Southern First Bancshares, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Southern First is a South Carolina bank holding company operating Southern First Bank, focused on commercial, consumer and mortgage lending and deposit services in South Carolina.
Key financial results
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net interest income | $7.644 million | $6.878 million |
| Net income | $1.250 million | $0.961 million |
| Net income available to common shareholders | $1.057 million; diluted EPS $0.22 | $0.784 million; diluted EPS $0.18 |
| Net interest margin, tax-equivalent | 3.68% | 3.69% |
| Net interest spread | 3.54% | 3.52% |
| Efficiency ratio | 66.8% | 67.1% |
| Cash provided by operating activities | $1.921 million | $2.864 million |
| Cash used in investing activities | $42.649 million | $18.425 million |
| Cash provided by financing activities | $44.024 million | $22.338 million |
| Cash and cash equivalents | $42.499 million | $39.203 million at Dec. 31, 2013 |
| Total assets | $936.884 million | $890.831 million at Dec. 31, 2013 |
| Loans, gross | $778.798 million | $737.267 million at Dec. 31, 2013 |
| Deposits | $722.412 million | $680.319 million at Dec. 31, 2013 |
| Borrowings and junior subordinated debentures | $137.503 million | Unchanged from Dec. 31, 2013 |
| Shareholders’ equity | $69.775 million | $65.665 million at Dec. 31, 2013 |
Material changes and management commentary
- Net income rose 30.1% year over year. Net interest income increased 11.1%, driven mainly by higher average earning assets and lower interest expense; noninterest income rose 9.9%, while the loan-loss provision declined to $1.0 million from $1.125 million.
- Average loan yield fell 35 basis points to 4.75%. Management attributed the decline to loans originated or renewed at lower market rates. The tax-equivalent margin edged down one basis point as lower asset yields largely offset reduced funding costs.
- Noninterest expense increased 10.3% to $5.769 million, principally from compensation and benefits, including costs associated with nine additional employees. Management said it does not anticipate significant further reductions in deposit or borrowing costs, which are already historically low.
- Loans grew $41.5 million during the quarter, while deposits increased $42.1 million. The loan-to-deposit ratio was 108% at both March 31, 2014 and December 31, 2013. Retail deposits were 91.5% of deposits; brokered deposits were 8.5%.
- On January 27, 2014, the company issued 475,000 common shares at $13 per share in a private placement, raising approximately $6.0 million net as reported in equity, and used $4.057 million to redeem Series T preferred stock. The redemption is expected to reduce annual preferred dividends by about $200,000.
- Allowance for loan losses was $10.713 million, or 1.38% of gross loans. Net charge-offs were $0.500 million, or 0.27% of average loans annualized, versus $0.849 million and 0.52% a year earlier.
- Nonperforming assets were $10.002 million, 1.07% of assets, compared with $9.535 million at year-end. Nonaccrual loans increased to $8.854 million. Total troubled debt restructurings were $12.9 million; three previously restructured loans totaling $3.455 million defaulted during the quarter.
- Regulatory capital ratios exceeded the stated “well-capitalized” thresholds. The Bank reported total risk-based capital of 11.97%, Tier 1 risk-based capital of 10.72%, and Tier 1 leverage of 9.17%. Basel III rules begin phasing in in 2015; management said their ultimate impact was still under review.
Outlook, risks and contingencies
- The filing gives no specific earnings or growth guidance and cautions that first-quarter results are not necessarily indicative of full-year results. Management expected weaker economic conditions to persist into 2014 and highlighted competitive pressure on loan yields and funding.
- Management planned to open a second Charleston-area office in Mount Pleasant, expected in mid-2014.
- Interest-rate modeling estimated net interest income changes from the base case of +3.44%, +7.74% and +13.35% for rate increases of 100, 200 and 300 basis points, respectively, and −5.22%, −9.26% and −11.58% for equivalent decreases. These are model estimates dependent on assumptions, not forecasts.
- Liquidity included $45.0 million of unused correspondent-bank federal funds lines and $75.5 million of unused FHLB borrowing capacity. Some securities were pledged as collateral. Unfunded loan commitments totaled $161.9 million, and letters of credit totaled $3.2 million.
- Key stated risks include real-estate collateral and loan concentrations, credit losses and portfolio seasoning, interest-rate and deposit-flow changes, funding access, regulatory requirements, competition, cybersecurity and the adequacy of the loan-loss allowance. Management reported no material pending legal proceedings known to it and no subsequent events requiring accrual or disclosure.
Important facts for investors to verify
- Whether rapid loan growth is matched by sustainable core-deposit growth and whether the 108% loan-to-deposit ratio creates funding pressure.
- Trends in delinquencies, nonaccrual loans, TDR defaults and charge-offs, and the adequacy of the allowance given the real-estate concentration.
- Whether net interest margin stabilizes as asset yields decline and deposit and borrowing costs have limited room to fall.
- The terms and effect of the common-stock placement and preferred-stock redemption, including dilution and future preferred dividends.
- Actual liquidity and capital effects as commitments are funded, Basel III phases in and the planned Mount Pleasant office opens.