Southern First Bancshares, Inc. — 2020 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2020, with unaudited fourth-quarter comparisons also presented. Southern First is a South Carolina bank holding company operating Southern First Bank, a community bank serving South Carolina, North Carolina and Atlanta, with commercial and retail banking and mortgage banking businesses. The bank had 11 retail offices at year-end; approval to open a Charlotte office was received in February 2021.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $2.483 billion | $2.267 billion |
| Gross loans | $2.143 billion | $1.944 billion |
| Deposits | $2.143 billion | $1.876 billion |
| Net interest income | $79.8 million | $67.3 million |
| Provision for loan losses | $29.6 million | $2.3 million |
| Net income | $18.3 million | $27.9 million |
| Diluted EPS | $2.34 | $3.58 |
| Net interest margin, tax-equivalent (MD&A) | 3.48% | 3.43% |
| Efficiency ratio | 50.15% | 54.07% |
- Profitability and revenue: Net income fell 34.2%. Higher net interest income and noninterest income were more than offset by the sharply higher credit provision and operating costs. Noninterest income rose 82.6% to $27.4 million, led by mortgage banking income of $19.8 million, up from $9.9 million.
- Credit quality: The allowance for loan losses increased to $44.1 million, or 2.06% of gross loans, from $16.6 million, or 0.86%. Net charge-offs were $2.1 million, equal to 0.10% of average loans. Nonperforming assets were $9.2 million, or 0.37% of assets, versus $6.8 million, or 0.30%, a year earlier. Potential problem loans increased to $19.6 million from $9.0 million.
- Cash flow: Operating activities provided $20.6 million; investing activities used $230.8 million; and financing activities provided $183.0 million. Cash and cash equivalents declined $27.1 million to $100.7 million.
- Liquidity and debt: The loan-to-deposit ratio was 100%, versus 104%. Year-end borrowings included $25.0 million of FHLB advances and $36.0 million of subordinated debentures. Available capacity included $118.5 million in unused correspondent-bank lines and $512.5 million in unused FHLB borrowing capacity. The $15.0 million holding-company credit line was unused at year-end.
- Capital: The Bank reported a 13.92% total risk-based capital ratio, 12.66% CET1 ratio and 10.26% leverage ratio, and was described as well-capitalized.
Material changes and notable items
- Assets grew 9.5%, loans 10.3% and deposits 14.2%. Consumer real estate loans were a major growth driver; real estate secured 84.6% of loans.
- Average earning assets grew, while lower deposit rates reduced interest expense by $10.4 million. The tax-equivalent net interest margin increased five basis points, although asset yields fell as rates declined.
- The bank originated 853 Paycheck Protection Program loans totaling $97.5 million, then sold the portfolio in June 2020. It recognized $2.2 million in net lender fees on the sale; the filing reports $3.9 million of total lender fee income from PPP lending.
- Mortgage volume drove higher mortgage revenue and production costs. The company also recorded a $1.0 million write-down of other real estate owned and sold two Columbia offices, recognizing a $180,000 gain.
- Quarter-four net income was $8.6 million, compared with $7.2 million in Q4 2019; Q4 provision expense was $2.3 million, versus $1.1 million.
- The company has not paid cash dividends and said it does not intend to do so for the foreseeable future, preferring to retain earnings for growth and capital.
Outlook, risks and contingencies
Management said economic uncertainty could keep credit provisions elevated into 2021, while improved conditions could support a provision release. It also anticipates pressure on net interest margin as new and renewed loans price below existing portfolio yields. No specific numerical earnings or growth guidance is provided.
COVID-19-related loan deferrals had covered 864 loans with $599.6 million in balances; 98% had completed their deferral period and resumed normal payments by year-end. Two modified loans totaling $13.5 million still had a remaining deferral period. Management highlighted continuing uncertainty around borrower recovery, collateral values, unemployment, hospitality and tourism exposures, and possible post-stimulus credit deterioration. Other material risks include commercial real estate and borrower concentration, interest-rate sensitivity, loan-portfolio seasoning, cybersecurity and vendor dependence, regulatory changes, and the transition away from LIBOR. The company said no pending or threatened legal proceeding was expected to have a material effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor facts to verify
- Reconcile the filing’s selected-data net interest margin of 3.55% for 2020 with the MD&A’s 3.48% tax-equivalent margin; confirm the definitions and basis used.
- Track allowance adequacy, classified and potential problem loans, nonperforming assets, and realized losses as pandemic accommodations and government support unwind.
- Assess margin sensitivity and deposit costs as loan yields reset; review the disclosed rate-shock analysis and LIBOR-linked exposures.
- Confirm the status and economics of the Charlotte expansion and new Greenville headquarters construction, including the disclosed $28.2 million construction contract.
- Review the company’s dividend policy, regulatory capital, liquidity capacity and large unfunded commitments, which totaled $480.1 million at year-end.