SouthState Bank Corp: Form 10-Q for the period ended Sep 30, 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 and nine months ended September 30, 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|DuncanWilliams Securities Corp. (“SouthState|DuncanWilliams”), 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. SSB First Street Corporation, an investment subsidiary of the Bank headquartered in Wilmington, Delaware, holds 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 September 30, 2024, we had approximately $46.1 billion in assets and 5,144 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 (i) its capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees, income generated from the purchase of government guaranteed loans and sale of pooled loans, and consulting fees for services related to these activities, and (ii) 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 also operate Corporate Billing, a transaction-based division of the Bank headquartered in Decatur, Alabama, that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide.

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 three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, and also analyzes our financial condition as of September 30, 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.

Recent Events

Independent Bank Group, Inc. (“Independent”) Proposed Merger

On May 20, 2024, SouthState and Independent announced that the two companies had entered into an Agreement and Plan of Merger dated May 17, 2024 (“Merger Agreement”), which provides that upon the terms and subject to the conditions set forth in the Merger Agreement, Independent will merge with and into SouthState, with SouthState continuing as the surviving corporation in the merger. Immediately following the merger, Independent’s wholly-owned banking subsidiary, Independent Bank, will merge with and into the Bank, which will continue as the surviving bank in the bank merger. The Merger Agreement was approved by the Boards of Directors of the Company and Independent by the unanimous vote of directors present at the applicable meetings and the shareholders of each of SouthState and Independent. The Merger Agreement is still subject to regulatory approvals and other customary closing conditions.

Under the terms of the Merger Agreement, shareholders of Independent will receive 0.60 shares of SouthState’s common stock for each share of Independent common stock they own. The transaction is expected to close during the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of required statutory approvals. At September 30, 2024, Independent reported $18.6 billion in total assets, $14.3 billion in loans and $16.0 billion in deposits.

OCC Merger Policy Statement

The OCC adopted a final rule amending its procedures for reviewing applications under the Bank Merger Act (“BMA”) and adding a policy statement on the OCC’s substantive approach to evaluating bank mergers under the BMA. The policy statement outlines the general principles the OCC will apply when reviewing bank merger applications and clarifies how the OCC would consider the statutory factors under the BMA. The policy statement identifies certain indicators that are more likely to withstand scrutiny and be approved expeditiously and those that would raise supervisory or regulatory concerns. Indicators generally consistent with timely approval, include, among others, appropriate capital and supervisory ratings, lack of enforcement or fair lending actions, lack of significant CRA or consumer compliance concerns or significant adverse effect on competition, and that the resulting institution would have total assets less than $50 billion. The final rule becomes effective on January 1, 2025. The Company is assessing the rule and its possible impact on the Company’s strategy.

CFPB Open Banking Rule

In October 2024, the CFPB finalized a rule to implement Section 1033 of the Dodd-Frank Act, which would require certain entities, including the Company and the Bank, to, among other things, make available to a consumer, upon request, information in its control or possession concerning the consumer financial product or service that the consumer obtained from that entity. In general, the rule also requires, among other things, data providers holding a consumer account, such as the Bank, to establish a developer interface satisfying certain data security specifications and other standards, through which the data provider can receive requests for, and provide, specific types of data covered by the rule in electronic, usable form to authorized third parties, including data aggregators. Under the rule, data providers are prohibited from, among other things, charging consumers or third parties fees for processing these consumer data requests. The rule also places certain data security, authorization and other obligations on third parties accessing covered data from data providers, which could include the Company and the Bank when acting in certain capacities. The rule requires third parties to limit their collection, use, and retention of the data received to only what is reasonably necessary to provide the consumers’ requested product or service. The compliance date for a depository institution data provider that holds at least $10 billion in total assets but less than $250 billion in total assets is April 1, 2027; however, the final rule is subject to ongoing litigation that could impact whether and when the Company and the Bank are required to comply with the rule. We continue to evaluate the final rule and the potential impacts on the Company and the Bank.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with 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.

The following is a summary of our allowance for credit losses (“ACL”) critical accounting policy, which is highly dependent on estimates, assumptions and judgments.

Allowance for Credit Losses (ACL)

The ACL reflects management’s estimate of the portion of the amortized cost of loans and unfunded commitments that it does not expect to collect. Management has a methodology determining its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded on the balance sheet reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. See Note 2—Summary of Significant Accounting Policies for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 7—Allowance for Credit Losses and “Allowance for Credit Losses (ACL) on Loans and Certain Off-Balance-Sheet Credit Exposures” in this MD&A.

One of the most significant judgments influencing the ACL is the macroeconomic forecasts from the third-party service provider. Changes in the economic forecasts may significantly affect the estimated credit losses which may potentially lead to materially different quantitatively modeled allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables, it is difficult to estimate the impact of a change in any one individual variable on the ACL. SouthState uses a third-party service provider to support the economic forecast assumptions under CECL forecast by providing various levels of economic scenarios. These scenarios are weighted in accordance with management assessment of scenarios as well as expectations of the general market and industry conditions. To illustrate the sensitivity of these scenarios, if a 100% probability weighting was applied to the adverse scenario rather than using the probability-weighted three scenario approach, this would result in an increase in the ACL by approximately $206.9 million (all other things equal, including no compensating adjustments to qualitative factor adjustments). Conversely, if a 100% probability weighting was applied to the upside scenario, this would result in a decrease in the ACL by approximately $95.8 million. The adverse scenario includes assumptions including, but not limited to, elevated interest rates weakening consumers and public confidence, inflation, the conflict in the Middle East leading to a wider war, tensions between China and Taiwan interrupt trade, political risks, increased unemployment and the U.S. economy falling into recession in 2024. Conversely, the upside scenario includes assumptions such as a swift resolution of international conflicts, stabilization of consumer confidence, more than full employment, reduced political tensions, and other favorable assumptions. This sensitivity analysis and related impact on the ACL is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at September 30, 2024.

Results of Operations

Overview

We reported consolidated net income of $143.2 million, or diluted earnings per share (“EPS”) of $1.86, for the third quarter of 2024 as compared to consolidated net income of $124.1 million, or diluted EPS of $1.62, in the comparable period of 2023, a 15.3% increase in consolidated net income and a 14.8% increase in diluted EPS. During the nine months ended September 30, 2024, we reported consolidated net income of $390.6 million, or diluted EPS of $5.09, as compared to consolidated net income of $387.5 million, or diluted EPS of $5.07, in the comparable period of 2023, a 0.8% increase in consolidated net income and a 0.4% increase in diluted EPS. The $19.0 million increase in consolidated net income for the third quarter of 2024 compared to the same period of 2023 was the net result of the following items:

• A $43.7 million increase in interest income, resulting from a $50.3 million increase in interest income from loans and loans held for sale partially offset by a $2.2 million decrease in interest income from investment securities, and a $4.4 million 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 of 34 basis points as loans continued to reprice higher from the comparatively higher rate environment in 2022 and in 2023. The Federal Reserve Bank decreased its federal funds rate by 50 basis points for the first time since early 2022, however, the rate cut took place in mid-September 2024. The increase in interest income in loans was also due to an increase in the average balance of $1.7 billion mainly through organic growth of loans held for investment. The decline in interest income from investment securities and federal funds sold, securities purchased under agreement to resell and interest-bearing deposits was mainly due to the decline in average balance of $550.1 million and $262.9 million, respectively;
• A $47.6 million increase in interest expense, which mainly resulted from a $44.0 million increase in interest expense from deposits, a $1.4 million increase in interest expense in federal funds purchased and securities sold under agreements to repurchase, and $2.2 million increase in interest in other borrowings. The increase in interest expense from deposits resulted from an increase in costs due to deposits repricing in the higher interest rate environment along with growth in higher costing money market and time deposits since the third quarter of 2023. The average cost of deposits, excluding noninterest-bearing deposits, increased by 55 basis points compared to the third quarter of 2023;
• A $39.7 million decrease in the provision for credit losses, as the Company released provision for credit losses of ($7.0) million in the third quarter of 2024 while recording a provision for credit losses of $32.7 million in the third quarter of 2023. During the third quarter of 2024, we released provision for credit losses mainly due to a decline in unfunded commitments leading to a release of provision of $(8.7) million. The provision for credit losses also declined due to lower net loan growth in the third quarter of 2024 compared to the same period in 2023 as well as improvement in economic forecasts with inflation falling and interest rates beginning to decline in the third quarter of 2024;
• A $2.1 million increase in noninterest income due to an increase in trust and investment services income of $2.0 million, an increase in bank owned life insurance of $1.2 million, and an increase in fees on deposit accounts of $1.1 million. These increases were offset by a decline in correspondent banking and capital market income of $3.0 million. See Noninterest Income section on page 57 for further discussion;
• An $8.6 million increase in noninterest expense, which resulted primarily from an increase in salaries and employee benefits of $4.7 million, in merger, branch consolidation, severance related and other expense of $3.1 million, and an information services expense of $1.9 million. These increases were partially offset by declines in FDIC assessment and other regulatory charges of $1.2 million, and amortization of intangibles of $1.3 million. See Noninterest Expense section on page 59 for further discussion; and
• Higher income tax provision of $10.2 million due to higher pretax book income between the two quarters. The Company recorded pretax book income of $186.5 million in the third quarter of 2024 compared to pretax book income of $157.3 million in the third quarter of 2023. The increase was also due to 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 $3.6 million during the third 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 third quarter in 2024 compared to the same period in 2023. Our effective tax rate was 23.24% for the three months ended September 30, 2024, compared to 21.08% for the three months ended September 30, 2023. See Income Tax Expense section on page 60 for further discussion.

Our quarterly efficiency ratio increased to 56.6% in the third quarter of 2024 compared to 54.0% in the third quarter of 2023. The increase in the efficiency ratio compared to the third quarter of 2023 was the result of a 0.5% 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 32.8% increase in interest expense as the repricing of interest-bearing liabilities caught up with the repricing of interest-earning assets in 2023 and 2024 resulting from the rising rate environment. The increase in noninterest expense was reflective of a 3.2% increase in salaries and employee benefits, an 8.6% increase in information services expense, and a 1,914.6% increase in merger and branch consolidation related expense mostly related to the proposed merger with Independent.

Basic and diluted EPS were $1.88 and $1.86, respectively, for the third quarter of 2024, compared to $1.63 and $1.62, respectively, for the third quarter of 2023. The increase in basic and diluted EPS was due to a 15.3% increase in net income in the third quarter of 2024 compared to the same period in 2023. The effects from the increase in net income were partially offset by an increase in average basic common shares of 0.2%. The increase in net income in the third quarter of 2024 was mainly attributable to a decrease in provision for credit losses during the third quarter of 2024.

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 September 30, 2024, the return on average assets increased compared to the same period in 2023. This increase was primarily due to the increase in net income of $19.0 million, or 15.3%, which was mainly attributable to a decline in the provision for credit losses due to lower new loan growth in the third quarter of 2024 compared to the same period in 2023, a decline in unfunded commitments, as well as improvement in economic forecasts with inflation falling and interest rates beginning to decline in the third quarter of 2024. The effects on the return on average assets from the increase in net income were partially offset by an increase in average assets of 1.7% for the three months ended September 30, 2024, from the same period in 2023 mainly due to an increase in average loans of $1.6 billion through organic growth. For the nine months ended September 30, 2024, the return on average assets declined slightly as average assets increased 1.8% while net income only increased 0.8% compared to the same period in 2023.
• For the three months ended September 30, 2024, the return on average equity increased compared to the same period in 2023. This increase was primarily due to higher net income of 15.3% partially offset by the effects from an increase in average equity of 7.9%. The increase in net income was mainly attributable to lower provision for credit losses. For the nine months ended September 30, 2024, the return on average equity decreased due to a 6.5% increase in average equity or $343.8 million while net income only increased 0.8% or $3.1 million. The increase in average equity was due to net income earned and a reduction in accumulated other comprehensive loss.
• For the three months ended September 30, 2024, the return on average tangible equity increased compared to the same period in 2023. This increase was due to the increase in net income adjusted for amortization of intangibles of 13.8%, or $17.9 million, being greater than the increase in average tangible equity of 13.4%, or $443.5 million. For the nine months ended September 30, 2024, the return on average tangible equity decreased due to lower net income adjusted for amortization of intangibles of $333,000, or 0.1% along with an increase in average tangible equity of $369.4 million, or 11.4%.
• The equity to assets ratios was 12.81% for the quarter ended September 30, 2024, an increase of 1.18% from September 30, 2023. This increase resulted from the effects of the net income earned during the last twelve months being greater than the increase in total assets of 2.4% from September 30, 2023.
• Dividend payout ratios were 28.76% and 30.82% for the three and nine month periods ending September 30, 2024, respectively, and 31.84% and 29.78% for the three and nine month periods ending September 30, 2023, respectively. The decrease in the dividend payout ratio for the three months period ending September 30, 2024, was due to the 15.3% increase in net income being greater than the increase in dividends paid during the current quarter of 4.2% compared to the same period in 2023. The dividend payout ratio for the nine months period ending September 30, 2024, increased due to a net income increase of 0.8% compared to an increase in total dividends paid of 4.3% when compared to the same period in 2023.

Net Interest Income and Margin

Non-Tax Equivalent (“TE”) net interest income decreased $3.9 million, or 1.1%, to $351.5 million in the third quarter of 2024 compared to $355.4 million in the same period in 2023. Interest-earning assets averaged $41.2 billion during the three months period ended September 30, 2024, compared to $40.4 billion for the same period in 2023, an increase of $847.6 million, or 2.1%. Interest-bearing liabilities averaged $28.1 billion during the three months period ended September 30, 2024, compared to $26.5 billion for the same period in 2023, an increase of $1.5 billion, or 5.7%. Non-TE net interest income decreased $52.7 million, or 4.8%, to $1.0 billion in the nine months ended September 30, 2024, compared to $1.1 billion in the same period in 2023. Interest-earning assets averaged $41.0 billion during the nine months ended September 30, 2024, compared to $40.0 billion during the same period in 2023. Interest-bearing liabilities averaged $27.8 billion during the nine months ended September 30, 2024, compared to $25.7 billion for the same period in 2023, an increase of $2.0 billion, or 7.9%.

