Executive Summary / Key Takeaways

• Southern First Bancshares delivered robust first-quarter 2025 results, marked by a significant increase in net income and earnings per share, primarily driven by strong net interest income growth.
• The expansion in the net interest margin was a key highlight, resulting from a decrease in interest expense, particularly on deposits, coupled with growth in the loan portfolio and an increase in loan yields.
• The company maintains a solid balance sheet with healthy capital ratios exceeding regulatory requirements, positioning it as "well capitalized" despite ongoing uncertainties in the broader banking environment.
• SFST's client-focused, relationship-based banking model, known as "ClientFIRST," serves as a core strategic differentiator in its competitive Southeastern markets, fostering customer loyalty amidst pressure from larger, more digitally-focused institutions.
• While facing competitive pressures on deposit costs and potential risks from interest rate fluctuations and commercial real estate exposure, the company's liquidity position, supported by diverse funding sources including the IntraFi network and FHLB capacity, appears robust.

Unpacking Southern First's Strategic Position and First Quarter Momentum

Southern First Bancshares, Inc. (NASDAQ: SFST) operates as a regional bank holding company, primarily through its wholly-owned subsidiary, Southern First Bank. Since its founding in 1999, the company has carved out a presence in the attractive growth markets of the Southeast, spanning key regions in South Carolina, North Carolina, and Georgia. At its core, SFST's strategy revolves around a deeply client-focused model, leveraging dedicated relationship teams to provide personalized service. This "ClientFIRST" approach is central to its culture and is viewed by management as a distinct competitive advantage, aiming to build lasting client relationships in contrast to the more transactional models often employed by larger institutions.

The banking industry landscape is intensely competitive, with SFST vying for market share against a mix of national giants like PNC Financial Services Group (PNC) and U.S. Bancorp (USB), larger regional players such as Fifth Third Bank (FITB) and Truist Financial Corporation (TFC), and other community banks. While these larger competitors often boast extensive branch networks, significant balance sheet scale, and advanced digital platforms, SFST differentiates itself through localized expertise and a high-touch service model. This allows SFST to potentially achieve higher customer loyalty and retention rates in its specific operating areas, even if it means higher operating costs per unit compared to the economies of scale enjoyed by national banks. The competitive pressure is particularly acute in attracting and retaining deposits, where the prevailing rate environment necessitates competitive pricing.

In terms of technology, a bank's capabilities are crucial for both operational efficiency and customer service. The article does not detail proprietary, cutting-edge technological breakthroughs akin to those in manufacturing or software development, but it indicates that SFST incurs costs related to "Outside service and data processing," including "software licensing and maintenance." This suggests reliance on standard, likely third-party, banking technology solutions necessary to support its operations, such as ATM processing, mortgage banking systems, and presumably online/mobile banking platforms to serve its clients. The strategic intent behind these technology investments appears to be enabling the core relationship banking model and maintaining operational soundness, rather than leading with digital innovation as a primary competitive moat, which is a strength often highlighted by larger peers like FITB and USB with their "advanced digital platforms" and "faster processing." Quantifiable benefits of SFST's specific technology stack beyond general operational support are not detailed.

Building from this foundation, SFST's historical journey has seen geographic expansion into its current footprint. Past acquisition activity is mentioned, but the core strategic narrative remains centered on organic growth driven by its relationship model within these target markets. This strategy appears to be yielding positive results in the current environment.

The first quarter of 2025 demonstrated significant momentum for Southern First. Net income surged to $5.3 million, a substantial increase from $2.5 million in the same period of 2024. This translated to diluted earnings per share of $0.65, up from $0.31 year-over-year. The primary catalyst for this improved profitability was a notable increase in net interest income, which rose by 25.4% to $23.4 million in Q1 2025 from $18.6 million in Q1 2024.

This growth in net interest income was fueled by a combination of factors. Interest expense decreased by $3.5 million, largely due to lower rates paid on interest-bearing deposits. Concurrently, interest income increased by $1.3 million, benefiting from growth in the average balance of the loan portfolio and a modest increase in the average loan yield (up 15 basis points to 5.20%). The average yield on total interest-earning assets saw a smaller increase (up 10 basis points to 5.12%), partially tempered by a decrease in yields on federal funds sold and interest-bearing deposits.

The favorable shift in funding costs relative to asset yields resulted in a significant expansion of the net interest margin (on a tax-equivalent basis), which climbed 47 basis points to 2.41% in Q1 2025 from 1.94% in Q1 2024. The net interest spread also widened by 56 basis points to 1.60%. This margin improvement is a critical indicator of the bank's ability to effectively price its assets and liabilities in the current rate environment.

Noninterest income also contributed positively, increasing by 16.9% to $3.1 million. This was primarily driven by a 22.3% increase in mortgage banking income, reflecting higher mortgage volume, and a 39.3% increase in service fees on deposit accounts, attributed to commercial credit card and wire fee income.

