Business context and reporting period
Southern First Bancshares, Inc. is a South Carolina bank holding company operating Southern First Bank, a commercial bank with nine offices in Greenville, Columbia and Charleston. Its core activities are commercial, consumer and mortgage lending and deposit gathering, using a relationship-based “ClientFIRST” model. This Form 10-K covers the fiscal year ended December 31, 2014; comparisons are principally with 2013.
Financial performance and condition
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total assets | $1,029.9 million | $890.8 million | Up 15.6% |
| Gross loans | $871.4 million | $733.7 million | Up 18.8% |
| Deposits | $788.9 million | $680.3 million | Up 16.0% |
| Net interest income | $33.0 million | $29.0 million | Up 13.8% |
| Net interest margin, tax-equivalent | 3.68% | 3.71% | Down 3 basis points |
| Net income | $6.6 million | $5.1 million | Up 29.4% |
| Net income available to common shareholders | $5.7 million | $4.4 million | Up 30.7% |
| Diluted EPS | $1.10 | $0.98 | Up 12.2% |
| Efficiency ratio | 64.16% | 66.45% | Improved |
Net interest income grew as average earning assets increased, particularly loans; lower asset yields partly offset volume growth. Noninterest income rose to $5.8 million from $3.8 million, led by mortgage fees. Noninterest expense increased 14.2% to $24.9 million, including higher staffing and mortgage-related costs, $647,000 of real-estate-owned activity and a $250,000 legal-settlement expense. The company also recorded a $230,000 gain on securities sales.
Operating cash flow was $4.7 million, versus $8.6 million in 2013. Investing activities used $130.8 million, primarily reflecting loan growth; financing activities provided $128.1 million, including deposit growth and equity issuance. Cash and cash equivalents ended the year at $41.3 million. The allowance for loan losses was $11.8 million, or 1.35% of gross loans; net charge-offs were $2.6 million, or 0.33% of average loans.
Shareholders’ equity was $83.0 million, compared with $65.7 million a year earlier. The company raised approximately $24.4 million in net proceeds from a January private placement and November public offering, and redeemed its remaining $15.3 million of Series T preferred stock in December. Year-end borrowings included $135.2 million of FHLB advances and other borrowings and $13.4 million of junior subordinated debentures. The Bank was classified as well capitalized; its total risk-based capital ratio was 11.96% and leverage ratio was 9.08%. Management believed the Company and Bank would meet Basel III capital requirements on a fully phased-in basis, subject to implementation.
Material changes versus the prior comparable period
- Loan growth was strong across all three South Carolina markets; the loan-to-deposit ratio increased to 110% from 108%.
- Mortgage operations expanded, contributing to higher fee income and expenses.
- Nonperforming assets increased to $10.0 million from $9.5 million, but declined to 0.97% of assets from 1.07%. Nonaccrual loans fell to $6.7 million from $8.3 million, while other real estate owned rose to $3.3 million from $1.2 million.
- Common equity increased following the stock offerings and redemption of preferred stock; no preferred stock remained outstanding at year-end.
- Net interest margin edged down, while the efficiency ratio and returns improved. Return on average assets was 0.69%, versus 0.61%.
Outlook, risks and unusual items
The filing provides no numerical earnings or growth guidance. Management expected economic uncertainty and competitive pressure to continue into 2015 and described ongoing focus on profitable growth, core deposits, credit quality, expense discipline and risk management. Management indicated that deposit costs had limited room for further significant reductions.
Key exposures include South Carolina economic conditions, real-estate and commercial-credit concentration, an expanding and relatively unseasoned loan portfolio, and interest-rate sensitivity. Approximately 81.2% of loans were secured by real estate; 74% of the portfolio was fixed-rate. The company estimated that a 100-basis-point rate increase would raise net interest income 3.85%, while a 100-basis-point decrease would reduce it 5.44%; these are model estimates, not forecasts. Unfunded credit commitments totaled $167.3 million. Liquidity also depends on continued deposit gathering and borrowing access; $41.3 million of liquid assets represented 4.0% of assets, and some securities were pledged.
Basel III requirements began taking effect in 2015, with the capital conservation buffer scheduled to phase in through 2019. Other stated risks include regulatory and compliance costs, cybersecurity and third-party service-provider disruptions, competition, key-person dependence, and restrictions on capital distributions. The company had not paid cash dividends and said it did not intend to do so for the foreseeable future. Management reported no pending material litigation; the auditor issued an unqualified opinion on the financial statements, and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Loan growth, borrower and real-estate concentrations, collateral values, and the seasoning of recent originations.
- Allowance adequacy and trends in charge-offs, nonaccrual loans, troubled restructurings and foreclosed properties.
- Funding quality and liquidity, particularly the 110% loan-to-deposit ratio, large time-deposit maturities, and availability of borrowing lines.
- Actual sensitivity of net interest income and regulatory capital as rates and Basel III requirements change.
- Sustainability of mortgage-related fee growth and expense increases, including the disclosed legal settlement and real-estate-owned costs.
- Common-share dilution and capital-allocation implications of the 2014 offerings, option awards and preferred-stock redemption.