Southern First Bancshares: A Relationship-Driven Ascent Amidst Shifting Tides (NASDAQ:SFST) - SFST Stock Research Report

## Executive Summary / Key Takeaways * Relationship-Centric Growth: Southern First Bancshares (SFST) distinguishes itself through its "ClientFIRST" model, emphasizing personalized service and relationship banking across its expanding Southeastern footprint, which underpins its stable deposit base and loan growth. * Robust Financial Rebound: The company demonstrated significant financial improvement in Q2 2025, with net income surging by 119.4% year-over-year, primarily driven by a substantial 29.5% increase in net interest income and a 52 basis point expansion in net interest margin. * Strategic Funding and Liquidity: SFST maintains a strong liquidity profile, supported by a high proportion of retail deposits (84.6% of total deposits), diverse borrowing capacities, and strategic use of networks like IntraFi Promontory to manage funding and attract large deposits. * Adapting to Market Dynamics: While benefiting from falling Fed Funds rates, SFST anticipates continued pressure on net interest margins due to a competitive deposit environment and remains vigilant regarding broader economic uncertainties, including commercial real estate values. * Operational Efficiency and Credit Management: The company improved its efficiency ratio to 67.5% in Q2 2025 and refined its allowance for credit losses (ACL) methodology to a discounted cash flow (DCF) approach, enhancing risk estimation and demonstrating proactive credit quality management. ## A Foundation Built on Relationships: SFST's Core Strategy and Market Presence Southern First Bancshares, Inc. (SFST), established in 1999 with Southern First Bank as its cornerstone, has cultivated a distinct identity in the competitive regional banking landscape. From its Greenville, South Carolina headquarters, SFST has strategically expanded its footprint to 13 locations across key markets in South Carolina (Columbia, Charleston), North Carolina (Charlotte, Triangle, Triad regions), and Atlanta, Georgia. This expansion has broadened its reach for its core business: accepting demand and savings deposits and providing commercial, consumer, and mortgage loans to the general public. SFST's overarching strategy is deeply rooted in its "ClientFIRST" culture, which prioritizes exceptional client service through dedicated relationship teams. This model aims to provide clients with a single banker contact and a supportive team, fostering a consistent and superior level of professional service. This client-focused approach is not merely a slogan; it is a fundamental differentiator that SFST believes provides a distinct competitive advantage, aiming to build strong, lasting relationships that translate into a stable deposit base and quality loan portfolio. The broader financial services industry is currently navigating a complex environment. The banking sector experienced significant liquidity challenges and rising interest rates in 2023, leading to notable bank failures. While the immediate disruptions have largely stabilized, the financial environment remains uncertain, marked by ongoing inflationary pressures and persistent concerns surrounding commercial real estate (CRE) values and refinancing risks. In early 2025, the Federal Reserve began lowering interest rates, a move that can stimulate loan demand but also potentially compress net interest margins. The Federal Reserve's continued balance sheet reduction further contributes to funding and market volatility. SFST's relationship-driven model is designed to provide resilience in such an environment, emphasizing client retention and prudent risk management. ## Competitive Dynamics and Strategic Positioning SFST operates in a highly competitive regional banking market, contending with both larger, more diversified financial institutions and other community-focused banks. Key direct competitors include First Citizens BancShares (TICKER:FCNCA), Truist Financial Corporation (TICKER:TFC), Regions Financial Corporation (TICKER:RF), and Synovus Financial Corp. (TICKER:SNV). SFST's "ClientFIRST" model and localized approach stand in contrast to the more acquisitive growth strategies of larger players like FCNCA, which has shown robust balance sheets and diversified portfolios through mergers. While FCNCA leverages its wider network and rapid access to new technologies, SFST aims for greater efficiency in serving small to mid-sized businesses through its direct customer relationships. Similarly, against Truist Financial (TFC), a behemoth with an extensive geographic footprint and diverse digital offerings, SFST's streamlined, regionally tailored services offer a simpler, potentially more cost-effective solution for local customers. TFC's scale allows for superior profitability and resilience, but SFST's niche market positioning can foster stronger customer loyalty. Compared to regional peers like Regions Financial (RF) and Synovus Financial (SNV), SFST shares a similar Southeastern focus. RF emphasizes commercial and consumer banking with strong lending expertise, while SNV targets middle-market businesses with investments in digital tools. SFST's strength lies in its community ties and operational agility, which enable effective service in niche segments. However, SFST's smaller scale compared to these larger regional banks can limit its investment in innovation and lead to higher relative costs. For instance, SFST's Net Profit Margin (TTM) of 10.25% is lower than FCNCA's 19% and RF's 20%, reflecting the scale advantages of its larger competitors. Its Price to Sales Ratio (TTM) of 1.61 is also lower than FCNCA's 2.03 and TFC's 2.38, indicating a potentially more conservative valuation relative to revenue.

