BAYFIRST FINANCIAL CORP. The following discussion explains our financial condition and results of operations as of and for the three and six months endedJune 30, 2022 . 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 Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 30, 2022 . 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, global military hostilities, or climate changes, 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 them; the ability of the Company to implement its strategy and expand its banking operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets or global military hostilities; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, 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. 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. Our largest expenses are interest on those deposits and borrowings, professional fees, and salaries and commissions 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. AtJune 30, 2022 , the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing our consolidated financial statements were the policies 34
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related to the allowance for loan losses, and fair value measurement of SBA servicing rights, residential loans held for sale, SBA loans held for investment at fair value, and residential derivatives, which are discussed more fully below.
Allowance for Loan Losses
The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses. Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates, including the loss content for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. In addition, management may include qualitative adjustments intended to capture the impact of other uncertainties in the lending environment such as underwriting standards, current economic and political conditions, and other factors affecting the credit quality. Changes to one or more of the estimates used could result in a different estimated allowance for loan losses.
Fair Value Measurements
Mortgage derivatives, loans held for sale, investments, and certain other loans
are recorded at fair value on a recurring basis. Additionally, from time to
time, other assets and liabilities may be recorded at fair value on a
nonrecurring basis, such as impaired loans, other real estate, SBA servicing
rights, and certain other assets and liabilities. Fair value is an estimate of
the exchange price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (i.e., not a forced transaction, such as a
liquidation or distressed sale) between market participants at the measurement
date and is based on the assumptions market participants would use when pricing
an asset or liability. Fair value measurement and disclosure guidance
establishes a three-level hierarchy for disclosure of assets and liabilities
recorded at fair value. Valuations generated from model-based techniques that
use at least one significant assumption not observable in the market are
considered Level 3 and reflect estimates of assumptions market participants
would use in pricing the asset or liability.
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 elected to
take advantage of this 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
Residential Mortgage Restructuring. On May 12, 2022 , BayFirst Financial Corp
announced that BayFirst National Bank completed a restructuring of its
Residential Mortgage Division. The Bank discontinued its primary consumer direct
residential mortgage business line. In doing so, residential loan production
offices were closed in Overland Park, Kansas , New Albany, Ohio , and Tampa,
Florida . The restructuring was undertaken by the Bank as a response to reduced
volume due to a lack of refinance demand in the current rising rate environment
which directly impacted the consumer direct business line. As a result of this
restructuring, the Bank will focus resources on its traditional retail mortgage
business supported by loan production offices across the nation. At the same
time, the Bank has aligned its operational staffing in its Residential Mortgage
Division to reflect the discontinuation of its consumer direct offices and
overall production estimates across the platform. In doing so, the Bank incurred
a one-time pre-tax restructuring charge of approximately $630 thousand in the
second quarter of 2022, consisting of approximately $250 thousand of severance
and related payments, $145 thousand of write-offs of fixed assets, and $235
thousand of valuation adjustments on the leased branch facilities.
Conversion to a National Bank . On May 16, 2022 , BayFirst Financial Corp.'s
wholly-owned subsidiary completed its conversion to a national bank. As part of
this process, the Bank, formerly known as First Home Bank , changed its name to
BayFirst National Bank .
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Third Quarter Common Stock Dividend. OnJuly 26, 2022 , BayFirst's Board of Directors declared a third quarter 2022 cash dividend of$0.08 per common share. The dividend will be payableSeptember 15, 2022 to common shareholders of record as ofSeptember 1, 2022 . This dividend marks the 25th consecutive quarterly cash dividend paid since BayFirst initiated cash dividends in 2016. Third Quarter Preferred Series A Stock Dividend. BayFirst's Board of Directors declared a quarterly cash dividend of$22.50 on our Series A Preferred Stock. The dividend will be payableOctober 3, 2022 to shareholders of record as ofJuly 16, 2022 . The amount and timing of the dividend is in accordance with the terms of the Series A Preferred Stock. Third Quarter Preferred Series B Stock Dividend. BayFirst's Board of Directors declared a quarterly cash dividend of$20.00 on our Series B Convertible Preferred Stock. The dividend will be payableOctober 3, 2022 to shareholders of record as ofJuly 16, 2022 . The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock. 36
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Selected Financial Data - Unaudited
As of and for the Three Months Ended As of and for the Six Months Ended
(Dollars in thousands, except per share data) 6/30/2022 3/31/2022 6/30/2021 6/30/2022 6/30/2021
Income Statement Data:
Net interest income$ 7,454 $ 6,406 $ 12,904 13,860 25,534 Provision for loan losses 250 (2,400) - (2,150) 2,000 Noninterest income 17,899 18,868 38,212 36,767 71,371 Noninterest expense 25,676 27,647 33,668 53,323 67,389 Income tax expense (benefit) (291) 14 4,432 (277) 6,989 Net income (loss) (282) 13 13,016 (269) 20,527 Preferred stock dividends 208 208 235 416 567 Net income available to (loss attributable to) common shareholders$ (490) $
(195)
