SOUTHSTATE CORPORATION 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, South State and the proposed merger with CenterState. 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:
Economic downturn risk, potentially resulting in deterioration in the credit
markets, 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;
? Increased expenses, loss of revenues, and increased regulatory scrutiny
associated with our total assets having exceeded
Personnel risk, including our inability to attract and retain consumer and
? commercial bankers to execute on our client-centered, relationship driven
banking model;
? Risks related to our proposed merger with CenterState, including:
the possibility that the merger does not close when expected or at all because
o required regulatory, shareholder or other approvals and other conditions to
closing are not received or satisfied on a timely basis or at all;
o the occurrence of any event, change or other circumstances that could give rise
to the termination of the merger agreement;
o potential difficulty in maintaining relationships with clients, employees or
business partners as a result of our proposed merger with CenterState;
o 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
o that the integration will be materially delayed or will be more costly or
difficult than expected;
Failure to realize cost savings and any revenue synergies from, and to limit
? liabilities associated with, mergers and acquisitions within the expected time
frame, including our proposed merger with CenterState;
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;
Ownership dilution risk associated with potential mergers and acquisitions in
? which our stock may be issued as consideration for an acquired company,
including our proposed merger with CenterState which is an all-stock
transaction;
? Potential deterioration in real estate values;
The impact of competition with other financial service businesses and from
? nontraditional financial technology ("FinTech") companies, including pricing
pressures and the resulting impact, including as a result of compression to net
interest margin;
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 risk involving the effect of a change in interest rates on our
? earnings, the market value of our loan and securities portfolios, and the
market value of our equity;
? Liquidity risk affecting our ability to meet our obligations when they come
due;
Risks associated with an anticipated increase in our investment securities
? portfolio, including risks associated with acquiring and holding investment
securities or potentially determining that the amount of investment securities
we desire to acquire are not available on terms acceptable to us;
? Price risk focusing on changes in market factors that may affect the value of
traded instruments in "mark-to-market" portfolios;
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? Transaction risk arising from problems with service or product delivery;
Compliance risk involving risk to earnings or capital resulting from violations
? of or nonconformance with laws, rules, regulations, prescribed practices, or
ethical standards;
Regulatory change risk resulting from new laws, rules, regulations, accounting
principles, proscribed practices or ethical standards, including, without
limitation, the possibility that regulatory agencies may require higher levels
? of capital above the current regulatory-mandated minimums and including the
impact of the Tax Cuts and Jobs Act, the
rules and regulations, and the possibility of changes in accounting standards,
policies, principles and practices, including changes in accounting principles
relating to loan loss recognition (CECL);
? Strategic risk resulting from adverse business decisions or improper
implementation of business decisions;
? Reputation risk that adversely affects our earnings or capital arising from
negative public opinion;
? Terrorist activities risk that results in loss of consumer confidence and
economic disruptions;
Cybersecurity risk related to our dependence on internal computer systems and
the technology of outside service providers, as well as the potential impacts
? of third party security breaches, which subject us to potential business
disruptions or financial losses resulting from deliberate attacks or
unintentional events;
? Greater than expected noninterest expenses;
Noninterest income risk resulting from the effect of regulations that prohibit
? or restrict the charging of fees on paying overdrafts on ATM and one-time debit
card transactions;
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;
? The risks of fluctuations in the market price of our common stock that may or
may not reflect our economic condition or performance;
The payment of dividends on our common stock is subject to regulatory
? supervision as well as the discretion of our Board of Directors, our
performance and other factors;
Risks associated with actual or potential information gatherings,
? investigations or legal proceedings by customers, regulatory agencies or
others, including litigation related to our proposed merger with CenterState;
Operational, technological, cultural, regulatory, legal, credit and other risks
? associated with the exploration, consummation and integration of potential
future acquisition, whether involving stock or cash consideration; and
Other risks and uncertainties disclosed in our most recent Annual Report on
Form 10-K filed with the
including the factors discussed in Item 1A, Risk Factors, or disclosed in
? documents filed or furnished by us with or to the
Annual Reports on Form 10-K, and of which could cause actual results to differ
materially from future results expressed, implied or otherwise anticipated by
such forward-looking statements.
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 theSEC . We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward-looking statements.
Introduction
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes South State Corporation and its
subsidiary's results of operations for the year ended December 31, 2019 as
compared to the year ended December 31, 2018 , and the year ended December 31,
2018 as compared to the year ended December 31, 2017 , and also analyzes our
financial condition as of December 31, 2019 as compared to
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December 31, 2018 . Like most banking institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on most of which we pay interest. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb our estimate of probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our earnings. In the following section, we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion. The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other information included in this Report.
Overview
We achieved net income of$186.5 million , or$5.36 diluted earnings per share ("EPS"), during 2019 compared to net income of$178.9 million , or$4.86 diluted EPS, in 2018. Net income available to the common shareholders was up$7.6 million , or 4.3% in 2019, due primarily to the following:
Increased interest income of
increase in interest income from loans, a
income from investment securities and a
income on federal funds sold, securities purchased under agreement to resell
and interest-bearing deposits. Interest income on non-acquired loans increased
? such loans and a 19 basis point increase in yield on such loans. These
increases were partially offset by a
on our acquired loan portfolio due to a
balance of such loans. The increase in interest income from investment
securities was due to both increases in average balances and increases in
yields. The increase in interest income from federal funds sold, securities
purchased under agreements to resell and interest-bearing deposits was due to
an increase in average balance;
Increased interest expense of
million increase in the average balance of total interest-bearing liabilities
and a 30 basis point increase in the cost of total interest-bearing
? liabilities. The increase in average balances was primarily due to a
million increase in other borrowings. The increase in the cost of
interest-bearing liabilities was mainly due to the effect of the rising/higher
interest rate environment throughout 2018 and the first half of 2019, along
with growth in higher cost other borrowings in 2019;
Lower provision for loan losses of
a
due to lower loan growth in 2019 and our continued low amount of net
? charge-offs (excluding overdrafts and ready reserves), reflecting continued
strength in the asset quality of our portfolio. This decline was partially
offset by an increase in the provision for acquired non-credit impaired loans
of
in that portfolio;
Decreased noninterest income of
? recoveries on acquired loans and a
investment services income. These decreases were partially offset by a
million increase in mortgage
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banking income and a
Noninterest Income section on page 59 for further discussion);
Decreased noninterest expense of
million decrease in occupancy expense and a
? amortization of intangibles. These decreases were partially offset by the
addition of
million increase in advertising and marketing expense, a
in salaries and employee benefits and a
noninterest expense. (See Noninterest Expense section on page 62 for further
discussion); and
Lower income tax provision of
? tax rate primarily as a result of additional federal and state tax credits
available during 2019 compared to 2018.
Our asset quality related to non-acquired loans remained strong in 2019. AtDecember 31, 2019 , net charge offs as a percentage of average non-acquired loans for 2019 remained flat at 0.04% compared to 2018. Non-acquired nonperforming assets ("NPAs") increased to$26.5 million atDecember 31, 2019 from$19.1 million atDecember 31, 2018 , due to an increase of$7.8 million in non-acquired nonperforming loans. NPAs as a percentage of non-acquired loans and repossessed assets increased five basis points to 0.29% atDecember 31, 2019 as compared to 0.24% atDecember 31, 2018 . Our asset quality related to the acquired loan portfolio remained stable in 2019 as net charge offs increased while NPAs declined. AtDecember 31, 2019 , net charge offs as a percentage of average acquired non-credit impaired loans increased five basis points to 0.11% in 2019 from 0.06% in 2018. Acquired NPAs decreased slightly to$19.7 million atDecember 31, 2019 from$21.4 million atDecember 31, 2018 , due to a decrease of$2.5 million in nonperforming acquired non-credit impaired loans. This decrease was partially offset by an increase in acquired other real estate owned ("OREO") of$824,000 .
The ALLL declined slightly to 0.62% of total non-acquired loans atDecember 31, 2019 compared to 0.65% atDecember 31, 2018 . The allowance provides 2.50 times coverage of non-acquired nonperforming loans atDecember 31, 2019 , a decrease from 3.41 times coverage atDecember 31, 2018 . Net charge-offs as a percentage of average non-acquired loans remained flat at 0.04% in 2019 compared to 2018 as net charge-offs from the loan portfolio (excluding overdrafts and ready reserves) were in a net recovery position of$188,000 in 2019. The continuing low amount of net charge-offs on the non-acquired loan portfolio has driven the ALLL as a percentage of total non-acquired loans down. Our efficiency ratio improved to 62.5% atDecember 31, 2019 from 63.6% atDecember 31, 2018 . The improvement in our efficiency ratio was due to the effect of the 3.9% decrease in noninterest expense being greater than the effect of the 1.7% decrease in the total of net interest income and noninterest income. The main reason for the decline in noninterest expense was the$25.3 million decrease in merger and branch consolidation expense in 2019. Excluding merger and branch consolidation expenses, pension plan termination expense and net gains on sale of securities, our adjusted efficiency ratio (non-GAAP) was 60.3% atDecember 31, 2019 and 59.1% at December, 31, 2018. We continue to remain well-capitalized with a total risk-based capital ratio of 12.8% and a Tier 1 leverage ratio of 9.7%, as ofDecember 31, 2019 , compared to 13.6% and 10.7%, respectively, atDecember 31, 2018 . The total risk-based capital ratio decreased in 2019 as total capital (excluding the change in accumulated other comprehensive income, or AOCI) declined by$19.2 million or 0.8% while total risk-weighted assets increased$655.3 million or 5.9%. The decline in capital was mainly due to the repurchase of 2,165,000 shares of our common stock in 2019 for a total of$156.9 million and the payment of dividends to our common shareholders of$57.7 million . This was partially offset by net income of$186.5 million . The Tier 1 leverage ratio also decreased from the prior year as total capital (excluding the change in AOCI) declined by$19.2 , million or 0.8%, while total average eligible assets increased$1.2 billion , or 8.9%. This decrease was also due to a decline in capital from our stock repurchases and our payment of the dividends. We believe our current capital ratios position us well to grow both organically and through certain strategic opportunities. AtDecember 31, 2019 , we had$15.9 billion in assets and 2,547 full-time equivalent employees. Through our Bank we provide our customers with checking accounts, NOW accounts, savings and time deposits of various types, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, business loans, agriculture loans, real estate loans, personal use loans, home improvement loans, automobile 49
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loans, manufactured housing loans, boat loans, credit cards, letters of credit, home equity lines of credit, safe deposit boxes, bank money orders, wire transfer services, correspondent banking services, and use of ATM facilities.
Recent Events
CenterState Bank Corporation Proposed Merger
OnJanuary 25, 2020 ,South State and CenterState Bank Corporation, aFlorida corporation ("CenterState") entered into an Agreement and Plan of Merger (the "merger agreement"), pursuant to which South State and CenterState have agreed to combine their respective companies in an all-stock merger of equals. The merger agreement provides that, upon the terms and subject to the conditions set forth therein, CenterState will merge with and into South State, with South State continuing as the surviving entity, in a transaction we refer to as the "merger." The merger agreement was unanimously approved by the boards of directors of South State and CenterState, and is subject to shareholder and regulatory approval and other customary closing conditions. Under the terms of the merger agreement, shareholders of CenterState will receive 0.3001 shares of South State common stock for each share of CenterState common stock they own. After the merger, it is anticipated that CenterState shareholders will own approximately 53% and South State shareholders will own approximately 47% of the combined company. The aggregate consideration, including "in the money" outstanding stock options, is valued at approximately$2.9 billion , based on approximately 125,174,000 shares of CenterState common stock outstanding as ofDecember 31, 2019 and on South State'sFebruary 20, 2020 closing stock price of$78.16 . The transaction is expected to close during the third quarter of 2020. AtDecember 31, 2019 , CenterState reported$17.1 billion in total assets,$12.0 billion in loans and$13.1 billion in deposits.
Branch consolidation and other cost initiatives - 2019
Inmid-January 2019 , we scheduled the closure of 13 branch locations to occur in 2019. We closed twelve of the branches during the second quarter of 2019, and we closed the remaining branch inOctober 2019 . We also began other cost-reduction initiatives during the first quarter of 2019 including the implementation of new technology and the renegotiation of contracts. We estimate the annual savings from these branch closures and cost-reduction initiatives to be$13.0 million , and the net impact of these efforts in 2019 was approximately$10.0 million . Capital Management
During 2019, we remained active in repurchasing shares of our common stock, repurchasing 2,165,000 shares at an average price of$72.49 per share (excluding commission expense), for a total of$156.9 million . InJune 2019 , our Board of Directors authorized the repurchase of an additional 2,000,000 shares of our common stock under the New Repurchase Program. There were 835,000 shares available for repurchase under the New Repurchase Program as ofDecember 31, 2019 . In the first quarter of 2020, we repurchased an additional 160,000 shares of our common stock at an average price of$77.63 per share (excluding cost of commission) for a total of$12.4 million . We may repurchase up to an additional 675,000 shares of common stock under the Repurchase Program.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared based on the application of
accounting policies in accordance with generally accepted accounting principles
("GAAP") and follow general practices within the banking industry. Our financial
position and results of operations are affected by management's application of
accounting policies, including estimates, assumptions and judgments made to
arrive at the carrying value of assets and liabilities and amounts reported for
revenues and expenses. Differences in the application of these policies could
result in material changes in our consolidated financial position and
consolidated results of operations and related disclosures. Understanding our
accounting policies is fundamental to understanding our consolidated financial
position and consolidated results of operations. Accordingly, our significant
accounting policies and changes in accounting principles and effects of new
accounting pronouncements are discussed in Note 1 of our audited consolidated
financial statements.
The following is a summary of our critical accounting policies that are highly dependent on estimates, assumptions and judgments.
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Business Combinations
We account for acquisitions under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 805, Business Combinations,
which requires the use of the acquisition method of accounting. All identifiable
assets acquired, including loans, and liabilities assumed, are recorded at fair
value. No allowance for loan losses related to the acquired loans is recorded on
the acquisition date because the fair value of the loans acquired incorporates
assumptions regarding credit risk.
Acquired credit-impaired loans are accounted for under the accounting guidance
for loans and debt securities acquired with deteriorated credit quality, found
in FASB ASC Topic 310-30, Receivables-Loans and Debt Securities Acquired with
Deteriorated Credit Quality, and initially measured at fair value, which
includes estimated future credit losses expected to be incurred over the life of
the loans. Loans acquired in business combinations with evidence of credit
deterioration are considered impaired. Loans acquired through business
combinations that do not meet the specific criteria of FASB ASC Topic 310-30,
but for which a discount is attributable, at least in part to credit quality,
are also accounted for under this guidance. Certain acquired loans, such as
lines of credit (consumer and commercial) and loans for which there was no
discount attributable to credit are accounted for in accordance with FASB ASC
Topic 310-20, where the discount is accreted through earnings based on estimated
cash flows over the estimated life of the loan.
For further discussion of our loan accounting and acquisitions, see Note 1-Summary of Significant Accounting Policies, Note 2-Mergers and Acquisitions and Note 4-Loans and Allowance for Loan Losses to the audited condensed consolidated financial statements.
