SouthState Bank Corp (SSB) FY 2022 MD&A

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, the economy and SouthState. 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 19 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, 2022 as compared to the year ended December 31, 2021, and the year ended December 31, 2021 as compared to the year ended December 31, 2020, and also analyzes our financial condition as of December 31, 2022 as compared to December 31, 2021. 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.

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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 Corporation 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, which it acquired on February 1, 2021 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 CBI Holding Company, LLC (“CBI”), which in turn owns 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. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code.

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At December 31, 2022, we had $43.9 billion in assets and 5,029 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.

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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. The correspondent banking and capital markets division was expanded with the Bank’s acquisition of SouthState|Duncan-Williams.

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We earned net income of $496.0 million, or $6.60 diluted earnings per share (“EPS”), during 2022 compared to net income of $475.5 million, or $6.71 diluted EPS, in 2021. Net income available to the common shareholders was up $20.5 million, or 4.3%, in 2022 compared to 2021. For further discussion of the Company’s results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021, and the year ended December 31, 2021 as compared to the year ended December 31, 2020, see Results of Operations section of this MD&A starting on page 55.

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At December 31, 2022, we had total assets of approximately $43.9 billion compared to approximately $41.8 billion at December 31, 2021. See the Financial Condition section of this MD&A starting on page 66 for a more detailed description of the change in our balance sheet.

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Our asset quality results remained strong in December 31, 2022, net charge offs as a percentage of average loans increased slightly to 0.02% compared to 0.01% for the year ended December 31, 2021. The total nonperforming assets (“NPAs”) increased $26.0 million to $109.7 million at December 31, 2022 from $83.7 million at December 31, 2021. Acquired NPAs increased $2.6 million to $62.5 million at December 31, 2022 from $59.8 million at December 31, 2021. Acquired nonperforming loans increased $4.6 million and acquired OREO and other nonperforming assets decreased $2.0 million. Non-acquired NPAs increased $23.4 million to $47.3 million at December 31, 2022 from $23.9 million at December 31, 2021, which was related to an increase in non-acquired

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nonperforming loans of $23.7 million. Non-acquired OREO and other NPAs declined by $345,000 to $245,000 as of December 31, 2022 compared to $590,000 as of December 31, 2021. The total NPAs as a percentage of total assets increased 5 basis points to 0.25% at December 31, 2022 as compared to 0.20% at December 31, 2021.

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Our efficiency ratio was 54.2% at December 31, 2022 compared to 65.5% at December 31, 2021. The improvement in our efficiency ratio was due to both the effects of a 2.0% decrease in noninterest expense and the 18.6% increase in the total of tax-equivalent (“TE”) net interest income and noninterest income. The Company’s net interest income has increased significantly in 2022 with the current rising rate environment.

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We continue to remain well-capitalized with a total risk-based capital ratio of 13.0% and a Tier 1 leverage ratio of 8.7%, as of December 31, 2022, compared to 13.6% and 8.1%, respectively, at December 31, 2021. The total risk-based capital ratio decreased due to the additional risk-weighted assets acquired through the acquisition of Atlantic Capital in the first quarter of 2022, which on average, had a higher risk weighting, the reduction in cash and cash equivalents during the year, which are lower risk weighted assets, and due to the organic growth in loans during 2022, which have a higher risk weighting. The effects on our ratios from the increase in risk-weighted assets were partially offset by an increase in total risk-based capital due to net income recognized in 2022, the addition to the net equity of $657.8 million issued for the Atlantic Capital acquisition and the $75.0 million in subordinated debentures assumed from Atlantic Capital that qualify as Tier 2 risk-based capital. These increases in capital were partially offset by the $119.3 million of stock repurchases completed during 2022, including shares withheld for taxes pertaining to the vesting of equity awards, along with the dividend paid to shareholders of $146.5 million and the redemption of $13.0 million of subordinated debentures on June 30, 2022. The Tier 1 leverage ratios for both the Company and Bank increased compared to December 31, 2021, as the percentage increase in Tier 1 capital was greater than the percentage increase in average assets during 2022, due mainly to net income and equity issued in the Atlantic Capital acquisition. 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, 2022 compared to December 31, 2021, see Financial Condition section of this MD&A starting on page 66.

