Southern First Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statement amounts are in dollars in thousands unless stated otherwise. Southern First is a Greenville, South Carolina-based bank holding company operating through Southern First Bank, serving South Carolina communities with commercial, consumer and mortgage loans and deposit services. The Bank converted from a national to a South Carolina state charter on April 1, 2013. It had eight offices and purchased property for a future Mount Pleasant office.
Financial performance and position
- Q2 earnings: Net interest income was $7.13 million, up 11.8% from $6.38 million in Q2 2012. Provision for loan losses declined to $750,000 from $1.275 million. Noninterest income increased to $878,000 from $741,000, while noninterest expense rose to $5.30 million from $4.66 million. Net income was $1.30 million versus $815,000; income available to common shareholders was $1.109 million, or diluted EPS of $0.25, versus $589,000, or $0.13 per diluted share.
- First-half earnings: Net income was $2.262 million versus $1.503 million; diluted EPS was $0.43 versus $0.23. Net interest income increased 12.0% to $14.008 million. Provision expense was $1.875 million versus $2.475 million.
- Margins and costs: Tax-equivalent net interest margin was 3.70% for both Q2 and the first half, compared with 3.61% and 3.53%, respectively, in the prior-year periods. Management attributed margin improvement principally to lower funding costs, partly offset by lower asset yields. The Q2 efficiency ratio, excluding securities gains and real estate owned activity, rose to 66.4% from 62.9%.
- Balance sheet at June 30: Total assets were $839.0 million, up 5.1% from year-end 2012. Gross loans were $687.5 million, up $41.5 million; deposits were $632.1 million, up $55.8 million. Net loans were $677.9 million, and investment securities were $75.6 million. Shareholders’ equity was $63.6 million versus $64.1 million at year-end.
- Funding, debt and liquidity: Borrowings comprised $124.1 million of FHLB advances and other borrowings plus $13.4 million of junior subordinated debentures; there were no federal funds purchased at quarter-end, versus $13.2 million at year-end. Cash and cash equivalents were $35.6 million. The loan-to-deposit ratio was 109%. Available capacity included $34.0 million of unused correspondent-bank lines and $50.4 million of unused FHLB capacity, as reported by the Company.
- Cash flow, first half: Operating activities provided $3.9 million; investing activities used $39.0 million, largely reflecting $43.9 million of net loan originations; financing activities provided $41.3 million, including $55.8 million of deposit growth. Cash and cash equivalents increased $6.2 million to $35.6 million.
- Credit quality: Nonperforming assets fell to $6.9 million, or 0.82% of assets and 1.00% of gross loans, from $9.9 million, or 1.24% and 1.53%, respectively, at year-end. The allowance was $9.6 million, or 1.39% of gross loans, and covered nonperforming loans by 172.5%. First-half net charge-offs were $1.4 million, or 0.43% of average loans, compared with $2.3 million, or 0.75%, in first-half 2012.
- Capital and securities: The Bank’s reported total risk-based capital ratio was 12.51%, above the 10% well-capitalized threshold; its Tier 1 leverage ratio was 9.29%, above the 5% threshold. Available-for-sale securities had a $944,000 net unrealized loss at June 30, versus a $1.8 million net unrealized gain at year-end; the resulting first-half other comprehensive loss was $1.8 million.
Material changes and management commentary
- Loan growth and lower funding costs supported higher net interest income; deposit growth was driven in part by the newer Charleston and Columbia offices. Management reported that the Charleston office accounted for $27.8 million of the $41.5 million increase in loans since year-end.
- Operating costs rose with staffing and expansion: management cited 15 additional employees, including hires for new offices and expanded mortgage operations. The Company reported higher compensation, occupancy and data-processing costs; lower FDIC insurance and real-estate-owned expenses partly offset those increases.
- Management described overall credit quality as improved and cited lower past-due loans and nonperforming assets. However, the portfolio remains significantly real-estate-secured: 81.3% of loans were secured by real estate, and 87% of nonperforming loans were so secured.
- The Company implemented a new allowance methodology in Q1 2013, including a 12-quarter historical loss period and revised qualitative factors. Allowance estimates are inherently judgmental and sensitive to collateral values, economic conditions and borrower performance.
- No specific earnings or balance-sheet guidance was provided. Management said weak economic conditions were expected to continue through 2013 and noted potential pressure on credit costs, loan yields, funding costs, liquidity and capital. Its interest-rate model estimated net interest income would increase 2.35% with rates up 100 basis points and decrease 4.40% with rates down 100 basis points; management cautioned that assumptions may not prove valid.
- Key disclosed risks include real-estate values and loan concentrations, portfolio growth and seasoning, changing rates and deposit flows, competition, regulatory requirements, cybersecurity, and maintaining capital and credit-loss reserves. Unfunded commitments to extend credit were $124.1 million, including $99.8 million at variable rates; letters of credit totaled $2.5 million.
- The Company reported no material pending legal proceeding known to management and no subsequent event requiring accrual or disclosure. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether continued loan and deposit growth can offset pressure on loan yields and sustain margin improvement.
- Whether the decline in nonperforming assets and past-due loans persists, and whether the allowance remains adequate under the new model and current collateral values.
- How rising staffing and expansion costs affect efficiency and earnings as new offices and mortgage operations develop.
- Actual capital and liquidity effects of Basel III implementation, planned growth, deposit mix and potential commitment drawdowns.
- The impact of interest-rate movements on net interest income, securities values and funding costs, including the assumptions underlying management’s sensitivity estimates.