KBRA Affirms Ratings for Southern First Bancshares, Inc.
6 Sep 2024 | New York
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 revised to Stable from Negative.
The ratings are supported by management’s deep-rooted knowledge of its footprint, an operating strategy centered on organic growth, a relatively balanced loan portfolio (in terms of mix) that appears to be underwritten conservatively and supported by collateral; the bank generally targets commercial clients.
The Outlook revision to Stable is based on management’s commitment to increase regulatory capital ratios (driven by earnings retention and de minimis RWA growth) to a level more commensurate with peers. KBRA notes that the company’s practice excludes common share dividends and share repurchases in recent years.
Starting in 2H22, in conjunction with higher short-term interest rates, the bank’s declining trend in profitability underperformed rated peers, partly because of the liability sensitive balance sheet, which was the result of a combination of the bank's comparably weaker funding base (a greater reliance on maturity deposits and more expensive wholesale funding sources - brokered deposits and FHLB borrowings comprising around 19% of total liability) and certain fixed-rate nature of the loan portfolio. Further compounding earnings pressure is the mortgage gain-on-sale income that was largely muted since the FRB’s ZIRP policy was reversed.
Total on-balance sheet liquidity amounted to around 8% of total assets, which consists of total investment securities (3.4%) and ST investments (4.7%) and is considered low, mostly due to the elevated loan-to-deposit ratio of 105%. Total uninsured deposits amounted to around 38% of total deposits – a portion of which are public funds collateralized by FHLB letter of credit ($380 million). The coverage of uninsured deposits from total on-balance sheet liquidity, combined with available borrowing capacity from wholesale sources is adequate, although KBRA notes that these contingent sources might not always be available.
Credit costs have been well managed on a historical basis, supported by the company’s disciplined credit culture, in addition to its economically robust operating markets, generally.
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