Southern First Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company is a South Carolina bank holding company operating Southern First Bank, with eight offices in the Greenville, Columbia and Charleston markets. Figures are in millions of dollars unless noted; balance-sheet comparisons are to December 31, 2012.
Financial performance and condition
| Metric | Q3 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Net interest income | $7.36 million | Up 9.8% from Q3 2012 |
| Net interest margin, tax-equivalent | 3.73% | 3.72% in Q3 2012 |
| Net income | $1.42 million | $1.23 million in Q3 2012 |
| Net income available to common shareholders | $1.23 million; diluted EPS $0.27 | $0.84 million; diluted EPS $0.19 in Q3 2012 |
| Total assets | $849.9 million | Up 6.5% from $798.0 million |
| Gross loans / net loans | $708.0 million / $698.2 million | Gross loans up $62.1 million, or 9.6% |
| Deposits | $607.1 million | Up $30.8 million, or 5.3% |
| Shareholders’ equity | $64.8 million | $64.1 million at year-end 2012 |
| Cash and cash equivalents | $23.7 million | $29.4 million at year-end 2012 |
For the first nine months, net interest income was $21.37 million, up 11.2%; net income was $3.68 million, up 34.9%; and diluted EPS was $0.71 versus $0.42 in 2012. The tax-equivalent net interest margin was 3.71%, compared with 3.60%. Nine-month noninterest income was $2.82 million, down 1.7%, while noninterest expense rose 10.9% to $16.04 million. The Q3 efficiency ratio, excluding securities gains and real estate owned activity, increased to 65.2% from 61.8%.
Nine-month operating cash flow was $7.64 million; investing activities used $63.04 million, chiefly reflecting $65.32 million of net loan originations; financing activities provided $49.70 million. Cash and cash equivalents declined $5.70 million during the period. Total borrowings included $3.56 million of federal funds purchased, $154.1 million of FHLB advances and other borrowings, and $13.4 million of junior subordinated debentures. The loan-to-deposit ratio was 117%.
The Bank reported regulatory capital ratios above the filing’s “well-capitalized” thresholds: total risk-based capital 12.42%, Tier 1 risk-based capital 11.17%, and Tier 1 leverage 9.30%. Available federal-funds lines totaled $45 million, with $3.6 million drawn; stated unused FHLB borrowing capacity was $35 million.
Material changes and credit quality
- Loan growth was concentrated partly in the Charleston market: management attributed $42.6 million of the $62.1 million net loan growth to its new East Bay Street office. Real estate secured 82.1% of loans.
- Lower funding costs supported earnings: the company said deposit and borrowing rates declined faster than earning-asset yields. Q3 interest expense fell $345,000 year over year even as average interest-bearing liabilities increased.
- Credit indicators improved in some respects: nine-month net charge-offs were $1.93 million, or 0.38% of average loans, versus $3.27 million, or 0.71%, in 2012. Loans 30 or more days past due were 0.83% of total loans, down from 1.11% at year-end 2012.
- Nonperforming assets were $10.08 million, or 1.19% of assets, versus $9.89 million and 1.24% at year-end. Nonaccrual loans, including nonaccruing troubled debt restructurings (TDRs), rose to $8.50 million from $8.17 million. Accruing TDRs were $6.95 million, down from $9.42 million.
- The allowance for loan losses was $9.82 million, 1.39% of gross loans; it covered 115.5% of nonperforming loans. Management implemented a revised allowance model in Q1, including a 12-quarter historical loss period.
- Available-for-sale securities had a $1.2 million net unrealized loss at September 30, compared with a $1.8 million net unrealized gain at year-end 2012. The company attributed losses primarily to interest-rate changes and said it did not consider the securities other-than-temporarily impaired.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management described economic conditions as challenging and expected weakness to continue through 2013, with potential pressure on credit quality, asset yields, funding costs, liquidity and capital. It also noted that lower loan yields and competitive deposit conditions could constrain margins. A second Charleston-area office in Mount Pleasant was expected to open in mid-2014.
Key disclosed risks include real-estate collateral values and loan concentrations, loan growth and portfolio seasoning, interest-rate movements, deposit flows and funding access, regulatory actions, cybersecurity and competition. Unfunded commitments to extend credit were $137.6 million, including $108.1 million at variable rates; letters of credit totaled $2.6 million. Management said a significant portion of commitments, particularly consumer equity lines, was not expected to be funded based on historical experience. The company stated that the impact of Basel III capital standards, scheduled to begin taking effect for the Bank in 2015, was still under review.
Unusual or notable items included the absence of securities-sale gains in 2013 compared with $295,000 in Q3 2012 and $363,000 for the 2012 nine-month period; increased compensation and occupancy costs tied to office and mortgage-business expansion; and a 10% stock dividend issued in February 2013, with prior-period share and EPS data adjusted. The company redeemed $1.0 million of Series T preferred stock during the first nine months. Management reported no subsequent events requiring accrual or disclosure, and no material pending legal proceeding was identified.
Investor facts to verify
- Whether loan growth, particularly real-estate and Charleston-area exposure, remains prudent as the portfolio seasons.
- Whether the allowance and credit-quality trends adequately reflect nonaccrual loans, TDRs and collateral valuations.
- Whether deposit growth and available borrowing capacity can support the 117% loan-to-deposit ratio without materially raising funding costs.
- Whether operating-expense growth from new offices and mortgage expansion translates into improved efficiency and returns.
- How interest-rate changes affect the company’s margin, securities values, liquidity and capital, and what Basel III implementation means for its capital position.