BayFirst Financial Corp 10-Q for FY2022 Q1
BayFirst Financial Corp. (BAFN)
10-Q
2022-05-13
For: 2022-03-31
View Original
Added on
April 06, 2026
About this 10-Q
BayFirst Financial Corp filed this 10-Q on May 13, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $13K
- down 99.8% from net income of $7.51M a year earlier
- Diluted EPS
- -$0.05
- compared with $1.82 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended | |||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to | |||||
Commission file number 001-41068
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices) | (Zip Code) | ||||
(727 ) 440-6848
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o | |||||||||||
| x | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 4,013,036 shares of common stock as of May 11, 2022.
| Page | ||||||||
Item 1A. | ||||||||
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.
| AFS: Available for Sale | FDIC: Federal Deposit Insurance Corporation | ||||
| ALCO: Asset-Liability Committee | FHLB: Federal Home Loan Bank | ||||
| ALLL: Allowance for Loan Losses | FNBB: First National Bankers Bank | ||||
AOCI: Accumulated Other Comprehensive Income | FRB: Federal Reserve Bank | ||||
| ASC: FASB Accounting Standards Codification | FVO: Fair Value Option | ||||
| ASU: FASB Accounting Standards Update | GAAP: Generally Accepted Accounting Principles | ||||
BHCA: Bank Holding Company Act of 1956, as amended | IRA: Individual Retirement Account | ||||
| BOLI: Bank Owned Life Insurance | JOBS Act: Jumpstart Our Business Startups Act of 2012 | ||||
| BSA: Bank Secrecy Act of 1970 | LHFS: Loans Held for Sale | ||||
| CAA: Consolidated Appropriations Act | MMDA: Money Market Deposit Account | ||||
| CARES Act: Coronavirus Aid, Relief, and Economic Security Act | NOW: Negotiable Order of Withdrawal | ||||
| CBLR: Community Bank Leverage Ratio | NSPP: Non-Qualified Stock Purchase Plan | ||||
| CECL: Current Expected Credit Losses | OFR: Florida Office of Financial Regulation | ||||
CET1: Common Equity Tier 1 Capital | OLC: Officer Loan Commitee | ||||
| C&I: Commercial and Industrial | OREO: Other Real Estate Owned | ||||
| CIK: Central Index Key | OTTI: Other-Than-Temporary Impairment | ||||
| COVID-19: Coronavirus Disease 2019 | PCAOB: Public Company Accounting Oversight Board | ||||
| DCLC: Directors’ Credit and Loan Committee | PPP: Paycheck Protection Program | ||||
| DODD-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | PPPLF: Paycheck Protection Program Liquidity Facility | ||||
| DRIP: Dividend Reinvestment Plan | QIB: Qualified Institutional Buyer | ||||
| EGC: Emerging Growth Company | SBA: Small Business Administration | ||||
| Equity Plan: The Amended and Restated 2017 Equity Inventive Plan | SEC: U.S. Securities and Exchange Commission | ||||
| ESG: Environmental, Social, and Governance | SOFR: Secured Overnight Financing Rate | ||||
| ESOP: Employee Stock Ownership Plan | U.S.: United States | ||||
| ESPP: Employee Stock Purchase Plan | USDA: United States Department of Agriculture | ||||
| Exchange Act: Securities Exchange Act of 1934 | USDA B&I: United States Department of Agriculture Buiness and Industry | ||||
| FASB: Financial Accounting Standards Board | TDR: Troubled Debt Restructure | ||||
| FBCA: Florida Business Corporation Act | iXBRL: Inline eXtensible Business Reporting Language | ||||
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BAYFIRST FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | ||
Part I - Financial Information
Item 1. Financial Statements
| ASSETS | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
Cash and due from banks | $ | $ | |||||||||
Interest-bearing deposits in banks | |||||||||||
Cash and cash equivalents | |||||||||||
Time deposits in banks | |||||||||||
Investment securities available for sale | |||||||||||
Investment securities held to maturity | |||||||||||
Restricted equity securities, at cost | |||||||||||
Residential loans held for sale | |||||||||||
| Government guaranteed loans held for sale | |||||||||||
SBA loans held for investment, at fair value | |||||||||||
Loans held for investment, at amortized cost net of allowance for loan losses of $ | |||||||||||
Accrued interest receivable | |||||||||||
Premises and equipment, net | |||||||||||
Loan servicing rights | |||||||||||
Deferred income taxes | |||||||||||
Right-of-use operating lease assets | |||||||||||
Bank owned life insurance | |||||||||||
Other assets | |||||||||||
Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
Liabilities: | |||||||||||
Noninterest-bearing deposits | $ | $ | |||||||||
Interest-bearing transaction accounts | |||||||||||
Savings and money market deposits | |||||||||||
Time deposits | |||||||||||
Total deposits | |||||||||||
Subordinated debentures | |||||||||||
Notes payable | |||||||||||
PPP Liquidity Facility | |||||||||||
Accrued interest payable | |||||||||||
Operating lease liabilities | |||||||||||
Accrued expenses and other liabilities | |||||||||||
Total liabilities | |||||||||||
Shareholders’ equity: | |||||||||||
Preferred stock, Series A; no par value, | |||||||||||
Preferred stock, Series B; no par value, | |||||||||||
Common stock and additional paid-in capital; no par value, | |||||||||||
Accumulated other comprehensive loss, net | ( | ( | |||||||||
Unearned compensation | ( | ( | |||||||||
Retained earnings | |||||||||||
Total shareholders’ equity | |||||||||||
Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes.
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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars in thousands, except per share data) | ||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Interest income: | |||||||||||||||||||||||
Loans, including fees | $ | $ | |||||||||||||||||||||
Interest-bearing deposits in banks and other | |||||||||||||||||||||||
Total interest income | |||||||||||||||||||||||
Interest expense: | |||||||||||||||||||||||
Deposits | |||||||||||||||||||||||
Borrowings | |||||||||||||||||||||||
Total interest expense | |||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||
Provision for loan losses | ( | ||||||||||||||||||||||
Net interest income after provision for loan losses | |||||||||||||||||||||||
Noninterest income: | |||||||||||||||||||||||
Residential loan fee income | |||||||||||||||||||||||
Loan servicing income, net | |||||||||||||||||||||||
| Gain on sale of government guaranteed loans, net | |||||||||||||||||||||||
Service charges and fees | |||||||||||||||||||||||
SBA loan fair value gain (loss) | ( | ||||||||||||||||||||||
Other noninterest income | |||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||
Noninterest expense: | |||||||||||||||||||||||
Salaries and benefits | |||||||||||||||||||||||
Bonus, commissions, and incentives | |||||||||||||||||||||||
Mortgage banking | |||||||||||||||||||||||
Occupancy and equipment | |||||||||||||||||||||||
Data processing | |||||||||||||||||||||||
Marketing and business development | |||||||||||||||||||||||
Professional services | |||||||||||||||||||||||
Loan origination and collection | |||||||||||||||||||||||
Employee recruiting and development | |||||||||||||||||||||||
Regulatory assessments | |||||||||||||||||||||||
Other noninterest expense | |||||||||||||||||||||||
Total noninterest expense | |||||||||||||||||||||||
Income before income taxes | |||||||||||||||||||||||
Income tax expense | |||||||||||||||||||||||
Net income | |||||||||||||||||||||||
Preferred stock dividends | |||||||||||||||||||||||
Net income (loss attributable to) available to common shareholders | $ | ( | $ | ||||||||||||||||||||
Basic earnings (loss) per common share | $ | ( | $ | ||||||||||||||||||||
Diluted earnings (loss) per common share | $ | ( | $ | ||||||||||||||||||||
See accompanying notes.
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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollars in thousands) | ||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Net income | $ | $ | |||||||||||||||||||||
Net unrealized (losses) on investment securities available for sale | ( | ||||||||||||||||||||||
Deferred income tax benefit | |||||||||||||||||||||||
Other comprehensive (loss), net | ( | ||||||||||||||||||||||
Comprehensive income (loss) | $ | ( | $ | ||||||||||||||||||||
See accompanying notes.
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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (Dollars in thousands, except per share data) | ||
| Preferred Shares, Series A | Preferred Shares, Series B | Common Shares(1) | Preferred Stock, Series A | Preferred Stock, Series B | Common Stock and Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Unearned Compensation | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-qualified stock purchase plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of preferred stock, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards - common stock: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock expense, net of tax impact | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B preferred stock to common stock | — | ( | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared on: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Common stock ($ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock warrants | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options, net | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards - common stock: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock expense, net of tax impact | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared on: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Common stock ($ | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Common shares for all periods shown herein reflect the three-for-two stock split, effective on May 10, 2021.
See accompanying notes.
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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) | ||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash from operating activities: | |||||||||||
| Depreciation of fixed assets | |||||||||||
| Net securities premium amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Amortization of discount on PPP loans purchased | ( | ( | |||||||||
| Provision for loan losses | ( | ||||||||||
Accretion of discount on unguaranteed loans | ( | ( | |||||||||
| Deferred tax expense (benefit) | ( | ||||||||||
Origination of SBA loans held for sale | ( | ||||||||||
Proceeds from sales of SBA loans held for sale | |||||||||||
Net gains on sales of SBA loans | ( | ||||||||||
Origination of residential loans held for sale | ( | ( | |||||||||
Proceeds from sales of residential loans held for sale | |||||||||||
Net gains on sales of residential loans held for sale | ( | ( | |||||||||
Change in fair value of residential loans held for sale | |||||||||||
Change in fair value of SBA loans held for investment, at fair value | ( | ||||||||||
Amortization of loan servicing rights | |||||||||||
Non-qualified stock purchase plan expense | |||||||||||
Stock based compensation expense | |||||||||||
Income from bank owned life insurance | ( | ( | |||||||||
Changes in: | |||||||||||
Accrued interest receivable | ( | ||||||||||
Other assets | ( | ( | |||||||||
Accrued interest payable | ( | ( | |||||||||
Other liabilities | ( | ||||||||||
| Net cash from operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Purchase of investment securities available for sale | ( | ||||||||||
Principal payments on investment securities available for sale | |||||||||||
Principal payments on investment securities held to maturity | |||||||||||
Purchase (sale) of restricted equity securities | ( | ||||||||||
| Purchase of time deposits from banks | ( | ||||||||||
Loan (originations) and payments, net | ( | ( | |||||||||
Purchase of premises and equipment | ( | ( | |||||||||
| Net cash (used in) investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
Net change in deposits | |||||||||||
| Net increase of short-term fed funds purchased | |||||||||||
Payments on notes payable | ( | ( | |||||||||
Net proceeds (repayments) of PPP Liquidity Facility borrowings | ( | ||||||||||
Proceeds from issuance of preferred stock, net | |||||||||||
Proceeds from sale of common stock, net | |||||||||||
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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) | ||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Share buyback - redeemed stock | ( | ||||||||||
Dividends paid on common stock | ( | ( | |||||||||
Dividends paid on preferred stock | ( | ( | |||||||||
Net cash from (used in) financing activities | ( | ||||||||||
Net change in cash and cash equivalents | |||||||||||
Cash and cash equivalents, beginning of period | |||||||||||
Cash and cash equivalents, end of period | $ | $ | |||||||||
Supplemental cash flow information | |||||||||||
Interest paid | $ | $ | |||||||||
Income taxes paid | $ | $ | |||||||||
Supplemental noncash disclosures | |||||||||||
| Net change in unrealized holding gain on investment securities available for sale | $ | ( | $ | ||||||||
| Transfer of loans and leases held for investment to loans held for sale | $ | $ | |||||||||
Recognition of right of use asset and operating lease liability | $ | $ | |||||||||
Conversion of Series B preferred stock to common stock | $ | $ | |||||||||
See accompanying notes.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include BayFirst Financial Corp. and its wholly owned subsidiary, First Home Bank d/b/a BayFirst Bank, together referred to as “the Company”.
