BAYFIRST FINANCIAL CORP. The following discussion explains our financial condition and results of operations as of and for the three and nine months endedSeptember 30, 2021 . The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Registration Statement on Form S-1 for the year endedDecember 31, 2020 , filed with theSEC onNovember 3, 2021 . Annualized results for these interim periods may not be indicative of results for the full year or future periods. In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; the ability of the Company to implement its strategy and expand its lending operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR and the development of a substitute; changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with theSEC . Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise. Overview The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level. The following discussion should be read in conjunction with our consolidated financial statements. As a one-bank holding company, we generate most of our revenue from interest on loans and gain-on-sale income derived from the sale of loans into the secondary market. Our primary source of funding for our loans is deposits. Our largest expenses are interest on those deposits and salaries plus related employee benefits. We measure our performance through our net interest income after provision for loan losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios. Application of Critical Accounting Policies and Estimates The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates. Accounting policies, as described in detail in the notes to the Company's consolidated financial statements, are an integral part of the Company's consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company's reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. •Determination of the allowance for loan losses; •Valuation of SBA loan servicing rights; and 33 -------------------------------------------------------------------------------- Table of Contents •Fair value of residential loans held for sale and residential mortgage derivatives. Changes in these estimates that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, could have a material impact on the Company's financial position or results of operation. Further, the Company is an emerging growth company. The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have not opted out of such extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies do so. This may make the Company's financial statements not comparable with those of public companies which are neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used. Recent Developments Third Quarter Common Stock Dividend. OnOctober 29, 2021 , BayFirst's Board of Directors declared a third quarter 2021 cash dividend of$0.07 per common share. The dividend was paid onDecember 15, 2021 , to shareholders of record at the close of business onNovember 15, 2021 . Stock Repurchase Plan. OnNovember 30, 2021 , BayFirst's Board of Directors amended its stock repurchase program to allow the Company to repurchase up to$450,000 of the Company's issued and outstanding common stock per quarter. The Board of Directors initially authorized the program onJanuary 26, 2021 for the repurchase of up to$100,000 per quarter and amended the program onSeptember 9, 2021 to increase the quarterly purchase limit to$400,000 . The changes to the program will be implemented immediately and will continue until the earlier of the date an aggregate of$1,000,000 of common stock has been repurchased, with no more than$450,000 being bought back in one quarter, orOctober 1, 2022 , or termination of the program by the Board of Directors.
Listing on Nasdaq Capital Market. On
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Selected Financial Data - Unaudited
As of and for the Three Months Ended As of and for the Nine Months Ended
(Dollars in thousands, except per share
data) 9/30/2021 6/30/2021 9/30/2020 9/30/2021 9/30/2020
Income Statement Data:
Net interest income 8,016 12,904 10,084 33,550 21,880
Provision for loan losses (3,000) - 7,000 (1,000) 11,900
Noninterest income 21,992 38,212 32,192 93,363 66,318
Noninterest expense 31,229 33,668 28,208 98,618 67,995
Income tax expense 499 4,432 1,815 7,488 1,206
Net income 1,280 13,016 5,253 21,807 7,097
Preferred stock dividends 230 235 202 797 557
Net income available to common
shareholders $ 1,050 $ 12,781 $ 5,051 $ 21,010 $ 6,540
Balance Sheet Data:
Average loans held for investment,
excluding PPP loans 467,283 481,424 353,620 457,111 352,428
Average total assets 1,086,377 1,541,287 1,457,997 1,419,264
1,092,295
Average common shareholders' equity 81,989 68,525 44,025 69,574 40,757 Total loans held for investment 656,294 895,194 1,266,753 656,294
1,266,753
Total loans held for investment, excluding PPP loans 500,647 465,470 387,242 500,647
387,242
Total loans held for investment, excl gov't gtd loan balances 306,723 304,364 275,786 306,723 275,786 Allowance for loan losses 16,616 20,797 18,913 16,616 18,913 Total assets 943,743 1,198,229 1,501,516 943,743 1,501,516 Common shareholders' equity 83,593 81,838 50,439 83,593 50,439 Per Share Data: (2) Basic earnings per common share$ 0.27 $ 3.34 $ 1.47 $ 5.60$ 1.91 Diluted earnings per common share$ 0.26 $ 2.98 $ 1.37 $ 5.13$ 1.78 Dividends per common share$ 0.070 $ 0.070 $ 0.067 $ 0.207$ 0.201 Book value per common share$ 21.32 $ 21.16 $ 14.60 $ 21.32$ 14.60 Tangible book value per common share (1)$ 21.30 $ 21.14 $ 14.57 $ 21.30$ 14.57 Performance Ratios: Return on average assets 0.47 % 3.38 % 1.44 % 2.05 % 0.87 % Return on average common equity 5.12 % 74.61 % 45.89 % 40.26 % 21.40 % Net interest margin 3.04 % 3.46 % 2.84 % 3.26 % 2.76 % Dividend payout ratio 26.09 % 2.10 % 4.57 % 3.69 % 10.51 % Asset Quality Data: Net charge-offs$ 1,181 $ 1,221 $ 967 $ 3,546$ 3,729 Net charge-offs/avg loans held for investment excl PPP 1.01 % 1.01 % 1.09 % 1.03 % 1.41 % Nonperforming loans$ 10,495 $ 9,884 $ 13,837 $ 10,495$ 13,836 Nonperforming loans (excluding gov't gtd balance)$ 3,756 $ 3,576 $ 4,057 $ 3,756$ 4,057 Nonperforming loans/total loans held for investment 1.60 % 0.97 % 1.09 % 1.60 % 1.09 % Nonperforming loans (excl gov't gtd balance)/total loans held for investment 0.57 % 0.35 % 0.92 % 0.57 % 0.92 % ALLL/Total loans held for investment 2.53 % 2.32 % 1.49 % 2.53 % 1.49 % ALLL/Total loans held for investment, excl PPP loans 3.32 % 4.47 % 4.88 % 3.32 % 4.88 % Other Data: Full-time equivalent employees 651 671 545 651 545 Banking center offices 6 6 6 6 6 Loan production offices 22 26 23 22 23
(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable
GAAP equivalent.
(2) Adjusted for the three-for-two stock split, effective
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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in this report are not measures of
financial condition or performance recognized by GAAP. These non-GAAP financial
measures include tangible common shareholders' equity and tangible book value
per common share. Our management uses these non-GAAP financial measures in its
analysis of our performance, and we believe that providing this information to
financial analysts and investors allows them to evaluate capital adequacy.
