Southern First Bancshares : Reports Results for First Quarter 2023

Southern First Reports Results for First Quarter 2023

Greenville, South Carolina, April 25, 2023 - Southern First Bancshares, Inc. (NASDAQ: SFST), holding company for Southern First Bank, today announced its financial results for the three-month period ended March 31, 2023.

"While the current interest rate environment continues to be challenging in terms of margin and earnings, we are excited about the outstanding retail deposit growth and record number of client accounts opened during the first quarter of 2023," stated Art Seaver, the Company's Chief Executive Officer. "We continue to enjoy strong momentum in attracting new clients and recruiting great bankers, which will have a lasting impact on the performance of our Company."

2023 First Quarter Highlights

• Net income was $2.7 million and diluted earnings per common share were $0.33 for Q1 2023
• Total deposits increased 27% to $3.4 billion at Q1 2023, compared to $2.7 billion at Q1 2022
• Total loans increased 28% to $3.4 billion at Q1 2023, compared to $2.7 billion at Q1 2022
• Book value per common share increased to $37.16 at Q1 2023, or 6%, over Q1 2022
• Record number of new account openings during Q1 2023

				Quarter Ended
		March 31	December 31	September 30	June 30	March 31
		2023	2022	2022	2022	2022
Earnings ($ in thousands, except per share data):
Net income available to common shareholders	$	2,703	5,492	8,413	7,240	7,970
Earnings per common share, diluted		0.33	0.68	1.05	0.90	0.98
Total revenue(1)		22,468	25,826	28,134	27,149	26,091
Net interest margin (tax-equivalent)(2)		2.36%	2.88%	3.19%	3.35%	3.37%
Return on average assets(3)		0.30%	0.63%	1.00%	0.92%	1.10%
Return on average equity(3)		3.67%	7.44%	11.57%	10.31%	11.60%
Efficiency ratio(4)		76.12%	63.55%	57.03%	58.16%	56.28%
Noninterest expense to average assets (3)		1.89%	1.87%	1.92%	2.02%	2.03%
Balance Sheet ($ in thousands):
Total loans(5)	$	3,417,945	3,273,363	3,030,027	2,845,205	2,660,675
Total deposits		3,426,774	3,133,864	3,001,452	2,870,158	2,708,174
Core deposits(6)		2,946,567	2,759,112	2,723,592	2,588,283	2,541,113
Total assets		3,938,140	3,691,981	3,439,669	3,287,663	3,073,234
Book value per common share		37.16	36.76	35.99	35.39	34.90
Loans to deposits		99.74%	104.45%	100.95%	99.13%	98.25%
Holding Company Capital Ratios(7):
Total risk-based capital ratio		12.67%	12.91%	13.58%	13.97%	14.37%
Tier 1 risk-based capital ratio		10.66%	10.88%	11.49%	11.83%	12.18%
Leverage ratio		8.77%	9.17%	9.44%	9.71%	10.12%
Common equity tier 1 ratio(8)		10.23%	10.44%	11.02%	11.33%	11.65%
Tangible common equity(9)		7.60%	7.98%	8.37%	8.60%	9.06%
Asset Quality Ratios:
Nonperforming assets/ total assets		0.12%	0.07%	0.08%	0.09%	0.15%
Classified assets/tier one capital plus allowance for credit losses		5.10%	4.71%	5.24%	7.29%	7.83%
Loans 30 days or more past due/ loans(5)		0.11%	0.11%	0.07%	0.10%	0.13%
Net charge-offs (recoveries)/average loans(5) (YTD annualized)		0.01%	(0.05%)	(0.06%)	0.02%	0.00%
Allowance for credit losses/loans(5)		1.18%	1.18%	1.20%	1.20%	1.24%
Allowance for credit losses/nonaccrual loans		854.33%	1,470.74%	1,388.87%	1,166.70%	726.88%

[Footnotes to table located on page 6]

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INCOME STATEMENTS - Unaudited

