Note 2—Mergers and Acquisitions

The following are business combinations which have occurred over the past three years:

Park Sterling Corporation (“PSC” or “Park”) – November 30, 2017 – Whole bank acquisition

Southeastern Bank Financial Corporation (“SBFC” or “Southeastern” – January 3, 2017 – Whole bank acquisition

Bank of America, N.A. (“BOA”) – August 21, 2015 – Branch acquisition which resulted in the purchase of 12 South Carolina branch locations and one Georgia branch location from BOA

Park Sterling Corporation

On November 30, 2017, SSB acquired all of the outstanding common stock of Park Sterling Corporation (“PSC”), of Charlotte, North Carolina, the bank holding company for Park Sterling Bank (“PSB”), in a stock transaction. PSC common shareholders received 0.14 shares of the Company’s common stock in exchange for each share of PSC stock resulting in the Company issuing 7,480,343 shares of its common stock. In total, the purchase price for PSC was $693.0 million including the value of “in the money” outstanding stock options totaling $4.3 million.

The PSC 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
	As Recorded		Fair Value			As Recorded by
(Dollars in thousands)	by Park		Adjustments			the Company
Assets
Cash and cash equivalents	$	116,454	$	—		$	116,454
Investment securities		461,261		1,444	(a)		462,705
Loans held for sale		2,200		68,686	(b)		70,886
Loans, net of allowance and mark		2,346,612		(95,878)	(c)		2,250,734
Premises and equipment		61,059		(4,882)	(d)		56,177
Intangible assets		73,090		(46,915)	(e)		26,175
OREO and repossessed assets		2,549		(429)	(f)		2,120
Bank owned life insurance		72,703		—			72,703
Deferred tax asset		17,963		11,596	(g)		29,559
Other assets		21,595		(476)	(h)		21,119
Total assets	$	3,175,486	$	(66,854)		$	3,108,632

Liabilities
Deposits:
Noninterest-bearing	$	561,874	$	—		$	561,874
Interest-bearing		1,886,810		2,692	(i)		1,889,502
Total deposits		2,448,684		2,692			2,451,376
Federal funds purchased and securities sold under agreements to repurchase		—		—			—
Other borrowings		329,249		11,689	(j)		340,938
Other liabilities		24,179		2,131	(k)		26,310
Total liabilities		2,802,112		16,512			2,818,624
Net identifiable assets acquired over (under) liabilities assumed		373,374		(83,366)			290,008
Goodwill		—		402,951			402,951
Net assets acquired over liabilities assumed	$	373,374	$	319,585		$	692,959

Consideration:
South State Corporation common shares issued							7,480,343
Purchase price per share of the Company's common stock						$	92.05

Company common stock issued ($688,566) and cash exchanged for fractional shares ($88)						$	688,654
Cash paid for stock option redemptions							4,305
Fair value of total consideration transferred						$	692,959

Explanation of fair value adjustments

(a)—Adjustment reflects marking the securities portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects a reclass of $68.7 million by SSB of Shared National Credits (loans) from loans held for investment to loans held for sale.

(c)—Adjustment reflects the fair value adjustments (discount) of $60.9 million based on the Company’s evaluation of the acquired loan portfolio. This amount excludes the allowance for loan losses (“ALLL”) and fair value adjustment (discount) of $12.5 million and $21.3 million, respectively, recorded by PSC and is net of the $68.7 million reclass related to the Shared National Credits noted in (b).

(d)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.

(e)—Adjustment reflects the recording of a 1.66% Core Deposit Intangible (“CDI”) on the acquired deposit accounts that totaled $26.2 million offset by a write-off of $73.1 million of existing goodwill and CDI acquired from PSC.

(f)—Adjustment reflects the fair value adjustments to other real estate owned (“OREO”) based on the Company’s evaluation of the acquired OREO portfolio.

(g)—Adjustment to record deferred tax asset related to the fair value adjustments and an adjustment from the PSC tax rate to the SSB tax rate.

(h)—Adjustment reflects the write-off of accrued interest receivable and along with certain prepaid expenses.

(i)—Adjustment reflects the premium for fixed maturity time deposits of $2.95 million offset by the write-off of existing fair value marks of $253,000 acquired from PSC.

