BayFirst Financial Earnings Call: Turnaround Amid SBA Drag

BayFirst Financial Corp ((BAFN)) has held its Q4 earnings call. Read on for the main highlights of the call.

BayFirst Financial Balances Turnaround Progress With Lingering SBA Pain in Latest Earnings Call

BayFirst Financial Corp’s latest earnings call painted a cautious but constructive picture: management showcased tangible progress in reshaping the bank into a core community-focused franchise, with healthier deposits, strong liquidity, rising treasury fee income, and tighter cost controls. Yet the discussion was overshadowed by legacy credit problems tied to unguaranteed SBA 7(a) loans, which drove elevated charge-offs, a fourth-quarter net loss, and a decline in shareholders’ equity. Overall sentiment was one of transition: the worst may not be over, but management argued that the underlying community bank is strengthening as the legacy SBA portfolio winds down.

Solid Deposit Growth and Favorable Funding Mix

BayFirst highlighted steady organic deposit growth as a key pillar of its transition to a core community banking model. The bank added $12.5 million of deposits in the fourth quarter, bringing year-end balances to $1.18 billion, up $40.7 million or 3.6% over the prior year. Management underscored the quality of this funding base, noting that 85% of deposits were FDIC-insured as of December 31, 2025—an important comfort point for both regulators and investors in a still-sensitive rate and liquidity environment.

Robust Liquidity and Capital to Support Repricing

Liquidity remained a bright spot, with a liquidity ratio above 18% at year-end. This gives BayFirst meaningful flexibility to pay down or reprice expensive funding and to gradually lower its overall cost of deposits. Management emphasized that this surplus liquidity should help the bank improve its cost of funds over time and support more competitive loan pricing, positioning the franchise more favorably once credit headwinds from legacy SBA exposures subside.

Net Interest Margin Holds Steady Amid Rate Pressures

Despite industry-wide pressure on funding costs, BayFirst’s net interest margin (NIM) held relatively stable at 3.58% in the fourth quarter, slipping only three basis points sequentially. Net interest income increased to $11.2 million, up $0.5 million from the prior year’s quarter. Management framed these trends as evidence that core banking earnings remain resilient even as the loan portfolio shrinks due to the SBA wind-down and other runoff.

Treasury Management Fees Surge as Commercial Focus Deepens

Fee-based business from core commercial customers showed meaningful momentum. Treasury management and merchant services revenue surged 69% compared to 2024, signaling that the bank is gaining traction with business clients in its Tampa Bay markets. This growing, recurring revenue stream is a critical component of BayFirst’s strategy to replace volatile SBA-related income with more stable, relationship-driven fee income.

Cost-Cutting and Restructuring Sharply Reduce Expenses

BayFirst reported a dramatic reduction in operating expenses as restructuring efforts took hold. Fourth-quarter non-interest expense fell to $11.9 million, down $13.3 million from the prior quarter, driven by a $7.3 million restructuring charge and lower compensation and servicing costs. For the full year, and excluding the prior quarter’s restructuring charge, non-interest expense was $3.7 million lower than in 2024. Management pointed to notable cuts in compensation (down $2.6 million), bonuses and commissions (down $3.6 million), and marketing (down $0.5 million), underscoring a leaner cost structure tailored to the new community banking focus.

Strategic Exit From SBA 7(a) and Refocus on Community Banking

A central theme of the call was the completion of several major strategic milestones in 2025. BayFirst exited the SBA 7(a) lending business, sold a substantial amount of 7(a) loan balances, and implemented headcount and expense reductions. These moves are designed to reduce earnings volatility and credit risk from national SBA lending and to concentrate resources on building a more traditional community bank franchise in the Tampa Bay region. Management presented this strategic reset as painful in the short term but essential for long-term stability and profitability.

Progress on Legacy Asset Resolution

The bank is actively shrinking its exposure to legacy unguaranteed SBA loans. Unguaranteed SBA 7(a) balances declined to $171.6 million at year-end, down $50.4 million from September 30, 2025 and $51.4 million from a year earlier. This reduction reflects both runoff and loan sales and is central to the bank’s plan to gradually lower credit costs. Management stressed that while this portfolio still carries risk, its shrinking size should reduce its drag on future results.

Net Loss Narrows but Equity Takes a Hit

Despite operational progress, BayFirst remained in the red for the quarter. The company reported a fourth-quarter net loss of $2.5 million, an improvement from the $18.9 million loss in the third quarter but still a negative outcome that weighed on capital. Shareholders’ equity declined by $23.4 million versus the end of 2024, reflecting cumulative losses and other equity impacts over the year. Investors were reminded that the turnaround is ongoing and that restoring earnings consistency and capital strength remains a key priority.

