BayFirst Financial Corp. — Q3 2022 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2022. Unless stated otherwise, amounts are in millions of dollars. The company operates through BayFirst National Bank and reports one business segment. In Q3, it discontinued its nationwide residential mortgage production operation; that business is presented as discontinued operations, while mortgage origination continues in local Florida markets.
Financial performance and position
- Q3 earnings: Continuing-operations net income was $3.1 million, versus a $1.3 million loss in Q3 2021. Including a $4.5 million discontinued-operations loss, consolidated net loss was $1.4 million; loss attributable to common shareholders was $1.6 million. Diluted EPS was $(0.35), including $0.68 from continuing operations and $(1.03) from discontinued operations.
- Nine-month earnings: Continuing-operations net income was $3.4 million, compared with $8.2 million in 2021. A $5.0 million discontinued-operations loss resulted in a consolidated net loss of $1.7 million and a common-shareholder loss of $2.3 million. Diluted EPS was $(0.48), versus $5.13 in 2021.
- Revenue and margin: Q3 continuing net interest income was $9.2 million, up 26% year over year; nine-month continuing net interest income was $21.4 million, down 30%, primarily because PPP interest income declined. Net interest margin, including discontinued operations, was 4.63% in Q3 versus 3.04%, and 3.90% for nine months versus 3.26%. Q3 noninterest income was $9.8 million, including $7.4 million of government-guaranteed loan sale gains and $1.0 million of SBA fair-value gains. Nine-month noninterest income was $23.1 million.
- Expenses and credit: Continuing noninterest expense rose 13% to $14.2 million in Q3 and 13% to $41.7 million for nine months. Q3 provision for loan losses was $0.75 million, compared with a $3.0 million provision release a year earlier; the nine-month provision was a $1.4 million release. Net charge-offs were $2.3 million for nine months, versus $3.5 million. The allowance was $9.7 million, or 1.48% of amortized-cost loans.
- Balance sheet and funding: Total assets were $930.3 million, up from $917.1 million at year-end 2021. Deposits were $785.7 million, up $64.1 million; loans held for investment at amortized cost, net, were $646.1 million. Cash and cash equivalents fell to $36.5 million from $109.7 million. Shareholders’ equity declined to $90.6 million from $96.3 million, including a $3.4 million increase in accumulated other comprehensive loss, largely from securities valuation changes.
- Cash flow: Nine-month operating cash flow was $283.4 million, including $249.1 million from continuing operations; investing used $377.5 million and financing provided $20.8 million. Cash declined by $73.2 million. Operating cash flow included $268.3 million of proceeds from SBA loan sales, so it should not be read as a recurring earnings measure.
- Debt, liquidity and capital: The company had $28.0 million of short-term FRB borrowings, $6.0 million of subordinated debentures and $3.0 million of notes payable; the $69.7 million PPP Liquidity Facility balance was repaid in Q1. The reported on-balance-sheet liquidity ratio was 9.40%, down from 16.76% at year-end. The Bank was categorized as well capitalized; its total risk-based capital ratio was 15.02% and CET1 ratio was 13.77%. Management reported compliance with debt covenants.
Material changes versus comparable periods
- Q3 common results shifted from income of $1.1 million in 2021 to a loss of $1.6 million in 2022, chiefly reflecting the mortgage division’s weaker results and restructuring costs, partly offset by higher SBA loan sale gains and continuing net interest income.
- For the first nine months, common results fell from income of $21.0 million to a loss of $2.3 million. The filing cites lower residential mortgage fee income, $4.3 million of mortgage-business restructuring charges, the nonrecurrence of a $13.8 million PPP loan sale gain, and higher continuing expenses; stronger non-PPP SBA sale gains partly offset these factors.
- Loans held for investment at amortized cost grew from $560.9 million at year-end to $646.1 million. The portfolio mix shifted toward residential and commercial real estate loans, while PPP loans declined.
- Available-for-sale securities had $5.1 million of gross unrealized losses at quarter-end, versus $0.6 million at year-end, primarily attributed to rising interest rates. The company said it did not intend, and did not expect to be required, to sell the securities before recovery.
Outlook, risks and unusual items
- Management anticipated further net interest margin improvement as rates rise, noting that most SBA loans reset quarterly with the prime rate. This is an expectation, not formal earnings guidance.
- The nationwide residential mortgage exit followed a sharp decline in mortgage volumes and an uncertain outlook. Q3 pretax restructuring charges were approximately $3.1 million; nine-month charges were $4.3 million. Q3 included severance, fixed-asset and lease valuation write-offs, contract write-offs, and impairment items.
- Interest-rate sensitivity modeling estimated that an immediate +100 basis-point parallel move would increase net interest income by 2.0% over 12 months; a +400 basis-point move by 15.0%. Economic value of equity was estimated to decline 10.6% under +400 basis points. Actual results can differ from model estimates and higher rates may affect borrowers and funding costs.
- Management said Hurricane Ian caused no significant facility damage or operational disruption and was not expected to materially affect results; no credit-loss allowance was recognized for the storm at the time of filing.
- CECL adoption was expected in 2023. Management could not reasonably estimate the impact and said adoption could materially affect financial position or results. The filing also cites loan-loss estimates, fair-value assumptions, interest rates, economic conditions and deposit flows as important risks.
- At September 30, $303.5 million of deposits exceeded the FDIC insurance limit. Off-balance-sheet unfunded commitments and unused lines totaled $135.7 million. Management did not expect material losses from these commitments.
- Management reported no litigation expected 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 division exit, associated costs and remaining discontinued-operation assets and liabilities develop as expected.
- Whether SBA loan-sale gains and fair-value gains are repeatable, and how results perform without PPP-related effects.
- Loan quality, charge-offs, allowance adequacy and the effect of government guarantees and prior borrower support on reported credit trends.
- Deposit stability, uninsured-deposit concentration, liquidity and reliance on borrowing capacity as rates and funding costs change.
- The eventual CECL allowance impact and assumptions behind SBA loan and servicing-right fair values and interest-rate sensitivity models.
- The filing’s post-quarter dividend disclosures: the common dividend was declared October 25, 2022 for payment December 15, while the stated preferred dividend payment date appears as January 3, 2022 despite the October 2022 declaration and record date. Verify the intended preferred dividend date.