BayFirst Financial (BAFN) Q2 2026 earnings call transcript

Thank you, Marina. Good morning, and thank you for joining our call today. With me is Scott McKim, our CFO, and Robin Oliver, our COO. Please remember, 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 2 of the investor presentation. My first full quarter is CEO at Bay 1st has been very busy. We set to work on a number of initiatives, thus short and longer term. The substantial 80 million dollar capital raise at the end of April was the first and was the certainly biggest step for the future of our bank. We completed and deployed our exit resolution plan to address the bank's legacy credit issues, predominantly related to underentee balances of the FBA 7A loans.

During the process of completing the asset resolution plan, our team also identified some material misstatements from prior periods. We had restated financial statements for the next six. The amended 10K and 10Q have been filed this week. Scott will elaborate on both in a few minutes. You know the special meeting of shareholders on July 14th, where the company obtained shareholder approval to amend Bay 1st financial corporation's articles of incorporation to increase the number of authorized shares of common stock from 15 million to 100 million and exchange all 4,000 outstanding shares of mandatorily convertible cumulative perpetual preferred stock series D and all 4,000 outstanding shares of mandatorily convertible cumulative perpetual preferred stock series E for a total of 22,856,000 shares of common stock.

Upon conversion all shares of series D and series E preferred stock were retired. The company series A and series B preferred shares were redeemed in July as well. Management also noted a mid-August launch as the date for the rights offering we announced back in April. Beyond these shareholder actions, we've also moved decisively to strengthen our operating structure and leadership team.

Most notably, trade porn has joined as Bay 1st Chief Banking Officer. Trade has been a career banker in Tampa for over 22 years and will lead our retail and commercial banking teams. As a lifelong Tampa resident with deep roots and involvement in several real estate industry and community organizations, trade brings the local market insight, relationship orientation, and proven leadership needed to help us sharpen execution and accelerate growth across our franchise. Adam Curtis will continue to lead commercial lending with the organization as chief lending officer. He will report to trade. The commercial relationship managers and portfolio managers will report to Adam as that team focuses on growing and serving our commercial business customers across our footprint.

Adam's steady leadership, strong customer relationships, and strong lending expertise remain critical to our ability to serve commercial clients and grow this important line of business with quality and consistency. Samantha Hill has transitioned to director of retail banking with responsibility for production, growth, and execution across our retail banking centers. She will also report to trade. All banking center managers now report to Sam, giving us clearer accountability and a more focused retail strategy. Sam brings a strong record of team development, customer experience, and branch execution, and her leadership will be important as we expand four relationships across our banking center network. Additionally, we have submitted an application to open a new retail location in south Tampa. This office will bring our total retail branch network back to 12, having closed an office in Sarasota last quarter.

With that operational foundation in place, I will now turn the call over to Scott who will discuss the quarter's earnings, including the impact of the asset resolution plan and restatement. Scott.

Thank you, Al. Good morning, everyone. We are reporting a net loss, $32.7 million in the second quarter, as compared to the restated net loss of $5.9 million we reported for the first quarter. As Al mentioned, the asset resolution plan was deployed during the second quarter, and therefore had dominated during the results that we will talk about today.

The plan was a thorough review of the bank's legacy, unguaranteed SBA 78 portfolio, as well as our other portfolios. We conducted an analysis which provided adjustments to the net amount expected to be collected on over 7,000 individual SBA loans, which resulted in the full or partial charge on several of those loans. We established a specific allowance for credit losses on six loans, increased the overall allowance on unguaranteed SBA 78 loan categories, and also adjustments to the fair market values on our portfolio of loans that we have measured at fair value. In total, the adjustment amounted to $38.4 million. For vision expense for the quarter was $29.7 million, and the company's total allowance for credit losses on June 30, 2026 was $45.1 million.

Additionally, the company booked an impairment of $1.5 million on a non-marketable equity investment and a firm who was a partner at the company's former SBA 78 lending business. Finally, the company wrote down the unamortized premium on the bank's portfolio of purchase, fully-guaranteed USDA loans, which are at risk of default, or early prepayment. I want to be clear, this adjustment is not credit specific. In total, the asset resolution plan impact was $41.5 million.

