SOUTHERN FIRST BANCSHARES INC
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒Annual Report Pursuant To Section 13 Or 15(d) of The Securities Exchange Act of 1934
For The Fiscal Year December 31, 2021.
Or
☐Transition Report Pursuant To Section 13 Or 15(d) of The Securities Exchange Act of 1934
For the Transition Period from _________ to __________
Commission file number 000-27719
Southern First Bancshares, Inc.
(Exact name of registrant as specified in its charter)
(State of Incorporation) (I.R.S. Employer Identification No.)
100 Verdae Boulevard, Greenville, SC 29607
(Address of principal executive offices) (Zip Code)
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Trading Symbol Name of each exchange on which registered
Common Stock SFST The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2021 (based on the average bid and ask price of the Common Stock as quoted on the NASDAQ Global Market on June 30, 2021), was $380,614,294.
7,976,994 shares of the registrant’s common stock were outstanding as of February 25, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Southern First Bancshares, Inc.
Index to Form 10-K
Page
PART I
Item 1.Business 5
Item 1A.Risk Factors 28
Item 1B.Unresolved Staff Comments 42
Item 2.Properties 42
Item 3.Legal Proceedings 43
Item 4.Mine Safety Disclosures 43
PART II
Item 6.[Reserved] 45
Item 7A.Quantitative and Qualitative Disclosures about Market Risk 65
PART II
Item 8.Financial Statements and Supplementary Data 66
Item 9A.Controls and Procedures 110
Item 9B.Other Information 110
Item 9C.Disclosures Regarding Foreign Jurisdictions that Prevent Inspections 110
PART III
Item 10.Directors, Executive Officers and Corporate Governance 110
Item 11.Executive Compensation 110
Item 14.Principal Accounting Fees and Services 110
Item 15.Exhibits, Financial Statement Schedules 110
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CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operation, plans, business strategy, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described below under Item 1 A. Risk Factors and the following:
•
The impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
•
Restrictions or conditions imposed by our regulators on our operations;
•
Increases in competitive pressure in the banking and financial services industries;
•
Changes in access to funding or increased regulatory requirements with regard to funding;
•
Changes in deposit flows;
•
Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
•
Credit losses due to loan concentration;
•
Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
•
Our ability to successfully execute our business strategy;
•
Our ability to attract and retain key personnel;
•
The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets;
•
Changes in the interest rate environment which could reduce anticipated or actual margins;
•
Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the new presidential administration and Democratic control of Congress;
•
Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
•
Changes occurring in business conditions and inflation;
•
Increased cybersecurity risk, including potential business disruptions or financial losses;
•
Changes in technology;
•
The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
•
Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
•
Changes in monetary and tax policies;
•
The rate of delinquencies and amounts of loans charged-off;
•
The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
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•
Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
•
Adverse changes in asset quality and resulting credit risk-related losses and expenses;
•
Changes in accounting policies and practices;
•
Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
•
Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed;
•
The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and
•
Other risks and uncertainties detailed in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchange Commission (“SEC”).
If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Annual Report on Form 10-K. We make these forward-looking as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements, except as required by applicable law.
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PART I
Item 1. Business
General
Southern First Bancshares, Inc. (the
“Company”) was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under
the Bank Holding Company Act of 1956. Our primary business is to serve as the holding company for Southern First Bank (the “Bank”),
a South Carolina state bank. The Bank is a commercial bank with eight retail offices located in the Greenville, Columbia, and Charleston
markets of South Carolina, three retail offices in the Raleigh, Greensboro, and Charlotte markets of North Carolina and one retail office
in Atlanta, Georgia.
The Bank is primarily engaged in the business of
accepting demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing
commercial, consumer and mortgage loans to the general public.
The Company’s reportable segments represent
the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments
include Commercial and Retail Banking, Mortgage Banking, and Corporate Operations as described below.
Commercial
and Retail Banking. The Company’s primary business is to provide traditional deposit and lending products and services to
its commercial and retail banking clients. The commercial and retail banking segment employs 241 of the Company’s full-time equivalent
(“FTE”) employees.
