Business context and reporting period
Southern First Bancshares, Inc. is a South Carolina bank holding company operating Southern First Bank, a community bank serving Greenville, Columbia and Charleston. This Form 10-K reports the fiscal year ended December 31, 2013; figures below are in U.S. dollars unless stated otherwise. The Bank converted from a national to a South Carolina state charter effective April 1, 2013.
Financial performance and condition
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Total assets | $890.8 million | $798.0 million | Up 11.6% |
| Gross loans | $737.3 million | $645.9 million | Up $91.3 million |
| Deposits | $680.3 million | $576.3 million | Up $104.0 million |
| Interest income | $36.1 million | $34.7 million | Up $1.4 million |
| Net interest income | $29.0 million | $26.0 million | Up 11.6% |
| Net interest margin, tax-equivalent | 3.71% | 3.61% | Up 10 basis points |
| Provision for loan losses | $3.5 million | $4.6 million | Lower by $1.1 million |
| Noninterest income | $3.8 million | $3.8 million | Nearly unchanged |
| Noninterest expenses | $21.8 million | $19.5 million | Up 11.8% |
| Net income | $5.1 million | $3.9 million | Up 32.6% |
| Diluted EPS | $0.98 | $0.64 | Up from $0.64 |
| Operating cash flow | $10.1 million | $11.9 million | Down $1.7 million |
Net income available to common shareholders was $4.4 million, versus $2.8 million in 2012. The 2013 improvement reflected higher net interest income, lower credit-loss provision and modestly higher noninterest income, partly offset by higher operating expenses and taxes. Net interest income benefited from asset growth and lower funding costs; lower loan yields partly offset those benefits. The efficiency ratio rose to 65.9% from 63.2%, reflecting expansion and mortgage-operation costs.
At year-end, net loans were $727.1 million; securities were $73.6 million; and cash and cash equivalents were $39.2 million, equal to 4.4% of assets. Total liabilities were $825.2 million and shareholders’ equity was $65.7 million. Borrowings included $124.1 million of FHLB advances and other borrowings and $13.4 million of junior subordinated debentures. The loan-to-deposit ratio was 108%, down from 112%. Available liquidity included $45.0 million of unused correspondent-bank federal funds lines and $69.8 million of additional FHLB borrowing capacity, subject to collateral and availability.
The Bank was well capitalized at year-end: total risk-based capital was 12.2%, Tier 1 risk-based capital 10.9%, and the leverage ratio 9.1%. Its allowance for loan losses was $10.2 million, or 1.39% of gross loans, compared with $9.1 million, or 1.41%, a year earlier. Net charge-offs declined to $2.4 million, or 0.34% of average loans, from $4.4 million, or 0.71%. Nonperforming assets were $9.5 million, 1.07% of assets, versus $9.9 million, 1.24%.
Material changes and unusual items
- Loan growth was concentrated partly in the newer Charleston market, which contributed $59.4 million of growth; consumer real estate loans also expanded. Real estate secured 80.6% of loans, and commercial real estate represented 51.8% of the portfolio.
- Retail deposits increased, but out-of-market deposits rose to $63.3 million, or 9.3% of deposits, from $13.0 million, or 2.3%, as the Bank funded loan growth. Wholesale CDs of $39.1 million were due within 12 months.
- Noninterest expense growth included $2.2 million higher compensation and benefits, reflecting 13 additional employees, expanded mortgage capabilities and growth support. The Bank also opened/expanded offices and incurred related occupancy and processing costs.
- Available-for-sale securities had $2.0 million of net unrealized losses at year-end, largely attributed to interest-rate movements; management reported no intent or likely requirement to sell before recovery of cost and concluded the securities were not other-than-temporarily impaired. Accumulated other comprehensive income declined $2.5 million during 2013.
- After year-end, on January 27, 2014, the Company issued 475,000 common shares at $13 per share, raising gross proceeds of approximately $6.2 million, and used $4.1 million to redeem 4,057 Series T preferred shares. The filing’s pro forma shows preferred stock declining to $11.2 million and common shares increasing to 4,794,750. The Series T dividend rate on remaining shares was scheduled to rise from 5% to 9% effective May 15, 2014.
- Fourth-quarter 2013 net income was $1.4 million and diluted EPS was $0.27; fourth-quarter net interest income was $7.6 million, provision expense $825,000, and noninterest expense $5.8 million.
Outlook, commentary and risks
Management expected economic weakness and intense competition for loans and deposits to persist into 2014, and said deposit and borrowing rates were already historically low, limiting prospects for further funding-cost reductions. It planned to continue expanding mortgage services and expected a Mount Pleasant, South Carolina office to open in the second half of 2014. The filing gives no numerical earnings, revenue, loan-growth or margin guidance.
Key exposures include real-estate and commercial-loan concentration, individual large borrower relationships, relatively unseasoned loan growth, collateral values, and the subjectivity of the loan-loss allowance. Other material risks include interest-rate and margin sensitivity, deposit competition and liquidity, regulatory changes including Basel III capital requirements, cybersecurity and operational disruption, and dependence on key personnel. The Company reported no pending or threatened legal proceeding it believed would materially affect its condition; management stated disclosure controls and internal control over financial reporting were effective. The independent auditor issued an unqualified opinion on the financial statements but did not express an opinion on internal-control effectiveness.
Most important facts for investors to verify
- Whether credit quality and the allowance remain adequate as the rapidly growing loan portfolio seasons; review nonaccrual loans, TDRs, charge-offs and real-estate collateral appraisals.
- How the Bank funds continued loan growth, including reliance on wholesale deposits, CD maturities and secured borrowing capacity, and whether liquidity remains sufficient.
- Whether expansion and mortgage operations generate revenue sufficient to offset higher staffing, occupancy and other operating costs.
- The capital, earnings-per-share and dilution effects of the 2014 share issuance and preferred-stock redemption, and the cost of any Series T shares remaining after the rate increase.
- Potential effects of rising or falling interest rates, including the filing’s modeled net-interest-income sensitivity: +2.64% for a 100-basis-point increase and −4.25% for a 100-basis-point decrease.