Southern First Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Southern First Bancshares is a bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 or June 30, 2019 | Comparable period or prior date |
|---|---|---|
| Net income | $7.24; diluted EPS $0.93 | Q2 2018: $5.51; diluted EPS $0.71 |
| Net interest income | Q2: $16.54; H1: $32.36 | Q2 2018: $14.61; H1 2018: $28.65 |
| Net interest margin, tax-equivalent | Q2: 3.43%; H1: 3.47% | Q2 2018: 3.49%; H1 2018: 3.56% |
| Noninterest income | Q2: $4.09; H1: $7.08 | Q2 2018: $2.77; H1 2018: $5.19 |
| Noninterest expense | Q2: $11.37; H1: $22.02 | Q2 2018: $9.98; H1 2018: $19.18 |
| Total assets | $2,116 | December 31, 2018: $1,901 |
| Gross loans / deposits | $1,809 / $1,854 | December 31, 2018: $1,677 / $1,648 |
| Cash and cash equivalents | $116.8 | December 31, 2018: $72.9 |
| Borrowings | FHLB advances and other borrowings: $25.0; junior subordinated debentures: $13.4 | December 31, 2018: $50.0 and $13.4 |
- Q2 net income increased 31.4% year over year; first-half net income rose 23.5%. First-half diluted EPS was $1.71 versus $1.39 in 2018.
- First-half net interest income increased 12.9%, reflecting loan growth and higher asset yields, partly offset by increased funding costs. The Q2 efficiency ratio improved to 55.1% from 57.4%.
- Mortgage banking income rose 73.7% in Q2 and 58.5% for the first half, with management citing higher mortgage origination volume and a favorable mortgage-rate environment. Compensation and benefits, data-processing, and other operating costs also increased; staffing included 20 additional employees.
- Gross loans grew 7.9% from year-end; commercial loans were 67.7% of the portfolio. Real-estate-secured loans represented 82.4% of gross loans.
- The allowance for loan losses was $16.1, or 0.89% of gross loans, versus 0.94% at year-end and 1.05% at June 2018. First-half net charge-offs were $0.218, or 0.03% of average loans, annualized.
- Nonperforming assets were $5.8, 0.27% of assets and 0.32% of gross loans, compared with 0.31% and 0.35% at year-end. Total TDRs were $10.2; nonaccruing TDRs were $3.2.
- First-half operating cash flow was negative $0.1; investing cash outflow was $137.7, mainly reflecting loan growth and a $5.0 purchase of life-insurance policies. Financing cash inflow was $181.6, including $205.9 of deposit growth and a $25.0 reduction in borrowings. Cash increased $43.9.
- Liquidity included $72.0 of unused correspondent-bank federal-funds lines, $368.7 of stated unused FHLB borrowing capacity, and an unused $15.0 line of credit. The loan-to-deposit ratio was 98%, down from 102% at year-end. Retail deposits were 96.2% of deposits; brokered deposits were 3.8%.
- The Bank exceeded the disclosed well-capitalized thresholds at June 30, 2019: total risk-based capital 11.94%, Tier 1 11.03%, common equity Tier 1 11.03%, and leverage 9.63%. Shareholders’ equity was $189.9.
Changes, outlook, risks and unusual items
- Margin pressure is a key management concern: deposit competition raised funding costs faster than asset yields, reducing the Q2 tax-equivalent margin by 6 basis points and the first-half margin by 9 basis points year over year. Management anticipated continued pressure from deposit competition and a potential Federal Reserve rate cut; no quantitative earnings guidance was provided.
- Interest-rate sensitivity modeling estimated net-interest-income declines versus base case of 0.94% for rates up 100 basis points, 2.88% up 200, and 5.53% up 300; declines of 3.16%, 4.66%, and 3.04% for rates down 100, 200, and 300 basis points, respectively. These are estimates dependent on assumptions, not forecasts.
- The company was preparing to adopt CECL (ASC 326), then expected to be effective after December 31, 2019. Management said adoption may increase the allowance for credit losses, but the amount remained under review; a possible implementation delay was also being evaluated.
- Key disclosed risks include real-estate and loan-concentration exposure, credit deterioration, rapid loan growth and limited seasoning, deposit competition or outflows, interest-rate changes, regulatory requirements, cybersecurity, and the costs and execution of expansion into Atlanta, Greensboro and Raleigh.
- Effective April 9, 2019, the Bank entered into a development-services contract with a company owned by a director for a Greenville office project, providing for monthly payments of $50,000 through December 31, 2019. Verify the related-party terms and project costs.
- Management reported no material change in previously disclosed risk factors, no material pending legal proceedings known to management, and no subsequent event requiring accrual or disclosure. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether loan growth and deposit funding remain sustainable, and how deposit pricing affects margins and profitability.
- Credit quality trends, including real-estate concentrations, TDRs, past-due loans, allowance adequacy and the effect of CECL adoption.
- Mortgage banking income sustainability given its contribution to noninterest-income growth and the favorable rate environment cited by management.
- Liquidity and capital capacity under continued growth or adverse deposit, credit and interest-rate conditions; confirm regulatory ratios and available borrowing capacity.
- The economics, governance and related-party handling of the Greenville development-services agreement and associated office expansion.