COLUMBIA, S.C.—July 30, 2018—South State Corporation (NASDAQ: SSB) today released its unaudited results of operations and other financial information for the three-month and six-month periods ended June 30, 2018. Highlights for the second quarter of 2018 include the following:
- Second quarter 2018 financial results:
- Net income was $40.5 million, compared with $42.3 million in the first quarter of 2018, a decrease of $1.8 million
- Diluted EPS of $1.09 compared with $1.15, a decrease of $0.06
- Adjusted net income (non-GAAP) was $52.7 million, compared to $51.2 million, a 2.8% increase, or $1.5 million
- Adjusted diluted EPS (non-GAAP) of $1.43, compared to $1.39, a 2.9% increase
- There are four specific items to note: (1) completed the system conversion from the Park Sterling (PSTB) merger and closed 10 branches; (2) net loan growth totaled $191.6 million, or 7.2% annualized; (3) total deposits were flat and interest expense increased by $3.1 million; and (4) increased the cash dividend to $0.35 per share, up $0.01 per share over last quarter.
- Performance ratios second quarter 2018 compared to first quarter 2018
- Return on average assets totaled 1.12% compared to 1.19%
- Adjusted return on average assets (non-GAAP) was 1.45% compared to 1.44%
- Return on average equity totaled 6.96% compared to 7.41%
- Return on average tangible equity (non-GAAP) was 13.79% compared to 14.69%
- Adjusted return on average tangible equity (non-GAAP) increased to 17.68% from 17.60%
- Efficiency ratio was 65.6% down from 66.7%, due primarily to lower salaries and employee benefits
- Adjusted efficiency ratio (non-GAAP) was 57.3% an improvement from 60.0% (excluding merger-related and conversion expenses and securities losses (gains))
- Balance sheet linked quarter
- Cash and cash equivalents decreased by $247.7 million
- Net loan growth for the quarter totaled $191.6 million, or 7.2% annualized, spread across consumer real estate, commercial & industrial, and commercial owner occupied real estate, with limited CRE growth
- Noninterest bearing deposits increased by $32.0 million, or 4.1% annualized; and interest bearing deposits decreased by $56.8 million, or 2.7% annualized, led by a reduction in brokered deposits of $54.3 million
- Other borrowings decreased $99.8 million from repayment of FHLB advances during the quarter
- Shareholders’ equity increased $25.8 million, primarily from net income, net of the dividends paid, of $27.9 million offset by accumulated other comprehensive loss (“AOCI”) of $5.7 million, net of tax, primarily from the available for sale securities portfolio
- Total equity to total assets increased to 16.12% from 15.81%
- Tangible equity to tangible assets (non-GAAP) increased to 9.45% from 9.20%
- Asset quality
- Nonperforming assets (NPAs) increased by $8.1 million, or 23.9%, to $42.2 million at June 30, 2018, primarily due to properties from branch closures related to the merger with PSTB taken into other real estate owned (OREO), from the level at March 31, 2018, and increased by $7.8 million, or 22.70% from June 30, 2017
- NPAs to total assets increased to 0.29% at June 30, 2018, from 0.23% at March 31, 2018 and improved from 0.31% at June 30, 2017
- Net charge-offs on non-acquired loans were 0.01% annualized, or $189,000, compared to $367,000, or 0.02% annualized in the first quarter of 2018. Compared to the second quarter of 2017, net charge offs totaled $756,000, or 0.05% annualized.
- Net charge-offs on acquired non-credit impaired loans were 0.14% annualized, or $1.1 million, compared to 0.02% annualized, or $169,000 in the first quarter of 2018. In the second quarter of 2017, net charge-offs were 0.10% annualized, or $429,000.
- Coverage ratio of ALLL on non-acquired non-performing loans was 322% at June 30, 2018 compared to 316% at March 31, 2018 and 297% at June 30, 2017.
Quarterly Cash Dividend
The Board of Directors of South State Corporation declared a quarterly cash dividend on July 26, 2018, of $0.35 per share payable on its common stock. This per share amount is higher by $0.01 per share, or 2.9%, compared to last quarter and $0.02 per share, or 6.1%, higher than the same quarter one year ago. The dividend will be payable on August 24, 2018 to shareholders of record as of August 17, 2018.
