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South State Corporation Reports Third Quarter 2019 Results and Declares Increase in Quarterly Cash Dividend

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COLUMBIA, S.C.—October 28, 2019—South State Corporation (NASDAQ: SSB) today released its unaudited results of operations and other financial information for the three-month and nine-month period ended September 30, 2019. The Company reported consolidated net income of $51.6 million, or $1.50 per diluted common share for the three months ended September 30, 2019, a $10.1 million increase, or $0.33 per share increase in EPS, compared to the second quarter of 2019.

“This quarter demonstrated our commitment to enhancing value for our customers, team, and shareholders,” said Robert R. Hill Jr., CEO of South State Corporation.  “The Company announced longer term financial targets at the end of 2018, and I am pleased with our progress.  The bank continues to see excellent credit quality in the loan portfolio, and we have a balance sheet that is very well positioned.  We look forward to building on these results in the quarters ahead.”

Soundness

Our operating principles begin with a focus on soundness. Asset quality and funding strength are among the competitive advantages for South State. Asset quality remains strong with total non-performing assets equal to 0.27% of total assets at September 30, 2019, an increase of 0.01% from June 30, 2019.  Non-interest bearing deposits grew by $51.6 million to $3.3 billion, or 6.3% annualized.  Our loan and deposit base is well-diversified and we believe this contributes to a stable and high quality balance sheet.

Capital Management

We are focused on utilizing excess capital and have repurchased approximately 8% of outstanding shares since the third quarter 2018. Capital levels remain solid and we continue to preserve our ability to accommodate balance sheet growth and future investments in the company.

During the third quarter of 2019, we remained active in repurchasing company common stock and bought 858,800 shares at an average price of $75.08 per share, a total of $64.5 million. In June of 2019, the Company’s Board of Directors authorized a new Repurchase Program of 2,000,000 shares, and there were 1,000,000 shares available for repurchase under this plan as of September 30, 2019. The Company has acquired 165,000 shares thus far in the fourth quarter of 2019, at an average price of $74.88 per share, or $12.4 million.

 Operating Leverage

Operating leverage improved by $13.2 million in the third quarter of 2019 compared to second quarter of 2019, and the efficiency ratio declined to 58.4%. This was largely driven by a decline in noninterest expenses.

The Company announced various cost saving measures earlier this year to include the closure of 13 branch offices during 2019. Twelve of these locations had been closed as of September 30, 2019, with the remaining closure scheduled for late October 2019.  In the third quarter of 2019, the Company recognized approximately $3.2 million in cost saves and remain on track to achieve the expected cost saves in 2019 of $10.0 million.

Quarterly Cash Dividend

The Company’s Board of Directors voted to increase the common stock dividend this quarter by $0.03 to $0.46 per share, which is a 7.0% increase compared to last quarter, and a $0.10 per share increase, or 27.8%, compared to the same quarter one year ago. The dividend will be payable on November 15, 2019 to shareholders of record as of November 8, 2019.

Third Quarter 2019 Financial Performance

The Company reported consolidated net income of $51.6 million, or $1.50 per diluted common share for the three-months ended September 30, 2019, a $10.1 million increase, or $0.33 per share improvement in EPS compared to second quarter of 2019.  Weighted average diluted share count declined by 1.0 million shares, from the second quarter of 2019, due to the continuation of the Company repurchasing common shares under the Repurchase Program.  Compared to the third quarter of 2018, net income totaled $47.1 million, or $1.28 per diluted common share, and weighted average diluted shares were 2.6 million higher than the third quarter of 2019.  Net interest income increased by $194,000 compared to the second quarter of 2019 on slightly lower interest expense.  The provision for loan losses increased by $324,000, with the nonacquired provision for loan losses increasing $448,000 compared to second quarter of 2019; while the acquired loan loss provision declined by $124,000.  Noninterest income was flat compared to second quarter of 2019 at $37.6 million.  Excluding securities gains, noninterest income increased by $1.2 million in the third quarter of 2019.  Noninterest expense was lower by $13.0 million due primarily to the pension plan termination cost of $9.5 million and $2.1 million in branch consolidation expense and other cost initiatives incurred in second quarter of 2019. In addition, the Company received a $1.6 million credit on its FDIC assessment in 3Q 2019, and expects to receive approximately another credit of $800,000 in the fourth quarter of 2019.  The efficiency ratio and adjusted efficiency ratio were 58.4% in 3Q 2019, compared to 66.9% and 59.8%, respectively, in second quarter of 2019.

Income Tax Expense

During the third quarter of 2019, our effective income tax rate increased to 20.13% from 19.78% in the second quarter of 2019 and from 17.26% in the third quarter of 2018. The primary factor in the higher effective tax rate in the third quarter of 2019 compared to the second quarter of 2019 was higher pre-tax book income, primarily related to the charge for the termination of the pension plan and branch consolidation expense and other cost initiatives in second quarter of 2019.  Compared to the third quarter of 2018, the higher effective tax rate was attributable to the increase in pre-tax book income and the absence of the tax benefit related to the revaluation of deferred taxes.

