Item 1A. Risk Factors 29
Item 1B. Unresolved Staff Comments 43
Item 1C. Cybersecurity 43
Item 2. Properties 44
Item 3. Legal Proceedings 45
Item 4. Mine Safety Disclosures 45
PART II
Item 6. [Reserved] 46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 65
Item 8. Financial Statements and Supplementary Data 66
Item 9A. Controls and Procedures 110
Item 9B. Other Information 110
PART III
Item 10. Directors, Executive Officers and Corporate Governance 111
Item 11. Executive Compensation 111
Item 14. Principal Accounting Fees and Services 111
PART IV
Item 15. Exhibits, Financial Statement Schedules 112
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CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements
which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results
of operation, plans, business strategy, objectives, or future performance. These statements are based on many assumptions and estimates
and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements,
as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,”
“would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,”
“expect,” “anticipate,” “predict,” “project,” “potential,” “believe,”
“continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar
expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results
to differ from those anticipated in any forward-looking statements include, but are not limited to, those described below under Item 1A.
Risk Factors and the following:
· Restrictions or conditions imposed by our regulators on our operations;
· Credit losses due to loan concentration;
· Our ability to successfully execute our business strategy;
· Our ability to attract and retain key personnel;
· Changes occurring in business conditions and inflation;
· Changes in technology;
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· The rate of delinquencies and amounts of loans charged-off;
If any of these risks or uncertainties materialize,
or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from
those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause
actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I,
Item 1A of this Annual Report on Form 10-K. We urge investors to consider all of these factors carefully in evaluating the forward-looking
statements contained in this Annual Report on Form 10-K. We make these forward-looking as of the date of this document and we do not intend,
and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those
expressed in, or implied or projected by, the forward-looking statements, except as required by applicable law.
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PART I
Item 1. Business
General
Southern First Bancshares, Inc. (the
“Company”) was incorporated in March 1999 under the laws of South Carolina and is a bank holding company registered under
the Bank Holding Company Act of 1956 (the “BHCA”). Our primary business is to serve as the holding company for Southern First
Bank (the “Bank”), a South Carolina state bank. The Bank is a commercial bank with eight retail offices located in the Greenville,
Columbia, and Charleston markets of South Carolina, three retail offices in the Raleigh, Greensboro, and Charlotte markets of North Carolina
and one retail office in Atlanta, Georgia. In addition, we opened our Dream Mortgage Center, a loan production office, located in Columbia,
South Carolina during 2023.
The Bank is primarily engaged in the business of accepting
demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial,
consumer and mortgage loans to the general public.
Unless the context requires otherwise, references to
the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,
Inc. and its subsidiaries.
Our Competitive Strengths
We believe that the following business strengths have
been instrumental to the success of our core operations. We believe these attributes will enable us to continue profitable growth, while
remaining fundamentally sound and driving value to our shareholders.
Simple and Efficient ClientFIRST Model.
We operate our Bank using a simple and efficient style of banking that is focused on providing core banking products and services to our
clients through a team of talented and experienced bankers. We refer to this model as “ClientFIRST” and it is structured to
deliver superior client service via “relationship teams,” which provide each client with a specific banker contact and a consistent
support team responsible for all of the client’s banking needs. We believe this model results in a consistent and superior level
of professional service that provides us with a distinct competitive advantage by enabling us to build and maintain long-term relationships
with desirable clients, enhancing the quality and stability of our funding and lending operations and positioning us to take advantage
of future growth opportunities in our existing markets. We also believe that this client focused culture has led to our successful expansion
into new markets in the past, and will enable us to be successful if we seek to expand into new markets in the future.
Our ClientFIRST model focuses on achieving cost efficiencies
by diligently managing the growth of our number of employees and banking offices. We believe that the identification of talented bankers
will drive our growth strategy, as opposed to a more general desire to enter a specific geography or market. This strategy translates
into a smaller number of brick and mortar offices relative to our size and compared to peer banks, but larger overall deposit balances
in our offices as compared to peers. As a result, our offices average approximately $240.5 million in total deposits. We believe this
style of banking allows us to deliver exceptional client service, while achieving lower efficiency ratios relative to certain of our local
competitors, as evidenced by our 73.5% efficiency ratio for the year ended December 31, 2024.
We continue to make significant investments in our
IT systems and technology offerings to our clients that we believe will continue to drive low-cost deposit growth. We believe that our
current mobile banking, on-line banking and cash management offerings are industry-leading solutions amongst community banks, and we plan
to continue to invest in the latest technology solutions to enable us to meet the evolving needs of our clients and maintain this competitive
advantage over other community banks.
