SouthState Bank Corp: Form 10-Q for the period ended Mar 31, 2024

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to the financial statements contained in this Quarterly Report beginning on page 3. For further information, refer to the MD&A appearing in the Annual Report on Form 10-K for the year ended December 31, 2023. Results for the three months ended March 31, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or any future period.

Unless otherwise mentioned or unless the context requires otherwise, references to “SouthState,” the “Company,” “we,” “us,” “our” or similar references mean SouthState Corporation and its consolidated subsidiaries. References to the “Bank” means SouthState Corporation’s wholly owned subsidiary, SouthState Bank, National Association, a national banking association.

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. Corporate Billing, a transaction-based division headquartered in Decatur, Alabama, that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide, merged into the Bank in March 2024 and now operates as a division of the Bank. 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. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code.

At March 31, 2024, we had approximately $45.1 billion in assets and 5,179 full-time equivalent employees. Through our Bank branches, ATMs and online banking platforms, we provide our customers with a wide range of financial products and services, through a six (6) state footprint in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. These financial products and services include deposit accounts such as checking accounts, savings and time deposits of various types, safe deposit boxes, bank money orders, wire transfer and ACH services, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, loans of all types, including business loans, agriculture loans, real estate-secured (mortgage) loans, personal use loans, home improvement loans, automobile loans, manufactured housing loans, boat loans, credit cards, letters of credit, home equity lines of credit, treasury management services, and merchant services.

We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located in Atlanta, Georgia, Memphis, Tennessee, Walnut Creek, California, and Birmingham, Alabama. This division’s primary revenue generating activities are related to its capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities; and its correspondent banking division, which includes spread income earned on correspondent bank deposits (i.e., federal funds purchased) and correspondent bank checking account deposits and fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services.

We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisitions of select financial institutions, or branches in certain market areas.

The following discussion describes our results of operations for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023 and also analyzes our financial condition as of March 31, 2024 as compared to December 31, 2023. Like most financial 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 which we may pay interest. Consequently, one of the key measures of our success is the amount of our 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.

Of course, there are risks inherent in all loans, as such, we maintain an allowance for credit losses, otherwise referred to herein as ACL, to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for credit losses against our operating earnings. In the following discussion, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion.

The following sections also identify 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 statistical information also included in this report.

Critical Accounting Policies

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 2 — Summary of Significant Accounting Policies and Note 3 — Recent Accounting and Regulatory Pronouncements of our consolidated financial statements in this Quarterly Report on Form 10-Q and in Note 1 — Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended December 31, 2023.

Results of Operations

Overview

We reported consolidated net income of $115.1 million, or diluted earnings per share (“EPS”) of $1.50, for the first quarter of 2024 as compared to consolidated net income of $139.9 million, or diluted earnings of $1.83, in the comparable period of 2023, a 17.8% decrease in consolidated net income and a 18.0% decrease in diluted EPS. The $24.9 million decrease in consolidated net income was the net result of the following items:

• A $66.8 million increase in interest income, resulting from a $70.3 million increase in interest income from loans and loans held for sale partially offset by a $2.8 million decrease in interest income from investment securities, and a $667,000 decrease in interest income on federal funds sold, securities purchased under agreement to resell and interest-bearing deposits. The increase in interest income from loans was due to an increase in the yield as loans continued to reprice higher from the rising rate environment in 2022 and in 2023 as the Federal Reserve Bank raised its federal funds rate by 525 basis points. The increase in interest income was also due to an increase in the average balance of loans of $2.1 billion through organic loan growth;
• A $104.2 million increase in interest expense, which resulted from a $104.2 million increase in interest expense from deposits, a $1.9 million increase in interest expense in federal funds purchased and securities sold under agreements to repurchase partially offset by a $1.9 million decrease in interest expense from corporate and subordinated debentures and other borrowings. The increase in interest expense from deposits resulted mainly from an increase in costs due to the higher interest rate environment with the increase in interest rates in 2022 and 2023. This increase in average cost of deposits was felt throughout 2023 starting with the stress in the financial markets and liquidity that occurred in March 2023 with the closure of a few failed financial institutions. The average cost of deposits, excluding non-interest bearing deposits, increased by 147 basis points compared to the first quarter of 2023;
• A $20.4 million decrease in the provision for credit losses, as the Company recorded a provision for credit losses of $12.7 million in the first quarter of 2024 while recording a provision for credit losses of $33.1 million in the first quarter of 2023. During the first quarter of 2024, we recorded a lower provision for credit losses as economic forecasts improved since the first quarter of 2023, with inflation falling and interest rates stabilizing, along with lower new loan growth in the first quarter of 2024 compared to the same period in 2023;
• A $203,000 increase in noninterest income, primarily from an increase in service charges on deposit accounts of $2.0 million, in debit prepaid, ATM and merchant card related income of $1.2 million, in mortgage banking income of $1.8 million and in other noninterest income of $3.3 million. The increase in other noninterest income is mainly attributable to the recognition of credit from an external vendor of $2.5 million during the first quarter of 2024. These increases were mostly offset by a decline in correspondent banking and capital market income of $9.3 million. See Noninterest Income section on page 52 for further discussion;
• An $8.8 million increase in noninterest expense, which resulted primarily from an increase in salaries and employee benefits of $6.4 million, an accrual for the FDIC special assessment of $3.9 million, in FDIC assessment and other regulatory charges of $2.2 million, and an information services expense of $2.4 million. These increases were partially offset by declines in merger, branch consolidation, severance related and other expense of $4.9 million and amortization of intangibles of $1.3 million. See Noninterest Expense section on page 54 for further discussion; and
• Lower income tax provision of $634,000 primarily due to lower pretax book income between the two quarters. The Company recorded pretax book income of $153.5 million in the first quarter of 2024 compared to pretax book income of $179.0 million in the first quarter of 2023. The effects of the lower pretax book income were mostly offset by the effects of the Company adopting ASU 2023-02 in the first quarter of 2024 whereby it applied the proportional amortization method of accounting related to its low income housing tax credits partnerships (“LIHTC”). With the adoption of ASU 2023-02, the amortization of the LIHTCs is now recorded within Provision for Income Taxes rather than Other Noninterest Expense on the Statement of Income. The amortization for the Company’s LIHTCs totaled $3.5 million during the first quarter of 2024. The change in the accounting method, in addition to other items recorded during the current quarter, increased our effective tax rate for the first quarter in 2024 compared to the same period in 2023. Our effective tax rate was 25.05% for the three months ended March 31, 2024 compared to 21.84% for the three months ended March 31, 2023. See Income Tax Expense section on page 55 for further discussion.

Our quarterly efficiency ratio increased to 58.5% in the first quarter of 2024 compared to 51.4% in the first quarter of 2023. The increase in the efficiency ratio compared to the first quarter of 2023 was the result of an 8.3% decrease in the total of tax-equivalent net interest income and noninterest income along with a 4.3% increase in noninterest expense (excluding amortization of intangibles). This decrease was reflective of a 150.7% increase in interest expense as the repricing of interest-bearing liabilities caught up with the repricing of interest-earning assets in 2023 and into the first quarter of 2024 resulting from the rising rate environment.

Basic and diluted EPS were $1.51 and $1.50, respectively, for the first quarter of 2024, compared to $1.84 and $1.83, respectively for the first quarter of 2023. The decrease in basic and diluted EPS was due to a 17.8% decrease in net income in the first quarter of 2024 compared to the same period in 2023 along with an increase in average basic common shares of 0.5%. The decrease in net income in the first quarter of 2023 was mainly attributable to an increase in interest expense pertaining to interest-bearing liabilities resulting from the rising rate environment as noted above.

Selected Figures and Ratios

(Dollars in thousands)

* Denotes a non-GAAP financial measure. The section titled “Reconciliation of GAAP to non-GAAP” below provides a table that reconciles GAAP measures to non-GAAP measures.

• For the three months ended March 31, 2024, the return on average assets declined compared to the same period in 2023. This decrease was primarily due to the decrease in net income of $24.9 million, or 17.8%, which was attributable to an increase in the cost of interest-bearing liabilities resulting from the rising rate environment. The decline in the return on average assets was also due to an increase in average assets for the three months ended March 31, 2024 of $906.7 million, or 2.1%, compared to the same period in 2023, mainly due to an increase in loans of $2.1 billion through organic growth.
• For the three months ended March 31, 2024, the return on average equity and the return on average tangible equity declined compared to the same period in 2023. These decreases were primarily due to lower net income of 17.8%, along with an increase in average equity of 6.9% and tangible equity of 12.3%.
• The equity-to-assets ratio was 12.29% for the three months ended March 31, 2024, an increase of 0.61% from March 31, 2023. This increase resulted from net income earned during the last twelve months being greater than the increase in total assets of 0.5% from March 31, 2023.
• Dividend payout ratios were 34.42% for the three-month period ending March 31, 2024 and 27.09% for the three-month period ending March 31, 2023. The increase in the dividend payout ratio for the three months ended March 31, 2024 was due to the 17.8% decrease in net income along with total dividends paid during the first quarter of 2024 increasing 4.4% compared to the same period in 2023.

