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South State Corporation Reports Third Quarter 2017 Results and Quarterly Cash Dividend

COLUMBIA, S.C.--(BUSINESS WIRE)--

South State Corporation (SSB) today released its unaudited results of operations and other financial information for the three-month and nine-month period ended September 30, 2017. Highlights for the third quarter of 2017 include the following:

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  • Net income was $35.0 million for the third quarter of 2017 compared to $31.8 million for the second quarter of 2017, an increase of $3.2 million, or 10.1%, while adjusted net income (non-GAAP) was $35.7 million in the third quarter of 2017, up $1.1 million, or 3.2% increase, compared to $34.6 million for the second quarter of 2017
    • Earnings per share (EPS) – diluted was $1.19 for the third quarter of 2017 compared to $1.08 for the second quarter of 2017, a 10.2% increase; and
    • Adjusted net income per share (non-GAAP) – diluted was $1.22 for the third quarter of 2017 and $1.18 for the second quarter of 2017, a 3.4% increase
  • Net loan growth for the third quarter of 2017 was $83.9 million, or 4.1% annualized
  • Performance ratios linked quarter
    • Return on average assets totaled 1.25% compared to 1.15%
    • Adjusted return on average assets (non-GAAP) was 1.28% compared to 1.25%
    • Return on average tangible equity (non-GAAP) improved to 14.93% compared to 14.16%
    • Adjusted return on average tangible equity (non-GAAP) decreased to 15.21% from 15.34%
    • Efficiency ratio was 59.5% down from 62.8%, due to lower operating and merger costs
    • Adjusted efficiency ratio (non-GAAP) was 58.4% down from 59.7% (excluding merger-related and conversion expenses and securities gains, net)
  • Balance sheet and equity linked quarter
    • Cash and cash equivalents declined by $28.0 million as total loan growth outpaced deposit growth
    • Investment securities portfolio decreased by $22.1 million as maturities, calls and sales outpaced purchases during the quarter
    • Noninterest bearing deposits decreased by $129.6 million, and interest bearing deposits increased by $160.0 million
    • Shareholders’ equity increased $27.3 million, with $25.4 million coming from quarterly earnings, net of the quarterly dividend.
    • Total equity to total assets improved to 14.62% from 14.39% at June 30, 2017
    • Tangible equity to tangible assets (Non-GAAP) increased to 9.36% from 9.11%
  • Asset quality linked quarter
    • Nonperforming assets (NPAs) decreased by $891,000, or 2.6%, to $33.5 million
    • NPAs to total assets improved to 0.30% from 0.31% in the second quarter of 2017
    • Net charge offs on non-acquired loans were 0.04% annualized, or $547,000, compared to $756,000, or 0.05% annualized in the second quarter of 2017
    • Net charge offs (recoveries) on acquired non-credit impaired loans were 0.00%, or ($4,000), compared to 0.10%, or $429,000 in the second quarter of 2017
    • Coverage ratio of ALLL on non-acquired non-performing loans strengthened to 322.1% from 297.4%

Quarterly Cash Dividend

The Board of Directors of South State Corporation has declared a quarterly cash dividend on October 18, 2017, of $0.33 per share payable on its common stock. This per share amount is the same as last quarter, and $0.01 per share, or 3.0% higher than the dividend paid a year ago. The dividend will be payable on November 17, 2017 to shareholders of record as of November 10, 2017.

Merger with Park Sterling Corporation and $10.0 Billion Impact

During the third quarter of 2017, the Company filed a joint proxy statement and prospectus for special shareholder meetings which are scheduled for October 25, 2017, for both companies. As announced previously, closing of this merger is expected to occur in the fourth quarter of 2017, with the core system conversion anticipated to be completed in the first quarter of 2018.

South State crossed $10.0 billion in total assets in January of 2017 with the Southeastern Bank Financial Corporation merger. Beginning in the first quarter of 2018, our FDIC insurance costs will increase as a result of having been over $10.0 billion in total assets for four consecutive quarters. Including the Park Sterling impact, we currently estimate the added expense to be approximately $500,000 annually.

Effective in July of 2018, the cap on interchange fees under the Durbin amendment will be in place. Including the Park Sterling impact, we estimate an annual reduction of interchange fees of approximately $17.0 million pre-tax and $11.0 million after-tax, or $0.30 per share.

