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 and six months ended June 30, 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 meanSouth State Corporation and its consolidated subsidiaries. References to the "Bank" meansSouth 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 inWinter Haven, Florida , and was incorporated under the laws ofSouth Carolina in 1985. We provide a wide range of banking services and products to our customers through our Bank. The Bank operatesSouth State Advisory, Inc. , a wholly owned registered investment advisor. The Bank also operatesDuncan-Williams, Inc. ("Duncan-Williams "), which it acquired onFebruary 1, 2021 . Duncan-Williams is a registered broker-dealer, headquartered inMemphis, Tennessee , that serves primarily institutional clients across theU.S. in the fixed income business. The Bank also ownsCBI Holding Company, LLC ("CBI"), which in turn ownsCorporate Billing, LLC ("Corporate Billing"), a transaction-based finance company headquartered inDecatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. The holding company also ownsSSB Insurance Corp. , a captive insurance subsidiary pursuant to Section 831(b) of theU.S. Tax Code and R4ALL, Inc. , which manages a troubled loan purchased from the Bank. AtJune 30, 2021 , we had approximately$40.4 billion in assets and 5,203 full-time equivalent employees. Through our Bank branches, ATMs and online banking platforms, we provide our customers with a full range of commercial and consumer loan and deposit products through a six (6) state footprint inAlabama ,Florida ,Georgia ,North Carolina ,South Carolina andVirginia . Through Corporate Billing, we provide factoring, invoicing, collection and accounts receivable management services nationwide. 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 inBirmingham, Alabama andAtlanta, 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 and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 and also analyzes our financial condition as ofJune 30, 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 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
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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 in the 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, in March 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. In October 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 through October 1, 2020 , which was the latest moratorium
expiration for states in our footprint. Eviction actions remained suspended
through December 31, 2020 per Centers for Disease Control and Prevention Agency
Order 2020-19654. Additionally, we offered fee waivers, payment deferrals, and
other expanded assistance for automobile, mortgage, small business and personal
lending customers.
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Future governmental actions may require more of these and other types of
customer-related responses. We are awaiting a final ruling from the
As ofJune 30, 2021 , we have deferrals of$120 million , or 0.53%, 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. Also, we have extended credit to both customers and non-customers related to the PPP. As ofJune 30, 2021 , we have produced approximately 28,000 loans totaling approximately$3.2 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 loans 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. With the adoption of ASU 2016-13 onJanuary 1, 2020 , the Company changed its method for calculating its ACL for loans, investments, unfunded commitments and other financial assets. As a result of the new accounting standard, the Company changed its method for calculating its ACL for loans from an incurred loss method to a life of loan method. See Note 2 - Significant Accounting Policies, Note 7 - Allowance for Credit Losses, and the caption "Allowance for Credit Losses" in the MD&A section of this Quarterly Report on Form 10-Q for further details. 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 the "Goodwill and Other Intangible Assets" section under "Critical Accounting Policies". 52 Table of Contents
Atlantic Capital Bancshares, Inc. Proposed Merger
OnJuly 23, 2021 ,South State and Atlantic Capital announced the two companies had entered into a Merger Agreement, upon the terms and subject to the conditions set forth in the Merger Agreement, wherebyAtlantic Capital will merge with and into South State, with South State continuing as the surviving entity. The Merger Agreement was unanimously approved by the Board of Directors of the Company andAtlantic Capital , and is subject to the approval byAtlantic Capital's shareholders, as well as regulatory approvals and other customary closing conditions. Under the terms of the Merger Agreement, shareholders ofAtlantic Capital will receive 0.36 shares of South State's common stock for each share ofAtlantic Capital common stock they own. The transaction is expected to close during the first quarter of 2022. AtJune 30, 2021 ,Atlantic Capital reported$3.8 billion in total assets,$2.3 billion in loans and$3.3 billion in deposits.
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, and "Allowance for Credit Losses" 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 ofJune 30, 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. During the second quarter of 2021, we changed the annual impairment date toOctober 31 ; however, 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
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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 and second quarters of 2021. Our stock price closed onJune 30, 2021 at$81.76 , which was above book value of$67.60 and tangible book value of$43.07 . 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 and client list 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. 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, bank properties held for sale, 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. Deferred tax assets as ofJune 30, 2021 were$36.7 million which was down from$110.9 as ofDecember 31, 2020 . The decrease in deferred tax assets during the first six months of 2021 was mostly attributable to a decrease in the fair value of loans and securities, as well as the release of allowance for credit losses recorded during the period. The Company and its subsidiaries file a consolidated federal income tax return. Additionally, income tax returns are filed by the Company or its subsidiaries inAlabama ,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 atJune 30, 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 and 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 Statements 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
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shortened during periods of market volatility. In response to market conditions and other economic factors, Management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from the current valuations used to determine the fair value of 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 and Loan Related expense, a component of Noninterest Expense in the Statements of Net Income. Results of Operations Overview We reported consolidated net income of$99.0 million , or diluted earnings per share ("EPS") of$1.39 , for the second quarter of 2021 as compared to consolidated net loss of($84.9) million , or diluted EPS of ($1.96 ), in the comparable period of 2020, a 216.5% increase in consolidated net income and a 170.9% increase in diluted EPS. The$183.9 million increase in consolidated net income was the net result of the following items:
An
million increase in interest income from acquired loans, a
increase in interest income on non-acquired loans and a
in interest income from investment securities. Interest income on acquired
loans increased due to the
balance during the second quarter of 2021, which was due to the CSFL merger
completed on
? increase in the average acquired loan balance was partially offset by a decline
in the yield on acquired loans of 68 basis points compared to the same period
in the prior year. Non-acquired loan interest income increased due to the
billion increase in the average non-acquired loan balance, although the yield
declined by 10 basis points. Investment interest income increased due to the
decline of 68 basis points in the yield. The yield declined in both loans and
investments compared to the second quarter of 2020 due to the falling interest
rate environment;
A
the cost of interest-bearing liabilities of 28 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 deposit growth due to government stimulus. The decrease in the cost of
interest-bearing liabilities was due to a falling interest rate environment as
the
range of 0.00% to 0.25% in
second quarter of 2021 reflects the full impact of these actions and the Company's move to reduce the interest rates paid on deposits;
A
recorded a release of the allowance for credit losses of
second quarter of 2021 while recording a provision for credit losses of
million in the second quarter of 2020. The Company recorded higher provision
for credit losses in the second quarter of 2020 due to the provision for credit
losses on Non-PCD loans and unfunded commitments acquired from CSFL of
? million (i.e. the impact of the adoption of CECL on Non-PCD acquired loans) and
due to the higher provision for credit losses on non-acquired loans, which was
the result of forecasted losses taking into consideration the impact of the
COVID-19 pandemic on the overall loan portfolio. In the second quarter of 2021,
with the improvement in the economy and the increased availability of the
COVID-19 vaccine, the Company released some of this allowance for credit losses
based on improvements in economic forecasts;
A
the impact of the CSFL merger completed in the second quarter of 2020. The
largest increases were from a
? and capital market income, a
and a
SBA loans and bank owned life insurance. These increases were partially offset
by a decline in mortgage banking income of
section on page 61 for further discussion);
An
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, extinguishment of debt cost of
second quarter of 2021, occupancy expense of
expense of$6.9 million and amortization of 55 Table of Contents
intangibles of
in merger and branch consolidation expense of
Expense section on page 63 for further discussion); and
A
primarily due to the change in pretax book income (loss) between the two
quarters. The Company recorded a pretax book loss of
? second quarter of 2020 primarily due to merger costs and provision for credit
losses associated with the merger with CSFL. The Company recorded pretax book
income of
was 22.42% for the three months ended
three months endedJune 30, 2020 . Our quarterly efficiency ratio declined slightly to 76.3% in the second quarter of 2021 compared to 78.4% in the second quarter of 2020. The decrease in the efficiency ratio compared to the second quarter of 2020 was the result of a 49.3% increase in noninterest expense (excluding amortization of intangibles) being less than the 53.4% increase in the total of tax-equivalent ("TE") net interest income and noninterest income. The elevated efficiency ratios for the three months endedJune 30, 2021 and 2020 are due to the one-time expenses that occurred in each quarter. In the second quarter of 2021, total expense included merger and branch consolidation expense of$33.0 million and extinguishment of debt cost of$11.7 million . In the second quarter of 2020, total expense included merger and branch consolidation expense of$43.0 million . Diluted and basic EPS were$1.39 and$1.40 , respectively, for the second quarter of 2021, compared to a loss of ($1.96 ) for both diluted and basic EPS for the second quarter of 2020. The increase of 216.5% in net income in the second quarter of 2021 was greater than the increase in average common shares of 63.6% compared to the same period in 2020. The second quarter of 2021 includes the effect of net income from CSFL for the entire quarter while the second quarter of 2020 includes a partial month. The weighted average common shares increased to 70.9 million shares, or 63.6%, due to the merger with CSFL compared to 43.3 million weighted average shares outstanding during the quarter endedJune 30, 2020 . The Company issued 37.3 million shares as a result of the merger with CSFL during the second quarter of 2020. Selected Figures and Ratios Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020
Return on average assets (annualized) 1.00 % (1.49) % 1.27 % (0.63) % Return on average equity (annualized) 8.38 % (11.78) % 10.52 % (4.67) % Return on average tangible equity (annualized)* 14.12 % (19.71) % 17.59 % (7.52) % Dividend payout ratio ** 33.65 % N/M 27.12 % N/M Equity to assets ratio 11.78 % 11.91 % 11.78 % 11.91 % Average shareholders' equity$ 4,739,241 $ 2,900,443 $ 4,713,339 $ 2,618,395 * - 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 and six months ended
For the three and six months ended
and return on average tangible equity increased compared to the same periods in
2020. These increases were primarily due to the increase in net income of
three and six months ended
? primarily as a result of the provision for credit losses recorded for the
non-PCD loan portfolio and unfunded commitments acquired through the CSFL
merger completed in the second quarter of 2020. For the three and six months
ended
increased
periods in 2020.