The following presents these non-GAAP financial measures along with their most
directly comparable financial measures calculated in accordance with GAAP:
Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
As of
(Dollars in thousands, except per share
data) September 30, 2021 June 30, 2021 September 30, 2020
(Unaudited) (Unaudited) (Unaudited)
Total shareholders' equity $ 94,298 $ 92,813 $ 62,154
Less: Preferred stock liquidation
preference (10,705) (10,975) (11,715)
Total equity available to common
shareholders 83,593 81,838 50,439
Less: Goodwill (100) (100) (100)
Tangible common shareholders' equity $ 83,493 $ 81,738 $ 50,339
Common shares outstanding 3,919,977 3,867,414 3,455,190
Tangible book value per common share $ 21.30 $ 21.14 $ 14.57
Results of Operations
BayFirst's operating results depend on our net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, consisting primarily of deposits. Net
interest income is determined by the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and the relative amounts of interest-earning assets and
interest-bearing liabilities. Our interest rate spread is affected by
regulatory, economic, and competitive factors which influence interest rates,
loan demand, and deposit flows. In addition, our operating results can be
affected by the level of nonperforming loans, as well as the level of
our noninterest income, and our noninterest expenses, such as salaries and
employee benefits, occupancy and equipment costs, and income taxes.
We are dependent on noninterest income, which is derived primarily from
residential loan fee income and net gain on the sales of the guaranteed portion
of government guaranteed loans. We operate residential mortgage loan production
offices in a number of states. We sell a substantial portion of the mortgage
loans that we originate on the secondary market which generates gains on the
sale of these loans. Additionally, while we retained some of our government
guaranteed loans on our balance sheet, we sell both the guaranteed balance of
our government guaranteed loans, as well as a percentage of the unguaranteed
portions of such loans. This activity generates gains on sales on the guaranteed
portions of the loans.
Net Income
We had net income for the three months ended September 30, 2021 of $1.28
million , or $0.26 per diluted common share, compared to net income for the three
months ended September 30, 2020 of $5.25 million , or $1.37 per diluted common
share. The decrease of $3.97 million in net income was due to lower recognition
of PPP loan origination fee income, lower residential loan fee income, and an
increase in noninterest expenses, partially offset by a decrease in provision
for loan loss expense.
We had net income for the nine months ended September 30, 2021 of $21.81
million , of $5.13 per diluted common share, compared to net income for the nine
months ended September 30, 2020 of $7.10 million or $1.78 per diluted common
share. The increase of $14.71 million in net income was due to a $13.80 million
gain from the sale of PPP loans in the second quarter of 2021, an increase in
residential loan fee income, an increase in PPP loan origination fees
recognized, and
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a decrease in provision for loan loss expense, partially offset by an increase
in noninterest expenses, particularly salaries and commission expenses.
Net Interest Income
Net interest income was $8.02 million for the three months ended September 30,
2021 , a decrease of $2.07 million or 20.51% compared to net interest income for
the nine months ended September 30, 2020 of $10.08 million . This decrease was
primarily due to a decrease of $2.64 million in PPP origination fees recognized,
partially offset by a decrease in interest expense on deposits and PPPLF
borrowings. The net interest margin for the three months ended September 30,
2021 was 3.04% compared to 2.84% for the three months ended September 30, 2020 .
Net interest income was $33.55 million for the nine months ended September 30,
2021 , an increase of $11.67 million or 53.34% compared to net interest income
for the nine months ended September 30, 2020 of $21.88 million . This increase
was primarily due to an increase of $5.73 million in PPP origination fees
recognized, partially due to the fact that PPP loan funding did not begin until
the second quarter of 2020. Additional items that contributed to this increase
in net interest income were an increase in PPP interest income, an increase in
interest income on other loans, and a decrease in interest expense on deposits,
partially offset by an increase in interest expense on PPPLF borrowings. The net
interest margin for the nine months ended September 30, 2021 was 3.26% compared
to 2.76% for the nine months ended September 30, 2020 . This increase was due to
the same factors noted above with respect to the increase in net interest
income.
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Average Balance Sheet and Analysis of Net Interest Income
The following tables set forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest and dividend income of
BayFirst from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
(v) net interest margin; and (vi) ratio of average interest-earning assets to
average interest-bearing liabilities (dollars in thousands). Loans in nonaccrual
status, for the purposes of the following computations, are included in the
average loan balances. FRB, FHLB, and FNBB restricted equity holdings are
included in other interest-earning assets. The Company did not have a
significant amount of tax-exempt assets.
Three Months Ended
2021 2020
Average Balance Interest Yield Average Balance Interest Yield
Interest-earning assets:
Investment securities $ 23,055 $ 75 1.29 % $ - $ - 0.00 %
Loans, excluding PPP (1) 562,095 7,891 5.57 % 457,949 6,678 5.80 %
PPP loans 288,406 1,466 2.02 % 859,786 5,872 2.72 %
Other 171,208 113 0.26 % 96,356 72 0.30 %
Total interest-earning assets 1,044,764 9,545 3.62 % 1,414,091 12,622 3.55 %
Non interest-earning assets 41,613 43,906
Total assets $ 1,086,377 $ 1,457,997
Interest-bearing liabilities:
NOW, MMDA and savings $ 518,243 $ 974 0.75 % $ 347,039 $ 947 1.09 %
Time deposits 52,729 178 1.34 % 96,337 593 2.45 %
PPPLF advances 315,875 278 0.35 % 859,409 794 0.35 %
Other borrowings 9,484 99 4.14 % 20,908 204 3.88 %
Total interest-bearing
liabilities 896,331 1,529 0.68 % 1,323,693 2,538 0.76 %
Demand deposits 87,248 69,256
Non interest-bearing
liabilities 9,969 11,972
Shareholders' equity 92,829 53,076
Total liabilities and
shareholders' equity $ 1,086,377 $ 1,457,997
Net interest income $ 8,016 $ 10,084
Interest rate spread 2.95 % 2.79 %
Net interest margin (2) 3.04 % 2.84 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 116.56 % 106.83 %
(1) Includes nonaccrual loans. (2) Net interest margin represents net interest income divided by average total interest-earning assets.