Mortgage
Banking. The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary
market to investors and employs 37 FTE employees.
Corporate
Operations. Corporate operations is comprised primarily of compensation and benefits for certain members of management and interest
on company debt. There are no direct employees of corporate operations, however a portion of the salaries related to executive management
and finance are allocated to this segment.
Unless the context requires otherwise, references
to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,
Inc. and its subsidiaries.
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Our Competitive Strengths
We believe that the following business strengths
have been instrumental to the success of our core operations. We believe these attributes will enable us to continue profitable growth,
while remaining fundamentally sound and driving value to our shareholders.
Simple and Efficient ClientFIRST Model.
We operate our Bank using a simple and efficient style of banking that is focused on providing core banking products and services to our
clients through a team of talented and experienced bankers. We refer to this model as “ClientFIRST” and it is structured to
deliver superior client service via “relationship teams,” which provide each client with a specific banker contact and a consistent
support team responsible for all of the client’s banking needs. We believe this model results in a consistent and superior level
of professional service that provides us with a distinct competitive advantage by enabling us to build and maintain long-term relationships
with desirable clients, enhancing the quality and stability of our funding and lending operations and positioning us to take advantage
of future growth opportunities in our existing markets. We also believe that this client focused culture has led to our successful expansion
into new markets in the past, and will enable us to be successful if we seek to expand into new markets in the future.
Our ClientFIRST model focuses on achieving cost
efficiencies by diligently managing the growth of our number of employees and banking offices. We believe that the identification of talented
bankers will drive our growth strategy, as opposed to a more general desire to enter a specific geography or market. This strategy translates
into a smaller number of brick and mortar offices relative to our size and compared to peer banks, but larger overall deposit balances
in our offices as compared to peers. As a result, our offices average approximately $213.7 million in total deposits. We believe this
style of banking allows us to deliver exceptional client service, while achieving lower efficiency ratios relative to certain of our local
competitors, as evidenced by our 53.8% efficiency ratio for the year ended December 31, 2021.
We continue to make significant investments in
our IT systems and technology offerings to our clients that we believe will continue to drive low-cost deposit growth. We believe that
our current mobile banking, on-line banking and cash management offerings are industry-leading solutions amongst community banks, and
we plan to continue to invest in the latest technology solutions to enable us to meet the evolving needs of our clients and maintain this
competitive advantage over other community banks.
Attractive South Carolina, North Carolina
and Georgia Markets. We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the
three largest markets in South Carolina; three banking offices located in Charlotte, Raleigh and Greensboro, North Carolina, which are
the three largest markets in North Carolina; and one banking office located in Atlanta, Georgia, which is the largest market in Georgia.
The following table illustrates our market share, by insured deposits as of the dates indicated, in these seven markets:
(Dollars in thousands)
(1) Represents the metropolitan statistical area (“MSA”) for each market.
(3) The Charlotte office was not open as of June 30, 2021.
Greenville. The city of Greenville is located
in Greenville County, South Carolina approximately midway between Atlanta and Charlotte on the heavily traveled I-85 business corridor.
The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated 932,705 residents as of 2020. The median household
income for the Greenville-Anderson MSA was $55,790 for 2019. A large and diverse metropolitan area, the Greenville-Anderson-Mauldin MSA
is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Hubbell Lighting as well as
hosting significant operations for BMW and Lockheed Martin.
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Columbia. The city of Columbia is located
in Richland County, South Carolina and its surrounding suburban areas expand into adjoining Lexington County. Columbia is the state capital,
the largest city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry
Training Center. The Columbia MSA is the second most populous market in the state with an estimated population of 847,397 residents as
of 2020. The median household income for the Columbia MSA was $53,765 for 2019.
Charleston. The city of Charleston is located
in Charleston County, South Carolina. The Charleston-North Charleston MSA is the third most populous market in the state with an estimated
population of 819,705 residents as of 2020. Charleston is home to the deepest port in the Southeast and boasts top companies in the aerospace,
biomedical and technology fields such as Boeing, the Medical University of South Carolina (MUSC) and Blackbaud. The median household income
for the Charleston-North Charleston MSA was approximately $64,283 for 2019. One of our retail offices in the Charleston market is located
in the city of Mount Pleasant, which is located just north of Charleston in Charleston County and ranks as the fourth largest city in
South Carolina.