Equity to assets ratio was 11.78%, a decrease from 11.91% at
decrease from the comparable period in 2020 was due to the increase in total
? assets of 7.0% being greater than the increase in equity of 5.9%. Both the
increase in assets and equity were primarily due to organic growth and combined
earnings post-merger.
Dividend payout ratio was 33.65% and 27.12% for the three and six months ended
?
dividing total dividends paid during the quarter and year-to-date 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$90.6 million , or 55.7%, to$253.1 million in the second quarter of 2021 compared to$162.6 million in the same period in 2020. Interest earning assets averaged$35.6 billion during the three months period endedJune 30, 2021 compared to$20.3 billion for the same period in 2020, an increase of$15.4 billion , or 75.9%. Interest bearing liabilities averaged$23.1 billion during the three months period endedJune 30, 2021 compared to$13.8 billion for the same period in 2020, an increase of$9.4 billion , or 67.9%. Some key highlights are outlined below:
Higher interest income by
acquired loans, non-acquired loans and investment securities by
balances, which were
The average balance of acquired loans increased primarily due to the acquired
? loans from the merger with CSFL, which were only outstanding for 23 days in the
second quarter of 2020 resulting a lower average acquired loan balance for the
second quarter of 2020. The average balance of our non-acquired loan portfolio
increased primarily through organic growth. The average balance of investment
securities increased as a result of the Company's decision to increase the
investment portfolio due to the excess liquidity and the inclusion of securities acquired in the CSFL merger. Lower interest expense by$3.6 million due to the continuous lower rate
environment in the second quarter of 2021, compared to the same period in 2020
as the average cost of funds, including demand deposits, declined by 20 basis
points. The decline in cost of funds was partially offset by an increase in the
? average balances for interest-bearing liabilities of
driven by an increase in average interest-bearing deposits of
the second quarter of 2021 compared to the same period in 2020. Assumed
interest-bearing deposits of
outstanding for 23 days in the second quarter of 2020 resulting a lower average
balance of interest-bearing deposits for the second quarter of 2020. Non-TE yield on interest-earning assets for the second quarter of 2021
decreased 57 basis points to 3.01% from the comparable period in 2020. The
decline in yield on interest-earning assets was due to the falling interest
rate environment resulting from the drops in the federal funds rate made by the
?
yielding federal funds sold, reverse repos and other interest-bearing deposits
increased
period in 2020 in addition to a 22 basis points reduction in the yield on loans
held for investment.
The average cost of interest-bearing liabilities for the second quarter of 2021
decreased 28 basis points from the same period in 2020. This decrease occurred
? in all deposit categories of funding as the interest rate environment remained
low during the second quarter of 2021. Our overall cost of funds, including
noninterest-bearing deposits, was 0.17% for the three months ended
2021 compared to 0.37% for the three months ended
The Non-TE net interest margin decreased by 38 basis points and the TE net
interest margin decreased by 37 basis points in the second quarter of 2021
? compared to the same quarter of 2020 due to the decline in the yield on
interest earning assets of 57 basis points, which was only partially offset by
the lower cost of interest-bearing liabilities of 28 basis points.
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The tables below summarize the analysis of changes in interest income and
interest expense for the three and six months ended
Three Months Ended
June 30, 2021 June 30, 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
4,825,832 17,347 1.44% 2,109,609 10,920 2.08% Investment securities (tax-exempt)
546,153 2,667 1.96% 197,862 1,505 3.06%
Loans held for sale 281,547 1,977 2.82% 203,267 1,498 2.96%
Acquired loans, net 10,564,735 115,937 4.40% 5,270,857 66,561 5.08%
Non-acquired loans 13,742,664 128,263 3.74% 10,446,530 99,648 3.84% Total interest-earning assets
35,631,605 267,541 3.01% 20,262,035 180,564 3.58% Noninterest-Earning Assets: Cash and due from banks
478,298 285,989
Other assets 4,128,583 2,564,844
Allowance for non-acquired loan losses (405,734) (213,943)
Total noninterest-earning assets 4,201,147 2,636,890
Total Assets $ 39,832,752 $ 22,898,925
Interest-Bearing Liabilities:
Transaction and money market accounts $ 15,453,940 $
4,513 0.12%
2,995,871 453 0.06% 1,699,377 336 0.08%
Certificates and other time deposits 3,408,778 4,571 0.54% 2,321,684 7,192 1.25% Federal funds purchased and repurchase agreements
914,641 323 0.14% 415,304 391 0.38%
Corporate and subordinated debentures 368,622 4,548 4.95% 188,062 1,971 4.22% Other borrowings
275 3 4.38% 1,028,822 3,021 1.18% Total interest-bearing liabilities
23,142,127 14,411 0.25% 13,785,525 18,007 0.53% Noninterest-Bearing Liabilities: Demand deposits
11,037,617 5,586,817
Other liabilities 913,767 626,140
Total noninterest-bearing liabilities ("Non-IBL") 11,951,384 6,212,957
Shareholders' equity 4,739,241 2,900,443
Total Non-IBL and shareholders' equity 16,690,625 9,113,400
Total Liabilities and Shareholders' Equity $ 39,832,752 $ 22,898,925
Net Interest Income and Margin (Non-Tax Equivalent) $ 253,130 2.85% $ 162,557 3.23%
Net Interest Margin (Tax Equivalent) 2.87% 3.24%
Total Deposit Cost (without debt and other borrowings) 0.12% 0.29%
Overall Cost of Funds (including demand deposits) 0.17% 0.37%
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Six Months Ended
June 30, 2021 June 30, 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
4,518,471 32,755 1.46% 1,996,068 22,835 2.30% Investment securities (tax-exempt)
511,001 4,779 1.89% 169,031 2,904 3.45%
Loans held for sale 290,210 3,969 2.76% 122,539 1,829 3.00%
Acquired loans, net 11,163,517 250,699 4.53% 3,643,249 102,359 5.65%
Non-acquired loans 13,235,717 251,476 3.83% 9,935,357 196,553 3.98% Total interest-earning assets
34,935,633 546,017 3.15% 17,152,354 328,364 3.85% Noninterest-Earning Assets: Cash and due from banks
429,259 264,954
Other assets 4,109,765 2,219,190
Allowance for non-acquired loan losses (431,191) (160,569)
Total noninterest-earning assets 4,107,833 2,323,575
Total Assets $ 39,043,466 $ 19,475,929
Interest-Bearing Liabilities:
Transaction and money market accounts $ 15,068,237
2,888,712 887 0.06% 1,513,955 986 0.13%
Certificates and other time deposits 3,540,069 10,007 0.57% 1,979,835 13,297 1.35% Federal funds purchased and repurchase agreements
883,631 673 0.15% 371,838 1,006 0.54% Corporate and subordinated debentures
379,274 9,418 5.01% 151,981 3,162 4.18% Other borrowings
138 3 4.38% 900,176 6,564 1.47% Total interest-bearing liabilities
22,760,061 30,889 0.27% 11,972,309 37,793 0.63% Noninterest-Bearing Liabilities: Demand deposits
10,543,604 4,429,092
Other liabilities 1,026,462 456,133
Total noninterest-bearing liabilities ("Non-IBL") 11,570,066 4,885,225
Shareholders' equity 4,713,339 2,618,395
Total Non-IBL and shareholders' equity 16,283,405 7,503,620
Total Liabilities and Shareholders' Equity $ 39,043,466 $ 19,475,929
Net Interest Income and Margin (Non-Tax Equivalent) $ 515,128 2.97% $ 290,571 3.41%
Net Interest Margin (Tax Equivalent) 2.99% 3.42%
Total deposit cost ( without debt and other borrowings) 0.13% 0.36%
Overall Cost of Funds (including demand deposits) 0.19% 0.46%(1) Investment securities (taxable) include trading securities.