The Federal Reserve implemented a 50 basis-point rate cut in mid-September 2024, following a series of rate hikes that began in March 2022, resulting in a target range of 4.75% to 5.00% at September 30, 2024. As the rate reduction occurred toward the end of the third quarter of 2024, the Company operated in a comparatively higher rate environment for majority of the three and nine months ended September 30, 2024, while it operated under a comparatively lower rate environment in the same time periods in 2023. Some key highlights are outlined below:

• Both the non-TE and TE net interest margin decreased by 10 basis points in the third quarter of 2024 compared to the same quarter of 2023 due to the increase in the cost of interest-bearing liabilities of 56 basis points outweighing the increase in the yield on interest earning assets of 33 basis points. The increase in the cost of interest-bearing liabilities lagged the increase in yield on interest-earning assets during the rising interest rate cycle prior to the recent rate cut and has caught up in the latter half of 2023 and into 2024.
• Non-TE yield on interest-earning assets for the third quarter of 2024 increased 33 basis points to 5.25% 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 loans held for sale, as the Federal Reserve Bank interest rate hikes during 2023 and a majority of the first nine months of 2024 continue to impact these rates. Yields on loans held for sale increased due to new Small Business Administration (“SBA”) loan purchases that generally earn higher yields compared to mortgage loans. The interest rate impact, in combination with the increases in the average balance of the higher yielding loan held for investment portfolio of $1.6 billion, and the decline in the average balances of lower yielding investment securities of $550.1 million, affected the overall yield increase between the comparable periods.
• The average cost of interest-bearing liabilities for the third quarter of 2024 increased 56 basis points from the same period in 2023. This increase was driven by the effects from the relatively higher rate environment on the repricing of all deposit accounts, federal funds purchased, securities purchased with agreement to repurchase, and trust preferred corporate debt. The average cost of interest-bearing deposits increased 55 basis points as the cost increase occurred across all deposit categories as a result of the comparatively higher rate environment and a change in the deposit mix. Our deposits have shifted from lower-costing savings and transaction accounts to higher-costing money market accounts as the customers have sought higher yields during the current rate environment. The average balance of transaction deposit accounts decreased by $502.4 million, and savings accounts decreased by $391.4 million, while average balance of money market account increased by $2.1 billion for the third quarter of 2024 compared to the same period in 2023. The average cost of federal funds purchased and securities sold with agreements to repurchase increased by 92 basis points and 71 basis points, respectively, while the average cost of corporate and subordinated debentures increased by 1 basis point. Other borrowings, consisting of FHLB advances had an average cost of 3.78% during the third quarter of 2024 compared to 5.50% for the compared period in 2023. Our overall cost of funds, including noninterest-bearing deposits, was 1.99% for the three months ended September 30, 2024, compared to 1.52% for the three months ended September 30, 2023.

The tables below summarize the analysis of changes in interest income and interest expense for the three and nine months ended September 30, 2024, and 2023 and net interest margin on a tax equivalent basis:

(Dollars in thousands)

(Dollars in thousands)

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

Investment Securities

The interest earned on investment securities decreased by $2.2 million and $7.4 million, respectively, in the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023. The average balance of investment securities decreased $550.1 million and $693.5 million, respectively, for the three and nine months ended September 30, 2024, from the comparable periods in 2023. The yield on the investment securities increased 6 basis points and 9 basis points, respectively, during the three and nine months ended September 30, 2024, compared to the same periods in 2023 due to the rising rate environment. While the Bank reduced the size of its investment securities portfolio, the yield on the investment securities increased as the Company reinvested cash flows from securities in a higher interest rates environment in the three and nine months ended September 30, 2024, compared to the same periods in 2023, resulting in a higher yield in 2024.

Loans

Interest earned on loans held for investment increased $48.1 million to $491.4 million and increased $176.7 million to $1.4 billion, respectively, during the three and nine months ended September 30, 2024, from the comparable periods in 2023. Interest earned on loans held for investment included loan accretion income recognized during the three and nine months ended September 30, 2024, and 2023 of $2.9 million, $11.5 million, $4.1 million and $16.9 million, respectively, a decrease of $1.2 million and $5.4 million, respectively. Some key highlights for the quarter ended September 30, 2024, are outlined below:

• Our non-TE yield on total loans increased 33 basis points in the third quarter of 2024 compared to the same period in 2023 due to a 43 basis-point increase in the yield on the non-acquired loan portfolio and a 2 basis-point increase in the yield on the acquired loan portfolio.
• The yield on the acquired loan portfolio increased slightly from 6.15% in the third quarter of 2023 to 6.17% in the same period in 2024, while interest income on the acquired loan portfolio declined by $20.6 million during the same period.
• The interest income on acquired loans decreased by $20.6 million, due to a $1.3 billion decrease in average balance during the third 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 2 basis points.
• The yield on the non-acquired loan portfolio increased 43 basis points to 5.80% in the third quarter of 2024 compared to 5.37% in the same period in 2023. Interest income on the non-acquired loan portfolio increased $68.7 million during the same period.
• The increases in both yield and interest income on non-acquired loans were attributable to both an increase in the average loan balance of $2.9 billion during the third quarter of 2024 compared to the same period in 2023, primarily through organic loan growth and renewals of acquired loans that are moved to our non-acquired loan portfolio, along with a higher yield of 43 basis points due to the higher rate environment.

Interest-Bearing Liabilities

The quarter-to-date average balance of interest-bearing liabilities increased by $1.5 billion, or 5.7%, in the third quarter of 2024 compared to the same period in 2023. The cost of interest-bearing liabilities increased by 56 basis points to 2.73% and the overall cost of funds, including demand deposits, increased by 47 basis points to 1.99% in the third quarter of 2024, compared to the same period in 2023. Some key highlights for the quarter ended September 30, 2024, compared to the same period in 2023 include:

• The cost of interest-bearing deposits was 2.63% for the third quarter of 2024 compared to 2.08% for the same period in 2023.
• Interest expense on interest-bearing deposits increased by $44.0 million in the third quarter of 2024 compared to the same period in 2023 primarily due to interest expense on transaction and money market accounts and certificate and other time deposits increased. Interest expense on transaction and money market accounts and certificates and other time deposits increased by $36.1 million and $7.9 million, respectively, while interest expense on savings declined by $26,000. 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 second quarter of 2023. The increase in the cost of interest-bearing deposits lagged the increase in the yield on interest-earning assets during this higher interest rate cycle and has caught up in the latter half of 2023 and into the first half of 2024.
• The average balance of interest-bearing deposits increased by $1.3 billion, primarily due to a $1.6 billion average balance increase of transaction and money market accounts and a $75.6 million average balance increase of certificates and other time deposits, which drove up interest expense. The increase in the average balance of transaction and money market accounts was partially offset by a decrease in the average saving deposits of $391.4 million.
• The cost of federal funds purchased increased 22 basis points while the average balance increased $67.9 million in the third quarter of 2024, which drove the $1.1 million increase in interest expense compared to the same period in 2023.
• The cost of repurchase agreements was 2.34% for the third quarter of 2024 compared to 1.52% for the same period in 2023. The effects from the increase in the cost of repurchase agreements, partially offset by the effects from a decline in the average balance of $45.2 million, drove the increase in the interest expense of $356,000 during the third quarter of 2024 compared to the same period in 2023.
• The cost on the corporate and subordinated debt remained flat increasing only by 1 basis point to 6.10% for the three months ended September 30, 2024, compared to the same period in 2023, while the average balance decreased by $373,000. Interest expense from corporate and subordinated debentures decreased by $7,000 during the third quarter of 2024 compared to the same period in 2023 due to the decrease in average balance.
• The cost of other borrowings, consisting of FHLB advances, for the three months ended September 30, 2024, was 5.57% and interest expense was $3.1 million compared to 5.50% and $889,000 during the third quarter of 2023. The increase in interest expense was due to an increase in the average balance of other borrowings of $155.4 million to $219.6 million during the third quarter of 2024 compared to $64.1 million during the same period in 2023. The Company used FHLB advances in 2024 to provide additional liquidity as the competition for deposits increased during the year.

