SouthState Bank Corp (SSB) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, SouthState and the proposed merger with ACBI. 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, those risks listed under “Summary of Risk Factors” starting on page 19 of this Report.

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 the SEC. We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward looking statements.

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes SouthState Corporation and its subsidiary’s results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, and the year ended December 31, 2020 as compared to the year ended December 31, 2019, and also analyzes our financial condition as of December 31, 2021 as compared to December 31, 2020. Like most banking institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on most of which we pay interest. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

There are risks inherent in all loans, so we maintain an allowance for credit losses to absorb our estimate of probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by recording a provision or recovery for credit losses against our earnings. In the following section, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other services we charge to our customers. We incur costs in addition to interest expense on deposits and other borrowings, the largest of which is salaries and employee benefits. We describe the various components of this noninterest income and noninterest expense in the following discussion.

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The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other information included in this Report.

Overview

SouthState Corporation is a financial holding company headquartered in Winter Haven, Florida, and was incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our Bank. The Bank operates SouthState Advisory, Inc., a wholly owned registered investment advisor. The Bank also operates Duncan-Williams, Inc. (“Duncan-Williams”), which it acquired on February 1, 2021. Duncan-Williams is a registered broker-dealer, headquartered in Memphis, Tennessee, that serves primarily institutional clients across the U.S. in the fixed income business. The Bank also owns CBI Holding Company, LLC (“CBI”), which in turn owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. The holding company also owns SSB Insurance Corp., a captive insurance subsidiary pursuant to Section 831(b) of the U.S. Tax Code. The holding company also owned R4ALL, Inc., which managed troubled loans purchased from the Bank. During the third quarter of 2021, the final loan held by R4ALL, Inc. paid off, and the holding company subsequently dissolved R4ALL, Inc. effective October 29, 2021.

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At December 31, 2021, we had $42.0 billion in assets and 5,036 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 in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. 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.

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We also operate a correspondent banking and capital markets division within our national bank subsidiary, of which the majority of its bond salesmen, traders and operational personnel are housed in facilities located in Birmingham, Alabama and Atlanta, Georgia. This division’s primary revenue generating activities are related to its capital markets division, which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities; and its correspondent banking division, which includes spread income earned on correspondent bank deposits (i.e., federal funds purchased) and correspondent bank checking account deposits and fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The correspondent banking and capital markets division was further expanded with the addition of Duncan-Williams on February 1, 2021.

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We earned net income of $475.5 million, or $6.71 diluted earnings per share (“EPS”), during 2021 compared to net income of $120.6 million, or $2.19 diluted EPS, in 2020. Net income available to the common shareholders was up $354.9 million, or 294.2%, in 2021 compared to 2020. For further discussion of the Company’s results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, and the year ended December 31, 2020 as compared to the year ended December 31, 2019, see Results of Operations section of this MD&A starting on page 57.

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At December 31, 2021, we had total assets of approximately $42.0 billion compared to approximately $37.8 billion at December 31, 2020. See the Financial Condition section of this MD&A starting on page 68 for a more detailed description of the change in our balance sheet.

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Our asset quality results remained strong in 2021. For the year ended December 31, 2021, net charge offs as a percentage of average loans remained unchanged at 0.01% from the year ended December 31, 2020. The total Nonperforming Assets (“NPAs”) decreased $35.3 million to $83.7 million at December 31, 2021 from $119.1 million at December 31, 2020. Acquired NPAs decreased $29.4 million to $59.8 million at December 31, 2021 from $89.2 million

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at December 31, 2020. Acquired nonperforming loans decreased $20.7 million and acquired OREO and other nonperforming assets decreased $8.7 million. Non-acquired NPAs decreased $6.0 million to $23.9 million at December 31, 2021 from $29.9 million at December 31, 2020. This decline was mainly related to a decline in non-acquired nonperforming loans which fell by $5.9 million from December 31, 2020. Non-acquired OREO and other NPAs remained stable in 2021 and decreased $98,000. The total NPAs as a percentage of total assets decreased 12 basis points to 0.20% at December 31, 2021 as compared to 0.32% at December 31, 2020.

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Our efficiency ratio was 65.6% at December 31, 2021 compared to 67.5% at December 31, 2020. The positive change in our efficiency ratio was due to the effect of the 22.0% increase in the total of net interest income and noninterest income being greater than the effect of the 18.5% increase in noninterest expense. The main reason for the increase in net interest income and noninterest income was due to the Company having a full year’s effect of the income in 2021 from the merger with CSFL that occurred in June 2020. The lower percentage increase in noninterest expense was mainly due to the cost saves recognized since the merger with CSFL.

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We continue to remain well-capitalized with a total risk-based capital ratio of 13.56% and a Tier 1 leverage ratio of 8.05%, as of December 31, 2021, compared to 14.24% and 8.27%, respectively, at December 31, 2020. The total risk-based capital ratio decreased in 2021 as total risk-weighted assets increased $1.7 billion, or 6.5%, while total risk-based capital (excluding the change in accumulated other comprehensive income, or AOCI) grew by $50.6 million, or 1.4%. The decrease in the total risk-based capital ratio at the Company was due to the percentage increase in total risk-based capital being less than the percentage increase in total risk-based assets. The reason for the lower percentage increase in the total risk-based capital at the Company was due the redemption of $25.0 million in subordinated debt and $38.5 million in trust preferred securities during the second quarter of 2021 that was included in total risked-based capital along with the amount of allowance for credit losses eligible for capital purposes declining $77.3 million with the releases of provision in 2021. The Tier 1 leverage ratio decreased from the prior year as tier 1 capital (excluding the change in AOCI) increased by $191.5 million or 6.4%, while total average eligible assets increased $3.4 billion, or 9.3%. The Tier 1 leverage ratio declined as the percentage increase in Tier 1 risk-based capital was less than the percentage increase in the average assets for regulatory capital purposes. The increase in average assets was mainly due to an increase in cash and cash equivalents and investments from December 31, 2020 with deposits growing as the federal government has pushed funds into the market through stimulus programs, in addition to consumers remaining conservative in their spending habits. We believe our current capital ratios position us well to grow both organically and through certain strategic opportunities. For further discussion of the Company’s financial condition as of December 31, 2021 compared to December 31, 2020, see Financial Condition section of this MD&A starting on page 68.

COVID-19

Although the economy has been recovering from the COVID-19 pandemic and vaccine distributions and treatments are generally available, businesses throughout the United States and our customers are still being adversely affected by the COVID-19 pandemic. In many of the states in our market area, as the economies have been allowed to reopen, there has been an increase in cases of COVID-19 and several new variants of COVID-19 in 2021 that have caused cases to increase.

