Southern First Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are against December 31, 2018. Financial statements are unaudited. Southern First is a South Carolina bank holding company whose primary business is commercial, consumer and mortgage lending funded principally by deposits.
Financial results and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Interest income | $21.6 million | $17.2 million, Q1 2018 |
| Net interest income | $15.8 million | $14.0 million, Q1 2018 |
| Net interest margin, tax-equivalent | 3.52% | 3.63%, Q1 2018 |
| Noninterest income | $3.0 million | $2.4 million, Q1 2018 |
| Noninterest expense | $10.6 million | $9.2 million, Q1 2018 |
| Net income | $6.0 million; diluted EPS $0.78 | $5.2 million; diluted EPS $0.67, Q1 2018 |
| Total assets | $2.01 billion | $1.90 billion, Dec. 31, 2018 |
| Loans, gross | $1.734 billion | $1.677 billion, Dec. 31, 2018 |
| Deposits | $1.758 billion | $1.648 billion, Dec. 31, 2018 |
| Cash and cash equivalents | $117.3 million | $72.9 million, Dec. 31, 2018 |
| FHLB advances and other borrowings | $25.0 million | $50.0 million, Dec. 31, 2018 |
| Shareholders’ equity | $181.2 million | $173.9 million, Dec. 31, 2018 |
- Net income increased 15.3% year over year. Net interest income rose 12.7%, while total interest expense increased to $5.8 million from $3.1 million.
- Tax-equivalent net interest margin declined 11 basis points: asset yields rose 37 basis points, but the cost of interest-bearing liabilities increased 64 basis points. Management attributed deposit-cost pressure to competition and anticipated continued pressure on spread and margin.
- Mortgage banking income increased 39.8% to $1.9 million, reflecting higher origination volume; total noninterest income rose 23.7%. Noninterest expense increased 15.7%, including higher compensation, occupancy and data-processing costs. The efficiency ratio increased to 56.6% from 55.9%.
- Allowance for loan losses was $16.1 million, or 0.93% of gross loans, compared with $15.8 million, or 0.94%, at year-end. Q1 provision was $0.3 million; net charge-offs were $11,000. Nonperforming assets were $6.0 million, 0.30% of assets and 0.35% of gross loans, versus $5.8 million at year-end.
- Cash provided by operations was $12.9 million; investing activities used $53.9 million, primarily reflecting loan growth; financing activities provided $85.4 million, including $110.1 million of deposit growth and $25.0 million of net borrowing repayments.
- The loan-to-deposit ratio was 99%, down from 102% at year-end. The company reported $72.0 million in unused correspondent-bank lines, $329.8 million of available FHLB borrowing capacity and an unused $15.0 million credit line.
- The Bank’s total risk-based capital ratio was 12.08%, and its Tier 1 leverage ratio was 9.86%; the filing states the Bank remained “well capitalized.” Return on average assets was 1.28% and return on average equity was 13.74%, both annualized.
Material changes and unusual items
- Loans grew 3.4% during the quarter; commercial loans increased 3.9% and consumer loans 2.4%. Real-estate-secured loans represented 82.4% of the portfolio.
- Deposits increased $110.1 million, while FHLB advances and other borrowings declined $25.0 million. Brokered deposits were $79.7 million, or 4.5% of deposits.
- Adoption of lease accounting in Q1 resulted in a $15.0 million right-of-use asset and $15.5 million lease liability at March 31; management said the standard did not materially affect other consolidated financial statements.
- Available-for-sale securities had a $480,000 net unrealized loss at quarter-end, improved from $1.2 million at year-end. Management attributed unrealized losses primarily to interest-rate changes, not credit deterioration, and did not consider the securities other-than-temporarily impaired.
- No cash dividends have been paid since inception. No material subsequent events requiring accrual or disclosure were identified.
Outlook, risks and contingencies
- No formal earnings or financial guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- The company intends to adopt the current expected credit loss standard (CECL) on January 1, 2020. Parallel model testing began in Q1; management expects adoption may increase the allowance, but the amount remains under review and depends on portfolio mix and economic conditions.
- Interest-rate sensitivity analysis estimated net interest income declines of 0.46% for a 100-basis-point increase and 3.53% for a 100-basis-point decrease; larger modeled changes were also negative. Results depend on assumptions and are not forecasts.
- Unfunded credit commitments totaled $400.2 million, including $277.6 million at variable rates; letters of credit to customers were $10.0 million. The company expects that a significant portion of unfunded lines will not be drawn.
- Key disclosed risks include deposit competition and funding availability, interest-rate and margin changes, real-estate and loan-concentration exposure, credit quality and loan growth, regulatory requirements, expansion costs in Atlanta, Greensboro and Raleigh, and cybersecurity. Management reported no material change to the prior Form 10-K risk factors.
- Management reported no material pending legal proceeding expected to adversely affect the company and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit pricing and funding competition continue to compress net interest margin.
- Loan growth, real-estate concentration, delinquencies, nonperforming assets and the adequacy of the allowance, including CECL’s eventual impact.
- Whether elevated expense growth and market expansion translate into sustained revenue and profitability.
- Deposit stability, brokered and large time-deposit maturities, available borrowing capacity, and the company’s ability to fund continued loan growth.
- Actual performance versus the filing’s interest-rate sensitivity assumptions and the risks associated with unfunded commitments.