Average loans held for investment, excluding PPP loans 561,455 520,559 445,893 541,120 456,467 Average total assets 879,868 872,311 1,541,230 876,110 1,588,465 Average common shareholders' equity 83,235 83,990 68,525 83,611 63,248 Total loans held for investment 641,737 561,797 895,194 641,737 895,194 Total loans held for investment, excluding PPP loans 610,527 517,434 465,470 610,527 465,470 Total loans held for investment, excluding government guaranteed loan balances 458,624 374,353 314,438 458,624 314,438 Allowance for loan losses 9,564 10,170 20,797 9,564 20,797 Total assets 921,377 888,541 1,198,229 921,377 1,198,229 Common shareholders' equity 83,690 85,274 81,838 83,690 81,838 Per Share Data: Basic earnings (loss) per common share$ (0.12) $ (0.05) $ 3.34 $ (0.17) $ 5.44 Diluted earnings (loss) per common share$ (0.12) $ (0.05) $ 2.98 $ (0.17) $ 4.87 Dividends per common share$ 0.080 $ 0.080 $ 0.070 $ 0.160 $ 0.137 Book value per common share$ 20.82 $ 21.25 $ 21.16 $ 20.82 $ 21.16 Tangible book value per common share (1)$ 20.80 $ 21.22 $ 21.14 $ 20.80 $ 21.14 Performance Ratios: Return on average assets (0.13) % 0.01 % 3.38 % (0.06) % 2.58 % Return on average common equity (2.35) % (0.93) % 74.61 % (1.64) % 63.12 % Net interest margin 3.73 % 3.25 % 3.46 % 3.49 % 3.34 % Dividend payout ratio (65.54) % (164.25) % 2.09 % (93.64) % 2.52 % Asset Quality Data: Net charge-offs$ 856 $ 882 $ 1,220 $ 1,738 $ 2,365 Net charge-offs/average loans held for investment excluding PPP 0.61 % 0.68 % 1.09 % 0.64 % 1.04 % Nonperforming loans$ 10,437 $ 8,834 $ 9,884 $ 10,495 $ 13,836 Nonperforming loans (excluding government guaranteed balance)$ 4,245 $ 2,660 $ 3,577 $ 3,756 $ 4,057 Nonperforming loans/total loans held for investment 1.63 % 1.57 % 1.10 % 1.63 % 1.10 % Nonperforming loans (excluding gov't guaranteed balance)/total loans held for investment 0.66 % 0.47 % 0.40 % 0.66 % 0.40 % ALLL/Total loans held for investment at amortized cost 1.62 % 1.84 % 2.35 % 1.62 % 2.35 % 37
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As of and for the Three Months Ended As of and for the Six Months Ended
(Dollars in thousands, except per
share data) 6/30/2022 3/31/2022 6/30/2021 6/30/2022 6/30/2021
ALLL/Total loans held for investment
at amortized cost, excluding PPP loans 1.71 % 2.00 % 4.57 % 1.71 % 4.57 %
Other Data:
Full-time equivalent employees 485 575 671 485 671
Banking center offices 7 7 6 7 6
Loan production offices 19 20 26 19 26(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.
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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) June 30, 2022 March 31, 2022 June 30, 2021
(Unaudited) (Unaudited) (Unaudited)
Total shareholders' equity $ 93,295 $ 94,879 $ 92,813
Less: Preferred stock liquidation
preference (9,605) (9,605) (10,975)
Total equity available to common
shareholders 83,690 85,274 81,838
Less: Goodwill (100) (100) (100)
Tangible common shareholders' equity $ 83,590 $
85,174
Common shares outstanding 4,019,023 4,013,173 3,867,414 Tangible book value per common share$ 20.80 $ 21.22$ 21.14 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 retain 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 sale of the guaranteed portions of the loans. Net Income (Loss) We had net loss for the three months endedJune 30, 2022 of$282 thousand , or$(0.12) per diluted common share, compared to net income for the three months endedJune 30, 2021 of$13.0 million , or$2.98 per diluted common share. The decrease of$13.3 million was the result of the$13.8 million one-time gain on sale of PPP loans in 2021, lower PPP loan origination fee and interest income, and lower residential loan fee income, partially offset by an increase in held for investment SBA loan fair value gains, resulting primarily from election of the fair value option on$41.7 million of loans originated in the current quarter, as well as an$8.0 million decrease in noninterest expense, which resulted primarily from decreased human resource costs. We had net loss for the six months endedJune 30, 2022 of$269 thousand , of$(0.17) per diluted common share, compared to net income for the six months endedJune 30, 2021 of$20.5 million or$4.87 per diluted common share. The decrease of$20.8 million in net income was due to a$32.0 million decrease in residential loan fee income, a$13.8 million gain on sale of PPP loans in 2021, and lower PPP loan origination fee and interest income . These items were partially offset by a$2.4 million increase related to held for investment SBA loan fair value gains, higher gains on non-PPP SBA guaranteed loan sales, a$14.1 million reduction, or 20.9%, in noninterest expense and a$4.2 million lower provision for loan losses. 39
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Net Interest Income
Net interest income was$7.5 million for the three months endedJune 30, 2022 , a decrease of$5.5 million or 42.2% compared to net interest income for the three months endedJune 30, 2021 of$12.9 million . This decrease was primarily due to lower net PPP loan interest and origination fee income. The net interest margin for the three months endedJune 30, 2022 was 3.73% compared to 3.46% for the three months endedJune 30, 2021 . With the recent interest rate increases enacted by theFederal Reserve , the Company anticipates further improvement in its net interest margin as its SBA loan portfolio rates are tied to prime with the vast majority resetting at the beginning of each quarter. Net interest income was$13.9 million for the six months endedJune 30, 2022 , a decrease of$11.7 million or 45.7% compared to net interest income for the six months endedJune 30, 2021 of$25.5 million . This decrease was mainly due to the decrease in net PPP loan interest and origination fee income. The net interest margin for the six months endedJune 30, 2022 was 3.49% compared to 3.34% for the six months endedJune 30, 2021 . This increase was due to the same factors noted above. 40
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Average Balance Sheet and Analysis of Net Interest Income
The following tables set forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest and dividend income of
BayFirst from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
(v) net interest margin; and (vi) ratio of average interest-earning assets to
average interest-bearing liabilities. Loans in nonaccrual status, for the
purposes of the following computations, are included in the average loan
balances. FRB, FHLB, and FNBB restricted equity holdings are included in other
interest-earning assets. The Company did not have a significant amount of
tax-exempt assets.
