10-Q 1 sfst4399411-10q.htm QUARTERLY REPORT
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2024
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to
Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina   58-2459561
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
6 Verdae Boulevard    
Greenville, S.C.   29607
(Address of principal executive offices)   (Zip Code)

864-679-9000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock SFST The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x
Non-accelerated filer o Smaller Reporting Company o
    Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,159,847 shares of common stock, par value $0.01 per share, were issued and outstanding as of October 29, 2024.

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
September 30, 2024 Form 10-Q

INDEX

  Page
PART I – CONSOLIDATED FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statements of Income 4
     
  Consolidated Statements of Comprehensive Income 5
     
  Consolidated Statements of Shareholders’ Equity 6
     
  Consolidated Statements of Cash Flows 7
     
  Notes to Unaudited Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
     
Item 4. Controls and Procedures 44
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 45
     
Item 1A. Risk Factors 45
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
     
Item 3. Defaults upon Senior Securities 45
     
Item 4. Mine Safety Disclosures 45
     
Item 5. Other Information 45
     
Item 6. Exhibits 45

2

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

             
 
   September 30,   December 31, 
(dollars in thousands, except share data)  2024   2023 
   (Unaudited)   (Audited) 
ASSETS          
Cash and cash equivalents:          
Cash and due from banks  $25,289    28,020 
Federal funds sold   226,110    119,349 
Interest-bearing deposits with banks   9,176    8,801 
Total cash and cash equivalents   260,575    156,170 
Investment securities:          
Investment securities available for sale   134,597    134,702 
Other investments   19,640    19,939 
Total investment securities   154,237    154,641 
Mortgage loans held for sale   8,602    7,194 
Loans   3,619,556    3,602,627 
Less allowance for credit losses   (40,166)   (40,682)
Loans, net   3,579,390    3,561,945 
Bank owned life insurance   53,663    52,501 
Property and equipment, net   90,158    94,301 
Deferred income taxes, net   11,595    12,200 
Other assets   16,411    16,837 
Total assets  $4,174,631    4,055,789 
LIABILITIES          
Deposits  $3,518,825    3,379,564 
FHLB advances and related debt   240,000    275,000 
Subordinated debentures   24,903    36,322 
Other liabilities   64,365    52,436 
Total liabilities   3,848,093    3,743,322 
SHAREHOLDERS’ EQUITY          
Preferred stock, par value $.01 per share, 10,000,000 shares authorized   -    - 
Common stock, par value $.01 per share, 20,000,000 shares authorized, 8,156,097 shares issued and outstanding at September 30, 2024; 10,000,000 shares authorized, 8,088,186 shares issued and outstanding at December 31, 2023.   82    81 
Nonvested restricted stock   (4,219)   (3,596)
Additional paid-in capital   124,288    121,777 
Accumulated other comprehensive loss   (9,063)   (11,342)
Retained earnings   215,450    205,547 
Total shareholders’ equity   326,538    312,467 
Total liabilities and shareholders’ equity  $4,174,631    4,055,789 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

3

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

                         
 
   For the three months   For the nine months 
   ended September 30,   ended September 30, 
(dollars in thousands, except share data)  2024   2023   2024   2023 
Interest income                    
Loans  $47,550    43,542    139,700    121,380 
Investment securities   1,412    1,470    4,308    2,788 
Federal funds sold and interest-bearing deposits with banks   2,209    2,435    6,072    4,295 
Total interest income   51,171    47,447    150,080    128,463 
Interest expense                    
Deposits   27,725    25,130    82,873    64,245 
Borrowings   2,855    2,972    8,443    5,623 
Total interest expense   30,580    28,102    91,316    69,868 
Net interest income   20,591    19,345    58,764    58,595 
Provision for (reversal of) credit losses   -    (500)   325    2,235 
   Net interest income after provision for (reversal of) credit losses   20,591    19,845    58,439    56,360 
Noninterest income                    
Mortgage banking income   1,449    1,208    4,536    3,167 
Service fees on deposit accounts   455    356    1,265    1,011 
ATM and debit card income   599    588    1,730    1,680 
Income from bank owned life insurance   401    349    1,162    1,018 
Other income   271    249    669    653 
Total noninterest income   3,175    2,750    9,362    7,529 
Noninterest expenses                    
Compensation and benefits   10,789    10,231    32,936    30,874 
Occupancy   2,595    2,562    7,704    7,537 
Outside service and data processing costs   1,930    1,744    5,738    5,078 
Insurance   1,025    1,243    2,945    2,829 
Professional fees   548    504    1,748    1,914 
Marketing   319    293    1,077    994 
Other   833    725    2,634    2,573 
Total noninterest expenses   18,039    17,302    54,782    51,799 
Income before income tax expense   5,727    5,293    13,019    12,090 
Income tax expense   1,345    1,195    3,116    2,831 
Net income  $4,382    4,098    9,903    9,259 
Earnings per common share                    
Basic  $0.54    0.51    1.22    1.15 
Diluted   0.54    0.51    1.22    1.15 
Weighted average common shares outstanding                    
Basic   8,064,283    8,052,926    8,100,003    8,043,410 
Diluted   8,089,176    8,072,408    8,123,846    8,077,830 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

