Southern First Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures are unaudited. Southern First is a South Carolina bank holding company operating Southern First Bank, with 13 offices across South Carolina, North Carolina and Georgia. The bank focuses on commercial and consumer lending and relationship-based deposit gathering.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets | $1.901 billion | $1.625 billion |
| Gross loans | $1.677 billion | $1.387 billion |
| Deposits | $1.648 billion | $1.381 billion |
| Net interest income | $60.2 million | $50.9 million |
| Net income | $22.3 million | $13.0 million |
| Diluted EPS | $2.88 | $1.76 |
| Net interest margin, tax-equivalent | 3.58% | 3.57% |
| Efficiency ratio | 56.52% | 57.38% |
| Return on average assets / equity | 1.27% / 13.83% | 0.87% / 9.66% |
| Cash and cash equivalents | $72.9 million | $92.2 million |
| Shareholders’ equity | $173.9 million | $149.7 million |
Net interest income grew 18.2%, primarily from higher average loan balances and yields. Interest expense rose substantially as deposit costs increased; net interest spread fell eight basis points to 3.27%. Noninterest income increased 9.3% to $10.2 million, including $5.5 million of mortgage banking income. Noninterest expense rose 15.1% to $39.8 million, mainly reflecting compensation, staffing and occupancy costs. The lower 2018 tax expense also lifted earnings: the effective tax rate was 22.3%, versus 44.9% in 2017, which included a $2.4 million charge to remeasure deferred tax assets after the federal tax-rate reduction.
Cash flow: Operating activities provided $31.7 million, investing activities used $301.7 million, and financing activities provided $250.7 million. Net cash and cash equivalents declined $19.3 million during the year. Loan growth was funded principally by a $267.0 million increase in deposits, alongside reduced borrowings.
Debt and liquidity: Year-end FHLB advances and other borrowings were $50.0 million, down from $67.2 million; junior subordinated debentures remained $13.4 million. The loan-to-deposit ratio was 102%. The company reported $72.0 million in unused correspondent federal-funds lines, $313.3 million in additional stated FHLB borrowing capacity, and an unused $15.0 million credit line. These sources are subject to availability, collateral and other terms.
Capital and credit: The Bank was classified as well capitalized, with total risk-based capital of 12.16%, common equity Tier 1 of 11.20%, and leverage capital of 9.84%. Nonperforming assets improved to $5.8 million, or 0.31% of assets, from $7.5 million, or 0.46%. Net charge-offs were $1.7 million, 0.11% of average loans. The allowance was $15.8 million, or 0.94% of gross loans, down from 1.12% a year earlier.
Material changes and outlook
- Assets grew 17.0%, loans 20.9%, and deposits 19.3%. Commercial loans were 67.3% of the portfolio; real-estate-secured loans were 82.3%.
- 2018 fourth-quarter net income was $5.8 million and diluted EPS was $0.75, versus $2.1 million and $0.27 in fourth-quarter 2017. The prior-year quarter included the Tax Act deferred-tax remeasurement charge.
- Management gave no specific numerical earnings or growth guidance. It anticipates continued pressure on net interest spread and margin amid possible rate increases and deposit competition; the filing also notes the portfolio’s sizable fixed-rate share.
- Management expects CECL adoption on January 1, 2020 may increase the allowance for credit losses; the impact was still being evaluated. Lease accounting adoption in 2019 was expected to add approximately $18.5 million each in lease liabilities and right-of-use assets.
- Key risks include commercial real estate and other real-estate collateral exposure, loan growth and limited seasoning, interest-rate and funding sensitivity, competition, expansion execution, cybersecurity and third-party service-provider risks, and changing regulation. Potential problem loans rose to $6.3 million from $4.5 million, and TDRs totaled $9.3 million versus $7.8 million.
- The company reported no material pending litigation and management concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether loan and deposit growth can continue without increasing funding costs or weakening underwriting and credit quality.
- Trends in potential problem loans, TDRs, commercial-real-estate concentrations, charge-offs and allowance adequacy, including the effect of CECL.
- Deposit mix, wholesale and large time-deposit maturities, liquidity availability and collateral capacity for FHLB borrowing.
- Actual net interest margin and spread sensitivity as assets and liabilities reprice; management’s modeled rate scenarios showed lower net interest income under both rising- and falling-rate shocks.
- Whether expansion into newer markets and higher operating costs produce sustainable returns; the company does not intend to pay cash dividends for the foreseeable future.