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Mergers and Acquisitions

3 Months Ended

Mar. 31, 2021

Mergers and Acquisitions

Mergers and Acquisitions

Note 4 — Mergers and Acquisitions

CenterState Bank Corporation (“CSFL”)

On June 7, 2020, the Company acquired all of the outstanding common stock of CSFL, of Winter Haven, Florida, the bank holding company for CenterState Bank, N.A. (“CSB”), in a stock transaction. Pursuant to the Merger Agreement, (i) CSFL merged with and into the Company, with the Company continuing as the surviving corporation (the “Merger”), and (ii) immediately following the Merger, South State Bank (“SSB”), a South Carolina banking corporation and wholly owned bank subsidiary of the Company, merged with and into CSB, a national banking association and wholly owned bank subsidiary of CSFL, with CSB continuing as the surviving bank (the “Bank Merger”). In connection with the Bank Merger, CSB changed its name to “South State Bank, National Association” (hereinafter referred to as the “Bank”). CSFL common shareholders received 0.3001 shares of the Company’s common stock in exchange for each share of CSFL stock resulting in the Company issuing 37,271,069 shares of its common stock. In total, the purchase price for CSFL was $2.26 billion including the value of the conversion of CSFL’s outstanding warrants, stock options and restricted stock units totaling $15.5 million. Subsequently, during the fourth quarter 2020, the purchase price (consideration transferred) decreased by $5.2 million due to an update to the value for stock options assumed and converted in the merger. The stock options assumed reflect their intrinsic value based upon a Black Scholes valuation.

In the acquisition, the Company acquired $13.0 billion of loans, including PPP loans, at fair value, net of $239.5 million, or 1.82%, estimated discount, including a fair value adjustment of $29.8 million recorded during the third quarter 2020, to the outstanding principal balance, representing 113.9% of the Company’s total loans at December 31, 2019. Of the total loans acquired, Management identified $3.1 billion that had more than insignificantly deteriorated since origination and were thus determined to be PCD loans.

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $125.9 million, which will be amortized utilizing a sum-of-the-years’-digit method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships. During the third quarter 2020, the Company identified an additional intangible related to its correspondent banking business acquired in the CSFL merger of approximately $10.0 million. As a result of the various measurement period adjustments identified during 2020, goodwill was reduced by $39.4 million to $561.0 million.

During three months ended March 31, 2021 and March 31, 2020, the Company incurred approximately $10.0 million and $4.1 million, respectively, of acquisition costs related to this transaction. These acquisition costs are reported in merger and branch consolidation related expenses on the Company’s Consolidated Statements of Income.

The CSFL transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.


					Initial			Subsequent
		As Recorded			Fair Value			Fair Value			As Recorded by
(Dollars in thousands)		by CSFL			Adjustments			Adjustments			the Company
Assets
Cash and cash equivalents		$	2,566,450		$	—		$	—		$	2,566,450
Investment securities			1,188,403			5,507	(a)		—			1,193,910
Loans held for sale			453,578			—			—			453,578
Loans, net of allowance and mark			12,969,091			(48,342)	(b)		29,834	(b)		12,950,583
Premises and equipment			308,150			2,392	(c)		2,893	(c)		313,435
Intangible assets			1,294,211			(1,163,349)	(d)		10,000	(d)		140,862
OREO and repossessed assets			10,849			(791)	(e)		(49)	(e)		10,009
Bank owned life insurance			333,053			—			—			333,053
Deferred tax asset			54,123			(8,681)	(f)		(8,203)	(f)		37,239
Other assets			967,059			(604)	(g)		642	(g)		967,097
Total assets		$	20,144,967		$	(1,213,868)		$	35,117		$	18,966,216

Liabilities
Deposits:
Noninterest-bearing		$	5,291,443		$	—		$	—		$	5,291,443
Interest-bearing			10,312,370			19,702	(h)		—			10,332,072
Total deposits			15,603,813			19,702			—			15,623,515
Federal funds purchased and securities sold under agreements to repurchase			401,546			—			—			401,546
Other borrowings			278,900			(7,401)	(i)		—			271,499
Other liabilities			977,725			(4,592)	(j)		857	(j)		973,990
Total liabilities			17,261,984			7,709			857			17,270,550
Net identifiable assets acquired over (under) liabilities assumed			2,882,983			(1,221,577)			34,260			1,695,666
Goodwill			—			600,483			(39,441)			561,042
Net assets acquired over liabilities assumed		$	2,882,983		$	(621,094)		$	(5,181)		$	2,256,708

Consideration:
South State Corporation common shares issued												37,271,069
Purchase price per share of the Company's common stock											$	60.27

Company common stock issued ($2,246,327) and cash exchanged for fractional shares ($74)											$	2,246,401
Stock option conversion												2,900
Restricted stock conversion												7,407
Fair value of total consideration transferred											$	2,256,708	(k)

Explanation of fair value adjustments

(a)— Represents the reversal of CSFL's existing fair value adjustments of $40.7 million and the adjustment to record securities at fair value (premium) totaling $46.2 million (includes reclassification of all securities held as HTM to AFS totaling $175.7 million).