Allowance for Non-Acquired Loan Losses
The allowance for loan losses reflects management's estimated losses that will result from the inability of our borrowers to make required loan payments. We establish the allowance for loan losses through a provision for loan losses charged to earnings. We charge loan losses against the allowance when management believes that the collectability of the principal amount of a loan is unlikely. We credit subsequent recoveries, if any, to the allowance. The allowance consists of general and specific reserves. The general reserve relates to loans that are not identified as impaired. We determine the general reserve by applying loss percentages to the portfolio based on historical loss experience and management's evaluation and "risk grading" of the loan portfolio, which has a high degree of management subjectivity. Additionally, we include in this evaluation the general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal and external credit reviews and results from external bank regulatory examinations. The specific reserve relates to impaired loans. We determine the specific reserve on a loan-by-loan basis based on management's evaluation of our exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Management evaluates nonaccrual loans and TDRs to determine whether or not they are impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. We require updated appraisals on at least an annual basis for impaired loans that are collateral dependent. Generally, the need for specific reserve is evaluated on impaired loans, and once a specific reserve is established for a loan, a charge off of that amount occurs in the quarter subsequent to the establishment of the specific reserve. The process of determining the level of the allowance for loan losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusion.
Allowance for Acquired Loan Losses
With theSavannah Bancorp ("SBC"),First Financial Holdings, Inc. ("FFHI"),Southeastern Bank Financial Corporation ("SBFC") and thePark Sterling Corporation ("PSC") acquisitions, we segregated the acquired loan portfolio into two categories (i) loans for which there was a discount related, in part, to credit ("acquired credit impaired loans" accounted for under FASB ACS Topic 310-30), and (ii) loans for which there was not a material discount attributable to credit ("acquired non-credit impaired loans" accounted for under FASB ASC Topic 310-20). For additional information about these classifications, see "Business Combinations" above. 51 Table of Contents
We aggregate acquired credit impaired loans in loan pools with common risk characteristics in accordance with the provisions of ASC Topic 310-30. We estimate the cash flows expected to be collected on these based on the expected remaining life of the loans, which includes the effects of estimated prepayments. Cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. We will perform re-estimations of cash flows on these loan pools on a quarterly basis. Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for loan losses during the period. Any decline in expected cash flows due only to changes in expected timing of cash flows is recognized prospectively as a decrease in yield on the loan and any improvement in expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loan. Probable and significant increases in cash flows (in a loan pool where an allowance for acquired loan losses was previously recorded) reduces the remaining allowance for acquired loan losses before recalculating the amount of accretable yield percentage for the loan pool in accordance with FASB ASC Topic 310-30. We account for acquired non-credit impaired loans on an individual basis. The allowance for loan losses on acquired non-credit impaired loans is measured and recorded consistent with our non-acquired loans.
Other Real Estate Owned ("OREO")
We report OREO, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, at the lower of cost or fair value, determined on the basis of current valuations obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. We record subsequent declines in the fair value of OREO below the new cost basis through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from the current valuations used to determine the fair value of OREO. Management reviews the value of OREO periodically and adjusts the values as appropriate. Revenue and expenses from OREO operations as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO expense and loan related expense, a component of non-interest expense.
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. 52 Table of Contents We evaluated the carrying value of goodwill as ofApril 30, 2019 , our annual test date, and determined that no impairment charge was necessary. Our stock price has historically traded above its book value and tangible book value. AtDecember 31, 2019 , our stock price was$86.75 which was above book value of$70.32 and tangible book value of$39.13 . Based on the updated analysis of goodwill as ofApril 30, 2019 and the fact that our stock price has traded above book value during the third and fourth quarter of 2019, we believe there is no impairment of goodwill as ofDecember 31, 2019 . Should our future earnings and cash flows decline, discount rates increase, and/or the market value of our stock decreases, an impairment charge to goodwill and other intangible assets may be required. Core deposit intangibles, client list intangibles, and noncompetition ("noncompete") intangibles consist of costs that resulted from the acquisition of other banks from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the wealth and trust management business. Noncompete intangibles represent the value of key personnel relative to various competitive factors such as ability to compete, willingness or likelihood to compete, and feasibility based upon the competitive environment, and what the Bank could lose from competition. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes and Deferred Tax Assets
Income taxes are provided for the tax effects of the transactions reported in our condensed consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write downs of OREO properties, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, mortgage servicing rights, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded in situations where it is "more likely than not" that a deferred tax asset is not realizable. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiaries file a consolidated federal income tax return. Additionally, income tax returns are filed by the Company or its subsidiaries in the state ofSouth Carolina ,Georgia ,North Carolina ,Florida ,Virginia ,Alabama , andMississippi . We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves atDecember 31, 2019 or 2018. OnDecember 22, 2017 , the Tax Reform Act was signed into law and includes numerous provisions that impact us most notably a reduction in the corporate tax rate from the prior maximum rate of 35% to a flat rate of 21%. As a result, we revalued our deferred tax assets and liabilities during 2017 which resulted in South State recording a non-cash, increase to income tax expense of$26.6 million . While we took significant efforts to estimate the impact of this revaluation in 2017, additional refinement was required during 2018 to finalize the revaluation. We recorded a tax benefit of$991,000 as a result of additional revaluation refinement measurement period adjustments related to the acquisition of PSC, recognition of income from acquired loans, and adjustments resulting from our 2017 income tax returns filed in 2018.
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to our audited consolidated financial statements entitled "Summary of Significant Accounting Policies."
Results of Operations
Consolidated net income available to common shareholders increased by$7.6 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . This increase reflects an increase in interest income, a decrease in provision for loan losses, a decrease in noninterest expense, and a decrease in income tax expense. Partially offsetting these positive effects on net income was an increase in interest expense and a decrease in noninterest income. Below are key highlights of our results of operations during 2019:
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Consolidated net income available to common shareholders increased 4.3% to
?
? Basic earnings per common share increased 10.2% to
2018 and increased 83.1% from
? Diluted earnings per common share increased 10.3% to
in 2018, and increased 82.9% from
Book value per common share was
2019 was the result of the increase in shareholders' equity from net income and
the increase in accumulated other comprehensive income along with the decline
in common shares outstanding due to our repurchase of 2,165,000 shares during
? 2019, partially offset by the reduction in equity from our share repurchases
and dividends paid on our common stock. The increase in 2018 was the result of
the increase in shareholders' equity from net income along with the decline in
common shares outstanding due to our repurchase of 1,000,000 shares during
2018, partially offset by the reduction in equity from our share repurchases
and dividends paid on our common stock.
Return on average assets was 1.21% in 2019, a decrease from 1.23% in 2018 and
an increase from 0.77% in 2017. The decrease in 2019 compared to 2018, was
driven by the increase in total average assets of 6.1%, or
?
the increase in net income which rose 104.3%, or
million in 2018, while total average assets increased 28.1%, or
to
Return on average common shareholders' equity increased to 7.89% in 2019,
compared to 7.63% in 2018, and 5.26% in 2017. The increase in 2019 compared to
2018, was driven by an increase in net income of 4.3%, or
? 2019, compared to a smaller percentage increase in average common shareholders'
equity of 0.9% or
2017, was driven by an increase in net income of 104.3%, or
2018, compared to a smaller percentage increase in average common shareholders'
equity of 40.7%, or
Our dividend payout ratio was 30.94% for 2019 compared with 28.27% in 2018 and
44.11% in 2017. The increase in the dividend payout ratio in 2019 compared to
2018, was due to the percentage increase in dividends paid of 14.1%, or
? million, being higher than the percentage increase in net income available to
common shareholders which increased 4.3%. The decrease in the dividend payout
ratio in 2018 compared to 2017, was due to the increase in net income available
to common shareholders which increased
lower percentage increase in dividends paid of 4.3%.
Our common equity to assets ratio decreased to 14.90% in 2019, compared with
16.12% in 2018 and 15.96% in 2017. The decrease in 2019, compared to 2018, was
the result of the percentage increase in total assets of 8.5% being greater
? than the percentage increase in shareholders' equity of 0.3%. The increase in
2018, compared to 2017, was the result of the percentage increase in
shareholders' equity of 2.5% being greater than the percentage increase in
total assets of 1.4%.
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In the table below, we have reported our results of operations by quarter for
the years ended
Table 1-Quarterly Results of Operations (unaudited)
2019 Quarters 2018 Quarters(Dollars in thousands) Fourth Third Second First Fourth Third Second First Interest income$ 147,454 $ 150,001 $ 149,982 $ 143,390 $ 143,868 $ 143,560 $ 141,732 $ 138,048 Interest expense 20,998 22,628 22,803 20,123 17,476 15,271 12,170 9,075 Net interest income 126,456 127,373 127,179 123,267 126,392 128,289 129,562 128,973 Provision for loan losses 3,557 4,028 3,704 1,488 3,734 3,117 4,478 2,454 Noninterest income 36,307 37,582 37,618 32,058 35,642 32,027 37,525 40,555 Noninterest expense 100,628 96,364 109,407 98,239 96,664 100,294 110,506 113,463 Income before income taxes 58,578 64,563 51,686 55,598 61,636 56,905 52,103 53,611 Income taxes 9,487 12,998 10,226 11,231 12,632 9,823 11,644 11,285 Net income available to common shareholders$ 49,091 $ 51,565 $ 41,460 $ 44,367 $ 49,004 $ 47,082 $ 40,459 $ 42,326 Earnings Per Share Net income, basic$ 1.46 $ 1.51 $ 1.18 $ 1.25 $ 1.36 $ 1.28 $ 1.10 $ 1.15 Net income, diluted 1.45 1.50 1.17 1.25 1.35 1.28 1.09 1.15 Cash dividends 0.46 0.43 0.40 0.38 0.36 0.35 0.34 0.33 Net Interest Income Net interest income is the largest component of our net income. Net interest income is the difference between income earned on interest-earning assets and interest paid on deposits and borrowings. Net interest income is determined by the yields earned on interest-earning assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities, the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin. TheFederal Reserve's Federal Open Market Committee's target for federal funds increased 125 basis points in 2017 and 100 basis points in 2018 to a range of 2.25% to 2.50% for the year endedDecember 31, 2018 . During 2019, the federal funds target rate remained at the 2.25% to 2.50% range untilJuly 2019 when theFederal Reserve began to drop the federal funds target rate. In the last half of 2019, theFederal Reserve dropped the federal funds target rate 75 basis points to the range of 1.50% to 1.75% atDecember 31, 2019 . These changes in interest rates affected both our net interest income and net interest margin. The yield on our non-acquired loan portfolio increased 19 basis point in 2019 from 2018 and increased 23 basis points in 2018 from 2017, contributing to higher interest income which had a positive effect on our net interest income and net interest margin for 2019 as compared to 2018, and 2018 as compared to 2017. We have also had to increase the rates paid on most of our deposit products in 2019 and 2018 as interest rates have increased, in order to retain deposit balances. As a result, the cost of interest-bearing deposits increased 23 basis points in 2019 and 35 basis points in 2018. The increase in the rate/cost of interest-bearing liabilities due to higher interest rates has contributed to higher interest expense, which had a negative effect on our net interest income and net interest margin for 2019 as compared to 2018 and 2018 as compared to 2017. With theFederal Reserve dropping the federal funds target rate 75 basis points during the last half of 2019, we have begun to see the yields on all categories of interest-earning assets and costs on all categories of interest-bearing liabilities decline. This has had an overall negative effect on our net interest income and net interest margin in the last half of 2019. 55 Table of Contents 2019 compared to 2018
Net interest income and net interest margin highlighted for the year ended
Our net interest income decreased by
? during 2019, compared to 2018, as increases in interest income were more than
offset by increases in interest expense.
Our interest income increased
increase in interest income from investment securities and a
increase in interest income on federal funds sold and securities purchased
? under agreements to resell and interest-bearing deposits, partially offset by a
interest income was due primarily to both higher average balances on interest-earning assets (other than acquired loans) and higher yields on non-acquired loans and investment securities, as follows:
Average interest-earning assets increased
billion in 2019, compared to 2018. The average balance of our non-acquired loan
portfolio increased
average balance of federal funds sold, securities purchased under agreements to
? resell and interest-bearing deposits increased
balance of investment securities increased
to invest as a result of growth in total deposits and other borrowings. These
increases were partially offset by a
balance of our acquired loan portfolio.
The average yield on non-acquired loans increased 19 basis points in 2019,
compared to 2018, while the average yield on investment securities increased 11
? basis points, each due to the higher rate environment for most of 2019,
compared to 2018, as the
rate 100 basis points from
Overall, our yield on interest-earning assets in 2019 decreased ten basis
points from 2018, due to a change in asset mix, as the average balance of
acquired loans (our highest yielding asset at 6.37%) declined
the average balance of federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits (our lowest yielding asset
at 2.06%) increased
? average yields and balances on our non-acquired loan portfolio and investment
securities in 2019 (discussed above). Our loan portfolio continues to remix
with 81% of the portfolio comprised of non-acquired loans and 19% comprised of
acquired loans at
of the total loan portfolio in 2019 was due to continued payoffs, charge-offs,
transfers to OREO, and renewals of acquired loans that are moved to our non-acquired loan portfolio.
Our interest expense increased
? increase in other borrowing interest expense. These increases were due
primarily to higher average balances of
deposits and higher average balances of
Overall, the average cost of interest-bearing liabilities for 2019 increased 30
basis points from 2018, due primarily to a 23-basis point increase in the cost
of interest-bearing deposits and a
balance of other borrowings (our highest cost interest-bearing liability at
2.75%). The average cost of deposits increased from 0.54% during 2018 to 0.76%
? in 2019, due to the higher interest rate environment for most of 2019, compared
to 2018, and because of increased competition for deposits in our markets. The
increase in the average balance of other borrowing was due to our strategic
decision to use a longer term FHLB funding strategy to fund balance sheet
growth, resulting in the average balance of FHLB advances increasing
million in 2019. We have borrowed
2019 to lock in longer term low cost funds.
Our net interest margin decreased by 31 basis points to 3.76% in 2019, compared
to 4.07% in 2018. Our net interest margin (taxable equivalent) decreased by 32
basis points to 3.77% in 2019, compared to 4.09% in 2018. These decreases were
? due mainly to the increase in the cost of interest-bearing liabilities of 30
basis points, the decline in the average balance of acquired loans of
billion (our highest yielding asset), the increase in the average balance of
federal funds sold, securities purchased under agreements to resell and
56
Table of Contents
interest-bearing deposits of
increase in the average balance of other borrowings of
highest cost interest-bearing liability).
The yield on interest-earning assets and the cost on interest-bearing
liabilities began to decline during the last half of 2019 as the Federal
?
period. Our interest-earning assets have repriced more quickly than our
interest-bearing liabilities as rates have fallen during the last six months of
the year causing the net interest margin to decline. 2018 compared to 2017
Net interest income and net interest margin for the year ended
? Our net interest income increased by
Our higher net interest income in 2018 was mainly driven by an increase in
interest income due to higher balances of average interest-earning assets
including a
increase in acquired loans and a
securities. The increase in our non-acquired loan portfolio was driven by
? organic growth as our markets remained sound in 2018. The increase in our
acquired loan portfolio and in investment securities was due to the addition of
loans and investment securities acquired in our acquisition of PSC in the
fourth quarter of 2017. With the PSC merger in the fourth quarter of 2017, we
acquired
after fair value marks.
