Southern First Bancshares, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY 2010. The company is a South Carolina bank holding company operating Southern First Bank in the Greenville and Columbia markets. Its community-bank business centers on deposits and commercial, consumer, and real-estate lending.
Financial results and position
| Metric | FY 2011 / Dec. 31, 2011 | FY 2010 / Dec. 31, 2010 |
|---|---|---|
| Total assets | $767.7 million | $736.5 million |
| Gross loans / net loans | $598.6 million / $589.7 million | $572.4 million / $564.0 million |
| Deposits | $562.9 million | $536.3 million |
| Net interest income | $23.3 million | $20.2 million |
| Provision for loan losses | $5.3 million | $5.6 million |
| Net income | $2.1 million | $0.9 million |
| Net income (loss) available to common shareholders | $944,000 | $(235,000) |
| Diluted EPS | $0.24 | $(0.06) |
| Net interest margin, tax-equivalent | 3.30% | 2.91% |
| Noninterest expenses | $17.9 million | $16.6 million |
- Profitability and margins: Net income rose 134.6%. Lower funding costs drove the $3.1 million increase in net interest income; interest expense fell 22.6%, while interest income declined modestly. The efficiency ratio improved to 65.0% from 70.5%. Return on average assets was 0.28% and return on average equity 3.40%.
- Credit and asset quality: Allowance for loan losses was $8.9 million, or 1.49% of gross loans, versus $8.4 million, or 1.47%. Net charge-offs were $4.7 million (0.81% of average loans), down from $5.0 million (0.86%). Nonperforming assets decreased to $14.0 million, or 1.82% of assets, from $15.0 million, or 2.03%; nonaccrual loans nevertheless increased to $10.3 million from $9.3 million. Year-end troubled debt restructurings (TDRs) totaled $12.2 million, including $7.4 million accruing and $4.8 million nonaccruing.
- Cash flow: Operating cash flow was $11.2 million; investing activities used $67.9 million, mainly reflecting securities purchases and net loan originations; financing activities provided $25.8 million. Cash and cash equivalents fell $30.8 million to $23.0 million.
- Debt and liquidity: FHLB advances and repurchase agreements totaled $122.7 million, and junior subordinated debentures were $13.4 million. The loan-to-deposit ratio was 106.35%. Retail deposits were 91.9% of deposits; out-of-market deposits were 8.1%, down from 16.1%. Available federal funds lines totaled $30.5 million, with no year-end borrowings, and reported unused FHLB capacity was $10.1 million.
- Capital: Shareholders’ equity was $62.5 million. The bank reported total risk-based capital of 13.1%, Tier 1 risk-based capital of 11.9%, and leverage capital of 9.5%, above the OCC-required minimums of 12%, 10%, and 9%, respectively.
Changes, outlook, and material matters
- Net interest margin improved as deposit and borrowing rates declined; management expected further deposit-cost relief as CDs repriced and said it did not expect loan yields to change significantly in the near term.
- Management expected elevated charge-offs to continue into 2012 and described weak economic conditions, real-estate pressures, and continued regulatory scrutiny as ongoing challenges. No numerical earnings or revenue guidance is provided.
- The bank remains subject to a 2010 OCC Formal Agreement covering credit-risk management, underwriting, liquidity, funding, and reporting, as well as higher individual capital thresholds. Management said it believed the bank complied with substantially all requirements; the OCC’s concurrence is not assured. Brokered deposits above 25% of total deposits require prior written OCC non-objection. Management planned not to renew $32.8 million of wholesale CDs maturing in 2012.
- Approximately 79.9% of loans had real estate as a primary or secondary component of collateral; commercial real estate is a significant concentration. The filing also flags portfolio seasoning, collateral values, borrower performance, deposit competition, funding costs, and interest-rate sensitivity. The bank was liability-sensitive over the next year under its gap analysis.
- The company received $17.3 million through the Treasury CPP in 2009. The preferred stock carries a 5% cumulative dividend through 2014 and 9% thereafter. Management intended to repay it before the step-up, but gave no assurance it could do so. Preferred dividends and discount accretion reduced FY 2011 common earnings by approximately $1.1 million. The associated warrant may dilute common shareholders.
- Noninterest income fell to $2.8 million, partly because FY 2010 included a $1.2 million securities-sale gain. FY 2011 included a $25,000 other-than-temporary impairment charge; the company also sold a private-label mortgage security and recognized a further loss. OREO declined to $3.7 million after sales and write-downs; FY 2011 included $782,000 of OREO write-downs and a $318,000 loss on OREO sales.
- In 2011 the company corrected an accounting error in preferred-stock discount accretion and related common-share earnings. Prior periods were restated; management stated the error was not material to interim or annual financial statements. The 2010 common-share loss was restated from $(447,000) to $(235,000), and 2009 common income from $265,000 to $489,000.
- The filing reports no material pending litigation. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective, but the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Subsequent OCC examinations, continued compliance with the Formal Agreement, and maintenance of the bank’s higher capital ratios.
- Performance and collateral values of nonaccrual loans, impaired loans, and the $12.2 million TDR portfolio; adequacy of the allowance and the expected trajectory of charge-offs.
- Actual deposit repricing, retention of local deposits, nonrenewal of wholesale CDs, and liquidity after the decline in cash balances.
- Ability and regulatory capacity to redeem CPP preferred stock before its dividend rate rises to 9% in 2014, plus potential warrant dilution.
- Whether the filing’s FY 2011 figures and restated comparative common-share earnings are reflected consistently in future reporting; verify stock-dividend-adjusted per-share data.