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,
2021 . Results for the three and six months ended June 30, 2022 are not
necessarily indicative of the results for the year ending December 31, 2022 or
any future period.
Unless otherwise mentioned or unless the context requires otherwise, references
to "SouthState ," the "Company" "we," "us," "our" or similar references mean
SouthState Corporation and its consolidated subsidiaries. References to the
"Bank" means SouthState Corporation's wholly owned subsidiary, SouthState Bank ,
National Association, a national banking association.
Overview
SouthState 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 operatesSouthState 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, automotive parts and service providers nationwide. The holding company ownsSSB Insurance Corp. , a captive insurance subsidiary pursuant to Section 831(b) of theU.S. Tax Code. AtJune 30, 2022 , we had approximately$46.2 billion in assets and 5,190 full-time equivalent employees. Through our Bank branches, ATMs and online banking platforms, we provide our customers with a wide range of financial products and services, through a six (6) state footprint inAlabama ,Florida ,Georgia ,North Carolina ,South Carolina andVirginia . These financial products and services include deposit accounts such as checking accounts, savings and time deposits of various types, safe deposit boxes, bank money orders, wire transfer and ACH services, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, loans of all types, including business loans, agriculture loans, real estate-secured (mortgage) loans, personal use loans, home improvement loans, automobile loans, manufactured housing loans, boat loans, credit cards, letters of credit, home equity lines of credit, treasury management services, and merchant services. We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located 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, 2022 compared to the three and six months endedJune 30, 2021 and also analyzes our financial condition as ofJune 30, 2022 as compared toDecember 31, 2021 . 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 47
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the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. Of course, there are risks inherent in all loans, as such we maintain an allowance for credit losses, otherwise referred to herein as ACL, to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for credit losses against our operating earnings. In the following discussion, we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion. The following sections also identify significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Recent Events
We are continuously monitoring the impact of various global and national events on our results of operation and financial conditions, including inflation, and rising interest rates to combat elevated inflation, continued supply chain disruptions, as a result of, among other factors, the continued COVID-19 pandemic, and other global events. While employment figures show resilience, it is widely acknowledged that the chances of recession have increased over the quarter, and as a result, we recorded provision for credit losses of approximately$19.3 million during the second quarter of 2022, including the provision for unfunded commitments. The continued uncertainty around the COVID-19 pandemic and its latest variants and subvariants, as well as other global events, such as ongoing supply chain issues, elevated gas and oil prices, theUkraine -Russia conflict and the impact of high levels of inflation, may result in additional provision for credit losses in the future. Please see "Allowance for Credit Losses" in this MD&A for more information on the Company's analysis of expected credit losses. Furthermore, the timing and impact of such events on our business, financial statements and results of operations more generally will depend on future developments, which are highly uncertain and difficult to predict. In addition, growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, has contributed to rising inflation. In response, theFederal Reserve is raising interest rates and signaled that it will continue to raise rates and taper its purchase of mortgage and other bonds. The timing and impact of inflation and rising interest rates on our business, financial statements and results of operations will depend on future developments, which are highly uncertain and difficult to predict.
OnMarch 1, 2022 , the Company acquired all of the outstanding common stock ofAtlantic Capital , the holding company forAtlantic Capital Bank ("ACB"), in a stock transaction. Pursuant to the merger agreement, (i)Atlantic Capital merged with and into the Company, with the Company continuing as the surviving corporation in the merger, and (ii) immediately following the merger, ACB merged with and intoSouthState Bank, N.A. ("SSB"), with SSB continuing as the surviving bank in the bank merger.
Under the terms of the merger agreement, shareholders of
In the acquisition, the Company acquired$2.4 billion of loans, including PPP loans, at fair value, net of$54.3 million , or 2.24%, estimated discount to the outstanding principal balance, representing 10.0% of the Company's total loans atDecember 31, 2021 . Of the total loans acquired, Management identified$137.9 million that had more than insignificantly deteriorated since origination and were thus determined to be PCD loans. Additional details regarding theAtlantic Capital merger are discussed in Note 4 - Mergers and Acquisitions. 48 Table of Contents Overdraft Program InApril 2022 , the Company announced it will be modifying its consumer overdraft program to eliminate Non-Sufficient Funds ("NSF") fees as well as transfer fees to cover overdrafts. It will also offer a deposit product with no overdraft fees. The changes will be implemented starting in the third quarter of 2022 and are estimated to reduce diluted annual earnings per share by approximately
8 to10 cents . Critical Accounting Policies
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with GAAP and follow general practices within the banking industry. Our financial position and results of operations are affected by Management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Differences in the application of these policies could result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 2 - Summary of Significant Accounting Policies and Note 3 - Recent Accounting and Regulatory Pronouncements of our consolidated financial statements in this Quarterly Report on Form 10-Q and in Note 1 - Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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 expected credit losses that will result from the inability of our borrowers to make required loan payments. Management uses a 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, 2022 andDecember 31, 2021 , the balance of goodwill was$1.9 billion and$1.6 billion , respectively. As a result of theAtlantic Capital merger onMarch 1, 2022 , the Company recognized additional goodwill of$341.4 million .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. We changed the annual impairment date toOctober 31 during the second quarter of 2021 in order for the valuation to be closer to our year-end audit date. Our most recent evaluation of goodwill was performed as ofOctober 31, 2021 , and we determined that no impairment charge was necessary. Our stock price has traded above book value and tangible book value in the first six months of 2022. Our stock price closed onJune 30, 2022 at$77.15 , which was above book value of$66.64 and tangible book value of$39.47 . We will continue to monitor the impact of COVID-19 and other global events on the Company's business, operating results, cash flows and financial condition. If the economy deteriorates and our stock price falls below current levels, we will have to reevaluate the impact on our 49 Table of Contents
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, wealth and trust management businesses. 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 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 loans, available for sale securities, ACL, write downs of OREO properties and 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, 2022 were$157.9 million , an increase of approximately$93.0 million compared to$65.0 million as ofDecember 31, 2021 . The increase in deferred tax assets during the first six months of 2022 was mostly attributable to a$153.6 million increase in unrealized losses from the available for sale securities portfolio, as well as the addition of$30.4 million of net deferred tax assets acquired fromAtlantic Capital , offset by a$71.6 million decrease in the mark-to-market adjustment pertaining to loans with the remaining difference due to other temporary differences. The Company and its subsidiaries file a consolidated federal income tax return. Additionally, income tax returns are filed by the Company or its subsidiaries in the states ofAlabama ,California ,Colorado ,Florida ,Georgia ,Mississippi ,Missouri ,New Jersey , NewYork, North Carolina ,Pennsylvania ,South Carolina ,Tennessee ,Texas , andVirginia and inNew York City . We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves atJune 30, 2022 orDecember 31, 2021 .
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.
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. For OREO, at the time of foreclosure or initial possession of collateral,
any excess of the loan balance over the fair value of the real estate held as
collateral is treated as a charge against the 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 Condensed
Consolidated Statements of Income. Subsequent adjustments to this value are
described below in the following paragraph.
We report subsequent declines in the fair value of OREO and bank properties held
for sale below the new cost basis through valuation adjustments. Significant
judgments and complex estimates are required in estimating the fair value of
these properties, and the period of time within which such estimates can be
considered current is significantly shortened during periods of market
volatility. In response to market conditions and other economic factors,
Management may use 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 on
the
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Condensed Consolidated Statements of Income. For bank property held for sale,
any adjustments to fair value, as well as gains or losses on sales, are recorded
in Other Expense, a component of Noninterest Expense on the Condensed
Consolidated Statements of Income.
Results of Operations
Overview
We reported consolidated net income of$119.2 million , or diluted earnings per share ("EPS") of$1.57 , for the second quarter of 2022 as compared to consolidated net income of$99.0 million , or diluted EPS of$1.39 , in the comparable period of 2021, a 20.4% increase in consolidated net income and a 13.0% increase in diluted EPS. The$20.2 million increase in consolidated net income was the net result of the following items:
An
? million increase in interest income from loans and a
interest income from investment securities;
A
service charges on deposits accounts and deposit, prepaid, ATM and merchant
card related income of
? addition, correspondent banking and capital market income, SBA income and bank
owned life insurance income increased by
million, respectively. These increases were partially offset by a decline in
mortgage banking income of
page 57 for further discussion);
An
a decline in merger and branch consolidation related expense of
and extinguishment of debt cost of
? cost was the result of the early redemption of trust preferred securities
completed during the second quarter of 2021. These decreases were partially
offset by an increase in other noninterest expense of
increase in professional fees of
on page 59 for further discussion);
A
? decline in the cost of interest-bearing liabilities of 7 basis points partially
offset by an increase in the average balance of interest-bearing liabilities of
A
? the Company recorded provision for credit losses of
second quarter of 2022 while recording a release of the allowance for credit
losses of
A
change in pretax book income between the two quarters. The Company recorded
? pretax book income of
pretax book income of
effective tax rate was 21.66% for the three months ended
to 22.42% for the three months ended
Our quarterly efficiency ratio declined to 54.9% in the second quarter of 2022
compared to 76.3% in the second quarter of 2021. The improvement in the
efficiency ratio compared to the second quarter of 2021 was the result of the
12.6% decrease in noninterest expense (excluding amortization of intangibles)
and the 21.4% increase in the total of tax-equivalent ("TE") net interest income
and noninterest income. The elevated efficiency ratio for the three months ended
June 30, 2021 was due to the one-time expenses incurred during the second
quarter of 2021, including total noninterest expense that included merger and
branch consolidation related expense of $33.0 million and extinguishment of debt
cost of $11.7 million . The merger and branch consolidation related expense for
the second quarter of 2022 was $5.4 million .
Basic and diluted EPS were $1.58 and $1.57 , respectively, for the second quarter
of 2022, compared to $1.40 and $1.39 , respectively for the second quarter of
2021. The increase in basic and diluted EPS was due to a 20.4% increase in net
income in the second quarter of 2022 compared to the same period in 2021,
partially offset by an increase in average common shares. The increase in
average basic common shares was due to the Company issuing 7.3 million shares on
March 1, 2022 with the Atlantic Capital acquisition, less the 2.4 million of
stock repurchases completed by the Company between June 30, 2021 and June 30,
2022 .
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Selected Figures and Ratios
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2022 2021 2022 2021
Return on average assets
(annualized) 1.04 % 1.00 % 1.00 % 1.27 %
Return on average equity
(annualized) 9.36 % 8.38 % 8.81 % 10.52 %
Return on average tangible equity
(annualized)* 16.59 % 14.12 % 15.28 % 17.59 %
Dividend payout ratio 31.03 % 33.65 % 32.26 % 27.12 %
Equity to assets ratio 10.91 % 11.78 % 10.91 % 11.78 %
Average shareholders' equity $ 5,109,325 $ 4,739,241 $ 5,023,721 $ 4,713,339 * Denotes a non-GAAP financial measure. The section titled "Reconciliation of GAAP to non-GAAP" below provides a table that reconciles GAAP measures to non-GAAP measures.
