BayFirst Financial Q1 2024 Earnings Call Transcript

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April 26, 2024

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the BayFirst Financial Corporation Q1 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, April 26, 2024. I would now like to turn the conference over to Mr.

Operator

Tom Zernick, Chief Executive Officer. Please go ahead, sir.

Speaker 1

Hey, thank you, Lara. Good morning and thank you for participating on our call today. I have with me our President and Chief Operating Officer, Robin Oliver and Chief Financial Officer, Scott McKim. 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.

Speaker 1

Before I discuss our Q1 performance, I want to clearly state that I and the rest of our executive team are not content with our Q1 results. We missed our goals for earnings and profitability driven by higher net charge offs and lower core SBA 7A production in the Q1. Our underlying credit metrics remain stable and our community banking division continues to perform well. However, our focus is to elevate all areas of our business model. We're focused on that and are working to close the gaps in process, and we continue to right size staffing as needed.

Speaker 1

This focus is applied to every small business loan we write as that lender borrower partnership is oftentimes the key to keeping a small business operating through high inflation and interest rates. Furthermore, we operate in a footprint that many consider one of the nation's strongest. We remain committed to continuing to build the franchise value of our great community bank in Tampa Bay. During Q1, we produced net income of $800,000 This represents a 12% increase over Q1 'twenty three earnings of $700,000 but a 50% decrease over Q4 earnings of $1,700,000 Net income decreased to 2 primary factors: higher provision for credit losses of $1,300,000 quarter over quarter, coupled with weaker than forecasted core SBA 7 loan production. Our core loans are loans $350,000 to $5,000,000 in size.

Speaker 1

Bay first opened its 12th banking center in the attractive Tampa Bay market during the quarter. Our South Trail Sarasota location completes our near term branch expansion plans. We were successful in growing deposit balances by $22,200,000 during the quarter and by $74,400,000 year over year. We maintain a community focused business model serving individuals, families and small businesses with a focus on establishing strong client relationships as we grow checking and savings across accounts across our marketplace. This model continues to build franchise value on our great community bank here in Tampa Bay.

Speaker 1

While net charge offs increased during the Q1, we continue to monitor asset quality metrics, including non performing loans exclusive of government guaranteed loan balances, which declined from the end of last quarter. The increase in net charge offs was due to the performance of the portfolio of unsecured consumer loans purchased in 2022 as well as higher net charge offs from the bank's FlashCap SBA Guaranteed Small Loan Program, particularly from loans originated prior to 2020 when rates were significantly lower and now these borrowers have felt the impact of rising rates in their payments. The bank stopped originating loans under the FlashCap product model during the quarter, and Robin will share more details on asset quality metrics in a few minutes. Let me now share some highlights from around Bay First. Our retail banking centers continued to build value as we were successful in growing deposit balances 2.3% and net new accounts 4.7% during the Q1 of 2024 ending the quarter at $1,010,000,000 During the Q1, there were increases in non interest bearing deposit account balances of 3,300,000 savings and money market deposit account balances of $18,900,000 and time deposit balances of $8,900,000 partially offset by a decrease in interest bearing transaction account balances of 8,900,000 dollars Bay First has maintained a granular deposit base and continues to benefit from 84% of our deposits being insured at March 31, 2024.

Speaker 1

On the lending side, BayFirst continues to enjoy minimal commercial exposure in the CRE space with non owner occupied CRE representing only 5.5% of our loans held for investments at the end of the quarter. Loans held for investment increased by $19,100,000 or 2.1 percent during the Q1 of 2024 to 934,900,000 due to originations in conventional community bank loans and increased $142,100,000 or 17.9 percent over the past year. During the quarter, the company originated $197,200,000 of loans and sold $127,800,000 of government guaranteed loan balances. The company's government guaranteed loan origination platform, Credit Bench, originated 130 point $6,000,000 in new government guaranteed loans during the Q1 of 2024, a decrease of $9,900,000 from $144,900,000 of loans produced in the previous quarter and a 7.8% increase over $121,100,000 of loans produced during the Q1 of 2023. Demand remains strong for the company's BOLT loan program, an SBA 7 loan product designed to expeditiously provide working capital loans of $150,000 or less to businesses throughout the country.

Speaker 1

Since the BOLT launch in 2022, the company has originated 4,168 BOLT loans totaling $539,900,000 of which 760 Bolt loans totaling $98,200,000 were originated during the quarter. Now I will pass the microphone to Scott McKim, our Chief Financial Officer, to provide an overview of our financial performance.

Speaker 2

Thank you, Tom. Good morning, everyone. As Tom mentioned, our net income from continuing operations was just over $800,000 in the Q1. Balances of loans held for investments grew $19,100,000 or 2.1 percent during the quarter and overall total assets increased $26,400,000 dollars to $1,140,000,000 or an increase of 2.4% during the quarter. Year over year total assets have increased $74,000,000 or 7%.

Speaker 2

Total deposits increased $22,200,000 or 2.3 percent during the quarter of this year and increased by $74,400,000 from the Q1 of 2023. Total deposits ended the quarter at just over $1,000,000,000 Shareholders' equity at quarter end was $100,600,000 and is flat to the end of the 4th quarter and is $10,300,000 higher than the Q1 of 2023. There was a slight increase in accumulated other comprehensive loss of $207,000 during the quarter and our tangible book value decreased slightly to $20.45 per share from $20.60 per share at the end of the Q4 driven by higher share counts. Net interest income was $8,700,000 in the first quarter, essentially flat to the Q4 and down $300,000 from the year ago. This is reflecting both higher interest expense as well as higher interest income and the net interest margin decreased about 6 basis points from the 4th quarter, again reflecting increases in interest income offset by slightly higher cost of higher deposit costs during the quarter.

Speaker 2

Non interest income from continuing operations was $14,300,000 for the Q1 of 2024. That was down $400,000 reflecting lower fair value gains on fewer loans in the Q1 compared to the Q4 of last year. Loans which were sold during the quarter provided higher net premium gains of $1,000,000 and compared to the Q1 of 2023, non interest income was up $4,800,000 reflecting higher gains on sale of loans, packaging fees on loans originated as well as other income. Provision for credit losses was $4,100,000 in the 1st quarter compared to $2,700,000 in the Q4 and $1,900,000 in the Q1 of 2023. While overall asset quality remains relatively stable, net charge off did increase due to our portfolio consumer loans purchased from a 3rd party in 2022 as well as higher net charge offs on unguaranteed balances of SBA 7 loans.

Speaker 2

As we have previously mentioned, the unsecured consumer loan exposure continues to pay down and we expect its impact on net charge offs to dissipate throughout this year. Non interest expense decreased by $700,000 in the first quarter compared to the Q4, primarily due to a decrease of $600,000 of commission and incentive costs and $1,000,000 of loan origination and collection costs, both reflecting lower core SBA 7 loan origination volume. Offsetting these decreases were higher salary costs of $500,000 for income tax reset as well as an increase in professional fees, which included a one time $400,000 expense. Compared to the Q1 of 2023, non interest expense is $2,300,000 higher driven by loan origination and incentive costs as loan production in the Q1 of 2024 was $37,000,000 higher than the Q1 of last year as well as the additional professional costs that I just mentioned as well. At this point, I will turn things over to our President and Chief Operating Officer, Robin Oliver, to discuss some asset quality in detail.

Speaker 2

Robin?

Speaker 3

Thank you, Scott. Good morning, everyone. I want to begin by first noting that asset quality metrics remain well within acceptable levels for the conventional commercial portfolio. And in addition, the company's organically originated consumer loan portfolio is performing at or above expectations. Nonperforming and past due loans in the residential loan portfolio are stable, but remain slightly elevated mostly due to one loan with a low loan to value ratio for which no loss is expected.

Speaker 3

The ratio of the allowance for credit losses to total loans for investment at amortized cost, excluding government guaranteed balances, remained relatively flat in all periods at 2.06% as of March 31, 2024 2.03% at December 31, 2023 and 2.1% a year ago at March 31, 2023. As Scott mentioned, net charge offs for the Q1 of 2024 were elevated at $3,700,000 a $1,100,000 increase from $2,600,000 for the Q4 of 2023 and a $1,800,000 increase compared to $1,900,000 in the Q1 of 2023. Nonperforming assets, excluding government guaranteed loans to total assets, were stable, however, at 0.7% as of March 31, 'twenty four compared to 0.74% as of December 31 and but up from 0.2% at March 31, 2023. We continue to make changes to improve the asset quality performance of the bank's credit bench working capital lending program. Beginning in January of 2024, the FlashCap loan product was discontinued due to its higher than expected credit losses.

Speaker 3

FlashCap provided working capital loans under the SBA 7 small loan program for loans under 350,000 dollars The bank's BOLT small loan program provides working capital loans of $150,000 or less and was developed using stricter underwriting standards than the historical flash cap program after analyzing the data from thousands of flash cap loans originated in prior years. The BOLT loan product has performed better than anticipated with a lower loss rate than the flash cap loan program. And even with that, management suspended lending to a few industries this quarter, which present higher risk or have performed below expectations. Furthermore, additional credit enhancements were made to the BOLT underwriting parameters this quarter to improve future performance. Although net charge offs were higher than anticipated in the Q1, past due and nonperforming ratios are stable.

Speaker 3

We are monitoring the loan portfolio closely, and we have made several adjustments to help improve future loss rates. In addition to the enhancements I mentioned around the Flash Cap and Bolt loan portfolios, we have also added resources to our loan workout and loss mitigation teams and implemented new technology whereby we can text payment reminders to certain borrowers as yet another touch point to get in front of them. In addition, as Scott noted, given the shrinking size of the purchased unsecured consumer loan portfolio, we expect the charge offs to begin to decrease in this portfolio throughout the remainder of the year. While the results for Q1 did not meet our expectations, we do see a stronger path forward. Management is laser focused on asset quality, hitting production targets and maximizing the investments we have made in banking centers and technology to improve our profitability and our overall efficiency.

Speaker 3

At this time, I will turn it back to Tom for any final comments.

Speaker 1

Thank you, Robin. And I would just like to say thank you all of you for participating on our call this morning. And we look forward to now opening it up for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from from the line of Ross Haberman from RLH. Please go ahead.

Speaker 4

Good morning. How are you guys? Could you tell me how big in total the flash what do you call it, the flash loan portfolio was in dollars? Yes. Yes.

Speaker 4

Sorry, please. Yes.

Speaker 2

Ross, at the end of the Q1, our exposure or the unguaranteed portion of that was about $49,000,000

Speaker 4

And the allowance you have against that is what, what percentage or what points I should say?

Speaker 2

We're pretty heavily reserved on that. We are our ACL just on that component of the portfolio is about 3,500,000

Speaker 4

dollars 3,500,000. All right. And you're saying you began to see exposure over and above that and that's why you're slowing it down or stopping it, I should say?

Speaker 2

As far as the product goes?

Speaker 3

Yes. Yes. Just really the FlashCap product was really our main C and I small loan product pre pandemic. And we continue to do some of it when we re started after PPP and the pandemic. But it really wasn't a big driver for us at this point as we started to focus on Voalte.

Speaker 3

And so we just felt given the losses in that portfolio and where it was at this time that we would just go ahead and discontinue that product. It's not that we're not going to do C and I small loans other than BOLT. We will do those, but they'll really get a more thorough underwriting as part our core SBA loan program.

Speaker 4

How are you doing in terms of general? I know you had before you joined, there was a big unguaranteed portion of the SBA on your balance sheet. Could you tell me what that number is? And what kind of delinquencies you're seeing in that part of your unguaranteed portfolio today?

Speaker 2

Yes. Ross, the total unguaranteed balances of SBA 7 loans that we had at the end of the Q1 was about $202,000,000 And as far as the overall delinquencies, you can see that in the slides that we have. The number that we're reporting there includes the non SBA balances as well. But predominantly, what we are seeing in terms of delinquencies is coming from the unguaranteed side of things. So kind of talk it through this as I pull up that exact number for you just a moment here.

Speaker 4

I'm sorry, I don't have the slides in front of me. I apologize.

Speaker 2

Sure. Hang on just

Speaker 4

a moment.

Speaker 2

It's 1.7%. That includes that tax as well as the amount.

Speaker 1

Yes, correct.

Speaker 4

And it's

Speaker 1

down from

Speaker 2

2.9% at the end of last year.

Speaker 4

And what kind of delinquencies are you seeing on that today? And I only ask because a number of other banks I've spoken to are seeing a pickup specifically in that unguaranteed portion. Just because all these are institutions, groups, organizations that you lent to at, I don't know, 5% or 6% are now going to pay over 10% is it's quite a lot of strife, you might say, with the new rates?

Speaker 2

That yes, that's very valid comments. When we underwrite the loans, we try to stress test what the rate increases are. And some of the feedback we've gotten is that the higher interest rates today versus 18 months ago, it creates a lot of stress for these businesses. Many of them are working through it. Many of them we are working with to make sure that the loans are structured properly going forward.

Speaker 2

Certainly, we want to help them pay. We don't want them to default, but there's a lot of ongoing dialogue with many of them.

Speaker 4

And again, going back to my question, what kind of delinquencies are you seeing in the Q1 for that $200,000,000

Speaker 2

Yes, that's the 1.7% that I mentioned.

Speaker 4

I got it. Okay. Thank you very much. I appreciate the help. Thank you.

Speaker 2

Yes. Thanks for dialing in this morning.

Speaker 1

Have a good one, Ross.

Speaker 4

Okay.

Operator

Our next question comes from the line of Julien Tazarino from Sycamore Analytics. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 1

Good morning. Good morning. Hi, Julien.

Speaker 5

Can you talk about the gain on sale trends for the SBA business? Like I can sort of tell but maybe just explain what the volume trends are and the gain on sale margins are and if there's much seasonality to that? Sure.

Speaker 2

Let me kind of break that up into the 2 pieces there. First, I'll answer the easy one. Is it seasonal? We haven't seen anything that would lead us to believe that there's any seasonal variations when we sell these loans. So I'm not going to suggest that that's any driver behind it.

Speaker 2

In the Q1, we did see 2 things. First of all, the volume of loans that we sold was lower than what we had sold in the 4th quarter, but the premiums that were offered and paid on what we did sell in the Q1 were higher than what we got in the 4th quarter. Right now, those premiums vary. We typically see on SBA loans somewhere in the neighborhood of 8% to 12% depending on what the actual loan is priced at. And I don't think it will continue to go any higher than that.

Speaker 2

We did see some moderate increase going back to June, July of last year, but I think it is probably leveled out at this point.

Speaker 5

It leveled out around what level?

Speaker 2

At the higher end of that range, about 12%.

Speaker 5

Around 12%. Okay. I wonder if the market for these loans because you're selling them, right? I wonder if the market for these loans is improving like if demand is increasing as maybe demand for commercial real estate mortgage backed securities is somewhat moderating or?

Speaker 3

It certainly could be. I think the market really does like our Voalte product. They like the granularity of it and the homogeneous nature of that product. So that does tend to garner higher premiums. The folks that buy loans don't tend to want some of the larger loans.

Speaker 3

Those are it kind of messes up the pools if you have one large loan in there, as a significant portion of it. So sometimes that's where we see some lower premiums is on the larger loans. But if they're 25 year CRE deals, then that works the other way and it pushes up the premium. So, but given our portfolio of small loan C and I 10 year, that does tend perform pretty well maybe compared to other banks that are selling SBA guaranteed.

Speaker 5

Okay. Okay. The securities portfolio, you have a lot of asset backed securities. What kind of asset backed securities are those?

Speaker 2

As far as the makeup of the portfolio?

Speaker 5

Yes. Just what kind of what's the asset backing those ABS securities?

Speaker 2

Yes. There's a couple of different ones. Some are real estate plus some are also private student loan.

Speaker 3

That's guaranteed. That's guaranteed, correct. From the government.

Speaker 5

Private student loans or government guaranteed student loans?

Speaker 2

They are issued by a private lender, but they are government guaranteed.

Speaker 5

Okay. Okay. And what is asset backed real estate? What's that an example of? Like what's an example of that?

Speaker 2

Typical mortgage backed. Yes, just mortgage backed. We've got a we bought a bond that fits nicely into our CRA investment program, for example. It's nothing too exotic, that's for sure.

Speaker 5

Then why isn't it just out of curiosity, why isn't it in the mortgage backed security classification?

Speaker 2

It would be actually on that one. Okay. All

Speaker 5

right. Let's talk about the ABS.

Speaker 2

No, no, no. It's the CROA bond that I mentioned is actually a single loan to an entity that provides low income housing.

Speaker 5

Okay. Okay. All right. Okay. And then, I was wondering, you mentioned that you've pulled back from certain industries and you may have pulled back from certain geographies too.

Speaker 5

I was curious if that's the case or not. And then just which industries and or which geographies have you pulled back from because you're seeing kind of increasing risk profile?

Speaker 1

Yes. Hi, Julianne. This is Tom. We ended up taking a look at defaults over the last 12 months as we do each month. And we decided to exit transportation, marketing and advertising and also limit our exposure in hotel and restaurants, all of which were showing signs of poor performance and we chose not to continue to lend into those specific industries.

Speaker 1

We did not make any geographical changes as we did not see any kind of portfolio performance issues in any specific geography.

Speaker 5

Okay. That's good about the geography. Yes. And it's good that it's not like a bunch of industries, it's pretty much those 4, right?

Speaker 1

Correct.

Speaker 5

Yes. And how about for your local Tampa Bay real estate values, what are you seeing there for 1 to 4 family real estate values, how those have been trending as well as commercial real estate, if you know, for the local?

Speaker 1

Yes. If you read the Tampa Bay Business Journal, the Tampa Bay market continues to be mentioned as a very strong MSA compared to other markets across the country. So it's one of the benefits of being headquartered here and having 12 banking centers throughout Tampa Bay. We operate in a very real estate attractive market. Job employment continues to be very strong here in Tampa Bay, and we're fortunate on the real estate side and employment side.

Speaker 5

Real estate values trending higher or kind of moderating? Or what's the recent trend?

Speaker 1

Yes. I think they're probably stabilizing and in some sectors actually going up because we have so many people moving to Tampa Bay. So it's all supply and demand, but we have not seen any deterioration. And I think I would classify it as stable to improving in values.

Speaker 5

Okay, good. And you mentioned that you're going to you mentioned in the press release, I think, that you're going to start focusing on kind of rightsizing the employment levels, I think, and or maybe you mentioned that in your comments. But I noticed that the FTEs increased, maybe sorry, maybe because of the new branch that just opened, but you went from like 305 FTEs up to 313. Is that going to do you have any kind of expense rationalization plan or you're going to hold that steady? I just was curious about the comp line.

Speaker 3

Yes. Sure. So the new banking center certainly did contribute to that increase and some of it may be a little bit of timing here. But ultimately, we are always looking at the expenses. And certainly, in this environment, we're not happy with the earnings.

Speaker 3

And we and as the production decreases, we have to take a look at everything. And there's 2 things we can impact, right? More production, more revenue or less cost, and we're working on both. But so I wouldn't say an expense rationalization plan. But we certainly we did have some rightsizing during the quarter.

Speaker 3

But as noted, we also opened the new banking center as well. So Tom or Scott, feel free to add anything additional there.

Speaker 2

I think you particularly agree.

Speaker 5

Okay. Okay. And then I just was curious about the shares outstanding. They went up kind of more than past quarters. Is that I'm assuming that's from comp related option related comp or something with the share count.

Speaker 5

But I'm just wondering, any chance you could offset that increase with buybacks, at least the share count isn't increasing?

Speaker 2

Julien, you are correct. The increase is due to compensation based grants. That's what raised the share count. Those typically we do that in January. And so that's why you see in the Q1, it's not going to continue to increase.

Speaker 2

As far as stock buyback goes, there we don't have the excess capital to repurchase stock at this point in time. Certainly, if we did, we would based on where the stock is trading right now, which we still believe is below what the real value of the company is. But until we get to the point where we actually have excess capital to repurchase it, we won't be exploring or looking for ways to repurchase stock.

Speaker 5

Yes. Even I wasn't really talking about like a big buyback just to kind of hold that share count steady. But I know it wouldn't mean probably getting an authorization past the regulators or something and sometimes it's just not worth it. But yes, so you mentioned don't have excess cap. Where would where is the level where you have excess cap?

Speaker 5

Like where does the TCE to TA ratio or whichever ratio you're looking at?

Speaker 3

I think it depends, right? I mean, right now, we're sitting at 9.12 percent Tier 1 leverage. And we're always measuring that compared to particularly the risk in our loan portfolio and with the unguaranteed balances. And so that's sometimes a moving target. So I don't know that it's an easy answer to your question, but I think we'd all like to see Tier 1 grow this year to over 10%.

Speaker 3

So but when we start getting much higher than that, if we get in the 11% 10 point

Speaker 4

Yes.

Speaker 5

Yes. Okay. All right. Very good. Very good.

Speaker 5

Well, thank you. Appreciate it.

Speaker 3

Thank you.

Speaker 1

Thank you, Julien.

Operator

There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Zurnig for final closing comments.

Speaker 1

All right. Well, listen, again, thank you so much for participating on our call. Thank you for the questions this morning. And our exec team looks forward to going back and doing our blocking and tackling so we can get back to becoming a high performing bank here in Tampa Bay. Thank you and have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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Earnings Conference Call
BayFirst Financial Q1 2024
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