Attractive South Carolina, North Carolina, and
Georgia Markets. We have eight banking offices located in Greenville, Columbia and Charleston, South Carolina, which are the three
largest markets in South Carolina; three banking offices located in Charlotte, Raleigh and Greensboro, North Carolina, which are the three
largest markets in North Carolina; and one banking office located in Atlanta, Georgia, which is the largest market in Georgia. The following
table illustrates our market share, by insured deposits as of the dates indicated, in these seven markets:
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(Dollars in thousands)
(1) Represents the metropolitan statistical area (“MSA”) for each market.
Greenville. The city of Greenville is located
in Greenville County, South Carolina approximately midway between Atlanta and Charlotte on the heavily traveled I-85 business corridor.
The Greenville-Anderson MSA is the most populous market in South Carolina with an estimated population of 975,480 as reported for 2023.
The median household income for the Greenville-Anderson-Mauldin MSA was $69,413 for 2023. A large and diverse metropolitan area, the Greenville-Anderson
MSA is one of the southeast region’s premier areas for business, serving as headquarters for Michelin and Current Lighting (formerly
Hubbell Lighting) as well as hosting significant operations for BMW and Lockheed Martin.
Charleston. The city of Charleston is located
in Charleston County, South Carolina. The Charleston-North Charleston MSA is the third most populous market in the state with an estimated
population of 849,417 for 2023. Charleston is home to the deepest port in the Southeast and boasts top companies in the aerospace, biomedical
and technology fields such as Boeing, the Medical University of South Carolina (MUSC) and Blackbaud. The median household income for the
Charleston-North Charleston MSA was approximately $85,165 for 2023. One of our retail offices in the Charleston market is located in the
city of Mount Pleasant, which is located just north of Charleston in Charleston County and ranks as the fourth largest city in South Carolina.
Columbia. The city of Columbia is located in
Richland County, South Carolina and its surrounding suburban areas expand into adjoining Lexington County. Columbia is the state capital,
the largest city in the state and the home of the University of South Carolina and Fort Jackson, the Army’s largest Initial Entry
Training Center. The Columbia MSA is the second most populous market in the state with an estimated population of 856,889 for 2023. The
median household income for the Columbia MSA was $67,189 for 2023.
Raleigh. The city of Raleigh is the second largest
city in the state of North Carolina and is located in Wake County, North Carolina. The Raleigh-Cary MSA is one of the most populous markets
in the state with an estimated population of 1.51 million for 2023. Raleigh is the state capital and is home to North Carolina State University
and is part of the Research Triangle area, together with Durham, North Carolina (home of Duke University) and Chapel Hill, North Carolina
(home of the University of North Carolina at Chapel Hill). The median household income for the Raleigh-Cary MSA was approximately $96,096
for 2023.
Greensboro. The city of Greensboro is the third
largest city in North Carolina and is located in Guilford County, North Carolina. The Greensboro-High Point MSA is one of the most populous
markets in the state of North Carolina with an estimated population of 789,842 for 2023. Greensboro has traditionally been a fixture in
the textiles, tobacco and furniture industries while also moving towards an increased presence of high-tech, aviation and transportation/logistics
sectors. Greensboro, along with Winston-Salem and High Point, is commonly referred to as the Triad region of North Carolina and is home
to companies such as Honda Aircraft, Lincoln Financial Group and Volvo Trucks of North America. The median household income for the Greensboro-High
Point MSA was approximately $63,280 for 2023.
Charlotte. The city of Charlotte is the largest
city in the state and is located in Mecklenburg County, North Carolina. The Charlotte-Concord-Gastonia MSA is the most populous market
in the state of North Carolina with an estimated population of 2.81 million for 2023. Charlotte is the second largest banking city in
the United States after New York and is home to the corporate headquarters of Bank of America, Truist Financial, and the east coast headquarters
of Wells Fargo. Charlotte is also home to many Fortune 500 companies including Duke Energy, Honeywell and Lowe’s. The median household
income for the Charlotte-Concord-Gastonia MSA was approximately $81,262 for 2023.
Atlanta. The Atlanta-Sandy Springs-Alpharetta
MSA has the eighth largest population in the U.S. estimated at 6.31 million for 2023. Atlanta is the state capital of, and largest city
in, Georgia and is the world headquarters of corporations such as
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Coca-Cola, Home Depot, UPS, Delta Airlines and Turner
Broadcasting. The median household income for the Atlanta-Sandy Springs-Alpharetta MSA is $86,505 for 2023.
We believe that the demographics and growth characteristics
of these seven markets will provide us with significant opportunities to further develop existing client relationships and expand our
client base.
Data related to the estimated population and median
household income for each of the markets presented above is from the Federal Reserve Economic Data (“FRED”) online database.