				Quarter Ended
		March 31	Dec 31	Sept 30	June 30	Mar 31
(in thousands, except per share data)		2023	2022	2022	2022	2022
Interest income
Loans	$	36,748	33,939	29,752	26,610	23,931
Investment securities		613	562	506	448	474
Federal funds sold		969	525	676	180	59
Total interest income		38,330	35,026	30,934	27,238	24,464
Interest expense
Deposits		17,179	10,329	5,021	1,844	908
Borrowings		727	578	459	510	392
Total interest expense		17,906	10,907	5,480	2,354	1,300
Net interest income		20,424	24,119	25,454	24,884	23,164
Provision for credit losses		1,825	2,325	950	1,775	1,105
Net interest income after provision for credit
losses		18,599	21,794	24,504	23,109	22,059
Noninterest income
Mortgage banking income		622	291	1,230	1,184	1,494
Service fees on deposit accounts		325	316	318	327	303
ATM and debit card income		555	558	542	548	514
Income from bank owned life insurance		332	344	315	315	315
Loss on disposal of fixed assets		-	-	-	(394)	-
Other income		210	198	275	285	301
Total noninterest income		2,044	1,707	2,680	2,265	2,927
Noninterest expense
Compensation and benefits		10,356	9,576	9,843	9,915	9,456
Occupancy		2,457	2,666	2,442	2,219	1,778
Outside service and data processing costs		1,629	1,521	1,529	1,528	1,533
Insurance		689	551	507	367	260
Professional fees		660	788	555	693	599
Marketing		366	282	338	329	269
Other		947	1,029	832	737	790
Total noninterest expenses		17,104	16,413	16,046	15,788	14,685
Income before provision for income taxes		3,539	7,088	11,138	9,586	10,301
Income tax expense		836	1,596	2,725	2,346	2,331
Net income available to common
shareholders	$	2,703	5,492	8,413	7,240	7,970
Earnings per common share - Basic	$	0.34	0.69	1.06	0.91	1.00
Earnings per common share - Diluted		0.33	0.68	1.04	0.90	0.98
Basic weighted average common shares		8,026	7,971	7,972	7,945	7,932
Diluted weighted average common shares		8,092	8,071	8,065	8,075	8,096

[Footnotes to table located on page 6]

Net income for the first quarter of 2023 was $2.7 million, or $0.33 per diluted share, a $2.8 million decrease from the fourth quarter of 2022 and a $5.3 million decrease from the first quarter of 2022. Net interest income decreased $3.7 million for the first quarter of 2023, compared to the fourth quarter of 2022, and decreased $2.7 million, compared to the first quarter of 2022. The decrease in net interest income from the prior quarter and prior year was driven by an increase in interest expense on our deposit accounts related to the Federal Reserve's 475-basis point interest rate hikes during the past 12 months.

The provision for credit losses was $1.8 million for the first quarter of 2023, compared to $2.3 million for the fourth quarter of 2022 and $1.1 million for the first quarter of 2022. The provision expense during the first quarter of 2023, calculated under the Current Expected Credit Loss ("CECL") methodology adopted effective January 1, 2022, includes a $1.9 million provision for loan losses and a $30 thousand reversal of the reserve for unfunded commitments.

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Noninterest income totaled $2.0 million for the first quarter of 2023, a $337 thousand increase from the fourth quarter of 2022 and an $883 thousand decrease from the first quarter of 2022. Mortgage banking income has typically been the largest component of our noninterest income; however, lower mortgage origination volume during the past 12 months, combined with our strategy to keep a larger percentage of these loans in our portfolio, has impacted our profitability. Consequently, mortgage banking income was $622 thousand for the first quarter of 2023, an increase of $331 thousand from the prior quarter income and an $872 thousand decrease from the first quarter of 2022.

Noninterest expense for the first quarter of 2023 was $17.1 million, a $691 thousand increase from the fourth quarter of 2022, and a $2.4 million increase from the first quarter of 2022. The increase in noninterest expense from the previous quarter was driven by increases in compensation and benefits, outside service and data processing costs, and insurance expense, while the increase from the prior year related to increases in compensation and benefits, occupancy, and insurance expenses. Compensation and benefits expense increased from the previous quarter and year, driven by annual salary increases, hiring of new team members, and higher benefits expense. Occupancy expense increased from the prior year due to costs associated with the construction and relocation of our headquarters, while insurance costs increased from the prior quarter and year due to higher FDIC insurance premiums.

Our effective tax rate was 23.6% for the first quarter, an increase from 22.5% for the fourth quarter of 2022 and from 22.6% for the first quarter of 2022. The higher tax rate in the first quarter of 2023 relates to the effect of equity compensation transactions on our tax rate during the quarter.