Investment Securities Interest earned on investment securities was higher in the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 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 and six months endedJune 30, 2021 increased$3.1 billion and$2.9 billion , respectively, from the comparable period in 2020. With the excess liquidity from the growth in deposits during 2020 and the first six 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 acquired investment portfolio of$1.2 billion from the merger with CSFL. The acquired portfolio was only outstanding for 23 days in the three and six months endedJune 30, 2020 . The yield on the investment securities declined 67 basis points and 89 basis points, respectively, during the three and six months endedJune 30, 2021 compared to the same periods in 2020. The decline in the yield was 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 of this reduction on overall interest rates. The securities purchased during the last quarter of 2020 and the first six months of 2021 have a lower interest rate than the existing portfolio.
Loans
Interest earned on loans held for investment increased$78.0 million to$244.2 million and$203.3 million to$502.2 million , respectively, in the three and six months endedJune 30, 2021 from the comparable periods in 2020. Interest earned on loans held for investment included loan accretion income recognized during the three and six months endedJune 30, 2021 of$6.3 million and$16.7 million , respectively, and$10.1 million and$21.0 million during the 59
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three and six months endedJune 30, 2020 , respectively, a decrease of$3.8 million between the comparable quarters and a decrease of$4.3 million between the two six-month periods ended. Some key highlights for the quarter ended
June 30, 2021 are outlined below:
Our non-TE yield on total loans decreased 22 basis points in the second 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 100.4%
? growth in the average acquired loan portfolio and 31.6% growth in the average
non-acquired loan portfolio. The growth in the acquired loan portfolio was due
to the addition of
only outstanding for 23 days during the second quarter of 2020. The growth in
the non-acquired loan portfolio was due to normal organic growth and PPP loans.
The yield on the acquired loan portfolio decreased from 5.08% in the second
quarter of 2020 to 4.40% in the same period in 2021 while interest income
increased by
? increased by
acquired loans decreased by 68 basis points due to the overall lower rate
environment along with the decline in loan accretion income of
during the second quarter of 2021 compared to the same period in 2020.
The yield on the non-acquired loan portfolio decreased from 3.84% in the second
quarter of 2020 to 3.74% in the same period in 2021 while interest income
increased by
increased by
causing interest income on non-acquired loans to increase. The yield on
? non-acquired loans declined by 10 basis points due to the continuous low
interest rate environment. The most recent rate change by the
was the federal funds target rate which dropped by 150 basis points to a range
of 0.00% to 0.25% in
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$9.4 billion , or 67.9%, in the second quarter of 2021 compared to the same period in 2020. Overall cost of funds, including demand deposits, decreased by 20 basis points to 0.17% in the second quarter of 2021, compared to the same period in 2020. Some key highlights for the quarter endedJune 30, 2021 compared to the same period in 2020 include:
Increase in interest-bearing deposits average balance of
increase in federal funds purchased and repurchase agreements of
? million, and an increase in corporate and subordinated debt of
These increases were slightly offset by a decrease in other borrowings of
billion.
Increase in average interest-bearing deposits is due to the assumption of
billion in interest-bearing deposits from the CSFL merger during the second
quarter of 2020. The increase in average federal funds purchased and repurchase
agreements, average corporate and subordinated debt and other borrowings was
also due to borrowings assumed in the merger with CSFL. The Company assumed
? million in subordinated debt and trust 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. In
Company redeemed
securities assumed from the CSFL merger. The Company will begin to see a
reduction in interest expense related to corporate and subordinated debentures
beginning in the third quarter of 2021.
The decline in interest expense of
compared to the same period in 2020 was driven by lower cost on interest
bearing deposits and federal funds purchased and repurchase agreements. The
cost of interest-bearing deposits was 0.18% for the second quarter of 2021
compared to 0.42% for the same period in 2020 while the cost on federal funds
purchased and repurchase agreements was 0.14% for the second quarter of 2021
compared to 0.38% for the same period in 2020. The decline in cost related to
? deposits and federal funds purchased and repurchase agreements was due to the
falling interest rate environment resulting from the drops in the federal funds
rate made by the
basis point decrease in the average rate on all interest-bearing liabilities
from 0.53% to 0.25% for the three months ended
costs was partially offset by an increase in the cost on the corporate and
subordinated debt of 73 basis points due to the debt acquired in the CSFL
merger in the second quarter of 2020 having a higher cost than the legacy SSB
debt. As mentioned
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above, the Company redeemed
preferred securities in
merger.
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. Noninterest-Bearing Deposits
Noninterest-bearing deposits are transaction accounts that provide our Bank with "interest-free" sources of funds. Average noninterest-bearing deposits increased$5.5 billion , or 97.6%, to$11.0 billion in the second quarter of 2021 compared to$5.6 billion during the same period in 2020. The increase in average noninterest-bearing deposits was mainly due to the noninterest-bearing deposits of$5.3 billion assumed from the merger with CSFL inJune 2020 . The completion of the merger with CSFL was onJune 7th, 2020 . As a result, for the second quarter of 2020, the assumed noninterest-bearing deposits from the merger with CSFL were only outstanding for 23 days, which lead to a lower average balance compared to the period-end balance atJune 30, 2020 .
Noninterest Income
Noninterest income provides us with additional revenues that are significant sources of income. For the three months endedJune 30, 2021 and 2020, noninterest income comprised 23.8%, and 25.1%, respectively, of total net interest income and noninterest income. For the six months endedJune 30, 2021 and 2020, noninterest income comprised 25.4%, and 25.3%, respectively, of total net interest income and noninterest income. Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020
Service charges on deposit accounts$ 14,806 $ 10,115 $ 30,900 $ 22,419 Debit, prepaid, ATM and merchant card related income 9,130 6,564 18,318 12,401 Mortgage banking income 10,115 18,371 36,995 33,018 Trust and investment services income 9,733 7,138 18,311 14,527 Correspondent banking and capital market income 25,877 10,067 54,625 10,560 Securities gains, net 36 - 36 - Bank owned life insurance income 5,047 1,381
8,347 3,911 Other 4,276 711 7,773 1,643 Total noninterest income$ 79,020 $ 54,347 $ 175,305 $ 98,479
Noninterest income increased by
Service charges on deposit accounts were higher in the second 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. Debit, prepaid, ATM and merchant card related income was higher by$2.6
million, or 39.1%, in the second quarter of 2021 by the same quarter in 2020.
? The increase in debit, prepaid, ATM and merchant card related income was mainly
driven by higher debit card, credit card sales incentive and merchant card
income.