Three Months Ended
2022 2021
(Dollars in thousands) Average Balance Interest
Yield Average Balance Interest YieldInterest-earning assets: Investment securities$ 46,366 $ 229 1.98 % $ 14,155$ 47 1.33 % Loans, excluding PPP (1) 635,170 7,915 5.00 550,222 6,752 4.92 PPP loans 35,867 296 3.31 724,860 8,094 4.48 Other 83,199 186 0.90 205,155 104 0.20 Total interest-earning assets 800,602 8,626 4.32 1,494,392 14,997 4.03 Noninterest-earning assets 79,266 46,838 Total assets$ 879,868 $ 1,541,230 Interest-bearing liabilities: NOW, MMDA and savings$ 644,286 $ 974 0.61$ 491,289 $ 980 0.80 Time deposits 26,463 86 1.30 98,863 214 0.87 PPPLF advances - - - 749,824 655 0.35 Other borrowings 11,813 112 3.80 25,393 244 3.85 Total interest-bearing liabilities 682,562 1,172 0.69 1,365,369 2,093 0.61 Demand deposits 96,530 84,695 Noninterest-bearing liabilities 7,936 10,466 Shareholders' equity 92,840 80,700 Total liabilities and shareholders' equity$ 879,868 $ 1,541,230 Net interest income$ 7,454 $ 12,904 Interest rate spread 3.63 3.41 Net interest margin (2) 3.73 3.46 Ratio of average interest-earning assets to average interest-bearing liabilities 117.29 % 109.45 %
(1) Includes nonaccrual loans. (2) Net interest margin represents net interest income divided by average total interest-earning assets.
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Six Months Ended June 30,
2022 2021
(Dollars in thousands) Average Balance Interest Yield Average Balance Interest Yield
Interest earning-assets:
Investment securities $ 38,550 $ 326 1.71 % $ 6,992 $ 47 1.36 %
Loans, excluding PPP (1) 619,699 15,027 4.89 597,176 13,351 4.51
PPP loans 46,901 739 3.18 774,619 16,306 4.24
Other 94,771 274 0.58 164,880 185 0.23
Total interest-earning assets 799,921 16,366 4.13 1,543,667 29,889 3.90
Noninterest-earning assets 76,189 44,798
Total assets $ 876,110 $ 1,588,465
Interest-bearing liabilities:
NOW, MMDA and savings $ 626,973 $ 2,060 0.66 $ 468,080 $ 2,013 0.87
Time deposits 32,868 217 1.33 97,515 501 1.04
PPPLF advances 11,428 20 0.35 817,053 1,421 0.35
Other borrowings 10,529 209 4.00 41,472 420 2.04
Total interest-bearing
liabilities 681,798 2,506 0.74 1,424,120 4,355 0.62
Demand deposits 97,045 76,642
Noninterest-bearing
liabilities 4,051 10,837
Shareholders' equity 93,216 76,866
Total liabilities and
shareholders' equity $ 876,110 $ 1,588,465
Net interest income $ 13,860 $ 25,534
Interest rate spread 3.38 3.29
Net interest margin (2) 3.49 3.34
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 117.33 % 108.39 %
(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. Loans in nonaccrual status, for the purpose 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. (Dollars in thousands) Rate Volume Total Three Months EndedJune 30, 2022 vs.June 30, 2021 : Interest-earning assets: Investment securities$ 32 $ 150 $ 182 Loans, excluding PPP 106 1,057 1,163 PPP loans (1,680) (6,118) (7,798) Other interest-earning assets 175 (93) 82 Total interest-earning assets (1,367) (5,004) (6,371) Interest-bearing liabilities: NOW, MMDA and savings (270) 264 (6) Time deposits 75 (203) (128) PPPLF - (655) (655) Other borrowings (3) (129) (132) Total interest-bearing liabilities (198) (723) (921) Net change in net interest income$ (1,169) $ (4,281) $ (5,450) Six Months EndedJune 30, 2022 vs.June 30, 2021 : Interest-earning assets: Investment securities$ 15 $ 264 $ 279 Loans, excluding PPP 1,159 517 1,676 PPP loans (3,287) (12,280) (15,567) Other interest-earning assets 194 (105) 89 Total interest-earning assets (1,919) (11,604) (13,523) Interest-bearing liabilities: NOW, MMDA, and savings (541) 588 47 Time deposits 114 (398) (284) PPPLF advances - (1,401) (1,401) Other borrowings 234 (445) (211) Total interest-bearing liabilities (193) (1,656) (1,849) Net change in net interest income$ (1,726) $ (9,948) $ (11,674) 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 that may affect our ability to collect on the loans in our portfolio. Asset quality remained stable in the second quarter of 2022. As the financial impact of the COVID-19 pandemic became more predictable throughout 2021, the Company began adjusting downward its allowance for loan losses from the historic high levels reached in 2020 at the onset of the pandemic. The Company recorded a provision for the three months endedJune 30, 2022 of$250 thousand . This compared to no provision for the three months endedJune 30, 2021 . During the three 43
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months ended
We recorded a negative provision for loan losses for the six months endedJune 30, 2022 of$2.2 million compared to a$2.0 million provision for the six months endedJune 30, 2021 . The decrease of$4.2 million in the provision for loan losses was primarily due to the same factors mentioned above. During the six months endedJune 30, 2022 , we charged off$1.7 million in loans compared to$2.4 million during the six months endedJune 30, 2021 .
