BAYFIRST FINANCIAL CORP. The following discussion is an analysis of the results of operations for the fiscal years endedDecember 31, 2022 andDecember 31, 2021 and financial condition as ofDecember 31, 2022 andDecember 31, 2021 . This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. In addition to the historical information contained herein, this Form 10-K includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, global military hostilities, or climate changes, including its effects on the economic environment, its customers and its operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with them; the ability of the Company to implement its strategy and expand its banking operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets or global military hostilities; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with theSEC . Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise. Selected Financial Data - Unaudited As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share data) 12/31/2022 9/30/2022 12/31/2021 12/31/2022 12/31/2021 Income Statement Data: Net interest income$ 8,574 $ 9,170
700 750 (2,500) (700) (3,500)
Noninterest income 8,404 9,804 5,597 31,550 21,973
Noninterest expense 13,493 14,158 13,262 55,212 50,279
Income tax expense (benefit) 672 983 (276) 1,560 2,691
Net income from continuing operations 2,113 3,083 856 5,478 9,029
Net (loss) income from discontinued
operations (791) (4,485) 1,955 (5,827) 15,589
Net income (loss) 1,322 (1,402) 2,811 (349) 24,618
Preferred stock dividends 208 208 208 832 1,005
Net income available to (loss
attributable to) common shareholders $ 1,114 $ (1,610) $ 2,603 $ (1,181) $ 23,613
Balance Sheet Data:
Average loans held for investment,
excluding PPP loans $ 703,193 $ 663,716
925,194 939,847 923,485 904,546 1,294,287
Average common shareholders' equity 80,158 83,014 83,056 82,589 72,955
Total loans held for investment 728,652 680,805 583,948 728,652 583,948
Total loans held for investment,
excluding PPP loans 709,479 658,669 504,525 709,479 504,525
Total loans held for investment,
excluding government guaranteed loan
balances 569,892 520,408 332,977 569,892 332,977
Allowance for loan losses 9,046 9,739 13,452 9,046 13,452
Total assets 938,895 930,275 917,095 938,895 917,095
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As of and for the Three Months Ended As of and for the Year Ended
(Dollars in thousands, except per share data)
12/31/2022 12/31/2021
Common shareholders' equity 82,279 81,032 86,685 82,279 86,685
Per Share Data:
Basic earnings (loss) per common share $ 0.28 $
(0.40)
$ (0.37) $ 0.62 $ (0.22) $ 5.91 Dividends per common share$ 0.080 $ 0.080 $ 0.070 $ 0.320 $ 0.277 Book value per common share$ 20.35 $ 20.10 $ 21.77 $ 20.35 $ 21.77 Tangible book value per common share (1)$ 20.35 $ 20.10 $ 21.75 $ 20.35 $ 21.75 Performance Ratios: Return on average assets 0.57 % (0.60) % 1.22 % (0.04) % 1.90 % Return on average common equity 5.56 % (7.76) % 12.54 % (1.43) % 32.37 % Net interest margin 4.19 % 4.63 % 3.07 % 3.97 % 3.23 % Dividend payout ratio 28.99 % (20.02) % 10.65 % (108.95) % 4.46 % Asset Quality Data: Net charge-offs$ 1,393 $ 575 $ 664 $ 3,706 $ 4,210 Net charge-offs/average loans held for investment excluding PPP 0.79 % 0.35 % 0.51 % 0.61 % 1.00 % Nonperforming loans$ 10,468 $ 10,267 $ 11,909 $ 10,468 $ 11,909 Nonperforming loans (excluding government guaranteed balance)$ 3,671 $ 4,015 $ 3,967 $ 3,671 $ 3,967 Nonperforming loans/total loans held for investment 1.44 % 1.51 % 2.04 % 1.44 % 2.04 % Nonperforming loans (excluding gov't guaranteed balance)/total loans held for investment 0.50 % 0.59 % 0.68 % 0.50 % 0.68 % ALLL/Total loans held for investment at amortized cost 1.29 % 1.48 % 2.34 % 1.29 % 2.34 % ALLL/Total loans held for investment at amortized cost, excluding PPP loans 1.33 % 1.54 % 2.72 % 1.33 % 2.72 % Other Data: Full-time equivalent employees 291 524 637 291 637 Banking centers 8 8 7 8 7 Loan production offices (2) 1 20 17 1 17
(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent. (2) All out of market nationwide residential loan production offices have been closed.
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. The management team uses these non-GAAP financial measures in its analysis of its performance, and they 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:
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Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
As of
(Dollars in thousands, except per share
data) December 31, 2022 September 30, 2022 December 31, 2021
(Unaudited) (Unaudited) (Unaudited)
Total shareholders' equity $ 91,884 $ 90,637 $ 96,290
Less: Preferred stock liquidation
preference (9,605) (9,605) (9,605)
Total equity available to common
shareholders 82,279 81,032 86,685
Less: Goodwill - - (100)
Tangible common shareholders' equity $ 82,279 $ 81,032 $ 86,585
Common shares outstanding 4,042,474 4,031,937 3,981,117
Tangible book value per common share $ 20.35 $ 20.10 $ 21.75
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 December 31, 2022 , the most critical of these significant
accounting policies in understanding the estimates and assumptions involved in
preparing the consolidated financial statements were the policies related to the
allowance for loan losses, and fair value measurement of investment securities,
SBA servicing rights and SBA loans held for investment at fair value, 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 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
Investments and certain SBA 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.
