South State Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. South State Corporation is a regional bank holding company operating through South State Bank in South Carolina, North Carolina, Georgia, and Virginia. The filing compares 2019 primarily with 2018.
Financial results and condition
| Metric | FY2019 / year-end 2019 | Prior comparable period |
|---|---|---|
| Total assets | $15.92 billion | $14.68 billion at year-end 2018 |
| Loans, net | $11.31 billion | $10.96 billion at year-end 2018 |
| Deposits | $12.18 billion | $11.65 billion at year-end 2018 |
| Shareholders’ equity | $2.37 billion | $2.37 billion at year-end 2018 |
| Net interest income | $504.3 million | $513.2 million |
| Net income | $186.5 million | $178.9 million |
| Diluted EPS | $5.36 | $4.86 |
| Net interest margin, taxable equivalent | 3.77% | 4.09% |
| Efficiency ratio | 62.52%; adjusted non-GAAP ratio 60.33% | 63.57%; adjusted non-GAAP ratio 59.06% |
| Cash and cash equivalents | $688.7 million at year-end | $409.0 million at year-end 2018 |
- Total interest income rose $23.6 million, but interest expense increased $32.6 million, driving the $8.9 million decline in net interest income. Higher funding costs and a shift from acquired loans toward lower-yielding cash and securities pressured margin.
- Operating cash flow was $181.0 million; investing activities used $795.1 million and financing activities provided $893.7 million. Cash and cash equivalents increased $279.7 million during the year.
- Noninterest income was $143.6 million, down 1.5%; noninterest expense was $404.6 million, down 3.9%. Lower merger-related costs and regulatory assessments were partly offset by $9.5 million of pension termination expense.
- Net charge-offs were 0.04% of average non-acquired loans. The non-acquired allowance for loan losses was $56.9 million, or 0.62% of non-acquired loans. Non-acquired nonperforming assets rose to $26.5 million from $19.1 million; total nonperforming assets, including acquired assets, were $46.2 million.
- Capital remained above regulatory minimums: consolidated CET1 11.30%, Tier 1 risk-based 12.25%, total risk-based 12.78%, and Tier 1 leverage 9.73%. Each was lower than in 2018, principally reflecting asset growth and share repurchases.
- Borrowings included $700 million in short-term FHLB advances and approximately $115.8 million in junior subordinated debt. Deposits were the principal funding source; 27% of year-end deposits were noninterest-bearing. The company reported $1.6 billion of remaining availability on its $2.5 billion FHLB facility, plus other borrowing capacity.
Material changes versus 2018
- Net income increased 4.3%, while diluted EPS rose 10.3%, supported in part by fewer weighted-average shares following repurchases.
- Non-acquired loans grew 16.6% to $9.25 billion, while acquired loans declined by $962 million as they paid down, were charged off, foreclosed, or moved into the non-acquired portfolio. Total loans increased 3.2%.
- Deposits increased 4.6%. Noninterest-bearing deposits rose 6.0%; certificates of deposit declined.
- Investment securities increased 30.0% to $2.01 billion. The company bought securities and sold lower-yielding holdings; a $5.4 million gain on Visa Class B shares helped offset realized losses on other securities.
- Thirteen branches were closed. Management estimated approximately $13 million in annual savings from branch closures and other cost initiatives, with a net benefit of approximately $10 million in 2019.
- The Durbin Amendment reduced debit interchange revenue; management estimated an approximately $20 million reduction in 2019. A $2.4 million FDIC assessment credit helped lower regulatory expense.
Outlook, risks, and unusual items
- Proposed merger: On January 25, 2020, South State agreed to an all-stock merger of equals with CenterState Bank Corporation. CenterState shareholders would receive 0.3001 South State shares per share and are expected to own approximately 53% of the combined company. Closing was expected in the third quarter of 2020, subject to shareholder, regulatory, and other approvals. The filing describes integration, execution, dilution, and approval risks; a $120 million termination fee may apply in specified circumstances.
- CECL adoption: The company adopted the expected-credit-loss standard on January 1, 2020. Its baseline estimate was an allowance of $105 million to $120 million, including unfunded commitments—an increase of approximately $35 million to $50 million—and an estimated after-tax equity reduction of $33.5 million to $45.2 million. These were estimates, subject to economic conditions and portfolio changes.
- Unusual items: The 2019 results included $9.5 million of pension plan termination expense. The pension plan was terminated and distributions were completed by year-end. The company also recorded a $5.4 million gain from Visa Class B shares, partly offset by losses on securities sales.
- Key risks: Regional economic weakness, real-estate and commercial lending concentrations, credit quality, interest-rate and margin sensitivity, deposit competition, liquidity and funding costs, regulatory requirements, cybersecurity and operational disruption, and merger execution. Commercial real estate loans were 225.6% of total risk-based capital, below the cited 300% supervisory guideline.
- The filing provides no specific earnings or revenue guidance. Management said current capital levels supported organic growth and strategic opportunities and described liquidity as adequate. It cautioned that falling rates had caused earning assets to reprice faster than interest-bearing liabilities late in 2019.
- Management reported no pending or threatened litigation expected to have a material effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify the proposed CenterState merger’s approvals, expected closing timetable, exchange ratio, ownership split, termination provisions, and integration assumptions.
- Review CECL’s actual opening allowance, retained-earnings adjustment, and subsequent effects against the filing’s preliminary ranges.
- Track non-acquired nonperforming loans and assets, commercial real estate exposure, criticized/classified loans, and allowance coverage.
- Assess whether deposit growth and liquidity can support loan growth without further margin pressure or increased wholesale funding costs.
- Reconcile reported and adjusted efficiency and return measures, including the effect of pension, merger, securities, and other excluded items.