(b)— Represents approximately 2.04%, or $269.1 million, total mark of the loan portfolio including a 1.97%, or $259.7 million credit mark, based on a third party valuation. Also, includes the reversal of CSFL's ending allowance for credit losses of $158.2 million and fair value adjustments of $62.6 million. Fair value was subsequently adjusted by $29.8 million due to a reduction in the loan mark (discount).

(c)— Represents the MTM adjustment of $4.0 million on leased assets partially offset by the write-off of deminimus fixed assets of $1.6 million. Subsequently, the fair value on certain bank premises was adjusted by $2.9 million based on updated appraisals received.

(d)— Represents approximately a 1.28% core deposit intangible, or $125.9 million from a third party valuation. This amount is net of $84.9 million existing core deposit intangible and $1.2 billion of existing goodwill from CSFL’s prior transactions that was reversed. Approximately $10.0 million in a customer list intangible related to the correspondent banking business was subsequently identified and recorded in the third quarter of 2020.

(e)— Represents the reversal of prior valuation reserves of $878,000 and recorded new valuation reserves of $1.7 million on both OREO and other repossessed assets. The fair value was subsequently adjusted based on gains and losses recognized from sales of OREO and other repossessed assets.

(f)— Represents deferred tax assets related to fair value adjustments measured using an estimated tax rate of 22.0%. This includes an adjustment from the CSFL tax rate to our tax rate. The difference in tax rates relates

to state income taxes. Additional deferred tax liability related to subsequent fair value adjustments identified and an updated estimated tax rate of 23.78% was approximately $8.2 million.

(g)— Represents a valuation reserve of bank property held for sale of $3.2 million and a fair value adjustment of a lease receivable of $116,000. These amounts are offset by positive fair value adjustment for investment in low income housing of $3.3 million.

(h)— Represents estimated premium for fixed maturity time deposits of $20.2 million partially offset by the reversal of existing CSFL fair value adjustments related to time deposit marks from other merger transactions of $546,000.

(i)— Represents the recording of a discount of $12.5 million on TRUPs from a third party valuation partially offset by the reversal of the existing CSFL discount on TRUPs and other debt of $5.1 million.

(j)— Represents the reversal of an existing $7.1 million unfunded commitment reserve at purchase date partially offset by a fair value adjustment to increase lease liabilities associated with leased facilities totaling $2.5 million. The discount rate applied to the bank owned life insurance split dollar liability was subsequently adjusted resulting in an increase in the other liability of $857,000.

(k)— The purchase price, or the fair value of total consideration transferred, decreased by $5.2 million to $2.9 million for stock options assumed and converted in the merger. The stock options assumed reflect their intrinsic value based upon a Black Sholes valuation.

Comparative and Pro Forma Financial Information for the CSFL Acquisition

Pro-forma data for the three months ended March 31, 2020 listed in the table below presents pro-forma information as if the CSFL acquisition occurred at the beginning of 2020. These results combine the historical results of CSFL in the Company’s Consolidated Statement of Net Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2020.

Merger-related costs of $4.1 million from the CSFL acquisition were incurred during the first quarter 2020 and were excluded from pro forma information below. No adjustments have been made to reduce the impact of any OREO write downs, investment securities sold or repayment of borrowings recognized by CSFL in 2020. The Company recorded expenses related to systems conversions and other costs of integration during the year 2020 and the first quarter of 2021 for the CSFL merger. The expenses related to systems conversions and other costs of integration are expected to continuously be recorded in 2021. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisitions which are not reflected in the pro forma amounts below. The total revenues presented below represent pro-forma net interest income plus pro-forma noninterest income:


		Pro Forma
		Three Months Ended
(Dollars in thousands)		March 31, 2020
Total revenues (net interest income plus noninterest income)		$	374,136
Net interest income		$	274,214
Net adjusted income available to the common shareholder		$	58,179
EPS - basic		$	0.82
EPS - diluted		$	0.81

The disclosures regarding the results of operations for CSFL subsequent to the acquisition date are omitted as this information is not practical to obtain. Although the Company has not converted CSFL’s core system, the majority of the fixed costs and purchase accounting entries were booked on the Company’s core system making it impractical to determine CSFL’s results of operation on a stand-alone basis.

Duncan-Williams, Inc. (“Duncan-Williams”)

On February 1, 2021, the Company completed its previously announced acquisition of Duncan-Williams, a 52-year-old family- and employee-owned registered broker-dealer, headquartered in Memphis, Tennessee, serving primarily institutional clients across the U.S. in the fixed income business. Duncan-Williams firm became an operating subsidiary of South State Bank immediately following the transaction.

In total, the purchase price for Duncan-Williams was $48.3 million, including an additional premium of $8.0 million that is payable after three years from the date of acquisition. The acquisition was accounted for under the

acquisition method of accounting in accordance with ASC Topic 805. The Company recognized goodwill on this acquisition of $15.8 million. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date.