As our new management team had assessed the existing business and started to make updates to the strategic plan, we identified some additional one-time charges during the quarter, which amounted to $2.2 million and reflect the right off of vendor contracts, which will no longer be used, and also the approval of a changing control payment to prior management. All of these adjustments together equal $43.8 million of the company's pre-tax $44 million loss for the quarter. We announced on July 15 that we identified $2.8 million of deferred origination costs and $2.1 million of accrued interest as of March 31, 2026, related to loans which had defaulted, or was placed into non-cruel status and prior periods, which resulted in a material understatement of provision expense and overstatement of net interest income during the affected quarterly period, in which the years were accumulated in 2024, 2025, and the first quarter of 2026.

Subsequent to that announcement, we further identified another $3.4 million of deferred origination costs, which should have been met against net gain on sale of government guaranteed loans, and resulted in a material overstatement of those net gain on sale of government guaranteed loans during the affected quarterly period, in which the error accumulated specifically in the years of 2024 and 2025. These errors occurred in periods prior to 2024 as well, but were not material during those periods. Our restatement efforts have correctly recited the company's earnings to date, and we have amended our 2025 10K and our first quarter 10Q. Management and the Board of Directors take our obligation to provide accurate and transparent financial reporting seriously. We move quickly to investigate what happened and to correct it and to notify our shareholders.

We continue to work through internal operational remediation activities and will report and future SEC violence on our progress towards resolution and strengthening our internal controls over financial reporting. It is important to note that by exiting the SBA 7A lending business, these errors will not recruit. Nonetheless, we will ensure that our internal operations are compliance. Please note, as I continue, our prior period metrics, which I will mention, are the restated metrics. Other financial results include loans held for investment decreased by $41.4 million or 4% during the second quarter of 2026 to $882.8 million and decreased 237.7 million or 21% over the past year.

Most of this decreased year over year reflects the sale of loans and the exit of the SBA 7A lending in the fourth quarter of 2025. The deposits decreased $97 million or 9% during the second quarter of 2026 and decreased $175 million or 15% of the past year to $989 million. The decrease in deposits during the quarter was primarily due to reductions and high rate promotional deposits held with non-relationship customers and also a decrease in broker deposits. 80% of the bank's deposits were insured by FDIC on June 30, 2026 and the bank's on balance sheet liquidity ratio as of June 30, 2026 was 14.95% and the bank did not have any wholesale borrowies. Shareholders' equity at the end of the quarter was $115.9 million, which is $40.3 million higher than it was at the end of the first quarter.

The increase is from the capital rate net of the asset revolution plan. Net accumulated other comprehensive loss increased slightly by $57,000 during the quarter, ending at $2.1 million. Changing will book value per share decreased this quarter to $4.8, $4.82 per share from $14.22 per share at the end of the first quarter. Our net interest margin was 3.48% of four basis points in the first quarter. Net interest income was $9.4 million in the second quarter, virtually unchanged from the first quarter and down $2.7 million from the year ago quarter.

On a normalized basis, the net interest margin for the second quarter, excluding the one-time impact that I mentioned as part of the asset revolution plan, was 4.07%, which was driven by positive trends and cost of funds, which decreased 24 basis points from the prior quarter to 2.66%.

The bank's cost of funds is now down 49 basis points year to day reflecting our efforts to exit promotional rate balances and broker deposit balances.

Non-interest income was negative $6.8 million in the second quarter of 2026, which is $7.7 million worse than the first quarter, 80-degree increase of $17.3 million from the second quarter of 2025.

Current quarter net interest income includes an $8 million in one-time impact related to the border-proof asset resolution plan. Additionally, the year-over-year decrease is exasperated by exiting the SBA 7A lending business at no additional gain funds sales of government guarantee loans will be booked. Non-interest expense was $17.7 million, an increase of $2.9 million compared to the first quarter. Essentially, all of this increase is related to one-time charges that were driven by our actions under the asset resolution plan and the one-time items I have mentioned. In total, approximately $2.5 million. Compensation costs were about $600,000 higher, driven largely by a crude changing control payment that I mentioned. Also, as I mentioned, our provision for credit losses was $29 million in the second quarter compared to $3.4 million in the first quarter and $7.6 million in the second quarter of 2025.

