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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from    to

Commission file number 000-27719

sfb2.gif

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina

 

58-2459561

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 Verdae Boulevard, Suite 100,

Greenville, S.C.

 

29607

(Address of principal executive offices)

 

(Zip Code)

 

864-679-9000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

SFST

The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,734,644 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 30, 2020.


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

June 30, 2020 Form 10-Q

INDEX

PART I – CONSOLIDATED FINANCIAL INFORMATION

Page

Item 1.Consolidated Financial Statements

Consolidated Balance Sheets

3

Consolidated Statements of Income

4

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Shareholders’ Equity

6

Consolidated Statements of Cash Flows

7

Notes to Unaudited Consolidated Financial Statements

8

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.Qualitative and Quantitative Disclosures about Market Risk

43

Item 4.Controls and Procedures

43

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

43

Item 1A.Risk Factors

43

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.Defaults upon Senior Securities

44

Item 4.Mine Safety Disclosures

44

Item 5.Other Information

44

Item 6.Exhibits

44

2


PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

June 30,

December 31,

(dollars in thousands, except share data)

2020

2019

(Unaudited)

(Audited)

ASSETS

Cash and cash equivalents:

Cash and due from banks

$

47,292

19,196

Federal funds sold

87,743

89,256

Interest-bearing deposits with banks

103,371

19,364

Total cash and cash equivalents

238,406

127,816

Investment securities:

Investment securities available for sale

70,997

67,694

Other investments

2,610

6,948

Total investment securities

73,607

74,642

Mortgage loans held for sale

44,169

27,046

Loans

2,036,801

1,943,525

Less allowance for loan losses

(31,602

)

(16,642

)

Loans, net

2,005,199

1,926,883

Bank owned life insurance

40,551

40,011

Property and equipment, net

61,344

58,478

Deferred income taxes

4,017

4,275

Other assets

15,002

8,044

Total assets

$

2,482,295

2,267,195

LIABILITIES

Deposits

$

2,188,643

1,876,124

Federal Home Loan Bank advances and other borrowings

-

110,000

Subordinated debentures

35,944

35,890

Other liabilities

41,554

39,321

Total liabilities

2,266,141

2,061,335

SHAREHOLDERS’ EQUITY

Preferred stock, par value $.01 per share, 10,000,000 shares authorized

-

-

Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,734,644 and 7,672,678 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

77

77

Nonvested restricted stock

(1,001

)

(803

)

Additional paid-in capital

108,031

106,152

Accumulated other comprehensive income (loss)

805

(298

)

Retained earnings

108,242

100,732

Total shareholders’ equity

216,154

205,860

Total liabilities and shareholders’ equity

$

2,482,295

2,267,195

See notes to consolidated financial statements that are an integral part of these consolidated statements.

3


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

For the three months ended June 30,

For the six months ended

June 30,

(dollars in thousands, except share data)

2020

2019

2020

2019

Interest income

Loans

$

23,554

22,098

46,921

42,988

Investment securities

384

539

780

1,087

Federal funds sold and interest-bearing deposits with banks

53

451

155

625

Total interest income

23,991

23,088

47,856

44,700

Interest expense

Deposits

3,627

6,175

8,802

11,550

Borrowings

590

374

1,184

793

Total interest expense

4,217

6,549

9,986

12,343

Net interest income

19,774

16,539

37,870

32,357

Provision for loan losses

10,200

300

16,200

600

Net interest income after provision for loan losses

9,574

16,239

21,670

31,757

Noninterest income

Mortgage banking income

5,776

2,830

8,444

4,687

Service fees on deposit accounts

197

265

459

530

ATM and debit card income

394

443

793

823

Income from bank owned life insurance

270

222

540

438

Other income

2,570

330

2,889

606

Total noninterest income

9,207

4,090

13,125

7,084

Noninterest expenses

Compensation and benefits

8,450

7,399

16,322

14,182

Occupancy

1,498

1,343

3,033

2,682

Outside service and data processing costs

1,228

1,045

2,420

2,005

Insurance

298

280

619

598

Professional fees

527

414

1,023

853

Marketing

101

236

359

496

Other

542

651

1,240

1,200

Total noninterest expenses

12,644

11,368

25,016

22,016

Income before income tax expense

6,137

8,961

9,779

16,825

Income tax expense

1,459

1,721

2,269

3,576

Net income available to common shareholders

$

4,678

7,240

7,510

13,249

Earnings per common share

Basic

$

0.61

0.97

0.98

1.77

Diluted

0.60

0.93

0.96

1.71

Weighted average common shares outstanding

Basic

7,722,419

7,495,508

7,700,508

7,477,525

Diluted

7,818,651

7,755,821

7,822,912

7,748,879

See notes to consolidated financial statements that are an integral part of these consolidated statements.

