Southern First Bancshares, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Southern First is a South Carolina-based bank holding company operating primarily in South Carolina, North Carolina, and Georgia. It provides commercial, consumer, and mortgage lending and deposit services. This summary covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Key financial results and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $19.3 | $25.5 | $58.6 | $73.5 |
| Net income | $4.1 | $8.4 | $9.3 | $23.6 |
| Diluted EPS | $0.51 | $1.04 | $1.15 | $2.93 |
| Noninterest income | $2.8 | $2.7 | $7.5 | $7.9 |
| Noninterest expense | $17.3 | $16.0 | $51.8 | $46.5 |
- Margins and efficiency: Tax-equivalent net interest margin was 1.97% in Q3, down from 3.19%; for the first nine months it was 2.12%, versus 3.30%. Net interest spread was 1.12% for Q3 and 1.28% year to date. Q3 efficiency ratio increased to 78.3% from 57.0%.
- Balance sheet at September 30: Total assets were $4.02 billion, up 8.9% from year-end 2022. Gross loans were $3.55 billion, up $280.3 million (8.6%); deposits were $3.35 billion, up $213.9 million. Shareholders’ equity was $303.9 million.
- Credit: Allowance for credit losses was $41.1 million, or 1.16% of gross loans, compared with $38.6 million and 1.18% at year-end 2022. Nonperforming assets rose to $4.3 million (0.11% of assets) from $2.6 million (0.07%); nonaccrual loans increased by $1.7 million. Loans 30 days or more past due were 0.13% of the portfolio. Nine-month net charge-offs were $358,000.
- Cash flow and funding: Operating cash flow was $10.8 million for the first nine months, versus $36.8 million in 2022. Investing activities used $343.7 million, principally reflecting loan growth; financing provided $314.4 million, including deposit growth and $100 million of net additional borrowings. Cash and cash equivalents ended at $152.4 million, down from $170.9 million at year-end.
- Debt and liquidity: FHLB advances and related debt were $275 million, up from $175 million; subordinated debentures were $36.3 million. The loan-to-deposit ratio was 106%. Management reported $528.4 million of unused FHLB capacity, $118.5 million of available correspondent-bank federal funds lines, and $219.9 million pledged and available at the Federal Reserve Discount Window. No borrowings were outstanding on the correspondent lines.
- Capital: The Bank was described as well capitalized. At September 30, its total risk-based capital ratio was 12.27%, CET1 ratio 11.01%, and Tier 1 leverage ratio 8.50%.
Material changes versus comparable periods
- Q3 net income fell about 51% year over year; nine-month net income fell about 61%. Management attributed the decline primarily to sharply higher deposit interest costs following Federal Reserve rate increases.
- Q3 interest expense rose to $28.1 million from $5.5 million, while interest income increased to $47.4 million from $30.9 million. For the first nine months, interest expense increased by $60.7 million, outpacing the $45.8 million increase in interest income.
- Average interest-bearing deposit cost was 3.70% in Q3, compared with 0.93% a year earlier; average total interest-bearing liability cost rose to 3.72% from 1.00%. Management said loan yields have repriced more slowly than funding costs and expects continued margin pressure because many loans are fixed rate while deposits reprice faster.
- Nine-month noninterest expense increased 11.3%, with higher compensation, insurance premiums (including FDIC insurance), and occupancy costs. Mortgage banking income declined 18.9% year to date, primarily due to lower mortgage volume and lower related derivative income.
- Available-for-sale securities had fair value of $144.0 million against amortized cost of $163.3 million, an unrealized loss of $19.3 million. Management attributed the losses primarily to interest rates, said the securities were investment grade, and stated it did not expect to be required to sell them before recovery.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management warned of continued net interest margin and spread pressure.
- Interest-rate sensitivity analysis estimated net interest income would decline 19.19% under a 300-basis-point rate increase, while a 300-basis-point decrease would increase it 21.89%; these estimates depend on assumptions and are not forecasts.
- Estimated uninsured deposits were $1.4 billion, or 40.4% of deposits, compared with $1.5 billion, or 47.8%, at year-end. Wholesale deposits were 10.2% of deposits, up from 7.5%. Deposit competition, funding access, and liquidity remain risks.
- Real-estate-secured loans represented 84.5% of the portfolio. Non-owner-occupied commercial real estate and multifamily loans equaled 266.3% of the Bank’s total risk-based capital. The filing also cites loan growth and limited seasoning, real-estate values, credit concentrations, and economic conditions as risks.
- The Company entered a $200 million pay-fixed portfolio-layer fair-value swap in Q2 to help manage interest-rate risk. It enrolled in the Federal Reserve Bank Term Funding Program in July and had $13 million of eligible securities pledged to the program at quarter-end.
- The Company disclosed a violation of one covenant on its $15 million line of credit; the lender subsequently waived it. Two modified commercial business loans had a combined amortized cost of $329,000; both were current after modification, with no payment defaults during the period.
- Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors. A special FDIC assessment related to recent bank failures may increase insurance costs.
Most important facts for investors to verify
- Whether deposit pricing and funding mix continue to compress net interest margin, and how quickly loan yields adjust.
- Trends in uninsured deposits, wholesale funding, deposit retention, and available contingent liquidity.
- Commercial real-estate concentration, nonaccrual loan growth, criticized loan grades, and adequacy of credit-loss reserves.
- Realized or further changes in the $19.3 million securities unrealized loss and the Company’s capacity to hold those securities through recovery.
- The effect of elevated operating costs, FDIC assessments, and mortgage banking weakness on profitability and the efficiency ratio.
- Ongoing covenant compliance and the conditions or limits attached to liquidity facilities and regulatory capital requirements.