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The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic, and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities, initially resulted in less economic activity, lower equity market valuations and increased volatility and disruption in financial markets, and had an adverse effect on our business, financial condition and results of general operations, with a more limited impact to our correspondent banking and capital markets business lines. Those impacts declined as the economy reopened during the second half of 2021. However, the ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and will depend on various developments and other factors, including, among others, an increase in cases as a result of new waves of the pandemic or as new variants of the disease begin to circulate, how federal, state and local governments and the private sector respond, and the associated impacts on the economy, financial markets and our customers, employees and vendors.

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Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic has had a significant impact on our business and operations.

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As part of our efforts to practice social distancing, in March 2020, we closed all of our banking lobbies and began conducting most of our business through drive-thru tellers and through electronic and online means. To support the health and well-being of our employees, we allowed a majority of our non-customer facing workforce to work from home. In October 2020, we reopened our banking lobbies in our branch locations, but a majority of our support staff is still working from home. We anticipate the remaining support staff that has elected to return to the office will return in early 2022.

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To support our customers or to comply with law, starting in 2020, we deferred loan payments from 90 to 360 days for consumer and commercial customers. We will continue to offer COVID-19 deferrals through September 30, 2022. For customers directly impacted by the COVID-19 pandemic, we suspended residential property foreclosure sales and involuntary automobile repossessions through October 1, 2020, which was the latest moratorium expiration for states in our footprint. Eviction actions were suspended through December 31, 2020 per Centers for Disease Control and Prevention Agency Order 2020-19654. Additionally, we offered fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, small business and personal lending customers.

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Also, we have extended credit to both customers and non-customers related to the Paycheck Protection Program (“PPP”) loans. As of December 31, 2021, we have produced approximately 28,000 loans totaling approximately $3.2 billion through the PPP. Approximately $244.6 million of those PPP loans remain outstanding as of December 31, 2021.

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The CFPB issued guidelines applicable to mortgage borrowers impacted by COVID-19 relating to loss mitigation and loan modifications which remain in effect from August 26, 2021 until September 30, 2022. We have confirmed that the Company’s current mortgage loan standards and processes meet all of the guidelines set forth by the CFPB. Future governmental actions may require more of these and other types of customer-related responses.

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As of December 31, 2021, we have deferrals of $8.5 million, or 0.04%, of our total loan portfolio, excluding loans held for sale and PPP loans. For commercial loans, the standard deferral was 90 days for both principal and interest, 120 days of principal only payments or 180 days of interest only payments. We have actively reached out to our customers to provide guidance and direction on these deferrals. In terms of available lines of credit, the Company has not experienced an increase in borrowers drawing down on their lines.

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While deferrals have been decreasing materially since the third quarter of 2020, given the fluidity of the pandemic and the risk there may be new lockdowns or restrictions on business activities to slow the spread of the virus, there is no guarantee that some loans not currently on deferral might return to deferral status.

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A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic in order to provide borrowers with flexibility with respect to repayment terms. The Company’s payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company elected the accounting policy in the CARES Act to suspend TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic if the concession met the criteria defined under the CARES Act.

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We are continuously monitoring the impact of the COVID-19 pandemic on our results of operations and financial condition. With the adoption of ASU 2016-13 on January 1, 2020, the Company changed its method for calculating its ACL for loans, investments, unfunded commitments and other financial assets. As a result of the new accounting standard, the Company changed its method for calculating its ACL for loans from an incurred loss method to a life of loan method. Considering the COVID-19 pandemic in our CECL models and moving to one CECL model (with the merged bank) during the third quarter of 2020, we recorded a provision for credit losses of $236.0 million in 2020. The recorded amount mainly was from the second quarter 2020, where the provision for credit losses was comprised of three major components: (1) $119.1 million for the day 1 provision for loans without significant credit deterioration (“Non-PCD”) acquired from CSFL, (2) $31.3 million from the legacy SouthState loan portfolio, and (3) $1.1 million from the acquired CSFL loan portfolio since the merger date. While there have been improvements in the economic forecasts during 2021, resulting in a recovery for credit losses of $165.3 million during the current year, there is continued uncertainty around the COVID-19 pandemic and its latest Omicron variant that may result in additional provision for credit losses in the future.

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We also are monitoring the impact of COVID-19 on the valuation of goodwill. Additional detail in regards to

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the goodwill analysis is disclosed below under the Goodwill and Other Intangible Assets section of the Critical Accounting Policies and Estimates.

Atlantic Capital Bancshares, Inc. Merger

On July 23, 2021, SouthState and Atlantic Capital announced that the two companies had entered into a Merger Agreement, which provides that upon the terms and subject to the conditions set forth in the Merger Agreement, Atlantic Capital will merge with and into SouthState, with SouthState continuing as the surviving corporation in the merger. The Merger Agreement was unanimously approved by the Board of Directors of the Company and Atlantic Capital’s shareholders. The Company received OCC’s approval for the pending merger in October 2021, and the Federal Reserve Board’s approval in February 2022.

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Under the terms of the Merger Agreement, shareholders of Atlantic Capital will receive 0.36 shares of SouthState’s common stock for each share of Atlantic Capital common stock they own. The transaction is expected to close during the first quarter of 2022. At December 31, 2021, Atlantic Capital reported $3.8 billion in total assets, $2.4 billion in loans and $3.3 billion in deposits.

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CenterState Bank Corporation Merger

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On June 7, 2020, the Company acquired all of the outstanding common stock of CSFL, the holding company for CSB, in a stock transaction.  Pursuant to the merger agreement, (i) CSFL merged with and into the Company, with the Company continuing as the surviving corporation in the Merger, and (ii) immediately following the Merger, SSB merged with and into CSB, with CSB continuing as the surviving bank in the Bank Merger. In connection with the Bank Merger, CSB changed its name to SouthState Bank, National Association. CSFL common shareholders received 0.3001 shares of the Company’s common stock in exchange for each share of CSFL stock resulting in the Company issuing 37,271,069 shares of its common stock. In total, the purchase price for CSFL was $2.3 billion including the value of the conversion of outstanding warrants, stock options and restricted stock units totaling $10.3 million.

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In the acquisition, the Company acquired $13.0 billion of loans (excluding loans held for sale) at fair value, net of $239.5 million, or 1.82%, estimated discount to the outstanding principal balance. Of the total loans acquired, Management identified $3.1 billion with credit deficiencies that were identified as Purchased Credit Deteriorated (“PCD”) loans. The Company assumed $15.6 billion in deposits including a $20.2 million premium for fixed maturity time deposits.

