Southern First Bancshares : Reports Results for Fourth Quarter 2022

Southern First Reports Results for Fourth Quarter 2022

Greenville, South Carolina, January 24, 2023 - Southern First Bancshares, Inc. (NASDAQ: SFST), holding company for Southern First Bank, today announced its financial results for the three and twelve months ended December 31, 2022.

"Southern First continues to attract talented bankers, and clients are moving their relationships to Southern First at a record pace," stated Art Seaver, the company's Chief Executive Officer. "In the fourth quarter of 2022, our team generated the largest loan growth quarter in our company's history. While this transitional interest rate cycle of the Federal Reserve is weakening our current margin, we continue to grow book value and are excited about our momentum as we head into the new year."

2022 Fourth Quarter Highlights

• Net income was $5.5 million, compared to $12.0 million for Q4 2021
• Diluted earnings per common share were $0.68 per share, compared to $1.49 for Q4 2021
• Total loans increased 31% to $3.3 billion, compared to $2.5 billion at Q4 2021
• Total deposits increased 22% to $3.1 billion at Q4 2022, compared to $2.6 billion at Q4 2021
• Book value per common share increased to $36.76, or 5%, over Q4 2021

				Quarter Ended
		December 31	September 30	June 30	March 31	December 31
		2022	2022	2022	2022	2021
Earnings ($ in thousands, except per share data):
Net income available to common shareholders	$	5,492	8,413	7,240	7,970	12,005
Earnings per common share, diluted		0.68	1.04	0.90	0.98	1.49
Total revenue(1)		25,826	28,134	27,149	26,091	26,194
Net interest margin (tax-equivalent)(2)		2.88%	3.19%	3.35%	3.37%	3.35%
Return on average assets(3)		0.63%	1.00%	0.92%	1.10%	1.66%
Return on average equity(3)		7.44%	11.57%	10.31%	11.60%	17.61%
Efficiency ratio(4)		63.55%	57.03%	58.16%	56.28%	56.25%
Noninterest expense to average assets (3)		1.87%	1.92%	2.02%	2.03%	2.06%
Balance Sheet ($ in thousands):
Total loans(5)	$	3,273,363	3,030,027	2,845,205	2,660,675	2,489,877
Total deposits		3,133,864	3,001,452	2,870,158	2,708,174	2,563,826
Core deposits(6)		2,759,112	2,723,592	2,588,283	2,541,113	2,479,412
Total assets		3,691,981	3,439,669	3,287,663	3,073,234	2,925,548
Book value per common share		36.76	35.99	35.39	34.90	35.07
Loans to deposits		104.45%	100.95%	99.13%	98.25%	97.12%
Holding Company Capital Ratios(7):
Total risk-based capital ratio		12.91%	13.58%	13.97%	14.37%	14.90%
Tier 1 risk-based capital ratio		10.88%	11.49%	11.83%	12.18%	12.65%
Leverage ratio		9.17%	9.44%	9.71%	10.12%	10.18%
Common equity tier 1 ratio(8)		10.44%	11.02%	11.33%	11.65%	12.09%
Tangible common equity(9)		7.98%	8.37%	8.60%	9.06%	9.50%
Asset Quality Ratios:
Nonperforming assets/ total assets		0.07%	0.08%	0.09%	0.15%	0.17%
Classified assets/tier one capital plus allowance for credit losses		4.71%	5.24%	7.29%	7.83%	12.61%
Loans 30 days or more past due/ loans(5)		0.11%	0.07%	0.10%	0.13%	0.09%
Net charge-offs (recoveries)/average loans(5) (YTD annualized)		(0.05%)	(0.06%)	0.02%	0.00%	0.06%
Allowance for credit losses/loans(5)		1.18%	1.20%	1.20%	1.24%	1.22%
Allowance for credit losses/nonaccrual loans		1,470.74%	1,388.87%	1,166.70%	726.88%	625.16%

[Footnotes to table located on page 6]

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INCOME STATEMENTS - Unaudited

