BayFirst Financial Q2 2024 Earnings Call Transcript

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July 26, 2024

There are 5 speakers on the call.

Operator

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 a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, July 26, 2024. I would now like to turn the conference over to Robin Oliver.

Operator

Please go ahead.

Speaker 1

Thank you, Joanna. Good morning, everyone, and thank you for participating on our Today's call will include forward looking statements and non GAAP financials. 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 Q2, we produced net income of $900,000 which represents a 5.1% increase over Q1 'twenty four earnings of $800,000 Net income increased primarily due to lower provision for credit losses of $1,000,000 and lower non interest expense of $1,200,000 offset by lower revenue from servicing income and gains on loan sales of $2,600,000 quarter over quarter as SBA 7 loan production was weaker than projected.

Speaker 1

While we made progress with lowering our provision for credit losses and non interest expense in the quarter, we are not content with our 2nd quarter results. We continue to see pressure on our SBA 7 production in the current interest rate and credit environment. And as such, we missed our earnings goal due to lower Bolt and Core SBA 7A 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 rightsizing our staffing and incentive compensation, renegotiating key vendor contracts, launching a modification program for our SBA 7 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.

Speaker 1

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 May 1. Earlier this year, we opened our 12th 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 Q2 at $1,040,000,000 Wafers 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.

Speaker 1

During the Q2, the bank launched its customer referral program called Refer A Friend and has already 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 Cash Kids Club and Trendsetter program. We make these programs more impactful and attract new customers.

Speaker 1

On the lending side, DayFirst 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 $74,000,000 or 8% during the Q2 of 2024 to $1,010,000,000 primarily due to an increase in conventional community bank loans, which increased $172,000,000 or 20.5 percent over the past year. During the Q2, 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, Credit Bench, originated $99,000,000 in new government guaranteed loans during the quarter, a decrease of 24% from $131,000,000 of loans produced in the previous quarter and a 21% decrease from $126,000,000 of loans produced during the Q2 of 2023.

Speaker 1

The company's BOLT loan program and SBA 7 loan product designed to expeditiously provide working capital loans of $150,000 or less to businesses throughout the country saw reduced production in the 2nd 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 $611,000,000 of which 561 BOLT loans totaling 72,000,000 were originated this quarter. The company originated $179,000,000 of loans in total this quarter and sold $79,000,000 of government guaranteed loan balances. In addition to SBA lending, we also originate USDA loans. And during the Q2, we added 2 USDA lenders, bringing us to a total of 3 lenders in this space and diversifying our sources of revenue.

Speaker 1

I also want to share some exciting milestones regarding Power LOS, our commercial loan origination platform, which is currently used by the Credit Bench team for all BOLT loans and is in process of being implemented for all other commercial loan products. In the Q2, we processed the 10,000 application and the system automatically processed its 100 thousand 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 rules allow for, this involved 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.

Speaker 1

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.

Speaker 2

Thank you, Robin. Good morning, everyone. As Robin mentioned, our net income from continuing operations was $900,000 in the 2nd quarter. Balances of loans held for investment grew $73,400,000 or 7.9 percent during the quarter and overall total assets increased $73,700,000 to $1,220,000,000 or 6.4% growth during the quarter. Year over year, total assets have increased $130,500,000 or 12%.

Speaker 2

Total deposits increased 35,000,000 or 3.5 percent during the Q2 of this year and increased by $97,600,000 from the Q2 of 2023. Total deposits ended the quarter at $1,040,000,000 Shareholders' equity at quarter end is $101,000,000 and is $9,900,000 higher than the end of the Q2 of 2023. There was also a slight decrease in accumulated comprehensive loss of $75,000 during the quarter. Tangible book value increased this quarter to $20.54 per share, up $0.09 from $20.45 per share at the end of the first 2nd quarter, up $400,000 or 5% compared to the Q1 and down $100,000 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.

Speaker 2

Non interest income was $11,700,000 in the Q2 of 2024, down $2,600,000 reflecting lower gains on sales of government guaranteed loans. Compared to the Q2 of 2023, non interest income is up 700,000 dollars reflecting higher fair value gains on sale of loans. Non interest expense decreased by $1,200,000 in the 2nd quarter, notably due to a decrease of $1,100,000 of compensation costs and a $500,000 of professional services costs. Compared to the Q1 of 2023, non interest expense is $200,000 higher driven by data processing costs offset by lower commission and incentive costs as loan production was down, as Robin already mentioned, from the Q1. Provision for credit losses was $3,000,000 in the 2nd quarter compared to $4,100,000 in the Q1 and $2,800,000 in the Q2 of 2023.

Speaker 2

Net charge offs decreased by $400,000 primarily from lower charge offs on unguaranteed SBA 7 loan balances. As Robin noted, our efforts to actively manage our SBA 7 portfolio have positively impacted net charge offs during the quarter. Our portfolio of unsecured consumer loans purchased from a 3rd party generated over $600,000 of net charge offs during the 2nd 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 to net charge offs to continue to dissipate throughout this year.

Speaker 2

As far as charge offs go, annualized net charge offs as a percentage of average loans held for investment and amortized cost were 1.45% in the Q2 of 2024. That's a decrease from 1.71% in the 1st quarter and 1.15% in the Q2 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 Q2 last year. Past due and non accrual loans to total loans held for investment at amortized cost were 1.8% at June 30, 2024.

Speaker 2

That's up slightly from 1.76% at the end of the Q1 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 30, 2024, 1.62% as of March 31, 2024 and 1.61% as of June 30, 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 30, 2024, down from 1.88% as of March 31, 2024 and 2.03% as of June 30, 2023. We believe the Alaska 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.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Julianne Castorino at Sycamore Analytics. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Good morning, Julien. Good morning.

Speaker 3

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 as Trace gets more information.

Speaker 1

Sure. Yeah. Happy to expand on that. We will be focusing here in Tampa Bay. The gentleman that we hired, and we put a press release out about it earlier this week, is a long time Tampa native and has been in this market.

Speaker 1

And we this is part of our conventional community bank 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, say, dollars 8,000,000 to $10,000,000 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 we think our personalized service, our product set and our go to market strategy will be attractive.

Speaker 1

And we are going to 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 going to be focused more on C and 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.

Speaker 1

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.

Speaker 3

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

Speaker 1

He is not bringing over an existing portfolio, but he certainly already has a lot of contacts and leads.

Speaker 3

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

Speaker 1

They will not be. And we certainly looked at that carefully and explored with our auditors. But this isn't 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.

Speaker 1

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, if rates go down down or their circumstances change, they can always prepay so as not to have that long of a loan. But we have had a great response in that. We started it early June. And we have a lot of borrowers that are very happy and thanking us for being proactive and reaching out to them and offering them this option, because many are struggling.

Speaker 1

We have a lot of borrowers where we did SBA loans pre pandemic free rate increases. And they've seen 5 point 5 rate increases over the last couple of years. And so it's made it quite tough for many of these small businesses. And our goal is to keep the small businesses open and keep the charge offs down. And hopefully, this will help in doing that.

Speaker 3

Yes, sounds really good. Yes, so the what's the kind of the economic environment? Is it I think of your area, Florida has been very pretty vibrant. But you said people are shy are you when you is this across the country or

Speaker 1

is this local or localized? It's across the country. Yes, you're right. Tampa Bay is flourishing, but we're a nationwide SBA lender. So these loans are all across the nation.

Speaker 3

Right, right. Okay. Very good. Well, it sounds like a good program. And thank you.

Speaker 3

Thanks.

Speaker 1

Thank you. Appreciate your questions today.

Operator

Thank you. Next question comes from Ian Green at Pentagon Capital. Please go ahead.

Speaker 4

Excuse me. Hi, good morning.

Speaker 1

Good morning.

Speaker 4

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

Speaker 2

Yes. Ian, I'll go ahead and seal that one. You're exactly right. I mean, it's being able to grow, I'll call 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.

Speaker 2

And as we have kind of evolved the business a little bit and sort of broaden 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 going to go a little bit deeper. We're going to start I think you're going to start to see us grow that really not just from the healthcare space, but other businesses from existing clients.

Speaker 2

This is something that whereas the SBA business is nationwide, this is heavily focused in the retail footprint where we exist today.

Speaker 4

All right. Okay. Yes. Now in terms of real estate in your geography, I mean, as the other question the previous question had highlighted that Florida is pretty vibrant, your area of Florida is very vibrant. How are you seeing overall in different categories and also some things that you would be exposed to?

Speaker 4

How is that all holding up on more of a macro level?

Speaker 2

I would say this. It's 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 where we're at, for example, there is still quite a bit of population growth, 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 to 8 quarters.

Speaker 2

I would say that the values that kind of creeped up perhaps 18 to 24 months ago have stabilized. We're not seeing that sort of move shot type approach anymore. And then furthermore, the lending that we're doing is being very focused around the fact that we want to 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 its business owners are actually operating outside of or out of their own real estate.

Speaker 2

So we're not exposed to retail strip malls and some of the other higher risk type of ventures that are out there. So unlike some of the other institutions, I think that operate in the space, we just haven't gone down that path and have no intent to go down that path.

Speaker 4

Great. Thank you. Thanks, Ian.

Operator

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

Speaker 1

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

Operator

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

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Key Takeaways

  • BayFirst reported Q2 net income of $900,000, a 5.1% increase over Q1 driven by a $1.0 million reduction in credit loss provisions and $1.2 million lower non‐interest expenses, offset by a $2.6 million drop in servicing income and loan sale gains due to weaker SBA 7 production.
  • Management enacted cost and credit initiatives—rightsizing staffing and incentives, renegotiating vendor contracts, launching an SBA 7 loan modification program to extend maturities and reduce charge-offs, and investing in technology—with most benefits expected in the back half of 2024.
  • Branch network grew to 12 locations, fueling a 5.8% rise in deposits and an 8.3% increase in new accounts YTD, supported by programs like Refer A Friend, the Branch Anywhere iPad service, Cash Kids Club, and the Trendsetter initiative to attract low-cost, sticky deposits.
  • Loans held for investment climbed 8% QoQ to $1.01 billion, led by a 20.5% YoY surge in conventional community bank lending, while non‐owner‐occupied CRE remains just 6% of the portfolio and a new Director of Healthcare Lending targets Tampa Bay medical practices.
  • Government-guaranteed loan originations fell to $99 million (-24% QoQ) and BOLT loans totalled $72 million, but the Power LOS platform processed its 10,000th application and 100,000th automated due-diligence check, positioning the bank for greater efficiency.
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Earnings Conference Call
BayFirst Financial Q2 2024
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