Southern First Bancshares, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The company is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. This unaudited filing covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017.
Financial performance and condition
| Metric | Q2 2018 | Six months 2018 | Prior comparable period |
|---|---|---|---|
| Net interest income | $14.6 million | $28.7 million | Q2: $12.4 million; six months: $24.0 million |
| Net income | $5.5 million | $10.7 million | Q2: $3.6 million; six months: $6.7 million |
| Diluted EPS | $0.71 | $1.39 | Q2: $0.49; six months: $0.95 |
| Net interest margin, tax-equivalent | 3.49% | 3.56% | Q2: 3.49%; six months: 3.55% |
| Provision for loan losses | $0.4 million | $0.9 million | Q2: $0.5 million; six months: $1.0 million |
Q2 net income rose 52.9% and first-half net income rose 59.7% year over year. Higher net interest and noninterest income and a lower effective tax rate contributed; increased noninterest expense partly offset gains. The effective tax rate was 21.3% in Q2 versus 36.2% in Q2 2017, and 22.1% for the first half versus 35.7%.
- Revenue and expenses: Q2 noninterest income was $2.8 million, up 8.2%; first-half noninterest income was $5.2 million, up 12.5%. Q2 noninterest expense was $10.0 million, up 13.9%; first-half expense was $19.2 million, up 12.0%. Q2 efficiency ratio improved to 57.4% from 58.8%.
- Assets and lending: Total assets were $1.788 billion, up 10.0% from year-end. Gross loans were $1.533 billion, up 10.6%; commercial loans grew 13.1% and consumer loans 5.8%. Real estate loans were 83% of the portfolio.
- Credit quality: Allowance for loan losses was $16.1 million, or 1.05% of gross loans, versus $15.5 million, or 1.12%, at year-end. First-half net charge-offs were $323,000, or 0.04% of average loans, annualized. Nonperforming assets were $7.8 million (0.44% of assets), compared with $7.5 million (0.46%) at year-end. Troubled debt restructurings totaled $10.6 million across 28 loans, up from $7.8 million across 21 loans.
- Funding and liquidity: Deposits were $1.568 billion, up from $1.381 billion; FHLB advances and other borrowings fell to $28.6 million from $67.2 million. Cash and cash equivalents were $109.4 million, or 6.1% of assets. The loan-to-deposit ratio was 97.8%, down from 100.4%. Available borrowing included $262.7 million of FHLB capacity, $72 million in correspondent-bank lines and an unused $15 million line with another lender.
- Cash flow: First-half operating cash flow was $18.6 million versus $5.7 million a year earlier; investing cash outflow was $150.3 million versus $155.4 million; financing cash inflow was $148.9 million versus $189.9 million. Cash and cash equivalents increased $17.2 million to $109.4 million.
- Capital: Shareholders’ equity was $160.9 million, up from $149.7 million. The Bank remained well-capitalized; its total risk-based capital ratio was 12.46%, common equity Tier 1 ratio 11.39%, and Tier 1 leverage ratio 9.69%.
Material changes, outlook and risks
- Average loan balances drove much of the net interest income increase. Loan yields rose, but deposit costs also increased; management anticipated continued pressure on net interest spread and margin if rates rise further and competition remains intense. Q2 spread declined to 3.19% from 3.26% a year earlier.
- Hiring and expansion—including new offices in North Carolina and South Carolina—contributed to higher compensation and occupancy costs. Management attributed higher professional fees mainly to legal and loan appraisal costs.
- Interest-rate sensitivity estimates showed net interest income changes versus base of +0.73% for a 100-basis-point increase, +0.47% for a 200-basis-point increase, and -0.47% for a 300-basis-point increase; declines of 100, 200 and 300 basis points corresponded to -4.67%, -7.15% and -7.08%. These are model estimates subject to assumptions and limitations.
- Key risks include real-estate and loan concentrations, credit deterioration, rapid loan growth and limited seasoning, funding and deposit competition, interest-rate changes, regulatory requirements, cybersecurity and the execution and costs of market expansion. Unfunded credit commitments were $377.3 million, up from $310.6 million at year-end; management said a significant portion, particularly consumer equity lines, was not expected to fund based on historical experience.
- The Tax Act reduced the tax rate; management said its accounting for the Act was not final and was expected to be completed when the 2017 tax return was filed. The company was evaluating the future expected-credit-loss standard (ASU 2016-13) and did not plan early adoption. No material subsequent events requiring accrual or disclosure were identified. The filing reports no material change in risk factors and no material pending legal proceeding known to management.
Important facts for investors to verify
- Whether loan growth and deposit gathering can continue without further margin compression or increased funding costs.
- Trends in nonperforming loans, TDRs, charge-offs and the adequacy of the allowance, especially given real-estate concentration and portfolio growth.
- Actual utilization and liquidity implications of unfunded commitments, brokered deposits, and outstanding FHLB letters of credit.
- Capital and liquidity capacity under changing rate, credit and regulatory conditions; assess sensitivity estimates alongside their assumptions.
- Final tax-accounting effects and the eventual impact of adopting the expected-credit-loss standard.