Net Interest Income and Margin

Non-Tax Equivalent (“TE”) net interest income decreased $37.3 million, or 9.8%, to $343.9 million in the first quarter of 2024 compared to $381.3 million in the same period in 2023. Interest earning assets averaged $40.7 billion during the three months period ended March 31, 2024 compared to $39.4 billion for the same period in 2023, an increase of $1.2 billion, or 3.2%. Interest bearing liabilities averaged $27.5 billion during the three months period ended March 31, 2024 compared to $24.6 billion for the same period in 2023, an increase of $2.9 billion, or 11.7%.

The Federal Reserve made four 25 basis-point rate increases during 2023, starting early February 2023 with the most recent increase in late July 2023, resulting in a range of 5.25% to 5.50% at March 31, 2024. As a result, the Company operated under a higher rate environment for the first quarter of 2024 while it operated under a comparatively lower rate environment in the first quarter of 2023. Some key highlights are outlined below:

• Both the non-TE and TE net interest margin decreased by 52 basis points in the first quarter of 2024 compared to the same quarter of 2023 due to the increase in the cost of interest-bearing liabilities of 139 basis points outweighing the increase in the yield on interest earning assets of 48 basis points. The increase in the cost of interest-bearing liabilities lagged the increase in yield on interest-earning assets during this rising interest rate cycle and has caught up in the latter half of 2023 and into the first quarter of 2024.
• Non-TE yield on interest-earning assets for the first quarter of 2024 increased by 48 basis points to 5.12% from the comparable period in 2023 due to higher yields on the majority of interest-earning assets, including loans held for investment, investments securities, and federal funds sold and interest-earning deposits with banks, as the Federal Reserve Bank raised interest rates during 2023. The increases in interest rates, in combination with the increase in the average balance of the higher yielding loan portfolio of $2.1 billion, the decline in the average balances of lower yielding investment securities of $766.8 million and federal funds sold and interest-earning deposits with banks of $90.9 million, affected the overall yield increase between the comparable periods.
• The average cost of interest-bearing liabilities for the first quarter of 2024 increased by 139 basis points to 2.53% from the same period in 2023. This increase was driven by the effects from the higher rate environment on the repricing of all deposit accounts, federal funds purchased, securities purchased with agreement to repurchase, trust preferred corporate debt, and other borrowings. The average cost of interest-bearing deposits increased by 147 basis points as the increase occurred in all deposit categories and was a result of the rising rate environment and a change in the deposit mix. Our deposits have shifted from lower-costing savings and transaction deposit accounts to higher-costing certificates and other time deposits and money market accounts as customers have sought higher yields during the rising rate environment. The average cost of securities sold with agreements to repurchase and federal funds purchased increased 123 by basis points and 69 basis points, respectively, while the average cost of corporate and subordinated debentures increased by 24 basis points. Other borrowings, consisting of FHLB advances had an average cost of 5.66% during the first quarter of 2024 compared to 4.76% for the compared period in 2023. Our overall cost of funds, including noninterest-bearing deposits, was 1.83% for the three months ended March 31, 2024 compared to 0.75% for the three months ended March 31, 2023.

The tables below summarize the analysis of changes in interest income and interest expense for the quarter ended March 31, 2024 and 2023 and net interest margin on a tax equivalent basis.

(Dollars in thousands)

(1) Investment securities (taxable) and (tax-exempt) include trading securities.

Investment Securities

The interest earned on investment securities decreased by $2.8 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This is a result of the Bank carrying a lower average balance in investment securities in 2024 compared to the same period in 2023. The average balance of investment securities for the three months ended March 31, 2024 decreased by $766.8 million from the comparable period in 2023. This decrease was due to maturities, mortgage paydowns and sales within the AFS and HTM investment portfolios being greater than the purchases of these securities as the Company has only purchased $80.4 million in AFS and HTM securities since March 31, 2023. The effects from the decline in average balance were partially offset by the increase in yield. The yield on the total investment securities increased by 7 basis points during the three months ended March 31, 2024 compared to the same periods in 2023 due to the rising rate environment.

Loans

Interest earned on loans held for investment increased by $70.0 million to $463.0 million in the first quarter ended March 31, 2024 from the comparable period in 2023. Interest earned on loans held for investment included loan accretion income recognized during the quarters ended March 31, 2024 and 2023 of $4.3 million and $7.4 million, respectively, a decrease of $3.1 million. Some key highlights for the quarter ended March 31, 2024 are outlined below:

• Our non-TE yield on total loans increased by 49 basis points in the first quarter of 2024 compared to the same period in 2023 due to a 60 basis-point increase in yield on the non-acquired loan portfolio and a 29 basis-point increase in the yield on the acquired loan portfolio.
• The yield on the acquired loan portfolio increased by 29 basis points to 6.26% in the first quarter of 2024 from 5.97% in the same period in 2023, while interest income on the acquired loan portfolio decreased by $15.8 million during the same period.
• The interest income on acquired loans decreased due to a $1.4 billion decrease in average balance during the first quarter of 2024 compared to the same period in 2023. The average balance decreased due to paydowns, pay-offs and renewals of acquired loans that are moved to our non-acquired loan portfolio. The effect from the decline in average acquired loans balance was partially offset by the increase in yield of 29 basis points.
• The yield on the non-acquired loan portfolio increased by 60 basis points to 5.62% in the first quarter of 2024 compared to 5.02% in the same period in 2023. Interest income on the non-acquired loan portfolio increased by $85.9 million during the same period.
• The increases in both yield and interest income on non-acquired loans were attributable to both a higher average balance of $3.5 billion through organic loan growth and renewals of matured acquired loans that are moved to our non-acquired loan portfolio, along with a higher yield of 60 basis points due to the higher rate environment.

Interest-Bearing Liabilities

The quarter-to-date average balance of interest-bearing liabilities increased by $2.9 billion, or 11.7%, in the first quarter of 2024 compared to the same period in 2023. The cost of interest-bearing liabilities increased by 139 basis points to 2.53% and the overall cost of funds, including demand deposits, increased by 108 basis points to 1.83% in the first quarter of 2024 compared to the same period in 2023. Some key highlights for the quarter ended March 31, 2024 compared to the same period in 2023 include:

• The cost of interest-bearing deposits was 2.44% for the first quarter of 2024 compared to 0.97% for the same period in 2023.
• Interest expense on interest-bearing deposits increased by $104.2 million in the first quarter of 2024 compared to the same period in 2023 as interest expense on all interest-bearing deposit accounts increased. Interest expense on transaction and money market accounts, savings, and certificates and other time deposits increased by $76.8 million, $62,000, and $27.4 million, respectively. One factor driving the increase in average cost and interest expense was the repricing of deposits in the higher rate environment in 2024 compared to the first quarter of 2023. The increase in the cost of interest-bearing deposits lagged the increase in the yield on interest-earning assets during this rising interest rate cycle and has caught up in the latter half of 2023 and into the first quarter of 2024.
• The average balance of interest-bearing deposits increased by $3.1 million, driving up interest expense. The increase in average balance of interest-bearing deposit was due to an increase in the average balance of transaction and money market accounts of $2.7 billion, along with an increase in the average balance of higher costing time deposits of $1.2 billion, partially offset by a decrease in average saving deposits of $709.0 million. The increase in average cost and interest expense was also due to a change in deposit mix. During the rising rate environment, our deposits have shifted from lower-costing savings and transaction deposit accounts to higher-costing certificates and other time deposits and money market accounts with customers seeking higher yields.
• The cost of federal funds purchased increased by 69 basis points in the first quarter of 2024 due to the rising rate environment. This increase in cost along with the increase in the average balance of $63.2 million drove the $1.2 million increase in interest expense compared to the same period in 2023.
• The cost of repurchase agreements was 1.95% for the first quarter of 2024 compared to 0.72% for the same period in 2023 driven by the effects from the higher interest environment. The effects from the increase in the cost of repurchase agreements, partially offset by the effects from a decline in the average balance of $92.9 million, drove the increase in the interest expense of $692,000 during the first quarter of 2024 compared to the same period in 2023.
• The cost of the corporate and subordinated debt increased by 24 basis points to 6.17% for the three months ended March 31, 2024 compared to the same period in 2023, also driven by the effects from the rising rate environment on the repricing of variable rate corporate debentures. The interest expense from corporate and subordinated debentures increased by $274,000 during the first quarter of 2024 compared to the same period in 2023 due to the increase in average cost.
• The cost of other borrowings, consisting of FHLB advances, for the three months ended March 31, 2024 was 5.66% and interest expense was $2.4 million compared to 4.76% and $4.6 million during the first quarter of 2023. The decline in interest expense was due to a decline in the average balance of other borrowings of $221.4 million from $393.3 million during the first quarter of 2023 compared to $172.0 million during the same period in 2024. The Bank used FHLB advances in the first quarter of 2023 to provide excess liquidity during the financial turmoil from the closures of failed banks in 2023, having $900 million in outstanding advances at March 31, 2023.

