Southern First Bancshares, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The company is a South Carolina bank holding company operating commercial and retail banking, mortgage banking, and corporate businesses. This unaudited report covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Results for the quarter are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $3.006 million; diluted EPS $0.45 | $2.028 million; diluted EPS $0.31 in Q1 2015 |
| Net interest income | $10.307 million | $9.070 million in Q1 2015 |
| Noninterest income | $2.559 million | $2.141 million in Q1 2015 |
| Noninterest expense | $7.517 million | $7.461 million in Q1 2015 |
| Net interest margin, tax-equivalent | 3.64% | 3.72% in Q1 2015 |
| Total assets | $1.239 billion | $1.217 billion at December 31, 2015 |
| Loans, gross | $1.039 billion | $1.005 billion at December 31, 2015 |
| Deposits | $1.003 billion | $985.7 million at December 31, 2015 |
| Shareholders’ equity | $98.3 million | $94.2 million at December 31, 2015 |
| Cash and cash equivalents | $54.8 million | $62.9 million at December 31, 2015 |
| FHLB advances and other borrowings; junior subordinated debentures | $115.2 million; $13.4 million | Both balances unchanged from year-end |
Profitability and margins. Net income increased 48.2% year over year. Net interest income rose 13.6%, mainly reflecting growth in average earning assets, while noninterest income rose 19.5%. The efficiency ratio improved to 58.4% from 66.6%. The net interest margin declined eight basis points, as asset yields fell and funding costs increased. Return on average assets was 1.00% and return on average equity was 12.47% for Q1 2016, on an annualized basis.
Cash flow and liquidity. Operating cash flow was negative $4.4 million, investing cash flow negative $21.5 million, and financing cash flow positive $17.8 million; cash and cash equivalents decreased $8.1 million during the quarter. The loan-to-deposit ratio was 104%. The company reported $45 million of unused correspondent-bank federal funds lines, $114.6 million of available FHLB borrowing capacity, and an unused $10 million credit line. Management stated it believed existing deposits and borrowing sources would meet long-term liquidity needs.
Credit and capital. The allowance for loan losses was $13.9 million, or 1.34% of gross loans. Q1 net charge-offs were $356,000, equal to 0.14% of average loans on an annualized basis. Nonperforming assets were $8.5 million, or 0.68% of assets, down from $9.1 million and 0.75% at year-end. The Bank’s total risk-based capital ratio was 11.60%; the company’s was 11.89%. Management said both would have met fully phased-in Basel III capital adequacy requirements as of March 31, 2016.
Material changes versus comparable periods
- Gross loans grew $33.9 million, or 3.4%, from year-end; deposits increased $17.5 million. Assets increased 1.8%.
- Net interest income and noninterest income increased, supporting higher earnings. Loan and mortgage fee income rose $321,000, driven mainly by mortgage operations.
- Interest margin compressed from 3.72% to 3.64% year over year; management attributed this to lower earning-asset yields and a modestly higher liability cost.
- Noninterest expense was nearly flat overall. Lower real-estate-owned expenses, including the comparison against a prior-year property write-down, offset higher compensation and occupancy costs.
- Nonperforming assets and troubled debt restructurings declined from year-end; allowance coverage of nonperforming loans was 224.6%.
- Available-for-sale securities fell to $77.1 million from $89.9 million at year-end. The portfolio had a $778,000 net unrealized gain at March 31, 2016, compared with a $6,000 unrealized loss at year-end.
Outlook, commentary, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management described its relationship-focused banking model and continued expansion of mortgage operations. It cautioned that forward-looking statements are subject to risks including competition, funding and deposit-flow changes, interest-rate movements, real-estate and loan-concentration exposure, credit quality, loan-portfolio seasoning, cybersecurity, regulation, and capital requirements.
Unusual or notable items included $307,000 of gains on investment-security sales, following approximately $12.2 million of securities sold or called; increased electronic and debit-card fraud expense, primarily in January 2016; and a prior-year real-estate write-down that contributed to lower year-over-year OREO expenses. Unfunded commitments to extend credit totaled $201.0 million, including $144.6 million at variable rates. The company reported no material pending legal proceedings known to management and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth can continue without weakening underwriting or asset quality, particularly given real-estate collateral exposure and loan concentration.
- Whether higher net charge-offs and the allowance remain appropriate as the portfolio grows and ages.
- Whether margin pressure persists as loan yields, deposit costs, and market interest rates change.
- How deposit growth, the 104% loan-to-deposit ratio, and available borrowing capacity affect liquidity and funding costs.
- Whether mortgage-banking fee income and securities gains are repeatable; Q1 securities-sale gains were a noninterest-income contributor.
- The potential funding effect of unfunded lending commitments and the maturity of $52.3 million of wholesale certificates of deposit within 12 months.