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South State Corporation Reports Third Quarter 2018 Results and Quarterly Cash Dividend

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COLUMBIA, S.C.—October 22, 2018—South State Corporation (NASDAQ: SSB) today released its unaudited results of operations and other financial information for the three-month and nine-month periods ended September 30, 2018. Highlights for the third quarter of 2018 include the following:

•    Third quarter 2018 financial results:

  • Net income was $47.1 million, compared to $40.5 million in the second quarter of 2018, an increase of $6.6 million
  • Diluted EPS of $1.28 compared to $1.09, an increase of $0.19 per share
  • Adjusted net income (non-GAAP) was $49.1 million, compared to $52.7 million, a $3.6 million decrease
  • Adjusted diluted EPS (non-GAAP) of $1.33 compared to $1.43, a decline of 0%

•    Performance ratios third quarter 2018 compared to second quarter 2018

  • Return on average assets totaled 1.28% compared to 12%
  • Adjusted return on average assets (non-GAAP) was 1.33% compared to 45%
  • Return on average equity totaled 7.89% compared to 96%
  • Return on average tangible equity (non-GAAP) was 15.29% compared to 79%
  • Adjusted return on average tangible equity (non-GAAP) decreased to 15.90% from 68%
  • Efficiency ratio was 3% down from 65.6%, due primarily to lower merger and conversion cost, lower other real estate owned (“OREO”) expense and troubled loan related cost, and lower information services expense
  • Adjusted efficiency ratio (non-GAAP) was 59.5% up from 57.3% (excluding merger-related and conversion expenses and securities losses (gains)), and due to lower noninterest income

•    Balance sheet linked quarter

    • Cash and cash equivalents decreased by $89.5 million
    • Non-acquired loan growth during the quarter totaled $408.9 million, or 5% annualized, spread across all categories, while net loan growth (net of acquired loan runoff) for the quarter totaled $78.8 million, or 2.9% annualized, spread across consumer real estate, commercial owner occupied real estate, and consumer non-real estate
    • Noninterest bearing deposits increased by $4.6 million, or 60% annualized; and interest bearing deposits decreased by $29.1 million, or 1.4% annualized (with $20.6 million of the decrease coming from brokered deposits acquired in the Park Sterling (“PSTB”) merger);
    • Other borrowings were flat at $115.9 million; Fed funds purchased and repurchase agreements declined by $52.3 million
    • Shareholders’ equity increased $19.8 million, primarily from net income, net of the dividends paid, of

$34.2 million offset by accumulated other comprehensive loss (“AOCI”) of $8.4 million, net of tax, primarily from the incremental unrealized loss within the available for sale securities portfolio; and by the buyback of 100,000 shares of company stock

  • Total equity to total assets increased to 16.31% from 12%
  • Tangible equity to tangible assets (non-GAAP) increased to 9.65% from 45%

•    Asset quality

  • Nonperforming assets (NPAs) decreased by $3.5 million, or 3%, to $38.6 million at September 30, 2018, primarily due to the disposition of properties (OREO)
  • NPAs to total assets decreased to 0.27% at September 30, 2018, from 0.29% at June 30, 2018 and improved from 0.30% at September 30, 2017
  • Net charge-offs on non-acquired loans were 0.07% annualized, or $1.3 million, compared to $189,000, or 01% annualized in the second quarter of 2018. Compared to the third quarter of 2017, net charge offs increased from $547,000, or 0.04% annualized.
  • Net charge-offs on acquired non-credit impaired loans were 0.01% annualized, or $70,000, compared to 0.14% annualized, or $1.1 million, in the second quarter of In the third quarter of 2017, net charge-offs (recoveries) were 0.00% annualized, or ($4,000).
  • Coverage ratio of the ALLL of non-acquired non-performing loans increased to 326% at September 30, 2018 compared to 322% at both June 30, 2018 and September 30,

Quarterly Cash Dividend

The Board of Directors of South State Corporation declared a quarterly cash dividend on October 18, 2018, of $0.36 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 $0.03 per share, or 9.1%, higher than the same quarter one year ago. The dividend will be payable on November 16, 2018 to shareholders of record as of November 9, 2018.

Durbin Amendment Impact

During the third quarter of 2018, the Durbin Amendment became effective for the Company and reduced noninterest income (Fees on deposit accounts) by approximately $4.8 million pre-tax. On an after-tax basis, the estimated impact was $3.8 million, or $0.10 per diluted share.

