Southern First Bancshares, Inc. (NASDAQ: SFST), holding company for Southern First Bank, announced its financial results for the three and six-month period ended June 30, 2020.
“In this current environment, our focus continues to be on the care of our team and clients,” stated Art Seaver, the company’s Chief Executive Officer. “This was a quarter that witnessed significant activity around the PPP program, and I am proud of our team for their passion to help our clients. We remain diligent in our focus on risk in this environment and in continuing to impact lives – the mission of our company.”
2020 Second Quarter Highlights
- Net income of $4.7 million, compared to $7.2 million for Q2 2019
- Diluted earnings per common share of $0.60 per share, compared to $0.93 for Q2 2019
- Loan loss provision of $10.2 million, compared to $300 thousand for Q2 2019
- Payment modifications on 863 loans for $647.1 million
- 56% of modifications, or $362.1 million, returned to original payment status
- Loans within nine targeted industries represent 43% of total modifications
- 41% of target industry modifications, or $150.0 million, returned to original payment status
- Completed sale of $97.5 million PPP loan portfolio, recognizing net SBA fees of $2.2 million in Q2 2020
- Columbia office, South Carolina consolidation as a result of success in digital strategies
As a result of the uncertain economic conditions brought about by the COVID-19 pandemic, our business and that of many of our clients has been impacted significantly. In order to maintain the safety of our team and our clients, we shifted approximately 70% of our team to working remotely and began operating in a drive-thru only mode with “in-person” client meetings by appointment in late March 2020. This strategy, combined with digital technology, has proven to be extremely effective, highlighting a number of possibilities for operational improvements, including consolidating our three Columbia, South Carolina offices into one location. We believe that this office combination will create a new synergy among our Columbia team, assist with staffing challenges and facilitate a renewed sense of service to our clients. The consolidation is expected to take place on September 30, 2020.
In an effort to assist our clients through this challenging time, we became an approved SBA lender in March 2020 and processed 853 loans under the Payroll Protection Program (“PPP”) for a total of $97.5 million, receiving SBA lender fee income of $3.9 million. As the regulations and guidance for PPP loans and the forgiveness process continued to change and evolve, management recognized the operational risk and complexity associated with this portfolio and decided to pursue the sale of the PPP loan portfolio to a third party better suited to support and serve our PPP clients through the loan forgiveness process. This loan sale will allow our team to focus on serving our clients and proactively monitor and address credit risk brought on by the pandemic. On June 26, 2020 we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner ACAP SME LLC, and immediately recognized SBA lender fee income of $2.2 million, net of sale and processing costs.
Beginning late in the first quarter of 2020, we began granting loan modifications or deferrals to certain borrowers affected by the pandemic on a short-term basis of three to six months. As of June 30, 2020, our clients had requested loan payment deferrals or payments of interest only on 863 loans totaling $647.1 million, of which 90.0% were commercial loans. As of June 30, 2020, 56% of these loans have reached the end of their deferral period and are beginning to resume normal payments. At June 30, 2020, non-performing assets were not yet materially impacted by the economic pressures of COVID-19; however, accruing TDRs increased by $2.9 million during the first quarter of 2020 due to loan modifications related to three client relationships who were experiencing financial difficulty prior to the pandemic.
As we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial clients, we have identified nine loan categories to monitor during this crisis. The table below identifies these segments as well as the outstanding and committed loan balances for each industry. Of the $276.9 million of loans modified in these categories, 54% have begun to resume normal payments.
Net income for the second quarter of 2020 was $4.7 million, or $0.60 per diluted share, a $1.8 million increase from the first quarter of 2020 and a $2.6 million decrease from the second quarter of 2019. For the six months ended June 30, 2020, net income was $7.5 million, a decrease of 43.3% over the six months ended June 30, 2019.
Net interest income increased $1.7 million for the second quarter of 2020 compared with the first quarter of 2020, reflecting an increase in loan balances and a reduction in deposit costs. In comparison to the second quarter of 2019, net interest income increased $3.2 million, or 19.6%. Net interest income for the first six months of 2020 increased 17.0% compared with the first half of 2019.
