Southern First Bancshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The company is a bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services. Amounts below are in U.S. dollars; financial-statement amounts are generally rounded to millions.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $14.0 million | $11.6 million in Q1 2017; up 21.0% |
| Net interest margin, tax-equivalent | 3.63% | 3.61% in Q1 2017 |
| Net interest spread | 3.38% | 3.40% in Q1 2017 |
| Net income | $5.2 million | $3.1 million in Q1 2017; up 67.5% |
| Diluted earnings per share | $0.67 | $0.46 in Q1 2017 |
| Noninterest income / expense | $2.4 million / $9.2 million | $2.1 million / $8.4 million in Q1 2017 |
| Efficiency ratio | 55.9% | 61.2% in Q1 2017 |
| Total assets | $1.729 billion | $1.625 billion at December 31, 2017 |
| Gross loans / deposits | $1.459 billion / $1.521 billion | $1.387 billion / $1.381 billion at December 31, 2017 |
| Cash and cash equivalents | $136.1 million | $92.2 million at December 31, 2017 |
| FHLB advances and other borrowings | $28.6 million | $67.2 million at December 31, 2017 |
| Junior subordinated debentures | $13.4 million | Unchanged from December 31, 2017 |
| Shareholders’ equity | $154.7 million | $149.7 million at December 31, 2017 |
| Allowance for loan losses | $15.9 million; 1.09% of gross loans | $15.5 million; 1.12% at December 31, 2017 |
Cash flow: Operating activities provided $6.4 million, investing activities used $63.5 million, and financing activities provided $101.0 million. Cash increased by $43.9 million in the quarter. Financing inflows included $139.4 million of net deposit growth, partly offset by a $38.6 million net reduction in FHLB advances and other borrowings; investing cash use primarily reflected $72.5 million of net loan originations.
Material changes and management commentary
- Net interest income rose as average interest-earning assets grew 19.7%, led by loan growth and higher federal funds balances. Higher asset yields were partly offset by increased funding costs: the average rate on interest-bearing liabilities rose 12 basis points to 1.06%, while the net interest spread declined two basis points.
- Loan balances increased $72.3 million, or 5.2%, during the quarter. Commercial loans rose 6.9% and consumer loans 2.0%. Real-estate-secured loans represented 82.3% of the portfolio.
- Noninterest income increased 18.0%, mainly from higher mortgage banking income and ATM/debit card income. Expenses increased 10.1%, principally due to compensation, occupancy, and professional fees; management cited additional employees and new or expanded locations.
- The effective tax rate fell to 22.8% from 35.1%, primarily due to the Tax Cuts and Jobs Act. Management said the accounting for the Act was still being evaluated and expected to be completed after filing the 2017 tax return.
- Available-for-sale securities had a $1.5 million unrealized loss at quarter-end, compared with $578,000 at year-end. Management attributed losses primarily to interest-rate changes, said the securities were investment grade, and reported no intent or expected requirement to sell before recovery.
- Nonperforming assets were $7.5 million, or 0.43% of assets, versus $7.5 million, or 0.46%, at year-end. Net charge-offs were $171,000, or 0.05% of average loans on an annualized basis. Troubled debt restructurings totaled $8.5 million across 22 loans; management considered the allowance adequate.
- The Bank reported a 10.01% Tier 1 leverage ratio and 12.73% total risk-based capital ratio at March 31, 2018 and stated that it remained well capitalized. The loan-to-deposit ratio was 96%, down from 100% at year-end.
Outlook, risks, and contingencies
The filing provides no specific earnings or growth guidance. Management anticipates continued pressure on net interest spread and margin if Federal Reserve rate increases and competitive deposit pricing persist. Its interest-rate sensitivity analysis estimated net interest income changes from the base case ranging from positive 1.39% to 1.77% for rate increases of 100 to 300 basis points, and negative 5.23% to 7.83% for decreases of 100 to 300 basis points. These are model estimates subject to assumptions, not forecasts.
- Key disclosed risks include credit losses, real-estate concentration and collateral values, loan growth and portfolio seasoning, deposit flows and funding access, competition, interest-rate changes, regulatory actions, cybersecurity, and the execution and cost of expansion into Atlanta, Greensboro, and Raleigh.
- Unfunded commitments to extend credit were $355.5 million, including $235.2 million at variable rates; management expected that a significant portion would not be funded. Letters of credit to customers were $6.2 million. FHLB letters of credit securing client deposits totaled $235.9 million.
- Available contingent borrowing sources included $72.0 million in federal funds lines, $226.4 million of unused FHLB borrowing capacity, and an unused $15.0 million line of credit. The company also disclosed approximately $13.5 million in future minimum operating lease commitments.
- Management reported no subsequent events requiring accrual or disclosure and no material pending legal proceeding known to it. Adoption of the revenue-recognition standard had no material impact; the company was evaluating the expected-credit-loss standard and did not plan early adoption.
Important facts for investors to verify
- Whether loan growth and expansion spending can continue to support earnings while deposit costs rise and margins face pressure.
- Credit quality trends, especially real-estate concentrations, impaired loans, TDRs, delinquencies, and the adequacy of the allowance as the portfolio grows.
- The stability and cost of deposits, including growth in brokered deposits and the maturity of large time deposits.
- Whether unrealized securities losses, interest-rate sensitivity, or liquidity needs could lead to realized losses or further margin pressure.
- The sustainability of the lower tax rate and improved earnings, and the eventual balance-sheet and capital effects of new accounting standards.