SOUTHSTATE CORPORATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") relates to the financial statements contained in this
Quarterly Report beginning on page 3. For further information, refer to the MD&A
appearing in the Annual Report on Form 10-K for the year ended December 31,
2020 . Results for the three months ended March 31, 2021 are not necessarily
indicative of the results for the year ending December 31, 2021 or any future
period.
Unless otherwise mentioned or unless the context requires otherwise, references
to "South State," the "Company" "we," "us," "our" or similar references mean
South State Corporation and its consolidated subsidiaries. References to the
"Bank" means South State Corporation's wholly owned subsidiary, South State
Bank, National Association , a national banking association.
Overview
South State Corporation is a financial holding company headquartered in Winter
Haven, Florida , and was incorporated under the laws of South Carolina in 1985.
We provide a wide range of banking services and products to our customers
through our Bank. The Bank operates South State Advisory, Inc. (formerly First
Southeast 401K Fiduciaries, Inc. ), a wholly owned registered investment advisor.
The Bank also operates Duncan-Williams, Inc. ("Duncan-Williams "), which it
acquired on February 1, 2021 . Duncan-Williams is a registered broker-dealer,
headquartered in Memphis, Tennessee , that serves primarily institutional clients
across the U.S. in the fixed income business. Through the merger with
CenterState Bank Corporation ("CSFL") in the second quarter of 2020, the Bank
also owns CBI Holding Company, LLC ("CBI"), which in turn owns Corporate
Billing, LLC ("Corporate Billing"), a transaction-based finance company
headquartered in Decatur, Alabama that provides factoring, invoicing, collection
and accounts receivable management services to transportation companies and
automotive parts and service providers nationwide. Also, through the merger with
CSFL in the second quarter of 2020, the holding company operates R4ALL, Inc. ,
which manages troubled loans purchased from the Bank to their eventual
disposition and SSB Insurance Corp. , a captive insurance subsidiary pursuant to
Section 831(b) of the U.S. Tax Code.
At March 31, 2021 , we had approximately $39.7 billion in assets and 5,210
full-time equivalent employees. Through our Bank branches, ATMs and online
banking platforms, we provide our customers with a wide range of financial
services, including deposit accounts such as checking accounts, NOW accounts,
savings and time deposits of various types, safe deposit boxes, bank money
orders, wire transfer and ACH services, brokerage services and alternative
investment products such as annuities and mutual funds, trust and asset
management services, loans of all types, including business loans, agriculture
loans, real estate-secured (mortgage) loans, personal use loans, home
improvement loans, automobile loans, manufactured housing loans, boat loans,
credit cards, letters of credit, home equity lines of credit, treasury
management services, merchant services and, factoring through a six (6) state
footprint in Alabama , Florida , Georgia , North Carolina , South Carolina and
Virginia . We also operate a correspondent banking and capital markets division
within our national bank subsidiary, of which the majority of its bond salesmen,
traders and operational personnel are housed in facilities located in
Birmingham, Alabama and Atlanta, Georgia . This division's primary revenue
generating activities are related to its capital markets division, which
includes commissions earned on fixed income security sales, fees from hedging
services, loan brokerage fees and consulting fees for services related to these
activities; and its correspondent banking division, which includes spread income
earned on correspondent bank deposits (i.e., federal funds purchased) and
correspondent bank checking account deposits and fees from safe-keeping
activities, bond accounting services for correspondents, asset/liability
consulting related activities, international wires, and other clearing and
corporate checking account services. The correspondent banking and capital
markets division was further expanded with the addition of Duncan-Williams onFebruary 1, 2021 .
We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisitions of select financial institutions, or branches in certain market areas.
The following discussion describes our results of operations for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 and also analyzes our financial condition as ofMarch 31, 2021 as compared toDecember 31, 2020 . Like most financial institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we may pay interest. Consequently, one of the key measures of our success is the amount of our net 48 Table of Contents interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. Of course, there are risks inherent in all loans, as such we maintain an allowance for credit losses, otherwise referred to herein as ACL, to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for credit losses against our operating earnings. In the following discussion, we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion. The following sections also identify significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report. Recent Events COVID-19 The COVID-19 pandemic has severely restricted the level of economic activity in our markets. Specifically due to the COVID-19 pandemic, the federal and state governments in which we have financial centers and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of some businesses that have been deemed to be non-essential. While our business has been designated an essential business, which allows us to continue to serve our customers, we serve many customers that were deemed, or who were employed by businesses that were deemed, to be non-essential. Although states in our market area have allowed businesses to reopen in the second and third quarters of 2020 that were deemed non-essential, there are still many restrictions, and our customers are still being adversely effected by the COVID-19 pandemic. In many of the states in our market area, as the economies have been allowed to reopen, there has been an increase in cases of COVID-19 and some restrictions have been reinstated. The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and increased volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of general operations, with a more limited impact to our mortgage and correspondent banking and capital markets business lines. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and inthe United States as a whole. The COVID-19 pandemic has had a significant impact on our business and operations. As part of our efforts to practice social distancing, inMarch 2020 , we closed all of our banking lobbies and began conducting most of our business through drive-thru tellers and through electronic and online means. To support the health and well-being of our employees, we allowed a majority of our non-customer facing workforce to work from home. InOctober 2020 , we reopened our banking lobbies in our branch locations, but a majority of our support staff is still working from home. To support our customers or to comply with law, we deferred loan payments from 90 to 360 days for consumer and commercial customers. For customers directly impacted by the COVID-19 pandemic, we suspended residential property foreclosure sales and involuntary automobile repossessions throughOctober 1, 2020 , 49
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which was the latest moratorium expiration for states in our footprint. Eviction actions remained suspended throughDecember 31, 2020 perCenters for Disease Control andPrevention Agency Order 2020-19654. Additionally, we offered fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, small business and personal lending customers.
Future governmental actions may require more of these and other types of
customer-related responses. We are awaiting a final ruling from the
As ofMarch 31, 2021 , we have deferrals of$186 million , or 0.83%, of our total loan portfolio, excluding loans held for sale and Paycheck Protection Program ("PPP") loans. For commercial loans, the standard deferral was 90 days for both principal and interest, 120 days of principal only payments or 180 days of interest only payments. We have actively reached out to our customers to provide guidance and direction on these deferrals. In terms of available lines of credit, the Company has not experienced an increase in borrowers drawing down on their lines. As ofMarch 31, 2021 , below are the loan portfolios which we
view are of the greatest risk:
Lodging (hotel / motel) loan portfolio - 13% is under deferral, and the
? weighted average loan to value ("LTV") was 59%. The Company currently has
million, or 4.3% of the total loan portfolio, excluding loans held for sale and
PPP loans, in lodging loans.
Restaurant loan portfolio - 2% is under deferral, and the weighted average LTV
? of real estate secured was 56%. The Company currently has
1.9% of the total loan portfolio, excluding loans held for sale and PPP loans,
in restaurants.
Retail loan portfolio - 0.03% of retail CRE loan portfolio is under deferral
? and the weighted average LTV of 53%. The Company currently has
or 9.8% of the total loan portfolio, excluding loans held for sale and PPP
loans, in retail CRE loans. Also, we have extended credit to both customers and non-customers related to the PPP. As ofMarch 31, 2021 , we have produced approximately 26,000 loans totaling approximately$3.1 billion through the PPP. While deferrals have been decreasing materially since the third quarter of 2020, given the fluidity of the pandemic and the risk there may be new lockdowns or restrictions on business activities to slow the spread of the virus, there is no guarantee that some loan not currently on deferral might return to deferral status. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic in order to provide borrowers with flexibility with respect to repayment terms. The Company's payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company elected the accounting policy in the CARES Act to suspend TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic if the concession met the criteria defined under the CARES Act. We are continuously monitoring the impact of the COVID-19 pandemic on our results of operations and financial condition. We implemented ASU 2016-13 in the first quarter of 2020 related to the calculation for our ACL for loans, investments, unfunded commitments and other financial assets. Considering the COVID-19 pandemic in our CECL models and moving to one CECL model (with the merged bank), during the third quarter of 2020, we recorded an additional provision for credit losses in the third quarter of 2020. We also adjust our investment securities portfolio to market each period end and review for any impairment that would require a provision for credit losses. At this time, we have determined there is no need for a provision for credit losses related to our investment securities portfolio. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments in the future on the securities we hold, as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio. We also are monitoring the impact of the COVID-19 pandemic on the valuation of goodwill. Additional detail in regards to the goodwill analysis is disclosed below under theGoodwill and Other Intangible Assets section of the Recent
Events.
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Mergers and Acquisition
On February 1, 2021 , the Company completed its previously announced acquisition
of Duncan-Williams, Inc. ("Duncan-Williams "). Duncan-Williams , which operates as
a wholly owned subsidiary of the Bank, is a registered broker-dealer,
headquartered in Memphis, Tennessee , that serves primarily institutional clients
across the U.S. in the fixed income business.
Branch Consolidation
As a part of the ongoing evaluation of customer service delivery and
efficiencies, the Company closed 4 branch locations during the first quarter of
2021. The expected cost associated with these closures and cost initiatives is
estimated to be approximately $400,000 , and primarily includes personnel,
facilities and equipment cost. The annual savings in 2021 of these closures is
expected to be $750,000 . Two of the locations are in Florida and two in Georgia .
Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with GAAP and follow general practices within the banking industry. Our financial position and results of operations are affected by Management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Differences in the application of these policies could result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 2 and Note 3 of our consolidated financial statements in this Quarterly Report on Form 10-Q and in Note 1 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
The following is a summary of our critical accounting policies that are highly dependent on estimates, assumptions and judgments.
Allowance for Credit Losses or ACL
The ACL reflects Management's estimate of losses that will result from the inability of our borrowers to make required loan payments. Due to the Merger between the Company and CSFL, effectiveJune 7, 2020 , Management adopted one combined methodology during the third quarter of 2020. Management used the one systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgment; therefore, Management's process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company's ACL recorded in the balance sheet reflects Management's best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for Management's current estimate of expected credit losses. See Note 2 - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 7 - Allowance for Credit Losses in this Quarterly Report on Form 10-Q, "Provision for Credit Losses and Nonperforming Assets" in this MD&A.