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 $0.9 billion, or 8.4%, to $10.4 billion in the third quarter of 2024 compared to $11.4 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 interest bearing checking accounts such as money market and time deposits, seeking higher yields.

Noninterest Income

Noninterest income provides us with additional revenues that are significant sources of income. For the three months ended September 30, 2024, and 2023, noninterest income comprised 17.6%, and 17.0%, respectively, of total net interest income and noninterest income. For the nine months ended September 30, 2024, and 2023, noninterest income comprised 17.5%, and 16.8%, respectively, of total net interest income and noninterest income.

(Dollars in thousands)

Noninterest income increased slightly by $2.1 million, or 2.9%, during the third 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 $1.1 million, or 4.7%, during the current quarter compared to the same period of the prior year. The increase was mainly attributable to a $973,000 increase in overdraft fees in the third quarter of 2024 compared to the same period in 2023.
• Trust and investment services income for the third quarter of 2024 increased by $2.0 million, or 21.2%, from the third quarter of 2023, as assets under management have increased by $1.5 billion, or 19.8%.
• Correspondent banking and capital markets income in the third quarter of 2024 decreased by $3.0 million, or 23.4%, compared to the same quarter 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 third quarter of 2024 compared to the third quarter of 2023 resulting from the comparatively higher interest rate environment in 2024. The decline was offset by a $4.4 million decrease in the expense attributable to the variation margin payments for centrally cleared swaps where we recorded an expense of $7.5 million related to variation margin payments in the third quarter of 2024 compared to an expense of $11.9 million in the third quarter of 2023.
• Bank owned life insurance income increased $1.2 million, or 17.6%, during the third quarter of 2024 compared to the same period in 2023. This increase was primarily due to higher death proceeds on BOLI policies received during the third quarter of 2024 compared to the same period in 2023.

Noninterest income increased by $300,000, or 0.1%, during the nine months ended September 30, 2024, compared to the same period in 2023. This year-to-date change in total noninterest income resulted from the following:

• Service charges on deposit accounts were higher in 2024 by $3.7 million, or 5.7%, compared to 2023. The increase was mainly attributable to a $3.0 million increase in overdraft fees and a $849,000 increase in service charge account maintenance fees in 2024 compared to 2023.
• Debit, prepaid, ATM and merchant card related income was higher by $1.4 million, or 4.7%, in 2024 compared to 2023. The increase in debit, ATM, prepaid and merchant card related income was primarily due to lower card and ATM system related expense of $1.1 million.
• Mortgage banking income increased by $4.1 million, or 36.8%, in 2024 compared to 2023, which comprised of a $4.8 million, or 69.2%, increase in secondary market mortgage income and a decrease of $694,000, or 16.4%, in mortgage servicing related income. Mortgage production declined from $1.8 billion in the first nine months of 2023 to $1.5 billion in the first nine months of 2024 with relatively higher mortgage rates continuing during 2024, however we allocated a higher percentage of mortgage production to the secondary market in 2024 compared to 2023 from 38% to 57%.
• Mortgage income from the secondary market increased by $4.8 million between the comparable periods resulting from a $3.3 million increase in the gain on sale of mortgage loans, which is net of the commission expense related to mortgage production, a $740,000 increase in the fair value of loans held for sale, the change in fair value of the pipeline of $434,000, and a $337,000 increase in the fair value of MBS forward trades. Mortgage commission expense was $8.7 million in 2024 compared to $6.5 million in 2023.
• The decrease in mortgage servicing related income, net of the hedge, in 2024 was due to a $876,000 decrease in the change in fair value of the MSR including decay, offset by a $182,000 increase in service fee income. The decrease in fair value of the MSR between the comparable periods was primarily due to a decrease in the change in fair value from interest rates of $4.8 million and a $179,000 decline in MSR decay, offset by a $4.1 million increase from gains/losses on the MSR hedge.
• Correspondent banking and capital markets income for 2024 decreased by $26.6 million, or 58.3%, compared to 2023. The decline was primarily related to a decrease of $24.1 million in income generated from the sale of customer swap ARC hedges in 2024 compared to 2023 resulting from the comparatively higher interest rate environment in 2024. The decline was also due to fixed income revenue being lower by $981,000 in 2024 compared to 2023. In addition, the expense attributable to the variation margin payments for centrally cleared swaps increased where we recorded an expense of $29.2 million related to variation margin payments in the 2024 compared to an expense of $28.8 million in 2023.
• SBA income increased by $2.6 million, or 26.5% in 2024 compared to 2023. The increase was primarily attributable to an increase in gains on sale of SBA loans of $2.1 million due to an increase in the balances of loans sold of 21% in 2024.
• Other income increased by $9.0 million, or 93.1%, in 2024 compared to 2023. This increase was due to approximately $5.2 million in income recognized on federal tax refunds received during the second quarter of 2024 for net operating loss carrybacks filed in 2021, the Bank recognizing approximately $3.0 million in credits from an external vendor in 2024, and approximately $876,000 resulting from the release of accrued expense attributable to UTPs. Income from VISA merchant sponsorship program, in which the Bank earns fees by aiding merchants in processing transactions through VISA, also increased $651,000.

Noninterest Expense

(Dollars in thousands)

Noninterest expense increased by $8.6 million, or 3.6%, in the third quarter of 2024 as compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:

• Salaries and employee benefits increased $4.7 million, or 3.2%, in the third quarter of 2024 compared to the same period in 2023. The increase was primarily driven by higher employee benefit costs of $7.0 million, resulting from higher Supplemental Executive Retirement Plans (“SERP”) related expense. The lower SERP costs in the third quarter of 2023 was associated with prior year’s annual SERP liability adjustment due to increases in interest rates. In addition, salaries increased approximately $1.2 million resulting from merit increases. These increases were partially offset by a decrease in commissions of $2.3 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. Incentive expense also declined by $1.2 million during 2024.
• Information services expense increased $1.9 million, or 8.6%, in the third quarter of 2024 compared to the same period in 2023. The increase was due to additional costs associated with the Company updating systems and expenses associated with transferring, managing, and processing data as it grows in size and complexity.
• Amortization of intangibles, which is related to the Company’s prior mergers, decreased $1.3 million, or 19.5%.
• FDIC assessment and other regulatory charges decreased $1.2 million, or 13.3%, in the third quarter of 2024 compared to the same period in 2023. The decrease was primarily attributed to a lower assessment rate, reflecting the Bank’s strengthened capital position year-over-year.
• Merger, branch consolidation and severance related expense increased $3.1 million in the third quarter of 2024 compared to the same period in 2023. Of the $3.1 million increase in 2024, approximately $1.8 million pertains to costs associated with the previously announced acquisition of Independent and $1.3 million in the restructuring costs.

Noninterest expense increased by $23.5 million, or 3.3%, during the nine months ended September 30, 2024, compared to the same period in 2023. The categories and explanations for the fluctuations year-to-date, except the items discussed below, are similar to the ones noted above in the quarterly comparison.