Mortgage banking income decreased by
quarter compared to the same period prior year, which was comprised of
million, or 59.4%, decrease from mortgage income in the secondary market,
partially offset by a
related income, net of the hedge. During the current quarter, the Company
allocated a lower percentage of its mortgage production and pipeline to the
? secondary market compared to the previous quarter, which resulted in a decrease
in mortgage income from the secondary market. During the second quarter of
2021, mortgage income from the secondary market comprised of a
decline in the change in fair value of the pipeline, loans held for sale and
MBS forward trades. This decrease was offset by a
gain on sale of mortgage loans to
which is net of the increase in commission
61
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expense related to mortgage production of
second quarter of 2021. The allocation of mortgage production between portfolio
and secondary market depends on the Company's liquidity, market spreads and rate
changes during each period and will fluctuate quarter to quarter. The increase
in mortgage servicing related income, net of the hedge in the second quarter of
2021 was due to a
including decay along with a
The increase in fair value of the MSR is due to an increase in mortgage rates
from the second quarter of 2020 and the increase in the servicing fee income is
due to the increase in size of the servicing portfolio.
Correspondent banking and capital markets income for the second quarter of 2021
increased by
CSFL which was completed in the second quarter of 2020 and the acquisition of
? Duncan-
correspondent banking and capital markets income. The income from this business
includes commissions earned on fixed income security sales, fees from hedging
services, loan brokerage fees and consulting fees for services related to these
activities.
Bank owned life insurance income increased
second quarter of 2021 compared to the same quarter in 2020. This increase was
? due the acquisition of
merger with CSFL during the second quarter of 2020 along with the purchase of
Other income increased by
? second quarter of 2020. This increase was mainly due to increases in SBA loan
servicing fees and gains on sale of SBA loans of$2.9 million . Noninterest income increased by$76.8 million , or 78.0%, during the six months endedJune 30, 2021 compared to the same period in 2020. This change in total noninterest income resulted from the following:
Service charges on deposit accounts were higher in 2021 by
37.8%, than 2020, due primarily to the 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 and savings accounts, in net NSF and AOP
income and in fees related to wire transfers. Debit, prepaid, ATM and merchant card related income was higher by$5.9
million, or 47.7%, in 2021 compared to 2020. The increase in debit, prepaid,
? ATM and merchant card related income was mainly driven by higher debit card,
credit card sales incentive, ATM and merchant card income due to the increase
in activity related to the merger with CSFL in the second quarter of 2020.
Mortgage banking income increased by
comprised of
secondary market, partially offset by a
mortgage servicing related income, net of the hedge. The increase in mortgage
income from the secondary market in 2021 comprised of a
in the gain on sale of mortgage loans to
? 2021, which is net of the increase in commission expense related to mortgage
production of
by a
held for sale and MBS forward trades. The slight decrease in mortgage servicing
related income, net of the hedge in 2021 was due to a
the change in fair value of the MSR including decay partially offset by a
million increase from servicing fee income.
Correspondent banking and capital markets income for 2021 increased by
million from 2020. The merger with CSFL, which was completed in the second
quarter of 2020 and the acquisition of Duncan-
? resulted in the significant increase in correspondent banking and capital
markets income. The income from this business includes commissions earned on
fixed income security sales, fees from hedging services, loan brokerage fees
and consulting fees for services related to these activities.
Trust and investment services income increased
? compared to 2020. The increase in business through the merger with CSFL which
was completed in the second quarter of 2020 resulted in the increase in income.
Bank owned life insurance income increased
compared to 2020. This increase was due to an increase in the cash surrender
value of
? in the merger with CSFL during the second quarter of 2020, along with the
purchase of
partially offset by a
insurance policies.
Other income increased by
? second quarter of 2020. This increase was mainly due to increases in SBA loan
servicing fees and gains on sale of SBA loans of
in rental income of$611,000 . 62 Table of Contents Noninterest Expense Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020
Salaries and employee benefits$ 137,379 $ 81,720 $ 277,740 $ 142,698 Occupancy expense 22,844 15,959 46,175 28,246 Information services expense 19,078 12,155 37,867 21,462 OREO expense and loan related 240 1,107 1,242 1,694 Amortization of intangibles 8,968 4,665 18,132 7,672 Business development and staff related expense 4,305 1,447
7,676 3,691
Supplies and printing 971 624 2,070 1,087
Postage expense 1,529 986 3,100 2,028
Professional fees 2,301 2,848 5,575 5,342FDIC assessment and other regulatory charges 4,931 2,403 8,772 4,461 Advertising and marketing 1,659 531 3,399 1,345 Merger and branch consolidation related expense 32,970 40,279
42,979 44,408
Extinguishment of debt cost 11,706 - 11,706 -
Other 14,502 10,388 25,661 18,226
Total noninterest expense $ 263,383 $ 175,112 $ 492,094 $ 282,360
Noninterest expense increased by $88.3 million , or 50.4%, in the second quarter
of 2021 as compared to the same period in 2020. The quarterly increase in total
noninterest expense primarily resulted from the following:
An increase in salaries and employee benefits of
compared to the second quarter of 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
employees increased 101.4% to 5,203 at
CSFL from 2,583 at
A decrease in merger-related and branch consolidation related expense of
? million compared to the second quarter of 2020. The costs in the second quarter
of 2021 and 2020 both mainly consisted of costs related to merger with CSFL.
Occupancy and information services expense increased
This increase was related to the additional cost associated with facilities,
? employees and systems added through our merger with CSFL. Our number of
branches increased by 126, or 81.3% from 155 at
the merger with CSFL) to 281 at
Amortization of intangibles increased
? due to the merger with CSFL which resulted in the Company recording a core
deposit intangible asset of
intangible asset of
The Company had extinguishment of debt cost of
quarter of 2021. This cost was from the write-off of the fair market value mark
? recorded on the trust preferred securities assumed in the CSFL merger. All of
the trust preferred securities assumed in the CSFL merger were redeemed in June
2021.
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. Noninterest expense increased by$209.7 million , or 74.3%, during the six months endedJune 30, 2021 compared to the same period in 2020. The categories and explanations for the increases year-to-date are similar to the ones noted above in the quarterly comparison. Income Tax Expense Our effective tax rate was 22.42% and 22.07% for the three and six months endedJune 30, 2021 compared to 22.56% and 25.20% for the three and six months endedJune 30, 2020 . The decrease 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. In the second quarter of 2020, the Company acquired CSFL in a merger of equals and incurred significant acquisition costs that resulted in a pre-tax loss for the quarter. In addition to the acquisition costs, the Company recorded$119 million in non- 63
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PCD provision for credit losses as part of the merger. This loss led to an income tax benefit being recorded in the second quarter of 2020.
The decrease in the year-to-date effective tax rate compared to the second quarter of 2020 was driven by the increase in pre-tax book income that was recorded in the current quarter compared to the pre-tax book loss that was generated during the second quarter of 2020. This along with an increase in federal tax credits available and an increase in tax-exempt income through the first six months of 2021 compared to 2020 also led to a decrease in the year-to-date effective tax rate.
Analysis of Financial Condition
Summary
Our total assets increased approximately$2.6 billion , or 6.8%, fromDecember 31, 2020 toJune 30, 2021 , to approximately$40.4 billion . Within total assets, cash and cash equivalents increased$1.8 billion , or 38.9%, investment securities increased$1.3 billion , or 28.6%, and loans decreased$631.1 million , or 0.3%, during the period. Within total liabilities, deposit growth was$2.5 billion , or 8.3%, and federal funds purchased and securities sold under agreements to repurchased growth was$82.8 million , or 10.5%. Total borrowings decreased$38.6 million , or 9.9%. Total shareholder's equity increased$109.7 million , or 2.4%. Our loan to deposit ratio was 72% and 80% atJune 30, 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. AtJune 30, 2021 , investment securities totaled$5.7 billion , compared to$4.4 billion atDecember 31, 2020 , an increase of$1.3 billion , or 28.6%. We continue to increase our investment securities strategically primarily with excess funds due to continued deposit growth. During the six months endedJune 30, 2021 , we purchased$1.8 billion of securities,$276.7 million classified as held to maturity and$1.5 billion classified as available for sale. These purchases were partially offset by maturities, paydowns, sales and calls of investment securities totaling$475.5 million . Net amortization of premiums were$19.7 million in the first six months of 2021. The decrease in fair value in the available for sale investment portfolio of$30.8 million in the first six months of 2021 compared toDecember 31, 2020 was mainly due to an increase in short and long term interest rates during the six period ending
June 30, 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 RatedJune 30, 2021 U.S. Government agencies
- $ -
Residential mortgage-backed securities issued by
2,397,686 2,380,891 (16,795) 98 -
- 2,397,588
Residential collateralized mortgage-obligations issued by
754,479 761,484 7,005 - -
- 754,479
Commercial mortgage-backed securities issued by
1,055,640 1,058,652 3,012 13,770 -
- 1,041,870 State and municipal obligations
677,226 693,128 15,902 675,788 -
- 1,438Small Business Administration loan-backed securities
528,706 532,316 3,610 528,706 - - -
Corporate securities 13,535 13,892 357 - - - 13,535
$ 5,526,560 $ 5,537,551 $ 10,991 $ 1,317,650 $ - $ - $ 4,208,910
* 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-
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backed securities. The balances presented under the ratings above reflect the amortized cost of the investment securities.
