SOUTHERN FIRST BANCSHARES INC quarterly report, Q2 FY2012

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Southern First Bancshares, Inc. — Q2 2012 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. The company is a South Carolina bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services, primarily in the Greenville area.

Financial results and key metrics

  • Q2 earnings: Net income was $815,000, up from $628,000. Net income available to common shareholders was $589,000, or diluted EPS of $0.15, versus $343,000, or $0.09 per diluted share.
  • First-half earnings: Net income was $1.503 million, versus $1.165 million. Income available to common shareholders was $988,000, or diluted EPS of $0.25, versus $596,000, or $0.15.
  • Interest income and margin: Q2 interest income was $8.534 million; net interest income was $6.378 million, up 9.9%. Tax-equivalent net interest margin was 3.61%, compared with 3.28%. For the first half, net interest income was $12.508 million, up from $11.203 million, and tax-equivalent margin was 3.53%, versus 3.23%. Lower funding costs more than offset reduced yields on loans and investments.
  • Credit costs: Q2 provision for loan losses was $1.275 million, compared with $650,000. First-half provision was $2.475 million, versus $1.375 million. First-half net charge-offs were $2.269 million, or 0.75% of average loans, compared with $1.042 million, or 0.36%.
  • Other income and expenses: Q2 noninterest income rose to $741,000 from $618,000. Noninterest expense declined to $4.655 million from $4.855 million; the efficiency ratio, excluding securities gains and real estate owned activity, improved to 62.9% from 66.8%. First-half noninterest income was $1.578 million and expense was $9.434 million, compared with $1.174 million and $9.322 million.
  • Cash flow: For the six months, operating cash flow was $5.854 million and investing cash flow was $12.185 million, including $29.730 million of securities-sale proceeds and $23.729 million of net loan originations. Financing cash flow was negative $9.776 million, including an $8.495 million decline in deposits. Cash and cash equivalents increased $8.263 million to $31.268 million.
  • Balance sheet at June 30: Assets were $759.632 million, down from $767.745 million at year-end 2011. Gross loans were $618.874 million, up from $598.634 million; deposits were $554.417 million, down from $562.912 million. Shareholders’ equity was $63.171 million, versus $62.539 million.
  • Debt and liquidity: FHLB advances and repurchase agreements totaled $122.7 million; junior subordinated debentures were $13.403 million. The loan-to-deposit ratio was 112%. The company reported $30.5 million in unused correspondent-bank federal funds lines and $30.9 million in available FHLB borrowing capacity. About half of investment securities were pledged against debt.
  • Capital: Bank regulatory ratios were 13.27% total risk-based capital, 12.02% Tier 1 risk-based capital, and 9.77% Tier 1 leverage, above the OCC-agreed minimums of 12%, 10%, and 9%, respectively. Management described the bank as well capitalized.

Material changes and notable items

  • Loans increased about $20.2 million from year-end, while available-for-sale securities declined about $34.3 million. The company said it sold $29.7 million of securities to support liquidity amid increased loan demand.
  • Nonperforming assets decreased to $12.923 million from $13.950 million at year-end, or 1.70% of assets versus 1.82%. Nonaccrual loans, including nonaccruing troubled debt restructurings, were $10.368 million; other real estate owned was $2.555 million. Troubled debt restructurings totaled $14.5 million across 40 loans, compared with $12.2 million across 42 loans at year-end.
  • The allowance for loan losses was $9.131 million, 1.48% of gross loans, compared with $8.925 million, or 1.49%, at year-end. Management considered the allowance adequate, while noting that future economic or credit deterioration could require additional provisions.
  • The Treasury’s auction of its Series T preferred shares occurred June 28. The company repurchased 1,000 shares for $904,000; the transaction settled July 3. The company also repurchased the Treasury’s warrant for $1.1 million on July 25, after quarter-end. The preferred-share repurchase is expected to save $50,000 in annual dividends; about $93,000 of related offering costs were included in Q2 expense.
  • A 10% stock dividend was distributed in February 2012; prior-period share and EPS data were adjusted. The filing also describes a correction of an immaterial prior-period accounting error affecting preferred-stock discount accretion and common earnings per share; 2011 comparative figures are restated.

Outlook, risks, and contingencies

  • The company provided no quantitative earnings or financial guidance. Management stated that weak economic conditions were expected to continue through the remainder of 2012 and into 2013, with potential continued pressure on credit quality, asset yields, funding costs, liquidity, and capital.
  • The company announced plans to expand into Charleston, South Carolina, and expected to open an office in the third quarter of 2012.
  • The bank remained subject to a 2010 OCC Formal Agreement covering credit risk management, underwriting, liquidity, and funds management. Management believed it had substantially complied with the requirements, but cautioned the OCC might not agree; failure to comply could result in further regulatory action.
  • Credit risk is significant: 80.9% of loans were real-estate-related, and 91% of nonperforming loans were secured by real estate. Key risks include local real estate conditions, borrower performance, loan concentrations, allowance adequacy, deposit flows, competition, regulatory requirements, and interest-rate movements.
  • Unfunded commitments to extend credit were $109.8 million, including $85.7 million at variable rates; letters of credit totaled $2.6 million. The company said a significant portion of commitments, particularly consumer equity lines, was not expected to be funded.
  • Interest-rate sensitivity estimates showed net interest income declines of 1.34% and 1.98% under +100 and +200 basis-point scenarios, respectively; the +300-basis-point scenario showed an increase of 1.83%. Declines under −100, −200, and −300 basis points were 0.57%, 2.27%, and 3.86%. These are model estimates subject to assumptions.
  • No material pending legal proceedings were reported. Management stated disclosure controls were effective as of June 30, 2012.

Investor verification points

  • Review subsequent-period credit performance, charge-offs, nonperforming loans, TDRs, and whether the allowance remains adequate.
  • Verify the liquidity and funding effects of loan growth, securities sales, deposit trends, pledged securities, and the high loan-to-deposit ratio.
  • Confirm settlement and accounting for the preferred-share and warrant repurchases, including their effects on capital, dividends, and diluted share count.
  • Track OCC Formal Agreement compliance, required capital levels, and any regulatory feedback or actions.
  • Assess execution costs and performance of the planned Charleston expansion and whether economic conditions match management’s stated outlook.
  • Consider the disclosed restatement of 2011 comparative preferred-stock accretion and EPS figures when comparing periods.