For the three months ended
? return on average equity and the return on average tangible equity increased
while for the six months endedJune 30, 2022 , all three ratios decreased compared to the same period in 2021.
These increases for the three months ended
the percentage increase in net income of 20.4% was greater than the increases
in average assets, equity or tangible equity of 15.1%, 7.8% and 1.33%,
o respectively. The increase in net income was mainly due to an increase in net
interest income of
losses of
For the six months ended
decrease in net income of
was mainly attributable to the provision for credit losses of
recorded during the first six months of 2022 compared to a negative provision
(recovery) for credit losses of
months of 2021. The average assets, as a result of both the assets acquired
o from the merger with
investment securities, increased
average equity and the average tangible equity also increased
and
equity issued for the acquisition of
was partially offset by the stock repurchases completed by the Company through
June 30, 2022 . Equity to assets ratios for the quarter endedJune 30, 2022 was 10.91%, a
decrease of 0.87% from
? total assets resulting from higher levels of investment securities and loans as
our liquidity has increased through the growth in deposits, and the assets
acquired through the
Dividend payout ratios were 31.03% and 32.26% for the three and six month
periods ending
and six month periods ending
dividend payout ratio for the three months period ending
the 20.4% increase in net income while total dividends paid during the current
? quarter increased 11% compared to the same period in 2021. The dividend payout
ratio for the six months period ending
income and higher dividend paid per share compared to the same period in 2021.
The dividend paid per share was
months of 2022 compared to
period in 2021.
Net Interest Income and Margin
Non-TE net interest income increased$61.1 million , or 24.2%, to$314.3 million in the second quarter of 2022 compared to$253.1 million in the same period in 2021. Interest earning assets averaged$40.7 billion during the three months period endedJune 30, 2022 compared to$35.6 billion for the same period in 2021, an increase of$5.1 billion , or 14.2%, which was in part due to the acquisition ofAtlantic Capital completed onMarch 1, 2022 . Interest bearing liabilities averaged$25.8 billion during the three months period endedJune 30, 2022 compared to$23.1 billion for the same period in 2021, an increase of$2.6 billion , or 11.4%, which was partly due to the interest-bearing liabilities assumed fromAtlantic Capital onMarch 1, 2022 . In March of 2020, theFederal Reserve dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25% in reaction to the COVID-19 pandemic. Rates remained at this low level untilmid-March 2022 , when theFederal Reserve approved its first federal funds target rate increase in more than three years to a range of 0.25% to 0.50%. In earlyMay 2022 , theFederal Reserve approved another 50 basis points 52 Table of Contents
rate increase, followed by a 75 basis points increase, resulting a range of
1.50% to 1.75% effective
Both the non-TE and TE net interest margin increased 25 by basis points in the
second quarter of 2022 compared to the same quarter of 2021 due to the increase
in the yield on interest earning assets of 20 basis points and by the lower
cost of interest-bearing liabilities, which decreased 7 basis points compared
to the same period in 2021. The increase in the net interest margin was due to
the rising rate environment in the second quarter of 2022, as well as the
increase in average balances of the higher yielding non-acquired loans as a
? percentage of the average balance of total interest-earning assets and the
decline in the average balances of the lower yielding federal fund sold,
reverse repos and other interest-bearing deposits as a percentage of the
average balance of total interest-earning asset. The net interest margin also
increased due the cost of interest-bearing liabilities declining even in the
rising rate environment as the interest-bearing liabilities were slower to
reprice. The cost on interest-bearing deposits declined 9 basis point to 0.09%
during the second quarter of 2022 compared to the same period in 2021. Non-TE yield on interest-earning assets for the second quarter of 2022
increased 20 basis points to 3.21% from the comparable period in 2021. The
increase in yield on interest-earning assets was mainly due to an increase in
? yield on investment securities, acquired loans and federal funds sold and
interest-earning deposits with banks with the
raise interest rates late in the first quarter of 2022. The yield also
increased due to the increase in the average balance on the higher yielding
non-acquired loans of
The average cost of interest-bearing liabilities for the second quarter of 2022
decreased 7 basis points from the same period in 2021. Our overall cost of
funds, including noninterest-bearing deposits, was 0.12% for the three months
ended
These decreases were due to the reduction in the average balances of the higher
? costing time deposits and federal funds purchased along with the fact that the
interest-bearing liabilities have been slower to reprice in the rising rate
environment. The average cost of interest-bearing deposits has actually
declined 8 basis points as the cost decrease occurred in all deposit
categories. The overall cost of funds also declined due to a
increase in our noninterest-bearing deposits from the second quarter in 2021.
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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, 2022 June 30, 2021
Average Interest Average Average Interest Average
Balance
Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
Interest-Earning Assets:
Federal funds sold and interest-earning deposits with banks
8,635 0.75 %
7,950,894 38,948 1.96 % 4,825,832 17,347 1.44 % Investment securities (tax-exempt) (1)
929,525 6,076 2.62 % 546,153 2,667 1.96 %
Loans held for sale 76,567 791 4.14 % 281,547 1,977 2.82 %
Acquired loans, net 9,079,664 105,950 4.68 % 10,564,735 115,937 4.40 %
Non-acquired loans 18,053,194 165,259 3.67 % 13,742,664 128,263 3.74 % Total interest-earning assets
40,687,395 325,659 3.21 % 35,631,605 267,541 3.01 % Noninterest-Earning Assets: Cash and due from banks
609,803 478,298
Other assets 4,851,518 4,128,583
Allowance for credit losses (300,927) (405,734)
Total noninterest-earning assets 5,160,394 4,201,147
Total Assets $ 45,847,789 $ 39,832,752
Interest-Bearing Liabilities:
Transaction and money market accounts $ 18,316,890 $
3,836 0.08 %
3,548,192 143 0.02 % 2,995,871 453 0.06 %
Certificates and other time deposits 2,776,478 1,797 0.26 % 3,408,778 4,571 0.54 % Federal funds purchased
333,326 628 0.76 % 520,585 112 0.09 %
Securities sold with agreements to repurchase 403,008 153 0.15 % 394,056 211 0.21 %
Corporate and subordinated debentures 405,241 4,823 4.77 % 368,622 4,548 4.95 % Other borrowings
- - - % 275 3 4.38 %
Total interest-bearing liabilities 25,783,135 11,380 0.18 % 23,142,127 14,411 0.25 % Noninterest-Bearing Liabilities: Demand deposits
13,882,304 11,037,617
Other liabilities 1,073,025 913,767
Total noninterest-bearing liabilities ("Non-IBL") 14,955,329 11,951,384
Shareholders' equity 5,109,325 4,739,241
Total Non-IBL and shareholders' equity 20,064,654 16,690,625
Total Liabilities and Shareholders' Equity $ 45,847,789 $ 39,832,752
Net Interest Income and Margin (Non-Tax Equivalent) $ 314,279 3.10 % $ 253,130 2.85 %
Net Interest Margin (Tax Equivalent) 3.12 % 2.87 %
Total Deposit Cost (without debt and other borrowings) 0.06 % 0.12 %
Overall Cost of Funds (including demand deposits) 0.12 % 0.17 %
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Six Months Ended
June 30, 2022 June 30, 2021
Average Interest Average Average Interest Average
Balance
Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
Interest-Earning Assets:
Federal funds sold and interest-earning deposits with banks
11,487 0.45 %
7,535,701 69,068 1.85 % 4,518,471 32,755 1.46 % Investment securities (tax-exempt) (1)
854,871 9,951 2.35 % 511,001 4,779 1.89 %
Loans held for sale 93,460 1,661 3.58 % 290,210 3,969 2.76 %
Acquired loans, net 8,756,492 196,512 4.53 % 11,163,517 250,699 4.53 %
Non-acquired loans 17,237,788 307,444 3.60 % 13,235,717 251,476 3.83 % Total interest-earning assets
39,613,176 596,123 3.03 % 34,935,633 546,017 3.15 % Noninterest-Earning Assets: Cash and due from banks
591,386 429,259
Other assets 4,505,271 4,109,765
Allowance for credit losses (304,757) (431,191)
Total noninterest-earning assets 4,791,900 4,107,833
Total Assets $ 44,405,076 $ 39,043,466
Interest-Bearing Liabilities:
Transaction and money market accounts $ 17,897,372 $
6,053 0.07 %
3,478,548 273 0.02 % 2,888,712 887 0.06 %
Certificates and other time deposits 2,812,454 4,078 0.29 % 3,540,069 10,007 0.57 % Federal funds purchased
344,053 739 0.43 % 478,001 203 0.09 %
Securities sold with agreements to repurchase 420,536 311 0.15 % 405,630 470 0.23 %
Corporate and subordinated debentures 379,828 8,916 4.73 % 379,274 9,418 5.01 % Other borrowings
- - - % 138 3 4.38 %
Total interest-bearing liabilities 25,332,791 20,370 0.16 % 22,760,061 30,889 0.27 % Noninterest-Bearing Liabilities: Demand deposits
13,078,631 10,543,604
Other liabilities 969,933 1,026,462
Total noninterest-bearing liabilities ("Non-IBL") 14,048,564 11,570,066
Shareholders' equity 5,023,721 4,713,339
Total Non-IBL and shareholders' equity 19,072,285 16,283,405
Total Liabilities and Shareholders' Equity $ 44,405,076 $ 39,043,466
Net Interest Income and Margin (Non-Tax Equivalent) $ 575,753 2.93 % $ 515,128 2.97 %
Net Interest Margin (Tax Equivalent) 2.95 % 2.99 %
Total deposit cost (without debt and other borrowings) 0.06 % 0.13 %
Overall Cost of Funds (including demand deposits) 0.11 % 0.19 %
(1) Investment securities (taxable) and (tax-exempt) include trading securities.
Investment Securities Interest earned on investment securities was higher in the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 . The average balance of investment securities for the three and six months endedJune 30, 2022 increased$3.5 billion and$3.4 billion , respectively, from the comparable periods in 2021. The yield on the investment securities increased 54 basis points and 39 basis points, respectively, during the three and six months endedJune 30, 2022 compared to the same periods in 2021. Both the average balance and the yield on the investment securities increased as the Bank used a portion of the excess funds to strategically increase the size of its investment securities, along with the Bank's strategy on replacing lower yielding securities with higher yielding securities as long-term interest rates started to increase in the first quarter of 2022, in addition to retaining a portion of the investment securities acquired fromAtlantic Capital onMarch 1, 2022 . The excess liquidity was from the continuous growth in deposits since 2021 and in the first six months of 2022.
Loans
Interest earned on loans held for investment increased$27.0 million , to$271.2 million and increased$1.8 million to$504.0 million , respectively, in the three and six months endedJune 30, 2022 from the comparable periods in 2021. Interest earned on loans held for investment included loan accretion income recognized during the three and six months endedJune 30, 2022 and 2021 of$12.8 million ,$19.5 million ,$6.3 million and$16.7 million , respectively, an increase of$6.5 million and an increase of$2.8 million , respectively. Some key highlights for the quarter endedJune 30, 2022 are outlined below: 55 Table of Contents
Our non-TE yield on total loans decreased 2 basis points in the second quarter
of 2022 compared to the same period in 2021 due to a decline in the average
balance of the acquired loan portfolio of
? yield than the non-acquired loan portfolio. The average non-acquired loan
portfolio increased by
the same period in 2021, while the yield on the non-acquired loan portfolio
decreased 7 basis points.
o The yield on the non-acquired loan portfolio decreased to 3.67% in the second
quarter of 2022 compared to 3.74% in the same period in 2021.