Also, driving our higher net interest income in 2018 was an increase of 23
basis points on the yield on interest earning assets, mainly due to a 23 basis
point increase in the yield on our non-acquired loan portfolio and a 21 basis
point increase in the yield on our investment portfolio. These increases were
partially offset by a 41 basis point decline in the yield on our acquired loan
portfolio. The yield on our non-acquired loan portfolio increased mainly due to
the
in 2018, which effectively increased the Prime Rate used for pricing for a
? majority of our variable rate loans and new non-acquired loans. The increase in
interest rates during 2018 was also the reason for the increase in the yield on
our investment portfolio, as we purchased
during 2018 in the rising rate environment. The yield on our acquired loan
portfolio declined due to the acquired credit impaired loans being renewed and
the cash flow from these assets being extended, which increase the weighted
average life of the loan pools within all of our acquired loan portfolios. In
addition, the yield on the loans acquired in the merger with PSC during the
fourth quarter of 2017 were lower than the yields on our existing acquired loan
portfolio.
Our higher net interest income in 2018 was partially offset by higher interest
expense of
expense was mainly due to higher cost/rates on our interest bearing liabilities
as the average cost of interest-bearing liabilities increase 36 basis points to
0.60% in 2018. The increase in the average rate of interest-bearing liabilities
was due to higher costs on all categories of interest-bearing liabilities as
interest-bearing deposits increased 35 basis points, federal funds purchased
and repurchase agreements increased 42 basis points and other borrowings
increased 43 basis points. The increase in the cost of interest-bearing
? deposits was primarily the result of the rising rate environment with the
2018. These rate increases led to an increase in the costs of our core deposits
through increased competition in our markets. The increase in costs of deposits
was also affected by the rates on the deposits acquired through the merger with
PSC being higher than the rates on our legacy deposits. The increase in cost on
federal funds purchased and repurchased agreement and other borrowings was also
the result of the
100 basis points in 2018, which has increased short term borrowing rates and
rates on our long term trust preferred borrowings which reprice quarterly and
are tied to three-month LIBOR.
Our higher interest expense in 2018 was also driven by an increase in average
interest-bearing liabilities. Most categories of interest-bearing liabilities
? increased in 2018 including interest-bearing deposits by
borrowings by
of PSC in the fourth quarter of 2017, in which we acquired
interest-bearing deposits and$340.9 57 Table of Contents
million of other borrowings. After the PSC acquisition, we paid off
million of the acquired other borrowings.
Our net interest margin decreased three basis points to 4.07% from 4.10% in
2017. Our net interest margin (taxable equivalent) decreased six basis points
? to 4.09% from 4.15% in 2017. This was mainly due to the increase in the cost of
interest-bearing liabilities of 36 basis points being greater than the increase
in the yield on interest-earning assets of 23 basis points in 2018.
Table 2-Yields on Average Interest-Earning Assets and Rates on Average
Interest-Bearing Liabilities
Year Ended December 31,
2019 2018 2017
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
(Dollars in thousands) Balance Paid Rate Balance Paid Rate Balance Paid Rate
Assets
Interestearning assets:
Nonacquired loans, net of
unearned income(1) $ 8,594,639 $ 368,437 4.29 % $ 7,179,467 $ 294,704 4.10 % $ 5,914,252 $ 228,829 3.87 %
Acquired loans, net of
acquired ALLL(2) 2,582,234 164,597 6.37 % 3,586,146 225,453 6.29 % 2,373,287 158,987 6.70 % Loans held for sale
46,553 1,756 3.77 % 31,255 1,321 4.23 % 45,571 1,719 3.77 %
Investment securities:
Taxable 1,528,418 39,949 2.61 % 1,410,097 35,563 2.52 % 1,225,009 28,165 2.30 %
Taxexempt 184,239 6,186 3.36 % 203,517 6,152 3.02 % 193,460 5,591 2.89 %
Federal funds sold and
securities purchased under
agreements to resell and time
deposits 480,064 9,902 2.06 % 193,798 4,015 2.07 % 224,161 2,709 1.21 % Total interestearning assets 13,416,147 590,827 4.40 %
12,604,280 567,208 4.50 % 9,975,740 426,000 4.27 % Noninterestearning assets: Cash and due from banks 228,393 233,515 205,107 Other real estate owned 12,598 12,822 15,906 Other assets 1,825,058 1,738,022 1,197,480 Allowance for loan losses (53,369) (47,183) (39,937) Total noninterestearning assets 2,012,680 1,937,176 1,378,556 Total assets$ 15,428,827 $ 14,541,456 $ 11,354,296 Liabilities Interestbearing liabilities: Deposits Transaction and money market accounts$ 5,574,504 $ 35,915 0.64 %$ 5,243,094 $ 23,063 0.44 %$ 4,077,742 $ 4,517 0.11 % Savings deposits 1,342,733 4,304 0.32 % 1,441,264 4,526 0.31 % 1,372,948 2,061 0.15 % Certificates and other time deposits 1,734,333 25,701 1.48 % 1,793,035 17,863 1.00 % 1,123,824 5,775 0.51 % Federal funds purchased and securities sold under agreements to repurchase 282,172 2,627 0.93 % 312,768 2,356 0.75 % 325,713 1,080 0.33 % Other borrowings 654,753 18,005 2.75 % 157,992 6,184 3.91 % 102,985 3,581 3.48 % Total interestbearing liabilities 9,588,495 86,552 0.90 % 8,948,153 53,992 0.60 % 7,003,212 17,014 0.24 % Noninterestbearing liabilities:
Noninterestbearing deposits 3,222,504
3,112,204 2,595,596 Other liabilities 254,176 137,450 89,840 Total noninterestbearing liabilities 3,476,680 3,249,654 2,685,436 Shareholders' equity 2,363,652 2,343,649 1,665,648 Total noninterestbearing liabilities and shareholders' equity 5,840,332 5,593,303 4,351,084 Total liabilities and shareholders' equity$ 15,428,827 $ 14,541,456 $ 11,354,296 Net interest spread 3.50 % 3.90 % 4.03 %
Impact of interest free funds 0.26 %
0.17 % 0.07 %
Net interest margin
(nontaxable equivalent) 3.76 % 4.07 % 4.10 %
Net interest margin (taxable
equivalent) 3.77 % 4.09 % 4.15 %
Net interest income $ 504,275 $ 513,216 $ 408,986 (1) Nonaccrual loans are included in the above analysis.
(2) ALLL is an abbreviation for the allowance for loan losses.
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Table 3-Volume and Rate Variance Analysis
2019 Compared to 2018 2018 Compared to 2017
Increase (Decrease) due to Increase (Decrease) due to
(Dollars in thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
Interest income on:
Nonacquired loans, net of unearned
income(2) $ 58,089 $ 15,644 $ 73,733 $ 48,953 $ 16,922 $ 65,875
Acquired loans, net of acquired ALLL(4) (63,114) 2,258 (60,856) 81,250 (14,784) 66,466
Loans held for sale 647 (212) 435 (540) 142 (398)
Investment securities:
Taxable 2,984 1,402 4,386 4,255 3,143 7,398
Tax exempt(3) (583) 617 34 291 270 561
Federal funds sold and securities
purchased under agreements to resell and
time deposits 5,982 (95) 5,887 (379) 1,685 1,306
Total interest income 4,005 19,614 23,619 133,830 7,378 141,208
Interest expense on:
DepositsTransaction and money market accounts 1,458 11,394 12,852 1,291 17,255 18,546 Savings deposits (309) 87 (222) 103 2,362 2,465 Certificates and other time deposits (585) 8,423 7,838 3,439 8,649 12,088 Federal funds purchased and securities sold under agreements to repurchase (230) 501
271 (450) 1,726 1,276 Other borrowings 19,444 (7,623) 11,821 1,913 690 2,603 Total interest expense 19,778 12,782 32,560 6,296 30,682 36,978 Net interest income$ (15,773) $ 6,832 $ (8,941) $ 127,534 $ (23,304) $ 104,230
(1) The rate/volume variance for each category has been allocated on the same
basis between rate and volumes.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a taxable-equivalent basis in the above
analysis.
(4) ALLL is an abbreviation for the allowance for loan losses.
Noninterest Income and Expense
Noninterest income provides us with additional revenues that are significant sources of income. In 2019, 2018, and 2017, noninterest income comprised 22.2%, 22.1%, and 25.5%, respectively, of total net interest income and noninterest income. Note that recoveries on acquired loans will no longer be recorded through the income statement beginning in 2020 with the adoption of CECL. These recoveries will be recorded through the allowance for credit losses on the balance sheet.
Table 4-Noninterest Income for the Three Years
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017
Fees on deposit accounts $ 75,435 $ 81,649 $ 80,764
Mortgage banking income 17,564 13,590 17,954Trust and investment services income 29,244 30,229 25,401 Securities gains, net
2,711 (655) 1,421
Recoveries on acquired loans 6,847 9,117 8,572 Other 11,764 11,819 6,670 Total noninterest income$ 143,565 $ 145,749 $ 140,029 59 Table of Contents 2019 compared to 2018
Our noninterest income decreased 1.5% for the year ended
Fees on deposit accounts decreased
primarily from decreased bankcard service income of
decline in net debit card income of
charged related to the Durbin amendment, which became effective for us on July
1, 2018 (The Durbin amendment is a provision of federal law that requires the
? processing, if the bank has over
partially offset by an increase in service charges on deposit accounts of
million, in ATM income of
of
maintenance fees on deposit accounts. These increases were due to more
customers/accounts and more activity on accounts. The increase in monthly
maintenance fees was also due to an increase in commercial treasury services.
Recoveries on acquired loans declined
? acquired loans will no longer be recorded through the income statement in 2020
with the adoption of CECL)
? Trust and investment services income decreased by
resulted from a decline in trust asset management fees of$951,000 .
These decreases were partially offset by:
Mortgage banking income increased by
of an increase of
increase in gains on sale of mortgage loans from a higher volume of sales
driven by the lower rate environment in the last half of 2019, due to an
increase in the fair value of the mortgage pipeline and loan held for sale of
?
income from the mortgage-backed securities forward hedge of
increases were partially offset by a decline in income from mortgage servicing
rights, net of the hedge of
the fair value of the mortgage servicing rights due to the decline in interest
rates in the last half of 2019. Securities gains, net of$2.7 million during 2019 compared to securities
losses, net of
? result of us selling VISA Class B shares at a gain of
offset by net realized losses of
were sold during the year. 2018 compared to 2017
Our noninterest income increased 4.1% for the year ended
Fees on deposit accounts increased
resulted from higher service charges on deposit accounts and
retail fees associated with the increase in customers related to our merger
? with PSC. These increases were mostly offset by a
bankcard services income due to a cap on bankcard fees charged resulting from
limitations under the Durbin amendment, which became effective for us on July
1, 2018.
Trust and investment services income increased by
? increase in wealth customers added with our merger with PSC and organic growth
of our legacy wealth business.
Recoveries on acquired loans increased
? acquired loans will no longer be recorded through the income statement in 2020
with the adoption of CECL)
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Table of Contents
Other noninterest income increased by
million increase in income related to fees from swap transactions, a
? million increase in bank owned life insurance income related to policies
acquired in our merger with PSC and
of an acquired credit impaired loan.
These increases were partially offset by:
A
lower income from the secondary market of
? and sales volume which was partially offset by an increase of
income from mortgage servicing rights, net of the hedge which was mainly the
result of an increase in the fair value due to changes in interest rates.
Reclassification of Interchange network costs
ASU Topic 606 requires us to report network costs associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of noninterest expense as Bankcard expense. For the years endedDecember 31, 2019 , 2018 and 2017, gross interchange and debit card transaction fees totaled$24.4 million ,$33.0 million , and$35.6 million , respectively, while the related network costs totaled$11.9 million ,$12.1 million , and$9.1 million , respectively. On a net basis we reported$12.5 million ,$20.9 million , and$26.5 million , respectively, as interchange and debit card transactions fees in the accompanying Consolidated Statements of Income as noninterest income in Fees on Deposit Accounts for the years endedDecember 31, 2019 , 2018 and 2017. (See Bankcard Services Income section below for a discussion on the decline in gross interchange fees during 2019 and 2018). Bankcard Services Income We exceeded$10 billion in total consolidated assets upon consummation of our merger with SBFC onJanuary 3, 2017 . Banks with over$10 billion in total assets are no longer exempt from the requirements of theFederal Reserve's rules on interchange transaction fees for debit cards. This means that, beginning onJuly 1, 2018 due to the Durbin amendment, the Bank was limited to receiving only a "reasonable" interchange transaction fee for any debit card transactions processed using debit cards issued by the Bank to our customers. TheFederal Reserve has determined that it is unreasonable for a bank with more than$10 billion in total assets to receive more than$0.21 plus 5 basis points of the transaction plus a$0.01 fraud adjustment for an interchange transaction fee for debit card transactions. This reduction in the amount of interchange fees we receive for electronic debit interchange began reducing our revenues as ofJuly 1, 2018 . As noted above, bankcard income including interchange transaction fees is included in "Fees on deposit accounts". For the years endedDecember 31, 2019 and 2018, we earned approximately$23.7 million and$31.2 million , respectively, in interchange transaction fees for debit cards. We estimate that bankcard service income was reduced by approximately$10.0 million during the third and fourth quarters of 2018 and approximately$20.0 million in 2019 due to the Durbin amendment's impact on the amount that we may charge for interchange
transaction fees.
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Table of Contents
Noninterest expense represents the largest expense category for our company.
During 2019 and 2018, we continued to emphasize careful controls around our
noninterest expense, while also working through the SBFC and PSC merger. With
that, our expenses decreased $16.3 million or 3.9% from 2018 and increased $52.6
million or 14.3% from 2017.
Table 5-Noninterest Expense for the Three Years
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017Salaries and employee benefits$ 234,747 $ 233,130 $ 194,446 Occupancy expense 47,457 49,165
40,925
Information services expense 35,477 34,322
25,462
OREO expense and loan related 3,242 3,510
6,721
Pension plan termination expense 9,526 - - Amortization of intangibles 13,084 14,209
10,353
Supplies, printing and postage expense 5,881 5,839
6,148
Professional fees 10,325 8,883
5,975
FDIC assessment and other regulatory charges 4,545 8,405
3,924
Advertising and marketing 4,309 4,221
3,963
Merger and branch consolidation related expense 4,552 29,868
44,503
Other 31,493 29,375 25,900
Total noninterest expense $ 404,638 $ 420,927 $ 368,320
2019 compared to 2018
Noninterest expense decreased
Merger and branch consolidation related expense decreased
84.8%. This decrease in costs was related to the higher costs in 2018
? associated with the merger with PSC, which occurred in the fourth quarter of
2017 and the conversion in the second quarter of 2018. The costs in 2019 were
mainly related to the consolidation of 13 branches during the year.
45.9%. This decrease was mainly due to our receipt of our small bank assessment
credit of
? assessment to be paid in
(
assessment that occurred in the fourth quarter of 2018 and the change in risk
related to certain acquired loans, which resulted in lower assessments beginning in the fourth quarter of 2018.