			Quarter Ended				Twelve Months Ended
	Dec 31	Sept 30	Jun 30	Mar 31	Dec 31		December 31
(in thousands, except per share data)	2022	2022	2022	2022	2021	2022	2021

Interest income
Loans	$	33,939	29,752	26,610	23,931	23,661
Investment securities		562	506	448	474	410
Federal funds sold		525	676	180	59	66
Total interest income		35,026	30,934	27,238	24,464	24,137
Interest expense
Deposits		10,329	5,021	1,844	908	900
Borrowings		578	459	510	392	380
Total interest expense		10,907	5,480	2,354	1,300	1,280
Net interest income		24,119	25,454	24,884	23,164	22,857
Provision (reversal) for loan losses		2,325	950	1,775	1,105	(4,200)
Net interest income after provision for loan losses		21,794	24,504	23,109	22,059	27,057
Noninterest income
Mortgage banking income		291	1,230	1,184	1,494	1,931
Service fees on deposit accounts		187	194	209	191	200
ATM and debit card income		575	559	563	528	560
Income from bank owned life insurance		344	315	315	315	312
Loss on disposal of fixed assets		-	-	(394)	-	-
Other income		310	382	388	399	334
Total noninterest income		1,707	2,680	2,265	2,927	3,337
Noninterest expense
Compensation and benefits		9,576	9,843	9,915	9,456	9,208
Occupancy		2,666	2,442	2,219	1,778	2,081
Other real estate owned expenses		-	-	-	-	-
Outside service and data processing costs		1,521	1,529	1,528	1,533	1,395
Insurance		551	507	367	260	342
Professional fees		788	555	693	599	682
Marketing		282	338	329	269	260
Other		1,029	832	737	790	767
Total noninterest expenses		16,413	16,046	15,788	14,685	14,735
Income before provision for income taxes		7,088	11,138	9,586	10,301	15,659
Income tax expense		1,596	2,725	2,346	2,331	3,654
Net income available to common shareholders	$	5,492	8,413	7,240	7,970	12,005

114,233 91,599

1,990 1,335

1,439 233

117,662 93,167

18,102 3,909

1,939 1,526

20,041 5,435

97,621 87,732

6,155 (12,400)

91,466 100,132

4,198 11,376

1. 782 757

   2,225 2,092

   1,289 1,231

2. -
   1,480 1,645
   9,580 17,101

38,790 36,103

9,105 6,956

• 385
  6,112 5,468
  1,686 1,149
  2,635 2,589
  1,216 905
  3,389 2,875

62,933 56,430

38,113 60,803

8,998 14,092

29,115 46,711

Earnings per common share - Basic	$	0.69	1.06	0.91	1.00	1.52	3.66	5.96
Earnings per common share - Diluted		0.68	1.04	0.90	0.98	1.49	3.61	5.85
Basic weighted average common shares		7,971	7,972	7,945	7,932	7,877	7,958	7,844
Diluted weighted average common shares		8,071	8,065	8,075	8,096	8,057	8,072	7,989

[Footnotes to table located on page 6]

Net income for the fourth quarter of 2022 was $5.5 million, or $0.68 per diluted share, a $2.9 million decrease from the third quarter of 2022 and a $6.5 million decrease from the fourth quarter of 2021. Net interest income decreased $1.3 million for the fourth quarter of 2022, compared to the third quarter of 2022, and increased $1.3 million, or 5.5%, compared to the fourth quarter of 2021. The decrease in net interest income from the prior quarter was driven by an increase in interest expense on our deposit accounts related to the Federal Reserve's 425-basis point increase in the federal funds rate. The increase in net interest income from the fourth quarter of 2021 related to growth in our loan portfolio, partially offset by the higher interest expense on our deposit accounts.

The provision for credit losses was $2.3 million for the fourth quarter of 2022, compared to $950 thousand for the third quarter of 2022 and a reversal of $4.2 million for the fourth quarter of 2021. The provision expense during the fourth quarter of 2022, calculated under the Current Expected Credit Loss ("CECL") methodology adopted effective January 1, 2022, includes a $2.3 million provision for loan losses and a $25 thousand provision for unfunded commitments. The increased provision during the fourth quarter was driven by $243.3 million of loan growth. The reversal in the provision during the fourth quarter of 2021 was driven by improvement in economic conditions after the onset of the pandemic.