? Interest income increased by
balance of
The average balance of non-acquired loans increased by
? through organic loan growth and renewals of acquired loans that are moved to
our non-acquired loan portfolio.
o The yield on the acquired loan portfolio increased from 4.40% in the second
quarter of 2021 to 4.68% in the same period in 2022.
Interest income on acquired loans decreased by
a decrease in the average balance. The effects from the decrease in average
? balance were partially offset by an increase in yield of 28 basis points mainly
due to an increase in accretion income of
second quarter of 2022. This increase was mainly related to accretion income
related to the
For the acquired loans, the average balance decreased by
? decrease in the average balance in the acquired loan portfolio was due to
paydowns, pay-offs and renewals of acquired loans that are moved to our
non-acquired loan portfolio.
With the rise in interest rates beginning late in
o increase in the yield on loans during the second quarter of 2022 compared to
the previous quarter. Interest-Bearing Liabilities The quarter-to-date average balance of interest-bearing liabilities increased$2.6 billion , or 11.4%, in the second quarter of 2022 compared to the same period in 2021. Overall cost of funds, including demand deposits, decreased by 5 basis points to 0.12% in the second quarter of 2022, compared to the same period in 2021. Some key highlights for the quarter endedJune 30, 2022 compared to the same period in 2021 include:
? The cost of interest-bearing deposits was 0.09% for the second quarter of 2022
compared to 0.18% for the same period in 2021.
Interest expense on interest-bearing deposits decreased by
o second quarter of 2022 compared to the same period in 2021. Interest expense on
all categories of interest-bearing liabilities declined with the largest decrease being$2.8 million on time deposits.
The average balance of interest-bearing deposits increased by
primarily due to excess deposits maintained in customer deposit accounts and
the interest-bearing deposits of
acquisition on
deposits, however, decreased
compared to the same period in 2021 resulting in the overall decrease in the
o cost of interest-bearing deposits. Overall, interest-bearing deposits have been
slower to reprice in the rising rate environment. The average cost of
interest-bearing deposits has actually declined 9 basis points as the cost
decrease occurred in all deposit categories. Average core interest-bearing
deposits, excluding time deposits, increased
quarter of 2022 compared to the same period in 2021. These core deposits are
normally lower cost funds.
? The cost on the corporate and subordinated debt also declined by 18 basis
points for the three months ended
o The interest expense from corporate and subordinated debt increased
during the second quarter of 2022 compared to the same period in 2021.
The average balance of corporate and subordinated debt increased by
million due to the assumed subordinated debt of approximately
from
o by the redemption of
which caused the overall cost to decline in the second quarter of 2022 compared
to the same period in 2021. The Company also
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redeemed $13.0 million subordinated debentures in late June 2022 .
These cost decreases were offset by a 67 basis points increase on the federal
? funds purchased due to the rising rate environment in the second quarter of
2022. Although the average balance decreased by
? There were no outstanding other borrowings in 2022. The
on a line of credit in
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$2.8 billion , or 25.8%, to$13.9 billion in the second quarter of 2022 compared to$11.0 billion during the same period in 2021. The increase in average noninterest-bearing deposits was primarily due to our focus on relationship banking and the overall liquidity in banking system. The Company also acquired noninterest-bearing deposit balances fromAtlantic Capital during the first quarter of 2022, which affected the average balance for the second quarter of 2022. The noninterest-bearing deposit balances fromAtlantic Capital on the acquisition date were approximately$1.4 billion in total.
Noninterest Income
Noninterest income provides us with additional revenues that are significant sources of income. For the three months endedJune 30, 2022 and 2021, noninterest income comprised 21.9%, and 23.8%, respectively, of total net interest income and noninterest income. For the six months endedJune 30, 2022 and 2021, noninterest income comprised 23.2%, and 25.4%, respectively, of total net interest income and noninterest income. Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2022 2021 2022 2021 Service charges on deposit accounts$ 21,142 $ 14,806 $ 40,036 $ 30,900 Debit, prepaid, ATM and merchant card related income 12,516 9,130 22,524 18,318 Mortgage banking income 5,480 10,115 16,074 36,995 Trust and investment services income 9,831 9,733 19,549 18,311 Correspondent banking and capital market income 27,604 25,877 55,598 54,625 Securities gains, net - 36 - 36 SBA income 4,343 2,933 7,524 5,408 Bank owned life insurance income 6,246 5,047 11,506 8,347 Other 1,130 1,343 1,571 2,365 Total noninterest income$ 88,292 $ 79,020 $ 174,382 $ 175,305
Noninterest income increased by
Service charges on deposit accounts was higher by
the second quarter of 2022 compared to the same period in 2021, mainly due to
the increase in customers and activity through the
? completed during the first quarter of 2022. The total increase includes service
charge account maintenance fees of
Privilege ("AOP") charges of
wire transfer fees of$610,000 . Debit, prepaid, ATM and merchant card related income was higher by$3.4
million, or 37.1%, in the second quarter of 2022 by the same quarter in 2021.
The increase in debit, prepaid, ATM and merchant card related income was mainly
? driven by higher debit card and credit card sales incentive, ATM and merchant
card income resulting from the increase in activity related to the merger with
credit card sales incentive, merchant card related, and foreign ATM fee income
increased by
Correspondent banking and capital markets income for the second quarter of 2022
? increased by
business includes commissions earned on fixed income
57
Table of Contents
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 2022 compared to the same quarter in 2021. This increase was
? due to the purchase of
addition of
in the first quarter of 2022.
SBA income, including impact from change to fair value accounting, increased by
?
loan servicing fees and gains on sale of SBA loans.
Mortgage banking income decreased by
quarter compared to the same period prior year, which was comprised of
million, or 51.8%, decrease from mortgage income in the secondary market,
slightly 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 same quarter in 2021, which resulted in a
decrease in mortgage income from the secondary market. 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.
During the second quarter of 2022, mortgage income from the secondary market
comprised of a
pipeline, loans held for sale and MBS forward trades and a
o decrease in gain on sale of mortgage loans, which is net of the commission
expense related to mortgage production. Mortgage commission expense was
million during the six months ended
during the comparable period in 2021.
The increase in mortgage servicing related income, net of the hedge, in the six
months ended
income, offset by a
including decay. The increase in servicing fee resulted from the increase in
o size of the servicing portfolio. The decrease in the change in fair value of
the MSR was primarily due to an increase in losses on the MSR hedge of
million, offset by an increase in the change in fair value from interest rates
of
2021.
Noninterest income decreased by
Mortgage banking income decreased by
comprised of
secondary market, offset by a
servicing related income, net of the hedge. During the current year, the
? Company allocated a lower percentage of its mortgage production and pipeline to
the secondary market compared to 2021, which resulted in a decrease in mortgage
income from the secondary market. 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.
During the first six months of 2022, mortgage income from the secondary market
comprised of a
pipeline, loans held for sale and MBS forward trades and a
o decrease in gain on sale of mortgage loans, which is net of the commission
expense related to mortgage production. Mortgage commission expense was
million during the six months ended 2022 compared to
comparable period in 2021.
The increase in mortgage servicing related income, net of the hedge, in the six
months ended 2022 was due to a
value of the MSR including decay and a
o income. The fair value from interest rates increased
rates have increased starting
value of the MSR was due to an increase in losses on the MSR hedge including
decay of
in size of the servicing portfolio.
Service charges on deposit accounts were higher in 2022 by
29.6%, compared to 2021, due primarily due to the increase in customers and
? activity through the
of 2021. The increase includes service charge account maintenance fees of
million, in NSF and AOP charges of$3.6 million and in other retail fees including wire transfer fees of$1.2 million . Debit, prepaid, ATM and merchant card related income was higher by$4.2
million, or 23.0%, in 2022 compared to 2021. The increase in debit, prepaid,
? ATM and merchant card related income was mainly driven by higher debit card,
credit card sales incentive, ATM and merchant card income due to the increase
in activity related to the merger with
quarter of 2022. The six months ended June
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30, 2022 included activity from
30, 2022. Debit card income, credit card sales incentive, and foreign ATM fee
income increased by
Bank owned life insurance income increased
? compared to 2021. This increase was due the purchase of
policies since
acquisition of
Correspondent banking and capital markets income for 2022 increased by
? compared to 2021. The six months ended
Duncan-
SBA income, including impact from change to fair value accounting, increased by
?
servicing fees and gains on sale of SBA loans.
Trust and investment services income increased
? compared to 2021. Also, the average assets under management for the first six
months of 2022 have increased
for the same period in 2021.
Noninterest Expense
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2022 2021 2022 2021Salaries and employee benefits$ 137,037 $ 137,379 $ 274,710 $ 277,740 Occupancy expense 22,759 22,844 44,599 46,175 Information services expense 19,947 19,078 39,140 37,867 OREO expense and loan related (income) expense (3) 240 (241) 1,242 Amortization of intangibles 8,847 8,968 17,341 18,132 Business development and staff related expense 4,916 4,305
9,192 7,676
Supplies and printing 676 971 1,278 2,070
Postage expense 1,724 1,529 3,311 3,100
Professional fees 4,331 2,301 8,080 5,575FDIC assessment and other regulatory charges 5,332 4,931 10,144 8,772 Advertising and marketing 2,286 1,659 4,049 3,399 Merger and branch consolidation related expense 5,390 32,970
15,666 42,979
Extinguishment of debt cost - 11,706 - 11,706
Other 17,927 14,502 32,500 25,661
Total noninterest expense $ 231,169 $ 263,383 $ 459,769 $ 492,094
Noninterest expense decreased by $32.2 million , or 12.2%, in the second quarter
of 2022 as compared to the same period in 2021. The quarterly decrease in total
noninterest expense primarily resulted from the following:
A decrease in merger and branch consolidation related expense of
compared to the second quarter of 2021. The expense in the second quarter of
? 2022 consists of branch consolidations and the merger related costs pertaining
to the
mainly consisted of costs related to the merger with CenterState. A decrease in extinguishment of debt cost of$11.7 million in the second
quarter of 2022. The cost incurred in the second quarter of 2021 was from the
? write-off of the unamortized purchase accounting adjustment recorded on the
trust preferred securities assumed in the CenterState merger. All of the trust
preferred securities assumed in the CenterState merger were redeemed in June
2021.
An increase in other noninterest expense of
? the second quarter of 2021. This increase was due to increases in fraud,
digital banking and miscellaneous operational charge-off related expenses.
An increase in professional fees of
? second quarter of 2021. This increase was mainly due to a
in advisory and committee fees.
Noninterest expense decreased by$32.3 million , or 6.6%, during the six months endedJune 30, 2022 compared to the same period in 2021. The categories and explanations for the increases year-to-date, except the items discussed below, are similar to the ones noted above in the quarterly comparison.
