South State Corporation released its unaudited results of operations and other financial information for the three-month and six-month period ended June 30, 2016. Highlights of the second quarter 2016 include the following:

• Net income was $24.5 million for the 2Q 2016 equal to the 1Q 2016, while net operating earnings improved by $3.5 million to $28.5 million from 1Q 2016 of $25.0 million, a 13.8% increase

  • Earnings per share (EPS) – diluted was $1.01 for 1Q and 2Q of 2016 compared to $1.03 in 2Q 2015, a 1.9% decrease;

  • Operating earnings per share – diluted was $1.18 for 2Q 2016 compared to $1.04 for 1Q 2016 and $1.09 in 2Q 2015, a 8.3% increase;

  • Increased dividend paid to common shareholders by 25.0%, or $0.06, since June 30, 2015

• Net loan growth (non-acquired loans exceeded acquired loan runoff) during 2Q 2016 was $253.1 million, or 16.5% annualized

  • Non-acquired loan growth totaled $344.2 million or 31.0% annualized growth; which

  • Outpaced acquired loan runoff of $91.1 million

• Performance ratios 2Q 2016 to 1Q 2016

  • Return on average assets was 1.13% compared to 1.15%

  • Operating return on average assets improved to 1.32% from 1.18%

  • Return on average tangible equity was 14.59% compared to 15.04%

  • Operating return on average tangible equity improved to 16.85% from 15.36%

  • Efficiency ratio was 64.54% compared to 64.07%

  • Operating efficiency ratio improved to 60.81% from 63.22% (excluding branch consolidation expenses and the charge for the early termination of the FDIC loss share agreements)

• Balance sheet 2Q 2016

  • Cash and cash equivalents decreased by $215.4 million with growth in loans

  • Other real estate owned (“OREO”) decreased $3.5 million to $22.4 million, including the disposition of 45 properties during the second quarter of 2016

  • Early termination of loss share agreements with the FDIC during the 2Q 2016

  • Noninterest bearing deposits increased by $96.6 million, or 19.2% annualized

  • Shareholders’ equity increased $22.3 million to $1.1 billion

  • Equity to assets improved to 12.66% from 12.48%

  • Tangible equity to tangible assets improved to 8.66% from 8.43%

• Asset quality improvement from 1Q 2016

  • Nonperforming assets (NPAs) declined by 8.0%, or $4.0 million, to $45.9 million

  • NPAs to total assets improved to 0.53% from 0.58%

  • Net charge offs on non-acquired loans were 0.06% in 2Q 2106 down from 0.09%

  • Net charge offs on acquired non-credit impaired loans decreased to 0.07% in 2Q 2016 compared to 0.08%

  • Coverage ratio of ALLL on non-acquired non-performing loans improved to 201.1% from 182.6%

Quarterly Cash Dividend

The Board of Directors of South State Corporation has declared a quarterly cash dividend of $0.31 per share payable on its common stock. This per share amount is $0.01 per share, or 3.3% higher than the dividend paid in the immediately preceding quarter and is $0.06 per share, or 24.0%, higher than a year ago. The dividend will be payable on August 19, 2016 to shareholders of record as of August 12, 2016.

Merger with Southeastern Bank Financial Corporation

On June 17, 2016, we announced jointly the signing of a definitive merger agreement with SBFC. As of March 31, 2016, SBFC, headquartered in Augusta, Georgia, had approximately $1.9 billion in assets, $1.6 billion in deposits and $1.0 billion in loans. This merger will add 12 offices in the Augusta, Ga and Aiken, SC markets. Southeastern currently ranks second in market share in the Augusta metro market. Under the terms of the agreement, shareholders of Southeastern are expected to receive 0.7307 shares of South State Corporation stock for each share of SBFC common stock. Pending regulatory and shareholder approvals, the closing and system conversion is scheduled to occur in the first quarter of 2017.