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Noninterest income totaled $1.7 million for the fourth quarter of 2022, a $973 thousand decrease from the third quarter of 2022 and a $1.6 million decrease from the fourth quarter of 2021. In prior quarters, mortgage banking income has been the largest component of our noninterest income; however, due to lower mortgage origination volume during the past 12 months, combined with our strategy to keep a larger percentage of these loans in our portfolio, mortgage banking income decreased to $291 thousand from prior quarter income of $1.2 million and from income of $1.9 million for the prior year.

Noninterest expense for the fourth quarter of 2022 was $16.4 million, a $367 thousand increase from the third quarter of 2022, and a $1.7 million increase from the fourth quarter of 2021. The increase in noninterest expense from the previous quarter was driven by increases in occupancy, professional fees, and other noninterest expenses, while the increase from the prior year related to increases in compensation and benefits, occupancy, insurance and other noninterest expenses. In comparison to the prior quarter, the increases in occupancy, professional fees and other noninterest expenses were due to higher property tax expenses, an increase in legal and accounting/audit costs, as well as an increase in FDIC insurance premiums. Compensation and benefits expense increased from the prior year primarily due to the hiring of new team members, combined with annual salary increases, while the increase in occupancy expense relates to costs associated with the relocation of our headquarters. In addition, our insurance costs increased during 2022 due to higher FDIC insurance premiums and our noninterest expense increase reflects higher travel and entertainment costs as well as an increase in fraud losses.

Our effective tax rate was 22.5% for the fourth quarter, a decrease from 24.5% for the prior quarter of 2022 and 23.3% for the fourth quarter of 2021. The lower tax rate in the fourth quarter of 2022 relates to the greater impact of our tax-exempt and equity compensation transactions on our tax rate during the quarter.

NET INTEREST INCOME AND MARGIN - Unaudited

												For the Three Months Ended
			December 31, 2022			September 30, 2022			December 31, 2021
		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	$	60,176	$	525	3.46%	$	122,071	$	676	2.20%	$	138,103	$	66	0.19%
Investment securities, taxable		86,594		515	2.36%		91,462		449	1.95%		107,181		351	1.30%
Investment securities, nontaxable(2)		9,987		61	2.42%		10,160		74	2.89%		11,695		75	2.56%
Loans(10)	3,165,061		33,939	4.25%	2,941,350		29,752	4.01%	2,452,677	23,661	3.83%
Total interest-earning assets	3,321,818		35,040	4.18%	3,165,043		30,951	3.88%	2,709,656	24,153	3.54%
Noninterest-earning assets		162,924					159,233					153,284
Total assets	$3,484,742				$3,324,726				$2,862,940
Interest-bearing liabilities
NOW accounts	$	343,541		379	0.44%	$	361,500		178	0.20%	$	330,067		64	0.08%
Savings & money market	1,529,532		7,657	1.99%	1,417,181		3,663	1.03%	1,278,930		637	0.20%
Time deposits		405,907		2,293	2.24%		361,325		1,180	1.30%		155,708		199	0.51%
Total interest-bearing deposits	2,278,980		10,329	1.80%	2,140,006		5,021	0.93%	1,764,705		900	0.20%
FHLB advances and other borrowings		7,594		81	4.23%		1,357		10	2.92%		-		-	-%
Subordinated debentures		36,197		497	5.45%		36,169		449	4.93%		36,089		380	4.18%
Total interest-bearing liabilities	2,322,771		10,907	1.86%	2,177,532		5,480	1.00%	1,800,794		1,280	0.28%
Noninterest-bearing liabilities		869,314					858,202					791,700
Shareholders' equity		292,657					288,542					270,446
Total liabilities and shareholders'
equity	$3,484,742				$3,324,276				$2,862,940
Net interest spread					2.32%					2.88%					3.26%
Net interest income (tax equivalent) /
margin			$24,133	2.88%			$25,471	3.19%			$22,873	3.35%
Less: tax-equivalent adjustment(2)				14					17					16
Net interest income			$24,119				$25,454				$22,857

[Footnotes to table located on page 6]

Net interest income was $24.1 million for the fourth quarter of 2022, a $1.3 million decrease from the third quarter, driven by a $5.4 million increase in interest expense, partially offset by a $4.1 million increase in interest income, on a taxable basis.

