Business Context and Reporting Period
Southern First Bancshares, Inc. is a South Carolina bank holding company operating Southern First Bank, which provides commercial, consumer and mortgage lending and deposit services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013. The company opened its second full-service office in the Charleston market in August 2014.
Financial Performance
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $8.5 million | $7.4 million | $24.2 million | $21.4 million |
| Provision for loan losses | $1.3 million | $775,000 | $3.3 million | $2.7 million |
| Noninterest income | $1.6 million | $1.1 million | $4.0 million | $2.8 million |
| Noninterest expense | $6.1 million | $5.5 million | $18.2 million | $16.0 million |
| Net income | $1.8 million | $1.4 million | $4.6 million | $3.7 million |
| Net income available to common shareholders | $1.6 million | $1.2 million | $3.9 million | $3.1 million |
| Diluted EPS | $0.31 | $0.27 | $0.79 | $0.71 |
Third-quarter net income rose 28.7% year over year; nine-month net income increased 26.1%. Management attributed growth primarily to higher net interest and noninterest income, partly offset by higher credit provisions and operating costs. The efficiency ratio improved to 60.4% from 65.5% in the quarter.
Financial Position, Liquidity and Capital
- Total assets were $1.008 billion, up 13.1% from year-end 2013. Net loans were $821.4 million, up from $723.4 million; deposits were $772.8 million, up from $680.3 million. Gross loans increased $99.1 million, with growth across the Greenville, Columbia and Charleston markets.
- Cash and cash equivalents were $58.0 million versus $39.2 million at year-end; investment securities totaled $63.4 million versus $73.6 million. The company sold $10.4 million of securities during the second quarter to meet increased liquidity needs associated with loan demand, recording a $230,000 gain.
- For the nine months, operating cash flow was $3.0 million, investing cash outflow was $93.6 million and financing cash inflow was $109.4 million. Cash increased $18.8 million to $58.0 million.
- Borrowings totaled $153.0 million, including $139.6 million of FHLB advances and other borrowings and $13.4 million of junior subordinated debentures. The loan-to-deposit ratio was 108%. Available liquidity included $45.0 million in unused correspondent-bank lines and $88.0 million in unused FHLB borrowing capacity.
- Shareholders’ equity was $73.6 million, compared with $65.7 million at year-end. The increase reflected a $6.0 million net common-stock private placement, earnings and other comprehensive income, partly offset by $4.1 million of preferred-stock redemptions. The Bank’s total risk-based capital ratio was 12.04%; management reported capital ratios above well-capitalized thresholds.
Material Changes, Credit Quality and Margins
- Tax-equivalent net interest margin declined to 3.66% from 3.73% in the quarter and to 3.67% from 3.71% for the nine-month period. Lower loan yields outweighed lower funding costs; management said it did not anticipate significant further reductions in deposit or borrowing rates.
- Loan fee income rose substantially, primarily from mortgage origination fees. Compensation costs also increased, reflecting additional staff for mortgage operations, the Mount Pleasant office and retail lending and deposit activity.
- Nonperforming assets increased to $11.5 million, or 1.14% of assets, from $9.5 million, or 1.07%, at year-end. Nonaccrual loans decreased to $8.0 million, while other real estate owned rose to $3.5 million from $1.2 million.
- The allowance for loan losses was $11.3 million, or 1.36% of gross loans. Nine-month net charge-offs were $2.2 million, or 0.37% of average loans annualized, versus $1.9 million, or 0.38%, a year earlier. The provision increased partly due to third-quarter net charge-offs and portfolio growth.
- Total troubled debt restructurings were $9.4 million across 37 loans, down from $13.0 million across 34 loans at year-end. Commercial real estate represented 49.5% of loans; real estate secured 81.4% of the portfolio.
- In January 2014, the company issued 475,000 common shares at $13 per share and used proceeds to redeem $4.1 million of Series T preferred stock. The preferred dividend rate rose to 9% in May 2014; remaining preferred stock had an $11.2 million par value.
Outlook, Risks and Contingencies
The filing gives no specific earnings or growth guidance. Management stated that weaker economic conditions were expected to continue through the rest of 2014 and cautioned that interim results are not necessarily indicative of full-year results. Interest-rate sensitivity analysis estimated net interest income would increase 12.67% under a 300-basis-point rate rise and decrease 11.98% under a 300-basis-point decline, based on modeled assumptions rather than a forecast.
Key risks include loan losses and concentrations in real estate and commercial real estate, relatively recent loan growth and limited seasoning, local economic weakness, competition for deposits and loans, funding and liquidity needs, interest-rate changes, regulatory and capital-rule changes, and cybersecurity and third-party service-provider risks. Unfunded commitments to extend credit were $162.2 million, mostly variable rate; management expected a significant portion not to be drawn. Management reported no material pending legal proceeding and no subsequent event requiring accrual or disclosure. Disclosure controls were considered effective, with no material change in internal control reported for the quarter.
Important Facts for Investors to Verify
- Whether loan growth and mortgage-related fee income can continue without further margin pressure or a disproportionate increase in operating costs.
- Developments in nonperforming assets, OREO, classified loans, charge-offs and the adequacy of the loan-loss allowance as the portfolio seasons.
- Deposit stability, funding costs, the 108% loan-to-deposit ratio, and access to contingent borrowing capacity as loan demand grows.
- The effect of the 9% preferred dividend and any further preferred-stock redemption on earnings available to common shareholders.
- Capital levels and the impact of Basel III phase-in requirements, including whether the company maintains adequate flexibility to fund growth.
- Assumptions behind interest-rate sensitivity estimates and whether actual asset and liability repricing differs from the modeled scenarios.