Effective July 1, 2018, the cap on interchange fees under the Durbin amendment will be in effect for the Company. We expect lower interchange income of approximately $8.5 million (pre-tax) during the last half of 2018.
Park Sterling – Fair Value Adjustments
During the second quarter of 2018, the Company adjusted the fair values of certain acquired assets and liabilities. These adjustments are reflected below in the column labeled “6/30/2018 Fair Value Adjustments”. The adjustments include the following:
- Loans were adjusted to reflect movement between acquired credit impaired (ACI) loan portfolio and acquired noncredit impaired (ANCI) loan portfolio, and the movement in interest rates (from 9/30/2017) between initial fair values and interest rates at November 30, 2017. The fair value adjustment (discount) on these loans totaled $9.1 million, with $2.4 million related to credit and $6.7 million related to noncredit. This resulted in more acquired loan interest income during the second quarter of 2018 of approximately $516,000.
- Intangible assets (core deposit intangible) increased by $3.3 million from the movement in interest rates, resulting in more amortization expense during the second quarter of 2018 of $321,000.
- Interest-bearing liabilities (time deposits) fair values were adjusted as well for the movement in interest rates resulting in less premium than originally valued. This resulted in higher interest expense during the second quarter of 2018 of $236,000.
The reduction in net income resulting from all of these adjustments totaled approximately $41,000, pre-tax.
Second Quarter 2018 Financial Performance
The Company reported consolidated net income of $40.5 million, or $1.09 per diluted common share for the three-months ended June 30, 2018, a $1.8 million decrease from the first quarter of 2018. Interest income was up $3.7 million as a result of an increase in non-acquired loan interest income of $5.5 million during the second quarter, partially offset by lower acquired interest income of $2.8 million, as the acquired loan portfolio continued to decline during the quarter. Interest expense increased by $3.1 million, with $1.8 million increase from transaction and money market accounts, $812,000 attributable to certificate and other time deposits and $486,000 in savings accounts. These increases in interest expense were due to the continued higher cost of the deposit base. The Company’s cost of funds was 0.55% for the second quarter of 2018, an increase of 0.14% from the first quarter of 2018. Compared to the second quarter of 2017, cost of funds increased by 0.33% which was primarily the result of the addition of Park Sterling funding cost and increases related to the Company’s deposit base. The total provision for loan losses increased $2.0 million compared to the first quarter of 2018. Valuation allowance (impairment) related to acquired loans was $359,000 higher than in the first quarter of 2018, as several pools had reduced cash flows and extensions of timing of expected cash flows. The provision for loan losses related to acquired non-credit impaired loans was higher by $1.1 million, compared to the first quarter of 2018. One loan was charged off during the quarter which totaled approximately $750,000. The provision for loan losses on non-acquired loans was $738,000 higher compared to the first quarter of 2018 due primarily to loan growth during the quarter. Noninterest income decreased by $3.0 million. Mortgage banking income was down $1.6 million and acquired loan recoveries declined $808,000. Salaries and employee benefits were $7.4 million lower. This decline was primarily due to lower to payroll taxes, $2.8 million in bonuses paid to all employees during the first quarter, and fewer FTEs. Many noninterest expense categories were lower for the second quarter of 2018 due to the conversion and branch closures related to the Park Sterling merger.
Income Tax Expense
During the second quarter of 2018, the Company’s effective income tax rate was 22.35%, or $11.6 million. As a result of the changes in fair value of the Park Sterling opening balance sheet, the Company recorded $613,000 in additional income tax expense related to the revaluation of deferred taxes. Without this charge, the effective rate for the second quarter was 21.17%, compared to the first quarter of 2018 was 21.05%. On a year-to-date basis, the effective rate was 21.69%, including the additional deferred tax charge and 21.11% without the charge.
“We continued to produce attractive levels of profitability in the second quarter,” said Robert R. Hill, Jr., CEO of South State Corporation. “The recently announced management changes put into place the next generation of leadership at South State. Our bank’s talented team combined with high growth markets, good core funding, a diverse loan portfolio and a solid capital base put us in a good competitive position.”