We continue to monitor and adjust rates paid on deposit products as part of our strategy to manage our net interest margin. Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, and other borrowings. Interest-bearing transaction accounts include NOW, HSA, Interest on Lawyers’ Trust Accounts (“IOLTA”), and Market Rate checking accounts.

Noninterest-Bearing Deposits

Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds. Average noninterest-bearing deposits decreased by $2.2 billion, or 17.5%, to $10.5 billion in the first quarter of 2024 compared to $12.8 billion during the same period in 2023. The decrease in the average balance of noninterest bearing deposits was due to customers moving funds from noninterest bearing checking accounts to seek higher yields resulting from the rising rate environment, along with customers having less excess cash as funds from government support programs related to the COVID-19 pandemic began to decline.

Noninterest Income

Noninterest income provides us with additional revenues that are significant sources of income. For the three months ended March 31, 2024 and 2023, noninterest income comprised 17.2% and 15.8%, respectively, of total net interest income and noninterest income.

(Dollars in thousands)

Noninterest income increased by $203,000, or 0.3%, during the first quarter of 2024 compared to the same period in 2023. This quarterly change in total noninterest income resulted from the following:

• Service charges on deposit accounts were higher by $2.1 million, or 10.0%, in the first quarter of 2024 compared to the same period in 2023. The increase was mainly attributable to a $1.2 million increase in Non-Sufficient Fund (“NSF”) fees, a $674,000 increase in account maintenance fees, and approximately $209,000 increase in other services charges during the first quarter of 2024 compared to the same period in 2023.
• Debit, prepaid, ATM and merchant card related income increased by $1.2 million, or 13.3%, during the first quarter of 2024 compared to the same period in 2023. The increase was primarily driven by an increase in debit/ATM fee income, net of card expense.
• Mortgage banking income increased by $1.8 million, or 42.4%, during the first quarter of 2024 compared to the same period of 2023, which comprised of a $950,000, or 60.7%, increase in mortgage servicing related income and a $887,000, or 32.1%, increase in secondary market mortgage income. Mortgage production declined from $556.0 million in the first quarter of 2023 to $428.8 million in the first quarter of 2024 with higher mortgage rates continuing during 2024. We allocated a higher percentage of mortgage production to the secondary market in the first quarter of 2024 compared to the same period in 2023 as the percentage allocated increased from 28% to 53%. The allocation of mortgage production between portfolio and secondary market depends on the Company’s liquidity, market spreads and rate changes during each period and will fluctuate year to year.
• The increase in mortgage servicing related income, net of the hedge, in the first quarter of 2024 was primarily due to a $916,000 increase in the change in fair value of the MSR including decay. The increase in fair value of the MSR between the comparable periods was primarily due to an increase in the change in fair value from interest rates of $3.7 million, offset by a decrease from gains/losses on the MSR hedge of $2.7 million and a $33,000 decline in MSR decay.
• Mortgage income from the secondary market increased by $887,000 between the comparable periods resulting from decreases in the change in fair value of the pipeline of $449,000 and loans held for sale of $135,000, offset by an increase in the fair value of MBS forward trades of $1.5 million and a $5,000 increase in the gain on sale of mortgage loans, which is net of the commission expense related to mortgage production. Mortgage commission expense was $2.2 million during the first quarter of 2024 compared to $1.3 million during the comparable period in 2023.
• Trust and investment services income for the first quarter of 2024 increased by $454,000, or 4.6%, from the first quarter of 2023 as assets under management have increased by $881.5 million, or 11.9%, in that same time frame.
• Correspondent banking and capital markets income in the first quarter of 2024 decreased by $9.3 million, or 68.3%, compared to the same period in 2023. The decline was primarily related to a decrease of $6.3 million in income generated from the sale of customer swap ARC hedges during the first quarter of 2024 compared to the first quarter of 2023 resulting from the higher interest rate environment in 2024. The decline was also due to the expense attributable to the variation margin payments for centrally cleared swaps where we recorded an expense of $10.3 million related to variation margin payments in the first quarter of 2024 compared to an expense of $8.4 million in the first quarter of 2023. In addition, commissions and fees earned on fixed income security sales were lower by $917,000 in the first quarter of 2024 compared to the same period in 2023.
• SBA income increased by $641,000, or 17.2%, during the first quarter of 2024 compared to the same period in 2023. SBA income includes changes in fair value of the servicing asset, loan servicing fees and gains on sale of SBA loans. The increase was attributable to higher gains on sale of SBA loans of $802,000, partially offset by declines in SBA servicing fee income and the change in fair value of the SBA servicing asset of $123,000 and $38,000, respectively.
• Other income increased by $3.2 million, or 105.9%, in the first quarter of 2024 compared to the same quarter in 2023. This increase was primarily due to the Bank recognizing approximately $2.5 million in credits from an external vendor during the first quarter of 2024.

Noninterest Expense

(Dollars in thousands)

Noninterest expense increased by $8.8 million, or 3.7%, in the first quarter of 2024 compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:

• Salaries and employee benefits increased by $6.4 million, or 4.4%, in the first quarter of 2024 compared to the same period in 2023. The increase was primarily due to an increase in salaries of $6.6 million resulting from merit increases and an increase in the number of employees, along with higher employee benefits of $2.2 million from higher FICA tax paid and medical insurance expense. These increases were partially offset by a decrease in commissions of $2.2 million, which is mainly attributable to lower commissions related to the correspondent banking division resulting from lower bond sales and lower income from the ARC hedging program.
• Information services expense increased by $2.4 million, or 12.2% in the first quarter of 2024 compared to the same period in 2023. The increase was due to additional cost associated with the Company updating systems and software as it grows in size and complexity.
• Amortization of intangibles, which is related to the Company’s prior mergers, decreased by $1.3 million, or 17.8%.
• Professional fees decreased by $587,000, or 15.9%, primarily due to lower legal and other general business consulting expenses incurred in the first quarter of 2024 compared to the same period in 2023.
• FDIC assessment and other regulatory charges increased by $2.2 million, or 35.6%, in the first quarter of 2024 compared to the same period in 2023. The increase in the FDIC assessment was primarily due to an increase in the FDIC assessment rate to bring the overall FDIC fund to 1.35x total deposits by the end of 2028. The increase also reflects changes in the Company’s size and complexity along with the effects from the increase in the Company’s classified assets.
• The Company accrued an additional $3.9 million related to the FDIC’s special assessment introduced in 2023 to recover losses to the FDIC’s Deposit Insurance Fund resulting from the bank failures that occurred in early 2023. The FDIC notified banks in the first quarter of 2024 the estimate of the losses expected from the bank failures were larger than originally estimated. As a result, the Bank increased its accrual of the FDIC special assessment in anticipation of the higher assessment that may be allocated to the Bank.
• Merger, branch consolidation, severance related and other expense decreased by $4.9 million, or 52.1%, to $4.5 million in the first quarter of 2024 compared to the same period in 2023. Of the $4.5 million in 2024, approximately $4.4 million pertains to one-time costs associated with the cybersecurity incident, which was identified as an isolated event as previously disclosed by the Company. The Company did not incur any merger expense pertaining to prior acquisitions during the first quarter of 2024, while it had a total of $1.3 million merger expense associated with the Atlantic Capital acquisition during the comparative period in 2023. In the first quarter of 2023, the Company also recorded $8.1 million in restructuring costs. The restructuring costs included approximately $7.0 million of severance related expense pertaining to the elimination of the Company’s executive officer position and approximately $1.1 million of severance related expense pertaining to the reduction in force of the Company’s mortgage division.
• Other noninterest expense decreased by $432,000, or 2.5%, in the first quarter of 2024 compared to the same period in 2023. This decrease primarily resulted from a $2.1 million decline in amortization expenses related to the adoption of ASU 2023-02 effective January 1, 2024, which changed the accounting method of the Company’s LIHTC structured investments. Starting in the first quarter of 2024, the amortization expense related to the Company’s LIHTC investments is being recorded within Provision for Income Taxes on the Consolidated Statement of Income. Additionally, there was a $1.2 million decrease in tax payments due to higher other franchise taxes incurred during the first quarter of 2023, and a $642,000 decrease in incurred but not reported insurance loss reserves. These decreases were offset by a $3.3 million increase in earnings credit expense to Homeowners Association (“HOA”) customers. The Bank provides a credit to HOA customers based on the average deposit balances held that reduces fees for other services provided.

