Capital Ratios

3 Months Ended

Mar. 31, 2020

Capital Ratios

Capital Ratios

Note 17 — Capital Ratios

We are subject to regulations with respect to certain risk-based capital ratios. These risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted based on the rules to reflect categorical credit risk. In addition to the risk-based capital ratios, the regulatory agencies have also established a leverage ratio for assessing capital adequacy. The leverage ratio is equal to Tier 1 capital divided by total consolidated on-balance sheet assets (minus amounts deducted from Tier 1 capital). The leverage ratio does not involve assigning risk weights to assets.

In July 2013, the Federal Reserve announced its approval of a final rule to implement the regulatory capital reforms developed by the Basel Committee on Banking Supervision (“Basel III”), among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules became effective January 1, 2015, subject to a phase-in period for certain aspects of the new rules.

As applied to the Company and the Bank, the new rules include a new minimum ratio of common equity Tier 1 capital (“CET1”) to risk-weighted assets of 4.5%. The new rules also raised the minimum required ratio of Tier 1 capital to risk-weighted assets from 4% to 6%. The minimum required leverage ratio under the new rules is 4%. The minimum required total capital to risk-weighted assets ratio remains at 8% under the new rules.

In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of CET1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The capital conservation buffer became fully phased-in on January 1, 2019 and consists of an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets.

The Bank is also subject to the regulatory framework for prompt corrective action, which identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and is based on specified thresholds for each of the three risk-based regulatory capital ratios (CET1, Tier 1 capital and total capital) and for the leverage ratio.

The following table presents actual and required capital ratios as of March 31, 2020, December 31, 2019 and March 31, 2019 for the Company and the Bank under the Basel III capital rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

									Required to be
					Minimum Capital				Considered Well
	Actual				Required - Basel III				Capitalized
(Dollars in thousands)	Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
March 31, 2020
Common equity Tier 1 to risk-weighted assets:
Consolidated	$	1,325,607	11.09	%	$	836,974	7.00	%	$	777,190	6.50	%
South State Bank (the Bank)		1,388,822	11.62	%		836,917	7.00	%		777,137	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated		1,438,043	12.03	%		1,016,325	8.50	%		956,542	8.00	%
South State Bank (the Bank)		1,388,822	11.62	%		1,016,256	8.50	%		956,476	8.00	%
Total capital to risk-weighted assets:
Consolidated		1,520,966	12.72	%		1,255,461	10.50	%		1,195,677	10.00	%
South State Bank (the Bank)		1,471,745	12.31	%		1,255,375	10.50	%		1,195,595	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated		1,438,043	9.56	%		601,691	4.00	%		752,114	5.00	%
South State Bank (the Bank)		1,388,822	9.24	%		601,530	4.00	%		751,912	5.00	%
December 31, 2019:
Common equity Tier 1 to risk-weighted assets:
Consolidated	$	1,326,725	11.30	%	$	822,225	7.00	%	$	763,495	6.50	%
South State Bank (the Bank)		1,417,616	12.07	%		822,218	7.00	%		763,488	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated		1,438,995	12.25	%		998,416	8.50	%		939,686	8.00	%
South State Bank (the Bank)		1,417,616	12.07	%		998,407	8.50	%		939,677	8.00	%
Total capital to risk-weighted assets:
Consolidated		1,501,321	12.78	%		1,233,338	10.50	%		1,174,607	10.00	%
South State Bank (the Bank)		1,479,942	12.60	%		1,233,327	10.50	%		1,174,597	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated		1,438,995	9.73	%		591,731	4.00	%		739,664	5.00	%
South State Bank (the Bank)		1,417,616	9.59	%		591,592	4.00	%		739,490	5.00	%
March 31, 2019:
Common equity Tier 1 to risk-weighted assets:
Consolidated	$	1,338,085	11.86	%	$	789,903	7.00	%	$	733,481	6.50	%
South State Bank (the Bank)		1,429,219	12.67	%		789,867	7.00	%		733,448	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated		1,449,854	12.85	%		959,168	8.50	%		902,746	8.00	%
South State Bank (the Bank)		1,429,219	12.67	%		959,125	8.50	%		902,706	8.00	%
Total capital to risk-weighted assets:
Consolidated		1,506,710	13.35	%		1,184,855	10.50	%		1,128,433	10.00	%
South State Bank (the Bank)		1,486,075	13.17	%		1,184,801	10.50	%		1,128,382	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated		1,449,854	10.52	%		551,366	4.00	%		689,207	5.00	%
South State Bank (the Bank)		1,429,219	10.37	%		551,218	4.00	%		689,022	5.00	%

As of March 31, 2020, December 31, 2019, and March 31 2019, the capital ratios of the Company and the Bank were well in excess of the minimum regulatory requirements and exceeded the thresholds for the “well capitalized” regulatory classification.

In June 2016, the FASB issued ASU No. 2016-13 which required an entity to utilize a new impairment model known as the CECL model to estimate its lifetime “expected credit loss.” This standard was adopted and became effective on January 1, 2020 and the Company applied the provisions of the standard using the modified retrospective method as a cumulative-effect adjustment to retained earnings. Related to the implementation of ASU 2016-13, we recorded additional allowance for credit losses for loans of $54.4 million, deferred tax assets of $12.6 million, an additional reserve for unfunded commitments of $6.4 million and an adjustment to retained earnings of $44.8 million. Instead of recognizing the effects from ASU 2016-13 at adoption, the standard included a transitional method option for recognizing the Day 1 effects on the Company’s regulatory capital calculations over a three year phase-in. In March 2020, in response to the COVID-19 pandemic, the regulatory agencies provided an additional transitional method option of a two-year deferral for the start of the three year phase-in of the recognition of the Day 1 effects of ASU 2016-13 along with an option to defer the current impact on regulatory capital calculations of ASU 2016-13 during the first two years (“5 year method”). Under this 5 year method, the Company would recognize an estimate of the previous method for determining the allowance for credit losses in regulatory capital calculations and the difference from the CECL method would be deferred for two years. After two years, the effects from Day 1 and the deferral difference from the first two years of applying CECL would be phased-in over three years using the straight-line method. The regulatory rules provide a one-time opportunity at the end of the first quarter of 2020 for covered banking organizations to choose

its transition option for CECL. The Company chose the 5 year method and is deferring the recognition of the effects from Day 1 and the CECL difference from the first two years of application. If the Company had not chosen to apply a transitional method related to CECL, its consolidated common equity tier 1 to risk-weighted assets ratio would be 10.62%, its consolidated tier 1 capital to risk-weighted assets would be 11.56%, its consolidated total capital to risk-weighted assets would be 12.81% and its consolidated tier 1 capital to average assets (leverage ratio) would be 9.23% at March 31, 2020. As such, the Company would still exceed the thresholds for the “well capitalized” regulatory classification.