Balance Sheet and Capital

At September 30, 2019, the Company’s total assets were $15.8 billion, an increase of $1.1 billion from December 31, 2018, and an increase of $1.2 billion, or 8.5%, from September 30, 2018. During the third quarter of 2019, changes in the balance sheet include the following:

  1. Net loan growth totaled $64.0 million, or 2.3% annualized. Non-acquired loans increased by $307.2 million or 14.1% annualized, and acquired loans decreased by $243.2 million, or 37.0% annualized.
  2. Investment securities portfolio grew by $95.9 million to almost $1.9 billion, representing 11.8% of total assets.
  3. Non-interest bearing deposits grew by $51.6 million, or 6.3% annualized.
  4. Interest bearing deposits grew by $49.9 million, or 2.3% annualized.
  5. Repurchased 858,800 common shares totaling $64.5 million.

The Company’s book value per common share increased to $69.34 per share at September 30, 2019, compared to $68.34 at June 30, 2019 and $64.49 at September 30, 2018. Total equity (capital) decreased by $23.0 million due to the shares of common stock repurchased during the third quarter.  The decrease from the repurchased stock, net of stock options and vested restricted stock, of $61.3 million was partially offset by an improvement in the change in accumulated comprehensive income of $1.4 million, and net income, net of the dividend paid, of $36.9 million, during the third quarter.  Tangible book value (“TBV”) per common share increased by $0.35 per share to $38.20 at September 30, 2019, compared to $37.85 at June 30, 2019, and increased by $2.83 per share, or 8.0%, from $35.37 at September 30, 2018.

“South State continues to make solid progress towards its long-term goals,” said John C. Pollok, Chief Financial Officer. “Our operating leverage continued to improve and with the shares repurchased during 2019, resulted in a 16.6% return on average tangible common equity in the third quarter of 2019.”

Performance and Capital Ratios
Asset Quality

Total nonperforming assets increased by $2.1 million to $42.4 million, representing 0.27% of total assets, an increase of 1 basis point compared to June 30, 2019. Non-performing acquired non-credit impaired loans decreased by $389,000 and totaled $9.6 million.  Legacy non-performing loans increased by $3.6 million during the third quarter of 2019 to $19.2 million at September 30, 2019.  The allowance for loan losses as a percentage of non-acquired nonaccrual loans was 286% at September 30, 2019, down from 343% in the second quarter of 2019, and down from 326% at September 30, 2018.

At September 30, 2019, the allowance for non-acquired loan losses was $54.9 million, or 0.62%, of non-acquired period-end loans and $53.6 million, or 0.62%, at June 30, 2019, and $49.9 million, or 0.66% at September 30, 2018. Net charge-offs within the non-acquired portfolio were $1.1 million, or 0.05% annualized, in the third quarter of 2019, compared to $452,000, or 0.02% annualized, in the second quarter of 2019. Third quarter 2018 net charge-offs totaled $1.3 million, or 0.07% annualized.  Net charge-offs (recoveries) related to the non-acquired loan portfolio totaled ($9,000) during the third quarter of 2019 and ($536,000) for the nine months ended September 30, 2019.  The remaining net charge-offs were from overdraft and ready reserve accounts and totaled $1.1 million, for the third quarter of 2019, and, for the nine months ended September 30, 2019, totaled $2.6 million.

During the third quarter of 2019, the provision for loan losses totaled $2.5 million for the non-acquired loan portfolio compared to $2.0 million in the second quarter of 2019, and $3.3 million in the third quarter of 2018.

Net charge offs related to “acquired non-credit impaired loans” were $760,000, or 0.15% annualized, in the third quarter of 2019; and the Company recorded a provision for loan losses, accordingly. There was one loan which comprised the majority of the charge-off in this category.  Net charge-offs in the second quarter of 2019 totaled $1.4 million, or 0.25% annualized, and in the third quarter of 2018, net charge-offs totaled $70,000, or 0.01% annualized.

During the third quarter of 2019, the Company recorded net impairment of $786,000 within the acquired credit impaired loan pools compared to $251,000 in the second quarter of 2019. During the third quarter of 2018, the Company recorded net impairment (release) of ($284,000).

Total OREO decreased during the third quarter with the disposition of property from both the nonacquired and acquired OREO assets. The decline totaled $1.1 million with a balance of $13.4 million at September 30, 2019.  The OREO balance at September 30, 2018 was $12.1 million.

Net Interest Income and Margin

Non-taxable equivalent net interest income was $127.4 million for the third quarter of 2019, an increase of $194,000 from the second quarter of 2019. The increase resulted primarily from lower interest expense on deposits which totaled $175,000.  Interest income from the loan portfolio declined by $639,000, which was attributable to lower yields in the acquired loan portfolio on lower average balances, and $4.5 million lower interest income, offset partially by the nonacquired loan portfolio increasing by $3.9 million on higher average balance and slightly lower rate of 4.31% compared to 4.32% in second quarter of 2019.  Interest expense increased by $624,000 in other borrowings as FHLB advances entered into in the second quarter of 2019 were outstanding for the entire third quarter of 2019.  This increase was fully offset by lower deposit funding cost of $738,000 in 3Q 2019.  Lastly, there was one more day of net interest income in the third quarter of 2019 compared to the second quarter of 2019.

