| |
| · 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; |
| · restrictions or conditions imposed by our regulators on our operations; |
| · increases in competitive pressure in the banking and financial services industries; |
| · changes in the interest rate environment which could reduce anticipated or actual margins; |
| · our expectations regarding our operating revenues, expenses, effective tax rates and other results of operations; |
| · changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry; |
| · changes in economic conditions resulting in, among other things, a deterioration in credit quality; |
| · changes occurring in business conditions and inflation; |
| · changes in access to funding or increased regulatory requirements with regard to funding; |
| · increased cybersecurity risk, including potential business disruptions or financial losses; |
| · changes in deposit flows; |
| · changes in technology; |
| · our current and future products, services, applications and functionality and plans to promote them; |
| · 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; |
| · changes in accounting policies and practices; |
| · 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; |
| · our ability to maintain appropriate levels of capital and to comply with our capital ratiorequirements, including the potential that the regulatory agencies may require higher levels of capital above the current standard regulatory-mandated minimums and the impact of the capital rules under Basel III; |
| · our ability to attract and retain key personnel; |
| · loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions; |
| · our ability to retain our existing clients, including our deposit relationships; |
| · adverse changes in asset quality and resulting credit risk-related losses and expenses; and |
| · other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “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 our Annual Report on Form 10-K for the year ended December 31, 2013. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements 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.
OVERVIEW
We are a bank holding company headquartered in Greenville, South Carolina, and were incorporated in March 1999 under the laws of South Carolina. We provide a wide range of banking services and products to our clients through our wholly-owned subsidiary, Southern First Bank, a South Carolina state bank.
The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public. We currently have eight offices located in Greenville, Lexington, Richland, and Charleston Counties of South Carolina. In December 2012, we opened our Charleston office at 480 East Bay Street, Charleston, South Carolina and our third full-service office in Columbia, South Carolina. During the second quarter of 2013, we purchased a piece of property for a future full-service office in Mount Pleasant, South Carolina. This office will be our second office in the Charleston, South Carolina market, which is expected to open in mid-2014.
Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as “ClientFIRST.”
At March 31, 2014, we had total assets of $936.9 million, a 5.2% increase from total assets of $890.8 million at December 31, 2013. The largest components of our total assets are loans and securities which were $768.1 million and $74.7 million, respectively, at March 31, 2014. Comparatively, our loans and securities totaled $727.1 million and $73.6 million, respectively, at December 31, 2013. Our liabilities and shareholders’ equity at March 31, 2014 totaled $867.1 million and $69.8 million, respectively, compared to liabilities of $825.2 million and shareholders’ equity of $65.7 million at December 31, 2013. The principal component of our liabilities is deposits which were $722.4 million and $680.3 million at March 31, 2014 and December 31, 2013, respectively.
Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.
Our net income was $1.3 million and $961,000 for the three months ended March 31, 2014 and 2013, respectively, an increase of $289,000, or 30.1%. After our dividend payment to our preferred shareholders, net income to common shareholders was $1.1 million, or diluted earnings per share (“EPS”) of $0.22, for the first quarter of 2014 as compared to net income to common shareholders of $784,000, or diluted EPS of $0.18 for the same period in 2013. The increase in net income resulted primarily from increases in net interest income and noninterest income as well as a decrease in the provision for loan losses.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.
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Effect of Economic Trends
Markets in the United States and elsewhere have experienced extreme volatility and disruption since the latter half of 2007. While the economy as a whole has steadily improved since 2009, the weaker economic conditions are expected to continue into 2014. Financial institutions likely will continue to experience credit losses above historical levels and elevated levels of non-performing assets, charge-offs and foreclosures. In light of these conditions, financial institutions also face heightened levels of scrutiny from federal and state regulators. These factors negatively influenced, and likely will continue to negatively influence, earning asset yields at a time when the market for deposits is intensely competitive. As a result, financial institutions experienced, and may continue to experience, pressure on credit costs, loan yields, deposit and other borrowing costs, liquidity, and capital.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. For the three month period ended March 31, 2014 our net interest income was $7.6 million, an 11.1% increase over net interest income of $6.9 million for the same period in 2013. In comparison, our average earning assets increased 11.3%, or $86.4 million, during the first quarter of 2014 compared to the first quarter of 2013, while our interest bearing liabilities increased by $71.0 million during the same period. The increase in average earning assets is primarily related to an increase in average loans, partially offset by a decrease in investment securities, while the increase in average interest-bearing liabilities is primarily a result of an increase in interest bearing deposits, offset in part by a decrease in FHLB advances and other borrowings.