Occupancy expense decreased by
? to the cost savings related to the merger with PSC and branch consolidations
that occurred during 2019. Our number of branches decreased by 13, or 7.7%,
from 168 atDecember 31, 2018 to 155 atDecember 31, 2019 .
Amortization of intangibles decreased
? due to the decline in amortization of core deposit intangibles as time passed
from the applicable merger dates.
These decreases were partially offset by:
Pension plan termination expense of
? our pension plan which resulted in the recognition of the losses from the
pension plan that were being held in accumulated other comprehensive income of
Other noninterest expense increased by
? mainly due to a
related to low income housing tax credit partnerships. We added approximately
? Salaries and employee benefits increased$1.6 million , or 0.7%. This increase was mainly due to an 62 Table of Contents
increase in salaries, wages and commission of
decline in incentives of
salaries and wages was mainly due to normal annual raises in 2019 and the
increase in commissions was mainly related to the increase in mortgage
production with the declining interest rate environment in the last half of
2019. The decline in incentives in 2019 was based upon the measurement against
our goals compared to 2018.
Professional fees increased
? due to consulting fees related to the implementation of ASU No 2016-13 -
Financial Instruments - Credit Losses or "CECL" which becomes effective for us
onJanuary 1, 2020 . 2018 compared to 2017
Noninterest expense increased 14.3% for the year ended
Salaries and employee benefits expense increased by
The increase was mainly attributable to the costs associated with the addition
of personnel resulting from our merger with PSC and the hiring of additional
? staff to support our crossing the
of full-time equivalent employees increased from approximately 2,276 before the
merger with PSC onNovember 30, 2017 to 2,602 atDecember 31, 2018 . The increase was also attributable to the payment of bonuses to employees inFebruary 2018 of$2.8 million .
Information services expense increased
to the additional cost associated with facilities, employees and systems added
? resulting from our merger with PSC. Our number of branches increased by 39 from
129 before the merger with PSC on
2018.
Net occupancy expense and furniture and equipment expense increased by
? million and
additional cost associated with facilities added resulting from our merger with
PSC as noted above.
increase was due to our exceeding
? quarters which resulted in a change in how the
as well as the addition of assets and liabilities acquired resulting from our
merger with PSC in the fourth quarter of 2017.
? Amortization of intangibles increased
core deposit intangible created with our merger with PSC.
Other noninterest expense increased
to a
? related to our merger with PSC and a
tax credit partnership investments due to the addition of four new investments
in 2018.
These increases were partially offset by:
A
expense. In 2018, we had costs associated with the acquisition of PSC of
million, while in 2017, we had costs associated with the SBFC and PSC mergers
? of
related expenses mainly consists of change in control payments, severance
payments, merger related incentive payments, system conversion costs,
investment banking fees, legal costs and vendor contract resolution payments.
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Table of Contents
Income Tax Expense
Our effective tax rate decreased to 19.07% at December 31, 2019 , compared to
20.24% at December 31, 2018 . The reduced rate is primarily the result of
additional federal and state tax credits available in 2019 compared to 2018, in
particular one federal tax credit that closed late in the fourth quarter of 2019
totaling approximately $2.4 million . The impact of the tax credits was partially
offset by a slight increase in pre-tax income over the prior year.
Financial Condition
Overview
At December 31, 2019 , we had total assets of approximately $15.9 billion ,
consisting principally of $9.3 billion in non-acquired loans, $1.8 billion in
acquired non-credit impaired loans, $356.8 million in acquired credit impaired
loans, net of allowance and $2.0 billion in investment securities. Our
liabilities at December 31, 2019 totaled $13.5 billion , consisting principally
of deposits of $12.2 billion and other borrowings of $815.9 million . At December
31, 2019 , our shareholders' equity was $2.4 billion .
At December 31, 2018 , we had total assets of approximately $14.7 billion ,
consisting principally of $7.9 billion in non-acquired loans, $2.6 billion in
acquired non-credit impaired loans, $485.1 million in acquired credit impaired
loans, net of allowance and $1.5 billion in investment securities. Our
liabilities at December 31, 2018 totaled $12.3 billion , consisting principally
of deposits of $11.6 billion . At December 31, 2018 , our shareholders' equity was
$2.4 billion .
Investment Securities
We use investment securities, the second largest category of interest-earning
assets, to generate interest income through the employment of excess funds, to
provide liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for public funds deposits and repurchase agreements. At December 31,
2019 and 2018, investment securities totaled $2.0 billion and $1.5 billion ,
respectively. For the year ended December 31, 2019 , average investment
securities were $1.7 billion , or 12.8% of average earning assets, compared with
$1.6 billion , or 12.8% of average earning assets for the year ended December 31,
2018 . The expected average life of the investment portfolio at December 31, 2019
was approximately 4.69 years, compared with 4.54 years at December 31, 2018 . See
Note 1-Summary of Significant Accounting Policies in the audited consolidated
financial statements for our accounting policy on investment securities.
As securities are purchased, they are designated as held to maturity or
available for sale based upon our intent, which incorporates liquidity needs,
interest rate expectations, asset/liability management strategies, and capital
requirements. We do not currently hold, nor have we ever held, any securities
that are designated as trading securities.
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The following table presents the reported values of investment securities for
the past five years:
Table 6-Investment Securities
for the Five Years
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Heldtomaturity (amortized
cost):
State and municipal obligations $ - $ - $ 2,529 $ 6,094 $ 9,314
Total heldtomaturity - - 2,529 6,094 9,314
Availableforsale (fair value):
Governmentsponsored entities
debt 25,941 48,251 85,509 84,642 162,507
State and municipal obligations 208,415 200,768 220,437 107,402 131,364
GSE mortgagebacked securities 1,721,691 1,268,048 1,340,687 803,577 711,849
Corporate securities - - 1,560 2,559 2,596
Total availableforsale 1,956,047 1,517,067 1,648,193 998,180 1,008,316
Total other investments 49,124 25,604
23,047 10,707 10,118
Total investment securities
During 2019, our total investment securities increased$462.5 million , or 30.0%, fromDecember 31, 2018 , as a result of our purchases of$979.1 million in investment securities as well as improvements in the market value of the portfolio of$38.9 million , partially offset by maturities, calls and paydowns of investment securities totaling$308.1 million and sales totaling$240.1 million during 2019. Net amortization of premiums was$7.3 million during 2019. We increased our investment securities strategically with the excess funds from deposit growth and the increase in other borrowings in 2019. In the first and second quarter of 2019, we also sold certain lower yielding legacy securities (mostly mortgage-backed securities) at a loss and reinvested the funds in higher yielding current market securities which also consisted mostly of mortgage-backed securities. The losses on the sales of securities of approximately$3.1 million taken in this restructuring were offset by a gain of$5.4 million that we recorded on the sale of VISA Class B shares. AtDecember 31, 2019 , the fair value of the total available for sale investment securities portfolio was$15.3 million , or 0.8%, above its amortized cost basis. Comparable valuations atDecember 31, 2018 reflected a total available for sale investment portfolio fair value that was$23.6 million , or 1.5%, below its amortized cost basis. The increase in fair value in the available for sale investment portfolio atDecember 31, 2019 compared toDecember 31, 2018 was mainly due to the decrease in interest rates in the last half of 2019 and due to our sale of certain lower yielding securities during the first and second quarters of 2019, with the proceeds reinvested in higher yielding securities when interest rates were higher than at year end.
Held-to-maturity
We did not hold any HTM securities during 2019 and currently do not plan to purchase any securities that will be classified as HTM securities.
Available for sale
Securities available for sale consist mainly of debentures of government-sponsored entities, state and municipal bonds, and mortgage-backed securities. AtDecember 31, 2019 , investment securities with a fair value and amortized cost of$2.0 billion and$1.9 billion , respectively, were classified as available for sale. The adjustment for net unrealized gains of$15.3 million between the carrying value of these securities and their amortized cost has been reflected, net of tax, in the consolidated balance sheet as a component of accumulated other comprehensive loss. The following are highlights of our available-for-sale securities:
Total securities available for sale increased
the balance at
investment portfolio increased
? was
securities in 2019, partially offset by maturities, maturities, calls and
paydowns of investment securities totaling
our portfolio to fit our investment strategy.
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? The balance of securities available for sale represented 12.6% of total assets
atDecember 31, 2019 and 10.3% of total assets atDecember 31, 2018 .
Interest income earned on securities in 2019 was
the yield on available for sale securities. In 2019, we used a portion of our
? excess liquidity from growth in deposits and other borrowings to increase the
size of our investment portfolio. The increase in yield was mainly due to our
sale of some lower yielding securities during the first and second quarters of
2019, with the proceeds reinvested in higher yielding securities when interest
rates were higher than at year end.
AtDecember 31, 2019 , we had 143 securities available for sale in an unrealized loss position, which totaled$4.5 million . See Note 3-Investment Securities in the consolidated financial statements for additional information. The decrease in the number and the amount of loss on securities in a loss position on the available for sale investment portfolio was primarily related to the mortgage-backed securities category, and was the result of the decrease in interest rates during 2019 as both short and long term interest rates declined during the year. It was also due to the restructuring of the investment portfolio completed in the first and second quarters of 2019 where we sold many of the securities that were in a loss position. All debt securities available for sale in an unrealized loss position as ofDecember 31, 2019 continue to perform as scheduled. We have evaluated the cash flows and determined that all contractual cash flows should be received; therefore impairment is considered temporary because we have the ability to hold these securities within the portfolio until the maturity or until the value recovers, and we believe that it is not likely that we will be required to sell these securities prior to recovery. As a result, we do not consider these investments to be other-than-temporarily impaired atDecember 31, 2019 . We continue to monitor all of these 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 these securities are other than temporarily impaired, which would require a charge to earnings in such periods. Any charges for other-than-temporary impairment related to securities available for sale would not impact cash flow, tangible capital or liquidity. While 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. While we generally hold these assets on a long-term basis or until maturity, any short-term investments or securities available for sale could be sold at an earlier point, depending partly on changes in interest rates and alternative investment opportunities.
Other Investments
Our other investment securities consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As ofDecember 31, 2019 , we determined that there was no impairment on our other investment securities. As ofDecember 31, 2019 , other investment securities represented approximately$49.1 million , or 0.31% of total assets and primarily consisted of FHLB stock which totals$43.0 million , or 0.27% of total assets. There were no gains or losses on the sales of these securities during 2019
or
2018.
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Table 7-Maturity Distribution and Yields of
Due In Due After Due After Due After
1 Year or Less 1 Thru 5 Years 5 Thru 10 Years 10 Years Total(7)
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
AvailableforsaleGovernmentsponsored entities debt(4) $ - - %$ 14,998 2.61 %$ 10,943 3.08 % $ - - %$ 25,941 2.81 % State and municipal obligations(2)(3) 5,311 3.65 % 25,825 3.43 % 43,477 3.47 % 133,802 3.36 % 208,415 3.40 % Mortgagebacked securities(5) 2,004 2.60 % 14,463
2.54 % 392,747 2.45 % 1,312,477 2.64 % 1,721,691 2.60 % Total availableforsale
7,315 3.36 % 55,286 2.97 % 447,167 2.56 % 1,446,279 2.71 % 1,956,047 2.68 % Total other investments(1)
- - % - - % - - % 49,124 5.89 % 49,124 5.89 % Total investment securities(6)
$ 7,315 3.36 %$ 55,286 2.97 %$ 447,167 2.56 %$ 1,495,403 2.81 %$ 2,005,171 2.76 % Percent of total 0 % 3 % 22 % 75 % Cumulative percent of total 0 % 3 % 25 % 100 %
(1) FHLB and other non-marketable equity securities have no set maturity date and
are classified in "Due after 10 Years."
(2) Yields on tax-exempt income have been presented on a taxable-equivalent basis
in the above table.
(3) The expected average life for state and municipal obligations is 5.32 years.
(4) The expected average life for government sponsored entities debt securities
is 1.42 years.
(5) The expected average life for mortgage-backed securities is 4.66 years.
(6) The expected average life for the total investment securities portfolio is
4.69 years (not including FHLB and corporate stock with no maturity date).
(7) For available-for-sale securities, this total equals total fair value.
Loan Portfolio
Our loan portfolio remains our largest category of interest-earning assets. AtDecember 31, 2019 , total loans were$11.4 billion , which was an overall increase of$357.3 million , or 3.2%, from the balance at the end of 2018. Non-acquired loan growth was$1.3 billion , or 16.6% for 2019, which was made up of a 8.5% increase in consumer real estate loans, a 23.2% increase in commercial non-owner occupied real estate loans, a 17.6% increase in commercial owner occupied real estate loans, a 21.4% increase in commercial and industrial loans, a 2.0% increase in other income producing property and a 20.0% increase in consumer non real estate loans. Total acquired loans declined by$962.3 million , which was made up of a 21.2% decrease in consumer real estate loans, a 41.3% decrease in commercial non-owner occupied real estate loans, a 27.6% decrease in commercial owner occupied real estate loans, a 52.2% decrease in commercial and industrial loans, a 30.4% decrease in other income producing property and an 19.0% decrease in consumer non real estate loans. The decreases in the acquired loan portfolio were primarily in the non-credit impaired portfolio and were due to principal payments, charge offs, foreclosures and renewals of acquired loans that were moved to our non-acquired loan portfolio. Acquired loans as a percentage of total loans decreased to 18.7% atDecember 31, 2019 compared to 28.0% atDecember 31, 2018 . As ofDecember 31, 2019 , non-acquired loans as a percentage of the overall portfolio were 81.3% compared to 72.0% atDecember 31, 2018 . Average total loans outstanding during 2019 were$11.2 billion , an increase of$411.3 million , or 3.8%, over the 2018 average of$10.8 billion . The increase in average total loans was due to organic growth in the non-acquired loan portfolio. (For further discussion of the Company's acquired loan accounting, see Note 1-Summary of Significant Accounting Policies, Note 2-Mergers and Acquisitions and Note 4-Loans and Allowance for Loan Losses in the consolidated financial statements.) 67 Table of Contents
The following table presents a summary of the non-acquired loan portfolio by type:
Table 8-Distribution of Non-Acquired Loans by Type
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Real estate:Commercial nonowner occupied(1)$ 2,779,498 $ 2,256,996 $ 1,839,768 $ 1,295,179 $ 889,756 Consumer(2) 2,637,467 2,431,413 1,967,902 1,580,839 1,338,239 Commercial owner occupied real estate 1,784,017 1,517,551 1,262,776 1,177,745 1,033,398 Commercial and industrial 1,280,859 1,054,952 815,187 671,398 503,808 Other income producing property 218,617 214,353
193,847 178,238 175,848 Consumer 538,481 448,664 378,985 324,238 233,104 Other loans 13,892 9,357 33,690 13,404 46,573 Total nonacquired loans$ 9,252,831 $ 7,933,286 $ 6,492,155 $ 5,241,041 $ 4,220,726
Includes
2019, 2018, 2017, 2016, and 2015, respectively.
(2) Includes owner occupied real estate.