AtJune 30, 2021 , we had 156 investment securities (including both available for sale and held to maturity) in an unrealized loss position, which totaled$46.9 million . AtDecember 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 70 securities, while the total dollar amount of the unrealized loss increased by$41.6 million . The increase in both the number of investment securities in a loss position and the total unrealized loss fromDecember 31, 2020 is due to an increase in short and long term interest rates during the first six months of 2021. All investment securities in an unrealized loss position as ofJune 30, 2021 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability to hold these securities within the portfolio until 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 ofJune 30, 2021 , we determined that there was no impairment on our other investment securities. As ofJune 30, 2021 , other investment securities represented approximately$160.6 million , or 0.40% of total assets and primarily consists of FHLB and FRB stock which totals$146.0 million , or 0.36% of total assets. There were no gains or losses on the sales of these securities for three and six months endedJune 30, 2021 and 2020, respectively. Trading Securities Through itsCorrespondent Banking Department and its wholly-owned broker dealerDuncan-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. AtJune 30, 2021 , we had$89.9 million of trading securities. Loans Held for Sale The balance of mortgage loans held for sale decreased$119.0 million fromDecember 31, 2020 to$171.4 million atJune 30, 2021 . Total mortgage production remained strong at$1.4 billion during the second quarter; however a higher percentage of mortgage production was booked to portfolio compared to previous quarters, 43% for the second quarter of 2021 compared to 33% in the previous quarter and 28% during the fourth quarter of 2020. This resulted in a lower percentage of mortgage production being allocated to the secondary market.
The
allocation of mortgage
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production between portfolio and secondary market depends on the Company's liquidity, market spreads and rate changes during each period and will fluctuate over time.
Loans
The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
LOAN PORTFOLIO (ENDING BALANCE) June 30, % of December 31, % of (Dollars in thousands) 2021 Total 2020 Total Acquired loans: Acquired - non-purchased credit deteriorated loans: Construction and land development$ 290,692 1.2 %$ 495,638 2.0 % Commercial non-owner occupied 2,314,756 9.7 % 2,623,838 10.6 % Commercial owner occupied real estate 1,688,142
7.0 % 1,819,129 7.4 % Consumer owner occupied 935,854 3.9 % 1,129,618 4.6 % Home equity loans 489,110 2.0 % 609,709 2.5 %
Commercial and industrial 1,182,113 4.9 % 2,112,514 8.6 % Other income producing property 389,150
1.6 % 461,357 1.9 % Consumer non real estate 167,880 0.7 % 206,812 0.8 % Other 253 - % 254 - %
Total acquired - non-purchased credit deteriorated loans 7,457,950 31.0 % 9,458,869 38.4 % Acquired - purchased credit deteriorated loans (PCD): Construction and land development
77,851 0.3 % 115,146 0.5 %
Commercial non-owner occupied 1,022,771 4.3 % 1,185,472 4.8 %
Commercial owner occupied real estate 656,347 2.7 % 746,976 3.0 % Consumer owner occupied 313,240 1.3 % 380,170 1.5 % Home equity loans 64,801 0.3 % 81,238 0.3 %
Commercial and industrial 115,119 0.5 % 178,070 0.7 % Other income producing property 119,160
0.5 % 148,449 0.6 % Consumer non real estate 64,970 0.3 % 80,288 0.3 % Other - - % - - %
Total acquired - purchased credit deteriorated loans (PCD) 2,434,259 10.2 % 2,915,809 11.7 % Total acquired loans
9,892,209 41.2 % 12,374,678 50.1 %
Non-acquired loans:
Construction and land development 1,579,103 6.6 % 1,280,062 5.2 %
Commercial non-owner occupied 2,948,281 12.3 % 2,342,936 9.5 %
Commercial owner occupied real estate 2,550,700 10.6 % 2,266,592 9.2 % Consumer owner occupied 2,300,236 9.6 % 2,172,879 8.8 % Home equity loans 645,451 2.7 % 601,194 2.4 %
Commercial and industrial 3,143,029 13.1 % 2,755,726 11.2 % Other income producing property 299,992
1.2 % 245,094 1.0 % Consumer non real estate 664,233 2.7 % 607,234 2.5 % Other 9,844 - % 17,739 0.1 % Total non-acquired loans 14,140,869 58.8 % 12,289,456 49.9 %
Total loans (net of unearned income)$ 24,033,078
100.0 %$ 24,664,134 100.0 %
* As a result of the conversion of legacy CenterState's core system to the Company's core system, completed during the second quarter of 2021, several loans were reclassified to conform with the Company's current loan segmentation, most notably residential investment loans which were reclassed from Consumer Owner Occupied to Other Income Producing Property, and some multi-family loans that were reclassified from Other Income Producing Property to Commercial Non-Owner Occupied. Prior period loan balances presented above were revised to conform with the current loan segmentation. Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), decreased by$631.1 million , or 5.2% annualized, to$24.0 billion atJune 30, 2021 . Our non-acquired loan portfolio increased by$1.9 billion , or 30.4% annualized, driven by growth in all categories except other loans. Commercial non-owner occupied loans, commercial and industrial loans, construction and land development loans and commercial owner occupied loans led the way with$605.3 million ,$387.3 million ,$299.0 million and$284.1 million in year-to-date loan growth, respectively, or 52.1%, 28.3%, 47.1% and 25.3% annualized growth, respectively. The acquired loan portfolio decreased by$2.5 billion , or 40.5% annualized, from paydowns and payoffs in both the PCD and
NonPCD loan
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categories. Acquired loans as a percentage of total loans decreased to 41.2% and
non-acquired loans as a percentage of the overall portfolio increased to 58.8%
at June 30, 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 amount needed to adjust the ACL for Management's current
estimate of expected credit losses. The Company's ACL is calculated using
collectively evaluated and 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, and consideration of condition
within the bank's operating environment and geographic area. Additional forecast
scenarios may be weighed along with the baseline forecast to arrive at the final
reserve estimate. While periods of relative economic stability should generally
lead to stability in forecast scenarios and weightings to estimate credit
losses, periods of instability can likewise require Management to adjust the
selection of scenarios and weightings, in accordance with the accounting
standards.
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The COVID-19 pandemic has created increased volatility and uncertainties within
the economy and economic forecasts. Accordingly, during the fourth quarter of
2020, Management used a blended forecast scenario (two-thirds baseline and
one-third more severe scenario) to determine the allowance for credit losses as
of December 31, 2020 . At the height of lockdowns and uncertainties around the
path of the epidemic and efficacy of vaccination efforts during the first
quarter of 2021, Management adjusted the blended forecast scenario to an equal
weight between the baseline and the more adverse scenario to determine the
allowance for credit losses as of March 31, 2021 . In recognition of positive
developments including suppression of the virus through continued vaccinations,
widespread reopening of the economy, and an improved economic outlook,
Management returned to the blended forecast scenario of two-thirds baseline and
one-third more severe scenario to determine the allowance for credit losses as
of June 30, 2021 . The resulting release was approximately $59 million . If the
economic forecast weighting had not been adjusted, this would have resulted in a
smaller release of approximately $12 million , which Management did not deem
appropriate given the pace 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 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
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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 June 30, 2021 , the accrued interest receivable for loans
recorded in Other Assets was $82.8 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
third quarter of 2020, Management completes funding studies 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 applies 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 commitments. As of June 30,
2021 , the liability recorded for expected credit losses on unfunded commitments
was $31.0 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 on January 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 of June 30, 2021 , the
balance of the ACL was $350.4 million or 1.46% of total loans. The ACL decreased
$56.1 million from the balance of $406.5 million recorded at March 31, 2021 .
