Southern First Bancshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comparisons are with Q1 2020 for operating results and December 31, 2020 for balance-sheet changes. The company is a South Carolina bank holding company focused on commercial, consumer and mortgage banking.
Financial performance
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Net interest income | $21.3 million | $18.1 million, Q1 2020 |
| Noninterest income | $5.9 million | $3.9 million, Q1 2020 |
| Net income | $10.4 million | $2.8 million, Q1 2020 |
| Diluted EPS | $1.31 | $0.36, Q1 2020 |
| Net interest margin, tax-equivalent | 3.60% | 3.43%, Q1 2020 |
| Efficiency ratio | 52.1% | 56.2%, Q1 2020 |
Net interest income rose 17.5%, mainly because deposit funding costs fell; lower yields on earning assets partly offset the benefit. Mortgage banking income increased 73.7% to $4.6 million, while mortgage production costs also rose. The $0.3 million negative provision for loan losses benefited earnings, compared with a $6.0 million provision in Q1 2020. The company reported a 22.1% effective tax rate.
Financial position, cash flow and credit
- Total assets were $2.58 billion, up 3.9% from year-end. Gross loans were $2.18 billion, up $40.8 million; deposits were $2.26 billion, up $116.0 million.
- Cash and cash equivalents were $155.3 million, versus $100.7 million at year-end. Q1 operating cash flow was $10.6 million; investing activities used $48.5 million and financing activities provided $92.6 million.
- The allowance for loan losses was $43.5 million, or 1.99% of gross loans, down from $44.1 million and 2.06% at year-end. Q1 net charge-offs were $350,000.
- Nonperforming assets were $7.8 million, or 0.30% of assets, down from $9.2 million, or 0.37%, at year-end. The loan-to-deposit ratio was 97%, versus 100% at year-end.
- The company had no FHLB advances or other borrowings outstanding at quarter-end, down from $25.0 million at year-end; subordinated debentures were $36.0 million. The filing reports $118.5 million of unused correspondent-bank federal funds lines, $511.9 million of unused FHLB borrowing capacity and an unused $15.0 million holding-company credit line.
- Bank capital ratios exceeded regulatory minimums; the Bank’s total risk-based capital ratio was 14.29% and its Tier 1 leverage ratio was 10.61%.
Material changes, outlook and risks
- Net income increased substantially year over year, reflecting lower credit-loss provision expense, higher net interest income and stronger mortgage banking income. Noninterest expense rose 14.5%, including higher mortgage production costs and a $387,000 expense related primarily to a commercial property sale.
- Management said most COVID-related borrower deferrals had ended; two loans remained under deferral arrangements at March 31. It identified hospitality and tourism as areas still exposed to pandemic-related credit risk.
- The hotel portfolio comprised 21 loans totaling $109.7 million. Two loans totaling $13.5 million remained deferred. During Q1, four hotel loans totaling $48.8 million were downgraded to special mention and seven totaling $26.2 million to substandard. The classified asset ratio rose to 14.42% following the downgrades.
- Management expects pressure on net interest spread and margin as new and renewed loans price below existing portfolio yields. The filing provides no specific earnings or revenue guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- Key risks include COVID-19 and economic recovery, credit quality and real-estate collateral values, loan concentrations, interest-rate changes, funding and deposit flows, competition, regulatory requirements and cybersecurity. Management said it believed capital and liquidity were sufficient, while noting further credit losses could adversely affect capital ratios.
- The company authorized a repurchase plan for up to 388,612 shares; none had been repurchased by March 31, 2021. It had not paid cash dividends since inception.
Important facts for investors to verify
- Whether hotel borrower performance, downgrades and remaining deferrals lead to further credit deterioration or higher provisions.
- Whether the $43.5 million allowance remains adequate as economic conditions and the loan portfolio evolve.
- Whether mortgage production and gains can sustain current earnings amid rising related costs and possible changes in mortgage demand.
- Whether falling asset yields pressure net interest margin despite low deposit costs, and whether the reported interest-rate sensitivity assumptions hold.
- The availability and conditions of stated borrowing capacity, and the potential funding needs associated with $490.1 million of unfunded loan commitments and other obligations.