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Nine Months Ended
2021 2020
Average Balance Interest Yield Average Balance Interest Yield
Interest earning-assets:
Investment Securities $ 12,500 $ 123 1.32 % $ 43 $ - - %
Loans, excluding PPP (1) 582,352 21,243 4.88 % 428,898 18,329 5.71
PPP loans 613,768 17,771 3.87 % 452,481 10,918 3.22
Other 166,918 297 0.24 % 176,201 571 0.43 %
Total interest-earning
assets 1,375,538 39,434 3.83 % 1,057,623 29,818 3.77 %
Non interest-earning assets 43,726 34,672
Total assets $ 1,419,264 $ 1,092,295
Interest-bearing
liabilities:
NOW, MMDA and savings $ 484,985 $ 2,987 0.82 % $ 339,485 $ 3,307 1.30 %
Time deposits 82,422 679 1.10 % 171,516 2,804 2.18 %
PPPLF advances 648,158 1,699 0.35 % 432,367 1,185 0.35
Other borrowings 30,692 519 2.26 % 20,494 642 4.18 %
Total interest-bearing
liabilities 1,246,257 5,884 0.63 % 963,862 7,938 1.10 %
Demand deposits 82,321 70,701
Non interest-bearing
liabilities 8,441 5,260
Shareholders' equity 82,245 52,472
Total liabilities and
shareholders' equity $ 1,419,264 $ 1,092,295
Net interest income $ 33,550 $ 21,880
Interest rate spread 3.20 % 2.67 %
Net interest margin (2) 3.26 % 2.76 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 110.37 % 109.73 %
(1) Includes nonaccrual loans. (2) Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The tables below present the effects of volume and rate changes on interest
income and expense for the periods indicated. Changes in volume are changes in
the average balance multiplied by the previous period's average rate. Changes in
rate are changes in the average rate multiplied by the average balance from the
previous period. The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate (dollars in thousands). Loans in nonaccrual status,
for the purposes of the following computations, are included in the average loan
balances. FRB, FHLB, and FNBB restricted equity holdings are included in other
interest-earning assets. The Company did not have a significant amount of
tax-exempt assets.
Rate Volume Total
Three Months Ended September 30, 2021 vs. September 30,
2020 :
Interest-earning assets:
Investment securities $ - $ 75 $ 75
Loans, excluding PPP (274) 1,487 1,213
PPP loans (1,231) (3,175) (4,406)
Other interest-earning assets (9) 50 41
Total interest-earning assets 260 (3,337) (3,077)
Interest-bearing liabilities:
NOW, MMDA and savings (353) 380 27
Time deposits (208) (207) (415)
PPPLF - (516) (516)
Other borrowings 13 (118) (105)
Total interest-bearing liabilities (261) (748) (1,009)
Net change in net interest income $ 521 $ (2,589) $ (2,068)
Nine Months Ended September 30, 2021 vs. September 30,
2020 :
Interest-earning assets:
Investment securities $ 123 $ - $ 123
Loans, excluding PPP (2,948) 5,862 2,914
PPP loans 2,471 4,382 6,853
Other interest-earning assets (245) (29) (274)
Total interest-earning assets (599) 10,215 9,616
Interest-bearing liabilities:
NOW, MMDA, and savings (1,454) 1,134 (320)
Time deposits (1,038) (1,087) (2,125)
PPPLF advances - 514 514
Other borrowings (366) 243 (123)
Total interest-bearing liabilities (3,971) 1,917 (2,054)
Net change in net interest income $ 3,373 Provision for Loan Losses The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors which may affect our ability to collect on the loans in our portfolio. We recorded a negative provision for loan losses for the three months endedSeptember 30, 2021 of$3.00 million compared to a$7.00 million provision for the three months endedSeptember 30, 2020 . During 2020 and the first quarter of 2021, we increased the qualitative factors in the allowance for loan losses calculation for the decline in economic indicators caused by the COVID-19 pandemic resulting in significant provision expense in those periods. As asset quality remained 40 -------------------------------------------------------------------------------- Table of Contents stable during the second and third quarters of 2021 and as many of the Company's SBA loans were bolstered by additional government support, additional provision for loan losses was not deemed necessary. During the three months endedSeptember 30, 2021 , we charged off$1.18 million in loans compared to$0.97 million during the three months endedSeptember 30, 2020 . Our ALLL was$16.62 million atSeptember 30, 2021 and$18.91 million atSeptember 30, 2020 . We recorded a negative provision for loan losses for the nine months endedSeptember 30, 2021 of$1.00 million compared to an$11.90 million provision for the nine months endedSeptember 30, 2020 . The decrease of$12.90 million in the provision for loan losses was primarily due to the same factors mentioned in the quarterly analysis above. During the nine months endedSeptember 30, 2021 , we charged off$3.55 million in loans compared to$3.73 million during the nine months endedSeptember 30, 2020 . Since the majority of the Company's loan portfolio consisted of SBA loans, most of which received from the SBA principal and interest payments under Section 1112 of the CARES Act during 2020 and 2021, our asset quality trends may appear more favorable than they otherwise would without the CARES Act support. Although the Company's asset quality trends indicate minimal stress on the portfolio, management believed it was prudent to be proactive in increasing the allowance for loan losses using qualitative measures throughout 2020 and 2021. Noninterest Income The following table presents noninterest income for the three and nine months endedSeptember 30, 2021 and 2020. For the Three Months Ended For the Nine Months Ended September September 30, 30, 2021 2020 2021 2020 Noninterest income: Residential loan fee income$ 21,323 $ 31,226 $ 76,704 $ 61,888 Loan servicing income, net 417 565 1,446 1,753 Gain (loss) on sale of SBA and PPP loans, net (338) - 13,460 1,732 Service charges and fees 261 205 730 664 SBA loan fair value gain 72 55 151 49 Other noninterest income 257 141 872 232 Total noninterest income$ 21,992 $
32,192
Noninterest income was$21.99 million during the three months endedSeptember 30, 2021 , a decrease of$10.20 million or 31.68% from$32.19 million during the three months endedSeptember 30, 2020 . The decrease was primarily due to the decrease in residential loan fee income of$9.90 million or 31.71% as a result of a decrease in residential mortgage volume of$91.71 million and a decrease in gain on sale margin due to a tighter spread between primary and secondary mortgage rates. Noninterest income was$93.36 million during the nine months endedSeptember 30, 2021 , an increase of$27.05 million or 40.78% from$66.32 million during the nine months endedSeptember 30, 2020 . The increase was primarily due to the$13.80 gain from the sale of PPP loans and an increase in residential loan fee income of$14.82 million or 23.94% primarily due to$646.62 million more loans sold during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents Noninterest Expense The following table presents noninterest expense for the three and nine months endedSeptember 30, 2021 and 2020. For the Three Months Ended For the Nine Months Ended September September 30, 30, 2021 2020 2021 2020 Noninterest expense: Salaries and benefits$ 12,851 $ 8,876 $ 38,966 $ 24,497 Bonus, commissions, and incentives 8,536 11,919 29,627 23,887 Mortgage banking 1,440 1,620 4,707 3,645 Occupancy and equipment 1,278 1,182 3,907 3,314 Data processing 1,347 1,163 5,209 3,086 Marketing and business development 1,924 717 5,444 2,250 Professional services 1,428 878 3,195 2,343 Loan origination and collection 683 908 2,284 1,771 Employee recruiting and development 809 245 2,431 1,135 Regulatory assessments 138 144 340 418 Other noninterest expense 795 556 2,508 1,649 Total noninterest expense$ 31,229 $
28,208