We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three month periods ended March 31, 2014 and 2013. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.
The following tables set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.
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Average Balances, Income and Expenses, Yields and Rates
| | | | | | | | |
| |
| For the Three Months Ended March 31, |
| 2014 | | 2013 |
(dollars in thousands) | Average
Balance | Income/
Expense | Yield/
Rate(1) | | Average
Balance | Income/
Expense | Yield/
Rate(1) |
Interest-earning assets | | | | | | | |
Federal funds sold | $ 25,010 | $ 14 | 0.24% | | $ 23,405 | $ 14 | 0.24% |
Investment securities, taxable | 50,488 | 359 | 2.88% | | 60,509 | 308 | 2.06% |
Investment securities, nontaxable (2) | 23,848 | 248 | 4.22% | | 25,081 | 252 | 4.07% |
Loans | 753,630 | 8,818 | 4.75% | | 657,616 | 8,265 | 5.10% |
Total interest-earning assets | 852,976 | 9,439 | 4.49% | | 766,611 | 8,839 | 4.68% |
Noninterest-earning assets | 48,666 | | | | 43,586 | | |
Total assets | $901,642 | | | | $810,197 | | |
Interest-bearing liabilities | | | | | | | |
NOW accounts | $150,936 | 59 | 0.16% | | $160,051 | 124 | 0.31% |
Savings & money market | 162,849 | 120 | 0.30% | | 118,579 | 81 | 0.28% |
Time deposits | 273,248 | 501 | 0.74% | | 222,894 | 601 | 1.09% |
Total interest-bearing deposits | 587,033 | 680 | 0.47% | | 501,524 | 806 | 0.65% |
FHLB advances and other borrowings | 124,128 | 940 | 3.07% | | 138,642 | 973 | 2.85% |
Junior subordinated debentures | 13,403 | 80 | 2.42% | | 13,403 | 86 | 2.60% |
Total interest-bearing liabilities | 724,564 | 1,700 | 0.95% | | 653,569 | 1,865 | 1.16% |
Noninterest-bearing liabilities | 108,075 | | | | 91,945 | | |
Shareholders’ equity | 69,003 | | | | 64,683 | | |
Total liabilities and shareholders’ equity | $901,642 | | | | $810,197 | | |
Net interest spread | | | 3.54% | | | | 3.52% |
Net interest income (tax equivalent) / margin | | $7,739 | 3.68% | | | $6,974 | 3.69% |
Less: tax-equivalent adjustment (2) | | 95 | | | | 96 | |
Net interest income | | $7,644 | | | | $6,878 | |
| | | | | | | |
(1)
Annualized for the three month period.
(2)
The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
Our net interest margin, on a tax-equivalent basis, was 3.68% for the three months ended March 31, 2014 compared to 3.69% for the first quarter of 2013. The slight decrease in net interest margin as compared to the same period in 2013, was driven primarily by a 19 basis point reduction in the yield of our interest-earning assets, offset in part by a 21 basis point reduction in the cost of our interest-bearing liabilities.
Our interest-earning assets increased by $86.4 million as compared to the same quarter in 2013, while the yield on these assets decreased by 19 basis points. The decline in yield on our interest earning assets was driven primarily by reduced yields on our loan portfolio due to loans being originated or renewed at market rates which are lower than those in the past. Our average loan balances increased by $96.0 million as of the first quarter of 2014, compared to the same period in 2013, while our loan yield decreased by 35 basis points during the same period.
While our interest-bearing liabilities increased by $71.0 million during the first quarter of 2014 as compared to the first quarter of 2013, our interest expense decreased by $165,000 due to a 21 basis point decline in the rate paid on these liabilities. During the past 12 months, we have continued to reduce rates on all of our deposit products as the Federal funds target rate has remained at a historical low. Consequently, the cost of our interest bearing deposits decreased 18 basis points from the first quarter of 2013. We do not anticipate a significant reduction in the rates on our deposits or FHLB advances and other borrowings in the future, as these rates are currently at historically low rates.
