Southern First Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Southern First is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. Financial amounts below are in U.S. dollars; figures are unaudited unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $22.2 million | $20.6 million | $64.9 million | $58.5 million |
| Provision for (reversal of) loan losses | ($6.0 million) | $11.1 million | ($8.2 million) | $27.3 million |
| Noninterest income | $4.2 million | $7.6 million | $13.8 million | $20.7 million |
| Noninterest expense | $14.0 million | $14.2 million | $41.7 million | $39.2 million |
| Net income | $14.0 million | $2.2 million | $34.7 million | $9.7 million |
| Diluted earnings per share | $1.75 | $0.28 | $4.36 | $1.24 |
| Tax-equivalent net interest margin | 3.38% | 3.52% | 3.49% | 3.46% |
- Balance sheet at September 30: Total assets were $2.78 billion, up 12.1% from December 31, 2020. Gross loans were $2.39 billion, up 11.5%; deposits were $2.43 billion, up $290.3 million. Shareholders’ equity was $265.6 million.
- Credit reserve and asset quality: Allowance for loan losses was $36.1 million, or 1.51% of gross loans, compared with $44.1 million, or 2.06%, at year-end 2020. Nine-month net recoveries were $126,000. Nonperforming assets increased to $13.9 million (0.50% of assets) from $9.2 million (0.37%). Loans 30 or more days past due were 0.49% of total loans, versus 0.17% at year-end.
- Cash flow and liquidity: Cash and cash equivalents were $128.5 million, compared with $100.7 million at year-end. For the first nine months, operating activities provided $49.8 million, investing activities used $289.9 million and financing activities provided $268.0 million. The loan-to-deposit ratio was 98%.
- Debt and capital: No FHLB advances or other borrowings were outstanding at quarter-end; subordinated debentures were $36.1 million. Bank capital ratios included total capital of 14.34%, CET1 of 13.09% and Tier 1 leverage of 10.60%, above the disclosed well-capitalized thresholds. The $15 million holding-company credit line was unused.
- Efficiency and returns: Efficiency ratio was 53.2% for Q3 and 53.0% year to date, compared with 50.3% and 49.5%, respectively, in 2020. Year-to-date annualized return on average assets was 1.78% and return on average equity was 19.02%.
Material changes versus comparable periods
- Net income rose sharply in Q3 and year to date, driven primarily by lower loan-loss provision expense, including reversals, and improved net interest income. The year-to-date provision was an $8.2 million reversal versus $27.3 million of expense in 2020.
- Net interest income increased 7.4% in Q3 and 10.9% year to date, mainly as deposit and other funding costs declined and average earning assets grew. However, Q3 tax-equivalent margin fell 14 basis points year over year to 3.38%; year-to-date margin improved 3 basis points.
- Mortgage banking income declined to $2.8 million in Q3 from $6.3 million, and to $9.4 million year to date from $14.7 million. The filing attributes the declines to lower sales activity, low housing inventory, lower refinancing volumes and reduced derivative-related fair value.
- Noninterest expenses increased 6.4% year to date, including higher compensation, mortgage production, occupancy and data-processing costs. Compensation growth included 24 hires over the prior 12 months.
- Loans grew faster than deposits in the first nine months. Consumer loans rose 18.4% and commercial loans 7.7%; the loan portfolio was 85.7% real-estate-related.
Outlook, risks and notable items
- Management provided no numerical earnings or growth guidance. It expects continued pressure on net interest spread and margin as new and renewed loans price below portfolio yields, and does not expect mortgage origination activity to remain at prior-year levels.
- Management cited improving economic conditions and low charge-offs in explaining reserve releases, but identified hospitality and tourism borrowers as an area of continuing credit risk. The hotel portfolio comprised 22 loans totaling $115.8 million; none were on deferral, past due 30 days or more, or on nonaccrual at September 30. Four hotel loans totaling $48.4 million were downgraded to special mention and seven totaling $26.1 million to substandard in Q1. The classified asset ratio rose to 14.90% from 8.18% at year-end 2020.
- After quarter-end, on October 29, 2021, the Company sold two commercial notes associated with a troubled client relationship for $7.8 million, resulting in a combined charge-off of $812,000.
- COVID-19 effects remain uncertain. Management said prior short-term pandemic-related loan deferrals had returned to normal payment structures. It also cited interest-rate, credit concentration, real-estate, deposit, competition, staffing, cybersecurity and regulatory risks.
- At quarter-end the Company had $118.5 million of correspondent-bank federal funds lines and $552.1 million of unused FHLB borrowing capacity. Unfunded loan commitments were $574.7 million; commitments for a new headquarters totaled $35.4 million, of which $18.4 million had been paid.
- The Company was evaluating adoption of the expected-credit-loss standard and considering early adoption on January 1, 2022; the disclosed effective date for a smaller reporting company is fiscal years beginning after December 15, 2022. Management reported no material pending legal proceeding or material change to previously disclosed risk factors.
Key facts for investors to verify
- How subsequent performance and credit outcomes affect the hotel exposures, classified asset ratio and allowance after the disclosed reserve releases.
- The realized impact of the October 29 note sale and related $812,000 charge-off, including any further resolution of the client relationship.
- Whether margin pressure and weaker mortgage banking activity persist, and how they affect core earnings and the efficiency ratio.
- Whether loan growth remains supported by core deposit growth and available liquidity, given the 98% loan-to-deposit ratio and $574.7 million of unfunded commitments.
- The timing and financial-statement impact of adopting the expected-credit-loss standard, including any cumulative adjustment to retained earnings.