Southern First Bancshares, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Southern First Bancshares is a South Carolina bank holding company focused on commercial, consumer and mortgage banking. This filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $20.6 million | $17.3 million | $58.5 million | $49.6 million |
| Provision for loan losses | $11.1 million | $0.7 million | $27.3 million | $1.3 million |
| Noninterest income | $7.6 million | $4.4 million | $20.7 million | $11.5 million |
| Noninterest expense | $14.2 million | $11.5 million | $39.2 million | $33.5 million |
| Net income | $2.2 million | $7.4 million | $9.7 million | $20.7 million |
| Diluted EPS | $0.28 | $0.95 | $1.24 | $2.66 |
| Net interest margin, tax-equivalent | 3.52% | 3.36% | 3.46% | 3.43% |
Q3 net interest income rose 19.4%, while net income fell mainly because loan-loss provision increased by $10.5 million year over year. Mortgage banking income rose to $6.3 million from $3.1 million in Q3, reflecting strong mortgage origination activity. The Q3 efficiency ratio was 50.3%, versus 53.0%.
Financial position, cash flow and liquidity
- At September 30, 2020, total assets were $2.48 billion, loans net of allowance were $2.04 billion, deposits were $2.18 billion and shareholders’ equity was $218.7 million. Since year-end 2019, assets increased 9.4%, gross loans increased 6.9%, and deposits increased 16.3%.
- Cash and cash equivalents were $162.9 million, up from $127.8 million at year-end 2019. For the first nine months, operating cash flow was negative $3.3 million, investing cash flow negative $157.6 million and financing cash flow positive $195.9 million. Financing inflows included $304.9 million of net deposit growth; the company also repaid approximately $110 million of FHLB and other borrowings.
- The allowance for loan losses was $42.2 million, or 2.03% of gross loans, compared with $16.6 million, or 0.86%, at December 31, 2019. Nine-month net charge-offs were $1.7 million.
- Nonperforming assets were $10.4 million, or 0.42% of assets, versus $6.8 million, or 0.30%, at year-end 2019. There were no loans more than 90 days past due and still accruing.
- The Bank’s September 30 capital ratios included a 13.71% total risk-based capital ratio, 12.45% common equity Tier 1 ratio and 10.05% Tier 1 leverage ratio; the Bank remained well capitalized. The company reported an 8.82% tangible common equity-to-assets ratio.
- Liquidity sources included $162.9 million of cash, $118.5 million in unused correspondent-bank federal funds lines, $540.5 million of available FHLB borrowing capacity and an unused $15 million holding-company credit line. The loan-to-deposit ratio was 95%, versus 104% at year-end 2019.
Material developments, outlook and risks
- COVID-19 credit exposure: The company had granted payment deferrals on 864 loans totaling $626.7 million, or 30.1% of the loan portfolio, by September 30. Sixty-eight percent of these loans had completed their deferral period and resumed normal payments; management expected 89% of modified loans to have resumed normal payments by October 31. Separately, $430.1 million of loans were outstanding in nine identified at-risk industries, including $195.5 million in non-essential retail and $90.6 million in hotels.
- Credit outlook: Management attributed the elevated provision to economic uncertainty, pandemic effects and risks in tourism and hospitality. It expected uncertainty to continue for at least the next few quarters and said the allowance could increase significantly through the remainder of 2020 and into 2021. This is management commentary, not quantified earnings guidance.
- PPP transaction: The Bank originated 853 Paycheck Protection Program loans totaling $97.5 million, then sold the portfolio on June 26, 2020. It recognized $2.2 million of net SBA lender fee income from the sale in other noninterest income; total PPP lender fees received were $3.9 million.
- Rate and earnings sensitivity: Management anticipated continued pressure on net interest spread and margin as loan yields adjust to lower market rates. Its model estimated net interest income would rise 4.34% with a 100-basis-point rate increase and fall 2.61% with a 100-basis-point decrease; these are modeled sensitivities, not forecasts.
- Other unusual items: A $673,000 Q3 expense related primarily to a valuation adjustment on one commercial property. The company completed the sale of two Columbia, South Carolina office buildings on October 9, 2020. It reported no material pending legal proceedings known to management and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether deferred borrowers, especially in identified at-risk sectors, resume regular payments and whether nonperforming assets or charge-offs rise.
- Whether the $42.2 million allowance adequately reflects expected credit losses and how management updates its economic assumptions.
- Whether mortgage banking income remains strong enough to offset credit costs, expense growth and pressure on net interest margin.
- Whether deposit growth, unused borrowing facilities and regulatory capital remain sufficient if borrowers draw commitments or credit losses increase.
- How the October 9 office-property sale affects subsequent-period results; the filing does not state its financial impact.