Also, as a part of crossing $10.0 billion in total assets, we will submit our first Dodd-Frank Act Stress Test (DFAST) in July of 2019.

                               

Third Quarter 2017 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   2017     2017     2017     2016     2016     2017       2016  
Interest income
Loans, including fees (8) $ 95,864 $ 93,600 $ 91,752 $ 76,709 $ 77,344 $ 281,216 $ 231,752

Investment securities, federal funds sold and securities purchased under agreements to resell

  8,547     9,179     9,234     5,979     5,937     26,960     18,723  
Total interest income 104,411 102,779 100,986 82,688 83,281 308,176 250,475
Interest expense
Deposits 2,974 2,661 2,497 1,423 1,412 8,132 4,380

Federal funds purchased, securities sold under agreements to repurchase, and other borrowings

  1,118     1,087     1,127     665     624     3,332     1,849  
Total interest expense   4,092     3,748     3,624     2,088     2,036     11,464     6,229  
Net interest income 100,319 99,031 97,362 80,600 81,245 296,712 244,246
Provision for loan losses   2,062     2,313     3,707     622     912     8,082     6,198  
Net interest income after provision for loan losses   98,257     96,718     93,655     79,978     80,333     288,630     238,048  
Noninterest income   36,040     37,574     36,435     32,831     35,340     110,049     97,499  
Pre-tax operating expense 80,023 82,232 83,699 70,400 72,482 245,954 215,834
Branch consolid./acquisition and merger expense   1,551     4,307     21,024     4,841     709     26,882     3,240  
Total noninterest expense   81,574     86,539     104,723     75,241     73,191     272,836     219,074  
Income before provision for income taxes 52,723 47,753 25,367 37,568 42,482 125,843 116,473
Provision for income taxes   17,677     15,930     7,103     13,391     14,387     40,710     39,368  
Net income $ 35,046   $ 31,823   $ 18,264   $ 24,177   $ 28,095   $ 85,133   $ 77,105  
 
Adjusted net income (non-GAAP) (3)
Net income (GAAP) $ 35,046 $ 31,823 $ 18,264 $ 24,177 $ 28,095 $ 85,133 $ 77,105
Securities gains, net of tax (349 ) (73 ) -- -- -- (422 ) (81 )
FDIC LSA early termination, net of tax -- -- -- -- -- -- 2,938
Branch consolid./acquisition and merger expense   1,031     2,870     15,137     3,814     468     19,038     2,146  
Adjusted net income (non-GAAP) $ 35,728   $ 34,620   $ 33,401   $ 27,991   $ 28,563   $ 103,749   $ 82,108  
 
Basic earnings per common share $ 1.20 $ 1.09 $ 0.63 $ 1.01 $ 1.17 $ 2.92 $ 3.21
Diluted earnings per common share $ 1.19 $ 1.08 $ 0.63 $ 1.00 $ 1.16 $ 2.90 $ 3.18
Adjusted net income per common share - Basic (non-GAAP) (3) $ 1.23 $ 1.19 $ 1.16 $ 1.16 $ 1.19 $ 3.58 $ 3.42
Adjusted net income per common share - Diluted (non-GAAP) (3) $ 1.22 $ 1.18 $ 1.15 $ 1.15 $ 1.18 $ 3.55 $ 3.40
Dividends per common share $ 0.33 $ 0.33 $ 0.33 $ 0.32 $ 0.31 $ 0.99 $ 0.89
Basic weighted-average common shares outstanding 29,114,574 29,094,908 28,891,669 24,035,960 24,016,075 29,023,451 23,988,774
Diluted weighted-average common shares outstanding 29,385,041 29,364,916 29,158,523 24,287,496 24,278,294 29,290,509 24,229,196
Effective tax rate 33.53 % 33.36 % 28.00 % 35.64 % 33.87 % 32.35 % 33.80 %
 