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As a result of the Bank Merger, the Bank became a national banking association that is subject to primary

supervision and regulation by the OCC and subject to the National Bank Act, and is no longer subject to supervision and regulation by the SCBFI. In addition, the FDIC is no longer the Bank’s primary federal regulator, and the Bank is now a member of the Federal Reserve System.

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Branch Consolidation and Other Cost Initiatives

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As a part of the ongoing evaluation of customer service delivery and efficiencies, the Company consolidated  branch locations in the first quarter of 2021.  The annual savings in 2022 of these closures, which primarily includes personnel, facilities, and equipment cost, is expected to be $726,000, and the impact in 2021 was approximately $605,000.  Two of the locations were in Florida and two in Georgia.

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Capital Management

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On January 27, 2021, the Board of Directors of the Company approved the authorization of a 3.5 million share Company stock repurchase plan (the “2021 Stock Repurchase Plan”). During 2021, the Company repurchased a total of 1,817,941 shares for $146.4 million or $80.51 per share (excluding commission expense).

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Our financial position and results of operations are affected by Management’s application of accounting

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policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Differences in the application of these policies could result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1 of our audited consolidated financial statements.

The following is a summary of our critical accounting policies that are highly dependent on estimates, assumptions and judgments.

Business Combinations

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We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which now requires us to record purchased financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no provision for credit losses affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit loss expense (or recovery of credit losses) in subsequent periods as they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted into interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.

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A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or premium shall be accreted into interest income using the effective yield method.

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For further discussion of our loan accounting and acquisitions, see Note 1—Summary of Significant Accounting Policies, Note 2—Mergers and Acquisitions, Note 4—Loans and Note 5—Allowance for Credit Losses to the audited condensed consolidated financial statements.

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Allowance for Credit Losses or ACL

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The ACL reflects Management’s estimate of expected credit losses that will result from the inability of our borrowers to make required loan payments. Due to the Merger between the Company and CSFL, effective June 7, 2020, Management collectively evaluated loans utilizing two different methodologies for the second quarter 2020. Subsequently during the third quarter 2020, Management adopted one methodology. Management used the one systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, Management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company’s ACL recorded in the balance sheet reflects Management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for Management’s current estimate of expected credit losses. See Note 1—Summary of Significant Accounting Policies for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 5—Allowance for Credit Losses and “Provision for Credit Losses” in this MD&A.

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Other Real Estate Owned and Bank Property Held For Sale

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Other real estate owned (“OREO”) consists of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans. Prior to the merger with CSFL, we classified former branch sites as OREO. During the second quarter of 2020 and with the merger with CSFL, the Company elected to reclassify these assets as bank property held for sale and report on a separate line within the Consolidated Balance Sheet. Both OREO and bank property held for sale are recorded at the lower of cost or fair value and the fair value was determined on the basis of current valuations obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure or initial possession of collateral, for OREO, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ACL. At the time a bank property is no longer in service and is moved to held for sale, any excess of the current book value over fair value is recorded as Noninterest Expense in the Consolidated Statements of Income. Subsequent adjustments to this value are described below in the following paragraph.

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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 judgment 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 utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from the current valuations used to determine the fair value of these properties. Management reviews the value of these properties periodically and adjusts the values as appropriate. Revenue and expenses from OREO operations, as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO Expense in the Consolidated Statements of Income. Gains or losses on sale of bank properties held for sale, and generally any subsequent write-downs to the value, are recorded as a component in Other Expense in the Consolidated Statements of Income.

Goodwill and Other Intangible Assets

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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 of December 31, 2021 and 2020, the balance of goodwill was $1.6 billion. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

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In January 2017, the FASB issued ASU No. 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on Step 1 of the previous accounting guidance’s two-step impairment test under ASC Topic 350. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The new standard eliminates the requirement to calculate a goodwill impairment charge using Step 2 which involved calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before proceeding to the quantitative step of determining whether the reporting unit’s carrying amount exceeds it fair value. This guidance was effective for the Company as of January 1, 2020.

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During the second quarter of 2021, the Company changed its annual goodwill valuation date to October 31 each year in order for the valuation to be closer to our year-end audit date. We evaluated the carrying value of goodwill as of October 31, 2021, our annual test date, considering the effects of COVID-19, and determined that no impairment charge was necessary. Our stock price has historically traded above its book value. However, during the first quarter of 2020, our stock price fell below book value and remained below book value until November 2020. This drop in stock price was mainly in reaction to the COVID-19 pandemic, which effected stock prices of companies in almost all industries. The lowest trading price for our stock during 2021 was $62.60, which was below year-end book value of $69.27. On December 31, 2021, our stock price closed at $80.11, which is above the book value of $69.27 and tangible book value of $44.62. Based upon our internal valuation and analysis as of October 31, 2021, we determined that no impairment charge was necessary at this time. We will continue to monitor the impact of COVID-19 on the Company’s business,

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operating results, cash flows and financial condition. If the COVID-19 pandemic continues and the economy continues to deteriorate and our stock price falls below current levels, we will have to reevaluate the impact on our financial condition and potential impairment of goodwill.

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Core deposit intangibles and client list intangibles consist primarily of amortizing assets established during the acquisition of other banks. This includes whole bank acquisitions and the acquisition of certain assets and liabilities from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the correspondent banking and wealth and trust management business. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness.

Income Taxes and Deferred Tax Assets

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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. 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 of Alabama, California, Colorado, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Texas, New York and Virginia and city of New York City. We evaluate the need for income tax reserves related to uncertain income tax positions but had no material reserves at December 31, 2021 or 2020.

Recent Accounting Standards and Pronouncements

For information relating to recent accounting standards and pronouncements, see Note 1 to our audited consolidated financial statements entitled “Summary of Significant Accounting Policies.”

Results of Operations

Consolidated net income available to common shareholders increased by $354.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase reflects a decrease in provision for credit losses, an increase in interest income, a decrease in interest expense, and an increase in noninterest income. Partially offsetting these positive effects on net income was an increase in noninterest expense and an increase in the provision for income taxes. The increase in net income was due to the effects from the merger with CSFL in 2020 with the Company having a full year of net interest income and noninterest income from the merger in 2021 along with the Company having a lower amount of merger related expenses in 2021. Another significant impact was related to the releases in the allowance for credit losses in 2021 compared to provision for credit losses in 2020.