Raleigh. The city of Raleigh is the second
largest city in the state and is located in Wake County, North Carolina. The Raleigh-Cary MSA is one of the most populous markets in the
state of North Carolina with an estimated population of 1.42 million residents as of 2020. Raleigh is the state capital and is home to
North Carolina State University and is part of the Research Triangle area, together with Durham, North Carolina (home of Duke University)
and Chapel Hill, North Carolina (home of the University of North Carolina at Chapel Hill). The median household income for the Raleigh
MSA was approximately $75,165 for 2019.
Greensboro. The city of Greensboro is the
third largest city in North Carolina and is located in Guilford County. The Greensboro-High Point MSA has an estimated population of 776,363
residents as of 2020. Greensboro has traditionally been a fixture in the textiles, tobacco and furniture industries while also moving
towards an increased presence of high-tech, aviation and transportation/logistics sectors. Greensboro, along with Winston-Salem and High
Point, is commonly referred to as the Triad region of North Carolina and is home to companies such as Honda Aircraft, Lincoln Financial
Group and Volvo Trucks of North America. The median household income for the Greensboro MSA was approximately $50,026 for 2019.
Atlanta. The Atlanta-Sandy Springs-Alpharetta
MSA has the ninth largest population in the U.S. with 6.09 million residents as of 2020. Atlanta is the state capital of, and largest
city in, Georgia and is the world headquarters of corporations such as Coca-Cola, Home Depot, UPS, Delta Airlines and Turner Broadcasting.
The median household income for the Atlanta MSA is $69,464 for 2019.
Charlotte. The Charlotte-Concord-Gastonia
MSA is among the top 25 largest populations in the U.S. with 2.68 million residents as of 2020. Charlotte is the largest manufacturing
region in the Carolinas and is the second largest financial hub in the country. Charlotte is also home to many Fortune 500 companies including
Duke Energy, Honeywell and Lowe’s. The median household income for the Charlotte MSA was $54,086 in 2019.
We believe that the demographics and growth characteristics
of these seven markets will provide us with significant opportunities to further develop existing client relationships and expand our
client base.
Data related to the estimated population and median
household income for each of the markets presented above is from the Federal Reserve Economic Data (“FRED”) online database.
Experienced Management Team, Dedicated Board
of Directors and Talented Employees. Our senior management team is led by R. Arthur Seaver, Jr., Michael D. Dowling, Calvin C.
Hurst and Silvia T. King whose biographies are included below. These executives lead a team of 23 additional senior team members which
we believe compares favorably to any community bank management team assembled in South Carolina.
R. Arthur “Art” Seaver, Jr.
has served as the Chief Executive Officer of our Company and our Bank since 1999. He has over 30 years of banking experience. From 1986
until 1992, Mr. Seaver held various positions with The Citizens & Southern National Bank of South Carolina. From 1992 until February
1999, he was with Greenville National Bank, which was acquired by Regions Bank in 1998. He was the Senior Vice President in lending and
was also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank. Mr. Seaver is
a 1986 graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School
of Community Bank Management.
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Michael D. Dowling has served as an Executive
Vice President and the Chief Financial Officer of our Company and our Bank since 2011 and as Chief Operating Officer since July 2019.
He has over 25 years of experience in the banking industry. Mr. Dowling was previously employed with KPMG LLP from 1994 until 2011, including
most recently as an Audit Partner (2005-2011) and a member of KPMG’s Financial Services practice. Mr. Dowling has extensive experience
working with public companies and financial institutions. He is a 1993 graduate of Clemson University, with a degree in Accounting and
is a CPA in South Carolina and North Carolina.
Calvin C. Hurst has served as Chief Banking
Officer of our Company and our Bank since March 2019. Mr. Hurst has over 14 years of banking experience. From 2006 to 2008, Mr. Hurst
served as a commercial underwriter for RBC Bank, and from 2008 to 2015 he served as commercial relationship manager for PNC Bank. Before
joining Southern First, Mr. Hurst served as regional vice president for TD Bank. Mr. Hurst is a 2005 graduate of Furman University, with
a Bachelor’s degree in Business Administration and Economics.
