Southern First Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a South Carolina bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services. Financial figures below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance and condition
| Metric | Q2 2021 | Comparable period |
|---|---|---|
| Net income | $10.3 | $4.7 in Q2 2020 |
| Diluted earnings per share | $1.29 | $0.60 in Q2 2020 |
| Net interest income | $21.4 | $19.8 in Q2 2020 |
| Net interest margin, tax-equivalent | 3.50% | 3.42% in Q2 2020 |
| Provision for loan losses | $(1.9), a reversal | $10.2 expense in Q2 2020 |
| Noninterest income | $3.6 | $9.2 in Q2 2020 |
| Noninterest expense | $13.5 | $12.6 in Q2 2020 |
| Efficiency ratio | 53.9% | 43.6% in Q2 2020 |
- For the first half of 2021, net income was $20.7 million and diluted EPS was $2.60, compared with $7.5 million and $0.96, respectively, in first-half 2020. Net interest income rose 12.8% to $42.7 million; tax-equivalent net interest margin was 3.55%, versus 3.43%.
- At June 30, total assets were $2.65 billion, up 6.8% from year-end 2020. Gross loans were $2.25 billion, up 5.2%; deposits were $2.31 billion, up 7.8%. Shareholders’ equity was $251.7 million, compared with $228.3 million at year-end.
- Allowance for loan losses was $41.9 million, or 1.86% of gross loans, versus $44.1 million, or 2.06%, at year-end 2020. First-half net charge-offs were $37,000.
- Cash and cash equivalents totaled $153.8 million, compared with $100.7 million at year-end. First-half cash flows were $33.8 million provided by operating activities, $126.4 million used in investing, and $145.7 million provided by financing activities.
- Borrowings included $36.1 million of subordinated debentures; there were no FHLB advances at June 30. The loan-to-deposit ratio was 98%, versus 100% at year-end.
Material changes and management commentary
- Higher earnings primarily reflected substantially lower loan-loss provisions and reduced deposit costs. For Q2, the provision comparison improved by $12.1 million year over year; lower noninterest income and higher expenses partly offset the benefit.
- Mortgage banking income fell to $2.0 million from $5.8 million in Q2 2020, which management attributed to low housing inventory, lower refinance volumes, and reduced loan-sale margins. PPP lender and referral fees declined to $268,000 from $2.2 million; the company did not originate new PPP loans in 2021.
- Management said lower deposit costs supported margin improvement but expects potential future margin pressure as new and renewed loans are priced below the existing portfolio. It also does not expect mortgage origination income to remain at the level seen in the prior 12 months. No formal earnings or financial guidance is provided.
- Management reported that most COVID-related loan modifications had returned to normal payment structures; two remained under deferral at quarter-end. Hospitality and tourism remain areas of credit concern: the hotel portfolio comprised 21 loans totaling $115.6 million, including two loans totaling $13.5 million still under deferral. No hotel loans were 30 or more days past due or on nonaccrual.
- Classified asset ratio increased to 13.36% from 8.18% at year-end 2020, mainly after hotel-loan downgrades in Q1 2021. The filing cites four hotel loans totaling $48.4 million downgraded to special mention and seven totaling $26.1 million downgraded to substandard.
Liquidity, capital, risks, and contingencies
- The Bank was reported well-capitalized. At June 30, its total risk-based capital ratio was 14.42%, CET1 ratio 13.16%, and Tier 1 leverage ratio 10.70%. Management said company and Bank capital ratios exceeded regulatory requirements.
- Available liquidity sources included $118.5 million of unused correspondent-bank federal funds lines, $530.4 million of unused FHLB borrowing capacity, and an unused $15.0 million holding-company credit line. Management reported no unusual COVID-related pressure on deposits or liquidity.
- Unfunded commitments to extend credit were $521.6 million, including $375.8 million at variable rates. The company also reported $39.6 million of commitments for a new headquarters, of which $15.4 million had been paid by quarter-end.
- Principal risks discussed include continuing or renewed COVID-19 effects, credit losses and real-estate concentration, hotel and tourism exposure, interest-rate and margin changes, loan growth and seasoning, competition, funding and deposit flows, cybersecurity, regulation, and execution of expansion plans. Management noted that further credit losses could adversely affect capital ratios.
- The company reported no material pending legal proceedings known to management and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether hotel and other classified credits stabilize, including performance of the deferred hotel loans and the effect of the reported downgrades.
- Whether provision reversals and low charge-offs are sustainable, and how allowance coverage responds to changing economic conditions.
- Whether mortgage banking income and the efficiency ratio recover as mortgage volumes and margins change.
- Whether loan growth can be funded by deposits while maintaining liquidity, capital ratios, and net interest margin.
- Progress and remaining cost of the headquarters project, and any drawdown or changes to stated borrowing capacity.