Southern First Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company is a bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net interest income | $23.2 | $21.3; up 8.9% |
| Net interest margin, tax-equivalent | 3.37% | 3.60% |
| Provision for credit losses | $1.1 | $0.3 reversal |
| Noninterest income | $2.9 | $5.9; down 50.4% |
| Noninterest expense | $14.7 | $14.2; up 3.7% |
| Net income | $8.0 | $10.4 |
| Diluted earnings per share | $0.98 | $1.31 |
| Efficiency ratio | 56.3% | 52.1% |
Financial position and cash flow
- At March 31, total assets were $3.07 billion, up 5.0% from year-end 2021. Gross loans were $2.66 billion, up $170.8 million (6.9%) during the quarter; deposits were $2.71 billion, up $144.3 million.
- Cash and cash equivalents were $149.2 million, compared with $167.2 million at December 31. Shareholders’ equity was $278.5 million, approximately unchanged from year-end.
- Quarterly operating cash flow was $7.9 million; investing cash outflow was $170.8 million, primarily reflecting loan growth; financing cash inflow was $144.9 million, primarily from deposit growth.
- Subordinated debentures were $36.1 million. The company reported no borrowings against its $118.5 million of correspondent-bank federal funds lines or its $15.0 million holding-company line. Available FHLB borrowing capacity was $591.8 million.
- The Bank remained well-capitalized. Its total risk-based capital ratio was 13.83%, common equity Tier 1 ratio 12.58%, and Tier 1 leverage ratio 10.46%.
- Loans were 85.8% secured by real estate. The loan-to-deposit ratio was 98%.
Changes, outlook and risks
- Net income and diluted EPS declined year over year, primarily reflecting higher credit-loss provisioning and a sharp reduction in mortgage banking income. Mortgage banking income fell to $1.5 million from $4.6 million; the segment recorded a $0.1 million pretax loss versus $2.2 million pretax income a year earlier.
- Management attributed lower mortgage income to reduced housing inventory and refinancing volumes, lower loan-sale margins and lower fair value of mortgage-related derivatives. It did not expect mortgage originations to remain at prior-year levels.
- Net interest income increased with higher average loan balances, but tax-equivalent net interest margin fell 23 basis points. Management anticipated continued margin and spread pressure as new and renewed loans priced below portfolio yields.
- Management recorded a $1.0 million provision for credit losses, citing loan growth. The allowance for credit losses was $32.9 million, or 1.24% of gross loans. Nonperforming assets were $4.5 million (0.15% of assets), down from $4.9 million at year-end.
- CECL was adopted January 1, 2022. Adoption increased the loan allowance by $1.5 million and the unfunded-commitment reserve by $2.0 million, with a $2.8 million after-tax reduction to retained earnings. The quarter-end unfunded-commitment reserve was $2.1 million.
- Available-for-sale securities had $8.1 million of unrealized losses at quarter-end, versus $1.9 million at year-end 2021. Management said losses were primarily interest-rate related, securities were investment grade, and it did not intend or expect to be required to sell them before recovery.
- Interest-rate sensitivity analysis estimated net interest income would decline 4.61% under a 100-basis-point rate increase and 15.53% under a 300-basis-point increase; the filing cautions that model assumptions may not hold.
- Management said the new Greenville headquarters, including a retail office, was expected to open in Q2 2022. It also cited COVID-19 and its economic effects, inflation, supply-chain and labor issues, credit quality, real-estate concentration, competition, funding, cybersecurity, and expansion execution among risks.
- The company reported no material change to previously disclosed risk factors and no material pending legal proceedings known to management. It has not paid cash dividends.
Important facts for investors to verify
- Whether subsequent quarters confirm continued loan growth, margin pressure and the outlook for mortgage banking volumes and profitability.
- How CECL assumptions and the allowance evolve alongside loan growth, delinquencies, criticized loans and real-estate collateral values.
- Whether deposit growth and liquidity sources remain adequate as the loan-to-deposit ratio stands at 98%; also monitor wholesale funding and unfunded commitments of $686.5 million.
- The effect of rising rates on both net interest income and the $8.1 million unrealized securities loss, including any changes in the company’s ability or intent to hold securities.
- Capital implications if consolidated assets remain above $3 billion at June 30, 2022: the filing says the company could lose small-bank-holding-company status in March 2023.
- Progress and costs for the Greenville headquarters opening and expansion into Charlotte, Greensboro and Atlanta.