Net charge-offs were $4.5 million down $200,000 compared to the first quarter, which was $4.7 million. Total unguarantined SBA 7A loan balances were $142,000,000 on June 30th. In comparison, the bank had $159.3 million of unguarantined SBA 7A loan balances at the end of the first quarter. Total annualized charge-offs as a percentage of average loans held for investment at amortized costs were 2.08% of the second quarter. It decreased from 2.14% in the first quarter of the year.

The ratio of allowance for credit losses on loans to total loan health or investment at amortized costs was 5.37% on June 30th compared to 2.36% on March 31st, 2026 and 2.43% as of the end of 2025. The ratio of allowance for credit losses to total loan health for investment at amortized costs and excluding government guaranteed loan balances was 5.82% on June 30th, 2026, 2.55% at the end of the first quarter and 2.60 at the end of 2025. The bank's tier 1 leverage ratio was 8.3% as of June 30th, 2026, compared to 5.89% at March 31st, 2026 and 7.73% as of June 30th, 2025.

The total capital to risk rate at that ratio was 12.77% as of June 30th, 2026, compared to 9% on March 31st, 2026 and 10.77% as of June 30th, 2025.

I will now turn the call over to Robin's to make some operational and credit comments. Robin?

Thank you, Scott. Good morning, everyone. First, I want to provide some further details around the asset resolution plan and the related impact. As Scott mentioned, the asset resolution plan identified and provided resolution for troubled loans, but it also provides protection from future charge off. Also, Scott mentioned our allowance for credit losses divided by total loans held for investment at amortized cost, excluding government guaranteed loans increased to 5.82% at the end of June. That is up from 1.86% a year ago. Further, the SBA Goldman portfolio now has 32.8% reserved against unguaranteed balances, and the SBA flash cap portfolio now has a 25% reserve. These two small loan portfolios represent 83 million of unguaranteed SBA balances.

As these loans season, we continue to learn how they perform, but we believe the actions taken under the asset resolution plan have adequately positioned the bank to manage future charge off. That being said, we know we must remain diligent in collecting and resolving problem assets. And to that end, progress is being made, and at the end of the second quarter, total non-performing loans, excluding government guarantee balances, were 14.4 million down from 15.9 million at the end of the first quarter, and the percentage of non-performing loans, excluding government guarantee balances compared to total loans held for investment, was also down to 1.72%, which was a 10- big point drop from March 31, 2026. Although that's up from a year ago, we are still making clear progress.

I should also note that of the 14.4 million in non-performing loans, 3.1 million of these balances were current and paying as agreed, and we will be evaluating those four potential return to a girl's status as time continues. And in addition, as I noted last quarter, although our classified loans are elevated at the moment, 68% of our classified loans were current and performing loans, whereby we are working with the borrowers towards resolution. Switching gears from credit, as we look towards the future growth of the bank and work towards a return to profitability, we are also focused on becoming as efficient as possible in our processes, while ensuring we provide an excellent experience for our customers to make banking easy with a high level of personal touch.

Our focus over the last two years has been on growing business deposits and treasury services, but the infusion of capital, this task quarter really allows us to get back to lending, which will help the bank grow both loans and the profits to add stable management's income and fee incomes instead of transactional earnings. Without adding significant headcount, we've also added leadership and talent in various areas of the bank, which we believe will position us for growth, including trade, the chief banking officer that Al mentioned, achieved data on the start, and retail personnel, including at the retail individuals to support our new South Tampa locations that is scheduled to open in September. We are excited about further expanding in Hillsborough County as we seek to round out our presence in the Tampa Bay market.

At this time, I will turn the call over to Al to make some final comments.

Thank you Rob. As I complete my first few months, it made first what I've seen only reinforces my belief that we have a significant opportunity ahead. I've spent time with our employees, customers, shareholders, and community leaders. And one thing is clear. State first has the people, relationships, and market position to become the leading community bank in the Tampa Bay region. Our focus is simple.

We're building a high-performing community bank centered on relationship banking, disciplined execution, sound credit practices, and exceptional service. We believe local businesses and consumers are best served when decisions are made close to home by bankers who know the market, understand their customers, and are invested in the success of the communities in which they serve.

