South State Corporation Reports Third Quarter 2020 Results and Declares Quarterly Cash Dividend

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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, 2020.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20201029006124/en/

The Company reported consolidated net income of $1.34 per diluted common share for the three months ended September 30, 2020, compared to net loss of ($1.96) per diluted common share for the three months ended June 30, 2020, and compared to $1.50 per diluted common share one year ago. Contributing to the net loss in the second quarter of 2020 was the initial provision for credit losses ("PCL") recorded on acquired non-purchase credit deteriorated ("NonPCD") loans and unfunded commitments ("UFC") which totaled $119.1 million, pre-tax, and merger-related costs of $40.3 million, pre-tax related to the June 7, 2020 merger with CenterState Bank Corporation ("CSFL").

Adjusted net income (non-GAAP) totaled $1.58 per diluted share for the three months ended September 30, 2020, compared to $0.89 per diluted share, in the second quarter of 2020, and compared to $1.49 per diluted share in the year ago period. Adjusted net income in the third quarter of 2020 removes $17.4 million of merger-related costs, after-tax; and in the second quarter of 2020 removed two primary adjustments: (1) the initial PCL on NonPCD loans and UFC of $92.2 million, after-tax, and (2) merger-related costs of $31.2 million, after-tax.

Highlights of the third quarter included:

  • Return on Average Equity of 8.3%.

  • Return on Average Tangible Common Equity of 14.7% (Non-GAAP); Adjusted Return on Average Tangible Common Equity of 17.1% (Non-GAAP).

  • Return on Average Assets ("ROAA") of 1.00%, and Adjusted ROAA of 1.18% (Non-GAAP).

  • Third quarter of 2020 Pre-Provision Net Revenue ("PPNR ") was $170 million, or 1.79% PPNR ROAA. This compares to the second quarter of 2020, where on a combined historical basis* (as if the companies had been merged for the full quarter, Non-GAAP), PPNR of $157 million, or 1.68% PPNR ROAA. The second quarter’s results only include the operations of CSFL for the final 23 days of the quarter.

  • Book value per share of $64.34 increased by $0.99 per share from 2Q 2020.

  • Tangible book value ("TBV") per share of $39.83, up $1.50 from 2Q 2020 (Non-GAAP).

  • Record quarterly revenue of $385 million (compared to actual prior period and combined historical basis).

  • Net interest margin, declined by 2 basis points to 3.22% during 3Q 2020 from 2Q 2020.

  • Significant allowance for credit losses and credit marks on the balance sheet representing 2.58% of total loans (excluding PPP loans).

  • Net charge-offs of $594,000, or 0.01% annualized.

  • As of 10/23/2020, loan deferrals totaled $452.4million, or 1.98% of the total loan portfolio, excluding PPP loans and held for sale loans.

"After closing our merger late in the second quarter, we are pleased with our first full quarter of operations as a combined company," said John C. Corbett, Chief Executive Officer. "Our fee businesses continue to perform well, leading us to another record quarter of revenue. While the current environment includes challenges and uncertainties, we look forward to the future with great optimism."

Robert R. Hill, Jr., Executive Chairman added, "The CenterState and South State partnership is about the long-term but you can clearly see the progress being made in the short-term. Progress with technology, products, efficiency, and talent all have us uniquely positioned. We are off to a solid start."

_______________
*The combined historical information presented is based on the reported GAAP results of the Company for three-month period ended June 30, 2020 and historical GAAP results of CSFL for the period from April 1, 2020 through June 7, 2020. The combined historical financial information set forth in this release has not been prepared in accordance with Article 11 of Regulation S-X, and therefore does not reflect any of the pro forma adjustments that would be required thereby.

Loan / Deposit Growth

As of September 30, 2020, we have assisted customers with nearly 20,000 Paycheck Protection Program ("PPP") loans and have an outstanding balance of $2.4 billion. We have recognized $8.5 million in deferred loan fees, net of costs in the income statement during the third quarter of 2020, and $15.9 million on a YTD basis. $53.3 million of net deferred fees remains to be recognized over the life of these loans. During the third quarter, loans (nonacquired and acquired) declined by $261.3 million, or 4.1% annualized. The third quarter decline in loans was centered in construction and development loans and single-family residential mortgage loans. Total deposits increased $12.7 million with core deposit growth totaling $310.6 million, or 4.8% annualized.

Quarterly Cash Dividend

The Company’s Board of Directors declared a common stock dividend of $0.47 per share, payable on November 20, 2020 to shareholders of record as of November 13, 2020.

Third Quarter 2020 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

2020

2020

2020

2019

2019

2020

2019

Interest income

Loans, including fees (6)

$

280,825

$

167,707

$

133,034

$

132,615

$

134,953

$

581,566

$

402,175

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

14,469

12,857

14,766

14,839

15,048

42,092

41,198

Total interest income

295,294

180,564

147,800

147,454

150,001

623,658

443,373

Interest expense

Deposits

15,154

12,624

14,437

15,227

16,655

42,215

50,693

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

9,792

5,383

5,350

5,771

5,973

20,525

14,861

Total interest expense

24,946

18,007

19,787

20,998

22,628

62,740

65,554

Net interest income

270,348

162,557

128,013

126,456

127,373

560,918

377,819

Provision for credit losses ("PCL")

29,797

151,474

36,533

3,557

4,028

217,804

9,220

Net interest income after provision for loan losses

240,551

11,083

91,480

122,899

123,345

343,114

368,599

Noninterest income

114,790

54,347

44,132

36,307

37,582

213,269

107,258

Pre-tax operating expense

215,225

134,634

103,118

99,134

96,364

452,977

291,158

Merger and/or branch consolid. expense

21,662

40,279

4,129

1,494

--

66,070

3,192

Federal Home Loan Bank advances prepayment fee

--

199

--

--

--

199

134

Pension plan termination expense

--

--

--

--

--

--

9,526

Total noninterest expense

236,887

175,112

107,247

100,628

96,364

519,246

304,010

Income (loss) before provision for income taxes

118,454

(109,682

)