Noninterest expense was$31.23 million during the three months endedSeptember 30, 2021 , an increase of$3.02 million or 10.71% from$28.21 million during the three months endedSeptember 30, 2020 . The increase was primarily due to increases in salaries and benefits and marketing and business development expense as the Company built infrastructure in various functions to support the Company's strategic initiatives and planned growth strategy. Noninterest expense was$98.62 million during the nine months endedSeptember 30, 2021 , an increase of$30.62 million or 45.04% from$68.00 million during the nine months endedSeptember 30, 2020 . The increase was primarily due to increases in salaries and benefits and commissions, marketing and business development expense and data processing expense with the majority of the increase related to the above-mentioned strategic initiatives and planned growth strategy. Income Taxes Income tax expense was$0.50 million for the three months endedSeptember 30, 2021 , a decrease of$1.32 million from income tax expense of$1.82 million for the three months endedSeptember 30, 2020 . Income tax expense was$7.49 million for the nine months endedSeptember 30, 2021 , an increase of$6.28 million over income tax expense of$1.21 million for the nine months endedSeptember 30, 2020 . The increase was primarily due to the increase in pre-tax earnings, partially offset by a one-time tax benefit of$969 thousand in the first quarter of 2020 as a result of the CARES Act signed into law in March of 2020. The effective income tax rate was 25.56% for the nine months endedSeptember 30, 2021 and 14.52% for the nine months endedSeptember 30, 2020 . 42
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Financial Condition
Investment Securities
The amortized costs, gross unrealized gains and losses, and estimated fair
values of investment securities available for sale at September 30, 2021 are
summarized as follows (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Investment securities:
Asset-backed securities $ 7,630 $ - $ (24) $ 7,606
Mortgaged-backed securities:
U.S. Government-sponsored enterprises 5,083 - (44) $ 5,039
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises 20,096 - (206) $ 19,890 Total investment securities available for sale
-
The investment securities available for sale were purchased during the nine months endedSeptember 30, 2021 and, therefore, had been in an unrealized loss position for less than 12 months atSeptember 30, 2021 . The Company held one security held to maturity atSeptember 30, 2021 andDecember 31, 2020 which matures inAugust 2039 . The security is a debt security to a government-sponsored enterprise and its amortized cost was$3 and$41 , the unrecognized loss was$1 and$2 , and the fair value was$2 and$39 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The security held to maturity had been in an unrealized loss position for longer than 12 months atSeptember 30, 2021 andDecember 31, 2020 . The unrealized loss has not been recognized into income because the issuer is of high credit quality as a government-sponsored enterprise, management does not intend to sell, and it is likely that management will not be required to sell the security prior to its anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments and the fair value is expected to recover as the bond approaches maturity. No securities were pledged as ofSeptember 30, 2021 orDecember 31, 2020 , and there were no sales of securities during the nine months endedSeptember 30, 2021 or the year endedDecember 31, 2020 . All securities have contractual remaining maturities of more than 10 years. The weighted average market yield of all securities was 1.31%. 43 -------------------------------------------------------------------------------- Table of Contents Loan Portfolio Composition Through the efforts of our management and loan officers, we have been able to achieve loan growth by taking advantage of the economic recovery and consolidation in our markets. Senior management and loan officers have continued to develop new sources of loan referrals, particularly among centers of local influence and real estate professionals, and have also enjoyed repeat business from loyal customers in the markets the Bank serves. We have no concentration of credit in any industry that represents 10% or more of our loan portfolio. The following table sets forth the composition of our loan portfolio, including LHFS as of the dates indicated (dollars in thousands). September 30, 2021 December 31, 2020 Amount % of Total Amount % of Total Residential loans held for sale$ 91,243 $ 208,704 Government guaranteed loans, held for sale - - SBA loans held for investment, at fair value 9,805 9,264 Loans held for investment, at amortized cost: Residential real estate 79,889 12.4 % 64,724 5.3 % Commercial real estate 151,122 23.5 % 114,884 9.3 % Construction and land 17,848 2.8 % 15,113 1.2 % Commercial and industrial 232,416 36.1 % 193,927 15.8 % Commercial and industrial - PPP 156,783 24.4 % 838,847 68.2 % Consumer and other 4,910 0.8 % 2,896 0.2 % Loans held for investment, at amortized cost, gross 642,968 100.0 % 1,230,391 100.0 % Discount on SBA 7(a) loans sold (3,753) (5,417) Discount on PPP loans purchased (24) (97) Deferred loan costs (fees), net 7,298 (5,819) Allowance for loan losses (16,616) (21,162) Loans held for investment, at amortized cost, net$ 629,873 $ 1,197,896 In general, construction loans are originated as construction-to-permanent loans. Third party take-out financing, where applicable, is typically in the form of permanent first mortgage conforming loans. The increase in residential lending is primarily due to enhancements in the Bank's personnel. During the nine months endedSeptember 30, 2021 , we originated approximately$70.65 million in loans through conventional lending channels,$110.19 million in loans through CreditBench (our SBA lending function), exclusive of PPP loans,$329.32 million of PPP loans, and$1.74 billion through the Residential Mortgage Lending Division. During the nine months endedSeptember 30, 2020 , we originated approximately$52.14 million in loans through conventional lending channels,$84.42 million through CreditBench, exclusive of PPP loans,$876.60 million of PPP loans, and$1.28 billion through the Residential Mortgage Lending Division. The decrease in the PPP balances was due to forgiveness of loans by the SBA and the second quarter of 2021 sale of 3,833 PPP loans for consideration equal to the total unpaid principal balance of$326.32 million . By comparison in 2020, we originated approximately$79.50 million in new loans through conventional lending channels,$101.08 million in loans through CreditBench, exclusive of PPP loans,$876.96 million of PPP loans, and$1.92 billion through the Residential Mortgage Lending Division. 44 -------------------------------------------------------------------------------- Table of Contents Loan Maturity/Rate Sensitivity The following table shows the contractual maturities of our loans atSeptember 30, 2021 (dollars in thousands). Loan balances in this table include loans held for investment at fair value, loans held for investment at amortized cost, discount on retained balances of loans sold, discount on PPP loans purchased, and deferred loan costs, net. Due
After One
Due in One Year Year to Five Due After Five Due After 15
or Less Years Years to 15 Years Years Total
Real estate:
Residential $ 3,619 $ 1,002 $ 5,092 $ 70,222 $ 79,935
Commercial 4,153 2,272 20,644 127,760 154,829
Construction and land 2,722 889 1,620 12,618 17,849
Commercial and industrial 7,051 6,219 217,122 12,729 243,121
Commercial and industrial - PPP 96,064 59,581 - - 155,645
Consumer and other 2,498 1,139 1,278 - 4,915
Total loans $ 116,107 $ 71,102 $ 245,756 $ 223,329 $ 656,294
The following table shows our loans with contractual maturities of greater than
one year that have fixed or adjustable interest rates at September 30, 2021
(dollars in thousands).
