Earnings Call Transcript - BAFN Q3 2025

Operator, Operator

Good morning, everyone, and thank you for joining the BayFirst Financial Corp. Q3 2025 Conference Call and webcast. This call is being recorded today, October 31, 2025. I will now hand it over to our CEO, Tom Zernick. Please proceed.

Thomas Zernick, CEO

Thank you, Joanna. Good morning, and thank you for joining our call today. Once again with me is Robin Oliver, our President and Chief Operating Officer; and Scott McKim, our Chief Financial Officer. Today's call will include forward-looking statements and non-GAAP financial measures. Please refer to our cautionary clause on forward-looking statements contained on Page 2 of the investor presentation. At the start of the year, management and the Board initiated a comprehensive strategic review of the bank's business model to chart a new path forward that holds true to our mission as a community bank. Today, we are reporting on the culmination of our work to derisk the balance sheet and position our community bank for long-term sustainable growth and enhanced shareholder value. For over a decade, the bank's SBA 7(a) business has provided revenue to help build our 12 branch network, which drives tremendous franchise value. At the same time, this line of business outgrew our community bank model and as reflected in this year's results, brought material risk that led to operating losses. In September, we reported BayFirst would exit SBA 7(a) lending and that we had signed a definitive agreement to sell a large portion of our SBA 7(a) portfolio to Banesco USA. Furthermore, the majority of our SBA 7(a) staff would be offered positions with Banesco USA's SBA lending team. I should note that we expect to close this transaction later in the quarter. However, the current federal government shutdown has generated some delays. While managing this transition, the BayFirst team continues to prioritize our community banking mission by delivering excellent service to our customers across the Tampa Bay and Sarasota markets. Our focus remains firmly on what matters most, being the premier community bank in Tampa Bay. That means building real relationships with local individuals, families, and small businesses through reliable checking and savings accounts. These connections give us a solid, stable funding foundation while strengthening our footprint throughout Tampa Bay's dynamic market. And today, more than 84% of our deposits are insured. This relationship-driven strategy helps us to deliver sustainable growth while maintaining the disciplined risk management and operational efficiency central to our long-term value creation. Scott will elaborate on the restructuring charge and the accounting impacts related to the portfolio sale to Banesco USA, and Robin will discuss changes to our senior leadership, which align with the focus I have previously shared. But first, I want to emphasize that though profitability has not met expectations, we are building a stronger, more resilient organization. Once restructuring is complete, we expect to return to profitability with the goal of positive return on assets of 40 to 70 basis points in 2026 with continued improvement in later years. Additionally, we will continue resolving nonperforming loans and improving credit quality. With strong market opportunities and operational capabilities, we remain focused on executing our strategy and delivering long-term shareholder value. To that end, we have made some important but difficult decisions regarding staff levels, span of control, and legacy costs related to our SBA 7(a) lending business and technology platform. I am confident our actions will allow us to create a stronger, more stable BayFirst. I also want to share some encouraging metrics, all of which will be sustainable as we move away from relying on gain on sale revenue, which has historically contributed to most of our earnings. We expect lower net charge-offs following the reduction of unguaranteed SBA 7(a) loans on the balance sheet. While our net interest margin dipped this quarter, the decrease was related to onetime items. We will be closer to the 4% target, which we mentioned previously, which is achieved through lower deposit costs and appropriately priced consumer and commercial loans originated across the Tampa Bay market. Now I will pass the microphone to Scott McKim, our CFO, to provide an overview of our financial performance.

