targets decreases, could increase prices for potential acquisitions which could reduce our potential returns, and reduce the attractiveness of these opportunities to us. In addition, acquisitions are subject to various regulatory approvals, and if we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, risk management, regulatory and fair lending compliance, including with respect to BSA and AML obligations, consumer protection laws, CRA obligations, and levels of goodwill and intangibles when considering acquisition and expansion proposals.
The standards by which bank and financial institution acquisitions will be evaluated are currently in flux and some banking organizations, including us, are experiencing delays in the processing of applications. In July 2021, President Biden issued an executive order on competition that requires the banking agencies to review the standards for bank mergers. This review is still ongoing for bank mergers and may change how the financial stability factor and community convenience and needs factor are evaluated. The OCC has proposed a policy statement on bank mergers designed to clarify the agency’s consideration of the statutory factors in the Bank Merger Act for approval of a bank merger, listing the indicators the OCC finds to be consistent with approval. See Part I Item 1 “Supervision and Regulation - Regulation of the Bank” for further details on the OCC’s proposed policy statement. In addition, some in Congress have called for a moratorium of any bank merger and acquisition of greater than $100 billion in assets. These proposals imply that we may be subject to higher antitrust standards, enhanced scrutiny under the Bank Merger Act guidelines, potentially delaying regulatory processing of applications. Any delay in approvals increases costs and uncertainties in the ability to successfully merge and integrate the target. Any acquisition could be dilutive to our earnings and shareholders' equity per share of our common stock.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit with the SEC is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or controls and procedures, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the controls systems are met.
These inherent limitations include the reality that judgments and decision making can be faulty, that alternative reasoned judgments can be drawn, and that breakdowns can occur because of a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an authorized override of the controls. In addition, properly integrating our acquisitions into our disclosure controls and procedures in a timely manner presents challenges. Accordingly, because of the inherent limitations in our controls systems, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in our internal controls over financial reporting and the restatement of previously filed financial statements.
Our accounting policies and processes are critical to how we report our financial condition and results of operations and require our management to make estimates about matters that are uncertain.
Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Several of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Pursuant to generally accepted accounting principles, we are required to make certain assumptions and estimates in preparing our financial statements, including determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If the assumptions or estimates underlying our financial statements are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets and liabilities, derivatives, securities, and certain loans, among other items, require a determination of their fair value in order to prepare our financial statements. Where quoted market prices are not available, we may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment. Some of these and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, being based on significant estimation and judgment. In addition, some illiquidity in markets and declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment, it could lead to declines in our earnings.
The value of securities in our investment portfolio may decline in the future.
As of December 31, 2023, we owned $7.5 billion of investment securities, which included $2.5 billion in held-to-maturity securities, $4.8 billion in available for sale securities and $192.0 million in other investments. The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio. For available-for-sale securities, the unrealized gains and losses are recorded in equity, net of tax, in accumulated other comprehensive income (“AOCI”). The Company has elected to exclude AOCI from its regulatory capital calculations, however, after the failure of a few financial institutions in the first quarter of 2023, many investors are taking into consideration losses in available for sale securities included in AOCI along with losses in held to maturity securities, which are not included in our financial statements, in looking at the valuations of financial institutions. If we experience further declines in the fair value of our available for sale and held to maturity securities, our stock price could be negatively impacted.
With adoption of Accounting Standards Codification (“ASC”) 326 effective January 1, 2020, we no longer evaluate securities for other-than-temporary impairments as the new accounting guidance changes the accounting for recognizing impairment on available for sale and held to maturity securities. We analyze each available for sale security on a quarterly on an individual basis to determine if there has been a decline in fair value below the amortized cost basis of the security to determine whether there is a credit loss associated with the decline in fair value. We consider the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. We use a systematic methodology to determine the ACL for investment securities held to maturity. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held to maturity portfolio. We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. Our estimate of the ACL involves a high degree of judgment; therefore, our process for determining expected credit losses my result in a range of expected credit losses. We monitor the held to maturity portfolio on a quarterly basis to determine whether a valuation account needs to be recorded. Because of changing economic and market conditions affecting issuers, we may be required to recognize expected credit losses on securities in future periods, which could have a material adverse effect on our business, financial condition or results of operations.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring, and retaining and providing growth opportunities for employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers, and caring about our customers and employees. If our reputation is negatively affected by the actions of our employees or otherwise, including as a result of a successful cyber-attack, information security breach or other similar incident we experience or any other unauthorized release or loss of customer information (including personal information), our business and, therefore, our operating results, may be materially adversely affected.
Actions by the financial service industry generally or by institutions or individuals in the industry can adversely affect our reputation indirectly by association. The proliferation of social media may increase the likelihood that negative public opinion from any of the real or perceived events in the financial services industry could impact our reputation and business. Negative public opinion could adversely affect the Company’s ability to attract and retain clients and teammates and can result in litigation and regulatory actions. All of these could adversely affect our growth, results of operation, and financial conditions.
Risks relating to the Regulatory Environment
We are subject to extensive regulation that could limit or restrict our activities.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various agencies, including the Federal Reserve, the OCC, CFPB, and the FDIC. These laws, regulations, and rules are imposed primarily to protect depositors, the FDIC Deposit Insurance Fund, consumers, and the banking system as a whole. We also are regulated by the SEC and the Financial Industry Regulatory Authority, or FINRA, whose regulations are designed to protect investors. Our compliance with these regulations is costly and potentially restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid and deposits and locations of our offices. We are also subject to capital guidelines established by our regulators, which require us to maintain sufficient capital to support our growth. Regulation of the financial services industry has increased significantly since the global financial crisis. The laws and regulations applicable to the banking industry could change at any time. The extent and timing of any regulatory reform as well as any effect on our business and financial results, are uncertain. Additionally, legislation or regulation may impose unexpected or unintended consequences, the impact of which is difficult to predict. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
In addition, the Biden Administration has sought to implement a more stringent regulatory agenda that is focused on fair lending issues, bank fees, and climate change. This agenda also has included a heightened focus on the regulation of loan portfolios and credit concentrations to borrowers impacted by climate change, heightened scrutiny on Bank Secrecy Act and anti-money laundering requirements, topics related to social equity, executive compensation, and increased capital and liquidity, as well as limits on share buybacks and dividends. In addition, mergers and acquisitions have been dampened by increased antitrust and regulatory scrutiny. The issuance of proposed rules and guidance in these areas, particularly around debit card fees and other consumer fees, if implemented as proposed, would have a material impact on our business, financial condition and results of operations.
Regulatory responses in connection with severe market downturns or unforeseen stress events may alter or disrupt our planned future strategies and actions. Adverse developments affecting the overall strength and soundness of other financial institutions, the financial services industry as a whole and the general economic climate and the U.S. Treasury market could have a negative impact on perceptions about the strength and soundness of our business even if we are not subject to the same adverse developments. For example, during 2023, the FDIC took control and was appointed receiver of Silicon Valley Bank, Signature Bank, and First Republic Bank, respectively. The failure of other banks and financial institutions and the measures taken by governments and regulators in response to these events could adversely impact our business, financial condition and results of operations.
Recent regulatory proposals may increase capital and liquidity risks.
If the changes to the capital rules issued by the banking regulators intended to bring the U.S. capital rules into conformance with the Basel Framework are adopted as proposed, banking organizations with assets of $100 billion or more may face significantly increased capital requirements. While the proposed rule does not affect the Company directly because it applies only to banking organizations with $100 billion or more in assets, it may adversely impact the Company due to general regulatory and investor expectations for the Company and the Bank to hold additional capital or as a result of larger banking organizations making changes in response to the increased capital requirements, which could have a material impact on the Company’s financial results and business mix. Please see Item I - Part 1 - “Supervision and Regulation - Capital Requirements” for further information regarding the capital rule proposal.
As the Company grows, the heightened expectations of regulatory agencies may expose us to additional regulatory risk.
As the Company grows above $50 billion in assets, the Company will be expected to bolster its risk management and governance framework to support a larger company. These expectations include established minimum standards for the design and implementation of the risk management framework and increased oversight and credible challenge by the board of directors over the Company’s risk profile and risk management practices. Our existing enterprise risk framework and program may not be easily scalable to meet such heightened expectations, thereby requiring lengthy or costly modifications to meet such expectations. Further, the Company’s existing workforce may not be sufficient or have the requisite skillset to design, operate and manage the bolstered framework, thereby requiring the Company to expend financial resources to hire and/or train the necessary staff. The Company’s failure to meet such heightened expectations may expose it to regulatory enforcement actions and civil penalties which could have an adverse material impact on the Company’s business, financial condition, operations and reputation and could jeopardize the Company’s ability to pursue acquisition opportunities.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company and the Bank each must meet regulatory capital requirements and maintain sufficient liquidity. Banking organizations experiencing growth, especially those making acquisitions, are expected to hold additional capital above regulatory minimums. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. In recent years, these market and regulatory expectations have increased substantially and have resulted in higher and more stringent capital requirements for us and the Bank.
Actions (if necessary) to increase capital, may adversely affect us. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Our failure to remain “well capitalized” for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds, and FDIC insurance costs, our ability to pay dividends on common stock and make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition. Under FDIC rules, if our subsidiary bank ceases to be a “well capitalized” institution for bank regulatory purposes, the interest rates that it pays and its ability to accept brokered deposits may be restricted. At December 31, 2023, we had approximately $719.7 million in wholesale brokered deposits, $29.1 million of in-market CDARs deposits, $2.1 billion of ICS deposits and approximately $59.5 million of deposits related to our prepaid card business, which are considered brokered deposits for regulatory purposes.
We are subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
The banking agencies regularly conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earning prospects, management, liquidity, sensitivity to market risk, consumer compliance, or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number or different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil money penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
The Company and other large banking organizations are becoming subject to increased scrutiny, more intense supervision and regulation, and a higher risk of enforcement action, with increased fines and penalties, which we expect to continue. We expect that our businesses will remain subject to extensive regulation and supervision.
The Bank is subject to the Bank Secrecy Act and other anti-money laundering statutes and regulations, and any deemed deficiency by the Bank with respect to these laws could result in significant liability and have material impact on our business strategy.
The BSA and its implementing regulations require financial institutions to, among other duties, implement and maintain an effective AML compliance program and file suspicious activity and currency transaction reports when appropriate. The Bank is also subject to increased scrutiny from OFAC with respect to its compliance with the U.S. economic sanctions laws and regulations, which include, among other things, the prohibition against dealing with, and the need to block or freeze assets of, persons that are the subject of U.S. economic sanctions. Please see Item I - Part 1 - “Supervision and Regulation - Anti-Money Laundering Rules” and Item 1 - Part 1 - “Supervision and Regulation - OFAC Regulation” for further information regarding the Bank’s obligations under the BSA and its implementing regulations and U.S. economic sanctions laws and regulations, respectively.
If the Bank’s policies, procedures, and systems are deemed deficient, or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, the Bank could be subject to liability, including fines and regulatory actions, which may include restrictions on its ability to pay dividends and the necessity and ability to obtain regulatory approvals to proceed with certain aspects of its business plan, including acquisition plans. Failure to maintain and implement an effective AML compliance program could also have serious reputational consequences for the Bank. Any of these results could have a material adverse effect on the Bank’s business, financial condition, results of operations, and future prospects.
The Bank is subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties and other sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on the Bank’s business, financial condition, results of operations, and future prospects.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
The FDIC insures deposits at FDIC-insured depository institutions, such as our subsidiary Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. The assessment base on which the Bank’s deposit insurance premiums is paid to the FDIC has been calculated based on its average consolidated total assets less its average equity. However, effective January 1, 2019, which was following the fourth consecutive quarter where the Bank’s total consolidated assets exceeded $10 billion, the FDIC started to use a performance score and loss-severity score to calculate the Bank’s initial FDIC assessment rate. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. While our risk management processes are designed to reduce risk by maintaining capital levels and mitigating any supervisory concerns, we may be unable to control the amount of premiums that we are required to pay for FDIC insurance in the event of a new economic downturn and an increase in financial institution failures. For example, we incurred a special assessment of $26 million by the FDIC to help recoup losses to the Deposit Insurance Fund resulting from the bank failures 2023. Any future increases in assessments or required prepayments in FDIC insurance premiums may materially adversely affect results of operations, including by reducing our profitability or limiting our ability to pursue business opportunities.
The Federal Reserve may require us to commit capital resources to support the Bank.
Applicable law and the Federal Reserve require a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Under these requirements, in the future, we could be required to provide financial assistance to our Bank if it experiences financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by any holding company in order to make the required capital injection into a bank is difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.
We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.
We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets. In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.
We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and cybersecurity, which could increase the cost of doing business, compliance risks and potential liability.
We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations relating to the data privacy and cybersecurity of the personal information of customers, employees or others, and any failure to comply with these laws, regulations, rules, standards and contractual obligations could expose us to liability and reputational damage. As new data privacy and cybersecurity-related laws, regulations, rules and standards are implemented, the time and resources needed for us to comply with such laws, regulations, rules and standards as well as our potential liability for non-compliance and reporting obligations in the case of cyber-attacks, information security breaches or other similar incidents, may significantly increase. Compliance with these laws, regulations, rules and standards may require us to change our policies, procedures and technology for information security and segregation of data, which could, among other things, make us more vulnerable to operational failures and to monetary penalties for breach of such laws, regulations, rules and standards.
For example, we are subject to federal law, including the Gramm-Leach-Bliley Act, which requires financial institutions to, among other things, periodically disclose their privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to share information with unaffiliated third parties under certain circumstances. We also are subject to federal regulations that, among other things, require a banking organization to notify its primary federal regulators as soon as possible and within 36 hours after identifying a “computer-security incident” that the banking organization believes in good faith is reasonably likely to materially disrupt or degrade its business or operations in a manner that would, among other things, jeopardize the viability of its operations, result in customers being unable to access their deposit and other accounts, result in a material loss of revenue, profit or franchise value, or pose a threat to the financial stability of the U.S. The federal government also is considering, and may pass, data privacy and cybersecurity legislation, to which we may become subject if passed. The Bank is also subject to rules and regulations issued by the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including with respect to data privacy and cybersecurity. Additionally, like other lenders, the Bank uses credit bureau data in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes.
Data privacy and cybersecurity are also areas of increasing state legislative focus. For example, the CCPA, among other things, gives California residents certain rights with respect to their personal information. Similar laws have been or may be adopted by other states where we do business or from which we collect personal information. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to individuals whose personal information has been disclosed as a result of a data breach.
Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal information than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase compliance costs. Aspects of the CCPA and other federal and state laws and regulations relating to data privacy and cybersecurity, as well as their enforcement, remain unclear, and we may be required to modify our practices in an effort to comply with them.
Further, while we strive to publish and prominently display privacy policies that are accurate, comprehensive, and compliant with applicable laws, regulations, rules and industry standards, we cannot ensure that our privacy policies and other statements regarding our practices will be sufficient to protect us from claims, proceedings, liability or adverse publicity relating to data privacy or cybersecurity. Although we endeavor to comply with our privacy policies, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and cybersecurity can subject us to potential federal or state action if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Additional risks could arise in connection with any failure or perceived failure by us, our service providers or other third parties with which we do business to provide adequate disclosure or transparency to our customers about the personal information collected from them and its use, to receive, document or honor the privacy preferences expressed by our customers, to protect personal information from unauthorized disclosure, or to maintain proper training on privacy practices for all employees or third parties who have access to personal information in our possession or control.
Any failure or perceived failure by us to comply with our privacy policies, or applicable data privacy and cybersecurity laws, regulations, rules, standards or contractual obligations, or any compromise of security that results in unauthorized access to, or unauthorized loss, destruction, use, modification, acquisition, disclosure, release or transfer of personal information, may result in requirements to modify or cease certain operations or practices, the expenditure of substantial costs, time and other resources, proceedings or actions against us, legal liability, governmental investigations, enforcement actions, claims, fines, judgments, awards, penalties, sanctions and costly litigation (including class actions). Any of the foregoing could harm our reputation, distract our management and technical personnel, increase our costs of doing business, adversely affect the demand for our products and services, and ultimately result in the imposition of liability, any of which could have a material adverse effect on our business, financial condition and results of operations. For further discussion of the data privacy and cybersecurity laws, regulations, rules and standards we are, or may in the future become, subject to, see Part I - Item 1 - “Supervision and Regulation - Data Privacy and Cybersecurity.”
Risks relating to our Common Stock
State law and provisions in our articles of incorporation or bylaws could make it more difficult for another company to purchase us, even though such a purchase may increase shareholder value.
In many cases, shareholders may receive a premium for their shares if we are purchased by another company. State law and our articles of incorporation and bylaws could make it difficult for anyone to purchase us without the approval of our board of directors.
Our articles of incorporation provide that a merger, exchange or consolidation of the Company with, or the sale, exchange or lease of all or substantially all of our assets to, any person or entity (referred to herein as a “Fundamental Change”), must be approved by the holders of at least 80% of our outstanding voting stock if the board of directors does not recommend a vote in favor of the Fundamental Change. The articles of incorporation further provide that a Fundamental Change involving a shareholder that owns or controls 20% or more of our voting stock at the time of the proposed transaction (a “Controlling Party”) must be approved by the holders of at least (i) 80% of our outstanding voting stock, and (ii) 67% of our outstanding voting stock held by shareholders other than the Controlling Party, unless (a) the transaction has been recommended to the shareholders by a majority of the entire board of directors or (b) the consideration per share to be received by our shareholders generally is not less than the highest price per share paid by the Controlling Party in the acquisition of its holdings of our common stock during the preceding three years. The approval by the holders of at least 80% of our outstanding voting stock is required to amend or repeal these provisions contained in our articles of incorporation. Finally, in the event that any such Fundamental Change is not recommended by the board of directors, the holders of at least 80% of our outstanding voting stock must attend a meeting called to address such transaction, in person or by proxy, in order for a quorum for the conduct of business to exist. If the 80% and 67% vote requirements described above do not apply because the board of directors recommends the transaction or the consideration is deemed fair, as applicable, then pursuant to the provisions of the South Carolina Business Corporation Act, the Fundamental Change generally must be approved by two thirds of the votes entitled to be cast with respect thereto.
Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities.
Shares of our Common Stock are not insured deposits and may lose value.
Shares of our common stock are not savings or deposit accounts and are not insured by the FDIC, or any other agency or private entity. Such shares are subject to investment risk, including the possible loss of some or all of the value of your investment.
Future capital needs could result in dilution of shareholder investment.
Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would dilute the ownership interest of our shareholders and may dilute the per share book value of our common stock. New investors also may have rights, preferences and privileges senior to our shareholders which may adversely impact our shareholders.
The trading volume in our common stock and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.
We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. Our stock price can fluctuate widely in response to a variety of factors. General market fluctuations, industry factors, and general economic and political conditions and events, such as terrorist attacks, economic slowdowns or recessions, interest rate changes, tax rate changes, credit loss trends, or currency fluctuations, also could cause our stock price to decrease regardless of operating results. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, or any of the other factors discussed above, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to national banks that are regulated by the OCC. For information on these regulatory restrictions on the right of the Bank to pay dividends to us and on the right of the Company to pay dividends to its shareholders, see Part I - Item 1 - “Supervision and Regulation - Dividend Restrictions.” If we do not satisfy these regulatory requirements, or if the Bank does not have sufficient earnings to make payments to us while maintaining adequate capital levels, we will be unable to pay dividends on our common stock.
Holders of our junior subordinated debentures have rights that are senior to those of our common shareholders.
We have helped support our continued growth through the issuance of, and the acquisition of, through prior mergers, trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. As of December 31, 2023, we had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $117.6 million, net of fair value adjustments. Payments of the principal and interest on these debt instruments are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the special purpose trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.
Our stock price may be volatile, which could result in losses to our investors and litigation against us.
Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings; changes in analysts’ recommendations or projections; our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers; new technology used or services offered by traditional and non-traditional competitors; news reports of trends, concerns, irrational exuberance on the part of investors, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of the Company’s common stock, and the current market price may not be indicative of future market prices.
Stock price volatility may make it more difficult for our investors to resell their common stock when they desire and at prices they find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business.
At December 31, 2023, our shareholders included three funds owning approximately 29% of our common stock and they may exercise significant influence over us and their interests may be different from our other shareholders.
Based on their 13G forms filed for the year end December 31, 2023, our shareholders include three funds that collectively own approximately 29% of the outstanding shares of our common stock. The top ten institutional owners collectively own approximately 50% of our outstanding shares of common stock, as reported by S&P Global. While the federal banking laws require prior bank regulatory approval if shareholders owning in excess of 9.9% of a financial holding company’s outstanding voting shares desire to act in concert, these institutional owners nonetheless could vote the same way on matters submitted to our shareholders without being deemed to be acting in concert and, if so, could exercise significant influence over us and actions taken by our shareholders. Interests of institutional funds may be different from our other shareholders. Accordingly, given their collective ownership, the funds could have significant influence over whether or not a proposal submitted to our shareholders receives required shareholder approval.
Risks relating to Economic Conditions and other Outside Forces
The political and economic environment could materially impact our business operations and financial performance, and uncertainty surrounding the potential legal, regulatory and policy changes by a possible new U.S. presidential administration may directly affect financial institutions and the global economy
The political and economic environment in the United States and elsewhere has resulted in and will continue to result in some uncertainty. Changing regulatory policies because of the changing political environment, could impact our regulatory and compliance costs and expected revenues, all of which could materially and adversely affect our business, financial condition and operating results. Additionally, financial markets may be adversely affected by fiscal or monetary policies established by central banks and financial regulators, uncertainty concerning government shutdowns, debt ceilings or funding for the government, actual or perceived instability in the U.S. banking system, and the current or anticipated impact of geopolitical instability of conflict, including in the Middle East, Ukraine, and Taiwan, as well as terrorism and other geopolitical events.
Further, a possible change in the U.S. presidential administration and congressional seat turnover following the 2024 election cycle may result in increased regulatory uncertainty. Changes in federal policy by the executive branch and regulatory agencies may occur over time through the new presidential administration’s and/or Congress’s policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry; however, the nature, timing and economic and political effects of such potential changes remain highly uncertain. At this time, it is unclear what laws, regulations and policies may change and whether future changes or uncertainty surrounding future changes will adversely affect our operating environment and therefore our business, financial condition and results of operations.
Changes and instability in global economic conditions and geopolitical matters could have a material adverse effect on our business, financial condition and results of operations.
Our business, financial condition and results of operations have been in the past and may, in the future, be materially affected by global economic conditions and geopolitical matters, including, both directly and indirectly, through the impact on client activity levels. The macroeconomic environment in the United States is susceptible to global events and volatility in the financial markets. Global economic and political developments, such as the Ukraine conflict, the Hamas attack on Israel and related events in the Middle East, increased global trade and other multinational tensions, and other global events, have adverse consequences that impact the macroeconomic environment, and these impacts may persist for some time, including disruptions of global supply chains, cross-border migration trends, labor gluts or shortages, increased energy prices, inflationary pressures and higher interest rates. Changes in the global economic and geopolitical environment have resulted in significant adverse effects for many different types of businesses nationwide and in the regions in which we operate, which could adversely impact economic and market conditions for the Company and its clients and counterparties.
The impacts of the Federal Reserve’s interest rate increases have dampened loan demand, and global events and geopolitical tensions could cause economic disruption which may result in further declines in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital, goodwill and our growth strategy. Developments related to the U.S. federal debt ceiling, including the possibility of a government shutdown, default by the U.S. government on its debt obligations, or related credit-rating downgrades, could have adverse effects on the broader economy, disrupt access to capital markets, and contribute to, or worsen, an economic recession. In addition, our net interest margin has been flat to decreasing in 2023 in response to competitive pressure to increase interest rates on deposits in order to retain our funding base faster than increasing the interest rate on our loans, thereby increasing our costs and reducing our revenues. In addition, increases in our loan pricing impacts our borrowers’ ability to repay existing loans or refinance loans as they become due, which could influence the recognition of credit losses on loans and securities and increase the allowance for credit losses, result in additional lost revenue, cause additional increases in expenses, result in goodwill impairment charges, result in the impairment of other financial and nonfinancial assets, and increase the Company’s cost of capital. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.
A slowdown in economic growth or a resumption of recessionary economic conditions could have an adverse effect on our business in the future.
