South State Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in millions of dollars unless noted. South State is a bank holding company operating through South State Bank, headquartered in Columbia, South Carolina; it reported approximately $8.1 billion in assets.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $82.3 | $81.0 | $163.3 | $164.3 |
| Provision for loan losses | $3.1 | $2.2 | $4.0 | $3.0 |
| Noninterest income | $30.1 | $24.4 | $56.6 | $45.1 |
| Noninterest expense | $71.5 | $75.9 | $142.0 | $153.3 |
| Net income | $24.9 | $17.9 | $48.8 | $34.9 |
| Diluted EPS | $1.03 | $0.74 | $2.02 | $1.40 |
- Q2 net income available to common shareholders rose 38.6% year over year. Six-month net income rose about 40%.
- Q2 net interest margin was 4.70% on a non-taxable-equivalent basis and 4.75% taxable-equivalent; the taxable-equivalent margin was unchanged year over year and down three basis points from Q1.
- Q2 return on average assets was 1.24%, versus 0.91% a year earlier; return on average equity was 9.78%, versus 7.63%. The reported 16.00% return on average tangible equity is a non-GAAP measure.
- At June 30, total assets were $8,085, up 3.3% from year-end 2014 and 1.1% year over year. Net loans were $5,749; deposits were $6,668; shareholders’ equity was $1,024.
- Cash and cash equivalents totaled $593.4. For the first half, operating cash flow was $71.5, investing cash flow was negative $111.2, financing cash flow was $215.2, and cash increased $175.5.
- Federal funds purchased and repurchase-agreement balances were $287.9; other borrowings were $55.1. Other borrowings fell $46.2 from year-end, principally following the Q1 redemption of $46.3 of trust preferred securities.
- Regulatory capital remained above “well capitalized” thresholds: consolidated CET1 was 12.16%, total risk-based capital 13.72%, and Tier 1 leverage 9.68%.
Material changes and operating trends
- Non-acquired loans grew $613.8, or 19.3%, year over year, and made up 65.5% of the loan portfolio, versus 56.0% a year earlier. Acquired loans continued to run off.
- Q2 noninterest income increased $5.7 year over year, led by mortgage banking income, up $2.4, and a $3.8 reduction in FDIC indemnification-asset amortization. Mortgage banking income was $7.1 in Q2 and $13.7 for the half-year.
- Q2 noninterest expense declined $4.4 year over year. The comparison included $6.5 of merger and branding costs in Q2 2014 versus $2.2 of branch consolidation costs in Q2 2015; other expense reductions also reflected branch consolidations and lower occupancy and equipment costs.
- Non-acquired nonperforming assets declined to $30.5 from $44.3 a year earlier; total nonperforming assets, including acquired assets, were $65.5. Non-acquired nonperforming loans were $24.7, and the allowance was 0.92% of non-acquired loans and 141% of non-acquired nonperforming loans.
- Annualized Q2 net charge-offs on non-acquired loans were 0.12%, compared with 0.17% in Q2 2014. Management reported continuing improvement in classified assets and problem loans.
- Accumulated other comprehensive income moved to a loss of $1.9 at June 30, mainly reflecting unrealized losses on available-for-sale securities during the first half.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management expected the investment securities portfolio to continue growing as a share of assets during the rest of 2015 and anticipated further, but less pronounced, declines in FDIC indemnification-asset amortization.
- The bank agreed to buy 12 South Carolina branches and one Georgia branch from Bank of America, with a 5.5% premium on qualifying deposits; regulatory approvals were received and closing was expected around August 21, 2015, subject to customary conditions. It also planned to consolidate or sell branch locations; two branch sales were expected to close in Q4, subject to approval and other conditions.
- Management cited credit, interest-rate, liquidity, market-price, integration, operational, compliance, regulatory, cybersecurity and economic risks. It noted that higher rates could raise funding costs and affect margins; acquired-loan cash flows and FDIC loss-share recoveries remain subject to estimates and contract terms.
- Commitments to extend credit and standby letters of credit totaled $1.4 billion; management did not anticipate material losses. The company disclosed ordinary-course litigation, but did not identify a pending material legal proceeding or expect a material financial-statement effect.
- Acquired credit-impaired loan accretable yield declined substantially in Q1 after faster-than-expected prepayments in certain FFHI loan pools; management said the change reflected timing of expected cash receipts and did not constitute impairment.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether organic loan growth, particularly consumer real estate and commercial lending, continues without weakening credit quality or requiring materially higher provisions.
- Whether reported earnings remain resilient as acquired-loan balances and related accretion income run off, and as FDIC indemnification amortization declines.
- How much of Q2 earnings improvement reflects recurring operations versus changes in mortgage banking, one-time costs, and FDIC-related items.
- Completion, deposit retention, integration costs and expected economics of the planned branch purchase and branch consolidations or sales.
- Liquidity and interest-rate sensitivity, including reliance on overnight repurchase funding, available borrowing facilities, and possible changes in deposit and wholesale funding costs.