This decrease during the second quarter of 2021 included a $53.9 million release
or decline in the provision for credit losses in addition to $2.1 million in net
charge-offs. In the first and second quarter of 2021, with the improvement in
the economy and the increased availability of the COVID-19 vaccine, the Company
has released $104.8 million of its allowance for credit losses based on
improvements in forecasts. Since the prior comparative period, the ACL has
decreased $84.2 million from the balance of $434.6 million recorded at June 30,
2020 . This decrease included a net release of the provision for credit losses of
$79.2 million since June 30, 2020 related to an improvement in the economy and
forecasts during the first half of 2021 along with net charge-offs of $3.5
million .
At June 30, 2021 , the Company had a reserve on unfunded commitments of $31.0
million which was recorded as a liability on the Balance Sheet, compared to
$35.8 million at March 31, 2021 . During three and six months ended June 30,
2021 , the Company recorded a release of the allowance, or negative provision for
credit losses, on unfunded commitments of $4.8 million and $12.4 million ,
respectively. 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
(Recovery) Provision for Credit Losses on the Condensed Consolidated Statements
of Net Income. For the prior comparative period, the Company had a reserve on
unfunded commitments of $21.1 million recorded at June 30, 2020 . With the
adoption of ASU 2016-13 on January 1, 2020 , the Company increased its reserve on
unfunded commitments by $6.5 million . During the three and six months ended June
30, 2020 , the provision for credit losses on unfunded commitments was $12.5
million and $14.3 million , respectively. Of these amounts, $9.6 million was
related to the merger with CSFL during the second quarter of 2020. 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 firstsix months of 2021. AtJune 30, 2021 , the allowance for credit losses was$350.4 million , or 1.46%, of period-end loans. The ACL provides 4.09 times coverage of nonperforming loans atJune 30, 2021 . Net charge-offs to the total average loans during three and six months endedJune 30, 2021 were 0.03% and 0.02%, respectively. We continued to show solid and stable asset quality numbers and ratios as ofJune 30, 2021 . The following table provides the allocation, by segment, for 69
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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.
June 30, 2021
(Dollars in thousands) Amount %*
Residential Mortgage Senior $ 55,820 18.0 %
Residential Mortgage Junior 825 0.1 %
Revolving Mortgage 14,550 5.7 %
Residential Construction 4,488 2.4 %
Other Construction and Development 45,488 6.1 %
Consumer 25,697 3.9 %
Multifamily 5,883 1.6 %
Municipal 1,063 2.7 %
30,691 12.2 %
Total $ 350,401 100.0 %
* Loan balance in each category expressed as a percentage of total loans, excluding PPP loans.
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The following tables present a summary of three and six months ended June 30,
2021 and 2020:
Three Months Ended June 30,
2021 2020
Non-PCD PCD Non-PCD PCD
(Dollars in thousands) Loans Loans Total Loans Loans Total
Balance at beginning of period $ 284,257 $ 122,203 $ 406,460 $ 137,376 $ 7,409 $ 144,785
Allowance Adjustment - FMV for CSFL
merger - - - - 150,946 150,946
Loans charged-off (5,076) (586) (5,662) (2,366) (65) (2,431)
Recoveries of loans previously
charged off 1,901 1,647 3,548 1,557 773 2,330
Net (charge-offs) recoveries (3,175) 1,061 (2,114) (809) 708 (101)
(Recovery) provision for credit
losses (35,714) (18,231) (53,945) 143,734 (4,756) 138,978
Balance at end of period $ 245,368 $ 105,033 $ 350,401 $ 280,301 $ 154,307 $ 434,608 Total loans, net of unearned income: At period end$ 24,033,078 $ 25,499,147 Average 24,307,399 15,717,387 Net charge-offs as a percentage of average loans (annualized) 0.03 % - % Allowance for credit losses as a percentage of period end loans 1.46 % 1.70 % Allowance for credit losses as a percentage of period end non-performing loans ("NPLs") 408.98 %
352.53 %
Six Months Ended June 30,
2021 2020
Non-PCD PCD Non-PCD PCD
(Dollars in thousands) Loans Loans Total Loans Loans Total
Allowance for credit losses at
January 1 $ 315,470 $ 141,839 $ 457,309 $ 56,927 $ - $ 56,927
Adjustment for implementation of
CECL - - - 51,030 3,408 54,438
Allowance Adjustment - FMV for
CenterState merger - - - - 150,946 150,946
Loans charged-off (7,593) (1,443) (9,036) (4,697) (957) (5,654)
Recoveries of loans previously
charged off 3,881 3,062 6,943 2,397 1,842 4,239
Net (charge-offs) recoveries (3,712) 1,619 (2,093) (2,300) 885 (1,415)
(Recovery) provision for credit
losses (66,390) (38,425) (104,815) 174,644 (932) 173,712
Balance at end of period $ 245,368 $ 105,033 $ 350,401 $ 280,301 $ 154,307 $ 434,608 Total loans, net of unearned income: At period end$ 24,033,078 $ 25,499,147 Average 24,399,234 13,578,606 Net charge-offs as a percentage of average loans (annualized) 0.02 % 0.02 % Allowance for credit losses as a percentage of period end loans 1.46 % 1.70 % Allowance for credit losses as a percentage of period end non-performing loans ("NPLs") 408.98 %
352.53 %
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Nonperforming Assets ("NPAs")
The following table summarizes our nonperforming assets for the past five
quarters:
June 30, March 31, December 31, September 30, June 30,(Dollars in thousands) 2021 2021 2020 2020
2020
Non-acquired:
Nonaccrual loans$ 14,221 $ 16,956 $ 16,035 $ 18,078 $ 19,011 Accruing loans past due 90 days or more 559 853 9,586 636
419
Restructured loans - nonaccrual 1,844 3,225 3,550 3,749
3,453
Total non-acquired nonperforming loans 16,624 21,034 29,171 22,463
22,883
Other real estate owned ("OREO") (2) (6) 444 490 552 726 1,181
Other nonperforming assets (3) 251 164 136 99
508
Total non-acquired nonperforming assets
17,319 21,688 29,859 23,288 24,572
Acquired:
Nonaccrual loans (1) 69,053 79,919 75,603 89,067 99,346Accruing loans past due 90 days or more - 105 2,065 907
1,053
Total acquired nonperforming loans 69,053 80,024 77,668 89,974
100,399
Acquired OREO and other nonperforming assets: Acquired OREO (2) (7) 4,595 10,981 11,362 12,754
16,836
Other acquired nonperforming assets (3) 182 311 206 150
151
Total acquired nonperforming assets 73,830 91,316 89,236 102,878
117,386
Total nonperforming assets$ 91,149 $ 113,004 $ 119,095 $ 126,166
Excluding Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.12 % 0.16 %
0.24 % 0.20 % 0.23 %
Total nonperforming assets as a percentage of total assets (5) 0.04 % 0.05 % 0.08 % 0.06 % 0.07 %
Nonperforming loans as a percentage of period end loans (4) 0.12 % 0.16 % 0.24 % 0.19 % 0.22 %
Including Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.38 % 0.46 %
0.48 % 0.50 % 0.56 %
Total nonperforming assets as a percentage of total assets 0.23 % 0.28 % 0.32 % 0.33 % 0.38 %
Nonperforming loans as a percentage of period end loans (4) 0.36 % 0.41 % 0.43 % 0.45 % 0.48 %
(1) Includes nonaccrual loans that are purchase credit deteriorated (PCD loans).
(2) Consists of real estate acquired as a result of foreclosure.
(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
2021,
that is now separately disclosed on the balance sheet.
Excludes acquired bank premises held for sale of
respectively, that is now separately disclosed on the balance sheet.