The Company reported consolidated net income of $35.0 million, or $1.19 per diluted common share for the three-months ended September 30, 2017, a $3.2 million increase from the second quarter of 2017. Interest income was up $1.6 million from the increase in non-acquired loan interest income of $4.7 million during the quarter, which was partially offset by the decline in acquired loan interest income of $2.5 million and investment securities interest income of $451,000, as both of these portfolios declined during the quarter. Interest expense increased by $344,000 primarily in “certificate and other time deposits” category. Our funding cost was 24 basis points for the third quarter, an increase of 2 basis points from the second quarter of 2017. Compared to the third quarter of 2016, our cost of funds increased by 9 basis points which is primarily the result of the addition of Southeastern Bank Financial Corporation’s (“SBFC” or “Southeastern”) balance sheet where the cost of funds was slightly higher than legacy South State’s. The total provision for loan losses decreased $251,000 compared to the second quarter of 2017. Valuation allowance (impairment) related to acquired loans was $699,000 higher than second quarter of 2017, provision for loan losses related to acquired non-credit impaired loans was lower by $433,000, and the provision for loan losses on non-acquired loans was $517,000 lower than last quarter primarily related to lower loan growth. Noninterest income decreased by $1.5 million from mortgage banking income which was down $1.7 million from the second quarter of 2017. Noninterest expense decreased by $5.0 million, with 56% of the decrease from lower merger and conversion cost. The remaining decline was across all operating categories, except net occupancy.

Income Tax Expense

During the quarter, our effective income tax rate increased slightly to 33.53% from 33.36% in the second quarter of 2017. The year-to-date (YTD) effective income tax rate was 32.35%, and is expected to increase as we conclude 2017. The YTD rate for 2016 was 33.80%. This decline in 2017 was primarily related to: (1) excess tax benefit associated with vested or exercised stock awards included in determination of the effective tax rate during the year and (2) an increase in tax-exempt income from bank owned life insurance (BOLI) policies, loans and securities.

“South State produced solid results for the period,” said Robert R. Hill, Jr., CEO of South State Corporation. “This accomplishment reflects the dedication of our team and the economic strength of the markets we serve. The performance was marked by a high level of asset quality, steady loan growth and sound expense management. Our mergers with Southeastern and with Park Sterling are on track and both add significant value and great people. We are very well-positioned to continue to build our company in the Southeast.”

                         

Balance Sheet and Capital

 
Ending Balance
Sept. 30,   June 30, Mar. 31, Dec. 31, Sept. 30,
BALANCE SHEET   2017     2017     2017     2016     2016  
Assets
Cash and cash equivalents $ 403,934   $ 431,890   $ 663,126   $ 374,448   $ 507,517  
Investment securities:
Securities held to maturity 3,678 4,166 6,095 6,094 6,851
Securities available for sale, at fair value 1,320,679 1,341,652 1,381,013 999,405 925,374
Other investments   12,439     13,076     13,501     9,482     9,482  
Total investment securities   1,336,796     1,358,894     1,400,609     1,014,981     941,707  
Loans held for sale   46,321     65,995     46,988     50,572     57,052  
Loans:
Acquired credit impaired 578,863 602,481 627,340 602,546 632,617
Acquired non-credit impaired 1,455,555 1,585,981 1,715,642 836,699 885,657
Non-acquired 6,230,327 5,992,393 5,564,307 5,241,041 5,008,113
Less allowance for non-acquired loan losses   (41,541 )   (40,149 )   (38,449 )   (36,960 )   (37,319 )
Loans, net   8,223,204     8,140,706     7,868,840     6,643,326     6,489,068  
Other real estate owned ("OREO") 13,527 14,430 20,007 18,316 22,211
Premises and equipment, net 198,146 201,539 203,505 183,510 179,450
Bank owned life insurance 151,402 150,476 149,562 104,148 103,427
Deferred tax asset 41,664 39,921 43,075 31,123 25,357
Mortgage servicing rights 29,937 29,930 30,063 29,037 23,064
Core deposit and other intangibles 50,472 52,966 55,461 39,848 41,738
Goodwill 597,236 595,817 595,711 338,340 338,340
Other assets   76,471     71,877     73,123     72,943     68,234  
Total assets $ 11,169,110   $ 11,154,441   $ 11,150,070   $ 8,900,592   $ 8,797,165  
 
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 2,505,570 $ 2,635,147 $ 2,599,111 $ 2,199,046 $ 2,176,155
Interest-bearing   6,556,451     6,396,507     6,434,327     5,135,377     5,071,251  
Total deposits   9,062,021     9,031,654     9,033,438     7,334,423     7,247,406  

Federal funds purchased and securities sold under agreements to repurchase

291,099 334,018 352,431 313,773 305,268
Other borrowings 83,307 98,147 107,988 55,358 55,306
Other liabilities   99,858     85,137     76,313     62,450     65,053  
Total liabilities   9,536,285     9,548,956     9,570,170     7,766,004     7,673,033  
 
