10-K: Southern First Bancshares Reports Strong 2025 Growth

Southern First Bancshares, Inc. reported a significant increase in net income and improved efficiency for the fiscal year ended December 31, 2025, driven by higher net interest income and strategic growth.

Summary

• Net income available to common shareholders increased by 95.53% to $30.366 million for the year ended December 31, 2025, up from $15.530 million in 2024.
• Diluted earnings per share (EPS) rose by 94.76% to $3.72 in 2025, compared to $1.91 in 2024.
• Total assets grew by 7.73% to $4.403 billion at December 31, 2025, from $4.088 billion in 2024.
• Net interest income increased by $23.7 million, or 29.2%, to $104.951 million in 2025, primarily due to a decrease in interest expense and an increase in interest income.
• The net interest margin (tax equivalent) improved to 2.57% in 2025, up 51 basis points from 2.06% in 2024.
• The efficiency ratio significantly improved to 63.96% in 2025, down from 78.54% in 2024, indicating better cost management.
• Loan growth was 5.87% in 2025, with total loans (net of allowance for credit losses) reaching $3.803 billion.
• Deposit growth was 8.18% in 2025, with total deposits reaching $3.717 billion.
• The allowance for credit losses to total loans remained stable at 1.10% in 2025, with net charge-offs to average total loans at 0.00%.
• Nonperforming assets to total assets increased slightly to 0.32% in 2025 from 0.27% in 2024.
• The Bank maintained a 'well-capitalized' status, exceeding all minimum regulatory capital requirements, with a Common Equity Tier 1 ratio of 11.61% and a Total Capital ratio of 12.85% at December 31, 2025.
• The Company transitioned to a discounted cash flow (DCF) methodology for estimating the allowance for credit losses in the first quarter of 2025, which did not have a material effect on financial statements.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a strong performance, driven by significant improvements in profitability metrics and efficiency, alongside robust capital levels and effective risk management. While some asset quality metrics show slight deterioration, overall credit quality remains strong, and strategic growth initiatives are progressing.

Positives

• Net income available to common shareholders increased by 95.53% to $30.366 million in 2025, demonstrating strong profitability.
• Diluted earnings per share (EPS) grew by 94.76% to $3.72 in 2025, reflecting enhanced shareholder value.
• Return on average assets improved significantly to 0.72% in 2025 from 0.38% in 2024.
• Return on average equity increased to 8.73% in 2025 from 4.84% in 2024.
• Net interest margin (tax equivalent) expanded by 51 basis points to 2.57% in 2025, indicating effective interest rate management.
• The efficiency ratio improved substantially to 63.96% in 2025 from 78.54% in 2024, showcasing operational efficiency.
• Net charge-offs to average total loans remained at a very low 0.00% in 2025, highlighting strong credit quality.
• The allowance for credit losses to nonperforming loans was robust at 305.65% in 2025, providing ample coverage for potential losses.
• The Bank maintained a 'well-capitalized' status, exceeding all minimum regulatory capital ratios, including a Common Equity Tier 1 ratio of 11.61% and a Total Capital ratio of 12.85% at December 31, 2025.
• Mortgage banking income increased by $722,000, or 13.0%, in 2025 due to higher mortgage volume.
• Service fees on deposit accounts increased by $601,000, or 34.1%, driven by higher transaction volume, wire transfer fees, and commercial credit card services growth.
• Average loan balances increased by $124.1 million in 2025, contributing to interest income growth.
• Average interest-earning assets increased by $152.4 million in 2025.
• Interest expense on deposits decreased in 2025 due to repricing in response to declining market interest rates.
• Core deposits grew to $2.88 billion in 2025 from $2.66 billion in 2024, providing a stable funding source.
• The Company maintains significant unused borrowing capacity from the FHLB ($836.5 million) and the Federal Reserve Discount Window ($181.2 million), enhancing liquidity.
• Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2025, with an unqualified opinion from independent auditors.
• The ClientFIRST model, focusing on superior client service and cost efficiencies, has resulted in larger average deposit balances per office ($263.7 million) compared to peers.
• Strategic investments in IT systems and technology offerings are driving low-cost deposit growth and maintaining a competitive advantage among community banks.
• Successful expansion into attractive South Carolina, North Carolina, and Georgia markets continues to provide growth opportunities.
• The executive management team brings an average of 30 years of banking experience, complemented by a dedicated board of directors with extensive local market knowledge.
• Management and the board's incentives are closely aligned with shareholders through substantial stock ownership (7.014% fully-diluted as of December 31, 2025).
• No material litigation is pending or threatened against the Company.