Noninterest Income
The following table presents noninterest income for the three and six months
ended
For the Three Months Ended June
30, For the Six Months Ended June 30,
(Dollars in thousands) 2022 2021 2022 2021
Noninterest income:
Residential loan fee income $ 10,212 $ 23,352 $ 23,403 $ 55,381
Loan servicing income, net 438 325 899 1,029
Gain on sale of government guaranteed loans, net 3,848 13,798 8,469 13,798
Service charges and fees 322 364 604 586
SBA loan fair value gain 2,708 7 2,511 79
Other noninterest income 371 366 881 498
Total noninterest income $ 17,899 $ 38,212 $ 36,767 $ 71,371
Noninterest income was $17.9 million during the three months ended June 30,
2022 , a decrease of $20.3 million or 53.2% from $38.2 million during the three
months ended June 30, 2021 . The decrease was primarily due to the one-time $13.8
million gain on sale of PPP loans in 2021 and a decrease in residential loan fee
income of $13.1 million or 56.3% as a result of a decrease in residential
mortgage volume of $216.5 million , partially offset by an increase in gains on
SBA loan sales and the resulting gain in SBA loan servicing income.
Noninterest income was $36.8 million during the six months ended June 30, 2022 ,
a decrease of $34.6 million or 48.5% from $71.4 million during the six months
ended June 30, 2021 . The decrease was primarily due to a $32.0 million reduction
in residential loan fee income and the $13.8 million gain on sale of PPP loans
in 2021. These items were partially offset by higher gains on the sale of
non-PPP SBA loans and a $2.4 million increase related to held for investment SBA
loan fair value gains.
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Noninterest Expense
The following table presents noninterest expense for the three and six months
ended
For the Three Months Ended June
30, For the Six Months Ended June 30,
(Dollars in thousands) 2022 2021 2022 2021
Noninterest expense:
Salaries and benefits $ 11,416 $ 12,948 $ 25,113 $ 26,115
Bonus, commissions, and incentives 4,995 9,218 9,601 21,091
Mortgage banking 677 1,572 1,679 3,267
Occupancy and equipment 1,382 1,297 2,803 2,629
Data processing 1,367 2,593 2,834 3,862
Marketing and business development 1,659 1,878 3,401 3,520
Professional services 1,075 843 2,382 1,767
Loan origination and collection 748 1,105 1,418 1,601
Employee recruiting and development 474 1,008 1,345 1,622
Regulatory assessments 120 100 189 202
Residential mortgage division restructuring
expense 630 - 630 -
Other noninterest expense 1,133 1,106 1,928 1,713
Total noninterest expense $ 25,676 $ 33,668 $ 53,323 $ 67,389
Noninterest expense was $25.7 million during the three months ended June 30,
2022 , a decrease of $8.0 million or 23.7% from $33.7 million during the three
months ended June 30, 2021 . The decline was primarily due to a decrease in
commissions earned on residential mortgage loan originations, salaries and
benefits, and data processing expense, partially offset by residential mortgage
division restructuring expense. The residential mortgage division restructuring
was undertaken by the Bank as a response to reduced volume due to a lack of
refinance demand in the current rising rate environment which directly impacted
the consumer direct business line. The Bank discontinued its primary consumer
direct residential mortgage business line in the second quarter 2022. As a
result, the Bank incurred a one-time pre-tax restructuring charge of
approximately $630 thousand , consisting of approximately $250 thousand of
severance and related payments, $145 thousand of write-offs of fixed assets, and
$235 thousand of valuation adjustments on the leased branch facilities.
Noninterest expense was $53.3 million during the six months ended June 30, 2022 ,
a decrease of $14.1 million or 20.9% from $67.4 million during the six months
ended June 30, 2021 . The decrease was primarily due to less commissions earned
on residential mortgage loan originations.
Income Taxes
Income tax benefit was$291 thousand for the three months endedJune 30, 2022 , a decrease of$4.7 million from income tax expense of$4.4 million for the three months endedJune 30, 2021 . The decrease was primarily due to the decrease in pre-tax earnings. Income tax benefit was$277 thousand for the six months endedJune 30, 2022 , a decrease of$7.3 million from income tax expense of$7.0 million for the six months endedJune 30, 2021 . The decrease was primarily due to the decrease in pre-tax earnings.
