KBRA Affirms Ratings for Southern First Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Greenville, South Carolina-based Southern First Bancshares, Inc. (NASDAQ: SFST)("the company"). KBRA also affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the subsidiary, Southern First Bank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are tied to management’s consistently applied operating strategy, the recent positive trend in regulatory capital ratios, and a history of limited problem loans, due, in part, to the concentration in residential lending, which, as a loan class, has exhibited favorable performance characteristics since the GFC era. In terms of loan quality, the bank’s average NCO rate for the period 2Q25 – 2021 effectively is 0%; as of 2Q25, the bank’s NPA ratio was 0.32% compared to a peer level of 0.72%. The ratings are constrained primarily by unfavorable consolidated and bank capital metrics relative to KBRA similarly rated peers as well as the bank’s higher costs, reliance upon potentially volatile sources of funds, and modest asset liquidity.

Substantial asset growth, in the period 2021-2023, caused capital ratios to decline at a greater rate than KBRA-rated peers (which also experienced meaningful asset growth), after being more commensurate with peer levels in earlier periods, including 2019-2020. Modest balance sheet growth in 2024 (coupled with ongoing absence of common stock dividends and share repurchases) resulted in capital ratio improvement, although metrics continue to trail rated peers by a notable margin. KBRA notes that YTD asset growth has mostly offset capital accretion, limiting capital ratio improvement.

The trend in earnings performance at the bank reflects the contours of the interest rate environment, given the liability-sensitive nature of the balance sheet, reliance on potentially volatile sources of deposit and non-deposit funds (which tend to be more price sensitive), and modest fee income contribution. While the NIM has rebounded post the current easing cycle, which commenced in September 2024, driven by a decline in total cost of deposits, the cost remains greater than peers at 2Q25 (2.72% vs. 2.21%). The yield on earning assets is generally in line with rated peers.

Management remains focused on improving the deposit base to reduce the beta and support related metrics, such as loans-to-deposits. While modest progress has been made, loans continue to constitute a large percentage of assets (87% at 2Q25), contributing to the high ratio of loans to deposits and the modest level of asset liquidity (ST investments and the securities book comprise 9% and 10% of total assets and deposits, respectively). Contingent sources of funding, in the form of FHLB, FRB, and Fed Funds’ borrowing capacity, totaled $1.15 billion at 2Q25; these sources, together with the investment book, offset uninsured deposits by 92%. KBRA notes that the securities portfolio is unpledged, although 89% of the loan portfolio is pledged to secure on- and off-balance sheet funding.

Rating Sensitivities

A rating upgrade in the near to intermediate term is unlikely, barring an exogenous event. Conversely, given the sizeable variance between the bank’s capital position and similarly rated KBRA peers, a downgrade could result if the gap does not continue to narrow or it begins to widen. In addition, although not currently anticipated, rating pressure could emanate from loan portfolio deterioration such that it creates volatility in earnings, including episodes of periodic net losses.

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Methodologies