Operating expenses saw a more modest increase of 4.1% to $18.8 million. The rise was mainly due to higher compensation and benefits ($447,000 increase), increased outside service and data processing costs ($191,000 increase, related to software and client services), and other expenses ($156,000 increase, including deposit account and fraud losses). Professional fees decreased, partially offsetting these increases. The improved revenue performance outpaced expense growth, leading to a better efficiency ratio of 71.1% in Q1 2025 compared to 84.9% in Q1 2024.

Looking at the balance sheet, total assets grew to $4.28 billion at March 31, 2025, up 4.8% from $4.09 billion at December 31, 2024. Loans, net of deferred fees, remained the largest asset component, increasing by 1.44% or $52.2 million during the quarter to $3.68 billion. This growth was notably driven by a $39.6 million increase in consumer loans secured by real estate, particularly high-quality 1-4 family loans. Real estate loans continue to dominate the portfolio, representing 83.7% of total loans.

Credit quality indicators show a relatively stable picture. Nonperforming assets totaled $11 million at March 31, 2025, compared to $10.9 million at December 31, 2024, representing 0.26% and 0.27% of total assets, respectively. Nonaccrual loans were $10.8 million and $10.9 million at the respective dates. The allowance for credit losses stood at $40.7 million, or 1.10% of outstanding loans, providing coverage of 378.09% of nonperforming loans. The company transitioned its ACL estimation methodology to a discounted cash flow (DCF) approach in Q1 2025, which management believes allows for better estimation through loan segmentation and reduced reliance on qualitative factors, although it resulted in a shift in allocation towards the consumer portfolio due to longer weighted average lives.

Funding remains a critical focus. Total deposits increased to $3.62 billion from $3.44 billion during the quarter. The company emphasizes growing core deposits but also utilizes wholesale funding, including brokered CDs (limited to 30% of total deposits) and the IntraFi Promontory Network, which provides access to aggregate FDIC insurance for large deposits and serves as an additional liquidity tool. Uninsured deposits were estimated at $1.4 billion, or 38.5% of total deposits, at March 31, 2025. Beyond deposits, SFST utilizes FHLB advances ($240 million outstanding) and has significant unused borrowing capacity from the FHLB ($774.7 million available). The holding company also maintains an unused $15 million line of credit to support the bank's capital.

Capital levels remain strong. As of March 31, 2025, the Bank's capital ratios (Total Capital, Tier 1 Capital, Common Equity Tier 1 Capital, and Tier 1 Leverage) all significantly exceeded the minimum requirements to be considered well capitalized under prompt corrective action provisions. The company's consolidated ratios also remain robust. Total shareholders' equity increased by $7.2 million during the quarter, driven by net income, equity compensation, and a decrease in accumulated other comprehensive loss.

Outlook and Risks

Management anticipates continued pressure on the net interest spread and net interest margin in future periods, primarily due to the competitive rate environment surrounding deposits. The company's interest rate sensitivity analysis forecasts potential impacts on net interest income from hypothetical rate changes over the next twelve months. While this is based on specific assumptions, it indicates that a 100 basis point upward shift could increase net interest income by 1.46%, while a 100 basis point downward shift could decrease it by 4.62%. More significant rate movements (200-300 bps) show larger potential impacts, highlighting the inherent interest rate risk.

Several risks could impact SFST's performance and the investment thesis. Economic risks include further changes in interest rates, potential credit losses (especially given the concentration in real estate loans and ongoing concerns around commercial real estate values), and broader market volatility. Regulatory risks are ever-present, with potential changes impacting capital requirements or operations. Competition for both loans and deposits remains intense. The ability to attract and retain deposits in a rising or volatile rate environment is crucial for funding and managing interest expense. While credit quality metrics are currently stable, a downturn in regional or national economic conditions could lead to increased delinquencies and charge-offs, adversely impacting the allowance for credit losses and capital ratios. The successful execution of the company's growth strategy in its target markets and the effective integration of new personnel, such as the recently appointed Chief Credit Officer and new board members, are also factors to monitor.

Conclusion

Southern First Bancshares demonstrated solid execution in the first quarter of 2025, translating its relationship-focused strategy into tangible financial results. The significant expansion in net interest income and margin, coupled with improved efficiency, underscores the bank's ability to perform effectively in the current economic climate. While the competitive landscape and potential impacts of interest rate fluctuations and credit quality remain pertinent considerations, SFST's strong capital and liquidity positions provide a degree of resilience. The company's continued emphasis on its client-centric model in growing Southeastern markets, supported by necessary operational technology and prudent risk management practices, forms the core of the investment narrative. Investors should weigh the positive momentum reflected in the recent financial performance against the inherent risks and competitive dynamics of the banking sector.