Recent Events

Atlantic Capital Bancshares, Inc. Merger

On March 1, 2022, the Company acquired all of the outstanding common stock of Atlantic Capital in a stock transaction. Upon the terms and subject to the conditions set forth therein, Atlantic Capital merged with and into the Company, with the Company continuing as the surviving corporation in the merger. Immediately following the merger, Atlantic Capital’s wholly owned banking subsidiary, Atlantic Capital Bank, N.A. (“ACB”) merged with and into the Bank, the surviving bank in the bank merger.

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Shareholders of Atlantic Capital received 0.36 shares of the Company’s common stock for each share of Atlantic Capital common stock they owned. In total, the purchase price for Atlantic Capital was $657.8 million.

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In the acquisition, the Company acquired $2.4 billion of loans, including Paycheck Protection Program (“PPP”) loans, at fair value, net of $54.3 million, or 2.24%, estimated discount to the outstanding principal balance, representing 10.0% of the Company’s total loans at December 31, 2021. Of the total loans acquired, management identified $137.9 million that had more than insignificantly deteriorated since origination and were thus determined to be PCD loans. Additional details regarding the Atlantic Capital merger are discussed in Note 2 — Mergers and Acquisitions.

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Branch Consolidation and Other Cost Initiatives

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As a part of the ongoing evaluation of customer service delivery and efficiencies, the Company consolidated 32 branch locations in the third and fourth quarters of 2022.  The annual savings in 2023 of these closures, which primarily includes personnel, facilities, and equipment cost, is expected to be $12.0 million, and the impact in 2022 was approximately $3.5 million.  These consolidated locations were in Florida, South Carolina, Georgia, North Carolina and Virginia.

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Capital Management

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On June 7, 2022, the Company received Federal Reserve Board’s supervisory nonobjection on the 2022 Stock Repurchase Program, which was previously approved by the Board of Directors of the Company in April 2022, contingent upon receipt of such supervisory nonobjection. The aggregate number of shares of common stock the Company is authorized to repurchase totaled 4,120,021 million shares, which includes 370,021 shares remaining from the Company’s 2021 Stock Repurchase Plan. 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

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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 now 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.

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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.

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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.

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Allowance for Credit Losses or ACL

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The ACL reflects management’s estimate of expected credit losses that will result from the inability of our

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borrowers to make required loan payments. Management used the systematic methodology to determine 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.

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Other Real Estate Owned and Bank Property Held For Sale

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Other real estate owned (“OREO”) consists of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans. Both OREO and bank property held for sale are recorded at the lower of cost or fair value and the fair value was determined on the basis of current valuations obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure or initial possession of collateral, for OREO, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ACL. At the time a bank property is no longer in service and is moved to held for sale, any excess of the current book value over fair value is recorded as Noninterest Expense in the Consolidated Statements of Income. Subsequent adjustments to this value are described below in the following paragraph.

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We report subsequent declines in the fair value of OREO and bank properties held for sale below the new cost basis through valuation adjustments. Significant judgment and complex estimates are required in estimating the fair value of these properties, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from the current valuations used to determine the fair value of these properties. Management reviews the value of these properties periodically and adjusts the values as appropriate. Revenue and expenses from OREO operations, as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO Expense in the Consolidated Statements of Income. Gains or losses on sale of bank properties held for sale, and generally any subsequent write-downs to the value, are recorded as a component in Other Expense in the Consolidated Statements of Income.

Goodwill and Other Intangible Assets

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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, 2022 and 2021, the balance of goodwill was $1.9 billion and $1.6 billion, respectively. 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.

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In January 2017, the FASB issued ASU No. 2017-04, which simplifies 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 new 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 new standard eliminates 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 will still be able to perform today’s optional qualitative goodwill impairment assessment before proceeding to the quantitative step of determining whether the reporting unit’s carrying amount exceeds it fair value.

