BayFirst Financial Corp.

Good morning, ladies and gentlemen, and welcome to the Bay First Financial Corporation's Q2 2024 conference call and webcast. At this time, all lines are notes and only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Friday, July 26, 2024. I would now like to turn the conference over to Robin Oliver. Please go ahead.

Thank you, Joanna. Good morning, everyone, and thank you for participating on our call today. I have with me our CFO, Scott McKim. Tom Zernick, our CEO, is not with us this morning due to a family emergency. Today's call will include forward-looking statements and non-GAAP financial measures. Please refer to our cautionary statement on forward-looking statements contained on page two of the investor presentation. During the second quarter, we produced net income of $0.9 million, which represents a 5.1% increase over Q1 24 earnings of $0.8 million. Net income increased primarily due to lower provision for credit losses of $1 million and lower non-interest expense of $1.2 million, offset by lower revenue from servicing income and gains on loan sales of $2.6 million quarter over quarter, as SBA 7 loan production was weaker than projected. While we made progress with lowering our provision for credit losses and non-interest expense in the quarter, we are not content with our second quarter results. We continue to see pressure on our SBA 7 production in the current interest rate and credit environment, and as such, we missed our earnings goal due to lower BOLT and core SBA 7 production during the quarter. We did, however, take several actions this quarter as we worked to improve our overall profitability, many of which will not fully produce improved results until the last half of this year. Some of those actions included right-sizing our staffing and incentive compensation, renegotiating key vendor contracts, launching a modification program for our SBA 7A borrowers who are struggling to make payments in a higher-rate environment with the goal of reducing charge-offs, and reducing other expenses while working to leverage our investments in technology. I want to assure our investors that our management's focus every day is to elevate all areas of our business under a more efficient platform to deliver improved earnings on a consistent basis. Now I would like to share some highlights from Around Bay First. 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 second quarter at $1.04 billion. Bay First continues to maintain a granular deposit base with 81% of deposits being insured at June 30th. As the banking industry competes for deposits, we are focused on various ways to grow more low-cost, sticky deposits. During the second quarter, the bank launched its customer referral program called Refer-A-Friend and has already seen success in bringing in many new customers from this program. We also added technology called Branch Anywhere, which allows our banking center teams to open accounts and serve customers using an iPad when out of the branch. This furthers our commitment to meet customers on their terms. I'd also like to highlight that we continue to grow customers and brand awareness through our Cash Kids Club and Trendsetter program. make these programs more impactful and attract new customers. On the lending side, Bay First continues to enjoy minimal commercial exposure in the CRE space with non owner occupied commercial real estate representing only 6% of our loans held for investment at the end of the quarter. Loans held for investment increased by 74 million or 8% during the second quarter of 2024 to 1.01 billion primarily due to an increase in conventional community bank loans, which increased 172 million or 20.5% over the past year. During the second quarter, we also added an experienced commercial lender to our team in Sarasota, as well as a director of healthcare lending who is tasked with overseeing the financial products and services geared towards the medical industry. With thousands of healthcare companies in Tampa Bay and a relatively low risk profile, we believe this is an industry focus that will serve us well. The company's government-guaranteed loan origination platform, CreditBench, originated $99 million in new government-guaranteed loans during the quarter, a decrease of 24% from $131 million of loans produced in the previous quarter, and a 21% decrease from 126 million of loans produced during the second quarter of 2023. The company's BOLT loan program, an SBA 7A loan product designed to expeditiously provide working capital loans of $150,000 or less to businesses throughout the country, saw reduced production in the second quarter, primarily as the bank tightened credit standards at the end of Q1 to ensure future credit quality. Since the launch of Bolt in 2022, the company has originated over 4,700 Bolt loans totaling $611 million, of which 561 Bolt loans totaling $72 million were originated this quarter. The company originated $179 million of loans in total this quarter and sold $79 million of government-guaranteed loan balances. In addition to SBA lending, we also originate USDA loans, and during the second quarter, we added two USDA lenders, bringing us to a total of three lenders in this space and diversifying our sources of revenue. I also want to share some exciting milestones regarding PowerLOS, our commercial loan origination platform, which is currently used by the credit bench team for all BOLT loans, and is in process of being implemented for all other commercial loan products. In the second quarter, we processed the 10,000th application, and the system automatically processed its 100,000th due diligence check. We are excited by the system's scalability and efficiency to help us reduce labor and processing costs as we move forward. As I mentioned earlier, midway through the second quarter, we added additional options to assist small business borrowers in their battle with high inflation and interest rates. As the SBA rules allow for, this involved modifying loan terms to extend the maturity date to make payments more manageable for businesses whose loans are performing and we expect to continue to perform. As a result of our continued focus on collection efforts along with this modification program, our underlying credit metrics improved and our net charge-offs were lower during the quarter. We believe this will also assist in reducing potential charge-offs in the future. At this time, I will pass the microphone to Scott McKim, our CFO, to provide additional overview of our financial performance and credit metrics.