28,365

58,578

64,563

37,137

171,847

Provision for income taxes

23,233

(24,747

)

4,255

9,487

12,998

2,741

34,455

Net income (loss)

$

95,221

$

(84,935

)

$

24,110

$

49,091

$

51,565

$

34,396

$

137,392

Adjusted net income (non-GAAP) (3)

Net income (loss) (GAAP)

$

95,221

$

(84,935

)

$

24,110

$

49,091

$

51,565

$

34,396

$

137,392

Securities gains, net of tax

(12

)

--

--

(20

)

(349

)

(12

)

(2,152

)

FHLB prepayment penalty

--

154

--

--

--

154

107

Pension plan termination expense, net of tax

--

--

--

--

--

--

7,641

Initial provision for credit losses - NonPCD loans and UFC

--

92,212

--

--

--

92,212

--

Merger and/or branch consolid. expense

17,413

31,191

3,510

1,252

-

52,114

2,449

Adjusted net income (non-GAAP)

$

112,622

$

38,622

$

27,620

$

50,323

$

51,216

$

178,864

$

145,437

Basic earnings (loss) per common share

$

1.34

$

(1.96

)

$

0.72

$

1.46

$

1.51

$

0.70

$

3.94

Diluted earnings (loss) per common share

$

1.34

$

(1.96

)

$

0.71

$

1.45

$

1.50

$

0.69

$

3.92

Adjusted net income per common share - Basic (non-GAAP) (3)

$

1.59

$

0.89

$

0.82

$

1.49

$

1.50

$

3.63

$

4.17

Adjusted net income per common share - Diluted (non-GAAP) (3)

$

1.58

$

0.89

$

0.82

$

1.48

$

1.49

$

3.60

$

4.15

Dividends per common share

$

0.47

$

0.47

$

0.47

$

0.46

$

0.43

$

1.41

$

1.21

Basic weighted-average common shares outstanding

70,905,027

43,317,736

33,566,051

33,677,851

34,056,771

49,330,267

34,858,503

Diluted weighted-average common shares outstanding

71,075,866

43,317,736

33,804,908

33,964,216

34,300,206

49,635,882

35,068,610

Adjusted diluted weighted-average common shares outstanding *

71,075,866

43,606,333

33,804,908

33,964,216

34,300,206

49,635,882

35,068,610

Effective tax rate

19.61

%

22.56

%

15.00

%

16.20

%

20.13

%

7.38

%

20.05

%

*Adjusted diluted weighted average common shares was calculated with the result of adjusted net income (non-GAAP).

The Company reported consolidated net income of $95.2 million, or $1.34 per diluted common share for the three-months ended September 30, 2020, an increase of $180.2 million, or $3.30 per diluted common share, from the second quarter of 2020. The net loss in the second quarter of 2020 was the result of the initial PCL recorded on the acquired NonPCD loans and the merger-related cost incurred from the merger with CSFL. Weighted-average diluted shares increased by 27.8 million shares, or 64.1%, compared to the second quarter of 2020, due primarily to the merger with CSFL in early June, in which the Company issued 37.3 million shares. These shares were outstanding all of the third quarter of 2020 compared to only 23 days in the second quarter of 2020. Net interest income increased by $107.8 million in the third quarter of 2020, compared to the second quarter of 2020, due to the full quarter impact of the merger with CSFL in the third quarter of 2020 compared to only 23 days in the second quarter of 2020. Interest income on acquired loans included $22.4 million of loan accretion. The PCL decreased by $121.7 million, due to the PCL on NonPCD loans and unfunded commitments associated with CSFL merger that were recognized in the second quarter of 2020. Noninterest income in was up $60.4 million compared to second quarter of 2020 to $114.8 million in the third quarter of 2020, due to the strong results from mortgage banking (primarily within the secondary market) and correspondent banking and capital markets income. Correspondent banking was added to the Company from the merger with CSFL and contributed $24.4 million in the third quarter of 2020 compared to $8.3 million in the month of June during the second quarter of 2020. Noninterest expense was higher in the third quarter of 2020 compared to the second quarter of 2020 by $61.8 million due primarily to the full quarter impact of the expenses of CSFL. Merger-related expense were lower by $18.6 million compared to the second quarter of 2020 when all professional services were incurred at legal close in early June of 2020. Adjusted noninterest expense was up approximately 59.9% over second quarter 2020, which relates directly to the addition of CSFL operating expense for all of the third quarter of 2020. The efficiency ratio (Non-GAAP) and adjusted efficiency ratio were 61.4% and 55.8% in 3Q 2020, respectively, compared to 80.5% and 61.9% in 2Q 2020, respectively.

