Southern First Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022 unless otherwise stated. The company operates Southern First Bank, serving individuals and businesses in South Carolina, North Carolina, and Georgia.
Financial results and condition
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $42.7 | $27.2 | $81.0 | $51.7 |
| Interest expense | $23.9 | $2.4 | $41.8 | $3.7 |
| Net interest income | $18.8 | $24.9 | $39.2 | $48.0 |
| Provision for credit losses | $0.9 | $1.8 | $2.7 | $2.9 |
| Noninterest income | $2.7 | $2.3 | $4.8 | $5.2 |
| Noninterest expense | $17.4 | $15.8 | $34.5 | $30.5 |
| Net income | $2.5 | $7.2 | $5.2 | $15.2 |
| Diluted EPS | $0.31 | $0.90 | $0.64 | $1.88 |
- Q2 tax-equivalent net interest margin was 2.05%, down from 3.35%; first-half margin was 2.20%, down from 3.36%. Q2 efficiency ratio rose to 80.7% from 58.2%.
- At June 30, assets were $4.00 billion, gross loans $3.54 billion, deposits $3.43 billion, and shareholders’ equity $301.5 million. Loans increased 8.1% and deposits increased $299.2 million from year-end.
- Cash and cash equivalents were $205.1 million. FHLB advances and related debt totaled $180.0 million; subordinated debentures were $36.3 million. The loan-to-deposit ratio was 103%.
- First-half operating cash flow was negative $5.3 million; investing cash flow was negative $264.8 million and financing cash flow was positive $304.3 million. Cash increased $34.2 million to $205.1 million.
- The allowance for credit losses was $41.1 million, or 1.16% of gross loans, versus $38.6 million, or 1.18%, at year-end. Nonperforming assets were $3.0 million (0.08% of assets); loans 30 or more days past due were 0.07% of the portfolio.
- Bank capital ratios remained above the filing’s well-capitalized thresholds: total risk-based capital 12.10%, CET1 10.85%, and Tier 1 leverage 8.85%. No cash dividends have been paid since inception.
Material changes and management commentary
- Net income fell sharply year over year as deposit repricing drove interest expense higher. Q2 deposit interest expense rose to $21.9 million from $1.8 million; management attributed margin compression to deposit costs rising faster than asset yields.
- Average interest-bearing liability cost rose to 3.46% in Q2 from 0.47%; average earning-asset yield increased to 4.65% from 3.66%. Management expects continued pressure because many loans are fixed-rate while deposits reprice more quickly.
- Noninterest expense rose 10.2% in Q2. Management cited higher compensation, costs at the new headquarters, and FDIC insurance premiums. First-half insurance expense was $1.6 million versus $0.6 million a year earlier.
- Loan growth was concentrated partly in real estate. Real estate-secured loans represented 84.1% of the portfolio; non-owner-occupied commercial real estate and multifamily loans equaled 273.2% of Bank risk-based capital.
- Available-for-sale securities had $107.6 million amortized cost and $91.5 million fair value, a $16.1 million unrealized loss. Management attributed losses primarily to interest rates, said it did not intend to sell and did not expect forced sale before recovery; securities were described as investment grade.
- Uninsured and uncollateralized deposits were estimated at $968.1 million, or 28.2% of deposits; uninsured deposits alone were estimated at $1.4 billion. Wholesale deposits increased to 12.3% of deposits from 7.5% at year-end.
- Management entered a $200 million pay-fixed portfolio-layer fair-value swap in Q2 to manage interest-rate exposure. In July 2023, the Bank enrolled in the Federal Reserve Bank Term Funding Program.
Outlook, risks and contingencies
- No numerical earnings or growth guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Key risks include deposit outflows and funding costs, interest-rate sensitivity, real-estate and borrower credit quality, loan concentration and seasoning, liquidity access, and potential increases in FDIC assessments following 2023 bank failures.
- The company estimated that a 100-basis-point rate increase would reduce modeled net interest income by 5.86%; a 300-basis-point increase would reduce it by 17.55%. These are model estimates based on assumptions, not forecasts.
- A $15 million line of credit was unused at quarter-end. The company disclosed a violation of one covenant as of June 30 and said the lender subsequently waived it. It also reported $609 million of unused FHLB borrowing capacity and $118.5 million of unused correspondent-bank federal-funds lines.
- Unfunded loan commitments were $850.0 million, with a $2.6 million reserve. Management reported no material pending legal proceedings and no loan modifications to financially distressed borrowers during the quarter.
Important facts for investors to verify
- Whether deposit costs stabilize, deposit mix and uninsured-deposit estimates change, and the company maintains sufficient liquidity.
- Whether net interest margin and earnings recover or continue to be pressured, including the effect and performance of the $200 million swap.
- Whether real-estate loan concentrations, criticized loans, delinquencies, charge-offs, and allowance adequacy evolve as loan growth seasons.
- How the $16.1 million unrealized securities loss and potential liquidity needs affect capital if securities must be sold.
- Whether the covenant waiver fully resolves the disclosed violation and whether capital ratios remain comfortably above regulatory thresholds.