Negatives

• Nonperforming assets to total assets increased to 0.32% in 2025 from 0.27% in 2024, indicating a slight deterioration in asset quality.
• Nonaccrual loans increased by $3.0 million in 2025, primarily due to movements within the consumer real estate portfolio.
• A loss on the sale of investment securities of $515,000 was recognized in 2025.
• The Company held $9.4 million in unrealized losses on available-for-sale investment securities at December 31, 2025, primarily due to market interest rate movements.
• The loan portfolio contains a number of real estate loans with relatively large balances, increasing concentration risk if a few loans deteriorate.
• Approximately 75% of the loan portfolio was in fixed-rate loans at December 31, 2025, which could be a disadvantage in a rising interest rate environment.
• Reliance on brokered deposits, which constituted 14.9% of total deposits in 2025, may introduce liquidity and cost volatility.
• An estimated $1.5 billion in uninsured deposits at December 31, 2025, poses a risk of rapid withdrawal during periods of market stress.
• The Company has not declared or paid any cash dividends on its common stock since inception and does not intend to for the foreseeable future, which may deter income-focused investors.
• The Company's stock price has been volatile in the past and may fluctuate substantially in the future, potentially resulting in losses for investors.
• The relatively low trading volume of the common stock may make it difficult for investors to resell shares at desired prices.
• Future sales of stock or capital raises could dilute the percentage ownership interest and book value per share of existing shareholders.
• Provisions in the articles of incorporation and bylaws, along with state and federal banking regulations, could delay or prevent a third-party takeover.
• Loans to directors and executive officers, including their affiliates, increased significantly to $52.129 million at December 31, 2025, from $25.145 million in 2024.