Silvia T. King has served as Chief Human
Resources Officer of our Company and our Bank since March 2018. Ms. King has over 17 years of Human Resources leadership experience. From
2003 to 2009, Ms. King served in various human resource and senior management roles with Monsanto Company and Select Comfort Corporation.
From 2009 to 2016, Ms. King served as senior human resources consultant for FGP International, a professional staffing firm in Greenville,
South Carolina, and most recently as a human resources instructor with e-Cornell University. Ms. King holds degrees in Psychology and
International Marketing from Clemson University and a Master of Human Resources degree from the University of South Carolina.
William M. Aiken, III has served as a Senior
Executive Vice President and Chief Risk officer of our Company and our Bank since 2021 and previously served as an executive credit risk
officer since 2020. He has over 25 years in the banking industry. Mr. Aiken has served in various roles at several banks during
his career including most recently as a Chief Commercial Credit officer at a regional bank. He is a 1996 graduate of Clemson University,
with a degree in Financial Management.
In addition to Messrs. Seaver, Dowling, Hurst,
Aiken and Ms. King, our executive management team consists of nine individuals who bring an average of 29 years of experience in the banking
industry.
The management team is complemented by our dedicated
board of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing,
insurance, management and finance. We believe that our management’s and board’s incentives are closely aligned with our shareholders
through the ownership of a substantial amount of our stock. As of December 31, 2021, our executive officers and board of directors owned
an aggregate of 583,794 shares of our common stock, including options to purchase shares of our common stock, which represented approximately
7.37% of the fully-diluted amount of our common stock outstanding. We believe that our officers’ and directors’ experience
and local market knowledge are valuable assets and will enable them to guide us successfully in the future.
In addition, we believe that we have assembled
a group of highly talented employees by being an employer of choice in the markets we serve. We employed a total of 278 FTE employees
as of December 31, 2021. Our employees are skilled in the areas of banking, information technology, management, sales, advertising and
marketing, among others. We strive to provide an “umbrella for great talent,” characterized by a culture of transparency and
collaboration which permeates all levels of the organization. To drive our culture of transparency and collaboration, our employees engage
in a series of weekly meetings to understand the goals and plan for each week. These meetings are intended to remind our employees of
our vision, strategy and ClientFIRST service, and provide our employees with information regarding monthly and quarterly goals and client
or prospect needs. In addition, each week is started with a meeting of all Senior and Executive Vice Presidents so that all team members
are informed on the latest developments of our Company. Our employees and their ClientFIRST approach to service have been instrumental
to our success.
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Our Business Strategy
We are focused on growing business relationships
and building core deposits, profitable loans and noninterest income. We believe that we have built a dynamic franchise that meets the
financial needs of our clients by providing an array of personalized products and services delivered by seasoned banking professionals
with knowledge of our local markets. Our overall strategic goal is to provide the highest level of service to our clients while achieving
high-performance metrics within the community banking market that drive franchise and shareholder value. Our specific business strategies
include:
Focus on Profitable and Efficient Growth.
Our executive management team and board of directors are dedicated to producing profits and returns for our shareholders. We actively
manage the mix of assets and liabilities on our balance sheet to optimize our net interest margin while also maintaining expense controls
and developing noninterest income streams. By continually striving to build a well-structured balance sheet, we seek to increase profitability
and improve our return on average assets, return on average equity and efficiency ratio. We believe that, as the economy continues to
improve, our focus on maximizing our net interest margin and minimizing our efficiency ratio while maintaining credit quality controls
will translate into continued and improved profitability and shareholder returns. We are committed to enhancing these levels of profitability
by focusing on our core competencies of commercial lending and core deposit gathering. We believe that we have the infrastructure currently
in place, such as technology, support staff and administration, to support expansion with limited associated noninterest expense increases.
Provide a Distinctive Client Experience.