Experienced Management Team, Dedicated Board
of Directors and Talented Employees. Our senior management team is led by R. Arthur Seaver, Jr., Calvin C. Hurst, Christian J.
Zych, William M. Aiken, Silvia T. King, and Julie A. Fairchild, and whose biographies are included below. These executives lead a team
of 28 additional senior team members which we believe compares favorably to any community bank management team assembled in South Carolina.
R. Arthur “Art” Seaver, Jr. has
served as the Chief Executive Officer of our Company and our Bank since 1999. He has over 35 years of banking experience. From 1986 until
1992, Mr. Seaver held various positions with The Citizens & Southern National Bank of South Carolina. From 1992 until February 1999,
he was with Greenville National Bank, which was acquired by Regions Bank in 1998. He was the Senior Vice President in lending and was
also responsible for managing Greenville National Bank’s deposit strategies prior to leaving to form the Bank. Mr. Seaver is a 1986
graduate of Clemson University with a bachelor’s degree in Financial Management and a 1999 graduate of the BAI Graduate School of
Community Bank Management.
Calvin C. Hurst has served as Chief Banking
Officer of our Company and our Bank since March 2019 and as President since August 2022. Mr. Hurst has over 15 years of banking experience.
From 2006 to 2008, Mr. Hurst served as a commercial underwriter for RBC Bank, and from 2008 to 2015 he served as commercial relationship
manager for PNC Bank. Before joining Southern First, Mr. Hurst served as regional vice president for TD Bank. Mr. Hurst is a 2005 graduate
of Furman University, with a Bachelor’s degree in Business Administration and Economics.
Christian J. Zych has served as Chief Financial
Officer of our Company and our Bank since May 2024. He has 30 years of experience in the banking industry. Mr. Zych is a highly accomplished
leader with a proven track record of financial management and analysis, formulation and execution of corporate and financial strategy,
and investor relations management. Mr. Zych holds a Master of Business Administration from Wake Forest University School of Business and
a bachelor’s degree in finance from Bentley University.
William M. Aiken, III has served as a Senior
Executive Vice President and Chief Risk officer of our Company and our Bank since 2021 and previously served as an executive credit risk
officer since 2020. He has over 25 years in the banking industry. Mr. Aiken has served in various roles at several banks during
his career including most recently as a Chief Commercial Credit officer at a regional bank. He is a 1996 graduate of Clemson University,
with a degree in Financial Management.
Silvia T. King has served as Chief Human Resources
Officer of our Company and our Bank since March 2018. Ms. King has over 20 years of Human Resources leadership experience. From 2003 to
2009, Ms. King served in various human resource and senior management roles with Monsanto Company and Select Comfort Corporation. From
2009 to 2016, Ms. King served as senior human resources consultant for FGP International, a professional staffing firm in Greenville,
South Carolina, and most recently as a human resources instructor with e-Cornell University. Ms. King holds degrees in Psychology and
International Marketing from Clemson University and a Master of Human Resources degree from the University of South Carolina.
Julie A. Fairchild has served as Chief Accounting
Officer and principal accounting officer of our Company and our Bank since October 2024. Ms. Fairchild joined the bank in 2005, serving
in various roles, most recently as Executive Vice President of Accounting and Finance. Prior to joining the Bank, Ms. Fairchild served
as audit manager for Elliott Davis LLC, a regional public accounting and consulting firm. Ms. Fairchild holds a Bachelor of Science degree
in accounting from Bob Jones University and is a certified public accountant in the State of South Carolina.
In addition to Messrs. Seaver, Hurst, Zych, Aiken,
Mses. King and Fairchild, our executive management team consists of 14 individuals who bring an average of 30 years of experience in the
banking industry.
The management team is complemented by our dedicated
board of directors with extensive local market knowledge and a wide range of experience including accounting, business, banking, manufacturing,
insurance, management and finance. We believe that our management’s and board’s incentives are closely aligned with our shareholders
through the
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ownership of a substantial amount of our stock. As
of December 31, 2024, our executive officers and board of directors owned an aggregate of 643,642 shares of our common stock, including
options to purchase shares of our common stock, which represented approximately 7.93% of the fully-diluted amount of our common stock
outstanding. We believe that our officers’ and directors’ experience and local market knowledge are valuable assets and will
enable them to guide us successfully in the future.