Income Tax Expense

Our effective tax rate was 25.05% for the three months ended March 31, 2024 compared to 21.84% for the three months ended March 31, 2023. The increase in the effective rate for the quarter, when compared to the same period in the prior year, is driven by amortization of LIHTCs as a result of the adoption of the proportional amortization under ASU 2023-02 effective January 1, 2024, as well as an increase in non-deductible FDIC premiums recorded during the current period. This was partially offset by a decrease in disallowed executive compensation and disallowed interest expense. In addition, the Company recorded approximately $2.8 million in income tax provision related to the revaluations of its deferred income taxes and other tax adjustments during the current period.

Analysis of Financial Condition

Summary

Our total assets increased by approximately $242.8 million, or 0.5%, from December 31, 2023 to approximately $45.1 billion at March 31, 2024. Within total assets, cash and cash equivalents increased by $210.6 million, or 21.1% and loans increased by $278.8 million or 0.9% during the period, while investment securities decreased by $231.6 million, or 3.1%. Within total liabilities, deposits grew $129.5 million, or 0.3%, and federal funds purchased and securities sold under agreements to repurchase increased by $65.5 million, or 13.4%. Total borrowings decreased by $100.1 million, or 20.3%. Total shareholder’s equity increased by $13.9 million, or 0.3%. The increase in cash and cash equivalents was primarily due to the increase in deposits of $129.5 million along with decline in investments of $231.6 million from maturities and pay downs of mortgage-backed securities. The increase in deposits was mainly from the increase in money market accounts of $356.7 million during the quarter. The increase in loans was due to normal organic growth. Our loan to deposit ratio was 88% and 87% at March 31, 2024 and December 31, 2023, respectively, while our percentage of non-interest bearing deposit accounts to total deposits was 28% and 29% at March 31, 2024 and December 31, 2023, respectively.

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 March 31, 2024, investment securities totaled $7.2 billion, compared to $7.5 billion at December 31, 2023, a decrease of $231.6 million, or 3.1%. At March 31, 2024, approximately 63.6% of the investment portfolio was classified as available for sale, approximately 33.8% was classified as held to maturity and 2.6% was classified as other investments. During the three months ended March 31, 2024, we purchased $54.6 million of capital stock with the Federal Home Loan Bank classified as other investment securities on the balance sheet of which we sold back $59.4 million. The net decrease to the capital stock holding for the Federal Home Loan Bank of Atlanta of $4.8 million during the first quarter of 2024 was due to the decrease in Federal Home Loan Bank borrowings. During the first quarter of 2024, the Bank did not purchase any securities available for sale or held to maturity. There were maturities, paydowns, and calls of investment securities totaling $168.4 million during the first quarter of 2024. Net amortization of premiums was $4.8 million in the first three months of 2024.

At March 31, 2024, the unrealized net loss of the available for sale securities portfolio was $830.2 million, or 15.3%, below its amortized cost basis, compared to an unrealized net loss of $776.6 million, or 14.0%, at December 31, 2023. At March 31, 2024, the unrealized net losses of the held to maturity securities portfolio was $430.0 million, or 17.6%, below its amortized cost basis, compared to an unrealized net losses of $402.7 million, or 16.2%, at December 31, 2023. The increase in the unrealized net loss in the available for sale investment portfolio of $53.6 and the increase in the unrealized net losses for the held to maturity portfolio of $27.3 during the first three months of 2024 was mainly due to the expectation that interest rates will remain higher in 2024 as inflation continues to remain higher than the Federal Reserve Bank target of 2.0%.

The following is the combined amortized cost and fair value of investment securities available for sale and held for maturity, aggregated by credit quality indicator:

(Dollars in thousands)

* Agency mortgage-backed securities (“MBS”), agency collateralized mortgage-obligations (“CMO”) and agency commercial mortgage-backed securities (“CMBS”) are guaranteed by the issuing government-sponsored enterprise (“GSE”) as to the timely payments of principal and interest. Except for Government National Mortgage Association securities, which have the full faith and credit backing of the United States Government, the GSE alone is responsible for making payments on this guaranty. While the rating agencies have not rated any of the MBS, CMO and CMBS issued, senior debt securities issued by GSEs are rated consistently as “Triple-A.” Most market participants consider agency MBS, CMOs and CMBSs as carrying an implied Aaa rating (S&P rating of AA+) because of the guarantees of timely payments and selection criteria of mortgages backing the securities. We do not own any private label mortgage-backed securities. The balances presented under the ratings above reflect the amortized cost of the investment securities.

At March 31, 2024, we had 1,236 investment securities, including both available for sale and held to maturity, which totaled $1.3 billion unrealized loss position. 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. The total number of investment securities with an unrealized loss position increased by 4 securities, while the total dollar amount of the unrealized loss increased by $80.0 million. The level of unrealized losses for each period is due to an overall increase in short- and long-term interest rates in 2022 and 2023 and the expectation that interest rates will not fall until late 2024 or 2025.

All investment securities in an unrealized loss position as of March 31, 2024 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability and intent to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is not more likely than not that we will be required to sell these securities prior to recovery. We continue to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of our securities may be sold or would require a charge to earnings as a provision for credit losses in such periods. Any charges as a provision for credit losses related to investment securities could impact cash flow, tangible capital or liquidity. See Note 2 — Summary of Significant Accounting Policies and Note 4 — Investment Securities for further discussion on the application of ASU 2016-13 on the investment securities portfolio.

As securities held for investment are purchased, they are designated as held to maturity or available for sale based upon our intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Although securities classified as available for sale may be sold from time to time to meet liquidity or other needs, it is not our normal practice to trade this segment of the investment securities portfolio. From time to time, the Bank may execute transactions to reposition the investment portfolio. Such activity has not expanded the broad asset classes used by the Bank. While management generally holds these assets on a long-term basis or until maturity, any short-term investments or securities available for sale could be converted at an earlier point, depending partly on changes in interest rates and alternative investment opportunities.

The following table presents a summary of our investment portfolio by contractual maturity and related yield as of March 31, 2024:

(Dollars in thousands)

(1) Yields on tax exempt income have been presented on a taxable equivalent basis in the table above.

(2) FRB, FHLB and other non-marketable equity securities have no set maturity date and are classified in “Due after 10 Years.”

(3) The total values presented in the table above represent total fair value for available for sale and amortized cost for held to maturity.

Approximately 86.0% 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. Approximately 13.6% 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 98% of the municipal bond portfolio has ratings in the Double A or Triple A category.

During the first quarter of 2024, the Company did not sell any securities that are available for sale or held to maturity. As of March 31, 2024, the portfolio had an effective duration of 5.89 years. We continue to monitor duration risk and seek to align actual duration with the target range.

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

(Dollars in thousands, duration in years)

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 March 31, 2024, we determined that there was no impairment on our other investment securities. As of March 31, 2024, other investment securities represented approximately $187.3 million, or 0.41% of total assets, and primarily consists of FHLB and FRB stock which totals to approximately $168.3 million, or 0.37% of total assets. There were no gains or losses on the sales of these securities for three months ended March 31, 2024 and 2023, respectively.

Trading Securities

We have a trading portfolio associated with our Correspondent Banking 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 $66.2 million and $31.3 million at March 31, 2024 and December 31, 2023, respectively.

Loans Held for Sale

The balance of mortgage loans held for sale increased $5.7 million from December 31, 2023 to $56.6 million at March 31, 2024. Total mortgage production was $429 million in the first quarter of 2024. This compares to $436 million in the fourth quarter of 2023. Mortgage production has declined as mortgage rates have continued to remain high. The percentage of mortgage production sold into the secondary market increased to 53% at March 31, 2024 compared to 49% in the fourth quarter of 2023. The allocation of mortgage production between portfolio and secondary market depends on the Company’s liquidity, market spreads and rate changes during each period and will fluctuate over time.