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed in a business combination. As ofMarch 31, 2021 andDecember 31, 2020 , the balance of goodwill was$1.6 billion .Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. 51 Table of Contents Our most recent evaluation of goodwill was performed as ofNovember 30, 2020 , and after considering the effects of COVID-19 on the economy, we determined that no impairment charge was necessary. Our stock price has historically traded above its book value, however, our stock price fell below book value and remained below book value through much of 2020 in reaction to the COVID-19 pandemic, which affected stock prices of companies in almost all industries. InNovember 2020 , our stock price rose back above book value as the economy slowly began to recover and there was positive news on vaccines for COVID-19. Our stock price closed onDecember 31, 2020 at$72.30 . Our stock price has continued to trade above book value and tangible book value in the first quarter of 2021. Our stock price closed onMarch 31, 2021 at$78.51 , which was above book value of$66.42 and tangible book value of$42.02 . We will continue to monitor the impact of COVID-19 on the Company's business, operating results, cash flows and financial condition. If the COVID-19 pandemic continues, the economy deteriorates and our stock price falls below current levels, we will have to reevaluate the impact on our financial condition and potential impairment of goodwill. Core deposit intangibles, client list intangibles, and noncompetition ("noncompete") intangibles consist primarily of amortizing assets established during the acquisition of other banks. This includes whole bank acquisitions and the acquisition of certain assets and liabilities from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the correspondent banking and wealth and trust management business. 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, ACL, write downs of OREO properties, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, mortgage servicing rights, 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 states ofAlabama ,California ,Colorado ,Florida ,Georgia ,Mississippi ,North Carolina ,South Carolina ,Tennessee ,Texas ,New York, New York City andVirginia . We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves atMarch 31, 2021 or 2020.
Other Real Estate Owned and Bank Property Held For Sale
Other real estate owned ("OREO") consists of properties obtained through
foreclosure or through a deed in lieu of foreclosure in satisfaction of loans.
Prior to the merger with CSFL, we classified former branch sites as held for
sale OREO. During the second quarter of 2020 and with the merger with CSFL, the
Company elected to reclassify these assets as bank property held for sale and
report on a separate line within the balance sheet. Both OREO and bank property
held for sale are recorded at the lower of cost or fair value and the fair value
was 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, for OREO, any excess of the
loan balance over the fair value of the real estate held as collateral is
treated as a charge against the ACL. At the time a bank property is no longer in
service and is moved to held for sale, any excess of the current book value over
fair value is recorded as an expense in the Statement of Net Income. Subsequent
adjustments to this value are described below in the following paragraph.
We report subsequent declines in the fair value of OREO and bank properties held
for sale below the new cost basis through valuation adjustments. Significant
judgments and complex estimates are required in estimating the fair value of
these properties, 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
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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 these properties. Management
reviews the value of these properties 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.
Results of Operations
Overview
We reported consolidated net income of$146.9 million , or diluted earnings per share ("EPS") of$2.06 , for the first quarter of 2021 as compared to consolidated net income of$24.1 million , or diluted EPS of$0.71 , in the comparable period of 2020, a 509.5% increase in consolidated net income and a 190.1% increase in diluted EPS. The$146.9 million increase in consolidated net income was the net result of the following items:
A
increase in interest income from acquired loans due to an increase in average
acquired loans from the merger with CSFL, a
income on non-acquired loans and a
from investment securities. Non-acquired loan interest income increased due to
the
• declined by 21 basis points. Investment interest income increased due to the
yield of 113 basis points. This increase in loan interest income was offset by
a
interest-earning deposits with banks due to a decline in yield of 100 basis
points attributable to the falling interest rate environment, even though the
average balance increased by
and the funds that flowed in from the government stimulus;
A
the cost of interest-bearing liabilities of 48 basis points. The effects from
the decline in cost were partially offset by an increase in the average balance
of interest-bearing liabilities of
CSFL and government stimulus. The decrease in the cost of interest-bearing
• liabilities was due to a falling interest rate environment as the Federal
Reserve dropped the federal funds target rate 150 basis points to a range of
0.00% to 0.25% in
quarter of 2021 reflects the full impact of these actions and the Company's
move to reduce the interest rate paid on deposits as opposed to a partial month
in the first quarter of 2020 ;
A
recorded a release of the allowance for credit losses of
first quarter of 2021 while recording a provision for credit losses of
million in the first quarter of 2020. The Company recorded higher provision for
• credit losses in the first quarter of 2020 and throughout 2020 in response to
the COVID-19 pandemic. In the first quarter of 2021, with the improvement in
the economy and the increased availability of the COVID-19 vaccine, the Company
began to release some of this allowance for credit losses based on improvements
in forecasts.
A
the impact of the CSFL merger completed in the second quarter of 2020. The
• largest increases were a
capital market income,
section on page 58 for further discussion);
A
the impact of the CSFL merger completed in the second quarter of 2020. The
largest increases were from salary and employee benefits which totaled
• million, occupancy expense of
and amortization of intangibles of
section on page 59 for further discussion); and
A
primarily due to an increase in pretax book income of
• first quarter of 2021 compared to the first quarter of 2020 which drove our
effective tax rate higher. Our effective tax rate was 21.83% for the three
months ended
31, 2020.
Our quarterly efficiency ratio increased to 61.1% in the first quarter of 2021
compared to 60.4% in the first quarter of 2020. The increase in the efficiency
ratio compared to the first quarter of 2020 was the result of a 110.6%
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increase in noninterest expense (excluding amortization of intangibles) being greater than the 108.1% increase in the total of net interest income and noninterest income. The significant increases in noninterest expense and net interest income and noninterest income were due to the fact the first quarter of 2021 includes the effects of the merger with CSFL while the first quarter of 2020 does not. Diluted and basic EPS were$2.06 and$2.07 , respectively, for the first quarter of 2021, compared to the first quarter of 2020 of$0.71 and$0.72 . The increase of 509.5% in net income in the first quarter of 2021 was greater than the increase in average common shares of 111% compared to the same period in 2020. The first quarter in 2021 includes the effect of net income from CSFL while the first quarter of 2020 does not. The weighted average common shares increased to 71.0 million shares, or 111%, due to the merger with CSFL compared to 33.6 million weighted average shares outstanding atMarch 31, 2020 . The Company issued 37.3 million shares with the merger with CSFL in the second quarter
of
2020.
Selected Figures and Ratios
Three Months Ended
March 31,
(Dollars in thousands) 2021 2020
Return on average assets (annualized) 1.56 % 0.60 %
Return on average equity (annualized) 12.71 % 4.15 %
Return on average tangible equity (annualized)* 21.16 % 8.35 %
Dividend payout ratio 22.72 % 65.70 %
Equity to assets ratio 11.88 % 13.95 %
Average shareholders' equity $ 4,687,149 $ 2,336,348
* - Denotes a non-GAAP financial measure. The section titled "Reconciliation
of GAAP to non-GAAP" below provides a table that reconciles GAAP measures to
non-GAAP measures.
For the three months ended
increased to 21.16% compared to 8.35% for the same period in 2020. This
increase was the result of an increase in net income, excluding amortization of
intangibles, of
average tangible equity of
increase in average tangible equity were both due to the merger with CSFL which
occurred in the second quarter of 2020. The main reason for the more
significant increase in net income was due to the provision for credit losses
where we had a release of
to a provision of
For the three months ended
an increase from 0.60% for the three months ended
was due to the increase in net income of
first quarter of 2021 being greater than the increase of 138.2% in average ? assets. The net income (merger expenses) and increase in average assets were
both due to the merger with CSFL that occurred in early
reason for the more significant increase in net income was due to the provision
for credit losses where we had a release of
of 2021 compared to a provision of
Equity to assets ratio was 11.88% for the three months ended
decrease from 13.95% for the three months ended
138.7% being greater than the increase in equity of 103.3%. Both the increase
in assets and equity were due to the merger with CSFL in the second quarter of
2020.
Dividend payout ratio was 22.72% for the three months ended
decrease from 65.70% for the three months ended
income being greater than the 110.7% increase in cash dividends paid per common
share. The dividend payout ratio is calculated by dividing total dividends paid
during the quarter by the total net income reported for the same period.
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Net Interest Income and Margin
Non-TE net interest income increased$134.0 million or 104.7% to$262.0 million in the first quarter of 2021 compared to$128.0 million in the same period in 2020. Interest earning assets averaged$34.2 billion during the three months period endedMarch 31, 2021 compared to$14.0 billion for the same period in 2020, an increase of$20.2 billion or 143.8%. Interest bearing liabilities averaged$22.4 billion during the three months period endedMarch 31, 2021 compared to$10.2 billion for the same period in 2020, an increase of$12.2 billion or 120.2%. Some key highlights are outlined below:
Higher interest income by
acquired loans, non-acquired loans and investment securities by
balances, which were
respectively. The average balance of acquired loans increased primarily due to
balances assumed from the merger with CSFL in the second quarter of 2020. The
1. average balance of our non-acquired loan portfolio increased primarily through
organic growth including PPP loans which averaged
quarter of 2021. The average balance of investment securities increased
through both the
with CSFL along with the Company's decision to increase the investment
portfolio due to the excess liquidity held through growth in deposits since
the first quarter of 2020.
Lower interest expense of
the first quarter of 2021 compared to the same period in 2020 as the average
cost of funds declined 48 basis points. This decline due to lower cost was
partially offset by increase in the average balances for interest-bearing
2. liabilities of
interest-bearing deposits of
compared to the same period in 2020. The increase in average interest-bearing
deposits was mainly due to the
acquired in the merger with CSFL in June 2020 .
