South State Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019 unless stated otherwise. South State is a bank holding company headquartered in Columbia, South Carolina. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $123.3 | $129.0 in Q1 2018; down 4.4% |
| Net interest margin | 3.90% non-taxable-equivalent | 4.19% in Q1 2018 |
| Net income / diluted EPS | $44.4 / $1.25 | $42.3 / $1.15 in Q1 2018 |
| Provision for loan losses | $1.5 | $2.5 in Q1 2018 |
| Noninterest income / expense | $32.1 / $98.2 | $40.6 / $113.5 in Q1 2018 |
| Cash from operating activities | $37.5 | $105.7 in Q1 2018 |
| Total assets | $15,406.9 | $14,689.1 at March 31, 2018 |
| Loans, net | $11,089.6 | $10,589.5 at March 31, 2018 |
| Total deposits | $11,919.0 | $11,663.1 at March 31, 2018 |
| Cash and cash equivalents | $949.6 | $644.5 at March 31, 2018 |
Quarter-end shareholders’ equity was $2,376.5 million. Regulatory capital ratios remained well above minimums: consolidated CET1 was 11.86%, total risk-based capital 13.35%, and Tier 1 leverage 10.52%. The Bank was classified as well capitalized.
Material changes versus Q1 2018
- Net income rose 4.8% and diluted EPS increased from $1.15 to $1.25, despite lower net interest income and noninterest income. Lower noninterest expense—particularly reduced merger-related costs—and a lower loan-loss provision supported earnings.
- Interest income increased $5.3 million, but interest expense rose $11.0 million. Management attributed higher funding costs mainly to competition for deposits and the rising-rate environment; the average cost of interest-bearing liabilities increased 48 basis points.
- Organic non-acquired loan balances grew 22.9% year over year, while acquired loans continued to run off. The acquired portfolio’s average balance fell about $1.1 billion, weighing on interest income and margin.
- Noninterest income declined $8.5 million. Deposit-account fees fell $4.7 million, primarily reflecting the Durbin Amendment’s debit interchange fee cap, which management estimated reduced bankcard income by about $5.3 million in the quarter. Mortgage banking income declined $2.6 million.
- Noninterest expense decreased $15.2 million, including a $10.2 million decline in merger and branch-consolidation costs and a $4.0 million reduction in salaries and benefits. The efficiency ratio improved to 63.2% from 66.7% a year earlier.
- Operating cash flow was $37.5 million versus $105.7 million a year earlier. Financing activities provided $580.5 million, including $500 million of FHLB advances; quarter-end cash rose to $949.6 million.
Outlook, risks and unusual items
- Cost actions: The company scheduled 13 branch closures during 2019, mostly in Q2, and began additional cost-reduction initiatives. It estimated 2019 costs of approximately $3.2 million, annual savings of $13.0 million, and approximately $10.0 million of savings in 2019.
- Funding and liquidity: The $500 million of FHLB advances were 90-day advances that management planned to renew, with swaps intended to fix funding costs at 2.44% and 2.21% for four and five years, respectively. The filing reports $823.6 million of availability on the FHLB facility at quarter-end, plus other stated borrowing facilities. Management considered liquidity adequate.
- Credit quality: Non-acquired nonperforming loans were $15.9 million, or 0.19% of non-acquired loans. The allowance was 0.63% of non-acquired loans and covered those nonperforming loans 3.27 times. Total nonperforming assets, including acquired assets, were $42.3 million. Management described asset quality as solid, while noting that acquired non-credit-impaired nonperforming loans had increased year over year.
- Concentrations and commitments: The company identified material concentrations in loans to lessors of nonresidential buildings ($1.4 billion), hotels and motels ($523.4 million), and lessors of residential buildings ($583.3 million). Commitments to extend credit and standby letters of credit totaled $2.8 billion; management did not anticipate material losses from them.
- Unusual securities activity: The company restructured part of its investment portfolio, selling lower-yielding securities at approximately $3.0 million in losses and reinvesting in higher-yielding securities. A $3.5 million gain on sale of Visa Class B shares partly offset those losses; reported net securities gains were $541,000.
- Other notable items: Adoption of lease accounting added $82.2 million of right-of-use assets and lease liabilities at January 1, 2019; quarter-end balances were $82.8 million and $83.0 million, respectively. The defined-benefit pension plan was expected to terminate and pay out in Q2 2019. The company stated it could not yet reasonably estimate the impact of future CECL adoption.
- Capital returns: The company repurchased 500,000 shares for $33.3 million in Q1 and reported a further 250,000 shares repurchased in May. The filing does not provide formal earnings guidance; it cautions that quarterly results are not necessarily indicative of full-year results.
Management reported no material changes to disclosed risk factors, no pending or threatened litigation expected to materially affect financial position or results, and effective disclosure controls. Key risks discussed include credit, interest-rate, liquidity, competition, regulatory, cybersecurity, and acquisition-integration risks.
Important facts for investors to verify
- Whether organic loan growth can offset continued acquired-loan runoff and rising deposit funding costs, supporting net interest income and margin.
- Whether branch closures and other cost initiatives deliver the stated savings, and how Durbin-related fee pressure affects recurring noninterest income.
- Trends in acquired and non-acquired nonperforming loans, real-estate concentration exposure, and allowance coverage as the loan portfolio expands.
- Renewal and cost terms for the short-dated FHLB advances, liquidity availability, and capital effects of buybacks and dividends.
- The eventual CECL adoption impact and pension-plan termination costs; the filing does not provide a clear quantified estimate for CECL.