(j)—Adjustment reflects the fair value adjustment (discount) of $2.4 million on PSC’s Trust Preferred Securities offset by the write-off of the existing PSC discount on its senior debt and TRUPs of $14.0 million.

(k)—Adjustment reflects the fair value adjustments to employee benefit plans of $1.5 million along with other adjustments of miscellaneous liabilities.

Southeastern Bank Financial Corporation

On January 3, 2017, SSB acquired all of the outstanding common stock of Southeastern Bank financial Corporation (“SBFC”), of Augusta, Georgia, the bank holding company for Georgia Bank & Trust Company of Augusta (“GB&T”), in a stock transaction. SBFC common shareholders received 0.7307 shares of the Company’s common stock in exchange for each share of SBFC stock resulting in the Company issuing 4,978,338 shares of its common stock. In total, the purchase price for SBFC was $435.1 million including the value of “in the money” outstanding stock options totaling $490,000.

The SBFC 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.


			Initial			Subsequent
	As Recorded		Fair Value			Fair Value			As Recorded by
(Dollars in thousands)	by SBFC		Adjustments			Adjustments			the Company
Assets
Cash and cash equivalents	$	72,043	$	—		$	—		$	72,043
Investment securities		591,824		(1,770)	(a)		—			590,054
Loans held for sale		13,652		—			—			13,652
Loans, net of allowance and mark		1,060,618		(10,668)	(b)		—			1,049,950
Premises and equipment		25,419		(2,212)	(c)		870	(c)		24,077
Intangible assets		140		17,980	(d)		—			18,120
OREO and repossessed assets		580		(30)	(e)		(100)	(e)		450
Bank owned life insurance		44,513		—			—			44,513
Deferred tax asset		16,247		(687)	(f)		515	(f)		16,075
Other assets		7,545		(482)	(g)		—			7,063
Total assets	$	1,832,581	$	2,131		$	1,285		$	1,835,997

Liabilities
Deposits:
Noninterest-bearing	$	262,967	$	—		$	—		$	262,967
Interest-bearing		1,257,953		—			—			1,257,953
Total deposits		1,520,920		—			—			1,520,920
Federal funds purchased and securities sold under agreements to repurchase		1,014		—			—			1,014
Other borrowings		110,620		(1,120)	(h)		—			109,500
Other liabilities		19,980		5,553	(i)		2,210	(i)		27,743
Total liabilities		1,652,534		4,433			2,210			1,659,177
Net identifiable assets acquired over (under) liabilities assumed		180,047		(2,302)			(925)			176,820
Goodwill		—		257,370			925			258,295
Net assets acquired over liabilities assumed	$	180,047	$	255,068		$	—		$	435,115

Consideration:
South State Corporation common shares issued										4,978,338
Purchase price per share of the Company's common stock									$	87.30

Company common stock issued ($434,609) and cash exchanged for fractional shares ($16)									$	434,625
Cash paid for stock option redemptions										490
Fair value of total consideration transferred									$	435,115

Explanation of fair value adjustments

(a)—Adjustment reflects marking the securities portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects the fair value adjustments of $30.7 million based on the Company’s evaluation of the acquired loan portfolio and excludes the allowance for loan losses (“ALLL”) of $20.1 million recorded by SBFC.

(c)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.

(d)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts that totaled $18.1 million.

(e)—Adjustment reflects the fair value adjustments to other real estate owned (“OREO”) and repossessed assets based on the Company’s evaluation of the acquired OREO and repossessed assets portfolio.

(f)—Adjustment to record deferred tax asset related to the fair value adjustments.

(g)—Adjustment reflects uncollectible portion of accrued interest receivable and loan fees receivable along with the write-off of certain prepaid expenses.

(h)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of other borrowings of Trust Preferred Securities with a discount of $2.1 million, netted with premium on certain Federal Home Loan Bank (“FHLB “) advances of $1.0 million.

(i)—Adjustment reflects the fair value adjustments to employee benefit plans of $8.3 million netted against an adjustment of other miscellaneous liabilities of $496,000.