Third Quarter 2018 Financial Performance

Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, Sept. 30,
INCOME STATEMENT 2018 2018 2018 2017 2017 2018 2017
Interest income
Loans, including fees (8) $132,043

 

11,517

$129,852 $127,041 $108,319 $95,864 $388,936

 

34,404

$ 281,216
Investment securities, federal funds sold and securities
purchased under agreements to resell 11,880 11,007 9,505 8,547 26,960
Total interest income 143,560

 

13,220

 

2,051

141,732 138,048 117,824 104,411 423,340 308,176
Interest expense
Deposits 10,009 6,913 4,220 2,974 30,142

 

6,374

8,132
Federal funds purchased, securities sold under agreements
to repurchase, and other borrowings 2,161 2,162 1,330 1,118 3,332
Total interest expense                                                                                15,271 12,170 9,075 5,550 4,092 36,516 11,464
Net interest income 128,289

3,117

129,562 128,973 112,274 100,319 386,824

10,049

296,712
Provision for loan losses 4,478 2,454 3,808 2,062 8,082
Net interest income after provision for loan losses                                      125,172 125,084 126,519 108,466 98,257 376,775 288,630
Noninterest income*                                                                                 32,027 37,525 40,555 36,762 33,736 110,107 103,268
Pre-tax operating expense* 95,818

4,476

96,410 102,167 84,645 77,719 294,395

29,868

239,173
Branch consolid./acquisition and merger expense 14,096 11,296 17,621 1,551 26,882
Total noninterest expense 100,294 110,506 113,463 102,266 79,270 324,263 266,055
Income before provision for income taxes 56,905 52,103 53,611 42,962 52,723 162,619

32,753

125,843
Provision for income taxes, includes deferred tax revaluation                               9,823 11,644 11,285 40,541 17,677 40,710
Net income $47,082 $40,459 $42,326 $2,421 $35,046 $129,866 $       85,133
Adjusted net income (non-GAAP) (3)
Net income (GAAP) $47,082 $40,459 $42,326 $2,421 $35,046 $129,866 $      85,133
Securities losses (gains), net of tax 9 505 (22) (349) 514 (422)
Provision for income taxes, deferred tax revaluation (1,603) 613 26,558 (990)
Branch consolid./acquisition and merger expense, net of tax 3,577 11,112 8,918 12,431 1,031 23,607 19,038
Adjusted net income (non-GAAP) $49,065 $52,689 $51,244 $41,388 $35,728 $152,997 $ 103,749
Basic earnings per common share $1.28

$1.28

$1.34

$.33

$0.35

36,645,181

36,893,496

$1.10 $1.15 $0.08 $1.20 $3.53

$3.52

$4.18

$4.15

$1.02

36,657,198

36,909,236

$         2.92
Diluted earnings per common share $1.09 $1.15 $ 0.08 $1.19 $         2.90
Adjusted net income per common share – Basic (non-GAAP) (3) $1.44 $ 1.40 $ 1.31 $1.23 $         3.58
Adjusted net income per common share – Diluted (non-GAAP) (3) $1.43 $1.39 $1.30 $1.22 $         3.55
Dividends per common share $0.34 $0.33 $0.33 $0.33 $         0.99
Basic weighted-average common shares outstanding 36,676,887 36,646,198 31,654,947 29,114,574 29,023,451
Diluted weighted-average common shares outstanding 36,928,981 36,899,068 31,905,505 29,385,041 29,290,509
Effective tax rate 17.26% 22.35% 21.05% 94.36% 33.53% 20.14% 32.35%
* These lines include a reclassfiication of network costs directly related to interchange and debit card transaction fees. ASU 2014-09 – Revenue recognition
requires netting of these expenses with the related revenue. All periods have been adjusted for this reclassification, and there was no impact to net income or
capital for any period presented.

 The Company reported consolidated net income of $47.1 million, or $1.28 per diluted common share for the three- months  ended September  30,  2018, a $6.6 million increase from the second quarter  of  2018. Interest  income was up $1.8 million as a result of an increase in non-acquired loan interest income of $5.8 million during the third quarter, partially offset by lower acquired interest income of $3.6 million, as the acquired loan portfolio continued to decline during the quarter. Interest expense increased by $3.1 million, with $2.3 million increase from transaction and money market accounts, $713,000 attributable to certificate and other time deposits and $209,000 in savings accounts. These increases in interest expense were due to the rising rate environment and continued competition within our markets for core deposits. The Company’s cost of funds was 0.68% for the third quarter of 2018, an increase of 0.13% from the second quarter of 2018. Compared to the third quarter of 2017, cost of funds increased by 0.44% 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 decreased $1.4 million compared to the second quarter of 2018. Valuation allowance impairment (release) related to acquired loans was ($284,000) net release compared to $522,000 impairment in the second quarter of 2018. Several pools had improved cash flows and reversals of prior period impairments accounted for the difference. The provision for loan losses related to acquired non-credit impaired loans was lower by $1.0 million, compared to the second quarter of 2018. One loan was charged off during the second quarter which totaled approximately $750,000 and resulted in a much higher provision for loan losses. The provision for loan losses on non- acquired loans was $471,000 higher compared to the second quarter of 2018 due primarily to loan growth during the quarter. Noninterest income decreased by $5.5 million, as bankcard income declined by approximately $4.8 million due primarily to the impact of the Durbin Amendment and waived fees related to Hurricane Florence, mortgage banking income  was  down $493,000  from lower  sales  within  the secondary  market,  and acquired loan recoveries  declined $930,000. These decreases were partially offset by improved service charges on deposit accounts primarily related to PSTB accounts which were waived during the second quarter of 2018. Noninterest expense was lower by $10.2 million primarily the result of lower merger and conversion related charges which were down by $9.6 million in the third quarter.