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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. The Company has
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.
OverviewThe following discussion and analysis presents the financial condition and results of operations on a consolidated basis. However, because the Company conducts all of its 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 the consolidated financial statements.
As a one-bank holding company, the Company generates most of its revenue from
interest on loans and gain-on-sale income derived from the sale of loans into
the secondary market. The primary source of funding for its loans is deposits.
The Company is dependent on noninterest income, which is derived primarily from
net gain on the sales of the guaranteed portion of government guaranteed loans.
The largest expenses are interest on those deposits and borrowings, professional
fees, and salaries and commissions plus related employee benefits. The Company
measures its performance through its 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.
Recent Developments
First Quarter Common Stock Dividend. On January 24, 2023 , BayFirst's Board of
Directors declared a first quarter 2023 cash dividend of $0.08 per common share,
payable March 15, 2023 to common shareholders of record as of March 1, 2023 .
This dividend marks the 27th consecutive quarterly cash dividend paid since
BayFirst initiated cash dividends in 2016.
First Quarter Preferred Series A Stock Dividend. BayFirst's Board of Directors
declared a quarterly cash dividend of $22.50 on the Series A Preferred Stock.
The dividend will be payable April 3, 2023 to shareholders of record as of
January 16, 2023 . The amount and timing of the dividend is in accordance with
the terms of the Series A Preferred Stock.
First Quarter Preferred Series B Stock Dividend. BayFirst's Board of Directors
declared a quarterly cash dividend of $20.00 on the Series B Convertible
Preferred Stock. The dividend will be payable April 3, 2023 to shareholders of
record as of January 16, 2023 . The amount and timing of the dividend is in
accordance with the terms of the Series B Convertible Preferred Stock.
Management Succession. On February 6, 2023 , BayFirst Financial Corp. issued a
press release announcing that Anthony N. Leo will retire as Chief Executive
Officer at the end of 2023. Leo will remain a Director of the Company and will
also serve as Special Counsel for strategic matters. The Board of Directors has
appointed Thomas G. Zernick to succeed Leo as Chief Executive Officer on January
1, 2024 . He was also appointed to serve as a Director of the Company. Zernick
has served as President of the Company since February 2022 , and previously
served as President of its CreditBench Division, which provides government
guaranteed lending to businesses throughout the nation. He joined the Company in
2016.
Stock Repurchase Program. On February 28, 2023 , the Board of Directors approved
the Company's 2023 Stock Repurchase Program ("Program"). The Program permits the
Company to repurchase up to $1,000,000 of the Company's issued and outstanding
common stock. The Program will continue until the earlier of: (i) the date an
aggregate of $1,000,000 of common stock has been repurchased; (ii) December 31,
2023 ; or (iii) the termination of the plan by the Board of Directors.
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Results of Operations
BayFirst's operating results depend on its 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. The interest rate spread is affected by
regulatory, economic, and competitive factors which influence interest rates,
loan demand, and deposit flows. In addition, its operating results can be
affected by the level of nonperforming assets, as well as the level of
the noninterest income and the noninterest expenses, such as salaries and
employee benefits, and occupancy and equipment costs, as well as income taxes.
The Company is dependent on noninterest income, which is derived primarily from
net gain on the sales of the guaranteed portion of government guaranteed loans,
as well as fair value adjustments for certain loans which management has elected
the fair value option. While the Company retains some of its government
guaranteed loans on the balance sheet, we may sell both the guaranteed balance
of its government guaranteed loans, as well as a percentage of the unguaranteed
portions of such loans. The sale of the guaranteed portions of the loans
generates noninterest income.
In the second quarter of 2022, the Bank discontinued its primary consumer direct
residential mortgage business line. In the third quarter of 2022, management
decided to discontinue the nationwide residential lending business. As a result
of the discontinuance, the nationwide residential line of business was
reclassified as a discontinued operation and reported in the financial
statements as such.
Net Income (Loss)
The Company had net loss for the year endedDecember 31, 2022 of$349 thousand or$0.22 per diluted common share, compared to net income for the year endedDecember 31, 2021 of$24.6 million or$5.91 per diluted common share. The decrease of$25.0 million from the previous year was primarily due to a decrease of$21.4 million in net income from mortgage banking activity which is a discontinued operation. Additionally, there was a$13.8 million gain on sale of PPP loans in 2021 which did not recur, noninterest expense on continuing operations increased$4.9 million , and PPP fee and interest income decreased$18.3 million . These items were partially offset by an$11.6 million increase in non-PPP loan interest and fee income, a$4.6 million increase in fair value gains related to held for investment SBA loans, and higher gains of$17.5 million on non-PPP SBA loan sales. The decrease in net income from discontinued operations was primarily the result of a decrease in gain on sale of residential mortgage loans of$64.2 million and the recognition of restructuring charges of$4.3 million for the discontinuation of the nationwide residential mortgage division, partially offset by lower noninterest expense of$41.0 million .