4


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

For the three months

ended June 30,

For the six months

ended June 30,

(dollars in thousands)

2020

2019

2020

2019

Net income

$

4,678

7,240

7,510

13,249

Other comprehensive income:

Unrealized gain on securities available for sale:

Unrealized holding gain arising during the period, pretax

500

720

1,395

1,404

Tax expense

(105

)

(151

)

(292

)

(294

)

Reclassification of realized gain

-

(2

)

-

(6

)

Tax expense

-

-

-

1

Other comprehensive income

395

567

1,103

1,105

Comprehensive income

$

5,073

7,807

8,613

14,354

See notes to consolidated financial statements that are an integral part of these consolidated statements.

5


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

For the three months ended June 30,

Accumulated

Nonvested

Additional

other

Common stock

Preferred stock

restricted

paid-in

comprehensive

Retained

(dollars in thousands, except share data)

Shares

Amount

Shares

Amount

stock

capital

income (loss)

earnings

Total

March 31, 2019

7,505,636

75

-

-

(993

)

103,600

(379

)

78,883

181,186

Net income

-

-

-

-

-

-

-

7,240

7,240

Proceeds from exercise of stock options

52,287

1

-

-

-

436

-

-

437

Compensation expense related to restricted stock, net of tax

-

-

-

-

106

-

-

-

106

Compensation expense related to stock options, net of tax

-

-

-

-

-

318

-

-

318

Other comprehensive income

-

-

-

-

-

-

567

-

567

June 30, 2019

7,557,923

$

76

-

$

-

$

(887

)

$

104,354

$

188

$

86,123

$

189,854

March 31, 2020

7,717,582

77

-

-

(1,105

)

107,529

410

103,564

210,475

Net income

-

-

-

-

-

-

-

4,678

4,678

Proceeds from exercise of stock options

17,062

-

-

-

-

222

-

-

222

Compensation expense related to restricted stock, net of tax

-

-

-

-

104

-

-

-

104

Compensation expense related to stock options, net of tax

-

-

-

-

-

280

-

-

280

Other comprehensive income

-

-

-

-

-

-

395

-

395

 

June 30, 2020

7,734,644

$

77

-

$

-

$

(1,001

)

$

108,031

$

805

$

108,242

$

216,154

 

For the six months ended June 30,

Accumulated

Nonvested

Additional

other

Common stock

Preferred stock

restricted

paid-in

comprehensive

Retained

(dollars in thousands, except share data)

Shares

Amount

Shares

Amount

stock

capital

income (loss)

earnings

Total

December 31, 2018

7,466,481

75

-

-

(741

)

102,625

(917

)

72,874

173,916

Net income

-

-

-

-

-

-

-

13,249

13,249

Proceeds from exercise of stock options

80,742

1

-

-

-

758

-

-

759

Issuance of restricted stock

10,700

-

-

-

(347

)

347

-

-

-

Compensation expense related to restricted stock, net of tax

-

-

-

-

201

-

-

-

201

Compensation expense related to stock options, net of tax

-

-

-

-

-

624

-

-

624

Other comprehensive income

-

-

-

-

-

-

1,105

-

1,105

June 30, 2019

7,557,923

$

76

-

$

-

$

(887

)

$

104,354

$

188

$

86,123

$

189,854

December 31, 2019

7,672,678

77

-

-

(803

)

106,152

(298

)

100,732

205,860

Net income

-

-

-

-

-

-

-

7,510

7,510

Proceeds from exercise of stock options

52,466

-

-

-

-

962

-

-

962

Issuance of restricted stock

9,500

-

-

-

(406

)

406

-

-

-

Compensation expense related to restricted stock, net of tax

-

-

-

-

208

-

-

-

208

Compensation expense related to stock options, net of tax

-

-

-

-

-

511

-

-

511

Other comprehensive income

-

-

-

-

-

-

1,103

-

1,103

 

June 30, 2020

7,734,644

$

77

-

$

-

$

(1,001

)

$

108,031

$

805

$

108,242

$

216,154

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

6


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

For the six months ended

June 30,

(dollars in thousands)

2020

 

2019

Operating activities

 

Net income

$

7,510

13,249

Adjustments to reconcile net income to cash provided by (used for) operating activities:

Provision for loan losses

16,200

600

Depreciation and other amortization

1,059

913

Accretion and amortization of securities discounts and premium, net

273

182

Net change in operating leases

112

492

Compensation expense related to stock options and restricted stock grants

719

825

Gain on sale of loans held for sale

(8,031

)