Loans

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

(Dollars in thousands)

Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), increased by $278.8 million, or 3.5% annualized, to $32.7 billion at March 31, 2024. Our non-acquired loan portfolio increased by $618.7 million, or 9.4% annualized, mainly driven by organic growth. Commercial non-owner occupied loans, consumer owner occupied loans, commercial and industrial loans, commercial owner occupied real estate, and home equity loans led the way with $621.6 million, $244.3 million, $112.6 million, $80.9 million and $25.1 million in year-to-date loan growth, respectively, or 39.1%, 16.6%, 9.8%, 8.1% and 8.8% annualized growth, respectively. The acquired loan portfolio decreased by $339.9 million, or 23.1% annualized. This decline 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. The main categories that declined were commercial non-owner occupied loans, commercial and industrial loans and commercial owner occupied loans, which decreased by $80.8 million, $73.0 million and $66.7 million, respectively, during the quarter. Acquired loans as a percentage of total loans decreased to 17.0% and non-acquired loans as a percentage of the overall portfolio increased to 83.0% at March 31, 2024. This compares to acquired loans as a percentage of total loans of 18.2% and non-acquired loans as a percentage of total loans of 81.8% at December 31, 2023.

Allowance for Credit Losses (“ACL”) on Loans and Certain Off-Balance-Sheet Credit Exposures

The ACL reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. Please see Note 1 — Summary of Significant Accounting Policies, under the “ACL – Loans” section, of our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 2 — Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL on loans.

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 and unrest in middle east, 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. For the quarter ending March 31, 2024, management selected a baseline weighting of 50%, a 25% weighting for an upside scenario and a 25% weighting for the more severe scenario. The scenario weightings were consistent with the first quarter of 2023. 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 and recent commercial real estate market sales data still show resilience and actual loan losses remain at low levels, continued projected weakness in the forecasted commercial real estate price index continues to elevate modeled expected losses for the Commercial Real Estate and Commercial Construction and Land Development, which excludes Residential Construction, loan segments. The resulting provision was approximately $12.7 million during the first quarter of 2024.

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. Please see MD&A, under the “Financial Condition”, “Allowance for Credit Losses (“ACL”)” section, of our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 2 — Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL on certain off-balance-sheet credit exposures.

As of March 31, 2024, the balance of the ACL was $469.7 million or 1.44% of total loans. The ACL increased $13.1 million from the balance of $456.6 million recorded at December 31, 2023. The net increase during the first quarter of 2024 included a $15.8 million provision and $2.7 million in net charge-offs. During the three months ended March 31, 2024, the Company recorded a provision for credit losses based on loan growth and current forecasts applied to our modeling to adequately capture potential economic recessionary risks.

At March 31, 2024, the Company had a reserve on unfunded commitments of $53.2 million, which was recorded as a liability on the Balance Sheet, compared to $56.3 million at December 31, 2023. During the three months ended March 31, 2024, the Company recorded a decrease in the reserve for unfunded commitments of $3.1 million. This amount was recorded in Provision (Recovery) for Credit Losses on the Consolidated Statements of Income. For the comparative period in 2023, the Company had a reserve on unfunded commitments of $85.1 million recorded at March 31, 2023. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financial assets during the first three months of 2024.

The ACL provides 2.73 times coverage of nonperforming loans at March 31, 2024. Net charge-offs to the total average loans during the three months ended March 31, 2024 were 0.03%, compared to 0.01% during the three months ended March 31, 2023. We continued to experience solid and stable asset quality numbers and ratios as of March 31, 2024.

The following table provides the allocation, by segment, for expected credit losses as of March 31, 2024:

(Dollars in thousands)

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

The following table presents a summary of net charge off ratios (annualized) by loan segment, for the quarters ended March 31, 2024 and 2023:

(Dollars in thousands)

The following table presents a summary of the changes in the ACL, for the three months ended March 31, 2024 and 2023:

(Dollars in thousands)

Nonperforming Assets (“NPAs”)

The following table summarizes our nonperforming assets for the past five quarters:

(Dollars in thousands)

(1) Consists of real estate acquired as a result of foreclosure.

(2) Consists of non-real estate foreclosed assets, such as repossessed vehicles.

(3) Includes nonaccrual loans that are purchase credit deteriorated (PCD loans).

(4) Loan data excludes mortgage loans held for sale.

(5) For purposes of this calculation, total assets include all assets (both acquired and non-acquired).

(6) Excludes non-acquired bank properties held for sale of $9.0 million, $9.0 million, $11.8 million, $10.0 million, and $13.3 million as of March 31, 2024, December 31, 2023, September 30, 2023, June 30, 2023 and March 31, 2023, respectively, that is now separately disclosed on the balance sheet.

(7) Excludes acquired bank properties held for sale of $0, $3.4 million, $3.4 million, $3.4 million, and $3.4 million as of March 31, 2024, December 31, 2023, September 30, 2023, June 30, 2023 and March 31, 2023, respectively, that is now separately disclosed on the balance sheet.

Total nonperforming assets were $174.5 million, or 0.53% of total loans and repossessed assets, at March 31, 2024, a decrease of $9.6 million, or 5.2%, from December 31, 2023. Total nonperforming loans were $172.3 million, or 0.53%, of total loans, at March 31, 2024, a decrease of $10.4 million, or 5.7%, from December 31, 2023. Non-acquired nonperforming loans decreased by $13.1 million from December 31, 2023. The decrease in non-acquired nonperforming loans was driven primarily by a decrease in commercial nonaccrual loans of $7.2 million, a decrease in accruing loans past due 90 days or more of $8.8 million, offset by an increase in consumer nonaccrual loans of $2.9 million. The accruing loans past due 90 days or more decreased by $8.8 million at March 31, 2024 compared to December 31, 2023, due primarily to a decrease in accruing loans past due 90 days or more of factored receivables, which are trade credits rather than promissory notes loans that are deemed to be low risk. Acquired nonperforming loans increased $2.7 million from December 31, 2023. The increase in the acquired nonperforming loan balances was due primarily to an increase in commercial nonaccrual loans of $4.6 million, offset by a decrease in consumer nonaccrual loans of $1.0 million and a decline in accruing loans past due 90 days or more of $1.0 million.

Interest-Bearing Liabilities

Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, securities sold under agreements to repurchase and other borrowings. Interest-bearing transaction accounts include NOW, HSA, Interest on Layers’ Trust Accounts (“IOLTA”), and Market Rate checking accounts.

Total interest-bearing deposits increased by $232.4 million, or 3.5% annualized, to $26.6 billion at March 31, 2024 from $26.4 billion at December 31, 2023. This increase was mainly driven by growth in money market accounts of $356.7 million, including $167.1 million in reciprocal insured money market deposits. This increase was partially offset by declines in interest-bearing checking accounts of $80.0 million and savings deposits of $75.0 million. Customers continue to move funds from lower yielding deposit products seeking higher yields in money market accounts. Federal funds purchases related to the Correspondent Banking Division and securities sold under agreements to repurchase were $554.7 million at March 31, 2024, a $65.5 million increase from December 31, 2023. Other borrowings, consisting of FHLB borrowings, decreased to $0 at March 31, 2024 from $100 million at December 31, 2023. Corporate and subordinated debentures declined by $92,000 to $391.8 million. Some key highlights are outlined below:

• As noted above, the Company’s higher yielding money market accounts increased during the first quarter of 2024. The Company raised interest rates on most interest-bearing deposit products (in particular money market accounts and time deposit specials) due to competitive pressures to retain deposits. Average interest-bearing deposits increased by $3.1 billion to $26.4 billion in the quarter ended March 31, 2024 compared to the same period in 2023. For more information on the composition of our total deposits, see Note 8 – Deposits.
• Other borrowings, consisting of FHLB borrowings, decreased to $0 at March 31, 2024 from $100 million at December 31, 2023. The Company paid down its FHLB borrowings in the first quarter of 2024 with the growth in deposits and the maturities and pay downs in investment securities providing liquidity.

Noninterest-Bearing Deposits

Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds. At March 31, 2024, the period end balance of noninterest-bearing deposits of $10.5 billion remained fairly stable compared to the balance at December 31, 2023 of $10.6 billion. Average noninterest-bearing deposits were $10.5 billion for the first quarter of 2024 compared to $12.8 billion for the first quarter of 2023. This decrease in the average noninterest bearing deposits from the quarter ended March 31, 2023 was mainly due to customers seeking higher yields in the rising rate environment. Also, customers have less excess cash as funds from government support programs related to the COVID-19 pandemic began to decline, as well as the resulting effects of higher costs related to inflation.

Uninsured Deposits

At March 31, 2024 and December 31, 2023, the Company had approximately $13.3 billion and $14.2 billion, respectively, in estimated uninsured deposits. The amounts above are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements issued by the FDIC for the FFIEC 041, also referred to as the Call Report.

