Southern First Bancshares, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unless otherwise stated, financial amounts are in thousands of dollars. The filing compares quarterly results with Q1 2010 and balance-sheet amounts with December 31, 2010.
Business context and financial position
The company is the holding company for Southern First Bank, a community bank operating primarily in Greenville County, South Carolina. Its business is commercial, consumer and mortgage lending funded mainly by deposits. The board issued a 10% stock dividend in February 2011; prior-period share and per-share figures were adjusted accordingly.
| Metric | March 31, 2011 | December 31, 2010 / comparable |
|---|---|---|
| Total assets | $760.1 million | $736.5 million at Dec. 31 |
| Loans, net | $571.2 million | $564.0 million at Dec. 31 |
| Deposits | $560.1 million | $536.3 million at Dec. 31 |
| Cash and cash equivalents | $75.5 million | $53.9 million at Dec. 31 |
| FHLB advances and repurchase agreements | $122.7 million | $122.7 million at Dec. 31 |
| Junior subordinated debentures | $13.4 million | $13.4 million at Dec. 31 |
| Shareholders’ equity | $59.8 million | $59.2 million at Dec. 31 |
Results and key metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Interest income | $8.605 million | $8.857 million |
| Interest expense | $3.204 million | $4.076 million |
| Net interest income | $5.401 million | $4.781 million |
| Provision for loan losses | $725 thousand | $1.400 million |
| Noninterest income | $595 thousand | $590 thousand |
| Noninterest expense | $4.506 million | $4.028 million |
| Net income | $537 thousand | $18 thousand |
| Net income available to common shareholders | $208 thousand | $(322) thousand |
| Basic and diluted EPS | $0.06 | $(0.09) |
| Net interest margin, tax-equivalent | 3.18% | 2.83% |
| Net interest spread | 2.96% | 2.60% |
Operating cash flow was $1.320 million, compared with $1.677 million in Q1 2010. Investing activities used $3.242 million, while financing activities provided $23.618 million, primarily reflecting $23.758 million of net deposit growth. Cash and cash equivalents increased $21.696 million during the quarter.
The allowance for loan losses was $8.388 million, or 1.45% of gross loans. Net charge-offs were $723 thousand (0.51% of average loans), down from $1.223 million (0.86%) in Q1 2010. The loan-to-deposit ratio was 103%. The Bank reported regulatory capital ratios of 13.04% total risk-based capital, 11.79% Tier 1 risk-based capital and 9.74% Tier 1 leverage; these exceeded the higher minimums agreed with the OCC.
Material changes and credit quality
- Net income rose by $519 thousand year over year, principally as net interest income increased $620 thousand and loan-loss provision declined $675 thousand. Lower funding costs drove the improvement: total interest expense fell $872 thousand, while interest income declined $252 thousand.
- Noninterest expense increased $478 thousand. Real estate owned activity was $531 thousand, compared with $20 thousand a year earlier; data processing and insurance costs also increased. The reported efficiency ratio, excluding securities gains and real estate owned activity, improved to 66.7% from 75.4%.
- Nonperforming assets edged down to $14.829 million from $14.955 million at year-end, but nonaccrual loans increased to $10.956 million from $9.326 million. Management attributed the increase mainly to ten loan relationships placed on nonaccrual during the quarter. Other real estate owned declined to $3.873 million after property sales and write-downs.
- Commercial loans were 74.6% of the portfolio; approximately 80% of loans were secured by real estate. The filing reports $1.7 million of troubled debt restructurings at quarter-end, versus $488 thousand at year-end.
- Deposits grew $23.758 million during the quarter. Management said retail deposits increased while out-of-market deposits declined; out-of-market deposits were $74.0 million at March 31. The company reported substantial short-term liquidity, including $75.5 million of cash and equivalents, but noted that much of its securities portfolio was pledged against debt.
Outlook, risks and unusual items
- Management expected weak economic conditions to continue through the rest of 2011, with continued pressure on credit quality, foreclosures, asset yields, funding costs, liquidity and capital. The filing gives no quantitative earnings or revenue guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- The Bank remained subject to a June 2010 OCC Formal Agreement covering credit-risk management, underwriting, liquidity and funds management. Management believed it was substantially compliant, but noted the OCC might not agree; failure to comply could lead to further regulatory action. The agreement also set Bank capital minimums of 12% total risk-based, 10% Tier 1 risk-based and 9% leverage.
- Key exposures include real-estate collateral and commercial real estate concentration, borrower and geographic concentrations, potential further credit deterioration, deposit competition, interest-rate changes and dependence on regulatory compliance. The Bank was liability-sensitive over the next 12 months under its gap analysis.
- A private-label collateralized mortgage obligation had a $2.803 million book value, a Caa1 current rating and $379 thousand of unrealized losses after being in a loss position for at least 12 months. Management concluded it was not other-than-temporarily impaired and expected contractual principal and interest recovery, while warning that actual credit losses could differ from assumptions.
- The company was considering participation in the Small Business Lending Fund; no final decision is stated. Series T preferred stock carried a 5% annual dividend for its first five years, increasing to 9% thereafter; preferred dividends and accretion reduced Q1 income available to common shareholders.
Important facts for investors to verify
- Whether nonaccrual loans and troubled debt restructurings stabilize or grow, and whether collateral values support the allowance for loan losses.
- The reconciliation of real-estate-owned expense and losses: the statements report $531 thousand of activity expense, while the discussion separately describes sale losses and property write-downs.
- Continued compliance with the OCC Formal Agreement, its capital minimums and brokered-deposit restrictions, and any regulatory developments.
- Deposit retention and replacement of maturing out-of-market funding, as well as available borrowing capacity and securities pledged as collateral.
- Performance assumptions and impairment assessment for the Caa1 private-label mortgage security.
- Any decision on Small Business Lending Fund participation and the potential effect of future preferred-stock dividend costs.