Shareholders' equity:
Preferred stock - $.01 par value; authorized 10,000,000 shares -- -- -- -- --
Common stock - $2.50 par value; authorized 40,000,000 shares 73,168 73,148 73,077 60,576 60,523
Surplus 1,136,352 1,134,328 1,132,173 711,307 705,124
Retained earnings 427,093 401,706 379,534 370,916 354,490
Accumulated other comprehensive income (loss)   (3,788 )   (3,697 )   (4,884 )   (8,211 )   3,995  
Total shareholders' equity   1,632,825     1,605,485     1,579,900     1,134,588     1,124,132  
Total liabilities and shareholders' equity $ 11,169,110   $ 11,154,441   $ 11,150,070   $ 8,900,592   $ 8,797,165  
 
Common shares issued and outstanding 29,267,369 29,259,264 29,230,734 24,230,392 24,209,122
 

At September 30, 2017, the Company’s total assets were $11.2 billion, an increase of $2.3 billion from December 31, 2016, and an increase of $2.4 billion from September 30, 2016. Total assets acquired from Southeastern, including goodwill, totaled $2.1 billion in the first quarter of 2017. During the third quarter of 2017, cash and cash equivalents and securities both declined compared to June 30, 2017 balances, and loan growth moderated from the strong second quarter as loans increased $83.9 million, excluding the allowance for loan losses, or 4.1% annualized increase. Investment securities decreased $22.1 million and cash and cash equivalents declined by $28.0 million. Other real estate owned (“OREO”) declined by $903,000. The company disposed of 21 properties during the third quarter of 2017, which more than offset the increases from the transfers in to OREO. Total deposits increased $30.4 million from June 30, 2017. Fed funds purchased and securities sold under repurchase agreements decreased by $42.9 million during the third quarter to $291.1 million.

The Company’s book value per common share increased to $55.79 per share at September 30, 2017, compared to $46.82 at December 31, 2016, and $46.43 at September 30, 2016. During the third quarter of 2017, capital increased $27.3 million due to net income of $35.0 million offset by the common stock dividend paid of $9.7 million. Accumulated other comprehensive income (“AOCI”) decreased $91,000 due primarily to an unrealized loss in the AFS securities portfolio during the quarter of $245,000, net of tax. Tangible book value (“TBV”) per common share increased by $0.96 per share to $33.66 at September 30, 2017, compared to $32.70 at June 30, 2017, and increased by $2.93 per share, or 9.5%, from $30.73 at September 30, 2016. The quarterly increase of $0.96 per share in tangible book value primarily the result of (1) earnings per share, excluding amortization of intangibles, of $1.26, offset by the dividend paid to shareholders of $0.33 per share; (2) the issuance of restricted stock and stock related to employee stock purchase plan which increased tangible book value by $0.07 per share; and (3) offset by an increase in goodwill related to Southeastern of $1.4 million, net of tax, or $0.05 per share decline in tangible book value.

“During the third quarter of 2017, tangible book value per share improved by $0.96 to $33.66 per share, reflective of our strong earnings of $35.0 million for the quarter,” said John C. Pollok, COO and CFO. “In addition, our return on average assets was 1.25% and our efficiency ratio dropped to 59.48%, as we have fully realized the expected cost saves from our merger with Southeastern.”

