Southern First Bancshares, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Southern First is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2012 / Mar. 31, 2012 | Comparable period / Dec. 31, 2011 |
|---|---|---|
| Net income | $0.688 | $0.537 in Q1 2011 |
| Net income available to common shareholders | $0.399 | $0.253 in Q1 2011 |
| Basic / diluted EPS | $0.10 / $0.10 | $0.07 / $0.06 in Q1 2011 |
| Net interest income | $6.129 | $5.401 in Q1 2011 |
| Tax-equivalent net interest margin | 3.45% | 3.18% in Q1 2011; 3.36% in Q4 2011 |
| Provision for loan losses | $1.200 | $0.725 in Q1 2011 |
| Noninterest income / expense | $0.837 / $4.779 | $0.595 / $4.506 in Q1 2011 |
| Total assets | $770.006 | $767.745 |
| Gross loans / net loans | $607.925 / $598.729 | $598.634 / $589.709 |
| Deposits | $566.722 | $562.912 |
| Shareholders’ equity | $63.006 | $62.539 |
Cash provided by operating activities was $0.911 million, compared with $1.320 million in Q1 2011. Investing activities provided $18.808 million, principally reflecting $27.742 million of securities-sale proceeds, partly offset by loan growth. Financing activities provided $3.649 million. Cash and cash equivalents ended the quarter at $46.373 million, up from $23.005 million at year-end; the prior-year quarter-end balance was $75.546 million.
The efficiency ratio, excluding securities-sale gains and real estate-owned activity, improved to 65.3% from 66.7%. Annualized return on average assets was 0.36%; return on average equity was 4.34%. The allowance for loan losses was $9.196 million, or 1.51% of gross loans. Q1 net charge-offs were $0.929 million, equal to 0.62% of average loans on an annualized basis.
Material changes and management commentary
- Net income increased $0.151 million year over year, as higher net interest income and noninterest income more than offset higher credit provision and operating expenses.
- Net interest income rose 13.5%. Management attributed the margin improvement mainly to lower funding costs: the average cost of interest-bearing liabilities fell 51 basis points, while the yield on earning assets declined 24 basis points. Loan yield declined to 5.34% from 5.71%.
- Noninterest income rose 40.1%, including a $0.072 million gain on securities sales. Noninterest expense increased 6.1%; higher compensation, occupancy and data-processing costs were partly offset by lower real estate-owned activity and FDIC insurance expense.
- Gross loans increased $9.291 million from year-end. Commercial loans were 73.8% of the portfolio; real-estate-related loans represented 80.3% of gross loans. The loan-to-deposit ratio was 107%.
- Nonperforming assets were $13.777 million, or 1.79% of assets and 2.27% of gross loans, versus $13.950 million at year-end. Nonaccrual loans were $10.044 million; other real estate owned was $3.733 million. Total TDRs were 36 loans totaling $12.5 million, including $5.812 million of nonaccruing TDRs.
- Available-for-sale securities declined to $70.691 million from $100.660 million, largely following securities sales used to support liquidity amid increased loan demand. Management recorded a $0.072 million net gain on those sales.
- Retail deposits increased while brokered deposits declined: brokered deposits were $35.0 million, or 6.2% of deposits, at quarter-end. Management said it did not plan to renew $22.0 million of wholesale CDs scheduled to mature in 2012.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance was provided. Management expected loan yields to remain broadly stable and deposit costs to continue declining, citing approximately $69.6 million of retail CDs scheduled to reprice within six months. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- Management described economic conditions as weak and expected elevated credit losses, nonperforming assets and foreclosures to remain risks. The portfolio’s real-estate concentration, local property values, borrower performance, loan growth and the adequacy of the allowance are material sensitivities.
- The Bank remains subject to a 2010 OCC Formal Agreement covering credit risk, underwriting, liquidity and funds management. Management believed the Bank complied with substantially all requirements, but noted the OCC might not concur and that failure to comply could trigger further regulatory action. The Bank must maintain agreed minimum ratios of 12% total risk-based capital, 10% Tier 1 risk-based capital and 9% leverage capital.
- At March 31, 2012, the Bank reported total risk-based capital of 13.15%, Tier 1 risk-based capital of 11.90% and Tier 1 leverage capital of 9.62%; management said the Bank remained well capitalized. The filing also discusses possible future effects of Basel III and other regulatory changes.
- Liquidity sources included $46.4 million of cash and cash equivalents, $30.5 million of unused correspondent-bank federal funds lines and $6.0 million of reported unused FHLB capacity. Some securities were pledged against debt, limiting their immediate availability for sale. Unfunded credit commitments were $103.3 million; letters of credit were $2.6 million.
- Interest-rate sensitivity estimates showed modeled net interest income changes of +2.83% for a 300-basis-point increase, but declines of 1.64% and 2.20% for increases of 100 and 200 basis points, respectively; modeled declines for rate decreases ranged from 0.07% to 3.04%. Management cautioned that these estimates depend on assumptions and may differ from actual outcomes.
- The company disclosed a correction of a prior accounting error involving preferred-stock discount accretion and related common earnings and EPS. It said the error was not material to prior interim or annual statements; Q1 2011 common income and EPS were restated. A 10% stock dividend was issued in February 2012, and comparative share and per-share data were adjusted.
- Series T preferred stock issued under the Treasury’s Capital Purchase Program carries cumulative dividends of 5% annually for the first five years and 9% thereafter. The quarter included a $0.216 million preferred dividend. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether the $9.196 million loan-loss allowance adequately reflects specific impaired-loan risks, charge-offs and the real-estate-heavy portfolio.
- Trends in nonaccrual loans, TDR performance, foreclosures and OREO valuations, including the effect of collateral values and any further credit losses.
- Compliance with the OCC Formal Agreement and continued headroom over its higher-than-standard capital requirements.
- Funding and liquidity as wholesale CDs mature, given the 107% loan-to-deposit ratio and the pledged portion of the securities portfolio.
- The assumptions behind interest-rate sensitivity estimates and the sustainability of margin improvement as assets and liabilities reprice.
- The restated comparative EPS and preferred-stock accounting, and the terms and potential dilution associated with the Treasury warrant.