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We evaluated the carrying value of goodwill as of October 31, 2022, our annual test date, and determined that

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no impairment charge was necessary. Our stock price has historically traded above its book value. On December 31, 2022, our stock price closed at $76.36, which is above the book value of $67.04 and tangible book value of $40.09. The lowest trading price for our stock during 2022 was $72.26, which was above year-end book value and tangible book value. Based upon our internal valuation and analysis as of October 31, 2022, we determined that no impairment charge was necessary at this time. 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.

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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

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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, including loans, available for sale securities, ACL, write downs of OREO properties and bank properties held for sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, mortgage servicing rights, and post-retirement benefits. 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. A valuation allowance is recorded in situations where it is “more likely than not” that a deferred tax asset is not realizable. 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 the states of Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, South Carolina, Tennessee, Texas, and Virginia and city of New York City. We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves at December 31, 2022 or 2021.

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 increased by $20.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase reflects an increase in interest income and a decrease in noninterest expense. Partially offsetting these positive effects on net income was an increase in provision for credit losses, a decrease in noninterest income, an increase in interest expense, and an increase in the provision for income taxes. Below are key highlights of our results of operations during 2022:

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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.

In March of 2020, the Federal Reserve dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25% in reaction to the COVID-19 pandemic. During 2022, the Federal Reserve raised interest rates one time by 25 basis points, two times by 50 basis points, and four times by 75 basis points from a range of 0.00% to 0.25% to a range of 4.25% to 4.50%. As a result, the Company operated under an increasing rate environment for the majority of 2022.

2022 compared to 2021

Net interest income and net interest margin are highlighted for the year ended December 31, 2022, compared to 2021:

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2021 compared to 2020

Net interest income and net interest margin highlighted for the year ended December 31, 2021, compared to 2020:

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Table 1—Yields on Average Interest-Earning Assets and Rates on Average Interest-Bearing Liabilities

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Table 2—Volume and Rate Variance Analysis

Noninterest Income and Expense

Noninterest income provides us with additional revenues that are significant sources of income. In 2022, 2021, and 2020, noninterest income comprised 18.8%, 25.5%, and 27.4%, respectively, of total net interest income and noninterest income. Beginning in 2020 with the adoption of CECL, recoveries on acquired loans are no longer recorded through the income statement but are recorded through the allowance for credit losses on the balance sheet.

Table 3—Noninterest Income for the Three Years

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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:

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2021 compared to 2020

Our noninterest income increased 13.9% for the year ended December 31, 2021 compared to 2020. This change in total noninterest income resulted from the following:

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Noninterest expense represents the largest expense category for our company. During 2022 and 2021, we continued to emphasize careful controls around our noninterest expense. With that, our expenses in 2022 decreased $18.7 million or 2.0% from 2021. Noninterest expense increased $150.8 million or 18.9% in 2021 from 2020, which was mainly attributable to having a full year of activity from the CenterState merger in 2021 compared to a partial year in 2020.

Table 4—Noninterest Expense for the Three Years

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2022 compared to 2021

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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:

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2021 compared to 2020

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Noninterest expense increased $150.8 million, or 18.9% for the year ended December 31, 2021 compared to 2020. This increase was mainly due to 2021 having a full year’s effect from the merger with CenterState while 2020 was only partially affected from the merger date of June 7, 2020. The change in total noninterest expense resulted from the following:

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Income Tax Expense

Our effective tax rate slightly increased to 21.68% at December 31, 2022 compared to 21.30% for the year-ended December 31, 2021.  The increase was mainly due to increase in non-deductible executive compensation, an increase in non-deductible FDIC premiums, and additional expense related to return to provision items recorded during 2022. The increase was partially offset by an increase in tax-exempt income and an increase in the cash surrender value of BOLI policies held, and an increase in federal tax credits available in 2022 compared to 2021. For additional information refer to Note 12—income Taxes in the consolidated financial statements.