Fixed Adjustable
Interest Rate Interest Rate
Real estate:
Residential $ 21,636 $ 54,680
Commercial 1,202 149,474
Construction and land 5,720 9,407
Commercial and industrial 2,073 233,997
Commercial and industrial - PPP 59,581 -
Consumer and other 2,246 171
Total loans $ 92,458 $ 447,729
Credit Risk
The Bank's primary business is making commercial, consumer, and real estate
loans. This activity inevitably has risks for potential loan losses, the
magnitude of which depends on a variety of economic factors affecting borrowers,
which are beyond our control. We have developed policies and procedures for
evaluating the overall quality of our credit portfolio and the timely
identification of potential problem loans. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about future
events that it believes to be reasonable, but which may or may not prove
accurate. Thus, there can be no assurance that charge-offs in future periods
will not exceed the ALLL, or that additional increases in the ALLL will not be
required.
Allowance for Loan Losses. The Bank must maintain an adequate ALLL based on a
comprehensive methodology that assesses the probable losses inherent in our loan
portfolio. We maintain an ALLL based on a number of quantitative and qualitative
factors, including levels and trends of past due and nonaccrual loans, asset
classifications, loan grades, change in volume and mix of loans, collateral
value, historical loss experience, size and complexity of individual credits and
economic conditions. Provisions for loan losses are provided on both a specific
and general basis. Specific allowances are provided for impaired credits for
which the expected/anticipated loss is measurable. General valuation allowances
are determined by a portfolio segmentation based on collateral type with a
further evaluation of various quantitative and qualitative factors noted above.
We periodically review the assumptions and formulate methodologies by which
additions are made to the specific and general valuation allowances for loan
losses in an effort to refine such allowances in light of the current status of
the factors described above. The methodology is presented to and approved by the
Bank's Board of Directors. Future additional
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provisions to the loan loss reserve may be made as appropriate as new loans are
originated or as existing loans may deteriorate.
All adversely classified loans are evaluated for impairment. If a loan is deemed
impaired, it is evaluated for potential loss exposure. The evaluation occurs at
the time the loan is classified and on a regular basis thereafter (at least
quarterly). This evaluation is documented in a status report relating to a
specific loan or relationship. Specific allocation of reserves on impaired loans
considers the value of the collateral, the financial condition of the borrower,
and industry and current economic trends. We review the collateral value, cash
flow, and tertiary support on each impaired credit. Any deficiency outlined by a
real estate collateral evaluation analysis, or cash flow shortfall, is accounted
for through a specific allocation for the loan.
For performing loans which are evaluated collectively, we perform a portfolio
segmentation based on collateral type and additionally, for SBA loans, by loan
origination year.The government guaranteed loan balances are included in the
collectively evaluated for impairment balances. The loss factors for each
segment are calculated using actual loan loss history for each segment of loans
over the most recent one to three years, depending on the segment and vintage
year of the loans in the segment of SBA loans. The Bank's actual loss experience
is supplemented with other economic factors based on the risks present for each
portfolio segment.
These economic factors include consideration of the following: levels of, and
trends in delinquencies and impaired loans; levels of, and trends in charge-offs
and recoveries; migration of loans to the classification of special mention,
substandard, or doubtful; trends in volume and terms of loans; effects of any
changes in risk selection and underwriting standards; other changes in lending
policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in credit concentration.
While management believes our ALLL is adequate as of September 30, 2021 , future
adjustments to our allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the determination.
Nonperforming Assets. At September 30, 2021 , we had $3.76 million in
nonperforming assets, excluding government guaranteed loan balances, and our
ALLL represented 2.53% of total loans. At September 30, 2020 , we had $4.06
million in nonperforming assets, excluding government guaranteed loan balances,
and our ALLL represented 1.49% of total loans. Total loans at September 30, 2021
and 2020, include government guaranteed loans, as well as PPP loans which have
no reserves allocated to them. ALLL as a percentage of loans, not including
residential loans held for sale and government guaranteed loan balances, was
5.25% at September 30, 2021 , compared to 6.63% at September 30, 2020 .
At December 31, 2020 , we had $3.33 million in nonperforming assets, excluding
government guaranteed loan balances, and our ALLL represented 1.72% of total
loans, including PPP loans. Total loans at December 31, 2020 include government
guaranteed loans which have no reserves allocated to them. ALLL as a percentage
of loans, not including residential loans held for sale and government
guaranteed loan balances, was 7.24% at December 31, 2020 .
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The following table sets forth certain information on nonaccrual loans and
foreclosed assets, the ratio of such loans and foreclosed assets to total assets
as of the dates indicated, and certain other related information (dollars in
thousands).
