BayFirst Financial - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the BayFirst Financial Corporation's Q2 2024 conference call and webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Friday, July twenty-sixth, twenty twenty-four. I would now like to turn the conference over to Robin Oliver. Please go ahead.

Robin Oliver (President and COO)

Thank you, Joanna. Good morning, everyone, and thank you for participating on our call today. I have with me our CFO, Scott McKim. Tom Zernick, our CEO, is not with us this morning due to a family emergency. Today's call will include forward-looking statements and non-GAAP financial measures. Please refer to our cautionary statement on forward-looking statements contained on page 2 of the investor presentation. During the second quarter, we produced net income of $0.9 million, which represents a 5.1% increase over Q1 2024 earnings of $0.8 million. Net income increased primarily due to lower provision for credit losses of $1 million and lower non-interest expense of $1.2 million, offset by lower revenue from servicing income and gains on loan sales of $2.6 million quarter over quarter as SBA 7(a) loan production was weaker than projected.

While we made progress with lowering our provision for credit losses and non-interest expense in the quarter, we are not content with our second quarter results. We continue to see pressure on our SBA 7(a) production in the current interest rate and credit environment, and as such, we missed our earnings goal due to lower Bolt and core SBA 7(a) production during the quarter. We did, however, take several actions this quarter as we work to improve our overall profitability, many of which will not fully produce improved results until the last half of this year.

Some of those actions included right-sizing our staffing and incentive compensation, renegotiating key vendor contracts, launching a modification program for our SBA 7(a) borrowers who are struggling to make payments in a higher rate environment with the goal of reducing charge-offs and reducing other expenses while working to leverage our investments in technology. I want to assure our investors that our management's focus every day is to elevate all areas of our business under a more efficient platform to deliver improved earnings on a consistent basis. Now, I would like to share some highlights from around BayFirst. Earlier this year, we opened our twelfth banking center, concluding our current branch development program with a focus in the near term on leveraging the investments we've already made.

At the heart of our franchise value, the banking centers grew deposit balances 5.8% and net new accounts 8.3% year to date, ending the second quarter at $1.04 billion. BayFirst continues to maintain a granular deposit base, with 81% of deposits being insured at June 30. As the banking industry competes for deposits, we are focused on various ways to grow more low-cost, sticky deposits. During the second quarter, the bank launched its customer referral program called Refer a Friend, and has already seen success in bringing in many new customers from this program. We also added technology called Branch Anywhere, which allows our banking center teams to open accounts and serve customers using an iPad when out of the branch. This furthers our commitment to meet customers on their terms.

I'd also like to highlight that we continue to grow customers and brand awareness through our Kids Cash Club and TrendSetters program. We make these programs more impactful and attract new customers. On the lending side, BayFirst continues to enjoy minimal commercial exposure in the CRE space, with non-owner occupied commercial real estate representing only 6% of our loans held for investment at the end of the quarter. Loans held for investment increased by $74 million, or 8%, during the second quarter of 2024 to $1.01 billion, primarily due to an increase in conventional community bank loans, which increased $172 million, or 20.5%, over the past year.

During the second quarter, we also added an experienced commercial lender to our team in Sarasota, as well as a director of healthcare lending, who is tasked with overseeing the financial products and services geared towards the medical industry. With thousands of healthcare companies in Tampa Bay and a relatively low risk profile, we believe this is an industry focus that will serve us well. The company's government-guaranteed loan origination platform, CreditBench, originated $99 million in new government-guaranteed loans during the quarter, a decrease of 24% from $131 million of loans produced in the previous quarter and a 21% decrease from $126 million of loans produced during the second quarter of 2023.

The company's Bolt loan program, an SBA 7(a) loan product designed to expeditiously provide working capital loans of $150,000 or less to businesses throughout the country, saw reduced production in the second quarter, primarily as the bank tightened credit standards at the end of Q1 to ensure future credit quality. Since the launch of Bolt in 2022, the company has originated over 4,700 Bolt loans, totaling $611 million, of which 561 Bolt loans totaling $72 million were originated this quarter. The company originated $179 million of loans in total this quarter and sold $79 million of government-guaranteed loan balances.

