Southern First Bancshares, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The company is a South Carolina bank holding company whose subsidiary provides commercial, consumer and mortgage banking services. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The quarter was materially affected by the emerging COVID-19 pandemic.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $2.8 million; $0.36 | Q1 2019: $6.0 million; $0.78 |
| Net interest income | $18.1 million | Q1 2019: $15.8 million |
| Net interest margin, tax-equivalent | 3.43% | Q1 2019: 3.52% |
| Provision for loan losses | $6.0 million | Q1 2019: $0.3 million |
| Noninterest income / expense | $3.9 million / $12.4 million | Q1 2019: $3.0 million / $10.6 million |
| Efficiency ratio | 56.2% | Q1 2019: 56.6% |
| Total assets | $2.37 billion | December 31, 2019: $2.27 billion |
| Gross loans / allowance for loan losses | $2.03 billion / $22.5 million (1.11% of gross loans) | December 31, 2019: $1.94 billion / $16.6 million |
| Deposits | $2.03 billion | December 31, 2019: $1.88 billion |
| Borrowings: FHLB and other / subordinated debentures | $65.0 million / $35.9 million | December 31, 2019: $110.0 million / $35.9 million |
| Cash and cash equivalents | $141.1 million | December 31, 2019: $127.8 million |
| Shareholders’ equity | $210.5 million | December 31, 2019: $205.9 million |
| Cash flow from operations / investing / financing | $(3.6) million / $(88.5) million / $105.3 million | Q1 2019: $12.9 million / $(53.9) million / $85.4 million |
Q1 2020 net charge-offs were $0.18 million. Return on average assets was 0.51% and return on average equity was 5.42%. The Bank reported regulatory capital ratios above required thresholds and was considered well-capitalized; its total risk-based capital ratio was 13.16% and Tier 1 leverage ratio was 10.64%. The loan-to-deposit ratio was 100%.
Material changes versus Q1 2019 and year-end 2019
- Net income fell 52.9% and diluted EPS declined from $0.78 to $0.36. The principal driver was the $5.7 million year-over-year increase in loan-loss provision.
- Net interest income rose 14.4%, supported by higher average earning assets and loan growth. The tax-equivalent net interest margin declined 9 basis points as asset yields fell faster than funding costs.
- Mortgage banking income increased 43.7% to $2.7 million, reflecting stronger origination activity in a favorable mortgage-rate environment.
- Noninterest expense rose 16.2%, including increased compensation, occupancy and data-processing costs. Management attributed much of the compensation increase to 18 additional employees.
- From year-end, gross loans grew 4.5%, deposits rose 8.0%, and FHLB and other borrowings declined by $45 million. Nonperforming assets rose to $9.9 million from $6.8 million, or 0.49% of gross loans from 0.35%.
Outlook, commentary, risks and unusual items
- COVID-19 credit exposure: At March 31, 428 clients had requested or received payment deferrals or interest-only arrangements on $380.2 million of loans, equal to 18.7% of the portfolio; 93.3% were commercial. Six relationships totaling $2.9 million were treated as TDRs due to pre-existing borrower financial difficulty. By April 21, more than 750 loans totaling $591.8 million had been modified. The filing says modified loans’ risk ratings had not changed as of the reporting date and would be reassessed after deferrals ended.
- At-risk sectors: Nine identified categories—including non-essential retail, hotels, restaurants, religious organizations and private healthcare—totaled $409.3 million outstanding at March 31. By April 21, approximately 48% of balances in these categories had been modified.
- Provision outlook: Management said economic uncertainty could continue for several months and could result in a significant increase in the allowance in Q2 2020. Actual COVID-19 impacts remained uncertain and could affect credit losses, earnings, liquidity, collateral values and capital.
- Rates and margin: The Federal Reserve cut rates by a total of 225 basis points since August 2019. Management anticipated continued pressure on net interest spread and margin. Its modeled net-interest-income sensitivity ranged from a 2.87% increase under a 300-basis-point rate rise to a 5.60% increase under a 300-basis-point decline; these are scenario estimates, not guidance.
- Liquidity: The company reported $141.1 million in cash and cash equivalents, $72 million of unused correspondent-bank federal-funds lines and $385.9 million of available FHLB borrowing capacity at March 31. A $15 million holding-company credit line was unused at March 31 but fully utilized by April 21. Management reported no unusual pandemic-related deposit or liquidity pressure as of the filing’s discussion.
- PPP and contingencies: The Bank participated in the SBA Paycheck Protection Program. The filing warns of possible litigation, reputational costs and SBA-guaranty risk if loan origination, funding or servicing is found deficient. Management reported no material pending legal proceedings expected to materially harm the company.
- Other items: No cash dividends had been paid since inception. A March 11 repurchase plan authorized up to 383,650 shares; none had been repurchased by March 31. The company stated that its disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent-quarter loan-loss provisions, charge-offs, delinquencies and performance of COVID-19-modified loans, especially in the identified at-risk sectors.
- Updated modified-loan balances and any borrower downgrades or TDR classifications after deferral periods expire.
- Use and terms of the holding-company credit line, deposit trends, available borrowing capacity and regulatory capital after pandemic-related losses.
- Whether net interest margin pressure, loan demand and mortgage banking activity persist as rates and economic conditions change.
- PPP loan volumes, forgiveness and SBA reimbursement outcomes, and any related litigation or compliance exposure.