Capital Resources

Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As of March 31, 2024, shareholders’ equity was $5.5 billion, an increase of $13.9 million, or 0.3%, from December 31, 2023.

The following table shows the changes in shareholders’ equity during 2024.

(Dollars in thousands)

The Company repurchased 100,000 shares, at an average price of $79.85 per share for a total of $8.0 million under the 2022 Stock Repurchase Plan during the first quarter of 2024. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, general business conditions, regulatory requirements, the market price of our common stock, and the availability of alternative investment opportunities. As of March 31, 2024, a total of 3,920,021 authorized shares remain available for repurchase.

Under current regulations, the Company and the Bank are subject to a minimum ratio of common equity Tier 1 capital (“CET1”) to risk-weighted assets of 4.5% and a minimum required ratio of Tier 1 capital to risk-weighted assets of 6%. The minimum required leverage ratio is 4%. The minimum required total capital to risk-weighted assets ratio is 8%. Refer to Note 16 — Capital Ratios for more information regarding Company and Bank’s regulatory capital compliance requirements.

In response to the COVID-19 pandemic in 2020, the federal banking agencies issued a final rule for additional transitional relief to regulatory capital related to the impact of the adoption of CECL. The Company chose the five-year transition method and is deferring the recognition of the effects from the adoption date and the CECL difference for the first two years of application. The modified CECL transitional amount was fixed as of December 31, 2021, and that amount began the three-year phase out in the first quarter of 2022 with 25% phased out in 2024. At March 31, 2024, approximately $15.3 million was added to Tier 1 capital at the Company and Bank as a result of the modified CECL transition. Had the Company elected not to apply the modified CECL transitional amount to its Tier 1 capital, the Company and Bank would have still been considered well capitalized as of March 31, 2024.

The well-capitalized minimums and the Company’s and the Bank’s regulatory capital ratios for the following periods are reflected below:

The Company’s and Bank’s Common equity Tier 1 risk-based capital, Tier 1 risk-based capital and total risk-based capital and Tier 1 leverage ratios all improved compared to December 31, 2023. All of these ratios mainly improved due to net income recognized during the first quarter of 2024 of $115.1 million. Tier 1 capital increased by 1.1% and 0.5% at both the Company and Bank, respectively, with the increase in equity from the net income recognized. Total risk-based capital increased by 1.1% and 0.7% at both the Company and Bank, respectively, with the increase in equity resulting from net income along with the increase in the allowance for credit losses and unfunded commitments includable in Tier 2 capital. Both regulatory risk-based assets and quarterly average assets remained reasonably flat compared to the fourth quarter with average assets for both the Company and Bank decreasing by 0.6% and risk-based assets decreasing by 0.6%. Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.

Liquidity

Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses. Liquidity risk is the risk that the Bank’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations. Our Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring policies designed to ensure acceptable composition of our asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. We have employed our funds in a manner to provide liquidity from both assets and liabilities sufficient to meet our cash needs.

The ALCO has established key risk indicators to monitor liquidity and interest rate risk. The key risk indicators are reviewed and approved by the ALCO on an annual basis. The liquidity key risk indicators include the loan to deposit ratio, net noncore funding dependence ratio, On-hand liquidity to total liabilities ratio, the percentage of securities pledged to total securities, and the ratio of brokered deposits to total deposits. As of March 31, 2024, the Company was operating within its liquidity policy limits.

Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally, changes in the earning asset mix are of a longer-term nature and are not used for day-to-day corporate liquidity needs.

Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase, interest-bearing deposits at other banks and other short-term borrowings. We engage in routine activities to retain deposits intended to enhance our liquidity position. These routine activities include various measures, such as the following:

• Emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with our Bank;
• Pricing deposits, including certificates of deposit, at rate levels that will attract and /or retain balances of deposits that will enhance our Bank’s asset/liability management and net interest margin requirements; and
• Continually working to identify and introduce new products that will attract customers or enhance our Bank’s appeal as a primary provider of financial services.

Our non-acquired loan portfolio increased by approximately $618.7 million, or approximately 9.4% annualized, compared to the balance at December 31, 2023. The increase from December 31, 2023 was mainly related to organic growth and renewals of acquired loans that are moved to our non-acquired loan portfolio. The acquired loan portfolio decreased by $339.9 million from the balance at December 31, 2023 through principal paydowns, charge-offs, foreclosures and renewals of acquired loans.

Our investment securities portfolio (excluding trading securities) decreased by $231.6 million compared to the balance at December 31, 2023. The decrease in investment securities from December 31, 2023 was a result of maturities, calls, sales and paydowns of investment securities totaling $227.8 million, a reduction from the net amortization of premiums of $4.8 million as well as decrease in the market value of the available for sale investment securities portfolio of $53.6 million. These decreases were partially offset by purchases of other investment securities totaling $54.6 million. There were no purchases of available for sale or held to maturity securities during the quarter. The purchases of other investment securities were related to capital stock with the Federal Home Loan Bank of which we sold back $59.4 million during the first quarter of 2024. The activity in the purchases and sales of the Federal Home Loan Bank Capital Stock was due to activity with FHLB borrowings during the year. The Bank pledges a portion of its investment portfolio for a variety of purposes, including, but not limited to, collateral for public funds and credit with the Federal Home Loan Bank of Atlanta. As of March 31, 2024, the bank pledged 39.5% of the market value of its investment portfolio. As of March 31, 2024, the Bank had unpledged securities with a market value of $4.0 billion. These securities included Treasury, Agency, Agency MBS, Municipals and Corporate securities.

Total cash and cash equivalents were $1.2 billion at March 31, 2024 as compared to $1.0 billion at December 31, 2023. Liquidity has tightened starting in 2023 with the rising rate environment and turmoil in the financial markets occurring in early 2023. Competition for in-market deposits has increased throughout 2023 and 2024 resulting in increases in deposit rates to retain local deposits. The Bank supplements its in-market deposits with brokered deposits. While the Bank has a policy limit for brokered time deposits of no more than 15% of total deposits, it has operated well below this policy limit. At March 31, 2024, the percentage of brokered time deposits to total deposits was 2.0% compared to 1.9% at December 31, 2023. During the first quarter of 2024, the Company also borrowed funds from the FHLB on a short-term basis; however, no FHLB advances were outstanding at March 31, 2024. The outstanding borrowings from the FHLB were $100.0 million at December 31, 2023. See below for further discussion around brokered deposits and FHLB borrowings.

Our ongoing philosophy is to remain in a liquid position, as reflected by such indicators as the composition of our earning assets, typically including some level of reverse repurchase agreements; federal funds sold; balances at the Federal Reserve Bank; and/or other short-term investments; asset quality; well-capitalized position; and profitable operating results. Cyclical and other economic trends and conditions can disrupt our desired liquidity position at any time. We expect that these conditions would generally be of a short-term nature. Under such circumstances, we expect our reverse repurchase agreements and federal funds sold positions, or balances at the Federal Reserve Bank, if any, to serve as the primary source of immediate liquidity. We could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks. The Bank may also access funds from borrowing facilities established with the Federal Home Loan Bank of Atlanta and the discount window of the Federal Reserve Bank of Atlanta.

Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from depositors located around our branch footprint, and we believe that we have attractive opportunities to capture additional retail and commercial deposits in our markets, in addition to having access to brokered deposits. Of the $37.2 billion in total deposits at March 31, 2024, approximately 70% were insured or collateralized. The Bank has a granular deposit base comprised of over 1.4 million accounts, with an average deposit size of $27,000. The top ten and twenty deposit relationships comprise approximately 2% and 4% of total deposits, and approximately 28% of total deposits are non-interest bearing. The Bank’s deposit beta, which represents the change in the Bank’s cost of deposits over the change in the federal funds target rate, during this cycle (from March 2022 through March 2024) is approximately 33%.

At March 31, 2024 and December 31, 2023, we had $728.8 million and $719.7 million of traditional, out–of–market brokered time deposits, respectively. At March 31, 2024 and December 31, 2023, we had $2.3 billion and $2.2 billion, respectively, of reciprocal brokered deposits. Total deposits were $37.2 billion at March 31, 2024, an increase of $129.5 million from $37.0 billion at December 31, 2023. This increase in deposits from December 31, 2023 was driven by an increase in money market accounts of $356.7 million, including $167.1 million in reciprocal insured money market deposits along with a $30.6 million increase in time deposits. These increases were partially offset by declines in noninterest-bearing deposits of $102.9 million, interest-bearing checking deposits of $80.0 million and savings deposits of $75.0 million. As customers moved funds from noninterest-bearing deposits, interest-bearing checking and savings accounts, seeking higher yields in the rising rate environment, the Company has seen an increase in its balance of higher yielding money market accounts and time deposits during the first quarter of 2024. The Company raised interest rates on most interest-bearing deposit products (in particular money market accounts and time deposit specials) due to competitive pressures to retain deposits.