Below are key highlights of our results of operations during 2021:

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Net Interest Income

Net interest income is the largest component of our net income. Net interest income is the difference between income earned on interest-earning assets and interest paid on deposits and borrowings. Net interest income is determined by the yields earned on interest-earning assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities, the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin.

During 2019, the Federal Reserve’s Federal Open Market Committee’s target for federal funds target rate remained at the 2.25% to 2.50% range until July 2019 when the Federal Reserve began to drop the federal funds target rate. In the last half of 2019, the Federal Reserve dropped the federal funds target rate 75 basis points to the range of 1.50% to 1.75% at December 31, 2019. The Federal Reserve then dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25% in March 2020 in reaction to the COVID-19 pandemic. This drop in interest rates in 2019 and 2020 continued to affect both our net interest income and net interest margin for the year ended 2021. The yield on interest-earning assets declined 54 basis points in 2021 compared to 2020 and by 83 basis points in 2020 compared to 2019. The yield on our acquired loan portfolio decreased 41 basis points in 2021 from 2020 after a decrease of 147 basis point in 2020 from 2019 and the yield on our non-acquired loan portfolio decreased of 12 basis points in 2021 from 2020 after a decrease of 38 basis points in 2020 from 2019. These declines in yields on earning assets were the main drivers in the net interest margin declining 36 basis points in 2021 compared to 2020 and 51 basis points in 2020 compared to 2019.

We have also continued focusing on increasing core deposits (excluding certificates of deposits and other time deposits). The core deposits grew primarily due to the federal government pushing funds into the market through stimulus programs, in addition to consumers remaining conservative in their spending habits in reaction to the COVID-19 pandemic. These funds are normally lower cost funds. As a result, the cost of interest-bearing deposits decreased 21 basis points in 2021 after decreasing 40 basis points in 2020. The overall cost on all interest-bearing liabilities declined in 2021 compared to 2020 by 27 basis points. The decrease in the cost of interest-bearing liabilities has had a positive effect on our net interest income and net interest margin for 2021, however, the negative effect on the yield on interest earning assets has been greater.

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2021 compared to 2020

Net interest income and net interest margin highlighted for the year ended December 31, 2021, compared to 2020:

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2020 compared to 2019

Net interest income and net interest margin highlighted for the year ended December 31, 2020, compared to 2019:

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Table 1—Yields on Average Interest-Earning Assets and Rates on Average Interest-Bearing Liabilities

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Table 2—Volume and Rate Variance Analysis

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Noninterest Income and Expense

Noninterest income provides us with additional revenues that are significant sources of income. In 2021, 2020, and 2019, noninterest income comprised 25.5%, 27.4%, and 22.2%, respectively, of total net interest income and noninterest income. Note that recoveries on acquired loans were no longer recorded through the income statement beginning in 2020 with the adoption of CECL. These recoveries are now recorded through the allowance for credit losses on the balance sheet.

Table 3—Noninterest Income for the Three Years

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2021 compared to 2020

Our noninterest income increased 13.8% for the year ended December 31, 2021 compared to 2020. This change in total noninterest income resulted from the following:

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2020 compared to 2019

Our noninterest income increased 116.7% for the year ended December 31, 2020 compared to 2019 resulting primarily from the merger with CSFL in June of 2020. In addition, the following was also noted:

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Noninterest expense represents the largest expense category for our company. During 2021 and 2020, we continued to emphasize careful controls around our noninterest expense. With that, our expenses in 2021 increased $150.8 million or 18.9% from 2020, mainly due to the merger with CSFL. Noninterest expense increased $393.0 million or 97.1% in 2020 from 2019.

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Table 4—Noninterest Expense for the Three Years

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2021 compared to 2020

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Noninterest expense increased $150.8 million, or 18.9% for the year ended December 31, 2021 compared to 2020. This increase was mainly due to 2021 having a full year’s effect from the merger with CSFL while 2020 was only partially affected from the merger date of June 7, 2020. The change in total noninterest expense resulted from the following:

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2020 compared to 2019

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Noninterest expense increased $393.0 million, or 97.1% for the year ended December 31, 2020 compared to 2019 resulting primarily the merger with CSFL in June 2020. Below includes additional discussion:

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Income Tax Expense

Our effective tax rate increased to 21.30% at December 31, 2021 compared to (16.02%) for the year-ended December 31, 2020.  When excluding the tax loss carryback and other discrete items, the effective tax rate for the year-ended December 31, 2020 was 14.24%.  The increase was mainly due to increased pre-tax book income, offset by an increase in tax-exempt income and federal tax credits available. For additional information refer to Note 12—income

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Taxes in the consolidated financial statements.

Financial Condition

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Overview

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At December 31, 2021, we had total assets of approximately $42.0 billion, consisting principally of $23.6 billion in net loans ($16.1 billion in non-acquired loans, $5.9 billion in acquired non-credit deteriorated loans, $2.0 billion in acquired credit deteriorated loans, net of $301.8 million allowance for credit losses), $7.2 billion in investment securities and $6.8 billion in cash and cash equivalents. Our liabilities at December 31, 2021 totaled $37.2 billion, consisting principally of deposits of $35.1 billion ($11.5 billion in noninterest-bearing and $23.6 billion in interest-bearing) and short-term and long-term borrowings of $1.1 billion. At December 31, 2021, our shareholders’ equity was $4.8 billion.

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At December 31, 2020, we had total assets of approximately $37.8 billion, consisting principally of $24.2 billion in net loans ($12.3 billion in non-acquired loans, $9.5 billion in acquired non-credit impaired loans, $2.9 billion in acquired credit impaired loans, net of $457.3 million allowance for credit losses, $4.4 billion in investment securities and $4.6 billion in cash and cash equivalents. Our liabilities at December 31, 2020 totaled $33.1 billion, consisting principally of deposits of $30.7 billion ($9.7 billion in noninterest-bearing and $21.0 in interest-bearing) and short-term and long-term borrowings of $1.2 billion. At December 31, 2020, our shareholders’ equity was $4.6 billion.

Book value per common share was $69.27 at the end of 2021, an increase from $65.49 at the end of 2020. Book value per common share increased in 2021 as shareholder equity increased by 3.3% while common shares outstanding declined by 2.3%. The primary reason for an increase in shareholder’s equity of $155.0 million during 2021 was due to net income of $475.5 million. This increase was partially offset by declines in equity resulting from $135.2 million in dividends paid to shareholders, $146.4 million in common stock repurchased on the open market and $68.9 million reduction in AOCI related to unrealized losses on available for sale securities. The primary reason for the decline in common shares outstanding of 1.6 million was due to the Company repurchasing 1.8 million shares on the open market in 2021.