Our net interest spread was 3.54% for the three months ended March 31, 2014 compared to 3.52% for the same period in 2013. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 21 basis point reduction in rate on our interest-bearing liabilities, partially offset by a 19 basis point decline in yield on our earning assets, resulted in a 2 basis point increase in our net interest spread for the 2014 period.
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Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
| | | | | | | | | |
| |
| Three Months Ended |
| March 31, 2014 vs. 2013 | | March 31, 2013 vs. 2012 |
| Increase (Decrease) Due to | | Increase (Decrease) Due to |
(dollars in thousands) | Volume | Rate | Rate/
Volume | Total | | Volume | Rate | Rate/
Volume | Total |
Interest income | | | | | | | | | |
Loans | $ 1,201 | (565) | (83) | 553 | | $ 542 | (241) | (22) | 279 |
Investment securities | (61) | 125 | (16) | 48 | | (87) | (7) | 1 | (93) |
Federal funds sold | 1 | (1) | - | - | | 1 | (1) | - | - |
Total interest income | 1,141 | (441) | (99) | 601 | | 456 | (249) | (21) | 186 |
Interest expense | | | | | | | | | |
Deposits | 136 | (224) | (38) | (126) | | 57 | (491) | (22) | (456) |
FHLB advances and other borrowings | (96) | 71 | (8) | (33) | | 151 | (221) | (27) | (97) |
Junior subordinated debt | - | (6) | - | (6) | | - | (10) | - | (10) |
Total interest expense | 40 | (159) | (46) | (165) | | 208 | (722) | (49) | (563) |
Net interest income | $ 1,101 | (282) | (53) | 766 | | $ 248 | 473 | 28 | 749 |
| | | | | | | | | |
Net interest income, the largest component of our income, was $7.6 million for the three month period ended March 31, 2014 and $6.9 million for the three months ended March 31, 2013, a $766,000, or 11.1% increase during the first quarter of 2014. The increase in net interest income is due to a $601,000 increase in interest income, combined with a $165,000 decrease in interest expense. During the first quarter of 2014, the primary driver of the increase in net interest income was the $86.4 million increase in our average interest-earning assets as compared to the first quarter of 2013.
Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under “Balance Sheet Review – Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.
For the three months ended March 31, 2014 and 2013, we incurred a noncash expense related to the provision for loan losses of $1.0 million and $1.1 million, respectively, resulting in an allowance for loan losses of $10.7 million and $9.4 million for the 2014 and 2013 periods, respectively. The slightly lower provision for loan losses during the 2014 period relates primarily to the overall improvement in the credit quality of our loan portfolio during the first three months of 2014. The $10.7 million allowance represented 1.38% of gross loans at March 31, 2014 while the $9.4 million allowance was 1.41% of gross loans at March 31, 2013.
During the past twelve months, our loan balances increased by $113.6 million, while the amount of our nonperforming loans remained unchanged and our classified loans declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.
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Noninterest Income
The following table sets forth information related to our noninterest income.
| | | | | |
| | | |
| | | Three months ended March 31, |
(dollars in thousands) | | | | 2014 | 2013 |
Loan fee income | | | | $ 342 | 259 |
Service fees on deposit accounts | | | | 213 | 225 |
Income from bank owned life insurance | | | | 162 | 160 |
Other income | | | | 252 | 238 |
Total noninterest income | | | | $ 969 | 882 |
| | | | | |
Noninterest income increased $87,000, or 9.9%, in the first quarter of 2014 as compared to the same period in 2013. The increase in total noninterest income during this 2014 period resulted primarily from the following:
·
Loan fee income increased $83,000, or 32.0%, resulting primarily from increased mortgage origination fee income of $304,000.
·
Service fees on deposit accounts decreased $12,000, or 5.3%, primarily related to reduced income from service charges on our checking, money market, and savings accounts and a decrease in NSF fee income.
·
Other income increased by $14,000, or 5.9%, due primarily to increased income received from ATM and debit card transactions which is volume driven and increased rent income from tenants at our Knox Abbott location. Offsetting these increases was a $19,000 decrease in ACH processing fees related primarily to one client account.
In accordance with the requirements set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in June 2011, the Federal Reserve approved the final rule which caps an issuer's base fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule does not apply to institutions with less than $10 billion in assets, such as our Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $143,000 and $119,000 for the three months ended March 31, 2014 and 2013, respectively.
