Mergers and Acquisitions

9 Months Ended

Sep. 30, 2020

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, SouthState 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 “SouthState 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.

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 current quarter, 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 current quarter, 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 the current quarter, goodwill was reduced by $36.9 million to $563.6 million.

During the three and nine month periods ending September 30, 2020 the Company incurred approximately $21.6 million and $65.9 million, respectively, of acquisition costs related to this transaction. There were no expenses incurred related to this acquisition for the three and nine month periods ending September 30, 2019. 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)		—	(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		324,396		2,392	(c)		5,999	(c)		332,787
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		54,122		(8,681)	(f)		(8,952)	(f)		36,489
Other assets		1,061,136		(604)	(g)		26	(g)		1,060,558
Total assets	$	20,255,289	$	(1,213,868)		$	36,858		$	19,078,279
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		1,088,048		(4,592)	(j)		—			1,083,456
Total liabilities		17,372,307		7,709			—			17,380,016
Net identifiable assets acquired over (under) liabilities assumed		2,882,982		(1,221,577)			36,858			1,698,263
Goodwill		—		600,483			(36,858)			563,625
Net assets acquired over liabilities assumed	$	2,882,982	$	(621,094)		$	—		$	2,261,888
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										8,080
Restricted stock conversion										7,407
Fair value of total consideration transferred									$	2,261,888

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 $6.0 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 $9.0 million.

(g)— Represents a valuation reserve of bank property held for sale of $3.8 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.

Comparative and Pro Forma Financial Information for the CSFL Acquisition

Pro-forma data for the three and nine month periods ending September 30, 2020 and 2019 listed in the table below presents pro-forma information as if the CSFL acquisition occurred at the beginning of 2019. 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, 2019.

Merger-related costs of $65.9 million from the CSFL acquisition were incurred during 2020 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 in 2019 of CSFL in the amount of $3.8 million. Pro-forma data for the year 2020 eliminated the non-PCD provision recorded on the acquisition date of $119.1 million. If the CSFL acquisition had occurred at the beginning of 2019, the acquisition date loan loss reserve amount would have been recorded directly through retained earnings upon adoption of ASU 2016-13 on January 1, 2020. 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 either 2020 or 2019. Expenses related to systems conversions and other costs of integration are expected to be recorded during 2020 and 2021 for the CSFL 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. The total revenues presented below represent pro-forma net interest income plus pro-forma noninterest income:

	Pro Forma		Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2020		September 30, 2019
Total revenues (net interest income plus noninterest income)	$	361,287	$	1,151,361	$	1,009,372
Net interest income	$	275,217	$	788,031	$	786,383
Net adjusted income available to the common shareholder	$	113,008	$	300,248	$	301,898
EPS - basic	$	1.56	$	4.23	$	4.30
EPS - diluted	$	1.55	$	4.21	$	4.27

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.