BayFirst Financial Corp. — FY2021 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2021, with comparisons to FY2020. BayFirst is a Florida bank holding company operating through First Home Bank. Its principal activities are community banking, nationwide SBA and other government-guaranteed lending, and residential mortgage origination, primarily for sale into the secondary market.
Financial results and position
- Profitability: Net income was $24.6 million, up from $12.7 million; diluted EPS was $5.74 versus $3.01. Net income available to common shareholders was $23.6 million. The 2021 result included a $13.8 million gain from PPP loan sales and a $3.5 million negative loan-loss provision (a release), compared with a $16.9 million provision in 2020.
- Revenue and margins: Net interest income rose 20.3% to $40.2 million; net interest margin increased to 3.23% from 2.88%. Noninterest income rose 20.4% to $117.6 million, including $95.5 million of residential loan fee income and $18.0 million of net gains on government-guaranteed and PPP loan sales. Income before taxes was $32.5 million; income tax expense was $7.9 million, an effective rate of 24.2%.
- Costs: Noninterest expense increased 30.9% to $128.8 million, principally reflecting higher salaries, commissions, marketing, data processing, and spending to build infrastructure for growth.
- Loans and credit: Loans held for investment were $583.9 million at year-end, down from $1.23 billion, largely as PPP loans were sold or forgiven. Excluding PPP loans, these balances were $504.5 million, versus $402.5 million. Net charge-offs fell to $4.2 million from $6.5 million. Total nonperforming loans rose to $11.9 million from $9.6 million; excluding government-guaranteed balances, they were $4.0 million versus $3.3 million. The allowance for loan losses was $13.5 million.
- Balance sheet and liquidity: Total assets declined to $917.1 million from $1.545 billion, primarily reflecting the PPP-related balance-sheet runoff. Deposits increased to $721.7 million from $558.8 million. The reported on-balance-sheet liquidity ratio was 16.76%, up from 8.37%. Cash and cash equivalents were $109.7 million at year-end.
- Cash flow: Operating cash flow was $101.2 million, compared with an outflow of $107.8 million in 2020; investing cash flow was $601.9 million versus an outflow of $933.4 million. Financing cash flow was an outflow of $648.7 million, mainly reflecting an $811.6 million net repayment of the PPP Liquidity Facility. Cash and cash equivalents increased $54.3 million during 2021.
- Debt and capital: Year-end borrowings included $69.7 million under the PPP Liquidity Facility, $6.0 million of subordinated debentures, and $3.3 million of notes payable. The PPP facility balance was repaid in the first quarter of 2022. The Bank was classified as well capitalized: total capital to risk-weighted assets was 21.25%, and Tier 1 leverage was 12.22%. Shareholders’ equity was $96.3 million.
Changes, outlook, risks, and unusual items
- Management attributed improved earnings to PPP loan-sale gains, higher residential mortgage income, lower funding costs, and the reduction in loan-loss provision; increased operating costs partly offset these factors. Mortgage originations reached $2.22 billion, up from $1.92 billion, while loan sales and gains remain important to revenue.
- The company provided no specific numerical earnings or growth guidance. It described plans to expand lending geographically and add Tampa Bay banking centers, and stated that it believed the business was positioned to operate through the uncertain economic environment.
- Management’s key risks include sustaining SBA and mortgage loan production and sale volumes; dependence on technology partners and referral sources; borrower or referral fraud and SBA guarantee compliance; credit deterioration after pandemic-era government support or payment deferrals; deposit competition and liquidity; interest-rate and secondary mortgage-market changes; cybersecurity; and regulatory and execution risks from rapid growth.
- Management noted that pandemic-era SBA payments and borrower deferrals may have made credit trends appear stronger than underlying conditions. At year-end, 24 loans totaling $1.37 million were under payment deferral. The filing also identifies higher historical default risk in the SBA 7(a) Small Loan Program.
- The company reported $273.2 million of deposits above FDIC insurance limits. It also disclosed that 100% of the Bank’s shares secure the parent company’s $3.3 million term loan, which matures in 2029.
- First Home Bank applied to convert to a national bank charter in January 2022. The company said it expected to adopt CECL in 2023 but had not determined the size of the transition adjustment. It reported no material pending legal proceedings. The independent auditor issued an unqualified opinion on the financial statements; the company was not required to obtain an audit opinion on internal control effectiveness.
Important facts for investors to verify
- How much of FY2021 earnings is repeatable, given the $13.8 million PPP-sale gain and negative loan-loss provision?
- Whether credit quality holds up as pandemic-era SBA support and payment deferrals end, especially in unguaranteed SBA loans and the Small Loan Program.
- Whether mortgage and SBA origination, sale premiums, and servicing income can sustain profitability as market rates and secondary-market conditions change.
- How the sharp year-over-year balance-sheet contraction, deposit growth, uninsured deposits, and repayment of the remaining PPP facility affect funding and liquidity.
- The eventual CECL adoption impact, and progress and potential costs associated with the proposed national-bank charter conversion and expansion plans.