Executive Summary / Key Takeaways

• Southern First Bancshares (SFST) demonstrates robust financial performance, with net income surging over 97% year-over-year in Q3 2025 and diluted EPS more than doubling, driven by significant net interest income growth and margin expansion.
• The company's client-focused "ClientFIRST" model and strategic expansion into high-growth Southeastern markets underpin its consistent loan and deposit growth, reinforcing its regional market position.
• SFST's adoption of a Discounted Cash Flow (DCF) methodology for Allowance for Credit Losses (ACL) represents a key technological differentiator, enhancing risk management and asset quality estimation through advanced economic modeling.
• Despite broader industry uncertainties stemming from inflation and commercial real estate concerns, SFST maintains a strong liquidity profile and remains well-capitalized, supported by diverse funding sources and prudent capital management.
• The company's outlook is positive, with analysts projecting steady earnings per share for 2025 and an improving asset quality, positioning SFST for continued growth amidst a dynamic interest rate environment.

The Enduring Strength of a Client-First Regional Bank

Southern First Bancshares, Inc. (SFST), established in 1999 with its subsidiary Southern First Bank, has carved a distinct niche in the competitive Southeastern banking landscape. From its origins in South Carolina's Greenville, Columbia, and Charleston markets, the company has strategically expanded its footprint into key growth areas, including Charlotte, the Triangle and Triad regions of North Carolina, and Atlanta, Georgia. This expansion is not merely geographic; it is deeply rooted in a "ClientFIRST" business model, which emphasizes dedicated relationship teams providing personalized banking services. This approach fosters strong customer loyalty and is considered a significant competitive advantage in an industry often characterized by standardized offerings.

The broader banking industry has recently contended with a complex financial environment, marked by the liquidity challenges and bank failures observed in 2023. These events, exacerbated by rising interest rates impacting long-term investment securities, prompted regulatory interventions to stabilize the system. Currently, the sector continues to grapple with ongoing inflationary pressures and persistent concerns surrounding commercial real estate values and refinancing risks. Against this backdrop, SFST's foundational strengths, including its localized market expertise and client-centric culture, are crucial in maintaining stability and driving growth.

Technological Edge in Risk Management

While many financial institutions focus on customer-facing digital innovations, Southern First Bancshares has implemented a critical technological differentiator in its internal risk management framework. In the first quarter of 2025, the company refined its methodology for estimating the Allowance for Credit Losses (ACL) on loans, transitioning from a lifetime probability of default and loss given default model to a more sophisticated Discounted Cash Flow (DCF) approach. This shift allows for a superior estimation of credit losses through customized loan segmentation.

The DCF model leverages regression techniques that correlate national gross domestic product (GDP) and unemployment rates with historical default rates across various portfolios, enabling more robust and supportable forecasts for future losses. This advanced analytical capability reduces reliance on qualitative factors, allowing for more granular analysis by segment. Furthermore, the DCF methodology incorporates prepayment assumptions and the weighted average life of the loan portfolio, providing a more dynamic and comprehensive assessment of potential credit losses. For investors, this technological advancement in financial modeling translates into enhanced risk management, more accurate financial reporting, and improved capital allocation, ultimately bolstering the company's financial stability and investor confidence in its asset quality. The company noted that this change in accounting estimate did not have a material effect on its financial statements, indicating a smooth and effective implementation.

Strategic Growth and Financial Resilience

Southern First Bancshares' strategic initiatives have translated into compelling financial performance. For the third quarter of 2025, the company reported a substantial 33.70% increase in net interest income, reaching $27.50 million, compared to $20.60 million in the same period of 2024. This impressive growth was primarily fueled by a $3.80 million rise in interest income from interest-earning assets and a $3.10 million decrease in interest expense on interest-bearing liabilities. The net interest margin, on a tax-equivalent basis, expanded significantly by 54 basis points to 2.62% in Q3 2025, up from 2.08% in Q3 2024. This margin improvement was largely attributed to a 59 basis point decrease in the cost of interest-bearing liabilities, a direct benefit from the 125 basis point decrease in the Fed Funds rate over the preceding twelve months.

The company's loan portfolio, a primary driver of interest income, grew by $157.30 million, or an annualized 4.33%, during the first nine months of 2025, reaching $3.79 billion. This growth was broadly diversified, with notable increases in consumer real estate loans ($71.10 million), commercial owner-occupied loans ($53.80 million), and commercial business loans ($48.30 million). Deposits also saw healthy expansion, increasing by 6.98% to $3.68 billion by September 30, 2025, with retail deposits constituting a significant 84.60% of the total. This focus on core deposit growth is a strategic imperative to provide a stable funding source for its expanding loan portfolio.