Income Tax Expense

During the third quarter of 2018, the Company’s effective income tax rate was 17.26%, and income tax expense totaled $9.8 million. The decrease from the second quarter of 2018 was driven by the following: an increase in federal tax credits expected during 2018, an increase in the impact of excess tax benefit recorded on equity awards, and lastly, lower tax expense related to an update to the prior year provisional amount recorded to account for the effects of the Tax Cuts and Jobs Act of 2017. Without the benefit of the revaluation of deferred items, the effective rate for the third quarter was 20.08%, compared to 21.17% in the second quarter of 2018. On a year-to-date basis, the effective rate was 20.75%, without the additional deferred tax benefit; and was 20.14% including the additional deferred tax benefit.

“2018 has been a year of transition for our company and I am pleased with the progress we continued to make in the third quarter,” said Robert R. Hill, Jr., CEO of South State Corporation. “Our merger with Park Sterling has gone well, with North Carolina leading the bank with double digit loan growth during the quarter. The loan and balance sheet repositioning we have undergone is mostly complete. Overall loan production is at all-time highs and our markets continue to be robust with growth opportunities. We have, however, continued to face earnings headwinds in the near term with the impact of the Durbin Amendment, higher level of interest expense, and slower net loan growth. Expense management has been good and credit quality continues to be excellent. The balance sheet remains strong and 2018 marks the first time in two years where we are not focused on a pending acquisition. While overall revenue and balance sheet growth are below our historical performance levels, we are well-positioned for the long term.”

Balance Sheet and Capital

(dollars in thousands, except per share and share data) Ending Balance
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
BALANCE SHEET 2018 2018 2018 2017 2017
Assets
Cash and cash equivalents $307,309 $396,849 $644,504 $377,627 $403,934
Investment securities:
Securities held to maturity 500 499 1,274 2,529 3,678
Securities available for sale, at fair value 1,551,281 1,577,999 1,640,837 1,648,193 1,319,454
Other investments 19,229 19,229 23,479 23,047 13,664
Total investment securities 1,571,010 1,597,727 1,665,590 1,673,769 1,336,796
Loans held for sale 33,752 36,968 42,690 70,890 46,321
Loans:
Acquired credit impaired 512,633 551,979 597,274 618,803 578,863
Acquired non-credit impaired 2,786,102 3,076,424 3,274,938 3,507,907 1,455,555
Non-acquired 7,606,478 7,197,539 6,762,512 6,492,155 6,230,327
Less allowance for non-acquired loan losses (49,869) (47,874) (45,203) (43,448) (41,541)
Loans, net 10,855,344 10,778,068 10,589,521 10,575,417 8,223,204
Other real estate owned (“OREO”) 12,119 17,222 11,073 11,203 13,527
Premises and equipment, net 241,909 245,288 253,605 255,565 198,146
Bank owned life insurance 229,075 227,588 226,222 225,132 151,402
Deferred tax asset 47,943 48,853 46,736 45,902 41,664
Mortgage servicing rights 36,056 35,107 34,196 31,119 29,937
Core deposit and other intangibles 66,437 69,975 70,376 73,789 50,472
Goodwill 1,002,900 1,002,722 999,592 999,586 597,236
Other assets 118,361 110,121 105,004 126,590 76,471
Total assets $14,522,215 $14,566,488 $14,689,109 $14,466,589 $11,169,110
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing $3,157,478 $3,152,828 $3,120,818 $3,047,432 $2,505,570
Interest-bearing 8,456,397 8,485,461 8,542,280 8,485,334 6,556,451
Total deposits 11,613,875 11,638,289 11,663,098 11,532,766 9,062,021
Federal funds purchased and securities
sold under agreements to repurchase 279,698 331,969 357,574 286,857 291,099
Other borrowings 115,919 115,754 215,589 216,385 83,307
Other liabilities 144,584 132,109 130,269 121,661 99,858
Total liabilities 12,154,076 12,218,121 12,366,530 12,157,669 9,536,285
Shareholders’ equity:
Preferred stock – $.01 par value; authorized 10,000,000 shares
Common stock – $2.50 par value; authorized 80,000,000 shares 91,808 92,064 91,958 91,899 73,168
Surplus 1,805,685 1,811,446 1,807,989 1,807,601 1,136,352
Retained earnings 515,155 480,928 452,982 419,847 427,093
Accumulated other comprehensive loss (44,509) (36,071) (30,350) (10,427) (3,788)
Total shareholders’ equity 2,368,139 2,348,367 2,322,579 2,308,920 1,632,825
Total liabilities and shareholders’ equity $14,522,215 $14,566,488 $14,689,109 $14,466,589 $11,169,110
Common shares issued and outstanding 36,723,238 36,825,556 36,783,438 36,759,656 29,267,369

