Southern First Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a bank holding company whose subsidiary provides commercial, consumer, and mortgage banking services. Unless otherwise stated, financial amounts are in U.S. dollars.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $17.3 million | $15.5 million | $49.6 million | $44.2 million |
| Provision for loan losses | $0.65 million | $0.40 million | $1.25 million | $1.30 million |
| Noninterest income | $4.4 million | $2.5 million | $11.5 million | $7.7 million |
| Noninterest expense | $11.5 million | $10.2 million | $33.5 million | $29.4 million |
| Net income | $7.4 million | $5.8 million | $20.7 million | $16.5 million |
| Diluted EPS | $0.95 | $0.75 | $2.66 | $2.13 |
| Tax-equivalent net interest margin | 3.36% | 3.60% | 3.43% | 3.57% |
- Q3 net income rose 28.2%; nine-month net income rose 25.2%. Higher net interest income and mortgage banking revenue drove growth, partly offset by higher expenses.
- Q3 efficiency ratio improved to 53.0% from 56.5%. Nine-month effective tax rate was 21.6%, versus 22.2%.
- At September 30, total assets were $2.20 billion, up 15.8% from year-end 2018. Gross loans were $1.84 billion, up 9.6%; deposits were $1.90 billion, up 15.2%. Shareholders’ equity was $198.5 million.
- Cash and cash equivalents were $134.5 million, compared with $72.9 million at year-end. Nine-month operating cash flow was negative $1.1 million, versus positive $24.3 million a year earlier; investing cash outflow was $187.2 million and financing cash inflow was $250.0 million.
- The allowance for loan losses was $15.8 million, or 0.86% of gross loans, compared with 0.94% at year-end 2018. Nine-month net charge-offs were $1.16 million, or 0.09% of average loans, versus $0.68 million, or 0.06%, in 2018.
- Nonperforming assets were $7.0 million, 0.32% of assets, versus $5.8 million, 0.31%, at year-end. Loans 30 days or more past due were 0.30% of the portfolio. Approximately 82.7% of loans were real-estate secured.
- Bank capital ratios exceeded regulatory well-capitalized thresholds: total risk-based capital 13.22%, Tier 1 12.36%, common equity Tier 1 12.36%, and leverage 10.54%. The loan-to-deposit ratio was 97%.
Material changes, outlook, and risks
- Loan growth and higher mortgage originations supported revenue. Mortgage banking income increased 125.6% in Q3 and 79.6% year to date. Management attributed the increase to stronger origination volume in a favorable mortgage-rate environment.
- Operating costs rose with staffing and expansion: compensation increased 16.2% in both the quarter and nine-month comparison, reflecting 24 additional team members. Data-processing and outside-service costs also increased.
- Deposit competition increased funding costs. Q3 interest-bearing deposit cost was 1.71%, up from 1.24%; nine-month cost was 1.69%, up from 1.12%. Management anticipated continued pressure on net interest margin and spread from deposit competition and potential Federal Reserve rate cuts.
- On September 30, the company issued $23.0 million of 4.75% fixed-to-floating subordinated notes due 2029, receiving approximately $22.5 million net. Proceeds were intended for general corporate purposes, including bank capital and organic growth. The notes are unsecured, subordinated, and intended to qualify as Tier 2 capital.
- Subsequent to quarter-end, the company sold $6.2 million of HSA deposits for an approximately $745,000 gain; sold $30.3 million of investment securities for an approximately $718,000 gain; and repaid $25.0 million of FHLB advances, incurring a $1.5 million prepayment penalty.
- The company was preparing for the expected-credit-loss standard (CECL) and said it may increase the allowance; the amount remained under review. The filing notes that the effective date for smaller reporting companies was delayed to fiscal years beginning after December 15, 2022.
- Key risks include real-estate and loan-concentration exposure, portfolio growth and seasoning, credit quality, interest-rate and deposit-cost changes, expansion costs, competition, liquidity and regulatory requirements, and cybersecurity. The filing provides no formal earnings or revenue guidance.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It was not aware of material pending legal proceedings.
Important facts for investors to verify
- Whether margin pressure persists as deposit pricing and market rates change.
- Whether loan growth, delinquencies, nonperforming assets, and net charge-offs affect future provisions and allowance adequacy.
- How the post-quarter securities and HSA sales, FHLB repayment penalty, and subordinated-note proceeds affect earnings, liquidity, and capital.
- The eventual CECL allowance adjustment and its impact on retained earnings and results.
- Whether expansion-related staffing and technology costs are matched by sustainable revenue growth.