Business context and reporting period
South State Corporation, a regional bank holding company, reported for the three months ended March 31, 2018, compared with the same quarter of 2017. It had $14.7 billion in assets and approximately 2,700 full-time equivalent employees at quarter-end. Results reflect a full quarter of Park Sterling Corporation (PSC), acquired November 30, 2017; therefore, year-over-year comparisons include significant acquisition-related scale effects.
Financial and operating performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 | Change/comment |
|---|---|---|---|
| Net interest income | $129.0 | $97.4 | Up 32.5% |
| Noninterest income | $43.5 | $36.4 | Up 19.4% |
| Total revenue (net interest income plus noninterest income) | $172.5 | $133.8 | Up about 28.9% |
| Provision for loan losses | $2.5 | $3.7 | Down $1.3 |
| Noninterest expense | $116.4 | $104.7 | Up 11.2%; includes $11.3 of merger and branch-consolidation costs |
| Net income | $42.3 | $18.3 | Up 131.7% |
| Diluted EPS | $1.15 | $0.63 | Up from prior year |
| Net interest margin, non-tax-equivalent | 4.19% | 4.14% | Up 5 basis points |
| Efficiency ratio | 67.2% | 77.5% | Improved, partly because prior-year merger costs were higher |
Net interest income benefited from acquired PSC assets and organic loan growth, partly offset by higher funding costs. The average cost of interest-bearing liabilities rose 19 basis points year over year to 0.41%. Fee income growth was led by deposit-account fees and trust and investment services; mortgage banking income declined.
Balance sheet, liquidity, and capital
- Total assets were $14.69 billion, versus $14.47 billion at December 31, 2017 and $11.15 billion a year earlier. Net loans were $10.59 billion; total deposits were $11.66 billion.
- Cash and cash equivalents were $644.5 million at quarter-end. Quarterly cash flows were $105.7 million provided by operating activities, $26.2 million used in investing activities, and $187.4 million provided by financing activities.
- Federal funds purchased and repurchase agreements were $357.6 million; other borrowings were $215.6 million. Management described liquidity as adequate and reported additional borrowing facilities, including a $1.9 billion FHLB facility.
- Shareholders’ equity was $2.32 billion. Consolidated regulatory ratios were 11.85% CET1, 13.32% total risk-based capital, and 10.50% Tier 1 leverage; the company and bank exceeded well-capitalized thresholds.
- Available-for-sale securities had $31.5 million of gross unrealized losses at March 31, 2018, versus $12.8 million at year-end 2017. The company attributed the increase primarily to higher interest rates and said it did not expect to sell the securities or be required to sell before recovery.
Credit quality
The allowance for loan losses was $49.3 million, including $45.2 million for non-acquired loans and $4.1 million for acquired credit-impaired loans. Non-acquired allowance coverage was 0.67% of those loans. Annualized net charge-offs on non-acquired loans were 0.02%. Total nonperforming assets, including acquired assets, were $34.0 million, or 0.23% of assets; non-acquired nonperforming assets were $16.7 million. Management characterized overall asset quality as solid, while noting that allowance estimates depend on economic conditions, loan mix, collateral values, and management judgment.
Material changes versus the prior comparable period
- Net income increased $24.1 million, driven principally by higher interest income from PSC and organic loan growth, higher fee income, and lower merger expenses than in Q1 2017. The PSC acquisition also increased average interest-bearing liabilities and associated interest expense.
- Loans grew substantially year over year, with the PSC acquisition contributing materially; non-acquired loans increased 21.5% from March 31, 2017. Acquired-loan yield declined to 6.23% from 6.90%, while non-acquired-loan yield increased to 4.01% from 3.81%.
- Noninterest expense rose despite lower merger charges, reflecting PSC-related staffing, technology, occupancy, and amortization costs. The company had 179 branches at quarter-end, versus 129 a year earlier.
- Accumulated other comprehensive loss widened to $30.4 million from $10.4 million at December 31, 2017, primarily due to unrealized losses on available-for-sale securities. The company early adopted ASU 2018-02 and reclassified $2.9 million of stranded tax effects from accumulated other comprehensive income to retained earnings.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management expected further operating-cost savings and synergies from acquisitions, but said PSC systems-conversion and integration costs were expected in Q2 and Q3 2018.
- Because the company exceeded $10 billion in assets, the debit-card interchange fee cap was expected to take effect in July 2018. Management estimated a $8.5 million pretax reduction in bankcard services income during the second half of 2018, or $6.6 million after tax. Higher FDIC costs and added regulatory requirements are also associated with crossing the asset threshold.
- Commitments to extend credit and standby letters of credit totaled $3.0 billion; management did not anticipate material losses. The filing reports ordinary-course litigation and says it was not expected to have a material effect.
- Key stated risks include credit and interest-rate risk, liquidity and market-price risk, PSC integration and customer-retention challenges, regulatory changes and costs, cybersecurity, and economic deterioration. Reported commercial credit concentrations included $1.2 billion in loans to lessors of nonresidential buildings, $539.9 million in construction loans, and $506.2 million in loans to lessors of residential buildings.
- The company estimated that adoption of the new lease accounting standard would have resulted in an $83 million right-of-use asset and lease liability at March 31, 2018. Management also noted that acquired-loan cash-flow estimates, securities valuations, and goodwill impairment assessments involve significant judgments.
Important facts for investors to verify
- PSC integration progress, remaining merger and systems-conversion costs, and whether anticipated cost savings are achieved.
- The realized effect of the July 2018 interchange cap and related regulatory and FDIC costs.
- Loan growth and credit trends by acquired and non-acquired portfolios, including nonperforming assets, charge-offs, and allowance adequacy.
- Deposit pricing and funding-cost trends, and their effect on net interest margin as interest rates change.
- Whether unrealized securities losses, commercial real estate concentrations, or acquired-loan cash-flow revisions lead to earnings or capital impacts.