The economy is subject to worldwide events, such as the COVID-19 pandemic and geopolitical tensions in the Middle East and Europe, as well as domestic events, any or all of which could impact inflationary pressures and interest rates to dampen demand, and these and other political and market developments are affecting and could continue to affect consumer confidence levels and cause adverse changes in loan payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and the provision for credit losses. Changes in the financial services industry and the effects of current and future law and regulations that may be imposed in response to future market developments also could negatively affect us by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of other banks’ difficulties or failure, which would increase the capital we need to support our growth.
We may be impacted by actual or perceived soundness of other financial institutions, including as a result of the financial or operational failure of a major financial institution, or concerns about the creditworthiness of such a financial institution or its ability to fulfill its obligations, which can cause substantial and cascading disruption within the financial markets and increased expenses, including FDIC insurance premiums, and could affect our ability to attract and retain depositors and to borrow or raise capital. For example, during 2023 the FDIC took control and was appointed receiver of Silicon Valley Bank, Signature Bank, and First Republic Bank. In addition, adverse developments with respect to third parties with whom we have important relationships could also negatively impact perceptions about us. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. The failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact the Company’s business, financial condition and results of operations.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally become challenging, our business may be adversely affected. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. We cannot give any assurance we will continue to benefit from market growth or favorable economic conditions in our primary market areas if they do occur.
Adverse weather or manmade events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market areas in Florida, South Carolina, North Carolina, Georgia, Virginia and Alabama are susceptible to hurricanes, tropical storms and related flooding and wind damage as well as tornados and other types of strong storms. While only one storm in 2023 impacted a branch in our market area with little disruption in business, these type of storms may do so in the future and may increase in intensity because of changes in weather patterns and other factors including climate change. Such weather events and manmade events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future natural disasters or manmade events will affect our operations or the economies in our current or future market areas. Such events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans, as well as our own properties, and an increase in delinquencies, bankruptcies, foreclosures or loan losses that could result in a higher level of non-performing assets, net charge-offs, and provision for loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes, tropical storms, tornados or other extreme weather events, including flooding and wind damage, or manmade events. Many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in those markets.
We are subject to physical and financial risks associated with climate change and other weather and natural disaster impacts.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. Although the U.S. rejoined the Paris Agreement, effective as of February 19, 2021, and the U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change, each of which may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, which may require us to expend significant capital and incur compliance, operating, maintenance and remediation costs. Given the lack of empirical data on the credit and other financial risks posed by climate change, it is impossible to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change on the Bank may present certain unique risks.
The physical risks of climate change include discrete events, such as flooding, hurricanes, tornadoes, and wildfires, and longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Physical risks may alter the Company’s strategic direction in order to mitigate certain financial risks. A significant portion of our operations is located in the areas bordering the Gulf of Mexico and the Atlantic Ocean, regions that are susceptible to hurricanes, or in areas of the Southeastern U.S. that are susceptible to tornadoes and other severe weather events including severe droughts, floods, and sea level rise. Any of these, or any other severe weather event, could cause disruption to our operations and could have a material adverse effect on our overall business, results of operations or financial condition. We have taken certain preemptive measures that we believe will mitigate these adverse effects; however, such measures cannot prevent the disruption that a catastrophic earthquake, fire, hurricane, tornado or other severe weather event could cause to the markets that we serve and any resulting adverse impact on our customers, such as hindering our borrowers’ ability to timely repay their loans, diminishing the value of any collateral held by us, interrupting supply chains, causing significant property damage, causing us to incur additional expense or resulting in a loss of revenue, and affecting the stability of our deposit base. The severity and impact of future earthquakes, fires, hurricanes, tornadoes, droughts, sea level rise, floods and other weather-related events are difficult to predict and may be exacerbated by global climate change. Man-made disasters and other events connected with the Gulf of Mexico or Atlantic Ocean, such as oil spills, could have similar effects. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities, each of which could have a material adverse effect on our financial condition and results of operations.
Climate change may worsen the frequency and severity of future earthquakes, fires, hurricanes, tornadoes, droughts, sea level rise, floods and other extreme weather-related events that could cause disruption to our business and operations. Chronic results of climate change such as shifting weather patterns could also cause disruption to our business and operations. Climate change may also result in new and/or more stringent regulatory requirements for the Company, which could materially affect the Company’s results of operations by requiring the Company to take costly measures to comply with any new laws or regulations related to climate change that may be forthcoming. New regulations, shift in customer behaviors, supply chain collapse or breakthrough technologies that accelerate the transition to a lower carbon economy may negatively affect certain sectors and borrowers in our loan portfolio, impacting their ability to timely repay their loans or decreasing the value of any collateral held by us.
Transition risk resulting from our customers retooling their businesses to transition from reliance on fossil fuels to cleaner energy also may impact the Bank. While loan demand to facilitate that transition may increase, some businesses may not have the financial capacity to make those changes, impacting their ability to timely repay their loans or decreasing the value of any collateral held by us, which may adversely impact our results of operations.
In addition, the Company faces potential reputational risks as a result of its practices related to climate change, including as a result of the Company’s direct or indirect involvement in certain industries, as well as any decisions management makes in response to managing climate risk, especially as views on climate-related matters become subject to increased polarization. Further, there is increased scrutiny of climate change-related policies, goals, and disclosures, which could result in litigation and regulatory investigations and actions. We may incur additional costs and require additional resources as we evolve our strategy, practices and related disclosures with respect to these matters.
Market volatility could adversely affect our operations or ability to access capital.
The capital and credit markets have experienced volatility and disruption from time to time during the past several years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial condition or performance. If these periodic market disruptions and volatility continue or worsen, we may experience adverse effects, which may be material, on our ability to maintain or access capital and on our business, financial condition and results of operations.
Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive and we experience competition in our markets from many other financial institutions. We compete with commercial banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions and fintech or e-commerce companies that operate in our primary market areas and elsewhere. Some of these competitors may have a long history of successful operation in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources or more advanced technology may possess an advantage by being capable of maintaining numerous and more convenient banking locations, easy to use and available mobile and computer apps or Internet platforms, operating more ATMs and conducting extensive promotional and advertising campaigns.
We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions and credit unions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification, sophisticated online or mobile applications, and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.
The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings.
The Federal Reserve regulates the supply of money and credit in the U.S. as its policies determine in large part the cost of funds for lending and investing and return earned on those loans and investments, both of which affect our net interest margin. They can also materially decrease the value of financial assets we hold. Federal Reserve policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans, or could result in volatile markets and rapid declining collateral values. Changes in Federal Reserve policies are beyond our control and difficult to predict. Accordingly, the impact of these changes on our activities and results of operations is difficult to predict.
We are or may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations, and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects of the banking business involve a substantial risk of legal liability. The Company and the Bank have been named or threatened to be named as defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies that we have acquired). In addition, from time to time, we are, or may become, the subject of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC, self-regulatory organizations and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way the Company and the Bank conduct their business, or reputational harm.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters are located in a branch located at 1101 First Street South, Suite 202, Winter Haven, Florida 33880. Our bank owns 204 properties and leases 106 properties, most of which are used as branch locations, mortgage loan production offices, wealth management offices or for housing operational units in Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia. We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located in Georgia, Tennessee, and Alabama. In addition, we lease some space in California, Colorado, Montana, New York and Texas related to the correspondent banking and capital markets division, and occupy a space in Tennessee related to SouthState|DuncanWilliams. Although the properties owned and leased are generally considered adequate, we have a continuing program of modernization, expansion, and when necessary, occasional replacement of facilities. For additional information relating to the Company’s premises, equipment and lease commitments, see accompanying Note 7-Premises and Equipment and Note 21-Lease Commitments to our audited consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We or our Bank subsidiary is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our products and services and our businesses. We do not believe any pending or threatened legal proceedings in the ordinary course against the Bank would have a material adverse effect on our consolidated results of operations or consolidated financial position.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of February 29, 2024, we had issued and outstanding 76,252,786 shares of common stock which were held by approximately 6,800 registered shareholders. Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “SSB.” As of December 18, 2023, SouthState voluntarily withdrew the principal listing and trading of its common stock from Nasdaq and transferred such listing to the NYSE. The listing and trading of its common stock on the NYSE began at market open on December 19, 2023.
The table below describes historical information regarding our common stock for the last five fiscal years:
Stock Performance
Dividends per share
$
2.04
$
1.98
$
1.92
$
1.88
$
1.67
Dividend payout ratio
31.34
%
29.54
%
28.43
%
81.45
%
30.94
%
Dividend yield (based on the average of the high and low for the year)
2.77
%
2.39
%
2.46
%
2.93
%
2.27
%
Price/earnings ratio (based on year-end stock price and diluted earnings per share)
13.07x
11.57x
11.94x
33.01x
16.18x
Price/book ratio (end of year)
1.16x
1.14x
1.16x
1.10x
1.23x
Common Stock Statistics
Stock price ranges:
High
$
87.77
$
93.34
$
93.26
$
87.98
$
88.10
Low
59.51
72.26
62.60
40.42
58.87
Close
84.45
76.36
80.11
72.30
86.75
Volume traded on exchanges
142,642,700
90,603,400
88,780,100
86,495,680
39,218,800
As a percentage of average shares outstanding
187.50
%
121.44
%
126.11
%
157.85
%
113.19
%
Earnings per share, basic
$
6.50
$
6.65
$
6.76
$
2.20
$
5.40
Earnings per share, diluted
6.46
6.60
6.71
2.19
5.36
Book value per share
72.78
67.04
69.27
65.49
70.32
Quarterly Common Stock Price Ranges and Dividends
The table below describes the high and low trading price and dividends paid on our common stock for each quarterly period within the two most recent fiscal years.
Year Ended December 31,
Quarter
High
Low
Dividend
High
Low
Dividend
1st
$
85.38
$
66.56
$
0.50
$
93.34
$
80.22
$
0.49
2nd
72.98
59.51
0.50
84.09
72.49
0.49
3rd
79.46
64.21
0.52
86.57
72.26
0.50
4th
87.77
63.36
0.52
91.74
74.21
0.50
Dividends
We currently intend to continue to pay comparable quarterly cash dividends on our common stock, subject to approval by our Board of Directors, although we may elect not to pay dividends or to change the amount of such dividends. The payment of dividends is a decision by our Board of Directors based upon then-existing circumstances, including our rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the Board of Directors determines relevant.
The Company is a legal entity separate and distinct from the Bank. Federal Reserve policy provides that bank holding companies, such as the Company, should generally pay dividends to shareholders only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition; and (iii) the organization will continue to meet minimum capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Bank holding companies also are required to consult with the Federal Reserve, who could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.
We pay cash dividends to our shareholders from our assets, which are provided primarily by dividends paid to SouthState by our Bank. Certain restrictions exist regarding the ability of the Bank to transfer funds to SouthState in the form of cash dividends, loans or advances, as described under Part I - Item 1 - “Supervision and Regulation - Dividend Restrictions.” Federal bank regulators have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current earnings. The approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. During 2023, the Bank paid dividends to SouthState totaling $180.0 million. We used these funds primarily to pay dividends to shareholders of approximately $154.9 million in 2023.
Stock Performance Graph
The following stock performance graph compares SouthState’s cumulative total shareholder return on our common stock over the most recent five-year period with the NASDAQ Composite and the KBW NASDAQ Regional Banking Index, an index that comprises performance of U.S. companies that do business as regional banks or thrifts. The stock performance graph assumes $100 was invested in our common stock and the above indexes on December 31, 2018. The cumulative total return on each investment assumed the reinvestment of dividends.
Period Ending
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
SouthState Corporation
$
100.00
$
147.99
$
127.07
$
144.23
$
140.79
$
160.20
NASDAQ Composite Index
$
100.00
$
136.69
$
198.10
$
242.03
$
163.28
$
236.17
KBW NASDAQ Regional Bank Index
$
100.00
$
123.81
$
113.03
$
154.45
$
143.75
$
143.17
Repurchases of Equity Securities
In January 2021, the Board of Directors of the Company approved the authorization of a 3,500,000 share Company stock repurchase plan (the “2021 Stock Repurchase Plan”). During 2021 and through December 31, 2022, we repurchased 3,129,979 shares under the 2021 Stock Repurchase Plan, at an average price of $81.97 per share (excluding cost of commissions) for a total of $256.6 million. Of this amount, we repurchased 1,312,038 shares, at an average price of $83.99 per share (excluding cost of commissions) for a total of $110.2 million during 2022.
On April 27, 2022, the Company’s Board of Directors approved a new stock repurchase program (“2022 Stock Repurchase Program”) authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the 2021 Stock Repurchase Plan for a total authorization of 4,120,021 shares. On June 7, 2022, the Company received Federal Reserve Board’s supervisory nonobjection on the 2022 Stock Repurchase Program. Shares of common stock under the 2022 Stock Repurchase Program may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual means and timing of any repurchases, target number of shares and prices or range of prices under the 2022 Stock Repurchase Program may be determined by us in our discretion and depend on a number of factors, including the market price of our common stock, share issuances under our equity plans, general market and economic conditions, and applicable legal and regulatory requirements. In 2022, the Company did not repurchase any shares through the 2022 Stock Repurchase Program. During 2023, the Company repurchased a total of 100,000 shares at a weighted average price of $67.48 per share pursuant to the 2022 Stock Repurchase Program. As of December 31, 2023, there is a total of 4,020,021 shares authorized to be repurchased.
The following table reflects our share repurchase activity during the fourth quarter of 2023:
(d) Maximum
(c) Total
Number (or
Number of
Approximate
Shares (or
Dollar Value) of
Units)
Shares (or
(a) Total
Purchased as
Units) that May
Number of
Part of Publicly
Yet Be
Shares (or
(b) Average
Announced
Purchased
Units)
Price Paid per
Plans or
Under the Plans
Period
Purchased
Share (or Unit)
Programs
or Programs
October 1 - October 31
27,159
*
$
65.72
-
4,120,021
November 1 - November 30
100,212
*
67.47
100,000
4,020,021
December 1 - December 31
1,266
*
84.27
-
4,020,021
Total
128,637
100,000
4,020,021
*
For the months ended October 31, 2023, November 30, 2023 and December 31, 2023, total number of shares purchased includes 27,159 shares, 212 shares and 1,266 shares, respectively, that were repurchased under arrangements, authorized by our stock based compensation plans and Board of Directors, whereby officers or directors may sell previously owned shares to SouthState in order to pay for the exercises of stock options or for income taxes owed on vesting shares of restricted stock. These shares were not repurchased under the 2022 Stock Repurchase Program.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
Pursuant to the November 2020 Amendments, we elect to provide disclosures consistent with the amendments to Regulation S-K, Item 301, which eliminate the requirement to provide selected financial data in comparative tabular form for each of the last five fiscal years.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Statements included in this Report, which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are based on, among other things, management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, and the economy. Words and phrases such as “may,” “approximately,” “continue,” “should,” “expects,” “projects,” “anticipates,” “is likely,” “look ahead,” “look forward,” “believes,” “will,” “intends,” “estimates,” “strategy,” “plan,” “could,” “potential,” “possible” and variations of such words and similar expressions are intended to identify such forward-looking statements. We caution readers that forward-looking statements are subject to certain risks, uncertainties and assumptions that are difficult to predict with regard to, among other things, timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, those risks listed under “Summary of Risk Factors” starting on page 23 of this Report.
For any forward-looking statements made in this Report or in any documents incorporated by reference into this Report, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. All forward-looking statements speak only as of the date they are made and are based on information available at that time. We do not undertake any obligation to update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements. All subsequent written and oral forward-looking statements by us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by our forward looking statements may also be included in other reports that we file with the SEC. We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward looking statements.
Introduction
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes SouthState Corporation and its subsidiary’s results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022, and the year ended December 31, 2022 as compared to the year ended December 31, 2021, and also analyzes our financial condition as of December 31, 2023 as compared to December 31, 2022. Like most banking institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on most of which we pay interest. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
There are risks inherent in all loans, so we maintain an allowance for credit losses to absorb our estimate of probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by recording a provision or recovery for credit losses against our earnings. In the following section, we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion.
The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other information included in this Report.
Overview
SouthState is a financial holding company headquartered in Winter Haven, Florida, and was incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our Bank. The Bank operates SouthState|Duncan-Williams, a registered broker-dealer headquartered in Memphis, Tennessee that serves primarily institutional clients across the U.S. in the fixed income business. The Bank also operates SouthState Advisory, Inc., a wholly owned registered investment advisor, and Corporate Billing, a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. Corporate Billing’s previous holding company CBI Holding Company, LLC and its subsidiary CBI Real Estate Holding, LLC were merged into Corporate Billing effective November 30, 2023. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code. In late 2023, the Bank formed SSB First Street Corporation, an investment subsidiary headquartered in Wilmington, Delaware, to hold tax-exempt municipal investment securities as part of the Bank’s investment portfolio.
At December 31, 2023, we had $44.9 billion in assets and 5,184 full-time equivalent employees. Through our Bank branches, ATMs and online banking platforms, we provide our customers with a wide range of financial products and services, through a six (6) state footprint in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. These financial products and services include deposit accounts such as checking accounts, savings and time deposits of various types, safe deposit boxes, bank money orders, wire transfer and ACH services, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, loans of all types, including business loans, agriculture loans, real estate-secured (mortgage) loans, personal use loans, home improvement loans, automobile loans, manufactured housing loans, boat loans, credit cards, letters of credit, home equity lines of credit, treasury management services, and merchant services.
We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located in Atlanta, Georgia, Memphis, Tennessee, Walnut Creek, California, and Birmingham, Alabama. This division’s primary revenue generating activities are related to its capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities; and its correspondent banking division, which includes spread income earned on correspondent bank deposits (i.e., federal funds purchased) and correspondent bank checking account deposits and fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services.
We earned net income of $494.3 million, or $6.46 diluted earnings per share (“EPS”), during 2023 compared to net income of $496.0 million, or $6.60 diluted EPS, in 2022. Net income available to the common shareholders was down $1.7 million, or 0.4%, in 2023 compared to 2022. For further discussion of the Company’s results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022, and the year ended December 31, 2022 as compared to the year ended December 31, 2021, see Results of Operations section of this MD&A starting on page 66.
At December 31, 2023, we had total assets of approximately $44.9 billion compared to approximately $43.9 billion at December 31, 2022. See the Financial Condition section of this MD&A starting on page 76 for a more detailed description of the change in our balance sheet.
With high inflation and a rising interest rate environment, there was some deterioration in asset quality in 2023. However, our overall asset quality results remained strong during the year. Net charge offs as a percentage of average loans increased to 0.08% compared to 0.02% for the year ended December 31, 2022. The total nonperforming assets (“NPAs”) increased $74.4 million to $184.1 million at December 31, 2023 from $109.7 million at December 31, 2022. Non-acquired NPAs increased $75.2 million to $122.5 million at December 31, 2023 from $47.3 million at December 31, 2022, which was related to an increase in non-acquired nonperforming loans of $74.7 million. Non-acquired OREO and other NPAs increased by $466,000 to $711,000 as of December 31, 2023 compared to $245,000 as of December 31, 2022. Acquired NPAs decreased $827,000 to $61.6 million at December 31, 2023 from $62.5 million at December 31, 2022. Acquired nonperforming loans decreased $617,000 and acquired OREO and other nonperforming assets decreased $210,000. Total NPAs as a percentage of total assets increased 16 basis points to 0.41% at December 31, 2023 compared to 0.25% at December 31, 2022. While net charge-offs totaled $29.1 million, the Company recorded a total of $195.9 million of provision for credit losses for the trailing eight quarters. Our NPA ratios remained historically low.
Our efficiency ratio was 55.5% for the year ended December 31, 2023 compared to 54.2% for the same period in 2022. The increase in our efficiency ratio was due to the effects of a 7.0% increase in noninterest expense being greater than the effects of a 5.8% increase in the total net interest income and noninterest income. The increase in noninterest expense was mainly due to an increase in salaries and employee benefits of $28.6 million, an increase in FDIC regulatory and other regulatory charges of $10.0 million and the recording of the FDIC special assessment expense of $25.7 million in 2023.
We continue to remain well-capitalized with a total risk-based capital ratio of 14.1% and a Tier 1 leverage ratio of 9.4%, as of December 31, 2023, compared to 13.0% and 8.7%, respectively, at December 31, 2022. The improvement in the total risk-based capital ratio was mainly due to total risk-based capital increasing 11.1% with the increase in equity resulting from net income of $494.3 million recognized in 2023, along with the increase in the allowance for credit losses and unfunded commitments of $126.5 million includable in Tier 2 capital. Total risk-weighted assets increased $807.3 million, or 2.3%, in 2023. The improvement in the Tier 1 leverage ratio was due to the increase in Tier 1 capital of 9.8% with the increase in equity resulting from net income of $494.3 million recognized in 2023. Regulatory average assets used to calculate the Tier 1 leverage ratio only increased $707.6 million, or 1.6%, in 2023. We believe our current capital ratios position us well to grow both organically and through certain strategic opportunities. For further discussion of the Company’s financial condition as of December 31, 2023 compared to December 31, 2022, see Financial Condition section of this MD&A starting on page 76.
Recent Events
Capital Management
In April 2022, the Company’s Board of Directors approved a new stock repurchase program (“2022 Stock Repurchase Program”) authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the 2021 Stock Repurchase Program for a total authorization of 4,120,021 shares. During 2023, the Company repurchased a total of 100,000 shares at a weighted average price of $67.45, excluding cost of commissions, per share pursuant to the 2022 Stock Repurchase Program. During 2022, the Company did not repurchase any shares pursuant to the 2022 Stock Repurchase Program. During the first quarter of 2022, before the approval of the 2022 Stock Repurchase Program, the Company repurchased a total of 1,312,038 shares at a weighted average price of $83.99 per share pursuant to the 2021 Stock Repurchase Plan.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Differences in the application of these policies could result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1 of our audited consolidated financial statements.
The following is a summary of our critical accounting policies that are highly dependent on estimates, assumptions and judgments.
Business Combinations
We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which requires us to record purchased financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no provision for credit losses affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit loss expense (or recovery of credit losses) in subsequent periods as they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted into interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or premium shall be accreted into interest income using the effective yield method.
For further discussion of our loan accounting and acquisitions, see Note 1-Summary of Significant Accounting Policies, Note 2-Mergers and Acquisitions, Note 4-Loans and Note 5-Allowance for Credit Losses to the audited condensed consolidated financial statements.
Allowance for Credit Losses or ACL
The ACL reflects management’s estimate of the portion of the amortized cost of loans and unfunded commitments that it does not expect to collect. Management has a methodology determining its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded on the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 1-Summary of Significant Accounting Policies for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5-Allowance for Credit Losses and “Provision for Credit Losses” in this MD&A.
One of the most significant judgments influencing the ACL is the macroeconomic forecasts from the third-party service provider. Changes in the economic forecasts may significantly affect the estimated credit losses which may potentially lead to materially different quantitatively modeled allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables, it is difficult to estimate the impact of a change in any one individual variable on the ACL. SouthState uses a third-party service provider to support the economic forecast assumptions under CECL forecast by providing various levels of economic scenarios. These scenarios are weighted in accordance with management assessment of scenarios as well as expectations of the general market and industry conditions. To illustrate the sensitivity of these scenarios, if a 100% probability weighting was applied to the adverse scenario rather than using the probability-weighted three scenario approach, this would result in an increase in the ACL by approximately $263.8 million. Conversely, if a 100% probability weighting was applied to the upside scenario, this would result in a decrease in the ACL by approximately $137.3 million. The adverse scenario includes assumptions including, but not limited to, an extended shutdown of the federal government, inflation, global events such as the Russian-Ukrainian conflict, tensions between China and Taiwan, tensions in the Middle east, political risks, increased unemployment and the U.S. economy falling into recession in 2024. Conversely, the upside scenario includes assumptions such as a swift resolution of international conflicts, stabilization of consumer confidence, more than full employment, reduced political tensions, resolution of congressional gridlock, and other favorable assumptions. This sensitivity analysis and related impact on the ACL is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2023
Mortgage Servicing Rights (“MSRs”)
The Company has a mortgage loan servicing portfolio with related mortgage servicing rights. MSRs represent the present value of the future net servicing fees from servicing mortgage loans. Servicing assets and servicing liabilities must be initially measured at fair value, if practicable. For subsequent measurements, an entity can choose to measure servicing assets and liabilities either based on fair value or lower of cost or market. The Company uses the fair value measurement option for MSRs. MSRs are carried at fair value with changes in fair value recorded as a component of Mortgage Banking Income in the Consolidated Statements of Income.
