Southern First Bancshares, Inc. — Q1 2023 10-Q
Business context and reporting period. Southern First is a South Carolina-based bank holding company serving customers in South Carolina, North Carolina and Georgia. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Amounts are in millions unless otherwise noted.
Financial results and condition
- Earnings: Net income was $2.7 million, down from $8.0 million in Q1 2022. Diluted EPS was $0.33 versus $0.98.
- Interest income and margin: Net interest income was $20.4 million, down 11.8% year over year, despite interest income rising to $38.3 million from $24.5 million. Interest expense climbed to $17.9 million from $1.3 million, mainly as deposit costs rose. Tax-equivalent net interest margin was 2.36%, down from 3.37%; net interest spread was 1.59%, versus 3.28%.
- Other income and expenses: Noninterest income was $2.0 million, down 30.2%, primarily reflecting mortgage banking income falling to $0.6 million from $1.5 million. Noninterest expense increased 16.5% to $17.1 million, including higher compensation, new-headquarters occupancy costs and FDIC premiums. The efficiency ratio rose to 76.1% from 56.3%.
- Credit costs and loan quality: Provision for credit losses was $1.825 million versus $1.105 million, driven principally by loan growth. Gross loans increased $144.6 million, or 4.4%, to $3.42 billion; 84.4% were real-estate-secured. The allowance was $40.4 million, or 1.18% of gross loans. Nonperforming assets rose to $4.7 million (0.14% of gross loans) from $2.6 million; the filing attributes the increase mainly to three commercial relationships totaling $2.4 million. Loans 30 or more days past due were 0.11% of the portfolio.
- Assets, deposits and debt: Total assets were $3.94 billion, up 6.7% from year-end. Deposits increased $292.9 million to $3.43 billion; the loan-to-deposit ratio was 100%, down from 104%. FHLB advances and related debt were $125.0 million, down from $175.0 million; subordinated debentures were $36.2 million. Estimated uninsured deposits were about $1.1 billion, or 32.1% of deposits, versus 36.6% at year-end.
- Cash flow and liquidity: Operating cash flow was $1.2 million; investing activities used $142.8 million, largely reflecting loan growth; financing activities provided $242.9 million, mainly from deposit growth. Cash and cash equivalents ended at $272.2 million, up from $170.9 million. The company reported $118.5 million of unused correspondent-bank federal funds lines, $609.9 million of unused FHLB borrowing capacity and an unused $15.0 million line with another financial institution.
- Capital and securities: Shareholders’ equity was $299.4 million. The Bank reported a 12.38% total risk-based capital ratio, 11.13% CET1 ratio and 9.16% Tier 1 leverage ratio; management said the Bank remained well-capitalized. Available-for-sale securities had a $94.0 million fair value against $108.9 million amortized cost, an unrealized loss of $14.9 million, primarily attributed to interest rates. Management said it did not intend, and was more likely than not would not be required, to sell them before recovery.
Material changes and management commentary
- The main year-over-year earnings pressure was the sharp repricing of deposits: average interest-bearing deposit costs rose to 2.78% from 0.20%. Asset yields also increased, but more slowly, to 4.42% from 3.56%.
- Management anticipates continued pressure on net interest margin and spread because many loans are fixed-rate while deposits reprice faster. No specific earnings or margin guidance is provided.
- Management cited record new-account openings in Q1 and continued focus on core deposits. Retail deposits were 89.9% of deposits; wholesale deposits were 10.1%.
- Interest-rate sensitivity analysis estimated net interest income would decline 5.43% with rates up 100 basis points and 16.34% with rates up 300 basis points; it estimated increases of 10.80% and 30.48% under corresponding rate decreases. These are model estimates based on assumptions, not forecasts.
- The filing discusses March 2023 bank failures and potential effects on depositor confidence, liquidity, competition for funding and FDIC assessments. It warns that a special FDIC assessment to recover losses related to protecting uninsured depositors could raise the company’s costs. Management said the company was not directly affected by the failures.
- Other cited risks include deposit outflows, interest-rate and economic changes, real-estate concentration and credit losses, loan growth and seasoning, regulatory actions, cybersecurity, and execution of market expansion. The company reported no material pending legal proceeding known to management and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit pricing and funding mix continue to compress net interest margin, and how actual deposit flows compare with the quarter-end balance and uninsured-deposit estimate.
- Whether loan growth remains strong and whether nonperforming loans, criticized credit grades and provision expense rise from Q1 levels.
- Whether the $14.9 million unrealized securities loss changes with rates, and whether available liquidity and borrowing capacity remain accessible under stress.
- The eventual cost and timing of any special FDIC assessment, and the impact on operating expenses and profitability.
- The filing reports provision expense of $1.825 million in the income statement, while the allowance activity note shows $1.855 million of loan provision, alongside a $30,000 reversal for unfunded commitments. Investors may wish to reconcile these presentations.