(4,411

)

Loans originated and held for sale

(254,492

)

(154,785

)

Proceeds from sale of loans held for sale

245,400

143,928

Increase in cash surrender value of bank owned life insurance

(540

)

(438

)

Increase in deferred tax asset

(35

)

(3,323

)

Increase in other assets

(6,975

)

(774

)

Increase in other liabilities

880

3,481

Net cash provided by (used for) operating activities

2,080

(61

)

Investing activities

Increase (decrease) in cash realized from:

Increase in loans, net

(94,516

)

(132,241

)

Purchase of property and equipment

(2,641

)

(2,104

)

Purchase of investment securities:

Available for sale

(11,373

)

(5,115

)

Other

(1,275

)

-

Payments and maturities, calls and repayments of investment securities:

Available for sale

9,193

5,991

Other investments

5,614

810

Purchase of life insurance policies

-

(5,000

)

Net cash used for investing activities

(94,998

)

(137,659

)

Financing activities

Increase (decrease) in cash realized from:

Increase in deposits, net

312,519

205,872

Decrease in Federal Home Loan Bank advances and other borrowings, net

(109,973

)

(25,000

)

Proceeds from the exercise of stock options

962

759

Net cash provided by financing activities

203,508

181,631

Net increase in cash and cash equivalents

110,590

43,911

Cash and cash equivalents at beginning of the period

127,816

72,873

Cash and cash equivalents at end of the period

$

238,406

116,784

Supplemental information

Cash paid for

Interest

$

11,008

12,063

Income taxes

-

3,323

Schedule of non-cash transactions

Unrealized gain on securities, net of income taxes

1,103

1,110

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

2,115

15,395

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

7


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Nature of Business and Basis of Presentation

Business Activity

Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. 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.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”) on March 2, 2020. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments

In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices. Please refer to “Note 10 – Reportable Segments” for further information on the reporting for the Company’s three business segments.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, real estate acquired in the settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

Risks and Uncertainties

The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our clients, employees and vendors.

8


The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on Company’s business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s net interest income, provision for loan losses, and certain transaction-based line items of noninterest income. Other financial impacts could occur though such potential impact is unknown at this time.

As of June 30, 2020, the Company and Bank capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of June 30, 2020, the $15.0 million line was unused.

As of June 30, 2020, 863 of our clients had requested loan payment deferrals or payments of interest only on loans totaling $647.1 million, of which 90.0% were commercial loans. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty; however, three client relationships, with loans totaling $2.9 million, were granted short-term loan modifications which were considered TDRs due to the client experiencing financial difficulty prior to the pandemic. In certain cases, we have made a second three-month deferral to our clients based on individual circumstances for the borrower.

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends. As of June 30, 2020, $362.1 million, or 56%, of these loans have reached the end of their deferral period and are beginning to resume normal payments with a significant majority of the remaining modified loans completing their deferral period by the end of the third quarter. The table below provides a breakdown of loan modification requests due to the COVID-19 pandemic by type of concession.

 

June 30, 2020

(dollars in thousands)

# Loans

Amount

% of Total Portfolio

Payment deferrals

602

$

488,984

24.0

%

Interest only

253

154,093

7.6

%

Financial difficulty (TDR)

8

4,017

0.2

%

863

$

647,094

31.8

%

While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we have identified nine loan categories considered to be “at-risk” of significant impact. As of June 30, 2020, 41% of these loans have reached the end of their deferral period and are beginning to resume normal payments. The table below identifies these segments as well as the outstanding, committed and modified loan balances for each industry.

9


 

June 30, 2020

% of

% of Total

Total

Committed

Total

Balance

Loans

Committed

Balance

Modified

(dollars in thousands)

Outstanding

Outstanding

Balance

Outstanding

Balance

% Modified

Religious organizations

$

60,088

 

3.0

%

 

90,439

 

66.4

%

 

33,671

 

54.4

%

Entertainment facilities

4,745

0.2

%

9,325

50.9

%

845

17.8

%

Hotels

84,163

4.1

%

104,049

80.9

%

74,383

88.4

%

Personal care businesses

1,356

0.1

%

1,395

97.2

%

572

42.2

%

Restaurants

14,467

0.7

%

15,977

90.5

%

9,889

68.4

%

Sports facilities

22,098

1.1

%

22,768

97.1

%

21,064

95.3

%

Travel related businesses

3,325

0.2

%

4,082

81.5

%

3,080

92.6

%

Private healthcare facilities

36,054

1.8

%

41,116

87.7

%

24,857

68.9

%

Non-essential retail

191,674

9.4

%

199,873

95.9

%