In accordance with FASB ASC Topic 310-30, we aggregated acquired credit impaired loans that have common risk characteristics into pools within the following loan categories: commercial real estate, commercial real estate-construction and development, residential real estate, residential real estate junior lien, home equity, consumer, and commercial and industrial. The following table presents the acquired credit impaired loans by type:
Table 9-Distribution of Acquired Credit Impaired Loans by Type
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Commercial real estate $ 130,938 $ 196,764 $ 234,595 $ 218,821 $ 268,058
Commercial real estate-construction and
development 25,032 32,942 49,649 44,373 54,272
Residential real estate 163,359 207,482 260,787 258,100 313,319
Consumer 35,488 42,492 51,453 59,300 70,734
Commercial and industrial 7,029 10,043
26,946 25,347 31,193
Total acquired credit impaired loans
Acquired loans that are not credit impaired and lines of credit (consumer and commercial) are accounted for in accordance with FASB ASC Topic 310-20. The following table presents the acquired non-credit impaired loans by type:
Table 10-Distribution of Acquired Non-Credit Impaired Loans by Type
December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Real estate:Commercial nonowner occupied(1)$ 481,010 $ 844,323 $ 1,220,523 $ 44,718 $ 53,952 Consumer(2) 685,163 871,238 1,031,202 569,149 709,075 Commercial owner occupied real estate 307,193 421,841 521,818 27,195 39,220 Commercial and industrial 101,880 212,537 398,696 13,641 25,475 Other income producing property 95,697 133,110
196,669 39,342 51,169 Consumer 89,484 111,777 137,710 142,654 170,647 Other - - 1,289 - -
Total acquired noncredit impaired loans
Includes
2019, 2018, 2017, 2016, and 2015, respectively.
(2) Includes owner occupied real estate.
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Real estate mortgage loans continue to comprise the largest segment of our loan
portfolio. All commercial and residential loans secured by real estate are
included in this category. As of
Non-acquired loans were
loans were
compared to non-acquired loans of
?
principal payments, charge offs, foreclosures and renewals of acquired loans
that were moved to our non-acquired loan portfolio.
Non-acquired loans secured by real estate mortgages, excluding commercial owner
occupied loans and other income producing property loans, were
comprised 47.6% of the total loan portfolio. This was an increase of
? real estate mortgages, excluding commercial owner occupied loans, were
decrease of
off of the acquired loan portfolio. Between both the non-acquired and acquired
portfolios, 59.8% of loans were real estate mortgage loans, excluding
commercial owner occupied loans and other income producing property loans.
Of the total non-acquired real estate mortgage loans, loans secured by
commercial real estate, excluding commercial owner occupied loans, were
billion, or 24.4% of the total loan portfolio. Loans secured by consumer real
? estate were
to loans secured by commercial real estate of
loans secured by consumer real estate of
2018.
Of the total acquired real estate mortgage loans, loans secured by commercial
real estate, excluding commercial owner occupied loans, were
? 4.9%, at
estate of
of
Non-acquired and acquired commercial owner occupied real estate loans were
? compared to
commercial owner occupied real estate loans increased
acquired commercial owner occupied real estate loans decreased
from
Total loan interest income was$533.0 million in 2019, an increase of$12.9 million , or 2.5%, over$520.2 million in 2018, due to a$1.4 billion increase in the average balance of our non-acquired loan portfolio and a 19-basis point increase in the yield on such portfolio, partially offset by the effects from a decline in our average balance of the acquired loan portfolio of$1.0 billion . The yield on the non-acquired loan portfolio increased from 4.10% in 2018 to 4.29% in 2019 due to theFederal Reserve increasing the federal funds target rate 100 basis points during the year endedDecember 2018 , with rates remaining at that level, until starting to decline inAugust 2019 . On average, the prime rate was higher in 2019 compared to 2018, which is used in pricing a majority of our variable rate loans and new non-acquired loans. The 2019 average acquired loan portfolio yield of 6.37% was higher compared to 6.29% in 2018. Non-acquired loans secured by commercial real estate were comprised of$968.4 million in construction and land development loans and$1.8 billion in commercial non-owner occupied loans atDecember 31, 2019 . AtDecember 31, 2018 , we had$841.4 million in construction and land development loans and$1.4 billion in commercial non-owner occupied loans. Acquired loans secured by commercial real estate were comprised of$48.9 million in construction and land development loans and$512.8 million in commercial non-owner occupied loans atDecember 31, 2019 . AtDecember 31, 2018 , we had$196.0 million in construction and land development loans and$761.4 million in commercial non-owner occupied loans in the acquired loan portfolio. During 2019, we have seen our acquired construction and development loan portfolio decline by$147.1 million as these loans have rolled off from the acquired loan portfolio mainly from the SBFC and PSC acquisitions in 2017. Construction and land development loans are more susceptible to a risk of loss during a downturn in the business cycle. 69
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Non-acquired loans secured by consumer real estate comprised of$2.1 billion in consumer owner occupied loans and$518.6 million in home equity loans atDecember 31, 2019 . AtDecember 31, 2018 , we had$1.9 billion in consumer owner occupied loans and$495.1 million in home equity loans in the non-acquired loan portfolio. Acquired loans secured by consumer real estate comprised of$588.1 million in consumer owner occupied loans and$239.4 million in home equity loans atDecember 31, 2019 . AtDecember 31, 2018 , we had$748.1 million in consumer owner occupied loans and$302.4 million in home equity loans in the acquired loan portfolio. During 2019, we have seen the consumer real estate loan portfolio decline by$16.9 million from 2018 with the acquired consumer real estate loans decreasing$223.0 million , offset by the non-acquired consumer real estate loans increasing by$206.1 million .
The table below shows the contractual maturity of the non-acquired loan
portfolio at
Table 11-Maturity Distribution of Non-acquired Loans
December 31, 2019 1 Year Maturity Over (Dollars in thousands) Total or Less 1 to 5 Years 5 Years Real estate:
Commercial nonowner occupied$ 2,779,498 $ 215,968 $ 1,340,631 $ 1,222,899 Consumer 2,637,467 50,308 68,834 2,518,325 Commercial owner occupied real estate 1,784,017 151,082 718,892 914,043 Commercial and industrial 1,280,859 302,930 578,406 399,523 Other income producing property 218,617 39,173
152,555 26,889 Consumer 538,481 32,745 203,091 302,645 Other loans 13,892 13,892 - - Total nonacquired loans$ 9,252,831 $ 806,098 $ 3,062,409 $ 5,384,324 AtDecember 31, 2019 and 2018 our non-acquired commercial non owner-occupied real estate loans, with fixed rates and maturities greater than a year, had a balance of$1.6 billion and$1.3 billion , respectively. The adjustable interest rate loan balance in this loan category was$963.4 million and$742.6 million , respectively. The non-acquired commercial owner occupied loans, with fixed rates and maturities greater than a year, had a balance of$1.5 billion and$1.3 billion , respectively. The adjustable interest rate loan balance in this loan category was$157.0 million and$41.7 million , respectively. The non-acquired commercial and industrial loan category, with fixed rates and maturities greater than a year, had a balance of$875.3 million and$672.4 million , respectively. The adjustable interest rate loan balance in this loan category was$102.6 million and$95.7 million , respectively.
The table below shows the contractual maturity of the acquired non-credit
impaired loan portfolio at
Table 12-Maturity Distribution of Acquired Non-credit Impaired Loans
December 31, 2019 1 Year Maturity Over (Dollars in thousands) Total or Less 1 to 5 Years 5 Years Real estate: Commercial nonowner occupied$ 481,010 $ 72,741 $ 312,739 $ 95,530 Consumer 685,163 16,097 107,105 561,961 Commercial owner occupied real estate 307,193 47,345 168,525 91,323 Commercial and industrial 101,880 29,265 51,371 21,244 Other income producing property 95,697 21,905 25,696 48,096 Consumer 89,484 1,785 10,759 76,940 Other - - - - Total acquired noncredit impaired loans$ 1,760,427 $ 189,138 $ 676,195 $ 895,094 70 Table of Contents
AtDecember 31, 2019 and 2018, our acquired non-credit impaired commercial non owner-occupied real estate loans, with fixed rates and maturities greater than a year, had a balance of$185.2 million and$271.3 million , respectively. The adjustable interest rate loan balance in this loan category was$223.1 million and$387.9 million , respectively. The acquired non-credit impaired commercial owner occupied loans, with fixed rates and maturities greater than a year, had a balance of$167.3 million and$232.3 million , respectively. The adjustable interest rate loan balance in this loan category was$92.5 million and$128.2 million , respectively. The acquired non-credit impaired commercial and industrial loan category, with fixed rates and maturities greater than a year, had a balance of$60.4 million and$113.2 million , respectively. The adjustable interest rate loan balance in this loan category was$12.2 million and$46.1 million , respectively.
The table below shows the contractual maturity of the acquired credit impaired
loan portfolio at
Table 13-Maturity Distribution of Acquired Credit Impaired Loans
December 31, 2019 1 Year Maturity Over (Dollars in thousands) Total or Less 1 to 5 Years 5 Years Commercial real estate$ 130,938 $ 27,230 $ 74,379 $ 29,329 Commercial real estate-construction and development 25,032 11,326 12,335 1,371 Residential real estate 163,359 23,595 59,621 80,143 Consumer 35,488 223 4,816 30,449 Commercial and industrial 7,029 2,750
1,733 2,546
Total acquired credit impaired loans
AtDecember 31, 2019 and 2018 our acquired credit impaired commercial real estate loans, with fixed rates and maturities greater than a year, had a balance of$94.0 million and$133.8 million , respectively. The adjustable interest rate loan balance in this loan category was$9.7 million and$21.7 million , respectively. The acquired credit impaired commercial construction and development loans, with fixed rates and maturities greater than a year, had a balance of$13.1 million and$10.1 million , respectively. The adjustable interest rate loan balance in this loan category was$617,000 and$5.5 million , respectively. The acquired credit impaired commercial and industrial loan category, with fixed rates and maturities greater than a year, had a balance of$3.7 million and$8.0 million , respectively. The adjustable interest rate loan balance in this loan category was$625,000 and$36,000 , respectively.
Nonaccrual Loans
We place non-acquired loans and acquired non-credit impaired loans on nonaccrual once reasonable doubt exists about the collectability of all principal and interest due. Generally, this occurs when principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. We do not consider our acquired purchased credit impaired loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection. Therefore, interest income is recognized through accretion of the difference between the carrying value of these loans and the present value of expected future cash flows.
Troubled Debt Restructurings ("TDRs")
We designate loan modifications as TDRs when, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that it would not otherwise consider (ASC Topic 310-40). Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. We return TDRs to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months). AtDecember 31, 2019 and 2018, total TDRs were$13.5 million and$11.7 million , respectively, of which$10.9 million 71
Table of Contents
were accruing restructured loans atDecember 31, 2019 , compared to$11.1 million atDecember 31, 2018 . We do not have significant commitments to lend additional funds to these borrowers whose loans have been modified.
The level of risk elements in the loan portfolio, OREO and other nonperforming assets for the past five years is shown below:
Table 14-Nonperforming Assets
December 31, December 31, December 31, December 31, December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Non-acquired:
Nonaccrual loans$ 19,724 $ 14,179
514 191 491 281 300
Restructured loans 2,578 648 925 1,979 2,662
Total nonperforming loans 22,816 15,018 14,831 14,745 18,747
Other real estate owned ("OREO")(2) 3,569 3,902 2,415 3,927 8,705
Other nonperforming assets(3) 136 135 121 71 78
Total nonperforming assets excluding
acquired assets 26,521 19,055 17,367 18,743 27,530
Acquired non-credit impaired:
Nonaccrual loans 10,839 13,489 9,397 4,728 3,764
Accruing loans past due 90 days or
more 275 162 50 106 53
Total acquired nonperforming loans 11,114 13,651 9,447 4,834 3,817
Acquired OREO and other nonperforming
assets:
Acquired covered OREO - - - - 5,751
Acquired noncovered OREO 8,395 7,508 8,788 14,389 16,098Other acquired nonperforming assets(3) 184 247 475 637 546 Total acquired nonperforming assets(1) 8,579 7,755 9,263 15,026 22,395 Total nonperforming assets$ 46,214 $ 40,461 $ 36,077 $ 38,603 $ 53,742 Excluding acquired assets: Total nonperforming assets as a percentage of total loans and repossessed assets(4) 0.29 % 0.24 % 0.27 % 0.36 % 0.65 % Total nonperforming assets as a percentage of total assets 0.17 % 0.13 % 0.12 % 0.21 % 0.32 % Nonperforming loans as a percentage of period end loans(4) 0.25 % 0.19 % 0.23 % 0.28 % 0.44 % Including acquired assets: Total nonperforming assets as a percentage of total loans and repossessed assets(4) 0.41 % 0.37 % 0.34 % 0.58 % 0.89 % Total nonperforming assets as a percentage of total assets 0.29 % 0.28 % 0.25 % 0.43 % 0.63 % Nonperforming loans as a percentage of period end loans(4) 0.30 % 0.26 % 0.23 % 0.29 % 0.38 %
Excludes the acquired credit impaired loans that are contractually past due
90 days or more totaling
million and
considered to be performing due to the application of the accretion method
under FASB ASC Topic 310-30. (For further discussion of our application of
the accretion method, see Business Combinations, and Method of Accounting for
Loans Acquired under Note 1-Summary of Significant Accounting Policies in the
consolidated financial statements.)
(2) Includes certain real estate acquired as a result of foreclosure and property
not intended for bank use.
(3) Consists of non-real estate foreclosed assets, such as repossessed vehicles
and mobile homes.
(4) Loan data excludes mortgage loans held for sale.
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Table of Contents
Total non-acquired nonperforming loans were $22.8 million , or 0.25% of total
non-acquired loans, an increase of approximately $7.8 million , or 51.9%, from
December 31, 2018 . The increase in nonperforming loans was driven primarily by
an increase in commercial nonaccrual loans of $5.9 million and an increase in
restructured nonaccrual loans of $1.9 million . The increase in commercial
nonaccrual loans was mainly driven by a $2.4 million increase in commercial
owner occupied nonaccrual loans and an increase of $3.4 million in commercial
and industrial nonaccrual loans during 2019. Acquired non-credit impaired
nonperforming loans were $11.1 million , or 0.63% of total acquired non-credit
impaired loans, a decrease of $2.5 million , or 18.6%, from December 31, 2018 .
The decrease in acquired non-credit impaired nonperforming loans was mainly
driven by a $3.0 million decline in consumer real estate nonaccrual loans, a
decline in commercial owner occupied nonaccrual loans of $567,000 , offset by a
$857,000 increase in non-accruing other income producing property loans.
Non-acquired nonperforming loans increased by approximately $3.6 million during
the fourth quarter of 2019 from the level at September 30, 2019 . The increase
was mainly due to an increase in commercial nonaccrual loans of $1.4 million and
restructured nonaccrual loans of $2.0 million . The increase in commercial
nonaccrual loans was mainly driven by a $1.5 million increase in commercial and
industrial nonaccrual loans. Acquired non-credit impaired nonperforming loans
increased by approximately $1.5 million during the fourth quarter of 2019 from
the level at September 30, 2019 . The increase was mainly due to a $831,000
increase in other income producing property nonaccrual loans and a $644,000
increase in consumer real estate nonaccrual loans. The top ten nonaccrual loans
at December 31, 2019 totaled $10.2 million and consisted of four loans located
along the coastal region (Beaufort to Myrtle Beach ), two in the Charlotte
region, one in the Upstate region (Greenville -Spartanburg ), and three in the
Central region (Augusta ). These loans comprise 30.9% of total nonaccrual loans
at December 31, 2019 , with the majority being real estate collateral dependent.