Risks

• Restrictions or conditions imposed by regulators on operations.
• Increases in competitive pressure in the banking and financial services industries from various financial institutions, including larger, more diversified entities and FinTech companies.
• Changes in access to funding or increased regulatory requirements with regard to funding, which could impair liquidity.
• Changes in deposit flows, negatively affected by competitor rates, general interest rate levels, regulatory capital requirements, returns on alternative investments, and general economic conditions.
• Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior, or other factors.
• Credit losses due to loan concentration, particularly with approximately 83% of the loan portfolio collateralized by real estate.
• Changes in the amount of the loan portfolio collateralized by real estate and weaknesses in the real estate market.
• Inability to successfully execute business strategy.
• Inability to attract and retain key personnel, including experienced loan originators and management.
• Risks and costs associated with expansion into new markets or through mergers/acquisitions, including integration challenges and failure to realize anticipated benefits.
• Changes in the interest rate environment, which could reduce anticipated or actual margins, especially with 75% of the loan portfolio in fixed-rate loans.
• Changes in political, economic, legislative, or regulatory conditions, including new governmental initiatives affecting the financial services industry and potential disruptions from U.S. federal government funding lapses.
• Changes in economic conditions resulting in a deterioration in credit quality.
• Changes occurring in business conditions and inflation, including persistently higher input costs, wage pressures, and ongoing supply chain disruptions.
• Increased cybersecurity risk, including potential business disruptions or financial losses, and reliance on third-party vendors for critical systems.
• Changes in technology, including the rapid adoption of AI by competitors, which could detrimentally impact competitive positioning.
• The adequacy of the allowance for credit losses and the amount of loan loss provisions required in future periods.
• Examinations by regulatory authorities, potentially requiring increased allowance for credit losses or asset write-downs.
• Changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets, and other market conditions that may affect liquidity and asset/liability values.
• Any increase in FDIC assessments, which would increase the cost of doing business.
• Risks associated with complex and changing regulatory environments, including data privacy, artificial intelligence (AI), information security, climate change, environmental, social and governance (ESG) matters, and labor matters.
• The rate of delinquencies and amounts of loans charged-off.
• The rate of loan growth in recent years and the lack of seasoning of a portion of the loan portfolio.
• Inability to maintain appropriate levels of capital and to comply with capital ratio requirements.
• Adverse changes in asset quality and resulting credit risk-related losses and expenses.
• Changes in accounting standards, rules, and interpretations.
• Risks associated with actual or potential litigation or investigations by customers, regulatory agencies, or others, including lender liability claims.
• Adverse effects of failures by vendors to provide agreed-upon services in the manner and at the cost agreed.
• Potential effects of events beyond control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics; war, terrorism, or other geopolitical conflicts; disruptions in supply chains; utility outages; trade disputes; and widespread cybersecurity incidents.
• Deterioration of one or a few relatively large real estate loans could cause a significant increase in nonperforming loans.
• Commercial real estate loans (45.7% of the portfolio) involve distinct credit and collateral risks, and regulatory imposition of limits could curtail growth and adversely affect earnings.
• Repayment of commercial business loans (16.0% of the portfolio) is often dependent on unpredictable cash flows of the borrower, and collateral may fluctuate in value.
• Actual loan losses could exceed the allowance for credit losses.
• A percentage of loans in the portfolio may include exceptions to loan policies and supervisory guidelines, potentially increasing the risk of loan loss.
• Liquidity needs could adversely affect financial condition and results of operations, especially with increased competition for deposits and volatility in wholesale funding markets.
• Subject to extensive regulation that has limited business conduct and could impose financial requirements.
• Failure to comply with fair lending laws could lead to material penalties.
• Risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.
• Risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
• Consumer lending laws may restrict the ability to originate certain mortgage loans or increase liability.
• The Federal Reserve may require commitment of capital resources to support the Bank.
• Environmental risks, including hazardous substances on foreclosed properties and climate change risks such as severe weather events.
• Reliance on other companies to provide key components of business infrastructure increases exposure to cybersecurity risks and operational disruptions.
• The soundness of other financial institutions could adversely affect the Company due to interrelationships and counterparty risk.
• Losses due to errors, omissions, or fraudulent behavior by employees, clients, counterparties, or other third parties.
• Operational or security systems may experience an interruption or breach in security, including as a result of cyber-attacks.
• The enterprise risk management framework may not be effective in mitigating all risks.
• Controls and procedures may fail or be circumvented.
• Failure to keep pace with technological change could adversely affect the business.
• The development and use of AI presents risks and challenges, including biased/inaccurate outputs, confidential information disclosure, intellectual property infringement, and limited transparency.
• Profitability is dependent on banking activities, which are highly competitive.
• Negative public opinion surrounding the Company and the financial institutions industry generally could damage reputation and adversely impact earnings.
• Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material adverse effect.
• Consumers may decide not to use banks to complete their financial transactions (disintermediation).
• Reliance on brokered deposits could adversely affect liquidity and operating results.

Future Outlook

The Company expects to open a new retail office in Cary, North Carolina in late 2026 and plans to continue investing in IT systems and technology to drive low-cost deposit growth and meet evolving client needs. Management anticipates that an improving economy, coupled with a focus on maximizing net interest margin and minimizing the efficiency ratio while maintaining credit quality, will lead to continued and improved profitability and shareholder returns. The Company will pursue controlled franchise expansion, including potential new locations and entry into contiguous metropolitan markets, after rigorous due diligence and vetting of local banking teams. While evaluating potential acquisition opportunities, the Company has no immediate plans for specific acquisitions, believing organic growth is sufficient. Economic uncertainty, persistent inflationary pressures, higher interest rates, geopolitical conflicts, and potential market volatility are expected to continue into 2026. Regulatory developments, including the finalization of Basel III Endgame rules, changes in bank merger oversight, and new CFPB rules, remain uncertain and could impact future operations and capital requirements. The Company does not intend to declare cash dividends for the foreseeable future, prioritizing the retention of earnings for business growth and capital strengthening.