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\ SFST's competitive advantages, or "moats," include its strong local brand, which fosters customer loyalty and recurring revenue, and its regulatory licenses, which enable access to regional markets and support capital efficiency. These advantages help SFST compete by offering tailored services that counter the broader, more standardized offerings of larger banks. However, SFST faces vulnerabilities due to its smaller scale, which can lead to higher operating costs and potentially lower margins. This makes it challenging to match the revenue expansion of acquisitive competitors. ## Technology: An Enabler, Not a Primary Differentiator While SFST's core competitive advantage stems from its human-centric "ClientFIRST" model, technology plays a crucial supporting role in enabling this strategy and enhancing operational efficiency. The company provides standard digital banking services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment, and mobile banking. Investments in technology are evident in the increased "outside service and data processing costs," which rose by 11.6% in Q2 2025, primarily due to "software licensing and maintenance costs, item processing, and electronic banking." However, SFST's technology is not presented as a unique, proprietary differentiator that provides a quantifiable competitive moat in itself. Instead, the competitive analysis suggests that SFST may face "technological gaps" when compared to rivals who have invested in more "advanced digital tools" and "tech investments," potentially impacting SFST's "innovation speed." This implies that SFST's technology strategy is focused on maintaining competitive parity and supporting its relationship-based service model, rather than leading with groundbreaking technological innovation. For investors, this means that while technology is essential for SFST's operations, its primary value proposition remains its personalized service and strong community ties, rather than a distinct technological edge. A notable operational refinement, though not a customer-facing technological differentiator, is the company's transition in Q1 2025 to a discounted cash flow (DCF) approach for estimating its allowance for credit losses (ACL). This new methodology utilizes regression techniques that relate economic factors like national GDP and unemployment rates to default rates, allowing for more customized and granular credit loss estimation. This internal enhancement improves SFST's risk management capabilities, contributing to financial stability, though it did not have a material effect on the financial statements in the period of change. ## Financial Performance and Operational Strength SFST's recent financial performance underscores the effectiveness of its strategy in a dynamic interest rate environment. For the three months ended June 30, 2025, net income to common shareholders surged to $6.581 million, a remarkable 119.4% increase from $2.999 million in the same period of 2024. Diluted earnings per share (EPS) followed suit, rising to $0.81 from $0.37. This robust growth was primarily fueled by a significant increase in net interest income, which climbed 29.5% year-over-year to $25.30 million.

