Southern First Bancshares, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted. The company is a South Carolina bank holding company operating Southern First Bank.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $8.07 million | $7.13 million | $15.71 million | $14.01 million |
| Noninterest income | $1.52 million | $0.88 million | $2.49 million | $1.76 million |
| Net income | $1.57 million | $1.30 million | $2.82 million | $2.26 million |
| Net income available to common shareholders | $1.31 million | $1.11 million | $2.37 million | $1.89 million |
| Diluted EPS | $0.26 | $0.25 | $0.48 | $0.43 |
| Provision for loan losses | $0.95 million | $0.75 million | $1.95 million | $1.88 million |
- Q2 net income rose 20.5%; first-half net income rose 24.5%. Net interest income increased 13.2% for Q2 and 12.2% for the first half, largely reflecting growth in average loans and earning assets.
- Tax-equivalent net interest margin was 3.66% in Q2 versus 3.70% a year earlier, and 3.67% for the first half versus 3.70%. Lower loan yields were partly offset by lower funding costs.
- Q2 noninterest income increased 72.9%; excluding a $230,000 securities-sale gain, it increased 46.7%, led by mortgage-related loan fees. Q2 noninterest expense rose 19.1%, including a one-time $250,000 litigation settlement expense. The reported efficiency ratio, excluding securities gains and real estate owned activity, was 67.4% versus 66.4%.
- First-half operating cash flow was $4.54 million; investing cash outflow was $74.41 million, chiefly reflecting loan growth; financing cash inflow was $71.80 million, including deposit growth and common-stock proceeds. Cash and cash equivalents increased $1.92 million to $41.13 million.
Financial position, liquidity and capital
- At June 30, 2014, total assets were $967.1 million, up 8.6% from year-end 2013. Gross loans were $812.8 million, up $79.2 million; deposits were $747.4 million, up $67.1 million. Net loans were $801.7 million and investment securities were $64.7 million.
- Shareholders’ equity was $71.9 million versus $65.7 million at year-end. The January private placement issued 475,000 common shares at $13 each, generating $5.95 million; the company used $4.06 million to redeem 4,057 preferred shares. Remaining Series T preferred stock was $11.24 million; its dividend rate rose to 9% in May 2014.
- Borrowings totaled $140.5 million: $127.1 million in FHLB advances and other borrowings, plus $13.4 million in junior subordinated debentures. FHLB advances and other borrowings included $103.5 million of FHLB advances, $19.2 million of repurchase agreements and a $4.4 million line of credit.
- The loan-to-deposit ratio was 109%. Available capacity included $68.6 million from the FHLB and $45 million in unused correspondent-bank federal funds lines. Management said its core deposits and borrowing sources should meet long-term liquidity needs; increased loan demand prompted sales of $10.4 million of securities in Q2.
- The Bank’s capital ratios exceeded well-capitalized thresholds: total risk-based capital 12.18%, Tier 1 risk-based capital 10.93%, and Tier 1 leverage 9.26%. The company noted that Basel III requirements begin phasing in in 2015.
Material changes and credit quality
- Nonperforming assets increased to $13.6 million, or 1.40% of assets and 1.67% of gross loans, from $9.5 million, or 1.07% and 1.30%, respectively, at December 31, 2013. Nonaccrual loans rose to $12.3 million from $8.3 million, including $5.9 million of nonaccruing troubled debt restructurings (TDRs).
- TDRs totaled $12.4 million across 38 loans at June 30, compared with $13.0 million across 34 loans at year-end. The allowance for loan losses was $11.1 million, or 1.37% of gross loans, versus $10.2 million, or 1.39%, at year-end. First-half net charge-offs were $1.06 million, compared with $1.41 million a year earlier.
- Management cited loan growth and $560,000 of Q2 net charge-offs as factors in the higher quarterly provision. It considered the allowance adequate, while acknowledging estimation uncertainty. Real estate secured 80.9% of loans, leaving credit quality exposed to collateral values and real-estate conditions.
- Accumulated other comprehensive loss improved to $9,000 from $1.35 million at year-end, primarily reflecting recovery in unrealized securities values. A $230,000 securities gain was recorded after selling securities to support liquidity.
Outlook, risks and other disclosures
- No specific earnings or financial guidance was provided. Management said deposit rates were already historically low and did not anticipate significant further reductions in funding costs. The Mount Pleasant, South Carolina office was expected to open in August 2014.
- Management described economic conditions as improving but expected weaker conditions to continue through 2014. Disclosed risks include credit losses and loan concentrations, real-estate collateral values, loan growth and seasoning, interest-rate changes and margin pressure, funding and deposit flows, competition, regulatory requirements, capital adequacy, and cybersecurity.
- The company estimated net interest income sensitivity of +11.67% under a 300-basis-point rate increase and -10.73% under a 300-basis-point decrease; these are model estimates dependent on assumptions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Management reported no subsequent events requiring accrual or disclosure and no material pending legal proceedings known to it. It disclosed ordinary-course claims and lawsuits.
Important facts for investors to verify
- Whether rising nonperforming assets, TDRs and recent charge-offs lead to additional provisions or further credit deterioration.
- Whether loan growth can be funded sustainably, given the 109% loan-to-deposit ratio, liquidity-driven securities sales and reliance on borrowing capacity.
- Whether loan yields and net interest margin stabilize as management expects limited scope for further funding-cost reductions.
- The recurring contribution of mortgage fees and the effect of higher compensation, professional fees and other operating expenses on profitability.
- The eventual impact of Basel III capital rules and the cost and timing of redeeming remaining preferred stock.