• Occupancy expense increased $1.3 million, or 2.0%. The increase was primarily due to increases in branch maintenance and repair and lease related expenses.
• OREO and loan related expense increased to $2.5 million, or 325.9%, in 2024 compared to the same period in 2023. The increase was primarily due to a $1.5 million increase in Special Assets Management (“SAM”) related expenses including legal, tax and other costs and a $1.2 million increase in losses from the sales of OREO and other repossessed assets.
• The Company accrued a total of $4.5 million in 2024 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 Bank increased its accrual of the FDIC special assessment during the first and second quarter of 2024 based upon estimates of losses provided by the FDIC.
• Merger, branch consolidation and severance related expense increased by $2.2 million, or 19.5%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase was primarily due to approximately $8.0 million increase in one-time costs associated with the cybersecurity incident, along with approximately $1.8 million increase in merger costs. These increases were offset by a decrease in restructuring costs of $7.7 million.
• Other noninterest expense decreased $2.6 million, or 4.8% in 2024 compared to the same period in 2023. This decrease was primarily driven by a $6.3 million reduction due to the amortization of LIHTCs being recorded in income tax expense, effective January 1, 2024, following the adoption of ASU 2023-02, a $2.3 million decrease in donations, a $2.2 million decrease in miscellaneous expense which was mainly related to a release in accrued expense for an uncertain tax position (“UTP”) of $2.0 million in the second quarter of 2024, and a $1.9 million decrease in other operational expenses. These decreases were offset by a $10.8 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 23.24% for the three months ended September 30, 2024, compared to 21.08% for the three months ended September 30, 2023. The increase in the effective rate for the quarter, when compared to the same period in the prior year, is driven primarily by amortization of LIHTCs now being recorded as part of income tax expense as a result of the adoption of the proportional amortization under ASU 2023-02 effective January 1, 2024, as well as an increase in pre-tax book income and a decrease in disallowed interest expense. This was partially offset by a decrease in disallowed FDIC premiums and an increase in non-deductible merger expenses recorded during the current period.

Our effective tax rate for the first nine months of the year was 23.84% compared to 21.60% for the first nine months of 2023. The increase in the year-to-date effective tax rate compared to the same period of 2023 was primarily driven by amortization of LIHTC investments, an increase in pre-tax book income, a decrease in federal tax credits available in the current period, partially offset by a decrease in disallowed executive compensation and a decrease in disallowed interest expense. In addition, the Company recorded approximately $2.8 million in income tax provision during the first quarter of 2024 related to the revaluation of its deferred income taxes and other tax adjustments.

Analysis of Financial Condition

Summary

Our total assets increased approximately $1.2 billion, or 2.6%, from December 31, 2023, to September 30, 2024, to approximately $46.1 billion. Within total assets, cash and cash equivalents increased by $213.8 million, or 21.4% and net loans increased $1.1 billion, or 3.6%, while investment securities decreased $386.7 million, or 5.2%, during the period. Within total liabilities, deposits grew $589.3 million, or 1.6%, and federal funds purchased and securities sold under agreements to repurchase increased by $49.1 million, or 10.0%. Total borrowings increased by $199.7 million, or 40.6%. Total shareholder’s equity increased $371.5 million, or 6.7%. The increase in cash and cash equivalents was primarily due to the increase in deposits of $589.3 million, and other borrowings of $199.7 million along with the decline in investments of $386.7 million resulting from maturities and pay downs of mortgage-backed securities. The increase in deposits was mainly attributable to an increase in money market accounts and certificate of deposits. The increase in borrowings was due to a net increase in FHLB advances of $200.0 million compared to December 31, 2023. The increases in funding sources were mostly offset by the increase in loans of $1.2 billion, which was due to normal organic growth. Our loan to deposit ratio was 89% and 87% at September 30, 2024 and December 31, 2023, respectively, while our percentage of noninterest-bearing deposit accounts to total deposits was 28% and 29%, respectively at September 30, 2024, and December 31, 2023.

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 to 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 September 30, 2024, investment securities totaled $7.1 billion, compared to $7.5 billion at December 31, 2023, a decrease of $386.7 million, or 5.2%. At September 30, 2024, approximately 64.5% of the investment portfolio was classified as available for sale, approximately 32.5% was classified as held to maturity and approximately 3.0% was classified as other investments. During the nine months ended September 30, 2024, we purchased $140.1 million of capital stock of the Federal Home Loan Bank of Atlanta classified as other investment securities on the balance sheet of which we sold back $130.6 million. The net increase to the capital stock holding for the Federal Home Loan Bank of Atlanta of $9.5 million during the nine months of 2024 was due to the increase in Federal Home Loan Bank borrowings. During the nine months ended September 30, 2024, the Bank purchased $60.7 million of available for sale securities. There were maturities, paydowns, and calls of investment securities totaling $589.1 million during the nine months ended September 30, 2024. Net amortization of premiums was $14.6 million during the nine months ended September 30, 2024.

At September 30, 2024, the unrealized net losses of the available for sale securities portfolio was $639.8 million, or 12.3%, below its amortized cost basis, compared to an unrealized net loss of $776.6 million, or 14.0%, at December 31, 2023. At September 30, 2024, the unrealized net loss of the held to maturity securities portfolio was $337.6 million, or 14.7%, below its amortized cost basis, compared to an unrealized net loss of $402.7 million, or 16.2%, at December 31, 2023.

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 September 30, 2024, we had 1,204 investment securities including both available for sale and held to maturity, in an unrealized loss position, which totaled $980.6 million. 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 decreased, while the total dollar amount of the unrealized loss decreased by $200.6 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. The reduction in the unrealized losses in the third quarter of 2024 was due to the Federal Reserve Bank dropping interest rates by 50 basis points during the quarter and the expectation that further rate cuts could come in the fourth quarter of 2024 and into 2025.

All investment securities in an unrealized loss position as of September 30, 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 more likely than not that we will not 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 5 — 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 September 30, 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.”

Approximately 85.2% 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 14.4% 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.

The Company did not sell any securities that are available for sale or held to maturity during the nine months ended September 30, 2024. As of September 30, 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 September 30, 2024, we determined that there was no impairment on our other investment securities. As of September 30, 2024, other investment securities represented approximately $211.5 million, or 0.46% of total assets, and primarily consists of FHLB and FRB stock which totals $182.6 million, or 0.40% of total assets. There were no gains or losses on the sales of these securities for three and nine months ended September 30, 2024, and 2023, respectively.

Trading Securities

We have a trading portfolio associated with our Correspondent Banking Division and the Bank’s subsidiary, SouthState|DuncanWilliams. 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 $87.1 million and $31.3 million, respectively, at September 30, 2024, and December 31, 2023.

Loans Held for Sale

The balance of loans held for sale increased $236.2 million from December 31, 2023, to $287.0 million on September 30, 2024. Loans held for sale at September 30, 2024 consisted of mortgage and SBA loans held for sale. At December 31, 2023 loans held for sale consisted only of mortgage loans held for sale.

During the third quarter of 2024, the Company began purchasing the guaranteed portions of SBA loans from third-party originators with the intent to aggregate the guaranteed portion of the SBA loans into pools with similar characteristics to create a security representing an interest in those pools through the SBA’s fiscal transfer agent. SBA loans held for sale totaled $222.1 million at September 30, 2024. See Note – 20 – SBA Loans Held for Sale for more information. This new activity in SBA loans held for sale was the main reason for the significant increase in loans held for sale during the current period.