The methodology used to determine the fair value of MSRs is subjective and requires the development of a number of assumptions, including anticipated prepayments of loan principal. Fair value is determined by estimating the present value of the asset’s future cash flows utilizing estimated market-based prepayment rates and discount rates, interest rates and other economic factors and assumptions validated through comparison to trade information, industry surveys and with the use of independent third-party appraisals. Risks inherent in the MSRs valuation include higher than expected prepayment rates and/or delayed receipt of cash flows. The value of MSRs is significantly affected by interest rates available in the marketplace, which influence loan prepayment speeds. In general, during periods of declining interest rates, the value of mortgage servicing rights declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing rights generally increases due to reduced refinance activity.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed in a business combination. As of December 31, 2023 and 2022, the balance of goodwill was $1.9 billion. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
In January 2017, the FASB issued ASU No. 2017-04, which simplified the accounting for goodwill impairment for all entities by requiring impairment charges to be based on Step 1 of the previous accounting guidance’s two-step impairment test under ASC Topic 350. Under the guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminated the requirement to calculate a goodwill impairment charge using Step 2, which involved calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity is able to perform an optional qualitative goodwill impairment assessment before proceeding to the quantitative step of determining whether the reporting unit’s carrying amount exceeds it fair value.
We evaluated the carrying value of goodwill as of October 31, 2023, our annual test date, and determined that no impairment charge was necessary as the fair value of the entity exceeded the carrying value. We will continue to monitor the impact of current economic conditions and other events on the Company’s business, operating results, cash flows and financial condition. If the current economic conditions and other events were to deteriorate and our stock price falls below current levels, we will have to reevaluate the impact on our financial condition and potential impairment of goodwill.
Core deposit intangibles and client list intangibles consist primarily of amortizing assets established during the acquisition of other banks. This includes whole bank acquisitions and the acquisition of certain assets and liabilities from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the correspondent banking and wealth and trust management business. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes and Deferred Tax Assets
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. The Company determines the realization of deferred tax assets by considering all positive and negative evidence available, including the impact of recent operating results, future reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. Determining whether deferred tax assets are realizable is subjective and requires the use of significant judgment. A valuation allowance is provided when it is more-likely-than-not that some portion of the deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiaries file a consolidated federal income tax return. Additionally, income tax returns are filed by the Company or its subsidiaries in various state and local jurisdictions based on the Company’s footprint. The tax laws and regulations in each jurisdiction are complex and may be subject to different interpretations by the Company and the relevant taxing authorities. Therefore, the Company is required to exercise judgment in determining tax accruals and evaluating the Company’s tax positions, including evaluating uncertain tax positions. See Note 1 “Summary of Significant Accounting Policies and Note 12 “Income Taxes” to the consolidated financial statements for further details and discussion.
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to our audited consolidated financial statements entitled “Summary of Significant Accounting Policies.”
Results of Operations
Consolidated net income available to common shareholders decreased by $1.7 million, or 0.4%, to $494.3 million for the year ended December 31, 2023 compared to $496.0 million for the year ended December 31, 2022 and increased $18.8 million, or 3.9%, compared to $475.5 million in 2021. Below are key highlights of our results of operations during 2023:
● A $547.4 million increase in interest income, resulting from a $538.4 million increase in interest income from loans and loans held for sale, a $14.2 million increase in interest income from investment securities, slightly offset by a $5.2 million decrease in interest income on federal funds sold, securities purchased under agreement to resell and interest-bearing deposits. The increases in interest income in loans and investment securities were mainly due to the increase in yield in the rising rate environment in 2022 and in 2023 as the Federal Reserve Bank has raised its federal funds rate 525 basis points. The increase in interest income from loans is also due to the increase in the average balance of loans of $3.9 billion through organic loan growth. The decline in interest income from federal funds sold, securities purchased under agreements to resell and interest-bearing deposits was due to a decline in average balance of $3.1 billion as liquidity tightened in 2023 with a more competitive deposit market in the rising rate environment;
● A $430.4 million increase in interest expense, resulted from a $403.3 million increase in interest expense from deposits, a $16.1 million increase in interest expense from corporate and subordinated debentures and other borrowings, and a $7.7 million and $3.4 million increase in interest expense in federal funds purchased and securities sold under agreements to repurchase, respectively. The rise in interest expense is attributed primarily to increased costs across all categories of interest-bearing liabilities as interest rates have increased in 2022 and 2023. The increase in average cost of interest-bearing liabilities was particularly felt in 2023 with the stress in financial markets and liquidity along with the increased competition for deposits. The average cost of interest-bearing liabilities increased 164 basis point in 2023 compared to the prior year;
● A $22.3 million decrease in noninterest income, which resulted primarily from a $29.7 million decrease in correspondent banking and capital markets income, a $4.4 million decline in mortgage banking income, a $1.9 million decrease in debit, prepaid, ATM and merchant card related income, and a $1.7 million decrease in SBA income. These decreases were offset by a $6.4 million increase in other noninterest income, a $6.1 million increase in service charges on deposit accounts, a $2.4 million increase in Bank Owned Life Insurance (“BOLI”) income, and a $428,000 increase in trust and investment services income (See Noninterest Income section on page 71 for further discussion);
● A $64.9 million increase in noninterest expense, resulted primarily from a $28.7 million increase in salaries and employee benefits expense, the $25.7 million accrual for the FDIC special assessment in 2023, a $10.0 million increase in FDIC assessment and other regulatory charges, a $7.7 million increase in other noninterest expense, a $6.0 million increase in business development and staff related expense, a $4.8 million increase information services expenses, a $3.2 million increase in professional fees, and a $1.3 million increase in OREO expense and loan related expense. These increases were partially offset by a $17.7 million decrease in merger, branch consolidation and severance related expense and a $5.6 million decrease in amortization expense of intangible assets (See Noninterest Expense section on page 74 for further discussion);
● A $32.2 million increase in the provision for allowance for credit losses, as the Company recorded provision for credit losses of $114.1 million during 2023 compared to recording a provision for credit losses of $81.9 million in 2022. During 2023, we recorded a higher provision for credit losses as economic forecasts reflected the continued stress of inflation and rising interest rates that began in 2022 along with tight labor markets and global uncertainty; and
● Lower income tax provision of $769,000 primarily due to the change in pretax book income between the two years. The Company recorded pretax book income of $630.9 million in 2023 compared to pretax book income of $633.4 million in 2022. The Company’s effective tax rate was 21.64% for the year ended December 31, 2023 compared to 21.68% for the year ended December 31, 2022.
● Basic earnings per common share decreased 2.3% to $6.50 in 2023, from $6.65 in 2022 and decreased 3.8% from $6.76 in 2021.
● Diluted earnings per common share decreased 2.1% to $6.46 in 2023, from $6.60 in 2022, and decreased 3.7% from $6.71 in 2021.
● Return on average assets was 1.11% in 2023, a slight decrease compared to 1.12% in 2022 and a decrease compared to 1.19% in 2021. The decrease in 2023 compared to 2022 was driven by both the increase in total average assets of $175.5 million, or 0.4%, to $44.7 billion in 2023 along with the decrease in net income of $1.7 million, or 0.4%, to $494.3 million. The increase in average assets mainly resulted from the increase in non-acquired loans through organic growth partially offset by declines in investment securities and federal funds sold, securities purchased under agreements to resell and other interest-earning deposit as liquidity declined in 2023. The increase in 2022 compared to 2021 was driven by both increases in loans and investment securities through both the Atlantic Capital acquisition and organic growth.
● Return on average common shareholders’ equity decreased to 9.37% in 2023, compared to 9.84% in 2022, and decreased from 10.01% in 2021. The decrease in 2023 compared to 2022 was driven by the growth in average common shareholders’ equity of 4.7%, or $237.1 million, while net income declined by 0.4%, or $1.7 million, to $494.3 million. The increase in average common shareholders’ equity was mainly due to net income in 2023. The decrease in 2022 compared to 2021 was driven by the higher growth in average common shareholders’ equity of 6.1%, or $291.4 million, compared to the growth in net income of 4.3%, or $20.5 million, to $496.0 million. The increase in average equity in 2022 was primarily resulted from the Atlantic Capital acquisition.
● Our dividend payout ratio was 31.34% for 2023 compared with 29.54% in 2022 and 28.43% in 2021. The increase in the dividend payout ratio in 2023 compared to 2022 was due to the increase in total dividends paid during 2023 of 5.8%, or $8.4 million, while the net income available to common shareholders decreased 0.4%, or $1.7 million. The increase in the dividend payout ratio in 2022 compared to 2021 was due to the increase in total dividends paid during 2022 of 8.3%, or $11.3 million, being greater than the increase in net income available to common shareholders, which increased 4.3%, or $20.5 million.
Net Interest Income
Net interest income is the largest component of our net income. Net interest income is the difference between income earned on interest-earning assets and interest paid on deposits and borrowings. Net interest income is determined by the yields earned on interest-earning assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities, the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin.
The Federal Reserve made four 25 basis-point rate increases in 2023, the most recent in late July 2023, resulting in a range of 5.25% to 5.50% at December 31, 2023. As a result, the Company operated under an increasing rate environment for the majority of the year in 2023 while it operated under a comparatively lower rate environment in 2022.
2023 compared to 2022
Net interest income and net interest margin are highlighted for the year ended December 31, 2023, compared to 2022:
● The non-tax equivalent and the tax equivalent net interest margin increased by 27 basis points and 26 basis points, respectively, in 2023 compared to 2022. The net interest margin increased primarily due to the rising rate environment in effect during 2023. Despite the 164 basis points increase in the cost of interest-bearing liabilities being greater than the 135 basis points increase in the yield on interest-earning assets, our net interest margin increased due to average interest-earning assets of $40.1 billion being greater than average interest-bearing liabilities of $26.0 million during 2023.
o Overall, our yield on interest-earning assets in 2023 increased 135 basis points from 2022, primarily due to higher yields on all interest-earning assets as the Federal Reserve Bank raised interest rates 525 basis points starting late in first quarter of 2022. The increase in interest rates, in combination with the increase in the average balance of the higher yielding loan portfolio of $3.9 billion, along with the decline in the average balances of lower yielding federal funds sold, securities purchased under agreements to resell and other interest-earning deposits of $3.1 billion and investment securities of $615.6 million, affected the overall yield increase in interest-earning assets between the comparable periods.
o The average cost of interest-bearing liabilities in 2023 compared to 2022 increased 164 basis points. This increase was driven by the effects from the rising rate environment on the repricing of all deposit accounts, federal funds purchased and securities purchased with agreement to repurchase and other borrowings. The average cost of interest-bearing deposits increased 162 basis points as the increase occurred in all deposit categories. The average cost of federal funds purchased and securities purchased with agreements to repurchase increased 373 basis points and 111 basis points, respectively, while the average cost of other borrowings increased 66 basis points. The increase in the average cost of other borrowings was due to the variable rate trust preferred debt. The increase in overall average cost of interest-bearing liabilities for the 2023 from the same period in 2022 was also a result of the change in the mix of deposit balances, shifting from lower-costing savings and transaction deposit accounts to higher-costing certificates and other time deposits and money market accounts.
● Our net interest income increased by $116.9 million, or 8.8%, to $1.5 billion during 2023, compared to 2022 as our interest income increased $547.4 million while interest expense increased $430.4 million.
o Our interest income increased by $547.4 million due to higher non-acquired loan interest income of $542.7 million attributable to both a higher average balance of $5.7 billion through organic loan growth and renewals of matured acquired loans that are moved to our non-acquired loan portfolio along with a higher yield of 126 basis points due to the rising rate environment. Investment securities interest income was higher by $14.2 million because of an increase in the yield of 34 basis points due to the rising rate environment.
o These increases in interest income were partially offset by lower federal funds sold and repurchase agreements interest income of $5.2 million and lower interest income on acquired loans of $3.7 million due to lower average balances by $3.1 billion and $1.8 billion, respectively. Interest income on loans held for sale also declined by $643,000 due to a lower average balance of $33.9 million. The effects from the declines in average balance were partially offset by the increases in yields of 125 basis points on acquired loans, 378 basis on federal funds sold and repurchase agreements, and 248 basis points on loans held for sale from the effects of the rising rate environment.
o Our interest expense increased by of $430.4 million in 2023 compared to 2022 due primarily to interest expense on interest-bearing deposits increasing $403.3 million, which was attributable to an increase in the average cost of 162 basis points as well as an increase in the average balance of $1.1 billion. As noted above, the increase in expense on interest-bearing deposit was significantly impacted by the change in mix from lower costing savings and transaction deposit accounts to higher costing certificate and other time deposit accounts and money market accounts as customer sought higher yields in the competitive deposit market in 2023. Interest expense related to other borrowings increased $16.1 million due to an increase in average cost of 66 basis points along with an increase in the average balance of $238.0 million. Interest expense on federal funds purchased and repurchased agreements increased $7.7 million and $3.4 million, respectively, due to increases in the average costs of 373 basis points and 111 basis points, respectively.
● Average interest-earning assets increased $216.5 million, or 0.5%, to $40.1 billion in 2023 compared to 2022.
o The increase in the average balance on non-acquired loan portfolio of $5.7 billion was due to organic growth and renewals of matured acquired loans that are moved to our non-acquired loan portfolio.
o The decrease in the average balance on the acquired loan portfolio of $1.8 billion was due to paydowns, pay-offs and renewals of acquired loans that are moved to our non-acquired loan portfolio.
o The average balance in investment securities decreased by $615.6 million. The decrease in average was primarily a result of maturities, calls and paydowns on available for sale and held to maturity securities of $590.8 million, and $190.8 million, respectively, during the year, along with sales of available for sale securities of $129.6 million. These decreases were partially offset by an increase in market value on available for sale securities of $112.7 million and purchases of available for sale securities of $80.4 million.
o The average balance on federal funds sold, securities purchased under agreements to resell and other interest earning deposits decreased $3.1 billion as the liquidity tightened in 2023 with the more competitive market for deposits with costumers seeking higher yields.
● Average interest-bearing liabilities increased $1.2 billion, or 5.0%, to $26.0 billion in 2023 compared to 2022.
o The average balance of interest-bearing deposits increased $1.1 billion primarily due to an increase in the average balance of higher costing time deposits of $1.4 billion. Of this increase in time deposits, $769.0 million was due to an increase in the use of brokered time deposits during 2023. The average balance of transaction and money market accounts increased $328.3 million during 2023 as lower costing savings account deposits declined $567.5 million. Within transaction and money market accounts, there was a shift to the higher costing money market account accounts in 2023 as customers sought higher yields driving the increase in balance.
o The average balance of federal funds purchased decreased $52.6 million and repurchase agreements decreased $77.3 million.
o The average balance of other borrowings increased by $238.0 million due to the increased use of short-term FHLB advance during 2023 as deposits markets became more competitive.
2022 compared to 2021
Net interest income and net interest margin are highlighted for the year ended December 31, 2022, compared to 2021:
● Both the non-tax equivalent and the tax equivalent net interest margin increased by 45 basis points in 2022 compared to 2021. While the yield on interest-earning assets increased 45 basis points, the cost of interest-bearing liabilities marginally increased 3 basis points. The increase in the net interest margin was primarily due to the rising rate environment in effect during 2022 as our interest-earning assets have repriced more quickly than our interest-bearing liabilities. The increase was also due to a change in asset mix as the lower yielding interest-bearing deposit and federal funds sold declined in 2022, while our higher yielding loan portfolio and investments increased.
o Overall, our yield on interest-earning assets in 2022 increased 45 basis points from 2021, primarily due to higher yields on all interest-earning assets as the Federal Reserve Bank raised interest rates 425 basis points starting late in first quarter of 2022. The increases in interest rates, in combination with the increase in the average balance of the higher yielding loan portfolio of $3.3 billion and the investment portfolio of $2.7 billion, along with the decline in the average balance of lower yielding interest-earning deposits and federal funds sold of $1.6 billion, affected the overall yield increase between the comparable periods.
o The average cost of interest-bearing liabilities in 2022 compared to 2021 increased 3 basis points. This increase was driven by the effects from the rising rate environment on the repricing of variable rate products, including interest-bearing and savings deposits, federal funds purchased and trust preferred corporate debt. The cost of interest-bearing and savings deposits increased 5 basis points, while the cost of federal funds purchased increased 126 basis points and the cost of corporate and subordinated debentures increased 12 basis points. Overall, interest-bearing deposits have been slower to reprice in the rising rate environment.
● Our net interest income increased by $302.5 million, or 29.3%, to $1.3 billion during 2022, compared to 2021, as interest income increased $312.2 million and interest expense only increased $9.7 million.
o Our interest income increased by $312.2 million due to -
◾ Higher non-acquired loan interest income of $235.2 million due to a higher average balance of $5.0 billion, higher investment securities interest income of $84.6 million because of a higher average balance of $2.7 billion, and higher federal funds sold and repurchase agreements interest income of $40.1 million due to the rising rate environment in effect during the current year even though the average balance was lower by $1.6 billion.
◾ These increases in interest income were partially offset by lower interest income on acquired loans of $43.6 million due to a lower average balance of $1.6 billion resulting from paydowns, pay-offs and renewals of acquired loans that are moved to our non-acquired loan portfolio. Interest income on loans held for sale also declined by $4.1 million due to a lower average balance of $177.9 million.
o Our interest expense increased by of $9.7 million in 2022 compared to 2021 due to -
◾ Interest expense on interest-bearing deposits increasing $3.8 million because of a slight increase in the average cost of 1 basis point along with a $1.7 billion increase in the average balance, interest expense on federal funds purchased increasing $3.3 million because of an increase in the average cost of 126 basis points, and interest expense related to other borrowings increasing $2.6 million because of an increase in the average cost of 14 basis points.
● Average interest-earning assets increased $4.3 billion, or 12.0%, to $39.9 billion in 2022 compared to 2021.
o The increase in the average balance on non-acquired loan portfolio of $5.0 billion was due to organic growth and renewals of matured acquired loans that are moved to our non-acquired loan portfolio.
o The decrease in the average balance on the acquired loan portfolio of $1.6 billion was due to paydowns, pay-offs and renewals of acquired loans that are moved to our non-acquired loan portfolio.
o The increase in the average balance in investment securities of $2.7 billion was a result of the Bank using a portion of the excess funds to increase the size of its investment securities, along with the Bank’s strategy on replacing lower yielding securities with higher yielding securities as interest rates started to increase in the first quarter of 2022, in addition to retaining a portion of the investment securities acquired from Atlantic Capital on March 1, 2022. The excess liquidity was from the growth in deposits in 2021 and during the first half of 2022.
● Average interest-bearing liabilities increased $1.6 billion, or 6.8%, to $24.8 billion in 2022 compared to 2021.
o The average balance of interest-bearing deposits increased $1.7 billion, primarily due to the interest-bearing deposits of $1.6 billion assumed from the Atlantic Capital acquisition on March 1, 2022. The average balance of lower costing interest-bearing transaction accounts, money market accounts and savings accounts increased $2.4 billion, while the average balance of higher costing time deposits declined $631.7 million in 2022 compared to 2021.
o The average balance of federal funds purchased decreased $204.2 million and repurchase agreements decreased $357,000.
o The average balance of other borrowings increased by $42.3 million due to $78.4 million of subordinated debentures assumed from Atlantic Capital on March 1, 2022, partially offset by the redemption of $13.0 million of subordinated debentures in late June 2022.
Table 1-Yields on Average Interest-Earning Assets and Rates on Average Interest-Bearing Liabilities
Year Ended December 31,
Interest
Average
Interest
Average
Interest
Average
Average
Earned/
Yield/
Average
Earned/
Yield/
Average
Earned/
Yield/
(Dollars in thousands)
Balance
Paid
Rate
Balance
Paid
Rate
Balance
Paid
Rate
Assets
Interest-earning assets:
Non-acquired loans, net of unearned income(1)
$
24,813,599
$
1,312,452
5.29
%
$
19,094,680
$
769,766
4.03
%
$
14,121,233
$
534,565
3.79
%
Acquired loans, net
6,589,692
401,914
6.10
%
8,361,454
405,578
4.85
%
9,997,279
449,153
4.49
%
Loans held for sale
30,740
2,039
6.63
%
64,684
2,682
4.15
%
242,584
6,801
2.80
%
Investment securities(2):
Taxable
7,014,604
162,907
2.32
%
7,569,603
149,790
1.98
%
5,208,857
76,850
1.48
%
Tax-exempt
813,695
23,455
2.88
%
874,255
22,361
2.56
%
569,676
10,715
1.88
%
Federal funds sold and securities purchased under agreements to resell and time deposits
836,068
41,639
4.98
%
3,917,233
46,848
1.20
%
5,481,018
6,720
0.12
%
Total interest-earning assets
40,098,398
1,944,406
4.85
%
39,881,909
1,397,025
3.50
%
35,620,647
1,084,804
3.05
%
Noninterest-earning assets:
Cash and due from banks
471,418
550,733
495,910
Other assets
4,486,196
4,361,927
4,112,373
Allowance for loan losses
(400,051)
(314,094)
(381,244)
Total noninterest-earning assets
4,557,563
4,598,566
4,227,039
Total assets
$
44,655,961
$
44,480,475
$
39,847,686
Liabilities
Interest-bearing liabilities:
Deposits
Transaction and money market accounts
$
17,843,581
$
307,692
1.72
%
$
17,515,277
$
27,408
0.16
%
$
15,639,103
$
15,240
0.10
%
Savings deposits
2,961,654
7,514
0.25
%
3,529,142
1,781
0.05
%
3,043,977
1,262
0.04
%
Certificates and other time deposits
4,042,052
125,051
3.09
%
2,673,000
7,795
0.29
%
3,304,673
16,680
0.50
%
Federal funds purchased
225,642
11,457
5.08
%
278,251
3,744
1.35
%
482,471
0.09
%
Securities sold with agreements to repurchase
317,879
4,132
1.30
%
395,141
0.19
%
395,498
0.20
%
Other borrowings
635,113
35,952
5.66
%
397,113
19,867
5.00
%
354,799
17,258
4.86
%
Total interest-bearing liabilities
26,025,921
491,798
1.89
%
24,787,924
61,354
0.25
%
23,220,521
51,629
0.22
%
Noninterest-bearing liabilities:
Noninterest-bearing deposits
11,777,053
13,481,876
11,026,104
Other liabilities
1,575,621
1,170,394
852,135
Total noninterest-bearing liabilities
13,352,674
14,652,270
11,878,239
Shareholders’ equity
5,277,366
5,040,281
4,748,926
Total noninterest-bearing liabilities and shareholders’ equity
18,630,040
19,692,551
16,627,165
Total liabilities and shareholders’ equity
$
44,655,961
$
44,480,475
$
39,847,686
Net interest spread
2.96
%
3.25
%
2.83
%
Net interest income and margin (non-taxable equivalent)
$
1,452,608
3.62
%
$
1,335,671
3.35
%
$
1,033,175
2.90
%
TEFRA (included in net interest margin, tax equivalent)
3,023
8,876
5,921
Net interest income and margin (taxable equivalent)
$
1,455,631
3.63
%
$
1,344,547
3.37
%
$
1,039,096
2.92
%
Total Deposit Cost (without other borrowings)
1.20
%
0.10
%
0.10
%
Overall Cost of Funds (including interest-bearing deposits)
1.30
%
0.16
%
0.15
%
(1) Nonaccrual loans are included in the above analysis.
(2) Investment securities (taxable and tax-exempt) include trading securities.