Non-TE yield on interest-earning assets for the first quarter of 2021decreased 93 basis points to 3.30% from the comparable period in 2020. The
decline in yield on interest-earning assets was due to the falling interest
3. rate environment resulting from the drops in the federal funds rate made by
the
lower yielding federal funds sold, reverse repos and other interest-bearing
deposits increased
same period in 2020.
The average cost of interest-bearing liabilities for the first quarter of 2021
decreased 48 basis points from the same period in 2020. This decrease occurred
4. in all deposit categories of funding and was due to the falling interest rate
environment in the first quarter of 2020. Our overall cost of funds, including
noninterest-bearing deposits, was 0.21% for the three months ended
2021 compared to 0.59% for the three months ended
The Non-TE net interest margin decreased by 57 basis points and the TE net
interest margin decreased by 56 basis points in the first quarter of 2021
5. compared to the same quarter of 2020 due to the decline in the yield on
interest earning assets of 93 basis points, which was only partially offset by
the lower cost of interest-bearing liabilities of 48 basis points.
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The table below summarizes the analysis of changes in interest income and
interest expense for the three months ended
Three Months Ended
March 31, 2021 March 31, 2020
Average Interest Average Average Interest Average
Balance
Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
Interest-Earning Assets:
Federal funds sold, reverse repo, and time deposits
4,215,560 15,425 1.47% 1,851,052 11,915 2.59% Investment securities (tax-exempt)
467,592 2,095 1.82% 171,674 1,399 3.28%
Loans held for sale 298,970 1,991 2.70% 41,812 331 3.18%
Acquired loans, net 11,768,952 134,762 4.64% 2,015,492 35,798 7.14%
Non-acquired loans 12,723,137 123,214 3.93% 9,424,184 96,905 4.14% Total interest-earning assets
34,231,928 278,476 3.30% 14,042,524 147,800 4.23% Noninterest-Earning Assets: Cash and due from banks
379,675 243,919
Other assets 4,090,738 1,873,673
Allowance for non-acquired loan losses (456,931) (107,183)
Total noninterest-earning assets 4,013,482 2,010,409
Total Assets $ 38,245,410 $ 16,052,933
Interest-Bearing Liabilities:
Transaction and money market accounts $ 14,678,248 $
5,387 0.15%
2,780,361 434 0.06% 1,323,770 650 0.20%
Certificates and other time deposits 3,672,818 5,436 0.60% 1,642,749 6,105 1.49% Federal funds purchased and repurchase agreements
852,277 351 0.17% 328,372 615 0.75%
Corporate and subordinated debentures 390,043 4,870 5.06% 115,900 1,192 4.14% Other borrowings
- - - 771,531 3,543 1.85%
Total interest-bearing liabilities 22,373,747 16,478 0.30% 10,159,093 19,787 0.78% Noninterest-Bearing Liabilities: Demand deposits
10,044,102 3,271,368
Other liabilities 1,140,412 286,124
Total noninterest-bearing liabilities ("Non-IBL") 11,184,514 3,557,492
Shareholders' equity 4,687,149 2,336,348
Total Non-IBL and shareholders' equity 15,871,663 5,893,840
Total liabilities and shareholders' equity $ 38,245,410 $ 16,052,933
Net interest income and margin (Non-Tax Equivalent) $ 261,998 3.10% $ 128,013 3.67%
Net interest margin (Tax Equivalent) 3.12% 3.68%
Total Deposit Cost (without debt and other borrowings) 0.15% 0.46%
Overall Cost of Funds (including demand deposits) 0.21% 0.59%
(1) Investment securities (taxable) include trading securities.
Investment Securities Interest earned on investment securities was higher in the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . This is a result of the Bank carrying a higher average balance in investment securities in 2021 compared to the same periods in 2020. The average balance of investment securities for the three months endedMarch 31, 2021 increased$2.7 billion from the comparable period in 2020. With the excess liquidity from the growth in deposits during 2020 and the first three months of 2021, the Bank used a portion of the excess funds to strategically increase the size of its investment securities. The increase in the average balance was also due to the acquisition of CSFL's investment portfolio of$1.2 billion inJune 2020 . The yield on the investment securities declined 113 basis points during the three months endedMarch 31, 2021 compared to the same periods in 2020 due to the falling interest rate environment resulting from the drop in the federal funds rate made by theFederal Reserve inMarch 2020 and the impact this reduction has on the rate earned on security purchases.
Loans
Interest earned on loans increased$125.3 million to$258.0 million in the first quarter of 2021 compared to the same quarter of 2020. Interest earned related to loans included loan accretion income recognized in the first quarter of 56
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2021 totaling$10.4 million compared to loan accretion income of$10.9 million in the first quarter of 2020, a decrease of$515,000 . Some key highlights for the quarter endedMarch 31, 2021 are outlined below:
Our non-TE yield on total loans decreased 39 basis points in the first quarter
of 2021 compared to the same period in 2020 while average total loans increased
period in 2020. The increase in average total loans was the result of 483.9%
? growth in the average acquired loan portfolio and 35.0% growth in the average
non-acquired loan portfolio. The growth in the acquired loan portfolio was due
to the addition of
in the non-acquired loan portfolio was due to normal organic growth and PPP
loans.
The yield on the acquired loan portfolio decreased from 7.14% in the first
quarter of 2020 to 4.64% in the same period in 2021. For the acquired loans,
? average balance increased by
yield decreased by 250 basis points due to overall lower rate environment and
the lower yielding PPP loans assumed from the merger with CSFL.
The yield on the non-acquired loan portfolio decreased from 4.14% in the first
quarter of 2020 to 3.93% in the same period in 2021. Non-acquired loan yield
declined by 21 basis points due to the low yielding PPP loans originated during
? the first quarter of 2021 and low interest rate environment. The most recent
rate change by the
150 basis points to a range of 0.00% to 0.25% in
COVID-19 pandemic. This effectively decreased the Prime Rate, the rate used in
pricing a majority of our new originated loans. Interest-Bearing Liabilities The quarter-to-date average balance of interest-bearing liabilities increased$12.2 billion in the first quarter of 2021 compared to the same period in 2020 . Overall cost of funds, including demand deposits, decreased by 38 basis points to 0.21% in the first quarter of 2021, compared to the same period in 2020. Some key highlights for the quarter endedMarch 31, 2021 compared to the same period in 2020 include:
Increase in interest-bearing deposits of
? federal funds purchased, repurchase agreements and corporate and subordinated
debt of
other borrowings of
Increase in average interest-bearing deposits is due to the acquisition of
second quarter of 2020. The increase in average federal funds purchased and
repurchase agreements and the increase in average corporate and subordinated
debt and other borrowings was also due to borrowings acquired in the merger
? with CSFL. The Company assumed
repurchase agreements and
preferred debt from the merger in the second quarter of 2020. The decline in
average other borrowings, consisting mostly of FHLB advances, was due to the
Company making the strategic decision to payoff these borrowings in the fourth
quarter of 2020.
The decline in interest expense of
compared to the same period in 2020 was driven by lower cost on overall
interest bearing liabilities, especially on interest bearing deposits. The cost
on interest-bearing deposits was 0.22% for the first quarter of 2021 compared
? to 0.65% for the same period in 2020. The decline in cost related to deposits
was due to the falling interest rate environment resulting from the drops in
the federal funds rate made by the
resulted in a 48 basis point decrease in the average rate on all
interest-bearing liabilities from 0.78% to 0.30% for the three months ended
March 31, 2021 .
We continue to monitor and adjust rates paid on deposit products as part of our
strategy to manage our net interest margin. Interest-bearing liabilities include
interest-bearing transaction accounts, savings deposits, CDs, other time
deposits, federal funds purchased, and other borrowings. Interest-bearing
transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.
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Noninterest-Bearing Deposits
Noninterest-bearing deposits are transaction accounts that provide our Bank with "interest-free" sources of funds. Average noninterest-bearing deposits increased$6.8 billion , or 207.0%, to$10.0 billion in the first quarter of 2021 compared to$3.3 billion during the same period in 2020. This increase in both period end and average assets was mainly due to the noninterest-bearing deposits of$5.3 billion assumed from the merger with CSFL inJune 2020 . Noninterest Income
Noninterest income provides us with additional revenues that are significant
sources of income. For the three months ended
Three Months Ended
(Dollars in thousands) 2021 2020
Service charges on deposit accounts $ 16,094 $ 12,304
Debit, prepaid, ATM and merchant card related income 9,188 5,837 Mortgage banking income
26,880 14,647
Trust and investment services income 8,578
7,389
Correspondent banking and capital market income 28,748
494
Bank owned life insurance income 3,300 2,530 Other 3,497 931 Total noninterest income$ 96,285 $ 44,132
Noninterest income increased by
Service charges on deposit accounts and debit, prepaid, ATM and merchant card
related income were higher in the first quarter of 2021 by
increase in customers and activity through the merger with CSFL during the ? second quarter of 2020. The increase in service charges on deposit accounts was
mainly driven by an increase in service charge maintenance fees on checking
accounts and an increase in net NSF income. The increase in debit, prepaid, ATM
and merchant card related income was mainly driven by higher debit card and
merchant card income. Mortgage banking income increased by$17.5 million , or 83.5%, which was
comprised of
secondary market, partially offset by a
mortgage servicing related income, net of the hedge. The increase in mortgage
income in the secondary market was directly attributable to the increase in
volume resulting from the low interest rate environment brought on by the
pandemic and monetary policy of the
increase in volume due to the merger with CSFL. The increase in mortgage income
? from the secondary market in 2021 comprised of a
gain on sale of mortgage loans to
which is net of the increase in commission expense related to mortgage
production of
increase was offset by a
the pipeline, loans held for sale and MBS forward trades. The decrease in
mortgage servicing related income, net of the hedge in 2021 was due to a
million decrease in the change in fair value of the MSR including decay partially offset by a$1.1 million increase from servicing fee income. The merger with CSFL resulted in a significant increase in correspondent
banking and capital markets income, of which approximately
attributable to the Duncan-
includes commissions earned on fixed income security sales, fees from hedging
services, loan brokerage fees and consulting fees for services related to these
activities.