Financial Condition

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Overview

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At December 31, 2022, we had total assets of approximately $43.9 billion, consisting principally of $22.8 billion in non-acquired loans, $5.9 billion in acquired non-credit deteriorated loans, $1.4 billion in acquired credit deteriorated loans, net of $356.4 million allowance for credit losses, $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 billion in interest-bearing), $1.0 billion derivative liabilities and short-term and long-term borrowings of $948.7 million. At December 31, 2022, our shareholders’ equity was $5.1 billion.

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At December 31, 2021, we had total assets of approximately $41.8 billion, consisting principally of $16.1 billion in non-acquired loans, $5.9 billion in acquired non-credit impaired loans, $2.0 billion in acquired credit impaired loans, net of $301.8 million allowance for credit losses, $7.2 billion in investment securities, $6.7 billion in cash and cash equivalents and $1.6 billion in goodwill. Our liabilities at December 31, 2021 totaled $37.0 billion, consisting principally of deposits of $35.1 billion ($11.5 billion in noninterest-bearing and $23.6 in interest-bearing) and short-term and long-term borrowings of $1.1 billion. At December 31, 2021, our shareholders’ equity was $4.8 billion.

Book value per common share was $67.04 at the end of 2022, a decrease from $69.27 at the end of 2021. Book value per common share decreased in 2022 as common shares outstanding increased by 9.2% while shareholder equity increased by 5.7%. The primary reason for the increase in common shares outstanding of 6.4 million was due to 7.3 million shares issued for the Atlantic Capital merger, offset by the Company repurchasing 1.3 million shares on the open market in 2022. The primary reasons for an increase in shareholder’s equity of $272.0 million during 2022 were due to net income of $496.0 million and $659.8 million in common stock issued for the Atlantic Capital acquisition. These increases were partially offset by declines in equity resulting from a $655.9 million reduction in AOCI related to unrealized losses on available for sale securities and post-retirement benefit plans, $146.5 million in dividends paid to shareholders, and $110.2 million in common stock repurchased in the open market.

Our common equity to assets ratio slightly increased to 11.6% in 2022, compared with 11.5% in 2021. The increase in 2022, compared to 2021, was the result of the percentage increase in shareholders’ equity of 5.7% being greater than the percentage increase in total assets of 5.0%.

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Trading Securities

We have a trading portfolio associated with our Correspondent Bank Division and the Bank’s 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 Market 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 and $77.7 million, respectively, at December 31, 2022 and 2021.

Investment Securities

We use investment securities, our second largest category of earning assets, to generate interest income through the deployment of excess funds, provide liquidity, fund loan demand or deposit liquidation, and pledge as collateral for public funds deposits, repurchase agreements and derivative exposure. At December 31, 2022 and 2021, investment securities totaled $8.2 billion and $7.2 billion, respectively. For the year ended December 31, 2022, average investment securities were $8.4 billion, or 21.2% of average earning assets, compared with $5.8 billion, or 16.2% of average earning assets for the year ended December 31, 2021. The expected average life of the investment portfolio at December 31, 2022 was approximately 7.96 years, compared with 6.27 years at December 31, 2021. 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

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During 2022, our total investment securities increased $1.0 billion, or 14.2%, from December 31, 2021. 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. During 2022, we purchased $2.5 billion of securities, $1.1 billion classified as held to maturity, $1.4 billion classified as available for sale and $20.4 million classified as other investments. These purchases were partially offset by maturities, paydowns, sales and calls of investment securities totaling $1.3 billion. Net amortization of premiums were $27.3 million for the year ended December 31, 2022.

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At December 31, 2022, the unrealized net loss of the available for sale investment securities portfolio was $889.3 million, or 14.3%, below its amortized cost basis. Comparable valuations at December 31, 2021 reflected an unrealized net loss of the available for sale investment portfolio of $27.8 million, or 0.5%, below its amortized cost basis. The decrease in fair value in the available for sale investment portfolio at December 31, 2022 compared to December 31, 2021 was mainly due to an increase in both short term and long term interest rates during 2022. 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. At December 31, 2021, the unrealized net loss of the held to maturity investment securities portfolio was $41.8 million, or 2.3%, below its amortized cost basis.