Our markets have been subject to consolidation of local community banks primarily by larger, out-of-state financial institutions. We believe
there is a large client base in our markets that prefers doing business with a local institution and may be dissatisfied with the service
offered by national and larger regional banks. We believe that the exceptional level of professional service provided to our clients as
a result of our ClientFIRST model provides us with a distinct competitive advantage over our local competitors. We also believe that technology
innovation will continue to play a critical role in retaining clients and winning new business. We believe that our current mobile banking,
on-line banking and cash management offerings are industry-leading solutions amongst community banks. During 2021, 71% of deposits were
acquired through our office network, 24% came through the commercial remote deposit capture channel and the remaining 5% came through
consumer mobile deposits. We believe that the volume in remote deposit capture and mobile deposit channels will continue to increase over
time as more clients become acquainted with the convenience these services provide. By delivering superior professional service through
our ClientFIRST model, coupled with our deep understanding of our markets and our commitment to providing the latest technology solutions
to meet our clients’ banking needs, we believe that we can attract new clients and expand our total loans and deposits.
Maintain a Rigorous Risk Management Infrastructure.
As we grow, one of our top priorities is to continue to build a robust enterprise risk management infrastructure. We believe effective
risk management requires a culture of risk management and governance throughout the Company. The legislative and regulatory landscape
continues to quickly evolve, so we are continually performing risk assessments throughout the organization and re-allocating resources
where appropriate. We will continue to add new resources and technology investments to help enhance all of our risk management processes
throughout the Bank. Our risk management success is exemplified by our historic credit risk management and disciplined underwriting practices,
which have enabled us to successfully grow our balance sheet while maintaining strong credit quality metrics. We do not reduce our credit
standards or pricing discipline to generate new loans. In addition, we are heavily focused on compliance risk and cybersecurity risk,
as both of these risks have increased since our inception. Our management team continually analyzes emerging fraud and security risks
and utilizes tools, strategies and policies to manage risk while delivering an optimal and appropriate client experience. We believe our
risk management structure allows our board and senior management to maintain effective oversight of our risks to ensure that our personnel
are following prudent and appropriate risk management practices resulting in strong loan quality and minimal loan losses.
Attract Talented Banking Professionals With
A “ClientFIRST” Focus. We believe that our ability to attract and retain banking professionals with strong community
relationships and significant knowledge of our markets will continue to drive our success and grow our business in an efficient manner.
By focusing on experienced, established bankers who deliver exceptional client service through our ClientFIRST model, we believe we can
enhance our market position and add profitable growth opportunities. We believe that the strength of our exceptional client service and
relationship banking approach will continue to help us attract these established bankers. In recent years, we have invested in our internal
infrastructure, including support and back office personnel, and we believe that we can continue to add experienced frontline bankers
to our existing markets, which will drive our efficient growth.
We will continue to expand our franchise, but only
in a controlled manner and as permitted by our regulators. We may choose to open new locations, but only after rigorous due diligence
and substantial quantitative analysis regarding the financial and capital impacts of such investments. We may also seek to enter new metropolitan
markets contiguous to, or nearby, our current South Carolina footprint, such as our recently opened expansions in Greensboro and Charlotte,
North Carolina, but only after careful study and the identification and vetting of a local, senior level banking team with significant
experience and reputational strength in that market and receipt of any applicable regulatory approvals. We have not yet supplemented our
historic strategy of organic deposit and loan growth with traditional mergers or acquisitions. We evaluate potential acquisition opportunities
that we believe would be complementary to our business as part of our growth strategy. However, we have not yet identified any specific
acquisition opportunity that meets our strict requirements and do not have any immediate plans, arrangements or understandings relating
to any acquisition. Furthermore, we do not believe an acquisition is necessary to successfully drive our growth and execute our ClientFIRST
model.
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Lending Activities
General. We emphasize a range of lending
services, including real estate, commercial, and equity-line consumer loans to individuals and small- to medium-sized businesses and professional
firms that are located in or conduct a substantial portion of their business in our market area. Our underwriting standards vary for each
type of loan, as described below. Because loans typically provide higher interest yields than other types of interest-earning assets,
we invest a substantial percentage of our earning assets in our loan portfolio. At December 31, 2021, we had net loans of $2.46 billion,
representing 84.1% of our total assets.