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The increase in interest expense was driven by $139.0 million growth in average interest-bearing deposit balances at an average rate of 1.80%, an 87-basis points increase over the previous quarter, partially offset by $223.7 million growth in average loan balances at a yield of 4.25%, an increase of 24-basis points from the third quarter of 2022. In comparison to the fourth quarter of 2021, net interest income increased $1.3 million, resulting primarily from $712.4 million growth in average loan balances during 2022, combined with a 42-basis point increase in loan yield. Our net interest margin, on a tax- equivalent basis, was 2.88% for the fourth quarter of 2022, a 31-basis point decrease from 3.19% from the third quarter of 2022 and a 47-basis point decrease from 3.35% for the fourth quarter of 2021. As a result of the Federal Reserve's 425-basis point interest rate hikes during 2022, the yield on our interest-earning assets has increased by 64-basis points during the fourth quarter of 2022 in comparison to the fourth quarter of 2021. However, the rate on our interest-bearing liabilities, specifically our interest-bearing deposits, has increased by 158-basis points during the same time period, resulting in the lower net interest margin during the fourth quarter of 2022.

BALANCE SHEETS - Unaudited

				Ending Balance
		December 31	September 30	June 30	March 31	December 31
(in thousands, except per share data)		2022	2022	2022	2022	2021
Assets
Cash and cash equivalents:
Cash and due from banks	$	18,788	16,530	21,090	20,992	21,770
Federal funds sold		101,277	139,544	124,462	95,093	86,882
Interest-bearing deposits with banks		50,809	4,532	36,538	33,131	58,557
Total cash and cash equivalents		170,874	160,606	182,090	149,216	167,209
Investment securities:
Investment securities available for sale		93,347	91,521	98,991	106,978	120,281
Other investments		10,833	5,449	5,065	4,104	4,021
Total investment securities		104,180	96,970	104,056	111,082	124,302
Mortgage loans held for sale		3,917	9,243	18,329	17,840	13,556
Loans (5)		3,273,363	3,030,027	2,845,205	2,660,675	2,489,877
Less allowance for credit losses		(38,639)	(36,317)	(34,192)	(32,944)	(30,408)
Loans, net		3,234,724	2,993,710	2,811,013	2,627,731	2,459,469
Bank owned life insurance		51,122	50,778	50,463	50,148	49,833
Property and equipment, net		99,183	99,530	96,674	95,129	92,370
Deferred income taxes		12,522	18,425	15,078	10,635	8,397
Other assets		15,459	10,407	9,960	10,859	10,412
Total assets	$	3,691,981	3,439,669	3,287,663	3,072,640	2,925,548
Liabilities
Deposits	$	3,133,864	3,001,452	2,870,158	2,708,174	2,563,826
FHLB Advances		175,000	60,000	50,000	-	-
Subordinated debentures		36,214	36,187	36,160	36,133	36,106
Other liabilities		52,391	54,245	48,708	49,809	47,715
Total liabilities		3,397,469	3,151,884	3,005,026	2,794,116	2,647,647
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	79
Nonvested restricted stock		(3,306)	(3,348)	(3,230)	(3,425)	(1,435)
Additional paid-in capital		119,027	118,433	117,714	117,286	114,226
Accumulated other comprehensive loss		(13,410)	(14,009)	(10,143)	(6,393)	(740)
Retained earnings		192,121	186,629	178,216	170,976	165,771
Total shareholders' equity		294,512	287,785	282,637	278,524	277,901
Total liabilities and shareholders' equity	$	3,691,981	3,439,669	3,287,663	3,072,640	2,925,548
Common Stock
Book value per common share	$	36.76	35.99	35.39	34.90	35.07
Stock price:
High		49.50	47.16	50.09	65.02	64.73
Low		41.46	41.66	42.25	50.84	52.73
Period end		45.75	41.66	43.59	50.84	62.49
Common shares outstanding		8,011	7,997	7,986	7,981	7,925