4

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

                         
         
   For the three months
ended September 30,		   For the nine months
ended September 30,		 
(dollars in thousands)  2024   2023   2024   2023 
Net income  $4,382    4,098    9,903    9,259 
Other comprehensive income (loss):                    
Unrealized gain (loss) on securities available for sale:                    
Unrealized holding gain (loss) arising during the period, pretax   3,548    (3,221)   2,884    (2,333)
Tax benefit (expense)   (745)   676    (605)   488 
Other comprehensive income (loss)   2,803    (2,545)   2,279    (1,845)
Comprehensive income  $7,185    1,553    12,182    7,414 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

5

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

                                                           
  

 

For the three months ended September 30,

 
   Common stock   Preferred stock   Nonvested
restricted		   Additional
paid-in		   Accumulated
other
comprehensive		   Retained     
(dollars in thousands, except share data)  Shares   Amount   Shares   Amount   stock   capital   income (loss)   earnings   Total 
June 30, 2023   8,058,438   $81    -   $-   $(4,051)  $120,912   $(12,710)  $197,282   $301,514 
Net income    -    -    -    -    -    -    -    4,098    4,098 
Proceeds from exercise of stock options   14,250    -    -    -    -    312    -    -    312 
Issuance of restricted stock, net of forfeitures    15,950    -    -    -    (388)   388    -    -    - 
Compensation expense related to restricted stock, net of tax   -    -    -    -    374    -    -    -    374 
Compensation expense related to stock options, net of tax    -    -    -    -    -    145    -    -    145 
Other comprehensive loss   -    -    -    -    -    -    (2,545)   -    (2,545)
                                              
September 30, 2023   8,088,638   $81    -   $-   $(4,065)  $121,757   $(15,255)  $201,380   $303,898 
                                              
June 30, 2024   8,155,097   $82    -   $-   $(4,710)  $124,174   $(11,866)  $211,068   $318,748 
Net income   -    -    -    -    -    -    -    4,382    4,382 
Proceeds from exercise of stock options   1,000    -    -    -    -    23    -    -    23 
Issuance of restricted stock, net of forfeitures   -    -    -    -    -    -    -    -    - 
Compensation expense related to restricted stock, net of tax   -    -    -    -    491    -    -    -    491 
Compensation expense related to stock options, net of tax   -    -    -    -    -    91    -    -    91 
Other comprehensive income   -    -    -    -    -    -    2,803    -    2,803 
                                              
September 30, 2024   8,156,097   $82    -   $-   $(4,219)  $124,288   $(9,063)  $215,450   $326,538 
     
  

For the nine months ended September 30,

 
   Common stock   Preferred stock   Nonvested
restricted		   Additional
paid-in		   Accumulated
other
comprehensive		   Retained     
(dollars in thousands, except share data)  Shares   Amount   Shares   Amount   stock   capital   income (loss)   earnings   Total 
December 31, 2022   8,011,045   $80    -    -   $(3,306)  $119,027   $(13,410)  $192,121   $294,512 
Net income   -    -    -    -    -    -    -    9,259    9,259 
Proceeds from exercise of stock options   25,250    -    -    -    -    497    -    -    497 
Issuance of restricted stock, net of forfeitures   52,343    1    -    -    (1,824)   1,823    -    -    - 
Compensation expense related to restricted stock, net of tax   -    -    -    -    1,065    -    -    -    1,065 
Compensation expense related to stock options, net of tax   -    -    -    -    -    410    -    -    410 
Other comprehensive loss   -    -    -    -    -    -    (1,845)   -    (1,845)
                                              
September 30, 2023   8,088,638   $81    -   $-   $(4,065)  $121,757   $(15,255)  $201,380   $303,898 
                                              
December 31, 2023   8,088,186   $81    -   $-   $(3,596)  $121,777   $(11,342)  $205,547   $312,467 
Net income   -    -    -    -    -    -    -    9,903    9,903 
Proceeds from exercise of stock options   12,000    -    -    -    -    190    -    -    190 
Issuance of restricted stock, net of forfeitures   55,911    1    -    -    (2,035)   2,034    -    -    - 
Compensation expense related to restricted stock, net of tax   -    -    -    -    1,412    -    -    -    1,412 
Compensation expense related to stock options, net of tax   -    -    -    -    -    287    -    -    287 
Other comprehensive income   -    -    -    -    -    -    2,279    -    2,279 
                                              
September 30, 2024   8,156,097   $82    -   $-   $(4,219)  $124,288   $(9,063)  $215,450   $326,538 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

