Southern First Bancshares, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
The company is a South Carolina bank holding company whose subsidiary accepts deposits and makes commercial, consumer, and mortgage loans. This unaudited report covers the three months ended March 31, 2015; balance-sheet changes are compared with December 31, 2014. Results for the quarter are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2015 | Prior comparison |
|---|---|---|
| Net interest income | $9.1 million | $7.6 million, Q1 2014 |
| Net interest margin, tax-equivalent | 3.72% | 3.68%, Q1 2014 |
| Net income | $2.0 million | $1.25 million, Q1 2014 |
| Net income available to common shareholders | $2.0 million | $1.06 million, Q1 2014 |
| Diluted EPS | $0.31 | $0.22, Q1 2014 |
| Provision for loan losses | $625,000 | $1.0 million, Q1 2014 |
| Noninterest income | $2.14 million | $969,000, Q1 2014 |
| Noninterest expense | $7.46 million | $5.77 million, Q1 2014 |
| Efficiency ratio | 66.6% | 67.0%, Q1 2014 |
At March 31, 2015, total assets were $1.073 billion, net loans were $897.1 million, deposits were $850.3 million, and shareholders’ equity was $85.4 million. Gross loans grew $37.9 million and deposits increased $61.4 million during the quarter. FHLB advances and other borrowings declined $20.0 million to $115.2 million; junior subordinated debentures were $13.4 million.
Cash and cash equivalents were $51.7 million, up from $41.3 million at year-end. Cash flow was $0.7 million used in operations, $30.3 million used in investing, and $41.5 million provided by financing, for a $10.5 million net increase in cash. The loan-to-deposit ratio was 107%. Available liquidity included $45 million in unused correspondent-bank federal funds lines, $119.9 million of unused FHLB borrowing capacity, and an unused $10 million line of credit.
Material changes and operating drivers
- Net income available to common shareholders rose 91.9% year over year. Management attributed the improvement mainly to higher net interest and noninterest income and a lower loan-loss provision, partly offset by higher expenses.
- Net interest income increased 18.7%, driven primarily by growth in average earning assets and loans. Tax-equivalent margin edged up four basis points: funding costs fell nine basis points, partly offset by a six-basis-point decline in earning-asset yields.
- Noninterest income more than doubled. Loan and mortgage fee income increased to $1.20 million from $342,000, and the company recorded a $259,000 securities-sale gain. Mortgage fee growth was a major contributor.
- Noninterest expense rose 29.3%. Compensation increased $867,000, including costs associated with 21 additional employees; real estate owned activity increased $750,000, primarily due to a $737,000 write-down on one commercial property.
- The company sold $5.8 million of mortgage-backed securities and state and municipal obligations to support liquidity amid increased loan demand. Available-for-sale securities fell to $48.5 million from $55.0 million.
Credit, liquidity, outlook, and risks
- Nonperforming assets were $9.1 million, or 0.85% of assets and 1.00% of gross loans, versus $10.0 million, 0.97%, and 1.14%, respectively, at year-end. The decrease included a $737,000 OREO write-down. Nonaccrual loans were $6.5 million; there were no loans over 90 days past due and still accruing.
- The allowance for loan losses was $12.2 million, 1.35% of gross loans, compared with $11.8 million at year-end. Q1 net charge-offs were $136,000, or 0.06% of average loans on an annualized basis, versus $500,000, or 0.27%, in Q1 2014. Management considered the allowance adequate; estimates are judgmental and may change.
- Loans totaled $909.3 million before the allowance; 80.6% were secured by real estate. Total troubled debt restructurings were $9.6 million. Delinquencies of 30 days or more were 0.91% of total loans, up from 0.73% at year-end.
- Management stated that weaker economic conditions were expected to continue through 2015, with potential pressure on credit costs, loan yields, funding costs, liquidity, and capital. It did not provide specific earnings or growth guidance. Management expected the company and bank to remain above well-capitalized regulatory capital requirements; the Bank’s actual total capital ratio was 11.83% and its Tier 1 leverage ratio was 9.04%.
- Interest-rate sensitivity modeling estimated net interest income would rise 4.42% with rates up 100 basis points and fall 5.55% with rates down 100 basis points; larger modeled moves ranged from a 15.46% increase at +300 basis points to a 14.42% decline at −300 basis points. These are estimates based on assumptions, not forecasts.
- Key disclosed risks include credit losses and real-estate concentration, loan growth and seasoning, interest-rate and margin changes, competitive funding and deposit flows, regulatory requirements, cybersecurity, and the adequacy of the loan-loss allowance. Unfunded commitments to extend credit were $176.7 million. 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 the sharp rise in mortgage and loan fee income is sustainable, and how much earnings depend on securities-sale gains.
- The causes and potential recurrence of the $737,000 commercial-property write-down, and the valuation and disposition outlook for the remaining $2.57 million of OREO.
- Credit trends behind the increase in delinquencies, including nonaccruals, TDRs, real-estate collateral values, and the allowance relative to future loan growth.
- Funding resilience given the 107% loan-to-deposit ratio, growth in brokered deposits, and the maturity profile of large time deposits.
- Actual performance against the stated capital expectations and the assumptions underlying the interest-rate sensitivity estimates.