UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒Annual
Report Pursuant To Section 13 Or 15(d) of The Securities Exchange Act of 1934
For The Fiscal Year December 31, 2025.
Or
☐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)
6 Verdae Boulevard, Greenville, SC 29607
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Trading Symbol Name of each exchange on which registered
Common Stock SFST The NASDAQ Global Market
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ☒ No ☐
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 ☐ Accelerated
filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging
growth company ☐
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. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements
of
the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
The aggregate market value of the common equity held by non-affiliates
of the registrant as of June 30, 2025 (based on the average bid and ask price of the Common Stock as quoted on the NASDAQ Global Market
on June 30, 2025), was $292,504,676.
8,231,198 shares of the registrant’s common stock were
outstanding as of February 13, 2026.
DOCUMENTS INCORPORATED BY REFERENCE
Southern First Bancshares, Inc.
Index to Form 10-K
Page
PART I
Item 1. Business 5
Item 1A. Risk Factors 30
Item 1B. Unresolved Staff Comments 44
Item 1C. Cybersecurity 44
Item 2. Properties 46
Item 3. Legal Proceedings 46
Item 4. Mine Safety Disclosures 46
PART II
Item 6. [Reserved] 48
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 68
Item 8. Financial Statements and Supplementary Data 69
Item 9A. Controls and Procedures 113
Item 9B. Other Information 114
PART III
Item 10. Directors, Executive Officers and Corporate Governance 114
Item 11. Executive Compensation 114
Item 14. Principal Accounting Fees and Services 114
PART IV
Item 15. Exhibits, Financial Statement Schedules 115
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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,” “forecasts,” “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;
· The success and costs of expansion into potential new markets;
· 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 and expect to open a retail office in Cary, North Carolina in late 2026.
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 $263.7 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 64.0% efficiency ratio for the year ended December 31, 2025.
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 some of the 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-Greer
MSA is the most populous market in South Carolina with an estimated population of 996,680 as reported for 2024. The median household income
for the Greenville-Anderson-Greer MSA was $75,881 for 2024. A large and diverse metropolitan area, the Greenville-Anderson-Greer 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 869,940 for 2024. 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 $90,307 for 2024. 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 870,193 for 2024. The median household
income for the Columbia MSA was $70,788 for 2024.
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 1.56 million for 2024. 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 $102,144
for 2024.
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 800,722 for 2024. 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 $66,072 for 2024.
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 2.88 million for 2024. 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 $85,938 for 2024.
Atlanta. The Atlanta-Sandy Springs-Roswell MSA has
the nineth largest population in the U.S. estimated at 6.41 million for 2024. 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-Roswell MSA is $92,344 for 2024.
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 United States Census Bureau 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, Julie
A. Fairchild, Wesley C. Wilbanks, and Silvia T. King, whose biographies are included below.
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. Prior to joining us, Mr. Zych held various roles at United Community Bank, most recently serving
as Director of Corporate Development and Investor Relations for over a decade. He has 30 years of experience in the banking industry,
including 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.
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.
Wesley C. Wilbanks has served as Chief Credit Officer
of the Bank since April 2025. Mr. Wilbanks joined us in September 2021 as a Senior Credit Risk Officer before serving as Executive Director
of Market Support. Mr. Wilbanks has over 25 years of banking experience, and prior to joining Southern First, served in various senior
credit roles at SouthState Bank for 11 years. Mr. Wilbanks is a graduate of Palm Beach Atlantic University with a Bachelor’s degree
in Finance and a graduate of the School of Banking at LSU.
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.
In addition to Messrs. Seaver, Hurst, Zych, Wilbanks, Mses.
Fairchild and King, our executive management team consists of 13 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, 2025, our executive officers and board of directors owned
an aggregate of 567,422 shares of our common stock, including options to purchase shares of our common stock, which represented approximately
7.014% 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 315 FTE employees as of December
31, 2025. 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 2025, 40% of deposits were
acquired through our office network, 43% came through the commercial remote deposit capture channel and the remaining 15% 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. 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
footprint, such as our recent expansion in 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, 2025, we had net loans of $3.80 billion, representing
86.4% 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,
2025, our average loan size was approximately $382,000. 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, 2025, our ten largest client loan relationships represented approximately
$288 million, or 7.48%, of our loan portfolio.
In October 2023, we opened our 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 credit 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, 2025, the maximum amount we could lend to one borrower was $65.6 million. However, to mitigate concentration risk, our
internal lending limit at December 31, 2025 was $45.9 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, 2025, loans
secured by first or second mortgages on commercial and consumer real estate made up approximately 82.8% 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 16.0%
and 1.1%, respectively, of our total loan portfolio at December 31, 2025.
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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· 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, 2025, we had originated 12 loans utilizing government
enhancements and over 26 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, 2025, we had $552.9 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 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, 2025, 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, 38 financial institutions in the Charleston and Raleigh markets, 25 financial institutions in the Greensboro market, 49 financial
institutions in the Charlotte market, and 80 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
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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 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, 2025, we employed a total of 315 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
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· Limiting banks’ proprietary trading activities.
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
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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%.
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 of the date of this filing, the Basel III Endgame rules have
not been finalized, and their scope, and ultimate implementation remain uncertain.
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. In November 2025, federal banking regulators proposed changes to increase flexibility
under the community bank leverage ratio framework, including lowering the leverage ratio threshold from 9% to 8% and extending the grace
period for falling below the threshold from two quarters to four quarters, subject to certain conditions. Public comments on the proposal
were open through January 30, 2026. 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, 2025, the Bank was well-capitalized, as
defined by FDIC regulations. As of December 31, 2025, 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