Our common equity to assets ratio decreased to 11.45% in 2021, compared with 12.30% in 2020. The decrease in 2021, compared to 2020, was the result of the percentage increase in total assets of 11.0% being greater than the percentage increase in shareholders’ equity of 3.3%. The increase in total assets was mainly due to the increase in cash and cash equivalents and investment securities as our liquidity has increased through the growth in deposits.

Trading Securities

We have a trading portfolio associated with our Correspondent Bank Division, that was inherited through the acquisitions of CSFL in June 2020 and Duncan Williams in February 2021. For this portfolio, realized and unrealized gains and losses are included in trading securities revenue, a component of Correspondent Banking and Capital Market Income in our “Consolidated Statements of Income”. Securities purchased for this portfolio have primarily been municipal, treasuries and mortgage-backed agency securities and are held for short periods of time and totaled $77.7 million and $10.7 million, respectively, at December 31, 2021 and 2020.

Investment Securities

We use investment securities, the second largest category of interest earning assets, to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for public funds deposits, repurchase agreements and as collateral for derivative exposure. At December 31, 2021 and 2020, investment securities totaled $7.2 billion and $4.4 billion, respectively. For the year ended December 31, 2021, average investment securities were $5.7 billion, or 16.1% of average earning assets, compared with $2.9 billion, or 11.4% of average earning assets for the year ended December 31, 2020. The expected average life of the investment portfolio at December 31, 2021 was approximately 6.27 years, compared with 4.35 years at December 31, 2020. See Note 1—Summary of Significant Accounting Policies in the audited consolidated financial statements for our accounting policy on investment securities.

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As securities are purchased, they are designated as held to maturity or available for sale based upon our intent, which considers liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.

The following table presents the reported values of investment securities for the past two years:

Table 5—Values of Investment Securities

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During 2021, our total investment securities increased $2.7 billion, or 61.3%, from December 31, 2020. During 2021, we purchased $3.9 billion of securities, $975.3 million classified as held to maturity and $2.9 billion classified as available for sale. We continue to increase our investment securities strategically primarily with excess funds due to deposit growth and excess liquidity. These purchases were partially offset by maturities, paydowns, sales and calls of investment securities totaling $1.1 billion. Net amortization of premiums were $38.0 million for the year ended December 31, 2021.

At December 31, 2021, the unrealized net loss of the available for sale investment securities portfolio was $27.8 million, or 0.5%, below its amortized cost basis. Comparable valuations at December 31, 2020 reflected an unrealized net gain of the available for sale investment portfolio of $62.6 million, or 1.9%, above its amortized cost basis. The decrease in fair value in the available for sale investment portfolio at December 31, 2021 compared to December 31, 2020 was mainly due to the increase in short and long term interest rates during 2021. At December 31, 2021, the unrealized net loss of the held to maturity investment securities portfolio was $41.8 million, or 2.3%, below its amortized cost basis. At December 31, 2020, the unrealized net gain of the held to maturity investment securities portfolio was $1.6 million, or 0.2%, above its amortized cost basis.

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Table 6—Credit Ratings of Investment Securities

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Held to maturity

As described above the Company elected to classify some of its securities purchased during 2021 and 2020 as held to maturity. These are securities that the Company does not intend to sell and expects to hold to maturity. The securities consist of $112.9 million of agency securities and $1.6 billion of residential and commercial mortgage-backed securities issued by U.S government agencies or sponsored enterprises and $62.6 million of Small Business Administration loan-backed securities. The following are highlights of our held to maturity portfolio:

Available for sale

Securities available for sale consist mainly of debentures of government sponsored entities, state and municipal bonds, residential and commercial mortgage-backed securities issued by U.S government agencies or sponsored enterprises and Small Business Administration loan-backed securities. At December 31, 2021, investment securities with both a fair value and amortized cost of $5.2 billion, were classified as available for sale. The adjustment for net unrealized losses of $27.8 million between the carrying value of these securities and their amortized cost has been reflected, net of tax, in the Consolidated Balance Sheet as a component of Accumulated Other Comprehensive Loss. The following are highlights of our available for sale securities:

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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. See Note 3—Investment Securities in the consolidated financial statements for additional information. The increase in the number of securities in a loss position and the relative percentage of loss to portfolio size was primarily a result of the increase in short and long-term interest rates during 2021.

Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third-party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. The Company performed an analysis that determined that the following securities have a zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including securities issued by Ginnie Mae, Fannie Mae, FHLB, FFCB and SBA. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities in an unrealized loss position as of December 31, 2021 continue to perform as scheduled and we do not believe there is a credit loss or a provision for credit losses is necessary.

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Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1—Summary of Significant Account Policies for further discussion.

Other Investments

Our other investment securities consist of non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, Management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of December 31, 2021, we determined that there was no impairment on our other investment securities. As of December 31, 2021, other investment securities represented approximately $160.6 million, or 0.38% of total assets and primarily consisted of FRB and FHLB stock which totals $129.7 million and $16.3 million, respectively. There were no gains or losses on the sales of these securities during 2021 or 2020.

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Table 7—Maturity Distribution and Yields of Investment Securities

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Loan Portfolio

Our loan portfolio remains our largest category of interest-earning assets. At December 31, 2021, total loans, excluding held for sale loans, were $23.9 billion, which was an overall decrease of $736.0 million, or 3.0%, from the balance at the end of 2020. Non-acquired loan growth was $3.8 billion, or 30.6% for 2021, which was made up of a 21.5% increase in consumer real estate loans, a 55.0% increase in non-owner occupied real estate loans (including construction and land development loans), a 36.9% increase in commercial owner occupied real estate loans, a 5.4% increase in commercial and industrial loans, a 31.4% increase in other income producing property and a 16.9% increase in consumer non real estate loans. The increases in non-acquired loans were due to organic growth and renewals of acquired loans that are moved to our non-acquired loan portfolio. Total acquired loans decreased by $4.5 billion. The decreases in acquired loans were due to principal payments, charge offs, foreclosures and renewals of acquired loans that were moved to our non-acquired loan portfolio.