Balance Sheet and Capital
At June 30, 2018, the Company’s total assets were $14.6 billion, a decrease of $122.6 million from March 31, 2018, and an increase of $3.4 billion, or 30.6% from June 30, 2017. During the second quarter of 2018, cash and cash equivalents decreased by $247.7 million. This was the result of a decline in total deposits, other borrowings, federal funds purchased and securities sold under repurchase agreements on the liability side, and total loans increasing by $191.6 million, or 7.2% annualized, as nonacquired loans increased by $435.0 million, and acquired loans declined by $243.5 million. Partially offsetting these uses of cash was a decline in investment securities by $67.9 million.
The Company’s book value per common share increased to $63.77 per share at June 30, 2018, compared to $63.14 at March 31, 2018 and $54.87 at June 30, 2017. The increase in capital during the second quarter of 2018 of $25.8 million was related to net income totaling $40.5 million, partially offset by $12.5 million dividend paid to shareholders. AOCI reduced capital by $5.7 million. Tangible book value (“TBV”) per common share increased by $0.59 per share to $34.64 at June 30, 2018, compared to $34.05 at March 31, 2018, and increased by $1.94 per share, or 5.9%, from $32.70 at June 30, 2017. The quarterly increase of $0.59 per share in tangible book value was the result of (1) earnings per share, excluding amortization of intangibles, of $1.18, offset by the dividend paid to shareholders of $0.34 per share; (2) a decrease in AOCI of $0.16 per share; (3) an increase from the exercise of stock options and issuance of stock related to employee stock purchase plan of $0.09 per share; and (4) a decrease of $0.18 per share due to additional goodwill and core deposit intangible from the revaluation of PSTB acquired assets and liabilities performed in the second quarter of 2018.
“We continue to absorb and realign the 60% growth in assets from our two mergers in 2017, and this strategy is producing a core balance sheet both in terms of loans and funding,” said John C. Pollok, CFO. “The result of this balanced earnings equation creates tremendous optionality moving forward.”
Total nonperforming assets increased by $8.1 million to $42.2 million, representing 0.29% of total assets, an increase of 6 basis points from the balance at March 31, 2018. The increase was primarily the result of the closing of branches acquired in the Park Sterling merger during the second quarter which increased OREO by $6.0 million. Non-accrual loans increased by $1.9 million during the quarter, however, remain at very low levels. The allowance for loan losses as a percentage of non-acquired nonaccrual loans was 322%, up from 316% in the first quarter of 2018.
During the second quarter of 2018, the Company reported $9.6 million in nonperforming loans related to “acquired non-credit impaired loans.” This was an increase of $1.4 million from the balance at March 31, 2018; and an increase of $3.8 million higher than the balance at June 30, 2017, due primarily to the overall growth within this loan portfolio. Additionally, acquired nonperforming OREO and other assets owned increased by $388,000 from the balance at March 31, 2018 and declined by $912,000 from the balance of June 30, 2018.
At June 30. 2018, the allowance for non-acquired loan losses was $47.9 million, or 0.67%, of non-acquired period-end loans and $45.2 million, or 0.67%, at March 31, 2018, and $40.1 million, or 0.67% at June 30, 2017. Net charge-offs within the non-acquired portfolio were $189,000, or 0.01% annualized, in the second quarter of 2018, compared to $367,000 for the first quarter of 2018, or 0.02% annualized. Second quarter 2017 net charge-offs totaled $756,000, or 0.05% annualized. The net charge-offs over the past several quarters were primarily from overdraft and ready reserve accounts. Net charge-offs related to the non-acquired loan portfolio were in a net recovery position over the past four quarters. During the second quarter of 2018, the provision for non-acquired loan losses totaled $2.9 million compared to $2.1 million in the first quarter of 2018, and $2.5 million in the second quarter of 2017. The non-acquired provision for loan losses in the second quarter of 2018 and first quarter of 2017 resulted primarily from the risk and uncertainties in new and expanded markets resulting from the merger with PSTB.
Net charge offs related to “acquired non-credit impaired loans” were $1.1 million, or 0.14% annualized, in the second quarter of 2018; and the Company recorded a provision for loan losses, accordingly. This charge off level was primarily the result of a specific relationship, and was not representative of a particular trend within any of our markets. Net charge-offs in the first quarter of 2018 totaled $169,000, or 0.02% annualized, and in the second quarter of 2017, net charge-offs totaled $429,000, or 0.10% annualized.
