BayFirst Financial Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results include BayFirst Financial Corp. and First Home Bank, operating in Banking and Residential Mortgage Lending. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $6.41 | $12.63 in Q1 2021 |
| Provision for loan losses | $(2.40), a release | $2.00 expense in Q1 2021 |
| Noninterest income | $18.87 | $33.16 in Q1 2021 |
| Noninterest expense | $27.65 | $33.72 in Q1 2021 |
| Net income | $0.013 | $7.51 in Q1 2021 |
| Net income available to common shareholders | $(0.195); basic and diluted loss per share of $0.05 | $7.18; diluted EPS of $1.82 in Q1 2021 |
| Net interest margin | 3.25% | 3.21% in Q1 2021 |
| Total assets | $888.54 | $917.10 at December 31, 2021 |
| Total deposits | $770.13 | $721.69 at December 31, 2021 |
| Cash and cash equivalents | $122.10 | $109.73 at December 31, 2021 |
| Shareholders’ equity | $94.88 | $96.29 at December 31, 2021 |
Cash flow: Operating activities provided $105.76 million; investing activities used $71.49 million; financing activities used $21.89 million. Cash and cash equivalents increased $12.37 million. Operating cash flow included substantial mortgage and SBA loan origination and sale activity and should not be read as equivalent to recurring earnings.
Loans, credit and capital: Loans held for investment at amortized cost, net of allowance, were $542.86 million, versus $560.88 million at year-end. The allowance for loan losses was $10.17 million, down from $13.45 million. Total nonperforming loans were $8.83 million, including $6.17 million of government-guaranteed balances; nonperforming loans excluding those balances were $2.66 million. The Bank reported a 19.45% total risk-based capital ratio and was categorized as well capitalized.
Debt and liquidity: The company repaid the remaining $69.65 million balance of its PPP Liquidity Facility during Q1. At March 31, it had $5.99 million of subordinated debentures and $3.19 million of notes payable. The Bank’s on-balance-sheet liquidity ratio was 18.77%, compared with 16.76% at year-end. Approximately $322.05 million of deposits exceeded the FDIC insurance limit.
Material changes versus comparable periods
- Net income fell to $13,000 from $7.51 million in Q1 2021. Management attributed the decline mainly to lower PPP-related interest and origination-fee income and lower residential mortgage fee income; gains from SBA loan sales and lower expenses partly offset the decline.
- Residential loan fee income decreased to $13.19 million from $32.03 million, alongside a reported $380.29 million decrease in residential mortgage volume. Residential loan originations were $335.56 million versus $715.85 million a year earlier.
- The company recorded $4.62 million of net gains on sales of government-guaranteed loans, compared with none in Q1 2021. SBA loan originations excluding PPP increased to $47.33 million from $15.52 million.
- Noninterest expense declined 18% year over year, primarily due to lower mortgage commissions. The company reduced headcount by 65 in Q1, including 62 in Residential Mortgage; management said the expense benefit would become more meaningful from Q2 onward.
- Available-for-sale securities increased to $41.66 million from $30.89 million at year-end. Their gross unrealized losses were $1.95 million, contributing to a $1.04 million after-tax other comprehensive loss in Q1.
- Deposits rose $48.44 million from year-end, while total assets declined. The year-over-year balance-sheet comparison is also affected by the substantial runoff of PPP-related balances and associated funding.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management said the Federal Reserve’s rate increases could support future net interest margin because most SBA portfolio rates reset quarterly to Prime, while deposit-rate increases may lag.
- Management reported stable asset quality and released $2.40 million from the allowance in Q1, citing a more predictable pandemic impact and government support for many SBA borrowers. It cautioned that losses could exceed the allowance and future provisions may be needed if economic conditions differ from assumptions.
- The filing identifies higher credit risk in the SBA 7(a) Small Loan Program, and notes that prior SBA payment support may have made asset-quality trends appear more favorable. Thirteen loans totaling $676,000 were under payment deferrals at quarter-end; all were government-guaranteed loans.
- Interest-rate exposure, inflation, recession, geopolitical and military developments, market disruption, and changes in borrowers’ ability to repay are identified risks. Mortgage banking results also depend on production volume and fair-value movements in loans and derivatives.
- Adoption of CECL was expected for 2023. Management was evaluating methodologies and said the impact could be material to financial position and results, but could not yet estimate it.
- Off-balance-sheet credit commitments totaled $77.95 million, primarily unused lines of credit and unfunded loan commitments. Management did not anticipate material accounting losses from these instruments. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- After quarter-end, the Bank received approval to convert to a national bank, expected to occur May 16, 2022. The board also declared Q2 common and preferred dividends.
Most important facts for investors to verify
- Whether mortgage production and fee income stabilize, and whether the announced staffing reductions lower expenses as management expected.
- Whether the Q1 allowance release remains supportable as SBA payment deferrals, credit performance, and economic conditions evolve.
- How rate increases affect both asset yields and deposit costs, including the timing of deposit repricing and the value of the securities portfolio.
- The concentration and retention of uninsured deposits, and liquidity after repayment of the PPP Liquidity Facility.
- The eventual CECL adoption impact and completion of the Bank’s national-bank conversion.