South State Corporation released its unaudited results of operations and other financial information for the three-month and twelve-month periods ended December 31, 2016. Highlights for 2016 include the following:

• Net income was $101.3 million for 2016, and improved $1.8 million, or 1.8% increase, from 2015, while adjusted net income (non-GAAP) was $110.1 million in 2016, up $5.7 million, or 5.5% increase, from 2015

  • Earnings per share – diluted was $4.18 for 2016 compared to $4.11 in 2015, or a 1.7% increase;

  • Adjusted net income per share (non-GAAP) – diluted was $4.55 for 2016 compared to $4.31 in 2015, or a 5.6% increase;

  • Increased dividend paid to common shareholders during 2016 by 23.5%, or $0.23 per share, compared 2015

• Net loan growth for 2016 was $675.8 million, or 11.2%

  • Non-acquired loan growth totaled $1.0 billion, or 24.2% increase; which

  • Outpaced acquired loan runoff of $344.5 million

• Performance ratios during 2016 compared to 2015

  • Return on average assets totaled 1.16% compared to 1.21%

  • Adjusted return on average assets (non-GAAP) was 1.26% compared to 1.27%

  • Return on average tangible equity decreased to 14.72% compared to 15.97%

  • Adjusted return on average tangible equity (non-GAAP) declined to 15.94% from 16.72%

  • Efficiency ratio was 64.2% for both 2016 and 2015

  • Adjusted efficiency ratio (non-GAAP) was 61.8% down from 62.6% (excluding branch consolidation and merger expenses and the charge for the early termination of the FDIC loss share agreements in 2016)

• Balance sheet and equity during 2016

  • Cash and cash equivalents decreased by $321.3 million as loans increased

  • Investment securities portfolio declined by $12.8 million and comprise 11.4% of total assets, down from 2015 at 12% of assets

  • OREO declined by $12.2 million and totaled $18.3 million

  • Noninterest bearing deposits increased by $222.6, or 11.3%

  • Shareholders’ equity increased $75.2 million, or 7.1%, to $1.14 billion, primarily from net income less the common dividends paid

  • Equity to assets improved to 12.75% from 12.38% in 2015

  • Tangible equity to tangible assets improved to 8.88% from 8.24%

• Asset quality in 2016 compared 2015

  • Nonperforming assets declined by 28.2%, or $15.1 million, to $38.6 million

  • NPAs to total assets improved to 0.43% from 0.63%

  • Net charge offs on non-acquired loans were 0.06%, or $2.7 million, down from 0.09%, or $3.4 million

  • Net charge offs on acquired non-credit impaired loans were 0.07%, or $669,000, compared to 0.20%, or $2.4 million

  • Coverage ratio of ALLL on non-acquired non-performing loans improved to 250.7% from 181.8%

Quarterly Cash Dividend

The Board of Directors of South State Corporation has declared a quarterly cash dividend of $0.33 per share payable on its common stock. This per share amount is $0.01 per share, or 3.1% higher than the dividend paid in the immediately preceding quarter and is $0.05 per share, or 17.9%, higher than a year ago. The dividend will be payable on February 24, 2017 to shareholders of record as of February 17, 2017.

Merger with Southeastern Bank Financial Corporation (“SBFC” or “Southeastern”)

On January 3, 2017, the South State Corporation closed its merger with SBFC, and its wholly-owned bank subsidiary, Georgia Bank & Trust, merged into South State Bank. The Company issued 4,978,338 shares using an exchange ratio of 0.7307. The total purchase price was $435.1 million. Final allocation of the purchase price to the fair value of assets and liabilities acquired has not been completed and will be reported as part of the earnings release for first quarter of 2017 and Form 10-Q as of March 31, 2017. As of December 31, 2016, SBFC, headquartered in Augusta, Georgia, had approximately $1.8 billion in assets, $1.5 billion in deposits and $1.1 billion in loans. This merger added 12 offices in the Augusta, GA and Aiken, SC markets. Southeastern ranked second in market share in the Augusta market. The system conversion and branding change is scheduled to occur during Presidents’ Day weekend, February 17-20, 2017.

Branch Initiatives – Update

The Company announced the consolidation of eleven locations during the second, third and fourth quarters of 2016. During the second quarter, the Company closed eight locations; in the third quarter, one location was closed; and in the fourth quarter, one location was closed. One location which will be closed in the first quarter of 2017. The expected branch closure cost and anticipated cost savings remain on target as previously disclosed and planned.