Net Interest Income
Net interest income from continuing operations was$30.0 million for the year ended 2022, a decrease of$6.5 million or 17.9% from$36.5 million for the year ended 2021. The decrease was mainly due to a decline in net PPP loan interest income of$18.3 million , partially offset by higher interest income on non-PPP loans of$11.6 million .
Net interest margin including discontinued operations improved to 3.97% for the year ended 2022, compared to 3.23% for the year ended 2021.
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Average Balance Sheet and Analysis of Net Interest Income
The following table sets 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.
Year Ended
2022 2021
(Dollars in thousands) Average Balance Interest Yield Average Balance Interest Yield
Interest earning-assets:
Investment securities $ 43,768 $ 1,065 2.43 % $ 17,404 $ 199 1.14 %
Loans, excluding PPP (1) (2) 667,088 38,280 5.74 545,889 27,681 5.07
PPP loans 39,959 959 2.40 537,710 19,292 3.59
Other 73,867 1,009 1.37 145,654 371 0.25
Total interest-earning assets 824,682 41,313 5.01 1,246,657 47,543 3.81
Noninterest-earning assets 79,864 47,630
Total assets $ 904,546 $ 1,294,287
Interest-bearing liabilities:
NOW, MMDA and savings $ 602,491 $ 6,175 1.02 $ 501,701 $ 4,032 0.80
Time deposits 72,603 1,669 2.30 74,749 853 1.14
PPPLF advances 5,667 20 0.35 510,911 1,791 0.35
Other borrowings 22,708 702 3.09 28,359 624 2.20
Total interest-bearing
liabilities 703,469 8,566 1.22 1,115,720 7,300 0.65
Demand deposits 101,193 85,542
Noninterest-bearing liabilities 7,690 8,088
Shareholders' equity 92,194 84,937
Total liabilities and
shareholders' equity $ 904,546 $ 1,294,287
Net interest income $ 32,747 $ 40,243
Interest rate spread 3.79 3.16
Net interest margin (3) 3.97 3.23
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 117.23 % 111.74 %
(1) Includes nonaccrual loans.
(2) Includes $58,525 at an average yield of 4.69% and $123,953 at an average yield of 3.00% of residential loans held for sale from discontinued operations as
of December 31, 2022 and December 31, 2021 , respectively.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The table below presents the effects of volume and rate changes on interest
income and expense for the periods indicated. Changes in volume are changes in
the average balance multiplied by the previous period's average rate. Changes in
rate are changes in the average rate multiplied by the average balance from the
previous period. The net changes attributable to the
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combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.
(Dollars in thousands) Rate Volume Total Year EndedDecember 31, 2022 vs.December 31, 2021 : Interest-earning assets: Investment securities$ 370 $ 496 $ 866 Loans, excluding PPP(1) 3,945 6,654 10,599 PPP loans (4,830) (13,503) (18,333) Other interest-earning assets 902 (264) 638 Total interest-earning assets 387 (6,617) (6,230) Interest-bearing liabilities: NOW, MMDA, and savings 1,239 904 2,143 Time deposits 841 (25) 816 PPPLF advances - (1,771) (1,771) Other borrowings 219 (141) 78 Total interest-bearing liabilities 2,299 (1,033) 1,266 Net change in net interest income$ (1,912) $ (5,584) $ (7,496) (1) Includes$2,747 and$3,717 of interest income on residential loans held for sale from discontinued operations as ofDecember 31, 2022 andDecember 31, 2021 , respectively.
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 the Bank conducts, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to its market area, and other factors that may affect the ability to collect on the loans in its portfolio. As the financial impact of the COVID-19 pandemic became more predictable throughout 2021 and 2022, the Company began adjusting downward its allowance for loan losses from the historic high levels reached in 2020 at the onset of the pandemic. The Company recorded a negative provision for loan losses for the year endedDecember 31, 2022 of$700 thousand compared to a$3.5 million negative provision for the year endedDecember 31, 2021 . The increase of$2.8 million in the provision for loan losses expense was primarily due to the loan growth. During the year endedDecember 31, 2022 , net loan charge offs totaled$3.7 million compared to$4.2 million during the year endedDecember 31, 2021 .
The ALLL was
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Noninterest Income
The following table presents noninterest income from continuing operations for
the years ended
For the Year Ended
December 31,
(Dollars in thousands) 2022 2021
Noninterest income:
Loan servicing income, net $ 2,040 $ 1,864
Gain on sale of government guaranteed loans, net 21,720 18,024
Service charges and fees 1,306 1,027
SBA loan fair value gain 4,756 184
Other noninterest income 1,728 874
Total noninterest income $ 31,550 $ 21,973
Noninterest income from continuing operations was $31.6 million for the year
ended December 31, 2022 , an increase of $9.6 million or 43.6% from $22.0 million
for the year ended December 31, 2021 . The increase was primarily due to higher
gains on the sale of non-PPP SBA loans of $17.5 million and an increase related
to held for investment SBA loan fair value gains of $4.6 million , partially
offset by the $13.8 million gain on sale of PPP loans in 2021 which did not
recur.