September 30, September 30, December 31,
2021 2020 2020
Nonperforming loans (government guaranteed balances)
$ 9,780 $ 6,259 Nonperforming loans (unguaranteed balances) 3,756 4,057 3,327 Total nonperforming loans 10,495 13,837 9,586 OREO 3 - - Total nonperforming assets$ 10,498
1.60 % 1.09 % 0.78 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.57 % 0.32 % 0.27 %
Nonperforming assets as a percentage of total assets 1.11 % 0.92 % 0.62 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.40 % 0.27 % 0.22 %
ALLL to nonperforming loans 158.32 % 136.68 % 220.76 %
ALLL to nonperforming loans (excluding government
guaranteed balances) 442.39 % 466.18 % 636.07 %
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The following table sets forth information with respect to activity in the ALLL
for the periods shown (dollars in thousands):
At and for the Three Months Ended At and for the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Allowance at beginning of period $ 20,797 $ 12,880 $ 21,162 $ 10,742
Charge-offs:
Residential real estate - - - -
Commercial real estate (173) (7) (173) (7)
Commercial and industrial (1,500) (956) (4,090) (3,785)
Consumer and other (20) (17) (48) (79)
Total charge-offs (1,693) (980) (4,311) (3,871)
Recoveries:
Residential real estate 73 - 73 -
Commercial and industrial 439 12 688 131
Consumer and other - 1 4 11
Total recoveries 512 13 765 142
Net charge-offs (1,181) (967) (3,546) (3,729)
Provision for loan losses (3,000) 7,000 (1,000) 11,900
Allowance at end of period $ 16,616 $ 18,913 $ 16,616 $ 18,913
Net charge-offs to average loans held for
investment 0.63 % 0.32 % 0.44 % 0.62 %
Allowance as a percent of total loans held
for investment 2.53 % 1.49 % 2.53 % 1.49 %
Allowance as a percent of loans held for
investment, not including government
guaranteed loans 5.25 % 6.63 % 5.25 % 6.63 %
Allowance as a percent of nonperforming loans 158.32 % 136.68 % 158.32 % 136.68 %
Total loans held for investment $ 656,294 $ 1,266,753 $ 656,294 $ 1,266,753
Average loans held for investment $ 755,689 $ 1,213,406 $ 1,070,879 $ 804,909
Nonperforming loans (including government
guaranteed balances) $ 10,495 $ 13,837 $ 10,495 $ 13,837
Nonperforming loans (excluding government
guaranteed balances) $ 3,756 $ 4,057 $ 3,756 $ 4,057
Guaranteed balance of all government
guaranteed loans $ 339,766 $ 981,414 $ 339,766 $ 981,414
Loans held for sale, residential $ 91,243 $ 149,407 $ 91,243 $ 149,407
We recorded a negative provision of $3.00 million during the three months ended
September 30, 2021 , compared to a provision of $7.00 million for the same period
in 2020. We recorded a negative provision for loan losses of $1.00 million
during the nine months ended September 30, 2021 , compared to a provision of
$11.90 million for the same period in 2020. For the year ended 2020, the
provision for loan losses was $16.90 million . During 2020 and the first quarter
of 2021, we increased the qualitative factors in the allowance for loan losses
calculation for the decline in economic indicators caused by
the COVID-19 pandemic resulting in significant provision expense in those
periods. As asset quality remained stable during the second and third quarters
of 2021 and as many of the Company's SBA loans were bolstered by additional
government support, additional provision for loan losses was not deemed
necessary. Since 2016, the Company's loan losses have been incurred primarily in
its SBA unguaranteed loan portfolio, particularly loans originated under the SBA
7(a) Small Loan Program. The Small Loan Program represents loans of $350,000 or
less and such loans carry an SBA guarantee of 75% to 90% of the loan, depending
on the original principal balance. The default rate on loans originated in the
SBA 7(a) Small Loan Program is significantly higher than the Bank's other SBA
7(a) loans, conventional commercial loans, or residential mortgage loans.
Nonperforming assets to total assets, excluding government guaranteed loan
balances, were 0.40%, as of September 30, 2021 , as compared to 0.27% as of
September 30, 2020 . This percentage was 0.22% as of December 31, 2020 . Since the
majority of the Company's loan portfolio consisted of SBA loans, most of which
received from the SBA principal and
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interest payments under Section 1112 of the CARES Act during 2020 and 2021,
asset quality trends may appear more favorable than they otherwise would without
the SBA's support under the CARES Act.
As of September 30, 2021 , a total of 42 loans with principal balances of $3.95
million were under payment deferrals. Of those, 41 were government guaranteed
loans with $1.99 million in outstanding unguaranteed balances. As expected, the
level of SBA loans on deferral increased with the expiration of the Section 1112
payment support afforded under the CARES Act at which point certain borrowers
requested payment deferrals. With the Economic Aid Act signed into law on
December 27, 2020 , Section 1112 CARES Act payments were extended, with some
stipulations, which assisted the majority of our SBA borrowers for three months
and, depending on the type of business, up to eight months of additional
principal and interest payments with a cap of $9,000 per month per borrower,
beginning in February 2021 . Although the Company's asset quality trends indicate
minimal stress on the portfolio, management incorporated a qualitative measure
in the allowance for loan losses calculation.
SBA and Other Government Guaranteed Loans
The following table sets forth, for the periods indicated, information regarding
our SBA and other government guaranteed lending activity, excluding PPP loans
(dollars in thousands).
At and for the
At and for the Nine Months Ended Year Ended
September 30, December 31,
Government Guaranteed, Excluding PPP 2021 2020 2020
Number of loans originated 272 264 320
Amount of loans originated $ 110,185 $ 84,420 $ 101,076
Average loan size originated $ 405 $ 320 $ 316
Government guaranteed loan balances sold $ - $ 23,669 $ 23,713
Government unguaranteed loan balances sold $ 5,034 $ 393 393
Total government guaranteed loans $ 314,015 $ 248,567 $ 253,330
Government guaranteed loan balances $ 184,119 $ 101,903 $ 110,196
Government unguaranteed loan balances $ 129,896 $ 147,258 $ 143,134
Government guaranteed loans serviced for others $ 443,764 We make government guaranteed loans throughoutthe United States . The following table sets forth, at the dates indicated, information regarding the geographic disbursement of our SBA loan portfolio (dollars in thousands). The "All Other" category includes states with less than 5% in any period presented. September 30, December 31, 2021 2020 2020 Amount % of Total Amount % of Total Amount % of Total Florida$ 87,563 28 %$ 58,854 24 %$ 60,861 24 % California 40,795 13 % 34,654 14 % 32,891 13 % Texas 21,290 7 % 18,290 7 % 17,689 7 % Georgia 14,875 5 % 13,566 5 % 13,936 6 % All Other 149,492 47 % 123,203 50 % 127,953 50 % Total government guaranteed loans, excluding PPP$ 314,015 100 %$ 248,567 100 %$ 253,330 100 % As part of the Bank's strategic decision to be an active local and national PPP lender, the Bank developed and used local marketing efforts and a nationwide, online application platform. As a result of these efforts, the Bank originated$329.32 million in PPP loans during the nine months endedSeptember 30, 2021 and$876.96 million in 2020. The Bank used the 49 -------------------------------------------------------------------------------- Table of ContentsFederal Reserve's PPPLF to match fund the vast majority of those amounts. The following table reflects the Bank's PPP lending activity for the periods indicated (dollars in thousands). At and for the At and for the Three Months ended At and for the Nine Months Ended year ended September 30, September 30, December 31, 2021 2020 2021 2020 2020 Number of loans originated 2 2,558 3,858 8,930 8,948 Amount of loans originated$ 276 $ 64,888
$ 85 $ 98 $ 98 Amount of loans sold $ - $ -$ 326,318 $ - $ - Amount of loans purchased $ -$ 7,362 $ -$ 22,404 $ 22,404 Loan balance, net of deferred loan costs (fees) and discount on purchased loans$ 155,647 $ 879,511
$ 1,662 $ 4,302
$ 1,112 $ 19,531
Residential Mortgage Loans
The following table sets forth, for the periods indicated, information regarding
our residential mortgage lending activity (dollars in thousands).