 

At September 30, 2018, the Company’s total assets were $14.5 billion, a decrease of $44.3 million from June 30, 2018, and an increase of $3.4 billion, or 30.0% from September 30, 2017. During the third quarter of 2018, cash and cash equivalents decreased by $89.5 million. This was the result of a decline in total deposits, federal funds purchased and securities sold under repurchase agreements on the liability side, and total loans increasing by $78.8 million, or 2.9% annualized, as nonacquired loans increased by $408.9 million, and acquired loans declined by $329.7 million. Partially offsetting this net use of cash was a decline in investment securities by $26.7 million during the third quarter of 2018.

The Company’s book value per common share increased to $64.49 per share at September 30, 2018, compared to $63.77 at June 30, 2018 and $55.79 at September 30, 2017. The increase in capital during the third quarter of 2018 of $19.8 million was related to net income totaling $47.1 million, partially offset by $12.9 million dividend paid to shareholders, and an increase in unrealized losses within the securities portfolio causing AOCI to reduce capital by $8.4 million. Tangible book value (“TBV”) per common share increased by $0.73 per share to $35.37 at September 30, 2018, compared to $34.64 at June 30, 2018, and increased by $1.71 per share, or 5.1%, from $33.66 at September 30, 2017. The quarterly increase of $0.73 per share in tangible book value was the result of (1) earnings per share, excluding amortization of intangibles, of $1.36, offset by the dividend paid to shareholders of $0.35 per share; (2) a decrease in AOCI of $0.23 per share; and (3) a net decrease of $0.05 per share due to the buyback of 100,000 shares of common stock partially offset by the impact of share-based compensation and employee stock purchases during the third quarter of 2018.

“Tangible book value per share increased $0.73 per share to $35.37, a reflection of the continued earnings strength of the company,” said John C.Pollok, CFO. “Our capital ratios continue to improve and reflect the strength of our balance sheet and operating performance. Asset quality remained strong during the third quarter. The ratios of construction and land development loans to RBC and CRE to RBC was 76.2% and 212.4%, respectively, at the end of the third quarter and well below the regulatory guidelines.”

 

Three Months Ended Nine Months Ended
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
PERFORMANCE RATIOS 2018 2018 2018 2017 2017 2018 2017
Return on average assets (annualized) 1.28%

1.33%

7.89%

8.23%

15.29%

15.90%

62.31%

59.53%

27.30%

$64.49

$35.37

 

16.31%

9.65%

1.12% 1.19% 0.08% 1.25% 1.20%

1.41%

7.43%

8.75%

14.60%

17.04%

64.92%

58.94%

28.88%

1.03%
Adjusted return on average assets (annualized) (non-GAAP) (3) 1.45% 1.44% 1.33% 1.28% 1.26%
Return on average equity (annualized) 6.96% 7.41% 0.51% 8.57% 7.14%
Adjusted return on average equity (annualized) (non-GAAP) (3) 9.06% 8.98% 8.75% 8.73% 8.70%
Return on average tangible common equity (annualized) (non-GAAP) (7) 13.79% 14.69% 1.59% 14.93% 12.73%
Adjusted return on average tangible common equity (annualized) (non-GAAP) (3) (7) 17.68% 17.60% 15.83% 15.21% 15.36%
Efficiency ratio (tax equivalent) 65.63% 66.67% 68.01% 58.79% 65.97%
Adjusted efficiency ratio (non-GAAP) (9) 57.26% 60.04% 56.29% 57.64% 59.31%
Dividend payout ratio (2) 30.93% 28.68% 399.30% 27.56% 34.01%
Book value per common share $63.77 $63.14 $62.81 $55.79
Tangible common equity per common share (non-GAAP) (7) $ 34.64 $ 34.05 $33.61 $33.66
CAPITAL RATIOS
Equity-to-assets 16.12% 15.81% 15.96% 14.62%
Tangible equity-to-tangible assets (non-GAAP) (7) 9.45% 9.20% 9.23% 9.36%
Tier 1 common equity (6) 12.3% 12.0% 11.8% 11.6% 12.1%
Tier 1 leverage (6) 10.8% 10.6% 10.5% 10.4% 10.3%
Tier 1 risk-based capital (6) 13.3% 13.0% 12.8% 12.6% 12.9%
Total risk-based capital (6) 13.8%