Rising Net Charge-Offs Highlight Persistent Credit Stress

Credit metrics underscored that the bank is not yet past the legacy SBA hangover. Net charge-offs rose to $4.6 million in the fourth quarter, up $1.3 million sequentially. Annualized net charge-offs as a percentage of average loans climbed to 1.95% in Q4, versus 1.24% in Q3 and 1.34% for 2024. These elevated charge-off levels are largely tied to the troubled unguaranteed SBA portfolio and continue to weigh on earnings and investor confidence.

Legacy SBA 7(a) Risk Still Significant

Even after recent sales and runoff, BayFirst’s on-balance-sheet exposure to unguaranteed SBA 7(a) loans remains sizable at $171.6 million. Management was explicit that additional charge-offs are expected to continue into 2026, though they anticipate the impact will gradually lessen as the portfolio continues to shrink. The scale and unpredictability of these legacy losses remain a key risk factor for the near-term earnings trajectory.

Higher Credit Reserves and Mixed Asset Quality Trends

The bank has materially bolstered its credit reserves in response to legacy risk. The allowance for credit losses rose to 2.43% of total loans at December 31, 2025, up from 1.54% a year earlier, and was 2.61% at the end of the third quarter. Nonperforming loans excluding government-guaranteed balances were $16.9 million, up modestly from $16.5 million, representing 1.8% of loans—an increase of 11 basis points quarter-over-quarter and 45 basis points year-over-year. While these metrics reflect stress in parts of the portfolio, management argued that reserve levels are now appropriately aligned with identified risks.

Loan Portfolio Shrinks as SBA and Runoff Weigh

BayFirst’s loan book contracted in 2025 as the bank intentionally pulled back from riskier segments. Loans held for investment fell $34.8 million, or 3.5%, during the year to $963.9 million. Total loans held for investment declined by $102.7 million, or 9.6%, from the prior year, driven by runoff and the SBA wind-down. While this curbs earning-asset growth in the near term, management framed the contraction as a necessary step to reposition the balance sheet toward healthier, lower-risk community banking assets.

SBA Exit Pressures Non-Interest Income

The strategic exit from SBA 7(a) origination had a notable impact on non-interest income. For 2025, non-interest income was slightly negative at $104,000, a sharp year-over-year decline largely due to the elimination of gains on sales of government-guaranteed SBA loans that had previously supported fee income. Comparisons were further skewed by an $11 million gain from a sale-leaseback transaction in 2024, which did not repeat. Management acknowledged that rebuilding a diversified, sustainable fee base—such as treasury services—will take time.

Tangible Book Value Moves Lower

Reflecting the combination of losses and equity impacts, tangible book value per share fell to $17.22 at year-end, down from $17.90 at the end of the third quarter. This decline underscores the capital cost of working through legacy issues and restructuring the business. Management’s challenge will be to stabilize earnings and credit costs so that tangible book value can begin to rebuild.

Guidance: SBA Headwinds Easing, Core Bank Poised to Strengthen

Looking ahead, BayFirst guided investors to expect continued, but gradually diminishing, pressure from legacy SBA 7(a) loans. Additional charge-offs are likely as the remaining $171.6 million of unguaranteed balances continue to run off, but management believes the worst of the provisioning may be behind them and does not foresee significant incremental provision beyond current expectations. They highlighted strong liquidity above 18%, ongoing deposit growth to $1.18 billion with a high proportion of insured balances, and a stable 3.58% net interest margin as key supports. Ongoing SBA loan sales, deposit repricing aimed at bringing high-cost funding closer to peer levels, and rising treasury management revenue (up 69% year-over-year) are expected to bolster net interest margin and enable more competitive loan pricing over time. With an allowance for credit losses at 2.43% of loans, nonperformers at 1.8%, and tangible book value per share at $17.22, management’s message was that the balance sheet is being fortified and risk management tightened to gradually improve asset quality and profitability.

In closing, BayFirst’s earnings call underscored a company in the midst of a demanding but purposeful transition. The bank is making visible headway in deposit gathering, fee growth from core commercial clients, liquidity management, and cost discipline, even as it absorbs substantial credit losses and balance-sheet hits from legacy SBA 7(a) exposures. For investors, the story is still high-risk but increasingly defined: near-term results will remain choppy as charge-offs continue, yet the underlying community bank franchise appears to be getting stronger, offering potential upside if management can successfully navigate the remaining legacy drag.