South State Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. South State is a regional banking and financial services company operating across six southeastern states. Comparisons with Q2 2020 are affected by the June 2020 CenterState merger: 2021 includes a full quarter of the acquired business, while Q2 2020 included it for only part of the quarter.
Financial performance
| Metric | Q2 2021 | Q2 2020 |
|---|---|---|
| Net interest income | $253.1 million | $162.6 million |
| Noninterest income | $79.0 million | $54.3 million |
| Net interest income plus noninterest income | $332.2 million | $216.9 million |
| Net income (loss) | $99.0 million | $(84.9) million |
| Diluted EPS | $1.39 | $(1.96) |
| Tax-equivalent net interest margin | 2.87% | 3.24% |
For the six months ended June 30, net income was $245.9 million, versus a loss of $60.8 million in 2020; diluted EPS was $3.44 versus a loss per share of $1.58. Net interest income was $515.1 million and noninterest income was $175.3 million. The six-month tax-equivalent net interest margin was 2.99%, down from 3.42%.
- Q2 provision for credit losses was a recovery of $58.8 million, compared with a provision of $151.5 million a year earlier. Management attributed the release to improved economic forecasts and recovery conditions.
- Q2 noninterest expense was $263.4 million, up from $175.1 million. It included $33.0 million of merger and branch-consolidation costs and an $11.7 million debt-extinguishment charge. The reported efficiency ratio was 76.3%, versus 78.4%.
- Q2 return on average assets was 1.00%; return on average equity was 8.38%. The company declared a $0.47 per-share quarterly dividend during the period.
Financial condition, cash flow and capital
- Total assets were $40.4 billion, up 6.8% from year-end. Cash and cash equivalents were $6.4 billion, compared with $4.6 billion at December 31, 2020.
- Total loans were $24.0 billion, down from $24.7 billion at year-end; loans net of the allowance were $23.7 billion. The allowance for credit losses was $350.4 million, or 1.46% of period-end loans. Nonperforming loans were 0.36% of loans, including acquired loans.
- Total deposits rose to $33.2 billion from $30.7 billion. Noninterest-bearing deposits were $11.2 billion. The loan-to-deposit ratio was 72%, down from 80% at year-end.
- At June 30, short-term borrowings were $862.4 million; corporate and subordinated debentures were $326.5 million, and other borrowings were $25.0 million. The company redeemed $63.5 million of subordinated debentures and trust preferred securities in June; the related fair-value mark write-off generated the $11.7 million extinguishment charge.
- For the first six months, operating cash flow was $248.6 million, investing cash flow was $(912.2) million, and financing cash flow was $2.46 billion. Cash increased $1.80 billion to $6.40 billion, supported principally by deposit growth.
- Shareholders’ equity was $4.76 billion. At June 30, consolidated CET1 and total risk-based capital ratios were 12.14% and 14.12%; the Bank’s were 12.98% and 13.68%. Both were above required levels and the Bank remained well-capitalized.
Material changes and notable developments
- Q2 results turned profitable compared with the prior-year loss, reflecting higher interest income and noninterest income, lower funding costs, and a substantial credit-loss recovery. The prior-year quarter included significant CSFL merger-related credit-loss provisioning and expenses.
- Net interest margin declined as lower asset yields outweighed lower funding costs. The company reported Q2 tax-equivalent asset yield of 3.01%, down 57 basis points year over year; overall cost of funds, including demand deposits, fell to 0.17% from 0.37%.
- Noninterest income growth included correspondent banking and capital markets activity, expanded by the CSFL merger and Duncan-Williams acquisition, completed February 1, 2021. The latter had a stated purchase price of $48.3 million, including an $8.0 million payment due after three years.
- Non-acquired loans grew while acquired loans ran off; the company reported total loans down modestly from year-end. Investment securities increased to $5.7 billion from $4.4 billion, partly reflecting investment of excess deposit liquidity. Unrealized securities losses increased with market interest rates; management said it did not consider them credit-related and did not expect to be required to sell the securities before recovery.
Outlook, risks and contingencies
- No specific financial forecast or earnings guidance is provided. Management expected remaining CSFL integration expenses during the second half of 2021 and anticipated further cost savings and synergies, without quantifying them. The core-system conversion was completed in Q2 2021.
- COVID-19 remains an uncertain risk to borrowers, collateral values, loan demand and economic conditions. At June 30, $120 million, or 0.53% of the loan portfolio excluding loans held for sale and PPP loans, was on payment deferral. South State had originated approximately 28,000 PPP loans totaling $3.2 billion.
- On July 23, 2021, South State agreed to acquire Atlantic Capital in an all-stock transaction at an exchange ratio of 0.36 South State shares per Atlantic Capital share. Closing was expected in Q1 2022, subject to shareholder, regulatory and other conditions. Atlantic Capital reported $3.8 billion of assets, $2.3 billion of loans and $3.3 billion of deposits at June 30.
- On July 28, the Board increased the quarterly dividend from $0.47 to $0.49 per share. By August 5, the company had repurchased 1,053,403 shares under its 3.5-million-share repurchase authorization.
- Management identified risks including the pandemic and economic outlook, credit and interest-rate exposure, deposit retention and liquidity, securities valuation, LIBOR transition, cybersecurity and execution/integration of acquisitions. The company reported no pending material legal proceeding outside the ordinary course and said ordinary-course litigation was not expected to have a material financial effect.
Important facts for investors to verify
- Whether credit-loss releases remain appropriate as forecasts, loan performance and pandemic-related deferrals evolve; review the $350.4 million loan allowance and $31.0 million unfunded-commitment reserve.
- Underlying earnings and expense trends after separating merger/integration costs, the debt-extinguishment charge and the effects of the CSFL comparison period.
- Net interest margin sensitivity to rates, deposit costs and the enlarged securities portfolio; management’s disclosed model showed net interest income up 6.9% under a 100-basis-point rate increase and down 1.5% under a 100-basis-point decrease.
- Progress, costs, approvals and expected benefits of the Atlantic Capital transaction, as well as remaining CSFL integration savings and risks.
- Execution of capital returns and funding plans, including subsequent share repurchases, the dividend increase and the repayment of the $25 million holding-company line balance in July.