Southern First Bancshares, Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019, with comparisons to 2018. Southern First is a South Carolina bank holding company operating Southern First Bank, a community bank serving South Carolina, North Carolina, and Georgia through 13 offices. Its principal activities are commercial and retail banking, with mortgage banking as a separate segment.
Financial performance and condition
| Metric | FY 2019 / Dec. 31, 2019 | FY 2018 / Dec. 31, 2018 |
|---|---|---|
| Total assets | $2.267 billion | $1.901 billion |
| Loans, net of allowance | $1.927 billion | $1.662 billion |
| Deposits | $1.876 billion | $1.648 billion |
| Net interest income | $67.3 million | $60.2 million |
| Noninterest income | $15.0 million | $10.2 million |
| Net income | $27.9 million | $22.3 million |
| Diluted EPS | $3.58 | $2.88 |
| Net interest margin, tax-equivalent | 3.43% | 3.58% |
| Efficiency ratio | 54.07% | 56.52% |
Cash flow and liquidity. Operating cash flow was $18.3 million, investing cash flow was negative $275.6 million, and financing cash flow was positive $312.2 million. Cash and cash equivalents ended the year at $127.8 million, up from $72.9 million. The loan-to-deposit ratio was 104%. The Bank reported $72.0 million in unused correspondent-bank lines, $312.4 million of available FHLB borrowing capacity, and an unused $15.0 million line of credit.
Debt and capital. Year-end FHLB advances and other borrowings were $110.0 million, and subordinated debentures were $35.9 million. The Bank was well capitalized: total risk-based capital was 13.31%, CET1 was 12.42%, and leverage capital was 10.80%. The Company issued $23.0 million of 4.75% fixed-to-floating subordinated notes in September 2019; proceeds were approximately $22.5 million.
Asset quality. Nonperforming assets were $6.8 million, or 0.30% of assets and 0.35% of gross loans. Net charge-offs were $1.4 million, or 0.08% of average loans. The allowance for loan losses was $16.6 million, equal to 0.86% of gross loans. Real estate secured 82.8% of the loan portfolio, and commercial real estate exposure was 222.8% of the Bank’s risk-based capital.
Material changes versus 2018
- Assets grew 19.3%, loans 15.9%, and deposits 13.8%. Net income rose 25.0%; diluted EPS increased 24.3%.
- Net interest income increased 11.8%, mainly from loan and earning-asset growth. However, the net interest margin declined 15 basis points as funding costs rose faster than asset yields.
- Noninterest income increased 46.9%, driven primarily by mortgage banking income, which rose 79.0% on higher originations.
- Noninterest expense rose 11.8%, including higher compensation, occupancy, and data-processing costs. The efficiency ratio nevertheless improved.
- In the fourth quarter, the Company sold $6.2 million of HSA deposits, recognizing an approximately $745,000 gain; sold $29.5 million of investment securities, recognizing an approximately $720,000 gain; and prepaid $25.0 million of FHLB advances, incurring a $1.5 million penalty.
- The Company sold $23.0 million of subordinated notes and ended the year with $60.0 million more FHLB advances than at year-end 2018.
Outlook, commentary, risks, and unusual matters
- Management expects continued pressure on net interest spread and margin from repricing and competitive rates. The filing provides no quantified earnings, growth, or margin guidance.
- Management’s strategy emphasizes organic growth in core deposits and profitable lending, controlled geographic expansion, expense discipline, and continued technology and risk-management investment. It reported no immediate acquisition plans.
- Key risks include sensitivity to interest rates, real-estate and commercial-loan concentrations, loan-growth seasoning, local economic conditions, deposit competition, liquidity needs, cybersecurity and third-party service interruptions, and regulatory requirements.
- Management cited uncertainty from trade disputes and the potential economic effects of coronavirus as risks; the filing states that these effects were uncertain at the time.
- Credit indicators were generally low, but nonaccrual loans increased to $6.8 million, potential problem loans rose to $9.0 million, and allowance coverage of nonaccrual loans declined to 245.0% from 270.4%.
- Southern First expects CECL adoption in 2023 and could not estimate its impact. LIBOR transition also presents potential operational, contractual, and valuation risks.
- President F. Justin Strickland resigned from his Bank position effective January 21, 2020. The filing reports no pending or threatened legal proceeding believed likely to have a material effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained without weakening underwriting, liquidity, or funding costs, particularly given the 104% loan-to-deposit ratio.
- How the decline in net interest margin and management’s stated margin-pressure outlook affect future earnings.
- Whether real-estate concentration, nonaccrual loans, and potential problem loans lead to higher provisions or charge-offs.
- The terms, capital treatment, and future servicing cost of the 2019 subordinated notes, alongside the Company’s debt and capital needs.
- Whether mortgage banking income remains strong if mortgage originations or secondary-market conditions weaken; 2019 results included notable mortgage and asset-sale income as well as the FHLB prepayment penalty.
- Management changes following Mr. Strickland’s resignation, and any subsequent developments concerning coronavirus, LIBOR replacement, and CECL implementation.