Current Expected Credit Losses ("CECL")

Effective January 1, 2020, the Company adopted ASU 2016-13 ("CECL"), which impacts the allowance for credit losses and the liability for UFC. Below is a table showing the roll forward of the ACL and UFC for the third quarter of 2020:

Allowance for Credit Losses ("ACL & UFC")

NonPCD ACL

PCD ACL

Total

UFC

Ending balance 6/30/2020

$

280,301

$

154,307

$

434,608

$

21,051

Measurement period adj - PCD loans from CSFL merger

(1,542

)

(1,542

)

Charge offs

(1,897

)

(1,897

)

Acquired charge offs

(886

)

(1,859

)

(2,745

)

Recoveries

1,220

1,220

Acquired recoveries

691

2,137

2,828

Provision for credit losses

7,077

610

7,687

22,110

Ending balance 9/30/2020

$

286,506

$

153,653

$

440,159

$

43,161

Period end loans (includes PPP Loans)

$

22,094,095

$

3,143,720

$

25,237,815

N/A

Reserve to Loans (includes PPP Loans)

1.30

%

4.89

%

1.74

%

N/A

Period end loans (excludes PPP Loans)

$

19,742,374

$

3,143,720

$

22,886,094

N/A

Reserve to Loans (excludes PPP Loans)

1.45

%

4.89

%

1.92

%

N/A

Unfunded commitments (off balance sheet) *

$

4,584,160

Reserve to unfunded commitments (off balance sheet)

0.94

%

* Unfunded commitments excludes unconditionally cancelable commitments and letters of credit.

The ACL related to all loans totals $440.2 million compared to $434.6 million at June 30, 2020, and was recorded as a contra asset on its own line within the balance sheet, while the liability for UFC of $43.2 million was recorded on its own line in the liabilities section of the balance sheet. The total provision for credit losses recorded in the third quarter of 2020 was $29.8 million, including $22.1 million related to the liability for unfunded commitments (which was the result of a change in the methodology with the merger of CSFL and the Company). In the second quarter of 2020, (including the initial provision for credit losses related to acquired NonPCD loans and UFC from CSFL) the total provision for credit losses was $151.5 million.

Income Tax Expense

During the third quarter of 2020, our effective tax rate decreased to 19.61% from 22.56% in the second quarter of 2020 and from 20.13% in the third quarter of 2019. The primary reason for the decline relates to the fact that the Company was back in a pre-tax income position in 3Q 2020 compared to a pre-tax loss position in 2Q 2020, and the impact of the rate reducing items on the effective tax rate. The lower effective tax rate in 3Q 2020 compared to 3Q 2019 was mainly due to an increase in federal tax credits, as well as additional tax-exempt income resulting from the merger with CSFL. Lastly, an additional income tax benefit was recorded when legacy South State’s deferred taxes were revalued as a result of the merger. This was slightly offset by an increase in pre-tax income compared to the same period in 2019.

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

2020

2020

2020

2019

2019

Assets

Cash and cash equivalents

$

4,471,639

$

4,363,708

$

1,262,836

$

688,704

$

719,194

Investment securities:

Securities available for sale, at fair value

3,561,929

3,137,718

1,971,195

1,956,047

1,813,134

Other investments

185,199

133,924

62,994

49,124

49,124

Total investment securities

3,747,128

3,271,642

2,034,189

2,005,171

1,862,258

Loans held for sale

456,141

603,275

71,719

59,363

87,393

Loans:

Acquired - PCD

3,143,761

3,323,754

311,271

356,782

390,714

Acquired - NonPCD

10,557,968

11,577,833

1,632,700

1,760,427

1,965,603

Non-acquired

11,536,086

10,597,560

9,562,919

9,252,831

8,928,512

Less allowance for loan losses

(440,159

)

(434,608

)

(144,785

)

(56,927

)

(54,937

)

Loans, net

24,797,656

25,064,539

11,362,105

11,313,113

11,229,892

Bank property held for sale

24,504

25,541

5,412

5,425

8,424

Other real estate owned ("OREO")

13,480

18,016

7,432

6,539

4,991

Premises and equipment, net

626,259

627,943

312,151

317,321

323,506

Bank owned life insurance

556,475

556,807

233,849

234,567

233,206

Deferred tax asset

107,500

107,532

46,365

31,316

27,844

Mortgage servicing rights

34,578

25,441

26,365

30,525

28,674

Core deposit and other intangibles

171,637

170,911

46,809

49,816

53,083

Goodwill

1,566,524

1,603,383

1,002,900

1,002,900

1,002,900

Other assets

1,245,845

1,286,618

230,779

176,332

170,717

Total assets

$

37,819,366

$

37,725,356

$

16,642,911

$

15,921,092

$

15,752,082

Liabilities and Shareholders' Equity

Deposits:

Noninterest-bearing

$

9,681,095

$

9,915,700

$

3,367,422

...

$

3,245,306

$

3,307,532

Interest-bearing

20,288,859

20,041,585

8,977,125

8,931,790

8,716,255

Total deposits

29,969,954

29,957,285

12,344,547

12,177,096

12,023,787

Federal funds purchased and securities sold under agreements to repurchase

706,723

720,479

325,723

298,741

269,072

Other borrowings

1,089,637

1,089,279

1,316,100

815,936

815,771

Reserve for unfunded commitments

43,161

21,051

8,555

335

335

Other liabilities

1,446,478

1,445,411

326,943

255,971

292,161

Total liabilities

33,255,953

33,233,506

14,321,868

13,548,079

13,401,126

Shareholders' equity:

Preferred stock - $.01 par value; authorized 10,000,000 shares

--

--

--

--

--

Common stock - $2.50 par value; authorized 160,000,000 shares

177,321

177,268

83,611

84,361

84,757

Surplus

3,764,482

3,759,166

1,584,322

1,607,740

1,617,004

Retained earnings

604,564

542,677

643,345

679,895

646,325

Accumulated other comprehensive income

17,046

12,739

9,765

1,017

2,870

Total shareholders' equity

4,563,413

4,491,850

2,321,043

2,373,013

2,350,956

Total liabilities and shareholders' equity

$

37,819,366

$

37,725,356

$

16,642,911

$

15,921,092

$

15,752,082

Common shares issued and outstanding

70,928,304

70,907,119

33,444,236

33,744,385

33,902,726

At September 30, 2020, the Company’s total assets were $37.8 billion, an increase of $94.0 million from June 30, 2020. Below are highlights of certain line items:

1. Cash and cash equivalents increased by $107.9 million to $4.5 billion.
2. Investment securities portfolio increased by $476.0 million, and totaled $3.7 billion, representing 9.9% of total assets, an increase from 8.7% at June 30, 2020.
3. Total loans decreased by $261.3 million, with non-acquired loans increasing by $938.5 million and acquired loans decreasing by $1.2 billion.
4. Goodwill decreased by $36.9 million from measurement period adjustments related to fair value mark of loans (reduced loan discount) totaling $29.8 million, an intangible related to correspondent banking business acquired in the CSFL merger of $10.0 million, fair value adjustments to bank property of $6.0 million, and reduced deferred tax asset of $9.0 million
5. Non-interest bearing deposits decreased by $234.6 million.
6. Interest bearing deposits grew by $247.3 million.
7. Equity increased by $71.6 million during the third quarter from the following: (a) net income of $95.2 million, (b) other comprehensive income increasing by $4.3 million and (c) impact of equity awards increasing capital by $5.4 million, which were all partially offset by (d) dividends of $33.3 million.

The Company’s book value per common share increased to $64.34 per share at September 30, 2020, compared to $63.35 per share at June 30, 2020 and decreased compared to $69.34 at September 30, 2019. TBV per common share increased by $1.50 per share to $39.83 at September 30, 2020, compared to $38.33 at June 30, 2020, and increased by $1.63 per share, or 4.28%, from $38.20 at September 30, 2019. Total tangible equity (capital) increased by $107.7 million in the third quarter of 2020.

The following table presents a summary of the loan portfolio by type (dollars in thousands):

Ending Balance

Sept. 30,

June 30,

March 31,

Dec. 31,

Sept. 30,

LOAN PORTFOLIO

2020

2020

2020

2019

2019

Construction and land development

$

1,840,111

$

1,999,062

$

1,105,308

$

1,016,692

$

1,024,627

Commercial non-owner occupied real estate

5,936,372

6,021,317

2,371,371

2,322,590

2,356,335

Commercial owner occupied real estate

4,846,020

4,762,520

2,177,738

2,158,701

2,093,795

Consumer owner occupied real estate

4,311,186

4,421,247

2,665,405

2,704,405

2,757,424

Home equity loans

1,347,798

1,378,406

758,482

758,020

773,363

Commercial and industrial

5,419,120

5,341,363

1,418,421

1,386,303

1,261,527

Other income producing property

629,497

650,237

327,696

346,554

361,879

Consumer non real estate

900,171

916,623

674,791

662,883

654,422

Other

7,540

8,372

7,678

13,892

1,457

Total loans

$

25,237,815

$

25,499,147

$

11,506,890

$

11,370,040

$

11,284,829

The following table presents a summary of the deposit types (dollars in thousands):

Ending Balance

Sept. 30,

June 30,

March 31,

Dec. 31,

Sept. 30,

DEPOSITS

2020

2020

2020

2019

2019

Type

Demand deposits

$

9,681,095

$

9,915,700

$

3,367,422

$

3,245,306

$

3,307,532

Interest bearing deposits

6,414,905

6,192,915

2,963,679

2,989,467

2,812,912

Savings

2,618,877

2,503,514

1,337,730

1,309,896

1,317,705

Money market

7,404,299

7,196,456

3,029,769

2,977,029

2,869,217

Time deposits

3,850,778

4,148,700

1,645,947

1,655,398

1,716,421

Total deposits

$

29,969,954

$

29,957,285

$

12,344,547

$

12,177,096

$

12,023,787

Core deposits (excludes CDs)

26,119,176

25,808,585

10,698,600

10,521,698

10,307,366

Merger with CSFL

The merger with CSFL closed on June 7, 2020. The Company issued 37,271,069 shares using an exchange ratio of 0.3001. The total purchase price was $2.262 billion. The initial (preliminary) allocation of the purchase price to the fair value of assets and liabilities acquired was completed as of June 30, 2020. Below is a table that reflects that initial allocation of the purchase price and additional measurement period adjustments recorded during the third quarter of 2020:

South State Corporation

Fair Value of

CenterState Bank Corporation

Net Assets

Merger Date of June 7, 2020

Measurement

Acquired at

As Recorded

Fair Value

Period

Date of

(Dollars in thousands)

by CSFL

Adjustments

Adjustments

Acquisition

Assets

Cash and cash equivalents

$

2,566,450

$

--

$

2,566,450

Investment securities

1,188,403

5,507

--

1,193,910

Loans held for sale

453,578

--

453,578

Loans

12,969,091

(48,342

)

29,834

12,950,583

Premises and equipment

324,396

2,392

5,999

332,787

Intangible assets

1,294,211

(1,163,349

)

10,000

140,862

Other real estate owned and repossessed assets

10,849

(791

)

(49

)

10,009

Bank owned life insurance

333,053

--

333,053

Deferred tax asset

54,122

(8,681

)

(8,952

)

36,489

Other assets

1,061,136

(604

)

26

1,060,558

Total assets

$

20,255,289

$

(1,213,868

)

$

36,858

$

19,078,279

Liabilities

Deposits:

Noninterest-bearing

$

5,291,443

$

--

$

--

$

5,291,443

Interest-bearing

10,312,370

19,702

--

10,332,072

Total deposits

15,603,813

19,702

--

15,623,515

Federal funds purchased and securities sold under agreements to repurchase

401,546

--

--

401,546

Other borrowings

278,900

(7,401

)

--

271,499

Other liabilities

1,088,048

(4,592

)