Tax-equivalent net interest margin declined 9 basis points from the second quarter of 2019 and declined by 31 basis points from the third quarter of 2018. During the third quarter of 2019, the Company’s average total assets increased to $15.6 billion, an increase of $190.2 million from the second quarter of 2019, and an increase of $1.0 billion from the third quarter of 2018.  Average earning assets totaled $13.6 billion up $180.8 million from second quarter of 2019, and up $936.2 million from 3Q 2018.  Average interest-bearing liabilities totaled $9.7 billion at September 30, 2019, an increase of $145.4 million from June 30, 2019; and up $805.1 million from September 30, 2018.  Average non-interest bearing liabilities increased by $76.4 million, from June 30, 2019, to $3.5 billion; and was up $230.7 million from September 30, 2018.  Including the impact of noninterest bearing deposits, the Company’s overall cost of funds declined to 69 basis points for the third quarter of 2019 compared to 71 basis points in the second quarter of 2019, and increased when compared to 50 basis points one year ago.

Acquired Loans and Accretable Yield

The first table below reflects the quarterly roll forward of the acquired credit impaired loan accretable yield.  The table reflects the amount of acquired credit impaired loan interest income recognized each quarter, split between (1) contractual loan interest; and (2) the accretion recognized from the performance of the acquired credit impaired loans.

The second table below shows the split between principal and interest that will be accreted into interest income over the expected remaining life of the acquired credit impaired (ACI) loans, the third table shows the nonaccretable difference split between principal and interest which is not expected to be collected, and the fourth table shows “total acquired accretion income” recorded over the past five quarters.  The amount decreased in the third quarter of 2019 when compared to the second quarter of 2019, as the loan balances for both the ACI and acquired non-credit impaired loan (ANCI) portfolios declined.

The amount of ANCI discount recognized in the third quarter of 2019 was $2.7 million compared to $3.2 million recognized in the second quarter of 2019. The remaining balance of the discount on the acquired noncredit impaired loan portfolio totals $24.2 million at September 30, 2019, $26.9 million at June 30, 2019, and $37.1 million at September 30, 2018.

Noninterest Income and Expense

Noninterest income totaled $37.6 million for the third quarter of 2019 and the second quarter of 2019. In terms of the line items, fees on deposit accounts increased by $984,000 primarily from NSF fees and higher bankcard fees and mortgage banking income improved by $808,000 primarily from loans sold in the secondary market.  These increases were offset partially by lower wealth management income of $400,000 and lower other income of $210,000.  In the third quarter of 2019, the Company recognized $437,000 in gains on the disposition of bonds compared to the second quarter of 2019 when the Company sold 11,400 shares of VISA class B stock resulting in a gain of $1.8 million, which was partially offset by realized losses of $100,000 on lower yielding investment securities which were sold.

Compared to the third quarter of 2018, noninterest income increased by $5.6 million. The categories were as follows:

  1. $3.3 million improvement in mortgage banking income from higher secondary market income;
  2. Fees on deposit accounts were up $1.9 million due primarily to an increase in the number of customers, bankcard transactions and increases in certain service charges; and
  3. Higher recoveries on acquired loans of $163,000.

Noninterest expense was $96.4 million in the third quarter of 2019, a decrease of $13.0 million from $109.4 million in the second quarter of 2019. The decrease was primarily related to the following:  (1) the termination of the pension plan in the second quarter of 2019, which totaled $9.5 million, (2) lower FDIC assessment and other regulatory expense of $1.2 million related to a credit received from the FDIC totaling $1.6 million, and (3) no additional branch consolidation and other cost saving initiatives were recorded in the third quarter of 2019 compared to $2.1 million of expense in second quarter of 2019.  These were partially offset by higher salary and benefits of $1.0 million, which was comprised of higher retirement benefits, higher commissions and incentives related to mortgage, investment sales and retail services.  Adjusted noninterest expense totaled $96.4 million in 3Q 2019, which was $1.4 million lower than second quarter of 2019, and resulted in an adjusted efficiency ratio of 58.4% compared to 59.8% in second quarter of 2019.

Compared to the third quarter of 2018, noninterest expense was lower by $3.9 million. The net decrease was primarily due to the following:  (1)  merger-related and branch consolidated cost declined $4.5 million, as additional Park Sterling merger / conversion cost were incurred in 3Q 2018, (2) $2.3 million in lower FDIC assessment and other regulatory charges due primarily to the credit of $1.6 million received in 3Q 2019 from the FDIC; partially offset by (3) higher salaries and benefits which increased by $1.6 million due primarily to higher salaries and higher self-funded medical cost, and higher information services expense of $1.1 million.  Adjusted noninterest expense (non-GAAP) increased $546,000, or 2.3% annualized, compared to the third quarter of 2018.

South State Corporation will hold a conference call tomorrow, October 29, 2019, 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 10135375.  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 29, 2019 by 2:00 p.m. Eastern Time until 9:00 a.m. on November 12, 2019.  To listen to the replay, dial 877-344-7529 or 412-317-0088.  The passcode is 10135375.