? A decrease in salaries and employee benefits of
six months period ending 2022
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compared to the same period in 2021. The decrease was primarily due to anincrease in deferred loan costs, which are applied against salaries and employee
benefits, caused by higher loan production volumes and an update in the
Company's standard loan costs. The reduction was offset by increases associated
with the addition of
increases in retail and loan incentives. In addition, we recorded a total of
expenses during the current period, compared to
respectively, during the comparable period in 2021.
A decrease in occupancy expense of
months of 2022 compared to the same period in 2021. This decrease was mainly
? attributable to the Company realizing more cost savings and efficiencies from
the CenterState merger completed in
completed in
Capital.
A decrease in OREO and loan related expense of
period ending 2022 compared to the same period in 2021. This decrease was
? mainly due to the Company experiencing gains on the sale of OREO and other
acquired assets along with having several large recoveries from older losses
compared to the same period in 2021.
An increase in professional fees of
? period ending 2022 compared to the same period in 2021. This increase was
primarily due to increases in non-legal and advisory and committee related
fees.
An increase in business development and staff related expense of
or 19.7%, in the first six months of 2022 compared to the same period in 2021.
? This increase was mainly due to the limited expense in the same period 2021 due
to the COVID-19 pandemic as vaccines were just becoming widely available towards the end of the first quarter of 2021.
An increase in
15.6%, in the six months period ending 2022 compared to the same period in
? 2021. This increase was mainly due to an increase in the
in size and complexity.
An increase in information services expense of
? additional cost associated with systems was added through our acquisition of
Atlantic Capital . Income Tax Expense Our effective tax rate was 21.66% and 21.47% for the three and six months endedJune 30, 2022 compared to 22.42% and 22.07% for the three and six months endedJune 30, 2021 . The decrease in the effective tax rate for the quarter was driven by an increase in federal tax credits available, an increase in tax exempt income and the cash surrender value of BOLI policies held, as well as an increase in the excess tax benefit recorded on stock compensation. These balances were partially offset by an increase in pretax book income and non-deductible executive compensation. The decrease in the year-to-date effective tax rate compared to the same period of 2021 was driven by the decrease in pre-tax book income that was recorded in the current year compared to the same period in 2021. This along with an increase in federal tax credits available and an increase in tax-exempt income through the first six months of 2022 compared to 2021 also led to a decrease in the year-to-date effective tax rate.
Analysis of Financial Condition
Summary
Our total assets increased approximately$4.2 billion , or 10.1%, fromDecember 31, 2021 toJune 30, 2022 , to approximately$46.2 billion . Within total assets, loans increased$4.0 billion , or 17.0%, investment securities increased$1.5 billion , or 20.6%, while cash and cash equivalents decreased$2.1 billion , or 31.0% during the period. Within total liabilities, deposit growth was$3.8 billion , or 10.9%, and total borrowings increased$65.4 million , or 20.0%, while federal funds purchased and securities sold under agreements to repurchased decreased$111.2 million , or 14.2%. Total shareholder's equity increased$237.5 million , or 4.9%. The increases in loans, investments, total assets, deposits, borrowings and shareholder's equity were mainly attributable to the acquisition ofAtlantic Capital onMarch 1, 2022 . Our loan to deposit ratio was 72% and 68% atJune 30, 2022 andDecember 31, 2021 , respectively. 60 Table of ContentsInvestment 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, 2022 , investment securities totaled$8.7 billion , compared to$7.2 billion atDecember 31, 2021 , an increase of$1.5 billion , or 20.6%.The Atlantic Capital acquisition added$691.7 million of investment securities available for sale to our portfolio. We immediately sold$414.4 million , after principal paydowns, and retained$273.7 million in our portfolio.The Atlantic Capital securities retained were mostly state and municipal obligations. We continue to increase our investment securities strategically primarily with excess funds due to continued deposit growth. During the six months endedJune 30, 2022 , we purchased$2.3 billion of securities,$1.1 billion classified as held to maturity,$1.2 billion classified as available for sale and$20.4 million classified as other investment securities. These purchases were partially offset by maturities, paydowns, sales and calls of investment securities totaling$864.8 million . Net amortization of premiums was$14.9 million in the first six months of 2022. The decrease in fair value in the available for sale investment portfolio of$623.3 million in the first six months of 2022 compared toDecember 31, 2021 was mainly due to an increase in long term interest rates during the six months period endingJune 30, 2022 . 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: Amortized Fair Unrealized BB or (Dollars in thousands) Cost Value Net Loss AAA - A BBB Lower Not Rated June 30, 2022U.S. Treasuries
$ 320,391 $ 316,458 $ (3,933) $ 320,391 $ - $ - $ -U.S. Government agencies
418,176 381,346 (36,830) 418,176 -
- -
Residential mortgage-backed securities issued by
3,766,331 3,354,401 (411,930) 96 -
- 3,766,235
Residential collateralized mortgage-obligations issued by
1,226,946 1,120,159 (106,787) - -
- 1,226,946
Commercial mortgage-backed securities issued by
1,577,104 1,382,676 (194,428) 17,144 -
- 1,559,960 State and municipal obligations
1,239,072 1,068,558 (170,514) 1,239,017 -
- 55Small Business Administration loan-backed securities
544,961 505,488 (39,473) 544,961 - - -
Corporate securities 30,607 29,608 (999) - - - 30,607
$ 9,123,588 $ 8,158,694 $ (964,894) $ 2,539,785 $ - $ - $ 6,583,803
* Agency mortgage-backed securities ("MBS"), agency collateralized
mortgage-obligations (CMO) and agency commercial mortgage-backed securities
("CMBS") are guaranteed by the issuing government-sponsored enterprise ("GSE")
as to the timely payments of principal and interest. Except for Government
National Mortgage Association securities, which have the full faith and credit
backing of the United States Government, the GSE alone is responsible for making
payments on this guaranty. While the rating agencies have not rated any of the
MBS, CMO and CMBS issued, senior debt securities issued by GSEs are rated
consistently as "Triple-A." Most market participants consider agency MBS, CMOs
and CMBSs as carrying an implied Aaa rating (S&P rating of AA+) because of the
guarantees of timely payments and selection criteria of mortgages backing the
securities. We do not own any private label mortgage-backed securities. The
balances presented under the ratings above reflect the amortized cost of the
investment securities.
At June 30, 2022 , we had 1,260 investment securities (including both available
for sale and held to maturity) in an unrealized loss position, which totaled
$969.3 million . At December 31, 2021 , we had 296 investment securities
(including both available for sale and held to maturity) in an unrealized loss
position, which totaled $106.0 million . The total number of investment
securities with an unrealized loss position increased by 964 securities, while
the total dollar amount of the unrealized loss increased by $863.3 million . The
increase in both the number of investment securities in a loss position and the
total unrealized loss from December 31, 2021 is due to an increase in long term
interest rates during the first six months of 2022.
All investment securities in an unrealized loss position as of June 30, 2022
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 our securities may be sold or would require a charge to earnings as a
provision for credit losses in such periods. Any charges as a provision for
credit losses related to investment securities could impact cash flow, tangible
capital or liquidity. See Note 2 - Summary of Significant 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.
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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, 2022 , we determined that there was no impairment on our other investment securities. As ofJune 30, 2022 , other investment securities represented approximately$179.8 million , or 0.39% of total assets, and primarily consists of FHLB and FRB stock which totals$165.4 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, 2022 and 2021, respectively.
Trading Securities
We have a trading portfolio associated with our Correspondent Bank Division and its subsidiary Duncan-Williams . 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 Condensed Consolidated Statements of Income. Securities purchased for this portfolio have primarily been municipal bonds, treasuries and mortgage-backed agency securities, which are held for short periods of time and totaled$88.1 million and$77.7 million , respectively, atJune 30, 2022 andDecember 31, 2021 .
Loans Held for Sale
The balance of mortgage loans held for sale decreased$117.8 million fromDecember 31, 2021 to$73.9 million atJune 30, 2022 . Total mortgage production remained strong at$1.4 billion during the second quarter of 2022, however, a significantly higher percentage of mortgage production was booked to portfolio instead of being sold into the secondary market, 73% for the second quarter of 2022 compared to 53% in the previous quarter and 46% during the fourth quarter of 2021. The secondary pipeline decreased to$126 million atJune 30, 2022 compared to$254 million atDecember 31, 2021 . The allocation of mortgage production between portfolio and secondary market depends on the Company's liquidity, market spreads and rate changes during each period and will fluctuate over time. 62 Table of Contents Loans
The following table presents a summary of the loan portfolio by category (excludes loans held for sale):
LOAN PORTFOLIO (ENDING BALANCE) June 30, % of December 31, % of (Dollars in thousands) 2022 Total 2021 Total Acquired loans: Acquired - non-purchased credit deteriorated loans: Construction and land development$ 278,933 1.0 %$ 180,449 0.8 % Commercial non-owner occupied 2,293,042 8.2 % 2,048,952 8.6 % Commercial owner occupied real estate 1,494,018
5.3 % 1,325,412 5.5 % Consumer owner occupied 656,599 2.4 % 733,662 3.1 % Home equity loans 360,814 1.3 % 405,241 1.7 %
Commercial and industrial 1,361,534 4.9 % 770,133 3.2 % Other income producing property 220,219
0.8 % 286,566 1.2 % Consumer non real estate 242,848 0.9 % 139,470 0.6 % Other 227 - % 184 - %
Total acquired - non-purchased credit deteriorated loans 6,908,234 24.8 % 5,890,069 24.7 % Acquired - purchased credit deteriorated loans (PCD): Construction and land development
53,200 0.2 % 59,683 0.2 %
Commercial non-owner occupied 688,778 2.5 % 859,687 3.5 %
Commercial owner occupied real estate 505,509 1.8 % 542,602 2.3 % Consumer owner occupied 210,022 0.8 % 243,645 1.0 % Home equity loans 44,144 0.2 % 53,037 0.2 %
Commercial and industrial 94,699 0.3 % 85,380 0.4 % Other income producing property 64,598 0.1 % 88,093 0.4 % Consumer non real estate 46,642 0.1 % 55,195 0.2 % Total acquired - purchased credit deteriorated loans (PCD) 1,707,592 6.0 % 1,987,322 8.2 % Total acquired loans 8,615,826 30.8 % 7,877,391 32.9 % Non-acquired loans: Construction and land development 2,194,929 7.9 % 1,789,084 7.5 % Commercial non-owner occupied 4,742,151 17.0 % 3,827,060 16.0 % Commercial owner occupied real estate 3,422,198
12.2 % 3,102,102 13.0 % Consumer owner occupied 3,425,418 12.3 % 2,661,057 11.1 % Home equity loans 808,534 2.9 % 710,316 3.0 %
Commercial and industrial 3,351,295 12.0 % 2,905,620 12.1 % Other income producing property 384,842
1.4 % 322,145 1.3 % Consumer non real estate 959,006 3.4 % 709,992 3.0 % Other 31,067 0.1 % 23,399 0.1 % Total non-acquired loans 19,319,440 69.2 % 16,050,775 67.1 %
Total loans (net of unearned income)$ 27,935,266
100.0 %
Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale), increased by$4.0 billion , or 33.8% annualized, to$27.9 billion atJune 30, 2022 . This increase included a$197.5 million decline in total PPP loans fromDecember 31, 2021 . Excluding the effects from PPP loans, total loans increased$4.2 billion , or 35.8% annualized in the first six months of 2022. Our non-acquired loan portfolio increased by$3.3 billion , or 41.1% annualized, driven by growth in all categories. Commercial non-owner occupied loans, consumer owner occupied loans, commercial and industrial loans and construction and land development loans led the way with$915.1 million ,$764.4 million ,$445.7 million and$405.8 million in year-to-date loan growth, respectively, or 48.2%, 57.9%, 30.9% and 45.7% annualized growth, respectively. The non-acquired loan growth was offset by a$188.6 million decline in non-acquired PPP loans fromDecember 31, 2021 . The acquired loan portfolio increased by$738.4 billion , or 18.9% annualized, due to the addition of$2.4 billion due to the merger withAtlantic Capital , net of offsets from paydowns and payoffs in both the PCD and Non-PCD loan categories, along with renewals of acquired loans that were moved to our non-acquired loan portfolio. The main categories that increased were commercial and industrial loans and commercial owner occupied loans with$600.7 million and$131.5 million in year-to-date loan growth. Acquired loans as a percentage of total loans decreased to 30.8% and non-acquired loans as a percentage of the overall portfolio increased to 69.2% atJune 30, 2022 . This compares to acquired loans as a percentage of total loans of 32.9% and non-acquired loans as a percentage of total loans of 67.1% atDecember 31, 2021 .