--

1,083,456

Total liabilities

17,372,307

7,709

--

17,380,016

Net identifiable assets acquired over liabilities assumed

2,882,982

(1,221,577

)

36,858

1,698,263

Goodwill

600,483

(36,858

)

563,625

Net assets acquired over liabilities assumed

$

2,882,982

$

(621,094

)

$

--

$

2,261,888

Consideration:

South State Corporation common shares issued

37,271,069

Purchase price per share of the Company's common stock

$

60.27

Company common stock issued and cash exchanged for fractional shares

$

2,246,401

Stock Option Conversion

8,080

Restricted Stock Conversion

7,407

Fair value of total consideration transferred

$

2,261,888

The measurement period adjustments related to the merger between the Company and CSFL include the following:

  • Goodwill was reduced by $36.9 million with the measurement period adjustments recorded during the third quarter of 2020, resulting in total goodwill from the merger with CSFL of $563.6 million.

  • Lower loan mark (discount) of $29.8 million from an updated loan valuation ($28.3 million) and revised lower loan marks on certain PCD loans ($1.5 million).

  • The fair value adjustments for certain premises where updated appraisals were received and totaled $6.0 million.

  • Identification of an intangible related to the correspondent banking business totaling $10.0 million.

  • Deferred tax liability recorded for each of these adjustments totaling $9.0 million.

In addition, with respect to the merger and conversion:

  • Merger cost incurred during the third quarter was as expected at $21.7 million, and included contract terminations, professional fees, and severance and support incentives to personnel.

  • The merger integration, conversion, and cost savings identification process continues to be on schedule.

Performance and Capital Ratios

Three Months Ended

Nine Months Ended

Sept. 30,

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

Sept. 30,

Sept. 30,

PERFORMANCE RATIOS

2020

2020

2020

2019

2019

2020

2019

Return on average assets (annualized)

1.00

%

-1.49

%

0.60

%

1.23

%

1.31

%

0.18

%

1.20

%

Adjusted return on average assets (annualized) (non-GAAP) (3)

1.18

%

0.68

%

0.69

%

1.26

%

1.30

%

0.93

%

1.27

%

Return on average equity (annualized)

8.31

%

-11.78

%

4.15

%

8.26

%

8.70

%

1.41

%

7.76

%

Adjusted return on average equity (annualized) (non-GAAP) (3)

9.83

%

5.36

%

4.75

%

8.47

%

8.64

%

7.31

%

8.22

%

Return on average tangible common equity (annualized) (non-GAAP) (5)

14.66

%

-19.71

%

8.35

%

15.79

%

16.62

%

3.51

%

14.88

%

Adjusted return on average tangible common equity (annualized) (non-GAAP) (3) (5)

17.14

%

10.23

%

9.45

%

16.17

%

16.51

%

13.58

%

15.71

%

Efficiency ratio (tax equivalent)

61.39

%

80.52

%

62.11

%

61.64

%

58.40

%

66.82

%

62.82

%

Adjusted efficiency ratio (non-GAAP) (7)

55.78

%

61.91

%

59.72

%

60.73

%

58.40

%

58.29

%

60.19

%

Dividend payout ratio (2)

35.01

%

N/A

65.70

%

31.62

%

28.48

%

188.71

%

30.70

%

Book value per common share

$

64.34

$

63.35

$

69.40

$

70.32

$

69.34

Tangible common equity per common share (non-GAAP) (5)

$

39.83

$

38.33

$

38.01

$

39.13

$

38.20

CAPITAL RATIOS

Equity-to-assets

12.07

%

11.91

%

13.95

%

14.90

%

14.92

%

Tangible equity-to-tangible assets (non-GAAP) (5)

7.83

%

7.56

%

8.15

%

8.88

%

8.81

%

Tier 1 common equity (4) *

11.5

%

10.7

%

11.0

%

11.3

%

11.2

%

Tier 1 leverage (4) *

8.1

%

13.3

%

9.5

%

9.7

%

9.7

%

Tier 1 risk-based capital (4) *

11.5

%

10.7

%

12.0

%

12.3

%

12.2

%

Total risk-based capital (4) *

13.9

%

12.9

%

12.7

%

12.8

%

12.7

%

OTHER DATA

Number of branches

305

305

155

155

157

Number of employees (full-time equivalent basis)

5,266

5,369

2,583

2,547

2,544

*The regulatory capital ratios presented above include the assumption of the transitional method relative to the CAREs Act in relief of COVID-19 pandemic on the economy and financial institutions in the United States. The referenced relief allows a total five-year "phase in" of the CECL impact on capital and relief over the next two years for the impact on the allowance for credit losses resulting from COVID-19.

Asset Quality

Ending Balance

Sept. 30,

June 30,

Mar. 31,

Dec. 31,

Sept 30,

(Dollars in thousands)

2020

2020

2020

2019

2019

NONPERFORMING ASSETS:

Non-acquired

Non-acquired nonperforming loans

$

22,463

$

22,883

$

23,912

$

22,816

$

19,187

Non-acquired OREO and other nonperforming assets

825

1,689

941

1,011

1,464

Total non-acquired nonperforming assets

23,288

24,572

24,853

23,827

20,651

Acquired

Acquired nonperforming loans (2019 periods acquired non-credit impaired loans only) *

89,974

100,399

32,791

11,114

9,596

Acquired OREO and other nonperforming assets

12,904

16,987

6,802

5,848

7,207

Total acquired nonperforming assets

102,878

117,386

39,593

16,962

16,803

Total nonperforming assets *

$

126,166

$

141,958

$

64,446

$

40,789

$

37,454

Three Months Ended

Sept. 30,

June 30,

Mar. 31,

Dec. 31,

Sept 30,

2020

2020

2020

2019

2019

ASSET QUALITY RATIOS:

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

N/A

N/A

N/A

0.62

%

0.62

%

Allowance for credit losses as a percentage of loans

1.74

%

1.70

%

1.26

%

N/A

N/A

Allowance for credit losses as a percentage of loans, excluding PPP loans

1.92

%

1.88

%

N/A

N/A

N/A

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

N/A

N/A

N/A

249.50

%

286.32

%

Allowance for credit losses as a percentage of nonperforming loans *

391.47

%

352.53

%

255.34

%

N/A

N/A

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

N/A

N/A

N/A

0.06

%

0.05

%

Net charge-offs as a percentage of average loans (annualized)

0.01

%

0.00

%

0.05

%

N/A

N/A

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

N/A

N/A

N/A

-0.01

%

0.15

%

Total nonperforming assets as a percentage of total assets *

0.33

%

0.38

%

0.39

%

0.26

%

0.24

%

Nonperforming loans as a percentage of period end loans *

0.45

%

0.48

%

0.49

%

0.30

%

0.25

%

*Total nonperforming assets now include nonaccrual loans that are purchase credit deteriorated ("PCD loans"). In prior periods, these loans, which were called acquired credit impaired ("ACI") loans, were excluded from nonperforming assets. The adoption of CECL resulted in the discontinuation of the pool-level accounting for ACI loans and replaced it with loan-level evaluation for PCD nonaccrual status. The Company’s nonperforming loans increased by $21.0 million in the first quarter of 2020 from these loans. The Company has not assumed or taken on any additional risk relative to these assets. With the merger with CSFL, the amount of acquired nonaccruals loans increased by approximately $69.9 million.

Total nonperforming assets decreased by $15.8 million to $126.2 million, representing 0.33% of total assets, a decrease of 5 basis points compared to June 30, 2020. The decrease was due primarily to the reduction in nonperforming assets acquired, both in loans ($10.4 million) and in OREO ($4.1 million). Non-acquired non-performing assets decreased by $1.3 million during the third quarter of 2020 to $23.3 million at September 30, 2020. The ACL as a percentage of total nonperforming loans was 391% at September 30, 2020, up from 353% of total nonperforming loans at June 30, 2020.

At September 30, 2020, the ACL was $440.2 million, or 1.74%, of period end loans. Additionally, unfunded commitments have a reserve of $43.2 million, or 0.94% of unfunded commitments (off balance sheet). The ACL was $434.6 million, or 1.70%, of period end loans at June 30, 2020. Net charge-offs totaled $594,000, or 0.01%, annualized of average total loans, in the third quarter of 2020 compared to $101,000, or 0.00%, annualized in the second quarter of 2020.

During the third quarter of 2020, the provision for credit losses totaled $29.8 million for the loan portfolio compared to $151.5 million for the provision for credit losses in the second quarter of 2020. The significant provision in the second quarter of 2020 was the result of the merger with CSFL and the initial provision for credit losses recorded on NonPCD loans acquired, the unfunded commitment liability related to CSFL, and the additional PCL related to non-acquired South State loans totaled $28.4 million. This initial PCL on NonPCD acquired loans and UFC totaled $119.1 million. The total provision for credit losses of $29.8 million recorded in the third quarter of 2020 included $22.1 million related to the liability for unfunded commitments and $7.7 million from the expected lifetime losses of loans outstanding. Prior to the merger, each of CSFL and the Company ran separate CECL models. The CECL calculation at June 30, 2020 was the result of combining the results of the two models. During the third quarter, the Company consolidated into one CECL model. This change led to an increase in the reserve for unfunded commitments since the consolidated model used a differing methodology from that used for 2Q 2020.

Total OREO decreased during the third quarter of 2020 to $13.5 million, a $4.5 million decrease from the balance at June 30, 2020.

Net Interest Income and Margin

Three Months Ended

September 30, 2020

June 30, 2020

September 30, 2019

(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

$

4,406,376

$

1,215

0.11

%

$

2,033,910

$

432

0.09

%

$

491,627

$

2,676

2.16

%

Investment securities (taxable)

2,792,649

11,118

1.58

%

2,109,609

10,920

2.08

%

1,638,461

10,785

2.61

%

Investment securities (tax-exempt)

435,339

2,136

1.95

%

197,862

1,505

3.06

%

181,434

1,587

3.47

%

Loans held for sale

556,670

4,151

2.97

%

203,267

1,498

2.96

%

58,829

541

3.65

%

Loans

25,312,632

276,674

4.35

%

15,717,387

166,209

4.25

%

11,225,593

134,412

4.75

%

Total interest-earning assets

33,503,666

295,294

3.51

%

20,262,035

180,564

3.58

%

13,595,944

150,001

4.38

%

Noninterest-earning assets

4,361,551

2,636,890

2,014,172

Total Assets

$

37,865,217

$

22,898,925

$

15,610,116

Interest-Bearing Liabilities:

Transaction and money market accounts

$

13,671,430

$

7,853

0.23

%

$

8,132,276

$

5,096

0.25

%

$

5,581,057

$

8,932

0.63

%

Savings deposits

2,570,500

584

0.09

%

1,699,377

336

0.08

%

1,323,377

1,027

0.31

%

Certificates and other time deposits

4,007,542

6,717

0.67

%

2,321,684

7,192

1.25

%

1,730,567

6,696

1.54

%

Federal funds purchased and repurchase agreements

710,369

509

0.29

%

415,304

391

0.38

%

272,900

612

0.89

%

Other borrowings

1,089,399

9,283

3.39

%

1,216,884

4,992

1.65

%

816,188

5,361

2.61

%

Total interest-bearing liabilities

22,049,240

24,946

0.45

%

13,785,525

18,007

0.53

%

9,724,089

22,628

0.92

%

Noninterest-bearing liabilities

11,259,916

6,212,957

3,534,873

Shareholders' equity

4,556,061

2,900,443

2,351,154

Total Non-IBL and shareholders' equity

15,815,977

9,113,400

5,886,027

Total liabilities and shareholders' equity

$

37,865,217

$

22,898,925

$

15,610,116

Net interest income and margin (NON-TAX EQUIV.)