In addition, we believe that we have assembled a group
of highly talented employees by being an employer of choice in the markets we serve. We employed a total of 297 FTE employees as of December
31, 2024. Our employees are skilled in the areas of banking, information technology, management, sales, advertising and marketing, among
others. We strive to provide an “umbrella for great talent,” characterized by a culture of transparency and collaboration
which permeates all levels of the organization. To drive our culture of transparency and collaboration, our employees engage in a series
of weekly meetings to understand the goals and plan for each week. These meetings are intended to remind our employees of our vision,
strategy and ClientFIRST service, and provide our employees with information regarding monthly and quarterly goals and client or prospect
needs. In addition, each week is started with a meeting of all Executive Vice Presidents so that all team members are informed on the
latest developments of our Company. Our employees and their ClientFIRST approach to service have been instrumental to our success.
Our Business Strategy
We are focused on growing business relationships and
building core deposits, profitable loans and noninterest income. We believe that we have built a dynamic franchise that meets the financial
needs of our clients by providing an array of personalized products and services delivered by seasoned banking professionals with knowledge
of our local markets. Our overall strategic goal is to provide the highest level of service to our clients while achieving high-performance
metrics within the community banking market that drive franchise and shareholder value. Our specific business strategies include:
Focus on Profitable and Efficient Growth.
Our executive management team and board of directors are dedicated to producing profits and returns for our shareholders. We actively
manage the mix of assets and liabilities on our balance sheet to optimize our net interest margin while also maintaining expense controls
and developing noninterest income streams. By continually striving to build a well-structured balance sheet, we seek to increase profitability
and improve our return on average assets, return on average equity and efficiency ratio. We believe that, as the economy continues to
improve, our focus on maximizing our net interest margin and minimizing our efficiency ratio while maintaining credit quality controls
will translate into continued and improved profitability and shareholder returns. We are committed to enhancing these levels of profitability
by focusing on our core competencies of commercial lending and core deposit gathering. We believe that we have the infrastructure currently
in place, such as technology, support staff and administration, to support expansion with limited associated noninterest expense increases.
Provide a Distinctive Client Experience.
Our markets have been subject to consolidation of local community banks primarily by larger, out-of-state financial institutions. We believe
there is a large client base in our markets that prefers doing business with a local institution and may be dissatisfied with the service
offered by national and larger regional banks. We believe that the exceptional level of professional service provided to our clients as
a result of our ClientFIRST model provides us with a distinct competitive advantage over our local competitors. We also believe that technology
innovation will continue to play a critical role in retaining clients and winning new business. We believe that our current mobile banking,
on-line banking and cash management offerings are industry-leading solutions amongst community banks. During 2024, 38% of deposits were
acquired through our office network, 44% came through the commercial remote deposit capture channel and the remaining 17% came through
consumer mobile deposits. We believe that the volume in remote deposit capture and mobile deposit channels will continue to increase over
time as more clients become acquainted with the convenience these services provide. By delivering superior professional service through
our ClientFIRST model, coupled with our deep understanding of our markets and our commitment to providing the latest technology solutions
to meet our clients’ banking needs, we believe that we can attract new clients and expand our total loans and deposits.
Maintain a Rigorous Risk Management Infrastructure.
As we grow, one of our top priorities is to continue to build a robust enterprise risk management infrastructure. We believe effective
risk management requires a culture of risk management and governance throughout the Company. The legislative and regulatory landscape
continues to quickly evolve, so we are continually performing risk assessments throughout the organization and re-allocating resources
where appropriate. We will continue to add new resources and technology investments to help enhance all of our risk management processes
throughout the Bank. Our risk management success is exemplified by our historic credit risk management and disciplined underwriting practices,
which have enabled us to successfully grow our balance sheet while maintaining strong credit quality metrics. We do not reduce our credit
standards or pricing discipline to generate new loans. In addition, we are heavily focused on compliance risk and cybersecurity risk,
as both of these risks have increased since our inception. Our management team continually analyzes emerging fraud and security risks
and utilizes tools,
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strategies and policies to manage risk while delivering
an optimal and appropriate client experience. We believe our risk management structure allows our board and senior management to maintain
effective oversight of our risks to ensure that our personnel are following prudent and appropriate risk management practices resulting
in strong loan quality and minimal credit losses.
Attract Talented Banking Professionals With A
“ClientFIRST” Focus. We believe that our ability to attract and retain banking professionals with strong community
relationships and significant knowledge of our markets will continue to drive our success and grow our business in an efficient manner.
By focusing on experienced, established bankers who deliver exceptional client service through our ClientFIRST model, we believe we can
enhance our market position and add profitable growth opportunities. We believe that the strength of our exceptional client service and
relationship banking approach will continue to help us attract these established bankers. We have carefully invested in our internal infrastructure,
including support and back office personnel, and we believe that we can continue to add experienced frontline bankers to our existing
markets, which will drive our efficient growth.
