Southern First Bancshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; selected fourth-quarter results are also summarized below. Southern First is a South Carolina bank holding company serving markets in South Carolina, North Carolina and Georgia through Southern First Bank. Its relationship-focused business centers on commercial and consumer lending and core deposits.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets at year-end | $3.692 billion | $2.926 billion |
| Gross loans at year-end | $3.273 billion | $2.490 billion |
| Deposits at year-end | $3.134 billion | $2.564 billion |
| Net interest income | $97.6 million | $87.7 million |
| Provision for (reversal of) credit losses | $6.2 million | $(12.4) million |
| Noninterest income | $9.6 million | $17.1 million |
| Noninterest expense | $62.9 million | $56.4 million |
| Net income | $29.1 million | $46.7 million |
| Diluted EPS | $3.61 | $5.85 |
| Return on average assets / equity | 0.90% / 10.20% | 1.75% / 18.64% |
| Tax-equivalent net interest margin | 3.19% | 3.45% |
| Efficiency ratio | 58.71% | 53.83% |
| Allowance for credit losses / gross loans | $38.6 million / 1.18% | $30.4 million / 1.22% |
Net interest income increased 11.3%, mainly on loan growth, but higher deposit costs partly offset asset-yield gains. Net income fell 37.7% as the prior-year credit-loss reversal did not recur, mortgage banking income declined, and expenses rose. Mortgage banking income fell 63.1% to $4.2 million, while compensation, occupancy and other costs increased.
Fourth-quarter 2022 net income was $5.5 million, or diluted EPS of $0.68, compared with $12.0 million and $1.49 in fourth-quarter 2021. Q4 net interest income was $24.1 million versus $22.9 million; provision expense was $2.3 million versus a $4.2 million reversal.
Cash and cash equivalents ended the year at $170.9 million. Operating cash flow was $50.3 million; investing activities used $792.6 million, principally reflecting loan growth, while financing activities provided $745.9 million, principally from deposit growth and borrowings. The loan-to-deposit ratio was 104%, versus 97% in 2021.
Year-end borrowings included a $175 million variable-rate FHLB advance at 4.57%, due February 16, 2023, and $36.2 million of subordinated debentures. Available contingent liquidity included $515.8 million of unused FHLB capacity, $118.5 million of federal funds lines and an unused $15 million line of credit. The Bank was well capitalized: total risk-based capital was 12.45%, CET1 was 11.20%, and leverage was 9.43%.
Material changes and notable items
- Loans grew 31.5% ($783.5 million); deposits grew 22.2% ($570.0 million). Real estate secured 84.8% of loans; commercial real estate was 48.4% of the portfolio.
- Interest expense rose to $20.0 million from $5.4 million as deposit costs repriced upward amid the Federal Reserve’s 425-basis-point rate increase. Management reported expected further margin pressure because deposits reprice faster than much of the loan book.
- Available-for-sale securities had a $17.0 million pretax unrealized loss at year-end, compared with $0.9 million in 2021, primarily attributed to interest-rate changes rather than credit deterioration. Accumulated other comprehensive loss increased to $13.4 million.
- Brokered deposits were $236.2 million, or 7.5% of deposits, versus none at year-end 2021. Estimated uninsured deposits were approximately $1.4 billion.
- The company adopted CECL on January 1, 2022, increasing the loan allowance by $1.5 million and the unfunded-commitment reserve by $2.0 million; the after-tax $2.8 million cumulative adjustment reduced retained earnings.
- The new Greenville headquarters opened in June 2022. A $439,000 loss on disposal of assets from the former headquarters was recorded.
- Nonperforming assets improved to $2.6 million, or 0.07% of assets, from $4.9 million, or 0.17%. The 2022 allowance included net loan recoveries of $1.4 million.
Outlook, risks and contingencies
- No specific earnings, growth or margin guidance is provided. Management expects continued pressure on net interest spread and margin as deposit rates adjust faster than loan yields.
- Rate sensitivity modeling estimated net interest income would fall 16.59% under a 300-basis-point rate increase and rise 23.19% under a 300-basis-point decrease. These are model estimates dependent on assumptions, not forecasts.
- Key risks include real-estate and commercial-credit concentration, rapid loan growth, inflation and economic weakness, funding competition and deposit outflows, interest-rate exposure, cybersecurity and third-party service disruptions, and regulatory changes. The company states that approximately 87% of loans were fixed rate.
- The Bank received a “Needs to Improve” Community Reinvestment Act rating in its June 2022 examination. The filing says this restricts certain expansionary activities and may require prior regulatory approvals.
- CFO and COO Michael Dowling announced his resignation effective February 15, 2023, to lead a medical group that is a long-standing Bank client. The filing identifies leadership transition as a risk.
- Unfunded lending commitments were $878.3 million, up from $618.7 million. The company expects a significant portion will not be funded. Management reported no material pending litigation and no subsequent event requiring accrual or disclosure.
- The company has not paid common cash dividends since inception and said it does not intend to do so for the foreseeable future. Independent auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit retention, uninsured-deposit trends and the use and cost of brokered funding remain manageable.
- Whether margins stabilize as deposit costs and loan yields reset, and how actual results compare with the filing’s interest-rate sensitivity estimates.
- Whether fast loan growth and real-estate concentrations lead to deterioration in criticized loans, nonperforming assets or CECL allowance needs.
- Whether the unrealized securities losses affect liquidity or capital if securities must be sold, despite management’s stated intent and ability to hold them.
- How the Bank addresses its CRA rating and the resulting restrictions, and how the CFO/COO transition is managed.
- Whether the February 2023 FHLB advance maturity is refinanced or repaid on acceptable terms.