Southern First Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Southern First is a bank holding company operating through Southern First Bank, focused on commercial and retail banking and mortgage banking. Comparisons below are with Q3 or the first nine months of 2016, as applicable; balance-sheet comparisons are with December 31, 2016.
Key financial results
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Net interest income | $13.3 million, up 22.3% | $37.3 million, up 17.6% |
| Net income | $4.25 million, up 23.8% | $10.97 million, up 12.5% |
| Diluted earnings per share | $0.55, versus $0.51 | $1.50, versus $1.45 |
| Net interest margin, tax-equivalent | 3.60%, versus 3.63% | 3.56%, versus 3.66% |
| Provision for loan losses | $0.50 million, versus $0.83 million | $1.50 million, versus $2.03 million |
| Noninterest income | $2.54 million, down 15.7% | $7.16 million, down 17.9% |
| Noninterest expense | $8.81 million, up 12.9% | $25.93 million, up 11.9% |
Financial position, cash flow and capital
- Assets and lending: Total assets were $1.56 billion, up 16.2% from year-end 2016. Gross loans rose 14.1% to $1.33 billion; net loans were $1.31 billion. Real estate-secured loans represented 82.1% of the portfolio.
- Funding and debt: Deposits increased to $1.34 billion from $1.09 billion. FHLB advances and other borrowings fell to $39.2 million from $115.2 million; junior subordinated debentures were $13.4 million. The loan-to-deposit ratio was 99%, down from 107%.
- Liquidity: Cash and cash equivalents were $74.6 million, versus $46.6 million at year-end, or 4.8% of assets. The bank reported $243 million of unused FHLB borrowing capacity and $72 million in unused correspondent-bank federal funds lines. Operating cash flow for the first nine months was $14.3 million; investing activities used $186.9 million and financing activities provided $200.6 million.
- Capital: Shareholders’ equity increased to $147.4 million from $109.9 million, primarily following a May public offering of 805,000 shares for net proceeds of $24.8 million and retained earnings. The bank’s total risk-based capital ratio was 13.33%; management stated the company and bank would meet Basel III requirements on a fully phased-in basis. No cash dividends have been paid since inception.
- Profitability and expenses: Q3 efficiency ratio was 55.5%, versus 56.1%. Return on average assets for the first nine months was 0.99%; annualized return on average equity was 11.28%.
Material changes and management commentary
- Net interest income growth was driven mainly by higher average loan balances. Margin declined as deposit funding costs rose; the nine-month tax-equivalent margin fell 10 basis points to 3.56%.
- Mortgage banking income fell to $1.40 million in Q3 from $2.00 million, which management attributed primarily to lower origination volume amid higher market rates. For the nine months, mortgage banking income declined to $4.06 million from $5.69 million. Lower securities-sale gains also reduced year-to-date noninterest income.
- Higher compensation, occupancy, and data-processing costs reflected staffing and infrastructure growth, including 21 additional employees versus the prior year; six were associated with new Raleigh and Atlanta offices. Management described continued expansion into those markets, but provided no quantitative earnings or growth guidance.
- Credit indicators included nonperforming assets of $6.02 million, or 0.39% of assets, compared with $6.12 million, or 0.46%, at year-end. The allowance was $15.58 million, or 1.17% of gross loans; nine-month net charge-offs were $776,000, or 0.08% of average loans annualized. Troubled debt restructurings totaled $7.7 million, up from $6.7 million.
- Interest-rate sensitivity estimates indicated net interest income would increase 3.12% with rates up 100 basis points and decrease 4.39% with rates down 100 basis points. The filing cautions that these are estimates based on assumptions, not forecasts.
Risks, contingencies and unusual items
- Key risks cited include credit losses and real-estate concentration, rapid loan growth and portfolio seasoning, rising deposit costs and interest-rate exposure, competition, funding access, regulatory requirements, expansion execution and staffing, cybersecurity, and maintaining adequate capital and loan-loss reserves.
- Unfunded credit commitments were $265.2 million, including $197.0 million at variable rates. The filing says a significant portion relates to consumer equity lines and historically many commitments are not funded. Mortgage rate-lock commitments were $29.3 million.
- The company reported no material pending legal proceeding known to management and no subsequent event requiring accrual or disclosure. Management stated disclosure controls were effective and reported no material change in internal control during the quarter.
- Management’s allowance adequacy assessment and fair-value estimates depend on judgments and assumptions that could change. The filing also notes that results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether continued loan and deposit growth can sustain earnings as funding costs rise and net interest margin declines.
- Whether new Raleigh and Atlanta operations generate sufficient deposits and revenue to offset added staffing and occupancy costs.
- Credit quality trends, especially real-estate concentration, nonperforming and impaired loans, TDRs, and the adequacy of the allowance as the portfolio expands.
- Liquidity and funding assumptions, including deposit retention, the maturity and cost of wholesale CDs, and availability of borrowing capacity.
- Whether the reported interest-rate sensitivity and management’s capital adequacy assessment remain valid as market conditions and balance-sheet composition change.