These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles followed within the financial services industry for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements of BayFirst Financial Corp. for that period.
In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.
Operating results for the three month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2021 in the Company’s Annual Report filed on Form 10-K. There were no new accounting policies or changes to existing policies adopted during the first three months of 2022 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.
Effective May 10, 2021, the Company effected a three-for-two stock split. All share amounts and per share financial data contained in these financial statements related to periods prior and subsequent to this stock split have been adjusted to reflect the split.
Emerging Growth Company Status: The Company is expected to remain an "emerging growth company," as defined in the JOBS Act, through December 31, 2026. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period when complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements we file in the future for as long as we remain an emerging growth company, will be subject to all new or revised accounting standards generally applicable to private companies.
New Accounting Standards Not Yet Adopted:
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance was issued to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the CECL model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e., loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
investments in certain leases recognized by a lessor. In addition, the amendments in ASU 2016-13 require credit losses on securities available for sale to be presented as a valuation allowance rather than as a direct write-down thereon. The amendments in this ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted; however, the Company has elected to adopt new or revised accounting standards using the delayed effective dates applicable to Emerging Growth Companies. Management is in the process of evaluating the impact of adoption of this ASU on its Consolidated Financial Statements, processes, and controls and is not currently able to reasonably estimate the impact of adoption on the Company’s consolidated financial position, results of operations; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the allowance for credit losses. It is possible that the impact will be material to the Company’s consolidated financial position and results of operations. To date, the Company has established a CECL steering committee and has an implementation plan. The Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information to use in the CECL model.
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and is not expected to have a significant impact on our financial statement disclosures.
NOTE 2 – INVESTMENT SECURITIES
The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale at March 31, 2022 and December 31, 2021 are summarized as follows:
| March 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
Investment securities available for sale: | |||||||||||||||||||||||
Asset-backed securities | $ | $ | $ | ( | $ | ||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||
U.S. Government-sponsored enterprises | ( | ||||||||||||||||||||||
Collateralized mortgage obligations: | |||||||||||||||||||||||
U.S. Government-sponsored enterprises | ( | ||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
Total investment securities available for sale | $ | $ | $ | ( | $ | ||||||||||||||||||
| December 31, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
Investment securities available for sale: | |||||||||||||||||||||||
Asset-backed securities | $ | $ | $ | ( | $ | ||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||
U.S. Government-sponsored enterprises | ( | ||||||||||||||||||||||
Collateralized mortgage obligations: | |||||||||||||||||||||||
U.S. Government-sponsored enterprises | ( | ||||||||||||||||||||||
Total investment securities available for sale | $ | $ | $ | ( | $ | ||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| March 31, 2022 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| One to five years | |||||||||||
| Five to ten years | |||||||||||
| Beyond ten years | |||||||||||
| Total | $ | $ | |||||||||
As of March 31, 2022, the Company's investment portfolio consisted of 14 securities, 9 of which were in an unrealized loss position. The investment securities available for sale were purchased after March 31, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at March 31, 2022. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2022.
The following table summarizes securities with unrealized losses at March 31, 2022 and December 31, 2021 aggregated by security type and length of time in a continuous unrealized loss position:
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||
| March 31, 2022 | Far Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Asset-backed securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprises | ( | ( | |||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations: | |||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprises | ( | ( | |||||||||||||||||||||||||||||||||
| Total securities available for sale | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprises | ( | ( | |||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations: | |||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprises | ( | ( | |||||||||||||||||||||||||||||||||
| Total securities available for sale | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
The Company held one 2 2
No securities were pledged as of March 31, 2022 or December 31, 2021, and there were no sales of investment securities during the three months ended March 31, 2022 or December 31, 2021.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
NOTE 3 – LOANS
Loans held for investment, at amortized cost, at March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
Real estate: | |||||||||||
Residential | $ | $ | |||||||||
Commercial | |||||||||||
Construction and land | |||||||||||
Commercial and industrial | |||||||||||
Commercial and industrial - PPP | |||||||||||
Consumer and other | |||||||||||
Loans held for investment, at amortized cost, gross | |||||||||||
Deferred loan costs, net | |||||||||||
Discount on SBA 7(a) loans sold(1) | ( | ( | |||||||||
Discount on PPP loans purchased | ( | ( | |||||||||
Allowance for loan losses | ( | ( | |||||||||
Loans held for investment, at amortized cost | $ | $ | |||||||||
(1) The Company allocates the retained portion of loans sold based on relative fair value of the retained portion and the sold portion, which results in a discount on the retained portion.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following schedule presents the activity in the allowance for loan losses by loan segment for the three months ended March 31, 2022 and March 31, 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Balance, beginning of period | $ | $ | |||||||||||||||||||||
Charge-offs: | |||||||||||||||||||||||
Commercial and industrial | ( | ( | |||||||||||||||||||||
Consumer and other | ( | ( | |||||||||||||||||||||
Total charge-offs | ( | ( | |||||||||||||||||||||
Recoveries: | |||||||||||||||||||||||
| Real estate - commercial | |||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||
Total recoveries | |||||||||||||||||||||||
Net (charge-offs) | ( | ( | |||||||||||||||||||||
Provision for loan losses | ( | ||||||||||||||||||||||
Balance, end of period | $ | $ | |||||||||||||||||||||
Net (charge-offs) to total average loans held for investment | ( | % | ( | % | |||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at March 31, 2022. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.
| Real Estate- Residential | Real Estate- Commercial | Real Estate - Construction and Land | Commercial and Industrial | Commercial and Industrial - PPP | Consumer and Other | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at December 31, 2021. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.
| Real Estate- Residential | Real Estate- Commercial | Real Estate - Construction and Land | Commercial and Industrial | Commercial and Industrial - PPP | Consumer and Other | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The following table presents information related to impaired loans by loan segment at and for the three months ended March 31, 2022:
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | ||||||||||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
Real estate - residential | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Real estate - commercial | — | ||||||||||||||||||||||||||||||||||
Subtotal | — | ||||||||||||||||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||||||||||
Real estate - commercial | — | — | |||||||||||||||||||||||||||||||||
Commercial and industrial | — | — | |||||||||||||||||||||||||||||||||
Subtotal | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The following table presents information related to impaired loans by loan segment at and for the three months ended March 31, 2021:
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | ||||||||||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
Real estate - commercial | — | ||||||||||||||||||||||||||||||||||
Subtotal | — | ||||||||||||||||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||||||||||
Real estate - commercial | — | — | |||||||||||||||||||||||||||||||||
Commercial and industrial | — | — | |||||||||||||||||||||||||||||||||
Subtotal | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The unpaid principal balance represents the outstanding contractual balance. For purposes of the impaired loans by loan segment tables above, the unpaid principal balance and recorded investment do not include the government guaranteed balance. The government guaranteed balances of impaired loans at March 31, 2022 and December 31, 2021 were $6,174 and $6,197 , respectively.
Nonaccrual loans and loans past due over 89 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. The unguaranteed portions of government guaranteed loans that are under $100 are reserved in full. Impaired loans include commercial loans that are individually evaluated for impairment and deemed impaired as well as TDR for all loan portfolio segments. The sum of nonaccrual loans and loans past due over 89 days still on accrual will differ from the total impaired loan amount.
The following tables present the recorded investment in nonaccrual and loans past due over 89 days still on accrual by loan segment at March 31, 2022 and December 31, 2021. In the following table, the recorded investment does not include the government guaranteed balance.
| Nonaccrual | Loans Past Due Over 89 Days Still Accruing | ||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||
Real estate - residential | $ | $ | $ | $ | |||||||||||||||||||
Real estate - commercial | |||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The following table presents the aging of the recorded investment in past due loans at March 31, 2022 by loan segment:
| 30-89 Days Past Due | Greater Than 89 Days Past Due | Total Past Due | Loans Not Past Due (1) | Total Loans | |||||||||||||||||||||||||
Real estate - residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Real estate - commercial | |||||||||||||||||||||||||||||
Real estate - construction and land | |||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Commercial and industrial - PPP | |||||||||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) For the purposes of the table above, $ | |||||||||||||||||||||||||||||
The following table presents the aging of the recorded investment in past due loans at December 31, 2021 by loan segment:
| 30-89 Days Past Due | Greater Than 89 Days Past Due | Total Past Due | Loans Not Past Due (1) | Total Loans | |||||||||||||||||||||||||
Real estate - residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Real estate - commercial | |||||||||||||||||||||||||||||
Real estate - construction and land | |||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Commercial and industrial - PPP | |||||||||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) For the purposes of the table above, $ | |||||||||||||||||||||||||||||
Internal risk-rating grades are assigned to loans by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This analysis is performed at least annually. The Bank uses the following definitions for its risk ratings:
Pass – Loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Special Mention – These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard”. They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the Bank.