Table 2-Volume and Rate Variance Analysis
2023 Compared to 2022
2022 Compared to 2021
Increase (Decrease) due to
Increase (Decrease) due to
(Dollars in thousands)
Volume(1)
Rate(1)
Total
Volume(1)
Rate(1)
Total
Interest income on:
Non-acquired loans, net of unearned income(2)
$
230,547
$
312,139
$
542,686
$
188,272
$
46,929
$
235,201
Acquired loans(2)
(85,941)
82,277
(3,664)
(73,494)
29,919
(43,575)
Loans held for sale
(1,407)
(643)
(4,988)
(4,119)
Investment securities:
Taxable
(10,983)
24,100
13,117
34,830
38,110
72,940
Tax exempt(3)
(1,549)
2,643
1,094
5,729
5,917
11,646
Federal funds sold and securities purchased under agreements to resell and time deposits
(36,849)
31,640
(5,209)
(1,917)
42,045
40,128
Total interest income
93,818
453,563
547,381
148,432
163,789
312,221
Interest expense on:
Deposits
Transaction and money market accounts
279,770
280,284
1,828
10,340
12,168
Savings deposits
(286)
6,019
5,733
Certificates and other time deposits
3,992
113,264
117,256
(3,188)
(5,697)
(8,885)
Federal funds purchased
(708)
8,421
7,713
(174)
3,507
3,333
Securities sold under agreements to repurchase
(149)
3,522
3,373
(1)
(18)
(19)
Other borrowings
11,907
4,178
16,085
2,058
2,609
Total interest expense
15,270
415,174
430,444
9,001
9,725
Net interest income
$
78,548
$
38,389
$
116,937
$
147,708
$
154,788
$
302,496
(1) The rate/volume variance for each category has been allocated on the same basis between rate and volumes.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a taxable-equivalent basis in the above analysis.
Noninterest Income and Expense
Noninterest income provides us with additional revenues that are significant sources of income. In 2023, 2022, and 2021, noninterest income comprised 16.5%, 18.8%, and 25.5%, respectively, of total net interest income and noninterest income.
Table 3-Noninterest Income for the Three Years
Year Ended December 31,
(Dollars in thousands)
Service charges on deposit accounts
$
88,271
$
82,165
$
65,973
Debit, prepaid, ATM and merchant card related income
40,744
42,645
36,783
Mortgage banking income
13,355
17,790
64,599
Trust and investment services income
39,447
39,019
36,981
Correspondent banking and capital markets income
49,101
78,755
110,048
Securities gains, net
SBA income
13,929
15,636
11,865
Bank owned life insurance income
26,690
24,311
18,410
Other
15,326
8,896
9,491
Total noninterest income
$
286,906
$
309,247
$
354,252
2023 compared to 2022
Our noninterest income decreased $22.3 million, or 7.2%, for the year ended December 31, 2023 compared to 2022. This change in total noninterest income resulted from the following:
● Service charges on deposit accounts were higher in 2023 by $6.1 million, or 7.4%, compared to 2022. The increase was mainly attributable to a $3.9 million increase in account maintenance fees and a $2.4 million increase in Non-Sufficient Fund (“NSF”) fees, slightly offset by approximately $181,000 decrease in other services charges in 2023 compared to 2022. The majority of the increase in the account maintenance fees and the NSF fees in 2023 was related to business accounts as there was a full year of activity from the accounts acquired in the Atlantic Capital acquisition and the Company reduced that amount of business fees waived and charged off in 2023.
● Debit, prepaid, ATM and merchant card related income decreased by $1.9 million, or 4.5%, in 2023 compared to 2022. The decrease in debit, ATM, prepaid and merchant card related income was driven by a decrease in debit/ATM fee income, net of card expense, of $2.0 million, due mainly to a higher card expense of $2.2 million.
● Mortgage banking income decreased by $4.4 million, or 24.9%, which comprised of a $6.6 million, or 44.9%, decrease in secondary market mortgage income, offset by a $2.2 million, or 72.9%, increase in mortgage servicing related income. Mortgage production declined from $4.5 billion in 2022 to $2.2 billion in 2023 with the rise in mortgage rates continuing during 2023. The reduction in mortgage production resulted in lower mortgage income from the secondary market in 2023. We allocated a slightly higher percentage of mortgage production to the secondary market in 2023 compared to 2022. The allocation of mortgage production between portfolio and secondary market depends on the Company’s liquidity, market spreads and rate changes during each period and will fluctuate year to year.
o During 2023, mortgage income from the secondary market comprised of a $16.9 million decline in gain on sale of mortgage loans, which is net of the commission expense related to mortgage production, offset by a $10.2 million increase in the change in fair value of the pipeline, loans held for sale and MBS forward trades. Mortgage commission expense was $8.6 million during 2023 compared to $12.8 million during 2022. The declines in the gain on sale of mortgage loans and mortgage commission expense was mainly due to the reduction in mortgage production.
o The increase in mortgage servicing related income, net of the hedge, during 2023 was due to a $1.9 million increase in the change in fair value of the MSR including decay and a $290,000 increase in servicing fee income. The increase in fair value of the MSR in 2023 was primarily due to an increase in gains on the MSR hedge of $16.8 million and a $1.4 million increase due to a decline in MSR decay, offset by a decrease in the change in fair value from interest rates of $16.2 million.
● Trust and investment services income increased $428,000, or 1.1%, in 2023 compared to 2022. The increase was primarily due to an increase in fee earnings as the average assets under management increased $870.0 million, or 13.0%, and an increase in number of relationships under management from December 31, 2022 to December 31, 2023.
● Correspondent banking and capital markets income decreased by $29.7 million, or 37.7%, from 2022. The decline was due to the expense attributable to the variation margin payments for centrally cleared swaps, along with lower commissions and fees earned on fixed income security sales of $12.1 million during 2023 as the volume in sales declined compared to the same period in 2022 due to the volatility in financial markets and interest rate environment. We recorded an expense of $41.5 million related to variation margin payments in 2023 compared to an expense of $14.2 million in 2022. These declines in income were partially offset by an increase of $7.6 million in income generated from the customer swap ARC hedging program in 2023 compared to 2022.
● SBA income decreased by $1.7 million, or 10.9%, compared to 2022. SBA income includes changes in fair value of the servicing asset, loan servicing fees, and gains on sale of SBA loans. The decrease was attributable to a decrease in gains on sale of SBA loans of $922,000 and a decline in the fair value of the SBA servicing asset of $911,000, partially offset by an increase in SBA servicing fee income of $126,000.
● Bank owned life insurance income increased $2.4 million, or 9.8%, in 2023 compared to 2022. This increase was due to having a full year effect from the purchase of $86.0 million of new policies in March of 2022 and the addition of $74.6 million in BOLI resulting from the acquisition of Atlantic Capital in the first quarter of 2022 along with the purchase of $6.0 million of new policies purchased in 2023. In addition, the Company saw an increase of $296,000 in income received from the payout on BOLI policies during 2023 compared to 2022.
● Other income increased by $6.4 million, or 72.3%, in 2023 compared to 2022. This increase was primarily due to approximately $3.7 million in income for tax refunds, income from a legal settlement of approximately $960,000, and an increase in income generated from prepaid cards of $766,000. Income from VISA merchant sponsorship program, in which the Bank earns fees by aiding merchants in processing transactions through VISA, also increased $729,000. The Bank also recorded a total of $486,000 in income from assisting small business customers with Employee Retention Credit (“ERC”) filings in 2023.
2022 compared to 2021
Our noninterest income decreased 12.7% for the year ended December 31, 2022 compared to 2021. This change in total noninterest income resulted from the following:
● Service charges on deposit accounts were higher in 2022 by $16.2 million, or 24.5%, compared to 2021. During the third quarter of 2022, the Company modified its consumer overdraft program to eliminate Non-Sufficient Funds (“NSF”) fees as well as transfer fees to cover overdrafts. We also started offering a deposit product with no overdraft fees. However, mainly due to the increase in numbers of customers and activity through the Atlantic Capital merger completed during the first quarter of 2022, service charge account maintenance fees increased $9.8 million, NSF and Automated Overdraft Privilege (“AOP”) charges increased $4.1 million, and commissions from sales of checks increased $1.7 million.
● Debit, prepaid, ATM and merchant card related income was higher by $5.9 million, or 15.9%, in 2022 compared to 2021. The increase in debit, prepaid, ATM and merchant card related income was mainly driven by higher debit card income and credit card sales incentive income resulting from the increase in activity related to the acquisition of Atlantic Capital completed in the first quarter of 2022. Debit card income (net of debit card expenses) and credit card sales incentive increased by $4.1 million and $1.7 million, respectively.
● Mortgage banking income decreased by $46.8 million, or 72.5%, which was comprised of $45.5 million, or 75.5%, decrease from mortgage income in the secondary market and a $1.3 million, or 30.1%, decrease from mortgage servicing related income, net of the hedge. Starting in the second quarter of 2021, the Company allocated a lower percentage of its mortgage production and pipeline to the secondary market, which resulted in a decrease in mortgage income from the secondary market. The allocation of mortgage production between portfolio and secondary market depends on the Company’s liquidity, market spreads and rate changes during each period and will fluctuate year to year.
o During 2022, mortgage income from the secondary market comprised of a $4.8 million increase in the change in fair value of the pipeline, loans held for sale and MBS forward trades and a $50.4 million decrease in the net gain on sale of mortgage loans due to overall lower mortgage production in 2022, along with the lower allocation of mortgage production going to the secondary market. Mortgage commission expense was $12.8 million during 2022 compared to $27.2 million during 2021.
o The decrease in mortgage servicing related income, net of the hedge during 2022 was due to a $3.4 million decrease in the change in fair value of the MSR including decay, which was partially offset by a $2.1 million increase from servicing fee income. The decrease in the change in fair value of the MSR was primarily due to an increase in losses on the MSR hedge of $13.3 million, offset by an increase in the change in fair value from interest rates of $5.0 million and a $5.0 million decline in MSR decay as interest rates have increased since 2021. The increase in the servicing fee income is due to the increase in size of the servicing portfolio.
● Trust and investment services income increased $2.0 million, or 5.5%, in 2022 compared to 2021. The increase was primarily due to an increase in fees earnings as the assets under management increased $53.9 million, or 0.8%, and increases in numbers of accounts and relationships under management from December 31, 2021 to December 31, 2022.
● Correspondent banking and capital markets income for 2022 decreased by $31.3 million, or 28.4%, from 2021. The decline was due to lower commissions and fees earned on fixed income security sales during 2022 as the volume in sales declined from 2021 and due to expense attributable to the variation margin payments for the centrally cleared swaps. During 2022, the Company determined the variation margin payments for its interest rate swaps centrally cleared through London Clearing House (“LCH”) and Chicago Mercantile Exchange (“CME”) met the legal characteristics of daily settlements of the derivatives rather than collateral. The expense or income attributable to the variation margin payments for the centrally cleared swaps is now reported in noninterest income, specifically within Correspondent and Capital Markets Income, as opposed to interest income or interest expense. We recorded expense of $14.0 million related to variation margin payments in 2022 compared to income of $43,000 in 2021. The increase in expense in 2022 was due to the rise in interest rates which caused a decline in value in our centrally cleared interest rate swaps with LCH and CME. Refer to Note 1-Summary of Significant Accounting Policies, section titled “Derivative Financial Instruments” for a detailed discussion.
● SBA income, including the impact from the change to fair value accounting during 2022, increased by $3.8 million, or 31.8% compared to 2021. SBA income includes changes in fair value of the servicing asset, loan servicing fees and gains on sale of SBA loans. The increase is mainly attributable to additional business resulting from the acquisition of Atlantic Capital.
● Bank owned life insurance income increased $5.9 million, or 32.1%, in 2022 compared to 2021. This increase was due to the purchase of $86.0 million of new policies since March 2022 and the addition of $74.6 million in bank owned life insurance through the acquisition of Atlantic Capital completed in the first quarter of 2022, along with an increase in income from the payout of bank owned life insurance policies of $1.1 million in 2022 compared to 2021.
Noninterest expense represents the largest expense category for our company. Our expenses in 2023 increased $64.9 million or 7.0% from 2022. Our noninterest expenses in 2022 decreased $18.7 million or 2.0% from 2021.
Table 4-Noninterest Expense for the Three Years
Year Ended December 31,
(Dollars in thousands)
Salaries and employee benefits
$
583,398
$
554,704
$
552,030
Occupancy expense
88,695
89,501
92,225
Information services expense
84,472
79,701
74,417
OREO expense and loan related expense
1,716
2,029
Amortization of intangibles
27,558
33,205
35,192
Business development and staff related expense
25,055
19,015
14,571
Supplies and printing
3,575
2,871
3,246
Postage expense
7,003
6,750
6,413
Professional fees
18,547
15,331
10,629
FDIC assessment and other regulatory charges
33,070
23,033
17,982
FDIC special assessment
25,691
-
-
Advertising and marketing
9,474
8,888
7,959
Merger, branch consolidation and severance related expense
13,162
30,888
67,242
Extinguishment of debt cost
-
-
11,706
Other
73,164
65,445
52,780
Total noninterest expense
$
994,580
$
929,701
$
948,421
2023 compared to 2022
Noninterest expense increased $64.9 million, or 7.0%, for the year ended December 31, 2023 compared to 2022. The change in total noninterest expense resulted from the following:
● Salaries and employee benefits increased $28.7 million, or 5.2%, in 2023 compared to 2022. The increase was primarily due to an increase in salaries of $39.9 million resulting from merit increases and increase in numbers of employees. The increase was partially offset by a decrease in commissions of $2.5 million, mainly attributable to lower commissions related to lower bond sales within the correspondent division and loan sales with the SBA division along with declines in employee benefits of $2.2 million, and a decrease in incentives of $9.0 million.
● Information services expense increased $4.8 million, or 6.0%, in 2023 compared to 2022. The increase was due to additional cost associated with the Company updating systems and software as it grows in size and complexity.
● OREO expense and loan related expense increased $1.3 million, or 365.0%, in 2023 compared to 2022, which was primarily due to approximately a $1.1 million increase in Shared Appreciation Mortgage (“SAM”) related expenses including legal, tax and other costs.
● Amortization of intangibles, which is related to the Company’s prior mergers, decreased $5.6 million, or 17.0%.
● Business development and staff related expense increased $6.0 million, or 31.8%, in 2023 compared to 2022. This increase was mainly due to an increase in employee expenses including employee travel expense, convention and meeting expense, recruitment and relocation costs associated with the Company investing in new talent and employee education and training related costs.
● Professional fees increased $3.2 million, or 21.0%, in 2023 compared to 2022. This increase was primarily due to increases in consulting and audit related fees totaling $6.2 million, offset by a decrease in non-loan and loan legal and advisory related fees of $3.0 million.
● FDIC assessment and other regulatory charges increased $10.0 million, or 43.6%. This increase was primarily due to an increase in FDIC assessment of $10.6 million, slightly offset by declines from other regulatory fees of $599,000. The increase in the FDIC assessment was primarily due to an increase in the FDIC assessment rate in 2023 to bring the overall FDIC fund to 1.35x total deposit by the end of 2028. The increase also reflects
changes in the Company’s size and complexity, along with the resulting effects on the Company’s liquidity compared to 2022.
● The Company incurred a total of $25.7 million of the FDIC’s special assessment for the two-year special assessment period, with the entire assessed amount being recorded during the fourth quarter of 2023. The special assessment was introduced to recover losses to the FDIC’s Deposit Insurance Fund resulting from bank failures that occurred during early 2023.
● Merger, branch consolidation and severance related expense decreased $17.7 million, or 57.4% in 2023 compared to 2022. The decrease was primarily due to a $21.9 million decrease in merger expenses pertaining to the Atlantic Capital and CenterState mergers and a $4.7 million decrease in branch consolidation related expense in 2023 compared to 2022. These decreases were offset by severance related payments totaling $8.0 million related to restructuring costs recorded in 2023.
● Other noninterest expense increased $7.7 million, or 11.8%, compared to 2022. This increase was mainly attributable to a $10.1 million increase in earnings credit expense to Homeowners Association (“HOA”) customers. The Bank provides a credit to HOA customers based on the average deposit balances held that reduces fees for other services provided. There was a $2.8 million increase in state franchise and occupation tax payments, and a $2.7 million increase related to a new subscription to a system that provides real-time financial market data analysis services. These increases were partially offset by a decrease in fraud charge-offs, tax penalties, digital banking losses, and other insurance and miscellaneous operational charge-off related expenses totaling approximately $9.0 million.
2022 compared to 2021
Noninterest expense decreased $18.7 million, or 2.0% for the year ended December 31, 2022 compared to 2021. The change in total noninterest expense resulted from the following:
● Salary and employee benefits increased by $2.7 million, or 0.5%, primarily due to the addition of Atlantic Capital employees during the year, annual salary increases, and higher 2022 incentive costs. This increase was partially offset by a $7.3 million decline in commission expense and higher deferred loan costs due to increased loan production volumes and the late 2021 update of the Company’s standard loan costs. During 2022, we recorded a total of $383.6 million in salary expense and $(88.2) million in net deferred loan costs, compared to $366.2 million and $(46.5) million, respectively, during 2021. During 2022, we recorded a total of $35.5 million in commission expense and $96.8 million in incentive expense, compared to $42.8 million and $71.8 million, respectively, during 2021.
● Occupancy expense decreased $2.7 million, or 3.0%. The decrease was related to the cost savings associated with Atlantic Capital and branch consolidations that occurred during 2022. The number of branches declined in 2022 to 251 from 281 at the end of 2021.
● Information services expense increased $5.3 million, or 7.1%. The increase was due to additional cost associated with systems added through our acquisition of Atlantic Capital, along with the cost of the Company updating systems as it grows in size and complexity.
● Business development and staff related expense increased $4.4 million, or 30.5%, due mainly to the increase in employees resulting from the merger with Atlantic Capital and additional employee travel and entertainment as the COVID-19 pandemic receded.
● Professional fees increased $4.7 million, or 44.2%, in 2022 compared to 2021. This increase was primarily due to increases in non-loan legal, advisory and consulting related fees.
● FDIC assessment and other regulatory charges increased $5.1 million, or 28.1%. This increase was due to an increase in FDIC assessments and other regulatory charges. The FDIC assessment increased $4.3 million and OCC examination fee increased $761,000 as the Company continues to grow in size and complexity.
● Merger and branch consolidation related expense decreased $36.4 million, or 54.1% in 2022 compared to 2021. The expense in 2022 consists mainly of costs associated with branch consolidations and the merger related costs pertaining to the Atlantic Capital acquisition. The expense in 2021 mainly consisted of costs related to the merger with CenterState. Merger and branch consolidation expense of $18.5 million in 2022 and $1.7 million in 2021 was related primarily to the merger with Atlantic Capital while $64.4 million in merger and branch consolidation expense was related to the merger with CenterState in 2021.
● The Company had extinguishment of debt cost of $11.7 million in 2021. This cost was from the write-off of the unamortized fair market value adjustment recorded on the trust preferred securities assumed in the CenterState merger. All of the trust preferred securities assumed in the CenterState merger were redeemed in June 2021.
● Other noninterest expense increased by $12.7 million, or 24.0%. This increase was mainly due to a general increase in expenses due to the merger with Atlantic Capital, an increase in fraud, digital banking and miscellaneous operational charge-off related expenses of $6.5 million, expense related to the settlement of lawsuits of $2.6 million, increases in donations of $1.5 million, increases in tax penalties of $1.3 million, and increases in incurred but not reported insurance loss reserves of $1.1 million.
Income Tax Expense
Our effective tax rate held consistent at 21.64% at December 31, 2023, mirroring the 21.68% rate for the year-ended December 31, 2022. The slight decrease was due to a slight decrease in pre-tax book income, an increase in tax-exempt income, an increase in federal tax credits, offset partially by an increase in TEFRA interest expense disallowance and an increase in non-deductible FDIC premiums compared to December 31, 2022. For additional information refer to Note 12-Income Taxes in the consolidated financial statements.
Financial Condition
Overview
At December 31, 2023, we had total assets of approximately $44.9 billion, consisting principally of $32.4 billion in total loans, before taking into account the allowance for credit losses of $456.6 million, $7.5 billion in investment securities, $1.0 billion in cash and cash equivalents and $1.9 billion in goodwill. Our liabilities at December 31, 2023 totaled $39.4 billion, consisting principally of deposits of $37.0 billion ($10.6 billion in noninterest-bearing and $26.4 billion in interest-bearing), $804.5 million derivative liabilities and $981.1 million of short-term and long-term borrowings. At December 31, 2023, our shareholders’ equity was $5.5 billion.
At December 31, 2022, we had total assets of approximately $43.9 billion, consisting principally of $30.2 billion in total loans, before taking into account the allowance for credit losses of $356.4 million, $8.2 billion in investment securities, $1.3 billion in cash and cash equivalents and $1.9 billion in goodwill. Our liabilities at December 31, 2022 totaled $38.8 billion, consisting principally of deposits of $36.4 billion ($13.2 billion in noninterest-bearing and $23.2 in interest-bearing) and short-term and long-term borrowings of $948.7 million. At December 31, 2022, our shareholders’ equity was $5.1 billion.
Book value per common share was $72.78 at the end of 2023, an increase from $67.04 at the end of 2022. Book value per common share increased in 2023 as shareholder equity increased by 9.0% while common shares outstanding only increased by 0.4%. The primary reasons for an increase in shareholder’s equity of $458.2 December 31, 2023 were due to net income of $494.3 million and a $94.6 million increase in AOCI related to unrealized gains on available for sale securities and post-retirement benefit plans. These increases were partially offset by declines resulting from dividends paid to shareholders of $154.9 million, common stock repurchased from officers and directors for income taxes owed on their vested shares of restricted stock of $9.3 million, and common stock repurchased in the open market of $6.7 million.
Our common equity to assets ratio increased to 12.3% in 2023, compared to 11.6% in 2022. The improvement during 2023 was due to an increase in shareholders’ equity of 9.0%, resulting from the items noted above, while total assets had a moderate increase of 2.2%.
Trading Securities
We have a trading portfolio associated with our Correspondent Bank Division and its subsidiary SouthState|Duncan-Williams. This portfolio is carried at fair value and realized and unrealized gains and losses are included in trading securities revenue, a component of Correspondent Banking and Capital Markets Income in our Consolidated Statements of Income. Securities purchased for this portfolio have primarily been municipal bonds, treasuries and mortgage-backed agency securities, which are held for short periods of time and totaled $31.3 million at December 31, 2023 and 2022.
Investment Securities
We use investment securities, our second largest category of earning assets, to generate interest income, provide liquidity, fund loan demand or deposit liquidation, and pledge as collateral for public funds deposits, repurchase agreements, derivative exposures and to augment borrowing capacity at the Federal Reserve Bank of Atlanta, and the Federal Home Loan Bank of Atlanta. At December 31, 2023 and 2022, investment securities totaled $7.5 billion and $8.2 billion, respectively. For the year ended December 31, 2023, average investment securities were $7.7 billion, or 19.5% of average earning assets, compared with $8.4 billion, or 21.2% of average earning assets for the year ended December 31, 2022. The expected average life of the investment portfolio at December 31, 2023 was approximately 7.87 years, compared with 7.96 years at December 31, 2022. See Note 1-Summary of Significant Accounting Policies in the audited consolidated financial statements for our accounting policy on investment securities.
As securities are purchased, they are designated as held to maturity or available for sale based upon our intent, which considers liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.
The following table presents the reported values of investment securities for the past two years:
Table 5-Values of Investment Securities
December 31,
(Dollars in thousands)
Held to Maturity (amortized cost):
U.S. Government agencies
$
197,267
$
197,262
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,438,102
1,591,646
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
444,883
474,660
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
354,055
362,586
Small Business Administration loan-backed securities
53,133
57,087
Total held to maturity
$
2,487,440
$
2,683,241
Available for Sale (fair value):
U.S. Treasuries
73,890
265,638
U.S. Government agencies
224,706
219,088
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,558,306
1,698,353
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
527,422
601,045
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,024,170
1,000,398
State and municipal obligations
977,461
1,064,852
Small Business Administration loan-backed securities
371,686
444,810
Corporate securities
26,747
32,638
Total available for sale
4,784,388
5,326,822
Total other investments
192,043
179,717
Total investment securities
$
7,463,871
$
8,189,780
During 2023, our total investment securities decreased $725.9 million, or 8.9%, from December 31, 2022. During 2023, we purchased $307.1 million of securities, $80.4 million classified as available for sale and $226.7 million classified as other investments. These purchases were offset by maturities, paydowns, sales and calls of investment securities totaling $1.1 billion. Net amortization of premiums were $20.1 million for the year ended December 31, 2023. During 2022, the Atlantic Capital acquisition added $691.7 million of investment securities available for sale to our portfolio. We immediately sold $414.4 million in securities, after principal paydowns, and retained $273.7 million in our portfolio. The Atlantic Capital securities retained were mostly state and municipal obligations.