We will continue to expand our franchise, but only
in a controlled manner and as permitted by our regulators. We may choose to open new locations, but only after rigorous due diligence
and substantial quantitative analysis regarding the financial and capital impacts of such investments. We may also seek to enter new metropolitan
markets contiguous to, or nearby, our current South Carolina footprint, such as our recently opened expansions in Greensboro and Charlotte,
North Carolina, but only after careful study and the identification and vetting of a local, senior level banking team with significant
experience and reputational strength in that market and receipt of any applicable regulatory approvals. We have not yet supplemented our
historic strategy of organic deposit and loan growth with traditional mergers or acquisitions. We evaluate potential acquisition opportunities
that we believe would be complementary to our business as part of our growth strategy. However, we have not yet identified any specific
acquisition opportunity that meets our strict requirements and do not have any immediate plans, arrangements or understandings relating
to any acquisition. Furthermore, we do not believe an acquisition is necessary to successfully drive our growth and execute our ClientFIRST
model.
Lending Activities
General. We offer a full complement of loan
services to businesses and individuals. This includes commercial, real estate, and consumer loans. Our underwriting standards vary for
each type of loan, as described below. Because loans typically provide higher interest yields than other types of interest-earning assets,
we invest a substantial percentage of our earning assets in our loan portfolio. At December 31, 2024, we had net loans of $3.59 billion,
representing 87.9% of our total assets.
We focus our lending to businesses and individuals
that reside in the markets that we serve. By focusing on this client base and by serving each client with a consistent relationship team
of bankers, we have generated a loan portfolio with larger average loan amounts than we believe is typical for a community bank. As of
December 31, 2024, our average loan size was approximately $375,000. At the same time, we have strived to maintain a diversified loan
portfolio and limit the amount of our loans to any single client. As of December 31, 2024, our ten largest client loan relationships represented
approximately $289.0 million, or 7.95%, of our loan portfolio.
In October 2023, we announced the opening of the Dream
Mortgage Center in Columbia, South Carolina. The Dream Mortgage Center is a loan production center designed to create space for opportunities
for homebuyer education, community events, and mortgage lending experts equipped with a variety of loan products.
Loan Approval. Certain credit risks are inherent
in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting
from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment
risks by adhering to internal credit policies and procedures. These policies and procedures include officer and client lending limits,
a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies.
Our loan approval policies provide for various levels of officer lending authority. When the amount of aggregate loans to a single borrower
exceeds an individual officer’s lending authority, the loan request will be considered for approval by a team of officers led by
a senior lender, or by the voting members of the Credit Approval Support Team (“CAST”) committee, based on the loan amount.
The CAST committee, which is comprised of a group of our senior commercial lenders, senior credit administrators, chief risk officer,
president, and chief executive officer, has pre-determined lending limits, and any loans in excess of this lending limit will be submitted
for approval by our full board. We do not make any loans to any director or executive officer of the Bank unless the loan is approved
by the board of directors of the Bank and all loans to directors, officers and employees are on terms not more favorable to such person
than would be available to a person not affiliated with the Bank, consistent with federal banking regulations.
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Management monitors exposure to credit risk from potential
concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations of
lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods,
loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. These types of loans are subject to strict
underwriting standards and are more closely monitored than a loan with a low loan-to-value ratio. Furthermore, there are industry practices
that could subject us to increased credit risk should economic conditions change over the course of a loan’s life. For example,
we make variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon
payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks.
Credit Administration and Loan Review. We maintain
a continuous loan review system. We also apply a credit grading system to each loan, and we use an independent process to review the loan
files on a test basis to assess the grading of each loan. We periodically review performance benchmarks established by management in the
areas of nonperforming assets, charge-offs, past dues, and loan documentation. Each loan officer is responsible for each loan he or she
makes, regardless of whether other individuals or committees joined in the approval. This responsibility continues until the loan is repaid
or until the loan is officially assigned to another officer.
Lending Limits. Our lending activities are subject
to a variety of lending limits imposed by federal and state laws and regulations. In general, the Bank is subject to a legal limit on
loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. Based upon the capitalization of the Bank
at December 31, 2024, the maximum amount we could lend to one borrower was $60.4 million. However, to mitigate concentration risk, our
internal lending limit at December 31, 2024 was $42.3 million and may vary based on our assessment of the lending relationship. The board
of directors will adjust the internal lending limit as deemed necessary to continue to mitigate risk and serve our clients. The Bank’s
legal lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital. We are able
to sell participations in our larger loans to other financial institutions, which allow us to manage the risk involved in these loans
and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.