Substandard – These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – These loans have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at March 31, 2022:
| Pass | Special Mention | Substandard | Doubtful | Total Loans | |||||||||||||||||||||||||
Real estate - residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Real estate - commercial | |||||||||||||||||||||||||||||
Real estate - construction and land | |||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Commercial and industrial - PPP | |||||||||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||||||||
| Loans held for investment, at amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2021:
| Pass | Special Mention | Substandard | Doubtful | Total Loans | |||||||||||||||||||||||||
Real estate - residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Real estate - commercial | |||||||||||||||||||||||||||||
Real estate - construction and land | |||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Commercial and industrial - PPP | |||||||||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||||||||
| Loans held for investment, at amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Troubled Debt Restructurings
The following table presents loans classified as TDR at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Accruing | Nonaccruing | Accruing | Nonaccruing | ||||||||||||||||||||
Real estate - commercial | $ | $ | $ | $ | |||||||||||||||||||
The Company had not committed to lend any additional amounts to the loans classified as TDR at March 31, 2022 and December 31, 2021. The Company estimated $73 and $38 of impaired loan loss reserves for these loans at March 31, 2022 and December 31, 2021, respectively. There were no loans which were modified in the previous twelve months that defaulted during the three months ended March 31, 2022.
There were no new loans classified as TDR during the three months ended March 31, 2022.
The CARES Act was signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDR and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The CAA was signed into law on December 27, 2020, extends the applicable period to include modifications to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the date of the termination of the COVID-19 national emergency. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDR. The Company is applying this guidance to qualifying loan modifications.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
Loan modifications related to COVID-19 at March 31, 2022 and December 31, 2021 are presented in the table below:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Number of Loans | Outstanding Recorded Investment | Number of Loans | Outstanding Recorded Investment | ||||||||||||||||||||
Real estate - residential | $ | $ | |||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Total loan modifications related to COVID-19 | $ | $ | |||||||||||||||||||||
NOTE 5 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of securities available for sale on a monthly basis from a third party pricing service.
Residential Loans Held for Sale: The Company has elected to account for residential loans held for sale at fair value. The fair value of loans held for sale is determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The gain (loss) on loans held for sale is included in residential fee income in the Consolidated Statements of Income.
SBA Loans Held for Investment, at Fair Value: The Company has elected to account for certain SBA loans held for investment at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.
Mortgage Banking Derivatives: Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts, best efforts forward sales contracts, and interest rate lock commitments. The fair value of mandatory forward sales contracts is measured using quoted market prices (Level 1), or in some cases when quoted market prices are not available, the pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company (Level 2). Interest rate lock commitments involve pricing derived from market observable inputs that are adjusted based on pull-through rates (anticipated loan funding probability). Pull-through rates are an unobservable input which are the Company’s estimate of the percentage of interest rate lock commitments expected to result in closed loans (Level 3). The fair value of best efforts forward sales contracts is measured using market observable inputs that are adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).
Impaired Loans: A loan is considered to be impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. In most cases, the Bank measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate and/or business
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
or personal assets, including but not limited to equipment, inventory, and accounts receivable. The fair value of real estate collateral is determined based on third party appraisals by qualified licensed appraisers as well as internal estimates. The fair value of other business or personal assets is generally based on amounts reported on the financial statements of the customer or customer’s business. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the customer and the customer’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.
Assets and liabilities measured at fair value on a recurring basis at March 31, 2022 are summarized below:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
Financial assets | |||||||||||||||||||||||
Investment securities available for sale | $ | $ | $ | $ | |||||||||||||||||||
Residential loans held for sale | |||||||||||||||||||||||
SBA loans held for investment, at fair value | |||||||||||||||||||||||
Interest rate lock commitments | |||||||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
Best efforts forward sales contracts | |||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||
Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
Assets and liabilities measured at fair value on a recurring basis at December 31, 2021 are summarized below:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
Financial assets | |||||||||||||||||||||||
Investment securities available for sale | $ | $ | $ | $ | |||||||||||||||||||
Residential loans held for sale | |||||||||||||||||||||||
SBA loans held for investment, at fair value | |||||||||||||||||||||||
Interest rate lock commitments | |||||||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
Best efforts forward sales contracts | |||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||
Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.
Financial Instruments Recorded Using Fair Value Option
The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. None
The aggregate fair value, contractual balance, and gain at March 31, 2022 and December 31, 2021 for residential loans held for sale were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
Aggregate fair value | $ | $ | |||||||||
Contractual balance | |||||||||||
Gain | $ | $ | |||||||||
The total amount of losses from changes in fair value and interest income included in earnings for the three months ended March 31, 2022 and March 31, 2021 for residential loans held for sale were as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest income | $ | $ | |||||||||
| Change in fair value | ( | ( | |||||||||
Total (loss) | $ | ( | $ | ( | |||||||
The Company also elected the fair value option for certain of its non-PPP SBA loans originated in 2018 as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell SBA loans on a loan-by-loan basis. The portion of these loans guaranteed by the SBA are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans held for investment.
The aggregate fair value, contractual balance, and gain (loss) at March 31, 2022 and December 31, 2021 for SBA loans held for investment, at fair value, were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
Aggregate fair value | $ | $ | |||||||||
Contractual balance | |||||||||||
| Gain (loss) | $ | ( | $ | ||||||||
The total amount of gains and losses from changes in fair value and interest income included in earnings for the three months ended March 31, 2022 and March 31, 2021 for SBA loans held for investment, at fair value, were as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest income | $ | $ | |||||||||
| Change in fair value | ( | ||||||||||
Total gain (loss) | $ | ( | $ | ||||||||
Changes in fair value for SBA loans held for investment, at fair value, were included in SBA fair value gain (loss) on the Consolidated Statements of Income.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The table below presents a reconciliation of SBA loans held for investment, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and March 31, 2021:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Balance of SBA loans held for investment at fair value, beginning of period | $ | $ | |||||||||
Principal payments | ( | ( | |||||||||
Repurchase of guaranteed balances previously participated | |||||||||||
Total gains during the period | ( | ||||||||||
Balance of SBA loans held for investment at fair value, end of period | $ | $ | |||||||||
The Company’s valuation of SBA loans held for investment, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) Identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) Projecting these loan level characteristics for the life of each loan; and 3) Performing discounted cash flow modeling.
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of SBA loans held for investment, at fair value, interest rate lock commitments, and best efforts forward sales contracts falling within Level 3 of the fair value hierarchy at March 31, 2022 and December 31, 2021:
| Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
SBA loans held for | $ | Discounted | Discount rate | ||||||||||||||||||||
investment, at fair value | cash flow | Conditional prepayment rate | |||||||||||||||||||||
| Interest rate lock commitments | Quoted Market Prices | Pull-through expectations | |||||||||||||||||||||
| Best efforts forward sales contracts | Quoted Market Prices | Pull-through expectations | |||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
SBA loans held for | $ | Discounted | Discount rate | ||||||||||||||||||||
investment, at fair value | cash flow | Conditional prepayment rate | |||||||||||||||||||||
| Interest rate lock commitments | Quoted Market Prices | Pull-through expectations | |||||||||||||||||||||
| Best efforts forward sales contracts | Quoted Market Prices | Pull-through expectations | |||||||||||||||||||||
The significant unobservable inputs impacting the fair value measurement of SBA loans held for investment, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.
The significant unobservable inputs impacting the fair value measurement of interest rate lock commitments and best efforts sales contracts include pull-through rate. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments and best efforts forward sale contracts will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
Assets measured at fair value on a nonrecurring basis at March 31, 2022 are summarized below:
| Fair Value | Valuation Technique(s) | Significant Unobservable Input(s) | Discount % Range/Amount | ||||||||||||||||||||
Impaired loans | $ | Discount appraisals, estimated net realizable value of collateral | Collateral discounts | ||||||||||||||||||||
Assets measured at fair value on a nonrecurring basis at December 31, 2021 are summarized below:
| Fair Value | Valuation Technique(s) | Significant Unobservable Input(s) | Discount % Range/Amount | ||||||||||||||||||||
Impaired loans | $ | Discount appraisals, estimated net realizable value of collateral | Collateral discounts | ||||||||||||||||||||
Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments not carried at fair value, at March 31, 2022 and December 31, 2021 are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Level | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||
Cash and cash equivalents | 1 | $ | $ | $ | $ | ||||||||||||||||||||||||
Time deposits in banks | 2 | ||||||||||||||||||||||||||||
Investment securities held to maturity | 2 | ||||||||||||||||||||||||||||
Restricted equity securities, at cost | 2 | ||||||||||||||||||||||||||||
| Government guaranteed loans held for sale | 2 | ||||||||||||||||||||||||||||
Loans held for investment, at amortized cost | 3 | ||||||||||||||||||||||||||||
Accrued interest receivable | 3 | ||||||||||||||||||||||||||||
SBA loan servicing rights | 3 | ||||||||||||||||||||||||||||
Mortgage loan servicing rights | 3 | ||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||
Noninterest-bearing deposits | 2 | $ | $ | $ | $ | ||||||||||||||||||||||||
Interest-bearing transaction accounts | 2 | ||||||||||||||||||||||||||||
Savings and money market deposits | 2 | ||||||||||||||||||||||||||||
Time deposits | 2 | ||||||||||||||||||||||||||||
Subordinated debentures | 2 | ||||||||||||||||||||||||||||
Notes payable | 2 | ||||||||||||||||||||||||||||
PPP Liquidity Facility | 2 | ||||||||||||||||||||||||||||
Accrued interest payable | 2 | ||||||||||||||||||||||||||||
NOTE 6 – SBA LOAN SERVICING ACTIVITIES
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
principal balances of SBA loans serviced for others requiring recognition of a servicing asset were $507,986 and $459,670 at March 31, 2022 and December 31, 2021, respectively.
Activity for SBA loan servicing rights for the three months ended March 31, 2022 and March 31, 2021 follows:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||
Beginning of period | $ | $ | |||||||||||||||||||||
Additions | |||||||||||||||||||||||
Amortization | ( | ( | |||||||||||||||||||||
End of period | $ | $ | |||||||||||||||||||||
The fair value of SBA loan servicing rights was $8,891 and $8,050 at March 31, 2022 and December 31, 2021, respectively. Fair value was determined using a weighted average discount rate of 13.25 % and a weighted average prepayment speed of 10.26 % at March 31, 2022. Fair value was determined using a weighted average discount rate of 12.13 % and a weighted average prepayment speed of 10.37 % at December 31, 2021. The SBA loan servicing rights are amortized over the life of a loan on a loan-by-loan basis.