Branch Initiatives - Update

The Company announced the consolidation of 11 locations during the second, third and fourth quarters of 2016. During the second quarter, the Company closed 8 locations. The remaining three locations will be closed during third and fourth quarter of 2016. The expected one-time cost and cost savings remain on target as previously disclosed.

Second Quarter 2016 Financial Performance

The Company reported consolidated net income of $24.5 million, or $1.01 per diluted common share for the three-months ended June 30, 2016 equal to the first quarter of 2016. Interest income was down $436,000 primarily from lower income from investment securities. This decline was partially offset by lower interest expense of $233,000 which was the result of lower yield and lower balances on certificates and other time deposits. The provision for loan losses increased by a net $170,000. The provision for loan losses on non-acquired loans increased by $520,000, and was offset by the decline in the provision for loan losses on acquired loans by $350,000. Noninterest income increased by $2.1 million from the following items: Mortgage banking income increased by $1.4 million primarily from additional gains from the sale of mortgage loans; improved fees on deposit accounts of $1.4 million primarily from bankcard services; and additional income from the resolution of acquired loans of $2.2 million. These improvements were offset partially by a $3.0 million increase in the amortization of indemnification asset, which resulted from the early termination of the FDIC loss share agreements. Noninterest expense increased by $1.8 million with $615,000 coming from branch consolidation expenses and $1.1 million coming from operational charge offs, increased sales and use tax, and increased secondary mortgage repurchase activity. During the quarter, our effective income tax rate declined to 33.63% from 33.90% in the first quarter of 2016.

“These results reflect the ongoing progress in many areas of our company. Our growth is driven by attracting talented bankers to the team, and a strong and growing reputation as the alternative to the big banks. We see this activity across our markets, and it is balanced across loan categories and lines of business,” said Robert R. Hill, Jr., CEO of South State Corporation. “Growth in customer relationships is also creating shareholder value. Increasing tangible book value, earnings per share, and dividends are priorities, and all are evident in the results for the quarter and for the first half of 2016. Our team is well-positioned to make further gains with a strong and liquid balance sheet, and competitive products and services. We look forward to the Southeastern Bank Financial Corporation merger and welcoming their talented team in early 2017.”

Balance Sheet and Capital

At June 30, 2016, the Company’s total assets were $8.7 billion, an increase of $53.2 million from March 31, 2016 and an increase of $166.6 million from December 31, 2015. During the second quarter of 2016, the Company experienced asset growth primarily in loans of $253.3 million, excluding the change in the allowance for loan losses, and in investment securities totaling $11.6 million. These increases were primarily offset by a decline in cash and cash equivalents of $215.4 million from funding the loan growth during the quarter. OREO declined by $3.5 million due to the disposition of 45 properties during the second quarter. Mortgage servicing rights asset decreased $1.3 million due to the decline in fair value of the servicing rights from the decrease in interest rates during the quarter. Our net deferred tax asset decreased $6.1 million primarily from the increase in the deferred tax liability ($1.8 million) associated with the larger unrealized gain in available for sale securities, increase in deferred tax liability ($1.0 million) associated with deferred loan cost resulting from the loan growth, and less deferred tax asset ($3.0 million) associated with the recognition of acquired loan interest income. Total deposits increased $2.0 million due to noninterest bearing deposit growth of $96.6 million, or 19.2% annualized, while interest bearing deposits decreased by $94.6 million, in time deposits and money market accounts. Fed funds purchased and securities sold under repurchase agreements increased by $29.0 million during the second quarter.

The Company’s book value per common share increased to $45.64 per share at June 30, 2016, compared to $44.75 at March 31, 2016, and $43.84 at December 31, 2015. Capital increased $22.3 million due primarily to net income of $24.5 million, which was offset by the common dividend paid of $7.3 million. Accumulated other comprehensive income increased during the second quarter of 2016 due to the increased unrealized gains in the AFS securities portfolio during the quarter of $2.9 million, net of tax. Tangible book value per common share increased by $0.98 per share to $29.86 at June 30, 2016, compared to $28.88 at March 31, 2016, and increased by $1.98 per share from $27.88 at December 31, 2015. The quarterly increase was primarily the result of earnings per share, excluding amortization of intangibles, of $1.07 and the increase in AOCI of $0.12 per share, offset by the dividend paid to shareholders of $0.30 per share.