We have focused our lending activities primarily
on the professional sector in each of our markets including doctors, dentists, and small business owners. By focusing on this client base
and by serving each client with a consistent relationship team of bankers, we have generated a loan portfolio with larger average loan
amounts than we believe is typical for a community bank. As of December 31, 2021, our average loan size was approximately $307,000. At
the same time, we have strived to maintain a diversified loan portfolio and limit the amount of our loans to any single client. As of
December 31, 2021, our ten largest client loan relationships represented approximately $254.5 million, or 10.22%, of our loan portfolio.
Loan Approval. Certain credit risks are
inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks
resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate
repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and client lending
limits, a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit
policies. Our loan approval policies provide for various levels of officer lending authority. When the amount of aggregate loans to a
single borrower exceeds an individual officer’s lending authority, the loan request will be considered for approval by a team of
officers led by a senior lender, or by the voting members of the Credit Approval Support Team (“CAST”) committee, based on
the loan amount. The CAST committee, which is comprised of a group of our senior commercial lenders, chief banking officer, and chief
executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted for approval by
the finance committee of our board or by the full board. We do not make any loans to any director or executive officer of the Bank unless
the loan is approved by the board of directors of the Bank and all loans to directors, officers and employees are on terms not more favorable
to such person than would be available to a person not affiliated with the Bank, consistent with federal banking regulations.
Management monitors exposure to credit risk from
potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations
of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods,
loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. These types of loans are subject to strict
underwriting standards and are more closely monitored than a loan with a low loan-to-value ratio. Furthermore, there are industry practices
that could subject us to increased credit risk should economic conditions change over the course of a loan’s life. For example,
we make variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon
payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks.
Credit Administration and Loan Review. We
maintain a continuous loan review system. We also apply a credit grading system to each loan, and we use an independent process to review
the loan files on a test basis to assess the grading of each loan. We periodically review performance benchmarks established by management
in the areas of nonperforming assets, charge-offs, past dues, and loan documentation. Each loan officer is responsible for each loan he
or she makes, regardless of whether other individuals or committees joined in the approval. This responsibility continues until the loan
is repaid or until the loan is officially assigned to another officer.
Lending Limits. Our lending activities are
subject to a variety of lending limits imposed by federal and state laws and regulations. In general, the Bank is subject to a legal limit
on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. Based upon the capitalization of the Bank
at December 31, 2021, the maximum amount we could lend to one borrower was $49.7 million. However, to mitigate concentration risk, our
internal lending limit at December 31, 2021 was $34.8 million and may vary based on our assessment of the lending relationship. The board
of directors will adjust the internal lending limit as deemed necessary to continue to mitigate risk and serve our clients. The Bank’s
legal lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital. We are able
to sell participations in our larger loans to other financial institutions, which allow us to manage the risk involved in these loans
and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.
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Loan Portfolio Segments. Our loan portfolio
is comprised of commercial and consumer loans made to small businesses and individuals for various business and personal purposes. While
our loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers, the principal component
of our loan portfolio is loans secured by real estate mortgages on either commercial or residential property. These loans will generally
fall into one of the following six categories: commercial owner occupied real estate, commercial non-owner occupied real estate, commercial
construction, consumer real estate, consumer construction, and home equity loans. We obtain a security interest in real estate whenever
possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. At
December 31, 2021, loans secured by first or second mortgages on commercial and consumer real estate made up approximately 85.5% of our
loan portfolio. In addition to loans secured by real estate, our loan portfolio includes commercial business loans and other consumer
loans which comprised 13.4% and 1.1%, respectively, of our total loan portfolio at December 31, 2021.
Interest rates for all real estate loan categories
may be fixed or adjustable, and will more likely be fixed for shorter-term loans. We generally charge an origination fee for each loan
which is taken into income over the life of the loan as an adjustment to the loan yield. Other loan fees consist primarily of late charge
fees. Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value
of real estate. Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively
affect a borrower’s cash flow, creditworthiness, and ability to repay the loan. Although, the loans are collateralized by real estate,
the primary source of repayment may not be the sale of real estate.
