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). 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 Outlook for all long-term ratings has been revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook reflects recent profitability trends that have performed moderately weaker than many similarly rated peers and a constrained earnings growth outlook. The latter is in consideration of a liability sensitive balance sheet that contains a higher proportion of more expensive maturity deposits, a moderate residential mortgage mix, and mostly fixed rate loan structures. Furthermore, the earnings profile has become comparatively more spread-reliant with mortgage gain-on-sale income likely remaining relatively muted in the higher rate environment. Greater than peer NIM compression in recent quarters has been driven by a funding mix that reflects higher levels of brokered deposits and retail CDs versus peers, which represented 9% and 17%, respectively, of total deposits at 2Q23. In that regard, IB deposit costs (~3.30% in 2Q23) tracked notably higher than most KBRA rated peers. Additionally, regulatory capital protection as measured by the CET1 ratio, which represented a source of rating support in previous years, has regressed substantially as a result of weakened earnings in conjunction with comparatively elevated loan growth. The CET1 ratio of 10.0% as of 2Q23 contracted by 130 bps compared to 2Q22 and tracked 100 bps below the average of similarly-rated peers. While we expect earnings capacity to remain relatively muted over the near term, to stem some capital pressures, management intends to meaningfully temper new loan growth and strategically pay down noncore deposits. SFST’s ratings are supported by management’s deep-rooted knowledge of its footprint, an operating strategy centered on organic growth and a disciplined credit culture, a balanced loan mix with well supported collateral that we view as underwritten to conservative credit standards, and solid sponsor profiles. The mortgage portfolio is underpinned by a low debt-to-income measure that has historically averaged ~25%, and commercial portfolios, particularly investor CRE, are relatively granular with manageable sector concentrations. While overall office exposures totaled ~16% of total loans, they include a moderate portion of owner-occupied office space with medical offices comprising the largest tenant base. Investor office exposures accounted for 6% of total loans and largely reflected minimal loan and lease rollover risks and seemingly no material tenant concentrations.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term. A revision to a Stable Outlook would need to be precipitated by the CET1 ratio and earning measures returning to peer-like levels within the next 12 to 18 months while also increasing readily available contingent liquidity capacity. Conversely, deterioration in credit quality, an increase in more expensive and volatile funding sources, further earnings weakness, or lack of growth in the CET1 ratio could lead to a downgrade.

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