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SFST > SEC Filings for SFST > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for SOUTHERN FIRST BANCSHARES INC

Form 10-Q for SOUTHERN FIRST BANCSHARES INC


6-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion reviews our results of operations for the three and six month periods ended June 30, 2013 as compared to the three and six month periods ended June 30, 2012 and assesses our financial condition as of June 30, 2013 as compared to December 31, 2012. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2012 included in our Annual Report on Form 10-K for that period. Results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013 or any future period.

cautionary warning regarding forward-looking statements

This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words "may," "would," "could," "should," "will," "expect," "anticipate," "predict," "project," "potential," "believe," "continue," "assume," "intend," "plan," and "estimate," as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described under Item 1A- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2012, as well as the following:

credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;

credit losses due to loan concentration;

changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;

restrictions or conditions imposed by our regulators on our operations;

increases in competitive pressure in the banking and financial services industries;

changes in the interest rate environment which could reduce anticipated or actual margins;



changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;

changes in economic conditions resulting in, among other things, a deterioration in credit quality;

changes occurring in business conditions and inflation;

changes in access to funding or increased regulatory requirements with regard to funding;

increased cybersecurity risk, including potential business disruptions or financial losses;

changes in deposit flows;

changes in technology;

the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

changes in monetary and tax policies;

changes in accounting policies and practices;

the rate of delinquencies and amounts of loans charged-off;

the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

our ability to attract and retain key personnel;

our ability to retain our existing clients, including our deposit relationships;

adverse changes in asset quality and resulting credit risk-related losses and expenses; and

other risks and uncertainties detailed from time to time in our filings with the SEC.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed, implied or projected by us in such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see "Risk Factors" under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed, implied or projected by us in the forward-looking statements.

OVERVIEW

We are a bank holding company headquartered in Greenville, South Carolina, and were incorporated in March 1999 under the laws of South Carolina. We provide a wide range of banking services and products to our clients through our wholly-owned subsidiary, Southern First Bank, a South Carolina state bank. We do not engage in any significant operations other than the ownership of Bank.

The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public. We currently have eight offices located in Greenville, Lexington, Richland, and Charleston Counties of South Carolina. In December 2012, we opened our Charleston office at 480 East Bay Street, Charleston, South Carolina and our third full-service office in Columbia, South Carolina. During the second quarter of 2013, we purchased a piece of property


for a future full-service office in Mount Pleasant, South Carolina. This office will be our second office in the Charleston, South Carolina market.

Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST."

At June 30, 2013, we had total assets of $839.0 million, a 5.1% increase from total assets of $798.0 million at December 31, 2012. The largest components of our total assets are net loans and investment securities which were $677.9 million and $75.6 million, respectively, at June 30, 2013. Comparatively, our net loans and investment securities totaled $636.9 million and $86.0 million, respectively, at December 31, 2012. Our liabilities and shareholders' equity at June 30, 2013 totaled $775.4 million and $63.6 million, respectively, compared to liabilities of $733.9 million and shareholders' equity of $64.1 million at December 31, 2012. The principal component of our liabilities is deposits which were $632.1 million and $576.3 million at June 30, 2013 and December 31, 2012, respectively.

Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.

Our net income was $1.3 million and $815,000 for the three months ended June 30, 2013 and 2012, respectively, an increase of $485,000, or 59.5%. After our dividend payment to our preferred shareholders, net income to common shareholders was $1.1 million, or diluted earnings per share ("EPS") of $0.25, for the second quarter of 2013 as compared to net income to common shareholders of $589,000, or diluted EPS of $0.13 for the same period in 2012. The increase in net income resulted primarily from increases in net interest income and noninterest income as well as a decrease in the provision for loan losses.

Our net income was $2.3 million and $1.5 million for the six months ended June 30, 2013 and 2012, respectively, an increase of $759,000, or 50.5%. After our dividend payment to our preferred shareholders, net income to common shareholders was $1.9 million, or diluted EPS of $0.43, for the six months ended June 30, 2013 as compared to net income to common shareholders of $988,000, or diluted EPS of $0.23, for the same period in 2012. The increase in net income resulted primarily from increases in net interest income and noninterest income as well as a decrease in the provision for loan losses.

Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

Effect of Economic Trends

The twelve months ended December 31, 2012 and the first six months of 2013 continue to reflect the tumultuous economic conditions which have negatively impacted the liquidity and credit quality of financial institutions in the United States. Concerns regarding increased credit losses from the weakening economy have negatively affected capital and earnings of most financial institutions. Financial institutions have experienced significant declines in the value of collateral for real estate loans, heightened credit losses, which have resulted in record levels of non-performing assets, charge-offs and foreclosures. In addition, during the past four years, hundreds of financial


institutions failed or merged with other institutions, and two of the government sponsored housing enterprises were placed into conservatorship with the U.S. Government in 2008.