During the second of 2018, the Company recorded net impairment within certain acquired credit impaired loan pools totaling $522,000 compared to $163,000 valuation allowance in the first quarter of 2018. During the second quarter of 2017, the Company recorded net release of $572,000. Impairments are recognized immediately and releases are generally spread over time.
Total OREO increased to $17.2 million at June 30, 2018, up from $11.1 million at March 31, 2018. The $6.1 million increase was primarily the result of 10 branches closed during the second quarter of 2018. The Company expects the OREO balance to decline over the coming quarters as these assets are sold.
Net Interest Income and Margin
Non-taxable equivalent net interest income was $129.6 million for the second quarter of 2018, a $589,000 increase from the first quarter of 2018, resulting from the additional interest income on nonacquired loans, which was mostly offset by a decline in acquired loan interest income and higher interest expense. The highlights are below:
- Average balance of non-acquired loans increased by approximately $384.1 million and resulted in non-acquired loan interest income of $70.7 million, a $5.5 million increase from the first quarter of 2018. The yield on total non-acquired loans was 4.06% up from 4.01% in the first quarter of 2018.
- Acquired loan interest income decreased $2.8 million from the first quarter of 2018, to $58.8 million. The yield on acquired loans for the second quarter of 2018 was 6.30%, an increase of seven basis points from the first quarter of 2018, while the average balance of acquired loans declined by $265.2 million during the second quarter of 2018. This decline in average balance was the result of the continued decline of the acquired loan portfolio. In addition, during the second quarter of 2018, the Company reviewed additional acquired loans acquired in the PSTB merger and adjusted their fair values. Any future decline in the acquired loan yield will be primarily dependent upon the level of loan pay downs and pay-offs each quarter. The second quarter of 2018 total loan yield was 4.84% down from 4.85% in the first quarter of 2018 and up from 4.65% in the second quarter of 2017;
- Interest expense increased by $3.1 million in the second quarter of 2018 compared to the first quarter of 2018. This increase was within all categories of funding, except other borrowings. Deposit rates continued to increase in the rising rate environment and accounted for all of the increase. Interest expense on other borrowings declined due to the repayment of FHLB advances totaling $100.0 million in the second quarter of 2018. The rate increased in other borrowings due to the rate paid on trust preferred debt, which is tied to a floating rate (three month LIBOR plus a spread). Total cost of funds on interest-bearing liabilities was 55 basis points, an increase of 14 basis points from the first quarter of 2018 and up 33 basis points from the second quarter of 2017. The inclusion of the Park Sterling funding balances resulted in an increase in the Company’s interest-bearing liabilities of approximately $2.1 billion from the second quarter of 2017.
Tax-equivalent net interest margin declined 8 basis points from the first quarter of 2018 and improved by 1 basis point from the second quarter of 2017. During the second quarter of 2018, the Company’s average total assets increased to $14.5 billion from $14.4 billion at March 31, 2018 and from $11.1 billion at June 30, 2017. Average earning assets totaled $12.6 billion up $143.0 million compared to the first quarter of 2018. Average interest-bearing liabilities totaled $9.0 billion for the second quarter of 2018 which was flat compared to the first quarter 2018; and up from $6.8 billion for the second quarter of 2017. Average non-interest bearing demand deposits increased by $139.9 million during the second quarter of 2018; and increased by $604.7 million from June 30, 2017, due primarily to the merger with Park Sterling and growth during the past year. Including the impact of noninterest bearing deposits, the Company’s cost of funds was 40 basis points for the second quarter of 2018 compared to 31 basis points in the first quarter of 2018, and compared to 16 basis points in the second quarter of 2017.
The table above reflects the quarterly roll forward of the acquired credit impaired loan accretable yield, including a fair value adjustment of $1.5 million recorded in the second quarter of 2018 for the Park Sterling merger.
The Company recognized noncash loan interest income from the discount (fair value adjustment) on the acquired noncredit impaired loan portfolio of $7.6 million, $9.6 million, $6.1 million; $2.2 million; and $3.3 million, respectively during the five quarters. The remaining balance of the discount on the acquired noncredit impaired loan portfolio totals $43.6 million at June 30, 2018.
