Southern First Bancshares, Inc. — Q3 2016 Form 10-Q
Business context and period. The company is a South Carolina bank holding company providing commercial, consumer and mortgage lending and deposit services. This unaudited report covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $10.9 | $9.8 | $31.7 | $28.4 |
| Provision for loan losses | $0.8 | $0.9 | $2.0 | $2.5 |
| Noninterest income | $3.0 | $2.1 | $8.7 | $6.4 |
| Noninterest expense | $7.8 | $6.9 | $23.2 | $21.0 |
| Net income | $3.4 | $2.7 | $9.7 | $7.3 |
| Diluted earnings per share | $0.51 | $0.41 | $1.45 | $1.12 |
Net income increased 25.9% in the quarter and 33.2% year to date. Tax-equivalent net interest margin was 3.63% in Q3 (3.62% prior year) and 3.66% year to date (3.69% prior year). The Q3 efficiency ratio was 56.1%, versus 57.4% a year earlier. The nine-month effective tax rate was 36.0%, compared with 35.3%.
For the first nine months, operating cash flow was $10.5 million, investing cash outflow was $91.3 million and financing cash inflow was $59.9 million. Cash and cash equivalents declined $21.0 million to $41.9 million.
Financial position, liquidity and capital
- Total assets were $1.290 billion, up 6.0% from year-end 2015. Gross loans increased 10.9% to $1.114 billion; deposits grew 6.0% to $1.045 billion.
- Shareholders’ equity was $106.0 million, up from $94.2 million. Total investment securities were $73.6 million, down from $95.5 million; management attributed the lower cash and securities balances primarily to funding loan growth.
- FHLB advances and other borrowings were $115.2 million, unchanged from year-end; junior subordinated debentures were $13.4 million, also unchanged. The loan-to-deposit ratio was 107%, versus 102% at year-end.
- Available liquidity included $45 million of unused correspondent-bank federal funds lines, $144.9 million of unused FHLB borrowing capacity and an unused $10 million line of credit. Management cited deposits, FHLB borrowing and repurchase agreements as funding sources.
- Bank capital ratios were 11.77% total risk-based capital, 10.52% Tier 1 risk-based and 9.10% Tier 1 leverage. Company ratios were 12.11%, 10.86% and 9.38%, respectively. Management stated the company and Bank would meet fully phased-in Basel III capital adequacy requirements if then effective.
- Return on average assets was 1.05% and return on average equity was 12.94% for the nine-month period, annualized. The company reported that it had never paid cash dividends.
Changes, credit quality and other notable items
- Mortgage banking income rose to $2.0 million in Q3 from $1.3 million, and to $5.7 million year to date from $3.8 million. Management attributed growth to higher origination volume, two additional mortgage originators and a shift to mandatory delivery of mortgage loans to the secondary market in April 2016.
- Compensation and benefits increased 14.7% in Q3; the company cited higher staffing, including ten additional employees over the prior year, four associated with its new Raleigh, North Carolina office. Professional fees also increased, partly related to mortgage operations.
- Nonperforming assets declined to $7.5 million (0.58% of assets; 0.67% of gross loans) from $9.1 million at year-end. Nonaccrual loans were $5.6 million; other real estate owned was $1.9 million. Allowance for loan losses was $14.5 million, or 1.30% of gross loans, compared with $13.6 million, or 1.36%, at year-end. Year-to-date net charge-offs were $1.2 million, or 0.15% of average loans, annualized.
- Troubled debt restructurings totaled $9.2 million across 27 loans, compared with $8.0 million across 29 loans at year-end. One restructured loan had a payment default within 12 months.
- Real estate secured 81.2% of the loan portfolio. Management identified loan concentrations, real estate values, loan growth and seasoning, interest-rate changes, funding and deposit flows, competition, regulatory requirements, cybersecurity and expansion execution among risks.
- A short-term client deposit of approximately $40 million arrived in June; most was withdrawn in early July. Retail deposits were 93.4% of total deposits at quarter-end; brokered deposits were 6.6%. Approximately $68.9 million of wholesale CDs were due within 12 months.
- The company adopted the fair value option for mortgage loans held for sale on April 1, 2016; subsequent fair-value changes are recognized in earnings. It reported no subsequent events requiring accrual or disclosure and no material pending legal proceedings known to management.
Guidance and outlook
The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results. Its interest-rate sensitivity model estimated net interest income changes versus the base case of +2.48% for a 100-basis-point increase and -6.06% for a 100-basis-point decrease; the filing cautions that assumptions may not prove valid.
Important facts for investors to verify
- Whether loan growth, the 107% loan-to-deposit ratio and the decline in cash and securities are supported by stable funding and adequate liquidity.
- Whether credit quality and allowance coverage remain appropriate as the portfolio expands, given real-estate concentration, TDR growth and net charge-offs.
- How sustainable mortgage banking gains are, including the effects of mandatory-delivery practices, origination volume and fair-value accounting.
- Whether staffing, Raleigh expansion and other operating costs generate sufficient revenue to preserve efficiency and profitability.
- Whether interest-rate sensitivity, upcoming wholesale CD maturities and pledged securities affect future margins or funding flexibility.