SFST

Business Context and Reporting Period

Southern First Bancshares, Inc. (SFST) is a South Carolina-based bank holding company operating primarily in South Carolina, North Carolina, and Georgia. This Form 10-Q covers the quarterly period ended June 30, 2024. The Company is an accelerated filer and is not a smaller reporting company. As of July 25, 2024, there were 8,155,097 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 22.0% year-over-year for Q2 2024 and 7.0% for the six-month period, driven by higher interest income and noninterest income.
• Net Interest Margin (NIM): NIM compressed to 1.98% in Q2 2024 from 2.05% in Q2 2023. This was caused by deposit costs rising faster than loan yields; the cost of interest-bearing liabilities increased 58 basis points, while the yield on interest-earning assets increased only 47 basis points.
• Asset Growth: Total assets grew 1.3% to $4.11 billion from December 31, 2023. Loans increased slightly to $3.62 billion, while deposits grew to $3.46 billion.
• Noninterest Income: Increased 28.8% in Q2 2024, primarily due to a 43.8% rise in mortgage banking income ($1.9 million) driven by higher volume.
• Noninterest Expense: Increased 7.2% in Q2 2024, largely due to higher compensation and benefits ($1.0 million increase) and outside service costs ($257,000 increase).
• Asset Quality: Nonperforming assets (NPAs) increased significantly to $11.2 million (0.31% of gross loans) from $4.0 million at year-end 2023. This increase was driven by two relationships totaling $6.9 million moving to nonaccrual status in Q2.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates continued pressure on net interest spread and margin as a significant portion of the loan portfolio is fixed-rate, while deposit accounts reprice more quickly with Federal Reserve rate changes.
• Unusual Items: In Q2 2024, the Company recorded a $1.0 million charge-off related to a single relationship in the assisted living industry. Additionally, nonaccrual loans increased by $7.3 million during the first half of 2024.
• Capital: The Company remains "well capitalized" with a Common Equity Tier 1 ratio of 11.22% and a Tier 1 leverage ratio of 8.59% as of June 30, 2024. No cash dividends have been paid since inception.
• Liquidity: The Company maintains strong liquidity with $194.8 million in cash and equivalents, $598.5 million in unused FHLB borrowing capacity, and $128.5 million in federal funds lines of credit.
• Risks: Key risks include interest rate volatility, credit losses due to real estate concentration (84.3% of loans), and potential increases in FDIC assessments following recent bank failures.

Investor Verification Checklist

• Asset Quality Trend: Verify the trajectory of nonperforming assets, which more than doubled from year-end 2023 to Q2 2024, and the adequacy of the allowance for credit losses (1.11% of loans).
• Margin Compression: Assess the sustainability of the net interest margin given the mismatch between fixed-rate loan assets and repricing deposit liabilities.
• Concentration Risk: Review the exposure to commercial real estate, which represents 25.3% of the loan portfolio, and the specific impact of the assisted living industry charge-off.
• Deposit Stability: Monitor the composition of deposits, noting that 38.3% are uninsured and 13.4% are wholesale deposits.
• Capital Ratios: Confirm that capital ratios remain well above regulatory minimums despite the increase in nonperforming assets.