$

270,348

3.21

%

$

162,557

3.23

%

$

127,373

3.72

%

Net interest margin (TAX EQUIVALENT)

3.22

%

3.24

%

3.73

%

Total Deposit Cost of Funds

0.20

%

0.29

%

0.56

%

Overall Cost of Funds (including demand deposits)

0.31

%

0.37

%

0.69

%

The net interest margin ("NIM") declined by 2 basis points to 3.22% at September 30, 2020, from 3.24% at June 30, 2020, and declined from 3.73% from September 30, 2019. These declines were the result of the current low interest rate environment from the COVID-19 pandemic and the stimulus from the CARES Act. The yield on the acquired loan portfolio declined to 4.76% compared 5.08% in the second quarter of 2020, while the non-acquired loan portfolio only declined 1 basis point to 3.83% from 3.84% in the second quarter of 2020. Deposit cost declined by 9 basis points to 20 basis points in the third quarter of 2020. Including the impact of noninterest bearing deposits, the Company’s overall cost of funds declined to 31 basis points for the third quarter of 2020 compared to 37 basis points in the second quarter of 2020, and decreased from 69 basis points in the year ago period. The average balances for each category and the totals increased significantly in the third quarter of 2020, due primarily from the full quarter impact of the CSFL merger compared to only 23 days included in the second quarter of 2020.

Acquired Loans and Loan Accretion

With the adoption of CECL, loan accretion, accretable yield, and the related discounts are now consistently accounted for within the balance sheet and income statement. Acquired loans reflected the following results in the third quarter of 2020:

  • Contractual interest income totaled $146.3 million, or 4.13% yield.

  • Loan accretion totaled $22.4 million, compared to $10.1 million in the second quarter of 2020. The amount of accretion recognized in third quarter from the CSFL acquired loan portfolio totaled $14.7 million compared to $2.9 million in the second quarter which only included 23 days from the merger closing date.

  • Including the loan accretion, total interest income was $168.8 million on acquired loans resulting in 4.76% yield during the third quarter of 2020, down from 5.08% in the second quarter of 2020.

The table below reflects the remaining discount on acquired loans, which will be accreted into loan interest income over the contractual life of the loan and includes the discount recorded from the merger with CSFL, including a third quarter of 2020 measurement period adjustment primarily related to an updated loan valuation (dollars in thousands):

Unrecognized discount on acquired loans

Beginning balance, June 30, 2020

$

160,802

Measurement period adjustment of discount from the CSFL merger

(27,996

)

Loan accretion recognized in 3Q 2020

(22,445

)

Ending balance, September 30, 2020

$

110,361

Noninterest Income and Expense

Three Months Ended

Nine Months Ended

Sept. 30,

June 30,

Mar. 31,

Dec. 31,

Sept. 30,

Sept. 30,

Sept. 30,

(Dollars in thousands)

2020

2020

2020

2019

2019

2020

2019

Noninterest income:

Fees on deposit accounts

$

24,346

$

16,679

$

18,141

$

19,161

$

19,725

$

59,166

$

56,274

Mortgage banking income

48,022

18,371

14,647

3,757

6,115

81,040

13,807

Trust and investment services income

7,404

7,138

7,389

6,935

7,320

21,931

22,309

Securities gains, net

15

--

--

24

437

15

2,687

Correspondent banking and capital market income

26,432

10,067

493

1,357

690

36,992

1,536

Bank owned life insurance income

4,127

1,381

2,530

1,361

1,498

8,038

4,399

Recoveries of fully charged off acquired loans

--

--

--

2,232

1,401

--

4,615

Other

4,444

711

932

1,480

396

6,087

1,631

Total noninterest income

$

114,790

$

54,347

$

44,132

$

36,307

$

37,582

$

213,269

$

107,258

Noninterest expense:

Salaries and employee benefits

$

134,919

$

81,720

$

60,978

$

58,218

$

59,551

$

277,617

$

176,529

Pension plan termination expense

-

-

-

--

--

-

9,526

Occupancy expense

23,845

15,959

12,287

12,113

11,883

52,091

35,344

Information services expense

18,855

12,155

9,306

8,919

8,878

40,316

26,558

FHLB prepayment penalty

--

199

--

--

--

199

134

OREO expense and loan related

1,146

1,107

587

1,013

597

2,840

2,229

Business development and staff related

2,599

1,447

2,244

2,905

2,018

6,290

6,477

Amortization of intangibles

9,560

4,665

3,007

3,267

3,268

17,232

9,817

Professional fees

4,385

2,848

2,494

2,862

2,442

9,727

7,463

Supplies, printing and postage expense

2,755

1,610

1,505

1,464

1,418

5,870

4,417

FDIC assessment and other regulatory charges

2,849

2,403

2,058

1,327

228

7,310

3,218

Advertising and marketing

1,203

531

814

1,491

1,052

2,548

2,818

Other operating expenses

13,109

10,189

7,838

5,555

5,029

31,136

16,422

Branch consolid. or merger / convers related exp.

