SOUTHERN FIRST BANCSHARES INC SEC 10-K Report

Southern First Bancshares Inc., a prominent community bank operating in key markets across South Carolina, North Carolina, and Georgia, has released its annual 10-K report. The report highlights the company's robust financial performance, strategic initiatives, and the challenges it faces in the current economic environment. Southern First Bancshares continues to emphasize its ClientFIRST model, focusing on delivering superior client service through relationship teams and investing in technology to maintain a competitive edge.

Financial Highlights

• Total Interest Income: $201.2 million, driven by an increase in average interest-earning assets and higher yields on those assets.
• Net Interest Income: $81.2 million, a 4.6% increase from the previous year, primarily due to a $23.6 million increase in interest income.
• Net Income Available to Common Shareholders: $15.5 million, reflecting a 15.7% increase from the previous year, primarily due to an increase in net interest income and noninterest income.
• Diluted EPS: $1.91, up from $1.66 in the previous year, indicating improved profitability per share.
• Noninterest Income: $12.1 million, a 23.1% increase from the previous year, driven by higher mortgage banking income and service fees on deposit accounts.

Business Highlights

• ClientFIRST Model: Southern First Bancshares operates using a ClientFIRST model, emphasizing a simple and efficient banking style focused on core banking products and services. This model is structured to deliver superior client service through relationship teams, providing each client with a specific banker contact and a consistent support team.
• Geographical Performance: The company operates in key markets including Greenville, Columbia, and Charleston in South Carolina; Charlotte, Raleigh, and Greensboro in North Carolina; and Atlanta, Georgia. These markets are characterized by significant economic activity and growth potential, providing opportunities for client base expansion.
• IT and Technology Investments: Significant investments have been made in IT systems and technology offerings, including mobile banking, online banking, and cash management solutions, which are considered industry-leading among community banks. These investments are aimed at driving low-cost deposit growth and maintaining a competitive advantage.
• Dream Mortgage Center: In 2023, Southern First Bancshares opened the Dream Mortgage Center in Columbia, South Carolina. This loan production center is designed to facilitate homebuyer education, community events, and provide access to mortgage lending experts.
• Loan Portfolio Composition: As of December 31, 2024, the loan portfolio is diversified across commercial and consumer loans, with a significant portion secured by real estate. Commercial real estate loans make up 43.4% of the portfolio, while consumer real estate loans account for 36.7%.
• Risk Management: The company maintains a rigorous risk management infrastructure, focusing on credit risk management, compliance risk, and cybersecurity risk. This includes a continuous loan review system and a credit grading system to ensure strong loan quality and minimal credit losses.
• Employee and Management Structure: The company employs 297 full-time equivalent employees and is led by an experienced management team. The ClientFIRST culture is supported by a series of weekly meetings to align employees with the company's vision and strategy.
• Future Outlook: Southern First Bancshares plans to continue its focus on profitable and efficient growth, providing a distinctive client experience, and maintaining a robust risk management infrastructure. The company is also open to potential acquisition opportunities that align with its business strategy.

Strategic Initiatives

• Liquidity Management: The company has focused on maintaining a stable liquidity position by managing its asset and liability mix through asset/liability management practices. This includes monitoring sources and uses of funds to meet cash flow requirements while maximizing profits. The company has also engaged in strategic borrowing from the Federal Home Loan Bank (FHLB) and other financial institutions to support its liquidity needs.
• Capital Management: The company has actively managed its capital structure by redeeming $11.5 million of its outstanding subordinated debt, which was initially issued to qualify as Tier 2 capital for regulatory purposes. Additionally, the company has maintained a strong capital position with total shareholders' equity increasing to $330.4 million, supported by net income and stock option exercises. The company has not paid cash dividends since its inception, focusing instead on reinvesting earnings to support growth.
• Future Outlook: The company plans to continue its focus on liquidity management by leveraging its stable base of core deposits, federal funds purchased lines of credit, and borrowings from the FHLB. It also intends to explore additional funding options through the IntraFi Promontory Network to attract and retain large deposits. The company anticipates ongoing pressure on its net interest spread and margin due to the repricing of deposits in response to changes in the federal funds rate, and it plans to manage this through strategic asset and liability repricing.

Challenges and Risks

• Economic Conditions: The company faces significant risks related to economic conditions, particularly in its primary markets in South Carolina, North Carolina, and Georgia. Continued regional economic uncertainty, exacerbated by persistent inflation, supply chain disruptions, and subdued consumer spending, increases risks in these areas. The company's financial performance is highly dependent on the business environment in these local markets, which may differ from the broader U.S. economy.
• Real Estate Market: A significant portion of the company's loan portfolio is secured by real estate, with approximately 84% of loans having real estate as collateral. A weakening real estate market could lead to increased defaults and reduced collateral values, adversely affecting profitability and asset quality.
• Credit Risk: The company is exposed to credit risk, particularly with commercial real estate loans, which comprise 55.4% of the loan portfolio. These loans are riskier due to their dependence on the successful operation of the property and the borrower's income stream. Regulatory scrutiny on commercial real estate lending could also curtail growth and affect earnings.
• Liquidity Pressures: Increased competition for deposits and volatility in wholesale funding markets are concerns. The company relies on brokered deposits, which may not be as stable as other types of deposits, potentially affecting liquidity and net interest margin.
• Regulatory Risks: Extensive regulation affects operations, with recent developments increasing compliance costs, particularly in areas such as cybersecurity, data privacy, and anti-money laundering. Changes in federal regulatory agency leadership and policies could further impact the regulatory environment.
• Operational Risks: Reliance on third-party vendors for key business infrastructure could affect operations if these vendors experience difficulties. The company also faces risks from potential errors, omissions, or fraudulent behavior by employees or third parties.
• Cybersecurity Threats: Growing concerns about cybersecurity threats could disrupt operations and damage reputation. The company has increased spending on systems and controls to detect and prevent fraud, but these investments may prove insufficient.
• Interest Rate Risk: The company is subject to interest rate risk, with a significant portion of its loan portfolio in fixed-rate loans. Changes in interest rates could negatively impact net interest income. The Federal Reserve's monetary policies and the shape of the yield curve are critical factors influencing interest rate risk. Inflationary pressures and rising prices may also affect the company's financial condition and results of operations.

SEC Filing: SOUTHERN FIRST BANCSHARES INC [ SFST ] - 10-K - Mar. 03, 2025