Noninterest expenses
The following table sets forth information related to our noninterest expenses.
| | | | | | |
| | | | |
| | | Three months ended March 31, |
(dollars in thousands) | | | | 2014 | 2013 |
Compensation and benefits | | | | $ 3,410 | 2,952 |
Occupancy | | | | 727 | 707 |
Real estate owned activity | | | | 13 | 20 |
Data processing and related costs | | | | 594 | 576 |
Insurance | | | | 192 | 240 |
Marketing | | | | 201 | 186 |
Professional fees | | | | 223 | 181 |
Other | | | | 409 | 368 |
Total noninterest expense | | | | $ 5,769 | 5,230 |
| | | | | |
Noninterest expense was $5.8 million for the three months ended March 31, 2014, a $539,000, or 10.3%, increase from noninterest expense of $5.2 million for the three months ended March 31, 2013.
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The increase in total noninterest expenses resulted primarily from the following:
·
Compensation and benefits expense increased $458,000, or 15.5%, relating primarily to increases in base compensation and benefits expenses. Base compensation increased by $302,000 driven by the cost of nine additional employees, five of which were hired in relation to the expansion of our mortgage operations, with the remainder being hired to support our loan and deposit growth, combined with annual company-wide salary increases. Incentive compensation, which is based on certain targeted financial performance goals met by management, increased by $24,000, while benefit expenses increased by $141,000 during the same period, compared to the first quarter of the prior year.
·
Occupancy expenses increased $20,000, or 2.8%, driven by increased depreciation, utilities and maintenance expenses.
·
Data processing and related costs increased 3.1%, or $18,000, primarily related to increased ATM and debit card network fees, as well as increased courier fees for services we provide to our clients.
·
Marketing expenses increased by $15,000, or 8.1%, driven by an increase in community sponsorships and business development expenses.
·
Professional fees increased 23.2%, or $42,000, related to increased legal and consulting fees.
·
Other expenses increased by $41,000, or 11.1%, primarily related to increased collection costs, offset in part by reduced office supplies expense and litigation settlement costs.
Partially offsetting these increases in noninterest expense were decreases resulting from:
·
Real estate owned activity decreased by $7,000, or 35.0%, due primarily to lower expenses related to properties we hold.
·
Insurance expense decreased by $48,000, or 20.0%, due toa reduction in regulator fees resulting from the Bank’s change from a national charter to a South Carolina state charter.
Our efficiency ratio, excluding gains on sale of investment securities and real estate owned activity, was 66.8% for the first quarter of 2014 compared to 67.1% for the same period in 2013. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio improved slightly during the 2014 period primarily due the increase in net interest income as compared to the prior year.
We incurred income tax expense of $594,000 for the three months ended March 31, 2014 as compared to $444,000 during the same period in 2013. Our effective tax rate was 32.2% and 31.6% for the three months ended March 31, 2014 and 2013, respectively. The increase in income tax expense during the 2014 period is primarily a result of the increase in our net income during the respective period.
BALANCE SHEET REVIEW
Investment Securities
At March 31, 2014, the $74.7 million in our investment securities portfolio represented approximately 8.0% of our total assets. We held investment securities with a fair value of $68.7 million and an amortized cost of $69.6 million resulting in an unrealized loss of $877,000. At December 31, 2013, the $73.6 million in our investment securities portfolio represented approximately 8.3% of our total assets. At December 31, 2013, we held investment securities with a fair value of $67.4 million and an amortized cost of $69.5 million for an unrealized loss of $2.0 million.
Loans
Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the three months ended March 31, 2014 and 2013 were $753.6 million and $657.6 million, respectively. Before the allowance for loan losses, total loans outstanding at March 31, 2014 and December 31, 2013 were $778.8 and $737.3 million, respectively.
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The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2014, our loan portfolio included $627.5 million, or 80.6%, of real estate loans. As of December 31, 2013, real estate loans made up 80.6% of our loan portfolio and totaled $594.6 million. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $84.2 million as of March 31, 2014, of which approximately 41% were in a first lien position, while the remaining balance was second liens, compared to $78.5 million as of December 31, 2013, with approximately 37% in first lien positions. The average loan had a balance of approximately $84,000 and a loan to value of 70% as of March 31, 2014, compared to an average loan balance of $105,000 and a loan to value of approximately 67% as of December 31, 2013. Further, 0.15% and 0.10% of our total home equity lines of credit were over 30 days past due as of March 31, 2014 and December 31, 2013, respectively.
