Southern First Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company operates a community bank serving South Carolina, North Carolina, and Georgia.
Financial performance and condition
| Metric | Q2 / June 30, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $24.9 million | $21.4 million, Q2 2021 |
| Net income | $7.2 million; diluted EPS $0.90 | $10.3 million; diluted EPS $1.29, Q2 2021 |
| Net interest margin, tax-equivalent | 3.35% | 3.50%, Q2 2021 |
| Efficiency ratio | 58.2% | 53.9%, Q2 2021 |
| Total assets | $3,287.7 million | $2,925.5 million, Dec. 31, 2021 |
| Gross loans | $2,845.2 million | $2,489.9 million, Dec. 31, 2021 |
| Deposits | $2,870.2 million | $2,563.8 million, Dec. 31, 2021 |
| Cash and cash equivalents | $182.1 million | $167.2 million, Dec. 31, 2021 |
| FHLB advances and related debt | $50.0 million | None reported, Dec. 31, 2021 |
| Shareholders’ equity | $282.6 million | $277.9 million, Dec. 31, 2021 |
For the first six months, net interest income was $48.0 million versus $42.7 million; net income was $15.2 million versus $20.7 million, and diluted EPS was $1.88 versus $2.60. Tax-equivalent net interest margin was 3.36%, down from 3.55%. The annualized first-half return on average assets was 1.01% and return on average equity was 10.95%.
Six-month cash flows were $14.4 million provided by operating activities, $356.5 million used in investing activities, and $357.0 million provided by financing activities, producing a $14.9 million increase in cash. Loan growth was funded primarily by deposit growth and $50 million of net FHLB advances.
The allowance for credit losses was $34.2 million, or 1.20% of gross loans; the separate reserve for unfunded commitments was $2.33 million. Nonperforming assets were $2.93 million, 0.09% of assets, compared with $4.86 million, 0.17%, at year-end. The loan-to-deposit ratio was 99%.
Material changes versus comparable periods
- Q2 net interest income rose 16.1%, mainly due to loan growth, but margin declined 15 basis points as asset yields fell and funding costs rose. Management noted that deposits reprice faster than a significant portion of its fixed-rate loans and anticipated continued margin pressure.
- Net income fell in both the quarter and first half. Drivers included credit-loss provisioning rather than reversals, lower mortgage banking income, and higher noninterest expense.
- Q2 provision for credit losses was $1.8 million, versus a $1.9 million reversal in Q2 2021. First-half provision was $2.9 million, versus a $2.2 million reversal in first-half 2021.
- Mortgage banking income declined 40.3% in Q2 to $1.2 million and 59.5% in the first half to $2.7 million. The filing attributes the decline to low housing inventory, fewer refinancings, and lower loan-sale margins.
- Noninterest expense increased 17.0% in Q2 to $15.8 million and 10.2% in the first half to $30.5 million, reflecting compensation, occupancy, data-processing, insurance, and marketing costs. The second-quarter efficiency ratio worsened to 58.2%.
- Gross loans grew 14.3% from year-end, with commercial loans up 13.8% and consumer loans up 15.1%. Deposits increased $306.3 million; wholesale deposits were 6.5% of deposits at June 30, versus none reported at year-end.
- Available-for-sale securities had $12.8 million of gross unrealized losses at June 30, versus $1.9 million at year-end, primarily attributed to interest-rate changes. The company recorded a $9.4 million first-half other comprehensive loss.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management said mortgage origination volume was not expected to remain at prior-year levels and anticipated continued pressure on net interest spread and margin.
- The company adopted CECL on January 1, 2022. Adoption increased the loan allowance by $1.5 million and the unfunded-commitment reserve by $2.0 million, with a $2.8 million after-tax reduction to retained earnings. Prior-year periods use the previous incurred-loss method and are not fully comparable.
- The relocation to a newly constructed Greenville headquarters resulted in a $394,000 loss on disposal of assets in Q2. Management also cited added occupancy costs from the new headquarters and Charlotte office.
- Interest-rate risk modeling estimated net interest income changes of +0.49% for a 100-basis-point increase, +0.17% for a 200-basis-point increase, and -0.25% for a 300-basis-point increase; corresponding decreases of 100, 200, and 300 basis points were estimated to reduce net interest income by 4.85%, 7.09%, and 8.01%. These are modeled estimates, not forecasts.
- Liquidity sources included $118.5 million of unused correspondent-bank lines, $556.6 million of unused FHLB borrowing capacity, and an unused $15 million holding-company line. Management reported regulatory capital ratios above applicable minimums and the Bank was well capitalized.
- Key risks include real-estate and loan concentration, rapid loan growth and seasoning, credit losses, deposit flows and funding costs, changing interest rates, inflation and economic conditions, COVID-19 effects, competition, regulatory changes, and cybersecurity. About 85.3% of loans were secured by real estate.
- The company reported no material changes to previously disclosed risk factors, no known material pending legal proceeding, and no material change in internal control over financial reporting. A plan authorizing repurchases of up to 399,026 shares was announced; none had been repurchased by June 30, 2022.
Important facts for investors to verify
- Whether loan growth can be funded without materially higher deposit costs, and how quickly asset yields respond to rate increases.
- Trends in mortgage banking income, fee revenue, compensation and occupancy costs, and the efficiency ratio.
- Credit quality as the portfolio seasons: delinquencies, nonperforming loans, criticized loans, charge-offs, and the adequacy of CECL reserves, including unfunded commitments.
- The impact of the securities portfolio’s unrealized losses on capital and liquidity, particularly if securities must be sold.
- Deposit mix and concentration, wholesale funding usage, loan-to-deposit ratio, and availability of borrowing lines and collateral.
- Management’s assumptions behind interest-rate sensitivity estimates and the effect of further rate changes on margin and earnings.