The following describes the types of loans in our
loan portfolio.
● cost overruns;
● mismanaged construction;
● inferior or improper construction techniques;
● economic changes or downturns during construction;
● a downturn in the real estate market;
● rising interest rates which may prevent sale of the property; and
● failure to sell completed projects in a timely manner.
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We attempt to reduce the risk associated
with construction loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project
at or below 80%.
We are eligible to offer small business
loans utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s
504 programs. These loans typically are partially guaranteed by the government, which helps to reduce their risk. Government guarantees
of SBA loans do not exceed, and are generally less than, 80% of the loan. As of December 31, 2021, we had originated one loan utilizing
government enhancements.
Deposit Services
Our principal source of funds is core deposits.
We offer a full range of deposit services, including checking accounts, commercial checking accounts, savings accounts, and other time
deposits of various types, ranging from daily money market accounts to long-term certificates of deposit. There were no out-of-market,
or wholesale, certificates of deposits at December 31, 2021. In an effort to obtain lower cost deposits, we have focused on expanding
our retail deposit program. We currently have 12 retail offices which assist us in obtaining low cost transaction accounts that are less
affected by rising rates. Deposit rates are reviewed regularly by our senior management. We believe that the rates we offer are competitive
with those offered by other financial institutions in our area. We focus on client service and our ClientFIRST culture to attract and
retain deposits.
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Other Banking Services
In addition to deposit and loan services,
we offer other bank services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment
and mobile banking services. We earn fees for most of these services, including debit and credit card transactions, sales of checks, and
wire transfers. We also receive ATM transaction fees from transactions performed by our clients. We are associated with the NYCE, Pulse,
STAR, and Cirrus networks, which are available to our clients throughout the country. Since we outsource our ATM services, we are charged
related transaction fees from our ATM service provider. We have contracted with Fidelity National Information Systems, an outside computer
service company, to provide our core data processing services and our ATM processing. By outsourcing these services, we believe we are
able to reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant
portion of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have
during the period. We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are
able to attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association
is critical to our success. We also offer Internet banking services, bill payment services, and cash management and mobile banking services.
Competition
The banking business is highly competitive, and
we experience competition in our market from many other financial institutions. Competition among financial institutions is based upon
interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality
and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative
lending limits. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance
companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional,
national, and international financial institutions that operate offices in Greenville, Columbia and Charleston, South Carolina; Charlotte,
Raleigh and Greensboro, North Carolina; Atlanta, Georgia and elsewhere.
As of June 30, 2021, the most recent date for which
market data is available, there were 34 financial institutions in our primary market of Greenville County, 25 financial institutions in
the Columbia market, 34 financial institutions in the Charleston market, 39 financial institutions in the Raleigh market, 24 financial
institutions in the Greensboro market, 47 financial institutions in the Charlotte market, and 81 financial institutions in the Atlanta
market. We compete with other financial institutions in our market areas both in attracting deposits and in making loans. In addition,
we have to attract our client base from other existing financial institutions and from new residents. Many of our competitors are well-established,
larger financial institutions with substantially greater resources and lending limits, such as, Bank of America, Wells Fargo, and Truist.
These institutions offer some services, such as extensive and established branch networks and trust services that we do not provide. In
addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies
and federally insured banks. We believe the financial services industry will likely continue to become more competitive as further technological
advances enable more financial institutions to provide expanded financial services without having a physical presence in our markets.
Because larger competitors have advantages in attracting business from larger corporations, we do not generally compete for that business.
Instead, we concentrate our efforts on attracting the business of individuals and small and medium-size businesses. With regard to such
accounts, we generally compete on the basis of client service and responsiveness to client needs, the convenience of our offices and hours,
and the availability and pricing of our products and services.
We believe our commitment to quality and personalized
banking services through our ClientFIRST culture is a factor that contributes to our competitiveness and success.