Best community banking model starts with strong customer relationships. Our deposit mix and cost of funds remain a top priority. We're working to deepen existing relationships and improve the mix from higher-cost transactional accounts to relationships that value service, responsiveness, and long-term partnerships. On the lending side, loan growth has already gone. While we continue to manage payoffs and charge-offs associated with the legacy SBA portfolio, our focus has shifted toward growing traditional, commercial, and consumer lending with borrowers located in the markets we serve. Our loan pipeline is strong, and we are seeing encouraging opportunities across our footprint. We're also investing in technology and process improvements that enhance efficiency, improve customer experience, and position us to scale responsibly as we grow.

The capital we raised earlier this year provides us with strength and flexibility as we execute this strategy. We intend to deploy that capital thoughtfully, focusing on opportunities that strengthen the franchise, improve profitability, and support sustainable growth. While there is still work to do, I'm encouraged by the progress we've made in the momentum we are building, our priorities are clear. Road for relationships, strengthen performance, expand our presence in Tampa Bay, and deliver consistent long-term value for our shareholders. I want to thank our employees for their dedication, our customers for their trust, and our shareholders for their continued support. I am optimistic about our future and excited about what lies ahead.

Marina, I'll turn the probe back over to you for some questions.

And just a question to Scott.

Hi, Ross. Yeah, so we went from 159 down to 142. That's that's a pretty quick drop. But also keep in mind some some part of that was also related to the asset resolution plan. So it was a little bit higher than what what I would consider to be a true run rate for it. I will tell you that the you know, I'll start to break the pieces down as far as looking the portfolio for you. The the both were players largest part of it. Ross, I need a little feedback and there's a community real quick. Sorry, is that better? That's all right. Okay, here we go. So the bull portfolio and this is all the the loans that are both at amortized cost.

This excludes the fair value portfolio. We ended the court with 60 million in the bolt and that has a 33% reserve against that. So that's a little over almost 9.1 million dollars. The flash cap portfolio and this is the one that really is amortizing a little bit quicker that had 29 million dollars in balances and has a 25% reserve against it, which is 3.2 million. And then the the core what we call the course CNI. So this is some of the larger loans that have collateral others in real estate at $45 million in balances in it. And that has a 23% reserve against it or $1.5 million. Now there's another component of the SBA portfolio that has that is all real estate back.

It has $53 million in balances and there's a relatively small reserve about 1% against that. That part of the portfolio performs as expected. It is not a big loss driver for us. So you roll all those bits and pieces together and on the risk, your parts of the portfolio were reserved in the high 20%.

Yeah, Ross, thanks for asking that question. I was kind of expecting that one this morning. Just for you and everybody else that's listening that the rights offering is coming. There was because of the restatement, we wanted to make sure that we had updated reliable financials and all prior periods and current periods available to all investors that if you had a complete package of information for consideration before we lost the rights offering, obviously that's pushed the timing out on that a little bit. But now that we have everything filed or we'll have the the second quarter 10C will be filed later today.

That kind of frees us up to move on to the rights offering component. So what we'll end up doing is preparing the communication that goes out to all of the shareholders of record as of May 12th and those communications we should have in hand or be ready to mail those next week. With the deadline, we also have the full proxy which will be going out. Our annual shareholder meeting is scheduled for September 22nd. So really we're going to have a full population of all important documents in hand for investors to look at before they make a decision around the rights offers. So it is coming. I know it's taken a little bit longer than what we had initially wanted to do, but we wanted to make sure that we were checking all the boxes for everyone.

No, the rights offer, we'll watch that in August. I just wanted to mention when the shareholder meeting was and that's in September.

Thanks for the question, Ross.

Hi, Julian.

I think if I understand your question, the one time items in the asset resolution component was 43.8 million dollars. The total loss was 44 million. So the remaining operating loss to think about was about $200,000 for the quarter.

I think you can refer to that as being quarterly in.

I will tell you this the as we look forward, essentially the things that we talked about. If you have if you recall, I mentioned on the net interest margin, really, 4.8 was 4.07%. So there's a lot more in terms of overall earnings revenue that we are expecting going forward, plus all of the components that Al talked about in terms of growth in the balance sheet to bind with continued efforts to reduce the bank's overall cost of funds.

