BayFirst Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include BayFirst Financial Corp. and BayFirst National Bank. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $7.5 million | $12.9 million | $13.9 million | $25.5 million |
| Net interest margin | 3.73% | 3.46% | 3.49% | 3.34% |
| Net income (loss) | ($282,000) | $13.0 million | ($269,000) | $20.5 million |
| Net income (loss) attributable to common shareholders | ($490,000) | $12.8 million | ($685,000) | $20.0 million |
| Diluted EPS | ($0.12) | $2.98 | ($0.17) | $4.87 |
| Provision for loan losses | $250,000 | — | ($2.15 million) benefit | $2.0 million |
| Noninterest income | $17.9 million | $38.2 million | $36.8 million | $71.4 million |
| Noninterest expense | $25.7 million | $33.7 million | $53.3 million | $67.4 million |
Mortgage banking generated a Q2 loss before tax of $1.18 million, while Banking generated $609,000 of pretax income. For the first half, Mortgage Banking recorded a $1.43 million pretax loss and Banking earned $879,000 before tax.
Financial position, liquidity, and capital
- Total assets were $921.4 million at June 30, 2022, compared with $917.1 million at year-end 2021. Total deposits rose to $765.4 million from $721.7 million.
- Cash and cash equivalents were $67.9 million, down from $109.7 million at year-end. The Bank’s on-balance-sheet liquidity ratio was 13.26%, versus 16.76% at year-end; management says its general target is at least 7.0%.
- Loans held for investment totaled $641.7 million, including $579.5 million at amortized cost, net of allowance, and $52.2 million of SBA loans carried at fair value. Residential loans held for sale were $74.7 million.
- Shareholders’ equity was $93.3 million, down from $96.3 million, including a $2.2 million after-tax decline in accumulated other comprehensive income primarily associated with unrealized securities losses.
- FHLB and Federal Reserve borrowings totaled $40.0 million; subordinated debentures were $6.0 million and notes payable were $3.1 million. The $69.7 million PPP Liquidity Facility balance outstanding at year-end was repaid during Q1. The company reported compliance with debt covenants.
- For the six months, operating cash flow was $153.7 million, investing cash use was $208.3 million, and financing cash provided was $12.9 million. Cash and equivalents declined by $41.8 million.
- The Bank was categorized as well capitalized. At June 30, its total risk-based capital ratio was 16.37%, CET1 ratio 15.12%, and Tier 1 leverage ratio 11.37%.
Material changes versus comparable periods
- Quarterly and first-half earnings fell sharply, reflecting lower residential mortgage fee income, reduced PPP-related interest and origination fees, and the absence of the $13.8 million PPP loan-sale gain recorded in Q2 2021.
- Residential loan fee income fell 56% in Q2 to $10.2 million and declined $32.0 million in the first half to $23.4 million. Six-month residential originations were $641.1 million versus $1.24 billion in 2021.
- Noninterest expense declined 23.7% in Q2 and 20.9% in the first half, primarily due to lower mortgage commissions and personnel costs. Q2 results included a $630,000 one-time mortgage restructuring charge.
- Net interest margin improved year over year, even as net interest income fell because of the shrinking PPP portfolio. Management noted that most SBA portfolio rates reset quarterly with prime and anticipated further margin improvement following Federal Reserve rate increases.
- Loans held for investment increased from $570.2 million at year-end to $641.7 million. The mix shifted toward commercial real estate and residential loans, while PPP loans declined from $80.2 million to $31.4 million.
- The allowance for loan losses declined to $9.6 million from $13.5 million at year-end, reflecting a $2.15 million first-half provision benefit and net charge-offs of $1.74 million. Nonperforming loans excluding government-guaranteed balances were $4.25 million, up from $3.76 million at year-end.
Outlook, unusual items, and risks
- On May 12, 2022, the Bank completed a restructuring of its Residential Mortgage Division, discontinuing its primary consumer-direct mortgage business and closing offices in Kansas, Ohio, and Florida. It plans to focus on traditional retail mortgage lending. The approximately $630,000 pretax charge included about $250,000 for severance, $145,000 for fixed-asset write-offs, and $235,000 for lease-related valuation adjustments.
- The subsidiary converted to a national bank on May 16, 2022 and changed its name from First Home Bank to BayFirst National Bank.
- No formal earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. Its expectation of improved net interest margin is subject to interest-rate and balance-sheet assumptions.
- Key stated risks include economic deterioration, inflation, interest-rate changes, borrower credit quality and collateral values, deposit competition, mortgage origination volumes, and fair-value estimates. The filing notes that a significant portion of deposits—approximately $303.7 million—exceeded FDIC insurance limits.
- Available-for-sale securities had $3.47 million of unrealized losses at quarter-end; management said it did not intend, and did not expect to be required, to sell the securities before recovery. The securities portfolio’s fair value was $45.3 million.
- Off-balance-sheet credit commitments totaled $167.4 million, including $39.6 million in unfunded loan commitments and $127.7 million in unused lines of credit. Management did not anticipate material losses from these arrangements.
- The company is evaluating CECL adoption, expected January 1, 2023. It said the impact cannot yet be reasonably estimated and could be material to financial position or results.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect; the company reported no litigation believed likely to result in a material loss. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the mortgage restructuring stabilizes profitability as refinancing demand and originations remain lower.
- Whether margin gains from repricing assets offset higher deposit and borrowing costs as rates rise.
- Credit performance, charge-offs, nonperforming loans, and reserve adequacy, particularly in SBA small-loan and commercial portfolios; assess the effects of expiring government support.
- Liquidity and funding trends, including uninsured deposit concentration, use of secured borrowings, and the substantial increase in unused lines and loan commitments.
- Exposure to unrealized securities losses and the sensitivity of Level 3 SBA loan and mortgage derivative valuations to assumptions.
- The eventual CECL transition impact and whether regulatory capital remains comfortably above well-capitalized thresholds.