Following is a summary of our loan composition at March 31, 2014 and December 31, 2013. Of the $41.5 million in loan growth during the first quarter of 2014, $17.6 million was originated in the Greenville market, $8.6 million originated in the Columbia market, and $15.4 million originated in the Charleston market. In addition, $32.9 million of the increase was in loans secured by real estate, and $8.4 million in commercial business loans.
| | | | | |
| | | |
| March 31, 2014 | | December 31, 2013 |
(dollars in thousands) | Amount | % of Total | | Amount | % of Total |
Commercial | | | | | |
Owner occupied RE | $188,944 | 24.3% | | $185,129 | 25.1% |
Non-owner occupied RE | 174,899 | 22.5% | | 166,016 | 22.5% |
Construction | 38,162 | 4.9% | | 30,906 | 4.2% |
Business | 138,077 | 17.7% | | 129,687 | 17.6% |
Total commercial loans | 540,082 | 69.4% | | 511,738 | 69.4% |
Consumer | | | | | |
Real estate | 120,597 | 15.4% | | 114,201 | 15.5% |
Home equity | 84,185 | 10.8% | | 78,479 | 10.6% |
Construction | 20,710 | 2.7% | | 19,888 | 2.7% |
Other | 13,224 | 1.7% | | 12,961 | 1.8% |
Total consumer loans | 238,716 | 30.6% | | 225,529 | 30.6% |
Total gross loans, net of deferred fees | 778,798 | 100.0% | | 737,267 | 100.0% |
Less—allowance for loan losses | (10,713) | | | (10,213) | |
Total loans, net | $768,085 | | | $727,054 | |
| | | | | |
Nonperforming assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. As of March 31, 2014 and December 31, 2013, we had no loans 90 days past due and still accruing.
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Following is a summary of our nonperforming assets, including nonaccruing TDRs.
| | | | |
| | | | |
(dollars in thousands) | | March 31, 2014 | | December 31, 2013 |
Commercial | | $ 2,959 | | 3,198 |
Consumer | | 530 | | 156 |
Nonaccruing troubled debt restructurings | | 5,365 | | 4,983 |
Total nonaccrual loans | | 8,854 | | 8,337 |
Other real estate owned | | 1,148 | | 1,198 |
Total nonperforming assets | | $10,002 | | $9,535 |
| | | | |
At March 31, 2014, nonperforming assets were $10.0 million, or 1.07% of total assets and 1.28% of gross loans. Comparatively, nonperforming assets were $9.5 million, or 1.07% of total assets and 1.29% of gross loans at December 31, 2013. Nonaccrual loans increased $517,000 to $8.9 million at March 31, 2014 from $8.3 million at December 31, 2013. Nonaccrual loans at March 31, 2014 include two loans which were put on nonaccrual status during the first three months of 2014. In addition, during the first three months of 2014, one nonaccrual loan was returned to accrual status and two nonaccrual loans were either fully or partially charged-off. The amount of foregone interest income on the nonaccrual loans in the first three months of 2014 and 2013 was approximately $148,000 and $237,000, respectively.
Nonperforming assets include other real estate owned which decreased by $50,000 from December 31, 2013. During the first three months of 2014, we sold two real estate lots for $50,000. The balance at March 31, 2014 includes four commercial properties totaling $1.1 million and two residential properties totaling $64,000. All of these properties are located in the Upstate of South Carolina. We believe that these properties are appropriately valued at the lower of cost or market as of March 31, 2014.
At March 31, 2014 and 2013, the allowance for loan losses represented 120.99% and 148.55% of the total amount of nonperforming loans, respectively. A significant portion, or 93%, of nonperforming loans at March 31, 2014 is secured by real estate. Our nonperforming loans have been written down to approximately 67% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $10.7 million as of March 31, 2014 to be adequate.
As a general practice, most of our loans are originated with relatively short maturities of less than 10 years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the same credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperforming after evaluating the loan’s collateral value and financial strength of its guarantors. Nonperforming loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases the Company will seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, the Company will typically seek performance under the guarantee.
In addition, at March 31, 2014, 80.6% of our loans are collateralized by real estate and 86.1% of our impaired loans are secured by real estate. The Company utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Company to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of March 31, 2014, we do not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.
