Southern First Bancshares, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are primarily with FY 2016. Southern First is a South Carolina bank holding company operating Southern First Bank, with 11 offices across South Carolina, Raleigh, North Carolina, and Atlanta, Georgia. Raleigh opened in January 2017 and Atlanta in August 2017. The bank focuses on relationship-based commercial and consumer banking.
Key financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total assets | $1.625 billion | $1.341 billion |
| Gross loans | $1.387 billion | $1.164 billion |
| Deposits | $1.381 billion | $1.091 billion |
| Interest income | $61.2 million | $51.2 million |
| Net interest income | $50.9 million | $43.0 million |
| Noninterest income | $9.3 million | $10.8 million |
| Net income | $13.0 million | $13.0 million |
| Diluted EPS | $1.76 | $1.94 |
| Net interest margin, tax-equivalent | 3.57% | 3.63% |
| Efficiency ratio | 57.38% | 57.90% |
Net interest income rose 18.3%, principally on higher average loan balances. Net income was essentially unchanged: loan and balance-sheet growth was offset in part by lower mortgage banking income, higher operating costs, and a $2.4 million tax expense from remeasuring deferred tax assets following the Tax Act. The effective tax rate was 44.9%, versus 36.0%; excluding the disclosed Tax Act charge, the filing does not state an adjusted effective rate. Diluted EPS declined 9.3%, amid a larger weighted-average share count.
- Cash flow: Operating activities provided $17.2 million, investing activities used $239.0 million, and financing activities provided $267.4 million. Cash and cash equivalents increased $45.6 million to $92.2 million.
- Credit and allowance: Provision for loan losses was $2.0 million, down from $2.3 million. Net charge-offs were $1.3 million, or 0.10% of average loans. Allowance was $15.5 million, 1.12% of gross loans, versus 1.28% in 2016.
- Asset quality: Nonperforming assets were $7.5 million, or 0.46% of assets, compared with $6.1 million and the same 0.46% ratio in 2016. Nonaccrual loans rose to $7.3 million from $5.5 million. Troubled debt restructurings totaled $7.8 million.
- Funding and debt: Deposits increased 26.6%; the loan-to-deposit ratio was 100%, down from 107%. FHLB advances and other borrowings fell to $67.2 million from $115.2 million; junior subordinated debentures remained $13.4 million. Retail deposits were 98.0% of deposits.
- Liquidity and capital: The bank had $72.0 million in unused correspondent federal-funds lines, $242.2 million of unused FHLB borrowing capacity, and an unused $15.0 million line of credit. The Bank’s total risk-based capital ratio was 12.99% and leverage ratio 10.04%; it was classified as well capitalized.
Material changes and management commentary
- Loans grew 19.2% and deposits 26.6%. Growth included new-market expansion and a public offering of 805,000 shares in May 2017, generating $24.8 million net proceeds. Proceeds supported capital, repaid a former $10.0 million line of credit, and funded growth and general corporate purposes.
- Deposit costs increased: average interest-bearing deposit cost rose to 0.73% from 0.49%, contributing to a six-basis-point decline in net interest margin. Management noted that approximately 75% of loans were fixed-rate, creating exposure if funding costs rise faster than asset yields.
- Mortgage banking income fell 24.6% to $5.2 million, attributed mainly to lower origination volume as market rates increased. Compensation and benefits rose 14.9%, including the cost of 19 additional employees; total noninterest expense increased 10.8%.
- The Tax Act reduced the federal corporate rate to 21% from a maximum 35%. The 2017 $2.4 million deferred-tax remeasurement was provisional; the company said the final accounting could differ and expected to complete it upon filing its 2017 tax return.
- Management described growth as controlled and organic, with no immediate acquisition plans. It reported effective internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management identified potential gradual interest-rate increases but gave no timetable or formal forecast. Key risks include margin pressure from rate changes, loan and deposit competition, execution and costs of expansion in Raleigh and Atlanta, credit concentration and seasoning risk, real-estate collateral values, and cybersecurity and third-party service-provider disruptions. Real estate secured 82.1% of loans; management reported that commercial real estate exposure was below the cited supervisory concentration guidelines. Unfunded loan commitments were $345.9 million, including $249.5 million at variable rates; most are not expected to be funded based on historical experience. Management reported no material pending litigation and no subsequent event requiring accrual or disclosure. The company has not paid cash dividends and said it does not intend to do so for the foreseeable future.
Important facts for investors to verify
- Whether the Tax Act’s final deferred-tax accounting differs materially from the provisional $2.4 million expense, and the resulting effect on future effective tax rates.
- Whether loan growth and new offices translate into durable deposit funding and earnings, without further margin deterioration or disproportionate expense growth.
- Trends in nonaccrual loans, TDRs, classified assets, charge-offs, and allowance coverage as the rapidly growing loan portfolio seasons.
- Interest-rate sensitivity assumptions and actual deposit repricing versus asset yields; the filing’s modeled net-interest-income changes range from +1.48% for a 100-basis-point rise to -4.84% for a 100-basis-point decline.
- Capacity and terms of contingent funding sources, including collateral pledges, and the potential conversion of $345.9 million in unfunded commitments into funded loans.