Fourth Quarter 2016 Financial Performance

The Company reported consolidated net income of $24.2 million, or $1.00 per diluted common share for the three-months ended December 31, 2016, a $3.9 million decrease from the third quarter of 2016. Interest income was down $593,000 primarily from lower loan interest income, as the acquired interest income decreased more than the non-acquired interest income increased. This was only partially offset by interest income increases in the securities portfolio and loans held for sale. Interest expense increased by $52,000 due primarily to higher interest expense in time deposits and other borrowings. The provision for loan losses decreased $290,000 compared to the third quarter due primarily to a lower provision for loan losses on non-acquired loans of $491,000 which was driven by the overall improvement in credit quality, and partially offset by an increase allowance for acquired credit impaired loans of $239,000. Noninterest income decreased by $2.5 million from lower mortgage banking income of $1.8 million and lower recoveries on acquired loans of $872,000. These were offset partially by improved income in trust and investment services of $314,000. Noninterest expense increased by $2.1 million. This increase resulted from merger expenses associated with Southeastern Bank Financial Corporation of $4.3 million in the quarter, which was offset partially by lower salary and employee benefits of $1.3 million, lower OREO and trouble loan related expenses of $511,000, and lower regulatory expenses of $267,000. During the quarter, our effective income tax rate increased to 35.64% from 33.87% in the third quarter of 2016 due primarily to nondeductible expenses of $2.0 million related to the merger with SBFC.

“The results for 2016 continued to demonstrate strong performance across the company,” said Robert R. Hill, Jr., CEO of South State Corporation. “For the year, our team produced 11.2% loan growth while maintaining excellent asset quality. We are very pleased with the diversity of our loan growth, which included 26.3% commercial and industrial growth and 11.0% consumer non real estate growth. Expense management also continued to be good as we limited our expense growth to 2.2%, excluding merger and branch consolidation costs, during the year. This combination of growth and efficiency produced an adjusted return on assets 1.26% and adjusted return on tangible equity of 15.94%. During 2016, tangible book value rose 12.0% and the cash dividend increased 23.5%. I am pleased that our team produced this level of performance even as we invested in building the platform to cross $10 billion in assets. The merger with Southeastern, which was announced in June 2016, has now closed. The outstanding bankers from Southeastern, and the progress and opportunity this merger presents will contribute to the overall success in 2017 and forward for the company.”

Balance Sheet and Capital

At December 31, 2016, the Company’s total assets were $8.9 billion, an increase of $103.4 million from September 30, 2016 and an increase of $343.2 million from December 31, 2015. During the fourth quarter of 2016, the Company experienced asset growth primarily in loans of $153.9 million, excluding the change in the allowance for loan losses, and investment securities of $74.0 million. These increases were primarily offset by a decline in cash and cash equivalents of $133.1 million. Mortgage servicing rights increased by $6.0 million primarily from the changes in fair value due to interest rate movements during the fourth quarter. Total deposits increased $87.0 million due to noninterest-bearing deposit growth of $22.9 million, or 4.2% annualized, and interest-bearing deposits increased by $64.1 million, resulting mainly from an increase in NOW, IOLTA and money market accounts, partially offset by a decline in time deposits. Fed funds purchased and securities sold under repurchase agreements increased by $8.5 million during the fourth quarter to $313.8 million.

The Company’s book value per common share increased to $46.82 per share at December 31, 2016, compared to $46.43 at September 30, 2016, and $43.84 at December 31, 2015. During the fourth quarter of 2016, capital increased $10.5 million due to net income of $24.2 million, which was offset by the common dividend paid of $7.8 million. Accumulated other comprehensive income (“AOCI”) decreased $12.2 million due primarily to the decline in the unrealized gains in the AFS securities portfolio during the quarter of $11.7 million, net of tax. Tangible book value per common share increased by $0.49 per share to $31.22 at December 31, 2016, compared to $30.73 at September 30, 2016, and increased by $3.34 per share, or 12%, from $27.88 at December 31, 2015. The quarterly increase of $0.49 per share in tangible book value was primarily the result of earnings per share, excluding amortization of intangibles, of $1.05, offset by the dividend paid to shareholders of $0.32 per share and the decrease in AOCI of $0.50 per share (primarily from the change in fair value of the available for sale securities portfolio to an unrealized loss position during the quarter).

The total risk-based capital (RBC) ratio, at December 31, 2016, is estimated to be 13.0% up from September 30, 2016 of 12.9%, due primarily to our asset mix moving from higher risk weighted categories to lower risk weighted categories, and the increase in capital discussed above; and compared to, December 31, 2015, of 13.3%, was down, due primarily to loan growth during the year and the termination of our loss share agreements with the FDIC during the second quarter of 2016. Tier 1 leverage ratio increased from 9.7% at September 30, 2016 to 9.9% at December 31, 2016.

“The strength of our balance sheet and asset quality continue to serve us well as evidenced by the financial results in 2016,” said John C. Pollok, COO and CFO. “Our non-acquired loans grew by more than $1.0 billion, or 24%, in 2016, and was partially offset by $344.2 million, or 19%, decline in acquired loans. We returned to our shareholders $5.6 million more in dividend during 2016 than in 2015, and increased our tangible book value by $3.34 per share.”

Asset Quality

During the fourth quarter of 2016, overall asset quality improved as NPAs declined by $3.9 million, or 9.2%, to $38.6 million, and represented 0.43% of total assets. Compared to December 31, 2015, NPAs have declined by $15.1 million, or 28.2%, and represented 0.63% of total assets. During the fourth quarter of 2016, non-acquired NPAs, excluding acquired loans and acquired OREO, declined by $2.9 million, or 13.3%, to $18.7 million. Non-acquired nonperforming loans decreased by $265,000, or 1.8%, and non-acquired OREO and other assets repossessed decreased $2.6 million, or 40%. Non-acquired NPAs as a percentage of total non-acquired loans and repossessed assets declined to 0.36% compared to 0.43% at September 30, 2016.