Allowance for Credit Losses ("ACL")
The ACL reflects Management's estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company established the incremental increase in the ACL at adoption through equity and subsequent adjustments through a provision for credit losses charged to earnings. The Company records loans charged
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off against the ACL and subsequent recoveries, if any, increase the ACL when
they are recognized. Please see Note 2 - Significant Accounting Policies in this
Quarterly Report on Form 10-Q for further detailed descriptions of our
estimation process and methodology related to the ACL.
As stated in Note 2 - Significant Accounting Policies under the caption
Allowance for Credit Losses, 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 used 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. The Company therefore used 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 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 conditions within the bank's operating environment and
geographic area. Additional forecast scenarios may be weighted along with the
baseline forecast to arrive at the final reserve estimate. While periods of
relative economic stability should generally lead to stability in forecast
scenarios and weightings to estimate credit losses, periods of instability can
likewise require Management to adjust the selection of scenarios and weightings,
in accordance with the accounting standards. For the contractual term that
extends beyond the reasonable and supportable forecast period, the Company
reverts to the long term mean of historical factors within four quarters using a
straight-line approach. The Company generally uses a four-quarter forecast and a
four-quarter reversion period.
The COVID-19 pandemic, Russian invasion of Ukraine , global supply chain, energy
and commodity issues, and persistent elevated levels of inflation have increased
volatility and uncertainties within the economy and economic forecasts. It is
widely acknowledged that the chances of recession have increased over the
quarter. Accordingly, Management continues to use a blended forecast scenario of
the baseline and more severe scenario, depending on the circumstances and
economic outlook. As of June 30, 2022 , Management selected a baseline weighting
of 40%, down from 50% in the first quarter of 2022, and increased the more
severe scenario to 60%. Neither scenario approximates Management's view of the
economy. While employment figures show resilience, the baseline minimizes the
growing risk of economic headwinds, including the duration and depth of
inflation and the lengthening of the Russian invasion of Ukraine , and the impact
of rising interest rates. The resulting provision was approximately $19.3
million during the
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second quarter of 2022, including the provision for unfunded commitments. If the
economic forecast weighting had not been adjusted from the first quarter of
2022, this would have resulted in a release of approximately $4 million , which
Management deemed inappropriate given the underlying economic conditions as
compared with assumptions in the baseline scenario.
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. During the
quarter, we made a qualitative adjustment of $42.2 million , or 15 basis points,
for economic conditions based on an analysis that forecasts of commercial real
estate indices and the unemployment rate may not fully reflect the risks of
recession. In addition, we included a $2.1 million qualitative adjustment for
model limitations pertaining to the PCD loan portfolio acquired through the
Atlantic Capital merger.
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. The Company's threshold for individually
evaluated loans includes all non-accrual loans with a net book balance in excess
of $1.0 million . Management 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 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. The Company has not chosen
to early adopt the retirement of TDR guidance, which is scheduled for the
year-end 2022.
A restructuring that results in only a delay in payments that is insignificant
is not considered an economic concession. In accordance with the Coronavirus
Aid, Relief, and Economic Security Act, also known as 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 acquired PCD loans by adding the expected credit losses (i.e.,
allowance for credit losses) to the purchase price of the financial assets
rather than recording through the provision for credit losses in the income
statement. The expected credit loss, as of the acquisition day, of a PCD loan is
added to the allowance for credit losses. The non-credit discount or premium is
the difference between the unpaid principal balance and the amortized cost basis
as of the acquisition date. Subsequent to the acquisition date, the change in
the ACL on PCD loans is recognized through the provision for credit losses. The
non-credit discount or premium is accreted or amortized, respectively, into
interest income over the remaining life of the PCD loan on a level-yield basis.
In accordance with the
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transition requirements within the standard, the Company's acquired
credit-impaired loans (i.e., ACI or Purchased Credit Impaired) were treated as
PCD loans. As a result of the merger with
Atlantic Capital was acquired and merged with and into the Bank onMarch 1, 2022 , requiring that a closing date ACL be prepared forAtlantic Capital on a standalone basis and that the acquired portfolio be included in the Bank's first quarter ACL.Atlantic Capital's loans represented approximately 8% of the total Bank's portfolio atMarch 31, 2022 . Given the relative size and complexity of the acquired portfolio, similarities of the loan characteristics, and similar loss history to the existing portfolio, reserve calculations were performed using the Bank's existing CECL model, loan segmentation, and forecast weighting as the first quarter end reserve. The acquisition date ACL totaled$27.5 million , consisting of a non-PCD pooled reserve of$13.7 million , PCD pooled reserve of$5.7 million , and PCD individually evaluated reserve of$8.1 million . It represented about 8% of the combined Bank's ACL reserve atMarch 31, 2022 . The acquisition date reserve for unfunded commitments totaled$3.4 million , or 11% of the combined Bank's total atMarch 31, 2022 . 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 ofJune 30, 2022 , the accrued interest receivable for loans recorded in Other Assets was$82.1 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. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. 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. As ofJune 30, 2022 , the liability recorded for expected credit losses on unfunded commitments was$32.5 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. As ofJune 30, 2022 , the balance of the ACL was$319.7 million or 1.14% of total loans. The ACL increased$19.7 million from the balance of$300.4 million recorded atMarch 31, 2022 . This increase during the second quarter of 2022 included a$17.1 million of provision for credit losses, a$4.5 million measurement period adjustment for PCD loans acquired in theAtlantic Capital merger, in addition to$2.3 million in net charge-offs. During the first six months of 2022, the Company released$4.9 million of its allowance for credit losses along with net charge-offs of$4.7 million . For both the three and six months endedJune 30, 2022 , the Company recorded a provision for credit losses based on loan growth and increased weighting of the severe scenario in our modeling to reflect growing economic risks. AtJune 30, 2022 , the Company had a reserve on unfunded commitments of$32.5 million , which was recorded as a liability on the Balance Sheet, compared to$30.4 million atMarch 31, 2022 and$30.5 million atDecember 31, 2021 . During the three and six months endedJune 30, 2022 , the Company recorded a provision for credit losses on unfunded commitments of$2.1 million and$2.0 million , respectively. The year-to-date provision of$2.0 million includes the initial provision for credit losses for unfunded commitments acquired fromAtlantic Capital , which the Company recorded during the first quarter of 2022. The provision for credit losses is based on loan growth and increased weighting of the severe scenario in our modeling to reflect growing economic risks. This amount was recorded in Provision (Recovery) for Credit Losses on the Condensed Consolidated Statements of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during the first six months of 2022. AtJune 30, 2022 , the allowance for credit losses was$319.7 million , or 1.14%, of period-end loans. The ACL provides 3.55 times coverage of nonperforming loans atJune 30, 2022 . Net charge-offs to total average loans during the three and six months endedJune 30, 2022 were .03% and .04%, respectively. The increase in the ACL coverage ratio over nonperforming loans compared to the prior quarter was driven primarily by a decrease in accruing loans past due 90 66
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days or more. The decrease in accruing loans past due 90 days or more atJune 30, 2022 compared to the prior quarter was due to loan payoffs and reduction in factoring receivables that are deemed to be low risk in nature. We continued to show solid and stable asset quality numbers and ratios as ofJune 30, 2022 . The following table provides the allocation, by segment, for expected credit losses. Because PPP loans are government guaranteed and Management implemented additional reviews and procedures to help mitigate potential losses, Management does not expect to recognize credit losses on this loan portfolio and as a result, did not record an ACL for PPP loans within the C&I loan segment presented in the table below.
The following table provides the allocation, by segment, for expected credit
losses for the six months ended
June 30,2022
(Dollars in thousands) Amount %*
Residential Mortgage Senior $ 55,707 17.1 %
Residential Mortgage Junior 533 0.1 %
Revolving Mortgage 16,918 4.6 %
Residential Construction 7,565 2.7 %
Other Construction and Development 27,730 6.2 %
Consumer 24,752 4.4 %
Multifamily 2,458 2.2 %
Municipal 703 2.5 %
Owner Occupied Commercial Real Estate 64,688 19.4 %
33,485 15.4 %
Total $ 319,708 100.0 %
* Loan balance in each category expressed as a percentage of total loans, excluding PPP loans.
