Southern First Bancshares, Inc. — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; comparisons are primarily with FY2015. The filing was signed March 3, 2017. The company is a South Carolina bank holding company operating Southern First Bank, focused on commercial, consumer and mortgage lending and deposits in South Carolina markets.
Financial performance and condition
| Metric | FY2016 / Dec. 31, 2016 | FY2015 / Dec. 31, 2015 |
|---|---|---|
| Total assets | $1.341 billion | $1.217 billion |
| Gross loans | $1.164 billion | $1.005 billion |
| Deposits | $1.091 billion | $985.7 million |
| Net interest income | $43.0 million | $38.5 million |
| Noninterest income | $10.8 million | $8.4 million |
| Net income | $13.0 million | $10.2 million |
| Diluted EPS | $1.94 | $1.55 |
| Net interest margin, tax-equivalent | 3.63% | 3.63% |
| Efficiency ratio | 57.90% | 60.09% |
| Nonperforming assets / gross loans | 0.53% | 0.90% |
| Allowance / gross loans | 1.28% | 1.36% |
| Shareholders’ equity | $109.9 million | $94.2 million |
Net income rose 28.2%, with growth in net interest and noninterest income and a lower loan-loss provision, partly offset by higher operating and tax expenses. Net interest income increased 11.6%, primarily as average loans and earning assets expanded; asset yields declined slightly, while the tax-equivalent margin held steady. Mortgage banking income increased to $6.8 million from $5.0 million.
Credit metrics improved overall: nonperforming assets declined to $6.1 million from $9.1 million, and net charge-offs were $1.1 million, or 0.10% of average loans, versus $1.3 million, or 0.14%, in 2015. Potential problem loans nevertheless increased to $7.0 million from $4.6 million. The allowance was $14.9 million at year-end.
Cash flow, funding, debt and capital
Operating activities provided $17.1 million of cash; investing activities used $139.9 million, mainly reflecting loan growth; and financing activities provided $106.5 million, largely from deposit growth. Cash and cash equivalents fell $16.3 million to $46.6 million. The company reported liquid assets of 3.5% of total assets, down from 5.2% a year earlier.
Deposits were $1.091 billion; FHLB advances and other borrowings totaled $115.2 million, and junior subordinated debentures were $13.4 million. The loan-to-deposit ratio was 107%, versus 102% in 2015. Available liquidity sources included $45.0 million in unused correspondent federal-funds lines, $160.1 million in unused FHLB borrowing capacity, and an unused $10.0 million line of credit. A substantial share of investment securities and mortgage loans was pledged as collateral.
The company reported regulatory capital ratios of 12.11% total risk-based capital, 9.71% common equity Tier 1 and 9.42% leverage; the Bank was classified as well capitalized. No cash dividends on common stock have been paid, and management said it intends to retain earnings for growth and capital.
Material changes, outlook and notable items
- Assets grew 10.2%, loans 15.8% and deposits 10.7% year over year. Loan growth included $106.3 million in commercial loans and $52.4 million in consumer loans.
- Management’s stated strategy is controlled, profitable organic growth, with focus on relationship banking, core deposits, disciplined underwriting and expense management. No quantified earnings or growth guidance is provided.
- Regulatory approval to open a full-service Raleigh, North Carolina office was obtained in January 2017, extending the franchise beyond South Carolina. Six employees were hired for the Raleigh office during 2016.
- The company changed mortgage-loan delivery practices in April 2016, contributing to higher mortgage banking income. It adopted fair-value accounting for mortgage loans held for sale on April 1, 2016.
- Other real estate owned fell to $639,000 from $2.5 million. FY2016 included $428,000 of losses on sales of four properties and $466,000 of write-downs on six properties.
- Material risks highlighted include the concentration of real-estate-secured loans (81.1% of loans), commercial real estate exposure, relatively unseasoned loan growth, interest-rate sensitivity, deposit and liquidity pressures, competition, cybersecurity and dependence on key personnel and third-party systems. About 75% of loans were fixed rate; management’s modeled net interest income sensitivity ranged from +6.34% for a 300-basis-point rate increase to −11.56% for a 300-basis-point decrease.
- The company had $226.6 million of unfunded loan commitments and $4.4 million of letters of credit. Management reported no material pending litigation. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, including commercial real estate exposure and loans with high loan-to-value ratios, remains consistent with underwriting standards and is adequately reflected in the allowance.
- Whether the lower nonperforming-asset ratio is sustainable, given the increase in potential problem loans and the remaining troubled debt restructurings.
- How loan-to-deposit funding, reduced cash liquidity, pledged collateral and upcoming certificate-of-deposit and borrowing maturities affect funding flexibility.
- Whether Raleigh expansion and the Charleston office project generate sufficient deposits and revenue to offset added staffing, occupancy and construction costs.
- How rising rates affect margins, deposit pricing and variable-rate borrowing costs, and whether mortgage banking income remains resilient.
- Reconcile any quarter-specific expectations with the filing: this is an annual report, and it does not provide a clear numerical forward earnings or growth forecast.