Acquired loans as a percentage of total loans decreased to 32.9% at December 31, 2021 compared to 50.2% at December 31, 2020. As of December 31, 2021, non-acquired loans as a percentage of the overall portfolio were 67.1% compared to 49.8% at December 31, 2020. Average total loans outstanding during 2021 were $24.1 billion, increasing $4.7 billion, or 24.5%, over the 2020 average of $19.4 billion. (For further discussion of the Company’s acquired loan accounting, see Note 1—Summary of Significant Accounting Policies, Note 2—Mergers and Acquisitions, Note 4—Loans and Note 5—Allowance for Credit Losses in the consolidated financial statements.)

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The following table presents a summary of the loan portfolio by category (excludes loans held for sale):

Table 8—Distribution of Loans by Type

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The following highlights of our loan portfolio as of December 31, 2021 compared to December 31, 2020:

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Total loan interest income, excluding interest income on held for sale loans, was $983.7 million in 2021, an increase of $140.8 million, or 16.7%, over $842.9 million in 2020, due to a $3.4 billion increase in the average balance of our non-acquired loan portfolio and a $1.4 billion increase in the average balance of our acquired loan portfolio. The growth in the non-acquired loan portfolio average balance was due to normal organic growth and renewals of acquired loans. The growth in the acquired loan portfolio was due to the merger with CSFL that occurred during June of 2020 where the Company acquired approximately $13.0 billion in loans. The effects on interest income from the increases in average portfolio balances were offset by a 12 basis point decrease in the yield on the non-acquired portfolio and a 41 basis point decrease in the yield on the acquired portfolio. The yield on the non-acquired loan portfolio decreased from 3.91% in 2020 to 3.79% in 2021 and the yield on the acquired loan portfolio declined from 4.90% in 2020 to 4.49% in 2021. The decline in the yields on the non-acquired loan portfolio and the acquired loan portfolio was mainly due to the falling interest rate environment as the Federal Reserve dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25% in March 2020 in reaction to the COVID-19 pandemic, and remains unchanged to date.

Total construction and land development loans were $2.0 billion at December 31, 2021 compared to $1.9 billion at December 31, 2020. Non-acquired construction and land development loans increased $509.0 million in 2021 from $1.3 million at December 31, 2020 to $1.8 billion. Acquired construction and land development loans decreased $370.7 million in 2021 from $610.8 million at December 31, 2020 to $240.1 million. Construction and land development loans are more susceptible to a risk of loss during a downturn in the business cycle.

Total consumer real estate loans were comprised of $3.6 billion in consumer owner occupied loans and $1.2 billion in home equity line loans at December 31, 2021. This compares to $3.7 billion in consumer owner occupied loans and $1.3 billion in home equity lines loans at December 31, 2020. Non-acquired loans secured by consumer real estate were comprised of $2.7 billion in consumer owner occupied loans and $710.3 million in home equity loans at December 31, 2021. At December 31, 2020, we had $2.2 billion in consumer owner occupied loans and $601.2 million in home equity loans in the non-acquired loan portfolio. Acquired loans secured by consumer real estate comprised of $977.3 million in consumer owner occupied loans and $458.3 million in home equity loans at December 31, 2021. At December 31, 2020, we had $1.5 billion in consumer owner occupied loans and $690.9 million in home equity loans in the acquired loan portfolio. During 2021, we have seen the consumer real estate loan portfolio decrease by $167.9 million from 2020 as consumers have paid down debt with all the excess liquidity in the marketplace in 2021 through government stimulus and conservative consumer spending habits during the COVID-19 pandemic.

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The table below shows the contractual maturity of the non-acquired loan portfolio at December 31, 2021.

Table 9—Maturity Distribution of Non-acquired Loans

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Table 10—Non-Acquired Loans Due After One Year - Fixed or Floating

The table below shows the contractual maturity of the acquired non-purchased credit deteriorated loan portfolio at December 31, 2021.

Table 11—Maturity Distribution of Acquired Non-purchased Credit Deteriorated Loans

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Table 12— Acquired Non-PCD Loans Due After One Year - Fixed or Floating

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The table below shows the contractual maturity of the acquired credit impaired loan portfolio at December 31, 2021.

Table 13—Maturity Distribution of Acquired Purchased Credit Deteriorated Loans

Table 14— Acquired PCD Loans Due After One Year - Fixed or Floating

Troubled Debt Restructurings (“TDRs”)

We designate 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 TDR with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e., the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology for a TDR to calculate the effect of the concession provided to the borrower within the ACL.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the 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. At December 31, 2021 and 2020, total TDRs were $12.5 million and $19.7 million, respectively, of which $11.2 million were accruing restructured loans at December 31, 2021, compared to $14.6 million at December 31, 2020. We do not have significant commitments to lend additional funds to these borrowers whose loans have been modified.

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The level of risk elements in the loan portfolio, OREO and other nonperforming assets for the past two years is shown below:

Table 15—Nonperforming Assets

Total non-acquired nonperforming loans were $23.3 million, or 0.15% of total non-acquired loans, a decrease of approximately $5.9 million, or 20.1%, from December 31, 2020. The decrease in nonperforming loans was driven primarily by a decrease in accruing loans past due 90 days or more of $5.0 million, a decrease in restructured nonaccrual loans of $3.1 million, a decrease in consumer nonaccrual loans of $1.3 million, offset by an increase in commercial nonaccrual loans of $3.5 million. The decline in non-acquired accruing loans past due 90 days or more from 2020 was due to a decline in past due loans related to financing receivables from CBI. These loans are deemed low risk and their past due status can fluctuate due to the type of factoring receivable. Acquired nonperforming loans were $57.0 million, or 0.72% of total acquired loans, a decrease of $20.7 million, or 26.7%, from December 31, 2020. The decrease in acquired nonperforming loans was mainly driven by a decrease in consumer nonaccrual loans of $16.1 million, a decrease in commercial nonaccrual loans of $2.7 million and a decrease in accruing loans past due 90 days or more of $1.8 million. The decline in acquired consumer nonaccrual loans was mostly related to a decline in nonaccrual consumer real estate loans in 2021.

Non-acquired nonperforming loans decreased by approximately $2.2 million during the fourth quarter of 2021 from the level at September 30, 2021. The decrease was mainly due to a decrease in consumer nonaccrual loans of $3.9 million, a decrease in restructured nonaccrual loans of $1.2 million, offset by an increase in accruing loans past due 90

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days or more of $2.9 million. Acquired nonperforming loans decreased by approximately $7.7 million during the fourth quarter of 2021 from the level at September 30, 2021. The decrease was mainly due to a decrease in consumer nonaccruals of $6.4 million and a decrease in commercial nonaccruals of $1.4 million. The top ten nonaccrual loans at December 31, 2021 totaled $20.0 million and consisted of two loans located in South Carolina, four in the Georgia, and four in Florida. These loans comprise 26.5% of total nonaccrual loans at December 31, 2021, with the majority being real estate collateral dependent. We do not currently hold a specific reserve against any of these ten loans due to carrying balances being below current collateral values.