The following tables present a summary of net charge off ratios by loan segment
for the three and six months ended
Three Months Ended
June 30,2022 June 30,2021
Net Net
Recovery Recovery
(Charge (Charge
Net Recovery Off) Net Recovery Off)
(Dollars in thousands) (Charge Off) Average Balance Ratio (Charge Off) Average Balance Ratio
Residential Mortgage Senior $ 300 $ 4,479,609 0.01 % $ 274 $ 4,135,142 0.01 %
Residential Mortgage Junior 110 14,091 0.78 % 50 23,290 0.21 %
Revolving Mortgage 192 1,265,219 0.02 % 249 1,310,291 0.02 %
Residential Construction 2 712,162 - % - 536,067 - %
Other Construction and
Development 410 1,670,919 0.02 % 152 1,379,025 0.01 %
Consumer (1,464) 1,173,468 (0.12) % (955) 880,422 (0.11) %
Multifamily - 570,479 - % 3 363,309 - %
Municipal - 671,057 - % - 630,626 - %
Owner Occupied Commercial Real
Estate 16 5,391,531 - % (1,890) 4,838,531 (0.04) %
Non-Owner Occupied Commercial
Real Estate (56) 6,980,378 - % 70 5,867,690 - %
Commercial and Industrial (1,849) 4,203,945 (0.04) % (67) 4,343,006 - %
Total $ (2,339) $ 27,132,858 $ (2,114) $ 24,307,399
Six Months Ended
June 30,2022 June 30,2021
Net Net
Recovery Recovery
(Charge (Charge
Net Recovery Off) Net Recovery Off)
(Dollars in thousands) (Charge Off) Average Balance Ratio (Charge Off) Average Balance Ratio
Residential Mortgage Senior $ 636 $ 4,349,847 0.01 % $ 582 $ 4,173,755 0.01 %
Residential Mortgage Junior 146 14,131 1.03 % 83 25,979 0.32 %
Revolving Mortgage 231 1,254,439 0.02 % 497 1,329,861 0.04 %
Residential Construction 5 686,144 - % 1 549,086 - %
Other Construction and
Development 640 1,568,921 0.04 % 343 1,353,972 0.03 %
Consumer (3,593) 1,078,208 (0.33) % (2,594) 880,413 (0.29) %
Multifamily - 526,836 - % 3 371,304 - %
Municipal - 660,457 - % - 619,910 - %
Owner Occupied Commercial Real
Estate (41) 5,230,546 - % (1,584) 4,824,785 (0.03) %
Non-Owner Occupied Commercial
Real Estate 13 6,724,210 - % 197 5,842,644 - %
Commercial and Industrial (2,699) 3,900,541 (0.07) % 379 4,427,525 0.01 %
Total $ (4,662) $ 25,994,280 $ (2,093) $ 24,399,234
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The following tables present summary of ACL for the three and six months ended
June 30, 2022 and 2021:
Three Months Ended June 30,
2022 2021
Non-PCD PCD Non-PCD PCD
(Dollars in thousands) Loans Loans Total
Loans Loans Total
Balance at beginning of period
- 4,540 4,540 - - -
Loans charged-off (3,852) (2,311) (6,163) (5,076) (586) (5,662) Recoveries of loans previously charged off
2,354 1,470 3,824 1,901 1,647 3,548
Net (charge-offs) recoveries (1,498) (841) (2,339) (3,175) 1,061 (2,114) (Recovery) provision for credit losses
31,097 (13,986) 17,111 (35,714) (18,231) (53,945)
Balance at end of period $ 257,428 $ 62,280 $
319,708
Total loans, net of unearned income: At period end$ 27,935,266 $ 24,033,078 Average 27,132,858 24,307,399 Net charge-offs as a percentage of average loans (annualized) 0.03 % 0.03 % Allowance for credit losses as a percentage of period end loans 1.14 % 1.46 % Allowance for credit losses as a percentage of period end non-performing loans ("NPLs") 355.11 %
408.98 %
Six Months Ended June 30,
2022 2021
Non-PCD PCD Non-PCD PCD
(Dollars in thousands) Loans Loans Total Loans Loans Total
Allowance for credit losses at
January 1 $ 225,227 $ 76,580 $
301,807
- 13,758 13,758 - - -
Loans charged-off (7,976) (3,677) (11,653) (7,593) (1,443) (9,036) Recoveries of loans previously charged off
4,643 2,348 6,991 3,881 3,062 6,943
Net (charge-offs) recoveries (3,333) (1,329) (4,662) (3,712) 1,619 (2,093) Initial provision for credit losses - ACBI
13,697 13,697
(Recovery) provision for credit losses 21,837 (26,729) (4,892) (66,390) (38,425) (104,815) Balance at end of period$ 257,428 $ 62,280 $ 319,708 $ 245,368 $ 105,033 $ 350,401
Total loans, net of unearned income: At period end$ 27,935,266 $ 24,033,078 Average 25,994,280 24,399,234 Net charge-offs as a percentage of average loans (annualized) 0.04 % 0.02 % Allowance for credit losses as a percentage of period end loans 1.14 % 1.46 % Allowance for credit losses as a percentage of period end non-performing loans ("NPLs") 355.11 % 408.98 %
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) 2022 2021 2021 2021
2021
Non-acquired:
Nonaccrual loans$ 20,383 $ 19,174 $ 18,201 $ 22,087 $ 14,221 Accruing loans past due 90 days or more 1,371 22,818 4,612 1,729
559
Restructured loans - nonaccrual 333 408 499 1,713
1,844
Total non-acquired nonperforming loans 22,087 42,400 23,312 25,529
16,624
Other real estate owned ("OREO") (1) (6) - 252 252 92 444
Other nonperforming assets (2) 93 212 338 273
251
Total non-acquired nonperforming assets
22,180 42,864 23,902 25,894 17,319
Acquired:
Nonaccrual loans (3) 63,526 59,267 56,718 64,583 69,053Accruing loans past due 90 days or more 4,418 12,768 251 89
-
Total acquired nonperforming loans 67,944 72,035 56,969 64,672
69,053
Acquired OREO and other nonperforming assets: Acquired OREO (1) (7) 1,431 3,038 2,484 3,595
4,595
Other acquired nonperforming assets (2) 146 80 391 209
182
Total acquired nonperforming assets 69,521 75,153 59,844 68,476
73,830
Total nonperforming assets$ 91,701 $ 118,017 $ 83,746 $ 94,370
Excluding Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.11 % 0.25 %
0.15 % 0.17 % 0.12 %
Total nonperforming assets as a percentage of total assets (5) 0.05 % 0.09 % 0.06 % 0.06 % 0.04 %
Nonperforming loans as a percentage of period end loans (4) 0.11 % 0.25 % 0.15 % 0.17 % 0.12 %
Including Acquired Assets Total nonperforming assets as a percentage of total loans and repossessed assets (4) 0.33 % 0.44 %
0.35 % 0.40 % 0.38 %
Total nonperforming assets as a percentage of total assets 0.20 % 0.26 % 0.20 % 0.23 % 0.23 %
Nonperforming loans as a percentage of period end loans (4) 0.32 % 0.43 % 0.34 % 0.38 % 0.36 %
(1) Consists of real estate acquired as a result of foreclosure.
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(2) Consists of non-real estate foreclosed assets, such as repossessed vehicles.
(3) Includes nonaccrual loans that are purchase credit deteriorated (PCD loans).
(4) Loan data excludes mortgage loans held for sale.
(5) For purposes of this calculation, total assets include all assets (both
acquired and non-acquired).
Excludes non-acquired bank premises held for sale of
is now separately disclosed on the balance sheet.
Excludes acquired bank premises held for sale of
2022,
that is now separately disclosed on the balance sheet.
Total nonperforming assets were$91.7 million , or 0.33% of total loans and repossessed assets, atJune 30, 2022 , an increase of$8.0 million , or 9.5%, fromDecember 31, 2021 . Total nonperforming loans were$90.0 million , or 0.32%, of total loans, atJune 30, 2022 , an increase of$9.7 million , or 12.1%, fromDecember 31, 2021 . Non-acquired nonperforming loans decreased by$1.2 million fromDecember 31, 2021 . The decrease in non-acquired nonperforming loans was driven primarily by a decrease in accruing loans past due 90 days or more of$3.2 million , a decrease in restructured nonaccrual loans of$166,000 , offset by an increase in commercial nonaccrual loans of$2.2 million . The accruing loans past due 90 days or more atJune 30, 2022 partially consisted of a group of factoring receivables totaling$769,000 that were deemed to be low risk in nature. Although past due, these factoring receivables are performing as they are expected and are historically brought current during the following quarter. As ofMarch 31, 2022 , the balance of the factoring receivables 90 days past due was$22.6 million and has declined$21.8 million from that date. Acquired nonperforming loans increase$11.0 million fromDecember 31, 2021 . The increase in the acquired nonperforming loan balances was due to an increase in accruing loans past due 90 days or more of$4.2 million , an increase in commercial nonaccruing loans of$7.7 million , offset by a decrease in consumer nonaccruing loans of$900,000 . The majority of the increase in commercial nonaccruing loans are SBA guaranteed loans acquired in theAtlantic Capital merger in the first quarter of 2022. The majority of the increase in accruing loans past due 90 days or more was due to the addition of$3.2 million loans from theAtlantic Capital merger as well. AtJune 30, 2022 , OREO totaled$1.4 million , which was all acquired OREO. There was no nonacquired OREO balance for the period endJune 30, 2022 . Total OREO decreased$1.3 million fromDecember 31, 2021 . During the second quarter of 2022, we sold one nonacquired property with an aggregate value of$252,000 . On the property sold, we recorded a net gain of$37,000 . AtJune 30, 2022 , acquired OREO consisted of nine properties with an average value of$159,000 , compared to eleven properties with an average value of$226,000 atDecember 31, 2021 . In the second quarter of 2022, no new properties were transferred to acquired OREO, while selling five properties with an aggregate value of$1.6 million . On the properties sold, we recorded a net gain of$183,000 .
Potential Problem Loans
Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately$9.2 million , or 0.05%, of total non-acquired loans outstanding, atJune 30, 2022 , compared to$6.9 million , or 0.04%, of total non-acquired loans outstanding, atDecember 31, 2021 . Potential problem loans related to acquired loans totaled$17.7 million , or 0.20%, of total acquired loans outstanding, atJune 30, 2022 , compared to$19.3 million , or 0.24% of total acquired loans outstanding, atDecember 31, 2021 . 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 interest-bearing deposits increased$1.0 billion or 8.4% annualized to$24.5 billion atJune 30, 2022 from$23.6 billion atDecember 31, 2021 . This increase was driven by interest-bearing deposits assumed fromAtlantic Capital of$1.3 billion (balance of deposits atJune 30, 2022 ). During the six months endedJune 30, 2022 , core deposits increased$1.2 billion excluding the balance of core deposits assumed in theAtlantic Capital transaction during the first quarter of 2022. These funds exclude certificates of deposits and other time deposits and are normally lower cost funds. Federal funds purchased related to theCorrespondent Bank division and repurchase agreements were$670.0 million atJune 30, 2022 , down$111.2 million fromDecember 31, 2021 . Corporate and subordinated debentures increased by$65.4 million to$392.5 million . Some key highlights are outlined below:
? The increase in interest-bearing deposits from
an increase in interest-bearing
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transactional accounts including money markets of
million. Excluding deposits held by legacy
interest-bearing deposits declined
transactional accounts, including money market accounts, decreased
million, savings increased
million. Average interest-bearing deposits for the three months ended
2022 increased
2021.
Corporate and subordinated debentures increased
end balance at
?
transaction completed during the first quarter of 2022 which was partially
offset by the redemption of
2022.
Noninterest-Bearing Deposits
Noninterest-bearing deposits are transaction accounts that provide our Bank with "interest-free" sources of funds. AtJune 30, 2022 , the period end balance of noninterest-bearing deposits was$14.3 billion , exceeding theDecember 31, 2021 balance by$2.8 billion . The increase was mainly due to the noninterest-bearing deposits assumed from the merger withAtlantic Capital inMarch 2022 . The acquisition date noninterest-bearing deposits balances assumed fromAtlantic Capital totaled$1.4 billion and the balance ofAtlantic Capital deposits atJune 30, 2022 was$1.8 billion . Average noninterest-bearing deposits were$13.9 billion for the second quarter of 2022 compared to$11.0 billion for the second quarter of 2021. This increase was related to both organic growth and deposits assumed through theAtlantic Capital transaction.