Table 6—Credit Ratings of Investment Securities

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Held to maturity

As described above, the Company elected to classify some of its securities purchased during 2022 and 2021 as held to maturity. These are securities that the Company does not intend to sell and expects to hold to maturity. The securities consist of $197.3 million of agency securities, $2.4 billion of residential and commercial mortgage-backed securities issued by U.S government agencies or sponsored enterprises and $57.1 million of Small Business Administration loan-backed securities. The following are highlights of our held to maturity portfolio:

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, 2022, investment securities with a fair value and amortized cost of $5.3 billion and $6.2 billion, respectively, were classified as available for sale. The adjustment for net unrealized losses of $889.3 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:

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At December 31, 2022, we had 1,311 investment securities (including both available for sale and held to maturity) in an unrealized loss position, which totaled $1.3 billion. See Note 3—Investment Securities in the consolidated financial statements for additional information. The increase in the number of securities in a loss position and the relative percentage of loss to portfolio size was primarily due to an increase in short-term and long-term interest rates during 2022.

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. 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 length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (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, 2022 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 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

Our other investment securities consist of non-marketable equity securities that have 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, 2022, we determined that there was no impairment on our other investment securities. As of December 31, 2022, other investment securities represented approximately $179.7 million, or 0.41% of total assets and primarily consisted of FRB and FHLB stock which totals $150.3 million and $15.1 million, respectively. There were no gains or losses on the sales of these securities during 2022 or 2021.

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Table 7—Maturity Distribution and Yields of Investment Securities

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Loan Portfolio

Our loan portfolio remains our largest category of interest-earning assets. At December 31, 2022, total loans, excluding held for sale loans, were $30.2 billion, which was an overall increase of $6.2 billion, or 26.1%, from the balance at the end of 2021. Non-acquired loan growth was $6.8 billion, or 42.1% for 2022, driven by growth in all categories, with the exception of other loans. The loan growth was made up of a 58.4% increase in consumer real estate loans, a 43.9% increase in non-owner occupied real estate loans (including construction and land development loans), a 19.0% increase in commercial owner occupied real estate loans, a 41.7% increase in commercial and industrial loans, a 39.1% increase in other income producing property and a 55.4% increase in consumer non real estate loans. Total acquired loans decreased by $504.6 million, or 6.4%, from the balance at the end of 2021. 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, offset by the addition of $2.4 billion from the merger with Atlantic Capital during the period.

Average total loans outstanding during 2022 were $27.5 billion, $3.3 billion, or 13.8%, over the 2021 average of $24.1 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.)

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The following table presents a summary of the loan portfolio by category (excludes loans held for sale):

Table 8—Distribution of Loans by Type

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The following highlights of our loan portfolio as of December 31, 2022 compared to December 31, 2021:

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Total loan interest income, excluding interest income on held for sale loans, was $1.2 billion in 2022, an increase of $191.6 million, or 19.5%, over $983.7 million in 2021. This increase was mainly due to a $5.0 billion increase in the average balance of our non-acquired loan portfolio, offset by a $1.6 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

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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, even with the $2.4 billion in loans acquired through the merger with Atlantic Capital on March 1, 2022. The effects on interest income from the overall increases in average portfolio balances were enhanced by a 24 basis point increase in the yield on the non-acquired portfolio and a 36 basis point increase in the yield on the acquired portfolio. The yield on the non-acquired loan portfolio increased from 3.79% in 2021 to 4.03% in 2022 and the yield on the acquired loan portfolio increased from 4.49% in 2021 to 4.85% in 2022. 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 table below shows the contractual maturity of the non-acquired loan portfolio at December 31, 2022.

Table 9—Maturity Distribution of Non-acquired Loans

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Table 10—Non-Acquired Loans Due After One Year - Fixed or Floating

The table below shows the contractual maturity of the acquired non-purchased credit deteriorated loan portfolio at December 31, 2022.

Table 11—Maturity Distribution of Acquired Non-purchased Credit Deteriorated Loans

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Table 12— Acquired Non-PCD Loans Due After One Year - Fixed or Floating

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The table below shows the contractual maturity of the acquired purchased credit deteriorated loan portfolio at December 31, 2022.