Noninterest Expense
The following table presents noninterest expense from continuing operations for
the years ended
For the Year Ended December 31,
(Dollars in thousands) 2022 2021
Noninterest expense:
Salaries and benefits $ 27,422 $ 24,879
Bonus, commissions, and incentives 2,394 3,216
Occupancy and equipment 3,995 3,214
Data processing 4,828 5,288
Marketing and business development 2,660 2,698
Professional services
4,083 3,907
Loan origination and collection
3,711 2,452
Employee recruiting and development 2,230 1,714 Regulatory assessments 457 442 Director compensation 686 323 Liability and fidelity bond insurance 463 340 ATM and interchange 381 312 Telecommunication 367 250 Other noninterest expense 1,535 1,244 Total noninterest expense$ 55,212 $ 50,279
Noninterest expense was
Discontinued Operations
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Net loss from discontinued operations was$5.8 million for the year 2022, which was a$21.4 million reduction from net income of$15.6 million for the year ended 2021. The reduction in net income was primarily the result of a decrease in residential loan fee income of$64.2 million and the restructuring charges for the discontinuation of residential mortgage division of$4.3 million recognized in 2022. This was partially offset by a$41.0 million decrease in noninterest expense excluding the restructuring charge and a decrease in income tax expense of$7.1 million .
Income Taxes
Income tax expense from continuing operations was$1.6 million for the year endedDecember 31, 2022 , a decrease of$1.1 million from income tax expense of$2.7 million for the year endedDecember 31, 2021 . The decrease was primarily due to the decrease in pre-tax earnings from continuing operations. Income tax benefit from discontinued operations was$1.9 million for the year endedDecember 31, 2022 , a change of$7.1 million from income tax expense of$5.2 million for the year endedDecember 31, 2021 . The change was primarily due to the decrease in pre-tax earnings from discontinued operations. AtDecember 31, 2022 , the Company had$2.2 million of federal net operating loss carryforward and$362 thousand of state net operating loss carryforward. The net operating loss carryforwards do not expire. AtDecember 31, 2021 , the Company did not have any net operating loss carryforward.
The effective income tax rate was 51.60% for the year ended
Financial Condition
The following table presents the fair value of the Company's investment
securities portfolio classified as available for sale as of
(Dollars in thousands) December 31, 2022 December 31, 2021 Investment securities available for sale: Asset-backed securities $ 9,605 $ 7,535 Mortgage-backed securities: U.S. Government-sponsored enterprises 3,440 4,394 Collateralized mortgage obligations: U.S. Government-sponsored enterprises 18,220 18,964 Corporate bonds 11,084 - Total investment securities available for sale $ 42,349 $ 30,893
The following table presents the fair value of the Company's investment
securities portfolio classified as held to maturity as of
(Dollars in thousands) December 31, 2022 December 31, 2021
Investment securities held to maturity:
Mortgage-backed securities: U.S. Government-sponsored enterprises $ 2 $ 2 Corporate bonds 4,753 - Total investment securities held to maturity $ 4,755 $ 2 No investment securities were pledged as ofDecember 31, 2022 orDecember 31, 2021 , and there were no sales of investment securities during the year endedDecember 31, 2022 or the year endedDecember 31, 2021 . During the second quarter of 2022, the Company transferred a$1.5 million previously designated available for sale investment security to a held to maturity designation at estimated fair value. The reclassification was permitted as the Company has appropriately determined the ability and intent to hold the investment security as an investment until maturity 40
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or call. The investment security had no unrealized net gain or loss at the time of transfer since it was purchased near the end of the first quarter of 2022.
The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as ofDecember 31, 2022 andDecember 31, 2021 . Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. December 31, 2022 One year or less One to five years Five to ten years After ten years Amortized Amortized Amortized Amortized
(Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield Asset-backed securities $ - - % $ - - % $ - - %$ 9,873 5.40 % Mortgage-backed securities:U.S. Government -sponsored enterprises - - - - - - 4,133 1.55 Collateralized mortgage obligations:U.S. Government -sponsored enterprises - - - - - - 22,031 1.89 Corporate bonds - - 9,981 3.70 1,356 4.34 - - Total investment securities available for sale $ - - % $ 9,981 3.70 % $ 1,356 4.34 %$ 36,037 2.81 % December 31, 2021 One year or less One to five years Five to ten years After ten years Amortized Amortized Amortized Amortized (Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield Asset-backed securities $ - - % $ - - % $ - - %$ 7,624 0.90 % Mortgage-backed securities:U.S. Government -sponsored enterprises - - - - - - 4,470 1.32 Collateralized mortgage obligations:U.S. Government -sponsored enterprises - - - - - - 19,370 1.31 Total investment securities available for sale $ - - % $ - - % $ - - %$ 31,464 1.21 % The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as ofDecember 31, 2022 andDecember 31, 2021 . Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities receive monthly principal payments, which are not reflected below. 41
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December 31, 2022
One year or less One to five years Five to ten years After ten years
Amortized Amortized Amortized Amortized
(Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield
Mortgage-backed securities:
U.S. Government -sponsored
enterprises $ - - % $ - - % $ - - % $ 2 2.65 %
Corporate bonds - - 4,000 5.79 1,000 4.38 - -
Total investment securities held
to maturity $ - - % $ 4,000 5.79 % $ 1,000 4.38 % $ 2 0.74 %
December 31, 2021
One year or less One to five years Five to ten years After ten years
Amortized
Amortized Amortized Amortized
(Dollars in thousands) Cost Average Yield Cost Average Yield Cost Average Yield Cost Average Yield
Mortgage-backed securities:
U.S. Government -sponsored
enterprises $ - - % $ - - % $ - - % $ 2 0.80 %
Total investment securities
held to maturity $ - - % $ - - % $ - - % $ 2 0.80 %
Loan Portfolio Composition
Through the efforts of the management team and loan officers, strong loan
production resulted from its ability to take advantage of the economic recovery
and consolidation in its 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. The Bank has no
concentration of credit in any industry that represents 10% or more of its loan
portfolio. The following table sets forth the composition of its loan portfolio,
including LHFS as of the dates indicated.
