Southern First Bancshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless otherwise noted. Southern First is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services.
Financial performance
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $11.6 million | Up 12.6% from $10.3 million in Q1 2016 |
| Net interest margin, tax-equivalent | 3.61% | Down 3 basis points from 3.64% |
| Net income | $3.1 million | Up 3.5% from $3.0 million |
| Diluted earnings per share | $0.46 | $0.45 in Q1 2016 |
| Provision for loan losses | $0.5 million | Down from $0.625 million |
| Noninterest income | $2.1 million | Down 19.9% from $2.6 million |
| Noninterest expense | $8.4 million | Up 11.2% from $7.5 million |
| Efficiency ratio | 61.2% | Up from 58.4% |
| Operating cash flow | $7.0 million provided | $4.4 million used in Q1 2016 |
Financial position, liquidity and credit
- Total assets were $1.468 billion, up 9.5% from $1.341 billion at year-end. Gross loans rose 4.7% to $1.219 billion; deposits increased to $1.211 billion from $1.091 billion.
- Cash and cash equivalents were $121.2 million, or 8.3% of assets, versus $46.6 million, or 3.5%, at year-end. Management attributed the increase partly to building liquidity ahead of $44.5 million of FHLB advances maturing in Q2.
- Borrowings included $117.7 million of FHLB advances and other borrowings and $13.4 million of junior subordinated debentures. The company also had a $10 million line of credit fully drawn; it matured June 6, 2017, and management intended to renew it.
- Available borrowing capacity included $137.5 million at the FHLB and $45 million in unused correspondent-bank federal funds lines. The loan-to-deposit ratio was 101%, down from 107% at year-end.
- Shareholders’ equity was $113.6 million. Bank regulatory capital ratios exceeded stated minimums: total capital 12.20%, Tier 1 risk-based 10.95%, Common Equity Tier 1 10.95%, and Tier 1 leverage 9.47%. Management said the company and Bank would meet fully phased-in Basel III requirements if then effective.
- Allowance for loan losses was $15.3 million, or 1.25% of gross loans, compared with $14.9 million, or 1.28%, at year-end. Net charge-offs were $68,000, or 0.02% of average loans annualized, versus $356,000, or 0.14%, in Q1 2016.
- Nonperforming assets rose to $6.8 million, or 0.47% of assets and 0.56% of gross loans, from $6.1 million, or 0.46% and 0.53%, respectively. Nonaccrual loans increased to $6.2 million from $5.5 million. Loans 30 or more days past due were 0.45% of the portfolio, down from 0.55% at year-end.
- Real estate collateral supported 81.2% of loans. Management considered the allowance adequate, while noting the loan-loss estimate depends on judgment and may change with borrower conditions, collateral values and economic trends.
Material changes and management commentary
- Net interest income growth reflected higher average earning assets, particularly average loans, which increased about $180 million year over year. The tax-equivalent yield on earning assets declined slightly while funding costs rose; management cited lower loan yields and higher deposit and variable-rate borrowing costs.
- Noninterest income fell mainly because mortgage banking income declined $390,000 amid seasonal weakness and higher mortgage rates, and Q1 2016 included a $307,000 securities-sale gain. Management said 2017 mortgage origination volume may be below prior years.
- Expense growth was led by compensation and benefits, including staffing for Raleigh expansion and business growth. Real estate owned expenses fell substantially from the prior year.
- On April 25, 2017, the company announced expansion into the greater Atlanta market through the hiring of an experienced banker. Management warned that new-market facilities and hiring may increase costs and may not generate enough business to be profitable.
- There was no formal earnings or financial guidance in the filing. Results for the quarter are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Interest-rate sensitivity analysis estimated net interest income changes versus the base case of +3.65% for a 100-basis-point increase and -6.18% for a 100-basis-point decrease; modeled declines reached 10.60% under a 300-basis-point decrease. Results depend on assumptions that may not prove valid.
- Unfunded loan commitments totaled $268.0 million, including $201.2 million at variable rates. The company expects that a significant portion, particularly consumer equity lines, will not be drawn. Letters of credit to customers were $4.1 million.
- Mortgage loan sales may expose the company to repurchase or indemnification claims for specified borrower defaults or underwriting deficiencies. One TDR loan of $187,000 had a payment default within 12 months of restructuring.
- Management cited risks including credit concentration and real-estate exposure, loan growth and limited seasoning, deposit flows and funding access, interest-rate changes, competition, regulation, cybersecurity, and execution of market expansion. It reported no material pending legal proceedings and no subsequent events requiring accrual or disclosure.
Important facts for investors to verify
- Whether deposit growth and elevated cash balances persist, and how the $44.5 million of Q2 FHLB maturities and fully drawn $10 million credit line are refinanced or repaid.
- Whether loan growth, credit quality and nonperforming assets develop as expected, including the adequacy of the allowance amid the portfolio’s substantial real-estate concentration.
- Whether margin pressure continues as loan yields and funding costs change, and whether mortgage banking income remains below prior-year levels.
- Whether Raleigh and Atlanta expansion costs are matched by deposit, loan and revenue growth.
- How actual results compare with the filing’s interest-rate sensitivity assumptions and its stated liquidity and capital resources.