Loan Portfolio Segments. Our loan portfolio
is comprised of commercial and consumer loans made to small businesses and individuals for various business and personal purposes. While
our loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers, the principal component
of our loan portfolio is loans secured by real estate mortgages on either commercial or residential property. These loans will generally
fall into one of the following six categories: commercial owner occupied real estate, commercial non-owner occupied real estate, commercial
construction, consumer real estate, consumer construction, and home equity loans. We obtain a security interest in real estate whenever
possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. At
December 31, 2024, loans secured by first or second mortgages on commercial and consumer real estate made up approximately 83.5% of our
loan portfolio. In addition to loans secured by real estate, our loan portfolio includes commercial business loans and other consumer
loans which comprised 15.3% and 1.2%, respectively, of our total loan portfolio at December 31, 2024.
Interest rates for all real estate loan categories
may be fixed or adjustable, and will more likely be fixed for shorter-term loans. We generally charge an origination fee for each loan
which is taken into income over the life of the loan as an adjustment to the loan yield. Other loan fees consist primarily of late charge
fees. Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value
of real estate. Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively
affect a borrower’s cash flow, creditworthiness, and ability to repay the loan. Although, the loans are collateralized by real estate,
the primary source of repayment may not be the sale of real estate.
The following describes the types of loans in our loan
portfolio.
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commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed
85%. We also generally require that a borrower’s cash flow exceeds 115% of monthly debt service obligations. As of December 31,
2024, $214.0 million, or 5.9% of our total loan portfolio, was collateralized by office properties, $170.6 million, or 4.7%, was collateralized
by retail properties, $125.6 million, or 3.5%, was collateralized by hotels, and $96.7 million, or 2.7% was collateralized by multifamily
properties. In order to seek to ensure secondary sources of payment and liquidity to support a loan request, we typically review all of
the personal financial statements of the principal owners and require their personal guarantees.
· cost overruns;
· mismanaged construction;
· inferior or improper construction techniques;
· economic changes or downturns during construction;
· a downturn in the real estate market;
· rising interest rates which may prevent sale of the property; and
· failure to sell completed projects in a timely manner.
We attempt to reduce the risk associated
with construction loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project
at or below 80%.
We are eligible to offer small business loans
utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7(a) program and SBA’s 504
programs. These loans typically are partially guaranteed by the government, which helps to reduce their risk. Government guarantees of
SBA loans do not exceed, and are generally less than, 80% of the loan. As of December 31, 2024, we had originated ten loans utilizing
government enhancements and over 35 loans engaged in state-based small business partnerships.
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Deposit Services
Our principal source of funds is core deposits. We
offer a full range of deposit services, including checking accounts, commercial checking accounts, savings accounts, and other time deposits
of various types, ranging from daily money market accounts to long-term certificates of deposit. At December 31, 2024, we had $550.3 million
in out-of-market, or wholesale, certificates of deposits. In an effort to obtain lower cost deposits, we have focused on expanding our
retail deposit program. We currently have 12 retail offices which assist us in obtaining low cost transaction accounts that are less affected
by rising rates. Deposit rates are reviewed regularly by our senior management. We believe that the rates we offer are competitive with
those offered by other financial institutions in our area. We focus on client service and our ClientFIRST culture to attract and retain
deposits.
Other Banking Services
In addition to deposit and loan services, we offer
other bank services such as internet banking, cash management, safe deposit boxes, direct deposit, automatic drafts, bill payment and
mobile banking services. We earn fees for most of these services, including debit and credit card transactions, sales of checks, and wire
transfers. We also receive ATM transaction fees from transactions performed by our non-clients. We are associated with the NYCE, Pulse,
STAR, and Cirrus networks, which are available to our clients throughout the country. Since we outsource our ATM services, we are charged
related transaction fees from our ATM service provider. We have contracted with Fidelity National Information Systems, an outside computer
service company, to provide our core data processing services and our ATM processing. By outsourcing these services, we believe we are
able to reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant
portion of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have
during the period. We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are
able to attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association
is critical to our success. We also offer purchasing cards to our business clients which are designed for business expenses and procurement
purposes.
Competition
The banking business is highly competitive, and we
experience competition in our market from many other financial institutions. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and
scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending
limits. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national,
and international financial institutions that operate offices in Greenville, Columbia and Charleston, South Carolina; Charlotte, Raleigh
and Greensboro, North Carolina; Atlanta, Georgia and elsewhere.
