Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the SouthState Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn today’s call over to the Chief Financial Officer, Mr. Will Matthews. Sir, please go ahead.
William Matthews: Good morning, and welcome to SouthState’s Second Quarter 2023 Earnings Call. This is Will Matthews, and I’m here with John Corbett, Steve Young and Jeremy Lucas. John and I will provide some brief prepared remarks, and then we’ll open it up for questions. As always, a copy of our earnings release and presentation slides are on our Investor Relations website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect us. Now I’ll turn the call over to John Corbett, our CEO.
John Corbett: Thank you, Will. Good morning, everyone. Thanks for joining us. When we had our last earnings call in April, the banking industry was still in the fog of war. Three months later, the fog is starting to clear. Liquidity is stabilizing. The new regulatory framework is coming into focus and SouthState is in a position of relative strength for the next phase of the cycle. We’re pleased to report that for the first half of 2023, PPNR per share grew by 34% compared to the first half of last year. And so far this year, loan and deposit growth has been slightly better than our guidance. You’ll recall that for 2023, we plan to keep deposits flat and for loans to grow at a mid-single-digit pace. We projected that loan growth would be faster in the first half of the year a little slower in the back half of the year.
We’re now at the halfway point for 2023 and deposits are up 2%, and loans have grown at a 9% annualized pace. So balance sheet growth is on track. Our geographic business model has proven to be a competitive advantage for deposit pricing. Our regional presidents have done a superb job of efficiently using exception authority to protect our core relationships while effectively managing deposit costs. And it helps that SouthState has the lowest average deposit size of our peer group at $25,000 per account. And that granularity translates to stability. The long-term value of a bank is on the right side of the balance sheet and our granular and relationship-based deposit funding has resulted in a cumulative deposit beta of just 22% this cycle and we’re pleased to have had 6% growth in customer deposits in the second quarter.
Credit metrics are starting to normalize, but charge-offs remain very low. In the last year, we conservatively set aside $142 million in loan loss reserves to cover only $4 million in charge-offs. The result is bolstered our reserve, including unfunded loans by 30 basis points from 1.26% a year ago to a current allowance for credit losses over 1.5% at 1.56%. We believe the strength of our reserves and our capital base will give us an extra level of optionality as we enter the next phase of the cycle. The Southeast has proven to be the winner and it should continue to be the winner in a post-pandemic economy. Population growth and job growth are remarkably strong, and that’s driving real estate values and new home construction. SouthState operates in four of the six fastest growing states in the country.
And with the recent announcements of several new multibillion-dollar electric vehicle plants and battery plants and with tourism fully recovered, we see the momentum in the Southeast extending well beyond this decade. We don’t have a crystal ball, and we don’t know the ramifications of the Fed’s policies as hard as we try, but we are firm believers that granular and relationship-based deposit funding. Disciplined underwriting in high-growth markets and an entrepreneurial team of bankers is the recipe for success. Regardless of the Fed’s interest rate policies. And with that, I’ll flip it back to Will to walk you through the details of the quarter.
William Matthews: Thank you, John. I’ll go through a few details -- but I think a high-level summary of the quarter is that we put up a solid PPNR, though our NIM compressed a bit to 3.62%. Our deposit costs were in line with where we expected them to fall we had forecasted an increase of 45 to 50 basis points, and they moved up 48 basis points from Q1 to 111. We had solid growth in both loans and deposits though we expect our loan growth to slow down in the back half of the year. Our non-interest income performed well, exceeding our expectations. And conversely expenses were a little higher than expected, largely due to some items that are not expected to recur. On the balance sheet, our 11% annualized loan growth brings our first half growth rate to 9%.
As I said, we expect this to moderate for the final two quarters of the year. Deposits grew at a solid 3.6% annualized rate or 6% if you exclude the approximately $210 million in brokered CD maturities we didn’t replace. Like others, we continue to see a mixed shift in our deposits from DDA into money market accounts and CDs. DDAs represent 31% of our total deposits at quarter end, down from 34% last quarter. Pre-pandemic this figure was 28% to 29%, so we appear to be moving toward pre-pandemic levels of DDA as a percentage of deposits. Turning to the income statement. Our 362 NIM was down 31 basis points from Q1. Loan yields were up 15 basis points, but deposits were up 48 basis points bringing our cycle-to-date deposit beta to 22%. Our net interest income of $362 million was approximately equal to what we reported for the 2022 third quarter.
Non-interest income was up $6 million to $77 million, the best quarter we’ve had since last year’s second quarter. It was led by correspondent, which had $19 million in revenue after $8 million in interest expense on swap collateral for $27 million in gross revenue. This continues to be a difficult environment for fixed income, but our interest rate swap business had a very good quarter. Mortgage and wealth had solid quarters similar to Q1 levels. And deposit fees recovered to levels we saw in Q4. As I said, expenses came in higher than expected this quarter. A few factors impacting the quarter’s NIE. Compensation expense was up $3 million, around half of which was higher commission expense. We recorded a $1.5 million expense accrual for litigation and we recorded an adjustment for our FDIC assessment during the quarter to reflect the new assessment rate effective this year.
Our quarterly run rate going forward for FDIC insurance expense should be approximately $7 million in any special assessment and excluding other regulatory charges. Those two non-recurring items, the litigation accrual and the FDIC adjustment, along with the higher commission expense totaled around $5 million. Looking ahead, our team’s annual merit increases are effective July 1, subject to some variations in expense categories impacted by noninterest income and performance. We expect operating NIE in the next couple of quarters to be in the low to mid-240s. With respect to credit, we continue to build loan loss reserves in the face of a possible recession, with $38 million in provision expense against only $3 million in net charge-offs. Over the last four quarters, we’ve averaged one basis point in net charge-offs or a total of $4 million, while recording $142 million in provision expense for a $138 million build in total reserves in one year.
This brings our total reserve to just shy of $0.5 billion and 156 basis points of loans, up 30 basis points from a year ago. We knew the historically low levels of NPAs and criticized and classified loans we’ve enjoyed the last few quarters were not sustainable. We saw those metrics tick up a bit in Q2, though they remain at very moderate levels. I’ll note that almost 60% of our non-performing loans are current on payments. Like last quarter, we included in presentations some additional credit information on areas of interest. We continue to have very strong capital ratios with CE Tier 1 above 11% or 9.4% if AOCI were included in the calculation. Our TCE ratio improved slightly to 7.6%, with capital retention slightly offset by a higher AOCI impact versus Q1 due to increases in interest rates.
As I noted, we expect to see slower loan growth in the next couple of quarters so risk-weighted asset growth should be lower than what we experienced in the second quarter. With our solid capital position and our capital formation rate, we expect to continue to build and retain capital that we may potentially utilize our buyback authorization to repurchase shares should conditions warrant. Operator, we’ll now take questions.