December 31, 2022 December 31, 2021
(Dollars in thousands) Amount % of Total Amount % of Total
Residential loans held for sale from
discontinued operations $ 449 $ 114,131
Government guaranteed loans, held for
sale $ - $ 1,460
SBA loans held for investment, at fair
value $ 27,078 $ 9,614
Loans held for investment, at amortized
cost:
Residential real estate $ 202,329 29.1 % $ 87,235 15.3 %
Commercial real estate 231,281 33.3 163,477 28.7
Construction and land 9,320 1.3 18,632 3.3
Commercial and industrial 194,643 28.0 217,155 38.0
Commercial and industrial - PPP 19,293 2.8 80,158 14.1
Consumer and other 37,288 5.5 3,581 0.6
Loans held for investment, at amortized
cost, gross 694,154 100.0 % 570,238 100.0 %
Discount on SBA 7(a) loans sold (5,621) (3,866)
Premium (discount) on loans purchased 2,301 (13)
Deferred loan costs, net 10,740 7,975
Allowance for loan losses (9,046) (13,452)
Loans held for investment, at amortized
cost, net $ 692,528 $ 560,882
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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 year endedDecember 31, 2022 , the Bank originated approximately$254.9 million in loans through conventional lending channels,$386.0 million in loans through CreditBench (its SBA lending function), and$946.1 million through the Residential Mortgage Lending Division. During the year endedDecember 31, 2021 , the Bank originated approximately$94.9 million in loans through conventional lending channels,$169.5 million through CreditBench, exclusive of PPP loans,$329.3 million of PPP loans, and$2.22 billion through the Residential Mortgage Lending Division. During the year endedDecember 31, 2022 , the Company sold guaranteed balances of SBA loans of$311.8 million . Additionally, the Company purchased$16.6 million of government guaranteed loans and$37.2 million of consumer loans.
Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans atDecember 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, premium and discount on loans purchased, and deferred loan costs, net. Due After One Due in One Year Year to Five Due After Five Due After 15 (Dollars in thousands) or Less Years Years to 15 Years Years Total Real estate: Residential $ 3,761$ 1,984 $ 13,337$ 184,356 $ 203,438 Commercial 7,110 1,909 29,062 200,796 238,877 Construction and land 2,329 260 92 6,638 9,319 Commercial and industrial 11,564 16,750 184,369 7,577 220,260 Commercial and industrial - PPP 1,471 17,701 - - 19,172 Consumer and other 2,057 27,810 7,719 - 37,586
Total loans held for investment $ 28,292
$ 234,579
The following table shows the loans with contractual maturities of greater than
one year that have fixed or adjustable interest rates at
Fixed Adjustable
(Dollars in thousands) Interest Rate Interest Rate
Real estate:
Residential $ 52,181 $ 147,496
Commercial 6,534 225,233
Construction and land - 6,990
Commercial and industrial 21,070 187,626
Commercial and industrial - PPP 17,701 -
Consumer and other 5,313 30,216
Total loans held for investment
Credit Risk
The Bank's primary business is making commercial, consumer, and real estate
loans. This activity inevitably has risks for potential loan losses, the
magnitude of which depends on a variety of economic factors affecting borrowers,
which are beyond its control. The Bank has developed policies and procedures for
evaluating the overall quality of its 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.
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Allowance for Loan Losses. The Bank must maintain an adequate ALLL based on a comprehensive methodology that assesses the probable losses inherent in its loan portfolio. The Bank maintains 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. The Bank periodically reviews the assumptions and formulates methodologies by which changes 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. 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. The Bank reviews 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, a portfolio segmentation based on loan type is performed. The government guaranteed loan balances are included in the collectively evaluated portfolio balances. The loss factors for each segment are calculated using actual loan loss history for each segment of loans over the most recent one to three years, depending on the segment and vintage year of the loans in the segment of government guaranteed loans. The Bank's actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of, and trends in delinquencies and impaired loans; levels of, and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
While management believes its ALLL is adequate as of
Nonperforming Assets. AtDecember 31, 2022 , we had$3.7 million in nonperforming assets, excluding government guaranteed loan balances, and its ALLL represented 1.29% of total loans held for investment at amortized cost. AtDecember 31, 2021 , we had$4.0 million in nonperforming assets, excluding government guaranteed loan balances, and its ALLL represented 2.34% of total loans held for investment at amortized cost. Total loans held for investment atDecember 31, 2022 andDecember 31, 2021 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ALLL as a percentage of loans held for investment at amortized cost, not including government guaranteed loan balances, was 1.62% atDecember 31, 2022 , compared to 4.07% atDecember 31, 2021 . The decrease was the result of the reduction in qualitative factors which were elevated as a result of the uncertainty of the impact of the COVID-19 pandemic. 44
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The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.