The effective income tax rate was 50.73% for the six months ended
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Financial Condition
Investment Securities The following table presents the fair value of the Company's investment
securities portfolio classified as available for sale as of
(Dollars in thousands)June 30, 2022
Investment securities available for sale:
Asset-backed securities$ 9,909 $
7,535
Mortgaged-backed securities:
U.S. Government -sponsored enterprises 3,774
4,394
Collateralized mortgage obligations:
U.S. Government -sponsored enterprises 20,553
18,964
Corporate bonds 11,047 -
Total investment securities available for sale
30,893
The following table presents the fair value of the Company's investment
securities portfolio classified as held to maturity as of
(Dollars in thousands)June 30, 2022
Investment securities held to maturity:
Mortgaged-backed securities:
U.S. Government-sponsored enterprises $ 2 $
2
Corporate bonds 4,997
-
Total investment securities held to maturity
2
No investment securities were pledged as ofJune 30, 2022 orDecember 31, 2021 , and there were no sales of investment securities during the six months endedJune 30, 2022 or the year endedDecember 31, 2021 . During the second quarter of 2022, the Company transferred a$1.5 million previously designated available for sale investment security to a held to maturity designation at estimated fair value. The reclassification for the period endedJune 30, 2022 is permitted as the Company has appropriately determined the ability and intent to hold the investment security as an investment until maturity or call. The investment security had no unrealized net gain or loss at the time of transfer since it was purchased near the end of the first quarter of 2022. The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as ofJune 30, 2022 andDecember 31, 2021 . Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential 46
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mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.
June 30, 2022
One year or less One to five years Five to ten years After ten years
Amortized Amortized Amortized Amortized
(Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield Asset-backed securities $ - - % $ - - % $ - - %$ 10,098 2.34 % Mortgaged-backed securities:U.S. Government -sponsored enterprises - - - - - - 4,296 1.51 Collateralized mortgage obligations:U.S. Government -sponsored enterprises - - - - - - 23,023 1.81 Corporate bonds - - 11,339 1.62 - - - - Total investment securities available for sale $ - - %$ 11,339 1.62 % $ - - %$ 37,417 1.85 % December 31, 2021 One year or less One to five years Five to ten years After ten years Amortized Amortized Amortized Amortized (Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield Asset-backed securities $ - - % $ - - % $ - - %$ 7,624 0.90 % Mortgaged-backed securities:U.S. Government -sponsored enterprises - - - - - - 4,470 1.32 Collateralized mortgage obligations:U.S. Government -sponsored enterprises - - - - - - 19,370 1.31 Total investment securities available for sale $ - - % $ - - % $ - - %$ 31,464 1.21 % The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as ofJune 30, 2022 andDecember 31, 2021 . Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. June 30, 2022 One year or less One to five years Five to ten years After ten years Amortized Amortized Amortized Amortized (Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield Mortgaged-backed securities:U.S. Government -sponsored enterprises $ - - % $ - - % $ - - % $ 2 0.77 % Corporate bonds - - 4,014 3.40 1,000 4.38 - - Total investment securities held to maturity $ - - % $ 4,014 3.40 % $ 1,000 4.38 % $ 2 3.60 % 47
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December 31, 2021
One year or less One to five years Five to ten years After ten years
Amortized Amortized Amortized Amortized
(Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield
Mortgaged-backed securities:
U.S. Government -sponsored
enterprises $ - - % $ - - % $ - - % $ 2 0.80 %
Total investment securities
held to maturity $ - - % $ - - % $ - - % $ 2 0.80 %
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Loan Portfolio Composition
Through the efforts of our management and loan officers, strong loan production
resulted from our ability to take 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.
June 30, 2022 December 31, 2021
(Dollars in thousands) Amount % of Total Amount % of Total
Residential loans held for sale $ 74,708 $ 114,131
Government guaranteed loans, held for sale $ - $ 1,460
SBA loans held for investment, at fair value $ 52,209 $ 9,614
Loans held for investment, at amortized cost:
Residential real estate $ 122,403 20.9 % $ 87,235 15.3 %
Commercial real estate 216,067 37.0 163,477 28.7
Construction and land 9,686 1.7 18,632 3.3
Commercial and industrial 168,990 28.9 217,155 38.0
Commercial and industrial - PPP 31,430 5.4 80,158 14.1
Consumer and other 35,845 6.1 3,581 0.6
Loans held for investment, at amortized cost,
gross 584,421 100.0 % 570,238 100.0 %
Discount on SBA 7(a) loans sold (4,743) (3,866)
Premium/(discount) on loans purchased 2,221 (13)
Deferred loan costs, net 7,629 7,975
Allowance for loan losses (9,564) (13,452)
Loans held for investment, at amortized cost,
net $ 579,964 $ 560,882 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.
During the six months endedJune 30, 2022 , we originated approximately$143.9 million in loans through conventional lending channels,$137.4 million in loans through CreditBench (our SBA lending function), and$641.1 million through the Residential Mortgage Lending Division. During the six months endedJune 30, 2021 , we originated approximately$47.5 million in loans through conventional lending channels,$62.9 million through CreditBench, exclusive of PPP loans,$329.0 million of PPP loans, and$1.24 billion through the Residential Mortgage Lending Division. During the six months endedJune 30, 2022 , the Company sold guaranteed balances of SBA loans of$118.2 million .