As of March 31, 2014, impaired loans totaled $16.4 million for which $13.4 million of these loans have a reserve of approximately $5.1 million allocated in the allowance. During the first three months of 2014, the average
34
recorded investment in impaired loans was approximately $16.5 million. Comparatively,impaired loans totaled $16.4 million at December 31, 2013, and $14.1 million of these loans had a reserve of approximately $4.7 million allocatedin the allowance. During 2013, the average recorded investment in impaired loans was approximately $16.1 million.
We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of March 31, 2014, we determined that we had loans totaling $12.9 million, that we considered TDRs. As of December 31, 2013, we had loans totaling $13.0 million, that we considered TDRs.
Allowance for Loan Losses
The allowance for loan losses was $10.7 million and $9.4 million at March 31, 2014 and 2013, respectively, or 1.38% and 1.41% of outstanding loans, respectively. At December 31, 2013, our allowance for loan losses was $10.2 million, or 1.39% of outstanding loans, and we had net loans charged-off of $2.4 million for the year ended December 31, 2013.
During the three months ended March 31, 2014, we charged-off $512,000 of loans and recorded $12,000 of recoveries on loans previously charged-off, for net charge-offs of $500,000, or 0.27% of average loans, annualized. Comparatively, we charged-off $944,000 million of loans and recorded $95,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $849,000, or 0.52% of average loans, annualized, for the first three months of 2013.
Following is a summary of the activity in the allowance for loan losses.
| | | | |
| | | | |
| Three months ended March 31, | | Year ended |
(dollars in thousands) | 2014 | 2013 | | December 31, 2013 |
Balance, beginning of period | $ 10,213 | 9,091 | | 9,091 |
Provision | 1,000 | 1,125 | | 3,475 |
Loan charge-offs | (512) | (944) | | (2,478) |
Loan recoveries | 12 | 95 | | 125 |
Net loan charge-offs | (500) | (849) | | (2,353) |
Balance, end of period | $ 10,713 | 9,367 | | 10,213 |
| | | | |
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits, advances from the FHLB, and structured repurchase agreements. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. We have adopted guidelines regarding our use of brokered deposits that limit such deposits to 25% of total deposits and dictate that our current interest rate risk profile determines the terms. In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.
Our retail deposits represented $661.0 million, or 91.5%, of total deposits at March 31, 2014, while our out-of-market, or brokered, deposits represented $61.4 million, or 8.5%, of total deposits. At December 31, 2013, retail deposits represented $617.0 million, or 90.7%, of our total deposits and brokered CDs were $63.3 million, representing 9.3% of our total deposits. Of the $44.0 million increase in retail deposits during the first three months of 2014, $25.3 million is related to the Greenville market, $9.0 million is related the Columbia market, and $9.8 million is related to the Charleston market. Our loan-to-deposit ratio was 108% at March 31, 2014 andDecember 31, 2013.
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The following table shows the average balance amounts and the average rates paid on deposits.
| | | | | | |
| | |
| Three months ended March 31, |
| 2014 | | 2013 |
(dollars in thousands) | Amount | Rate | | Amount | Rate |
Noninterest bearing demand deposits | $101,776 | -% | | 85,380 | -% |
Interest bearing demand deposits | 150,936 | 0.16% | | 160,051 | 0.32% |
Money market accounts | 155,660 | 0.31% | | 112,377 | 0.29% |
Savings accounts | 7,189 | 0.09% | | 6,202 | 0.10% |
Time deposits less than $100,000 | 69,753 | 0.73% | | 78,492 | 0.96% |
Time deposits greater than $100,000 | 203,495 | 0.75% | | 144,402 | 1.16% |
Total deposits | $688,809 | 0.40% | | 586,904 | 0.56% |
| | | | | |
During the twelve months ended March 31, 2014, our average transaction account balances increased by $51.6 million, or 14.2%, from the three months ended March 31, 2013. In addition, our average time deposit balances increased by $50.4 million, or 22.6%, during the 2014 period, due primarily to a $49.7 million increase in average brokered deposits. In addition, during the past 12 months, we have continued to reduce the rates we pay on our interest-bearing deposits, as these deposits repriced; however, we do not anticipate a significant reduction in our deposit costs in the future.