The following table presents the components of net gain (loss) on sale of SBA loans, excluding sale of PPP loans, for the three months ended March 31, 2022 and March 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||
Gain on sale of guaranteed SBA loans | $ | $ | |||||||||||||||||||||
| Loss on sale of unguaranteed SBA loans | ( | ||||||||||||||||||||||
Costs recognized on sale of SBA loans | |||||||||||||||||||||||
Fair value of servicing rights created | |||||||||||||||||||||||
Gain on sale of SBA loans, net | $ | $ | |||||||||||||||||||||
NOTE 7 – LEASES
For the three months ended March 31, 2022 and March 31, 2021, the components of total lease cost and supplemental information related to operating leases were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Operating lease cost | $ | $ | |||||||||||||||||||||
Short-term lease cost | |||||||||||||||||||||||
Total lease cost, net | $ | $ | |||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Operating cash flows related to operating leases | $ | $ | |||||||||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
At March 31, 2022, the weighted average discount rate of operating leases was 2.06 % and the weighted average remaining life of operating leases was 4.10 years.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The future minimum lease payments for operating leases, subsequent to March 31, 2022, as recorded on the balance sheet, are summarized as follows:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
Thereafter | |||||
Total undiscounted lease payments | $ | ||||
Less: imputed interest | ( | ||||
Net lease liabilities | $ | ||||
NOTE 8 – OTHER BORROWINGS
In June 2021, the Company issued $6,000 of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years. The Debentures carry interest at a fixed rate of 4.50 % per annum for the initial five years of term and carry interest at a floating rate for the final 5 years of term. Under the debt agreements, the floating rates are based on a SOFR benchmark plus 3.78 % per annum. These Debentures were issued to redeem a $6,000 Subordinated Debenture which was issued in December 2018 and which carried interest at a rate of 6.875 % per annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5,987 and $5,985 at March 31, 2022 and December 31, 2021, respectively.
In March 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 (3.50 % at March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was $3,186 and $3,299 at March 31, 2022 and December 31, 2021, 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. As of March 31, 2022, the Company was in compliance with all financial debt covenants.
NOTE 9 – STOCK-BASED COMPENSATION
The Equity Plan governs the Company’s restricted stock and stock options. Total compensation cost that was charged against income related to the Equity Plan was $179 and $141 for the three months ended March 31, 2022 and March 31, 2021, respectively.
Restricted Stock
The Company awarded shares of restricted common stock to certain employees for which compensation expense is recognized ratably over the vesting period of the awards based on the fair value of the stock at issue date.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
A summary of changes in the Company’s nonvested restricted shares for the three months ended March 31, 2022 follows:
| Shares | Weighted-Average Grant-Date Fair Value, per share | ||||||||||
Nonvested at January 1, 2022 | $ | ||||||||||
Granted | |||||||||||
Vested | ( | ||||||||||
Forfeited | ( | ||||||||||
Nonvested at March 31, 2022 | $ | ||||||||||
At March 31, 2022 there was $608 of total unrecognized compensation cost related to nonvested restricted shares granted under the Equity Plan that is expected to be recognized over a weighted average period of 2.8 years. The total fair value of shares vested during the three months ended March 31, 2022 and March 31, 2021 was $70 and $71 , respectively.
Stock Options
The Equity Plan permits the grant of stock options to the Company’s employees and non-employee directors for up to 15 % of the total number of shares of Company common stock issued and outstanding, up to 1,500,000 shares. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The market price of the Company’s common stock is the closing sales price of the Common Stock on such date on the securities exchange having the greatest volume of trading in the Common Stock during the 30-day period preceding the day the value is to be determined or, if there is no reported closing sales price on such date, the next preceding date on which there was a reported closing price. Those option awards generally have a vesting period of 5 years for employees and 3 years for non-employee directors and have 10-year contractual terms.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of peer financial institutions. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the activity in the Equity Plan for the three months ended March 31, 2022 follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
Outstanding at January 1, 2022 | $ | ||||||||||||||||||||||
Granted | |||||||||||||||||||||||
Exercised | |||||||||||||||||||||||
Forfeited | ( | ||||||||||||||||||||||
Expired | |||||||||||||||||||||||
Outstanding at March 31, 2022 | $ | $ | |||||||||||||||||||||
Vested and exercisable at March 31, 2022 | $ | $ | |||||||||||||||||||||
There were no options granted for during the three months ended March 31, 2022. The weighted average fair value of options granted during the three months ended March 31, 2021 was $3.51 . Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $515 at March 31, 2022. This cost is expected to be recognized over a weighted average period of 2.21 years.
NOTE 10 – OTHER BENEFIT PLANS
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
shares were purchased at an average price of $16.83 . During the year ended December 31, 2021, 17,971 shares were purchased at an average price of $21.68 per share.
All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the three months ended March 31, 2022 and March 31, 2021 was $25 and $19 , respectively.
The Company has a Salary Continuation Agreement, (the “Agreement”), with an executive officer. In accordance with the Agreement, the executive will receive an annual benefit of $25 for twenty years following separation of service. If early termination occurs before December 31, 2022, the executive will not receive any benefit under the Agreement. The liability recorded for the Agreement was $331 and $312 at March 31, 2022 and December 31, 2021, respectively, and the related expense for the three months ended March 31, 2022 and March 31, 2021 was $19 and $45 , respectively.
The Company has a 401(k) plan that covers all employees subject to certain age and service requirements. The Company contributes 3 % of each employee’s salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. Expense recognized in relation to the 401(k) plan was $660 and $786 for the three months ended March 31, 2022 and March 31, 2021, respectively.
In December 2018, the Company approved an ESOP for eligible employees as of January 1, 2018. Each year, the Company’s Board of Directors may approve a discretionary percentage of employees’ salaries to be contributed to the ESOP for eligible employees. The Board approved 1 192 and $459 for the three months ended March 31, 2022 and March 31, 2021, respectively, and was $490 for the year ended December 31, 2021. During the year ended December 31, 2021, $366 was contributed to the ESOP. The Company has contributed 57,620 common shares to the ESOP since its approval in December 2018.
NOTE 11 – REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that the Bank met all capital adequacy requirements to which it was subject at March 31, 2022 and December 31, 2021.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s classification.
Actual and required capital amounts and ratios for the Bank are presented below at March 31, 2022:
| Actual | Required for Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
Total Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Common Equity Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Average Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
Actual and required capital amounts and ratios for the Bank are presented below at December 31, 2021:
| Actual | Required for Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
Total Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Common Equity Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Tier 1 Capital | |||||||||||||||||||||||||||||||||||
(to Average Assets) | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||
Dividend Restrictions
NOTE 12 – MORTGAGE BANKING ACTIVITIES
The following table presents the components of residential loan fee income for the three months ended March 31, 2022 and March 31, 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Net gain realized on sale of residential loans held for sale | $ | $ | |||||||||||||||||||||
Net change in fair value recognized on residential loans held for sale | ( | ( | |||||||||||||||||||||
Net change in fair value recognized on interest rate lock commitments | ( | ( | |||||||||||||||||||||
Net change in fair value recognized on mandatory and best efforts forward sales contracts | |||||||||||||||||||||||
Mortgage banking fees | |||||||||||||||||||||||
Residential loan fee income | $ | $ | |||||||||||||||||||||
As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Interest rate lock commitments and mandatory commitments to deliver loans to investors are considered derivatives.
At March 31, 2022 and December 31, 2021, the Company had interest rate lock commitments of $135,665 and $108,122 , mandatory forwards contracts of $158,500 and $142,500 , and forward sales contracts of $12,794 and $7,375 , respectively. The fair value of these mortgage banking derivatives was reflected by a total derivative asset of $3,231 and $1,550 and a total derivative liability of $737 and $189 at March 31, 2022 and December 31, 2021, respectively. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage banking derivatives are included in residential loan fee income in the Consolidated Statements of Income.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
The net gains (losses) relating to free-standing derivative instruments used for risk management at March 31, 2022 and December 31, 2021 are summarized below:
| March 31, 2022 | December 31, 2021 | ||||||||||
Mandatory forward sales contracts | $ | $ | ( | ||||||||
Best efforts forward sales contracts | |||||||||||
Interest rate lock commitments | |||||||||||
The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||
Included in other assets: | |||||||||||||||||||||||
Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
Best efforts forward sales contracts | |||||||||||||||||||||||
Included in other liabilities: | |||||||||||||||||||||||
Interest rate lock commitments | |||||||||||||||||||||||
Mandatory forward sales contracts | |||||||||||||||||||||||
NOTE 13 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
Unfunded loan commitments | $ | $ | |||||||||
Unused lines of credit | |||||||||||
Standby letters of credit | |||||||||||
All unused lines of credit at March 31, 2022 and December 31, 2021 were variable rate lines of credit and the majority of unfunded loan commitments at March 31, 2022 and December 31, 2021 were commitments to fund variable rate loans. Unfunded loan commitments are generally entered into for periods of 90 days or less.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
NOTE 14 – EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Basic: | |||||||||||||||||||||||
Net income | $ | $ | |||||||||||||||||||||
Less: Preferred stock dividends | |||||||||||||||||||||||
Net income (loss attributable to) available to common shareholders | $ | ( | $ | ||||||||||||||||||||
Weighted average common shares outstanding | |||||||||||||||||||||||
Basic earnings (loss) per common share | $ | ( | $ | ||||||||||||||||||||
Diluted: | |||||||||||||||||||||||
Net income | $ | $ | |||||||||||||||||||||
Less: Preferred stock dividends | |||||||||||||||||||||||
Add: Series B preferred stock dividends | |||||||||||||||||||||||
Net income (loss attributable to) available to common shareholders | $ | ( | $ | ||||||||||||||||||||
Weighted average common shares outstanding for basic earnings per common share | |||||||||||||||||||||||
Add: Dilutive effects of conversion of Series B preferred stock to common stock | |||||||||||||||||||||||
Add: Dilutive effects of assumed exercises of stock options/warrants | |||||||||||||||||||||||
Average shares and dilutive potential common shares | |||||||||||||||||||||||
Diluted earnings (loss) per common share | $ | ( | $ | ||||||||||||||||||||
As a result of incurring a net loss attributable to common shareholders for the three months ended March 31, 2022, potential convertible Series B preferred stock, stock options and warrants of 285,751 were excluded from diluted loss per share because the effect would have been anti-dilutive. Common stock options of 70,260 shares were excluded in computing diluted earnings per common share for the three months ended March 31, 2021, because they were anti-dilutive.
