BayFirst Financial Q4 2024 Earnings Call Transcript

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January 31, 2025
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Operator

Good morning, ladies and gentlemen, and welcome to the BayFirst Financial Corporation Q4 2024 Conference Call and Webcast. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Also note that this call is being recorded on Friday, January 31, 2025. And I would like to turn the conference over to Mr.

Operator

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

Julienne Cassarino
Principal at Sycamore Analytics LLC

Thank you, Sylvie. Good morning and thank you for participating on our call today. I have with me Robin Oliver, our President and Chief Operating Officer and our CFO, 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 deck.

Julienne Cassarino
Principal at Sycamore Analytics LLC

It was a busy quarter for Bate First as our business returned to normal after the autumn hurricanes. We also completed some initiatives to position the bank to success in 2025 and continue to grow earnings and improve performance. We completed a sale leaseback transaction with 2 of our banking offices, which generated a gain and improvement in the bank's capital position, which we leverage for future growth of loans and also deploy with a share repurchase program. More details on that shortly. Let me now share some highlights from around May 1.

Julienne Cassarino
Principal at Sycamore Analytics LLC

4th quarter net income was 9,800,000 dollars Excluding the gain from the sale leaseback, earnings were $1,100,000 essentially flat to the Q3 of this year. Our net interest margin improved 26 basis points to 3.6% in the 4th quarter. We also suspended the practice of measuring newly originated government guaranteed loans at fair value. Instead, we will measure loans held for investment at amortized cost, which will align gain on sale timing, origination costs and provision expense to when the loan is originated and sold. While this resulted in lower net income during the Q4 due to timing, we took the opportunity from the gain from the sale leaseback to adjust our strategy and our financial reporting will be more consistent with the industry going forward.

Julienne Cassarino
Principal at Sycamore Analytics LLC

Our convenient and attractive network of 12 banking centers across Tampa Bay grew deposit balances 16.5% and net new accounts 9% year to date ending the 4th quarter at $1,140,000,000 Bay First has maintained a granular deposit base and continues to benefit from 74% of deposits being insured on December 31, 2024. On the lending side, we deployed a major upgrade to our Power LOS commercial loan operating system with significant user interface improvements and faster application decisioning. Bay First continues to enjoy minimal commercial exposure in the CRE space with non owner occupied CRE representing only 6% of our loans held for investment at the end of the quarter. Loans held for investment increased by $24,100,000 or 2.3 percent during the Q4 of 2024 to $1,070,000,000 The company's government guaranteed loan origination platform originated 107,800,000 in new government guaranteed loans during the Q4 of 2024, an increase from $94,400,000 of loans produced in the previous quarter and a decrease from $144,900,000 of loans produced during the Q4 of 2023. The company's BOLT loan program, which is an SBA 7 loan product designed to expeditiously provide working capital loans of $150,000 or less for businesses throughout the country.

Julienne Cassarino
Principal at Sycamore Analytics LLC

Since the launch in 2022, the company has originated 5,726 Bolt loans totaling $741,500,000 of which 4.95 Bolt loans totaling $64,800,000 were originated during the Q4. In total, the company originated $158,700,000 of loans and sold $94,500,000 of government guaranteed loan balances during the quarter. For the full year, the company originated $431,500,000 of government guaranteed loans and our community bank originated $276,500,000 of conventional owner occupied CRE, C and I, home equity lines and loans, consumer loan term loans and first mortgage loans. Net of sold government guaranteed loan balances, total loan balances grew $150,800,000 or 16.5%. Our commitment to building the Premier Community Bank of Tampa Bay is reinforced by the recent hiring of our business banking team, who will focus on the banking needs, including deposits and treasury management for small businesses across our retail footprint.

Julienne Cassarino
Principal at Sycamore Analytics LLC

This follows the creation of our healthcare platform earlier in the year. These added production machines solidify Bay First for success in 2025. Finally, I want to remind everyone that our bank was ranked the top bank in Florida by Forbes Magazine for 2024. I'm very proud of our team for this accomplishment and want to thank all of our customers who voted for this recognition. Now I will pass the microphone to Scott McKim, our CFO to provide an overview of our financial performance.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Thank you, Tom. Good morning, everyone. As Tom mentioned, our net income from continuing operations was $9,800,000 in the 4th quarter. Excluding the sale leaseback gain, 4th quarter net income was $1,100,000 For the full year, total net income was $12,600,000 $4,400,000 excluding the sale leaseback gain. During the 4th quarter, balances of loans held for investment grew $24,100,000 or 2.3 percent during the quarter and overall total assets grew $43,200,000 to end at $1,290,000,000 or 3.5 percent during the quarter.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Since the end of 2023, total assets have increased $170,500,000 or 15.3 percent. Total deposits increased $31,000,000 or 2.8 percent during the Q4 of this year and increased $158,100,000 from December 31, 2023. Total deposits ended the year at $1,140,000,000 Shareholders' equity at quarter end was $110,900,000 and is $10,200,000 higher than the end of 2023. Net accumulated other comprehensive loss increased slightly by $644,000 during the quarter ending the year at just under $3,000,000 This is flat to our measurement at December 31, 2023. Tangible book value increased this quarter to $22.95 per share from $20.86 per share at the end of the 3rd quarter.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Also as Tom mentioned, our net interest margin improved 26 basis points to 3.60% in the 4th quarter. Net interest income was $10,700,000 in the 4th quarter, up $1,200,000 or 13% compared to the 3rd quarter and up $1,800,000 from the year ago quarter. Much of this improvement is due to lower interest expense on deposits of $900,000 in the 4th quarter compared to the 3rd quarter. This was generated by the migration of promotional price CDs, which matured during the quarter and migrated to lower rate CDs and money market accounts. Non interest income excluding the $11,600,000 gain from the sale leaseback was $10,600,000 for the Q4 of 2024.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

That was down $1,600,000 from the prior quarter. Also as Tom noted, we suspended the use of fair value measurements on newly originated government guaranteed loans during the quarter. By comparison, the use of fair value accounting provided $3,500,000 in gain revenue in the Q3. This change is a timing variance which will not occur in future periods. Compared to the Q3 of 2023, gain on sale of government guaranteed loans was $1,500,000 higher and government guaranteed loan servicing rate gains were $734,000 higher in the 4th quarter.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

For the full year and excluding the sale leaseback gain, non interest income was $883,000 lower than 2023. This variance is related to overall lower gains from the sale of government guaranteed loans in 2024 versus 2023. Notably, in 2023, the company sold $451,600,000 of government guaranteed loan balances versus $385,300,000 in 20.24. Non interest expense decreased by $1,900,000 in the 4th quarter and $900,000 of this decrease is from $0 of third party non deferrable origination expense compared to the 3rd quarter. This is also related to suspending the fair value measurements.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Lower compensation costs and incentives reflect lower loan originations in the 4th quarter combined with more as more origination costs were deferred versus costs recognized on loans measured at fair value during the Q3. Also marketing, recruiting and development and collection costs were also lower in the Q4 compared to the Q3 2024. For the full year of 2024, total non interest expense was $1,200,000 lower than 2023. Commissions, incentives and bonus expenses were $1,300,000 lower, marketing expenses were $1,300,000 lower and 3rd party non deferrable origination expenses were $1,600,000 lower. Offsetting all these lower expenses were higher data processing costs of $1,100,000 reflecting our investment in technology to support loan originations as well as higher collection costs of $600,000 and then other expenses of $400,000 Provision for credit losses was $4,500,000 in the 4th quarter compared to $3,100,000 in the 3rd quarter and $2,700,000 in the Q4 of 2023.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Net charge offs increased by $800,000 primarily from higher charge offs and unguaranteed SBA 7 loan balances. For the year, total provision for credit losses was $14,700,000 which was $4,300,000 higher than it was in 2023. Total net charge offs in 2024 were $13,000,000 which whereas the provision expense was $1,700,000 higher at $14,700,000 The ratio of allowance to credit losses to total loans held for investment and amortized costs was relatively flat this quarter compared to last quarter at 1.54% on December 31, 2024. That compares to 1.48% as of September 30, 2024 and 1.64% as of December 31, 2023. Our portfolio of unsecured consumer loans purchased from a third party generated over $395,000 of net charge offs during the quarter, which is comparable to Q3.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

At this time, I'll turn the call over to Robin to make some additional comments.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Thank you, Scott. Good morning, everyone. I would like to further delve into credit quality as it is a key focus for us, particularly given the nature of our SBA portfolio. The vast majority of our SBA loans are tied to prime adjusting quarterly. And as such, many of our borrowers have seen significant increases in their payments over the past 2 to 3 years.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

At the same time, they are also dealing with high inflation. To try to help these small businesses survive and mitigate loan losses, we've mentioned previously that the bank developed an express modification program for SBA 7 loans at the end of Q2 to help borrowers who are struggling to make payments. To date, approximately 500 SBA 7 loans have been modified to lower their payments by extending their maturity date with over half of these loans continuing to perform knowing that not all will be saved. That being said, the pace of new modifications has slowed considerably and is expected to represent a lesser emphasis in 2025 with rates stabilizing. In addition, although select commercial and consumer borrowers received some payment relief after the recent hurricanes affecting our area, All collateral was properly insured and we have had no losses as a result of these natural disasters to date.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Although loans past due 30 to 89 days showed improvement declining slightly quarter over quarter, non performing assets to total assets increased to 1.5% as of December 31, 2024. This compares to 1.38% at the end of the 3rd quarter and 0.92% as of December 31, 2023 with the increase this quarter largely being driven by 3 larger well collateralized loans. Annualized net charge offs as a percentage of average loans held for investment and amortized cost were 1.34% for the Q4 of 2024, up from 1.16% in the 3rd quarter and up from 1.27% in the Q4 of last year. In 2025, portfolio monitoring and collection will continue to be a focus with enhanced processes and new technology being implemented to better connect with borrowers, additional staffing hire to support volume and continued efforts to modify loans for qualified borrowers. I'm also pleased to announce the addition of a new Chief Credit Officer this month as our prior Chief Credit Officer moved to a consulting role in anticipation of retirement.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Finally, I'd also like to briefly cover some operational updates. Driving improved efficiency for our company is a key initiative and 2024 helps lay the groundwork for anticipated future improvements. In addition to the Power LOS loan origination platform enhancements Tom already mentioned, we rolled out a lockbox treasury management solution in the Q4 that will better allow us to serve healthcare companies and homeowners associations. Another notable example is the launch of a new workflow automation tool that will assist us in automating manual processes that have historically been done by email or other means. This new tool also has AI functionality that can instantaneously answer questions for employees on policies, procedures and frequently asked questions as well as automating the process for information technology requests.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

As we move forward in 2025, we have several other use cases for this software and several other projects coming to fruition that will further streamline processes, increase efficiency and lower costs. At this time, I'll turn it back to Tom for his final thoughts.

Julienne Cassarino
Principal at Sycamore Analytics LLC

Thank you, Robin. As I start my 2nd year as CEO of A1st, I'm very excited about our future and I look forward to sharing our continued successes with all of you in 2025. Thanks again for joining our call today. And I would like to now open it up for questions.

Operator

Thank you. First, we will hear from Julien Casarino at Sycamore Analytics. Please go ahead.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Hi, good morning.

Julienne Cassarino
Principal at Sycamore Analytics LLC

Good morning.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Okay, great. I want to make sure you could hear me. That was a great gain on the branches. I was just curious how old were those branches? When did they go on the books?

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

And then I was wondering if that lease cost was fixed for 15 years. It's pretty long term lease. I was just wondering if that was fixed or variable?

Julienne Cassarino
Principal at Sycamore Analytics LLC

Hi, Julianne. Good morning. Thanks for the question. So the two branches that we sold were our Countryside branch and you can kind of see this in our slide deck as well, which opened in 2018. And then also our Seminole branch, which was the original branch when the bank started and that was back in 1999.

Julienne Cassarino
Principal at Sycamore Analytics LLC

So it doesn't reflect the oldest ones. Obviously, our original branch was included and we were pretty pleased with the gain as well. As far as the lease arrangements go, the rent component associated with the lease is not stable. It does go up each year. It's 1% to 2% as I recall.

Julienne Cassarino
Principal at Sycamore Analytics LLC

So the details are out there. We filed that with our 8 ks. You can kind of see all the bits and pieces with it. But hopefully that answers your question.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Yes. And how many other branches? I think you have 10 other how many other ones do you own?

Julienne Cassarino
Principal at Sycamore Analytics LLC

So at this point, we own 8 of our other 12 branches.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Own 8 out of the remaining 10, right, 12, but you sold 2. So you own all your branches. Okay. Okay. Except for 2.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

And I was curious about the buybacks, which is great. Again, it's great to see, but you pay a stock dividend. And so if you look historically at the shares outstanding, they don't change much, right, even though you've had past buyback authorization. And I guess I was even this at $2,000,000 it's double your past one, but I think it's still only around 3% of the outstanding. So I was just wondering if, I was curious why not kind of double that, make it over 5%.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

It's $2,000,000 out of the almost $9,000,000 after tax gains. And you don't have any kind of CRE concentration cap issues, you don't have ample capital. And I was just and with the stock trading where it is 67%, I think, of tangible book now. Just wondering why not buyback more and actually take the share count down?

Julienne Cassarino
Principal at Sycamore Analytics LLC

Yes. That's a very good question. And the short answer is we are a loan production machine here at BayFirst. We put on over $700,000,000 in new originations across the company last year. We need to have adequate capital to continue to be producing these loans that will grow our earning assets on our balance sheet.

Julienne Cassarino
Principal at Sycamore Analytics LLC

We also took this opportunity with the gain to eliminate the fair value accounting treatment, something that was very important to us as we move forward. And the remaining dollars, we did want to show the confidence in our stock and we did get authorization for a $2,000,000 buyback and we will be evaluating that position as our earnings continue.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Okay. Was the $1,000,000 authorization a couple of years ago, was that finished?

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

That was only open for 1 year. So it was authorized, but it was it had a 1 year term.

Julienne Cassarino
Principal at Sycamore Analytics LLC

That one started December 31, 2023, Julienne. Okay. Not really replacing it. It's we've kind of been out of the market for last year and picked it back up.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Right. Well, buybacks are accretive buybacks are accretive buybacks. But I was thinking it would be great to see the share count actually go down. But it is accretive. It's great.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

The accounting change I thought was a big deal. That's a big accounting change. And I was just curious about the timing. How long are those held for sale loans on the books for about how long?

Julienne Cassarino
Principal at Sycamore Analytics LLC

Yes. They're not held for sale loans. I mean, we basically book all of our loans that held for investment. And if you're referring to the portfolio of loans that were initially booked at fair value, I will tell you that the bulk of those loans are our SBA 7 bulk program. And the term on those loans are 10 years.

Julienne Cassarino
Principal at Sycamore Analytics LLC

And as far as the average life of those, I would estimate that the portfolio is going to be around here for a while. The benefit for us more than anything else and this is coming from the person that has to do the financial reporting is that we're more and more going to look like other institutions that are in this space and lending. Fair value accounting certainly provides a it's an option that we can leverage, but it also makes us look different. And in some of the conversations that I've had with other investors, quite simply, it's like, well, you guys look different. It's a little bit difficult to kind of follow or make comparisons.

Julienne Cassarino
Principal at Sycamore Analytics LLC

So this is a great step for us to get back in line.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Yes. Yes. Well, sort of along those lines, what is the current SBA gain on sale margin and how has that been trending over the past 6 to 12 months?

Julienne Cassarino
Principal at Sycamore Analytics LLC

I'd say over the past 6 to 12 months, it's been stable. And the margin really is kind of variable. If I just kind of look at only the boat loans, the gross premiums that we're seeing on those are 12% to 14%. That really has kind of been the same almost, I'd say, almost until the end of 2023. And we haven't sold anything or done any sales so far in 2025.

Julienne Cassarino
Principal at Sycamore Analytics LLC

So I can't really comment on if that's still the case. But it's our product has been well accepted. It performs in a very predictable manner. So my hope is that it's going to continue at that level into 2025.

Julienne (Coe) Cassarino
Principal at Sycamore Analytics LLC

Okay, great. Well, thank you. Thank you.

Operator

Next, we will hear from Ian Green at Pendragon Capital. Please go ahead Ian.

Ian Green
Investment Manager at Pendragon Capital Management

Hi, good morning. Thank you. Two questions, I guess. One I wanted to ask first about you can hear me okay, yes? Yes.

Ian Green
Investment Manager at Pendragon Capital Management

Okay, great. Your C and I repricing and your consumer loan pricing, do you see with your maturity profiles there that there'll be a significant bump up in interest rate on that portfolio of C and I? And I guess the other question on the consumer, is that all is that almost entirely floating based on prime?

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

So this is Robin Ian. Good morning. So the C and I portfolio, when we first start with our balance sheet is very asset sensitive and the vast majority of our loan portfolio is variable rate. And a good portion of that is because of the SBA 7 lending that we do. So the vast so almost all of our C and I loans that are SBA are adjustable quarterly with and are tied to prime.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

So certainly we have some other conventional C and I business or other owner occupied CRE that is not, But it's a much smaller portion of the existing balance sheet. And then on the consumer side,

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

there is

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

a fair amount of home equity lines and those are also variable rate adjusting as soon as prime rate changes as well. So we are not like most other banks that may be worried about their commercial portfolio and rates adjusting at this time and causing some credit issues from that standpoint. Our borrowers have already seen the rate increases, which is frankly why our credit losses are higher, in the small loan space for unguaranteed SBA 7A.

Ian Green
Investment Manager at Pendragon Capital Management

And I assume you underwrite those. Yes, it's funny because some banks are actually seeing a real pop in net interest margin because they have quite a few bit rolling off. And I guess they've underwritten it, hopefully, that the borrowers can handle the rate increase. So I'm assuming you've stress test that and when you originate the loan, it's you have this big cushion of what the ability to pay is, I assume.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Yes, we do, certainly.

Ian Green
Investment Manager at Pendragon Capital Management

Yes. Now the other question I had just is sort of on the disaster insurance and how that all works. I mean, do you have any do you have a sense of like the loan value or the principal amount that's impacted that was impacted by hurricane damage and all that sort of stuff? And with that, does the insurance how does all that work? Are you getting cash flows in from the insurance companies?

Ian Green
Investment Manager at Pendragon Capital Management

Or is that all just going to the borrower and it just helps them I guess to keep repaying the loan that they have?

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Yes. So it's really pretty immaterial for us. I mean, we have a handful, maybe I can count them on both hands of commercial borrowers who were impacted in some way. But if they're in flood zones, they're required to have flood insurance at the time that we make the loan and throughout the loan period. So we're not aware of any properties that were where we have a shortfall.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

It's just a matter of time, right? So a lot of times we've just given 3 months deferrals, for example, while different properties got themselves cleaned up to reopen. So and if there are large dollar amounts of insurance premiums then certainly we do monitor that with the borrower and hold it in an escrow and make sure that the proper improvements are being made. So and then we have some smaller consumer loans that are in the same boat. But again, it's relatively immaterial to the portfolio.

Ian Green
Investment Manager at Pendragon Capital Management

And same as residential in residential

Ian Green
Investment Manager at Pendragon Capital Management

mortgages.

Robin Oliver
Robin Oliver
President & COO at BayFirst Financial

Same with residential. Yes, exactly.

Ian Green
Investment Manager at Pendragon Capital Management

Okay. Great. Well, thank you very much. Appreciate it.

Julienne Cassarino
Principal at Sycamore Analytics LLC

Thanks, Ian.

Scott McKim
Scott McKim
Executive VP & CFO at BayFirst Financial

Thanks, Ian.

Operator

And currently, we have no other questions registered. Ladies and gentlemen, this does conclude today's conference call. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Have a good weekend.

Executives
    • Scott McKim
      Scott McKim
      Executive VP & CFO
    • Robin Oliver
      Robin Oliver
      President & COO
Analysts
    • Julienne Cassarino
      Principal at Sycamore Analytics LLC
    • Julienne (Coe) Cassarino
      Principal at Sycamore Analytics LLC
    • Ian Green
      Investment Manager at Pendragon Capital Management
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