Bayfirst Financial Corp. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. Bayfirst operates through First Home Bank in two segments: community banking, including nationwide SBA lending, and residential mortgage lending, which originates loans primarily for sale. Comparisons below are with the corresponding 2020 periods unless noted.
Financial performance and condition
- Q3 earnings: Net interest income was $8.0 million, down 20.5%; net income was $1.28 million versus $5.25 million; diluted EPS was $0.26 versus $1.37. Net interest margin was 3.04%, compared with 2.84%.
- Nine-month earnings: Net interest income was $33.55 million, up 53.3%; net income was $21.81 million versus $7.10 million; diluted EPS was $5.13 versus $1.78. Net interest margin was 3.26%, compared with 2.76%.
- Revenue and expenses: Q3 noninterest income fell 31.7% to $21.99 million, mainly on lower residential mortgage fees. Nine-month noninterest income rose 40.8% to $93.36 million, including a $13.8 million gain from the Q2 sale of PPP loans. Noninterest expense increased 10.7% in Q3 to $31.23 million and 45.0% for nine months to $98.62 million, driven largely by staffing, commissions, marketing, and infrastructure spending.
- Credit provision and asset quality: The company recorded a negative provision (reserve release) of $3.0 million in Q3 and $1.0 million for nine months, versus provisions of $7.0 million and $11.9 million, respectively, in 2020. The allowance for loan losses was $16.62 million, or 2.53% of loans held for investment. Nonperforming loans were $10.50 million including government-guaranteed balances, and $3.76 million excluding them.
- Cash flow: Nine-month operating cash flow was $128.7 million and investing cash flow was $542.5 million; financing cash flow was negative $619.5 million. Cash and cash equivalents on the balance sheet were $107.1 million at September 30, versus $55.4 million at year-end 2020.
- Balance sheet and liquidity: Total assets were $943.7 million, down from $1.545 billion at December 31, 2020, principally reflecting the sharp contraction in PPP balances and related PPPLF funding. Deposits increased to $675.0 million from $558.8 million. Net loans held for investment at amortized cost were $629.9 million, versus $1.198 billion. The company reported a 17.66% on-balance-sheet liquidity ratio, compared with 8.37% at year-end.
- Debt and capital: PPPLF borrowings declined to $144.6 million from $881.3 million. Other reported obligations included $5.98 million of subordinated debentures and $3.41 million of notes payable. Shareholders’ equity rose to $94.3 million from $71.1 million. The Bank was categorized as well capitalized; its total capital ratio was 22.50% and Tier 1 leverage ratio was 12.64%.
Material changes and management commentary
- The $326.3 million sale of PPP loans in Q2 2021, PPP forgiveness, and reduced PPP lending lowered loans held for investment and associated PPPLF funding. PPP loans held for investment fell to $156.8 million from $838.8 million at year-end 2020.
- Mortgage production remained substantial, but Q3 residential loan fee income declined to $21.32 million from $31.23 million. Management attributed this to lower mortgage volume and tighter spreads between primary and secondary mortgage rates.
- Management said asset quality remained stable and government support benefited many SBA borrowers. It cautioned that trends may appear more favorable because of SBA payment support, and that future allowance adjustments may be needed if economic conditions differ from assumptions.
- After quarter-end, the Board declared a $0.07 per-share common dividend, paid December 15, 2021. On November 30, the company amended its repurchase program to permit up to $450,000 of repurchases per quarter, subject to a $1 million aggregate limit and an October 1, 2022 expiration. The shares began trading on Nasdaq Capital Market under BAFN on November 30.
Outlook, risks, and unusual items
The filing provides no quantified earnings or revenue guidance. Management’s forward-looking statements identify risks including COVID-19 and related economic effects, execution of growth plans, interest-rate and benchmark-rate changes, financial-market and economic conditions, and acquisition-related risks. Mortgage income is sensitive to production volume, sale margins, and changes in fair values of loans and hedging derivatives. Credit quality and the adequacy of the loan-loss allowance remain dependent on borrower conditions and management estimates. The company expects to adopt CECL for fiscal years beginning after December 15, 2022; management said the impact could be material but could not yet reasonably estimate it. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether mortgage production, gain-on-sale margins, and the mix of mortgage and banking earnings remain sustainable as market conditions change.
- How much of reported loan performance and reserve releases reflect underlying credit quality versus government guarantees and COVID-era support.
- The pace of PPP forgiveness and PPPLF repayment, and how the resulting balance-sheet contraction affects recurring net interest income.
- Whether expense growth and strategic investment translate into durable revenue growth and improved profitability.
- The assumptions behind fair values for mortgage assets and derivatives, SBA servicing rights, and the allowance for loan losses, as well as the eventual CECL adoption impact.
- The terms, execution, and capital effects of the amended stock repurchase program and the company’s ability to maintain dividends while meeting regulatory and liquidity needs.