Southern First Bancshares, Inc. — Q1 2024 Form 10-Q
Business context and period. Southern First is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services across South Carolina, North Carolina and Georgia. This summary covers the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless noted. Amounts are in U.S. dollars.
Financial performance and condition
- Earnings and revenue: Net income was $2.5 million, down 6.7% from $2.7 million in Q1 2023. Diluted EPS was $0.31 versus $0.33. Interest income rose to $48.4 million from $38.3 million, but interest expense increased to $29.7 million from $17.9 million. Net interest income consequently fell 8.7% to $18.6 million. Noninterest income increased 30.3% to $2.7 million, led by higher mortgage banking income.
- Margins and expenses: Tax-equivalent net interest margin declined to 1.94% from 2.36%; net interest spread fell to 1.04% from 1.59%. Management attributed margin pressure to funding costs rising faster than asset yields. Noninterest expense rose 5.8% to $18.1 million, and the efficiency ratio worsened to 84.9% from 76.1%.
- Loans and credit: Gross loans grew 1.1% to $3.64 billion; 84.3% were real-estate-related. The allowance for credit losses was $40.4 million, or 1.11% of gross loans, versus $40.7 million, or 1.13%, at year-end. The company recorded a $175,000 reversal of provision for credit losses, versus a $1.8 million provision in Q1 2023; management cited low net charge-offs and declining expected loss rates. Net charge-offs were $241,000, and nonperforming assets were $3.6 million, 0.09% of assets.
- Deposits, debt and liquidity: Deposits increased 2.4% to $3.46 billion. FHLB advances were $240.0 million, down from $275.0 million; subordinated debentures were $36.3 million. Cash and cash equivalents were $167.3 million. The loan-to-deposit ratio was 105%. Management reported $108.5 million of unused correspondent-bank lines, $236.1 million available at the Federal Reserve Discount Window and $590.0 million of unused FHLB borrowing capacity. An additional $15.0 million holding-company credit line was unused.
- Cash flow: Operating activities used $2.9 million, compared with $1.2 million provided in Q1 2023. Investing activities used $32.2 million; financing activities provided $46.3 million, including $81.1 million of net deposit growth and a $35.0 million reduction in borrowings. Cash increased $11.1 million to $167.3 million.
- Capital and securities: Shareholders’ equity was $315.3 million. The Bank remained “well capitalized”; its total risk-based capital ratio was 12.29% and Tier 1 leverage ratio was 8.77%. Available-for-sale securities had a $14.9 million unrealized loss at quarter-end, primarily attributed to interest rates; management said it did not intend, and was not likely required, to sell them before recovery.
Material changes and management outlook
- Compared with Q1 2023, higher average loan balances and yields supported interest income, but higher deposit and borrowing costs more than offset that growth. Average interest-bearing deposit cost rose to 3.97% from 2.78%; average loan yield rose to 5.05% from 4.47%.
- Mortgage banking income increased to $1.2 million from $0.6 million, which management attributed to higher mortgage volume. FDIC insurance costs also increased.
- Management anticipates continued pressure on net interest spread and margin because many loans have fixed rates while deposits reprice more quickly. The filing provides no numerical earnings or margin guidance.
- Risks include deposit outflows and funding costs, interest-rate sensitivity, credit deterioration and real-estate concentration, regulatory changes and higher FDIC assessments, competition, cybersecurity and operational risks. Non-owner-occupied commercial real estate and multifamily loans were 271.4% of Bank risk-based capital; office-property loans totaled $222.1 million.
- Estimated uninsured deposits were approximately $1.3 billion, or 37.8% of deposits. The company noted this is an estimate. It reported no material change to previously disclosed risk factors, no material pending legal proceeding known to management, and effective disclosure controls.
Key facts for investors to verify
- Whether deposit pricing and mix stabilize enough to improve net interest margin, and how deposit balances and uninsured deposits evolve.
- Credit quality trends in commercial real estate, especially non-owner-occupied, office and multifamily exposures; confirm migration in risk grades, delinquencies and nonaccrual loans.
- Whether the allowance remains adequate as loans grow and economic conditions change; review subsequent provisions, charge-offs and recoveries.
- How available liquidity and borrowing capacity compare with potential deposit outflows, and the terms and use of wholesale funding.
- Whether unrealized securities losses, rate changes and fixed-rate loan exposure affect liquidity, earnings or capital.