At December 31, 2023, the unrealized net loss of the available for sale investment securities portfolio was $776.6 million, or 14.0%, below its amortized cost basis. Comparable valuations at December 31, 2022 reflected an unrealized net loss of the available for sale investment portfolio of $889.3 million, or 14.3%, below its amortized cost basis. The increase in fair value in the available for sale investment portfolio at December 31, 2023 compared to December 31, 2022 was attributable to the Federal Reserve’s decision during their latest policy meeting held in December 2023 to hold the rates steady with indications of potential rate cuts in 2024. At December 31, 2023, the unrealized net loss of the held to maturity investment securities portfolio was $402.7 million, or 16.2%, below its amortized cost basis. At December 31, 2022, the unrealized net loss of the held to maturity investment securities portfolio was $433.1 million, or 16.1%, below its amortized cost basis.
Table 6-Credit Ratings of Investment Securities
Amortized
Fair
Unrealized
(Dollars in thousands)
Cost
Value
Net Loss
AAA - A
Not Rated
December 31, 2023
U.S. Treasuries
$
74,720
$
73,890
$
(830)
$
74,720
$
-
U.S. Government agencies
443,356
397,366
(45,990)
443,356
-
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises*
3,260,206
2,769,096
(491,110)
3,260,112
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises*
1,071,618
904,166
(167,452)
-
1,071,618
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises*
1,571,180
1,306,898
(264,282)
20,991
1,550,189
State and municipal obligations
1,129,750
977,461
(152,289)
1,129,078
Small Business Administration loan-backed securities
467,083
413,500
(53,583)
467,083
-
Corporate securities
30,533
26,747
(3,786)
-
30,533
$
8,048,446
$
6,869,124
$
(1,179,322)
$
2,135,322
$
5,913,124
*
Agency mortgage-backed securities (“MBS”), agency collateralized mortgage-obligations (“CMO”) and agency commercial mortgage-backed securities (“CMBS”) are guaranteed by the issuing government-sponsored enterprise (“GSE”) as to the timely payments of principal and interest. Except for Government National Mortgage Association securities, which have the full faith and credit backing of the United States Government, the GSE alone is responsible for making payments on this guaranty. While the rating agencies have not rated any of the MBS, CMO and CMBS issued, senior debt securities issued by GSEs are rated consistently as “Triple-A.” Most market participants consider agency MBS, CMOs and CMBSs as carrying an implied Aaa rating (S&P rating of AA+) because of the guarantees of timely payments and selection criteria of mortgages backing the securities. We do not own any private label mortgage-backed securities. The balances presented under the ratings above reflect the amortized cost of the investment securities.
Held to maturity
As described above, the Company elected to classify some of its securities purchased as held to maturity at the time of purchase. The securities designated as held to maturity are securities the Company does not intend to sell and expects to hold through maturity. The securities consist of $197.3 million of agency securities, $2.2 billion of residential and commercial mortgage-backed securities issued by U.S government agencies or sponsored enterprises and $53.1 million of Small Business Administration loan-backed securities. The following are highlights of our held to maturity portfolio:
● Total amortized cost of held to maturity portfolio totaled $2.5 billion
● The balance of securities held to maturity represented 5.5% of total assets at December 31, 2023.
● No purchases or sales of held to maturity investment securities in 2023; maturities, calls and paydowns totaled $190.8 million in 2023.
Available for sale
Securities available for sale consist of debentures of government sponsored entities, state and municipal bonds, residential and commercial mortgage-backed securities issued by U.S government agencies or sponsored enterprises, Small Business Administration loan-backed securities and corporate securities. At December 31, 2023, investment securities with a fair value and amortized cost of $4.8 billion and $5.6 billion, respectively, were classified as available for sale. The adjustment for net unrealized losses of $776.6 million between the carrying value of these securities and their amortized cost has been reflected, net of tax, in the Consolidated Balance Sheet as a component of Accumulated Other Comprehensive Loss. The following are highlights of our available for sale securities:
● Total securities available for sale decreased $542.4 million, or 10.2%, from the balance at December 31, 2022. The unrealized gain/loss position on the investment portfolio increased $112.7 million and net amortization of premiums was $15.2 million during 2023. We purchased $80.4 million of available for sale investment securities in 2023, partially offset by maturities, calls and paydowns totaling $590.8 million and sales totaling $129.6 million in 2023. The sales in 2023 were mainly related to restructuring our portfolio to fit our investment strategy and risk profile.
● The balance of securities available for sale represented 10.7% of total assets at December 31, 2023 and 12.1% of total assets at December 31, 2022.
● Interest income earned on all investment securities in 2023 was $186.4 million, an increase of $14.2 million, or 8.3%, from $172.2 million in 2022. The increase was due to an increase in the yield on investment securities while the total average balance decreased $615.6 million. The yield on investment securities increased 34 basis points during 2023, to 2.4%. The improvement in the yield was due the maturities, calls and sales of lower yielding securities.
At December 31, 2023, we had 1,232 investment securities (including both available for sale and held to maturity) in an unrealized loss position, which totaled $1.2 billion, compares to 1,311 investment securities in an unrealized loss position, which totaled $1.3 billion at December 31, 2022. See Note 1-Summary of Significant Accounting Policies and Note 3-Investment Securities in the consolidated financial statements for additional information.
Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For securities designated as held for sale, credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the extent to which the fair value has been less than cost, (4) our intent to hold the security as well as there being no requirement to sell the security, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third-party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including securities issued by Ginnie Mae, Fannie Mae, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities in an unrealized loss position as of December 31, 2023 continue to perform as scheduled and we do not believe there is a credit loss or a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities.
Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. Changes in the above considerations may affect our intent in the future. See Note 1-Summary of Significant Account Policies for further discussion.
Other Investments
Other investment securities include primarily our investments in FHLB and FRB stock with no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of December 31, 2023, other investment securities represented approximately $192.0 million, or 0.43% of total assets and primarily consisted of FRB and FHLB stock, which totaled $150.3 million and $22.8 million, respectively. There were no gains or losses on the sales of these securities during 2023 or 2022.
Table 7-Maturity Distribution and Yields of Investment Securities
Due In
Due After
Due After
Due After
1 Year or Less
1 Thru 5 Years
5 Thru 10 Years
10 Years
Total
(Dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Held to Maturity (amortized cost)
U.S. Government agencies
$
50,000
2.05
%
$
14,365
2.32
$
132,902
1.73
%
$
-
-
%
$
197,267
1.86
%
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
-
-
-
-
176,988
1.98
1,261,114
1.80
1,438,102
1.82
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
-
-
-
-
-
-
444,883
2.50
444,883
2.50
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
-
-
36,590
0.94
170,916
1.49
146,549
1.58
354,055
1.47
Small Business Administration loan-backed securities
-
-
-
-
-
-
53,133
1.25
53,133
1.25
Total held to maturity
$
50,000
2.05
%
$
50,955
1.33
%
$
480,806
1.74
%
$
1,905,679
1.93
%
$
2,487,440
1.88
%
Available for Sale (fair value)
U.S. Government treasuries
$
73,890
1.84
%
$
-
-
%
$
-
-
%
$
-
-
%
$
73,890
1.84
%
U.S. Government agencies
75,939
2.82
48,525
2.35
100,242
1.68
-
-
224,706
2.17
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
-
-
2,202
2.33
154,985
2.39
1,401,119
1.97
1,558,306
2.00
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
-
-
7,713
2.54
12,093
2.28
507,616
2.19
527,422
2.19
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
5.91
145,454
2.89
630,308
1.99
248,327
1.78
1,024,170
2.05
State and municipal obligations
2,006
3.65
29,281
3.32
118,037
2.56
828,137
2.64
977,461
2.65
Small Business Administration loan-backed securities
4,343
2.64
21,413
4.31
123,899
4.14
222,031
2.77
371,686
3.29
Corporate securities
-
-
8.29
25,578
3.96
4.50
26,747
4.04
Total available for sale
$
156,259
2.36
%
$
255,068
2.95
%
$
1,165,142
2.35
%
$
3,207,919
2.21
%
$
4,784,388
2.28
%
Total other investments
$
-
-
%
$
-
-
%
$
-
-
%
$
192,043
4.35
%
$
192,043
4.35
%
Total investment securities
$
206,259
2.29
%
$
306,023
2.68
%
$
1,645,948
2.17
%
$
5,305,641
2.19
%
$
7,463,871
2.20
%
Percent of total
%
%
%
%
Cumulative percent of total
%
%
%
%
(1) The expected average life for U.S. Government agencies is 4.48 years; 5.58 years for held to maturity and 3.61 years for available for sale.
(2) The expected average life for residential mortgage-backed securities issued by U.S. government agencies or sponsored enterprises is 7.40 years; 7.55 years for held to maturity and 7.28 years for available for sale.
(3) The expected average life for residential collateralized mortgage-obligations securities issued by U.S. government agencies or sponsored enterprises is 7.72 years; 8.43 years for held to maturity and 7.21 years for available for sale.
(4) The expected average life for commercial mortgage-backed securities issued by U.S. government agencies or sponsored enterprises is 5.70 years; 5.54 years for held to maturity and 5.75 years for available for sale.
(5) Weighted average yields on tax-exempt income have been presented on a taxable-equivalent basis, assuming a federal tax rate of 21.00% and a state tax rate of 4.95%, which is net of federal tax benefit in the above table. These yields were calculated using coupon interest and adjusting for discount accretion and premium amortization, where applicable.
(6) The expected average life for state and municipal obligations is 15.01 years.
(7) The expected average life for Small Business Administration loan-backed securities is 6.08 years; 7.64 years for held to maturity and 5.88 years for available for sale.
(8) The expected average life for corporate securities is 6.23 years.
(9) The expected average life for US Treasuries is 0.36 years.
(10) FRB, FHLB and other non-marketable equity securities have no set maturity date and are classified in “Due after 10 Years.”
(11) The expected average life for the total investment securities portfolio is 7.87 years (not including FRB, FHLB and corporate stock with no maturity date).
(12) The total values presented in the table above represent the total fair value of available for sale securities and amortized cost for held to maturity.
Approximately 85.4% of the investment portfolio is comprised of U.S. Treasury securities, U.S. Government agency securities, and U.S. Government Agency Mortgage-backed securities. These securities may be pledged to the Federal Home Loan Bank of Atlanta or the Federal Reserve Bank of Atlanta Discount Window or Bank Term Funding Program. Approximately 14.2% of the investment portfolio is comprised of municipal securities. A portion of the municipal bond portfolio may be pledged to the Federal Home Loan Bank of Atlanta subject to their credit approval. Approximately 95% of the municipal bond portfolio has ratings in the Double A or Triple A category.
During 2023, we sold approximately $125.3 million of municipal securities given advantageous market conditions. The primary rationale for the sale was to reduce municipal and portfolio duration/price risk at an opportune moment in fixed income markets. As of December 31, 2023, the portfolio had an effective duration of 5.74 years. We continue to monitor duration risk and seek to align actual duration with the target range.
The following table presents a summary of our investment portfolio duration for the periods presented:
Table 8-Investment Portfolio Duration
December 31, 2023
December 31, 2022
(Dollars in thousands, duration in years)
Amount
Duration
Amount
Duration
Held to Maturity (amortized cost)
U.S. Government agencies
$
197,267
5.03
$
197,262
5.81
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,438,102
6.40
1,591,646
6.13
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
444,883
6.24
474,660
6.52
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
354,055
4.06
362,586
5.00
Small Business Administration loan-backed securities
53,133
6.95
57,087
6.76
Total held to maturity
$
2,487,440
5.94
$
2,683,241
6.04
Available for Sale (fair value)
U.S. Treasuries
$
73,890
0.35
$
265,638
0.87
U.S. Government agencies
224,706
3.41
219,088
4.27
Residential mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,558,306
6.12
1,698,353
5.80
Residential collateralized mortgage-obligations issued by U.S. government
agencies or sponsored enterprises
527,422
5.69
601,045
5.95
Commercial mortgage-backed securities issued by U.S. government
agencies or sponsored enterprises
1,024,170
3.73
1,000,398
4.34
State and municipal obligations
977,461
8.62
1,064,852
8.74
Small Business Administration loan-backed securities
371,686
3.81
444,810
3.55
Corporate securities
26,747
2.45
32,638
2.94
Total available for sale
$
4,784,388
5.65
$
5,326,822
5.66
Loan Portfolio
Our loan portfolio remains our largest category of interest-earning assets. At December 31, 2023, total loans, excluding held for sale loans, were $32.4 billion, which was an overall increase of $2.2 billion, or 7.3%, from the balance at the end of 2022. Non-acquired loan growth was $3.7 billion, or 16.1% for 2023, driven by organic growth. The loan growth was made up of a 32.5% increase in consumer real estate loans, a 13.5% increase in non-owner occupied real estate loans (including construction and land development loans), a 9.2% increase in commercial owner occupied real estate loans, a 11.7% increase in commercial and industrial loans, a 5.5% increase in other income producing property and a 1.8% increase in consumer non real estate loans. Total acquired loans decreased by $1.5 billion, or 19.9% from the balance at the end of 2022. The decrease in acquired loans was due to paydowns and payoffs in both the PCD and Non-PCD loan categories along with renewals of acquired loans that were moved to our non-acquired loan portfolio.
Average total loans outstanding during 2023 were $31.4 billion, an increase of $3.9 billion, or 14.4%, over the 2022 average of $27.5 billion. (For further discussion of the Company’s acquired loan accounting, see Note 1-Summary of Significant Accounting Policies, Note 2-Mergers and Acquisitions, Note 4-Loans and Note 5-Allowance for Credit Losses in the consolidated financial statements.)
The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
Table 9-Distribution of Loans by Type
December 31,
(Dollars in thousands)
Acquired loans:
Acquired - non-purchased credit deteriorated loans:
Non-owner occupied real estate(1)
$
1,866,809
$
2,250,428
Consumer real estate(2)
724,463
902,271
Commercial owner occupied real estate
1,115,539
1,332,942
Commercial and industrial
863,584
1,128,280
Other income producing property
148,361
195,265
Consumer
77,930
133,679
Other
Total acquired - non-purchased credit deteriorated loans
4,796,913
5,943,092
Acquired - purchased credit deteriorated loans (PCD):
Non-owner occupied real estate(3)
454,776
599,522
Consumer real estate(2)
197,162
233,740
Commercial owner occupied real estate
349,755
435,650
Commercial and industrial
39,951
66,891
Other income producing property
35,358
52,827
Consumer
31,811
41,101
Total acquired - purchased credit deteriorated loans (PCD)
1,108,813
1,429,731
Total acquired loans
5,905,726
7,372,823
Non-acquired loans:
Non-owner occupied real estate(4)
9,173,563
8,083,369
Consumer real estate(2)
7,071,825
5,339,199
Commercial owner occupied real estate
4,032,377
3,691,601
Commercial and industrial
4,601,004
4,118,312
Other income producing property
472,615
448,150
Consumer
1,123,909
1,103,646
Other loans
7,470
20,762
Total non-acquired loans
26,482,763
22,805,039
Total loans (net of unearned income)
$
32,388,489
$
30,177,862
(1) Includes $135.8 million and $258.5 million of construction and land development loans at December 31, 2023 and 2022, respectively.
(2) Includes loans on both 1-4 family owner occupied property, as well as loans collateralized by 1-4 family owner occupied property with a business intent.
(3) Includes $9.5 million and $46.5 million of construction and land development loans at December 31, 2023 and 2022, respectively.
(4) Includes $2.8 billion and $2.6 billion of construction and land development loans at December 31, 2023 and 2022, respectively.
The following highlights of our loan portfolio as of December 31, 2023 compared to December 31, 2022:
● Non-acquired loans were $26.5 billion, or 81.8% of total loans of total loans at December 31, 2023. This compares to non-acquired loans of $22.8 billion, or 75.6% at December 31, 2022. The increase in non-acquired loans of $3.7 billion was due to organic growth and renewals of acquired loans that were moved to the non-acquired loan portfolio. Acquired loans were $5.9 billion, or 18.2% of total loans at December 31, 2023. This compares to acquired loans of $7.4 billion, or 24.4%, at December 31, 2022. The $1.5 billion decrease in acquired loans was due to principal payments, charge offs, foreclosures and renewals of acquired loans that were moved to our non-acquired loan portfolio.
o Non-acquired loans secured by non-owner occupied and consumer real estate were $16.2 billion and comprised 50.2% of the total loan portfolio at December 31, 2023. This was an increase of $2.8 billion, or 21.0%, over December 31, 2022. At December 31, 2023, acquired loans secured by non-owner occupied and consumer real estate were $3.2 billion and comprised 10.0% of the total loan portfolio. This was a decrease of $742.8 million, or 18.6%, over December 31, 2022. Between both the non-acquired and acquired portfolios, 60.2% of loans were non-owner occupied and consumer real estate loans.
◾ Of the non-acquired real estate loans at December 31, 2023, $9.2 billion, or 28.3% of the loan portfolio were secured by non-owner occupied real estate. Loans secured by consumer real estate were $7.1 billion, or 21.8% of the total loan portfolio at December 31, 2023. This compared to loans secured by non-owner occupied real estate of $8.1 billion, or 26.8%, and loans secured by consumer real estate of $5.3 billion, or 17.7% of the loan portfolio at December 31, 2022.
◾ Of the acquired real estate loans, $2.3 billion, or 7.2% of the loan portfolio were secured by non-owner occupied real estate at December 31, 2023. Loans secured by consumer real estate were $921.6 million, or 2.8% of the loan portfolio. This compared to acquired loans secured by non-owner occupied real estate of $2.8 billion, or 9.4%, and loans secured by consumer real estate of $1.1 billion, or 3.8% of the loan portfolio at December 31, 2022.
o Included within loans secured by non-owner occupied real estate noted above are construction and land development loans. Total construction and land development loans were $2.9 billion at December 31, 2023 compared to $2.9 billion at December 31, 2022. Construction and land development loans are more susceptible to a risk of loss during a downturn in the business cycle.
◾ Non-acquired construction and land development loans increased $222.8 million to $2.8 billion in 2023 from $2.6 billion at December 31, 2022.
◾ Acquired construction and land development loans declined $159.6 million to $145.3 million in 2023 from $304.9 million at December 31, 2022.
o Total consumer real estate loans were comprised of $6.6 billion in consumer owner occupied loans and $1.4 billion in home equity line loans at December 31, 2023. This compares to $5.2 billion in consumer owner occupied loans and $1.3 billion in home equity lines loans at December 31, 2022. During 2023, the consumer real estate loan portfolio increased by $1.5 billion from December 31, 2022 through organic growth.
◾ Non-acquired loans secured by consumer real estate were comprised of $5.9 billion in consumer owner occupied loans and $1.1 billion in home equity loans at December 31, 2023. At December 31, 2022, we had $4.4 billion in consumer owner occupied loans and $958.2 million in home equity loans in the non-acquired loan portfolio. The Company made the decision to hold more 1-4 family mortgage production in its portfolio in 2023 rather than sell the loans into the secondary market.
◾ Acquired loans secured by consumer real estate are comprised of $666.6 million in consumer owner occupied loans and $255.0 million in home equity loans at December 31, 2023. At December 31, 2022, we had $781.0 million in consumer owner occupied loans and $355.0 million in home equity loans in the acquired loan portfolio.
o Non-acquired and acquired commercial owner-occupied real estate loans were $4.0 billion, or 12.5%, and $1.5 billion, or 4.5%, respectively, of the total loan portfolio at December 31, 2023 compared to $3.7 billion, or 12.2%, and $1.8 billion, or 5.9%, respectively, of the loan portfolio at December 31, 2022.
◾ Non-acquired commercial owner-occupied real estate loans increased $340.8 million through organic growth and renewals of acquired loans.
◾ Acquired commercial owner-occupied real estate loans decreased $303.3 million due to principal payments, charge offs, foreclosures and renewals of acquired loans that were moved to our non-acquired loan portfolio from December 31, 2022 compared to December 31, 2023.
o Non-acquired and acquired commercial and industrial loans were $4.6 billion, or 14.2%, and $903.5 million, or 2.8%, respectively, of the total loan portfolio at December 31, 2023 compared to $4.1 billion, or 13.6%, and $1.2 billion, or 4.0%, respectively, of the loan portfolio at December 31, 2022.
◾ Non-acquired commercial and industrial loans increased $482.7 million from December 31, 2022 compared to December 31, 2023.
◾ Acquired commercial and industrial loans decreased $291.6 million from December 31, 2022 compared to December 31, 2023.
Total loan interest income, including interest income on held for sale loans, was $1.7 billion in 2023, an increase of $538.4 million, or 45.7%, compared to $1.2 billion in 2022. This increase was mainly due to a 126-basis point increase in the yield on the non-acquired portfolio and a 125-basis point increase in the yield on the acquired portfolio. The yield on the non-acquired loan portfolio increased from 4.03% in 2022 to 5.29% in 2023 and the yield on the acquired loan portfolio increased from 4.85% in 2022 to 6.10% in 2023. The increase in the yields on the non-acquired loan portfolio and the acquired loan portfolio was due to the rise in interest rates starting in March 2022. The effects on interest income from the overall increase in the yields on loans was enhanced by a $5.7 billion increase in the average balance of our non-acquired loan portfolio, offset by a $1.8 billion decrease in the average balance of our acquired loan portfolio. The growth in the non-acquired loan portfolio average balance was due to normal organic growth and renewals of acquired loans. The decline in the acquired loan portfolio was due to paydowns and payoffs, along with renewals of acquired loans that were moved to our non-acquired loan portfolio.
The table below shows the contractual maturity of the non-acquired loan portfolio at December 31, 2023.
Table 10-Maturity Distribution of Non-acquired Loans
December 31, 2023
1 Year
Maturity
Maturity
Over
(Dollars in thousands)
Total
or Less
1 to 5 Years
5 to 15 Years
15 Years
Non-owner occupied real estate
$
9,173,563
$
766,968
$
4,219,615
$
3,510,378
$
676,602
Consumer real estate
7,071,825
54,432
211,521
1,060,848
5,745,024
Commercial owner occupied real estate
4,032,377
186,278
1,231,568
2,489,662
124,869
Commercial and industrial
4,601,004
861,950
1,750,331
1,278,066
710,657
Other income producing property
472,615
37,527
271,071
87,278
76,739
Consumer
1,123,909
99,672
438,458
318,843
266,936
Other loans
7,470
7,470
-
-
-
Total non-acquired loans
$
26,482,763
$
2,014,297
$
8,122,564
$
8,745,075
$
7,600,827
Table 11-Non-Acquired Loans Due After One Year - Fixed or Floating
December 31, 2023
(Dollars in thousands)
Fixed Rate
Variable Rate
Non-owner occupied real estate
$
3,253,783
$
5,152,812
Consumer real estate
2,956,223
4,061,170
Commercial owner occupied real estate
2,515,847
1,330,252
Commercial and industrial
2,578,811
1,160,243
Other income producing property
295,826
139,262
Consumer
1,003,747
20,490
Total non-acquired loans
$
12,604,237
$
11,864,229
The table below shows the contractual maturity of the acquired non-purchased credit deteriorated loan portfolio at December 31, 2023.
Table 12-Maturity Distribution of Acquired Non-purchased Credit Deteriorated Loans
December 31, 2023
1 Year
Maturity
Maturity
Over
(Dollars in thousands)
Total
or Less
1 to 5 Years
5 to 15 Years
15 Years
Non-owner occupied real estate
$
1,866,809
$
317,109
$
812,197
$
674,463
$
63,040
Consumer real estate
724,463
23,138
133,855
181,107
386,363
Commercial owner occupied real estate
1,115,539
71,078
412,292
542,635
89,534
Commercial and industrial
863,584
108,755
378,573
259,861
116,395
Other income producing property
148,361
16,015
49,909
54,791
27,646
Consumer
77,930
6,811
14,306
48,728
8,085
Other
-
-
-
Total acquired - non-purchased credit deteriorated loans
$
4,796,913
$
543,133
$
1,801,132
$
1,761,585
$
691,063
Table 13- Acquired Non-PCD Loans Due After One Year - Fixed or Floating
December 31, 2023
(Dollars in thousands)
Fixed Rate
Variable Rate
Non-owner occupied real estate
$
479,469
$
1,070,231
Consumer real estate
219,344
481,981
Commercial owner occupied real estate
410,169
634,292
Commercial and industrial
455,250
299,579
Other income producing property
39,578
92,768
Consumer
67,818
3,301
Total acquired - non-purchased credit deteriorated loans
$
1,671,628
$
2,582,152
The table below shows the contractual maturity of the acquired purchased credit deteriorated loan portfolio at December 31, 2023.
