Southern First Bancshares, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Southern First is a South Carolina bank holding company whose subsidiary accepts deposits and makes commercial, consumer, and mortgage loans. This filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $9.84 million | $8.49 million | $28.40 million | $24.21 million |
| Noninterest income | $2.12 million | $1.56 million | $6.38 million | $4.05 million |
| Noninterest expense | $6.87 million | $6.07 million | $20.98 million | $18.15 million |
| Net income available to common shareholders | $2.73 million | $1.57 million | $7.32 million | $3.94 million |
| Diluted earnings per share | $0.41 | $0.31 | $1.12 | $0.79 |
At September 30, 2015, total assets were $1.174 billion, up 14.0% from year-end 2014. Gross loans were $993.2 million, up 14.0%; deposits were $943.9 million, up 19.6%; and shareholders’ equity was $91.1 million, versus $83.0 million. The allowance for loan losses was $13.4 million, or 1.35% of gross loans.
Q3 tax-equivalent net interest margin was 3.62%, down from 3.66% a year earlier; the nine-month margin was 3.69%, up from 3.67%. The Q3 efficiency ratio improved to 57.4% from 60.4%. Annualized nine-month return on average assets was 0.90% and return on average equity was 11.16%.
For the first nine months, operating cash flow was $12.5 million, investing cash flow was negative $138.6 million, and financing cash flow was $135.2 million. Cash and cash equivalents ended the period at $50.3 million, compared with $41.3 million at year-end 2014. Funding included $115.2 million of FHLB advances and other borrowings and $13.4 million of junior subordinated debentures.
Material changes versus comparable periods
- Common earnings rose 73.4% in Q3 and 85.5% year to date. Higher net interest income and noninterest income were partly offset by increased operating expenses.
- Loan and mortgage fee income increased to $1.43 million in Q3 from $0.86 million, and to $4.03 million year to date from $1.82 million, reflecting expanded mortgage operations.
- Noninterest expenses increased 13.3% in Q3 and 15.6% year to date. Compensation was the largest driver; year-to-date real-estate-owned (OREO) expenses also rose substantially.
- Net loan charge-offs declined to $0.88 million for the first nine months from $2.18 million a year earlier. Nonperforming assets were $9.84 million, or 0.84% of assets, compared with $9.96 million, or 0.97%, at year-end. Nonaccrual loans increased to $7.19 million from $6.65 million.
- Core deposits were $713.5 million. Retail deposits were 92.2% of total deposits; brokered deposits were 7.8%. The loan-to-deposit ratio was 105%, down from 110% at year-end.
Outlook, commentary, and risks
Management gave no specific earnings or growth guidance and cautioned that interim results are not necessarily indicative of full-year results. It described economic conditions as expected to remain weaker through the rest of 2015 and noted competitive pressure on asset yields, deposits, liquidity, and capital. Management did not anticipate significant further reductions in deposit or borrowing costs, which it said were already historically low.
Management considered the $13.4 million loan-loss allowance adequate. During Q3, the company changed its historical-loss measurement period from 12 to 20 quarters, stating the longer period better captures an economic cycle and portfolio risk. Approximately 81.4% of loans were secured by real estate. OREO declined to $2.66 million, in part following a $787,000 write-down recorded year to date.
At September 30, the Bank’s total capital ratio was 11.58%, Tier 1 ratio 10.33%, and common equity Tier 1 ratio 10.33%; management expected capital ratios to remain above well-capitalized minimums. Interest-rate sensitivity analysis estimated net interest income changes of +4.40% under a 100-basis-point increase and −4.54% under a 100-basis-point decrease, subject to assumptions and limitations. Available liquidity included $45.0 million of unused correspondent-bank lines and $77.9 million of unused FHLB borrowing capacity.
Key risks identified include real-estate collateral and loan concentration, loan growth and seasoning, credit losses, interest-rate and margin changes, deposit flows and funding access, competition, regulatory requirements, capital adequacy, and cybersecurity. Management reported no material pending legal proceedings known to it and no subsequent event requiring accrual or disclosure.
Important facts for investors to verify
- Whether rapid loan growth and real-estate concentration are matched by sufficient underwriting, collateral values, and allowance coverage.
- Whether nonaccrual loans, OREO valuations, and the significant year-to-date OREO write-down signal further credit costs.
- Whether deposit growth and available borrowing capacity can sustain loan funding without undue liquidity or funding-cost pressure.
- Whether margin trends and higher compensation and mortgage-operation costs affect future profitability and efficiency.
- Whether reported capital and interest-rate sensitivity remain resilient under changing rates and economic conditions.