Noninterest Income and Expense
Noninterest income totaled $37.5 million during the second quarter of 2018, a decrease of $3.0 million from the first quarter of 2018. The decrease was primarily attributable to mortgage banking income and acquired loan recoveries. The following provides additional explanations of noninterest income:
- Lower mortgage banking income of $1.6 million, from secondary market which was down $563,000 due to lower sales volume, with more loans being retained on balance sheet; and the income related to the mortgage servicing rights, net of the hedge, declined $1.0 million as treasury rates and spreads compared to mortgage rates were more muted than the sharp increase to both experienced in the first quarter resulting in higher gains in Q1 of 2018;
- Lower recoveries on acquired loans by $808,000; and
- Securities losses on the disposition of certain lower yielding assets totaling $641,000.
Compared to the second quarter of 2017, noninterest income grew by $2.2 million. The increase was primarily related to the merger with PSTB:
- Higher trust and investment services income of $1.1 million,
- Higher fees on deposit accounts with more customers from the merger totaling $2.7 million, and
- Higher other income of $1.0 million from cash surrender value of bank owned life insurance and capital markets income.
- These increases were partially offset by $1.9 million decline in mortgage banking income from the secondary market aspect of our mortgage line of business; and
- Securities losses recorded in 2Q 2018 of $641,000 compared to $110,000 gain from 2Q 2017.
Noninterest expense was $110.5 million in the second quarter of 2018, a decrease of $3.0 million from $113.5 million in the first quarter of 2018. Merger and conversion related expense increased $2.8 million from the cost incurred in the first quarter of 2018, as the system conversion related to the Park Sterling merger was completed and 10 branches were closed during the second quarter of 2018. Salaries and employee benefits declined $7.4 million due primarily to:
(1) Payment of $2.8 million in bonuses to employees 1Q 2018;
(2) Reduced payroll taxes (FICA and unemployment taxes) totaling $2.3 million; and
(3) Fewer FTEs resulting in lower salary & benefits totaling $2.0 million
FDIC assessment and other regulatory charges increased by $2.0 million in the second quarter of 2018 compared to the first quarter of 2018. The normal quarterly expense is expected to be approximately $2.3 million given our current asset size and risk within the balance sheet. Many other expenses came in lower than the prior quarter, which is reflective of the conversion and the closure of 10 branches during the quarter.
Compared to the second quarter of 2017, noninterest expense was $26.2 million higher. The net increase was primarily due to five categories of expense: (1) salaries and benefits increased $7.4 million due primarily to the additional employees from Park Sterling and the related benefits and incentives, (2) information services increased $2.5 million due primarily to the branches added from Park Sterling, (3) net occupancy and furniture and equipment expense increased by $1.8 million and $642,000, respectively, due to the addition of branches added from Park Sterling, (4) $2.3 million increase in the FDIC assessment related to exceeding $10.0 billion in assets, and (5) amortization of intangibles increased $1.2 million from additional core deposit intangible related to Park Sterling. Merger-related and conversion cost increased $9.8 million. In the second quarter of 2017, these cost were primarily related to the merger with Southeastern Bank Financial Corporation, compared to PSTB conversion/merger-related cost in the second quarter of 2018.
South State Corporation will hold a conference call tomorrow, July 31, 2018 at 10 a.m. Eastern Time, during which management will review earnings and performance trends. Callers wishing to participate may call toll-free by dialing 877-506-9272. The number for international participants is 412-380-2004. The conference ID number is 10121321. Participants can also listen to the live audio webcast through the Investor Relations section of www.SouthStateBank.com. A replay will be available beginning July 31, 2018 by 2:00 p.m. Eastern Time until 9:00 a.m. on August 14, 2018. To listen to the replay, dial 877-344-7529 or 412-317-0088. The passcode is 10121321.
South State Corporation is a financial services company headquartered in Columbia, South Carolina with approximately $14.6 billion in assets. South State Bank, the company’s primary subsidiary, provides consumer, commercial, mortgage, and wealth management solutions throughout the Carolinas, Georgia and Virginia. South State has served customers since 1934. Additional information is available at www.SouthStateBank.com.
Statements included in this press release include non-GAAP measures and should be read along with the accompanying tables which provide a reconciliation of non-GAAP measures to GAAP measures. Management believes that these non-GAAP measures provide additional useful information which allows readers to evaluate the ongoing performance of the Company. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the company’s results or financial condition as reported under GAAP.