Southern First Bancshares, Inc. — FY2021 Form 10-K
Business context and reporting period. This is the annual report for the year ended December 31, 2021, filed March 4, 2022; it is not a standalone quarterly filing. Southern First is a regional bank holding company operating Southern First Bank, with 12 offices across South Carolina, North Carolina and Georgia. Its principal activities are commercial and retail banking and mortgage banking.
Financial performance and condition
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Total assets | $2,925.5 | $2,482.6 | Up 17.8% |
| Gross loans | $2,489.9 | $2,142.9 | Up 16.2% |
| Deposits | $2,563.8 | $2,142.8 | Up 19.7% |
| Net interest income | $87.7 | $79.8 | Up 9.9% |
| Noninterest income | $17.1 | $27.4 | Down 37.5% |
| Noninterest expense | $56.4 | $53.7 | Up 5.0% |
| Net income | $46.7 | $18.3 | Up 154.9%; diluted EPS $5.85 vs. $2.34 |
| Operating cash flow | $78.1 | $20.6 | Cash increased $66.5 overall |
- Profitability and margins: Return on average assets was 1.75% (0.76% in 2020); return on average equity was 18.64% (8.49%). The efficiency ratio increased to 53.83% from 50.15%. The filing’s selected-data table reports tax-equivalent net interest margin of 3.45% vs. 3.55%; the detailed average-balance discussion reports 3.45% vs. 3.48%, an internal difference to verify. Net interest spread rose to 3.35% from 3.22%.
- Credit quality: The company recorded a $12.4 million provision reversal, versus $29.6 million of provision expense in 2020. Allowance for loan losses fell to $30.4 million, or 1.22% of loans, from $44.1 million, or 2.06%. Net charge-offs were 0.06% of average loans. Nonperforming assets declined to $4.9 million, 0.17% of assets, from $9.2 million, 0.37%. However, potential problem loans rose to $35.9 million from $19.6 million, and classified assets increased to 12.61% of capital from 8.2%, largely following downgrades of hotel loans.
- Funding, liquidity and debt: Cash and cash equivalents were $167.2 million, up from $100.7 million. The loan-to-deposit ratio was 97%, versus 100%. The company had no FHLB advances at year-end, compared with $25.0 million in 2020, and had $36.1 million of subordinated debentures. Available liquidity included $118.5 million in unused correspondent-bank federal funds lines, $580.7 million in unused FHLB borrowing capacity, and an unused $15.0 million holding-company credit line. Estimated uninsured deposits were approximately $1.2 billion.
- Capital: The Bank was well-capitalized. Its total risk-based capital ratio was 14.36%, CET1 ratio 13.11%, and leverage ratio 10.55% at year-end, all above well-capitalized thresholds.
- Cash flows: Operating activities provided $78.1 million; investing activities used $410.6 million, principally reflecting loan growth and property/equipment spending; financing activities provided $399.1 million, principally from deposit growth.
Material changes and notable items
- Net income increased sharply, primarily because of the provision reversal and higher net interest income. Interest income declined to $93.2 million from $94.8 million, but interest expense fell to $5.4 million from $15.0 million as deposit rates declined.
- Mortgage banking income fell to $11.4 million from $19.8 million as sales activity, refinancing volumes and margins declined. FY2020 also included $2.2 million of net PPP loan-sale fees; Southern First sold its PPP portfolio in 2020 and originated no new PPP loans in 2021.
- Commercial and consumer real estate loans represented about 85.5% of the loan portfolio. Commercial real estate exposure was material; management reported it remained below the cited supervisory concentration indicators.
- Cash used for investing included $26.5 million of property and equipment purchases. Construction in progress for the new Greenville headquarters was $29.9 million at year-end; the filing expected the building to open in Q2 2022.
- The available-for-sale securities portfolio had a $0.9 million unrealized loss at year-end, compared with a $1.3 million unrealized gain in 2020, largely reflecting interest-rate movements. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Outlook, risks and contingencies
- Management expected continued pressure on net interest spread and margin as new and renewed loans priced below the existing portfolio. The company also noted that low rates could weigh on net interest income until rates rose. At the time of the filing, the Federal Reserve had indicated three 25-basis-point rate increases were expected in 2022; this is not company earnings guidance.
- Southern First expected to early-adopt CECL on January 1, 2022. Disclosures estimate an allowance increase of $1 million to $3 million and a liability for unfunded commitments of $2.5 million to $4 million. Elsewhere, the filing describes an estimated combined retained-earnings charge of $3.5 million to $7 million.
- Management expected the pandemic to continue affecting the business in 2022. Risks cited include economic and labor-market uncertainty, inflation and supply-chain pressures, credit deterioration, real estate values, and possible further losses after relief measures expire. Hotel and restaurant loans totaled $124.5 million; five hotel loans downgraded in Q1 2021 were performing as agreed at year-end.
- Interest-rate sensitivity modeling showed estimated net interest income declines of 4.30% for a 100-basis-point increase and 1.87% for a 100-basis-point decrease, relative to the base case. Results depend on assumptions and may differ from actual outcomes.
- Unfunded commitments to extend credit totaled $618.7 million, including $413.3 million at variable rates; management expected a significant portion not to be funded. Letters of credit totaled $10.2 million. These are contingent exposures, not reported borrowings.
- The company had paid no common dividends since inception and did not intend to declare cash dividends for the foreseeable future. It had authorized a repurchase of up to 388,612 shares but had repurchased none through year-end.
- Key risks include concentration in real-estate-secured lending, interest-rate and funding risk, CECL implementation, competition and expansion costs, cybersecurity and third-party service-provider exposure, and regulatory or compliance actions. The company reported no pending or threatened legal proceeding believed likely to have a material effect.
Important facts for investors to verify
- Reconcile the conflicting 2020 net interest margin figures (3.55% in selected data versus 3.48% in the detailed discussion).
- Track CECL adoption results against the disclosed allowance and unfunded-commitment estimates, including the resulting retained-earnings impact.
- Monitor classified and potential problem loans, particularly hotel exposure, against improving headline nonperforming-asset measures and the lower allowance ratio.
- Assess the quality and stability of deposit growth, including the estimated $1.2 billion of uninsured deposits, and the use and availability of contingent liquidity.
- Evaluate margin performance as rates and loan yields reprice, and whether mortgage banking income and the efficiency ratio recover after the 2021 decline.
- Review the headquarters project’s final cost and timing, and confirm that reported regulatory capital and liquidity remain adequate as the bank expands.