NOTE 15 – OPERATING SEGMENTS
The Company has two reportable segments: Banking and Residential Mortgage Lending. The Banking segment provides a variety of traditional community banking services through its full-service banking centers located in St. Petersburg, Seminole, Pinellas Park, Clearwater, Sarasota, Tampa, and Belleair Bluffs, Florida, as well as SBA lending services throughout the nation. The Residential Mortgage Lending segment originates residential mortgage loans primarily for sale in the secondary market with offices throughout the nation. Loans and deposits provide the revenues in the Banking segment and loan sales provide the revenues in the Residential Lending segment.
Segment profit and loss is measured by net income after income tax. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process. Due to the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) | ||
Information about reportable segments and reconciliation of such information to the Consolidated Financial Statements follows:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| Residential Mortgage | Banking | Consolidated | Residential Mortgage | Banking | Consolidated | ||||||||||||||||||||||||||||||
Interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Interest expense | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Provision for loan losses | ( | ( | |||||||||||||||||||||||||||||||||
Residential loan fee income | |||||||||||||||||||||||||||||||||||
Internal transfer for portfolio loans originated | ( | ( | |||||||||||||||||||||||||||||||||
Other noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest expense | |||||||||||||||||||||||||||||||||||
Income before income tax expense (benefit) | ( | ||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | ( | ( | |||||||||||||||||||||||||||||||||
Net income (loss) | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Period end assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion explains our financial condition and results of operations as of and for the three months ended March 31, 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 ended December 31, 2021, filed with the SEC on March 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, 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 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, including the elimination of LIBOR and the development of substitutes; changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. 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 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. At March 31, 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
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related to the allowance for loan losses, and fair value measurement of SBA servicing rights, residential loans held for sale 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
Final Approval to Convert to a National Bank - On April 19, 2022, the Bank received final approval from the Office of the Comptroller of the Currency to convert First Home Bank to BayFirst National Bank. The conversion is expected to take place on May 16, 2022.
Second Quarter Common Stock Dividend. On April 26, 2022, BayFirst’s Board of Directors declared a second quarter 2022 cash dividend of $0.08 per common share. The dividend will be payable June 15, 2022 to common shareholders of record as of June 1, 2022. This dividend marks the 24th consecutive quarterly cash dividend paid since BayFirst initiated cash dividends in 2016.
Second Quarter Preferred Series A Stock Dividend. On April 26, 2022, BayFirst’s Board of Directors declared a quarterly cash dividend of $22.50 on our Series A Preferred Stock. The dividend will be payable June 15, 2022 to shareholders of record as of June 1, 2022. The amount and timing of the dividend is in accordance with the terms of the Series A Preferred Stock.
Second Quarter Preferred Series B Stock Dividend. On April 26, 2022, BayFirst’s Board of Directors declared a quarterly cash dividend of $20.00 on our Series B Convertible Preferred Stock. The dividend will be payable June 15, 2022
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to shareholders of record as of June 1, 2022. The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock.
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Selected Financial Data - Unaudited
| As of and for the Three Months Ended | ||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 3/31/2022 | 12/31/2021 | 3/31/2021 | |||||||||||||||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 6,406 | $ | 6,693 | $ | 12,630 | ||||||||||||||||||||||||||
| Provision for loan losses | (2,400) | (2,500) | 2,000 | |||||||||||||||||||||||||||||
| Noninterest income | 18,868 | 24,214 | 33,159 | |||||||||||||||||||||||||||||
| Noninterest expense | 27,647 | 30,224 | 33,721 | |||||||||||||||||||||||||||||
| Income tax expense | 14 | 372 | 2,557 | |||||||||||||||||||||||||||||
| Net income | 13 | 2,811 | 7,511 | |||||||||||||||||||||||||||||
| Preferred stock dividends | 208 | 208 | 332 | |||||||||||||||||||||||||||||
| Net income (loss attributable to) available to common shareholders | $ | (195) | $ | 2,603 | $ | 7,179 | ||||||||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||||||||||||||
| Average loans held for investment, excluding PPP loans | 520,559 | 518,697 | 413,558 | |||||||||||||||||||||||||||||
| Average total assets | 872,311 | 923,485 | 1,636,211 | |||||||||||||||||||||||||||||
| Average common shareholders’ equity | 83,990 | 83,056 | 57,944 | |||||||||||||||||||||||||||||
| Total loans held for investment | 561,797 | 583,948 | 1,388,533 | |||||||||||||||||||||||||||||
| Total loans held for investment, excluding PPP loans | 517,434 | 504,525 | 421,259 | |||||||||||||||||||||||||||||
| Total loans held for investment, excl gov’t gtd loan balances | 365,584 | 323,363 | 288,960 | |||||||||||||||||||||||||||||
| Allowance for loan losses | 10,170 | 13,452 | 22,017 | |||||||||||||||||||||||||||||
| Total assets | 888,541 | 917,095 | 1,716,831 | |||||||||||||||||||||||||||||
| Common shareholders’ equity | 85,274 | 86,685 | 66,046 | |||||||||||||||||||||||||||||
Per Share Data: (2) | ||||||||||||||||||||||||||||||||
| Basic earnings (loss) per common share | $ | (0.05) | $ | 0.66 | $ | 2.05 | ||||||||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | (0.05) | $ | 0.61 | $ | 1.82 | ||||||||||||||||||||||||||
| Dividends per common share | $ | 0.080 | $ | 0.070 | $ | 0.067 | ||||||||||||||||||||||||||
| Book value per common share | $ | 21.25 | $ | 21.77 | $ | 17.95 | ||||||||||||||||||||||||||
Tangible book value per common share (1) | $ | 21.22 | $ | 21.75 | $ | 17.93 | ||||||||||||||||||||||||||
| Performance Ratios: | ||||||||||||||||||||||||||||||||
| Return on average assets | 0.01 | % | 1.22 | % | 1.84 | % | ||||||||||||||||||||||||||
| Return on average common equity | (0.93) | % | 12.54 | % | 49.56 | % | ||||||||||||||||||||||||||
| Net interest margin | 3.25 | % | 3.07 | % | 3.21 | % | ||||||||||||||||||||||||||
| Dividend payout ratio | (164.25) | % | 10.65 | % | 3.26 | % | ||||||||||||||||||||||||||
| Asset Quality Data: | ||||||||||||||||||||||||||||||||
| Net charge-offs | $ | 882 | $ | 664 | $ | 1,145 | ||||||||||||||||||||||||||
| Net charge-offs/avg loans held for investment excl PPP | 0.68 | % | 0.51 | % | 1.11 | % | ||||||||||||||||||||||||||
| Nonperforming loans | $ | 8,834 | $ | 11,909 | $ | 9,741 | ||||||||||||||||||||||||||
| Nonperforming loans (excluding gov't gtd balance) | $ | 2,660 | $ | 3,967 | $ | 3,242 | ||||||||||||||||||||||||||
| Nonperforming loans/total loans held for investment | 1.57 | % | 2.04 | % | 0.70 | % | ||||||||||||||||||||||||||
| Nonperforming loans (excl gov’t gtd balance)/total loans held for investment | 0.47 | % | 0.68 | % | 0.57 | % | ||||||||||||||||||||||||||
| ALLL/Total loans held for investment | 1.81 | % | 2.30 | % | 1.59 | % | ||||||||||||||||||||||||||
| ALLL/Total loans held for investment, excl PPP loans | 1.97 | % | 2.67 | % | 5.23 | % | ||||||||||||||||||||||||||
| Other Data: | ||||||||||||||||||||||||||||||||
| Full-time equivalent employees | 575 | 637 | 649 | |||||||||||||||||||||||||||||
| Banking center offices | 7 | 7 | 6 | |||||||||||||||||||||||||||||
| Loan production offices | 20 | 23 | 22 | |||||||||||||||||||||||||||||
(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 May 10, 2021. | ||||||||||||||||||||||||||||||||
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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) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||
| Total shareholders’ equity | $ | 94,879 | $ | 96,290 | $ | 79,421 | ||||||||||||||
| Less: Preferred stock liquidation preference | (9,605) | (9,605) | (13,375) | |||||||||||||||||
| Total equity available to common shareholders | 85,274 | 86,685 | 66,046 | |||||||||||||||||
| Less: Goodwill | (100) | (100) | (100) | |||||||||||||||||
| Tangible common shareholders' equity | $ | 85,174 | $ | 86,585 | $ | 65,946 | ||||||||||||||
| Common shares outstanding | 4,013,173 | 3,981,117 | 3,678,566 | |||||||||||||||||
| Tangible book value per common share | $ | 21.22 | $ | 21.75 | $ | 17.93 | ||||||||||||||
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 March 31, 2022 of $13 thousand, or $(0.05) per diluted common share, compared to net income for the three months ended March 31, 2021 of $7.51 million, or $1.82 per diluted common share. The decrease of $7.50 million in net income was the result of lower PPP income and residential loan fee income, partially offset by higher income from the sale of SBA loans, and lower noninterest expense.
Net Interest Income
Net interest income was $6.41 million for the three months ended March 31, 2022, a decrease of $6.22 million or 49.28% compared to net interest income for the three months ended March 31, 2021 of $12.63 million. This decrease was primarily due to lower net PPP loan interest and origination fee income. The net interest margin for the three months ended March 31, 2022 was 3.25% compared to 3.21% for the three months ended March 31, 2021. With the recent rate increase enacted by the Federal Reserve, the net interest margin in future periods could improve as the majority of our SBA loan portfolio rates are tied to Prime resetting quarterly at the beginning of each quarter with a lag in rate increases on deposit accounts.