We do not currently hold a specific reserve against any of these ten loans.
At December 31, 2019 , non-acquired OREO decreased by $333,000 from the balance
at December 31, 2018 to $3.6 million . At December 31, 2019 , non-acquired OREO
consisted of 17 properties with an average value of $210,000 , an increase of
$24,000 in the average value from December 31, 2018 , when we had 21 properties.
In the fourth quarter of 2019, we added two properties with an aggregate value
of $626,000 into non-acquired OREO, and we sold five properties with a basis of
$519,000 in that same quarter. We did not record a net gain or loss on the
properties sold during the quarter. Our non-acquired OREO balance of
$3.6 million at December 31, 2019 is comprised of 18% in the Coastal Region
(Beaufort to Myrtle Beach , 17% in the Charlotte region, 14% in the Low Country
region (Orangeburg ), 9% in the Central region (Columbia ), 3% in the North
Georgia region and 39% in the Upstate region (Greenville and Spartanburg ). Also,
of the $3.6 million in non-acquired OREO, $2.7 million is related to properties
from closed bank facilities.
At December 31, 2019 , acquired OREO increased by $887,000 from the balance at
December 31, 2018 to $8.4 million . At December 31, 2019 , non-acquired OREO
consisted of 42 properties with an average value of $200,000 , an increase of
$61,000 from December 31, 2018 , when we had 54 properties. In the fourth quarter
of 2019, we added two properties with an aggregate value of $137,000 into
acquired OREO, and we sold 12 properties with a basis of $1.2 million in that
same quarter. We recorded a net loss of $704,000 on the properties sold during
the quarter. Also, of the $8.4 million in acquired OREO, $2.7 million is related
to properties from closed bank facilities. Our general policy is to obtain
updated OREO valuations at least annually. OREO valuations include appraisals or
broker opinions, (See Other Real Estate Owned ("OREO") under Critical Accounting
Policies and Estimates in Item 7-Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion on ourOREO policies.) Potential Problem Loans Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately$7.5 million , or 0.08% of total non-acquired loans outstanding atDecember 31, 2019 , compared to$5.8 million , or 0.07% of total non-acquired loans outstanding atDecember 31, 2018 . Potential problem loans related to acquired non-credit impaired loans totaled$4.4 million , or 0.25%, of total acquired non-credit impaired loans atDecember 31, 2019 , compared to$5.3 million , or 0.22% of total acquired non-credit impaired loans atDecember 31, 2018 . All potential problem loans represent those loans where information about possible credit problems of the borrowers has caused management to have concern about the borrower's ability to comply with present repayment terms. 73 Table of Contents Allowance for Loan Losses OnDecember 13, 2006 , theFederal Reserve Board , theFDIC , and other regulatory agencies collectively revised the banking agencies' 1993 policy statement on the allowance for loan and lease losses to ensure consistency with generally accepted accounting principles inthe United States and more recent supervisory guidance. Our loan loss policy adheres to the interagency guidance. Our allowance for loan losses is based upon estimates made by management. We maintain an allowance for loan losses at a level that we believe is appropriate to cover estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of our loan portfolio. Arriving at the allowance involves a high degree of management judgment and results in a range of estimated losses. We regularly evaluate the adequacy of the allowance through our internal risk rating system, outside and internal credit review, and regulatory agency examinations to assess the quality of the loan portfolio and identify problem loans. The evaluation process also includes our analysis of current economic conditions, composition of the loan portfolio, past due and nonaccrual loans, concentrations of credit, lending policies and procedures, and historical loan loss experience. The provision for loan losses is charged to expense in an amount necessary to maintain the allowance at an appropriate level. The allowance for loan losses on non-acquired loans consists of general and specific reserves. The general reserves are determined by applying loss percentages to the portfolio that are based on historical loss experience for each class of loans and management's evaluation and "risk grading" of the loan portfolio. Additionally, the general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal and external credit reviews and results from external bank regulatory examinations are included in this evaluation. Currently, these adjustments are applied to the non-acquired loan portfolio when estimating the level of reserve required. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of our exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. These are loans classified by management as doubtful or substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Generally, the need for a specific reserve is evaluated on impaired loans, and once a specific reserve is established for a loan, a charge off of that amount occurs in the quarter subsequent to the establishment of the specific reserve. Loans that are determined to be impaired are provided a specific reserve, if necessary, and are excluded from the calculation of the general reserves. We segregated the acquired loan portfolio into performing loans ("non-credit impaired") and credit impaired loans. The acquired non-credit impaired loans and acquired revolving type loans are accounted for under FASB ASC 310-20, with each loan being accounted for individually. Acquired non-credit impaired loans are recorded net of any acquisition accounting discounts or premiums and have no allowance for loan losses associated with them at acquisition date. The related discount, if applicable, is accreted into interest income over the remaining contractual life of the loan using the level yield method. Subsequent deterioration in the credit quality of these loans is recognized by recording a provision for loan losses through the income statement, increasing the acquired non-credit impaired allowance for loan losses. The acquired credit impaired loans will follow the description in the next paragraph. In determining the acquisition date fair value of acquired credit impaired loans, and in subsequent accounting, we generally aggregate purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. Evidence of credit quality deterioration for the loan pools may include information such as increased past-due and nonaccrual levels and migration in the pools to lower loan grades. 74 Table of Contents The following tables provide the allocation for the non-acquired and acquired credit impaired allowance for loan losses. AtDecember 31, 2019 , there was no allowance recognized for acquired non-credit impaired loan losses.
Table 15-Allocation of the Allowance for Non-Acquired Loan Losses
2019 2018 2017 2016 2015
(Dollars in thousands) Amount %* Amount %* Amount %* Amount %* Amount %*
Real estate:
Commercial nonowner
occupied $ 16,803 30.0 % $ 14,436 28.5 % $ 12,446 28.3 % $ 9,071 24.7 % $ 7,684 21.1 %
Consumer owner occupied 15,784 28.5 % 15,347 30.6 % 12,918 30.3 % 11,031 30.2 % 10,141 31.7 %
Commercial owner
occupied real estate 10,581 19.3 % 9,369 19.1 % 8,128 19.5 % 8,022 22.5 % 8,341 24.5 %
Commercial and
industrial 8,339 13.8 % 7,454 13.3 % 5,488 12.6 % 4,842 12.8 % 3,974 11.9 % Other income producing property
1,336 2.4 % 1,446 2.7 % 1,375 3.0 % 1,542 3.4 % 1,963 4.2 % Consumer
3,947 5.8 % 3,101 5.7 % 2,788 5.8 % 2,350 6.2 % 1,694 5.5 % Other loans
137 0.2 % 41 0.1 % 305 0.5 % 102 0.2 % 293 1.1 %
Total $ 56,927 100.0 % $ 51,194 100.0 % $ 43,448 100.0 % $ 36,960 100.0 % $ 34,090 100.0 %
* Loan carrying value in each category, expressed as a percentage of total non-acquired loans
Table 16-Allocation of the Allowance for Acquired Credit Impaired Loan Losses
2019 2018 2017 2016 2015
(Dollars in thousands) Amount %* Amount %* Amount %* Amount %* Amount %* Commercial real estate
$ 1,377 36.2 %$ 801 40.2
%
2,555 45.1 % 2,246 42.4 % 3,553 41.8 % 2,419 42.6 % 2,986 42.5 %
Consumer 539 9.8 % 761 8.7 % 461 8.3 % 558 9.8 % 313 9.6 %
Commercial and industrial 24 2.0 % 79 2.0 % 145 4.3 % 238 4.2 % 174 4.2 %
Total $ 5,064 100.0 % $ 4,604 100.0 % $ 4,627 100.0 % $ 3,395 100.0 % $ 3,706 100.0 %
* Loan carrying value in each category, expressed as a percentage of total acquired credit impaired loans
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The following table presents changes in the allowance for loan losses on non-acquired loans for the last five years:
Table 17-Summary of Non-Acquired Loan Loss Experience
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Allowance for loan losses at
January 1 $ 51,194 $ 43,448 $ 36,960 $ 34,090 $ 34,539
Chargeoffs:
Real estate:Commercial nonowner occupied (81) (76) (546) (270) (375) Consumer (253) (295) (515) (1,034) (921) Commercial owner occupied real estate (87) (659) - (118) (851) Commercial and industrial (622) (500) (776) (876) (357) Other income producing property (31) (2)
(51) (7) (102) Consumer (5,843) (4,480) (3,261) (3,597) (3,574) Total chargeoffs (6,917) (6,012) (5,149) (5,902) (6,180) Recoveries: Real estate:
Commercial nonowner occupied 1,092 1,351 1,100 1,424 443 Consumer 478 411 516 433 387 Commercial owner occupied real estate 174 145 220 54 31 Commercial and industrial 351 256 343 292 844 Other income producing property 94 21
85 87 85
Consumer 1,178 811 689 943 1,011
Total recoveries 3,367 2,995 2,953 3,233 2,801
Net chargeoffs * (3,550) (3,017) (2,196) (2,669) (3,379)
Provision for loan losses 9,283 10,763 8,684 5,539 2,930
Allowance for loan losses at
December 31 $ 56,927 $ 51,194 $ 43,448 $ 36,960 $ 34,090
Average loans, net of unearned income
** $ 8,594,639 $ 7,179,467 $ 5,914,252 $ 4,741,294 $ 3,785,243
Ratio of net chargeoffs to average
loans, net of unearned income 0.04 % 0.04 % 0.04 % 0.06 % 0.09 %
Allowance for loan losses as a
percentage of total nonacquired
loans 0.62 % 0.65 % 0.67 % 0.71 % 0.81 %
* Net charge-offs atDecember 31, 2019 , 2018, 2017, 2016, and 2015 include automated overdraft protection ("AOP") and insufficient fund ("NSF") principal net charge-offs of$3.7 million ,$2.9 million ,$2.0 million ,$2.2 million , and$2.1 million , , respectively, that are included in the consumer classification above.
** Non-acquired average loans, net of unearned income does not include loans held for sale.
The decrease in non-acquired provision for loan losses in 2019 from 2018 was primarily due to a lower amount of loan growth in 2019 along with the continued low amount of net charge-offs excluding overdrafts and ready reserves. Non-acquired loans grew by$1.3 billion in 2019 compared to$1.4 billion in 2018. Net charge-offs to average loans remained at 0.04% in 2019 compared to 2018, which mostly consisted of net charge-offs related to overdrafts and ready reserve accounts. Asset quality in the non-acquired loan portfolio, although declining slightly, remained stable in 2019 with nonperforming loans increasing$7.8 million to$22.8 million and past due loans increasing$2.1 million to$9.7 million during 2019, compared with 2018. The following provides highlights for the years endedDecember 31, 2019 and 2018:
Total net charge-offs increased
year ended
overdrafts and ready reserve accounts which increased
? to 2018, as charge offs on actual loans were in a net recovery position of
non-acquired loan portfolio excluding overdrafts and ready reserves declined by
31, 2018 to a net recovery position of
2019.
Gross charge-offs increased by
ended
charge-offs in 2019,
? accounts which increased
charge-offs related to the non-acquired loan portfolio excluding overdrafts and
ready reserves declined by$285,000 for the year endedDecember 31, 2019 compared to 2018. 76 Table of Contents
Gross recoveries increased
ended
recoveries in 2019,
? accounts which increased
related to the non-acquired loan portfolio excluding overdrafts and ready
reserves increased by
2018.
The decrease in net charge-offs excluding overdrafts and ready reserve accounts
of
? decreases in net charge-offs in commercial owner occupied real estate of
non-owner occupied real estate of
? For the twelve months ended
charge-offs to average loans was 0.04%.
? The ratio of the ALLL to cover non-acquired nonperforming loans decreased from
340.9% at
The ALLL increased fromDecember 31, 2019 compared toDecember 31, 2018 due primarily to loan growth, increased risk and uncertainty in new and expanded markets from our mergers in 2017, and increases in certain loan types during the period that require higher reserves. From a general perspective, we generally consider a three-year historical loss rate on all loan portfolios, unless circumstances within a portfolio loan type require the use of an alternate historical loss rate to better capture the risk within the portfolio. We also consider qualitative factors such as economic risk, model risk and operational risk when determining the ALLL. We adjust our qualitative factors to account for uncertainty and certain risk inherent in the portfolio that cannot be measured with historical loss rates. All of these factors are reviewed and adjusted each reporting period to account for management's assessment of loss within the loan portfolio. Overall, the general reserve increased by$6.0 million in 2019 compared to the balance atDecember 31, 2018 .
The three-year historical loss rate average on an overall basis remained
consistent at one basis point when compared with
Economic risk at the end of 2019 remained consistent and was unchanged as compared to 2018. The economic risk factor for unemployment, real estate market exposure and home sales all remained consistent. Compared to the third quarter of 2019, there was no adjustment in the economic risk factor. Model risk overall declined by one basis point in 2019 compared to 2018, and was based on our external and internal review of methodology. Risk comes from the fact that our ALLL model is not all-inclusive. Risk inherent with new products, new markets, and timeliness of information are examples of this type of exposure. Our model has been reviewed by management, the audit committee, and the Bank's primary regulators (including theFDIC and the SCBFI), and we believe it adequately addresses the various inherent risks in our loan portfolio. Operational risk consists of the underwriting, documentation, closing and servicing associated with any loan. This risk is managed through policies and procedures, portfolio management reports, best practices and the approval process. The risk factors evaluated include the following: exposure outside our deposit footprint, changes in underwriting standards, levels of past due loans and classified assets, loan growth, supervisory loan to value exceptions, results of external loan reviews, our centralized loan documentation process and significant loan concentrations. Operational risk declined by one basis point during 2019 compared to 2018. On a specific reserve basis, the ALLL atDecember 31, 2019 decreased by approximately$282,000 fromDecember 31, 2018 . The loan balances being evaluated for specific reserves during the year remained flat increasing only$1.5 million from$57.0 million atDecember 31, 2018 to$58.5 million atDecember 31, 2019 . 77 Table of Contents
The following table presents changes in the allowance for loan losses on
acquired non-credit impaired loans for the years ended
Table 18-Summary of Acquired Non-Credit Impaired Loan Loss Experience
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Allowance for loan losses at
January 1 $ - $ - $ - $ - $ -
Chargeoffs:
Real estate:
Commercial nonowner occupied (44) (107) (82) - -
Consumer (269) (506) (1,009) (428) (2,022)
Commercial owner occupied real
estate (786) (28) - 39 -
Commercial and industrial (1,289) (1,108) (71) (66) (118)
Other income producing property (26) - -
- (4)
Consumer (444) (465) (468) (532) (643)
Other loans - - -
Total chargeoffs (2,858) (2,214) (1,630) (987) (2,787)
Recoveries:
Real estate:Commercial nonowner occupied 3 8 4 4 4 Consumer 232 166 434 211 339 Commercial owner occupied real estate - - 2 - - Commercial and industrial 190 63 6 9 19 Other income producing property 71 - 8
43 4
Consumer 51 68 23 51 21
Other loans - - - - -
Total recoveries 547 305 477 318 387
Net chargeoffs (2,311) (1,909) (1,153) (669) (2,400)
Provision for loan losses 2,311 1,909 1,153 669 2,400
Allowance for loan losses at
December 31 $ - $ - $ - $ - $ -
Average loans, net of unearned
income $ 2,162,245 $ 3,032,182 $ 1,768,493 $ 943,005 $ 1,180,723
Ratio of net chargeoffs to
average loans, net of unearned
income 0.11 % 0.06 % 0.07 % 0.07 % 0.20 %
The provision for loan losses on the acquired non-credit impaired loan portfolio
was $2.3 million for the year ended December 31, 2019 compared to $1.9 million
in 2018. This was an increase of $402,000 , or 21.1%. This increase in the
provision was mainly related to an increase in commercial owner occupied real
estate charge-offs of $758,000 , partially offset by a decrease in consumer real
estate charge-offs of $237,000 during 2019 compared to 2018. The increase in
commercial owner occupied real estate charge-offs in 2019 was primarily related
to one loan relationship and we do not believe it is representative of a
particular trend within any of our markets.