 

168

2,640

13.5% 13.3% 13.0% 13.5%
OTHER DATA
Number of branches 169 179 182 129
Number of employees (full-time equivalent basis) 2,654 2,700 2,719 2,255

Asset Quality

Ending Balance
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
(Dollars in thousands) 2018 2018 2018 2017 2017
NONPERFORMING ASSETS:
Non-acquired  

$15,315

3,229

Non-acquired nonperforming loans $14,870 $14,307 $14,831 $12,896
Non-acquired OREO and other nonperforming assets 8,179 2,363 2,536 6,330
Total non-acquired nonperforming assets 18,544 23,049 16,670 17,367 19,226
Acquired  

10,800

9,302

Acquired nonperforming loans 9,590 8,233 9,447 6,401
Acquired OREO and other nonperforming assets 9,527 9,139 9,263 7,846
Total acquired nonperforming assets 20,102 19,117 17,372 18,710 14,247
Total nonperforming assets $38,646 $42,166 $34,042 $36,077 $33,473
Three Months Ended Nine Months Ended
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
2018 2018 2018 2017 2017 2018 2017
ASSET QUALITY RATIOS:
Allowance for non-acquired loan losses as a
percentage of non-acquired loans (1) 0.66% 0.67% 0.67% 0.67% 0.67% 0.66% 0.67%
Allowance for non-acquired loan losses as a
percentage of non-acquired nonperforming loans 325.62% 321.95% 315.95% 292.95% 322.12% 325.62% 322.12%
Net charge-offs on non-acquired loans as a percentage of
average non-acquired loans (annualized) (1) 0.07% 0.01% 0.02% 0.02% 0.04% 0.04% 0.04%
Net charge-offs on acquired non-credit impaired loans as a percentage
of average acquired non-credit impaired loans (annualized) (1) 0.01% 0.14% 0.02% 0.07% 0.00% 0.06% 0.06%
Total nonperforming assets as a percentage
of total assets 0.27% 0.29% 0.23% 0.25% 0.30%
Excluding Acquired Assets
NPLs as a percentage of period end non-acquired loans (1) 0.20% 0.21% 0.21% 0.23% 0.21%
Total nonperforming assets as a percentage of
total non-acquired loans and repossessed assets (1) (4) 0.24% 0.32% 0.25% 0.27% 0.31%
Total nonperforming assets as a percentage
of total assets (5) 0.13% 0.16% 0.11% 0.12% 0.17%

 

Total nonperforming assets decreased by $3.5 million to $38.6 million, representing 0.27% of total assets, a decrease of 2 basis points from the balance at June 30, 2018. The decline was the result of the disposition of 24 properties during the third quarter resulting in a $5.1 million decrease in OREO. Non-performing loans increased by $1.7 million during the third quarter to $26.1 million at September 30, 2018. The allowance for loan losses as a percentage of non-acquired nonaccrual loans was 326%, up from 322% in the second quarter of 2018.

During the third quarter of 2018, the Company reported $10.8 million in nonperforming loans related to “acquired non- credit impaired loans.” This was an increase of $1.2 million from the balance at June 30, 2018; and an increase of $4.4 million higher than the balance at September 30, 2017, due primarily to the growth from the PSTB acquisition. Additionally, acquired OREO and other assets owned decreased by $225,000 from the balance at June 30, 2018 and increased by $1.5 million from the balance of September 30, 2017.

At September 30, 2018, the allowance for non-acquired loan losses was $49.9 million, or 0.66%, of non-acquired period- end loans and $47.9 million, or 0.67%, at June 30, 2018, and $41.5 million, or 0.67% at September 30, 2017. Net charge- offs within the non-acquired portfolio were $1.3 million, or 0.07% annualized in the third quarter of 2018, compared to $189,000, or 0.01% annualized, in the second quarter of 2018. Third quarter 2017 net charge-offs totaled $547,000, or 0.04% annualized. Net charge-offs related to the non-acquired loan portfolio were $540,000 during the third quarter of 2018 while over the past several quarters net charge-offs were primarily from overdraft and ready reserve accounts. Net charge offs related to the non-acquired loan portfolio have been in a net recovery position over the prior four quarters (2nd quarter 2018 through 3rd quarter 2017). During the third quarter of 2018, the provision for non-acquired loan losses totaled $3.3 million compared to $2.9 million in the second quarter of 2018, and $1.9 million in the third quarter of 2017.