At December 31, 2021, non-acquired OREO decreased by $300,000 from the balance at December 31, 2020 to $252,000. At December 31, 2021, non-acquired OREO consisted of one property with an average value of $252,000, an increase of $173,000 in the average value from December 31, 2020 when we had 7 properties. In the fourth quarter of 2021, we added one property with an aggregate value of $252,000 into non-acquired OREO, and we sold two properties with a basis of $81,000 in that same quarter. We recorded a net gain of $6,000 on the properties sold during the fourth quarter of 2021. Our non-acquired OREO property at December 31, 2021 is located in the Central region (Columbia, SC).

At December 31, 2021, acquired OREO decreased by $8.9 million from the balance at December 31, 2020 to $2.5 million. At December 31, 2021, non-acquired OREO consisted of 11 properties with an average value of $226,000, a decrease of $99,000 from December 31, 2020 when we had 35 properties. In the fourth quarter of 2021, we added two properties with an aggregate value of $874,000 into acquired OREO, and we sold 12 properties with a basis of $1.7 million in that same quarter. We recorded a net gain of $618,000 on the properties sold during the quarter. Our general policy is to obtain updated OREO valuations at least annually. OREO valuations include appraisals or broker opinions, (See Other Real Estate Owned (“OREO”) under Critical Accounting Policies and Estimates in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on our OREO policies.)

Potential Problem Loans

Potential problem loans, which are not included in nonperforming loans, related to non-acquired loans were approximately $6.9 million, or 0.04% of total non-acquired loans outstanding at December 31, 2021, compared to $5.9 million, or 0.05% of total non-acquired loans outstanding at December 31, 2020. Potential problem loans related to acquired loans totaled $19.3 million, or 0.24%, of total acquired loans at December 31, 2021, compared to $13.4 million, or 0.11% of total acquired loans outstanding, at December 31, 2020. All potential problem loans represent those loans where information about possible credit problems of the borrowers has caused Management to have concern about the borrower’s ability to comply with present repayment terms.

Allowance for Credit Losses (“ACL”)

As stated previously, the ACL reflects Management’s estimate of expected credit losses that will result from the inability of our borrowers to make required loan payments. At adoption of ASU 2016-13, the Company established the incremental increase in the ACL through equity and subsequent adjustments through a provision for or recovery of credit losses recorded to earnings. The Company records loans charged off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized.

Management uses systematic methodologies to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgment; therefore, Management’s process for determining expected credit losses may result in a range of expected credit losses. The Company’s ACL recorded in the balance sheet reflects Management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for Management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.

The Company merged with CSFL on June 7, 2020. For the second quarter ended June 30, 2020, given the proximity of the merger date to the quarter end, Management collectively evaluated loans from each legacy loan portfolio utilizing pre-existing methodologies implemented prior to the merger and aggregated the result. During the third quarter of 2020, Management consolidated the two methodologies into one to arrive at the ACL recorded at September 30, 2020 for both the ACL related to the loan portfolio and the reserve related to the unfunded commitments

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(off-balance-sheet credit exposures). The new methodology for unfunded commitments utilizes a funding rate, as opposed to a utilization rate which was a method applied to the SouthState legacy portfolio prior to the third quarter, to determine the reserve for each respective segment of unfunded commitments. This new method, along with the change in mix of unfunded commitments, resulted in an increase in the reserve for legacy SouthState Bank unfunded commitments during the third quarter of 2020.

The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”) method is utilized for each loan in a pool, and the results are aggregated at the pool level. A periodic tendency to default and absolute loss given default are applied to a projective model of the loan’s cash flow while considering prepayment and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (e.g., default rates and prepayment speeds). The Company has identified the following portfolio segments: Owner-Occupied Commercial Real Estate, Non Owner-Occupied Commercial Real Estate, Multifamily, Municipal, Commercial and Industrial, Commercial Construction and Land Development, Residential Construction, Residential Senior Mortgage, Residential Junior Mortgage, Revolving Mortgage, and Consumer and Other.

In determining the proper level of the ACL, Management has determined that the loss experience of the Bank provides the best basis for its assessment of expected credit losses. It therefore utilized its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks). For most of the segment models for collectively evaluated loans, the Company incorporated two or more macroeconomic drivers using a statistical regression modeling methodology.

Management considers forward-looking information in estimating expected credit losses. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline outlook and alternative scenarios for the United States economy. The baseline, along with the evaluation of alternative scenarios, is used by Management to determine the best estimate within the range of expected credit losses. Management has evaluated the appropriateness of the reasonable and supportable forecast scenarios and has made adjustments as needed. Management evaluates the appropriateness of the reasonable and supportable forecast scenarios and takes into consideration the scenarios in relation to actual economic and other data (such as COVID-19 epidemiological data and federal stimulus), as well as the volatility and magnitude of changes within those scenarios quarter over quarter, and consideration of condition within the bank’s operating environment and geographic area. Additional forecast scenarios may be weighed along with the baseline forecast to arrive at the final reserve estimate. While periods of relative economic stability should generally lead to stability in forecast scenarios and weightings to estimate credit losses, periods of instability can likewise require Management to adjust the selection of scenarios and weightings, in accordance with the accounting standards. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors within four quarters using a straight-line approach. The Company generally utilizes a four-quarter forecast and a four-quarter reversion period.

The COVID-19 pandemic has created increased volatility and uncertainties within the economy and economic forecasts. Accordingly, Management has used a blended forecast scenario of the baseline and more severe scenario ranging between two-thirds baseline and one-third more severe scenario to an equal weight between the baseline and more severe scenario since December 31, 2020, depending on the circumstances and economic outlook. As of December 31, 2021, Management selected a baseline weighting of 55%, down from 60% in the third quarter of 2021, and increased the more severe scenario to 45%, as several issues have materialized that warrant a more cautious approach. These issues include, but are not limited to, level of optimism in the baseline forecast outlook as compared to consensus forecasts; political impediments to moving the Build Back America legislation forward; persistent headwinds related to the Omicron variant of COVID-19; and growing evidence that inflationary pressures in the labor market and supply chains are more than transitory. The resulting release was approximately $9.2 million during the fourth quarter of 2021. If the economic forecast weighting had not been adjusted from the third quarter of 2021, this would have resulted in a higher release of approximately $13.4 million, which Management deemed inappropriate given the underlying economic conditions and likelihood of additional stimulus 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

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Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) Lending Policy; 2) Economic conditions not captured in models; 3) Volume and Mix of Loan Portfolio; 4) Past Due Trends; 5) Concentration Risk; 6) External Factors; and 7) Model Limitations.