December 31, December 31,
(Dollars in thousands) 2022 2021
Nonperforming loans (government guaranteed balances) $ 6,797 $ 7,942
Nonperforming loans (unguaranteed balances) 3,671 3,967
Total nonperforming loans 10,468 11,909
OREO 56 3
Total nonperforming assets $
10,524
1.44 % 2.04 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.50 % 0.68 %
Nonperforming assets as a percentage of total assets 1.12 % 1.30 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.40 % 0.43 %
ALLL to nonperforming loans 86.42 % 112.96 %
ALLL to nonperforming loans (excluding government guaranteed balances)
246.42 % 339.10 %
The following table sets forth information with respect to activity in the ALLL
for the periods shown:
At and for the
Year Ended
(Dollars in thousands) December 31,
2022 2021
Allowance at beginning of period $ 13,452 $ 21,162
Charge-offs:
Commercial real estate (42) (169)
Commercial and industrial (3,632) (4,919)
Consumer and other (669) (70)
Total charge-offs (4,343) (5,158)
Recoveries:
Commercial real estate 80 78
Commercial and industrial 503 863
Consumer and other 54 7
Total recoveries 637 948
Net charge-offs (3,706) (4,210)
Provision for loan losses (700) (3,500)
Allowance at end of period $ 9,046 $ 13,452
Net charge-offs to average loans held for investment 0.57 % 0.44 %
Allowance as a percent of total loans held for investment at amortized cost
1.29 % 2.34 %
Allowance as a percent of loans held for investment at amortized cost, not including government guaranteed loans
1.62 % 4.07 %
Allowance as a percent of nonperforming loans 86.42 % 112.96 %
Total loans held for investment $ 728,652 $ 583,948
Average loans held for investment $ 648,522 $ 959,646
Nonperforming loans (including government guaranteed balances) $ 10,468 $ 11,909
Nonperforming loans (excluding government guaranteed balances) $ 3,671 $ 3,967
Guaranteed balance of government guaranteed loans
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The following table details net charge-offs to average loans outstanding by loan
category for the years ended
Year Ended December 31, 2022 Year Ended December 31, 2021
Net Net
(Dollars in thousands) Charge-off/(Recovery) Average Loans HFI Net Charge-off/(Recovery) Ratio Charge-off/(Recovery)
Average Loans HFI Net Charge-off/(Recovery) Ratio
Residential real estate $ - $ 120,287 - % $ - $ 62,110 - %
Commercial real estate (38) 250,592 (0.02) 91 176,506 0.05
Commercial and industrial 3,129 212,013 1.48 4,056 177,445 2.29
Commercial and industrial - PPP - 39,959 - - 537,710 -
Consumer and other 615 25,671 2.40 63 5,875 1.07
Total loans held for investment $ 3,706 $ 648,522 0.57 % $ 4,210 $ 959,646 0.44 %
The Bank recorded a negative provision of $700 thousand during the year ended
December 31, 2022 , compared to a negative provision of $3.5 million for the same
period in 2021. During 2020 and the first quarter of 2021, the Bank increased
the qualitative factors in the allowance for loan losses calculation to reflect
the decline in economic indicators caused by the COVID-19 pandemic, resulting in
significant provision expense in those periods. As asset quality has remained
stable and as many of the Company's SBA loans were bolstered by additional
government support, the current year decrease in the allowance is deemed
appropriate. Since 2016, the Company's loan losses have been incurred primarily
in its SBA unguaranteed loan portfolio, particularly loans originated under the
SBA 7(a) Small Loan Program. The Small Loan Program represents loans of $350
thousand or less and such loans carry an SBA guarantee of 75% to 90% of the
loan, depending on the original principal balance. The default rate on loans
originated in the SBA 7(a) Small Loan Program is significantly higher than the
Bank's other SBA 7(a) loans, conventional commercial loans, or residential
mortgage loans.
Nonperforming assets to total assets, excluding government guaranteed loan
balances, were 0.40% as of December 31, 2022 , as compared to 0.43% as of
December 31, 2021 . Since the majority of the Company's loan portfolio consisted
of SBA loans, most of which received from the SBA principal and interest
payments under Section 1112 of the CARES Act during 2020 and 2021, asset quality
trends may appear more favorable than they otherwise would without the SBA's
support under the CARES Act. As of December 31, 2022 , there were no loans under
payment deferral as a result of COVID-19 pandemic.
SBA and Other Government Guaranteed Loans
The following table sets forth, for the periods indicated, information regarding the SBA and other government guaranteed lending activity, excluding PPP loans.