Thank you, Robin. Good morning, everyone. As Robin mentioned, our net income from continuing operations was $0.9 million in the second quarter. Balances of loans held for investment grew $73.4 million, or 7.9% during the quarter, and overall total assets increased $73.7 million to $1.22 billion, or 6.4% growth during the quarter. Year-over-year total assets have increased $130.5 million, or 12%. Total deposits increased $35 million for 3.5% during the second quarter of this year and increased by $97.6 million from the second quarter of 2023. Total deposits ended the quarter at $1.04 billion. Shareholders' equity at quarter end is $101 million and is $9.9 million higher than the end of the second quarter of 2023. There was also a slight decrease in accumulated other comprehensive loss of $75,000 during the quarter. Tangible book value increased this quarter to $20.54 per share, up 9 cents from $20.45 per share at the end of the first quarter. Net interest income was $9.2 million in the second quarter, up $400,000 or 5% compared to the first quarter, and down $900,000 from the year-ago quarter. Net interest margin increased by one basis point from Q1, reflecting increases in both interest earned on loans and interest paid on deposits. Non-interest income was $11.7 million in the second quarter of 2024, down $2.6 million, reflecting lower gains on sales of government-guaranteed loans. Compared to the second quarter of 2023, non-interest income is up $700,000, reflecting higher fair value gains on sale of loans. Non-interest expense decreased by $1.2 million in the second quarter, notably due to a decrease of $1.1 million of compensation costs and a half a million dollars of professional services costs. Compared to the first quarter of 2023, non-interest expense is $0.2 million higher driven by data processing costs offset by lower commission and incentive costs as loan production was down, as Robin already mentioned, from the first quarter of Provision for credit losses was $3 million in the second quarter, compared to $4.1 million in the first quarter and $2.8 million in the second quarter of 2023. Net charge-offs decreased by $0.4 million, primarily from lower charge-offs on unguaranteed SBA 7 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 third party generated over $600,000 of net charge-offs during the second quarter. That was down by $260,000 from Q1. As we have previously mentioned, the unsecured consumer loan exposure continues to pay down, and we expect this impact on net charge-offs to continue to dissipate throughout this year. As far as charge-offs go, annualized net charge-offs as a percentage of average loans held for investment at amortized costs were 1.45% in the second quarter of 2024. That's a decrease from 1.71% in the first quarter and 1.15% in the second quarter of 2023. Non-performing assets to total assets was 1.28% as of June 30, 2024, compared to 0.97% as of March 31, 2024, and 0.79% as of June 30, 2023. Non-performing assets excluding government guaranteed loans to total assets was 0.82% as of June 30, 2024, compared to 0.70% as of March 31, 2024, and 0.61% as of the end of second quarter last year. Past due and non-accrual loans to total loans held for investment at amortized cost were 1.8% at June 30, 2024, That's up slightly from 1.76 at the end of the first quarter and up from 1.56% in the same quarter of last year. The ratio of allowance for credit losses to total loans held for investment at amortized cost was 1.50% at June 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 costs, 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 allowance for credit loss is reasonable for all our loan portfolios and their forecasted performance. At this time, I'll turn it back over to Robin for any final comments.