Capital Resources
Our ongoing capital requirements have been met primarily through retained
earnings, less the payment of cash dividends. As of
The following table shows the changes in shareholders' equity during 2022:
Total shareholders' equity atDecember 31, 2021 $
4,802,940
Net income
219,504
Dividends paid on common shares ($0.98 per share)
(70,805)
Dividends paid on restricted stock units
(126)
Net decrease in market value of securities available for sale, net of deferred taxes
(469,738)
Stock options exercised
737
Stock issued pursuant to restricted stock units
1
Employee stock purchases 704
Equity based compensation 17,799
Common stock repurchased pursuant to stock repurchase plan (110,204)
Common stock repurchased - equity plans
(8,179)
Stock issued pursuant to the acquisition ofAtlantic Capital
659,772
Net fair value of unvested equity awards assumed in the
(1,980)
Total shareholders' equity atJune 30, 2022 $
5,040,425
InJanuary 2021 , the Board of Directors of the Company approved the authorization of a 3,500,000 share Company stock repurchase plan (the "2021 Stock Repurchase Plan"). During 2021 and throughJune 30, 2022 , we repurchased 3,129,979 shares, at an average price of$81.97 per share (excluding cost of commissions) for a total of$256.6 million . Of this amount, we repurchased 1,312,038 shares, at an average price of$83.99 per share (excluding cost of commissions) for a total of$110.2 million during 2022. OnJune 7, 2022 , the Company receivedFederal Reserve Board's supervisory nonobjection on the 2022 stock repurchase program (the "2022 Repurchase Program"), which was previously approved by the Board of Directors of the Company, contingent upon receipt of such supervisory nonobjection. The 2022 Repurchase Program authorizes the Company to repurchase up to 3.75 million shares, or up to approximately 5 percent, of the Company's outstanding shares of common stock as ofMarch 31, 2022 . Our Board of Directors approved the program after considering, among other things, our liquidity needs and capital resources as well as the estimated current value of our net assets. The aggregate number of shares of common stocks authorized to be repurchased totals 4.12 million shares, which includes approximately 370,000 shares remaining from the Company's 2021 Stock Repurchase Plan. The number of shares to be 70
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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. 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 and Tier 1 minority interests. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt, trust preferred securities and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in CET1 capital and often would operate to reduce this category of capital. When the current capital rules were first implemented, the Bank exercised its one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI, allowing us to retain our pre-existing treatment for AOCI. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a banking organization must maintain a "capital conservation buffer" on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital), resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The Bank is also subject to the regulatory framework for prompt corrective action, which identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and is based on specified thresholds for each of the three risk-based regulatory capital ratios (CET1, Tier 1 capital and total capital) and for the leverage ratio. The federal banking agencies revised their regulatory capital rules to (i) address the implementation of CECL? (ii) provide an optional three-year phase-in period for the adoption date 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 71
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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 adoption date impact on retained earnings upon adoption of CECL (CECL transitional amount) and the calculated change in the ACL relative to the adoption date 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 Company chose the five-year transition method and is deferring the recognition of the effects from the adoption date and the CECL difference for the first two years of application. The modified CECL transitional amount was calculated each quarter for the first two years of the five-year transition. The amount of the modified CECL transition amount was fixed as ofDecember 31, 2021 , and that amount is subject to the three-year phase out, which began in the first quarter of 2022.
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 2022 2021
SouthState Corporation :Common equity Tier 1 risk-based capital N/A 11.05
% 11.75 % Tier 1 risk-based capital 6.00 % 11.05 % 11.75 % Total risk-based capital 10.00 % 12.96 % 13.56 % Tier 1 leverage N/A 8.00 % 8.05 %SouthState Bank :
Common equity Tier 1 risk-based capital 6.50 % 12.00
% 12.62 % Tier 1 risk-based capital 8.00 % 12.00 % 12.62 % Total risk-based capital 10.00 % 12.68 % 13.22 % Tier 1 leverage 5.00 % 8.67 % 8.65 % The Company's and Bank's Common equity Tier 1 risk-based capital, Tier 1 risk-based capital and total risk-based capital ratios decreased compared toDecember 31, 2021 . These ratios decreased due to the additional risk-weighted assets acquired through the acquisition ofAtlantic Capital in the first quarter of 2022, which on average, had a higher risk weighting, the reduction in cash and cash equivalents during the quarter, which are lower risk weighted assets, and due to the organic growth in loans during 2022, which have a higher risk weighting. The effects on our ratios from the increase in risk-weighted assets were partially offset by an increase in Tier 1 and total risk-based capital. The increase in capital was due to net income recognized in 2022, the addition to the net equity of$658.8 million issued for theAtlantic Capital acquisition and the$75.0 million in subordinated debt, also assumed fromAtlantic Capital , that qualifies as total risk-based capital. These increases in capital were partially offset by the$118.4 million of stock repurchases completed during the quarter, including shares withheld for taxes pertaining to the vesting of equity awards, along with the dividend paid to shareholders of$70.8 million and the redemption of$13 million of subordinated debentures onJune 30, 2022 . The Tier 1 leverage ratios for both the Company and Bank remained approximately flat compared toDecember 31, 2021 , as the effects from the increase in average assets during 2022 were offset by the increases in Tier 1 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. Liquidity risk is the
risk that the Bank's financial condition or overall safety and soundness is
adversely affected by an inability (or perceived inability) to meet its
obligations. Our Asset Liability Management Committee ("ALCO") is charged with
the responsibility of monitoring policies designed to ensure acceptable
composition of our asset/liability mix. Two critical areas of focus for ALCO are
interest rate sensitivity and liquidity risk management. We have employed our
funds in a manner to provide liquidity from both assets and liabilities
sufficient to meet our cash needs.
Asset liquidity is maintained by the maturity structure of loans, investment
securities and other short-term investments. Management has policies and
procedures governing the length of time to maturity on loans and investments.
Normally, changes in the earning asset mix are of a longer-term nature and are
not used for day-to-day corporate liquidity needs.
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Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase, interest-bearing deposits at other banks and other short-term borrowings. We engage in routine activities to retain deposits intended to enhance our liquidity position. These routine activities include various measures, such as the following:
Emphasizing relationship banking to new and existing customers, where borrowers
? are encouraged and normally expected to maintain deposit accounts with our
Bank;
Pricing deposits, including certificates of deposit, at rate levels that will
? attract and /or retain balances of deposits that will enhance our Bank's
asset/liability management and net interest margin requirements; and
Continually working to identify and introduce new products that will attract
? customers or enhance our Bank's appeal as a primary provider of financial
services.
Our non-acquired loan portfolio increased by approximately$3.3 billion , or approximately 41.1% annualized, compared to the balance atDecember 31, 2021 . The increase fromDecember 31, 2021 was mainly related to organic growth and renewals on acquired loans. The acquired loan portfolio increased by$738.4 million from the balance atDecember 31, 2021 through the addition of$2.4 billion in loans acquired in theAtlantic Capital transaction onMarch 1, 2022 . This increase was partially offset through principal paydowns, charge-offs, foreclosures, and renewals of acquired loans. Our investment securities portfolio (excluding trading securities) increased$1.5 billion compared to the balance atDecember 31, 2021 . The increase in investment securities fromDecember 31, 2021 was a result of purchases of$2.3 billion , along with$703.7 million in investment securities acquired in theAtlantic Capital transaction. This increase was partially offset by maturities, calls, sales and paydowns of investment securities totaling$864.8 million , as well as decreases in the market value of the available for sale investment securities portfolio of$623.3 million . Net amortization of premiums was$14.9 million in the first six months of 2022. 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$4.7 billion atJune 30, 2022 as compared to$6.8 billion atDecember 31, 2021 as funds were used to fund loan growth and purchase securities during the six months endedJune 30, 2022 . AtJune 30, 2022 andDecember 31, 2021 , we had$149.9 million and$325.0 million of traditional, out-of-market brokered deposits. AtJune 30, 2022 andDecember 31, 2021 , we had$804.1 million and$900.1 million , respectively, of reciprocal brokered deposits. Total deposits were$38.9 billion atJune 30, 2022 , an increase of$3.8 billion from$35.1 billion atDecember 31, 2021 . This increase was mainly due to the$3.0 billion in deposits assumed in theAtlantic Capital transaction onMarch 1, 2022 . Our deposit growth sinceDecember 31, 2021 included an increase in demand deposit accounts of$2.8 billion , as well as an increase in savings and money market accounts of$1.2 billion , partially offset by a decline in interest-bearing transaction accounts of$65.7 million and time deposits of$105.7 million . Total borrowings atJune 30, 2022 were$392.5 million and consisted of trust preferred securities and subordinated debentures, which includes$78.5 million of subordinated debt assumed fromAtlantic Capital onMarch 1, 2022 . Total short-term borrowings atJune 30, 2022 were$670.0 million , consisting of$284.6 million in federal funds purchased and$385.4 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. Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers. In addition to commitments to extend credit, we also issue standby letters of credit, which are assurances to third parties that they will not suffer a loss if our customer fails to meet its contractual obligation to the third-party. Although our experience indicates that many of these standby letters of credit will expire unused, through our various sources of liquidity, we believe that we will have the necessary resources to meet these obligations should the need arise. Our ongoing philosophy is to remain in a liquid position, as reflected by such indicators as the composition of our earning assets, typically including some level of reverse repurchase agreements, federal funds sold, balances at theFederal Reserve Bank , and/or other short-term investments; asset quality; well-capitalized position; and profitable operating results. Cyclical and other economic trends and conditions can disrupt our desired liquidity position at any 73 Table of Contents time. We expect that these conditions would generally be of a short-term nature. Under such circumstances, we expect our reverse repurchase agreements and federal funds sold positions, or balances at theFederal Reserve Bank , if any, to serve as the primary source of immediate liquidity. AtJune 30, 2022 , our Bank had total federal funds credit lines of$300.0 million with no balance outstanding. If we needed additional liquidity, we would turn to short-term borrowings as an alternative immediate funding source and would consider other appropriate actions such as promotions to increase core deposits or the use of the brokered deposit markets. AtJune 30, 2022 , our Bank had$924.4 million 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, 2022 , our Bank had a total FHLB credit facility of$3.2 billion with total outstanding FHLB letters of credit consuming$1.6 million leaving$3.2 billion in availability on the FHLB credit facility. The holding company has a$100.0 million unsecured line of credit withU.S. Bank National Association with no balance outstanding atJune 30, 2022 . We believe that our liquidity position continues to be adequate and readily available. Our contingency funding plan describes several potential stages based on stressed liquidity levels. Liquidity key risk indicators are reported to the Board of Directors on a quarterly basis. We maintain various wholesale sources of funding. If our deposit retention efforts were to be unsuccessful, we would use these alternative sources of funding. Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged. This could increase our cost of funds, impacting our net interest margin and net interest spread.