When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. 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 that the repayment terms were not considered to be unique to the asset.

Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a troubled debt restructuring (“TDR”) with a borrower. In the event of a reasonably-expected TDR, the Company factors the reasonably-expected TDR into the current expected credit losses estimate. For consumer loans, the point at which a TDR is reasonably expected is when the Company approves the borrower’s application for a modification (i.e., the borrower qualifies for the TDR) or when the Credit Administration department approves loan concessions on substandard loans. For commercial loans, the point at which a TDR is reasonably expected is when the Company approves the loan for modification or when the Credit Administration department approves loan concessions on substandard loans. The Company uses a discounted cash flow methodology for a TDR to calculate the effect of the concession provided to the borrower within the ACL.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the 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 transition requirements within the standard, the Company’s acquired credit-impaired loans (i.e., ACI or Purchased Credit Impaired) were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of December 31, 2021 and 2020, the accrued interest receivable for loans recorded in Other Assets were $70.6 million and $93.9 million, respectively.

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

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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 of December 31, 2021 and 2020, the liabilities recorded for expected credit losses on unfunded commitments were $30.5 million and $43.4 million, respectively. The current adjustment to the ACL for unfunded commitments is recognized through the Provision for Credit Losses in the 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 2021.

With the adoption of ASU 2016-13 on January 1, 2020, the Company changed its method for calculating the allowance for loans from an incurred loss method to a life of loan method. See Note 1—Significant Accounting Policies. As of December 31, 2021, the balance of the ACL was $301.8 million or 1.26% of total loans. The ACL decreased $12.3 million from the balance of $314.1 million recorded at September 30, 2021. This decrease during the fourth quarter of 2021 included an $11.4 million release or decline in the provision for credit losses in addition to $1.0 million in net charge-offs. For the year ended December 31, 2021, the ACL decreased $155.5 million from the balance of $457.3 million. The decrease in ACL of $155.5 million was due to a release of the allowance for credit losses of $152.4 million along with net charge-offs of $3.1 million in 2021. For both the three and twelve months ended December 30, 2021, the Company had releases of allowance for credit losses resulting from improvements in the economic forecasts that drive our ACL model. The improvement in the economy and the increased availability and higher percentage of people receiving the COVID-19 vaccine and boosters contributed to the change in the economic forecasts. As of December 31, 2020, the balance of the ACL was $457.3 million or 1.85% of total loans. For the year ended December 31, 2020, the ACL increased $400.1 million from the balance of $56.9 million. This increase included a $199.4 million provision for credit losses during the period (which includes $109.4 million of provision recorded for non-PCD loans acquired through the merger with CSFL), a $149.4 million allowance for credit losses recorded on acquisition date on PCD loans acquired from CSFL and an increase of $54.5 million through the impact of the initial adoption of CECL. These increases in 2020 were partially offset by $2.8 million in net charge-offs.

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At December 31, 2021, the Company had a reserve on unfunded commitments of $30.5 million which was recorded as a liability on the Consolidated Balance Sheet, compared to $43.4 million at December 31, 2020. During the year ended December 31, 2021, the Company recorded a release of the reserve for unfunded commitments, or recovery for credit losses, on unfunded commitments of $12.9 million. With the improvement in the economy and the increased availability of the COVID-19 vaccine, the Company began to release some of this reserve for unfunded commitments based on improvements in economic forecasts. This amount was recorded in (Recovery) Provision for Credit Losses on the Consolidated Statements of Income. With the adoption of ASU 2016-13 on January 1, 2020, the Company increased its reserve on unfunded commitments by $6.5 million. During the year ended December 31, 2020, the provision for credit losses on unfunded commitments was $36.6 million. Included in the provision for credit losses for the year ended December 31, 2020, $9.6 million was related to the merger with CSFL, which was completed during the second quarter of 2020. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financials asset during the first nine months of 2021 or 2020.

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For the year ended December 31, 2021, the allowance for credit losses was $301.8 million, or 1.26%, of period-end loans. The ACL provides 3.76 times coverage of nonperforming loans at December 31, 2021, compared to 4.28 times at December 31, 2020. Net charge offs to total average loans during the year ended December 31, 2021 were 0.01%, the same percentage as for the year ended December 31, 2020. We continued to show solid and stable asset quality numbers and ratios as of December 31, 2021. The following table provides the allocation, by segment, for expected credit losses. Because PPP loans are government guaranteed and Management implemented additional reviews and procedures to help mitigate potential losses, Management does not expect to recognize credit losses on this loan portfolio and as a result, did not record an ACL for PPP loans within the C&I loan segment presented in the table below.

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Table 16—Allocation of the Allowance by Segment

*     Loan balance in each category expressed as a percentage of total loans excluding PPP loans.

The following table presents a summary of net charge off ratios by loan segment, for the year ended December 31, 2021 and 2020:

Table 17—Disaggregated Net Recovery (Charge Off) Ratio by Segment

The following table presents a summary of the changes in the ACL, for the year ended December 31, 2021 and 2020:

Table 18—Summary of Changes in ACL

*     Net charge-offs at December 31, 2021 and 2020 include automated overdraft protection (“AOP”) and insufficient fund (“NSF”) principal net charge-offs of $4.6 million and $2.8 million, respectively, that are included in the consumer classification above.

**   Average loans, net of unearned income does not include loans held for sale.

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The following table presents changes in the allowance for loan losses on non-acquired loans for the year ended December 31, 2019, prior to the adoption of ASU 2016-13:

Table 19—Summary of Non-Acquired Loan Loss Experience

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*     Net charge-offs at December 31, 2019 include automated overdraft protection (“AOP”) and insufficient fund (“NSF”) principal net charge-offs of $3.7 million that are included in the consumer classification above.

**   Non-acquired average loans, net of unearned income, does not include loans held for sale.

The following table presents changes in the allowance for loan losses on acquired non-credit impaired loans for the year ended December 31, 2019, prior to the adoption of ASU 2016-13:

Table 20—Summary of Acquired Non-Credit Impaired Loan Loss Experience

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The following table presents changes in the allowance for loan losses on acquired credit impaired loans for the year ended December 31, 2019, prior to the adoption of ASU 2016-13:

Table 21—Summary of Acquired Credit Impaired Loan Loss Experience

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