Table 13—Maturity Distribution of Acquired Purchased Credit Deteriorated Loans

Table 14— Acquired PCD Loans Due After One Year - Fixed or Floating

Troubled Debt Restructurings (“TDRs”)

We designate expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e., the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology for a TDR to calculate the effect of the concession provided to the borrower within the ACL.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic in order to provide borrowers with flexibility with respect to repayment terms. The Company’s payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic if the concession met the criteria as defined under the CARES Act. At December 31, 2022 and 2021, total TDRs were $21.4 million and $12.5 million, respectively, of which $13.5 million were accruing restructured loans at December 31, 2022, compared to $11.2 million at December 31, 2021. We do not have significant commitments to lend additional funds to these borrowers whose loans have been modified.

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The level of risk elements in the loan portfolio, OREO and other nonperforming assets for the past two years is shown below:

Table 15—Nonperforming Assets

Total non-acquired nonperforming loans were $47.0 million, or 0.21% of total non-acquired loans, an increase of approximately $23.7 million, or 101.7%, from December 31, 2021. The increase in nonperforming loans was driven primarily by an increase in commercial nonaccrual loans of $19.4 million, an increase in restructured nonaccrual loans of $3.7 million, an increase in consumer nonaccrual loans of $2.9 million, offset by a decrease in accruing loans past due 90 days or more of $2.3 million. The increase in commercial nonaccrual loans at December 31, 2022 was primarily due to three commercial owner occupied loans totaling $16.0 million and two commercial and industrial loans totaling $2.5 million. Acquired nonperforming loans were $61.5 million, or 0.83% of total acquired loans, an increase of $4.6 million, or 8.0%, from December 31, 2021. The increase in acquired nonperforming loans was mainly driven by an increase in commercial nonaccrual loans of $5.8 million, an increase in accruing loans past due 90 days or more of $1.7 million, offset by a decrease in consumer nonaccrual loans of $3.0 million.

The top ten nonaccrual loans at December 31, 2022 totaled $38.1 million and consisted of one loan located in South Carolina, one in North Carolina, six in Georgia, and two in Florida. These loans comprise 31.6% of total nonaccrual loans at December 31, 2022, with the majority being real estate collateral dependent. We currently hold a specific reserve against two of these ten loans, totaling $2.4 million. The remaining eight loans do not carry a specific reserve due to carrying balances being below current collateral values or the loans are SBA guaranteed.

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At December 31, 2022, non-acquired OREO decreased by $111,000 from the balance at December 31, 2021 to $141,000. At December 31, 2022, non-acquired OREO consisted of three properties with an average value of $47,000, a decrease of $205,000 in the average value from December 31, 2021 when we had one property. In the fourth quarter of 2022, we transferred one property with a value of $83,000 to non-acquired OREO, and we sold no properties during the quarter. At December 31, 2022, one of the non-acquired OREO properties was located in the Hillsborough (Fort Myers, Fla) region and two of the properties were located in the Beaufort (SC) region.

At December 31, 2022, acquired OREO decreased by $1.6 million from the balance at December 31, 2021 to $0.9 million. At December 31, 2022, acquired OREO consisted of three properties with an average value of $294,000, an increase of $68,000 from December 31, 2021 when we had 11 properties. In the fourth quarter of 2022, we did not transfer new properties into acquired OREO, however, we sold seven properties with a basis of $1.2 million during the quarter, resulting in a net loss of $85,000 on the properties sold.

Our general policy is to obtain updated OREO valuations at least annually. OREO valuations include appraisals or broker opinions, (See Other Real Estate Owned (“OREO”) under Critical Accounting Policies and Estimates in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on our OREO policies.)

Potential Problem Loans

Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately $15.8 million, or 0.07% of total non-acquired loans outstanding at December 31, 2022, compared to $6.9 million, or 0.04% of total non-acquired loans outstanding at December 31, 2021. Potential problem loans related to acquired loans totaled $23.1 million, or 0.31%, of total acquired loans at December 31, 2022 compared to $19.3 million, or 0.24% of total acquired loans outstanding, at December 31, 2021. All potential problem loans represent loans where information about possible credit problems of the borrowers may result in the borrower’s inability to comply with present repayment terms.

Allowance for Credit Losses (“ACL”)

As stated previously, the ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company established the incremental increase in the ACL at adoption through equity and subsequent adjustments through a provision for credit losses charged to earnings. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized.

Management uses systematic methodologies to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. 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 loan portfolio. 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. The Company’s ACL recorded in 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. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.

The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”) method is used for each loan in a pool, and the results are aggregated at the pool level. A periodic tendency to default and absolute loss given default are applied to a projective model of the loan’s cash flow while considering prepayment and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (e.g., default rates and prepayment speeds). The Company has identified the following portfolio segments: Owner-Occupied Commercial Real Estate, Non Owner-Occupied Commercial Real Estate, Multifamily, Municipal, Commercial and Industrial, Commercial Construction and Land Development, Residential Construction, Residential Senior Mortgage, Residential Junior Mortgage, Revolving Mortgage, and Consumer and Other.

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In determining the proper level of the ACL, management has determined that the loss experience of the Bank provides the best basis for its assessment of expected credit losses. The Company therefore used its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks). For most of the segment models for collectively evaluated loans, the Company incorporated two or more macroeconomic drivers using a statistical regression modeling methodology.

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.

It is widely acknowledged that the chances of recession are still high. Accordingly, management continues to use a blended forecast scenario of the baseline and more severe scenario, depending on the circumstances and economic outlook. As of December 31, 2022, management selected a baseline weighting of 75% and decreased the more severe scenario to 25% from using a baseline weighting of 60% and the more severe scenario of 40% at the end of the third quarter of 2022. The increase of the baseline weighting reflects increasing recognition of more downside risks in the economic forecast from persistent levels of inflation and rising interest rates, geopolitical tension and the Russian invasion of Ukraine, and global supply chain, energy and commodity issues. The more severe scenario increased in severity from the prior quarter and was viewed as less likely by management. While employment figures still showed resilience and provision related to actual loan losses remains at very low levels, the downward shifts in forecasted commercial real estate price index, national house price index and GDP increased expected loss rates for Commercial and Residential Real Estate as well as C&I loans. The resulting provision was approximately $47.1 million during the fourth quarter of 2022, including a provision for unfunded commitments of $14.2 million during the quarter. During 2022, the Company recorded $81.6 million in provision for credit losses, including a provision of $36.7 million for unfunded commitments.

Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: (1) lending policy; (2) economic conditions not captured in models; (3) volume and mix of loan portfolio; (4) past due trends; (5) concentration risk; (6) external factors; and (7) model limitations. At December 31, 2022, we included $9.2 million in qualitative adjustments, which was comprised of model limitations pertaining to the PCD loan portfolio acquired through the Atlantic Capital merger of $1.6 million, potential impact of rising rates on certain C&I credits of $3.3 million, and implementation of a new reserve framework for loan policy exceptions of $4.3 million. Of the total $9.2 million in qualitative adjustments made in the fourth quarter of 2022, $1.3 million was related to unfunded commitments.

When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company’s threshold for individually evaluated loans includes all non-accrual loans with a net book balance in excess of $1.0 million. management will monitor the credit environment and make adjustments to this threshold in the future if warranted. Based on the threshold above, consumer financial assets will generally remain in pools unless they meet the dollar threshold. The expected credit losses on individually evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually

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evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and the repayment terms were not considered to be unique to the asset.

Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a troubled debt restructuring (“TDR”) with a borrower. In the event of a reasonably expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e., the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology for a TDR to calculate the effect of the concession provided to the borrower within the ACL. The Company has not chosen to early adopt the retirement of TDR guidance, which was adopted effective January 1, 2023.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic in order to provide borrowers with flexibility with respect to repayment terms. The Company’s payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic if the concession met the criteria as defined under the CARES Act.

For purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e., allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition day, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the unpaid principal balance and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s acquired credit-impaired loans (i.e., ACI or Purchased Credit Impaired) were treated as PCD loans. As a result of the merger with Atlantic Capital, the Company identified approximately $137.9 million of loans as PCD and recorded an allowance for credit losses of $13.8 million on acquisition date for PCD loans.

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. 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 follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of December 31, 2022 and 2021, the accrued interest receivable for loans recorded in Other Assets were $105.4 million and $70.6 million, respectively.

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

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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, 2022 and 2021, the liabilities recorded for expected credit losses on unfunded commitments were $67.2 million and $30.5 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. 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 2022.

As of December 31, 2022, the balance of the ACL was $356.4 million, or 1.18%, of total loans. The ACL increased $32.0 million from the balance of $324.4 million recorded at September 30, 2022. This increase during the fourth quarter of 2022 was the result of $32.9 million provision for credit losses and $0.9 million in net charge-offs. 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. As of December 31, 2021, the balance of the ACL was $301.8 million or 1.26% of total loans. For the year ended December 31, 2021, the ACL decreased $155.5 million from the balance of $457.3 million. The decrease in ACL of $155.5 million was due to a release of the allowance for credit losses of $152.4 million along with net charge-offs of $3.1 million in 2021. For 2021, the Company had releases of allowance for credit losses resulting from improvements in the economic forecasts that drive our ACL model as the economy improved during 2021.

​

At December 31, 2022, the Company had a reserve on unfunded commitments of $67.2 million, which was recorded as a liability on the Consolidated Balance Sheet, compared to $30.5 million at December 31, 2021. During the fourth quarter of 2022, the Company recorded a provision for credit losses on unfunded commitments of $14.2 million. The year-to-date 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 Company recorded a release of $12.9 million related to unfunded commitments during 2021. 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 ACL provides 3.28 times coverage of nonperforming loans at December 31, 2022. Net charge offs to total average loans during the year ended December 31, 2022 were 0.02%, compared to 0.01% during the year ended December 31, 2021. We continued to show solid and stable asset quality numbers and ratios as of December 31, 2022. The following table provides the allocation, by segment, for expected credit losses. Because PPP loans are government guaranteed and management implemented additional reviews and procedures to help mitigate potential losses, management does not expect to recognize credit losses on this loan portfolio and as a result, did not record an ACL for PPP loans within the C&I loan segment presented in the table below.

Table 16—Allocation of the Allowance by Segment

*     Loan balance in each category expressed as a percentage of total loans excluding PPP loans.

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The following table presents a summary of net charge off ratios by loan segment, for the year ended December 31, 2022 and 2021:

Table 17—Disaggregated Net Recovery (Charge Off) Ratio by Segment

The following table presents a summary of the changes in the ACL, for the years ended December 31, 2022 and 2021:

*     Net charge-offs at December 31, 2022 and 2021 include automated overdraft protection (“AOP”) and insufficient fund (“NSF”) principal net charge-offs of $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 HSA, IOLTA, and Market Rate checking accounts.

During 2022, overall deposits increased $1.3 billion, or 3.7%, to $36.4 billion from December 31, 2021. The increase was mainly due to the deposits assumed from the merger with Atlantic Capital in March 2022. The acquisition date deposits assumed from Atlantic Capital totaled $3.0 billion and were approximately $2.5 billion at December 31, 2022. Excluding the deposits assumed in the Atlantic Capital acquisition, our deposits have declined $1.2 billion in 2022 as the funds in the market from federal government stimulus programs have declined along with the effects from

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rising interest rates in the second half of 2022, which has increased competition and alternatives for deposits. The changes in our deposits since December 31, 2021 included an increase in noninterest-bearing transaction account deposits of $1.7 billion and saving deposits of $113.8 million. These increases were offset by a decline in interest-bearing demand deposits (including money market accounts) of $97.7 million and time deposits of $390.1 million. During 2022, we continued our focus on increasing core deposits (excluding certificates of deposits and other time deposits), which are normally lower cost funds compared to certificate of deposit balances.

The following table presents total deposits for the two years at December 31:

Table 22—Total Deposits