Business context and reporting period
Southern First Bancshares, Inc., through Southern First Bank, N.A., provides commercial, consumer and mortgage lending and deposit services, principally in South Carolina. This Form 10-Q covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Dollar figures below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $5.974 | $5.231 | $17.177 | $14.909 |
| Provision for loan losses | $1.670 | $1.275 | $3.045 | $4.975 |
| Net income | $0.483 | $0.337 | $1.649 | $0.450 |
| Net income (loss) available to common shareholders | $0.197 | $0.055 | $0.793 | $(0.392) |
| Diluted EPS | $0.05 | $0.02 | $0.22 | $(0.11) |
| Net interest margin, tax-equivalent | 3.36% | 3.00% | 3.27% | 2.87% |
- At September 30, total assets were $758.1 million; loans, net, $582.3 million; deposits, $554.7 million; shareholders’ equity, $61.9 million; and cash and cash equivalents, $40.1 million. Gross loans were $591.1 million and the allowance for loan losses was $8.8 million, or 1.48% of gross loans.
- Borrowings included $122.7 million of FHLB advances and repurchase agreements and $13.4 million of junior subordinated debentures. The loan-to-deposit ratio was 107%.
- For the first nine months, operating cash flow was $7.6 million, investing cash flow was $(39.2) million and financing cash flow was $17.8 million. Cash and cash equivalents fell $13.8 million to $40.1 million.
- Bank capital ratios were 13.23% total risk-based, 11.97% Tier 1 risk-based and 9.69% Tier 1 leverage. The filing states these exceeded OCC-agreed minimums and the Bank remained well-capitalized.
Material changes versus comparable periods
- Quarterly net income rose $0.146 million year over year; nine-month net income rose $1.199 million. Lower funding costs drove much of the increase: nine-month interest expense fell $2.716 million even as interest income declined $0.448 million.
- Quarterly noninterest expense rose 19.0% to $4.352 million, mainly from compensation and benefits. Nine-month expense rose 16.1% to $13.674 million, including $1.057 million of real-estate-owned activity expense.
- Nine-month net charge-offs declined to $2.680 million from $4.324 million. Nonperforming assets fell to $12.480 million (1.65% of assets) from $14.955 million (2.03%) at year-end 2010, while the allowance increased to $8.751 million.
- Loans increased $18.7 million and deposits increased $18.4 million from year-end. Available-for-sale securities rose to $81.0 million from $63.8 million; cash and cash equivalents declined from $53.9 million.
- The company disclosed a correction of an accounting error in preferred-stock discount accretion and related common earnings per share. Prior periods were restated; management said the error was not material to interim or annual financial statements. A 10% stock dividend in 2011 was reflected in comparative share and EPS data.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management expected weak economic conditions to continue through the remainder of 2011 and noted heightened risk of a “double-dip” recession.
- Management anticipated further reductions in deposit costs as approximately $103.7 million of retail CDs matured and repriced within six months; it did not expect to replace $10.8 million of wholesale CDs. It also planned to continue investing excess federal funds in securities.
- The Bank remained subject to a 2010 OCC Formal Agreement covering credit risk, underwriting, liquidity and funds management. Management believed it complied with substantially all requirements, but noted the OCC might not agree; noncompliance could lead to additional regulatory action. The Bank was required to maintain minimum capital ratios of 12% total risk-based, 10% Tier 1 risk-based and 9% leverage.
- Credit risks include substantial real-estate concentration (about 80% of loans), weak regional property markets, rising past-due loans and uncertainty in collateral values. At September 30, 24 troubled debt restructurings totaled $7.8 million; 12 previously restructured loans had defaulted during the first nine months, eight during Q3.
- Liquidity and rate risks include a 19.9% negative cumulative gap to earning assets over the first year and dependence on deposit retention and borrowing capacity. Available unused FHLB capacity was $10.2 million, with $30.5 million of correspondent-bank lines undrawn. Dodd-Frank implementation and debit-card interchange changes could affect costs and fee income.
- Investment restructuring included sale of a $2.5 million private-label mortgage security, with an additional $0.512 million loss, and sales of other securities with a reported $0.527 million gain. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether OCC requirements remain satisfied and how the regulator assesses compliance and required capital levels.
- Performance, collateral coverage and subsequent defaults of the $7.8 million TDR portfolio; trends in delinquencies, charge-offs and the allowance for loan losses.
- Deposit retention and repricing assumptions, upcoming CD maturities, liquidity availability and sensitivity to interest-rate changes.
- The effects of real-estate exposure, OREO valuations and securities portfolio transactions on future credit costs and earnings.
- The preferred-stock accounting correction and restated common-share earnings, and the impact of regulatory changes on debit-card fees and operating costs.