                           
Three Months Ended Nine Months Ended
Sept. 30,       June 30, Mar. 31, Dec. 31, Sept. 30, Sept. 30,       Sept. 30,
PERFORMANCE RATIOS   2017     2017     2017     2016     2016   2017   2016  
Return on average assets (annualized) 1.25 % 1.15 % 0.68 % 1.08 % 1.28 % 1.03 % 1.19 %
Adjusted return on average assets (annualized) (non-GAAP) (3) 1.28 % 1.25 % 1.25 % 1.26 % 1.30 % 1.26 % 1.27 %
Return on average equity (annualized) 8.57 % 7.98 % 4.74 % 8.50 % 10.00 % 7.14 % 9.41 %
Adjusted return on average equity (annualized) (non-GAAP) (3) 8.73 % 8.69 % 8.67 % 9.84 % 10.17 % 8.70 % 10.02 %
Return on average tangible common equity (annualized) (non-GAAP) (7) 14.93 % 14.16 % 8.87 % 13.42 % 15.86 % 12.73 % 15.18 %
Adjusted return on average tangible common equity (annualized) (non-GAAP) (3) (7) 15.21 % 15.34 % 15.55 % 15.44 % 16.11 % 15.36 % 16.12 %
Efficiency ratio (tax equivalent) 59.48 % 62.80 % 77.51 % 65.82 % 62.30 % 66.54 % 63.62 %
Adjusted efficiency ratio (Non-GAAP) (9) 58.35 % 59.67 % 61.95 % 61.59 % 61.70 % 59.98 % 61.88 %
Dividend payout ratio (2) 27.56 % 30.33 % 52.82 % 32.06 % 26.71 % 34.01 % 27.93 %
Book value per common share $ 55.79 $ 54.87 $ 54.05 $ 46.82 $ 46.43
Tangible common equity per common share (non-GAAP) (7) $ 33.66 $ 32.70 $ 31.77 $ 31.22 $ 30.73
 
CAPITAL RATIOS
Equity-to-assets 14.62 % 14.39 % 14.17 % 12.75 % 12.78 %
Tangible equity-to-tangible assets (non-GAAP) (7) 9.36 % 9.11 % 8.85 % 8.88 % 8.84 %
Tier 1 common equity (6) 12.1 % 11.9 % 11.9 % 11.7 % 11.5 %
Tier 1 leverage (6) 10.3 % 10.1 % 10.0 % 9.9 % 9.7 %
Tier 1 risk-based capital (6) 12.9 % 12.8 % 12.8 % 12.4 % 12.3 %
Total risk-based capital (6) 13.5 % 13.3 % 13.3 % 13.0 % 12.9 %
 
OTHER DATA
Number of branches 129 129 129 118 119
Number of employees (full-time equivalent basis) 2,255 2,261 2,277 2,055 2,039
 
                                 

Asset Quality

 
Ending Balance
Sept. 30,       June 30, Mar. 31, Dec. 31, Sept. 30,
(Dollars in thousands)   2017     2017     2017     2016     2016  
NONPERFORMING ASSETS:
Non-acquired
Non-acquired nonperforming loans $ 12,896 $ 13,499 $ 13,035 $ 14,745 $ 15,010
Non-acquired OREO and other nonperforming assets   6,330     4,633     5,705     3,998     6,614  
Total non-acquired nonperforming assets   19,226     18,132     18,740     18,743     21,624  
Acquired
Acquired nonperforming loans 6,401 5,793 4,950 4,834 4,633
Acquired OREO and other nonperforming assets   7,846     10,439     14,992     15,026     16,279  
Total acquired nonperforming assets   14,247     16,232     19,942     19,860     20,912  
Total nonperforming assets $ 33,473   $ 34,364   $ 38,682   $ 38,603   $ 42,536  
 
Three Months Ended Nine Months Ended
Sept. 30, June 30, Mar. 31, Dec. 30, Sept. 30, Sept. 30, Sept. 30,
  2017     2017     2017     2016     2016   2017   2016  
ASSET QUALITY RATIOS:

Allowance for non-acquired loan losses as a percentage of non-acquired loans (1)

0.67 % 0.67 % 0.69 % 0.71 % 0.75 % 0.67 % 0.75 %

Allowance for non-acquired loan losses as a percentage of non-acquired nonperforming loans

322.12 % 297.42 % 294.97 % 250.66 % 248.63 % 322.12 % 248.63 %

Net charge-offs on non-acquired loans as a percentage of average non-acquired loans (annualized) (1)

0.04 % 0.05 % 0.05 % 0.05 % 0.03 % 0.04 % 0.06 %

Net charge-offs on acquired non-credit impaired loans as a percentage of average acquired non-credit impaired loans (annualized) (1)

0.00 % 0.10 % 0.08 % 0.06 % 0.07 % 0.06 % 0.08 %

Total nonperforming assets as a percentage of total assets

0.30 % 0.31 % 0.35 % 0.43 % 0.48 %
Excluding Acquired Assets
NPLs as a percentage of period end non-acquired loans (1) 0.21 % 0.23 % 0.23 % 0.28 % 0.30 %

Total nonperforming assets as a percentage of total non-acquired loans and repossessed assets (1) (4)

0.31 % 0.30 % 0.34 % 0.36 % ...