For the Three Months Ended For the Nine Months Ended September For the Year
September 30, 30, Ended December 31,
2021 2020 2021 2020 2020
Number of loans originated 1,620 2,119 5,745 4,546 6,727
Amount of loans originated $ 506,673 $ 598,385 $ 313 $ 282 $ 304 $ 281 $ 285 Loan balances sold$ 540,684 $ 544,857 $ 1,855,685 $ 1,209,063 $ 1,787,574 Deposits General. In addition to deposits, sources of funds available for lending and for other purposes include loan repayments and proceeds from the sales of loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and market conditions. Borrowings, as well as available lines of credit, may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels. Deposits. Deposits are attracted principally from within our primary service area ofPinellas ,Hillsborough ,Manatee ,Pasco , andSarasota Counties,Florida . We offer a wide selection of deposit instruments including demand deposit accounts, NOW accounts, money-market accounts, regular savings accounts, certificate of deposit accounts; and retirement savings plans (such as IRA accounts). Certificate of deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. We emphasize commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits. Deposit interest rates are set weekly by management, based on a review of loan demand, deposit flows for the previous week and a survey of rates among competitors and other financial institutions inFlorida . 50 -------------------------------------------------------------------------------- Table of Contents The amounts of each of the following categories of deposits, at the dates indicated, are as follows (dollars in thousands): Deposit Types September 30, 2021 September 30, 2020 December 31, 2020 Noninterest-bearing deposits$ 87,625 13.0 %$ 70,115 13.7 %$ 62,650 11.2 % Interest-bearing transaction accounts 157,304 23.3 % 112,902 22.1 % 140,265 25.1 % Money market accounts 362,476 53.7 % 235,385 46.1 % 274,421 49.1 % Savings 14,976 2.2 % 12,323 2.4 % 12,323 2.2 % Subtotal 622,381 92.2 % 430,725 84.3 % 489,659 87.6 % Total time deposits 52,653 7.8 % 79,417 15.6 % 69,125 12.4 % Total deposits$ 675,034 100.0 %$ 510,142 100.0 %$ 558,784 100.0 % The following table sets forth the remaining maturities of our time deposits of$100 thousand or greater by category as ofSeptember 30, 2021 (dollars in thousands). Three months or less$ 3,100 Over three months through six months 18,118 Over six months through 12 months 10,267 Over 12 months 6,760 Total$ 38,245 Other Borrowings InJune 2021 , the Company issued$6.00 million of Subordinated Debentures (the "Debentures") that matureJune 30, 2031 and are redeemable after five years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial five years of their term and carry interest at a floating rate for the final five years of their term. Under the terms of the Debentures, the floating rates are based on a SOFR benchmark plus 3.78% per annum. The Debentures were issued to redeem a$6.00 million Subordinated Debenture which was issued inDecember 2018 and which carried interest at a fixed rate of 6.875% per annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to$5.98 million and$5.95 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. InMarch 2020 , the Company renegotiated the terms of the debt and combined the line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at prime (3.25% atSeptember 30, 2021 ). The new note matures onMarch 10, 2029 and the balance of the note was$3.41 million and$3.75 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The note is secured by 100% of the stock of the Bank and requires the Company to comply with certain loan covenants during the term of the note. InApril 2020 , the Company entered into the PPPLF. Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrues interest at 0.35% per annum and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging fromApril 15, 2022 toAugust 27, 2025 , and will be accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. The balances outstanding on this facility were$144.60 million and$881.26 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. Capital Resources Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale investment securities. Shareholders' equity increased$23.23 million to$94.30 million atSeptember 30, 2021 as compared to$71.07 million atDecember 31, 2020 . The increase in shareholders' equity was primarily impacted by$21.81 million of net income generated during the nine months endedSeptember 30, 2021 and the issuance of common stock. The common stock was 51 -------------------------------------------------------------------------------- Table of Contents issued under the non-qualified stock purchase plan of$662 thousand , the dividend reinvestment plan of$389 thousand , and employee stock ownership plan of$366 thousand . Additionally, the bank issued preferred stock with net proceeds of$727 thousand and common stock with net proceeds of$701 thousand . These increases were partially offset by decreases of$201 thousand of accumulated other comprehensive income due to increases in net unrealized losses on available-for-sale securities,$797 thousand of dividends declared on our preferred stock, and$778 thousand of dividends declared on our common stock during the nine months endedSeptember 30, 2021 . The following table summarizes the changes in our shareholders' equity for the periods indicated below: For the Three Months Ended September For the Nine Months Ended September 30, 30, 2021 2020 2021 2020 Balance at beginning of period$ 92,813 $
53,307
1,280 5,253 21,807 7,097
Issuance of common stock under:
Non-qualified stock purchase plan 218 107 662 303
Dividend reinvestment plan 105 98 389 405
Employee stock ownership plan 366 - 366 260
Issuance of preferred stock, net - 3,723 727 3,723
Issuance of common stock, net - - 701 -
Stock-based compensation expense 6 6 43 (5)
Exercise of stock options 93 92 310 280
Other comprehensive income (loss) (79) - (201) -
Dividends declared on preferred stock (230) (202) (797) (557)
Dividends declared on common stock (274) (230) (778) (684)
Balance at end of period $ 94,298 $ 62,154 $ 94,298 $ 62,154
The Bank is subject to regulatory capital requirements imposed by various
regulatory banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by banking regulators that,
if undertaken, could have a direct material effect on BayFirst's and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors.
In 2020, the Federal banking regulatory agencies adopted a rule to simplify the
methodology for measuring capital adequacy for smaller, uncomplicated banks.
