Southern First Bancshares, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Southern First Bancshares is a South Carolina bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services. This unaudited report covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 or June 30, 2016 | Comparison |
|---|---|---|
| Net income | $3.306; diluted EPS $0.49 | Q2 2015: $2.560; diluted EPS $0.39 |
| Six-month net income | $6.312; diluted EPS $0.94 | First half 2015: $4.588; diluted EPS $0.70 |
| Net interest income | Q2: $10.513; first half: $20.820 | Q2 2015: $9.491; first half 2015: $18.561 |
| Net interest margin, tax-equivalent | Q2: 3.62%; first half: 3.63% | Both comparable 2015 periods: 3.73% |
| Noninterest income | Q2: $3.146; first half: $5.704 | Q2 2015: $2.115; first half 2015: $4.256 |
| Noninterest expense | Q2: $7.853; first half: $15.369 | Q2 2015: $6.646; first half 2015: $14.106 |
| Efficiency ratio | Q2: 57.5% | Q2 2015: 57.3% |
| Assets; net loans | $1,290.7; $1,051.2 | December 31, 2015: $1,217.3; $991.3 |
| Deposits; shareholders’ equity | $1,049.1; $102.4 | December 31, 2015: $985.7; $94.2 |
| Cash and cash equivalents | $71.5 | December 31, 2015: $62.9 |
| Borrowings and junior subordinated debentures | $115.2 and $13.4 | Both balances unchanged from year-end |
| Operating cash flow, first half | $1.658 | First half 2015: $5.633 |
Material changes and management commentary
- Net income rose 29.1% year over year in Q2 and 37.6% for the first half. Management attributed the improvement primarily to higher net interest income and noninterest income, partly offset by higher expenses and income taxes.
- Net interest income grew as average earning assets expanded, led by loans. However, lower loan yields on newly originated or renewed loans contributed to lower net interest margins. First-half net interest income increased 12.2% year over year.
- Mortgage banking income increased to $2.235 in Q2 from $1.321 a year earlier. Management cited greater origination volume, additional mortgage originators, and a shift to mandatory delivery of mortgage loans to the secondary market.
- Q2 noninterest expense increased 18.2% year over year, notably from compensation and benefits and real estate owned expenses. The latter included write-downs on two commercial properties. First-half compensation expense also rose with staffing and business growth.
- Gross loans increased 6.0% from year-end to $1,065.5. Commercial loans were 65.6% of the portfolio, and 80.9% of loans were secured by real estate.
- Deposits increased to $1,049.1, but a roughly $40 million short-term client deposit received in June was mostly withdrawn in early July. The reported 102% loan-to-deposit ratio therefore warrants review in light of that subsequent withdrawal.
Credit, liquidity, capital, and risks
- Nonperforming assets were $7.672, or 0.59% of assets and 0.72% of gross loans, down from $9.092, or 0.75% and 0.90%, respectively, at year-end. The allowance for loan losses was $14.317, or 1.34% of gross loans; first-half net charge-offs were $0.512, or 0.10% of average loans on an annualized basis.
- Troubled debt restructurings totaled $9.3 across 27 loans, compared with $8.0 across 29 loans at year-end. Management stated that no loans modified as TDRs had defaulted within 12 months of restructuring.
- Management reported liquid assets of $71.5, unused FHLB borrowing capacity of $110.7, and $45.0 in unused correspondent-bank federal funds lines. Approximately 43% of investment securities were pledged against debt and about 20% to secure client deposits. The filing says management believes existing deposits and borrowing sources can meet liquidity needs.
- The Bank’s regulatory capital ratios were 11.68% total capital, 10.43% Tier 1 risk-based, 10.43% Common Equity Tier 1, and 8.98% Tier 1 leverage. Management stated the Company and Bank would meet Basel III requirements on a fully phased-in basis if then effective.
- Interest-rate sensitivity analysis estimated net interest income changes of +4.25% for a 100-basis-point increase and -7.31% for a 100-basis-point decrease; results depend on assumptions about repricing and prepayments.
- Unfunded commitments to extend credit totaled $202.8, including $146.2 at variable rates; letters of credit were $4.3. The filing identifies real-estate values and concentration, credit quality, loan growth and seasoning, deposit flows and funding access, interest rates, competition, regulation, cybersecurity, and key-personnel retention as risks.
Outlook, contingencies, and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and assumptions.
- Effective April 1, 2016, the Company elected fair-value accounting for mortgage loans held for sale, with changes in fair value recognized in earnings. Mortgage loans held for sale were $14.4 at June 30, versus $4.9 at year-end.
- Management reported no subsequent events requiring accrual or disclosure. It was not aware of material pending legal proceedings expected to materially affect financial position, results, or cash flows. The Company reported no cash dividends since inception.
Important facts for investors to verify
- How much of deposit growth and liquidity at quarter-end depended on the roughly $40 million temporary deposit, and the effect of its July withdrawal.
- Whether loan growth can continue without further margin compression, given the decline in reported net interest margin and the stated lower yields on new and renewed loans.
- The performance and risk composition of the real-estate-heavy loan book, including TDRs, impaired loans, delinquency trends, and the adequacy of the allowance.
- Whether mortgage banking income and margins are sustainable, and the earnings effect of fair-value changes and any investor repurchase or indemnification claims.
- The assumptions underlying interest-rate sensitivity estimates and the availability of pledged collateral and borrowing capacity under stressed conditions.