Southern First Bancshares, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. The company is a South Carolina bank holding company operating Southern First Bank, with nine offices in Greenville, Columbia and Charleston; it focuses on commercial, consumer and mortgage lending and relationship-based banking.
Financial performance and condition
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total assets | $1.217 billion | $1.030 billion | Up 18.2% |
| Gross loans | $1.005 billion | $871.4 million | Up 15.3% |
| Deposits | $985.7 million | $788.9 million | Up 25.0% |
| Net interest income | $38.5 million | $33.0 million | Up 16.6% |
| Net interest margin, tax-equivalent | 3.63% | 3.68% | Down 5 basis points |
| Net income | $10.2 million | $6.6 million | Up 53.5% |
| Diluted EPS | $1.55 | $1.10 | Up 40.9% |
| Noninterest income | $8.4 million | $5.8 million | Up 45.6% |
| Noninterest expense | $28.2 million | $24.9 million | Up 13.3% |
| Efficiency ratio | 60.09% | 64.16% | Improved |
Growth in net interest income reflected higher average earning assets, especially loans, while yields on earning assets declined. Mortgage origination fees drove much of the increase in noninterest income. Net income growth also benefited from lower loan-loss provisions and the absence of preferred-stock dividends in 2015.
Fourth quarter: Net income available to common shareholders was $2.85 million and diluted EPS was $0.43, compared with $1.77 million and $0.30, respectively, in fourth-quarter 2014.
Cash flow and liquidity: Operating cash flow was $20.1 million; investing activities used $176.0 million, principally reflecting loan growth; financing activities provided $177.5 million, largely from deposit growth. Cash and cash equivalents ended the year at $62.9 million, up from $41.3 million. Available unused funding included $45.0 million in correspondent-bank lines, $75.7 million in FHLB borrowing capacity and a separate unused $10 million line. The loan-to-deposit ratio was 102%.
Debt and capital: FHLB advances and other borrowings totaled $115.2 million, down from $135.2 million; junior subordinated debentures were $13.4 million. Shareholders’ equity was $94.2 million. The company’s total risk-based capital ratio was 11.95% and CET1 ratio 9.40%; the Bank was reported well capitalized, with an 11.67% total risk-based capital ratio and 10.42% CET1 ratio. Management stated that the company and Bank met Basel III capital requirements on a fully phased-in basis at year-end.
Material changes, credit quality and notable items
- Nonperforming assets decreased to $9.1 million, or 0.75% of assets, from $10.0 million, or 0.97%, in 2014. Net charge-offs fell to $1.3 million, or 0.14% of average loans, from $2.6 million, or 0.33%.
- The allowance for loan losses rose to $13.6 million, equal to 1.36% of gross loans, from $11.8 million, or 1.35%. The provision declined to $3.2 million from $4.2 million; management attributed the lower provision primarily to improved credit quality.
- Real estate secured 81.4% of loans. Commercial real estate represented 48.1% of the portfolio; commercial loans were 65.2%. Approximately $94.0 million of loans exceeded regulatory supervisory loan-to-value limits, including $37.1 million with LTVs of 100% or more.
- Mortgage operations expanded: loan and mortgage fee income increased to $5.3 million from $2.9 million, including approximately $5.0 million of mortgage origination fee income. The company added five mortgage-team members.
- Other real estate owned declined to $2.5 million, but the company recorded $937,000 of property write-downs. The 2015 results also included a $297,000 gain on securities sales.
- Retail deposits were 94.0% of deposits; out-of-market deposits were 6.0%. Core deposits were $840.2 million. The company had no cash dividend policy for the foreseeable future and said it intended to retain earnings.
Outlook, risks and contingencies
The filing gives no quantified earnings or growth guidance. Management’s stated strategy is controlled organic growth in loans and core deposits, continued investment in technology and client service, and expense discipline; it reported no immediate acquisition plans. Management warned that future results depend on economic conditions, competition, funding and deposit flows, regulatory changes and interest rates.
Interest-rate exposure is notable: approximately 75% of loans were fixed rate. The company’s modeled net interest income increased 4.11% under a 100-basis-point rate rise, but declined 7.09% under a 100-basis-point fall; these are scenario estimates, not forecasts. Management also noted that some FHLB advances and all junior subordinated debt have variable rates.
Other key risks include real-estate and commercial-loan concentration, less-seasoned loan growth, collateral valuation and credit-loss estimates, cybersecurity and third-party technology dependence, regulatory capital and compliance requirements, and the company’s reliance on Bank dividends for parent-company liquidity. Unfunded commitments to extend credit were $194.7 million; the company also had a $7.6 million construction contract for a Charleston regional office. Management reported no material pending litigation and no subsequent events requiring accrual or disclosure. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- Whether rapid loan and deposit growth can be sustained without further margin pressure, and whether mortgage-related fee income is repeatable.
- Credit performance and collateral coverage in commercial real estate, high-LTV loans, impaired loans and TDRs; verify the adequacy of the allowance as the portfolio seasons.
- Funding resilience given the 102% loan-to-deposit ratio, certificate maturities and reliance on borrowing capacity, including any collateral restrictions.
- Actual sensitivity of earnings and funding costs to rate changes, particularly given the fixed-rate loan mix and variable-rate borrowings.
- Capital headroom after the Basel III conservation buffer phases in, and the parent company’s ability to service obligations without Bank dividends.
- Execution and cost of the Charleston office construction, and the impact of compensation, benefits and other operating expenses on future efficiency.