Southern First Reports Results for Third Quarter 2023

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Southern First Bancshares, Inc. (NASDAQ: SFST), holding company for Southern First Bank, today announced its financial results for the three-month period ended September 30, 2023.

“Our team generated improved performance over the prior quarter as evidenced by the growth in book value, general margin stability, capital accretion, and outstanding credit quality,” stated Art Seaver, the Company’s Chief Executive Officer. “While the monetary policy of the Federal Reserve has increased interest rates dramatically and resulted in a significant decline in loan demand, we are proud of our efforts to grow client relationships and support the needs of our clients and communities.”

2023 Third Quarter Highlights
– Net income was $4.1 million and diluted earnings per common share were $0.51 for Q3 2023
– Core deposits remained at $2.9 billion at Q3 2023, compared to Q2 2023 and increased 5% from Q3 2022
– Total loans increased 2% (annualized) to $3.6 billion at Q3 2023, compared to Q2 2023 and increased 17%, from $3.0 billion at Q3 2022
– Book value per common share increased to $37.57 at Q3 2023, or 4%, over Q3 2022
– Credit quality remains strong with nonperforming assets to total assets of 0.11% and past due loans to total loans of 0.13% at Q3 2023
– Net interest margin was 1.97% for Q3 2023, compared to 2.05% for Q2 2023 and 3.19% for Q3 2022
– Improvement in common equity tier 1 and risk-based capital ratios during Q3 2023, compared to Q2 2023

Net income for the third quarter of 2023 was $4.1 million, or $0.51 per diluted share, a $1.6 million increase from the second quarter of 2023 and a $4.3 million decrease from the third quarter of 2022. Net interest income increased $520 thousand for the third quarter of 2023, compared to the second quarter of 2023, and decreased $6.1 million, compared to the third quarter of 2022. The increase in net interest income from the prior quarter was primarily driven by an increase in interest income on loans and federal funds sold. The decrease in net interest income from the prior year was driven primarily by an increase in interest expense on our deposit accounts related to the Federal Reserve’s 525-basis point interest rate hikes during the past 19 months.

There was a reversal of the provision for credit losses of $500 thousand for the third quarter of 2023, compared to a provision of $910 thousand for the second quarter of 2023 and a provision of $950 thousand for the third quarter of 2022. The provision reversal during the third quarter of 2023 includes a $100 thousand reversal of the provision for credit losses and a $400 thousand reversal of the reserve for unfunded commitments. The reversal of the provision for credit losses was driven by lower expected loss rates, while the reversal of the reserve for unfunded commitments was driven by a decrease in the balance of unfunded commitments at September 30, 2023, compared to the previous quarter and year.

Noninterest income was $2.7 million for each of the third quarter of 2023, the second quarter of 2023, and the third quarter of 2022. Mortgage banking income continues to be the largest component of our noninterest income at $1.2 million for the third quarter of 2023, $1.3 million for the second quarter of 2023, and $1.2 million for the third quarter of 2022.

Noninterest expense for the third quarter of 2023 was $17.3 million, a $91 thousand decrease from the second quarter of 2023, and a $1.3 million increase from the third quarter of 2022. The decrease in noninterest expense from the previous quarter was driven by decreases in professional fees and other noninterest expenses, while the increase from the prior year related to increases in compensation and benefits, outside service and data processing costs, and insurance expenses. Compensation and benefits expenses increased from the previous year, driven by annual salary increases and the hiring of new team members. Outside service and data processing costs increased due to an increase in software licensing and maintenance costs, while insurance costs increased due to higher FDIC insurance premiums.

Our effective tax rate was 22.6% for the third quarter of 2023, 24.6% for the second quarter of 2023, and 24.5% for the third quarter of 2022. The lower tax rate in the third quarter of 2023 as compared to the previous quarters of 2023 relates primarily to the effect of equity compensation transactions and return to provision differences on our tax rate during the quarter.