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The following table presents changes in the allowance for loan losses on
acquired credit impaired loans for the five years ended
Table 19-Summary of Acquired Credit Impaired Loan Loss Experience
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017 2016 2015
Balance, beginning of the period $ 4,604 $ 4,627 $ 3,395 $ 3,706 $ 7,365
Provision for loan losses before benefit
attributable to FDIC loss share agreements:
Commercial real estate 577 532 247 1 (499)
Commercial real estate-construction and
development (148) 657 163 - (68)
Residential real estate 716 (892) 1,662 (129) 99
Consumer (222) 303 (83) 533 336
Commercial and industrial 260 511 64 183 (118)
Single pay - - - - (2)
Total provision for loan losses before
benefit attributable to FDIC loss share
agreements 1,183 1,111 2,053 588 (252)
Benefit attributable to FDIC loss share
agreements:
Commercial real estate - - - - 459
Commercial real estate-construction and
development - - - - 74
Residential real estate - - - 23 228
Consumer - - - - (107)
Commercial and industrial - - - - 131
Single pay - - - - 1
Total benefit attributable to FDIC loss
share agreements - - - 23 786
Total provision for loan losses charged to
operations 1,183 1,111 2,053 611 534
Provision for loan losses recorded through
the FDIC loss share receivable - - - (23) (786)
Reductions due to loan removals:
Commercial real estate (1) (19) - (16) (1,024)
Commercial real estate-construction and
development - (120) (122) (38) (91)
Residential real estate (407) (415) (528) (438) (1,500)
Consumer - (3) (14) (288) (298)
Commercial and industrial (315) (577) (157) (119) (426)
Single pay - - - - (68)
Total reductions due to loan removals (723) (1,134) (821) (899) (3,407)
Balance, end of the period $ 5,064 $ 4,604 $ 4,627 $ 3,395 $ 3,706
During 2019, the valuation allowance on acquired credit impaired loans increased
by $460,000 , or 10.0%. This was the result of impairments of $1.2 million which
were recorded through the provision for loan losses, being offset by loan
removals of $723,000 due to loans being paid off, fully charged off or
transferred to OREO. This compares to impairments of $1.1 million being recorded
through the provision for loan losses during 2018, being partially offset by
loan removals of $1.1 million due to loans being paid off, fully charged off or
transferred to OREO. Impairments are recognized immediately and releases are
generally spread over time.
In early 2016 and prior periods, we offset the impact of the provision
established for loans acquired in our FDIC -assisted acquisition that were
covered by loss share agreements, referred to as covered loans, by adjusting the
related FDIC indemnification asset. However, on June 23, 2016 , the Bank entered
into an early termination agreement with the FDIC with respect to all of its
outstanding loss share agreements. As a result, all assets previously classified
as covered became uncovered, and we now recognize the full amount of future
charge-offs, recoveries, gains, losses, and expenses related to these previously
covered assets, as the FDIC will no longer share in these amounts.
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Deposits
We rely on deposits by our customers as the primary source of funds for the continued growth of our loan and investment securities portfolios. Customer deposits are categorized as either noninterest-bearing deposits or interest-bearing deposits. Noninterest-bearing deposits (or demand deposits) are transaction accounts that provide us with "interest-free" sources of funds. Interest-bearing deposits include savings deposit, interest-bearing transaction accounts, certificates of deposits, and other time deposits. Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts. During 2019, all categories of deposits increased from 2018 except for savings deposits and certificates of deposit. Total deposits increased$530.2 million , or 4.6%, to$12.2 billion during 2019. Our deposit growth sinceDecember 31, 2018 included an increase in interest-bearing demand deposits of$559.3 million and noninterest-bearing transaction account deposits of$183.5 million while certificates of deposits declined$122.7 million and saving deposits declined$89.9 million . During 2019, we continued our focus on increasing core deposits (excluding certificates of deposits and other time deposits), which are normally lower cost funds from certificate of deposit balances. The following table presents total deposits for the five years atDecember 31 : Table 21-Total Deposits December 31, (Dollars in thousands) 2019 2018 2017 2016 2015 Demand deposits$ 3,245,306 $ 3,061,769 $ 3,047,432 $ 2,199,046 $ 1,976,480 Savings deposits 1,309,896 1,399,815 1,443,918 799,615 735,961 Interestbearing demand deposits 5,966,496 5,407,175 5,300,108 3,461,004 3,293,942 Total savings and interestbearing demand deposits 7,276,392 6,806,990 6,744,026 4,260,619 4,029,903 Certificates of deposit 1,651,399 1,775,095 1,738,384 872,773 1,092,750 Other time deposits 3,999 3,079 2,924 1,985 1,295 Total time deposits 1,655,398 1,778,174 1,741,308 874,758 1,094,045 Total deposits$ 12,177,096 $ 11,646,933 $ 11,532,766 $ 7,334,423 $ 7,100,428
Overall deposits grew through organic growth during 2019 from
Total deposits increased
?
above.
Noninterest-bearing deposits (demand deposits) increased by
? 6.0%, for the year ended
2018.
Money market (Market Rate Checking) and other interest-bearing demand deposits
? (NOW, IOLTA, and others) increased
when compared with
At
? to total deposits was 73.3%, consistent with the ratio of 73.7% at the end of
2018.
The following are key highlights regarding overall growth in average total deposits:
? Total deposits averaged
or 2.5%, from 2018. This increase was driven by organic growth.
? Average interest-bearing deposits increased by
billion in 2019 compared to 2018.
? Average noninterest-bearing demand deposits increased by
3.5%, to$3.2 billion in 2019 compared to 2018. 80 Table of Contents
The following table provides a maturity distribution of certificates of deposit
of
Table 22-Maturity Distribution of Certificates of Deposits of$250 Thousand or More December 31, (Dollars in thousands) 2019 2018 % Change Within three months$ 56,400 $ 60,135 (6.2) % After three through six months 35,848 44,732 (19.9) % After six through twelve months 103,164 123,248 (16.3) % After twelve months 107,823 91,896 17.3 %$ 303,235 $ 320,011 (5.2) % Short-Term Borrowed Funds Our short-term borrowed funds consist of federal funds purchased and securities sold under repurchase agreements and short-term FHLB Advances. Note 9-Federal Funds Purchased and Securities Sold Under Agreements to Repurchase in our audited financial statements provides a profile of these funds at each year-end, the average amounts outstanding during each period, the maximum amounts outstanding at any month-end, and the weighted average interest rates on year-end and average balances in each category. Federal funds purchased and securities sold under agreements to repurchase most typically have maturities within one to three days from the transaction date. Certain of these borrowings have no defined maturity date. Note 10-Other Borrowings in our audited financial statements provide provides a profile of short-term FHLB advances at each year-end, the average amounts outstanding during each period and the weighted average interest rates on year-end and average balances in each category. Short-term FHLB advances have a maturity of less than one year.
Long-Term Borrowed Funds
Our long-term borrowed funds consist of junior subordinated debt. Note 10-Other Borrowings in our audited financial statements provides a profile of these funds at each year-end, the balance at year end, the interest rate at year end and the weighted average interest rate for long-term borrowings. Each issuance of junior subordinated debt has a maturity of 30 years, but we can call the debt at any point without penalty. Capital and Dividends Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As ofDecember 31, 2019 , shareholders' equity was$2.4 billion , an increase of$6.7 million , or 0.3%, from atDecember 31, 2018 . The driving factor for this increase from 2018 is net income of$186.5 million and an increase in accumulated other comprehensive income of$25.9 million mainly related to gains in our investment securities portfolio. These increases were offset in 2019 by a reduction in capital of$156.9 million from the repurchase of 2,165,000 shares of our common stock under our repurchase programs and by cash dividends paid to common shareholders of$57.7 million . AtDecember 31, 2019 , we had accumulated other comprehensive gain of$1.0 million compared to an accumulated other comprehensive loss of$24.9 million atDecember 31, 2018 . This change was attributable to a$30.3 million , net of tax, improvement in the unrealized gain (loss) position in the available for sale securities portfolio, a$6.3 million , net of tax, improvement in the unrealized gain (loss) position related to pension plans and a$10.7 million , net of tax, decline in the unrealized gain (loss) position related to the cash flow hedges. The change in the unrealized gain (loss) position in the available for sale securities portfolio and the cash flow hedges are due to the decline in interest rates during 2019. The change in the unrealized gain (loss) position in the pension plan is due to our termination of the pension plan in the second quarter of 2019 and the recognition of the unrealized loss position into net income. Our equity-to-assets ratio decreased to 14.90% atDecember 31, 2019 from 16.12% atDecember 31, 2018 . The decrease fromDecember 31, 2018 was due to the percentage increase in equity of 0.3% being less than the percentage increase in total assets of 8.5%. This was mainly due to the reduction in equity during 2019 from our repurchase of 2,165,000 shares of common stock at a cost of$156.9 million . InMarch 2017 , our Board of Directors approved and reset the number of shares available to be repurchased under the 2004 Stock Repurchase Program to 1,000,000 of which all the shares were repurchased in the third and fourth quarters of 2018. OnJanuary 25, 2019 , our Board of Directors approved a new program to repurchase up to 1,000,000 of 81
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our common stock, which were repurchased in the first and second quarter of 2019 at an average price of$69.89 per share (excluding commission expense) for a total of$69.9 million . InJune 2019 , our Board of Directors authorized the repurchase of up to an additional 2,000,000 shares of our common stock after considering, among other things, our liquidity needs and capital resources as well as the estimated current value of our net assets (the "new Repurchase Program"). The number of shares to be purchased and the timing of the purchases during 2019 were 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 ofDecember 31, 2019 , we have repurchased 1,165,000 shares at an average price of$74.72 a share (excluding sales commission) for a total of$87.1 million in common stock under the New Repurchase Program. We may repurchase up to an additional 835,000 shares of common stock under the New Repurchase Program, however, we are not obligated to repurchase any additional shares under the New Repurchase Program. In March of 2005, theFederal Reserve Board announced changes to its capital adequacy rules, including the capital treatment of trust preferred securities. TheFederal Reserve's rule, which took effect in earlyApril 2005 , permitted bank holding companies to treat outstanding trust preferred securities as Tier 1 Capital for the first 25 years of the 30 year term of the related junior subordinated debt securities. We issued$40.0 million of these types of junior non-consolidated securities during 2005, positively impactingTier I Capital . InNovember 2007 , we acquired theScottish Bank and an additional$3.0 million of non-consolidated junior subordinated debt securities. InDecember 2012 , we acquired$9.2 million of non-consolidated junior subordinated debt securities through theSavannah Bancorp, Inc. acquisition. InJuly 2013 , we acquired an additional$46.1 million of non-consolidated junior subordinated debt securities through the FFHI merger which we redeemed inJanuary 2015 . InJanuary 2017 , we acquired$18.5 million of non-consolidated junior subordinated debt securities through the SBFC merger and inNovember 2017 , we acquired$40.9 million of non-consolidated junior subordinated debt securities through the PSC merger. (See Note 1-Summary of Significant Accounting Policies in the audited consolidated financial statements for a more detailed explanation of our trust preferred securities.) Pursuant to the Basel III rules adopted by the bank regulatory agencies inJuly 2013 , financial institutions with less than$15 billion in total assets may continue to include their trust preferred securities issued prior toMay 19, 2010 in Tier 1 capital, but cannot include in Tier 1 capital any trust preferred securities issued after such date. A financial institution may continue to include its trust preferred securities in Tier 1 capital if it exceeds$15 billion in total assets through organic growth, but if it exceeds$15 billion in total assets through an acquisition or enters into an acquisition after exceeding$15 billion in total assets through organic growth, then the trust preferred securities would no longer be included in Tier 1 capital. Therefore, upon closing on the proposed merger with CenterState in 2020, our trust preferred securities of$115.8 million will no longer be included in Tier 1 capital.
Table 23-Capital Adequacy Ratios
The following table presents our consolidated capital ratios under the Basel III
rules.
December 31,
(In percent) 2019 2018 2017
Common equity Tier 1 risk-based capital 11.30 12.05 11.59
Tier 1 riskbased capital 12.25 13.05 12.60
Total riskbased capital 12.78 13.56 13.04
Tier 1 leverage 9.73 10.65 10.36
The Tier 1 leverage ratio decreased in 2019, compared to 2018, due to the
increase in our average asset size outpacing the increase in our capital. CET1
risk-based capital, Tier 1 risk-based capital and total risk-based capital
ratios all decreased in 2019 compared to 2018, due to the increase in our
risk-based assets outpacing the increase in our capital. The lower percentage
increase in our capital was mainly due to the reduction in equity from our
repurchase of 2,165,000 shares of common stock at a cost of $156.9 million in
2019. Our capital ratios are currently well in excess of the minimum standards
and continue to be in the "well capitalized" regulatory classification.
We are subject to regulations with respect to certain risk-based capital ratios.
These risk-based capital ratios measure the relationship of capital to a
combination of balance sheet and off-balance sheet risks. The values of both
balance sheet and off-balance sheet items are adjusted based on the rules to
reflect categorical credit risk. In addition to the risk-based capital ratios,
the regulatory agencies have also established a leverage ratio for assessing
capital adequacy.
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The leverage ratio is equal to Tier 1 capital divided by total consolidated on-balance sheet assets (minus amounts deducted from Tier 1 capital). The leverage ratio does not involve assigning risk weights to assets.