In addition to SBA lending, we also originate USDA loans, and during the second quarter, we added 2 USDA lenders, bringing us to a total of 3 lenders in this space and diversifying our sources of revenue. I also want to share some exciting milestones regarding PowerLOS, our commercial loan origination platform, which is currently used by the CreditBench team for all Bolt loans and is in process of being implemented for all other commercial loan products. In the second quarter, we processed the 10,000th application, and the system automatically processed its 100,000th due diligence check. We are excited by the system's scalability and efficiency to help us reduce labor and processing costs as we move forward. As I mentioned earlier, midway through the second quarter, we added additional options to assist small business borrowers in their battle with high inflation and interest rates.

As the SBA, SBA rules allow for, this involved modifying loan terms to extend the maturity date to make payments more manageable for businesses whose loans are performing and we expect to continue to perform. As a result of our continued focus on collection efforts, along with this modification program, our underlying credit metrics improved and our net charge-offs were lower during the quarter. We believe this will also assist in reducing potential charge-offs in the future. At this time, I will pass the microphone to Scott McKim, our CFO, to provide additional overview of our financial performance and credit metrics.

Scott McKim (CFO)

Thank you, Robin. Good morning, everyone. As Robin mentioned, our net income from continuing operations was $0.9 million in the second quarter. Balances of loans held for investment grew $73.4 million, or 7.9% during the quarter, and overall total assets increased $73.7 million to $1.22 billion, or 6.4% growth during the quarter. Year-over-year, total assets have increased $103.5 million, or 12%. Total deposits increased $35 million, or 3.5% during the second quarter of this year, and increased by $97.6 million from the second quarter of 2023. Total deposits ended the quarter at $1.04 billion.

Shareholders' equity at quarter end is $101 million and is $9.9 million higher than the end of the second quarter of 2023. There was also a slight decrease in accumulated other comprehensive loss of $75,000 during the quarter. Tangible book value increased this quarter to $20.54 per share, up 9 cents from $20.45 per share at the end of the first quarter. Net interest income was $9.2 million in the second quarter, up $400,000 or 5% compared to the first quarter, and down $900,000 from the year ago quarter. Net interest margin increased by 1 basis point from Q1, reflecting increases in both interest earned on loans and interest paid on deposits.

Non-interest income was $11.7 million in the second quarter of 2024, down $2.6 million, reflecting lower gains on sales of government-guaranteed loans. Compared to the second quarter of 2023, non-interest income is up $700,000, reflecting higher fair value gains on sale of loans. Non-interest expense decreased by $1.2 million in the second quarter, notably due to a decrease of $1.1 million of compensation costs and $0.5 million of professional services costs. Compared to the first quarter of 2023, non-interest expense is $0.2 million higher, driven by data processing costs, offset by lower commission and incentive costs, as loan production was down, as Robin already mentioned, from the first quarter.

Provision for credit losses was $3 million in the second quarter, compared to $4.1 million in the first quarter and $2.8 million in the second quarter of 2023. Net charge-offs decreased by $0.4 million, primarily from lower charge-offs on unguaranteed SBA 7(a) loan balances. As Robin noted, our efforts to actively manage our SBA 7(a) portfolio have positively impacted net charge-offs during the quarter. Our portfolio of unsecured consumer loans, purchased from a third party, generated over $600,000 of net charge-offs during the second quarter. That was down by $260,000 from Q1. As we have previously mentioned, the unsecured consumer loan exposure continues to pay down, and we expect this impact on net charge-offs to continue to dissipate throughout this year.

As far as charge-offs go, annualized net charge-offs as a percentage of average loans held for investment at amortized cost were 1.45% in the second quarter of 2024. That's a decrease from 1.71% in the first quarter and 1.15% in the second quarter of 2023. Non-performing assets to total assets was 1.28% as of June 30, 2024, compared to 0.97% as of March 31, 2024, and 0.79% as of June 30, 2023. Non-performing assets, excluding government-guaranteed loans to total assets, was 0.82% as of June 30, 2024, compared to 0.70% as of March 31, 2024, and 0.61% as of the end of second quarter last year.

Past due and non-accrual loans to total loans held for investment at amortized cost were 1.8% at June thirtieth, 2024. That's up slightly from 1.76% at the end of the first quarter and up from 1.56% in the same quarter of last year. The ratio of allowance for credit losses to total loans held for investment at amortized cost was 1.50% at June thirtieth, 2024, 1.62% as of March thirty-first, 2024, and 1.61% as of June thirtieth, 2023.

The ratio of allowance for credit losses to total loans held for investment at amortized cost, this time excluding government-guaranteed loans, was 1.73% at June thirtieth, 2024, down from 1.8% as of March thirty-first, 2024, and 2.03% as of June thirtieth, 2023. We believe the allowance for credit loss is reasonable for all our loan portfolios and their forecasted performance. At this time, I'll turn it back over to Robin for any final comments.

Robin Oliver (President and COO)

Thank you, Scott. Appreciate your comments and appreciate everyone joining. At this time, I would like to open it up for any questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Julianna Cassarino at Sycamore Analytics. Please go ahead.

Julienne Cassarino (Principal)

Hi, good morning.

Scott McKim (CFO)

Good morning, Julienne.

Robin Oliver (President and COO)

Good morning.

Julienne Cassarino (Principal)

Hi, can you talk a little bit more about your new healthcare banking initiative? Like, specifically, what kind of healthcare providers are you targeting? What kind of loans, like if they're... What kind of collateral for the loans, if they're real estate or equipment backed? And, if those are all in Florida, or if those are East Coast or throughout the country, just to try to get some more information.

Robin Oliver (President and COO)

Sure. Yeah, happy to expand on that. We will be focusing here in Tampa Bay. The gentleman that we hired, we put a press release out about it earlier this week, is a longtime, you know, Tampa native and has been in this market, and this is part of our conventional community bank platform, which is focused right here in Tampa Bay. And we really just wanted to capitalize on a lot of the smaller healthcare practices that are out there. We'd be primarily looking at, you know, say, $8 million-$10 million in revenue-type healthcare companies and less. And we think there's a great market for us to get into there.

We know it's a tough market, but, you know, we think our personalized service, our product set, and our go-to-market strategy will be attractive. And we are gonna be focusing on both loans and deposits. We want both sides of the equation as we work to bank these businesses. I would say we are gonna be focused more on C&I, but we could be doing CRE as well. We have both products that would be available. So, that is just a little bit more about it. We're excited for Phil Russo, our Director of Healthcare Lending, to get started and bring on more team members and grow us into the future.

Julienne Cassarino (Principal)

Okay, great. Is he coming with a portfolio? Is he bringing over a portfolio?

Robin Oliver (President and COO)

He is not bringing over an existing portfolio.

Julienne Cassarino (Principal)

Okay.

Robin Oliver (President and COO)

But he certainly already has a lot of contacts and leads.

Julienne Cassarino (Principal)

Right. Good. Well, sounds good. And the modification program that you talked about, that you started, is that... Are those modified loans gonna be in the call report anywhere, like as a restructured loan, anything like that?

Robin Oliver (President and COO)

They will not be. And, and we've certainly, you know, looked at that carefully and explored with our, our auditors, but this is an SBA-allowed, type program to extend the maturity. It's very hard to reduce rate on these SBA loans once they're sold into the secondary market. It's not really possible. But what we can do is extend maturities by, say, 5 or up to 10 years, to reduce payments for those borrowers. And there's no prepayment penalties, so they can, you know, if, if rates go down, you know, or their circumstances change, they can always, you know, prepay so as not to have, you know, that long of a loan. But, you know, we have had a great response in that.

We started it early June, and, you know, we, we have a lot of borrowers that are, very happy and thanking us for, you know, being proactive and reaching out to them and offering them this option, 'cause there are many are struggling. There-- either we have a lot of borrowers where we did SBA loans, pre-pandemic, pre-rate increases, and, you know, they've seen 5.25 rate increases, you know, over the last couple of years. And so it's, it's made it quite tough for many of these small businesses. And, our goal is to keep the small businesses open, you know, and keep the charge-offs down, and, and hopefully, this will help in doing that.

Julienne Cassarino (Principal)

Yeah, sounds really good. Yeah, so what's the kind of economic environment? Is it... I think of your area, Florida, as being very pretty vibrant, but you said people are shying. Are you, when you, is this across the country, or is this local, more localized?

Robin Oliver (President and COO)

... It's across the country. Yes, you're right, Tampa Bay is flourishing, but we're a nationwide SBA lender, so these loans are, you know, all across the nation.

Julienne Cassarino (Principal)

Right. Right. Okay. Very good. Well, sounds like a good program, and thank you. Thanks.

Robin Oliver (President and COO)

Thank you. Appreciate your questions today.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star one now. Next question comes from Ian Green at Pendragon Capital. Please go ahead.

Ian Green (President and CIO)

Excuse me. Hi, good morning.

Robin Oliver (President and COO)

Good morning.

Ian Green (President and CIO)

Question: you know, how can you—maybe it's a different environment, a difficult environment, but, you know, what would be your strategy or what continues to be your strategy for getting non-interest-bearing deposits? It looks like, you know, that's an area where, you know, would help build your overall franchise value if you could get that percentage up, you know, of total deposits.

Scott McKim (CFO)

Yeah, Ian, I'll go ahead and field that one. You're exactly right. I mean, it's being able to grow. I'll call, you know, low-cost deposits or even no-cost deposits are definitely at the core of the franchise value for the bank. And we've been what I'll call moderately successful as far as raising those deposits in a very granular way among the entire Tampa Bay footprint. And as we have kind of evolved the business a little bit and sort of broadened our focus beyond just individuals and families, the small businesses that are located here have also started to come and join the bank. And the healthcare banking program that Robin already talked about is front and center to that. And being able to provide depository services, treasury management services to those businesses is part of that evolving strategy.

So it's gonna go a little bit deeper. We're gonna start, I think you're gonna start to see us grow that really, not just from the healthcare space, but other businesses from existing clients. You know, this is something that, you know, whereas the SBA business is nationwide, this is heavily focused in the retail footprint where we exist today.

Ian Green (President and CIO)

All right. Okay. Yeah. Now, in terms of the real estate in your geography, I mean, as, as the other question, the previous question had highlighted that Florida's pretty vibrant. Your area of Florida is very vibrant. How are you seeing the overall, you know, in different categories, also some things that you would, you know, be exposed to, how is that all holding up on more of a macro level?

Scott McKim (CFO)

I would say this, it's, you know, as you can imagine, we spend quite a bit of time looking at the real estate market, from a number of different sources, and it is what I'll generally categorize as being stable. And, you know, where we're at, for example, there is still quite a bit of population growth, a lot of, a lot of new homes still being built and, obviously businesses being set up and flourishing and looking for their own real estate. And as we look at the market, I would say that stability has kind of, it's been in place now really for the past 6-8 quarters. I would say that the values that kind of creeped up perhaps 18-24 months ago have stabilized.

We're not seeing that sort of moonshot type approach anymore. And then furthermore, the lending that we're doing is being very focused around the fact that, you know, we wanna make sure that the collateral is something that if there is a shift in the marketplace, that we can absorb it, and that the borrowers can absorb it without any sort of detrimental impact. Again, it's only about 6% of our loan portfolio is non-owner-occupied commercial real estate. The rest of it, the business owners are actually operating outside of or out of their own real estate. So we're not exposed to retail strip malls and some of the other higher risk type of ventures that are out there.

So, you know, unlike some of the other institutions, I think, that operate in this space, we just haven't gone down that path and have no intent to go down that path.

Ian Green (President and CIO)

Great. Thank you.

Scott McKim (CFO)

Thanks, Ian.

Operator (participant)

Thank you. We have no further questions. I will turn the call back over to Robin Oliver.

Robin Oliver (President and COO)

Excellent. Thank you, Joanna, and thanks, everyone, for joining us this morning for our call. Have a great day.

Operator (participant)

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.