Management Comments

• Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs.
• We consider exceptional client service to be a critical part of our culture, which we refer to as ClientFIRST.
• 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.
• 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.
• Our executive management team and board of directors are dedicated to producing profits and returns for our shareholders.
• 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.
• 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 believe that technology innovation will continue to play a critical role in retaining clients and winning new business.
• As we grow, one of our top priorities is to continue to build a robust enterprise risk management infrastructure.
• We do not reduce our credit standards or pricing discipline to generate new loans.
• 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.
• We will continue to expand our franchise, but only in a controlled manner.
• We may also seek to enter new metropolitan markets contiguous to, or nearby, our current footprint... 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 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.
• Management is not aware of any practice, condition or violation that might lead to termination of the Bank's deposit insurance.
• Management has and will continue to evaluate any changes to the CRA's regulations and their impact to the Bank.
• Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date.
• As a result of this level of coverage on nonaccrual loans, we believe the allowance for credit losses of $42.3 million as of December 31, 2025 is adequate.
• Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.
• The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company's financial condition, results of operations, or cash flow.
• Management believes there is no material litigation pending.
• The Company is of the opinion that the lease payments and consulting fees represent market costs that could have been obtained in similar arms length transactions.
• We do not feel that any existing noncancelable operating lease agreements are likely to materially impact our financial condition or results of operations in an adverse way.
• While management believes that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by future credit losses.

Industry Context

StockSavvy.ai notes that the banking industry remains highly competitive, facing challenges from larger, more diversified financial institutions and emerging FinTech companies leveraging advanced technologies like AI. Regulatory scrutiny has intensified across areas such as liquidity risk, cybersecurity, data privacy, and anti-money laundering, particularly following recent bank failures. The evolving regulatory landscape for bank mergers and acquisitions, with recent policy shifts, adds to uncertainty. The Federal Reserve's monetary policies continue to significantly influence bank operating results and interest rates, with inflationary pressures and potential yield curve inversions posing ongoing concerns. The Company's focus on a 'ClientFIRST' model and technology investments positions it to compete effectively by differentiating service and efficiency in this dynamic environment.

Comparison to Industry Standards

• The Company's efficiency ratio of 63.96% for 2025 is noted as 'lower efficiency ratios relative to certain of our local competitors,' suggesting a more efficient operation compared to some peers.
• The Company's offices average approximately $263.7 million in total deposits, which is described as 'larger overall deposit balances in our offices as compared to peers,' indicating strong branch productivity.
• The Company's current mobile banking, online banking, and cash management offerings are considered 'industry-leading solutions amongst community banks,' providing a technological edge over many smaller competitors.
• The Company's internal lending limit of $45.9 million at December 31, 2025, is more conservative than its legal lending limit of $65.6 million, demonstrating a disciplined approach to managing concentration risk compared to regulatory maximums.
• The level of non-owner occupied commercial real estate loans, at 236.5% of the Bank's total risk-based capital at December 31, 2025, is below the supervisory scrutiny threshold of 300% set by interagency guidance, indicating prudent management of CRE exposure.
• The Bank was 'well-capitalized' as defined by FDIC regulations, exceeding all minimum capital ratios, which is a strong indicator of financial health compared to industry benchmarks.
• The Bank received a 'Satisfactory CRA rating' on its most recent examination report (February 27, 2025), demonstrating compliance with community reinvestment obligations.
• The Company's internal guidelines limit brokered CDs to 30% of total deposits, and its actual brokered deposits were 14.9% in 2025, well within its conservative limits.
• The loan-to-deposit ratio improved to 103% at December 31, 2025, from 106% in 2024 and 107% in 2023, indicating a healthier funding profile.
• Net charge-offs to average total loans remained at 0.00% in 2025, which is exceptionally low and suggests superior credit quality compared to broader industry averages.

Management Changes

Corporate Governance

Legal Proceedings

• Management believes there is no pending or threatened legal proceeding against the Company which, if determined adversely, would have a material effect on its business, results of operations, or financial condition.