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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 March 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest | Yield | Average Balance | Interest | Yield | |||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||||
Investment securities | $ | 30,647 | $ | 97 | 1.28 | % | $ | — | $ | — | 0.00 | % | |||||||||||||||||||||||
Loans, excluding PPP (1) | 604,055 | 7,112 | 4.77 | % | 591,050 | 6,599 | 4.53 | % | |||||||||||||||||||||||||||
PPP loans | 58,058 | 443 | 3.09 | % | 878,532 | 8,212 | 3.79 | % | |||||||||||||||||||||||||||
Other | 106,472 | 88 | 0.34 | % | 123,907 | 81 | 0.27 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 799,232 | 7,740 | 3.93 | % | 1,593,489 | 14,892 | 3.79 | % | |||||||||||||||||||||||||||
Noninterest-earning assets | 73,079 | 42,722 | |||||||||||||||||||||||||||||||||
Total assets | $ | 872,311 | $ | 1,636,211 | |||||||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
NOW, MMDA and savings | $ | 609,467 | $ | 1,086 | 0.72 | % | $ | 444,612 | $ | 1,033 | 0.94 | % | |||||||||||||||||||||||
Time deposits | 39,344 | 131 | 1.35 | % | 96,152 | 287 | 1.21 | % | |||||||||||||||||||||||||||
PPPLF advances | 22,983 | 20 | 0.35 | % | 885,028 | 766 | 0.35 | % | |||||||||||||||||||||||||||
Other borrowings | 9,258 | 97 | 4.25 | % | 57,732 | 176 | 1.24 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 681,052 | 1,334 | 0.79 | % | 1,483,524 | 2,262 | 0.62 | % | |||||||||||||||||||||||||||
Demand deposits | 95,457 | 71,894 | |||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities | 2,207 | 7,804 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 93,595 | 72,989 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 872,311 | $ | 1,636,211 | |||||||||||||||||||||||||||||||
Net interest income | $ | 6,406 | $ | 12,630 | |||||||||||||||||||||||||||||||
Interest rate spread | 3.13 | % | 3.17 | % | |||||||||||||||||||||||||||||||
Net interest margin (2) | 3.25 | % | 3.21 | % | |||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 117.35 | % | 107.41 | % | |||||||||||||||||||||||||||||||
(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 Ended March 31, 2022 vs. March 31, 2021: | |||||||||||||||||
Interest-earning assets: | |||||||||||||||||
| Investment securities | $ | — | $ | 97 | $ | 97 | |||||||||||
Loans, excluding PPP | 366 | 147 | 513 | ||||||||||||||
PPP loans | (1,277) | (6,492) | (7,769) | ||||||||||||||
Other interest-earning assets | 19 | (12) | 7 | ||||||||||||||
Total interest-earning assets | (892) | (6,260) | (7,152) | ||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||
NOW, MMDA, and savings | (275) | 328 | 53 | ||||||||||||||
Time deposits | 30 | (186) | (156) | ||||||||||||||
PPPLF advances | — | (746) | (746) | ||||||||||||||
Other borrowings | 161 | (240) | (79) | ||||||||||||||
Total interest-bearing liabilities | (84) | (844) | (928) | ||||||||||||||
Net change in net interest income | $ | (808) | $ | (5,416) | $ | (6,224) | |||||||||||
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.
As the financial impact of the COVID-19 pandemic became more predictable throughout 2021, the Company began adjusting its allowance for loan losses from the historic high levels reached in 2020 at the onset of the pandemic. The Company continued this trend in the first quarter of 2022 which resulted in a negative provision for the three months ended March 31, 2022 of $2.40 million. This compared to a $2.00 million provision for the three months ended March 31, 2021. During the three months ended March 31, 2022, we charged off $882 thousand in loans compared to $1.15 million during the three months ended March 31, 2021. Our ALLL was $10.17 million at March 31, 2022 and $22.02 million at March 31, 2021.
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Noninterest Income
The following table presents noninterest income for the three months ended March 31, 2022 and March 31, 2021.
For the Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||||||||||||||
Noninterest income: | |||||||||||||||||||||||
Residential loan fee income | $ | 13,191 | $ | 32,029 | |||||||||||||||||||
Loan servicing income, net | 461 | 704 | |||||||||||||||||||||
| Gain on sale of government guaranteed loans, net | 4,621 | — | |||||||||||||||||||||
Service charges and fees | 282 | 222 | |||||||||||||||||||||
SBA loan fair value gain (loss) | (197) | 72 | |||||||||||||||||||||
Other noninterest income | 510 | 132 | |||||||||||||||||||||
Total noninterest income | $ | 18,868 | $ | 33,159 | |||||||||||||||||||
Noninterest income was $18.87 million during the three months ended March 31, 2022, a decrease of $14.29 million or 43.10% from $33.16 million during the three months ended March 31, 2021. The decrease was primarily due to the decrease in residential loan fee income of $18.84 million or 58.82% as a result of a decrease in residential mortgage volume of $380.29 million partially offset by an increase in gains on SBA loan sales.
Noninterest Expense
The following table presents noninterest expense for the three months ended March 31, 2022 and March 31, 2021.
For the Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||||||||||||||
Noninterest expense: | |||||||||||||||||||||||
Salaries and benefits | $ | 13,697 | $ | 13,167 | |||||||||||||||||||
Bonus, commissions, and incentives | 4,606 | 11,873 | |||||||||||||||||||||
Mortgage banking | 1,002 | 1,695 | |||||||||||||||||||||
Occupancy and equipment | 1,421 | 1,332 | |||||||||||||||||||||
Data processing | 1,467 | 1,269 | |||||||||||||||||||||
Marketing and business development | 1,742 | 1,642 | |||||||||||||||||||||
Professional services | 1,307 | 924 | |||||||||||||||||||||
Loan origination and collection | 670 | 496 | |||||||||||||||||||||
Employee recruiting and development | 871 | 614 | |||||||||||||||||||||
Regulatory assessments | 69 | 102 | |||||||||||||||||||||
Other noninterest expense | 795 | 607 | |||||||||||||||||||||
Total noninterest expense | $ | 27,647 | $ | 33,721 | |||||||||||||||||||
Noninterest expense was $27.65 million during the three months ended March 31, 2022, a decrease of $6.07 million or 18.01% from $33.72 million during the three months ended March 31, 2021. The decrease was primarily due to lower residential mortgage commissions. Additionally, the Company reduced headcount in the first quarter of 2022 by 65 with 62 of those from the Residential Mortgage Division. With a decline in production volume in the Residential Mortgage Division, the Company reduced its workforce to adjust to the expectations for volume moving forward. The impact to expense from the reduction of the workforce in the first quarter 2022 will not provide a meaningful reduction of noninterest expenses until the second quarter of 2022 and beyond.
Income Taxes
Income tax expense was $14 thousand for the three months ended March 31, 2022, a decrease of $2.54 million from income tax expense of $2.56 million for the three months ended March 31, 2021. The decrease was primarily due to the
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decrease in pre-tax earnings. The effective income tax rate was 24.07% for the three months ended March 31, 2022 and 25.40% for the three months ended March 31, 2021.
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 March 31, 2022 and December 31, 2021.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Asset-backed securities | $ | 7,571 | $ | 7,535 | |||||||
Mortgaged-backed securities: | |||||||||||
U.S. Government-sponsored enterprises | 4,065 | 4,394 | |||||||||
Collateralized mortgage obligations: | |||||||||||
U.S. Government-sponsored enterprises | 22,146 | 18,964 | |||||||||
Corporate bonds | 7,874 | — | |||||||||
Total investment securities available for sale | $ | 41,656 | $ | 30,893 | |||||||
The Company held one security held to maturity at March 31, 2022 and December 31, 2021, which matures in August 2039. The security is a debt security issued by a government-sponsored enterprise and its amortized cost and fair value was $2 thousand at March 31, 2022 and December 31, 2021.
No securities were pledged as of March 31, 2022 or December 31, 2021, and there were no sales of securities during the three months ended March 31, 2022 or the year ended December 31, 2021.
The securities available-for-sale presented in the following tables are reported at amortized cost and by contractual maturity as of March 31, 2022 and December 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.
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| One year or less | One to five years | Five to ten years | After ten years | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Average Yield | Amortized Cost | Average Yield | Amortized Cost | Average Yield | Amortized Cost | Average Yield | |||||||||||||||||||||||||||||||||||||||
Asset-backed securities | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 7,621 | 1.80 | % | |||||||||||||||||||||||||||||||
Mortgaged-backed securities: | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government-sponsored enterprises | — | — | % | — | — | % | — | — | % | 4,388 | 1.53 | % | |||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprises | — | — | % | — | — | % | — | — | % | 23,721 | 1.64 | % | |||||||||||||||||||||||||||||||||||
Corporate bonds | — | — | % | 5,018 | 1.18 | % | 2,856 | 2.98 | % | — | — | % | |||||||||||||||||||||||||||||||||||
Total investment securities available for sale | $ | — | — | % | $ | 5,018 | 1.18 | % | $ | 2,856 | 2.98 | % | $ | 35,730 | 1.66 | % | |||||||||||||||||||||||||||||||
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| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| One year or less | One to five years | Five to ten years | After ten years | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Average Yield | Amortized Cost | Average Yield | Amortized Cost | Average Yield | Amortized 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 | % | |||||||||||||||||||||||||||||||
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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.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
Residential loans held for sale | $ | 75,022 | $ | 114,131 | |||||||||||||||||||
Government guaranteed loans, held for sale | 1,445 | 1,460 | |||||||||||||||||||||
| SBA loans held for investment, at fair value | 8,769 | 9,614 | |||||||||||||||||||||
Loans held for investment, at amortized cost: | |||||||||||||||||||||||
Residential real estate | 102,897 | 18.7 | % | 87,235 | 15.3 | % | |||||||||||||||||
Commercial real estate | 189,684 | 34.5 | % | 163,477 | 28.7 | % | |||||||||||||||||
Construction and land | 18,038 | 3.3 | % | 18,632 | 3.3 | % | |||||||||||||||||
Commercial and industrial | 180,163 | 32.8 | % | 217,155 | 38.0 | % | |||||||||||||||||
Commercial and industrial – PPP | 44,792 | 8.2 | % | 80,158 | 14.1 | % | |||||||||||||||||
Consumer and other | 13,502 | 2.5 | % | 3,581 | 0.6 | % | |||||||||||||||||
Loans held for investment, at amortized cost, gross | 549,076 | 100.0 | % | 570,238 | 100.0 | % | |||||||||||||||||
| Discount on SBA 7(a) loans sold | (3,335) | (3,866) | |||||||||||||||||||||
Discount on PPP loans purchased | (10) | (13) | |||||||||||||||||||||
Deferred loan costs (fees), net | 7,297 | 7,975 | |||||||||||||||||||||
Allowance for loan losses | (10,170) | (13,452) | |||||||||||||||||||||
Loans held for investment, at amortized cost, net | $ | 542,858 | $ | 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 three months ended March 31, 2022, we originated approximately $63.59 million in loans through conventional lending channels, $47.33 million in loans through CreditBench (our SBA lending function), and $335.56 million through the Residential Mortgage Lending Division. During the three months ended March 31, 2021, we originated approximately $20.56 million in loans through conventional lending channels, $15.52 million through CreditBench, exclusive of PPP loans, $285.84 million of PPP loans, and $715.85 million through the Residential Mortgage Lending Division.