[Footnotes to table located on page 6]

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ASSET QUALITY MEASURES - Unaudited

				Quarter Ended
		December 31	September 30	June 30	March 31	December 31
(dollars in thousands)		2022	2022	2022	2022	2021
Nonperforming Assets
Commercial
Non-owner occupied RE	$	247	253	259	265	270
Commercial business		182	79	-	-	-
Consumer
Real estate		207	-	183	739	989
Home equity		195	197	200	815	653
Nonaccruing troubled debt restructurings		1,796	2,086	2,289	2,713	2,952
Total nonaccrual loans		2,627	2,615	2,931	4,532	4,864
Other real estate owned		-	-	-	-	-
Total nonperforming assets	$	2,627	2,615	2,931	4,532	4,864
Nonperforming assets as a percentage of:
Total assets		0.07%	0.08%	0.09%	0.15%	0.17%
Total loans		0.08%	0.09%	0.10%	0.17%	0.20%
Accruing troubled debt restructurings (TDRs)	$	4,503	4,683	3,558	3,241	3,299
Classified assets/tier 1 capital plus allowance for credit
losses		4.71%	5.24%	7.29%	7.83%	12.61%
				Quarter Ended
		December 31	September 30	June 30	March 31	December 31
(dollars in thousands)		2022	2022	2022	2022	2021
Allowance for Credit Losses
Balance, beginning of period	$	36,317	34,192	32,944	30,408	36,075
CECL adjustment		-	-	-	1,500	-
Loans charged-off		-	-	(316)	(169)	(1,509)
Recoveries of loans previously charged-off		22	1,600	39	180	42
Net loans (charged-off) recovered		22	1,600	(277)	11	(1,467)
Provision for credit losses		2,300	525	1,525	1,025	(4,200)
Balance, end of period	$	38,639	36,317	34,192	32,944	30,408
Allowance for credit losses to gross loans		1.18 %	1.20 %	1.20 %	1.24 %	1.22 %
Allowance for credit losses to nonaccrual loans		1,470.74 %	1,388.87 %	1,166.70 %	726.88 %	625.22 %
Net charge-offs to average loans QTD (annualized)		0.00 %	(0.22 %)	0.04 %	0.00 %	0.24 %

Total nonperforming assets remained at $2.6 million for the fourth quarter of 2022, representing 0.07% of total assets, compared to 0.08% in the third quarter of 2022. During the fourth quarter of 2022, our classified asset ratio improved to 4.71% from 12.61% in the fourth quarter of 2021. The improvement over the fourth quarter of 2021 was primarily the result of six hotel loans, or $18.5 million in the aggregate, we upgraded from substandard during 2022.

Effective January 1, 2022, we early adopted the CECL methodology for estimating credit losses, which resulted in an increase of $1.5 million to our allowance for credit losses and an increase of $2.0 million to our reserve for unfunded commitments. The tax-effected impact of these two items totaled $2.8 million and was recorded as an adjustment to our retained earnings as of January 1, 2022.

On December 31, 2022, the allowance for credit losses was $38.6 million, or 1.18% of total loans, compared to $36.3 million, or 1.20% of total loans, at September 30, 2022, and $30.4 million, or 1.22% of total loans, at December 31, 2021. We had negligible net recoveries of $22 thousand for the fourth quarter of 2022 compared to net recoveries of $1.6 million for the third quarter of 2022 and net charge-offs of $1.5 million for the fourth quarter of 2021. There was a provision for credit losses of $2.3 million for the fourth quarter of 2022 compared to a provision of $525 thousand for the third quarter of 2022 and a reversal of $4.2 million for the fourth quarter of 2021.

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