Asset-Liability Management and Market Risk Sensitivity
Our earnings and the economic value of equity vary in relation to the behavior of interest rates and the accompanying fluctuations in market prices of certain of our financial instruments. We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates. These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment. Our interest rate risk principally consists of reprice, option, basis, and yield curve risk.Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepayment options. Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors. The exercise of such options may result in higher costs or lower revenue. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities. Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts, and money market accounts where the price sensitivity of such products may vary relative to general markets rates. Yield curve risk refers to adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities. We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates. Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances. Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as the terms of contractual agreements, investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads. Equity at risk simulation uses assumptions regarding discount rates that value cash flows. Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes. Key simulation assumptions are subject to sensitivity analysis to assess the impact of assumption changes on earnings at risk and equity at risk. Model assumptions are reviewed by our Assumptions Committee.
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.
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The earnings simulation models take into account our contractual agreements with regard to investments, loans, deposits, borrowings, and derivatives as well as a number of behavioral assumptions applied to certain assets and liabilities. Mortgage banking derivatives used in the ordinary course of business consist of forward sales contracts and interest rate lock commitments on residential mortgage loans. These derivatives involve underlying items, such as interest rates, and are designed to mitigate risk. Derivatives are also used to hedge mortgage servicing rights. 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. Our interest rate risk key indicators are applied to a static balance sheet using forward rates from the Moody's Baseline Scenario. The Company will also use other rate forecasts, including, but not limited to, Moody's Consensus Scenario. This Base Case Scenario assumes the maturity composition of asset and liability rollover volumes is modeled to approximately replicate current consolidated balance sheet characteristics throughout the simulation. These treatments are consistent with the Company's goal of assessing current interest rate risk embedded in its current balance sheet. The Base Case Scenario assumes that maturing or repricing assets and liabilities are replaced at prices referencing forward rates derived from the selected rate forecast consistent with current balance sheet pricing characteristics. Key rate drivers are used to price assets and liabilities with sensitivity assumptions used to price non-maturity deposits. The sensitivity assumptions for the pricing of non-maturity deposits are subjected to sensitivity analysis no less frequently than on an annual basis. Interest rate shocks are applied to the Base Case on an instantaneous basis. The range of interest rate shocks will include upward and downward movements of rates through 400 basis points in 100 basis point increments. At times, market conditions may result in assumed rate movements that will be deemphasized. For example, during a period of ultra-low interest rates, certain downward rate shocks may be impractical. The model simulation results produced from the Base Case Scenario and related instantaneous shocks for changes in net interest income and instantaneous rate shocks for changes in the economic value of equity are referred to as the Core Scenario Analysis and constitute the policy key risk indicators for interest rate risk when compared to risk tolerances. Relative to prior modeling and disclosures, Management revised its deposit beta assumptions higher due to the rapid increase in interest rates and expected further increases. Previous beta assumptions reflected sensitivities across full interest rate cycles. The beta assumptions as ofJune 30, 2022 were revised to recognize that interest rates have risen while the Company's cost of deposits have increased slightly. During the second quarter of 2022, the federal funds target rate increased 125 basis points while the Company's total deposit cost increased 1 basis point. The federal funds rate increased an additional 75 basis points duringJuly 2022 . The revised beta assumptions reflect the acceleration of deposit cost increases associated with the expected increase in short term rates afterJune 30, 2022 . These beta assumptions, when combined with the minimal increase in deposit costs since the federal funds rate began to rise inMarch 2022 , reflect Management's estimates across the entire current rising rate cycle. The following interest rate risk metrics are derived from analysis using the Moody's Consensus Scenario published inJuly 2022 as the Base Case. The consensus forecast projects an inverted yield curve. As ofJune 30, 2022 , the earnings simulations indicated that the impact of an instantaneous 100 basis point increase / decrease in rates would result in an estimated 4.7% increase (up 100) and 7.6% decrease (down 100) in net interest income. We use Economic Value of Equity ("EVE") analysis as an indicator of the extent to which the present value of our capital could change, given potential changes in interest rates. This measure also assumes a static balance sheet (Base Case Scenario) with rate shocks applied as described above. AtJune 30, 2022 , the percentage change in EVE due to a 100-basis point increase or decrease in interest rates was 0.3% increase and 4.7% decrease, respectively. The percentage changes in EVE due to a 200-basis point increase or decrease in interest rates were 0.1% decrease and 9.1% decrease, respectively. The interest rate shock analysis results for EVE sensitivities are unusual due to the high levels of on-balance sheet liquidity and low deposit costs as ofJune 30, 2022 . 75
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The analysis below reflects a Base Case and shocked scenarios that assume a
static balance sheet projection where volume is added to maintain balances
consistent with current levels, except for PPP loans that are not assumed to be
replaced. Base Case assumes new and repricing volumes reference forward rates
derived from the Moody's Consensus rate forecast. Instantaneous, parallel, and
sustained interest rate shocks are applied to the Base Case scenario over a
one-year time horizon. Moody's Consensus forecast projects an inverted yield
curve to occur within 2022.
Percentage Change in Net Interest Income over One YearUp 100 basis points 4.7% Up 200 basis points 9.0% Down 100 basis points (7.6%) Down 200 basis points (19.5%) 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 Secured Overnight Financing Rate ("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 presented in our Annual Report on Form 10-K for the year ended 2021, 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. The Company is in the process of developing and implementing various proactive steps to facilitate the transition on behalf of customers, which include:
? The adoption and ongoing implementation of fallback provisions that provide for
the determination of replacement rates for LIBOR-linked financial products.
The adoption of new products linked to alternative reference rates, such as
? adjustable-rate mortgages, consistent with guidance provided by the
regulators, the Alternative Reference Rates Committee, and GSEs.
? The selection of SOFR indices as the replacement indices, and successful
completion of systems testing using the SOFR replacement indices.
The Company discontinued quoting LIBOR on
We intend to use the provisions of the Adjustable Interest Rate (LIBOR) Act passed byCongress and signed in to law by the President inMarch 2022 for certain contracts referencing LIBOR. The Act provides for the use of SOFR as the replacement index with a spread adjustment when the remaining LIBOR indices are discontinued. The Act applies when there is no contract provision addressing the loss of LIBOR and may be used otherwise as well, provided the contract does not provide for a specific replacement index. This aligns with the plan of action currently under implementation by the Company. The Company continues to evaluate its financial and operational infrastructure in its effort to transition all financial and strategic processes, systems, and models to reference rates other than LIBOR. The Company is in the process of developing and implementing processes to educate client-facing associates and coordinate communications with customers regarding the transition. 76
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As of
Approximately
? this amount,
discontinuation date of
Approximately
with a gross positive fair value of
value of
? program do not meet the strict hedge accounting requirements. Therefore, the
transition to LIBOR will have no hedge accounting impact as changes in the fair
value of both the customer swaps and the offsetting swaps are recognized
directly in earnings. Moreover, the exposure of both sides of these swaps is
presented in these figures. These exposures are intended to offset each other.
Trust preferred securities that reference LIBOR and had a total principal
? balance of
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, 2022 , 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 credit losses of the Company, or$955.8 million atJune 30, 2022 . Based on this criteria, we had six such credit concentrations atJune 30, 2022 , including loans to lessors of nonresidential buildings (except mini-warehouses) of$5.5 billion , loans secured by owner occupied office buildings (including medical office buildings) of$1.9 billion , loans secured by owner occupied nonresidential buildings (excluding office buildings) of$1.8 billion , loans to lessors of residential buildings (investment properties and multi-family) of$1.5 billion , loans secured by 1st mortgage 1-4 family owner occupied residential property (including condos and home equity lines) of$4.6 billion and loans secured by jumbo (original loans greater than$548,250 ) 1st mortgage 1-4 family owner occupied residential property of$1.8 billion . The risk for these loans and for all loans is managed collectively through the use of credit underwriting practices developed and updated over time. The loss estimate for these loans is determined using our standard ACL methodology. With some financial institutions adopting CECL in the first quarter of 2020, banking regulators established new guidelines for calculating credit concentrations. Banking regulators set the guidelines for construction, land development and other land loans to total less than 100% of total Tier 1 capital less modified CECL transitional amount plus ACL (CDL concentration ratio) and for total commercial real estate loans (construction, land development and other land loans along with other non-owner occupied commercial real estate and multifamily loans) to total less than 300% of total Tier 1 capital less modified CECL transitional amount plus ACL (CRE concentration ratio). Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank's total Tier 1 capital less modified CECL transitional amount plus ACL. AtJune 30, 2022 andDecember 31, 2021 , the Bank's CDL concentration ratio was 60.9% and 55.2%, respectively, and its CRE concentration ratio was 248.5% and 238.5%, respectively. As ofJune 30, 2022 , 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
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evaluating our performance and capital and may facilitate comparisons with other
institutions in the banking industry as well as period-to-period comparisons.
Non-GAAP measures should not be considered as an alternative to any measure of
performance or financial condition as promulgated under GAAP, and investors
should consider the Company's performance and financial condition as reported
under GAAP and all other relevant information when assessing the performance or
financial condition of the Company. Non-GAAP measures have limitations as
analytical tools, are not audited, and may not be comparable to other similarly
titled financial measures used by other companies. Investors should not consider
non-GAAP measures in isolation or as a substitute for analysis of the Company's
results or financial condition as reported under GAAP.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2022 2021 2022 2021Return on average equity (GAAP) 9.36 % 8.38 % 8.81 % 10.52 % Effect to adjust for intangible assets 7.23 % 5.74 % 6.47 % 7.07 % Return on average tangible equity (non-GAAP) 16.59 % 14.12 %
15.28 % 17.59 %
Average shareholders' equity (GAAP)
(2,060,537) (1,730,572) (1,946,527) (1,732,039)
Adjusted average shareholders' equity
(non-GAAP) $ 3,048,788 $ 3,008,669 $ 3,077,194 $ 2,981,300
Net income (GAAP) $ 119,175 $ 98,960 $ 219,504 $ 245,909 Amortization of intangibles 8,847 8,968 17,341 18,132 Tax effect (1,916) (2,011) (3,723) (4,002) Net income excluding the after-tax effect of amortization of intangibles (non-GAAP)$ 126,106 $ 105,917
Cautionary Note Regarding Any Forward-Looking Statements
Statements included in this report, which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are based on, among other things, Management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the 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 inflation, interest rate
increases, government or regulatory responses to the COVID-19 pandemic, federal
spending or 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;
? 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 acquisition of
? Risks related to the acquisition of
o potential difficulty in maintaining relationships with clients, employees or
business partners as a result of the acquisition of
o the amount of the costs, fees, expenses and charges related to the acquisition;
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;
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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;
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;
Current or anticipated impact of military conflict, including escalating
? military tension between
geopolitical events, and related risks that result 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 requests, 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;
Environmental, Social and Governance ("ESG") risks that could adversely affect
? our reputation, the trading price of our common stock and/or our business,
operations, and earnings; 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
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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.
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