In 2021, we originated approximately $94.90 million in new loans through conventional lending channels, $169.47 million in loans through CreditBench, exclusive of PPP loans, $329.32 million of PPP loans, and $2.22 billion through the Residential Mortgage Lending Division.
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Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans at March 31, 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, discount on PPP loans purchased, and deferred loan costs, net.
| (Dollars in thousands) | Due in One Year or Less | Due After One Year to Five Years | Due After Five Years to 15 Years | Due After 15 Years | Total | ||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||
Residential | $ | 4,362 | $ | 326 | $ | 8,669 | $ | 89,512 | $ | 102,869 | |||||||||||||||||||
Commercial | 5,271 | 1,839 | 24,319 | 163,104 | 194,533 | ||||||||||||||||||||||||
Construction and land | 2,676 | 773 | 635 | 13,954 | 18,038 | ||||||||||||||||||||||||
Commercial and industrial | 6,947 | 9,578 | 165,307 | 6,565 | 188,397 | ||||||||||||||||||||||||
Commercial and industrial - PPP | 21,234 | 23,129 | — | — | 44,363 | ||||||||||||||||||||||||
Consumer and other | 585 | 9,317 | 3,136 | 559 | 13,597 | ||||||||||||||||||||||||
Total loans | $ | 41,075 | $ | 44,962 | $ | 202,066 | $ | 273,694 | $ | 561,797 | |||||||||||||||||||
The following table shows our loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at March 31, 2022.
| (Dollars in thousands) | Fixed Interest Rate | Adjustable Interest Rate | |||||||||
Real estate: | |||||||||||
Residential | $ | 23,590 | $ | 74,917 | |||||||
Commercial | 2,428 | 186,834 | |||||||||
Construction and land | 5,596 | 9,766 | |||||||||
Commercial and industrial | 19,089 | 162,361 | |||||||||
Commercial and industrial - PPP | 23,129 | — | |||||||||
Consumer and other | 3,917 | 9,095 | |||||||||
Total loans | $ | 77,749 | $ | 442,973 | |||||||
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 for 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 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 March 31, 2022, future adjustments to our allowance may be necessary if economic conditions differ substantially from the assumptions used in making the determination.
Nonperforming Assets. At March 31, 2022, we had $2.66 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.81% of total loans. At March 31, 2021, we had $3.24 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.59% of total loans held for investment. Total loans at March 31, 2022 and March 31, 2021 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 2.71% at March 31, 2022, compared to 7.35% at March 31, 2021.
At December 31, 2021, we had $3.97 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.30% of total loans, including PPP loans. Total loans at December 31, 2021 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 4.04% at December 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.
| (Dollars in thousands) | March 31, 2022 | March 31, 2021 | December 31, 2021 | ||||||||||||||
Nonperforming loans (government guaranteed balances) | $ | 6,174 | $ | 6,499 | $ | 7,942 | |||||||||||
Nonperforming loans (unguaranteed balances) | 2,660 | 3,242 | 3,967 | ||||||||||||||
Total nonperforming loans | 8,834 | 9,741 | 11,909 | ||||||||||||||
OREO | 3 | — | 3 | ||||||||||||||
Total nonperforming assets | $ | 8,837 | $ | 9,741 | $ | 11,912 | |||||||||||
Nonperforming loans as a percentage of total loans held for investment | 1.57 | % | 0.70 | % | 2.04 | % | |||||||||||
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment | 0.47 | % | 0.23 | % | 0.68 | % | |||||||||||
Nonperforming assets as a percentage of total assets | 0.99 | % | 0.57 | % | 1.30 | % | |||||||||||
Nonperforming assets (excluding government guaranteed balances) to total assets | 0.30 | % | 0.19 | % | 0.43 | % | |||||||||||
ALLL to nonperforming loans | 115.12 | % | 226.02 | % | 112.96 | % | |||||||||||
ALLL to nonperforming loans (excluding government guaranteed balances) | 382.33 | % | 679.12 | % | 339.10 | % | |||||||||||
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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 March 31, | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Allowance at beginning of period | $ | 13,452 | $ | 21,162 | |||||||||||||||||||
Charge-offs: | |||||||||||||||||||||||
Commercial and industrial | (1,031) | (1,137) | |||||||||||||||||||||
Consumer and other | (15) | (16) | |||||||||||||||||||||
Total charge-offs | (1,046) | (1,153) | |||||||||||||||||||||
Recoveries: | |||||||||||||||||||||||
Commercial real estate | 8 | — | |||||||||||||||||||||
Commercial and industrial | 153 | 5 | |||||||||||||||||||||
Consumer and other | 3 | 3 | |||||||||||||||||||||
Total recoveries | 164 | 8 | |||||||||||||||||||||
Net charge-offs | (882) | (1,145) | |||||||||||||||||||||
Provision for loan losses | (2,400) | 2,000 | |||||||||||||||||||||
Allowance at end of period | $ | 10,170 | $ | 22,017 | |||||||||||||||||||
Net charge-offs to average loans held for investment | 0.61 | % | 0.35 | % | |||||||||||||||||||
Allowance as a percent of total loans held for investment | 1.81 | % | 1.59 | % | |||||||||||||||||||
Allowance as a percent of loans held for investment, not including government guaranteed loans | 2.71 | % | 7.35 | % | |||||||||||||||||||
Allowance as a percent of nonperforming loans | 115.12 | % | 226.02 | % | |||||||||||||||||||
Total loans held for investment | $ | 563,242 | $ | 1,388,533 | |||||||||||||||||||
Average loans held for investment | $ | 578,617 | $ | 1,292,090 | |||||||||||||||||||
Nonperforming loans (including government guaranteed balances) | $ | 8,834 | $ | 9,741 | |||||||||||||||||||
Nonperforming loans (excluding government guaranteed balances) | $ | 2,660 | $ | 3,242 | |||||||||||||||||||
Guaranteed balance of all government guaranteed loans | $ | 187,444 | $ | 1,089,098 | |||||||||||||||||||
Loans held for sale, residential | $ | 75,022 | $ | 208,762 | |||||||||||||||||||
The following table details net charge-offs to average loans outstanding by loan category for the years ended March 31:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Net Charge-off/(Recovery) | Average Loans HFI | Net Charge-off/(Recovery) Ratio | Net Charge-off/(Recovery) | Average Loans HFI | Net Charge-off/(Recovery) Ratio | |||||||||||||||||||||||||||||
Residential real estate | $ | — | $ | 76,881 | — | % | $ | — | $ | 54,987 | — | % | |||||||||||||||||||||||
Commercial real estate | (8) | 216,373 | (0.01) | — | 151,259 | — | |||||||||||||||||||||||||||||
Commercial and industrial | 878 | 222,305 | 1.58 | 1,132 | 205,889 | 2.20 | |||||||||||||||||||||||||||||
Commercial and industrial - PPP | — | 58,058 | — | — | 878,532 | — | |||||||||||||||||||||||||||||
Consumer and other | 12 | 5,000 | 0.96 | 13 | 1,423 | 3.65 | |||||||||||||||||||||||||||||
Total loans | $ | 882 | $ | 578,617 | 0.61 | % | $ | 1,145 | $ | 1,292,090 | 0.35 | % | |||||||||||||||||||||||
43
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 0.30%, as of March 31, 2022, as compared to 0.19% as of March 31, 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 March 31, 2022, a total of 13 loans with principal balances of $676 thousand were under payment deferrals. Of those, all were government guaranteed loans with $358 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 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 Three Months Ended March 31, | At and for the Year Ended December 31, | ||||||||||||||||||
| Government Guaranteed, Excluding PPP | 2022 | 2021 | 2021 | |||||||||||||||||
Number of loans originated | 86 | 49 | 374 | |||||||||||||||||
Amount of loans originated | $ | 47,332 | $ | 15,520 | $ | 169,467 | ||||||||||||||
Average loan size originated | $ | 550 | $ | 317 | $ | 453 | ||||||||||||||
Government guaranteed loan balances sold | $ | 71,345 | $ | — | $ | 44,854 | ||||||||||||||
Government unguaranteed loan balances sold | $ | 4,351 | $ | — | 5,034 | |||||||||||||||
Total government guaranteed loans | $ | 271,317 | $ | 261,502 | $ | 300,415 | ||||||||||||||
Government guaranteed loan balances | $ | 143,081 | $ | 121,824 | $ | 171,548 | ||||||||||||||
Government unguaranteed loan balances | $ | 128,236 | $ | 147,258 | $ | 128,867 | ||||||||||||||
Government guaranteed loans serviced for others | $ | 507,986 | $ | 505,289 | $ | 459,670 | ||||||||||||||
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We make government guaranteed loans throughout the 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.
| March 31, | December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||
Florida | $ | 83,129 | 31 | % | $ | 65,622 | 25 | % | $ | 89,143 | 30 | % | |||||||||||||||||||||||
California | 29,967 | 11 | % | 34,163 | 13 | % | 32,924 | 11 | % | ||||||||||||||||||||||||||
Texas | 17,835 | 7 | % | 17,992 | 7 | % | 20,976 | 7 | % | ||||||||||||||||||||||||||
Georgia | 12,512 | 5 | % | 14,093 | 5 | % | 13,894 | 5 | % | ||||||||||||||||||||||||||
All Other | 127,874 | 46 | % | 129,632 | 50 | % | 143,478 | 47 | % | ||||||||||||||||||||||||||
Total government guaranteed loans, excluding PPP loans | $ | 271,317 | 100 | % | $ | 261,502 | 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 March 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||||||||||||||||||||
Number of loans originated | 1,051 | 2,372 | ||||||||||||||||||||||||||||||
Amount of loans originated | $ | 335,560 | $ | 715,849 | ||||||||||||||||||||||||||||
Average loan size originated | $ | 319 | $ | 302 | ||||||||||||||||||||||||||||
Loan balances sold | $ | 371,929 | $ | 710,465 | ||||||||||||||||||||||||||||
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 of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota 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 in Florida.
