Southern First Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Southern First is a South Carolina bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services. Amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $5.80 | $4.90 | $11.20 | $9.68 |
| Provision for loan losses | $0.65 | $2.30 | $1.38 | $3.70 |
| Net income | $0.63 | $0.09 | $1.17 | $0.11 |
| Net income (loss) available to common shareholders | $0.31 | $(0.24) | $0.51 | $(0.56) |
| Diluted EPS | $0.08 | $(0.07) | $0.14 | $(0.16) |
- Q2 tax-equivalent net interest margin was 3.28%, versus 2.79%; six-month margin was 3.23%, versus 2.81%. Management attributed the improvement chiefly to lower funding costs. Q2 net interest spread was 3.06%, compared with 2.55%.
- Q2 noninterest income was $0.62 million, down from $1.60 million, principally because the prior-year quarter included a $1.09 million securities-sale gain. Noninterest expense rose 17.6% to $4.86 million, including higher real estate-owned (OREO) costs. Adjusted efficiency ratio, excluding securities gains and OREO activity, was 66.8% versus 76.0%.
- At June 30, total assets were $758.1 million, up from $736.5 million at year-end; net loans were $569.3 million, deposits $556.4 million, and shareholders’ equity $60.8 million. Available-for-sale and other investments totaled $93.9 million, up from $72.9 million.
- FHLB advances and repurchase agreements were $122.7 million and junior subordinated debentures were $13.4 million, both unchanged from year-end. Cash and cash equivalents were $52.0 million, down from $53.9 million. The loan-to-deposit ratio was 104%, versus 107% at year-end.
- For the first six months, operating cash flow was $4.7 million; investing activities used $26.3 million, largely reflecting securities purchases; financing activities provided $19.8 million, including $20.2 million of net deposit growth. Cash declined $1.8 million.
Changes, credit quality, and notable items
- Gross loans increased modestly to $578.0 million from $572.4 million at year-end. Commercial loans were 74.4% of the portfolio; approximately 80% of loans were real-estate secured.
- Nonperforming assets declined to $13.1 million (1.73% of assets; 2.27% of gross loans) from $15.0 million (2.03%; 2.61%). However, nonaccrual loans increased to $10.2 million from $9.3 million. OREO fell to $2.9 million from $5.6 million after property sales, but the company recorded $0.75 million of write-downs on four properties.
- Six-month net charge-offs fell to $1.04 million from $3.11 million. The allowance for loan losses was $8.72 million, or 1.51% of gross loans, versus $8.39 million, or 1.47%, at year-end. The company reported 15 troubled debt restructurings totaling $6.5 million, compared with two totaling $0.49 million at year-end.
- Management recorded a $25,000 other-than-temporary impairment on a private-label mortgage security. That security had a Caa1 current rating and 28.3% of deal loans at least 60 days delinquent; management expected substantially all principal and interest to be recovered but cautioned that losses could exceed assumptions.
- The bank remained subject to a June 2010 OCC Formal Agreement covering credit risk, underwriting, liquidity, and funds management. Management believed the bank was in compliance with substantially all requirements, but stated the OCC might not agree. The bank’s reported capital ratios exceeded the OCC-agreed minimums: total risk-based capital 13.36%, Tier 1 risk-based capital 12.11%, and leverage ratio 9.59%.
Outlook, risks, and contingencies
- Management expected weak economic conditions and elevated industry credit losses and regulatory scrutiny to continue through the remainder of 2011. The filing provides no specific earnings or growth guidance and cautions that interim results are not necessarily indicative of full-year results.
- Key risks include real-estate concentration and collateral values, borrower credit deterioration, allowance-estimation uncertainty, deposit competition and outflows, interest-rate sensitivity, and continued compliance with the OCC agreement. The bank was liability-sensitive over the coming year, with $131.0 million more liabilities than assets scheduled to reprice within 12 months.
- The bank had $89.6 million of unfunded loan commitments and $2.7 million of letters of credit. Management expected a significant portion of commitments not to be funded. Available federal funds lines totaled $30.5 million, with no borrowings outstanding; stated unused FHLB capacity was $7.2 million.
- The company warned that new Dodd-Frank requirements, including debit-card interchange rules effective October 1, 2011, could pressure fee income and increase compliance costs, even though the interchange fee cap did not technically apply to banks below $10 billion in assets. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Whether improvement in net interest income and lower credit costs can persist, given the absence of prior-year securities gains and higher current OREO expenses.
- Trends in nonaccrual loans, troubled restructurings, collateral values, charge-offs, and the adequacy of the $8.72 million loan-loss allowance.
- Progress and regulatory confirmation of compliance with the OCC Formal Agreement and its elevated capital requirements.
- Stability and cost of deposits, refinancing or renewal of wholesale funding, and liquidity available beyond reported cash balances.
- Future valuation and impairment outcomes for the delinquent private-label mortgage security and the effect of interchange and other regulatory changes.