Other income increased by
loan servicing fees and gains on sale of SBA loans of$2.5 million . 58 Table of Contents Noninterest Expense Three Months Ended (Dollars in thousands) 2021 2020 Salaries and employee benefits$ 140,361 $ 60,978 Occupancy expense 23,331 12,287 Information services expense 18,789 9,306 OREO expense and loan related 1,002 587 Amortization of intangibles 9,164 3,007
Business development and staff related expense 3,371 2,244 Supplies and printing
1,099 463
Postage expense 1,571 1,042
Professional fees 3,274 2,494
FDIC assessment and other regulatory charges 3,771 2,058
Advertising and marketing 1,740 814
Merger and branch consolidation related expense 10,009 4,129
Other 11,229 7,838
Total noninterest expense $ 228,711 $ 107,247
Noninterest expense increased by $121.5 million , or 113.3%, in the first quarter
of 2021 as compared to the same period in 2020. The quarterly increase in total
noninterest expense primarily resulted from the following:
Salaries and employee benefits expense increased by
in the first quarter of 2021 compared to the same period in 2020. This increase
was mainly attributable to an increase in all categories of salaries and ? benefits due to the increase in employees through the merger with CSFL in June
2020. Full time equivalent employees increased 101.7% to 5,210 at
2021 through the merger with CSFL from 2,583 at
recorded a total of
quarter, compared to
An increase in merger-related and branch consolidation related expense of
million compared to the first quarter of 2020. The costs in the first quarter ? of 2021 and 2020 were both primarily related to the merger with CSFL. The costs
in the first quarter of 2021 also consisted of branch consolidation costs along
with costs related to the DWI acquisition.
Occupancy and information services expense increased
our merger with CSFL. Our number of branches increased by 129, or 81.3% from
155 at
Amortization of intangibles increased
deposit intangible asset of
intangible asset of
The increases in the other line items is mainly related to the increase in ? costs associated with the addition of CSFL operations with the merger in the
second quarter of 2020. Income Tax Expense Our effective tax rate was 21.83% for the three months endedMarch 31, 2021 compared to 15.00% for the three months endedMarch 31, 2020 . The increase in the effective tax rate for the quarter was driven by increased pre-tax book income in the current quarter compared to the same period of 2020. The increase in pre-tax book income was a result of the combined incomes of South State and CenterState subsequent to the merger that closedJune 7, 2020 . Pre-tax book income was also higher compared to the first quarter of 2020 due to a release in the allowance for credit losses of$59.6 million in the current quarter. An additional allowance for credit losses of$36.5 million was recorded in the first quarter of 2020 as a result of the COVID-19 pandemic. The increase in pre-tax book income for the quarter was partially offset by an increase in federal estimates associated with tax credits and tax-exempt interest income compared to the first quarter of 2020. 59 Table of Contents
Analysis of Financial Condition
Summary
Our total assets increased approximately$1.9 billion , or 5%, fromDecember 31, 2020 toMarch 31, 2021 , to approximately$39.7 billion . Within total assets, cash and cash equivalents increased$1.4 billion , or 29.6%, investment securities increased$820.6 million , or 18.4%, and loans decreased$173,000 , or 0.7%, during the period. Within total liabilities, deposit growth was$1.7 billion , or 5.7%, and fed funds purchased and securities sold under agreements to repurchased growth was$98.9 million , or 12.7%. Total shareholder's equity increased$71.9 million , or 1.5%. Our loan to deposit ratio was 75% and 80% atMarch 31, 2021 andDecember 31, 2020 , respectively.Investment Securities We use investment securities, our second largest category of earning assets, to generate interest income through the deployment of excess funds, provide liquidity, fund loan demand or deposit liquidation, and pledge as collateral for public funds deposits, repurchase agreements and as collateral for derivative exposure. AtMarch 31, 2021 , investment securities totaled$5.3 billion , compared to$4.4 billion atDecember 31, 2020 , an increase of$820.6 million , or 18.5%. We continue to increase our investment securities strategically primarily with excess funds due to continued deposit growth and slow loan demand. During the three months endedMarch 31, 2021 , we purchased$1.1 billion of securities,$276.7 million classified as held to maturity and$850.6 million classified as available for sale. These purchases were partially offset by maturities, paydowns, and calls of investment securities totaling$234.6 million . Net amortization of premiums were$9.5 million in the first three months of 2021. The decrease in fair value in the available for sale investment portfolio in the first three months of 2021 compared toDecember 31, 2020 was mainly due to an increase in short and long term interest rates during the three months endedMarch 31, 2021 . The following is the combined amortized cost and fair value of investment securities available for sale and held for maturity, aggregated by credit quality indicator: Unrealized Amortized Fair Net Gain BB or (Dollars in thousands) Cost Value (Loss) AAA - A BBB Lower Not RatedMarch 31, 2021 U.S. Government agencies
- $ -
Residential mortgage-backed securities issued by
2,310,035 2,278,633 (31,402) - -
- 2,310,035
Residential collateralized mortgage-obligations issued by
781,738 785,249 3,511 98 -
- 781,640
Commercial mortgage-backed securities issued by
832,484 825,253 (7,231) 13,814 -
- 818,670 State and municipal obligations
589,954 596,103 6,149 588,402 -
- 1,552Small Business Administration loan-backed securities
504,210 501,706 (2,504) 504,210 - - -
Corporate securities 13,549 13,686 137 - - - 13,549
$ 5,106,958 $ 5,072,252 $ (34,706) $ 1,181,512 $ - $ - $ 3,925,446
* Agency mortgage-backed securities ("MBS"), agency collateralized
mortgage-obligations (CMO) and agency commercial mortgage-backed securities
("CMBS") are guaranteed by the issuing government-sponsored enterprise ("GSE")
as to the timely payments of principal and interest. Except for Government
National Mortgage Association securities, which have the full faith and credit
backing of the United States Government, the GSE alone is responsible for making
payments on this guaranty. While the rating agencies have not rated any of the
MBS, CMO and CMBS issued, senior debt securities issued by GSEs are rated
consistently as "Triple-A." Most market participants consider agency MBS, CMOs
and CMBSs as carrying an implied Aaa rating (S&P rating of AA+) because of the
guarantees of timely payments and selection criteria of mortgages backing the
securities. We do not own any private label mortgage-backed securities. The
balances presented under the ratings above reflect the amortized cost of the
investment securities.
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At March 31, 2021 , we had 217 investment securities (including both available
for sale and held to maturity) in an unrealized loss position, which totaled
$79.2 million . At December 31, 2020 , we had 86 investment securities (including
both available for sale and held to maturity) in an unrealized loss position,
which totaled $5.3 million . The total number of investment securities with an
unrealized loss position increased by 131 securities, while the total dollar
amount of the unrealized loss increased by $73.9 million . The increase in both
the number of investment securities in a loss position and the total unrealized
loss from December 31, 2020 is due to an increase in short and long term
interest rates during the first three months of 2021.
All investment securities in an unrealized loss position as of March 31, 2021
continue to perform as scheduled. We have evaluated the cash flows and
determined that all contractual cash flows should be received; therefore
impairment is 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. We continue to monitor all of our securities with a high
degree of scrutiny. There can be no assurance that we will not conclude in
future periods that conditions existing at that time indicate some or all of its
securities may be sold or would require a charge to earnings as a provision for
credit losses in such periods. Any charges as a provision for credit losses
related to investment securities could impact cash flow, tangible capital or
liquidity. See Note 2 - Summary of Significant Account Policies and Note 5 -
Investment securities for further discussion on the application of ASU 2016-13
on the investment securities portfolio.
As securities held for investment are purchased, they are designated as held to
maturity or available for sale based upon our intent, which incorporates
liquidity needs, interest rate expectations, asset/liability management
strategies, and capital requirements. Although securities classified as
available for sale may be sold from time to time to meet liquidity or other
needs, it is not our normal practice to trade this segment of the investment
securities portfolio. While Management generally holds these assets on a
long-term basis or until maturity, any short-term investments or securities
available for sale could be converted at an earlier point, depending partly on
changes in interest rates and alternative investment opportunities.
Other Investments
Other investment securities include primarily our investments in FHLB and FRB
stock with no readily determinable market value. Accordingly, when evaluating
these securities for impairment, Management considers the ultimate
recoverability of the par value rather than recognizing temporary declines in
value. As of March 31, 2021 , we determined that there was no impairment on our
other investment securities. As of March 31, 2021 , other investment securities
represented approximately $161.5 million , or 0.41% of total assets and primarily
consists of FHLB and FRB stock which totals $146.0 million , or 0.37% of total
assets. There were no gains or losses on the sales of these securities for the
three months ended March 31, 2021 and 2020, respectively.
Trading Securities
Through its Correspondent Banking Department and its wholly-owned broker dealer
Duncan-Williams Inc. , the Company will occasionally purchase trading securities
and subsequently sell them to their customers to take advantage of market
opportunities, when presented, for short-term revenue gains. Securities
purchased for this portfolio are primarily municipals, treasuries and
mortgage-backed agency securities and are held for short periods of time. This
portfolio is carried at fair value and realized and unrealized gains and losses
are included in trading securities revenue, a component of Correspondent Banking
and Capital Market Income in our Consolidated Statements of Net Income. At March
31, 2021 , we had $83.9 million of trading securities.
