Business context and reporting period
Southern First Bancshares, Inc. is a South Carolina bank holding company operating Southern First Bank, which provides commercial, consumer and mortgage loans and deposit services. This unaudited Form 10-Q covers the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts below are in U.S. dollars.
Key financial results and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $821.7 million | $798.0 million at Dec. 31, 2012 |
| Gross loans | $665.2 million | $645.9 million at Dec. 31, 2012 |
| Deposits | $612.4 million | $576.3 million at Dec. 31, 2012 |
| Net interest income | $6.878 million | $6.129 million in Q1 2012 |
| Net income | $961,000 | $688,000 in Q1 2012 |
| Net income available to common shareholders; diluted EPS | $784,000; $0.18 | $399,000; $0.09 in Q1 2012 |
| Net interest margin, tax-equivalent | 3.69% | 3.45% in Q1 2012 |
| Noninterest income / expense | $882,000 / $5.230 million | $837,000 / $4.779 million in Q1 2012 |
| Provision for loan losses | $1.125 million | $1.200 million in Q1 2012 |
| Operating cash flow | $2.864 million | $911,000 in Q1 2012 |
| Cash and cash equivalents | $36.190 million | $29.413 million at Dec. 31, 2012 |
| Shareholders’ equity | $64.4 million | $64.1 million at Dec. 31, 2012 |
Net interest income increased 12.2% year over year. Management attributed the improvement mainly to lower funding costs: the average cost of interest-bearing liabilities fell 41 basis points, while the yield on interest-earning assets declined 12 basis points. The efficiency ratio, excluding securities gains and real estate owned activity, rose to 67.1% from 65.3%.
At March 31, total liabilities were $757.3 million. Borrowings included $124.1 million of Federal Home Loan Bank advances and other borrowings, and $13.4 million of junior subordinated debentures. There were no federal funds purchased outstanding, compared with $13.2 million at year-end. The loan-to-deposit ratio was 109%, down from 112% at year-end. The Bank reported $34.0 million of available federal funds lines and $51.3 million of unused FHLB borrowing capacity. Approximately 44% of investment securities were pledged against debt.
Credit measures improved overall: nonperforming assets were $8.8 million, or 1.07% of assets, versus $9.9 million, or 1.24%, at year-end. The allowance for loan losses was $9.4 million, equal to 1.41% of gross loans; net charge-offs were $849,000, or 0.52% of average loans on an annualized basis. Total loans 30 days or more past due were 0.94% of the portfolio, versus 1.11% at year-end. Accruing troubled debt restructurings were $9.0 million.
The Bank’s regulatory capital ratios exceeded the stated “well-capitalized” thresholds: total risk-based capital was 12.71%, Tier 1 risk-based capital 11.46%, and Tier 1 leverage 9.42%. Annualized return on average assets was 0.48%; return on average equity was 6.03%.
Material changes versus comparable periods
- Year-over-year net income rose 39.7%, and diluted EPS doubled to $0.18. The company attributed the increase primarily to higher net interest income and noninterest income and a lower loan-loss provision.
- Gross loans grew $19.3 million from year-end; management attributed $12.9 million of growth to the Charleston office. Deposits increased $36.1 million, including growth from recently opened branches. Total assets increased 3.0% from year-end.
- Noninterest expenses increased 9.4% year over year, led by compensation and occupancy costs associated with additional employees, new offices and expanded mortgage operations. Q1 2013 expenses also included a $55,000 litigation settlement. Lower real estate-owned expenses partly offset these increases.
- Nonperforming assets declined, although other real estate owned increased to $2.5 million from $1.7 million at year-end. The company reported adding two properties for $1.0 million and selling two for approximately $198,000 during the quarter.
- The company issued a 10% stock dividend in February 2013; prior-period share counts and EPS were adjusted for comparability. The allowance model was also changed in Q1, including use of a 12-quarter historical loss period.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, revenue, loan-growth or margin guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Management described economic conditions as weak and expected them to continue through 2013, with potential pressure on credit quality, loan yields, funding costs, liquidity and capital.
- Disclosed risks include real-estate collateral and loan concentration exposure, credit losses and loan seasoning, interest-rate changes, deposit flows and funding access, regulatory requirements, competition, and cybersecurity risk. The company’s rate-sensitivity analysis estimated net interest income declines versus the base case under each modeled rate scenario: 3.87% for +100 basis points, 5.43% for +200, 4.15% for +300, and 0.89%, 2.43% and 3.56% for decreases of 100, 200 and 300 basis points, respectively.
- Effective April 1, 2013, the Bank converted from a national to a South Carolina state charter and changed its name. Management expected certain annual regulatory-fee savings and no substantial effect on activities or services. The conversion was not due to a dispute with the OCC.
- The OCC had ended the Bank’s formal agreement and individual minimum capital requirements effective December 19, 2012. On April 1, 2013, the company redeemed an additional $500,000 of preferred stock; the filing says the cumulative amount redeemed since July 2012 reached $2.0 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Track loan growth and concentration: 81.0% of loans were real-estate-related, and the Charleston office accounted for a substantial share of quarterly loan growth.
- Assess credit trends, including nonperforming assets, OREO, past-due loans, TDRs, charge-offs and allowance adequacy; note the new allowance methodology and management estimates involved.
- Monitor funding and liquidity, particularly the 109% loan-to-deposit ratio, deposit mix and maturities, pledged securities, and availability of borrowing lines.
- Confirm the durability of margin gains: funding costs fell materially, while loan yields and the yield on earning assets also declined; modeled rate scenarios showed lower net interest income than the base case.
- Review expense growth and branch economics, as new offices and mortgage expansion raised compensation and occupancy costs and the efficiency ratio increased.
- Check the effect of the charter conversion, preferred-stock redemptions and any final Basel III requirements on costs, capital and common-shareholder returns.