Table 14-Maturity Distribution of Acquired Purchased Credit Deteriorated Loans
December 31, 2023
1 Year
Maturity
Maturity
Over
(Dollars in thousands)
Total
or Less
1 to 5 Years
5 to 15 Years
15 Years
Non-owner occupied real estate
$
454,776
$
40,844
$
168,802
$
218,923
$
26,207
Consumer real estate
197,162
7,016
26,838
44,086
119,222
Commercial owner occupied real estate
349,755
32,249
135,100
155,546
26,860
Commercial and industrial
39,951
9,675
14,867
12,707
2,702
Other income producing property
35,358
5,654
6,099
15,991
7,614
Consumer
31,811
5,879
24,823
Total acquired - purchased credit deteriorated loans (PCD)
$
1,108,813
$
96,063
$
357,585
$
472,076
$
183,089
Table 15- Acquired PCD Loans Due After One Year - Fixed or Floating
December 31, 2023
(Dollars in thousands)
Fixed Rate
Variable Rate
Non-owner occupied real estate
$
72,137
$
341,795
Consumer real estate
87,042
103,104
Commercial owner occupied real estate
135,430
182,076
Commercial and industrial
20,239
10,037
Other income producing property
7,584
22,120
Consumer
31,170
Total acquired - purchased credit deteriorated loans (PCD)
$
353,602
$
659,148
Nonperforming Assets (“NPAs”)
The level of risk elements in the loan portfolio, OREO and other nonperforming assets for the past two years is shown below:
Table 16-Nonperforming Assets
December 31,
(Dollars in thousands)
Non-acquired:
Nonaccrual loans
$
110,467
$
40,517
Accruing loans past due 90 days or more
11,305
2,358
Restructured loans - nonaccrual
-
4,154
Total non-acquired nonperforming loans
121,772
47,029
Other real estate owned (“OREO”) (1) (2)
Other nonperforming assets (3)
Total OREO and other nonperforming assets excluding acquired assets
Total nonperforming assets excluding acquired assets
122,483
47,274
Acquired:
Nonaccrual loans (4)
58,916
55,808
Accruing loans past due 90 days or more
1,174
1,992
Restructured loans - nonaccrual
3,746
Total acquired nonperforming loans
60,929
61,546
Acquired OREO and other nonperforming assets:
Acquired OREO (1) (5)
Other acquired nonperforming assets (3)
Total acquired OREO and other nonperforming assets
Total acquired nonperforming assets
61,641
62,468
Total nonperforming assets
$
184,124
$
109,742
Excluding acquired assets:
Total nonperforming assets as a percentage of total loans and repossessed assets (6)
0.46
%
0.21
%
Total nonperforming assets as a percentage of total assets (7)
0.27
%
0.11
%
Nonperforming loans as a percentage of period end loans (6)
0.46
%
0.21
%
Including acquired assets:
Total nonperforming assets as a percentage of total loans and repossessed assets (6)
0.57
%
0.36
%
Total nonperforming assets as a percentage of total assets (7)
0.41
%
0.25
%
Nonperforming loans as a percentage of period end loans (6)
0.56
%
0.36
%
(1) Consists of real estate acquired as a result of foreclosure. Excludes certain property no longer intended for bank use.
(2) Excludes non-acquired bank premises held for sale of $9.0 million and $14.3 million as of December 31, 2023 and 2022, respectively, that is now separately disclosed on the balance sheet.
(3) Consists of non-real estate foreclosed assets, such as repossessed vehicles.
(4) Includes nonaccrual loans that are purchase credit deteriorated (PCD loans).
(5) Excludes acquired bank premises held for sale of $3.4 million as of December 31, 2023 and 2022, that is now separately disclosed on the balance sheet.
(6) Loan data excludes mortgage loans held for sale.
(7) For purposes of this calculation, total assets include all assets (both acquired and non-acquired).
Total non-acquired nonperforming loans were $121.8 million, or 0.46% of total non-acquired loans, an increase of approximately $74.7 million, or 158.9%, from December 31, 2022. The increase in nonperforming loans was driven primarily by an increase in commercial nonaccrual loans of $59.0 million, an increase in consumer nonaccrual loans of $10.9 million and an increase in accruing loans past due 90 days or more of $8.9 million, offset by a decrease in restructured nonaccrual loans of $4.1 million. The increase in commercial nonaccrual loans from December 31, 2022, was primarily due to three commercial and industrial relationships totaling $41.4 million, six commercial owner-occupied loans totaling $9.8 million, and three commercial non owner occupied loans totaling $4.2 million. The increase in accruing loans past due 90 days or more are deemed to be low risk and greater than 70% of these loans have been brought current since the year-end 2023. Acquired nonperforming loans were $60.9 million, or 1.03% of total acquired loans, a decrease of $617,000, or 1.0% from December 31, 2022. The decrease in acquired nonperforming loans was mainly driven by a decrease in consumer nonaccrual loans of $3.3 million, a decrease in restructured loans of $2.9 million and a decrease in accruing loans past due 90 days or more of $818,000, offset by an increase in commercial nonaccrual loans of $6.4 million.
The top ten nonaccrual loans at December 31, 2023 totaled $61.3 million and consisted of four loans located in South Carolina, two in North Carolina, three in Georgia, and one in Florida. These loans comprise 36.0% of total nonaccrual loans at December 31, 2023, with around 50% being real estate collateral dependent and the other 50% being non real estate. We currently hold a specific reserve against one of these ten loans, totaling $6.9 million. The remaining nine loans do not carry a specific reserve due to carrying balances being below current collateral values.
The decline in restructured nonaccrual loans over both the nonacquired and acquired loan portfolios was due to the adoption of ASU 2022-02 effective January 1, 2023, which extinguishes the former troubled debt restructuring (TDR) guidance and issues new requirements for determining modified loans to borrowers experiencing financial difficulty. As of December 31, 2023, the Bank had a total of $12.1 million loans to borrowers experiencing financial difficulty. Of the $12.1 million, $9.9 million loans were current and $2.2 million loans were 30 to 89 days past due.
Allowance for Credit Losses (“ACL”) on Loans and Certain Off-Balance-Sheet Credit Exposure
As stated previously, the ACL reflects management’s estimate of the portion of the amortized cost of loans and unfunded commitments that it does not expect to collect. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized.
Management considers forward-looking information in estimating expected credit losses. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline outlook and alternative scenarios for the United States economy. The baseline, along with the evaluation of alternative scenarios, is used by management to determine the best estimate within the range of expected credit losses. Management evaluates the appropriateness of the reasonable and supportable forecast scenarios and takes into consideration the scenarios in relation to actual economic and other data, such as gross domestic product growth, monetary and fiscal policy, inflation, supply chain issues and global events like the Russian/Ukraine conflict, as well as the volatility and magnitude of changes within those scenarios quarter over quarter, and consideration of conditions within the Bank’s operating environment and geographic area. Additional forecast scenarios may be weighted along with the baseline forecast to arrive at the final reserve estimate. While periods of relative economic stability should generally lead to stability in forecast scenarios and weightings to estimate credit losses, periods of instability can likewise require management to adjust the selection of scenarios and weightings, in accordance with the accounting standards. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors within four quarters using a straight-line approach. The Company generally uses a four-quarter forecast and a four-quarter reversion period.
In spite of the rapid interest rate hikes experienced cycle-to-date, the U.S. has thus far avoided a recession, although an inverted yield curve such as observed in the current interest rate environment often portends a coming recession. Management continues to use a blended forecast scenario of the baseline, upside, and more severe scenario, depending on the circumstances and economic outlook As of December 31, 2023, management selected a baseline weighting of 60%, a 20% weighting for an upside scenario and a 20% weighting for the more severe scenario compared to a baseline weighting of 75% and the more severe scenario of 25% at the end of the fourth quarter of 2022. While the December Federal Open Market Committee Meeting brought some clarity around the path of interest rates and condition of the economy, the scenario weightings reflect continued recognition of downside risks in the economic forecast from persistent levels of inflation, rising interest rates, and tightening credit conditions conducive of a mild recession. While employment figures still showed resilience and actual loan losses remain at low levels, continued downward shifts in the forecasted commercial real estate price index elevated modeled expected losses for the Commercial Real Estate and Commercial Construction and Land Development, which excludes Residential Construction, loan segments. As a result of the continued pressures in the market and tightening credit conditions, the Company recorded provision for credit losses of $114.1 million and net charge-offs of $24.9 million during 2023.
As disclosed previously, the longstanding TDR accounting rules were replaced with ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The Company adopted the retirement of TDR guidance, effective January 1, 2023. Please see Note 1 - Summary of Significant Accounting Policies in this Form 10-K for further detailed descriptions of how we determine expected losses from modifications of receivables to borrowers experiencing financial difficulty.
Atlantic Capital was acquired and merged with and into the Bank on March 1, 2022, requiring that a closing date ACL be prepared for Atlantic Capital on a standalone basis and that the acquired portfolio be included in the Bank’s first quarter ACL. Atlantic Capital’s loans represented approximately 8% of the total Bank’s portfolio at March 31, 2022. Given the relative size and complexity of the acquired portfolio, similarities of the loan characteristics, and similar loss history to the existing portfolio, reserve calculations were performed using the Bank's existing CECL model, loan segmentation, and forecast weighting as the first quarter end reserve. As a result of the merger with Atlantic Capital on March 1, 2022, the Company identified approximately $137.9 million of loans as PCD. The acquisition date ACL totaled $27.5 million, consisting of a non-PCD pooled reserve of $13.7 million, PCD pooled reserve of $5.7 million, and PCD individually evaluated reserve of $8.1 million. It represented about 8% of the combined Bank’s ACL reserve at March 31, 2022. The acquisition date reserve for unfunded commitments totaled $3.4 million, or 11% of the combined Bank’s total at March 31, 2022.
The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the expected credit loss will be recorded as a liability on the balance sheet. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. Management completes funding studies based on historical data to estimate the percentage of unfunded loan commitments that will ultimately be funded to calculate the reserve for unfunded commitments. Management applies this funding rate, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. As of December 31, 2023 and 2022, the liabilities recorded for expected credit losses on unfunded commitments were $56.3 million and $67.2 million, respectively. The current adjustment to the ACL for unfunded commitments is recognized through the Provision (Recovery) for Credit Losses in the Consolidated Statements of Income.
As of December 31, 2023, the balance of the ACL was $456.6 million, or 1.41%, of total loans. For the year ended December 31, 2023, the ACL increased $100.1 million from the balance of $356.4 million at December 31, 2022. The increase in ACL of $100.1 million included $125.0 million of provision for credit losses, and $24.9 million in net charge-offs. For both the three and twelve months ended December 31, 2023, the Company recorded provision for credit losses due to loan growth and current forecasts applied to our modeling to adequately capture growing economic recessionary risks. As of December 31, 2022, the balance of the ACL was $356.4 million or 1.18% of total loans. For the year ended December 31, 2022, the ACL increased $54.6 million from the balance of $301.8 million at December 31, 2021. The increase in ACL of $54.6 million was due a provision for credit losses of $45.2 million, $13.7 million due to the initial allowance for PCD loans acquired in the Atlantic Capital acquisition, along with net charge-offs of $4.3 million in 2022. For both the three and twelve months ended December 31, 2022, the Company recorded provision for credit losses due to loan growth and current forecasts applied to our modeling to adequately capture growing economic recessionary risks.
At December 31, 2023, the Company had a reserve on unfunded commitments of $56.3 million, which was recorded as a liability on the Consolidated Balance Sheet, compared to $67.2 million at December 31, 2022. During the three and twelve months ended December 31, 2023, the Company recorded a release in the reserve for unfunded commitments of $6.0 million and $10.9 million, respectively. For the prior comparative period, the Company recorded a provision for credit losses on unfunded commitments of $14.2 million and $36.7 million, respectively. The provision of $36.7 million recorded in 2022 includes the initial provision for credit losses for unfunded commitments acquired from Atlantic Capital, which the Company recorded during the first quarter of 2022. The provision for credit losses for unfunded commitments is based on the growth in unfunded loan commitments, production mix, and current forecast scenarios applied to our modeling to adequately capture growing economic recessionary risks. This amount was recorded in Provision (Recovery) for Credit Losses on the Consolidated Statements of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during 2023.
The ACL provides 2.50 times coverage of nonperforming loans at December 31, 2023. Net charge offs to total average loans during the year ended December 31, 2023 were 0.08%, compared to 0.02% during the year ended December 31, 2022. ACL, including reserve for unfunded commitments, as a percentage of loans were 1.58% and 1.40%, respectively, as of December 31, 2023 and 2022.
The following table provides the allocation, by segment, for expected credit losses for the year ended December 31, 2023. While non-owner occupied CRE is the largest segment of our loan portfolio, the risk profile of the non-owner occupied CRE portfolio remains low and stable. We have a granular loan portfolio where the average loan size of the non-owner occupied CRE portfolio is less than $5 million. The weighted average loan to value for the non-owner occupied CRE portfolio was less than 60% as of December 31, 2023. Loans for the commercial office space, which are included in the non-owner occupied CRE portfolio, represent approximately 4% of the total outstanding portfolio with an average loan size of less than $2 million as of December 31, 2023. Over 95% of these office spaces are located in the Company’s southeast footprint, of which approximately 91% mature in 2025 or later.
Table 17-Allocation of the Allowance by Segment
December 31, 2023
December 31, 2022
(Dollars in thousands)
Amount
%*
Amount
%*
Residential Mortgage Senior
$
78,052
21.8
%
$
72,188
18.8
%
Residential Mortgage Junior
0.0
%
0.0
%
Revolving Mortgage
10,942
4.6
%
14,886
4.6
%
Residential Construction
5,024
2.1
%
8,974
2.9
%
Other Construction and Development
65,772
6.8
%
45,410
6.5
%
Consumer
23,331
3.8
%
22,767
4.2
%
Multifamily
13,766
2.7
%
3,684
2.4
%
Municipal
2.3
%
2.4
%
Owner Occupied Commercial Real Estate
71,580
16.9
%
58,083
18.1
%
Non-Owner Occupied Commercial Real Estate
137,055
23.8
%
78,485
24.5
%
Commercial and Industrial
49,406
15.1
%
50,713
15.7
%
Total
$
456,573
100.0
%
$
356,444
100.0
%
* Loan balance in each category expressed as a percentage of total loans excluding PPP loans.
The following table presents a summary of net charge off ratios by loan segment, for the year ended December 31, 2023 and 2022:
Table 18-Disaggregated Net Recovery (Charge Off) Ratio by Segment
Year Ended
December 31, 2023
December 31, 2022
(Dollars in thousands)
Net Recovery (Charge Off)
Average Balance
Net Recovery (Charge Off) Ratio
Net Recovery (Charge Off)
Average Balance
Net Recovery (Charge Off) Ratio
Residential Mortgage Senior
$
$
6,399,401
0.01
%
$
1,036
$
4,792,864
0.02
%
Residential Mortgage Junior
12,142
0.89
%
13,835
1.53
%
Revolving Mortgage
1,073
1,422,717
0.08
%
3,536
1,294,044
0.27
%
Residential Construction
823,952
0.02
%
(13)
756,730
(0.00)
%
Other Construction and Development
1,981,715
0.02
%
1,100
1,669,834
0.07
%
Consumer
(9,795)
1,253,419
(0.78)
%
(7,788)
1,151,578
(0.68)
%
Multifamily
857,100
0.00
%
-
588,305
-
%
Municipal
-
733,406
-
%
-
685,538
-
%
Owner Occupied Commercial Real Estate
5,531,908
0.01
%
(649)
5,330,711
(0.01)
%
Non-Owner Occupied Commercial Real Estate
7,608,018
0.01
%
6,998,540
0.00
%
Commercial and Industrial
(19,088)
4,779,513
(0.40)
%
(1,920)
4,174,155
(0.05)
%
Total
$
(24,866)
$
31,403,291
(0.08)
%
$
(4,273)
$
27,456,134
(0.02)
%
The following table presents a summary of the changes in the ACL, for the years ended December 31, 2023, 2022 and 2021:
Table 19-Summary of the Changes in ACL
Year Ended December 31,
Non-PCD
PCD
Non-PCD
PCD
Non-PCD
PCD
(Dollars in thousands)
Loans
Loans
Total
Loans
Loans
Total
Loans
Loans
Total
Allowance for credit losses at January 1
$
309,606
$
46,838
$
356,444
$
225,227
$
76,580
$
301,807
$
315,470
$
141,839
$
457,309
ACL - PCD loans for ACBI merger
-
-
-
-
13,758
13,758
-
-
-
Loans charged-off
(39,077)
(1,571)
(40,648)
(17,332)
(6,114)
(23,446)
(14,391)
(2,508)
(16,899)
Recoveries of loans previously charged off
9,987
5,795
15,782
12,140
7,033
19,173
7,778
6,022
13,800
Net (charge-offs) recoveries
(29,090)
4,224
(24,866)
(5,192)
(4,273)
(6,613)
3,514
(3,099)
Initial provision for credit losses - ACBI
-
-
-
13,697
-
13,697
-
-
-
Provision (recovery) for credit losses
143,360
(18,365)
124,995
75,874
(44,419)
31,455
(83,630)
(68,773)
(152,403)
Balance at end of period
$
423,876
$
32,697
$
456,573
$
309,606
$
46,838
$
356,444
$
225,227
$
76,580
$
301,807
Total loans, net of unearned income:
At period end
$
32,388,489
$
30,177,862
$
23,928,166
Average
31,403,291
27,456,134
24,118,512
Net charge-offs as a percentage of average loans (annualized)
0.08
%
0.02
%
0.01
%
Allowance for credit losses as a percentage of period end loans
1.41
%
1.18
%
1.26
%
Allowance for credit losses as a percentage of period end non-performing loans (“NPLs”)
249.90
%
328.29
%
375.94
%
* Net charge-offs at December 31, 2023, 2022 and 2021 include automated overdraft protection (“AOP”) and insufficient fund (“NSF”) principal net charge-offs of $6.8 million, $6.5 million and $4.6 million, respectively, that are included in the consumer classification above.
** Average loans, net of unearned income does not include loans held for sale.3
Deposits
We rely on deposits by our customers as the primary source of funds for the continued growth of our loan and investment securities portfolios. Customer deposits are categorized as either noninterest-bearing deposits or interest-bearing deposits. Noninterest-bearing deposits (or demand deposits) are transaction accounts that provide us with “interest-free” sources of funds. Interest-bearing deposits include savings deposit, interest-bearing transaction accounts, certificates of deposits, and other time deposits. Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts. The Company uses brokered time deposits as a secondary source of deposits to supplement its primary source through organic growth of deposits from our customers.
During 2023, overall deposits increased $698.3 million, or 1.9%, to $37.0 billion from 2022. The increase was driven by growth in money market accounts of $3.2 billion, including $1.2 billion in reciprocal insured money market deposits and time deposits of $1.8 billion, including an increase in brokered deposits of $569.6 million. These increases were partially offset by declines in noninterest-bearing checking deposits of $2.5 billion, interest-bearing checking deposits of $976.7 million and savings deposits of $832.1 million. As customers moved funds from noninterest-bearing checking, interest-bearing checking and savings accounts, seeking higher yields in the rising rate environment, the Company increased its balance in higher yielding money market accounts including reciprocal insured money market deposits along with in-market time deposits and brokered deposits in 2023. The Company raised interest rates on most interest-bearing deposit products (in particular money market accounts and time deposit specials) during 2023 due to competitive pressures to retain deposits. The Company also increased its use of brokered time deposits in the first quarter of 2023 with the financial turmoil caused by the few regional banks failing to provide the Company with excess liquidity. The balance at the end of the first quarter was $1.4 billion. As the financial markets settled, the Company has allowed the brokered time deposits to run off to an ending balance of $719.7 million at December 31, 2023. The declines in noninterest-bearing, interest-bearing and savings accounts were also due to customers having less excess cash as funds from government support programs related to the COVID-19 pandemic declined.
The following table presents total deposits for the two years at December 31:
Table 20-Total Deposits
December 31,
(Dollars in thousands)
Noninterest-bearing deposits
$
10,649,274
$
13,168,656
Savings deposits
2,632,212
3,464,351
Interest-bearing demand deposits
19,517,470
17,297,630
Total savings and interest-bearing demand deposits
22,149,682
20,761,981
Certificates of deposit
4,245,382
2,413,963
Other time deposits
4,571
6,023
Total time deposits
4,249,953
2,419,986
Total deposits
$
37,048,909
$
36,350,623
The following are key highlights regarding overall changes in total deposits:
● Total deposits increased $698.3 million, or 1.9%, for the year ended December 31, 2023, compared to 2022.
o Noninterest-bearing deposits (demand deposits) decreased by $2.5 billion, or 19.1%, for the year ended December 31, 2023, when compared with December 31, 2022.
o Money market (Market Rate Checking) and other interest-bearing demand deposits increased $2.2 billion, or 12.8%, for the year ended December 31, 2023
o Savings deposits decreased $832.1 million, or 24.0%, when compared with December 31, 2022.
o At December 31, 2023, core deposits (total deposits excluding time deposits) represented 89% of total deposits compared with 93% at the end of 2022.
The following are key highlights regarding overall growth in average total deposits:
● Total deposits averaged $36.6 billion in 2023, a decrease of $575.0 billion, or 1.5%, from 2022.
o Average interest-bearing deposits increased by $1.1 billion, or 4.8%, to $24.8 billion in 2023 compared to 2022.
o Average noninterest-bearing demand deposits decreased by $1.7 billion, or 12.6%, to $11.8 billion in 2023 compared to 2022.
The following table provides a maturity distribution of certificates of deposit of $250,000 or more for the next twelve months as of December 31:
Table 21-Maturity Distribution of Certificates of Deposits of $250 Thousand or More
December 31,
December 31,
(Dollars in thousands)
% Change
Within three months
$
549,888
$
115,528
376.0
%
After three through six months
166,344
118,511
40.4
%
After six through twelve months
165,126
168,785
(2.2)
%
After twelve months
45,855
84,361
(45.6)
%
$
927,213
$
487,185
90.3
%
At December 31, 2023 and 2022, the Company estimates that is has approximately $14.2 billion and $14.6 billion, respectively, in uninsured deposits. The amounts above are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the Call Report.
The following table provides a maturity distribution of uninsured time deposits for the next twelve months as of December 31:
Table 22-Maturity Distribution of Uninsured Time Deposits
December 31,
(Dollars in thousands)
% Change
Within three months
$
285,760
$
57,302
398.7
%
After three through six months
77,094
71,261
8.2
%
After six through twelve months
84,876
91,785
(7.5)
%
After twelve months
29,855
42,361
(29.5)
%
$
477,585
$
262,709
81.8
%
Short-Term Borrowed Funds
Our short-term borrowed funds consist of federal funds purchased and securities sold under repurchase agreements, FRB borrowings on a secured line of credit, short-term FHLB Advances and the U.S. Bank line of credit. Note 10-Federal Funds Purchased and Securities Sold Under Agreements to Repurchase in our audited financial statements provides a profile of these funds at each year-end, the average amounts outstanding during each period, the maximum amounts outstanding at any month-end, and the weighted average interest rates on year-end and average balances in each category. Federal funds purchased and securities sold under agreements to repurchase most typically have maturities within one to three days from the transaction date. Certain of these borrowings have no defined maturity date. Note 11-Other Borrowings in our audited financial statements provide provides a profile of short-term FHLB advances, FRB borrowings and the U.S. Bank line of credit at each year-end, the average amount outstanding during each period and the weighted average interest rates on year-end and average balances. Short-term FHLB advances has a maturity of less than one year and the FRB borrowings and U.S. Bank line of credit has a daily maturity.
Long-Term Borrowed Funds
Our long-term borrowed funds consist of trust preferred junior subordinated debt and corporate subordinated debt. Note 11-Other Borrowings in our audited financial statements provides a profile of these funds at each year-end, the balance at year end, the interest rate at year end and the weighted average interest rate for long-term borrowings. Each issuance of trust preferred junior subordinated debt has a maturity of 30 years, but we can call the debt at any time without penalty.