As of June 30, 2024, the most recent date for which
market data is available, there were 40 financial institutions in our primary market of Greenville County, 27 financial institutions in
the Columbia market, 36 financial institutions in the Charleston and Raleigh markets, 25 financial institutions in the Greensboro market,
50 financial institutions in the Charlotte market, and 81 financial institutions in the Atlanta market. We compete with other financial
institutions in our market areas both in attracting deposits and in making loans. In addition, we have to attract our client base from
other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions
with substantially greater resources and lending limits, such as, Bank of America, Wells Fargo, and Truist. These institutions offer some
services, such as extensive and established branch networks and trust services that we do not provide. In addition, many of our non-bank
competitors are not subject to the same extensive federal regulations that
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govern bank holding companies and federally insured
banks. We believe the financial services industry will likely continue to become more competitive as further technological advances enable
more financial institutions to provide expanded financial services without having a physical presence in our markets. Because larger competitors
have advantages in attracting business from larger corporations, we do not generally compete for that business. Instead, we concentrate
our efforts on attracting the business of individuals and small and medium-size businesses. With regard to such accounts, we generally
compete on the basis of client service and responsiveness to client needs, the convenience of our offices and hours, and the availability
and pricing of our products and services.
We believe our commitment to quality and personalized
banking services through our ClientFIRST culture is a factor that contributes to our competitiveness and success.
Employees
At December 31, 2024, we employed a total of 297 full-time
equivalent employees. We provide our full-time employees and certain part-time employees with a comprehensive program of benefits, including
medical benefits, life insurance, long-term disability coverage and a 401(k) plan. Our employees are not represented by a collective bargaining
agreement. Management considers its employee relations to be excellent.
Available Information
We
file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the SEC which are accessible electronically
at the SEC’s website at www.sec.gov. We maintain an Internet website at www.southernfirst.com where these reports
can also be accessed free of charge. No information contained on our website is intended to be included as part of, or incorporated by
reference into, this Annual Report on Form 10-K.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive
state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory
oversight of virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders.
Changes in applicable laws or regulations may have a material effect on our business and prospects.
The following discussion is not intended to be a complete
list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It is intended
only to briefly summarize some material provisions. The following summary is qualified by reference to the statutory and regulatory provisions
discussed.
Legislative and Regulatory Developments
Two legislative and regulatory responses to the 2008
financial crisis – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Basel
III-based capital rules –continue to have an impact on our operations.
In addition, newer regulatory developments implemented
in response to the COVID-19 pandemic and the bank failures in 2023 will continue to have an impact on our operations.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act
The Dodd-Frank Act was signed into law in July 2010
and impacts financial institutions in numerous ways, including:
· Granting new authority to the FDIC as liquidator and receiver,
· Changing the manner in which deposit insurance assessments are made,
· Requiring regulators to modify capital standards,
· Establishing the Consumer Financial Protection Bureau (the “CFPB”),
· Imposing more stringent requirements on mortgage lenders, and
· Limiting banks’ proprietary trading activities.
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There are many provisions in the Dodd-Frank Act mandating
regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued, many remain
to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and
results of operations.
The Economic Growth, Regulatory Relief, and Consumer
Protection Act
On May 24, 2018, President Trump signed into law the
first major financial services reform bill since the enactment of the Dodd-Frank Act. The Economic Growth, Regulatory Relief, and
Consumer Protection Act (the “Reform Law”) modified or eliminated certain requirements on community and regional banks and
nonbank financial institutions. For instance, under the Reform Act and related rule making:
Basel Capital Standards
Regulatory capital rules known as Basel III impose
minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings
and loan associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank
holding companies,” generally holding companies with consolidated assets of less than $3 billion. More stringent requirements are
imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated
assets, $10 billion or more in total foreign exposures, or that have opted into the Basel II capital regime.
The Basel III rules require the Company and the Bank
to maintain the following minimum capital requirements:
· a common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio of 6%;
· a total risk-based capital ratio of 8%; and
· a leverage ratio of 4%.
Under Basel III, Tier 1 capital includes two
components: CET1 capital and additional Tier 1 capital. The highest form of capital, CET1 capital, consists solely of common stock (plus
related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority
interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred
stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed below). Tier 2 capital generally includes
the allowance for credit losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier
2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred
stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in
total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May
19, 2010 in Tier 1 Capital (but not in CET1 capital), subject to certain restrictions. AOCI is presumptively included in CET1 capital
and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of
the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election
and, as a result, retained our pre-existing treatment for AOCI.
In addition, in order to avoid restrictions
on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a 2.5% “capital
conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of CET1 capital, but
the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). The 2.5% capital conservation buffer
effectively results in the following minimum capital ratios (taking into account the capital conservation buffer): (i) a CET1 capital
ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
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Proposed new rules for U.S. implementation of capital
requirements under Basel IV rules, more recently referred to as the “Basel III Endgame”, were issued by the U.S. federal banking
agencies on July 27, 2023. These proposed rules include broad-based changes to the risk-weighting framework for various credit exposures
and operational risk capital requirements. However, the proposed rules generally apply only to large banking organizations with total
assets of $100 billion or more, and are expected to not be applicable to us. Recent regulatory developments have introduced uncertainty
regarding the implementation of the Basel III Endgame rules. Changes in leadership and evolving policy priorities within regulatory agencies
have led to speculation about potential delays or modifications to the final rulemaking process.