Total nonperforming assets were $91.1 million , or 0.38% of total loans and
repossessed assets, at June 30, 2021 , a decrease of $27.9 million , or 23.5%,
from December 31, 2020 . Total nonperforming loans were $85.7 million , or 0.36%,
of total loans, at June 30, 2021 , a decrease of $21.2 million , or 19.8%, from
December 31, 2020 . Non-acquired nonperforming loans declined by $12.5 million
from December 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 $9.0
million , a decrease in restructured nonaccrual loans of $1.7 million and a
decrease in primarily commercial nonaccrual loans of $1.8 million . The accruing
loans past due 90 days or more at December 31, 2020 were a group of similar
loans that were deemed to be low risk and almost all of these loans were brought
current in January 2021 . Acquired nonperforming loans declined $8.6 million from
December 31, 2020 . The decline in the acquired nonperforming loan balances was
due to a decrease in consumer nonaccrual loans of approximately $7.7 million , a
decrease in accruing loans past due 90 days or more of $2.1 million , offset by
an increase in commercial nonaccruing loans of $1.2 million .
At June 30, 2021 , OREO totaled $5.0 million , which included $444,000 in
non-acquired OREO and $4.6 million in acquired OREO. Total OREO decreased $6.9
million from December 31, 2020 . At June 30, 2021 , non-acquired OREO consisted of
3 properties with an average value of $148,000 . This compared to 7 properties
with an average value of $79,000 at December 31, 2020 . In the second quarter of
2021, we added no new properties into non-acquired OREO, while selling 1
property with an aggregate value of $25,000 . On the property sold, we recorded a
net loss of $8,000 . At June 30, 2021 , acquired OREO consisted of 21 properties
with an average value of $219,000 . This compared to 35 properties with an
average value of $325,000 at December 31, 2020 . In the second quarter of 2021,
we added no new properties into acquired OREO, while selling 21 properties with
an aggregate value of $6.3 million during the current quarter. On the properties
sold, we recorded a net gain of $6.0 million .
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Potential Problem Loans
Potential problem loans, which are not included in nonperforming loans, related
to non-acquired loans were approximately $20.2 million , or 0.14%, of total
non-acquired loans outstanding, at June 30, 2021 , compared to $5.9 million , or
0.05%, of total non-acquired loans outstanding, at December 31, 2020 . Potential
problem loans related to acquired loans totaled $18.5 million , or 0.19%, of
total acquired loans outstanding, at June 30, 2021 , compared to $13.4 million ,
or 0.11% of total acquired loans outstanding, at December 31, 2020 . All
potential problem loans represent those loans where information about possible
credit problems of the borrowers has caused Management to have concern about the
borrower's ability to comply with present repayment terms.
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$2.5 billion or 16.7% annualized to$33.2 billion atJune 30, 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$3.0 billion during the six months endedJune 30, 2021 as these funds are normally lower cost funds. Federal funds purchased related to the correspondent bank division and repurchase agreements were$862.4 million atJune 30, 2021 up$82.8 million fromDecember 31, 2020 . Corporate and subordinated debentures declined by$63.6 million to$326.5 million as the Company redeemed during the second quarter of 2021 some of the debt assumed in the merger with CSFL. Some key highlights are outlined below:
Interest-bearing deposits increased
2021 from the period end balance at
increase from
? transactional accounts including money markets of
million. Average interest-bearing deposits increased
billion in the quarter ended
Corporate and subordinated debentures declined
quarter of 2021 as the Company redeemed
securities and
? repayment of
current quarter. With the redemption of the trust preferred securities, the
remaining fair value mark of
cost during the current quarter. Noninterest-Bearing Deposits Noninterest-bearing deposits are transaction accounts that provide our Bank with "interest-free" sources of funds. AtJune 30, 2021 , the period end balance of noninterest-bearing deposits was$11.2 billion exceeding theDecember 31, 2020 balance by$1.5 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 half of 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 ofJune 30, 2021 , shareholders' equity was$4.8 billion , an increase of$109.7 million , or 2.4%, fromDecember 31, 2020 . The change from year-end was mainly attributable to the increase in equity through net income less dividends paid, common stock repurchased pursuant to our stock repurchase plan and a decline in the market value of investment securities available for sale. 73 Table of Contents
The following table shows the changes in shareholders' equity during 2021.
Total shareholders' equity atDecember 31, 2020 $
4,647,880
Net income
245,909
Dividends paid on common shares ($0.47 per share)
(66,685)
Dividends paid on restricted stock units
(91)
Net decrease in market value of securities available for sale, net of deferred taxes (23,453) Stock options exercised 1,907 Employee stock purchases 484 Equity based compensation 12,799 Common stock repurchased pursuant to stock repurchase plan
(60,161)
Common stock repurchased - equity plans
(966)
Total shareholders' equity atJune 30, 2021 $ 4,757,623 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 "2021 Stock Repurchase Plan"), 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 ofJune 30, 2021 , we have repurchased 700,000 shares, at an average price of$85.94 per share, excluding cost of commissions, for a total of$60.2 million , under the 2021 Stock Repurchase Plan and may repurchase up to an additional 2,800,000 shares of common stock under the 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 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. 74
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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. 75 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 June 30, December 31,
Minimums 2021 2020
South State Corporation :Common equity Tier 1 risk-based capital N/A 12.14 %
11.77 %
Tier 1 risk-based capital 6.00 % 12.14 % 11.77 %
Total risk-based capital 10.00 % 14.12 % 14.24 %
Tier 1 leverage N/A 8.13 % 8.27 %
South State Bank :Common equity Tier 1 risk-based capital 6.50 % 12.98 %
12.39 %
Tier 1 risk-based capital 8.00 % 12.98 % 12.39 %
Total risk-based capital 10.00 % 13.68 % 13.33 %
Tier 1 leverage 5.00 % 8.69 % 8.71 %
The Company's and Bank's Common equity Tier 1 risk-based capital and Tier 1 risk-based capital ratios increased compared toDecember 31, 2020 . These ratios increased as Tier 1 capital increased through net income during 2021 and growth in total risk-based assets remained flat at both the Company and Bank. The Tier 1 leverage ratio declined slightly both at the Company and Bank as the percentage increase in Tier 1 risk-based capital was less than the percentage increase in the average assets for regulatory capital purposes. The increase in average assets was mainly due to an increase in cash and cash equivalents and investments fromDecember 31, 2020 with deposits growing as the federal government has pushed funds into the market through stimulus programs in addition to consumers remaining conservative in their spending habits. The total risk-based capital increased at the Bank and declined at the Company. The increase in the total risk-based capital ratio at the Bank was due to the percentage increase in total risk-based capital being greater than the percentage increase in total risk-based assets. The reason for the decline in the total risk-based capital ratio at the Company was due the redemption of$25.0 million in subordinated debt and$38.5 million in trust preferred securities during the second quarter of 2021 that was included in total risked-based capital. Our capital ratios are currently well in excess of the minimum standards and continue to be in the "well capitalized" regulatory classification. Liquidity Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses. 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
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.