Under the Basel III rules, which became fully phased-in onJanuary 1, 2019 , South State and the Bank are required to maintain the following minimum capital levels: a CET1 risk-based capital ratio of 4.5%; a Tier 1 risk-based capital ratio of 6%; a total risk-based capital ratio of 8%; and a leverage ratio of 4%. In terms of quality of capital, Basel III emphasizes CET1 capital and implements strict eligibility criteria for regulatory capital instruments. In addition, under the Basel III rules, in order to avoid restrictions on capital distributions and discretionary bonus payments to executives, a covered banking organization is required to maintain a "capital conservation buffer" equal to 2.5% of risk-weighted assets in addition to its minimum risk-based capital requirements. This buffer consists solely of CET1 risk-based capital, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The Bank is also subject to the regulatory framework for prompt corrective action, which identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and is based on specified thresholds for each of the three risk-based regulatory capital ratios (CET1, Tier 1 capital and total capital) and for the leverage ratio. We pay cash dividends to shareholders from funds provided mainly by dividends received from our Bank. Dividends paid by our bank are subject to certain regulatory restrictions. The approval of the SCBFI is required to pay dividends that exceed 100% of net income in any calendar year. During 2019, the Bank paid special dividends to the Company totaling$157.0 million for which SCBFI approval was required. The Bank received approval from the SCBFI inJune 2019 to pay an additional$60.0 million above current year net income in dividends to the Company. These funds were used to repurchase Company stock on the open market totaling$156.9 million during 2019. No special dividend approval was needed from the SCBFI during 2018 or 2017. TheFederal Reserve Board , theFDIC , and the OCC have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current earnings.
The following table provides the amount of dividends and payout ratios for the
years ended
Table 24-Dividends Paid to Common Shareholders
Year Ended December 31,
(Dollars in thousands) 2019 2018 2017
Dividend payments to common shareholders
30.94 % 28.27 % 44.11 %
We retain earnings to have capital sufficient to grow our loan and investment
portfolios and to support certain acquisitions or other business expansion
opportunities. The dividend payout ratio is calculated by dividing dividends
paid during the year by net income for the year.
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. Our Asset Liability
Management Committee ("ALCO") is charged with the responsibility of monitoring
policies that are 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.
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. As
reported in Table 7, less than one percent of the investment portfolio
contractually matures in one year or less. This segment of the portfolio
consists mostly of municipal obligations along with some paydowns of
mortgage-backed securities. There is also an additional amount of securities
that could be called or prepaid, as well as expected
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monthly paydowns of mortgage-backed securities. Normally, changes in the earning asset mix are of a longer-term nature and are not utilized for day-to-day corporate liquidity needs.
Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase, interest-bearing deposits at other banks and other short-term borrowings. We engage in routine activities to retain deposits intended to enhance our liquidity position. These routine activities include various measures, such as the following:
Emphasizing relationship banking to new and existing customers, where borrowers
? are encouraged and normally expected to maintain deposit accounts with our
Bank;
Pricing deposits, including certificates of deposit, at rate levels that will
? attract and /or retain balances of deposits that will enhance our Bank's
asset/liability management and net interest margin requirements; and
Continually working to identify and introduce new products that will attract
? customers or enhance our Bank's appeal as a primary provider of financial
services.
Our non-acquired loan portfolio increased by approximately
Our investment securities portfolio increased$462.5 million in 2019 compared to the balance atDecember 31, 2018 , as a result of our purchases of$979.1 million of investment securities as well as improvements in the market value of the portfolio of$38.9 million , partially offset by maturities, calls and paydowns of investment securities totaling$308.1 million and sales totaling$240.1 million during 2019. Net amortization of premiums was$7.3 million during 2019. We increased our investment securities strategically with the excess funds from deposit growth and the increase in other borrowings in 2019. In the first and second quarter of 2019, we also sold certain lower yielding legacy securities (mostly mortgage-backed securities) at a loss and reinvested the funds in higher yielding current market securities which also consisted mostly of mortgage-backed securities. The losses on the sales of securities of approximately$3.1 million taken in this restructuring were offset by a gain of$5.4 million that we recorded on the sale of VISA Class B shares.
Total cash and cash equivalents was
AtDecember 31, 2019 andDecember 31, 2018 , we had$0 and$7.6 million , respectively, of traditional, out-of-market brokered deposits and$45.8 million and$72.2 million , respectively, of reciprocal brokered deposits. Total deposits were$12.2 billion atDecember 31, 2019 , up$530.2 million or 4.6% from$11.6 billion atDecember 31, 2018 . Our deposit growth sinceDecember 31, 2018 included a$183.5 million increase in demand deposit accounts, a$309.3 million increase in savings and money market accounts and a$160.1 million increase in interest-bearing transaction accounts, partially offset by a$122.7 million decline in certificates of deposit. Other borrowings increased$549.9 million to$815.9 million atDecember 31, 2019 , compared to 2018. Other borrowings atDecember 31, 2019 included$700.1 million in FHLB advances compared to$150.1 million atDecember 31, 2018 . We had approximately$115 million in junior subordinated debt atDecember 31, 2019 andDecember 31, 2018 . During the first quarter of 2019, we paid-off early the FHLB advance of$150.0 million that was outstanding atDecember 31, 2018 that would have matured inDecember 2019 . We then borrowed$500 million inMarch 2019 and$200 million inJune 2019 in 90-day fixed rate FHLB advances, which we currently plan to continuously renew. At the same time, we entered into interest rate swap agreements with a notional amount of$350 million (4 year agreement) and$350 million (5 year agreement) to manage the interest rate risk related to these 90-day FHLB advances. 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 occasional 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. 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 theFederal Reserve Bank , and/or other short-term investments; asset quality; well-capitalized position; and profitable 84
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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 theFederal Reserve Bank , if any, to serve as the primary source of immediate liquidity. AtDecember 31, 2019 , we had total federal funds credit lines of$606.0 million with no outstanding advances. If we needed additional liquidity, we would turn to short-term borrowings as an alternative immediate funding source and would consider other appropriate actions such as promotions to increase core deposits or the sale of a portion of our investment portfolio. AtDecember 31, 2019 , we had$388.1 million of credit available at theFederal Reserve Bank's discount window, but had no outstanding advances as of the end of 2019. In addition, we could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks and/or the FHLB. AtDecember 31, 2019 , we had a total FHLB credit facility of$2.5 billion with$700.1 million in outstanding advances,$63,000 in credit enhancements from participation in the FHLB's Mortgage Partnership Finance Program, and outstanding FHLB letters of credit to secure certain public funds deposits of$231.1 million , leaving$1.6 billion in availability on the FHLB credit facility. We have a$25.0 million unsecured line of credit withU.S. Bank National Association with no outstanding advances. We believe that our liquidity position continues to be adequate and readily available. Our contingency funding plan describes several potential stages based on stressed liquidity levels. Our Board of Directors reviews liquidity benchmarks quarterly. We also review on at least an annual basis our liquidity position and our contingency funding plans with our principal banking regulators. We maintain various wholesale sources of funding. If our deposit retention efforts were to be unsuccessful, we would utilize these alternative sources of funding. Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged. This could increase our cost of funds, impacting our net interest margin and net interest spread.
Derivatives and Securities Held for Trading
TheSEC has adopted rules that require comprehensive disclosure of accounting policies for derivatives as well as enhanced quantitative and qualitative disclosures of market risk for derivatives and other financial instruments. The market risk disclosures are classified into two categories: financial instruments entered into for trading purposes and all other instruments (non-trading purposes). We do not maintain a derivatives or securities trading portfolio.
Asset-Liability Management and Market Risk Sensitivity
Our earnings and the economic value of our shareholders' equity may vary in
relation to changes in interest rates and the accompanying fluctuations in
market prices of certain of our financial instruments. We use a number of
methods to measure interest rate risk, including simulating the effect on
earnings of fluctuations in interest rates and monitoring the present value of
asset and liability portfolios under various interest rate scenarios. The
earnings simulation models take into account our contractual agreements with
regard to investments, loans, deposits, borrowings, and derivatives. While the
simulation models are subject to the accuracy of the assumptions that underlie
the process, we believe that such modeling provides a better illustration of the
interest sensitivity of earnings than does a static or even a beta-adjusted
interest rate sensitivity gap analysis. The simulation models assist in
measuring and achieving growth in net interest income by providing the Asset-
Liability Management Committee ("ALCO") a reasonable basis for quantifying and
managing interest rate risk. Numerous simulations incorporate an array of
interest rate changes as well as projected changes in the mix and volume of
balance sheet assets and liabilities. Accordingly, the simulations are
considered to provide a measurement of the degree of earnings risk we have, or
may incur in future periods, arising from interest rate changes or other market
risk factors.
From time-to-time we enter into interest rate swaps to hedge some of our interest rate risks. For further discussion of the Company's interest rate swaps, see Note 27-Derivative Financial Instruments in the consolidated financial statements.
Our primary management tool and policy, established by ALCO and the board of directors, is to monitor exposure to interest rate increases and decreases of 100 basis points instantaneously. Our policy guideline prescribes 10% as the maximum negative impact on net interest income over a one-year horizon associated with an instantaneous change in interest rates of 100 basis points. Our principal simulation also uses a strategy (or dynamic) balance sheet that forecasts growth, not a static or frozen balance sheet. We traditionally have maintained a risk position well within the policy guideline level. As ofDecember 31, 2019 , the earnings simulations indicated that the impact of a 100 basis point increase / decrease in rates would result in an estimated 4.92% increase (up 100) and 4.85% decrease (down 100) in net 85
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interest income as compared with a flat base case interest rate environment. These simulations in declining-rate scenarios of larger magnitude are viewed by us and many other depository institutions as being more remote and not as meaningful. We consider smaller declining rate scenarios in our overall analysis which also illustrate that we are asset sensitive. Current simulations indicate that our rate sensitivity is somewhat asset sensitive to the indicated changes in interest rates over an one-year horizon. Comparatively, as ofDecember 31, 2018 , the earnings simulations indicated that the impact of an instantaneous 100 basis point increase in rates would have resulted in an approximate 3.8% increase in net interest income-as compared with a base case interest rate environment. The shape and non-parallel shifts of the fixed-income yield curve can also influence interest rate risk sensitivity. Therefore, we run a number of other rate scenario simulations to provide additional assessments of our interest rate risk posture. For example, in our strategy balance sheet analysis atDecember 31, 2019 , we simulated a curve that flattens with short-term rates rising by approximately 50 basis points with other rates beyond that point rising proportionally to a level that matches theDecember 31, 2019 30-year yield. This resulted in estimated net interest income increasing somewhat from a base case. This is largely attributable to our position in short-term assets rising quickly in yield. A simulation of a curve that steepened, caused by a 140 basis points rise in 30-year yields, and then sloping downward proportionally to the current one-month rate, would have estimated results that were slightly more beneficial to net interest income as deposit rates would rise only modestly and longer-term loan yields (like mortgages) would increase. In addition to simulation analysis, 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 assumes no growth or decline in the balance sheet (no management influence) but does assume mortgage-related prepayments and certain other cash flows occur. It provides a measure of rate risk extending beyond the analysis horizon contained in the simulation analyses. The EVE model is essentially a discounted cash flow fair value of all of the Company's tangible assets, liabilities, and derivatives. The difference represented by the present value of tangible assets minus the present value of liabilities is defined as the economic value of equity. AtDecember 31, 2019 , the Company's ratio of EVE-to-assets was 15.5% in a current forward rate curve. In hypothetical environments where rates increased / decreased by 200 basis points instantaneously the ratio was 16.3% (up 200) and 15.2% (down 200).
Asset Credit Risk and Concentrations
The quality of our interest-earning assets is maintained through our management of certain concentrations of credit risk. We review each individual earning asset including investment securities and loans for credit risk. To facilitate this review, we have established credit and investment policies that include credit limits, documentation, periodic examination, and follow-up. In addition, we examine these portfolios for exposure to concentration in any one industry, government agency, or geographic location.
Loan and Deposit Concentration
We have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our loans concentrated within a single industry or group of related industries. Furthermore, we attempt to avoid making loans that, in an aggregate amount, exceed 10% of total loans to a multiple number of borrowers engaged in similar business activities. AtDecember 31, 2019 and 2018, there were no aggregated loan concentrations of this type. We do not believe there are any material seasonal factors that would have a material adverse effect on us. We do not have foreign loans or 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 ofU.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 subsidiary has a diversified loan portfolio, a substantial portion of their borrowers' abilities to honor their contracts is dependent upon economic conditions withinSouth Carolina ,North Carolina ,Georgia and the surrounding regions. 86 Table of Contents
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 risk-based capital, or$375.3 million atDecember 31, 2019 . Based on this criteria, we had four such credit concentrations atDecember 31, 2019 , including loans on hotels and motels of$574.6 million , loans to lessors of nonresidential buildings (except mini-warehouses) of$1.4 billion , loans on owner occupied office buildings of$380.5 million and loans to lessors of residential buildings (investment properties and multi-family) of$570.9 million . 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 ALLL methodology. Banking regulators have established guidelines for the construction, land development and other land loans to total less than 100% of total risk-based capital and for total commercial real estate loans to total less than 300% of total risk-based capital. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank's total risk-based capital. AtDecember 31, 2019 andDecember 31, 2018 , the Bank's construction, land development and other land loans as a percentage of total risk-based capital were 68.7% and 69.5%, respectively. Commercial real estate loans (which includes construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) as a percentage of total risk-based capital were 225.6% and 216.0% as ofDecember 31, 2019 andDecember 31, 2018 , respectively. As ofDecember 31, 2019 andDecember 31, 2018 , the Bank was below the established regulatory guidelines. When a bank's ratios are in excess of one or both of these commercial real estate loan ratio 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.
Off-Balance Sheet Arrangements
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
At
In addition to commitments to extend credit, we also issue standby letters of credit, which are assurances to third parties that they will not suffer a loss if our customer fails to meet its contractual obligation to the third party. Standby letters of credit totaled$32.9 million atDecember 31, 2019 . Past experience indicates that many of these standby letters of credit will expire unused. However, through our various sources of liquidity, we believe that we will have the necessary resources to meet these obligations should the need arise. Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , which require the measure of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike most other industries, the majority of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution's performance than does the effect of inflation. Interest rates do not necessarily change in the same magnitude as the prices of goods and services. 87 Table of Contents
While the effect of inflation on banks is normally not as significant as is its influence on those businesses which have large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses. Inflation also affects our bank's customers and may result in an indirect effect on our bank's business.
Contractual Obligations
The following table presents payment schedules for certain of our contractual obligations as ofDecember 31, 2019 . Long-term debt obligations totaling$115.9 million mostly include junior subordinated debt. Short-term debt obligations pertain to 90-day FHLB advances that we plan to continuously renew at maturity each quarter. With the FHLB advances, we entered into interest rate swap agreements with a notional amount of$350 million (4 year agreement) and$350 million (5 year agreement) to manage the interest rate risk related to these FHLB advances. Operating lease obligations of$117.3 million pertain to banking facilities. Certain lease agreements include payment of property taxes and insurance and contain various renewal options. Additional information regarding leases is contained in Note 20 of the audited consolidated financial statements. Table 25-Obligations Less Than 1 to 3 3 to 5 More Than (Dollars in thousands) Total 1 Year Years Years 5 Years
Longterm debt obligations*$ 115,936 $ 7 $ 16 $ 16 $ 115,897 Short-term debt obligations* 700,000 700,000 - - - Operating lease obligations 117,254 8,077 16,567 16,388 76,222 Total$ 933,190 $ 708,084 $ 16,583 $ 16,404 $ 192,119
* Represents principal maturities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See "Asset-Liability Management and Market Risk Sensitivity" on page 85 in Management's Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk.
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