During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $100,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $519.9 million and $481.8 million at March 31, 2014 and December 31, 2013, respectively. Included in time deposits of $100,000 or more at March 31, 2014 is $44.2 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 0.59%.
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 2014 was as follows:
| |
| |
(dollars in thousands) | March 31, 2014 |
Three months or less | $ 27,683 |
Over three through six months | 27,298 |
Over six through twelve months | 62,700 |
Over twelve months | 84,868 |
Total | $202,549 |
| |
At March 31, 2014, the Company had $124.1 million in FHLB advances and other borrowings. Of the $124.1 million, FHLB advances represented $103.5 million, securities sold under structured agreements to repurchase represented $19.2 million, and a line of credit represented $1.4 million. During the first three months of 2014, we restructured five FHLB advances totaling $59.5 million. In accordance with accounting guidance, we determined that the present value of the cash flows of the modified advance will not change by more than 10% from the present value of the cash flows of the original advances. Therefore, the modified FHLB advance is considered to be a restructuring and no gain or loss was recorded in the transaction. The original FHLB advances had a weighted rate of 2.31% and an average remaining life of 40 months. Under the modified arrangement, the $59.5 million in FHLB advances have a weighted average rate of 2.22% and an average remaining life of 43 months.
36
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At March 31, 2014 and December 31, 2013, our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $42.5 million and $39.2 million, or 4.5% and 4.4% of total assets, respectively. Our investment securities at March 31, 2014 and December 31, 2013 amounted to $74.7 million and $73.6 million, or 8.0% and 8.3% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately 32% of these securities are pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash. In addition, approximately 44% of our investment securities are pledged to secure client deposits.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain three federal funds purchased lines of credit with correspondent banks totaling $45.0 million for which there were no borrowings against the lines of credit at March 31, 2014.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, 2014 was $75.5 million, based on the Bank’s $5.5 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity.
We believe that our existing stable base of core deposits, borrowings from the FHLB, and short-term repurchase agreements will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.
Total shareholders’ equity at March 31, 2014 was $69.8 million. At December 31, 2013, total shareholders’ equity was $65.7 million. The $4.1 million increase from December 31, 2013 is primarily related to the $6.2 million proceeds from the issuance of 475,000 shares of common stock in a private placement and net income of $1.3 million, partially offset by the repurchase of 4,057 shares of preferred stock for $4.1 million.
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average assets) annualized for the three months ended March 31, 2014 and the year ended December 31, 2013. Since our inception, we have not paid cash dividends.
| | | |
| | | |
| March 31, 2014 | | December 31, 2013 |
Return on average assets | 0.56% | | 0.61% |
Return on average equity | 7.35% | | 7.88% |
Return on average common equity | 7.58% | | 8.81% |
Average equity to average assets ratio | 7.65% | | 7.74% |
Tangible common equity to assets ratio | 6.25% | | 5.65% |
| | | |
37
Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.
At both the holding company and bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. As of March 31, 2014, our capital ratios exceed those required to be well-capitalized.
In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency each approved final rules to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Act. The rules will apply to all national and state banks, such as the Bank, and savings associations and most bank holding companies and savings and loan holding companies, such as the Company, which we collectively refer to herein as “covered banking organizations.” Bank holding companies with less than $500 million in total consolidated assets are not subject to the final rules, nor are savings and loan holding companies substantially engaged in commercial activities or insurance underwriting. The framework requires covered banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking institutions. In terms of quality of capital, the final rules emphasize common equity Tier 1 capital and implement strict eligibility criteria for regulatory capital instruments. The final rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity. The requirements in the rules begin to phase in on January 1, 2015 for covered banking organizations such as the Company and the Bank. The requirements in the rules will be fully phased in by January 1, 2019. The ultimate impact of the new capital standards on the Company and the Bank is currently being reviewed.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.
| | | | | | |
| | |
| | March 31, 2014 |
| Actual | For capital
adequacy purposes
minimum | To be well capitalized
under prompt
corrective
action provisions
minimum |
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital (to risk weighted assets) | $ 92,085 | 11.97% | 61,538 | 8.0% | 76,922 | 10.0% |
Tier 1 Capital (to risk weighted assets) | 82,456 | 10.72% | 30,769 | 4.0% | 46,153 | 6.0% |
Tier 1 Capital (to average assets) | 82,456 | 9.17% | 35,987 | 4.0% | 44,983 | 5.0% |
| | | | | | |
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The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.