45
The amounts of each of the following categories of deposits, at the dates indicated, are as follows:
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||
Noninterest-bearing deposits | $ | 92,680 | 12.0 | % | $ | 83,638 | 11.6 | % | |||||||||||||||
Interest-bearing transaction accounts | 180,815 | 23.5 | % | 163,495 | 22.7 | % | |||||||||||||||||
Money market accounts | 447,837 | 58.2 | % | 408,257 | 56.5 | % | |||||||||||||||||
Savings | 17,010 | 2.2 | % | 15,607 | 2.2 | % | |||||||||||||||||
Subtotal | 738,342 | 95.9 | % | 670,997 | 93.0 | % | |||||||||||||||||
Total time deposits | 31,787 | 4.1 | % | 50,688 | 7.0 | % | |||||||||||||||||
Total deposits | $ | 770,129 | 100.0 | % | $ | 721,685 | 100.0 | % | |||||||||||||||
At March 31, 2022, we held approximately $322.05 million of deposits that exceeded the FDIC insurance limit.
The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250,000 as of March 31, 2022.
| (Dollars in thousands) | |||||
Three months or less | $ | 1,100 | |||
Over three months through six months | 312 | ||||
Over six months through 12 months | 3,766 | ||||
Over 12 months | 979 | ||||
Total | $ | 6,157 | |||
Other Borrowings
In June 2021, the Company issued $6.00 million of Subordinated Debentures (the “Debentures”) that mature June 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 in December 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 $5.99 million and $5.99 million at March 31, 2022 and December 31, 2021, respectively.
In March 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 (3.50% at March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was $3.19 million and $3.30 million at March 31, 2022 and December 31, 2021, 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.
In April 2020, the Company entered into the Federal 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 $69.65 million at December 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 $1.41 million to $94.88 million at March 31, 2022 as compared to $96.29 million at December 31, 2021. The decrease was the result of decreases of $1.04 million of accumulated other comprehensive income
46
due to increases in net unrealized losses on available-for-sale securities, $208 thousand of dividends declared on our preferred stock, and $321 thousand of dividends declared on our common stock during the three months ended March 31, 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 March 31, 2022 and December 31, 2021,the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.
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) | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||
As of March 31, 2022 | |||||||||||||||||||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 106,128 | 19.45 | % | $ | 43,656 | 8.00 | % | $ | 54,570 | 10.00 | % | |||||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 99,247 | 18.19 | % | 32,742 | 6.00 | % | 43,656 | 8.00 | % | ||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | 99,247 | 18.19 | % | 24,556 | 4.50 | % | 35,470 | 6.50 | % | ||||||||||||||||||||||||||
Tier 1 Capital (to total assets) | 99,247 | 11.75 | % | 33,774 | 4.00 | % | 42,218 | 5.00 | % | ||||||||||||||||||||||||||
As of December 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 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 March 31, 2022 were $45.89 million, a decrease of $89.08 million from $134.97 million at December 31, 2021. The decrease was primarily due to the payoff of $69.65 million in PPP Liquidity Facility and a decrease in time deposits of $18.90 million.
47
The following tables present our contractual obligations as of March 31, 2022 and December 31, 2021.
Contractual Obligations as of March 31, 2022 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than One Year | One to Three Years | Three to Five Years | Over Five Years | Total | ||||||||||||||||||||||||
| Operating lease obligations | $ | 1,409 | $ | 2,161 | $ | 1,211 | $ | 151 | $ | 4,932 | |||||||||||||||||||
| Long-term borrowings | — | — | — | 3,186 | 3,186 | ||||||||||||||||||||||||
| Subordinated notes | — | — | — | 5,987 | 5,987 | ||||||||||||||||||||||||
| Time deposits | 25,097 | 5,773 | 917 | — | 31,787 | ||||||||||||||||||||||||
| Total | $ | 26,506 | $ | 7,934 | $ | 2,128 | $ | 9,324 | $ | 45,892 | |||||||||||||||||||
Contractual Obligations as of December 31, 2021 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than One Year | One to Three Years | Three to Five 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 | — | — | — | 6,050 | 6,050 | ||||||||||||||||||||||||
| Time deposits | 40,868 | 9,210 | 610 | — | 50,688 | ||||||||||||||||||||||||
| Total | $ | 86,969 | $ | 11,459 | $ | 26,896 | $ | 9,650 | $ | 134,974 | |||||||||||||||||||
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 of thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Unfunded loan commitments | $ | 15,411 | $ | 18,567 | |||||||
Unused lines of credit | 62,470 | 52,076 | |||||||||
Standby letters of credit | 68 | 68 | |||||||||
Total | $ | 77,949 | $ | 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.
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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 March 31, 2022 was 18.77%, as compared to 16.76% at December 31, 2021.
During the three months ended March 31, 2022, the Bank purchased additional 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 $41.66 million at March 31, 2022.
During each of the quarters of 2021 and the first quarter of 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 soley 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 March 31, 2022, BayFirst held $1.51 million 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.”
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest-rate risk inherent in loan and deposit taking activities. To that end, we actively monitor and manage our interest-rate risk exposure. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, should also be considered.
Our objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk. A sudden or substantial increase in interest rates may impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same rate, to the same extent, or on the same basis.
We established a comprehensive interest rate risk management policy which is administered by management’s Asset/Liability Committee (“ALCO”). The policy establishes risk limits, which are quantitative measures of the percentage change in net interest income (net interest income at risk) and the fair value of equity capital (economic value of equity at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity with computer-generated simulation analysis. The simulation model is designed to capture call features and interest rate caps and floors embedded in investment and loan contracts. As with any method of analyzing interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we use. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from the assumptions that we use in our modeling. The methodology does not measure the impact that higher rates may have on variable and adjustable-rate loan borrowers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
To minimize the potential for adverse effects of changes in interest rates on the results of our operations, we monitor assets and liabilities to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. To do this, we (i) emphasize the origination of adjustable-rate and variable-rate loans to be held for investment; (ii) maintain a stable core deposit base; and (iii) maintain a significant portion of liquid assets (cash, interest-bearing deposits with other banks, and available-for-sale investment securities).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
49
An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of March 31, 2022, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2022, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
50
Part II - Other Information
Item 1. Legal Proceedings
We are not currently involved in any litigation that we believe may result in a material loss. From time-to-time, we are involved in litigation arising in the ordinary course of our business.
Item 1A. Risk Factors
In addition to the risk factor discussed below and the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended December 31, 2021. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.
Changes in local, national, or global economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans, the quality of our security portfolio, and the value of the collateral securing our loans.
Our success depends to a significant extent upon local, national, and global economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, military hostilities, terrorism, trade wars, economic sanctions, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment securities in our portfolio or available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans. Recent political and military developments in Russia, Ukraine, and elsewhere are likely to result in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in oil production and supply in the Middle East and Russia, also affect the economy and stock prices in the U.S., which can affect our earnings, capital, as well as the ability of our customers to repay loans.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
Share Buyback Program. On January 26, 2021, the Company’s Board of Directors authorized a stock repurchase program for the repurchase of up to $100,000 per calendar quarter of the company’s issued and outstanding common stock. On November 30, 2021, the Company announced that its 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 changes to the program were 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, or October 1, 2022, or termination of the program by the Board of Directors. All common shares repurchased in the program will be retired and held as unissued shares available for use and reissuance for purposes as and when determined by the Board.
51
The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended March 31, 2022.
| Period | Number of Shares (1) | Average Price Paid Per Share | Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| January 1-31, 2022 | 2,212 | $ | 22.27 | 2,212 | 911,472 | |||||||||||||||||||||
| February 1-28, 2022 | — | — | 2,212 | 911,472 | ||||||||||||||||||||||
| March 1-31, 2022 | — | — | 2,212 | 911,472 | ||||||||||||||||||||||
| Total | 2,212 | $ | 22.27 | 2,212 | ||||||||||||||||||||||
| (1) Reflects the repurchase of shares on Nasdaq, and their subsequent retirement, pursuant to the repurchase program. | ||||||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
52
ITEM 6. EXHIBITS
(a)Exhibits.
| Exhibit Number | Exhibit Name | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 4.6 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022, formatted in iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith. | |||||||
| 104 | ||||||||
53
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BAYFIRST FINANCIAL CORP. | ||||||||
| Date: | May 13, 2022 | |||||||
| By: | /s/ Anthony N. Leo | |||||||
| Anthony N. Leo | ||||||||
| Chief Executive Officer (principal executive officer) | ||||||||
| Date: | May 13, 2022 | |||||||
| By: | /s/ Robin L. Oliver | |||||||
| Robin L. Oliver | ||||||||
| Chief Financial Officer and Chief Operating Officer (principal financial officer) | ||||||||
54
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony N. Leo, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of BayFirst Financial Corp. (the “Registrant”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
c) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
BAYFIRST FINANCIAL CORP.
Date: May 13, 2022
By: /s/ Anthony N. Leo
Anthony N. Leo
Chief Executive Officer
(principal executive officer)
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robin L. Oliver, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of BayFirst Financial Corp. (the “Registrant”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
c) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
BAYFIRST FINANCIAL CORP.
Date: May 13, 2022
By: /s/ Robin L. Oliver
Robin L. Oliver
Chief Financial Officer and Chief Operating Officer
(principal financial officer)
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony N. Leo, Chief Executive Officer of BayFirst Financial Corp. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1)The Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2022 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
BAYFIRST FINANCIAL CORP.
Date: May 13, 2022
By: /s/ Anthony N. Leo
Anthony N. Leo
Chief Executive Officer
(principal executive officer)
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robin L. Oliver, Chief Financial Officer of BayFirst Financial Corp. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2022 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
BAYFIRST FINANCIAL CORP.
Date: May 13, 2022
By: /s/ Robin L. Oliver
Robin L. Oliver
Chief Financial Officer and Chief Operating Officer
(principal financial officer)