Mortgage loans held for sale totaled $64.9 million at September 30, 2024, an increase from $50.9 million at December 31, 2023. Total mortgage production was $506 million in the third quarter of 2024. This compares to $552 million in the second quarter of 2024 and $521 million in the third quarter of 2023. Mortgage production has remained flat in 2024 as mortgage rates have continued to remain high and housing inventory has remained low. The percentage of mortgage production sold into the secondary market decreased slightly in the third quarter of 2024 to 58% from 59% in the second quarter of 2024 but increased from 47% in the third 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 loans held for sale), increased by $1.2 billion, or 4.8% annualized, to $33.5 billion at September 30, 2024. Our non-acquired loan portfolio increased by $2.2 billion, or 11.1% annualized, mainly driven by organic growth. Commercial non-owner-occupied loans, commercial and industrial loans, consumer owner-occupied loans, commercial owner-occupied real estate, and home equity loans led the way with $1.0 billion, $637.0 million, $605.5 million, $270.2 million and $154.6 million in year-to-date loan growth, respectively, or 21.7%, 18.5%, 13.6%, 9.0% and 18.1% annualized growth, respectively. The acquired loan portfolio decreased by $1.0 billion, or 23.4% 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 owner-occupied loans and commercial and industrial loans, which decreased by $362.6 million, $223.2 million and $210.4 million, respectively, year-to-date. Acquired loans as a percentage of total loans decreased to 14.5% and non-acquired loans as a percentage of the overall portfolio increased to 85.5% at September 30, 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.

Total commercial non-owner-occupied loans of $9.2 billion, approximately 27.6% of the total loans held for investment, was the largest category of the loan portfolio as of September 30, 2024. As of September 30, 2024, approximately 95% of the commercial non-owner-occupied portfolio was located within the Company’s footprint. Of the $9.2 billion, approximately $1.3 billion, or 4% of the total loans, represented our office segment. Approximately 95% of the office segment was located in the Company’s footprint and approximately 10% was located within the metropolitan or central business district. The weighted average Debt Service Coverage (“DSC”) was 1.62x and the loan-to-value was 57%. For additional discussion around classified commercial non-owner-occupied loans, refer to the “Nonperforming Assets” section in this MD&A.

The following table presents the top eight loan segments of the commercial non-owner-occupied loan category (excluding loans held for sale). The loan segments in the table below are determined by the call code, used for the Bank’s regulatory reporting requirements issued by the FDIC for the FFIEC 041, also referred to as the Call Report.

(Dollars in thousands)

(1) Net book balance in each segment that represents 2% or more of commercial non-owner-occupied portfolio as of September 30, 2024.

(2) Weighted average DSC information from the Company’s December 31, 2023 stress test using commitment balances, totaling approximately $6.2 billion. The Weighted average DSC information excludes loans below $1.5 million, unless part of a larger relationship.

(3) Weighted-average Loan-to-Value as of September 30, 2024.

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 an eight-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 September 30, 2024, as well as the prior quarter, management selected a baseline weighting of 40%, a 30% weighting for an upside scenario and a 30% weighting for the more severe scenario. The scenario weightings were unchanged from the prior quarter. Scenario weightings are generally expected to remain stable but are reviewed on a quarterly basis. The scenario weightings reflect continued recognition of downside risks in the economic forecast from persistent levels of inflation, high interest rates, and tightening credit conditions conducive of a mild recession. While employment figures still show resilience and actual loan losses remain at low levels, continued projected borrower weakness related to high interest rates, uncertainty, and lingering chances of an economic downturn continue to moderate optimism in the path of the forecast and kept expected losses mostly flat. A decrease in unfunded commitments primarily in commercial construction drove a provision release of approximately $7.0 million during the third 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 September 30, 2024, the balance of the ACL was $468.0 million or 1.39% of total loans. The ACL decreased $4.3 million from the balance of $472.3 million recorded at June 30, 2024. This decrease during the third quarter of 2024 included $1.8 million in provision for credit losses and $6.1 million in net charge-offs. During the nine months ended September 30, 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.

As discussed in Note 1 - Summary of Significant Accounting Policies, in the second quarter of 2024, updates were made to certain estimates used in the Company’s current expected credit loss model. While the total allowance and coverage of total loans remain the same, reserves at the loan segment level were updated due the expansion of macroeconomic variables. Although portions of the allowance may be allocated to specific loans or pools of loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

At September 30, 2024, the Company had a reserve on unfunded commitments of $41.5 million, which was recorded as a liability on the Consolidated Balance Sheet, compared to $50.3 million at June 30, 2024, and $56.3 million at December 31, 2023. During the three and nine months ended September 30, 2024, the Company recorded a decrease in the reserve for unfunded commitments of $8.7 million and $14.8 million, respectively. For the prior comparative period, the Company recorded a decrease in the reserve for unfunded commitments of $1.1 million and $4.9 million, respectively, during three and nine months ended September 30, 2023. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financial asset during the nine months ended September 30, 2024.

The ACL provides 2.47 times coverage of nonperforming loans at September 30, 2024. Net charge-offs to total average loans during three and nine months ended September 30, 2024, were 0.07% and 0.05%, respectively, compared to net charge-offs to total average loans of 0.16% and 0.08%, respectively, during the three and nine months ended September 30, 2023. We continued to experience solid and stable asset quality numbers and ratios as of September 30, 2024.

The following table provides the allocation, by segment, for expected credit losses as of September 30, 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 three and nine months ended September 30, 2024, and 2023:

(Dollars in thousands)

(Dollars in thousands)

The following tables present summary of ACL for the three and nine months ended September 30, 2024, and 2023:

(Dollars in thousands)

(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 premises held for sale of $5.2 million, $6.1 million, $9.0 million, $9.0 million, and $11.8 million as of September 30, 2024, June 30, 2024, March 31, 2024, December 31, 2023, and September 30, 2023, respectively, that is now separately disclosed on the balance sheet.

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

Total nonperforming assets were $191.0 million, or 0.57% of total loans and repossessed assets, at September 30, 2024, an increase of $6.8 million, or 3.7%, from December 31, 2023. Total nonperforming loans were $189.3 million, or 0.56%, of total loans, at September 30, 2024, an increase of $6.5 million, or 3.6%, from December 31, 2023. Non-acquired nonperforming loans decreased by $3.6 million from December 31, 2023. The decrease in non-acquired nonperforming loans was driven primarily by a decrease in commercial nonaccrual loans of $22.2 million, a decrease in accruing loans past due 90 days or more of $4.4 million, offset by an increase in consumer nonaccrual loans of $13.2 million and restructured nonaccrual loans of $9.8 million. The accruing loans past due 90 days or more decreased by $4.4 million at September 30, 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. The increase in restructured nonaccrual loans of $9.8 million was primarily due to two commercial loans that were modified under a term extension agreement. Acquired nonperforming loans increased $10.2 million from December 31, 2023. The increase in the acquired nonperforming loan balances was due primarily to an increase in commercial nonaccrual loans of $4.7 million, an increase in restructured nonaccrual loans of $5.7 million, an increase in consumer nonaccrual loans of $600,000, offset by a decline in accruing loans past due 90 days or more of $800,000.

As discussed previously under the “Loans” section in this MD&A, commercial non-owner-occupied loans represented the largest category of the loan portfolio as of September 30, 2024. We continued to experience solid and stable asset quality for these loans as of September 30, 2024, as approximately 0.2% of the total commercial non-owner-occupied loans were on non-accrual. In addition, approximately 5.1% and 2.6% of the total commercial non-owner-occupied loans were classified as substandard and still accruing, and special mention, respectively. The majority of these classified assets are mainly related to debt service coverage policy violations as interest rates have risen. However, most of these loans are still performing, are strongly collateralized and have strong borrowers supporting the loans. For additional information on the Company’s monitoring process for classified loans and a description of the general characteristics of the risk grades, refer to Note 6 — Loans in this Quarterly Report on Form 10-Q.