NET INTEREST INCOME AND MARGIN - Unaudited

											For the Three Months Ended
				March 31, 2023			December 31, 2022				March 31, 2022
		Average	Income/	Yield/		Average	Income/	Yield/		Average	Income/	Yield/
(dollars in thousands)		Balance	Expense	Rate(3)		Balance	Expense	Rate(3)		Balance	Expense	Rate(3)
Interest-earning assets
Federal funds sold and interest-
bearing deposits	$	85,966	$	969	4.57%	$	60,176	$ 525	3.46%	$	89,096	$	59	0.27%
Investment securities, taxable		87,521		530	2.46%		86,594	515	2.36%		113,101		425	1.52%
Investment securities, nontaxable(2)		10,266		106	4.21%		9,987	61	2.42%		11,899		64	2.17%
Loans(10)	3,334,530		36,748	4.47%	3,165,061	33,939	4.25%	2,573,978	23,931	3.77%
Total interest-earning assets	3,518,283		38,353	4.42%	3,321,818	35,040	4.18%	2,788,074	24,479	3.56%
Noninterest-earning assets		161,310					162,924				152,565
Total assets	$3,679,593				$3,484,742			$2,940,639
Interest-bearing liabilities
NOW accounts	$	303,176		440	0.59%	$	343,541	379	0.44%	$	406,054		115	0.11%
Savings & money market	1,661,878		11,992	2.93%	1,529,532	7,657	1.99%	1,242,225		618	0.20%
Time deposits		543,425		4,747	3.54%		405,907	2,293	2.24%		158,720		175	0.45%
Total interest-bearing deposits	2,508,479		17,179	2.78%	2,278,980	10,329	1.80%	1,806,999		908	0.20%
FHLB advances and other borrowings		18,243		200	4.45%		7,594	81	4.23%		16,626		12	0.29%
Subordinated debentures		36,224		527	5.90%		36,197	497	5.45%		36,116		380	4.27%
Total interest-bearing liabilities	2,562,946		17,906	2.83%	2,322,771	10,907	1.86%	1,859,741		1,300	0.28%
Noninterest-bearing liabilities		818,123					869,314				802,299
Shareholders' equity		298,524					292,657				278,600
Total liabilities and shareholders'
equity	$3,679,593				$3,484,742			$2,940,639
Net interest spread					1.59%				2.32%					3.28%
Net interest income (tax equivalent) /
margin			$20,447	2.36%			$24,133	2.88%			$23,179	3.37%
Less: tax-equivalent adjustment(2)				23				14					15
Net interest income			$20,424				$24,119				$23,164

[Footnotes to table located on page 6]

Net interest income was $20.4 million for the first quarter of 2023, a $3.7 million decrease from the fourth quarter of 2022, driven by a $7.0 million increase in interest expense, partially offset by a $3.3 million increase in interest income, on a taxable basis. The increase in interest expense was driven by $229.5 million growth in average interest-bearing deposit balances at an average rate of 2.78%, a 98-basis points increase over the previous quarter, partially offset by $169.5 million growth in average loan balances at a yield of 4.47%, an increase of 22-basis points from the fourth quarter of 2022. In comparison to

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the first quarter of 2022, net interest income decreased $2.7 million, resulting primarily from $701.5 million growth in average interest-bearing deposit balances during the 13 months ended March 31, 2023, combined with a 258-basis point increase in deposit rates. Our net interest margin, on a tax-equivalent basis, was 2.36% for the first quarter of 2023, a 52-basis point decrease from 2.88% for the fourth quarter of 2022 and a 101-basis point decrease from 3.37% for the first quarter of 2022. As a result of the Federal Reserve's 475-basis point interest rate hikes during the past 12 months, the rate on our interest- bearing liabilities has increased by 255-basis points during the first quarter of 2023 in comparison to the first quarter of 2022. However, the yield on our interest-earning assets, driven by our loan portfolio, has increased by only 86-basis points during the same time period, resulting in the lower net interest margin during the first quarter of 2023.

BALANCE SHEETS - Unaudited

				Ending Balance
		March 31	December 31	September 30	June 30	March 31
(in thousands, except per share data)		2023	2022	2022	2022	2022
Assets
Cash and cash equivalents:
Cash and due from banks	$	22,213	18,788	16,530	21,090	20,992
Federal funds sold		242,642	101,277	139,544	124,462	95,093
Interest-bearing deposits with banks		7,350	50,809	4,532	36,538	33,131
Total cash and cash equivalents		272,205	170,874	160,606	182,090	149,216
Investment securities:
Investment securities available for sale		94,036	93,347	91,521	98,991	106,978
Other investments		10,097	10,833	5,449	5,065	4,104
Total investment securities		104,133	104,180	96,970	104,056	111,082
Mortgage loans held for sale		6,979	3,917	9,243	18,329	17,840
Loans (5)		3,417,945	3,273,363	3,030,027	2,845,205	2,660,675
Less allowance for credit losses		(40,435)	(38,639)	(36,317)	(34,192)	(32,944)
Loans, net		3,377,510	3,234,724	2,993,710	2,811,013	2,627,731
Bank owned life insurance		51,453	51,122	50,778	50,463	50,148
Property and equipment, net		97,806	99,183	99,530	96,674	95,129
Deferred income taxes		12,087	12,522	18,425	15,078	10,635
Other assets		15,967	15,459	10,407	9,960	10,859
Total assets	$	3,938,140	3,691,981	3,439,669	3,287,663	3,072,640
Liabilities
Deposits	$	3,426,774	3,133,864	3,001,452	2,870,158	2,708,174
FHLB Advances		125,000	175,000	60,000	50,000	-
Subordinated debentures		36,241	36,214	36,187	36,160	36,133
Other liabilities		50,775	52,391	54,245	48,708	49,809
Total liabilities		3,638,790	3,397,469	3,151,884	3,005,026	2,794,116
Shareholders' equity
Preferred stock - $.01 par value; 10,000,000 shares
authorized		-	-	-	-	-
Common Stock - $.01 par value; 10,000,000 shares
authorized		80	80	80	80	80
Nonvested restricted stock		(4,462)	(3,306)	(3,348)	(3,230)	(3,425)
Additional paid-in capital		120,683	119,027	118,433	117,714	117,286
Accumulated other comprehensive loss		(11,775)	(13,410)	(14,009)	(10,143)	(6,393)
Retained earnings		194,824	192,121	186,629	178,216	170,976
Total shareholders' equity		299,350	294,512	287,785	282,637	278,524
Total liabilities and shareholders' equity	$	3,938,140	3,691,981	3,439,669	3,287,663	3,072,640
Common Stock
Book value per common share	$	37.16	36.76	35.99	35.39	34.90
Stock price:
High		45.05	49.50	47.16	50.09	65.02
Low		30.70	41.46	41.66	42.25	50.84
Period end		30.70	45.75	41.66	43.59	50.84
Common shares outstanding		8,048	8,011	7,997	7,986	7,981