(Dollars in thousands) At and for the Year Ended December 31, Government Guaranteed, Excluding PPP 2022 2021 Number of loans originated 1,364 374 Amount of loans originated$ 386,024 $ 169,467 Average loan size originated $ 283$ 453 Government guaranteed loan balances sold$ 311,783 $ 44,854 Government unguaranteed loan balances sold$ 13,803 $ 5,034 Total government guaranteed loans$ 300,219 $ 300,415 Government guaranteed loan balances$ 139,587 $ 171,548 Government unguaranteed loan balances$ 160,632 $ 128,867 Government guaranteed loans serviced for others $
660,600
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The Bank makes government guaranteed loans throughoutthe United States . The following table sets forth, at the dates indicated, information regarding the geographic disbursement of its SBA loan portfolio. The "All Other" category includes states with less than 5% in any period presented. December 31, 2022 2021 (Dollars in thousands) Amount % of Total Amount % of Total Florida$ 91,760 31 %$ 89,143 30 % California 35,365 12 32,924 11 Texas 22,378 7 20,976 7 Tennessee 19,598 7 2,629 1 All Other 131,118 43 154,743 51 Total government guaranteed loans, excluding PPP loans$ 300,219 100 %$ 300,415 100 % Residential Mortgage Loans
The following table sets forth, for the periods indicated, information regarding the residential mortgage lending activity from discontinued operations.
For the Year Ended
(Dollars in thousands) 2022 2021
Number of loans originated 2,779 7,265
Amount of loans originated $
946,120
Average loan size originated $ 340$ 306 Loan balances sold$ 932,118 $ 2,316,413 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 sourced principally from within its primary service area ofPinellas ,Hillsborough ,Manatee ,Pasco , andSarasota Counties,Florida . The Bank offers 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. The Bank emphasizes 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, recent cash flows and a survey of rates among competitors. Brokered deposits. At times, the Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering outside the market of the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank's internal policy limits the use of brokered deposits as a funding source to no more than 15% of total assets. The Company's ability to accept 47
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or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well capitalized." AtDecember 31, 2022 andDecember 31, 2021 , the Company had$746 thousand and$759 thousand , respectively, of brokered deposits. The amount of each of the following categories of deposits, at the dates indicated, are as follows: (Dollars in thousands) December 31, 2022 December 31, 2021 Noninterest-bearing deposits $ 93,235 11.8 % $ 83,638 11.6 % Interest-bearing transaction accounts 202,656 25.5 163,495 22.7 Money market accounts 345,200 43.4 408,257 56.5 Savings 17,853 2.2 15,607 2.2 Subtotal 658,944 82.9 670,997 93.0 Total time deposits 136,126 17.1 50,688 7.0 Total deposits$ 795,070 100.0 %$ 721,685 100.0 %
At
The following table provides information on the maturity distribution of the
time deposits exceeding the
(Dollars in thousands)
Three months or less $ 3,386
Over three months through six months 8,991
Over six months through 12 months 37,851
Over 12 months 5,050
Total $ 55,278
Other Borrowings
At December 31, 2022 , the Company had short-term FRB borrowings of $25.0 million
at 4.50% and no borrowings from the FHLB. There were no borrowings from the FHLB
or FRB at December 31, 2021 .
The Bank is a member of the FHLB of Atlanta , which provides short- and long-term
funding collateralized by mortgage-related assets to its members. FHLB
short-term borrowings bear interest at variable rates set by the FHLB. Any
advances that the bank were to obtain would be secured by a blanket lien on
$210.8 million of real estate-related loans as of December 31, 2022 . Based on
this collateral and the Company's holdings of FHLB stock, the Company was
eligible to borrow up to an additional $128.6 million from the FHLB at
December 31, 2022 .
In addition, the Bank has a line of credit with the Federal Reserve Bank secured
by $62.5 million of commercial loans as of December 31, 2022 . FRB short-term
borrowings bear interest at variable rates based on the Federal Open Market
Committee's target range for the federal funds rate. Based on this collateral,
the Company was eligible to borrow up to an additional $17.0 million from the
FRB at December 31, 2022 .
In June 2021 , the Company issued $6.0 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 $6.0 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 $6.0 million at December 31, 2022 and December 31, 2021 .
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 (6.25% at
December 31, 2022 ). The note matures on March 10, 2029 and the balance of the
note was $2.8 million and $3.3 million at December 31, 2022 and December 31,
2021 , respectively. The note is secured by 100% of the stock of the Company and
requires the Company to comply with certain loan covenants during the term of
the note.
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InApril 2020 , the Company entered into theFederal Reserve Bank's PPPLF. Under the PPPLF, advances were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company repaid the advance plus accrued interest. The balance outstanding on this facility was$69.7 million atDecember 31, 2021 . In the first quarter of 2022, the Company repaid the remaining balance of the advance.
Capital Resources
Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale investment securities.
Shareholders' equity decreased$4.4 million to$91.9 million atDecember 31, 2022 as compared to$96.3 million atDecember 31, 2021 . The decrease was the result of an increase of$3.3 million of accumulated other comprehensive loss due to increases in net unrealized losses on available for sale investment securities, net loss of$349 thousand , dividend declared on its preferred stock of$832 thousand , and dividends declared on its common stock of$1.3 million during the year endedDecember 31, 2022 . The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner while at the same time attempting to maximize shareholder value. Management assesses capital adequacy against the risk inherent in the 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, the Company must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. In 2020, the Federal banking regulatory agencies adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. This CBLR is calculated as the ratio of tangible equity capital divided by average total consolidated assets. CBLR tangible equity is defined as total equity capital, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than mortgage servicing assets). Under the proposal, a qualifying organization may elect to use the CBLR framework if its CBLR is greater than 9%. The Bank has elected not to use the CBLR framework.