6

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

             
  

 

For the nine months ended
September 30,

 
(dollars in thousands)  2024   2023 
Operating activities          
Net income  $9,903    9,259 
Adjustments to reconcile net income to cash provided by operating activities:          
Provision for credit losses   325    2,235 
Depreciation and other amortization   3,623    3,611 
Accretion and amortization of securities discounts and premium, net   437    142 
Net change in operating leases   114    188 
Compensation expense related to stock options and restricted stock grants   1,699    1,475 
Gain on sale of loans held for sale   (4,354)   (2,793)
Loans originated and held for sale   (148,745)   (112,930)
Proceeds from sale of loans held for sale   151,691    112,523 
Increase in cash surrender value of bank owned life insurance   (1,162)   (1,018)
Increase in deferred tax asset   -    (66)
Decrease (increase) in other assets   426    (7,892)
Increase in other liabilities   13,408    6,059 
Net cash provided by operating activities   27,365    10,793 
Investing activities          
Increase (decrease) in cash realized from:          
Increase in loans, net   (18,195)   (280,627)
Purchase of property and equipment   (567)   (1,120)
Purchase of investment securities:          
Available for sale   (20,513)   (58,204)
Other investments   (4,301)   (49,949)
Payments and maturities, calls and repayments of investment securities:          
Available for sale   23,065    5,039 
Other investments   4,600    41,182 
Net cash used for investing activities   (15,911)   (343,679)
Financing activities          
Increase (decrease) in cash realized from:          
Increase in deposits, net   139,261    213,907 
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net   (35,000)   100,000 
Decrease in subordinated debentures   (11,500)   - 
Proceeds from the exercise of stock options   190    497 
Net cash provided by financing activities   92,951    314,404 
Net increase (decrease) in cash and cash equivalents   104,405    (18,482)
Cash and cash equivalents at beginning of the period   156,170    170,874 
Cash and cash equivalents at end of the period  $260,575    152,392 
Supplemental information          
Cash paid for          
Interest  $87,129    64,390 
Income taxes   2,235    586 
Schedule of non-cash transactions          
Unrealized gain (loss) on securities, net of income taxes   2,279    (1,845)
Right-of-use assets obtained in exchange for lease obligations:          
Operating Leases   -    147 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

7

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business

Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 5, 2024. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments

The Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina, and Georgia. These services include demand, time and savings deposits, lending services and ATM processing and mortgage banking services. While the Company’s management periodically reviews limited production information for these revenue streams, that information is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will continue to evaluate these lines of business for separate reporting as facts and circumstances change.  Accordingly, the Company’s various banking operations are not considered by management to constitute more than one reportable operating segment.

Risk and Uncertainties

In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default within the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company. There were three significant bank failures in the first five months of 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the recent bank failures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which has and could continue to increase the cost of our FDIC insurance assessments. The ultimate impact of these bank failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, remains difficult to predict at this time.

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The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject the Company to changes with respect to the valuation of assets, the amount of required credit loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.

The Bank makes loans to individuals and businesses in the Upstate, Midlands, and Lowcountry regions of South Carolina as well as the Triangle, Triad and Charlotte regions of North Carolina and Atlanta, Georgia for various personal and commercial purposes. The Bank’s loan portfolio has a concentration of real estate loans. As of September 30, 2024 and 2023, real estate loans represented 84.4% and 84.5%, respectively, of total loans. However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector.

As of September 30, 2024, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by future credit losses.

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of September 30, 2024, the $15.0 million line was unused.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, real estate acquired in the settlement of loans, fair value of financial instruments, and valuation of deferred tax assets.

Reclassifications

Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

Newly Issued, But Not Yet Effective Accounting Standards

In December 2022, the FASB issued amendments to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification from December 31, 2022 to December 31, 2024, because the current relief in Reference Rate Reform Topic may not cover a period of time during which a significant number of modifications may take place. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company does not expect these amendments to have a material effect on its financial statements.

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NOTE 2 – Investment Securities

The amortized costs and fair value of investment securities are as follows:

                             
 
   September 30, 2024 
   Amortized   Gross Unrealized  Fair 
(dollars in thousands)   Cost   Gains   Losses  Value 
Available for sale                    
Corporate bonds   $2,128    -   181   1,947 
US treasuries   999    -    75   924 
US government agencies    18,113    4    1,431   16,686 
State and political subdivisions    22,450    -    2,427   20,023 
Asset-backed securities    34,271    70    76   34,265 
Mortgage-backed securities   68,108    35    7,391   60,752 
Total investment securities available for sale  $146,069    109    11,581   134,597 
    
   December 31, 2023
    Amortized   Gross Unrealized   Fair  
    Cost    Gains    Losses   Value 
Available for sale                   
Corporate bonds  $2,147    -    237