Loans Held for Sale
The balance of mortgage loans held for sale increased
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Loans
The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
LOAN PORTFOLIO (ENDING BALANCE) March 31, % of December 31, % of (Dollars in thousands) 2021 Total 2020 Total Acquired loans: Acquired - non-purchased credit deteriorated loans: Construction and land development$ 334,495 1.4 %$ 503,849 2.0 % Commercial non-owner occupied 2,337,495 9.5 % 2,470,402 10.0 % Commercial owner occupied real estate 1,762,063
7.2 % 1,823,209 7.4 % Consumer owner occupied 1,326,185 5.4 % 1,424,655 5.8 % Home equity loans 576,007 2.4 % 643,009 2.6 %
Commercial and industrial 1,657,827 6.8 % 2,112,514 8.6 % Other income producing property 253,639
1.0 % 274,165 1.1 % Consumer non real estate 185,949 0.8 % 206,812 0.8 % Other 253 - % 254 - %
Total acquired - non-purchased credit deteriorated loans 8,433,913 34.5 % 9,458,869 38.3 % Acquired - purchased credit deteriorated loans (PCD): Construction and land development
81,890 0.3 % 115,146 0.5 %
Commercial non-owner occupied 1,074,398 4.4 % 1,159,518 4.7 %
Commercial owner occupied real estate 713,338 2.9 % 752,290 3.1 % Consumer owner occupied 443,080 1.8 % 476,969 1.9 % Home equity loans 77,546 0.3 % 84,514 0.3 %
Commercial and industrial 157,787 0.6 % 178,907 0.7 % Other income producing property 58,649
0.2 % 68,177 0.3 % Consumer non real estate 73,778 0.4 % 80,288 0.3 % Other - - % - - %
Total acquired - purchased credit deteriorated loans (PCD) 2,680,466 10.9 % 2,915,809 11.8 % Total acquired loans
11,114,379 45.4 % 12,374,678 50.1 %
Non-acquired loans:
Construction and land development 1,472,516 6.0 % 1,280,071 5.2 %
Commercial non-owner occupied 2,514,560 10.3 % 2,301,403 9.3 %
Commercial owner occupied real estate 2,351,250 9.6 % 2,266,593 9.2 % Consumer owner occupied 2,257,244 9.2 % 2,206,418 8.9 % Home equity loans 633,535 2.6 % 609,166 2.5 %
Commercial and industrial 3,271,802 13.4 % 2,755,726 11.2 % Other income producing property 250,839
1.0 % 245,106 1.0 % Consumer non real estate 620,407 2.5 % 607,234 2.5 % Other 4,933 - % 17,739 0.1 % Total non-acquired loans 13,377,086 54.6 % 12,289,456 49.9 %
Total loans (net of unearned income)$ 24,491,465
100.0 %
Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), decreased by$172.7 million , or 0.7%, to$24.5 billion atMarch 31, 2021 . Our non-acquired loan portfolio increased by$1.1 billion , or 35.9% annualized, driven by growth in all categories except other loans. Commercial and industrial loans and commercial non-owner occupied loans led the way with$516.1 million and$212.2 million in quarterly loan growth, respectively, or 75.9% and 37.6% annualized growth, respectively. The acquired loan portfolio decreased by$1.3 billion , or 41.3% annualized, from paydowns and payoffs in both the PCD and NonPCD loan categories. Acquired loans as a percentage of total loans decreased to 45.4% and non-acquired loans as a percentage of the overall portfolio increased to 54.6% atMarch 31, 2021 .
Allowance for Credit Losses ("ACL")
The ACL reflects Management's estimate of losses that will result from the
inability of our borrowers to make required loan payments. The Company
established the incremental increase in the ACL at adoption through equity and
subsequent adjustments through a provision for credit losses charged to
earnings. The Company records loans charged off against the ACL and subsequent
recoveries, if any, increase the ACL when they are recognized.
Management uses systematic methodologies to determine its ACL for loans held for
investment and certain off-balance-sheet credit exposures. The ACL is a
valuation account that is deducted from the amortized cost basis to present the
net amount expected to be collected on the loan portfolio. Management considers
the effects of past events, current conditions, and reasonable and supportable
forecasts on the collectability of the loan portfolio. The Company's estimate of
its ACL involves a high degree of judgment; therefore, Management's process for
determining expected credit losses may result in a range of expected credit
losses. The Company's ACL recorded in the balance sheet reflects Management's
best estimate within the range of expected credit losses. The Company recognizes
in net income the
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amount needed to adjust the ACL for Management's current estimate of expected
credit losses. The Company's ACL is calculated using collectively evaluatedand individually evaluated loans.
The allowance for credit losses is measured on a collective pool basis when
similar risk characteristics exist. Loans with similar risk characteristics are
grouped into homogenous segments, or pools, for analysis. The Discounted Cash
Flow ("DCF") method is utilized for each loan in a pool, and the results are
aggregated at the pool level. A periodic tendency to default and absolute loss
given default are applied to a projective model of the loan's cash flow while
considering prepayment and principal curtailment effects. The analysis produces
expected cash flows for each instrument in the pool by pairing loan-level term
information (e.g., maturity date, payment amount, interest rate, etc.) with
top-down pool assumptions (e.g., default rates and prepayment speeds). The
Company has identified the following portfolio segments: Owner-Occupied
Commercial Real Estate , Non Owner-Occupied Commercial Real Estate , Multifamily,
Municipal, Commercial and Industrial, Commercial Construction and Land
Development , Residential Construction , Residential Senior Mortgage, Residential
Junior Mortgage, Revolving Mortgage, and Consumer and Other.
In determining the proper level of the ACL, Management has determined that the
loss experience of the Bank provides the best basis for its assessment of
expected credit losses. It therefore utilized its own historical credit loss
experience by each loan segment over an economic cycle, while excluding loss
experience from certain acquired institutions (i.e., failed banks). For most of
the segment models for collectively evaluated loans, the Company incorporated
two or more macroeconomic drivers using a statistical regression modeling
methodology.
Management considers forward-looking information in estimating expected credit
losses. The Company subscribes to a third-party service which provides a
quarterly macroeconomic baseline outlook and alternative scenarios for the
United States economy. The baseline, along with the evaluation of alternative
scenarios, is used by Management to determine the best estimate within the range
of expected credit losses. Management has evaluated the appropriateness of the
reasonable and supportable forecast scenarios and has made adjustments as
needed. For the contractual term that extends beyond the reasonable and
supportable forecast period, the Company reverts to the long term mean of
historical factors within four quarters using a straight-line approach. The
Company generally utilizes a four-quarter forecast and a four-quarter reversion
period.
As stated above, Management evaluates the appropriateness of the reasonable and supportable forecast scenarios and takes into consideration the scenarios in relation to actual economic and other data (such as COVID-19 epidemiological data and federal stimulus), as well as the volatility and magnitude of changes within those scenarios quarter over quarter. The current environment has brought increased volatility in economic forecasts. During the fourth quarter, Management used a blended forecast scenario (two-thirds baseline and one-third more severe scenario) to determine the allowance for credit losses as ofDecember 31, 2020 . Rapidly changing macroeconomic variables challenges the ability of the forecasts to assimilate and reflect most recent data, and uncertainties persist around the future path of those variables, given the speed and magnitude of the monthly and quarterly shifts. While the recent forecasts were significantly revised upward, given the uncertain path of economic recovery and efforts to contain the spread of COVID-19, it is possible that future forecasts are overly optimistic, and therefore forecast volatility should be considered. As such, Management adjusted the blended forecast scenario to an equal weight between baseline and the more adverse scenario during the current quarter to determine the allowance for credit losses as ofMarch 31, 2021 resulting in a release of approximately$58 million . If the economic forecast weighting had not been adjusted, this would have resulted in an additional release of approximately$35 million , which Management did not deem appropriate given the uncertainty around COVID-19 and the speed of economic recovery. Included in its systematic methodology to determine its ACL, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) Lending Policy; 2) Economic conditions not captured in models; 3) Volume and Mix of Loan Portfolio; 4) Past Due Trends; 5) Concentration Risk; 6) External Factors; and 7) Model Limitations. When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. During the third quarter of 2020, we consolidated the ACL models and due to the size of the combined company elected to increase the threshold for individually-evaluated loans to all non-accrual loans with a net book balance in excess of$1.0 million . We will monitor 63
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the credit environment and make adjustments to this threshold in the future if
warranted. Based on the threshold above, consumer financial assets will
generally remain in pools unless they meet the dollar threshold. The expected
credit losses on individually-evaluated loans will be estimated based on
discounted cash flow analysis unless the loan meets the criteria for use of the
fair value of collateral, either by virtue of an expected foreclosure or through
meeting the definition of collateral-dependent. Financial assets that have been
individually evaluated can be returned to a pool for purposes of estimating the
expected credit loss insofar as their credit profile improves and that the
repayment terms were not considered to be unique to the asset.
Management measures expected credit losses over the contractual term of a loan.
When determining the contractual term, the Company considers expected
prepayments but is precluded from considering expected extensions, renewals, or
modifications, unless the Company reasonably expects it will execute a troubled
debt restructuring ("TDR") with a borrower. In the event of a
reasonably-expected TDR, the Company factors the reasonably-expected TDR into
the current expected credit losses estimate. For consumer loans, the point at
which a TDR is reasonably expected is when the Company approves the borrower's
application for a modification (i.e., the borrower qualifies for the TDR) or
when the Credit Administration department approves loan concessions on
substandard loans. For commercial loans, the point at which a TDR is reasonably
expected is when the Company approves the loan for modification or when the
Credit Administration department approves loan concessions on substandard loans.
The Company uses a discounted cash flow methodology for a TDR to calculate the
effect of the concession provided to the borrower within the ACL.
A restructuring that results in only a delay in payments that is insignificant
is not considered an economic concession. In accordance with the CARES Act, the
Company implemented loan modification programs in response to the COVID-19
pandemic in order to provide borrowers with flexibility with respect to
repayment terms. The Company's payment relief assistance includes forbearance,
deferrals, extension and re-aging programs, along with certain other
modification strategies. The Company elected the accounting policy in the CARES
Act to not apply TDR accounting to loans modified for borrowers impacted by the
COVID-19 pandemic if the concession met the criteria as defined under the CARES
Act.