[Footnotes to table located on page 6]

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ASSET QUALITY MEASURES - Unaudited

				Quarter Ended
		March 31	December 31	September 30	June 30	March 31
(dollars in thousands)		2023	2022	2022	2022	2022
Nonperforming Assets
Commercial
Non-owner occupied RE	$	1,384	247	253	981	1,026
Commercial business		1,196	182	79	-	-
Consumer
Real estate		1,075	1,099	904	552	1,482
Home equity		1,078	1,099	1,379	1,398	2,024
Total nonaccrual loans		4,733	2,627	2,615	2,931	4,532
Other real estate owned		-	-	-	-	-
Total nonperforming assets	$	4,733	2,627	2,615	2,931	4,532
Nonperforming assets as a percentage of:
Total assets		0.12%	0.07%	0.08%	0.09%	0.15%
Total loans		0.14%	0.08%	0.09%	0.10%	0.17%
Classified assets/tier 1 capital plus allowance for credit
losses		5.10%	4.71%	5.24%	7.29%	7.83%
				Quarter Ended
		March 31	December 31	September 30	June 30	March 31
(dollars in thousands)		2023	2022	2022	2022	2022
Allowance for Credit Losses
Balance, beginning of period	$	38,639	36,317	34,192	32,944	30,408
CECL adjustment		-	-	-	-	1,500
Loans charged-off		(161)	-	-	(316)	(169)
Recoveries of loans previously charged-off		102	22	1,600	39	180
Net loans (charged-off) recovered		(59)	22	1,600	(277)	11
Provision for credit losses		1,855	2,300	525	1,525	1,025
Balance, end of period	$	40,435	38,639	36,317	34,192	32,944
Allowance for credit losses to gross loans		1.18 %	1.18 %	1.20 %	1.20 %	1.24 %
Allowance for credit losses to nonaccrual loans		854.33 %	1,470.74 %	1,388.87 %	1,166.70 %	726.88 %
Net charge-offs to average loans QTD (annualized)		0.01 %	0.00 %	(0.22 %)	0.04 %	0.00 %

Total nonperforming assets increased by $2.1 million during the first quarter of 2023, representing 0.12% of total assets, compared to 0.07% in the fourth quarter of 2023. The increase in nonperforming assets during the first quarter of 2023 results primarily from three commercial loans that went on nonaccrual status. In addition, our classified asset ratio increased to 5.10% for the first quarter of 2023 from 4.71% in the fourth quarter of 2022 and decreased from 7.83% in the first quarter of 2022. The improvement from the first quarter of 2022 was primarily the result of six hotel loans, or $18.5 million in the aggregate, we upgraded from substandard during the prior year.

On March 31, 2023, the allowance for credit losses was $40.4 million, or 1.18% of total loans, compared to $38.6 million, or 1.18% of total loans, at December 31, 2022, and $32.9 million, or 1.24% of total loans, at March 31, 2022. We had net charge- offs of $59 thousand, or 0.01% annualized, for the first quarter of 2023, compared to net recoveries of $22 thousand for the fourth quarter of 2022 and net recoveries of $11 thousand for the first quarter of 2022. There was a provision for credit losses of $1.9 million for the first quarter of 2023, compared to a provision of $2.3 million for the fourth quarter of 2022 and a provision of $1.0 million for the first quarter of 2022.

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