Net charge offs related to “acquired non-credit impaired loans” were $70,000, or 0.01% annualized, in the third quarter of 2018; and the Company recorded a provision for loan losses, accordingly. Net charge-offs in the second quarter of 2018 totaled $1.1 million, or 0.14% annualized, and in the third quarter of 2017, net charge-offs (recoveries) totaled ($4,000), or 0.00% annualized. The charge off level in the second quarter of 2018 was primarily the result of a specific relationship, and was not representative of a particular trend within any of our markets.

During the third quarter of 2018, the Company recorded a net release of $284,000 within certain acquired credit impaired loan pools compared to $522,000 net valuation impairment, in the second quarter of 2018. During the third quarter of 2017, the Company recorded net impairment of $127,000.

Total OREO decreased to $12.1 million at September 30, 2018, down from $17.2 million at June 30, 2018. The $5.1 million decrease was related to the disposition of 24 properties during the third quarter of 2018. The Company expects the OREO balance to decline during the fourth quarter of 2018 as the disposition of these assets continue.

Net Interest Income and Margin

Three  Months Ended
September 30, 2018 June 30, 2018 September 30, 2017
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
YIELD ANALYSIS Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest-Earning Assets:
Federal funds sold, reverse repo, and time deposits $232,894 $1,106 1.88% $203,189 $1,218 2.40% $169,511 $581 1.36%
Investment securities (taxable) 1,389,859 8,890 2.54% 1,439,334 9,048 2.52% 1,169,451 6,646 2.25%
Investment securities (tax-exempt) 199,283 1,521 3.03% 213,712 1,614 3.03% 186,108 1,320 2.81%
Loans held for sale 35,406 386 4.33% 32,313 337 4.18% 52,609 503 3.79%
Loans 10,802,287 131,657 4.84% 10,723,400 129,515 4.84% 8,227,544 95,361 4.60%
Total interest-earning assets 12,659,729 143,560 4.50% 12,611,948 141,732 4.51% 9,805,223 104,411 4.22%
Noninterest-earning assets 1,929,505 1,934,359 1,306,130
Total Assets $14,589,234 $14,546,307 $11,111,353
Interest-Bearing Liabilities:
Transaction and money market accounts $5,236,196 $6,979 0.53% $ 5,203,265 $4,691 0.36% $3,940,519 $ 1,070 0.11%
Savings deposits 1,445,370 1,369 0.38% 1,459,851 1,160 0.32% 1,373,301 522 0.15%
Certificates and other time deposits 1,823,855 4,871 1.06% 1,784,269 4,158 0.93% 1,058,812 1,382 0.52%
Federal funds purchased and repurchase agreements 294,162 599 0.81% 339,917 642 0.76% 307,730 276 0.36%
Other borrowings 119,412 1,452 4.82% 165,940 1,519 3.67% 92,951 842 3.59%
Total interest-bearing liabilities 8,918,995 15,270 0.68% 8,953,242 12,170 0.55% 6,773,313 4,092 0.24%
Noninterest-bearing liabilities 3,304,142 3,260,626 2,715,089
Shareholders’ equity 2,366,097 2,332,439 1,622,951
Total Non-IBL and shareholders’ equity 5,670,239 5,593,065 4,338,040
Total liabilities and shareholders’ equity $14,589,234 $14,546,307 $11,111,353
Net interest income and margin (NON-TAX EQUIV.) $128,290 4.02% $129,562 4.12% $ 100,319 4.06%
Net interest margin (TAX EQUIVALENT) 4.04% 4.14% 4.11%
 

0.50%

Overall Cost of Funds (including demand de posits) 0.40% 0.17%

 

Non-taxable equivalent net interest income was $128.3 million for the third quarter of 2018, a $1.3 million decrease from the second quarter of 2018. The decrease resulted from higher interest expense which offset the increase in interest income. The highlights follow:

  1. Average balance of non-acquired loans increased by approximately $391.7 million and resulted in an increase in non-acquired loan interest income of $5.8 million, to $76.5 million. The yield on total non-acquired loans was 4.12% up from 4.06% in the second quarter of
  2. Acquired loan interest income decreased $3.6 million from the second quarter of 2018, to $55.1 million. The yield on acquired loans for the third quarter of 2018 was 38%, an increase of eight basis points from the second quarter of 2018, while the average balance of acquired loans declined by $312.9 million during the third quarter of 2018. This decline in average balance continued as expected primarily from the PSTB acquired loan portfolio. Any future increase or decrease in the acquired loan yield will be primarily dependent upon the level of loan pay downs and pay-offs each quarter. For both the third and second quarter of 2018, total loan yield was 4.84% which was up from 4.60% in the third quarter of 2017.
  3. Interest expense increased by $3.1 million in the third quarter of 2018 compared to the second quarter of This increase was within all categories of funding, except other borrowings and fed funds purchased and repurchase agreements. Deposit rates continued to increase in the rising rate environment and accounted for all of the increase. Interest expense on other borrowings and fed funds purchased and repurchase agreements declined slightly compared to the second quarter of 2018 due to a decline in the average balance. 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 68 basis points, an increase of 13 basis points from the second quarter of 2018 and up 44 basis points from the third 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 third quarter of 2017.

Tax-equivalent net interest margin declined 10 basis points from the second quarter of 2018 and declined by 7 basis points from the third quarter of 2017. During the third quarter of 2018, the Company’s average total assets increased to $14.6 billion from $14.5 billion at June 30, 2018 and from $11.1 billion at September 30, 2017. Average earning assets totaled $12.7 billion, up $47.8 million compared to the second quarter of 2018. Average interest-bearing liabilities totaled $8.9 billion for the third quarter of 2018 which was flat compared to the second quarter 2018; and up from $6.8 billion for the third quarter of 2017. Average non-interest bearing demand deposits increased by $35.1 million during the third quarter of 2018; and increased by $535.0 million from September 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 50 basis points for the third quarter of 2018 compared to 40 basis points in the second quarter of 2018, and compared to 17 basis points in the third quarter of 2017.

 

Accretable Yield Rollforward (Acquired credit impaired loans)
September 30, 2018 Sept. 30, June 30, Mar. 31, Dec. 31, Se pt. 30,
(Dollars in thousands) 2018 2018 2018 2017 2017
Balance at beginning of period $121,804 $129,857 $133,095 $132,575 $139,283
Interest income * (11,723) (12,829) (12,366) (13,561) (14,362)
Additions from Georgia Bank & Trust Acquisition 307
Additions (decreases) from Park Sterling Bank Acquisition (1,460) 8,829
Improved cash flows affecting nonaccretable difference 4,953 6,381 9,204 5,118 7,756
Other changes, net (49) (145) (76) (173) (102)
Balance at end of period $114,985 $121,804 $129,857 $133,095 $132,575
* Interest income does not include interest income from loan advances post-acquisition on lines of credit, late fees or other loan fees.

 

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 $6.7 million, $7.6 million, $9.6 million, $6.1 million and $2.2 million, respectively during the five quarters. The remaining balance of the discount on the acquired noncredit impaired loan portfolio totals $37.1 million at September 30, 2018.

Noninterest Income and Expense

Three  Months Ended Nine Months Ended
Se pt. 30, June 30, Mar. 31, Dec. 31, Se pt. 30, Sept. 30, Sept. 30,
(Dollars in thousands) 2018 2018 2018 2017 2017 2018 2017
Noninterest income:
Fees on deposit accounts * $17,790 $ 22,612 $22,543 $21,224 $ 20,143 $2,945 $59,541
Mortgage banking income 2,824 3,317 4,948 3,744 3,446 11,089 14,210
Trust and investment services income 7,527 7,567 7,514 6,698 6,310 22,608 18,703
Securities (losses) gains, net (11) (641) 33 525 (652) 635
Recoveries of fully charged off acquired loans 1,238 2,167 2,975 2,925 1,944 6,380 5,647
Other 2,659 2,503 2,575 2,138 1,367 7,737 4,532
Total noninterest income $32,027 $37,525 $40,555 $ 36,762 $33,735  $110,107 $103,268
Noninterest expense:
Salaries and employee benefits $57,934 $55,026 $62,465 $50,735 $47,245 $175,425 $143,711
Net occupancy expense 7,630 7,815 8,166 6,707 6,214 23,611 18,650
Information services expense 7,804 8,903 9,738 6,686 6,003 26,445 18,776
Furniture and equipment expense 4,605 4,519 4,626 4,146 3,751 13,750 11,422
Bankcard expense * 379 311 691 558 443 1,381 1,623
OREO expense and loan related (19) 1,037 1,661 1,073 1,753 2,679 5,648
Business development and staff related 2,463 2,765 2,082 2,107 1,728 7,310 5,756
Amortization of intangibles 3,537 3,722 3,413 2,857 2,494 10,672 7,496
Professional fees 2,138 1,898 1,699 1,338 1,265 5,735 4,637
Supplies, printing and postage expense 1,561 1,406 1,392 1,433 1,491 4,359 4,715
FDIC assessment and other regulatory charges 2,525 3,277 1,263 895 918 7,065 3,029
Advertising and marketing 1,049 1,163 736 1,563 852 2,948 2,400
Other operating expenses 4,212 4,568 4,235 4,547 3,561 13,015 11,310
Merger & branch consolidation expense 4,476 14,096 11,296 17,621 1,551 29,868 26,882
Total noninterest expense $100,294 $110,506 $113,463 $102,266 $79,269 $324,263 $266,055
* The company reclassified network expenses directly related to interchange and transaction fee income out of bankcard expense and into fees on
deposit accounts, pursuant to ASC 606, Revenue from Contracts with Customers . This resulted in lower noninterest income and lower
noninterest expense in all periods presented as follows:
Reclassification amount $3,172 $3,002 $2,963 $2,336 $2,305 $9,137 $6,781