For purchased credit-deteriorated, otherwise referred to herein as PCD, assets
are defined as acquired individual financial assets (or acquired groups of
financial assets with similar risk characteristics) that, as of the date of
acquisition, have experienced a more-than-insignificant deterioration in credit
quality since origination, as determined by the Company's assessment. The
Company records PCD loans by adding the expected credit losses (i.e., allowance
for credit losses) to the purchase price of the financial assets rather than
recording through the provision for credit losses in the income statement. The
expected credit loss, as of the acquisition day, of a PCD loan is added to the
allowance for credit losses. The non-credit discount or premium is the
difference between the unpaid principal balance and the amortized cost basis as
of the acquisition date. Subsequent to the acquisition date, the change in the
ACL on PCD loans is recognized through the provision for credit losses. The
non-credit discount or premium is accreted or amortized, respectively, into
interest income over the remaining life of the PCD loan on a level-yield basis.
In accordance with the transition requirements within the standard, the
Company's acquired credit-impaired loans (i.e., ACI or Purchased Credit
Impaired) were treated as PCD loans.
The Company follows its nonaccrual policy by reversing contractual interest
income in the income statement when the Company places a loan on nonaccrual
status. Therefore, Management excludes the accrued interest receivable balance
from the amortized cost basis in measuring expected credit losses on the
portfolio and does not record an allowance for credit losses on accrued interest
receivable. As of March 31, 2021 , the accrued interest receivable for loans
recorded in Other Assets was $89.5 million .
The Company has a variety of assets that have a component that qualifies as an
off-balance sheet exposure. These primarily include undrawn portions of
revolving lines of credit and standby letters of credit. The expected losses
associated with these exposures within the unfunded portion of the expected
credit loss will be recorded as a liability on the balance sheet with an
offsetting income statement expense. Management has determined that a majority
of the Company's off-balance-sheet credit exposures are not unconditionally
cancellable. As part of the new combined ACL methodology implemented during the
current year, Management completed a funding study based on historical data to
estimate the percentage of unfunded loan commitments that will ultimately be
funded to calculate the reserve for unfunded commitments. Management applied
this funding rate, along with the loss factor rate determined for each pooled
loan segment, to unfunded loan commitments, excluding unconditionally
cancellable exposures and letters of credit, to arrive at the reserve for
unfunded loan commitments. Prior to the third quarter, the Company applied a
utilization rate instead of a funding rate to the South State legacy portfolio
to determine the reserve for unfunded
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commitments. As ofMarch 31, 2021 , the liability recorded for expected credit losses on unfunded commitments was$35.8 million . The current adjustment to the ACL for unfunded commitments is recognized through the provision for credit losses in the Condensed Consolidated Statements of Income. With the adoption of ASU 2016-13 onJanuary 1, 2020 , the Company changed its method for calculating it's allowance for loans from an incurred loss method to a life of loan method. See Note 2 - Significant Accounting Policies and Note 7 - Allowance for Credit Losses for further details. As ofMarch 31, 2021 , the balance of the ACL was$406.5 million or 1.66% of total loans. The ACL decreased$50.8 million from the balance of$457.3 million recorded atDecember 31, 2020 . This decrease during the first quarter of 2021 included a$50.9 million release or decline in the provision for credit losses partially offset by$21,000 in net recoveries. In the first quarter of 2021, with the improvement in the economy and the increased availability of the COVID-19 vaccine, the Company began to release some of this allowance for credit losses based on improvements in forecasts. For the prior comparative period, the ACL increased$33.4 million to$144.8 million from the balance of$111.4 million recorded at adoption of the CECL standard as ofJanuary 1, 2020 . This increase included a$34.7 million provision of credit losses during the first quarter of 2020 and net charge offs during the first quarter of 2020 of$1.3 million . The significant provision in the first quarter 2020 was due to the impact of the COVID-19 pandemic being modeled in the forecasted loss period and macroeconomic assumptions in the
first quarter of 2020. AtMarch 31, 2021 , the Company had a reserve on unfunded commitments of$35.8 million which was recorded as a liability on the Balance Sheet, compared to$43.4 million atDecember 31, 2020 . During three months endedMarch 31, 2021 , the Company had a release of allowance or negative provision for credit losses on unfunded commitments of$7.6 million . With the improvement in the economy and the increased availability of the COVID-19 vaccine, the Company began to release some of this allowance for credit losses based on improvements in forecasts. This amount was recorded in the (recovery) provision for credit losses on the Condensed Consolidated Statements of Income. For the prior comparative period, the Company had a reserve on unfunded commitments of$8.6 million recorded atMarch 31, 2020 . With the adoption of ASU 2016-13 onJanuary 1, 2020 , the Company increased its reserve on unfunded commitments by$6.5 million . During the first quarter of 2020, the provision for credit losses on unfunded commitments was$1.8 million . The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during the first three months of 2021 or 2020. AtMarch 31, 2021 , the allowance for credit losses was$406.5 million , or 1.66%, of period-end loans. The ACL provides 4.02 times coverage of nonperforming loans atMarch 31, 2021 . Net recoveries to the total average loans during three months endedMarch 31, 2021 were 0.00%. We continued to show solid and stable asset quality numbers and ratios as ofMarch 31, 2021 . The following table provides the allocation, by segment, for expected credit losses. Because PPP loans are government guaranteed and management implemented additional reviews and procedures to help mitigate potential losses, Management does not expect to recognize credit losses on this loan portfolio and as a result, did not record an ACL for PPP loans within the C&I loan segment presented in the table below. The following table provides the allocation, by segment, for expected credit losses. March 31, 2021 (Dollars in thousands) Amount %* Residential Mortgage Senior$ 63,042 18.5 % Residential Mortgage Junior 1,190 0.1 % Revolving Mortgage 16,003 5.9 % Residential Construction 3,892 2.3 % Other Construction and Development 55,337 6.1 % Consumer 27,883 3.9 % Multifamily 5,884 1.6 % Municipal 1,544 2.9 %
33,466 11.7 %
Total $ 406,460 100.0 %
* Loan balance in each category expressed as a percentage of total loans excluding PPP loans.
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The following table presents a summary of the changes in the ACL, for three
months ended
Three Months Ended March 31,
2021 2020
Non-PCD PCD Non-PCD PCD
(Dollars in thousands) Loans Loans Total Loans Loans Total
Balance at beginning of period $ 315,470 $ 141,839 $ 457,309 $ 56,927 $ - $ 56,927
Adjustment for implementation of
CECL - - - 51,030 3,408 54,438
Loans charged-off (2,517) (857) (3,374) (2,331) (892) (3,223)
Recoveries of loans previously
charged off 1,980 1,415 3,395 840 1,069 1,909
Net (charge-offs) recoveries (537) 558 21 (1,491) 177 (1,314)
(Recovery) provision for credit
losses (30,676) (20,194) (50,870) 30,910 3,824 34,734
Balance at end of period $ 284,257 $ 122,203 $ 406,460 $ 137,376 $ 7,409 $ 144,785 Total loans, net of unearned income: At period end$ 24,491,465 $ 11,506,890 Average 24,492,089 11,439,676 Net (recoveries) charge-offs as a percentage of average loans (annualized) (0.00) % 0.05 % Allowance for credit losses as a percentage of period end loans 1.66 % 1.26 % Allowance for credit losses as a percentage of period end non-performing loans ("NPLs") 402.20 %
255.34 %
Nonperforming Assets ("NPAs")
The following table summarizes our nonperforming assets for the past five
quarters:
March 31, December 31, September 30, June 30, March 31,(Dollars in thousands) 2021 2020 2020 2020 2020
Non-acquired:
Nonaccrual loans$ 16,956 $ 16,035 $ 18,078 $ 19,011 $ 19,773 Accruing loans past due 90 days or more 853 9,586 636 419 119 Restructured loans - nonaccrual 3,225 3,550 3,749 3,453 4,020 Total non-acquired nonperforming loans 21,034 29,171 22,463 22,883 23,912 Other real estate owned ("OREO") (2) (6) 490 552 726 1,181 784 Other nonperforming assets (3) 164 136 99 508 157 Total non-acquired nonperforming assets 21,688 29,859 23,288 24,572 24,853 Acquired: Nonaccrual loans (1) 79,919 75,603 89,067 99,346 32,548 Accruing loans past due 90 days or more 105 2,065 907 1,053 243 Total acquired nonperforming loans 80,024 77,668 89,974 100,399 32,791 Acquired OREO and other nonperforming assets: Acquired OREO (2) (7) 10,981 11,362 12,754 16,836 6,648 Other acquired nonperforming assets (3) 311 206 150 151 154 Total acquired nonperforming assets 11,292 11,568 12,904 16,987 6,802 Total nonperforming assets$ 113,004 $ 119,095
Excluding Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.16 % 0.24 % 0.20 % 0.23 % 0.26 % Total nonperforming assets as a percentage of total assets (5) 0.05 % 0.08 % 0.06 % 0.07 % 0.15 % Nonperforming loans as a percentage of period end loans (4) 0.16 % 0.24 % 0.19 % 0.22 % 0.25 % Including Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.46 % 0.48 % 0.50 % 0.56 % 0.56 % Total nonperforming assets as a percentage of total assets 0.28 % 0.32 % 0.33 % 0.38 % 0.39 % Nonperforming loans as a percentage of period end loans (4) 0.41 % 0.43 % 0.45 % 0.48 % 0.49 %
(1) Includes nonaccrual loans that are purchase credit deteriorated (PCD loans).
(2) Excludes 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.
(4) Loan data excludes mortgage loans held for sale.
(5) For purposes of this calculation, total assets include all assets (both
acquired and non-acquired).
Excludes non-acquired bank premises held for sale of
December 31, 2020 ,December 31, 2020 ,March 31, 2020 ,March 31, 2020 , respectively, that is now separately disclosed on the balance sheet. 66 Table of Contents Excludes acquired bank premises held for sale of$29.3 million ,$33.8
million,
sheet.