Liquidity in the debt markets remains low in spite of efforts by Treasury and the Federal Reserve to inject capital into financial institutions. The federal funds rate set by the Federal Reserve has remained at 0.25% since December 2008, following a decline from 4.25% to 0.25% during 2008 through a series of seven rate reductions.

The Treasury, the FDIC and other governmental agencies continue to enact rules and related to economic recovery programs, many of which contain limitations on the ability of financial institutions to take certain actions or to engage in certain activities. The weak economic conditions are expected to continue throughout 2013, and financial institutions likely will continue to experience heightened credit losses and higher levels of non-performing assets, charge-offs and foreclosures. In light of these conditions, financial institutions also face heightened levels of scrutiny from federal and state regulators. These factors negatively influenced, and likely will continue to negatively influence, earning asset yields at a time when the market for deposits is intensely competitive. As a result, financial institutions experienced, and are expected to continue to experience, pressure on credit costs, loan yields, deposit and other borrowing costs, liquidity, and capital.

results of operations

Net Interest Income and Margin

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. For the three month period ended June 30, 2013 our net interest income was $7.1 million, an 11.8% increase over net interest income of $6.4 million for the same period in 2012. In comparison, our average earning assets increased 8.9%, or $63.9 million, during the second quarter of 2013 compared to the second quarter of 2012, while our average interest bearing liabilities increased by $63.0 million during the same period. The increase in average earning assets is primarily related to an increase in average loans while the increase in average interest-bearing liabilities is primarily a result of an increase in interest bearing deposits and FHLB advances.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the "Average Balances, Income and Expenses, Yields and Rates" table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and six month periods ended June 30, 2013 and 2012. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the "Rate/Volume Analysis" table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

The following tables set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.


Average Balances, Income and Expenses, Yields and Rates



                                                                                        For the Three Months Ended June 30,
                                                                             2013                                      2012
                                                  Average     Income/      Yield/           Average     Income/      Yield/
  (dollars in thousands)                          Balance     Expense     Rate(1)           Balance     Expense     Rate(1)
  Interest-earning assets
  Federal funds sold                            $  29,043   $      18        0.25 %       $  32,053   $      21        0.26 %
  Investment securities, taxable                   55,535         270        1.95 %          58,839         358        2.45 %
  Investment securities, nontaxable (2)            24,619         252        4.10 %          17,814         213        4.81 %
  Loans                                           673,930       8,468        5.04 %         610,570       8,023        5.28 %
  Total interest-earning assets                   783,127       9,008        4.61 %         719,276       8,615        4.82 %
  Noninterest-earning assets                       45,932                                    43,232
  Total assets                                  $ 829,059                                 $ 762,508
  Interest-bearing liabilities
  NOW accounts                                  $ 153,025          99        0.26 %       $ 155,501         231        0.60 %
  Savings & money market                          148,530         121        0.33 %         107,060         104        0.39 %
  Time deposits                                   223,195         504        0.91 %         206,591         702        1.37 %
  Total interest-bearing deposits                 524,750         724        0.55 %         469,152       1,037        0.89 %
  Note payable and other borrowings               130,126         971        2.99 %         122,700       1,027        3.37 %
  Junior subordinated debentures                   13,403          87        2.60 %          13,403          92        2.76 %
  Total interest-bearing liabilities              668,279       1,782        1.07 %         605,255       2,156        1.43 %
  Noninterest-bearing liabilities                  95,849                                    92,967
  Shareholders' equity                             64,931                                    64,286
  Total liabilities and shareholders' equity    $ 829,059                                 $ 762,508
  Net interest spread                                                        3.54 %                                    3.39 %
  Net interest income (tax equivalent) /
  margin                                                    $   7,226        3.70 %                   $   6,459        3.61 %
  Less: tax-equivalent adjustment (2)                              96                                        81
  Net interest income                                       $   7,130                                 $   6,378

(1) Annualized for the three month period.
(2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

Our net interest margin, on a tax-equivalent basis, was 3.70% for the three months ended June 30, 2013 compared to 3.61% for the second quarter of 2012. The 9 basis point increase in net interest margin as compared to the same period in 2012, was driven primarily by a 36 basis point reduction in the cost of our interest bearing liabilities, offset in part by a 21 basis point reduction in the yield of our interest earning assets.

While our average interest-bearing liabilities increased by $63.0 million during the second quarter of 2013 as compared to the second quarter of 2012, our interest expense decreased by $374,000 due to a 36 basis point decline in the rate paid on these liabilities. During the past 12 months, we have continued to reduce rates on all of our deposit products in line with the historically low Federal funds target rate. Consequently, the cost of our interest bearing deposits decreased 34 basis points from the second quarter of 2012. Also, during the past 12 months, we restructured $35.0 million of our FHLB advances from a weighted average rate of 2.60% to a weighted average rate of 1.95%, which reduced the overall weighted average rate on our FHLB advances by 29 basis points.