The provision for loan losses increased to $10.2 million for the second quarter of 2020, compared to $6.0 million for the first quarter and $300 thousand for the second quarter of 2019. The increased provision during the second quarter of 2020 was driven by qualitative factors related to the uncertain economic conditions created by the COVID-19 pandemic. The provision for loan losses totaled $16.2 million for the first six months of 2020 compared to $600 thousand for the first six months of 2019.
Noninterest income totaled $9.2 million for the second quarter of 2020, a $5.3 million increase from the first quarter of 2020, and $5.1 million increase from the second quarter of 2019. The primary drivers of the increases were mortgage banking income resulting from the favorable mortgage rate environment and net SBA lender fee income of $2.2 million received on PPP loans originated and then sold to a third party.
Noninterest expense for the second quarter of 2020 increased $272 thousand compared with the first quarter of 2020 and $1.3 million compared with the second quarter of 2019. The increases were due primarily to higher compensation and benefits expense related to mortgage banking.
Our effective tax rate was 23.8% for the second quarter of 2020, 22.2% for the first quarter of 2020, and 19.2% for the second quarter of 2019. The higher tax rate this quarter relates to the favorable tax impact of stock option transactions in the prior periods.
Net interest income was $19.8 million for the second quarter of 2020, a $1.7 million increase from the first quarter of 2020. Interest income increased by $134 thousand while interest expense decreased by $1.6 million due primarily to a 43 basis point reduction in deposit costs. While average loan balances increased by $147.2 million, loan yield decreased by 29 basis points, neutralizing the impact to interest income. In comparison with the second quarter of 2019, net interest income increased $3.2 million due to higher loan balances and lower deposit costs, partially offset by lower yields on interest-earning assets and a higher subordinated debt balance. Our net interest margin, on a tax-equivalent basis, was 3.42% for the second quarter of 2020, a slight decrease from 3.43% for the first quarter of 2020 and the second quarter of 2019. Lower deposit costs nearly offset the lower loan yield during the second quarter of 2019, decreasing the impact to net interest margin.
Total nonperforming assets decreased by $923 thousand to $9.0 million for the second quarter of 2020, representing 0.36% of total assets, a decrease of six basis points compared to the first quarter of 2020. The decrease in nonperforming assets was primarily a result of a $912 thousand charge-off on one commercial real estate loan. The allowance for loan losses as a percentage of nonaccrual loans was 350.74% at June 30, 2020, compared to 226.14% at March 31, 2020 and 277.91% at June 30, 2019.
At June 30, 2020, the allowance for loan losses was $31.6 million, or 1.55% of total loans, compared to $22.5 million, or 1.11% of total loans, at March 31, 2020 and $16.1 million, or 0.89% of total loans, at June 30, 2019. Net charge-offs were $1.1 million, or 0.24% on an annualized basis, for the second quarter of 2020 compared to $180 thousand, or 0.04% of net charge-offs, annualized, for the first quarter of 2020. Net charge-offs were $207,000 for the second quarter of 2019. The provision for loan losses was $10.2 million for the second quarter of 2020 compared to $6.0 million for the first quarter of 2020 and $300 thousand for the second quarter of 2019. The increased provision during the second quarter of 2020 was driven by the COVID-19 pandemic and qualitative adjustment factors related to the uncertain economic conditions at June 30, 2020.
ABOUT SOUTHERN FIRST BANCSHARES
Southern First Bancshares, Inc., Greenville, South Carolina is a registered bank holding company incorporated under the laws of South Carolina. The company’s wholly-owned subsidiary, Southern First Bank, is the largest bank headquartered in South Carolina. Southern First Bank has been providing financial services since 1999 and now operates in 13 locations in the Greenville, Columbia, and Charleston markets of South Carolina as well as the Triangle and Triad regions of North Carolina and Atlanta, Georgia. Southern First Bancshares has consolidated assets of approximately $2.5 billion and its common stock is traded on the NASDAQ Global Market under the symbol “SFST.” More information can be found at www.southernfirst.com.