21,662

40,279

4,129

1,494

-

66,070

3,058

Merger and branding related expense

--

--

--

--

--

--

--

Total noninterest expense

$

236,887

$

175,112

$

107,247

$

100,628

$

96,364

$

519,246

$

304,010

Noninterest income totaled $114.8 million for the third quarter of 2020 compared to $54.3 million in the second quarter of 2020, an increase of $60.4 million. This large increase within all categories was due to the inclusion of income for the full quarter from the merger with CSFL compared to only 23 days in the second quarter of 2020. The largest increases were $29.7 million in mortgage banking income and $16.4 million in correspondent banking and capital markets income. Mortgage banking income improved by $23.5 million from the gains within the secondary market, net of commissions; and from $6.2 million of income associated with the MSR, net of the hedge.

Compared to the third quarter of 2019, noninterest income increased by $77.2 million due to the impact of merger with CSFL. Correspondent banking and capital markets income discussed above improved by $25.7 million and mortgage banking income increased by $41.9 million. Secondary market mortgage income was up $39.9 million from the increase in the gain on sale of mortgage loans, from both higher volume of loans and at higher margins. The other categories of noninterest income all increased, except for recoveries from acquired loans, which now flow through the allowance for credit losses, and resulted in a $1.4 million decrease.

Noninterest expense was $236.9 million in the third quarter of 2020, an increase of $61.8 million from $175.1 million in the second quarter of 2020. The increase was related to the full quarter impact of expense associated with the merger with CSFL (compared to only 23 days in 2Q 2020). Merger-related costs totaled $21.7 million for the quarter and was a decrease of $18.6 million from the second quarter of 2020. Adjusted noninterest expense totaled $215.2 million in 3Q 2020, which was $80.6 million higher than second quarter of 2020, and resulted in an adjusted efficiency ratio of 55.8% compared to 61.9%, in second quarter of 2020.

Compared to the third quarter of 2019, noninterest expense was higher by $140.5 million. The increase was due to the merger with CSFL in June 2020, and the inclusion of the combined company expenses for all of the third quarter of 2020. In addition, the third quarter of 2020 includes $21.7 million of additional merger-related cost. Adjusted noninterest expense (non-GAAP) increased $118.9 million, compared to the third quarter of 2019.

Conference Call

The Company will announce its third quarter 2020 earnings results in a news release after the market closes on October 29, 2020. At 10:30 a.m. Eastern Time on October 30, 2020, the Company will host a conference call to discuss its third quarter results. Callers wishing to participate may call toll-free by dialing 877-506-9272. Participants may also pre-register for the conference by navigating to https://dpregister.com/sreg/10148509/da2c128419. A dial in number and unique PIN will be provided upon completion of registration. Alternatively, individuals may listen to the live webcast of the presentation by visiting the link at the Company’s website at www.SouthStateBank.com. An audio replay of the live webcast is expected to be available by the evening of October 30, 2020 through the Investor Relations section of www.SouthStateBank.com.

***************

South State Corporation is a financial services company headquartered in Winter Haven, Florida. South State Bank, N.A., the company’s nationally chartered bank subsidiary, provides consumer, commercial, mortgage and wealth management solutions to more than one million customers throughout Florida, Alabama, Georgia, the Carolinas and Virginia. The bank also serves clients coast to coast through its correspondent banking division. Additional information is available at SouthStateBank.com.

Non-GAAP Measures

Statements included in this press release include non-GAAP measures and should be read along with the accompanying tables that 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.

Pre-provision net revenue (in thousands)

Sept. 30, 2020

June 30, 2020

Netincome (loss) (GAAP)

$

95,221

$

(84,935

)

PCL legacy SSB

29,797

31,259

PCL legacy CSB NonPCD and UFC - Day 1

-

119,079

PCL legacy CSB for June

-

1,136

Tax provision (benefit)

23,233

(24,747

)

Merger-related costs

21,662

40,279

Securities gain

(15

)

-

FHLB advance prepayment cost

-

199

CSB pre-merger PPNR

-

74,791

Pre-provision net revenue (PPNR) Non-GAAP

$

169,898

$

157,061

SSB average asset balance (GAAP)

$

37,865,217

$

22,898,925

CSB average asset balance pre-merger

14,604,081

Total average balance June 30, 2020 (Non-GAAP)

$

37,503,006

ROAA PPNR

1.79

%

1.68

%

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,

Sept. 30,

RECONCILIATION OF GAAP TO Non-GAAP

2020

2020

2020

2019

2019

2020

2019

Adjusted net income (non-GAAP) (3)

Net income (loss) (GAAP)

$

95,221

$

(84,935

)

$

24,110

$

49,091

$

51,565

$

34,396

$

137,392

Securities gains, net of tax

(12

)

--

--

(20

)

(349

)

(12

)

(2,152

)

PCL - NonPCD loans & unfunded commitments

--

92,212

--

--

--

92,212

--

Pension plan termination expense, net of tax

--

--

--

--

--

--

7,641

FHLB prepayment penalty, net of tax

--

154

--

--

--

154

107

Merger and branch consolidation/acq. expense, net of tax

17,413

31,191

3,510

1,252

--

52,114

2,449

Adjusted net income (non-GAAP)

$

112,622

$

38,622

$

27,620

$

50,323

$

51,216

$

178,864

$

145,437

Adjusted net income per common share - Basic (3)

Earnings (loss) per common share - Basic (GAAP)

$

1.34

$

(1.96

)

$

0.72

$

1.46

$

1.51

$

0.70

$

3.94

Effect to adjust for securities gains

(0.00

)

--

--

(0.01

)

(0.01

)

(0.00

)

(0.06

)

Effect to adjust for PCL - NonPCD loans & unfunded commitments

--

2.13

--

-