South State Corporation — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. The registrant is South State Corporation, a regional bank holding company operating through South State Bank in South Carolina, North Carolina, and Georgia. It filed on February 24, 2016.
Business context and financial performance
South State provides retail and commercial banking, mortgage lending, trust and investment services, and consumer finance. At year-end it reported approximately $8.6 billion in assets, $6.0 billion in loans, $7.1 billion in deposits, and $1.1 billion in shareholders’ equity.
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $443.3 million | $421.1 million |
| Net interest income | $327.8 million | $326.4 million |
| Net income | $99.5 million | $75.4 million |
| Net income available to common shareholders | $99.5 million | $74.4 million |
| Diluted earnings per share | $4.11 | $3.08 |
| Net interest margin, taxable-equivalent | 4.58% | 4.80% |
| Efficiency ratio | 64.19% | 71.41% |
| Cash provided by operating activities | $186.9 million | $118.6 million |
| Cash and cash equivalents, year-end | $695.8 million | $417.9 million |
For the fourth quarter, net income was $25.5 million and diluted EPS was $1.05, compared with $21.2 million and $0.88, respectively, in fourth-quarter 2014.
Balance sheet, credit, capital, and liquidity
- Assets increased 9.3% to $8.56 billion. Total loans, net of unearned income, were $6.00 billion, up from $5.72 billion; non-acquired loans grew 21.7%, while acquired loans declined about 20.7%.
- Deposits rose 9.9% to $7.10 billion. Noninterest-bearing deposits increased 20.5% to $1.98 billion. Nondeposit borrowings were approximately $343 million, including $288 million of federal funds purchased and repurchase agreements and $55 million of other borrowings.
- Operating cash flow was $186.9 million. Investing activities used $103.0 million and financing activities provided $194.1 million; cash increased $277.9 million during the year.
- Non-acquired net charge-offs fell to 0.09% of average loans from 0.16%. Non-acquired nonperforming assets declined to $27.5 million from $36.5 million; total nonperforming assets were 0.63% of assets, versus 1.02% a year earlier.
- The allowance for non-acquired loan losses was $34.1 million, or 0.81% of period-end non-acquired loans. About 77.1% of loans had real estate as a primary or secondary component of collateral.
- Year-end capital ratios included 11.84% common equity Tier 1, 13.34% total risk-based capital, and 9.31% Tier 1 leverage. The Bank was classified as well capitalized. Ratios are not fully comparable with 2014 because Basel III rules took effect in 2015.
- Management described liquidity as adequate. Cash and cash equivalents were $695.8 million; the Bank reported $371 million in federal funds credit lines with no advances and substantial FHLB borrowing capacity. The filing gives different FHLB availability figures in different discussions, so the precise available amount should be checked.
Changes, management commentary, and notable items
- Common shareholder net income increased 33.8%. Lower noninterest expense, higher noninterest income, and reduced funding costs more than offset lower interest income and a narrower net interest margin.
- Noninterest income increased 22.0%, including higher deposit fees, mortgage banking income, and trust and investment services income. FDIC indemnification asset amortization expense declined to $8.6 million from $21.9 million.
- Noninterest expense declined 5.3% to $287.1 million. The comparison reflects $23.9 million of merger and branding costs in 2014 versus $6.9 million of branch acquisition and consolidation costs in 2015. The 2015 results also included a $489,000 other-than-temporary impairment charge on an equity security.
- On August 21, 2015, the Bank acquired 13 branches from Bank of America—12 in South Carolina and one in Georgia—with approximately $438.3 million in deposits and a $25.0 million deposit premium.
- The Company redeemed $46.3 million of trust preferred securities in January 2015, reducing borrowing costs. The common dividend rose to $0.98 per share from $0.82; the payout ratio declined to 23.84% from 26.61%.
- Management said it expected economic and business activity in its markets to continue improving in 2016 and believed capital supported organic growth and selected strategic opportunities. The filing provides no specific earnings or growth guidance.
- Key risks include regional economic weakness, real estate and commercial credit exposure, interest-rate and margin changes, deposit competition and liquidity needs, acquisition integration, cyber and technology threats, and regulatory costs. FDIC loss-share protection is limited and certain commercial agreements have expired or were scheduled to expire, including Habersham’s on March 31, 2016. Estimated FDIC true-up obligations for BankMeridian and Plantation totaled about $7.8 million.
- Management reported no pending or threatened litigation expected to materially affect the Company. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the loan-mix and credit-quality trend, especially commercial real estate, construction lending, acquired loans, and allowance adequacy.
- Assess whether earnings growth is sustainable given the 21-basis-point decline in taxable-equivalent net interest margin and reliance on lower expenses and reduced FDIC-related amortization.
- Confirm available liquidity and borrowing capacity, including the differing FHLB availability amounts disclosed in the filing.
- Track the runoff and expiration of FDIC loss-share agreements, potential true-up payments, and the effect of reduced acquired-loan balances on future income.
- Evaluate integration and returns from the Bank of America branch purchase, and any future acquisition plans against capital and regulatory requirements.
- Check subsequent filings for capital ratios, dividend decisions, asset quality, and any updated guidance or material contingencies.