Total short-term borrowings at March 31, 2024 were $554.7 million, consisting of $273.4 million in federal funds purchased and $281.3 million in securities sold under agreements to repurchase. Total long-term borrowing at March 31, 2024 were $391.8 million and consisted of trust preferred securities and subordinated debentures. To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to take in shorter maturities of such funds. Our current approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise.

In addition to deposits, we have other contingency funding sources available to the Bank. At March 31, 2024, our Bank had a total FHLB credit facility of $6.6 billion, with $2.9 million in FHLB letters of credit outstanding at quarter-end, leaving $6.6 billion in availability on the FHLB credit facility. In addition, our Bank had $1.8 billion of credit available at the Federal Reserve Bank’s discount window and total federal funds credit lines of $300.0 million with no balances outstanding at quarter-end. The Bank also has an internal limit on brokered deposits of 15% of total deposits which would allow capacity of $5.6 billion as of March 31, 2024. The Bank had $728.8 million of outstanding brokered deposits at the end of the quarter leaving $4.8 billion in available capacity. All of these resources provide $13.5 billion of additional funding for the Bank. In addition, the Bank has $3.1 billion in market value of unpledged securities at March 31, 2024 that can be pledged to obtain additional funds, if necessary. The Company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at March 31, 2024. We believe that our liquidity position continues to be adequate and readily available.

As discussed previously and presented below, the Bank maintains credit facilities with the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta. The table below compares Primary Funding Sources to uninsured deposits as of March 31, 2024.

(Dollars in millions)

In addition to adequate liquidity, the Company and Bank are considered well capitalized by all regulatory capital standards as the Company and the Bank were significantly above the required capital levels as of March 31, 2024. The Company’s tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 9.58%, 11.95% and 14.39%, respectively, at March 31, 2024. The Bank’s Tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 10.14%, 12.66% and 13.99%, respectively, at March 31, 2024. As permitted, we elected to exclude accumulated other comprehensive income related to available for sale securities from Tier 1, CET 1 and total risk-based capital; however, even if our unrealized losses as of March 31, 2024 in our available for sale and held to maturity investment portfolios were recognized by selling the portfolios for liquidity purposes, all else being equal, our regulatory capital ratios would remain well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers. In addition to commitments to extend credit, we also issue standby letters of credit, which are assurances to third parties that they will not suffer a loss if our customer fails to meet its contractual obligation to the third-party. Although our experience indicates that many of these standby letters of credit will expire unused, through our various sources of liquidity, we believe that we will have the resources to meet these obligations should the need arise.

Our contingency funding plan describes several potential stages based on stressed liquidity levels. Liquidity key risk indicators are reported to the Board of Directors on a quarterly basis. As noted previously, we maintain various wholesale sources of funding. If our deposit retention efforts were to be unsuccessful, we would use these alternative sources of funding. Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged. This could increase our cost of funds, impacting our net interest margin and net interest spread.

Asset-Liability Management and Market Risk Sensitivity

Our earnings and the economic value of equity vary in relation to the behavior of interest rates and the accompanying fluctuations in market prices of certain of our financial instruments. We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment.

Our interest rate risk principally consists of reprice, option, basis, and yield curve risk. Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepayment options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.

We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.

Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as the terms of contractual agreements, investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. The assumptions for loan prepayments, deposit decay, and nonstable deposit balances are derived from models that use historical bank data. These models are independently validated. Equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. Key simulation assumptions are subject to sensitivity analysis to assess the impact of assumption changes on earnings at risk and equity at risk. Model assumptions are reviewed by our Assumptions Committee. While the Bank is continuously refining its modeling methodology, the core principles of the methodology have remained stable over the past two years.

Earnings at risk is defined as the percentage change in net interest income due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons.

Equity at risk is defined as the percentage change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity. Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time.

The earnings simulation models consider our contractual agreements with regard to investments, loans, deposits, borrowings, and derivatives as well as a number of behavioral assumptions applied to certain assets and liabilities.

Mortgage banking derivatives used in the ordinary course of business consist of forward sales contracts and interest rate lock commitments on residential mortgage loans. These derivatives involve underlying items, such as interest rates, and are designed to mitigate risk. Derivatives are also used to hedge mortgage servicing rights. For additional information see Note 15 — Derivative Financial Instruments in the consolidated financial statements.

From time to time, we execute interest rate swaps to hedge some of our interest rate risks. Under these arrangements, the Company enters into a variable rate loan with a client in addition to a swap agreement. The swap agreement effectively converts the client’s variable rate loan into a fixed rate loan. The Company then enters into a matching swap agreement with a third-party dealer to offset its exposure on the customer swap. The Company may also execute interest rate swap agreements that are not specific to client loans. As of March 31, 2024, the Company had a series of short-term interest rate hedges to address monthly accrual mismatches related to the Company’s ARC program and its transition from LIBOR to SOFR after June 30, 2023. For additional information on these derivatives refer to Note 15 — Derivative Financial Instruments in the consolidated financial statements.

Our interest rate risk key indicators are applied to a static balance sheet using forward rates from the Moody’s Baseline Scenario. The Company will also use other rate forecasts, including, but not limited to, Moody’s Consensus Scenario. This Base Case Scenario assumes the maturity composition of asset and liability rollover volumes is modeled to approximately replicate current consolidated balance sheet characteristics throughout the simulation. These treatments are consistent with the Company’s goal of assessing current interest rate risk embedded in its current balance sheet. The Base Case Scenario assumes that maturing or repricing assets and liabilities are replaced at prices referencing forward rates derived from the selected rate forecast consistent with current balance sheet pricing characteristics. Key rate drivers are used to price assets and liabilities with sensitivity assumptions used to price non-maturity deposits. The sensitivity assumptions for the pricing of non-maturity deposits are subjected to sensitivity analysis no less frequently than on an annual basis.

Interest rate shocks are applied to the Base Case on an instantaneous basis. Our policy establishes the use of upward and downward interest rate shocks applied in 100 basis point increments through 400 basis points. We calculate smaller rate shocks as needed. At times, market conditions may result in assumed rate movements that will be deemphasized. For example, during a period of ultra-low interest rates, certain downward rate shocks may be impractical. The model simulation results produced from the Base Case Scenario and related instantaneous shocks for changes in net interest income and changes in the economic value of equity are referred to as the Core Scenario Analysis and constitute the policy key risk indicators for interest rate risk when compared to risk tolerances. As of March 31, 2024, the Company was operating within its interest rate key risk indicator policy limits.

During 2023 and the first quarter of 2024, the beta assumption applied to total deposits increased to reflect changes in deposit mix. From the beginning of the upward rate cycle, our deposit costs have increased from five basis points to one hundred and seventy-four basis points. During this period, the federal funds rate has increased 525 basis points. Accordingly, our cycle to date beta has been approximately 33%. Management recognizes the difficulty in using historical data to forecast deposit betas in the current environment. For internal purposes, and based on the deposit mix as of March 31, 2024, the total deposit beta assumption was 35.0%. For internal forecasting, management will apply overlays to certain assumptions to adjust for current market conditions rather than use assumptions modeled over longer periods of time.

The following interest rate risk metrics are derived from analysis using the Moody’s Baseline Scenario published in April 2024 as the Base Case Scenario. As of March 31, 2024, the earnings simulations indicated that the year 1 impact of an instantaneous 100 basis point parallel increase / decrease in rates would result in an estimated 1.1% increase (up 100) and 1.8% decrease (down 100) in net interest income.

We use Economic Value of Equity (“EVE”) analysis as an indicator of the extent to which the present value of our capital could change, given potential changes in interest rates. This measure also assumes a static balance sheet (Base Case Scenario) with rate shocks applied as described above. At March 31, 2024, the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 2.4% decrease and 0.7% increase, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 5.9% decrease and 0.4% decrease, respectively. The interest rate shock analysis results for EVE sensitivities are unusual as the benefits of repricing assets are mitigated by increasing deposit costs, and downward shocks are constrained on various balance sheet categories due to the inability to price products below floors or zero. This is particularly meaningful given the cost of deposits as of March 31, 2024.

