Southern First Bancshares, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Southern First is a regional bank serving South Carolina, North Carolina and Georgia, offering commercial, consumer and mortgage lending and deposit services. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in millions unless stated otherwise.
Financial results and condition
- Q3 earnings: Net interest income was $25.5 million, up 14.8% year over year, as loan growth lifted interest income. Net income was $8.4 million versus $14.0 million; diluted EPS was $1.04 versus $1.75.
- Nine-month earnings: Net interest income was $73.5 million, up 13.3%. Net income was $23.6 million versus $34.7 million; diluted EPS was $2.93 versus $4.36.
- Interest margins: Tax-equivalent net interest margin was 3.19% in Q3 versus 3.38% a year earlier, and 3.30% for the nine months versus 3.49%. Q3 net interest spread declined to 2.88% from 3.28%.
- Other income and expenses: Q3 noninterest income fell 36.8% to $2.7 million, primarily as mortgage banking income declined to $1.2 million from $2.8 million. Q3 noninterest expense rose 14.3% to $16.0 million. The efficiency ratio increased to 57.0% from 53.2%.
- Assets, loans and deposits: Total assets were $3.44 billion, up 17.6% since year-end 2021. Gross loans grew 21.7% to $3.03 billion; deposits grew 17.1% to $3.00 billion. The loan-to-deposit ratio was 101%, versus 97% at year-end.
- Credit quality: The allowance for credit losses was $36.3 million, or 1.20% of gross loans. Nonperforming assets were $2.6 million (0.08% of assets), down from $4.9 million (0.17%) at year-end. Loans 30 or more days past due were 0.07% of the portfolio.
- Liquidity, debt and capital: Cash and cash equivalents were $160.6 million. The company reported $60.0 million in FHLB advances, $36.2 million in subordinated debentures, and $287.8 million in shareholders’ equity. The Bank’s total capital ratio was 13.09%; management said the Bank remained well-capitalized. Available unused borrowing capacity included $618.9 million from the FHLB and $118.5 million in correspondent-bank federal funds lines; a separate $15 million line was unused.
- Cash flow, nine months: Operating activities provided $36.8 million; investing activities used $541.9 million, principally reflecting loan growth; financing activities provided $498.4 million, including $437.6 million of deposit growth and $60.0 million of net borrowing. Cash declined $6.6 million to $160.6 million.
Material changes and unusual items
- Q3 provision for credit losses was $0.95 million, compared with a $6.0 million reversal in Q3 2021. The nine-month provision was $3.8 million, versus an $8.2 million reversal in 2021; current-period provision reflected loan and unfunded-commitment growth.
- The company adopted CECL on January 1, 2022. Adoption increased the loan allowance by $1.5 million and the reserve for unfunded commitments by $2.0 million, producing a $2.8 million after-tax reduction to retained earnings.
- Available-for-sale securities had a $17.7 million unrealized loss at September 30, 2022, compared with $0.9 million at year-end 2021. Management attributed losses principally to interest-rate changes, stated the securities were investment grade, and said it did not expect to sell them before recovery.
- For the nine months, mortgage banking income declined to $3.9 million from $9.4 million. The prior-year comparison also included no fixed-asset disposal loss, while 2022 included a $0.4 million loss.
- Shareholders’ equity increased $9.9 million from year-end, despite a $13.3 million after-tax other comprehensive loss, largely associated with securities. The company reported no cash dividends and no Q3 repurchases under its authorization for up to 399,026 shares.
Outlook, commentary and risks
Management expects continued pressure on net interest spread and margin: a significant portion of loans are fixed-rate while deposits reprice more quickly. It also does not expect mortgage origination volumes to remain at prior-year levels, which may reduce mortgage banking income. The filing provides no specific earnings or balance-sheet guidance.
Key disclosed risks include interest-rate and deposit-cost changes, funding access and deposit outflows, real-estate and loan-concentration exposure, credit losses and the seasoning of rapid loan growth, economic conditions and inflation, regulatory and capital requirements, cybersecurity, and execution of expansion plans. Unfunded loan commitments were $840.9 million, with a $2.8 million related reserve; letters of credit were $12.6 million. Management reported no material change to previously disclosed risk factors and no material pending legal proceeding known to it.
Important facts for investors to verify
- Reconcile nine-month 2021 diluted EPS: the income statement and MD&A report $4.36, while Note 9 reports $4.46.
- Track deposit pricing, funding mix, and margin sensitivity as deposit costs rise; management’s rate-shock analysis estimates net interest income declines of 3.17% under a 100-basis-point increase and 9.97% under a 300-basis-point increase.
- Monitor whether rapid loan growth, real-estate concentration and the CECL reserve remain consistent with asset-quality trends and future economic conditions.
- Assess the effect of the $17.7 million securities unrealized loss on accumulated other comprehensive income and capital if securities are sold or losses persist.
- Review the composition and potential funding of the $840.9 million in unfunded commitments, and the company’s reliance on deposits and secured borrowing capacity.