Capital and Dividends
Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As of December 31, 2023, shareholders’ equity was $5.5 billion, an increase of $458.2 million, or 9.0%, compared to the balance at December 31, 2022. The change from year-end 2022 was mainly attributable to net income of $494.3 million, an increase in the market value of securities available for sale, net of tax, of $93.3 million recorded through AOCI and the recognition of equity based compensation of $35.9 million. These increases were mainly offset by dividends paid on common shares of $154.9 million and common stock repurchased under our stock repurchase plan and equity plans of $16.1 million.
The following shows the changes in shareholders’ equity during 2023:
Table 23-Changes in Shareholders’ Equity
(Dollars in thousands)
Total shareholders' equity at December 31, 2022
$
5,074,927
Net income
494,308
Dividends paid on common shares ($2.04 per share)
(154,919)
Dividends paid on restricted stock units
(1,265)
Net increase in market value of securities available for sale, net of deferred taxes
93,252
Net increase in market value of post retirement plan, net of deferred taxes
1,300
Stock options exercised
2,926
Employee stock purchases
2,772
Equity based compensation
35,861
Common stock repurchased pursuant to stock repurchase plan
(6,748)
Common stock repurchased - equity plans
(9,316)
Total shareholders' equity at December 31, 2023
$
5,533,098
Our equity-to-assets ratio increased to 12.3% at December 31, 2023 from 11.6% at December 31, 2022. The increase from December 31, 2022 was due to the percentage increase in equity of 9.0% being higher than the percentage increase in total assets of 2.2%. The higher percentage growth in capital was mainly due to the Company’s net income of $494.3 million. The increase in assets in 2023 was mainly due to organic loan growth funded through deposit growth.
On April 27, 2022, the Company’s Board of Directors approved 2022 Stock Repurchase Program authorizing the Company to repurchase up to 3,750,000 of the Company’s common shares along with the remaining authorized shares of 370,021 from the Company’s 2021 Stock Repurchase Plan. Our Board of Directors approved the program after considering, among other things, our liquidity needs and capital resources as well as the estimated current value of our net assets. The aggregate number of shares of common stocks authorized to be repurchased totals 4.12 million shares. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, general business conditions, regulatory requirements, the market price of our common stock, and the availability of alternative investment opportunities. During 2023, the Company repurchased a total of 100,000 shares at a weighted average price of $67.48 per share pursuant to the 2022 Stock Repurchase Program. As of December 31, 2023, there is a total of 4,020,021 shares authorized to be repurchased.
We are subject to regulations with respect to certain risk-based capital ratios. These risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted based on the rules to reflect categorical credit risk. In addition to the risk-based capital ratios, the regulatory agencies have also established a leverage ratio for assessing capital adequacy. The leverage ratio is equal to Tier 1 capital divided by total consolidated on-balance sheet assets (minus amounts deducted from Tier 1 capital). The leverage ratio does not involve assigning risk weights to assets.
Specifically, we are required to maintain the following minimum capital ratios:
● a CET1, risk-based capital ratio of 4.5%;
● a Tier 1 risk-based capital ratio of 6%;
● a total risk-based capital ratio of 8%; and
● a leverage ratio of 4%.
Under the current capital rules, Tier 1 capital includes two components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock and Tier 1 minority interests. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt, trust preferred securities and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in CET1 capital and often would operate to reduce this category of capital. When the current capital rules were first implemented, the Bank exercised its one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI, allowing us to retain our pre-existing treatment for AOCI.
In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital), resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
The Bank is also subject to the regulatory framework for prompt corrective action, which identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and is based on specified thresholds for each of the three risk-based regulatory capital ratios (CET1, Tier 1 capital and total capital) and for the leverage ratio.
The federal banking agencies revised their regulatory capital rules to (i) address the implementation of CECL; (ii) provide an optional three-year phase-in period for the adoption date adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. CECL became effective for us on January 1, 2020 and the Company applied the provisions of the standard using the modified retrospective method as a cumulative-effect adjustment to retained earnings. Related to the implementation of ASU 2016-13, we recorded additional allowance for credit losses for loans of $54.4 million, deferred tax assets of $12.6 million, an additional reserve for unfunded commitments of $6.4 million and an adjustment to retained earnings of $44.8 million. Instead of recognizing the effects on regulatory capital from ASU 2016-13 at adoption, the Company initially elected the option for recognizing the adoption date effects on the Company’s regulatory capital calculations over a three-year phase-in.
In response to the COVID-19 pandemic in 2020, the federal banking agencies issued a final rule for additional transitional relief to regulatory capital related to the impact of the adoption of CECL. The Company chose the five-year transition method and is deferring the recognition of the effects from the adoption date and the CECL difference for the first two years of application. The modified CECL transitional amount was fixed as of December 31, 2021, and that amount began the three-year phase out in the first quarter of 2022 with 50% phased out in 2023. At December 31, 2023 and 2022, approximately $30.5 million and $45.8 million, respectively, was added to Tier 1 capital at the Company and Bank as a result of the modified CECL transition. Had the Company elected not to apply the modified CECL transitional amount to its Tier 1 capital, the Company and Bank would have still been considered well capitalized as of December 31, 2023 and 2022.
Table 24-Capital Adequacy Ratios
The following table presents our consolidated capital ratios under the applicable capital rules:
December 31,
(In percent)
Common equity Tier 1 risk-based capital
11.75
%
10.96
%
11.76
%
Tier 1 risk-based capital
11.75
%
10.96
%
11.76
%
Total risk-based capital
14.08
%
12.97
%
13.57
%
Tier 1 leverage
9.42
%
8.72
%
8.08
%
The Company’s and Bank’s Common equity Tier 1 risk-based capital, Tier 1 risk-based capital and total risk-based capital and Tier 1 leverage ratios all improved compared to December 31, 2022. All of these ratios mainly improved due to net income recognized during 2023 of $494.3 million. Tier 1 capital increased 8.6% and 9.8% at the Bank and Company, respectively, with the increase in equity resulting from the net income recognized during the current period. Total risk-based capital increased 10.9% and 11.1% at both the Bank and Company, respectively, with the increase in equity resulting from the net income recognized during the current period, along with the increase in the allowance for credit losses and unfunded commitments includable in Tier 2 capital. Both regulatory risk-based assets and quarterly average assets remained reasonably flat in the fourth quarter of 2023 compared to the fourth quarter of 2022 with average assets for the both Company and Bank increasing 1.6% and risk-based assets increasing 2.3%. Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification. Should the Company need to sell its available for sale and held to maturity securities for liquidity purposes and recognize the unrealized losses as of December 31, 2023 through earnings, all else equal, our capital ratios would remain well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.
The Company pays cash dividends to shareholders from its assets, which are mainly provided by dividends from its banking subsidiary. However, certain restrictions exist regarding the ability of its banking subsidiary to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. The federal banking agencies have issued policy statements which provide that bank holding companies and insured banks should generally pay dividends only out of current earnings.
During 2023, the Bank paid dividends to SouthState totaling $180.0 million. The Bank was not required to obtain approval of the OCC to pay these dividends. We used these funds and excess cash to pay our dividend to shareholders of $154.9 million and repurchase shares of our common stock on the open market totaling $6.7 million.
The following table provides the amount of dividends and payout ratios for the years ended December 31:
Table 25-Dividends Paid to Common Shareholders
Year Ended December 31,
(Dollars in thousands)
Dividend payments to common shareholders
$
154,919
$
146,486
$
135,201
Dividend payout ratios
31.34
%
29.54
%
28.43
%
We retain earnings to have capital sufficient to grow our loan and investment portfolios and to support certain acquisitions or other business expansion opportunities. The dividend payout ratio is calculated by dividing dividends paid during the year by net income for the year.
Liquidity
Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses. Liquidity risk is the risk that the Bank’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations. Our Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring policies designed to ensure acceptable composition of our asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. We have employed our funds in a manner to provide liquidity from both assets and liabilities sufficient to meet our cash needs.
The ALCO has established key risk indicators to monitor liquidity and interest rate risk. The key risk indicators are reviewed and approved by the ALCO on an annual basis. The liquidity key risk indicators include the loan to deposit ratio, net noncore funding dependence ratio, On-hand liquidity to total liabilities ratio, the percentage of securities pledged to total securities, and the ratio of brokered deposits to total deposits. As of December 31, 2023, the Company was operating within its liquidity policy limits.
Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally, changes in the earning asset mix are of a longer-term nature and are not used for day-to-day corporate liquidity needs.
Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase, interest-bearing deposits at other banks and other short-term borrowings. We engage in routine activities to retain deposits intended to enhance our liquidity position. These routine activities include various measures, such as the following:
● Emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with our Bank;
● Pricing deposits, including certificates of deposit, at rate levels that will attract and /or retain balances of deposits that will enhance our Bank’s asset/liability management and net interest margin requirements; and
● Continually working to identify and introduce new products that will attract customers or enhance our Bank’s appeal as a primary provider of financial services.
Our non-acquired loan portfolio increased by approximately $3.7 billion, or approximately 16.1%, compared to the balance at December 31, 2022. The increase in the non-acquired loan portfolio was due to organic growth and renewals of acquired loans that are moved to our non-acquired loan portfolio. The acquired loan portfolio decreased by $1.5 billion, or 19.9%, from the balance at December 31, 2022 through principal paydowns, charge-offs, foreclosures and renewals of acquired loans. For more detail around the changes in the loan portfolio see the Loan Portfolio section in MDA starting on page 81.
Our investment securities portfolio (excluding trading securities) decreased $725.9 million, or approximately 8.9%, compared to the balance at December 31, 2022. The decrease in investment securities from December 31, 2022 was a result of maturities, calls, sales and paydowns of investment securities totaling $1.1 billion and a reduction from the net amortization of premiums of $20.1 million. These decreases were partially offset by purchases of available for sale investment securities totaling $80.4 million and other investment securities of $226.7 million and an increase in the market value of the available for sale investment securities portfolio of $112.7 million. There were no purchases or sales of held to maturity securities during the year. For the purchases of other investment securities, $222.1 million of the purchases were related to capital stock with the Federal Home Loan Bank of which we sold back $214.4 million during 2023. The activity in the purchases and sales of the Federal Home Loan Bank Capital Stock was due to activity with FHLB borrowings during the year. The Bank pledges a portion of its investment portfolio for a variety of purposes, including, but not limited to, collateral for public funds and credit with the Federal Home Loan Bank of Atlanta. As of December 31, 2023, the bank pledged 49.6% of the market value of its investment portfolio. As of December 31, 2023, the Bank had unpledged securities with a market value of $3.5 billion. These securities included Treasury, Agency, Agency MBS, Municipals and Corporate securities. Total cash and cash equivalents declined $313.7 million in 2023 to $1.0 billion at December 31, 2023, compared to $1.3 billion at December 31, 2022. Liquidity has tightened in 2023 with the rising rate environment and turmoil in the financial markets. Competition for in-market deposits has increased throughout 2023 resulting in increases in deposit rates to retain local deposits. While the Company has increased its use of brokered time deposits since December 31, 2022, the ratio of brokered time deposits to total deposits at December 31, 2023 was only 1.9% compared to the Company’s internal limit of 15%. During 2023, the Company has also borrowed funds from the FHLB on a short-term basis. The outstanding borrowings from the FHLB were $100.0 million at December 31, 2023. See below for further discussion around brokered deposits and FHLB borrowings.
At December 31, 2023 and December 31, 2022, we had $719.7 million and $150.0 million of traditional, out-of-market brokered time deposits, respectively. At December 31, 2023 and December 31, 2022, we had $2.2 billion and $637.0 million, respectively, of reciprocal deposits. Total deposits were $37.0 billion at December 31, 2023, an increase of $698.3 million from $36.4 billion at December 31, 2022. Our deposit growth since December 31, 2022 included an increase in money market accounts of $3.2 billion and an increase in certificates of deposit of $1.8 billion. These increases were offset by declines in demand deposit, interest-bearing checking and savings accounts of $2.5 billion, $976.7 million and $832.1 million, respectively. As customers moved funds from noninterest bearing checking, interest bearing checking and savings accounts, seeking higher yields in the rising rate environment along with insurance coverage, the Company’s balance in higher costing in-market time deposits, brokered time deposits and in money market deposit accounts including reciprocal insured money market accounts, increased. The Company raised interest rates on most interest-bearing deposit products (in particular time deposit specials and money market accounts) during 2023 due to competitive pressures to retain deposits. Total short-term borrowings at December 31, 2023 were $589.2 million consisting of $248.2 million in federal funds purchased, $241.0 million in securities sold under agreements to repurchase and $100.0 million in short-term FHLB advances. Total long-term borrowings at December 31, 2023 were $391.9 million and consisted of trust preferred securities and subordinated debentures. To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to take in shorter maturities of such funds. Our current approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise.
The Bank has a granular deposit base comprised of over 1.4 million accounts, with an average deposit size of $27,000. The top ten and twenty deposit relationships comprise approximately three and four percent of total deposits. Approximately 29% of total deposits are non-interest bearing. The Bank’s deposit beta, which represents the change in the Bank’s cost of deposits over the change in the federal funds target rate, during this cycle (from March 2022 through December 2023) is approximately 30%.
The Bank supplements its in-market deposits with brokered deposits. While the Bank has a policy limit for brokered time deposits of no more than 15% of total deposits, it has operated well below this policy limit. At December 31, 2023, the percentage of brokered time deposits to total deposits was 1.9%. During calendar years 2022 and 2023, the highest ratio of brokered time deposits to total deposits was 3.8% on March 31, 2023. During the first quarter of 2023, the Company sought to increase liquidity with the turmoil in the financial markets after the few regional banks failed and increased the balance in brokered time deposits to $1.4 billion. As the financial markets stabilized during 2023, the Company has let the brokered time deposits run-off to an ending balance of $719.7 million at December 31, 2023.
As discussed below, the Bank maintains credit facilities with the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta. The table below compares Primary Funding Sources to uninsured deposits as of December 31, 2023.
Table 26-Primary Funding Sources to Uninsured Deposits
(Dollars in millions)
Available Capacity
Federal Home Loan Bank of Atlanta
$
6,986
Federal Reserve Discount Window of Atlanta
1,882
Cash and cash equivalents
Par value of securities that can be pledged to BTFP
3,638
Total primary sources
$
13,505
Uninsured deposits, excluding collateralized deposits
$
11,814
Uninsured and collateralized deposits
$
14,239
Coverage ratio, uninsured deposits
114.3%
Coverage ratio, uninsured and collateralized deposits
94.8%
Ratio of uninsured and collateralized deposits to total deposits
38.4%
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers. In addition to commitments to extend credit, we also issue standby letters of credit, which are assurances to third parties that they will not suffer a loss if our customer fails to meet its contractual obligation to the third-party. Although our experience indicates that many of these standby letters of credit will expire unused, through our various sources of liquidity, we believe that we will have the resources to meet these obligations should the need arise.
Our ongoing philosophy is to remain in a liquid position, as reflected by such indicators as the composition of our earning assets, typically including some level of reverse repurchase agreements; federal funds sold; balances at the Federal Reserve Bank; and/or other short-term investments; asset quality; well-capitalized position; and profitable operating results. Cyclical and other economic trends and conditions can disrupt our desired liquidity position at any time. We expect that these conditions would generally be of a short-term nature. Under such circumstances, we expect our reverse repurchase agreements and federal funds sold positions, or balances at the Federal Reserve Bank, if any, to serve as the primary source of immediate liquidity. We could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks. The Bank may also access funds from borrowing facilities established with the Federal Home Loan Bank of Atlanta and the discount window of the Federal Reserve Bank of Atlanta. At December 31, 2023, the Bank had a total FHLB credit facility of $7.1 billion, with $100.0 million in short-term FHLB advances and $2.9 million FHLB letters of credit outstanding at year-end, leaving $7.0 billion in availability on the FHLB credit facility. At December 31, 2023, the Bank had $1.9 billion of credit available at the Federal Reserve Bank’s discount window and federal funds credit lines of $300.0 million with no balances outstanding at quarter-end. The Bank also has an internal limit on brokered deposits of 15% of total deposits, which would allow capacity of $5.6 billion at December 31, 2023. The Bank had $719.7 million of outstanding brokered deposits at the end of the year leaving $4.8 billion in available capacity as per the internal policy limit of 15% of total deposits. All of these resources would provide an additional $14.0 billion in funding if we needed additional liquidity. The Bank also has $3.5 billion in market value of unpledged securities at December 31, 2023 that can be pledged to attain additional funds if necessary. We can also consider actions such as deposit promotions to increase core deposits. The Company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at December 31, 2023. We believe that our liquidity position continues to be adequate and readily available.
Our contingency funding plan describes several potential stages based on stressed liquidity levels. Liquidity key risk indicators are reported to the Board of Directors on a quarterly basis. We maintain various wholesale sources of funding. If our deposit retention efforts were to be unsuccessful, we would use these alternative sources of funding. Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged. This could increase our cost of funds, impacting our net interest margin and net interest spread.
Asset-Liability Management and Market Risk Sensitivity
Our earnings and the economic value of equity vary in relation to the behavior of interest rates and the accompanying fluctuations in market prices of certain of our financial instruments. We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment.
Our interest rate risk principally consists of reprice, option, basis, and yield curve risk. Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepayment options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.
We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.
Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as the terms of contractual agreements, investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. The assumptions for loan prepayments, deposit decay, and nonstable deposit balances are derived from models that use historical bank data. These models are independently validated. Equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. Key simulation assumptions are subject to sensitivity analysis to assess the impact of assumption changes on earnings at risk and equity at risk. Model assumptions are reviewed by our Assumptions Committee. While the Bank is continuously refining its modeling methodology, the core principles of the methodology have remained stable over the past two years.
Earnings at risk is defined as the percentage change in net interest income due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons.
Equity at risk is defined as the percentage change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity. Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time.
The earnings simulation models consider our contractual agreements with regard to investments, loans, deposits, borrowings, and derivatives as well as a number of behavioral assumptions applied to certain assets and liabilities.
Mortgage banking derivatives used in the ordinary course of business consist of forward sales contracts and interest rate lock commitments on residential mortgage loans. These derivatives involve underlying items, such as interest rates, and are designed to mitigate risk. Derivatives are also used to hedge mortgage servicing rights. For additional information see Note 28-Derivative Financial Instruments in the consolidated financial statements.
From time to time, we execute interest rate swaps to hedge some of our interest rate risks. Under these arrangements, the Company enters into a variable rate loan with a client in addition to a swap agreement. The swap agreement effectively converts the client’s variable rate loan into a fixed rate loan. The Company then enters into a matching swap agreement with a third-party dealer to offset its exposure on the customer swap. The Company may also execute interest rate swap agreements that are not specific to client loans. As of December 31, 2023, the Company had a series of short-term interest rate hedges to address monthly accrual mismatches related to the Company’s ARC program and its transition from LIBOR to SOFR after June 30, 2023. For additional information on these derivatives refer to Note 28-Derivative Financial Instruments in the consolidated financial statements.
Our interest rate risk key indicators are applied to a static balance sheet using forward rates from the Moody’s Baseline Scenario. The Company will also use other rate forecasts, including, but not limited to, Moody’s Consensus Scenario. This Base Case Scenario assumes the maturity composition of asset and liability rollover volumes is modeled to approximately replicate current consolidated balance sheet characteristics throughout the simulation. These treatments are consistent with the Company’s goal of assessing current interest rate risk embedded in its current balance sheet. The Base Case Scenario assumes that maturing or repricing assets and liabilities are replaced at prices referencing forward rates derived from the selected rate forecast consistent with current balance sheet pricing characteristics. Key rate drivers are used to price assets and liabilities with sensitivity assumptions used to price non-maturity deposits. The sensitivity assumptions for the pricing of non-maturity deposits are subjected to sensitivity analysis no less frequently than on an annual basis.
Interest rate shocks are applied to the Base Case on an instantaneous basis. Our policy establishes the use of upward and downward interest rate shocks applied in 100 basis point increments through 400 basis points. We calculate smaller rate shocks as needed. At times, market conditions may result in assumed rate movements that will be deemphasized. For example, during a period of ultra-low interest rates, certain downward rate shocks may be impractical. The model simulation results produced from the Base Case Scenario and related instantaneous shocks for changes in net interest income and changes in the economic value of equity are referred to as the Core Scenario Analysis and constitute the policy key risk indicators for interest rate risk when compared to risk tolerances. As of December 31, 2023, the Company was operating within it interest rate key risk indicator policy limits.
During 2023, the beta assumption applied to total deposits increased to reflect changes in deposit mix. From the beginning of the upward rate cycle, our deposit costs have increased from five basis points to one hundred sixty basis points. During this period, the federal funds rate has increased 525 basis points. Accordingly, our cycle to date beta has been approximately 30%. Management recognizes the difficulty using historical data to forecast deposit betas in the current environment. For internal purposes, and based on the deposit mix as of December 31, 2023, the total deposit beta assumption was 35.0%. For internal forecasting, Management will apply overlays to certain assumptions to adjust for current market conditions rather than use assumptions modeled over longer periods of time.
The following interest rate risk metrics are derived from analysis using the Moody’s Consensus Scenario published in January 2024 as the Base Case. As of December 31, 2023, the earnings simulations indicated that the year 1 impact of an instantaneous 100 basis point parallel increase / decrease in rates would result in an estimated 1.0% increase (up 100) and 1.7% decrease (down 100) in net interest income.
We use Economic Value of Equity (“EVE”) analysis as an indicator of the extent to which the present value of our capital could change, given potential changes in interest rates. This measure also assumes a static balance sheet (Base Case Scenario) with rate shocks applied as described above. At December 31, 2023, the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 2.6% decrease and 1.0% increase, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 6.3% decrease and 0.1% increase, respectively. The interest rate shock analysis results for EVE sensitivities are unusual as the benefits of repricing assets are mitigated by increasing deposit costs, and downward shocks are constrained on various balance sheet categories due to the inability to price products below floors or zero. This is particularly meaningful given the cost of deposits as of December 31, 2023.
The analysis below reflects a Base Case and shocked scenarios that assume a static balance sheet projection where volume is added to maintain balances consistent with current levels. Base Case assumes new and repricing volumes reference forward rates derived from the Moody’s Consensus rate forecast. Instantaneous, parallel, and sustained interest rate shocks are applied to the Base Case scenario over a one-year time horizon.
Table 26-Rate Shock Analysis - Net Interest Income and Economic Value of Equity
Percentage Change in Net Interest Income over One Year
Up 100 basis points
1.0%
Up 200 basis points
1.5%
Up 300 basis points
1.7%
Up 400 basis points
1.7%
Down 100 basis points
(1.7%)
Down 200 basis points
(4.5%)
Down 300 basis points
(8.8%)
Down 400 basis points
(11.8%)
LIBOR Transition
The publication of all tenors of U.S. dollar LIBOR on a representative basis ceased as of December 31, 2023. As previously noted, we established a cross-functional LIBOR transition working group that (1) assessed the Company's exposure to LIBOR indexed instruments and the data, systems and processes that were impacted; (2) established a detailed implementation plan; and (3) developed a formal governance structure for the transition. The Company developed and implemented various proactive steps to facilitate the transition on behalf of customers up through December 31, 2023, which included:
● The adoption and implementation of fallback provisions that provided for the determination of replacement rates for LIBOR-linked financial products.
● The adoption of new products linked to alternative reference rates, such as adjustable-rate mortgages, consistent with guidance provided by the U.S. regulators, the Alternative Reference Rates Committee, and GSEs.
● The selection of SOFR indices as the replacement indices, and successful completion of systems testing using the SOFR replacement indices.
● Successful transition of Libor-exposed instruments to SOFR and other indices as appropriate for contracts that provided for a specific replacement index other than SOFR.
We utilized the provisions of the Adjustable Interest Rate (LIBOR) Act passed by Congress and signed into law by the President in March 2022 for certain contracts referencing LIBOR. The Act provides for the use of SOFR as the replacement index with a spread adjustment when the remaining LIBOR indices are discontinued. The Act applies when there is no contract provision addressing the loss of LIBOR and may be used otherwise as well, provided the contract does not provide for a specific replacement index.
In addition, the Company developed and implemented processes to educate client-facing associates and coordinate communications with customers regarding the transition.
As of December 31, 2023, the Company’s LIBOR-indexed loans, derivatives, and trust preferred securities have migrated to SOFR and other indices.
