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spk00: Good morning, ladies and gentlemen, and welcome to the Bay First 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, April 26, 2024. I would now like to turn the conference over to Mr. Tom Zernick, Chief Executive Officer. Please go ahead, sir.
spk04: 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-gapped financial measures. Please refer to our cautionary statement on forward-looking statements contained on page two of the investor presentation. 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 first quarter results. We missed our goals for earnings and profitability driven by higher net charge offs and lower core SBA 7A production in the first quarter. 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. 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 Q1-23 earnings of $700,000, but a 50% decrease over Q4 earnings of $1.7 million. Net income decreased to two primary factors. Higher provision for credit losses of $1.3 million quarter over quarter, coupled with weaker than forecasted core SBA 7A loan production. Our core loans are loans $350,000 to $5 million in size. 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 $22.2 million during the quarter and by $74.4 million 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 accounts across our marketplace. This model continues to build franchise value on our great community bank here in Tampa Bay. While net charge offs increased during the first quarter, 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 flash cap 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 flash cap 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 real franchise value as we were successful in growing deposit balances 2.3% and net new accounts 4.7% during the first quarter of 2024, ending the quarter at 1.01 billion. During the first quarter, there were increases in non-interest bearing deposit account balances of 3.3 million savings and money market deposit account balances of $18.9 million and time deposit balances of $8.9 million, partially offset by a decrease in interest-bearing transaction account balances of $8.9 million. BayFirst has maintained a granular deposit base and continues to benefit from 84% of our deposits being insured at March 31, 2024. 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 19.1 million or 2.1% during the first quarter of 2024 to 934.9 million due to originations in conventional community bank loans, and increased 142.1 million, or 17.9%, over the past year. During the quarter, the company originated $197.2 million of loans and sold 127.8 million of government-guaranteed loan balances. The company's government-guaranteed loan origination platform credit bench originated $130.6 million in new government guaranteed loans during the first quarter of 2024, a decrease of $9.9 million from $144.9 million of loans produced in the previous quarter, and a 7.8% increase over $121.1 million of loans produced during the first quarter 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. Since the bolt launch in 2022, the company has originated 4168 bolt loans totaling 539.9 million of which 760 bolt loans totaling 98.2 million 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.
spk05: Thank you, Tom. Good morning, everyone. As Tom mentioned, our net income from continuing operations was just over $800,000 in the first quarter. Balances of loans held for investments grew 19.1 million, or 2.1%, during the quarter. And overall, total assets increased 26.4 million to $1.14 billion, or an increase of 2.4% during the quarter. Year-over-year total assets have increased $74 million, or 7%. Total deposits increased 22.2 million, or 2.3%, during the quarter. of this year and increased by $74.4 million from the first quarter of 2023. Total deposits ended the quarter at just over $1 billion. Shareholders' equity at quarter end was $106 million and is flat to the end of the fourth quarter and is $10.3 million higher than the first quarter 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 fourth quarter, driven by higher share counts. Net interest income was $8.7 million in the first quarter, essentially flat to the fourth quarter, and down $300,000 from a year ago. This is reflecting both higher interest expense as well as higher interest income, and the net interest margin decreased about six basis points from the first quarter, again reflecting increases in interest income offset by slightly higher deposit costs during the quarter. Non-interest income from continuing operations was $14.3 million for the first quarter of 2024. That was down $400,000, reflecting lower fair value gains on fewer loans in the first quarter compared to the fourth quarter of last year. Loans which were sold during the quarter provided higher net premium gains of $1 million, and compared to the first quarter of 2023, non-interest income was up $4.8 million, reflecting higher gains on sale of loans, packaging fees on loans originated, as well as other income. Provision for credit losses was $4.1 million in the first quarter compared to $2.7 million in the fourth quarter and $1.9 million in the first quarter of 2023. While overall asset quality remains relatively stable, net charge-off did increase due to our portfolio of unsecured consumer loans purchased from a third party in 2022, as well as higher net charge-off on unguaranteed balances of SBA 7A loans. As we have previously mentioned, the unsecured consumer loan exposure continues to pay down, and we expect its impact on net charge-off to dissipate throughout this year. Non-interest expense decreased by $700,000 in the first quarter compared to the fourth quarter, primarily due to a decrease of $600,000 of commission and incentive costs and $1 million of loan origination and collection costs, both reflecting lower core SBA 7A loan origination volumes. Offsetting these decreases were higher salary costs of half a million dollars for income tax resets, as well as an increase in professional fees, which included a one-time $400,000 expense. Compared to the first quarter of 2023, non-interest expense is $2.3 million higher driven by loan origination and incentive costs, as loan production in the first quarter of 2024 was $37 million higher than the first quarter of last year. as well as the additional professional cost 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. Robin.