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 $862.0 million, or 4.4% annualized, to $27.3 billion at September 30, 2024, from $26.4 billion at December 31, 2023. This increase mainly driven by growth in money market accounts of $1.1 billion, including $174.3 million in reciprocal insured money market deposits and time deposits of $404.7 million. This increase was partially offset by declines in interest-bearing checking accounts of $428.4 million and savings deposits of $189.6 million. Customers continue to move funds from lower yielding deposit products seeking higher yields in money market accounts and time deposits. Federal funds purchased related to the Correspondent Banking Division and securities sold under agreements to repurchase were $538.3 million at September 30, 2024, a $49.1 million increase from December 31, 2023. Other borrowings, consisting of FHLB borrowings, increased to $300.0 million at September 30, 2024 from $100.0 million at December 31, 2023. Corporate and subordinated debentures declined by $278,000 to $391.7 million. Some key highlights are outlined below:

• As noted above, the Company’s higher costing money market accounts and time deposits increased during the first nine months 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 $1.3 billion to $26.9 billion for the quarter ended September 30, 2024, compared to the same period in 2023. For more information on the composition of our total deposits, see Note 9 – Deposits.
• Other borrowings, consisting of FHLB borrowings, increased $200.0 million to $300.0 million at September 30, 2024, from $100.0 million at December 31, 2023. The Company borrowed additional FHLB borrowings in the first nine months of 2024 to provide additional liquidity.

Noninterest-Bearing Deposits

Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds. At September 30, 2024, the period end balance of noninterest-bearing deposits of $10.4 billion declined slightly compared to the balance at December 31, 2023 of $10.6 billion. Average noninterest-bearing deposits were $10.4 billion for the third quarter of 2024 compared to $11.4 billion for the third quarter of 2023. This decrease in the average noninterest bearing deposits from the quarter ended September 30, 2023, was mainly due to customers seeking higher yields in the comparatively higher rate environment. Also, customers have less excess cash as funds from government support programs related to the COVID-19 pandemic have declined, as well as the resulting effects of higher costs related to inflation.

Uninsured Deposits

At September 30, 2024, and December 31, 2023, the Company had approximately $13.9 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 September 30, 2024, shareholders’ equity was $5.9 billion, an increase of $371.5 million, or 6.7%, from December 31, 2023.

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

(Dollars in thousands)

The Company did not repurchase any shares under the 2022 Stock Repurchase Plan in the third or second quarter of 2024. 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 September 30, 2024, a total of 3,920,021 authorized shares remains 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 17 — 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 September 30, 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 September 30, 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 nine months ended September 30, 2024 of $390.6 million. Tier 1 capital increased by 6.5% and 6.3% at both the Company and Bank, respectively, with the increase in equity from the net income recognized. Total risk-based capital increased by 5.8% and 6.1% 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 of 2023 with average assets for both the Company and Bank increasing by 0.6% and risk-based assets increasing by 1.2%. 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 September 30, 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.

Overall, total loans increased $1.2 billion, or 4.8% annualized in first nine months of 2024. Our non-acquired loan portfolio increased by approximately $2.2 billion, or approximately 11.1% annualized, compared to the balance at December 31, 2023. The increase from December 31, 2023 was mainly related to organic growth and renewals on acquired loans that are moved to our non-acquired loan portfolio. The acquired loan portfolio decreased by $1.0 billion from the balance on December 31, 2023, through principal paydowns, charge-offs, foreclosures and renewals of acquired loans.

Our investment securities portfolio (excluding trading securities) decreased by approximately $386.7 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 $719.7 million and a reduction from the net amortization of premiums of $14.6 million. This decrease was partially offset by an increase in the market value of the available for sale investment securities portfolio of $136.8 million and purchases of investment securities of $200.8 million. Purchases of available for sale investment securities and other investment securities totaled $60.7 million and $140.2 million, respectively. There were no purchases of held to maturity securities during 2024. The purchases of other investment securities were related to capital stock with the Federal Home Loan Bank of which we sold back $130.6 million during 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 September 30, 2024, the bank pledged 41.5% of the market value of its available-for-sale and held-to-maturity investment portfolios. As of September 30, 2024, the Bank had unpledged securities with a market value of $3.8 billion. These securities included Treasury, Agency, Agency MBS, Municipals and Corporate securities.

Total cash and cash equivalents were $1.2 billion at September 30, 2024, as compared to $1.0 billion at December 31, 2023. Liquidity 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 September 30, 2024, the percentage of brokered time deposits to total deposits was 2.8% compared to 1.9% at December 31, 2023. During the third quarter of 2024, the Company also borrowed funds from the FHLB on a short-term basis of $300.0 million. 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 $37.6 billion in total deposits at September 30, 2024, approximately 69% 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, respectively, and approximately 28% of total deposits are non-interest bearing.

At September 30, 2024, and December 31, 2023, we had $1.1 billion and $719.7 million of traditional, out–of–market brokered time deposits, respectively. At September 30, 2024, and December 31, 2023, we had $2.4 billion and $2.2 billion, respectively, of reciprocal deposits. Total deposits were $37.6 billion at September 30, 2024, an increase of $589.3 million from $37.0 billion at December 31, 2023. This change in deposits from December 31, 2023, was driven by an increase in money market accounts of $1.1 billion, including $174.3 million in reciprocal insured money market deposits and in time deposits of $404.7 million. This increase was partially offset by declines in interest-bearing checking accounts of $428.4 million and savings deposits of $189.6 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 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 September 30, 2024, were $538.3 million, consisting of $290.4 million in federal funds purchased and $247.9 million in securities sold under agreements to repurchase. The Company also held $300.0 million in short term daily rate FHLB advances at September 30, 2024. Total long-term borrowing at September 30, 2024, were $391.6 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 primary contingency funding sources available to the Bank. At September 30, 2024, our Bank had a total FHLB credit facility of $6.5 billion, with $300.0 million in FHLB advance outstanding and $2.9 million in FHLB letters of credit outstanding at quarter-end, leaving $6.2 billion in availability on the FHLB credit facility. In addition, our Bank had $1.7 billion of credit available at the Federal Reserve Bank’s discount window and had $2.9 billion in market value of unpledged securities at September 30, 2024, that can be pledged to obtain additional funds, if necessary. All of these resources provide $12.0 billion of additional funding for the Bank.

As discussed previously and presented below, the table below compares Primary Funding Sources to uninsured deposits as of September 30, 2024.

(Dollars in millions)

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 September 30, 2024. The Bank had $1.1 billion of outstanding brokered deposits at the end of the quarter leaving $4.6 billion in available capacity. The Bank has federal funds credit lines of $275.0 million with no balances outstanding at quarter-end and the holding company has a $100.0 million unsecured line of credit with U.S. Bank National Association with no balance outstanding at September 30, 2024. We believe that our liquidity position continues to be adequate and readily available.

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 September 30, 2024. The Company’s tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 9.98%, 12.49% and 14.85%, respectively, at September 30, 2024. The Bank’s Tier 1 leverage ratio, CET 1 risk-based capital ratio and total risk-based capital ratio were 10.59%, 13.27% and 14.54%, respectively, at September 30, 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 September 30, 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.

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 for several 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 16 — 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 September 30, 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 16 — 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 September 30, 2024, the Company was operating within its interest rate key risk indicator policy limits.

