Southern First Bancshares, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The company is a South Carolina bank holding company operating through Southern First Bank, with commercial and retail banking and mortgage banking businesses. This unaudited report covers the quarter and six months ended June 30, 2017. Comparisons below are with the corresponding 2016 periods for earnings and with December 31, 2016 for balance-sheet measures.
Financial performance and position
| Metric | Q2 2017 / June 30, 2017 | Comparison |
|---|---|---|
| Net interest income | $12.4 million | Up 17.5% from $10.5 million in Q2 2016 |
| Net income | $3.6 million; diluted EPS $0.49 | Net income up 9.0% from $3.3 million; diluted EPS unchanged |
| Six-month net income | $6.7 million; diluted EPS $0.95 | Net income up 6.4% from $6.3 million; diluted EPS was $0.94 |
| Interest margin | Q2 tax-equivalent net interest margin 3.49%; spread 3.26% | Margin down 13 basis points and spread down 17 basis points year over year |
| Noninterest income and expense | Q2 income $2.6 million; expense $8.8 million | Income down 18.6%; expense up 11.6% year over year |
| Total assets | $1.54 billion | Up 14.8% from $1.34 billion at year-end 2016 |
| Loans and deposits | Gross loans $1.30 billion; deposits $1.30 billion | Loans up 11.7% and deposits up $206.8 million since year-end 2016; loan-to-deposit ratio 100%, versus 107% |
| Cash and liquidity | Cash and cash equivalents $86.8 million; liquid assets reported as 5.6% of total assets | $46.6 million and 3.5% at year-end 2016 |
| Borrowings | FHLB advances and other borrowings $73.2 million; junior subordinated debentures $13.4 million | FHLB advances and other borrowings decreased $42.0 million from year-end 2016 |
| Equity and capital | Shareholders’ equity $142.7 million; Bank total capital ratio 13.19%; Company total capital ratio 13.42% | Equity was $109.9 million at year-end 2016; management said the Company and Bank met fully phased-in Basel III capital requirements |
| Credit quality | Allowance for loan losses $15.4 million, or 1.19% of gross loans; nonperforming assets $5.7 million | Allowance was 1.28% at year-end; nonperforming assets were $6.1 million, or 0.46% of assets |
| Cash flows, first half | Operating cash provided $5.7 million; investing cash used $155.4 million; financing cash provided $189.9 million; cash increased $40.3 million | Cash increased $8.7 million in the first half of 2016 |
Material changes versus comparable periods
- Loan growth and higher average earning assets drove higher net interest income. Average loan balances rose $201.7 million year over year in Q2, while higher funding costs and lower asset yields compressed the margin.
- Mortgage banking income declined 28.3% in Q2, which management attributed primarily to lower origination volume amid higher market rates. Management said 2017 mortgage originations might not match 2016 levels.
- Operating expenses increased, including compensation and benefits, occupancy, data processing, and professional fees. The company cited 28 additional employees, including hires supporting new Raleigh and Atlanta markets. Q2 efficiency ratio rose to 58.8% from 57.5%.
- Nonperforming assets and past-due commercial loans declined from year-end levels. Net charge-offs were $411,000 for the first half, compared with $512,000 in the first half of 2016.
- On May 2, 2017, the company issued 805,000 shares at $32.75 per share, generating $24.8 million in net proceeds. It said proceeds supported capital, repayment of its former $10 million holding-company credit line, future organic growth, and general corporate purposes.
Outlook, risks, and unusual items
- The filing provides no formal earnings or financial guidance. Management described continued growth efforts, including expansion into Raleigh and Atlanta, while noting that hiring, new-office costs, and the time required to build deposits and assets create execution risks.
- Management said it was increasing on-balance-sheet liquidity. Available unused borrowing capacity included $203.1 million from the FHLB and $45.0 million of correspondent-bank federal funds lines; a new $15.0 million unsecured line was unused at quarter-end and carries financial covenants.
- Key disclosed risks include interest-rate changes and margin pressure; competition; deposit and funding changes; rapid loan growth and seasoning; real-estate concentration and collateral values; credit losses; regulatory capital requirements; staffing and expansion execution; cybersecurity; and the adequacy of the loan-loss allowance. The company reported that 82.0% of loans were real-estate related.
- Interest-rate sensitivity modeling estimated net interest income changes from base of +2.85% at a 100-basis-point increase and −4.88% at a 100-basis-point decrease, with larger modeled impacts at 200- and 300-basis-point changes. These are estimates based on assumptions, not forecasts.
- The company reported no subsequent event requiring accrual or disclosure and no material pending legal proceeding known to management. Unrealized securities losses were attributed primarily to interest-rate changes; management said the securities were investment grade and not other-than-temporarily impaired.
- The company reported no cash dividends since inception. It adopted share-based payment accounting guidance that reduced first-half 2017 income tax expense by $100,000. Future credit-loss accounting guidance was not yet effective, and its impact was under evaluation.
Most important facts for investors to verify
- Whether loan growth can be sustained without weakening underwriting or asset quality, particularly given real-estate concentration and portfolio seasoning.
- Whether deposit costs continue rising and whether loan and asset yields can offset funding-cost pressure on net interest margin.
- Whether mortgage banking revenue declines as anticipated and whether new-market hiring and office expansion produce sufficient business to cover added expenses.
- Whether liquidity, capital ratios, and funding capacity remain adequate as loans grow, including maturities of brokered certificates of deposit and compliance with the new line’s covenants.
- Whether the allowance remains appropriate as the portfolio expands; review changes in nonperforming loans, impaired loans, TDRs, charge-offs, and collateral valuations.