Comparative and Pro Forma Financial Information for Acquisitions in 2017

The adjusted results of the Company for the year ended December 31, 2017, include the adjusted results of the acquired assets and assumed liabilities for the 362 days subsequent to the acquisition date of January 3, 2017 related to the SBFC acquisition and for 31 days subsequent to the acquisition date of November 30, 2017 related to the PSC acquisition. Merger-related charges of $44.5 million are recorded in the consolidated statement of income and include incremental costs related to closing of the acquisitions, including legal, accounting and auditing, investment banker cost, termination of certain employment related contracts, travel costs, printing, supplies and other costs.

The following table discloses the impact of the mergers (excluding the impact of merger-related expenses and of the revaluation of the net deferred tax asset due to the Tax Reform Act) with SBFC since the acquisition on January 3, 2017 through December 31, 2017 and with PSC since the acquisition on November 30, 2017 through December 31, 2017. The table also presents certain pro forma information as if SBFC and PSC had been acquired on January 1, 2017 and January, 1 2016. These results combine the historical results of SBFC and PSC in the Company’s consolidated statement of 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, 2017 or January 1, 2016.

Merger-related costs of $50.0 million from the SBFC and PSC acquisitions were incurred during the year ended December 31, 2017, and were excluded from pro forma information below. In addition, no adjustments have been made to the pro formas to eliminate the provision for loan losses for the years ended December 31, 2017 and 2016 of SBFC and PSC in the amount of $325,000 and $3.5 million, respectively. No adjustments have been made to reduce the impact of any OREO write downs, investment securities sold or repayment of borrowings recognized by SBFC and PSC in either the years ended December 31, 2017 or 2016. The pro forma net adjusted income available to the common shareholder for December 31, 2017 includes the Company’s $26.6 million of income tax expense recorded as a result of the revaluation of the Company’s net deferred tax asset in connection with the Tax Reform Act signed into law during 2017. Expenses related to systems conversions and other costs of integration are expected to be recorded during 2018 for the PSC merger. 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:


	SBFC		PSC
	Actual since		Actual since
	Acquisition		Acquisition		Pro Forma		Pro Forma
	(January 3, 2017 through		(November 30, 2017 through		Year Ended		Year Ended
(Dollars in thousands)	December 31, 2017)		December 31, 2017)		December 31, 2017		December 31, 2016
Total revenues (net interest income plus noninterest income)	$	67,823	$	14,052	$	690,716	$	684,532
Net adjusted income available to the common shareholder	$	25,790	$	4,829	$	146,821	$	164,479

BOA Branch Acquisition

On August 21, 2015, the Bank completed its acquisition from BOA of 12 South Carolina branches located in Florence, Greenwood, Orangeburg, Sumter, Newberry, Batesburg-Leesville, Abbeville and Hartsville, South Carolina, and one Georgia branch located in Hartwell, Georgia. Under the terms of the Purchase and Assumption Agreement dated April 22, 2015, the Bank paid a deposit premium of $25.0 million, equal to 5.5% of the average daily deposits for the 30- day period immediately prior to the acquisition date. In addition, the Bank acquired approximately $3.1 million in loans and $4.1 million in premises and equipment. This transaction was fully taxable and there were no deferred tax assets or liabilities recorded as a result of this transaction.

The branch acquisition 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.

The following table presents the assets acquired and liabilities assumed as of August 21, 2015 and their initial fair value estimates:


	As Recorded		Fair Value			As Recorded by
(Dollars in thousands)	by BOA		Adjustments			the Company
Assets
Cash and cash equivalents	$	428,567	$	—		$	428,567
Loans		3,445		(295)	(a)		3,150
Premises and equipment		6,267		(2,138)	(b)		4,129
Intangible assets		—		6,800	(c)		6,800
Other assets		66		—			66
Total assets	$	438,345	$	4,367		$	442,712

Liabilities
Deposits:
Noninterest-bearing	$	97,440	$	—		$	97,440
Interest-bearing		340,849		—			340,849
Total deposits		438,289		—			438,289
Other liabilities		56		—			56
Total liabilities		438,345		—			438,345
Net identifiable assets acquired over (under) liabilities assumed		—		4,367			4,367
Goodwill		—		20,652			20,652
Net assets acquired over (under) liabilities assumed	$	—	$	25,019		$	25,019

Consideration:
Cash paid as deposit premium	$	25,019
Fair value of total consideration transferred	$	25,019

Explanation of fair value adjustments

(a)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.

(b)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.

(c)—Adjustment reflects the recording of the core deposit intangible on the acquired core deposit accounts.