Noninterest income also contributed positively, increasing by 13.40% to $3.60 million in Q3 2025. Mortgage banking income, the largest component of noninterest income, rose by 10.40% to $1.60 million, while service fees on deposit accounts surged by 37.40%, driven by commercial credit card fees and wire income. Despite a 5% increase in noninterest expenses to $18.90 million, primarily due to compensation and data processing costs, the company's efficiency ratio improved to 66.20% in Q3 2025 from 75.90% in Q3 2024, reflecting better operational leverage from increased net interest income.

Competitive Landscape and Strategic Positioning

Southern First Bancshares operates in a highly competitive regional banking environment, vying for market share against larger regional players like Regions Financial Corporation (RF), First Citizens BancShares (FCNCA), and Truist Financial Corporation (TFC), as well as a growing number of indirect competitors such as fintech companies and online banks. While larger rivals benefit from extensive branch networks, diversified service offerings, and often more advanced digital platforms, SFST differentiates itself through its "ClientFIRST" philosophy and deep local market penetration.

SFST's personalized service model fosters strong customer loyalty, which can lead to more robust growth in recurring revenue through long-term deposits and loans. This approach allows SFST to effectively compete in niche segments where larger, more standardized operations may fall short. The company's regulatory licenses also provide a foundational competitive advantage, ensuring market access and capital efficiency while deterring new entrants. However, SFST's smaller scale can lead to higher operating costs per customer compared to the economies of scale enjoyed by larger competitors. Furthermore, while SFST has innovated in risk management with its DCF model, it may face challenges in matching the speed and breadth of customer-facing technological advancements offered by its larger and more digitally-focused rivals. The company's use of the IntraFi Promontory Network, which provides access to aggregate FDIC insurance, is a strategic move to attract and retain large, insurance-conscious deposits, offering a competitive funding option against both traditional and wholesale sources.

Outlook and Risk Considerations

The outlook for Southern First Bancshares remains positive, underpinned by its strong Q3 2025 performance. Analysts project the company to earn $3.05 per share for the fiscal year ending December 2025, with the Zacks Consensus Estimate for earnings increasing by 14% over the past three months. This positive sentiment is driven by expectations of continued loan and deposit growth in its high-growth Southeastern markets, improving asset quality, and potential for further net interest margin expansion as interest rates adjust. The company's proactive management of its interest rate risk, as evidenced by its sensitivity analysis, suggests a degree of preparedness for varying rate environments. For instance, a hypothetical 300 basis point upward shift in interest rates is estimated to increase net interest income by 6.96%, while a 300 basis point downward shift could result in a 3.02% decrease.

However, the company acknowledges several pertinent risks. The financial environment remains uncertain due to ongoing inflationary pressures and persistent concerns regarding commercial real estate values and refinancing risks. While lower interest rates could stimulate loan demand, they also pose a risk of compressing net interest margins. The Federal Reserve's continued balance sheet reduction could also contribute to funding and market volatility. SFST's loan portfolio, with 83% collateralized by real estate, presents a concentration risk, although management believes its capital is sufficient to withstand an extended economic recession. The company's liquidity position, bolstered by $282.90 million in cash and equivalents, unused federal funds lines, and substantial FHLB borrowing capacity, provides a robust buffer against unexpected funding needs. As of September 30, 2025, SFST's capital ratios exceed all regulatory minimums, affirming its "well capitalized" status.

Conclusion

Southern First Bancshares stands as a compelling regional banking entity, demonstrating remarkable resilience and growth in a dynamic economic landscape. Its unwavering commitment to a client-centric model, coupled with strategic market expansion, has consistently driven strong loan and deposit growth. The company's forward-thinking adoption of a Discounted Cash Flow methodology for credit loss estimation highlights a commitment to robust risk management and analytical precision, providing a solid foundation for asset quality. Despite the broader industry headwinds of inflation and commercial real estate uncertainty, SFST's prudent financial management, strong liquidity, and well-capitalized position underscore its operational strength. The positive analyst outlook, combined with the company's strategic focus on core deposit growth and effective interest rate risk management, positions Southern First Bancshares for continued success, making it an attractive consideration for discerning investors seeking exposure to a well-managed regional bank with a clear path for sustained performance.