This CBLR is calculated as the ratio of tangible equity capital divided by
average total consolidated assets. CBLR tangible equity is defined as total
equity capital, prior to including minority interests, and excluding accumulated
other comprehensive income, deferred tax assets arising from net operating loss
and tax credit carryforwards, goodwill, and other intangible assets (other than
mortgage servicing assets). Under the proposal, a qualifying organization may
elect to use the CBLR framework if its CBLR is greater than 9%. The Bank has
elected not to use the CBLR framework.
At September 30, 2021 and December 31, 2020 , the Bank's capital ratios were in
excess of the requirement to be "well capitalized" under the regulatory
guidelines.
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As of the dates indicated, the Bank met all capital adequacy requirements to
which it is subject. The Bank's actual capital amounts and percentages are as
shown in the table below (dollars in thousands):
Actual Minimum(1) Well Capitalized(2)
Amount Percent Amount Percent Amount Percent
As of September 30, 2021
Total Capital (to risk-weighted
assets) $ 102,678 22.50 % $ 36,514 8.00 % $ 45,643 10.00 %
Tier 1 Capital (to risk-weighted
assets) 96,808 21.21 % 27,386 6.00 % 36,514 8.00 %
Common Equity Tier 1 Capital (to
risk-weighted assets) 96,808 21.21 % 20,539 4.50 % 29,668 6.50 %
Tier 1 Capital (to total assets) 96,808 12.64 % 30,643 4.00 % 38,304 5.00 %
As of December 31, 2020
Total Capital (to risk-weighted
assets) 78,824 17.02 % 37,056 8.00 % 46,320 10.00 %
Tier 1 Capital (to risk-weighted
assets) 72,825 15.72 % 27,792 6.00 % 37,056 8.00 %
Common Equity Tier 1 Capital (to
risk-weighted assets) 72,825 15.72 % 20,844 4.50 % 30,108 6.50 %
Tier 1 Capital (to total assets) 72,825 11.75 % 24,799 4.00 % 30,998 5.00 %
____________
(1) To be considered "adequately capitalized" under the FDIC's Prompt Corrective
Action regulations.
(2) To be considered "well capitalized" under the FDIC's Prompt Corrective
Action regulations.
Contractual Obligations
In the ordinary course of our operations, we enter into certain contractual
obligations. Total contractual obligations at September 30, 2021 were $211.20
million , a decrease of $752.82 million from $964.01 million at December 31,
2020 . The decrease was primarily due to a decrease of $736.66 million in PPP
Liquidity Facility as a result of PPP loan forgiveness.
The following tables present our contractual obligations as of September 30,
2021 and December 31, 2020 (dollars in thousands).
Contractual Obligations as of
One to Three Three to Five Over Five
Less than One Year Years Years Years Total
Operating lease obligations $ 1,098 $ 1,930 $ 1,167 $ 350 $ 4,545
Long-term borrowings - - - 3,413 3,413
PPP Liquidity Facility 105,941 - 38,660 - 144,601
Subordinated notes - - - 5,983 5,983
Time deposits 43,778 8,054 821 - 52,653
Total $ 150,817 $ 9,984 $ 40,648 $ 9,746 $ 211,195 Contractual Obligations as of
One to Three Three to Five Over Five
Less than One Year Years Years Years Total
Operating lease obligations $ 1,134 $ 1,209 $ 945 $ 637 $ 3,925
Long-term borrowings - - - 3,754 3,754
PPP Liquidity Facility - 791,778 89,484 - 881,262 Subordinated notes - - - 5,948 5,948 Time deposits 27,909 39,817 1,399 - 69,125 Total$ 29,043 $ 832,804 $ 91,828 $ 10,339 $ 964,014 53
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Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business. These financial instruments primarily include
unfunded loan commitments, undisbursed loans in process, unfunded lines of
credit, and standby letters of credit. The Bank uses these financial instruments
to meet the financing needs of its customers. These financial instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity
risk. These do not present unusual risks and management does not anticipate any
accounting losses that would have a material effect on the Bank.
A summary of the amounts of the Bank's financial instruments,
with off-balance sheet risk as of the dates indicated, is as follows (dollars in
thousands):
September 30, September 30, December 31,
2021 2020 2020
Unfunded loan commitments $ 57,592 $ 27,555 $ 34,867
Unused lines of credit 43,263 32,223 34,063
Standby letters of credit 68 68 68
Total $ 100,923 $ 59,846 $ 68,998
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Management evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's credit
evaluation of the counterparty.
Standby letters-of-credit are conditional lending commitments that we issue to
guarantee the performance of a customer to a third party and to support private
borrowing arrangements. Essentially, letters of credit issued have expiration
dates within one year of the issue date. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
credit. The Bank may hold collateral supporting those commitments. Newly issued
or modified guarantees that are not derivative contracts have been recorded on
the Bank's balance sheet at their fair value at inception.
In general, loan commitments and letters of credit are made on the same terms,
including with respect to collateral, as outstanding loans. Each customer's
creditworthiness and the collateral required are evaluated on
a case-by-case basis.
Liquidity
Liquidity management is the process by which we manage the flow of funds
necessary to meet our financial commitments on a timely basis and at a
reasonable cost and to take advantage of earnings enhancement opportunities.
These financial commitments include withdrawals by depositors, credit
commitments to borrowers, expenses of our operations, and capital expenditures.
The Bank generally maintains a liquidity ratio of liquid assets to total assets,
excluding PPP loans pledged to the PPPLF, of at least 7.0%. Liquid assets
include cash and due from banks, federal funds sold, interest-bearing deposits
with banks and unencumbered investment securities available-for-sale. Our
on-balance sheet liquidity ratio at September 30, 2021 was 17.66%, as compared
to 8.37% at December 31, 2020 .
During the nine months ended September 30, 2021 , the Bank purchased investment
securities, all of which were classified as investment securities available for
sale. The fair value of all of our investment securities available for sale
totaled $32.54 million at September 30, 2021 .
During each of the three quarters of 2021, the Bank paid a dividend of $250
thousand to BayFirst. Prior to that, the Bank retained its earnings to support
its growth. Therefore, BayFirst's liquidity has been dependent on funds received
from the issuance and sale of debt and equity securities. BayFirst's liquidity
needs are to make interest payments on its debt obligations, dividends on shares
of its Series A Preferred Stock, Series B Convertible Preferred Stock, and
common stock, and payment of certain operating expenses. As of September 30,
2021 , BayFirst held $107.10 million in cash and cash equivalents.
A description of BayFirst's and the Bank's debt obligations is set forth below
under the heading "Other Borrowings."
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