In 2021, we originated approximately
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Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans atJune 30, 2022 . 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, premium and discount on loans purchased, and deferred loan costs, net. Due After One Due in One Year Year to Five Due After Five Due After 15 (Dollars in thousands) or Less Years Years to 15 Years Years Total Real estate: Residential $ 3,419$ 1,428 $ 4,393$ 113,556 $ 122,796 Commercial 4,725 319 11,455 222,849 239,348 Construction and land 1,977 - 1,663 6,046 9,686 Commercial and industrial 12,500 968 181,046 8,040 202,554 Commercial and industrial - PPP 10,796 20,415 - - 31,211 Consumer and other 1,694 18,696 15,042 710 36,142
Total loans held for investment $ 35,111
$ 213,599
The following table shows our loans with contractual maturities of greater than
one year that have fixed or adjustable interest rates at
Fixed Adjustable
(Dollars in thousands) Interest Rate Interest Rate
Real estate:
Residential $ 29,643 $ 89,734
Commercial 6,728 227,895
Construction and land 761 6,948
Commercial and industrial 22,952 167,102
Commercial and industrial - PPP 20,415 -
Consumer and other 4,366 30,082
Total loans held for investment
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 the
economic environment that it believes impacts credit quality as of the balance
sheet date 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 provisions to the loan loss reserve
may be made as appropriate as new loans are originated or as existing loans may
deteriorate.
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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 loan type. The government guaranteed loan balances are included in the collectively evaluated portfolio 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 government guaranteed 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
Nonperforming Assets. AtJune 30, 2022 , we had$4.3 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.62% of total loans held for investment at amortized cost. AtJune 30, 2021 , we had$3.6 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.35% of total loans held for investment at amortized cost. Total loans held for investment atJune 30, 2022 andJune 30, 2021 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ALLL as a percentage of loans held for investment at amortized cost, not including government guaranteed loan balances, was 2.14% atJune 30, 2022 , compared to 6.67% atJune 30, 2021 . AtDecember 31, 2021 , we had$4.0 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.34% of total loans held for investment, including PPP loans. Total loans atDecember 31, 2021 included government guaranteed loans and loans measured at fair value which had no reserves allocated to them. ALLL as a percentage of loans at amortized cost, not including government guaranteed loan balances was 4.07% atDecember 31, 2021 .
The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.
June 30, June 30, December 31,
(Dollars in thousands) 2022 2021 2021
Nonperforming loans (government guaranteed balances)
6,307$ 7,942 Nonperforming loans (unguaranteed balances) 4,245 3,577 3,967 Total nonperforming loans 10,437 9,884 11,909 OREO 56 - 3 Total nonperforming assets$ 10,493 $
9,884
1.63 % 1.10 % 2.04 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.66 % 0.40 % 0.68 %
Nonperforming assets as a percentage of total assets 1.14 %
0.82 % 1.30 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.46 % 0.30 % 0.43 %
ALLL to nonperforming loans 91.64 % 210.41 % 112.96 %
ALLL to nonperforming loans (excluding government
guaranteed balances) 225.30 % 581.41 % 339.10 %
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The following table sets forth information with respect to activity in the ALLL for the periods shown:
At and for the Three Months Ended At and for the Six Months Ended (Dollars in thousands)
June 30, June 30,
2022 2021 2022 2021
Allowance at beginning of period $ 10,170 $ 22,017 $ 13,452 $ 21,162
Charge-offs:
Commercial real estate (53) - (53) -
Commercial and industrial (939) (1,453) (1,970) (2,590)
Consumer and other (26) (12) (41) (28)
Total charge-offs (1,018) (1,465) (2,064) (2,618)
Recoveries:
Commercial real estate 53 - 61 -
Commercial and industrial 107 244 260 249
Consumer and other 2 1 5 4
Total recoveries 162 245 326 253
Net charge-offs (856) (1,220) (1,738) (2,365)
Provision for loan losses 250 - (2,150) 2,000
Allowance at end of period $ 9,564 $ 20,797 $ 9,564 $ 20,797
Net charge-offs to average loans held for
investment 0.57 % 0.42 % 0.59 % 0.38 %
Allowance as a percent of total loans held for
investment at amortized cost 1.62 % 2.35 % 1.62 % 2.35 %
Allowance as a percent of loans held for
investment at amortized cost, not including
government guaranteed loans 2.14 % 6.67 % 2.14 % 6.67 %
Allowance as a percent of nonperforming loans 91.64 % 210.41 % 91.64 % 210.41 %
Total loans held for investment $ 641,737 $ 895,194 $ 641,737 $ 895,194
Average loans held for investment $ 597,322 $ 1,170,753 $ 588,021 $ 1,231,086
Nonperforming loans (including government
guaranteed balances) $ 10,437 $ 9,884 $ 10,437 $ 9,884
Nonperforming loans (excluding government
guaranteed balances) $ 4,245 $ 3,577 $ 4,245 $ 3,577
Guaranteed balance of government guaranteed loans $ 183,113 $ 580,756 $ 183,113 $ 580,756
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The following table details net charge-offs to average loans outstanding by loan
category for the three months ended
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Net
(Dollars in thousands) Net Charge-off/(Recovery) Average Loans HFI Net Charge-off/(Recovery) Ratio Charge-off/(Recovery) Average Loans HFI Net Charge-off/(Recovery) Ratio
Residential real estate $ - $ 98,440 - % $ - $ 61,650 - %
Commercial real estate - 245,769 - - 167,284 -
Commercial and industrial 832 194,580 0.86 1,209 215,318 2.25
Commercial and industrial - PPP - 35,867 - - 724,860 -
Consumer and other 24 22,666 0.21 11 1,641 2.68
Total loans held for investment $ 856 $ 597,322 0.29 % $ 1,220 $ 1,170,753 0.42 %
The following table details net charge-offs to average loans outstanding by loan
category for the six months ended
Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Net Net
(Dollars in thousands) Charge-off/(Recovery) Average Loans HFI Net Charge-off/(Recovery) Ratio Charge-off/(Recovery)
Average Loans HFI Net Charge-off/(Recovery) Ratio
Residential real estate $ - $ 87,720 - % $ - $ 58,337 - %
Commercial real estate (8) 231,152 (0.01) - 159,315 -
Commercial and industrial 1,710 208,366 1.64 2,341 237,215 1.97
Commercial and industrial - PPP - 46,901 - - 774,619 -
Consumer and other 36 13,882 0.52 24 1,600 3.00
Total loans held for investment $ 1,738 $ 588,021 0.59 % $ 2,365 $ 1,231,086 0.38 %