Scott McKim, CFO

Thank you, Tom. Good morning, everyone. We are reporting a net loss of $18.9 million in the third quarter, compared to a net loss of $1.2 million in the second quarter. In the third quarter, we recorded a restructuring charge of $7.3 million, in addition to an adjustment to the loan portfolio being sold to Banesco USA, an increase in our allowance for credit losses, and several other extraordinary items. The restructuring charge includes $2.9 million for writing off assets and prepaid expenses tied to the SBA 7(a) lending business, $3.9 million in personnel-related costs due to the termination of the company’s ESOP plan, and about $0.5 million in conversion deal costs. We had previously reported that the portfolio sale was priced at 97%. The final portfolio included a $5.1 million discount, which encompassed fair value adjustments, recognition of deferred costs, premium discounts, and the stated 3% discount. This was reflected in our noninterest income for this quarter. Additionally, our allowance for credit losses was reduced by $800,000 as we recognized that these loans are moving to held for sale. While not part of the restructuring charge, we also accrued $1.9 million for disallowed interest overpayments from the SBA during this quarter. Consequently, loans held for investment decreased by $127.1 million or 11.3% in the third quarter of 2025, ending at $998.7 million, which is a decrease of $43.8 million or 4.2% over the past year. During the quarter, $97 million of loans were transferred to held for sale and marked to the lower cost of market, as I mentioned earlier. Total deposit balances rose by $7.7 million or 0.7% in the third quarter of 2025 and increased by $59.3 million or 5.3% over the past year to reach $1.17 billion. The rise in deposits for the quarter was mainly due to an increase in time deposits of $53 million, partially offset by declines in noninterest-bearing accounts of $3.8 million, interest-bearing transaction accounts by $27.9 million, and savings and money market accounts by $13.7 million. Furthermore, as Tom pointed out, over 84% of the bank's deposits were insured by the FDIC on September 30, 2025. Shareholders' equity at the end of the quarter was $89.7 million, which is $12.6 million lower than the end of the second quarter and the third quarter of 2024. The net accumulated other comprehensive loss decreased by $300,000 during the quarter, finishing at $2.1 million. Tangible book value went down this quarter to $17.90 per share from $22.30 per share at the end of the second quarter. As Tom mentioned, our net interest margin dropped 45 basis points to 3.61% in the third quarter. Net interest income for the third quarter was $11.3 million, down $1 million compared to the second quarter but up $9.4 million from the same quarter last year. During this quarter, the bank wrote off $400,000 of unamortized premiums associated with a USDA guaranteed loan that was liquidated. Additionally, $600,000 of interest was reversed for loans that were moved to nonaccrual status during the quarter. Excluding these one-time adjustments, net interest income would have remained stable compared to the second quarter. Noninterest income showed a negative $1 million for the third quarter of 2025, down from $10.8 million in the second quarter and $11.7 million in the third quarter of 2024. This decrease for the third quarter is primarily due to a drop in gains from the sale of SBA 7(a) government-guaranteed loans. With the exit from the SBA 7(a) lending business, revenue from government-guaranteed loan sales will no longer influence noninterest income as it did in the past. Tom alluded to this earlier. Noninterest expense totaled $25.2 million, an increase of $7.7 million compared to the second quarter, with nearly all of this increase attributed to the $7.3 million restructuring charge I mentioned earlier. Loan origination and collection expenses also rose by $700,000 in the third quarter, although this was offset by lower salaries and benefits, including commissions and incentives. The provision for credit losses was $10.9 million in the third quarter, up from $7.3 million in the second quarter and $3.1 million in the previous year’s quarter. Net charge-offs, mainly from unguaranteed SBA 7(a) loans, were $3.3 million, down by $3.5 million compared to the second quarter. Without the $800,000 reduction in the allowance for credit losses for loans transferred to held for sale, the remaining increase in the provision was primarily for retained unguaranteed SBA 7 balances. The annualized net charge-offs as a percentage of average loans held for investment at amortized costs were 1.24% in the third quarter, down from 2.6% in the second quarter and slightly up from 1.16% in the third quarter of 2024. Nonperforming assets constituted 1.97% of total assets on September 30, compared to 1.79% on June 30, 2025, and 1.38% on September 30 last year. Excluding government-guaranteed loan balances, nonperforming assets were 1.21% of total assets as of September 30, 2025, compared to 1.12% as of June 30, 2025, and 0.88% on September 30, 2024. The allowance for credit losses to total loans held for investment at amortized cost was 2.61% on September 30, 2025, compared to 1.65% on June 30, 2025, and 1.7% on September 30 of last year. The ratio of the allowance for credit losses to total loans held for investment at amortized cost, excluding government-guaranteed loan balances, was 2.78% on September 30 of this year, compared to 1.85% in June of this year and 1.70% on September 30 of last year. Now, I will turn the call over to Robin to discuss staffing changes.