Total nonperforming assets were$113.0 million , or 0.46% of total loans and repossessed assets, atMarch 31, 2021 , a decrease of$6.1 million , or 5.1%, fromDecember 31, 2020 . Total nonperforming loans were$101.1 million , or 0.41%, of total loans, atMarch 31, 2021 , a decrease of$5.8 million , or 5.4%, fromDecember 31, 2020 . Non-acquired nonperforming loans declined by$8.1 million fromDecember 31, 2020 . The decline in non-acquired nonperforming loans was driven primarily by a decline in accruing loans past due 90 days or more of$8.7 million , a decrease in restructured nonaccrual loans of$325,000 , offset by an increase in primarily commercial nonaccrual loans of$929,000 . The accruing loans past due 90 days or more atDecember 31, 2020 were a group of similar loans that were deemed to be low risk and almost all of these loans were brought current inJanuary 2021 . Acquired nonperforming loans increased$2.4 million fromDecember 31, 2020 . The increase in the acquired nonperforming loan balances was due to an increase in nonaccrual loans of$4.3 million , offset by a decline in restructured nonaccrual loans of$2.0 million . AtMarch 31, 2021 , OREO totaled$11.5 million , which included$0.5 million in non-acquired OREO and$11.0 million in acquired OREO. Total OREO decreased$443,000 fromDecember 31, 2020 . AtMarch 31, 2021 , non-acquired OREO consisted of 4 properties with an average value of$122,000 . This compared to 7 properties with an average value of$79,000 atDecember 31, 2020 . In the first quarter of 2021, we added 2 new properties into non-acquired OREO with an aggregate value of$299,000 and we sold 5 properties with an aggregate value of$362,000 . On the properties sold we recorded a net gain of$19,000 . AtMarch 31, 2021 , acquired OREO consisted of 37 properties with an average value of$297,000 . This compared to 35 properties with an average value of$325,000 atDecember 31, 2020 . In the first quarter of 2021, we added 12 new properties into acquired OREO with an aggregate value of$1.3 million and sold 10 properties with an aggregate value of$1.3 million during the current quarter. On the properties sold, we recorded a net gain of$356,000 .
Nonperforming assets have been reduced by former bank property held for sale. Prior to the merger with CSFL, the Company included this information in nonperforming assets but is now reported as a separate item on the balance sheet. All periods have been reclassified to reflect this change.
Potential Problem Loans Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately$3.2 million , or 0.02%, of total non-acquired loans outstanding, atMarch 31, 2021 , compared to$5.9 million , or 0.05%, of total non-acquired loans outstanding, atDecember 31, 2020 . Potential problem loans related to acquired loans totaled$13.0 million , or 0.12%, of total acquired loans outstanding, atMarch 31, 2021 , compared to$13.4 million , or 0.11% of total acquired loans outstanding, atDecember 31, 2020 . All potential problem loans represent those loans where information about possible credit problems of the borrowers has caused Management to have serious concern about the borrower's ability to comply with present repayment terms. Interest-Bearing Liabilities
Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, securities sold under agreements to repurchase and other borrowings. Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.
Total deposits increased$1.7 billion or 23.1% annualized to$32.4 billion atMarch 31, 2021 from$30.7 billion atDecember 31, 2020 . We continue to focus on increasing core deposits (excluding certificates of deposits and other time deposits), which increased$2.0 billion in the first quarter of 2021 as these funds are normally lower cost funds. Federal funds purchased related to the correspondent bank division and repurchase agreements were$878.8 million atMarch 31, 2021 up$98.9 million fromDecember 31, 2020 . Some key highlights
are outlined below:
Interest-bearing deposits increased
31, 2021 from the period end balance at
? Average interest-bearing deposits increased
from the quarter ended
The increase fromDecember 31, 2020 was driven by an increase in interest-bearing transactional accounts including money 67 Table of Contents
markets of
decline in certificate of deposits of$268.9 million . Noninterest-Bearing Deposits Noninterest-bearing deposits are transaction accounts that provide our Bank with "interest-free" sources of funds. AtMarch 31, 2021 , the period end balance of noninterest-bearing deposits was$10.8 billion , which increased from theDecember 31, 2020 balance by$1.1 billion . We continue to focus on increasing the noninterest-bearing deposits to try and limit our funding costs. This increase was also partially driven by the federal government stimulus programs in the first quarter 2021 which pushed funds into the economy. Capital Resources Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As ofMarch 31, 2021 , shareholders' equity was$4.7 billion , an increase of$71.9 million , or 1.5%, fromDecember 31, 2020 . The change from year-end was mainly attributable to the increase in equity through net income less dividends paid and a decline in the unrealized gain (loss) in investment securities available for sale. The following table shows the changes in shareholders' equity during 2021. Total shareholders' equity atDecember 31, 2020 $
4,647,880
Net income
146,949
Dividends paid on common shares ($0.47 per share)
(33,380)
Dividends paid on restricted stock units
(68)
Net decrease in market value of securities available for sale, net of deferred taxes (48,620) Stock options exercised 1,771 Equity based compensation 6,092
Common stock repurchased - equity plans
(804)
Total shareholders' equity atMarch 31, 2021 $ 4,719,820 InJune 2019 , our Board of Directors announced the authorization for the repurchase of up to an additional 2,000,000 shares of our common stock under our 2019 Repurchase Program. ThroughDecember 31, 2020 we had repurchased 1,485,000 of the shares authorized. InJanuary 2021 , the Board of Directors of the Company approved the authorization of a new 3,500,000 share Company stock repurchase plan (the "New Repurchase Program"), which replaced in its entirety the revised 2019 Repurchase Program. Our Board of Directors approved the new plan after considering, among other things, our liquidity needs and capital resources as well as the estimated current value of our net assets. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, general business conditions, regulatory requirements, the market price of our common stock, and the availability of alternative investment opportunities. As ofMarch 31, 2021 , we have not repurchased any shares of the 3,500,000 shares authorized for repurchase under the New Repurchase Program. 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. 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.
Specifically, we are required to maintain the following minimum capital ratios:
?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%.
Under the current capital rules, Tier 1 capital includes two components: CET1
capital and additional Tier 1 capital. The highest form of capital, CET1
capital, consists solely of common stock (plus related surplus), retained
earnings, accumulated other comprehensive income, otherwise referred to as AOCI,
and limited amounts of minority
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interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed below). Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred stock is included only in Tier 2 capital, except that the capital rules permit bank holding companies with less than$15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued beforeMay 19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain restrictions. With the merger with CSFL during the second quarter of 2020, the Company's$115.0 million in trust preferred securities no longer qualifies for Tier 1 capital and is now only included in Tier 2 capital for regulatory capital calculations. AOCI is presumptively included in CET1 capital and often would operate to reduce this category of capital. When the current capital rules were first implemented, the Bank exercised its one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI, allowing us to retain our pre-existing treatment for AOCI. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a banking organization must maintain a "capital conservation buffer" on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital), resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. 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. The federal banking agencies revised their regulatory capital rules to (i) address the implementation of CECL? (ii) provide an optional three-year phase-in period for the day 1 adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL? and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. CECL became effective for us onJanuary 1, 2020 and the Company applied the provisions of the standard using the modified retrospective method as a cumulative-effect adjustment to retained earnings. Related to the implementation of ASU 2016-13, we recorded additional allowance for credit losses for loans of$54.4 million , deferred tax assets of$12.6 million , an additional reserve for unfunded commitments of$6.4 million and an adjustment to retained earnings of$44.8 million . Instead of recognizing the effects on regulatory capital from ASU 2016-13 at adoption, the Company initially elected the option for recognizing the adoption date effects on the Company's regulatory capital calculations over a three-year phase-in. In 2020, in response to the COVID-19 pandemic, the federal banking agencies issued a final rule for additional transitional relief to regulatory capital related to the impact of the adoption of CECL. The final rule provides banking organizations that adopt CECL in the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by the aforementioned three-year transition period to phase out the aggregate amount of benefit during the initial two-year delay for a total five-year transition. The estimated impact of CECL on regulatory capital (modified CECL transitional amount) is calculated as the sum of the day-one impact on retained earnings upon adoption of CECL (CECL transitional amount) and the calculated change in the ACL relative to the day-one ACL upon adoption of CECL multiplied by a scaling factor of 25%. The scaling factor is used to approximate the difference in the ACL under CECL relative to the incurred loss methodology. The modified CECL transitional amount will be calculated each quarter for the first two years of the five-year transition. The amount of the modified CECL transition amount will be fixed as ofDecember 31, 2021 , and that amount will be subject to the three-year phase out. The Company chose the five-year transition method and is deferring the recognition of the effects from day 1 and the CECL difference for the first two years of application. 69 Table of Contents
The well-capitalized minimums and the Company's and the Bank's regulatory capital ratios for the following periods are reflected below:
Well-Capitalized March 31, December 31,
Minimums 2021 2020
South State Corporation :Common equity Tier 1 risk-based capital N/A 12.13
% 11.77 % Tier 1 risk-based capital 6.00 % 12.13 % 11.77 % Total risk-based capital 10.00 % 14.49 % 14.24 % Tier 1 leverage N/A 8.47 % 8.27 %South State Bank :
Common equity Tier 1 risk-based capital 6.50 % 12.87
% 12.39 % Tier 1 risk-based capital 8.00 % 12.87 % 12.39 % Total risk-based capital 10.00 % 13.70 % 13.33 % Tier 1 leverage 5.00 % 8.99 % 8.71 % All of the Company's and Bank's regulatory capital ratios increased compared toDecember 31, 2020 . For the Tier 1 leverage ratio, the percentage increase in Tier 1 risk-based capital was greater than the percentage increase in the average assets for regulatory capital purposes for the Tier 1 leverage ratio at both the holding company and bank. The increase in Tier 1 risk-based capital was driven by net income during the quarter. For the common equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the total risk-based capital ratio, Tier 1 risk-based capital and total risk-based capital both increased during the first quarter of 2021 while total risk-based assets declined during the quarter at both the holding company and bank. The increase in capital for these ratios was driven by net income during the quarter while the decline in risk-based assets was mainly driven by a decline in our current exposure within derivatives related to back to back swaps due to the increase in interest rates. Our capital ratios are currently well in excess of the minimum standards and continue to be in the "well capitalized" regulatory classification. OnApril 28, 2021 , the Company announced it received approval from its Board of Directors to redeem$25.0 million of Subordinated Note and$38.5 million of Trust Preferred Securities as outlined in the table below. The Company also received regulatory approval from theFederal Reserve Bank of Atlanta to redeem the Subordinated Note and Trust Preferred Securities. The redemption of the Subordinated Note and Trust Preferred Securities will result in a reduction of Tier 2 capital of$63.5 million during the second quarter 2021. 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 monitoring liquidity management policies, which are designed to ensure acceptable composition of 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. 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 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
