Southern First Bancshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a South Carolina bank holding company operating Southern First Bank, with commercial and retail banking, mortgage banking, and corporate segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $19.8 million | $16.5 million | $37.9 million | $32.4 million |
| Provision for loan losses | $10.2 million | $0.3 million | $16.2 million | $0.6 million |
| Noninterest income | $9.2 million | $4.1 million | $13.1 million | $7.1 million |
| Noninterest expense | $12.6 million | $11.4 million | $25.0 million | $22.0 million |
| Net income | $4.7 million | $7.2 million | $7.5 million | $13.2 million |
| Diluted EPS | $0.60 | $0.93 | $0.96 | $1.71 |
- Q2 net interest margin was 3.42% on a tax-equivalent basis, versus 3.43% a year earlier; first-half margin was 3.43%, versus 3.47%.
- Q2 efficiency ratio improved to 43.6% from 55.1%, helped by mortgage banking and PPP-related income.
- Six-month operating cash flow was $2.1 million, compared with a $0.1 million use in the prior-year period. Cash and cash equivalents rose to $238.4 million from $127.8 million at year-end 2019.
Financial position, credit and liquidity
- At June 30, 2020, total assets were $2.48 billion, loans before allowance were $2.04 billion, deposits were $2.19 billion, and shareholders’ equity was $216.2 million. Since December 31, 2019, loans increased 4.8% and deposits increased $312.5 million.
- The allowance for loan losses increased to $31.6 million, or 1.55% of gross loans, from $16.6 million, or 0.86%, at year-end. First-half net charge-offs were $1.2 million. Nonperforming assets were $9.0 million, 0.36% of assets and 0.44% of gross loans, versus $6.8 million at year-end.
- Deposits were the main funding source; the loan-to-deposit ratio was 93%, down from 104% at year-end. The company had no FHLB advances outstanding, $118.5 million of unused correspondent-bank federal funds lines, $525.6 million of available FHLB borrowing capacity, and an unused $15 million holding-company credit line.
- The Bank’s regulatory capital ratios exceeded well-capitalized thresholds: total capital 13.33%, Tier 1 risk-based capital 12.07%, CET1 12.07%, and Tier 1 leverage 9.97%. Management said capital was adequate, while warning that further credit losses could reduce capital ratios.
- Subordinated debentures were $35.9 million. The company had no FHLB or other borrowings at quarter-end.
Material changes and unusual items
- Net income fell year over year, principally because of the sharply higher loan-loss provision. Net interest income and noninterest income increased, partly offsetting the provision and higher operating expenses.
- The company originated 853 Paycheck Protection Program loans totaling $97.5 million, then sold the portfolio on June 26. It recognized $2.2 million of net SBA lender fee income in other noninterest income; total PPP lender fee income was reported as $3.9 million.
- Mortgage banking income rose to $5.8 million in Q2 from $2.8 million, reflecting higher mortgage origination volume in the lower-rate environment.
- The Federal Reserve’s rate cuts weighed on asset yields. Management anticipated continued pressure on net interest spread and margin.
Outlook, risks and contingencies
- COVID-19 effects remained uncertain. Management expected economic uncertainty to continue for several quarters and said it could result in significant additional loan-loss allowance increases during the remainder of 2020 and into 2021. No formal earnings guidance was provided.
- As of June 30, 863 clients had requested deferrals or interest-only arrangements on $647.1 million of loans, equal to 31.8% of the portfolio; 90% were commercial. Of this amount, $362.1 million had reached the end of the deferral period and was beginning to resume normal payments. Deferrals were not generally classified as TDRs unless borrowers had pre-existing financial difficulty.
- Nine identified at-risk industry categories totaled $418.0 million of outstanding loans, or 20.5% of total loans; $276.9 million of those balances were modified. Hotels, non-essential retail, and religious organizations were notable exposures.
- Real estate secured 83.7% of loans, exposing the bank to collateral values and property-market conditions. The filing also identifies possible deposit outflows, line-of-credit utilization, concentration risk, cybersecurity, competition, and interest-rate changes as risks.
- Management reported no unusual pandemic-related liquidity pressure through June 30. It closed banking lobbies, enabled remote work for about 70% of staff, and planned to consolidate three Columbia, South Carolina offices into one location by September 30, 2020.
- The filing reports no material pending legal proceedings known to management and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether borrowers have resumed payments after deferrals ended, especially in the identified at-risk industries, and how loan ratings and delinquencies evolve.
- The adequacy of the $31.6 million allowance and the scale of any further provisions as COVID-19 conditions develop.
- The quality and repeatability of noninterest income, including mortgage banking results and PPP-related fees; PPP fee disclosures include $3.9 million in total lender fees and $2.2 million recognized net of sale and processing costs.
- The filing’s TDR disclosures are not fully consistent: one section describes three relationships totaling $2.9 million, while other sections report four relationships totaling $3.4 million and a table lists six new TDR loans totaling $3.408 million. Reconcile these figures with the company’s detailed disclosures.
- Funding and capital resilience if deposit growth reverses, borrowers draw unfunded commitments, or credit losses rise; unfunded credit commitments were $471.7 million at quarter-end.