spk06: 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. Non-performing 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. The ratio of the allowance for credit losses to total loans held 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 first quarter of 2024 were elevated at $3.7 million, a $1.1 million increase from $2.6 million for the fourth quarter of 2023, and a $1.8 million increase compared to $1.9 million in the first quarter of 2023. Non-performing assets excluding government-guaranteed loans to total assets We're stable, however, at 0.7% as of March 31, 24, compared to 0.74% as of December 31, 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 programs. Beginning in January of 2024, the flash cap loan product was discontinued due to its higher than expected credit losses. Flash cap provided working capital loans under the SBA 7A small loan program for loans under $350,000. 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 first quarter, past due and non-performing ratios are stable, 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. At this time, I will turn it back to Tom for any final comments.
spk04: Thank you, Robin. And I would just like to say thank you for all of you for participating on our call this morning. And we look forward to now opening it up for questions.
spk00: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone. 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 the number two. If you're using a phone, please lift the handset before pressing any. One moment, please, for your first question. Our first question comes from the line of Ross Haberman from RLH. Please go ahead.
spk02: 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 is in dollars?
spk03: Yes, sorry, please. Yes. Ross, at the...
spk05: At the end of the first quarter, our exposure or the unguaranteed portion of that was about $49 million.
spk02: And the allowance you have against that is what? What percentage or what points, I should say?
spk05: We're pretty heavily reserved on that. Our ACL just on that component of the portfolio is about $3.5 million. $3.5 million. All right.
spk02: 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. As far as the product goes?
spk06: Yeah, just really the flash cap product was really our main focus. C&I small loan product pre-pandemic. And we continued to do some of it when we restarted after PPP and the pandemic. But it really wasn't a big driver for us at this point as we started to focus on Bolt. 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&I small loans other than Bolts. We will do those, but they'll really get a more thorough underwriting as part of our core SBA loan program.
spk02: How are you doing in terms of general? I know before you joined, there was a big, unguaranteed portion of the SBA on your balance sheet. Could you tell me what that number is? What kind of delinquencies you're seeing in that part of your unguaranteed portfolio today?
spk05: Yeah, Ross, the total unguaranteed balances of SBA 7A loans that we had at the end of the first quarter was about $202 million. And as far as the overall delinquencies, you can see that in the slides that we have in The number that we're reporting there includes the non-SBA balances as well, but predominantly what we are seeing in terms of the delinquencies is coming from the unguaranteed side of things. So I'm kind of talking through this as I pull up that exact number for you. Just a moment here.
spk02: I'm sorry. I don't have the slides in front of me. I apologize.
spk03: Oh, sure.
spk02: Hang on just a moment.
spk03: It's 1.7%. Yeah, correct.
spk05: And that's down from 2.1% at the end of last year.
spk02: 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 All these institutions, groups, organizations that you lent to at, I don't know, 5% or 6% are now going to pay over 10% is, you know, it's quite a lot of strife, you might say, with the new rates.
spk05: Yeah, that's a very valid comment. When we underwrite the loans, we try to stress test what the great 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. 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.
spk02: And again, going back to my question, what kind of delinquencies are you seeing in the first quarter for that $200 million?
spk05: Yeah, that's the 1.7% that I mentioned.
spk02: Oh, oh, oh, oh. I got it. Okay, thank you very much. I appreciate the help. Thank you.
spk03: Yeah, thanks for dialing in this morning. Have a good one, Ross. Okay.
spk00: Our next question comes from the line of Julian Caterino from Sycamore Analytics. Please go ahead.
spk01: Hi, good morning. Good morning. Hey, Julian. Can you talk about the gain on sale trends for the SBA market? business, 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.
spk05: Sure. Let me kind of break that up into the two 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. In the first quarter, we did see two things. First of all, the volume of loans that we sold was lower than what we had sold in the fourth quarter, but the premiums that were offered and paid on what we did sell in the first quarter were higher than what we got in the fourth quarter. um you know right now those premiums vary um we typically see on on sba loans somewhere in the neighborhood of of eight to twelve percent depending on what the actual loan uh is priced at and i don't think it will continue to go any higher than that 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
spk01: Leveled out around what level?