Robin Oliver, President and COO

Thank you, Scott. First, I'd like to comment a bit more on our efforts around asset quality. Throughout this year, we have worked to strengthen credit administration practices to ensure the timely identification of problem credits as well as ensuring those same problem credits are resolved as quickly as possible. Management has worked to tighten credit underwriting in all areas of the loan portfolio and in an effort to ensure all loans are properly risk-rated and accounted for, management hired consultants and other third parties in the third quarter to assist in reviewing the portfolio to take an aggressive stance on recognizing all potential problem loans. This effort did increase our nonperforming and classified loans as well as our allowance for credit losses, as Scott reported. As we move forward into 2026, the goal will be the continual reduction of nonperforming and classified credits to bring these balances closer in line to peers. The overall wind-down of the SBA loan portfolio, the potential sales of additional SBA unguaranteed balances and the continued aggressive workout of problem loans is expected to improve asset quality in the coming quarters without significant additional provision for credit losses being necessary. As Tom mentioned, I also want to touch on some leadership changes. First, Tom Qualley has served as the bank's Sarasota market leader for the past several years. Tom is a veteran banker with over 40 years of experience, and he will be retiring in December. Succeeding Tom is Samantha Hill. Sam, as she likes to be called, joined BayFirst over a year ago and brings a wealth of knowledge in the commercial and community banking space. Tom and Sam have been working together and will complete their transition plan over the coming weeks. I also want to announce that Adam Curtis, who has been serving as our Pinellas County market leader, has assumed the leadership role in Tampa as well. Adam has added the two Tampa branches to his team and will also take over as Chief Lending Officer upon Tom Qualley's retirement. Adam is well known throughout both markets and has a great team of branch managers and business bankers. Finally, I want to note that Brandi Jaber's title is now Chief Administrative Officer. Previously, Brandi was focused on loan production operations. And with our restructuring efforts, she will now manage a few operational areas and importantly, the Banesco USA transition project. Brandi's historical knowledge of our SBA 7(a) lending business makes her the perfect leader for this important project. And that concludes the comments I have, and I will turn it back to Tom for his final thoughts.

Thomas Zernick, CEO

Thank you, Robin. Our Board of Directors and leadership team are committed to driving resilience and innovation as we position the company for long-term success and enhance shareholder value. We are confident that these efforts will better align the company and our bank with the demands of a dynamic banking landscape. We remain optimistic about the road ahead. Thank you.

Robin Oliver, President and COO

At this time, we'd like to turn it over for questions.

Operator, Operator

The first question comes from Ross Haberman at RLH Investments.

Ross Haberman, Analyst

I have two quick questions. You said you did not sell all of the SBA. How much did you hold back? How are you servicing them? And why don't you sell the whole thing?

Thomas Zernick, CEO

Our anticipation is, and I stress this is a forecast, that at the end of December, post-closing the transaction, the bank would still have about $167 million of unguaranteed SBA 7(a) loan balances. We are still working on selling the remainder of that portfolio. The transaction we announced previously was the amount of balances that Banesco USA wished to buy. We continue to look for other parties to market and sell that portfolio down. As for servicing, ultimately, Banesco will operate as the servicer for all of the loans in our SBA portfolio. At that point, a good portion of our team that has been servicing that portfolio on our behalf will move over, ensuring continuity between the two.

Ross Haberman, Analyst

What kind of reserve or allowance did you sell the bulk of the SBAs for, and will you have to take a bigger reserve or allowance for this last $167 million?

Thomas Zernick, CEO

The portfolio sale that we previously announced was at a 3% discount, so 97%. The increase in our allowance for credit loss that we are talking about today reflects an increase primarily related to the unguaranteed balances going forward. We're not anticipating adding additional ACL to the ACL for those remaining balances at the end of this year or in the future.

Operator, Operator

The next question comes from Julienne Cassarino at Sycamore Analytics. Thomas Zernick, CEO, stated that the portfolio sale previously announced was at a 3% discount, meaning 97%. The increase in our allowance for credit loss discussed today is mainly due to the unguaranteed balances moving forward. We do not expect to add more to the allowance for credit losses for those remaining balances at the end of this year or in the future.