Southern First Bancshares, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The company is a bank holding company whose subsidiary provides commercial, consumer and mortgage lending and deposit services. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $15.50 | $13.31 | $44.16 | $37.27 |
| Noninterest income | $2.53 | $2.54 | $7.73 | $7.16 |
| Net income | $5.78 | $4.25 | $16.51 | $10.97 |
| Diluted EPS | $0.75 | $0.55 | $2.13 | $1.50 |
| Provision for loan losses | $0.40 | $0.50 | $1.30 | $1.50 |
| Noninterest expense | $10.19 | $8.81 | $29.37 | $25.93 |
| Effective tax rate | 22.3% | 35.1% | 22.2% | 35.5% |
Margins and operating trends. Tax-equivalent net interest margin was 3.60% in Q3, unchanged year over year, and 3.57% for the nine months versus 3.56%. Net interest spread narrowed to 3.28% in Q3 from 3.38%, and to 3.29% for the nine months from 3.35%, as funding costs rose faster than asset yields. Q3 efficiency ratio was 56.5%, compared with 55.6%.
Financial condition, cash flow and credit
- Scale and funding: Total assets were $1.858 billion, up 14.3% from year-end 2017. Gross loans were $1.620 billion, up 16.8%; deposits were $1.589 billion, up 15.1%. Shareholders’ equity was $166.9 million, versus $149.7 million.
- Liquidity and borrowings: Cash and cash equivalents totaled $90.0 million, compared with $92.2 million at year-end. FHLB advances and other borrowings were $68.5 million; junior subordinated debentures were $13.4 million. The loan-to-deposit ratio was 101.9%. Available sources included $255.3 million of unused FHLB borrowing capacity, $72.0 million in unused federal funds lines and an unused $15.0 million credit line.
- Cash flow: For the nine months, operating activities provided $24.3 million, investing activities used $237.0 million and financing activities provided $210.5 million. Cash and cash equivalents decreased $2.2 million to $90.0 million.
- Credit quality: Nonperforming assets declined to $6.1 million (0.33% of assets; 0.38% of gross loans) from $7.5 million (0.46%; 0.54%) at year-end. Allowance for loan losses was $16.1 million, or 1.00% of gross loans, versus 1.12% at year-end; nine-month net charge-offs were $0.7 million, or 0.06% of average loans annualized.
- Capital: The Bank reported a 12.18% total risk-based capital ratio and a 9.87% Tier 1 leverage ratio and remained well capitalized. The company reported a 12.50% total risk-based capital ratio.
Material changes, outlook and risks
- Net income rose 36.0% in Q3 and 50.5% for the first nine months. Management attributed the increase mainly to higher net interest income and the lower tax rate following the Tax Cuts and Jobs Act; nine-month noninterest income also increased.
- Loan growth—primarily real estate lending—supported interest income. Real estate loans made up 83.5% of the portfolio. Deposits grew, but their cost increased; management cited continued potential pressure on net interest spread and margin from possible Federal Reserve rate increases and competitive deposit pricing.
- Noninterest expense rose 15.7% in Q3 and 13.3% for the nine months. Management cited added staff and compensation, expansion-related occupancy costs, and higher FDIC insurance premiums. The company added 25 employees and expanded in North Carolina, Atlanta and South Carolina markets.
- Management provided no specific earnings or growth guidance. It expects margin pressure may continue. Forward-looking results are subject to competition, deposit flows and funding access, interest-rate changes, credit quality, real estate values and concentrations, loan growth and seasoning, execution of market expansion, regulatory requirements and cybersecurity risks.
- Unusual or notable items: available-for-sale securities had $2.1 million of gross unrealized losses at September 30, attributed primarily to interest-rate movements; the company said it did not intend or expect to be required to sell the securities before recovery. The Tax Act’s accounting impact was still being evaluated. Lease commitments were approximately $15.2 million, and the company was evaluating the upcoming lease-accounting standard. Unfunded loan commitments were $390.5 million.
- Management reported no material pending legal proceedings known to it and no material change in previously disclosed risk factors. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether rapid loan growth can be sustained without weakening underwriting or increasing credit losses, especially given real estate concentration and portfolio seasoning.
- Whether deposit costs continue to rise faster than loan yields, and the resulting impact on net interest margin and spread.
- How expansion-related staffing and occupancy costs affect efficiency and profitability as new markets develop.
- Whether available liquidity and funding capacity remain adequate alongside a loan-to-deposit ratio above 100% and growing unfunded commitments.
- The eventual effects of tax-law implementation, lease accounting and expected-credit-loss accounting, including any material balance-sheet or earnings adjustments.