We recorded a provision of $250 thousand during the three months ended June 30,
2022 , compared to no provision for the same period in 2021. We recorded a
negative provision of $2.2 million during the six months ended June 30, 2022 ,
compared to a provision of $2.0 million for the same period in 2021. For the
year ended 2021, the provision for loan losses was $3.5 million . During 2020 and
the first quarter of 2021, we increased the qualitative factors in the allowance
for loan losses calculation to reflect the decline in economic indicators caused
by the COVID-19 pandemic, resulting in significant provision expense in those
periods. As asset quality has remained stable and as many of the Company's SBA
loans were bolstered by additional government support, the current year decrease
in the allowance is deemed appropriate. 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 thousand 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 0.46% as of June 30, 2022 , as compared to 0.30% as of June 30,
2021 . This percentage was 0.43% as of December 31, 2021 . 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, asset quality trends may appear more favorable than they
otherwise would without the SBA's support under the CARES Act.
As of June 30, 2022 , a total of 11 loans with principal balances of $459
thousand were under payment deferrals. Of those, all were government guaranteed
loans with $342 thousand 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
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which point certain borrowers requested payment deferrals. With the Economic Aid Act signed into law onDecember 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 thousand per month per borrower, beginning inFebruary 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.
At and for the
At and for the Six Months Ended Year Ended
(Dollars in thousands) June 30, December 31,
Government Guaranteed, Excluding PPP 2022 2021 2021
Number of loans originated 293 159 374
Amount of loans originated $ 137,354 $ 62,923 $ 169,467
Average loan size originated $ 469 $ 396 $ 453
Government guaranteed loan balances sold $ 118,186 $ - $ 44,854
Government unguaranteed loan balances sold $ 4,351 $ - 5,034
Total government guaranteed loans $ 290,387 $ 290,916 $ 300,415
Government guaranteed loan balances $ 151,903 $ 151,032 $ 171,548
Government unguaranteed loan balances $ 138,484 $ 139,884 $ 128,867
Government guaranteed loans serviced for others $ 522,050 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. The "All Other" category includes states with less than 5% in any period presented. June 30, December 31, 2022 2021 2021 (Dollars in thousands) Amount % of Total Amount % of Total Amount % of Total Florida$ 89,065 31 %$ 83,818 29 %$ 89,143 30 % California 37,242 13 36,685 13 32,924 11 Texas 18,747 6 18,553 6 20,976 7 Tennessee 16,676 6 2,863 1 2,629 1 Georgia 13,068 5 15,114 5 13,894 5 All Other 115,589 39 133,883 46 140,849 46 Total government guaranteed loans, excluding PPP loans$ 290,387 100 %$ 290,916 100 %$ 300,415 100 % Residential Mortgage Loans
The following table sets forth, for the periods indicated, information regarding our residential mortgage lending activity.
For the Three Months Ended June 30, For the Six Months Ended June 30,
(Dollars in thousands) 2022 2021 2022 2021
Number of loans originated 859 1,753 1,910 4,125
Amount of loans originated $ 305,576 $
522,080
$ 356 $ 298 $ 336 $ 300
Loan balances sold $ 304,618 $ 604,930 $ 676,547 $ 1,315,395
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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 by management at least monthly or more often if conditions require it, based on a review of loan demand, deposit flows for the previous period and a survey of rates among competitors and other financial institutions inFlorida . The amounts of each of the following categories of deposits, at the dates indicated, are as follows: (Dollars in thousands) June 30, 2022 December 31, 2021 Noninterest-bearing deposits$ 103,613 13.6 % $ 83,638 11.6 % Interest-bearing transaction accounts 195,386 25.5 163,495 22.7 Money market accounts 414,008 54.1 408,257 56.5 Savings 18,361 2.4 15,607 2.2 Subtotal 731,368 95.6 670,997 93.0 Total time deposits 34,038 4.4 50,688 7.0 Total deposits$ 765,406 100.0 %$ 721,685 100.0 %
At
The following table provides information on the maturity distribution of the time deposits exceeding theFDIC insurance limit of$250 thousand as ofJune 30, 2022 . (Dollars in thousands) Three months or less$ 313 Over three months through six months 380 Over six months through 12 months 3,386 Over 12 months 3,941 Total$ 8,020 Other Borrowings AtJune 30, 2022 , FHLB and FRB borrowings totaled$40.0 million consisting of$20.0 million in FHLB borrowings and$20.0 million in borrowings from the FRB. There were no borrowings from the FHLB or FRB atDecember 31, 2021 . The Bank is a member of the FHLB ofAtlanta , which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rate set by the FHLB. The advances were secured by a blanket lien on$192.5 million of real estate-related loans as ofJune 30, 2022 . Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional$109.8 million from the FHLB atJune 30, 2022 . In addition, the Bank has a secured line of credit with theFederal Reserve Bank and was secured by$34.8 million of commercial loans as ofJune 30, 2022 . FRB short-term borrowings bear interest at variable rates based on the Federal Open 55
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Market Committee's target range for the federal funds rate. Based on this
collateral, the Company was eligible to borrow up to an additional
InJune 2021 , the Company issued$6.0 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$6.0 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$6.0 million and$6.0 million atJune 30, 2022 andDecember 31, 2021 , respectively. InMarch 2020 , the Company renegotiated the terms of its outstanding senior debt and combined its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime (4.75% atJune 30, 2022 ). The new note matures onMarch 10, 2029 and the balance of the note was$3.1 million and$3.3 million atJune 30, 2022 andDecember 31, 2021 , respectively. The note is secured by 100% of the stock of the Company and requires the Company to comply with certain loan covenants during the term of the note. InApril 2020 , the Company entered into theFederal Reserve Bank's PPPLF. Under the PPPLF, advances were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and 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 repaid the advance plus accrued interest. The balance outstanding on this facility was$69.7 million atDecember 31, 2021 . In the first quarter of 2022, the Company repaid the remaining balance of the advance.