Net interest income was $19.3 million for the third quarter of 2023, a $520 thousand increase from the second quarter of 2023, driven by a $4.8 million increase in interest income, partially offset by a $4.2 million increase in interest expense, on a taxable basis. The increase in interest income was driven by $205.9 million growth in average interest-earning assets at an average rate of 4.84%, a 19-basis points increase over the previous quarter, partially offset by $225.5 million growth in average interest-bearing liabilities at an average cost of 3.72%, an increase of 26-basis points from the second quarter of 2023. In comparison to the third quarter of 2022, net interest income decreased $6.1 million, resulting primarily from $554.6 million growth in average interest-bearing deposit balances during the 12 months ended September 30, 2023, combined with a 277-basis point increase in deposit rates. Our net interest margin, on a tax-equivalent basis, was 1.97% for the third quarter of 2023, an 8-basis point decrease from 2.05% for the second quarter of 2023 and a 122-basis point decrease from 3.19% for the third quarter of 2022. As a result of the Federal Reserve’s 300-basis point interest rate hikes during the past 12 months, the rate on our interest-bearing liabilities has increased by 272-basis points during the third quarter of 2023 in comparison to the third quarter of 2022. However, the yield on our interest-earning assets, driven by our loan portfolio, has increased by only 96-basis points during the same time period, resulting in the lower net interest margin during the third quarter of 2023.

Total nonperforming assets increased by $1.3 million during the third quarter of 2023, representing 0.11% of total assets, compared to 0.08% for both the second quarter of 2023 and the third quarter of 2022. The increase in nonperforming assets during the third quarter of 2023 resulted primarily from four commercial loan relationships and two consumer loan relationships that were added to nonaccrual status. In addition, our classified asset ratio increased slightly to 4.72% for the third quarter of 2023 from 4.68% in the second quarter of 2023 and from 5.24% in the third quarter of 2022.

At both September 30, 2023 and June 30, 2023, the allowance for credit losses was $41.1 million, or 1.16% of total loans, compared to $36.3 million, or 1.20% of total loans, at September 30, 2022. We had net recoveries of $126 thousand, or 0.01% annualized, for the third quarter of 2023, compared to net charge-offs of $425 thousand for the second quarter of 2023 and net recoveries of $1.6 million for the third quarter of 2022. There was a reversal of the provision for credit losses of $100 thousand for the third quarter of 2023, compared to a provision of $1.1 million for the second quarter of 2023 and a provision of $525 thousand for the third quarter of 2022. The provision reversal was driven by lower expected loss rates resulting from low charge-offs, combined with stable loan portfolio balances during the quarter.

ABOUT SOUTHERN FIRST BANCSHARES
Southern First Bancshares, Inc., Greenville, South Carolina is a registered bank holding company incorporated under the laws of South Carolina. The company’s wholly owned subsidiary, Southern First Bank, is the second largest bank headquartered in South Carolina. Southern First Bank has been providing financial services since 1999 and now operates in 12 locations in the Greenville, Columbia, and Charleston markets of South Carolina as well as the Charlotte, Triangle and Triad regions of North Carolina and Atlanta, Georgia. Southern First Bancshares has consolidated assets of approximately $4.0 billion and its common stock is traded on The NASDAQ Global Market under the symbol “SFST.” More information can be found at www.southernfirst.com.

FORWARD-LOOKING STATEMENTS
Certain statements in this news release contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to future plans and expectations, and are thus prospective. Such forward-looking statements are identified by words such as “believe,” “expect,” “anticipate,” “estimate,” “preliminary”, “intend,” “plan,” “target,” “continue,” “lasting,” and “project,” as well as similar expressions. Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized. The inclusion of this forward-looking information should not be construed as a representation by our company or any person that the future events, plans, or expectations contemplated by our company will be achieved.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (2) the strength of the United States economy in general and the strength of the local economies in which the company conducts operations may be different than expected; (3) the rate of delinquencies and amounts of charge-offs, the level of allowance for credit loss, the rates of loan and deposit growth as well as pricing of each product, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (4) changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, changes affecting oversight of the financial services industry or consumer protection; (5) the impact of changes to Congress on the regulatory landscape and capital markets; (6) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) could continue to have a negative impact on the company; (7) changes in interest rates, which may continue to affect the company’s net income, interest expense, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of the company’s assets, including its investment securities; (8) elevated inflation which causes adverse risk to the overall economy, and could indirectly pose challenges to our clients and to our business; (9) any increase in FDIC assessments which have increased and may continue to increase our cost of doing business; and (10) changes in accounting principles, policies, practices, or guidelines. Additional factors that could cause our results to differ materially from those described in the forward-looking statements can be found in our reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov). All subsequent written and oral forward-looking statements concerning the company or any person acting on its behalf is expressly qualified in its entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.