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Our non-acquired loan portfolio increased by approximately$1.9 billion , or approximately 30.4% annualized, compared to the balance atDecember 31, 2020 . The increase fromDecember 31, 2020 was mainly related to organic growth and renewals on acquired loans along with a net increase in non-acquired PPP loans of$80.4 million . The acquired loan portfolio decreased by$2.5 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$695.2 million . Our investment securities portfolio (excluding trading securities) increased$1.3 billion compared to the balance atDecember 31, 2020 . The increase in investment securities fromDecember 31, 2020 was a result of purchases of$1.8 billion . This increase was partially offset by maturities, calls, sales and paydowns of investment securities totaling$475.5 million as well as declines in the market value of the available for sale investment securities portfolio of$30.8 million . Net amortization of premiums were$19.7 million in the first six 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$6.4 billion atJune 30, 2021 as compared to$4.6 billion atDecember 31, 2020 as deposits grew$2.5 billion during the six months of 2021. AtJune 30, 2021 andDecember 31, 2020 , we had$475.0 million and$600.0 million of traditional, out-of-market brokered deposits. AtJune 30, 2021 andDecember 31, 2020 , we had$748.8 million and$611.1 million , respectively, of reciprocal brokered deposits. Total deposits were$33.2 billion atJune 30, 2021 , an increase of$2.5 billion from$30.7 billion atDecember 31, 2020 . Our deposit growth sinceDecember 31, 2020 included an increase in demand deposit accounts of$1.5 billion , an increase in savings and money market accounts of$797.0 million and an increase in interest-bearing transaction accounts of$695.9 million partially offset by a decline in time deposits of$409.4 million . Total borrowings atJune 30, 2021 were$351.5 million and consisted of trust preferred securities and subordinated debentures of$326.5 million and an outstanding balance on our holding company line of credit of$25.0 million . During the second quarter of 2021, total trust preferred securities and subordinated debentures declined by$63.6 million as the Company redeemed$38.5 million in trust preferred securities and$25.0 million in subordinated debentures, in addition to the repayment of$11.0 million of subordinated notes that matured during the quarter. With the redemption of the trust preferred securities, the remaining fair value mark on these borrowings of$11.7 was written off as an extinguishment of debt cost. The holding company also borrowed$25.0 million on a line of credit inJune 2021 to provide some short term liquidity. This balance was paid off in July of 2021. Total short-term borrowings atJune 30, 2021 were$862.4 million , consisting of$486.1 million in federal funds purchased and$376.3 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. AtJune 30, 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. AtJune 30, 2021 , our Bank had$1.3 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. AtJune 30, 2021 , our Bank had a total FHLB credit facility of$2.6 billion with total outstanding FHLB letters of credit consuming$12.0 million leaving$2.6 billion in availability on the FHLB credit facility. The holding company has a$100.0 million unsecured line of credit with a$25.0 million outstanding balance leaving$75.0 million in availability atJune 30, 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 77 Table of Contents 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.
Asset-Liability Management and Market Risk Sensitivity
Our earnings and the economic value of equity vary in relation to the behavior of interest rates and the accompanying fluctuations in market prices of certain of our financial instruments. We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment. Our interest rate risk principally consists of reprice, option, basis, and yield curve risk.Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepayment options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities. We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances.
Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as the terms of contractual agreements, investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. Equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. Key simulation assumptions are subject to stress testing to assess the impact of assumption changes on earnings at risk and equity at risk. Model assumptions are reviewed by our Assumptions Committee.
Earnings at risk is defined as the percentage change in net interest income due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons.
Equity at risk is defined as the percentage change in the net economic value of
assets and liabilities due to changes in interest rates compared to a base net
economic value. The discounted present value of all cash flows represents our
economic value of equity. Equity at risk is generally considered a measure of
the long-term interest rate exposures of the balance sheet at a point in time.
Mortgage banking derivatives used in the ordinary course of business consist of
forward sales contracts and interest rate lock commitments on residential
mortgage loans. These derivatives involve underlying items, such as interest
rates, and are designed to mitigate risk. Derivatives are also used to hedge
mortgage servicing rights.
From time to time, we execute interest rate swaps to hedge some of our interest
rate risks. Under these arrangements, the Company enters into a variable rate
loan with a client in addition to a swap agreement. The swap agreement
effectively converts the client's variable rate loan into a fixed rate loan. The
Company then enters into a matching swap agreement with a third-party dealer to
offset its exposure on the customer swap. The Company may also execute interest
rate swap agreements that are not specific to client loans. As of the reporting
date, the Company did not have such agreements.
The analysis provided below assumes the base case reflects interest rates as of
the reporting date. Ramped and parallel interest rate shocks are applied over a
one-year time horizon. This analysis is applied to a static balance sheet that
assumes maturing or repricing assets and liabilities are replaced at current
market prices and volumes consistent
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with maintaining a stable balance sheet, with the exception of PPP loans that are not assumed to be replaced. The downward rate shock is subject to product floors and a zero-interest rate.
Percentage Change in Net Interest Income over One Year
Shock June 30, 2021
Up 100 basis points 6.90%
Up 200 basis points 13.80%
Down 100 basis points (1.50)%
Percentage Change in Economic Value of Equity
Shock June 30, 2021
Up 100 basis points 5.30%
Up 200 basis points 9.50%
Down 100 basis points (4.00)%
LIBOR Transition
InJuly 2017 , theFinancial Conduct Authority (FCA), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR at the end of 2021. OnMarch 5, 2021 , theFCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately afterDecember 31, 2021 for the one-week and two-month US dollar settings and immediately afterJune 30, 2023 for all remaining US dollar settings. The Alternative Reference Rates Committee has proposed SOFR as its preferred rate as an alternative to LIBOR and has proposed a paced market transition plan to SOFR from LIBOR. Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to LIBOR. As noted within Part I - Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended 2020, we hold instruments that may be impacted by the discontinuance of LIBOR including floating rate obligations, loans, deposits, derivatives and hedges, and other financial instruments but is not able to currently predict the associated financial impact of the transition to an alternative reference rate. We have established a cross-functional LIBOR transition working group that has 1) assessed the Company's current exposure to LIBOR indexed instruments and the data, systems and processes that will be impacted; 2) established a detailed implementation plan; and 3) developed a formal governance structure for the transition.
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 ofJune 30, 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$845.0 million atJune 30, 2021 . Based on this criteria, we had seven such credit concentrations atJune 30, 2021 , including loans on hotels and motels of$948.4 million , loans to lessors of nonresidential buildings (except mini-warehouses) of$4.0 billion , loans secured by owner occupied office buildings (including medical office buildings) of$1.7 billion , loans secured by owner occupied nonresidential buildings (excluding office buildings) of$1.4 billion , loans to lessors of residential buildings (investment properties and multi-family) of$1.3 billion , loans secured by 1st mortgage 1-4 family owner occupied residential property (including condos and home equity lines) of$4.0 billion and loans secured by jumbo (original loans greater than$548,250 ) 1st mortgage 1-4 family owner occupied residential property of$1.4 billion . The risk for these loans and for all loans is managed collectively through the use of credit 79 Table of Contents
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. AtJune 30, 2021 andDecember 31, 2020 , the Bank's CDL concentration ratio was 54.3% and 54.1%, respectively, and its CRE concentration ratio was 229.4% and 229.5%, respectively. As ofJune 30, 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.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2021 2020 2021 2020Return on average equity (GAAP) 8.38 % (11.78) % 10.52 % (4.67) % Effect to adjust for intangible assets 5.74 % (7.93) % 7.07 % (2.85) % Return on average tangible equity (non-GAAP) 14.12 % (19.71) %
17.59 % (7.52) %
Average shareholders' equity (GAAP)
(1,730,572) (1,240,650) (1,732,039) (1,146,070)
Adjusted average shareholders'
equity (non-GAAP) $ 3,008,669 $ 1,659,793 $ 2,981,300 $ 1,472,325
Net income (loss) (GAAP) $ 98,960 $ (84,935) $ 245,909 $ (60,825)
Amortization of intangibles 8,968 4,665 18,132 7,672
Tax effect (2,011) (1,052) (4,002) (1,933)
Net income (loss) excluding the
after-tax effect of amortization of
intangibles (non-GAAP) $ 105,917 $ (81,322) $ 260,039 $ (55,086)
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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, the merger with CSFL and the proposed acquisition ofAtlantic Capital . Words and phrases such as "may," "approximately," "continue," "should," "expects," "projects," "anticipates," "is likely," "look ahead," "look forward," "believes," "will," "intends," "estimates," "strategy," "plan," "could," "potential," "possible" and variations of such words and similar expressions are intended to identify such forward-looking statements. We caution readers that forward-looking statements are subject to certain risks, uncertainties and assumptions that are difficult to predict with regard to, among other things, timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:
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 and proposed acquisition of
Capital;
? Risks related to the proposed acquisition of
the possibility that the merger does not close when expected or at all because
o required regulatory, shareholder or other approvals and other conditions to
closing are not received or satisfied on a timely basis or at all;
o the occurrence of any event, change or other circumstances that could give rise
to the termination of the merger agreement;
o potential difficulty in maintaining relationships with clients, employees or
business partners as a result of the proposed acquisition of
o the amount of the costs, fees, expenses and charges related to the merger; and
problems arising from the integration of the two companies, including the risk
o that the integration will be materially delayed or will be more costly or
difficult than expected;
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;
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;
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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. Additional information with respect to factors that may cause actual results to differ materially from those contemplated by our forward-looking statements may also be included in other reports that we file with theSEC . We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward-looking statements. 82
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