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 decreased$3.0 million to$93.3 million atJune 30, 2022 as compared to$96.3 million atDecember 31, 2021 . The decrease was the result of decreases of$2.2 million of accumulated other comprehensive income due to increases in net unrealized losses on available for sale investment securities,$416 thousand of dividends declared on our preferred stock, and$642 thousand of dividends declared on our common stock during the six months endedJune 30, 2022 . We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss. 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
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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:
Actual Minimum(1) Well Capitalized(2)
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
As of June 30, 2022
Total Capital (to risk-weighted
assets) $ 107,716 16.37 % $ 52,625 8.00 % $ 65,782 10.00 %
Tier 1 Capital (to risk-weighted
assets) 99,461 15.12 39,469 6.00 52,625 8.00
Common Equity Tier 1 Capital (to risk-weighted assets) 99,461 15.12 29,602 4.50 42,758
6.50
Tier 1 Capital (to total assets) 99,461 11.37 34,998 4.00 43,747
5.00
As ofDecember 31, 2021 Total Capital (to risk-weighted assets) 106,002 21.25 39,909 8.00 49,886
10.00
Tier 1 Capital (to risk-weighted assets) 99,656 19.98 29,932 6.00 39,909
8.00
Common Equity Tier 1 Capital (to risk-weighted assets) 99,656 19.98 22,449 4.50 32,426
6.50
Tier 1 Capital (to total assets) 99,656 12.22 32,619 4.00 40,774
5.00
(1) To be considered "adequately capitalized" under the
(2) To be considered "well capitalized" under the
Contractual Obligations
In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations atJune 30, 2022 were$87.6 million , a decrease of$47.3 million from$135.0 million atDecember 31, 2021 . The decrease was primarily due to the payoff of$69.7 million in PPP Liquidity Facility and a decrease in time deposits of$16.7 million , partially offset by an increase in short-term FHLB and FRB borrowings of$40.0 million .
The following tables present our contractual obligations as of
Contractual Obligations as of
One to Three Three to Five
(Dollars in thousands) Less than One Year Years Years Over Five Years Total
Operating lease obligations $ 1,312 $ 2,050 $ 1,187 $ - $ 4,549
Short-term borrowings 40,000 - - - 40,000
Long-term borrowings - - - 3,072 3,072
Subordinated notes 50 - - 5,939 5,989
Time deposits 20,530 12,703 805 - 34,038
Total $ 61,892 $ 14,753 $ 1,992 $ 9,011 $ 87,648 Contractual Obligations as of
One to Three Three to Five
(Dollars in thousands) Less than One Year Years Years Over Five Years Total
Operating lease obligations $ 1,454 $ 2,249 $ 1,279 $ 301 $ 5,283
Long-term borrowings - - - 3,299 3,299
PPP Liquidity Facility 44,647 - 25,007 - 69,654
Subordinated notes - 50 - 6,000 6,050
Time deposits 40,868 9,210 610 - 50,688
Total $ 86,969 $ 11,459 $ 26,896 $ 9,650 $ 134,974
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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:
June 30, December 31,
(Dollars in thousands) 2022 2021
Unfunded loan commitments $ 39,606 $ 18,567
Unused lines of credit 127,735 52,076
Standby letters of credit 68 68
Total $ 167,409 $ 70,711
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 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 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 atJune 30, 2022 was 13.26%, as compared to 16.76% atDecember 31, 2021 . During the six months endedJune 30, 2022 , the Bank purchased additional investment securities, some of which were classified as investment securities available for sale. The fair value of all of our investment securities available for sale totaled$45.3 million atJune 30, 2022 . During each of the quarters of 2021 and 2022, 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 had historically been dependent solely 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 ofJune 30, 2022 ,BayFirst Financial Corp. held$787 thousand in cash and cash equivalents.
A description of BayFirst's and the Bank's debt obligations is set forth above under the heading "Other Borrowings."
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