Southern First Bancshares, Inc. — Q3 2012 Form 10-Q
Business context and period. The company is a South Carolina bank holding company operating Southern First Bank, primarily in Greenville County. This unaudited filing covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods, except balance-sheet comparisons, which are with December 31, 2011. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial results and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $6.71 | $5.97 | $19.22 | $17.18 |
| Provision for loan losses | $1.13 | $1.67 | $3.60 | $3.05 |
| Noninterest income | $1.29 | $0.72 | $2.87 | $1.90 |
| Noninterest expense | $5.03 | $4.35 | $14.46 | $13.67 |
| Net income | $1.23 | $0.48 | $2.73 | $1.65 |
| Diluted EPS | $0.21 | $0.05 | $0.46 | $0.20 |
- Margins and earnings drivers: Tax-equivalent net interest margin was 3.72% in Q3, up from 3.36%, and 3.60% for nine months, up from 3.27%. Lower funding costs and loan growth supported net interest income; lower yields on loans and securities partly offset the benefit.
- Balance sheet: At September 30, total assets were $780.4 million, net loans $628.4 million, deposits $574.4 million, total borrowings $137.5 million (including junior subordinated debentures), and shareholders’ equity $63.3 million. Since year-end 2011, loans grew $39.0 million, deposits grew $11.5 million, and available-for-sale securities declined $36.6 million.
- Liquidity and cash flow: Cash and cash equivalents were $35.9 million, versus $23.0 million at year-end. Nine-month operating cash flow was $7.9 million; investing cash used was $5.3 million and financing cash provided was $10.3 million. The loan-to-deposit ratio was 111%. The company reported $30.5 million in unused correspondent-bank federal funds lines and $16.6 million of unused FHLB capacity.
- Credit quality: Nonperforming assets fell to $11.2 million (1.43% of assets; 1.75% of gross loans) from $14.0 million (1.82%; 2.33%) at year-end. Nonaccrual loans were $9.2 million; accruing troubled debt restructurings were $8.6 million. TDRs totaled $14.0 million across 39 loans, versus $12.2 million across 42 loans at year-end.
- Allowance and charge-offs: The allowance was $9.3 million, or 1.45% of gross loans. Nine-month net charge-offs were $3.27 million, versus $2.68 million in 2011. Management considered the allowance adequate, while noting estimates are subjective and future provisions may be required.
- Capital: The Bank reported total risk-based capital of 12.97%, Tier 1 risk-based capital of 11.72%, and Tier 1 leverage of 9.76%, above the OCC-agreed minimums of 12%, 10%, and 9%, respectively. The company reported that it remained well capitalized.
Material changes versus comparable periods
- Q3 net income rose $0.74 million year over year; nine-month net income rose $1.08 million. Lower Q3 loan-loss provision and increased noninterest income contributed to the quarterly improvement.
- Nine-month interest income declined $0.46 million, but interest expense fell $2.50 million, lifting net interest income by $2.04 million. Deposit costs declined as the company replaced higher-cost out-of-market deposits with local deposits.
- Nine-month noninterest income increased $0.97 million, including a $0.36 million gain on securities sales. Noninterest expense increased $0.79 million; higher compensation, occupancy, data processing, and professional fees partly offset lower real-estate-owned activity costs.
- Retail deposits increased as brokered deposits fell: brokered deposits were $13.0 million, or 2.3% of deposits, at September 30, compared with $45.8 million, or 8.1%, at year-end 2011.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said economic conditions remained slow and uncertain, with challenges expected to persist through the rest of 2012 and into 2013; it cautioned that interim results are not necessarily indicative of full-year results.
- The company announced plans to expand into Charleston and expected to open a Charleston office and a third full-service Columbia office in Q4 2012. It had hired a Charleston regional executive and was constructing the Columbia office.
- The Bank remained subject to a 2010 OCC Formal Agreement addressing credit risk, underwriting, liquidity, and funds management. Management believed the Bank was complying with substantially all requirements but noted the OCC might not agree; noncompliance could prompt further regulatory action.
- Management identified material risks including real-estate loan concentration (81.4% of loans), regional economic weakness and collateral values, credit losses, funding and liquidity, interest-rate movements, regulatory requirements, and the proposed Basel III rules. The company was evaluating the potential Basel III impact.
- In 2012, the company repurchased 1,000 Series T preferred shares for $904,000 and the Treasury warrant for $1.1 million, ending Treasury’s equity stake under the Capital Purchase Program. The filing reports approximately $130,000 of related offering costs for the nine-month period; the preferred-share repurchase is expected to save $50,000 in annual dividends. It also recorded a $295,000 Q3 securities-sale gain.
- Off-balance-sheet unfunded credit commitments were $109.9 million, including $90.0 million at variable rates; letters of credit totaled $2.5 million. Management expected a significant portion of commitments not to be funded, based on historical experience.
- The filing reported no material pending legal proceedings and no subsequent events requiring accrual or disclosure.
Important facts for investors to verify
- Whether credit performance, TDRs, charge-offs, and the allowance remain consistent with management’s assessment, especially given the high real-estate concentration.
- Progress toward OCC Formal Agreement termination or any new regulatory requirements, and the Bank’s continued compliance with its higher capital thresholds.
- Whether Charleston and Columbia offices opened as planned, and how expansion-related staffing and occupancy costs affect results.
- Loan growth and the 111% loan-to-deposit ratio alongside deposit mix, available borrowing capacity, and securities pledged as collateral.
- The expected effect of Basel III and interest-rate changes on capital, funding costs, and net interest income; management’s sensitivity estimates depend on assumptions and may differ from actual outcomes.