At
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As of the dates indicated, the Bank met all capital adequacy requirements to
which it is subject. The Bank's actual capital amounts and percentages are as
shown in the table below:
Actual Minimum(1) Well Capitalized(2)
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
As of December 31, 2022
Total Capital (to risk-weighted
assets) $ 108,307 15.00 % $ 57,767 8.00 % $ 72,209 10.00 %
Tier 1 Capital (to risk-weighted
assets) 99,269 13.75 43,325 6.00 57,767 8.00
Common Equity Tier 1 Capital (to risk-weighted assets) 99,269 13.75 32,494 4.50 46,936
6.50
Tier 1 Capital (to total assets) 99,269 10.79 36,816 4.00 46,020
5.00
As ofDecember 31, 2021 Total Capital (to risk-weighted assets) 106,002 21.25 39,909 8.00 49,886
10.00
Tier 1 Capital (to risk-weighted assets) 99,656 19.98 29,932 6.00 39,909
8.00
Common Equity Tier 1 Capital (to risk-weighted assets) 99,656 19.98 22,449 4.50 32,426
6.50
Tier 1 Capital (to total assets) 99,656 12.22 32,619 4.00 40,774
5.00
(1) Minimum to be considered "adequately capitalized" under Basel III Capital Adequacy.
(2) Minimum to be considered "well capitalized" under Prompt Corrective Actions Provisions.
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, 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:
December 31, December 31,
(Dollars in thousands) 2022 2021
Unfunded loan commitments $ 23,512 $ 18,567
Unused lines of credit 134,366 52,076
Standby letters of credit 244 68
Total $ 158,122 $ 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 the Bank
issues 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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Contractual Obligations
In the ordinary course of its operations, the Company enters into certain contractual obligations. Total contractual obligations atDecember 31, 2022 were$174.9 million , an increase of$39.9 million from$135.0 million atDecember 31, 2021 . The increase was primarily due to an increase in time deposits of$85.4 million and an increase in short-term FRB borrowings of$25.0 million , partially offset by the payoff of$69.7 million in PPP Liquidity Facility.
The following tables present our contractual obligations as of
Contractual Obligations as of
One to Three Three to Five
(Dollars in thousands) Less than One Year Years Years Over Five Years Total
Operating lease obligations $ 1,450 $ 2,267 $ 1,245 $ - $ 4,962
Short-term borrowings 25,000 - - - 25,000
Long-term borrowings - - - 2,844 2,844
Subordinated notes 50 - - 5,942 5,992
Time deposits 120,240 15,587 299 - 136,126
Total $ 146,740 $ 17,854 $ 1,544 $ 8,786 $ 174,924 Contractual Obligations as of
One to Three Three to Five
(Dollars in thousands) Less than One Year Years Years Over Five Years Total
Operating lease obligations $ 1,454 $ 2,249 $ 1,279 $ 301 $ 5,283
Long-term borrowings - - - 3,299 3,299
PPP Liquidity Facility 44,647 - 25,007 - 69,654
Subordinated notes - 50 - 6,000 6,050
Time deposits 40,868 9,210 610 - 50,688
Total $ 86,969 $ 11,459 $ 26,896 $ 9,650 $ 134,974
Liquidity
Liquidity management is the process by which the Bank manages the flow of funds
necessary to meet its financial commitments on a timely basis and at a
reasonable cost to take advantage of earnings enhancement opportunities. These
financial commitments include withdrawals by depositors, credit commitments to
borrowers, expenses of the operations, and capital expenditures. The Bank
generally maintains a liquidity ratio of liquid assets to total assets of at
least 7.0%. Liquid assets include cash and due from banks, federal funds sold,
interest-bearing deposits with banks and unencumbered investment securities
available for sale. The on-balance sheet liquidity ratio at December 31, 2022
was 12.58%, as compared to 16.76% at December 31, 2021 .
During the year ended December 31, 2022 , the Bank purchased additional
investment securities, some of which were classified as investment securities
available for sale. The fair value of all of the investment securities available
for sale totaled $42.3 million at December 31, 2022 .
During each of the quarters of 2021 and the first two quarters of 2022, the Bank
paid a dividend of $250 thousand to BayFirst. The Bank also paid a $500 thousand
dividend in the third quarter of 2022 and a $750 thousand dividend in the fourth
quarter of 2022 to BayFirst. Prior to that, the Bank retained its earnings to
support its growth. BayFirst's liquidity had historically been dependent solely
on funds received from the issuance and sale of subordinated debt and preferred
stock. 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 December 31, 2022 , BayFirst Financial Corp. held $559 thousand
in cash and cash equivalents.
The Company expects that all the liquidity needs, including the contractual
commitments can be met by currently available liquid assets and cash flows. In
the event any unforeseen demand or commitments were to occur, the Company would
access the borrowing capacity with the FHLB, FRB, and lines of credit with other
financial institutions. The Company does
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not rely on investment securities as the main source of liquidity and does not foresee the need to sell investment securities for cash flow purposes. In addition, the Company has the ability to obtain wholesale deposits as another source of liquidity. The Company expects that the currently available liquid assets and the ability to borrow from the FHLB, FRB, and other financial institutions would be sufficient to satisfy the liquidity needs without any material adverse effect on the Company's liquidity.
A description of BayFirst's and the Bank's debt obligations is set forth above under the heading "Other Borrowings."
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