Asset Credit Risk and Concentrations
The quality of our interest-earning assets is maintained through our management of certain concentrations of credit risk. We review each individual earning asset including investment securities and loans for credit risk. To facilitate this review, we have established credit and investment policies that include credit limits, documentation, periodic examination, and follow-up. In addition, we examine these portfolios for exposure to concentration in any one industry, government agency, or geographic location.
Deposit Concentrations
At December 31, 2023 and 2022, we have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our deposits concentrated within a single industry or group of related industries. We do not believe there are any material seasonal factors that would have a material adverse effect on us. The total deposit balances held by top 10 and 20 deposit holders were below 5% of the Company’s average total deposit balances at December 31, 2023 and 2022. We do not have any foreign deposits.
Concentration of Credit Risk
Each category of earning assets has a certain degree of credit risk. We use various techniques to measure credit risk. Credit risk in the investment portfolio can be measured through bond ratings published by independent agencies. In the investment securities portfolio, the investments consist of U.S. government-sponsored entity securities, tax-free securities, or other securities having ratings of “AAA” to “Not Rated”. All securities, with the exception of those that are not rated, were rated by at least one of the nationally recognized statistical rating organizations. The credit risk of the loan portfolio can be measured by historical experience. We maintain our loan portfolio in accordance with credit policies that we have established. Although the Bank has a diversified loan portfolio, a substantial portion of our borrowers’ abilities to honor their contracts is dependent upon economic conditions within our geographic footprint and the surrounding regions.
We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25% of total Tier 1 capital plus regulatory adjusted allowance for credit losses of the Company, or $1.2 billion at December 31, 2023. Based on this criteria, we had eight such credit concentrations at December 31, 2023, including loans to lessors of nonresidential buildings (except mini-warehouses) of $6.2 billion, loans secured by owner occupied office buildings (including medical office buildings) of $1.9 billion, loans secured by owner occupied nonresidential buildings (excluding office buildings) of $1.8 billion, loans to lessors of residential buildings (investment properties and multi-family) of $2.4 billion, loans secured by 1st mortgage 1-4 family owner occupied residential property (including condos and home equity lines) of $8.8 billion, loans secured by jumbo (original loans greater than $726,200) 1st mortgage 1-4 family owner occupied residential property of $2.6 billion, loans secured by business assets including accounts receivable, inventory and equipment of $2.2 billion, and loans to consumers secured by non-real estate of $1.2 billion. The risk for these loans and for all loans is managed collectively through the use of credit underwriting practices developed and updated over time. The loss estimate for these loans is determined using our standard ACL methodology.
After the adoption of CECL in the first quarter of 2020, banking regulators established guidelines for calculating credit concentrations. Banking regulators set the guidelines for construction, land development and other land loans to total less than 100% of total Tier 1 capital less modified CECL transitional amount plus ACL (CDL concentration ratio) and for total commercial real estate loans (construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) to total less than 300% of total Tier 1 capital less modified CECL transitional amount plus ACL (CRE concentration ratio). Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total Tier 1 capital less modified CECL transitional amount plus ACL. At December 31, 2023, the Bank’s CDL concentration ratio was 59.7% and its CRE concentration ratio was 236.5%. At December 31, 2022, the Bank’s CDL concentration ratio was 64.8% and its CRE concentration ratio was 249.0%. As of December 31, 2023 and 2022, the Bank was below the established regulatory guidelines. When a bank’s ratios are in excess of one or both of these loan concentration ratios guidelines, banking regulators generally require an increased level of monitoring in these lending areas by bank management. Therefore, we monitor these two ratios as part of our concentration management processes.
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measure of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike most other industries, the majority of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance than does the effect of inflation. Interest rates do not necessarily change in the same magnitude as the prices of goods and services.
While the effect of inflation on banks is normally not as significant as is its influence on those businesses which have large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses. Inflation also affects our Bank’s customers and may result in an indirect effect on our Bank’s business.
Contractual Obligations
The following table presents payment schedules for certain of our contractual obligations as of December 31, 2023. Long-term debt obligations totaling $391.9 million include trust preferred junior subordinated debt and corporate subordinated debt. Operating and finance lease obligations of $126.6 million and $2.2 million, respectively, pertain to banking facilities. Certain lease agreements include payment of property taxes and insurance and contain various renewal options. Additional information regarding leases is contained in Note 21- Lease Commitments of the audited consolidated financial statements.
Table 27-Obligations
Less Than
1 to 3
3 to 5
More Than
(Dollars in thousands)
Total
1 Year
Years
Years
5 Years
Long-term debt obligations*
$
391,904
$
-
$
-
$
-
$
391,904
Short-term debt obligations*
100,000
100,000
-
-
-
Finance lease obligations
2,239
1,022
-
Operating lease obligations
126,567
15,970
28,850
25,657
56,090
Total
$
620,710
$
116,481
$
29,872
$
26,363
$
447,994
* Represents principal maturities.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See “Asset-Liability Management and Market Risk Sensitivity” on page 98 in Management’s Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Index to Financials Statements
Page
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP, Birmingham, Alabama, PCAOB Firm ID No. 42)
Report of Independent Registered Public Accounting Firm (FORVIS, LLP, Atlanta, Georgia, PCAOB Firm ID No. 686)
SouthState Corporation Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2023 and December 31, 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
SouthState’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of SouthState’s disclosure controls and procedures as of December 31, 2023, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that SouthState’s disclosure controls and procedures as of December 31, 2023, were effective to provide reasonable assurance regarding our control objectives.
Management’s Report on Internal Control over Financial Reporting is included on page of this Report. The report of SouthState’s independent registered public accounting firm regarding SouthState’s internal control over financial reporting begins on page of this Report.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Controls over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 is included in Item 8 of this Report under the heading “Management’s Report on Internal Controls Over Financial Reporting.”
Our independent auditors have issued an audit report on management’s assessment of internal controls over financial reporting. This Report entitled “Report of Independent Registered Public Accounting Firm” appears in Item 8.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
During the three months ended December 31, 2023, no directors or officers adopted or terminated a “Rule 10b5­-1 trading arrangement” or a “non-Ruel 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2023 and in connection with our 2024 Annual Meeting of Shareholders under the caption “Election of Directors,” under the caption “The Board of Directors and Committees,” in the subsection titled “Audit Committee” under the caption “The Board of Directors and Committees,” in the subsection titled “Governance Committee” under the caption “The Board of Directors and Committees,” and under the caption “Delinquent Section 16(a) Reports.” We incorporate such required information herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2023 and in connection with our 2024 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Director Compensation,” and “Executive Compensation,” including the sections titled “Summary Compensation Table,” “Grants of Plan-Based Awards Table,” “Year-end Equity Values and Equity Exercised or Vested Table,” “Nonqualified Deferred Compensation Table,” “Pension Benefits Table,” and “Potential Payments Upon Termination or Change of Control.” We incorporate such required information herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table contains certain information as of December 31, 2023, relating to securities authorized for issuance under our equity compensation plans:
A
B
C
Number of
Securities
remaining
Number of
available for
securities to be
Weighted-
future issuance
issued upon
average exercise
under equity
exercise of
price of
Compensation
Outstanding
Outstanding
plans (excluding
options,
options,
Securities
warrants, and
warrants, and
reflected in
Plan Category
Rights
Rights
column “A”)
Equity compensation plans approved by security holders
107,592
$
72.60
2,217,147
Equity compensation plans not approved by security holders
None
n/a
n/a
Included within the 2,217,147 number of securities available for future issuance in Column C of the table above are 914,169 shares remaining for future grant from the 2,072,245 of authorized shares under our 2020 Omnibus Incentive Plan and 1,302,978 shares remaining for future grant from the 1,763,825 of authorized shares under our 2002 Employee Stock Purchase Plan. Shares issued in respect of restricted stock and restricted stock units granted under the 2020 Omnibus Incentive Plan count as one share for every share/unit granted under the plan.
Other information required to be disclosed by this item will be disclosed under the captions “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” in our definitive proxy statement to be filed no later than 120 days after December 31, 2023 and in connection with our 2024 Annual Meeting of Shareholders. We incorporate such required other information herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required to be disclosed by this item will be disclosed under the caption “Certain Relationships and Related Transactions” in our definitive proxy statement to be filed no later than 120 days after December 31, 2023 and in connection with our 2024 Annual Meeting of Shareholders. We incorporate such required information herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required to be disclosed by this item will be disclosed under the caption “Audit and Other Fees” in our definitive proxy statement to be filed no later than 120 days after December 31, 2023 and in connection with our 2024 Annual Meeting of Shareholders. We incorporate such required information herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)
1. The financial statements and independent auditors’ report referenced in “Item 8 - Financial Statements and Supplementary Data” are listed below:
SouthState Corporation and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Schedules Filed: Not applicable. All of the schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instruction, the required information is contained elsewhere in the Form 10-K, or the schedules are inapplicable and therefore have been omitted.
3.
Exhibits
In most cases, documents incorporated by reference to exhibits that have been filed with our reports or proxy statements under the Securities Exchange Act of 1934 are available to the public over the Internet from the SEC’s web site at www.sec.gov. You may also read and copy any such document at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549 under our SEC file number (001-12669).
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
2.1
Agreement and Plan of Merger, dated as of July 22, 2021, by and between Atlantic Capital Bancshares, Inc. and South State Corporation †
8-K
001-12669
2.1
7/26/2021
3.1
Amended and Restated Articles of Incorporation of the Company filed October 24, 2014
8-K
001-12669
3.1
10/28/2014
3.2
Articles of Amendment, dated October 25, 2017, to the Amended and Restated Articles of Incorporation of the Company
8-K
001-12669
3.1
10/26/2017
3.3
Articles of Amendment effective June 7, 2020, to the Amended and Restated Articles of Incorporation of the Company
8-K
001-12669
3.1
6/8/2020
3.4
Articles of Amendment dated November 19, 2020, to the Amended and Restated Articles of Incorporation of the Company
S-8
001-12669
4.5
11/30/2020
3.5
Articles of Amendment dated September 1, 2021, to the Amended and Restated Articles of Incorporation of the Company
8-K
001-12669
3.1
9/3/2021
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
3.6
Amended and Restated Bylaws of SouthState Corporation dated February 24, 2022
8-K
001-12669
3.1
2/24/2022
3.7
Amended and Restated Bylaws of SouthState Corporation dated May 26, 2022
8-K
001-12669
3.1
5/31/2022
4.1
Specimen SouthState Corporation Common Stock Certificate
10-K
001-12669
4.1
2/27/2015
4.2
Articles of Incorporation (see Exhibits 3.1 through 3.5)
001-12669
4.3
Bylaws (see Exhibit 3.7)
001-12669
4.4
Description of Securities
10-K
001-12669
4.4
2/26/2021
4.5
Indenture, dated as of May 29, 2020, by and between CenterState Bank Corporation and U.S. Bank National Association, as trustee
8-K
001-12669
4.1
6/8/2020
4.6
First Supplemental Indenture, dated as of May 29, 2020, by and between CenterState Bank Corporation and U.S. Bank National Association, as trustee
8-K
001-12669
4.2
6/8/2020
4.7
Second Supplemental Indenture, dated as of June 7, 2020, by and between SouthState Corporation and U.S. Bank National Association, as trustee
8-K
001-12669
4.3
6/8/2020
4.8
Indenture dated as of August 20, 2020, by and between Atlantic Capital Bancshares, Inc. and U.S. Bank Trust Company, National Association (the successor in interest to US Bank National Association), as trustee
8-K
001-37615
4.1
8/2/2020
4.9
Form of 5.50% Fixed-to-Floating Subordinated Note due 2030 of Atlantic Capital Bancshares, Inc.
8-K
001-37615
4.2
8/2/2020
4.10
Form of Subordinated Note Purchase Agreement dated as of August 20, 2020, by and among Atlantic Capital Bancshares, Inc. and the Purchasers †
8-K
001-37615
10.1
8/2/2020
4.11
Form of Registration Rights Agreement dated as of August 20, 2020, by and among Atlantic Capital Bancshares, Inc. and Purchasers
8-K
001-37615
10.2
8/2/2020
10.1
SCBT Financial Corporation Stock Incentive Plan *
DEF 14A
001-12669
Appendix A
3/12/2004
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
10.2
Form of Split-Dollar Agreement of CenterState Bank Corporation *
8-K
001-32017
10.1
1/11/2006
10.3
Employment Agreement between CenterState Bank Corporation and John C. Corbett *
8-K
001-32017
10.4
7/14/2010
10.4
Amended and Restated SCBT, N.A. Deferred Income Plan executed November 30, 2010, to be effective December 1, 2010 *
8-K
001-12669
10.1
12/6/2010
10.5
Employment Agreement between CenterState Bank Corporation and Stephen D. Young *
10-K
001-32017
10.10
3/16/2011
10.6
Form of Stock Option Agreement under the SouthState Corporation Omnibus Stock and Performance Plan *
8-K
001-12669
10.2
1/22/2013
10.7
Supplemental Executive Retirement Benefits Agreement dated January 1, 2016 by and between National Bank of Commerce and Richard Murray, IV *
8-K
001-36878
10.1A
12/22/2015
10.8
Split-Dollar Agreement dated January 1, 2016 by and between National Bank of Commerce and Richard Murray, IV *
8-K
001-36878
10.2A
12/22/2015
10.9
Supplemental Executive Retirement Benefits Agreement dated January 1, 2016 by and between National Bank of Commerce and William E. Matthews, V *
8-K
001-36878
10.1B
12/22/2015
10.10
Split-Dollar Agreement dated January 1, 2016 by and between National Bank of Commerce and William E. Matthews, V *
8-K
001-36878
10.2B
12/22/2015
10.11
SouthState Corporation Omnibus Stock and Performance Plan (Originally approved by shareholders on April 24, 2012, as Amended and Restated Effective as of April 20, 2017) *
DEF 14A
001-12669
Appendix A
3/6/2017
10.12
Amendment Number 1 through 4 to Gateway Financial Holdings of Florida, Inc. Officers’ and Employees’ Stock Option Plan *
S-8
000-32017
10.1
5/1/2017
10.13
HCBF Holding Company, Inc. Amended and Restated 2010 Stock Incentive Plan *
S-8
000-32017
10.1
1/2/2018
10.14
Annual Incentive Plan dated March 23, 2018 *
8-K
001-12669
10.1
3/27/2018
10.15
2018 Supplemental Executive Retirement Benefits Agreement dated September 12, 2018, by and between National Bank of Commerce and Richard Murray IV *
8-K
001-36878
10.1A
9/17/2018
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
10.16
2018 Split-Dollar Agreement dated September 12, 2018, by and between National Bank of Commerce and Richard Murray IV *
8-K
001-36878
10.2A
9/17/2018
10.17
2018 Supplemental Executive Retirement Benefits Agreement dated September 12, 2018, by and between National Bank of Commerce and William E. Matthews V *
8-K
001-36878
10.1B
9/17/2018
10.18
2018 Split-Dollar Agreement dated September 12, 2018, by and between National Bank of Commerce and William E. Matthews V *
8-K
001-36878
10.2B
9/17/2018
10.19
Employment Agreement between CenterState Bank Corporation and Richard Murray IV *
8-K
000-32017
10.1
11/26/2018
10.20
Employment Agreement between CenterState Bank Corporation and William E. Matthews V *
8-K
000-32017
10.2
11/26/2018
10.21
Amendment No. 1 to Supplemental Executive Retirement Benefits Agreement dated December 13, 2018, by and between National Bank of Commerce and Richard Murray IV *
8-K
001-36878
10.1A
12/18/2018
10.22
Amendment No. 1 to 2018 Supplemental Executive Retirement Benefits Agreement dated December 13, 2018, by and between National Bank of Commerce and Richard Murray IV *
8-K
001-36878
10.1B
12/18/2018
10.23
Amendment Number One to 2016 Split-Dollar Agreement by and between National Bank of Commerce and Richard Murray IV, dated December 13, 2018 *
8-K
001-36878
10.2A
12/18/2018
10.24
Amendment Number One to 2018 Split-Dollar Agreement by and between National Bank of Commerce and Richard Murray IV, dated December 13, 2018 *
8-K
001-36878
10.2B
12/18/2018
10.25
Amendment No. 1 to Supplemental Executive Retirement Benefits Agreement dated December 13, 2018, by and between National Bank of Commerce and William E. Matthews V *
8-K
001-36878
10.1C
12/18/2018
10.26
Amendment No. 1 to 2018 Supplemental Executive Retirement Benefits Agreement dated December 13, 2018, by and between National Bank of Commerce and William E. Matthews V *
8-K
001-36878
10.1D
12/18/2018
10.27
Amendment Number One to 2016 Split-Dollar Agreement by and between National Bank of Commerce and William E. Matthews, dated December 13, 2018 *
8-K
001-36878
10.2C
12/18/2018
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
10.28
Amendment Number One to 2018 Split-Dollar Agreement by and between National Bank of Commerce and William E. Matthews V, dated December 13, 2018 *
8-K
001-36878
10.2D
12/18/2018
10.29
Form of Restricted Stock Unit Agreement under the SouthState Corporation 2019 Omnibus Incentive Plan *
10-K
001-12669
10.17
2/22/2019
10.30
2019 Omnibus Stock Incentive Plan *
DEF 14A
001-12669
Appendix A
3/6/2019
10.31
Amendment No. 1 to Premier Community Bank of Florida 2015 Stock Option Plan (Incorporated by reference to Exhibit 10.3a to the National Commerce Corporation Form S-4 Registrations Statement (333-224820), dated May 10, 2018) *
S-8 POS
000-32017
10.10
4/1/2019
10.32
Amendment No. 1 to Premier Community Bank of Florida 2017 Stock Option Plan (Incorporated by reference to Exhibit 10.4a to the National Commerce Corporation Form S-4 Registrations Statement (333-224820), dated May 10, 2018) *
S-8 POS
000-32017
10.12
4/1/2019
10.33
First Amendment to the First Landmark Bank 2015 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4a to the National Commerce Corporation Form S-4 Registration Statement (333-225524), dated June 8, 2018) *
S-8 POS
000-32017
10.4
4/1/2019
10.34
First Amendment to the First Landmark Bank 2007 Stock Option Plan (Incorporated by reference to Exhibit 10.3a to the National Commerce Corporation Form S-4 Registration Statement (333-225524), dated June 8, 2018) *
S-8 POS
000-32017
10.7
4/1/2019
10.35
Form of Performance-based Restricted Stock Unit Agreement under the SouthState Corporation 2019 Omnibus Incentive Plan *
8-K
001-12669
10.1
5/1/2019
10.36
Form of Time-based Restricted Stock Unit Agreement, with nonsolicitation provisions, under the SouthState Corporation 2019 Omnibus Incentive Plan *
8-K
001-12669
10.2
5/1/2019
10.37
Form of Time-based Restricted Stock Unit Agreement, without nonsolicitation provisions, under the SouthState Corporation 2019 Omnibus Incentive Plan *
8-K
001-12669
10.3
5/1/2019
10.38
Third Amended and Restated Employment and Noncompetition Agreement between SouthState Corporation and Robert R. Hill, Jr., dated as of January 25, 2020 *
10-K
001-12669
10.29
2/21/2020
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
10.39
Employment Agreement between SouthState Bank and for Renee R. Brooks dated January 25, 2020 *
10-K
001-12669
10.31
2/21/2020
10.40
Employment Agreement between SouthState Bank and Greg A. Lapointe dated January 25, 2020 *
10-K/A
001-12669
10.32
3/6/2020
10.41
Employment Agreement between SouthState Bank and John S. Goettee dated January 25, 2020 *
10-K/A
001-12669
10.33
3/6/2020
10.42
Employment Agreement between South State Bank and Jonathan Kivett, dated January 25, 2020 *
10-K/A
001-12669
10.34
3/6/2020
10.43
Employment Agreement dated July 22, 2021, by and among SouthState Bank, N.A. and Douglas L. Williams *
8-K
001-12669
10.3
3/1/2022
10.44
Employment Agreement dated July 22, 2021, by and among SouthState Bank, N.A. and Richard A. Oglesby, Jr.*
8-K
001-12669
10.4
3/1/2022
10.45
Employment Agreement dated July 22, 2021, by and among SouthState Bank, N.A. and Kurt A. Shreiner *
8-K
001-12669
10.5
3/1/2022
10.46
Amendment to Third Amended and Restated Employment Agreement and Noncompetition Agreement dated May 26, 2022 by and between Robert R. Hill, Jr. and the Company *
10-Q
001-12669
10.1
08/05/2022
10.47
Separation Agreement between SouthState Corporation and its Subsidiaries and Robert R. Hill, Jr. *
10-Q
001-12669
10.1
05/05/2023
10.48
CenterState Bank Corporation (formerly CenterState Banks, Inc.) 2013 Equity Incentive Plan, as amended September 17, 2015 *
S-8
001-12669
4.7
6/9/2020
10.49
CenterState Bank Corporation 2018 Equity Incentive Plan *
S-8
001-12669
4.11
6/9/2020
10.50
SouthState Deferred Income Plan (Amended and Restated) *
S-8
001-12669
4.4
8/3/2020
10.51
SouthState Corporation 2020 Omnibus Incentive Plan *
DEF 14A
001-12669
Annex C
8/12/2020
10.52
SouthState Corporation Non-Employee Directors Deferred Income Plan *
S-8
001-12669
4.6
9/30/2020
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
10.53
Form of Stock Option Agreement under the
South State Corporation 2020 Omnibus
Incentive Plan *
10-K
001-12669
10.47
2/26/2021
10.54
Form of Restricted Stock Unit Agreement under the South State Corporation 2020 Omnibus Incentive Plan *
10-Q
001-12669
10.1
5/7/2021
10.55
Form of Performance-based Restricted Share Unit Agreement under the South State Corporation 2020 Omnibus Incentive Plan *
10-Q
001-12669
10.2
5/7/2021
10.56
SouthState Corporation 2002 Employee Stock Purchase Plan (Amended and Restated) *
10-K
001-12669
10.49
2/25/2022
10.57
Atlantic Capital Bancshares, Inc. 2015 Stock Incentive Plan, as amended and restated effective May 16, 2018 (incorporated herein by reference to Exhibit 10.1 to ACBI’s Quarterly Report on Form 10-Q (File No. 001-37615), filed on August 8, 2018 *
S-8
001-12669
99.1
3/1/2022
10.58
Form of Performance Share Unit Agreement (Annual Incentive Plan)
001-12699
X
10.59
Amendment and Restatement, dated as of November 15, 2021, to Credit Agreement, dated as of October 28, 2013, by and between SouthState Corporation, as borrower, and U.S. Bank National Association, as lender
8-K
001-12669
10.1
11/16/2021
10.60
Amendment Number One, dated as of November 14, 2022, to and under Credit Agreement, dated as of November 15, 2021, by and between SouthState Corporation, as borrower, and U.S. Bank National Association, as lender
10-K
001-12699
10.57
2/24/2023
10.61
Amendment No. 2, dated as of November 13, 2023, to and under Credit Agreement, dated as of November 15, 2021, by and between SouthState Corporation, as borrower, and U.S. Bank National Association, as lender
001-12699
X
Subsidiaries of the Registrant
X
23.1
Consent of Ernst & Young LLP
X
23.2
Consent of FORVIS, LLP
X
24.1
Power of Attorney (contained herein as part of Annual Report on Form 10-K)
X
Incorporated by Reference
Exhibit No.
Description of Exhibit
Form
Commission File No.
Exhibit
Filing Date
Filed
Herewith
31.1
Rule 13a-14(a) Certification of the Principal Executive Officer
X
31.2
Rule 13a-14(a) Certification of the Principal Financial Officer
X
Section 1350 Certifications
X
97.1
Compensation Recoupment Policy, approved by SouthState Corporation’s Board of Directors on July 27, 2023, effective as of October 2, 2023 *
X
The following financial statements from the Annual Report on Form 10-K of SouthState Corporation, formatted in inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets as of December 31, 2023 and 2022, (ii) Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022 and 2021, (iv) Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2023, 2022 and 2021, (v) Consolidated Statement of Cash Flows for the years ended December 31, 2023, 2022 and 2021 and (vi) Notes to Consolidated Financial Statements.
X
Cover Page Interactive Data File (embedded within the Inline XBRL document).
X
†
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted. The registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
* Denotes a management compensatory plan or arrangement.
(b) Not Applicable.
SouthState Corporation and certain of its consolidated subsidiaries are parties to long-term debt instruments with respect to trust preferred securities under which the total amount of securities authorized does not exceed 10% of the total assets of SouthState Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, SouthState Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.