In addition, our interest-earning assets increased by $63.9 million as compared to the same quarter in 2012, while the yield on these assets decreased by 21 basis points. The decline in yield on our interest earning assets was driven primarily by reduced yields on our loan portfolio due to loans being originated or renewed at market rates which are lower than those in the past. Our average loan balances increased by $63.4 million as of the second quarter of 2013, compared to the same period in 2012, while our loan yield decreased by 24 basis points during the same period.

Our net interest spread was 3.54% for the three months ended June 30, 2013 compared to 3.39% for the same period in 2012. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 36 basis point reduction in rate on our interest-bearing liabilities, partially offset by a 21 basis point decline in yield on our earning assets, resulted in a 15 basis point increase in our net interest spread for the 2013 period.


                                                                                                 For the Six Months Ended June 30,
                                                                                   2013                                       2012
                                                  Average     Income/            Yield/            Average     Income/      Yield/
  (dollars in thousands)                          Balance     Expense           Rate(1)            Balance     Expense     Rate(1)
  Interest-earning assets
  Federal funds sold                            $  26,239   $      32              0.25 %        $  26,750   $      35        0.26 %
  Investment securities, taxable                   58,007         578              2.01 %           70,488         782        2.23 %
  Investment securities, nontaxable (2)            24,850         503              4.08 %           17,975         427        4.78 %
  Loans                                           665,316      16,733              5.07 %          606,155      16,009        5.31 %
  Total interest-earning assets                   774,412      17,846              4.65 %          721,368      17,253        4.81 %
  Noninterest-earning assets                       45,269                                           43,692
  Total assets                                  $ 819,681                                        $ 765,060
  Interest-bearing liabilities
  NOW accounts                                  $ 156,518         223              0.29 %        $ 154,409         503        0.66 %
  Savings & money market                          133,637         202              0.30 %          113,457         238        0.42 %
  Time deposits                                   223,046       1,105              1.00 %          208,734       1,558        1.50 %
  Total interest-bearing deposits                 513,201       1,530              0.60 %          476,600       2,299        0.97 %
  Note payable and other borrowings               134,361       1,944              2.92 %          122,700       2,096        3.44 %
  Junior subordinated debentures                   13,403         173              2.60 %           13,403         188        2.82 %
  Total interest-bearing liabilities              660,965       3,647              1.11 %          612,703       4,583        1.50 %
  Noninterest-bearing liabilities                  93,908                                           88,339
  Shareholders' equity                             64,808                                           64,018
  Total liabilities and shareholders' equity    $ 819,681                                        $ 765,060
  Net interest spread                                                              3.53 %                                     3.31 %
  Net interest income (tax equivalent) /
  margin                                                    $  14,199              3.70 %                    $  12,670        3.53 %
  Less: tax-equivalent adjustment (2)                             191                                              162
  Net interest income                                       $  14,008                                        $  12,508

(1) Annualized for the six month period.
(2) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

Our net interest margin, on a tax-equivalent basis, was 3.70% for the six months ended June 30, 2013 compared to 3.53% for the six months ended June 30, 2012. The 17 basis point increase in net interest margin during the six months ended June 30, 2013 was driven primarily by a 39 basis point reduction in the cost of our interest bearing liabilities compared to the same period in 2012.

During the first six months of 2013, our average interest-earning assets increased by $53.0 million as compared to the same period in 2012; however, the yield on our interest-earning assets declined by 16 basis points during 2013. The increase in interest-earning assets was driven by a $59.2 million increase in average loans, partially offset by a $5.6 million decrease in average investment securities, while the decline in yield on interest earning assets was driven primarily by reduced yields on our loan and investment securities portfolios.

In addition, our average interest-bearing liabilities increased by $48.3 million during the six month period ended June 30, 2013 as compared to the same period in 2012, while the cost of our interest-bearing liabilities declined by 39 basis points. In effect, our interest-bearing liabilities continue to reprice downward at a faster rate than our interest-earning assets

Our net interest spread was 3.53% for the six months ended June 30, 2013 compared to 3.31% for the same period in 2012. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 39 basis point reduction in rate on our interest-bearing liabilities, partially offset by a 16 basis point decline in yield on our earning assets, resulted in a 22 basis point increase in our net interest spread for the 2013 period.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.


                                                                                                Three Months Ended
                                             June 30, 2013 vs. 2012                         June 30, 2012 vs. 2011
                                         Increase (Decrease) Due to                     Increase (Decrease) Due to
                                                    Rate/                                          Rate/
  (dollars in thousands)       Volume     Rate     Volume     Total           Volume     Rate     Volume     Total
  Interest income
  Loans                      $    830     (349 )      (36 )     445         $    446     (694 )      (38 )    (286 )
  Investment securities            22      (82 )       (4 )     (64 )             31      (74 )       (5 )     (48 )
  Federal funds sold               (2 )     (1 )        -        (3 )            (19 )      2         (2 )     (19 )
  Total interest income           850     (432 )      (40 )     378              458     (766 )      (45 )    (353 )
  Interest expense
  Deposits                        103     (377 )      (39 )    (313 )              3     (810 )       (1 )    (808 )
. . .
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