 

Noninterest income totaled $32.0 million during the third quarter of 2018, a decrease of $5.5 million from the second quarter of 2018. The decrease was primarily attributable to the impact from the Durbin Amendment on bankcard income, lower mortgage banking income and lower acquired loan recoveries. The following provides additional explanations of noninterest income:

  • Lower fees on deposit accounts totaling $4.8 million, with $6.0 million primarily due to the Durbin Amendment and fees waived due to Hurricane Florence on ATM transactions, partially offset by higher income on deposit accounts of $1.2 million (waived service charges on accounts from PSTB during the second quarter of 2018 due to the conversion);
  • Lower mortgage banking income of $493,000, primarily related to lower income from the secondary market activity; and
  • Lower recoveries on acquired loans by $930,000; and partially offset
  • Lower securities loss of $630,000.

Compared to the third quarter of 2017, noninterest income declined by $1.7 million. The decrease was primarily related to the following:

  1. Fees on deposit accounts were down $2.4 million due to $4.0 million decline in bankcard services income (Durbin Amendment), which was partially offset by the increase in customers (from the PSTB merger) resulting in additional service charges on deposit accounts of $1.6 million;
  2. $622,000 decline in mortgage banking income primarily from lower gains and fewer mortgage loans sold in the secondary market;
  3. A decline in securities gains of $536,000, from the loss recorded in 3Q 2018 of $11,000 compared to $525,000 gain from 3Q 2017; and
  4. Lower recoveries from acquired loans totaling $706,000.
  5. These decreases were partially offset by higher trust and investment services income of $1.2 million, and
  6. Higher other income of $1.3 million primarily from cash surrender value of bank owned life insurance and capital markets income, both attributable to the PSTB

Noninterest expense was $100.3 million in the third quarter of 2018, a decrease of $10.2 million from $110.5 million in the second quarter of 2018. Merger and conversion related expenses declined $9.6 million from the cost incurred in the second quarter of 2018, as the Park Sterling integration cost was finalized during the third quarter of 2018. Salaries and employee benefits increased by $2.9 million due primarily to incentive increases and increased benefits related to self- funded medical cost and 401(k) match. FDIC assessment and other regulatory charges decreased by $752,000 in the third quarter of 2018, which was related to the second quarter of 2018 being higher due to the first quarter being under accrued. OREO and other troubled loan related cost were down significantly during the third quarter due to the net gain recorded on the disposition of 24 properties. Many other expenses came in lower than the prior quarter reflective of the cost saves achieved from the conversion and integration of PSTB.

Compared to the third quarter of 2017, noninterest expense was $21.0 million higher. The net increase was primarily due to the following: (1) salaries and benefits increased $10.7 million due primarily to the additional employees from Park Sterling and the related benefits and incentives, (2) information services increased $1.8 million due primarily to the branches added from Park Sterling, (3) net occupancy and furniture and equipment expense increased by $1.4 million and $854,000, respectively, due to the addition of branches added from Park Sterling, (4) $1.6 million increase in the FDIC assessment related to exceeding $10.0 billion in assets and the acquisition of PSTB, (5) amortization of intangibles increased $1.0 million from additional core deposit intangible related to Park Sterling, and (6) merger-related and conversion cost increased $2.9 million. In the third quarter of 2017, the merger-related cost were primarily related to the merger with Southeastern Bank Financial Corporation, compared to PSTB conversion/merger-related cost in the third quarter of 2018.

South State Corporation will hold a conference call tomorrow, October 23, 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 10124177. Participants can also listen to the live audio webcast through the Investor Relations section of www.SouthStateBank.com. A replay will be available beginning October 23, 2018 by 2:00 p.m. Eastern Time until 9:00 a.m. on November 6, 2018. To listen to the replay, dial 877-344-7529 or 412-317-0088. The passcode is 10124177.

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South State Corporation is a financial services company headquartered in Columbia, South Carolina with approximately $14.5 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.

Non-GAAP Measures

 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.