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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$1.1 billion , or approximately 35.9% annualized, compared to the balance atDecember 31, 2020 . Of the increase fromDecember 31, 2020 ,$343.7 million was related to the net increase in PPP loans during the three months endedMarch 31, 2021 . Excluding PPP loans, the non-acquired loan portfolio increased by$744.0 million , or 24.6% annualized fromDecember 31, 2020 . The acquired loan portfolio decreased by$1.3 billion from the balance atDecember 31, 2020 through principal paydowns, charge-offs, foreclosures and renewals of acquired loans. This included a reduction in acquired PPP loans of$331.3 million . Our investment securities portfolio increased$820.6 million compared to the balance atDecember 31, 2020 . The increase in investment securities fromDecember 31, 2020 was a result of purchases of$1.1 billion . This increase was partially offset by maturities, calls, sales and paydowns of investment securities totaling$234.5 million as well as declines in the market value of the available for sale investment securities portfolio of$63.8 million . Net amortization of premiums were$9.4 million in the first three months of 2021. The increase in investment securities was due to the Company making the strategic decision to increase the size of the portfolio with the excess funds from deposit growth. Total cash and cash equivalents were$6.0 billion atMarch 31, 2021 as compared to$4.6 billion atDecember 31, 2020 as deposits grew$1.7 billion during the first quarter of 2021. AtMarch 31, 2021 andDecember 31, 2020 , we had$475.0 million and$600.0 million of traditional, out-of-market brokered deposits. AtMarch 31, 2021 andDecember 31, 2020 , we had$700.1 million and$611.1 million , respectively, of reciprocal brokered deposits. Total deposits were$32.4 billion atMarch 31, 2021 , an increase of$1.7 billion from$30.7 billion atDecember 31, 2020 . Our deposit growth sinceDecember 31, 2020 included an increase in demand deposit accounts of$1.1 billion , an increase in savings and money market accounts of$512.4 million and an increase in interest-bearing transaction accounts of$413.5 million partially offset by a decline in certificates of deposit of$268.9 million . Total borrowings atMarch 31,2021 were$390.3 and consisted of trust preferred and subordinated debt. Of this amount,$11.0 million of the subordinated debt matured inApril 2021 and paid off. Total short-term borrowings atMarch 31, 2021 were$878.6 million , consisting of$479.3 million in federal funds purchased and$399.3 million in securities sold under agreements to repurchase. To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to take in shorter maturities of such funds. Our current approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise. Our ongoing philosophy is to remain in a liquid position, taking into account our current composition of earning assets, asset quality, capital position, and operating results. Our liquid earning assets include federal funds sold, balances at theFederal Reserve Bank , reverse repurchase agreements, and/or other short-term investments. Cyclical and other economic trends and conditions can disrupt our Bank's desired liquidity position at any time. We expect that these conditions would generally be of a short-term nature. Under such circumstances, our Bank's federal funds sold position and any balances at theFederal Reserve Bank serve as the primary sources of immediate liquidity. AtMarch 31, 2021 , our Bank had total federal funds credit lines of$325.0 million with no balance outstanding. If additional liquidity were needed, the Bank 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. AtMarch 31, 2021 , our Bank had$1.2 billion of credit available at theFederal Reserve Bank's Discount Window and had no balance outstanding. 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. AtMarch 31, 2021 , our Bank had a total FHLB credit facility of$2.9 billion with total outstanding FHLB letters of credit consuming$12.2 million leaving$2.9 billion in availability on the FHLB credit facility. The holding company has a$100.0 million unsecured line of credit with no outstanding advances atMarch 31, 2021 . We believe that our liquidity position continues to be adequate and readily available. Our contingency funding plans incorporate several potential stages based on liquidity levels. Also, we review on at least an annual basis our liquidity position and our contingency funding plans with our principal banking regulator. 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 we are charged. This could increase our cost of funds, impacting net interest margins and net interest spreads. 71 Table of Contents
Deposit and Loan Concentrations
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. As ofMarch 31, 2021 , 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 any foreign loans or deposits.
Concentration of Credit Risk
We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25% of total Tier 1 capital plus regulatory adjusted allowance for loan losses of the Company, or$853.7 million atMarch 31, 2021 . Based on this criteria, we had six such credit concentrations atMarch 31, 2021 , including loans on hotels and motels of$974.4 million , loans to lessors of nonresidential buildings (except mini-warehouses) of$4.0 billion , loans secured by owner occupied office buildings of$904.1 million , loans secured by owner occupied nonresidential buildings (excluding office buildings) of$2.1 billion , loans to lessors of residential buildings (investment properties and multi-family) of$1.3 billion and loans secured by 1st mortgage 1-4 family owner occupied residential property (including home equity lines) of$4.0 billion . The risk for these loans and for all loans is managed collectively through the use of credit underwriting practices developed and updated over time. The loss estimate for these loans is determined using our standard ACL methodology. With some financial institutions adopting CECL in the first quarter of 2020, banking regulators established new guidelines for calculating credit concentrations. Banking regulators set the guidelines for construction, land development and other land loans to total less than 100% of total Tier 1 capital less modified CECL transitional amount plus ACL (CDL concentration ratio) and for total commercial real estate loans (construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) to total less than 300% of total Tier 1 capital less modified CECL transitional amount plus ACL (CRE concentration ratio). Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank's total Tier 1 capital less modified CECL transitional amount plus ACL. AtMarch 31, 2021 andDecember 31, 2020 , the Bank's CDL concentration ratio was 52.6% and 54.1%, respectively, and its CRE concentration ratio was 223.7% and 229.5%, respectively. As ofMarch 31, 2021 , the Bank was below the established regulatory guidelines. When a bank's ratios are in excess of one or both of these loan concentration ratios guidelines, banking regulators generally require an increased level of monitoring in these lending areas by bank Management. Therefore, we monitor these two ratios as part of our concentration management processes.
Reconciliation of GAAP to Non-GAAP
The return on average tangible equity is a non-GAAP financial measure that
excludes the effect of the average balance of intangible assets and adds back
the after-tax amortization of intangibles to GAAP basis net income. Management
believes these non-GAAP financial measures provide additional information that
is useful to investors in evaluating our performance and capital and may
facilitate comparisons with other institutions in the banking industry as well
as period-to-period comparisons. Non-GAAP measures should not be considered as
an alternative to any measure of performance or financial condition as
promulgated under GAAP, and investors should consider South State's performance
and financial condition as reported under GAAP and all other relevant
information when assessing the performance or financial condition of South
State. Non-GAAP measures have limitations as analytical tools, are not audited,
and may not be comparable to other similarly titled financial measures used by
other companies. Investors should not consider non-GAAP measures in isolation or
as a substitute for analysis of South State's results or financial condition as
reported under GAAP.
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Three Months Ended
March 31,
(Dollars in thousands) 2021 2020Return on average equity (GAAP) 12.71 % 4.15 % Effect to adjust for intangible assets 8.45 % 4.20 % Return on average tangible equity (non-GAAP) 21.16 %
8.35 %
Average shareholders' equity (GAAP)$ 4,687,149 $ 2,336,348 Average intangible assets (1,733,522)
(1,051,491)
Adjusted average shareholders' equity (non-GAAP)$ 2,953,627
$ 1,284,857 Net income (loss) (GAAP)$ 146,949 $ 24,110 Amortization of intangibles 9,164 3,007 Tax effect (2,001) (451) Net income excluding the after-tax effect of amortization of intangibles (non-GAAP)$ 154,112
$ 26,666
Cautionary Note Regarding Any Forward-Looking Statements
Statements included in this report, which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are based on, among other things, Management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, South State and the merger with CSFL. 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 the COVID-19 pandemic or
government or regulatory responses thereto, federal spending cuts and/or one or
more federal budget-related impasses or actions;
Personnel risk, including our inability to attract and retain consumer and
? commercial bankers to execute on our client-centered, relationship driven
banking model;
Risks and uncertainties relating to the merger with CSFL, including the ability
? to successfully integrate the companies or to realize the anticipated benefits
of the merger;
? Expenses relating to the merger with CSFL and integration of legacy South State
and legacy CSFL;
? Deposit attrition, client loss or revenue loss following completed mergers or
acquisitions may be greater than anticipated;
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 merger with CSFL;
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;
? Potential deterioration in real estate values;
The impact of competition with other financial service businesses and from
? nontraditional financial technology 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;
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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;
? 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 the possibility
of changes in accounting standards, policies, principles and practices,
including changes in accounting principles relating to loan loss recognition
(2016-13 - 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;
? Civil unrest and/or 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;
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;
? Risks associated with our reliance on models and future updates we make to our
models, including the assumptions used by these models; and
Other risks and uncertainties disclosed in our most recent Annual Report on
Form 10-K filed with the
Factors, or disclosed in documents filed or furnished by us with or to the
? after the filing of such Annual Reports on Form 10-K, including risks and
uncertainties disclosed in Part II, Item 1A. Risk Factors, of this Quarterly
Report on Form 10-Q, any 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.
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Additional information with respect to factors that may cause actual results to
differ materially from those contemplated by our forward-looking statements may
also be included in other reports that we file with the SEC . We caution that the
foregoing list of risk factors is not exclusive and not to place undue reliance
on forward-looking statements.
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