So I'd like to think about it from the standpoint that core earnings in the second quarter was just below great even. But now that we have a clear path ahead, a lot of strength, a lot of good focus as far as what's coming, the bank is positioned for profitable earnings going forward.

No, there's no there's no valuation allowance against the deferred tax asset. Truthfully, and these are conversations that obviously we've had internally, the bank is positioned for a profitable growth going forward. And a new leadership team, a lot of strength is coming in. We believe that we will have no issues whatsoever in terms of reacquiring that asset in the future. So there is no valuation allowance at this time. Like I said, we continue to look at it, but at this time it is zero.

Tax rate for the for the quarter is about 25%.

The payout for the series A and series B, which I think you're referring to actually concluded this week. So that will actually get Q3 event.

Is that pre tax or after? I mean, it's a redemption. It's not really an income state, a component. So it's not not an reason.

Yes, okay.

No impact on shares either, right? Share counts. So the redemption payment is kind of going from one bucket to another.

The you mentioned 22.9 million shares from an exchange, but that's already like we don't have to make. Yeah, it's a third quarter event, but that mission preferred to comment.

So that if you're asking the tangible book value already has that dilution component baked into it.

Is that correct? That is correct. And obviously, if we would like to maximize that for shareholders, but we're not sure how much we will get. We'll report that when it's done.

So what would be that? What would be that impact on TCE and share count if everyone were to exercise?

4.1 million.

It was the 4.1. I think I needed to have.

It's, Julian, it's very small. We have, we are strictly focused on relationship based, I guess, depositors. And when I say relationship, it's not just the deposit side. In a lot of cases, we also have lending relationships. That's something that we have really been focused on. And I think out there a really nice job of explaining how we will go about that in the future. The key thing is in the past, we had some relatively large, what I'll call, well, I'll just say it. I mean, there were more of a place for, you know, for entities, the park money, we were paying them a very attractive rate to do it, because it was funding business, funding loan growth around the SBA business.

That's not what we're doing any longer. So, you know, we had conversations with those people. We said, well, we're not going to pay the rates anymore. They're out of market. Most of that money has left, and that was by design, as well as the run-off of the brokerage deposits that we have. And that was, that was also part of our strategy.

So, you'd tell you this, this quarter or this quarter ends deposit franchise is what there's no more transition to be done. You know, looking at the interest free and the broker, you know, this is a good base to go forward. Like, there's no more. Yeah, there's still some broker in there that's going to run off, but you know, really what's there I'm going to call you know, a quarter pause and just close.

It's local. It's local. Yeah. These are people we know that you can drive for about an hour to go visit them.

Yeah. Okay, great.

You got it. Sure.

I'll take that one. We do already have the systems in place that we need. I think we have all the tools to be successful here. And if you look at, you know, our growth in 25 over 24, our Treasury fee resonated grew about 75% year over year. And we're continuing to be on track to continue that increase this year. I think really what it is is we move up market a bit. You know, we are now, you know, really targeting our commercial business customers. And, you know, we are going to be banking some larger businesses than we have in the past. And those customers have more sophisticated needs. And, you know, we're going to do their loan.

We're going to get their operating account. And those operating accounts are just by the nature of the business going to come with Treasury. So I really think there's a strong opportunity there. And we have two different Treasury platforms, one for very small businesses and another that is more sophisticated. So I think we're well okay. Just to talk about the edge, our bankers know their customers, they're accessible.

At five o'clock, they don't turn their cell phones off. So it's true relationships, solving problems, being accessible, being local, not outsourcing or off-shoring customer support. And generally speaking, banking, professional executives and small businesses and investors and companies, they generally have larger average balances and their cost of funds is generally lower. So that comes with our initiative to, you know, act as a commercial bank, serving commercial customers in our community. So that it comes all together.

So we shouldn't, so in the end, we shouldn't see a significant investment. I mean, we will need to continue to expand the Treasury team. You know, it's a small team today. They're opportunities that this will provide. We'll have needs some additions to the team, but we don't have investments in software or other things and certainly the revenue that we get from it, you know, should balance off the additional costs that we may have.