As part of its response to the impact of the COVID-19
pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations
that adopted the credit impairment model, the Current Expected Credit Loss, or CECL, during the 2020 calendar year with the option to
delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred
loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during
the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2022, we did
not elect to utilize the five-year CECL transition.
In November 2019, the federal banking regulators published
final rules under the Reform Law (discussed above) implementing a simplified measure of capital adequacy for certain banking organizations
that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository
institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other
qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets
and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking
organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking
organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is
considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable,
is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s
prompt corrective action rules, discussed below. We do not have any immediate plans to elect to use the community bank leverage ratio
framework but may make such an election in the future.
As of December 31, 2024, the Bank was well-capitalized,
as defined by FDIC regulations. As of December 31, 2024, the Company had regulatory capital in excess of the Federal Reserve’s requirements
and met the Basel III rule requirements to be well-capitalized.
Acquisition Activity
The primary purpose of a bank holding company is to
control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank holding company. In addition, the prior approval of the FDIC
is required for a bank to merge with another bank or purchase the assets or assume the deposits of another bank. In determining whether
to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition,
the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis,
and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act (“CRA”).
On July 9, 2021, President Biden issued an Executive
Order on Promoting Competition in the American Economy. Among other initiatives, the Executive Order encouraged the federal banking agencies
to review their current merger oversight practices under the BHCA and the Bank Merger Act and adopt a plan for revitalization of such
practices. In December 2021, the U.S. Department of Justice (“DOJ”) (in consultation with the Federal Reserve, the Office
of the Comptroller of the Currency (the “OCC”), and FDIC announced that it was seeking additional public comments on whether
and how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines. The comment period closed on February 15, 2022. In March
2022, the FDIC published a Request for Information seeking information and comments regarding the laws, practices, rules, regulations,
guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including
the merger between an insured depository institution and a noninsured institution. In a May 2022 speech, the acting head of the OCC announced
that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s frameworks to analyze bank
mergers. In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.
On September 17, 2024, the FDIC approved a final Statement
of Policy on Bank Merger Transactions, updating its approach to evaluating bank mergers under the Bank Merger Act. The new policy emphasizes
a principles-based
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evaluation, focusing on factors such as the effect
of the transaction on competition, financial stability, and the convenience and needs of the community to be served. The OCC concurrently
approved a final rule updating its regulations for business combinations involving national banks and federal savings associations, including
a policy statement summarizing the principles used during its review of Bank Merger Act applications. Importantly, the Federal Reserve
did not join with the FDIC and the OCC in this updated guidance. Additionally, the DOJ announced its withdrawal from the 1995 Bank Merger
Competitive Review Guidelines, indicating that it would apply its 2023 Merger Guidelines to the banking industry.
These developments
reflect a heightened regulatory focus on bank mergers, with an emphasis on maintaining competition, ensuring financial stability, and
addressing community needs. However, given the shift in administration under President Trump, regulatory priorities may change. Financial
institutions considering mergers or acquisitions should monitor potential regulatory shifts under the new administration, as changes in
policy priorities may impact the level of scrutiny and the application of existing regulatory frameworks.
Proposed Legislation and Regulatory Action
From time to time, various legislative and regulatory
initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals
to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial
institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial
and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot
predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have
on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable
to the Company or the Bank could have a material effect on the business of the Company.
On October 2, 2024, the FDIC released a notice of proposed
rulemaking to strengthen recordkeeping requirements for certain types of custodial accounts. Under the proposed rule, FDIC-insured banks
holding certain custodial accounts, as defined in the proposal, would be required to take certain steps to ensure accurate account records
are maintained in order to determine the individual owner of the funds, including a requirement to reconcile the account for each individual
owner on a daily basis. These requirements, as well as others, apply if the bank uses a third party to maintain records. The FDIC extended
the comment period to January 16, 2025. It is unclear how President Trump’s administration will approach proposals under the previous
administration.
Southern First Bancshares, Inc.
We own 100% of the outstanding capital stock of the
Bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956. As a result, we
are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the BHCA and its regulations
promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina
Banking and Branching Efficiency Act.
Permitted Activities. Under the BHCA,
a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares
of any company engaged in, the following activities:
· banking or managing or controlling banks;
· furnishing services to or performing services for our subsidiaries; and
Activities that the Federal Reserve has found to be
so closely related to banking as to be a proper incident to the business of banking include: