SouthState Bank Corp (SSB) FY 2023 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, 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.

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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.

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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 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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 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.

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 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.

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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.

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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.

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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, 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.

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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.

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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.

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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. 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.”

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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:

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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.

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:

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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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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 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

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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:

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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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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

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2023 compared to 2022

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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:

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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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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

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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.

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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.

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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.

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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%.

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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

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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

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:

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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:

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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.

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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

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.

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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.

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The following table presents a summary of our investment portfolio duration for the periods presented:

Table 8—Investment Portfolio Duration

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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.)

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

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Table 9—Distribution of Loans by Type

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The following highlights of our loan portfolio as of December 31, 2023 compared to December 31, 2022:

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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.

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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

Table 11—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, 2023.

Table 12—Maturity Distribution of Acquired Non-purchased Credit Deteriorated Loans

Table 13— 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, 2023.

Table 14—Maturity Distribution of Acquired Purchased Credit Deteriorated Loans

Table 15— Acquired PCD Loans Due After One Year - Fixed or Floating

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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

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.

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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.

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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.

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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.

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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.

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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.

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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

*     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

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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