During 2023 and for the nine months ended September 30, 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 ninety basis points. During this period, the federal funds rate has increased 525 basis points. Accordingly, our cycle to date beta has been approximately 36%. 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 September 30, 2024, the total deposit beta assumption was 36.7%. 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 October 2024 as the Base Case Scenario. As of September 30, 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 1.2% increase (up 100) and 1.9% 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 September 30, 2024, the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 2.1% decrease and 1.2% increase, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 5.1% decrease and 0.7% decrease, respectively. 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 September 30, 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

As of September 30, 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 ten and 20 deposit holders were below 5% of the Company’s average total deposit balances at September 30, 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 September 30, 2024. Based on this criteria, we had seven such credit concentrations at September 30, 2024, including loans to lessors of nonresidential buildings (except mini-warehouses) of $5.7 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 $2.8 billion, loans secured by 1st mortgage 1-4 family owner-occupied residential property (including condos and home equity lines) of $9.5 billion, loans secured by jumbo (original loans greater than $548,250) of $2.7 billion, and loans secured by business assets including accounts receivable, inventory and equipment of $2.9 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 September 30, 2024, and December 31, 2023, the Bank’s CDL concentration ratio was 47.4% and 59.7%, respectively, and its CRE concentration ratio was 227.1% and 236.5%, respectively. As of September 30, 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 proposed acquisition of Independent. 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;
• Risks related to the proposed acquisition of Independent, including:
• the possibility that the merger does not close when expected or at all because required regulatory or other approvals and other conditions are not received or satisfied on a timely basis;
• the occurrence of any event, charge or other circumstances which could give rise to the termination of the Merger Agreement;
• potential difficulty in maintaining relationships with clients, employees, or business partners as a result of the proposed acquisition of Independent;
• the amount of the costs, fees, expenses, and charges related to the merger;
• problems arising from the integration of the two companies, including the risk that integration will be materially delayed or will be more costly or difficult than expected; and
• the failure to realize cost savings and any revenue synergies from, and to limit liabilities associated with, the merger during the expected time game;
• Deposit attrition, client loss or revenue loss following completed mergers or acquisitions that may be greater than anticipated;
• 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 the impact of special FDIC assessments, the Consumer Financial Protection Bureau regulations or other guidance, changes in policies and standards for regulatory review of bank mergers, and the possibility of changes in accounting standards, policies, principles and practices.

Risks relating to our Common Stock

• Ownership dilution risk associated with potential mergers and acquisitions in which SouthState’s stock may be issued as consideration for an acquired company;
• The risks of fluctuations in market prices for SouthState common stock that may or may not reflect economic condition or performance of SouthState; and
• 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.

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 September 30, 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 September 30, 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 September 30, 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 September 30, 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.

The Company is providing this additional risk factor to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023.

We may face risks with respect to future expansion, including our proposed acquisition of Independent.

Our business growth, profitability and market share have been enhanced by us engaging in strategic mergers and acquisitions and de novo branching either within or contiguous to our existing footprint. We have entered into a Merger Agreement with Independent, and we may acquire other financial institutions or parts of those institutions in the future and engage in additional de novo branching. We may also consider and enter into or acquire new lines of business or offer new products or services. As part of our acquisition strategy, we seek companies that are culturally similar to us, have experienced management and are in markets in which we operate or close to those markets so we can achieve economies of scale. We also may receive future inquiries and have discussions with potential acquirers of us or potential companies in which we may engage in a so-called “merger of equals.” Acquisitions and mergers, including our proposed acquisition of Independent, involve a number of risks, including:

• the time and costs associated with identifying and evaluating potential acquisitions and merger partners;
• inaccurate estimates and judgments regarding credit, operations, management and market risks of the target institution;
• the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
• our ability to receive regulatory approvals on the timeline and terms that are acceptable to us;
• the adverse consequences (including applicable termination fees and negative reactions from the financial markets and our customers and employees) we may experience if a merger is terminated under certain circumstances;
• the business uncertainties and contractual restrictions while a merger is pending;
• the limitation on our ability to pursue alternative acquisitions and mergers and the hinderance of other companies’ interest in trying to acquire us;
• our potential inability to satisfy certain conditions to the merger;
• our ability to finance an acquisition and possible dilution to our existing shareholders;
• potential deposit attrition, higher than expected costs, customer loss and business disruption associated with merger and acquisition integration, including, without limitation, and potential difficulties in maintaining relationships with key personnel;
• our ability to manage the expanded business and operations post-merger;
• the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;
• entry into new markets where we lack experience;
• the strain of growth on our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures;
• exposure to potential asset quality issues with acquired institutions;
• the introduction of new products and services into our business;
• the possibility of unknown or contingent liabilities;
• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;
• the risk of loss of key employees and customers; and
• fluctuations in the market price of SouthState common stock pre- and post-merger.

We also face litigation risks with respect to potential mergers and acquisitions, and such litigation is common.

We expect to continue to evaluate merger and acquisition opportunities that are presented to us in our current and expected markets and conduct due diligence related to those opportunities, as well as negotiate to acquire or merge with other institutions. If we announce a transaction, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions. As a result, holders of our common stock may have a reduced ownership and voting interest in the Company after a transaction and may exercise less influence over management.

We also may issue debt to finance one or more transactions, including subordinated debt issuances. Generally, acquisitions of financial institution involve the payment of a premium over book and market values, resulting in dilution of our book value and fully diluted earnings per share, as well as dilution to our existing shareholders. We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There is no assurance that, following any future mergers or acquisitions, including our proposed acquisition of Independent, that our integration efforts will be successful or our Company, after giving effect to the acquisition, will achieve increased revenues comparable to or better than our historical experience, and failure to realize such expected revenue increases, cost savings, increases in market presence or other benefits could have a material adverse effect on our financial conditions and results of operations.

We may not be able to successfully integrate Independent or to realize the anticipated benefits of the merger with Independent.

We entered into a Merger Agreement with Independent on May 17, 2024. If the proposed acquisition of Independent is completed, we will also integrate the systems and operations of Independent.

A successful integration of Independent’s operations with our operations so that the Company operates as one entity depends substantially on our ability to successfully consolidate operations, management teams, corporate cultures, systems and procedures and to eliminate redundancies and costs. While we have substantial experience in successfully integrating institutions we have acquired, we may encounter difficulties during integration, such as:

• the loss of key employees and customers;
• the disruption of operations and businesses;
• inability to maintain and increase competitive presence;
• loan, deposit, and revenue attrition;
• inconsistencies in standards, control procedures and policies;
• unexpected issues with costs, operations, personnel, and technology; and
• problems with the assimilation of new operations, sites or personnel.

Integration activities could divert resources from regular operations. In addition, general market and economic conditions, governmental actions, natural and human disasters or other international or domestic calamities affecting the financial industry generally may inhibit the Company’s successful integration of these Independent. In connection with the proposed acquisition of Independent, we will assume Independent’s outstanding debt obligations, and the surviving corporation’s level of indebtedness following the completion of the merger could adversely affect the Company’s ability to raise additional capital and to meet its obligations under existing indebtedness.

In addition, we have proposed to acquire Independent with the expectation that this merger will result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened and expanded market position for the combined company, technology efficiencies, cost savings and operating efficiencies. Achieving the anticipated benefits of these mergers is subject to a number of uncertainties, including whether we integrate the institution in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in a reduction in the price of our shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy and could materially and adversely affect the Company’s financial condition, results of operations, business and prospects.