Related Party Transactions

• Loans to directors and executive officers, including their affiliates, increased to $52.129 million at December 31, 2025, from $25.145 million at December 31, 2024. These loans were made on substantially the same terms as those with unrelated parties.
• Deposits by executive officers and directors and their related interests totaled $6.5 million at December 31, 2025, compared to $7.0 million at December 31, 2024.
• The Company has a land lease with a director for a branch office, with monthly payments of $10,749. Management believes these lease payments represent market costs.
• The Company periodically enters into consulting agreements with a director for development, administration, and advisory services related to property purchase and construction of branch offices and the new bank headquarters. No payments were made for these services in 2025 or 2024.
• The Company received rent payments of $93,000 in 2025 and $91,000 in 2024 from a company where a director is a private investor and chairman of the board. Management believes these rent payments represent market costs.

Stakeholder Impact

• **Shareholders**: Benefited from significant increases in net income and diluted EPS, and improved returns on assets and equity. However, the Company's policy of not paying cash dividends and retaining earnings for growth may not appeal to all income-focused investors. Stock price volatility and potential future dilution from capital raises remain risks.
• **Depositors**: Deposits are insured by the FDIC up to $250,000. The estimated $1.5 billion in uninsured deposits at December 31, 2025, could be a concern for large depositors during periods of market instability. The ClientFIRST model aims to provide superior service.
• **Employees**: Benefit from a comprehensive benefits program and stock incentive plans. Management reports excellent employee relations, and the Company's focus on attracting and retaining talented banking professionals supports career development.
• **Customers**: Benefit from the ClientFIRST model's personalized service, industry-leading mobile and online banking, and cash management solutions. The Dream Mortgage Center offers specialized homebuyer education and mortgage lending services.
• **Creditors**: The Company's strong capital ratios and well-capitalized status provide comfort. However, subordinated debentures rank junior to senior indebtedness, and the Company's obligation as a 'source of strength' to its subsidiary bank could impact the holding company's financial flexibility.

Next Steps

• Open a new retail office in Cary, North Carolina in late 2026.
• Continue to invest in IT systems and technology offerings to drive low-cost deposit growth and meet evolving client needs.
• Maintain focus on maximizing net interest margin and minimizing the efficiency ratio while upholding credit quality controls.
• Continue to expand the franchise in a controlled manner, including evaluating new locations and metropolitan markets contiguous to the current footprint.
• Evaluate potential acquisition opportunities that are complementary to the business, though no immediate plans for specific acquisitions exist.
• Management will continue to evaluate any changes to the CRA's regulations and their impact on the Bank.
• Continue ongoing investments in systems and controls to detect and prevent fraud.
• Monitor updates regarding the finalization and implementation of Basel III Endgame rules, bank merger review standards, and CFPB's Section 1033 rule reconsideration.
• The Board of Directors will annually review and approve the information security program, vendor management policy, acceptable use policy, and business continuity planning policy.
• The Board's Risk Committee will receive regular (at least quarterly) updates on cybersecurity risks and management's mitigation efforts.
• The Company does not intend to declare cash dividends for the foreseeable future, prioritizing the retention of earnings for business growth and capital strengthening.

Key Dates

Recommendation

Southern First Bancshares, Inc. delivered exceptional financial results in 2025, with net income and diluted EPS nearly doubling year-over-year. The significant improvement in net interest margin and efficiency ratio highlights effective management and operational leverage. The company maintains a well-capitalized status, strong credit quality with low net charge-offs, and a disciplined growth strategy focused on core deposits and commercial lending in high-growth Southeastern markets. While industry-wide regulatory uncertainties and interest rate risks persist, the company's proactive risk management, technological investments, and client-centric model position it for continued profitable growth. The current valuation, considering the strong performance and strategic clarity, presents a compelling "Strong Buy" opportunity for investors.

Keywords

Banking, Financial Services, Community Bank, Commercial Lending, Consumer Lending, Mortgage Loans, Deposits, Net Interest Margin, Efficiency Ratio, Capital Ratios, Credit Quality, Risk Management, Cybersecurity, SEC Filing, 10-K, South Carolina, North Carolina, Georgia, Regional Bank, ClientFIRST