spk05: At the higher end of that range, about 12%. Around 12%.
spk01: 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 increasing. somewhat moderating? It certainly could be.
spk06: I think the market really does like our Bolt product. They like the granularity of it and the homogenous 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 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 premiums. So But given our portfolio of small loan C&I 10-year, you know, that does tend to perform pretty well maybe compared to other banks that are selling SBA guaranteed.
spk01: Okay, okay. And the securities portfolio, you have a lot of asset-backed securities. What kind of asset-backed securities are those?
spk03: As far as the makeup of the portfolio?
spk01: Yeah, just what kind of, what's the asset backing those ABS securities?
spk05: Yeah, there's a couple different ones. Some are real estate, plus some are also private student loans.
spk06: That's guaranteed.
spk05: That's guaranteed, correct.
spk06: From the government.
spk01: Private student loans or government guaranteed student loans?
spk05: They are issued by a private lender, but they are government guaranteed.
spk01: Okay. Okay. And what is asset-backed real estate? What's that an example of? Like, what's an example of that?
spk05: Typical mortgage-backed. Yeah, just mortgage-backed. We bought a bond, you know, that fits nicely into our CRA investment program, for example. You know, it's nothing too exotic, that's for sure.
spk01: Then why isn't it, just out of curiosity, why isn't it in the mortgage-backed security classification?
spk03: It would be, actually, on that one.
spk01: Oh, okay. All right, let's talk about the ABS.
spk05: No, no, no. The CRA bond that I mentioned is actually a single loan to an entity that provides low-income housing.
spk01: 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. 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?
spk04: Yeah, hi Julianne. This is our 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 not to continue to lend into those specific industries. We did not make any geographical
spk01: changes as we did not see any kind of portfolio performance issues in any specific geography okay that's good about the geography yeah and it's good that it's not like a bunch of industries it's pretty much those four right correct yeah and how about for your local Tampa Bay real estate values? What are you seeing there for one to four family real estate values, how those have been trending, as well as commercial real estate, if you know, for the local?
spk04: Yeah, 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 That'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.
spk01: Real estate value is trending higher or kind of moderating? What's the recent trend?
spk04: Yeah, 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.
spk01: Okay, good, good. And you mentioned in the press release, I think, that you're going to start you know, focusing on kind of right-sizing the employment levels, I think, 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, you know, do you have any kind of expense rationalization plan or hold that steady? I just was curious about the comp line.
spk06: Yeah, 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, you know, we're not happy with the earnings, and as the production decreases, you know, we have to take a look at everything, and there's two 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, you know, we've We did have some right-sizing during the quarter, but as noted, we also opened the new banking center as well. So, you know, Tom or Scott, feel free to add anything additional there. I think he particularly agreed.
spk01: Okay. Okay. And then I just was curious about the shares outstanding. They went up kind of more than past quarters. I'm assuming that's from – comp related you know option related comp or something with the share count but I'm just wondering you know any chance you could offset that increase with you know buybacks at least the share count isn't increasing?
spk05: Julian, you are correct. The increases due to compensation-based grants, that's what raised the share count. Typically, we do that in January, and so that's why you see in the first quarter, it's not going to continue to increase. As far as stock buyback goes, we don't 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.
spk01: Yeah, even I wasn't really talking about like a big buyback just to kind of hold that share count, you know, steady. But I know it would mean probably getting an authorization past the regulators or something. And sometimes it's just not worth it. But yeah, so you mentioned don't have excess cap. Where is the level where you have excess cap? Like what is the...
spk06: tce to ta ratio or whichever ratio you're looking at i think it depends right i mean right now we're sitting at 9.12 percent tier one leverage and you know we're always measuring that compared to particularly the risk in our loan portfolio and with the unguaranteed balances and so you know that's sometimes the moving target so i don't know that it's an easy answer to your question but i i think we'd all like to see tier one grow this year to over 10%. So, but when we start getting, you know, much higher than that, you know, if we could get in the 11%, 10 and a half to 11% range, I think that gives us some more flexibility, I would say. I agree.
spk01: Yeah. Yeah. Okay. All right. Very good. Very good. Well, thank you. Appreciate it. Thank you.
spk03: Thank you, Julianne.
spk00: There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Zernick for final closing comments.
spk04: 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.
spk00: 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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