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\ The improvement in net interest income was largely a result of effective liability management. The net interest margin (tax-equivalent) expanded by 52 basis points to 2.50% in Q2 2025, compared to 1.98% in Q2 2024. This expansion was driven by a 55 basis point decrease in the rate on interest-bearing liabilities, primarily due to a 60 basis point reduction in the weighted average rate on interest-bearing deposits. This favorable trend was influenced by the 100 basis point decrease in the Fed Funds rate during late 2024. Concurrently, average interest-earning assets grew by $79.10 million, with a 14 basis point increase in loan yield, contributing to the overall yield on assets rising by six basis points to 5.18%. The loan portfolio demonstrated healthy growth, increasing by $115.10 million during the first six months of 2025, an annualized growth rate of 6.39%. This expansion was primarily driven by a $69.60 million increase in consumer real estate loans and a $33.50 million increase in commercial business loans. As of June 30, 2025, total gross loans stood at $3.75 billion, up from $3.63 billion at December 31, 2024. Real estate loans constitute a significant portion of the portfolio, representing 83.2% of total loans. The company maintains a conservative approach to credit quality, with nonperforming assets at $11.70 million, or 0.27% of total assets, as of June 30, 2025. The allowance for credit losses (ACL) stood at $41.30 million, covering 362.35% of nonperforming loans, reflecting management's belief in sufficient collateral and proactive risk assessment. Noninterest income, while a smaller component, saw mixed results. Mortgage banking income, the largest noninterest revenue stream, decreased by 18.4% in Q2 2025 due to lower mortgage volume. However, this was partially offset by a strong 36.3% increase in service fees on deposit accounts, driven by commercial credit card fees and wire fee income. Noninterest expenses increased by 3.7% in Q2 2025, primarily due to higher compensation and benefits and increased outside service and data processing costs. Despite these increases, the company's efficiency ratio improved significantly to 67.5% in Q2 2025 from 80.9% in Q2 2024, largely attributable to the robust growth in net interest income. ## Liquidity, Capital, and Forward Outlook SFST maintains a robust liquidity and capital position, crucial for a regional bank operating in an uncertain economic climate. As of June 30, 2025, cash and cash equivalents totaled $271.00 million, representing 6.3% of total assets. The company's primary funding sources are deposits and Federal Home Loan Bank (FHLB) advances. Retail deposits form the bedrock of its funding, accounting for 84.6% of total deposits, ensuring a relatively stable and cost-effective base. The loan-to-deposit ratio was 103% at June 30, 2025, indicating a balanced funding structure.

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\ To manage liquidity, SFST has access to diverse borrowing capacities, including $128.50 million in federal funds purchased lines of credit (unused), $199.70 million available with the Federal Reserve Discount Window, and $824.40 million in unused borrowing capacity from the FHLB. The company also strategically leverages the IntraFi Promontory Network to attract and retain large, insurance-conscious deposits, providing an additional, uncollateralized funding option. The holding company further benefits from an unused $15.00 million line of credit, which can support the subsidiary bank's capital ratios if needed. SFST's capital ratios remain strong and well above regulatory minimums. As of June 30, 2025, the Bank's capital ratios exceeded all regulatory requirements, maintaining its "well capitalized" status under prompt corrective action provisions. This strong capital base provides a buffer against potential future credit losses and supports continued loan growth. Looking ahead, management anticipates "continued pressure on our net interest spread and net interest margin in future periods based on the competitive rate environment around our deposits." This suggests that while recent rate cuts have been beneficial, the competition for deposits will likely intensify, potentially offsetting some of the positive impacts. For the fiscal year ending December 2025, analysts project earnings of $3.05 per share, reflecting an upward trend in earnings estimates over the past three months, with the Zacks Consensus Estimate increasing by 14%. The company also does not expect the recently enacted One Big Beautiful Bill Act (OBBBA) to have a material impact on its 2025 estimated annual effective tax rate or consolidated financial statements. Key risks to monitor include the concentration of real estate loans (83.2% of total loans), particularly non-owner occupied commercial real estate loans, which represent 241.1% of the Bank's total risk-based capital. While management believes collateral is sufficient to minimize future losses, a downturn in the real estate market or refinancing risks could impact asset quality. The ongoing uncertainty in the financial environment, including inflationary pressures and the Federal Reserve's balance sheet reduction, also poses potential challenges to loan demand and funding costs. ## Conclusion Southern First Bancshares presents a compelling investment narrative centered on its deeply ingrained "ClientFIRST" relationship model, which has consistently driven growth and fostered a resilient financial profile. The company's strong Q2 2025 performance, marked by significant net interest income growth and margin expansion, demonstrates its ability to capitalize on favorable interest rate dynamics and effectively manage its cost of funds. While SFST's technological investments primarily serve to enable its core service model rather than provide a unique competitive moat, its focus on personalized client relationships and prudent risk management remains its key differentiator in a competitive regional banking market. Despite anticipated pressures on net interest margins from a competitive deposit environment and ongoing uncertainties in commercial real estate, SFST's robust liquidity, strong capital ratios, and proactive credit quality management position it for continued stability. The positive analyst outlook for 2025 earnings further reinforces confidence in its trajectory. For discerning investors, SFST represents an opportunity to invest in a well-managed regional bank that leverages its relationship-driven culture to navigate market complexities and deliver consistent financial performance.