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 September 30, 2024. The Company is classified as an accelerated filer and is not a smaller reporting company. As of October 29, 2024, there were 8,159,847 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 6.9% year-over-year for Q3 2024, driven by higher net interest income and noninterest income, partially offset by increased noninterest expenses.
• Net Interest Income: Increased $1.25 million (6.4%) in Q3 2024 compared to Q3 2023. The Net Interest Margin (TE) expanded 11 basis points to 2.08% due to higher yields on interest-earning assets (up 34 bps) outpacing the increase in cost of funds (up 30 bps).
• Asset Quality: Nonperforming assets increased significantly to $11.58 million (0.32% of gross loans) from $3.96 million at year-end 2023. This increase was primarily due to two commercial relationships totaling $6.9 million moving to nonaccrual status in Q2 2024.
• Provision for Credit Losses: No provision was recorded for Q3 2024, compared to a $0.5 million reversal in Q3 2023. For the nine months ended September 30, 2024, a provision of $0.33 million was recorded, compared to $2.24 million in the prior year period.
• Noninterest Income: Increased 15.5% to $3.18 million in Q3 2024, led by a 20% increase in mortgage banking income.
• Noninterest Expenses: Increased 4.3% to $18.04 million in Q3 2024, driven by higher compensation and benefits and data processing costs.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued pressure on net interest spread and margin due to competitive deposit rates and potential Federal Reserve rate cuts. The Company maintains a "ClientFIRST" culture and focuses on core deposit growth.
• Liquidity: The Company maintains strong liquidity with $260.6 million in cash and cash equivalents. It has $716.7 million in unused borrowing capacity at the FHLB and $172.8 million available at the Federal Reserve Discount Window.
• Capital: The Bank remains "well capitalized," exceeding all regulatory minimums. Total Capital ratio was 12.50% and Tier 1 Leverage ratio was 8.70% as of September 30, 2024.
• Risks: Key risks include interest rate volatility, credit losses from real estate concentrations (84.4% of loans), and potential increases in FDIC assessments. The Company utilizes fair value swaps to hedge interest rate risk on a portion of its loan portfolio.
• Unusual Items: The increase in nonaccrual loans is a notable deviation from the prior year's low levels, though the allowance for credit losses remains well-covered at 346.78% of nonperforming loans.

Investor Verification Checklist

• Nonperforming Asset Spike: Verify the specific details and collateral coverage of the two commercial relationships ($6.9 million) that moved to nonaccrual in Q2 2024.
• Deposit Composition: Review the shift in deposit mix, noting the increase in wholesale deposits (time deposits >$250k) to 16.7% of total deposits and the reliance on higher-cost funding.
• Commercial Real Estate Exposure: Assess the concentration risk in non-owner occupied commercial real estate, which represents 25.3% of the loan portfolio and 257.3% of total risk-based capital.
• Interest Rate Sensitivity: Review the ALCO stress testing results indicating a potential 9.34% decrease in net interest income if rates rise 300 basis points.
• Allowance Adequacy: Confirm the sufficiency of the $40.2 million allowance given the recent deterioration in asset quality, despite the high coverage ratio.