During the fourth quarter, the Company reported $4.8 million in nonperforming loans related to “acquired non-credit impaired loans”. This was an increase of $201,000 from the balance at September 30, 2016. Additionally, acquired nonperforming OREO and other assets owned decreased by $1.3 million from September 30, 2016 and declined by $7.4 million from December 31, 2015.

At December 31, 2016, the allowance for non-acquired loan losses was $37.0 million, or 0.71%, of non-acquired period-end loans. The current allowance for loan losses provides 2.51 times coverage of period-end non-acquired nonperforming loans, up from 2.49 times at September 30, 2016, and 1.82 times at December 31, 2015. Net charge-offs within the non-acquired portfolio were $644,000, or 0.05% annualized, in the fourth quarter of 2016 compared to $394,000 for the third quarter, or 0.03% annualized. Fourth quarter 2015 net charge-offs totaled $1.4 million, or 0.14% annualized. During the fourth quarter of 2016, the provision for non-acquired loan losses totaled $284,000 compared to $775,000 in the third quarter of 2016, and $400,000 in the fourth quarter of 2015.

Net charge offs related to “acquired non-credit impaired loans” were $122,000, or 0.06% annualized, and the Company recorded a provision for loan losses, accordingly, during the fourth quarter of 2016. These charge-offs declined from $160,000 in the third quarter of 2016 and from $213,000 in the fourth quarter of 2015.

Total OREO decreased by $3.9 million during the fourth quarter of 2016 to $18.3 million at December 31, 2016. This decline was the result of the disposition of 36 properties totaling $6.6 million, partially offset by the addition of lower balance assets foreclosed on during the quarter. Overall, OREO and troubled loan related costs decreased by $511,000 compared to the third quarter 2016, and decreased by $271,000 compared to the fourth quarter of 2015. The improvement in this expense from fourth quarter of 2015 was primarily the result of lower “cost to carry” on smaller balances (including taxes, insurance and maintenance) and lower losses on the disposition of these assets.

Net Interest Income and Margin

Non-taxable equivalent net interest income was $80.6 million for the fourth quarter of 2016, a $645,000 decrease from the third quarter of 2016, resulting primarily from the following:

1. An $80.0 million decrease in the average balance of acquired loans from the third quarter of 2016, coupled with a 19 basis point decline in the yield resulted in a decline in acquired loan interest income of $2.2 million. The yield declined on acquired loans from 7.66%, in the third quarter of 2016, to 7.47%, in the fourth quarter of 2016, due primarily to the renewals of certain acquired loans which increased the weighted average lives of the loan pools, and continuing to accrete the same discounts (income) over a longer period of time. As the total loan portfolio continues to remix (more non-acquired loans and less acquired loans), the yield on the total loan portfolio declined from 4.74% in the third quarter of 2016 to 4.61% in the fourth quarter of 2016. Compared to the fourth quarter of 2015, the loan portfolio yield declined from 5.18%; and

2. $198.2 million increase in the average balance of non-acquired loans partially offset by the yield decreasing to 3.78% during the fourth quarter from 3.81% in the third quarter which resulted in an increase in non-acquired loan interest income of approximately $1.5 million; and

3. Interest expense increased by $52,000 from the third quarter of 2016. This increase was within all categories of funding, except transaction and money market accounts, primarily from higher average balances, except within time deposits, where the average declined. Rates increased during the fourth quarter of 2016, however, the total cost of funds remained at 15 basis points, the same as third quarter of 2016. Compared to the fourth quarter of 2015, interest expense declined $256,000, primarily the result of lower interest expense on certificates and other time deposits with $230.6 million decline in the average balance.

Tax-equivalent net interest margin decreased 9 basis points from the third quarter of 2016 and declined by 23 basis points from the fourth quarter of 2015. The Company’s average yield on interest-earning assets decreased 9 basis points while the average rate on interest-bearing liabilities remained unchanged at 15 basis point in the fourth and third quarter of 2016. During the fourth quarter of 2016, the Company’s average total assets increased to $8.9 billion from $8.8 billion at September 30, 2016 and from $8.5 billion at December 31, 2015. Average earning assets totaled $7.9 billion up $103.9 million compared to the third quarter of 2016, and up from $7.6 billion at December 31, 2015. Average interest-bearing liabilities rose to $5.5 billion for the fourth quarter of 2016 from $5.4 billion at September 30, 2016, and flat from $5.5 billion at December 31, 2015. Average non-interest bearing demand deposits increased by $56.9 million during the quarter and by $227.4 million from December 31, 2015. Including the impact of noninterest bearing deposits, the Company’s cost of funds remained at 11 basis points during the fourth and the third quarter of 2016.

Noninterest Income and Expense