Employees
At December 31, 2021, we employed a total of 278
FTE employees. We provide our full-time employees and certain part-time employees with a comprehensive program of benefits, including
medical benefits, life insurance, long-term disability coverage and a 401(k) plan. Our employees are not represented by a collective bargaining
agreement. Management considers its employee relations to be excellent.
Available Information
We file
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the SEC which are accessible electronically
at the SEC’s website at www.sec.gov. We maintain an Internet website at www.southernfirst.com
where these reports can also be accessed free of charge. No information contained on our website is intended to be included as part of,
or incorporated by reference into, this Annual Report on Form 10-K.
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SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive
state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory
oversight of virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders.
Changes in applicable laws or regulations may have a material effect on our business and prospects.
The following discussion is not intended to be
a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It
is intended only to briefly summarize some material provisions. The following summary is qualified by reference to the statutory and regulatory
provisions discussed.
Legislative and Regulatory Developments
Although the 2008 financial crisis has now passed,
two legislative and regulatory responses – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) and the Basel III-based capital rules – will continue to have an impact on our operations.
In addition, newer regulatory developments implemented
in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and
the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, have had and will continue
to have an impact on our operations.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act
The Dodd-Frank Act was signed into law in July
2010 and impacts financial institutions in numerous ways, including:
● Granting new authority to the FDIC as liquidator and receiver,
● Changing the manner in which deposit insurance assessments are made,
● Requiring regulators to modify capital standards,
● Establishing the Consumer Financial Protection Bureau (the “CFPB”),
● Imposing more stringent requirements on mortgage lenders, and
● Limiting banks’ proprietary trading activities.
There are many provisions in the Dodd-Frank Act
mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued,
many remain to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial
condition and results of operations.
The Economic Growth, Regulatory Relief, and Consumer
Protection Act
On May 24, 2018, President Trump signed into law
the first major financial services reform bill since the enactment of the Dodd-Frank Act. The Economic Growth, Regulatory Relief,
and Consumer Protection Act (the “Reform Law”) modifies or eliminates certain requirements on community and regional banks
and nonbank financial institutions. For instance, under the Reform Act and related rule making:
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Basel Capital Standards
Regulatory capital rules known as Basel III impose
minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings
and loan associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank
holding companies,” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered
a “small bank holding company.” More stringent requirements are imposed on “advanced approaches” banking organizations-those
organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted
in to the Basel II capital regime.
The Basel III rules require the Bank to maintain
the following minimum capital requirements:
● a new common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%;
● a Tier 1 risk-based capital ratio of 6%;
● a total risk-based capital ratio of 8%; and
● a leverage ratio of 4%.
Under Basel III, Tier 1 capital includes two components:
CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital, consists solely of common stock (plus related surplus),
retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that
are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority
interests and grandfathered trust preferred securities (as discussed below). Tier 2 capital generally includes the allowance for loan
losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier 2 minority interests, less
any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred stock is included only
in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in total consolidated assets
to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 Capital
(but not in CET1 capital), subject to certain restrictions. AOCI is presumptively included in CET1 capital and often would operate to
reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for
covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, retained our
pre-existing treatment for AOCI.
In addition, in order to avoid restrictions on
capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a 2.5% “capital
conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of CET1 capital, but
the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The 2.5% capital conservation buffer
effectively results in the following minimum capital ratios (taking into account the capital conservation buffer): (i) a CET1 capital
ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
On December 21, 2018, the federal banking agencies
issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment
model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in
period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL;
and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking
organizations that are subject to stress testing. We are currently evaluating the impact the CECL model will have on our financial statements
and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses upon adoption of the new standard. We
currently anticipate early adopting the CECL model as of January 1, 2022, before the January 1, 2023 implementation date, at which time
we estimate there will be a charge to retained earnings of between $3.5 million to $7.0 million.
In November 2019, the federal banking regulators
published final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking
organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1,
2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets
and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total
consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying
community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying
community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater
than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules
and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal
regulator’s prompt corrective action rules, discussed below. We do not have any immediate plans to elect to use the community bank
leverage ratio framework but may make such an election in the future.
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As of December 31, 2021, the Bank was well-capitalized,