The total risk-based capital ratio is estimated to be 12.6% down from March 31, 2016 of 13.0%, due primarily to loan growth and the loss from the early termination of loss share agreements with the FDIC, which was announced on June 23, 2016. Total RBC was also down from December 31, 2015 of 13.3%, for the same two reasons above. Tier 1 leverage ratio increased from March 31, 2016 of 9.4% to 9.5% at June 30, 2016. The Company’s capital position remains “well-capitalized” by all measures at June 30, 2016.

“During the second quarter, we had $253.1 million of net loan growth which was 16.5% annualized,” said John C. Pollok, COO and CFO. “The termination of the loss share agreements with the FDIC should help our efficiencies and improve our results going forward. In addition, the low interest rate environment continues to contribute to our overall low cost of funds (including noninterest bearing deposit balances) of 11 basis points down from 14 basis points a year ago.”

Asset Quality

During the second quarter of 2016, overall asset quality improved as NPAs declined by $4.0 million, or 8.0%, to $45.9 million, and represented 0.53% of total assets. Compared to June 30, 2015, NPAs have declined by $19.6 million, or 29.9%, and represented 0.81% of total assets. During the second quarter of 2016, non-acquired NPAs, excluding acquired loans and acquired OREO, declined by $1.8 million, or 6.6%, to $25.2 million. Non-acquired nonperforming loans decreased by $863,000, or 4.5%, and non-acquired OREO and other assets repossessed decreased $917,000, or 11.8%. Non-acquired NPAs as a percentage of total non-acquired loans and repossessed assets declined to 0.52% compared to 0.60% in the first quarter of 2016.

During the second quarter, the Company reported $4.4 million in nonperforming loans related to “acquired non-credit impaired loans”. This was an increase of $487,000 from the first quarter of 2016. Additionally, acquired nonperforming OREO and other assets owned declined by $2.7 million to $16.3 million from March 31, 2016 and by $5.5 million from December 31, 2015.

At June 30, 2016, the allowance for non-acquired loan losses was $36.9 million, or 0.77%, of non-acquired period-end loans. The current allowance for loan losses provides 2.01 times coverage of period-end non-acquired nonperforming loans, up from 1.83 times at March 31, 2016, and 1.82 times at December 31, 2015. At June 30, 2015, this coverage was 1.41 times. Net charge-offs within the non-acquired portfolio were $676,000, or 0.06% annualized, in the second quarter compared to $955,000 for the first quarter, or 0.09% annualized. Second quarter 2015 net charge-offs totaled $1.1 million, or 0.12% annualized. During the second quarter, the non-acquired allowance for loan losses was increased by $2.5 million compared to $2.0 million in the first quarter of 2016 through the provision for loan losses. The increase was primarily due to the loan growth within the non-acquired loan portfolio during the second quarter of 2016.

Net charge offs related to “acquired non-credit impaired loans” were $181,000, or 0.08% annualized, and the Company recorded a provision for loan losses, accordingly, during the second quarter of 2016. These charge-offs were relatively flat over the past three quarters. This was lower than the second quarter 2015 of $533,000, or 0.18% annualized, net charge offs.

Total OREO decreased by $3.5 million during the second quarter to $22.4 at June 30, 2016. This decline was primarily the result the disposition of 45 properties during the quarter. Overall, OREO and loan related costs declined by $900,000 compared to the first quarter 2016, and decreased by $1.1 million compared to the second quarter of 2015. This was the result of fewer write downs of property and less cost to carry of these assets (including taxes and insurance).

Net Interest Income and Margin