South State Corporation (South State Bank) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; interim financial statements are unaudited. Results are compared with Q1 2015 unless otherwise noted. Balance-sheet comparisons are identified separately.
Business context and financial performance
South State is a South Carolina-based bank holding company offering commercial and consumer banking, mortgage, trust, and investment services. It reported approximately $8.7 billion in assets. The company’s growth strategy emphasizes organic expansion and selective acquisitions.
| Metric | Q1 2016 | Comparable period |
|---|---|---|
| Net interest income | $81.6 million | $81.0 million; Q1 2015 |
| Provision for loan losses | $2.6 million | $0.8 million; Q1 2015 |
| Noninterest income | $30.0 million | $26.5 million; Q1 2015 |
| Noninterest expense | $72.0 million | $70.5 million; Q1 2015 |
| Net income | $24.5 million | $23.9 million; Q1 2015 |
| Diluted EPS | $1.01 | $0.99; Q1 2015 |
| Dividend per common share | $0.28 | $0.23; Q1 2015 |
Balance sheet, liquidity, capital, and credit
- Assets and lending: Total assets were $8.67 billion at March 31, up 8.1% year over year. Net loans were $6.13 billion, compared with $5.67 billion a year earlier. Non-acquired loans grew 24.7% year over year to $4.47 billion, while acquired loans continued to run off.
- Deposits and funding: Deposits totaled $7.16 billion, up 8.0% year over year. Noninterest-bearing deposits were $2.02 billion. Federal funds purchased and repurchase agreements were $312.0 million; other borrowings were $55.2 million.
- Cash and cash flow: Cash and cash equivalents were $697.3 million at quarter-end, little changed from year-end. Operating cash flow was $46.9 million versus $17.2 million in Q1 2015; investing activities used $120.1 million versus providing $20.1 million; financing activities provided $74.8 million versus $175.6 million. Net cash increased $1.5 million in Q1 2016.
- Margins and returns: Tax-equivalent net interest margin was 4.37%, down from 4.78% in Q1 2015. The decline reflected lower yields on interest-earning assets and a shift toward lower-yielding non-acquired loans, partly offset by lower funding costs. Return on average assets was 1.15% versus 1.23%; return on average equity was 9.18% versus 9.73%. The efficiency ratio improved to 64.1% from 65.1%; excluding one-time expenses, it was 63.2%.
- Credit quality: Total nonperforming assets, including acquired assets, were $49.9 million, down from $71.7 million a year earlier. Non-acquired nonperforming assets were $27.0 million, down from $34.1 million. The allowance was 0.79% of non-acquired loans and covered 182.6% of non-acquired nonperforming loans. Annualized net charge-offs on non-acquired loans were 0.09%, versus net recoveries of 0.01% in Q1 2015.
- Capital: Shareholders’ equity was $1.08 billion. At quarter-end, consolidated CET1, total risk-based capital, and leverage ratios were 11.56%, 13.03%, and 9.41%, respectively; the company and bank exceeded regulatory minimums and met the “well capitalized” classification.
- Liquidity: Management considered liquidity adequate. The bank reported $371 million in federal funds credit lines and $152 million available at the Federal Reserve discount window, with no advances outstanding on either. It also had a $1.2 billion FHLB facility, with limited usage reported.
Material changes and unusual items
- Net income increased 2.4% year over year. Higher deposit-account fees and lower FDIC indemnification-asset amortization more than offset lower mortgage banking income and higher loan-loss provision and expenses.
- Deposit-account fees increased $3.6 million, mainly reflecting deposit growth following the August 2015 acquisition of 13 Bank of America branches. Mortgage banking income fell $2.4 million, primarily due to fair-value changes in loans held for sale, mortgage servicing rights, and the mortgage pipeline.
- Noninterest expense rose $1.5 million. Increases included $1.1 million in information services, $958,000 in branch and conversion costs, and approximately $900,000 in bankcard expense; lower OREO and loan-related expense partly offset these items.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive income by $7.3 million after tax during the quarter.
- The company repurchased $4.4 million of shares in Q1, including purchases under its buyback plan and other share-related arrangements. It declared dividends of $0.28 per share.
Outlook, commentary, and risks
- The company planned to consolidate nine locations and convert two branches to drive-through-only locations during 2016. It estimated $3.0 million in one-time costs and $3.0 million in annual savings in 2017, with resources expected to support growth as assets approach $10 billion.
- Management expected lower yields from acquired loans going forward in 2016 as certain loans are renewed or extended. It also anticipated terminating remaining FDIC loss-share agreements during Q2 2016; the Habersham commercial agreement expired March 31, 2016.
- Key risks include credit and interest-rate exposure, liquidity and funding costs, execution of branch and acquisition integration, regulatory and compliance changes, cybersecurity and service-provider risks, and economic deterioration. A rise in interest rates could increase funding costs; mortgage-servicing-right values are sensitive to prepayment assumptions and interest rates.
- Commitments to extend credit and standby letters of credit totaled $1.6 billion; management did not anticipate material losses. The filing reported ordinary-course legal matters and stated management did not expect a material effect. No subsequent event requiring disclosure was identified.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provides no formal earnings guidance.
Important facts for investors to verify
- Whether continued growth in non-acquired lending sustains returns while net interest margin remains below the prior-year level.
- Whether loan growth changes credit costs, nonperforming assets, and the allowance relative to portfolio risk.
- Whether branch consolidation delivers the stated $3.0 million savings against estimated one-time costs, and whether those resources generate profitable growth.
- How FDIC loss-share agreement expirations and acquired-loan runoff affect provision expense, interest income, and indemnification-asset amortization.
- Whether liquidity, deposit retention, and capital remain adequate as the balance sheet grows and funding costs respond to interest rates.