| | | | | | |
| | |
| | March 31, 2014 |
| Actual | For capital
adequacy purposes
minimum | To be well capitalized
under prompt
corrective
action provisions
minimum |
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital (to risk weighted assets) | $92,983 | 12.09% | 61,538 | 8.0% | N/A | N/A |
Tier 1 Capital (to risk weighted assets) | 83,354 | 10.84% | 30,769 | 4.0% | N/A | N/A |
Tier 1 Capital (to average assets) | 83,354 | 9.24% | 36,066 | 4.0% | N/A | N/A |
| | | | | | |
The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Further, the Company cannot pay cash dividends on its common stock during any calendar quarter unless full dividends on the Series T preferred stock for the dividend period ending during the calendar quarter have been declared and the Company has not failed to pay a dividend in the full amount of the Series T preferred stock with respect to the period in which such dividend payment in respect of its common stock would occur.
EFFECT OF INFLATION AND CHANGING PRICES
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
OFF-BALANCE SHEET RISK
Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2014, unfunded commitments to extend credit were $161.9 million, of which $51.7 million was at fixed rates and $110.3 million was at variable rates. At December 31, 2013, unfunded commitments to extend credit were $138.7 million, of which approximately $32.6 million was at fixed rates and $106.1 million was at variable rates. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At March 31, 2014 and December 31, 2013, there was a $3.2 million and $3.0 million, respectively, commitment under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
A portion of our business is to originate mortgage loans that will be sold in the secondary market to investors. Loan types that we originate include conventional loans, jumbo loans and other governmental agency loan products. We
39
adhere to the legal lending limits and guidelines as set forth by the various governmental agencies and investors to whom we sell loans. Under a “best efforts” selling procedure, we make our best effort to process, fund, and deliver the loan to a particular investor. If the loan fails to fund, there is no immediate cost to us, as the market risk has been transferred to the investor. In the event of a customer loan default, we may be required to reimburse the investor.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
MARKET RISK AND INTEREST RATE SENSITIVITY
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
As of March 31, 2014, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.
| | |
Interest rate scenario | | Change in net interest
income from base |
Up 300 basis points | | 13.35 % |
Up 200 basis points | | 7.74 % |
Up 100 basis points | | 3.44 % |
Base | | - |
Down 100 basis points | | (5.22)% |
Down 200 basis points | | (9.26)% |
Down 300 basis points | | (11.58)% |
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2013, as filed in our Annual Report on Form 10-K.
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Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
ACCOUNTING, REPORTING, AND REGULATORY MATTERS
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by us:
In January 2014, the FASB amended the Receivables—Troubled Debt Restructurings by Creditors subtopic of the Codification to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments clarify the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity Risk.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
41
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the company’s financial position, results of operations or cash flows.
Item 1A RISK FACTORS.
Not applicable
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
Item 4. MINE SAFETY DISCLOSURES.
Not applicable
Item 5. OTHER INFORMATION.
Not applicable
Item 6. EXHIBITS.
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
|
| | SOUTHERN FIRST BANCSHARES, INC. |
| | Registrant |
| | |
| | |
Date: May 5, 2014 | | /s/R. Arthur Seaver, Jr. |
| | R. Arthur Seaver, Jr. |
| | Chief Executive Officer (Principal Executive Officer) |
| | |
| | |
Date: May 5, 2014 | | /s/Michael D. Dowling |
| | Michael D. Dowling |
| | Chief Financial Officer (Principal Financial and Accounting Officer) |
43
INDEX TO EXHIBITS
| | |
|
Exhibit
Number | | Description |
10.1 | | Form of Securities Purchase Agreement by and among Southern First Bancshares, Inc. and the other signatories thereto, dated as of January 27, 2014 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed January 28, 2014). |
| | |
10.2 | | Form of Registration Rights Agreement by and among Southern First Banchsares, Inc. and the other signatories thereto, dated as of January 27, 2014 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed January 28, 2014). |
| | |
31.1 | | Rule 13a-14(a) Certification of the Principal Executive Officer. |
| | |
31.2 | | Rule 13a-14(a) Certification of the Principal Financial Officer. |
| | |
32 | | Section 1350 Certifications. |
| | |
101 | | The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements. |
| | |
44