The analysis below reflects a Base Case and shocked scenarios that assume a static balance sheet projection where volume is added to maintain balances consistent with current levels. Base Case assumes new and repricing volumes reference forward rates derived from the Moody’s Baseline rate forecast. Instantaneous, parallel, and sustained interest rate shocks are applied to the Base Case scenario over a one-year time horizon.

Deposit Concentrations

At March 31, 2024 and December 31, 2023, we have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our deposits concentrated within a single industry or group of related industries. We do not believe there are any material seasonal factors that would have a material adverse effect on us. The total deposit balances held by top 10 and 20 deposit holders were below 5% of the Company’s average total deposit balances at March 31, 2024. We do not have any foreign deposits.

Concentration of Credit Risk

Each category of earning assets has a certain degree of credit risk. We use various techniques to measure credit risk. Credit risk in the investment portfolio can be measured through bond ratings published by independent agencies. In the investment securities portfolio, the investments consist of U.S. government-sponsored entity securities, tax-free securities, or other securities having ratings of “AAA” to “Not Rated”. All securities, with the exception of those that are not rated, were rated by at least one of the nationally recognized statistical rating organizations. The credit risk of the loan portfolio can be measured by historical experience. We maintain our loan portfolio in accordance with credit policies that we have established. Although the Bank has a diversified loan portfolio, a substantial portion of our borrowers’ abilities to honor their contracts is dependent upon economic conditions within our geographic footprint and the surrounding regions.

We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25% of total Tier 1 capital plus regulatory adjusted allowance for credit losses of the Company, or $1.2 billion at March 31, 2024. Based on this criteria, we had eight such credit concentrations at March 31, 2024, including loans to lessors of nonresidential buildings (except mini-warehouses) of $6.1 billion, loans secured by owner occupied office buildings (including medical office buildings) of $1.9 billion, loans secured by owner occupied nonresidential buildings (excluding office buildings) of $1.8 billion, loans to lessors of residential buildings (investment properties and multi-family) of $2.5 billion, loans secured by 1st mortgage 1-4 family owner occupied residential property (including condos and home equity lines) of $9.0 billion, loans secured by jumbo (original loans greater than $548,250) of $2.5 billion, loans secured by business assets including accounts receivable, inventory and equipment of $2.2 billion and loans to consumers secured by non-real estate of $1.2 billion. The risk for these loans and for all loans is managed collectively through the use of credit underwriting practices developed and updated over time. The loss estimate for these loans is determined using our standard ACL methodology.

After the adoption of CECL in the first quarter of 2020, banking regulators established guidelines for calculating credit concentrations. Banking regulators set the guidelines for construction, land development and other land loans to total less than 100% of total Tier 1 capital less modified CECL transitional amount plus ACL (CDL concentration ratio) and for total commercial real estate loans (construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) to total less than 300% of total Tier 1 capital less modified CECL transitional amount plus ACL (CRE concentration ratio). Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total Tier 1 capital less modified CECL transitional amount plus ACL. At March 31, 2024 and December 31, 2023, the Bank’s CDL concentration ratio was 48.9% and 59.7%, respectively, and its CRE concentration ratio was 235.1% and 236.5%, respectively. As of March 31, 2024, the Bank was below the established regulatory guidelines. When a bank’s ratios are in excess of one or both of these loan concentration ratios guidelines, banking regulators generally require an increased level of monitoring in these lending areas by bank management. Therefore, we monitor these two ratios as part of our concentration management processes.

Reconciliation of GAAP to Non-GAAP

The return on average tangible equity is a non-GAAP financial measure that excludes the effect of the average balance of intangible assets and adds back the after-tax amortization of intangibles to GAAP basis net income. Management believes these non-GAAP financial measures provide additional information that is useful to investors in evaluating our performance and capital and may facilitate comparisons with other institutions in the banking industry as well as period-to-period comparisons. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, are not audited, and may not be comparable to other similarly titled financial measures used by other companies. Investors should not consider non-GAAP measures in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under GAAP.

(Dollars in thousands)

Cautionary Note Regarding Any 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 the acquisition of Atlantic Capital. 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, the following:

Risks relating to our Business and Business Strategy

• Economic downturn risk, potentially resulting in deterioration in the credit markets, inflation, greater than expected noninterest expenses, excessive loan losses and other negative consequences, which risks could be exacerbated by potential negative economic developments resulting from federal spending cuts and/or one or more federal budget-related impasses or actions;
• Risks related to the ability of the Company to pursue its strategic plans which depend upon certain growth goals in our lines of business;
• Risks relating to the ability to retain our culture and attract and retain qualified people, which could be exacerbated by the continuing work from remote environment;
• Credit risks associated with an obligor’s failure to meet the terms of any contract with the Bank or otherwise fail to perform as agreed under the terms of any loan-related document;
• Interest rate risk primarily resulting from our inability to effectively manage the risk, and their impact on the Bank’s earnings, including from the correspondent and mortgage divisions, housing demand, the market value of the Bank’s loan and securities portfolios, and the market value of SouthState’s equity;
• A decrease in our net interest income due to the interest rate environment;
• Liquidity risk affecting the Bank’s ability to meet its obligations when they come due;
• Unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;
• Potential deterioration in real estate values;
• The loss of value of our investment portfolio could negatively impact market perceptions of us and could lead to deposit withdrawals;
• Price risk focusing on changes in market factors that may affect the value of traded instruments in “mark-to-market” portfolios;
• Transaction risk arising from problems with service or product delivery;
• The impact of increasing digitization of the banking industry and movement of customers to on-line platforms, and the possible impact on the Bank’s results of operations, customer base, expenses, suppliers and operations;
• Controls and procedures risk, including the potential failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures;
• Strategic risk resulting from adverse business decisions or improper implementation of business decisions;
• Reputation risk that adversely affects earnings or capital arising from negative public opinion including the effects of social media on market perceptions of us and banks generally;
• Cybersecurity risk related to the dependence of SouthState on internal computer systems and the technology of outside service providers, as well as the potential impacts of internal or external security breaches, which may subject the Company to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;
• Reputational and operational risks associated with environment, social and governance (ESG) matters, including the impact of recently passed state legislation and proposed federal and state regulatory guidance and regulation relating to climate change;
• Excessive loan losses;
• Reputational risk and possible higher than estimated reduced revenue from previously announced or proposed regulatory changes in the Bank’s consumer programs and products;
• Operational, technological, cultural, regulatory, legal, credit and other risks associated with the exploration, consummation and integration of potential future acquisitions, whether involving stock or cash consideration; and
• Geopolitical risk from terrorist activities and armed conflicts that may result in economic and supply disruptions, and loss of market and consumer confidence.

Risks relating to the Regulatory Environment

• Compliance risk involving risk to earnings or capital resulting from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards, and contractual obligations regarding data privacy and cybersecurity; and
• Regulatory change risk resulting from new laws, rules, regulations, accounting principles, proscribed practices or ethical standards, including, without limitation, the possibility that regulatory agencies may require higher levels of capital above the current regulatory-mandated minimums and including the impact of special FDIC assessments, the Consumer Financial Protection Bureau regulations or other guidance, and the possibility of changes in accounting standards, policies, principles and practices.

Risks relating to our Common Stock

• The risks of fluctuations in market prices for SouthState common stock that may or may not reflect economic condition or performance of SouthState;
• The payment of dividends on SouthState common stock, which is subject to legal and regulatory limitations as well as the discretion of the board of directors of SouthState, SouthState’s performance and other factors; and
• Ownership dilution risk associated with potential acquisitions in which SouthState’s stock may be issued as consideration for an acquired company.

Risks relating to Economic Conditions and Other Outside Forces

• Volatility in the financial services industry (including failures or rumors of failures of other depository institutions), along with actions taken by governmental agencies to address such turmoil, could affect the ability of depository institutions, including us, to attract and retain depositors and to borrow or raise capital;
• The impact of competition with other financial institutions, including deposit and loan pricing pressures and the resulting impact, including as a result of compression to net interest margin; and
• Catastrophic events such as hurricanes, tornados, earthquakes, floods or other natural or human disasters, including public health crises and infectious disease outbreaks, as well as any government actions in response to such events, and the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on SouthState and its customers and other constituencies.

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.

There have been no material changes in our quantitative and qualitative disclosures about market risk as of March 31, 2024 from those disclosures presented in our Annual Report on Form 10-K for the year ended 2023.

Evaluation of Disclosure Controls and Procedures

SouthState’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of SouthState’s disclosure controls and procedures as of March 31, 2024, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that SouthState’s disclosure controls and procedures as of March 31, 2024, were effective to provide reasonable assurance regarding our control objectives.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended March 31, 2024, that has materially affected, or is likely to materially affect, our internal control over financial reporting.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2. of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2023.