Executive Summary / Key Takeaways

• BayFirst Financial is undergoing a strategic shift, focusing on bolstering recurring net interest income from core community banking and reducing reliance on volatile gains from government-guaranteed loan sales.
• First quarter 2025 results showed a net loss, primarily driven by significantly lower noninterest income from government-guaranteed loan activities, despite growth in net interest income and reduced operating expenses.
• The company leverages a specialized technology platform, CreditBench, which provides quantifiable advantages in its national government-guaranteed lending niche, offering faster processing and lower costs compared to traditional methods.
• Credit quality metrics softened year-over-year, with an increase in nonperforming assets and elevated, though slightly lower, net charge-offs, reflecting the impact of ongoing economic headwinds on borrowers.
• Management is actively managing capital and liquidity, maintaining "well capitalized" status and initiating a share repurchase program, while exploring strategies to de-risk unguaranteed SBA loan balances.

Setting the Scene: A Community Bank's Strategic Evolution

BayFirst Financial Corp., founded in 1999 and operating through its subsidiary BayFirst National Bank, has established itself as a community bank serving small and medium-sized businesses and individuals primarily in the Tampa Bay region of Florida. Over its history, the company has expanded its offerings beyond traditional banking to include a significant national government-guaranteed lending platform. A notable strategic decision in the third quarter of 2022 saw the company exit its nationwide residential mortgage loan segment to focus resources on other priorities.

This history informs BayFirst's current strategic pivot. The company is actively working to enhance the stability of its revenue streams by emphasizing core net interest income generated from its community banking operations. This involves expanding its local footprint in the Tampa Bay area, focusing on growing lower-cost deposits and originating conventional loans. Concurrently, BayFirst aims to decrease its dependence on the more volatile income derived from selling the guaranteed portions of government-guaranteed loans into the secondary market.

The CreditBench Advantage: Technology as a Differentiator

A key element of BayFirst's strategy and competitive positioning lies in its specialized technology platform, particularly its CreditBench system for government-guaranteed lending. This platform is designed to streamline the complex process of originating and servicing loans like those guaranteed by the Small Business Administration (SBA). The technology provides tangible operational benefits that differentiate BayFirst in this niche market.

Analysis indicates that this specialized technology enables 20-30% faster loan processing speeds compared to more traditional banking methods. This efficiency translates into quantifiable financial advantages, including an estimated 15-20% lower processing cost per loan originated through the platform. For investors, this technological edge represents a competitive moat, potentially leading to higher profitability margins on these loans and supporting market share gains in the specialized lending segment. While specific R&D targets or future technological roadmaps beyond the existing platform were not detailed, the strategic intent is clear: leverage technology to drive efficiency and capture market share in a profitable niche.

Navigating the Competitive Currents

BayFirst operates within a competitive landscape that includes larger regional banks and other institutions specializing in commercial and government-guaranteed lending. Key publicly traded competitors include ServisFirst Bancshares (SFBS), Regions Financial (RF), Synovus Financial (SNV), and Truist Financial (TFC). While larger players like RF and TFC possess greater scale and broader geographic reach, BayFirst's strength lies in its focused approach and technological specialization in government-guaranteed lending.

Compared to peers like SFBS, which excels in overall cost efficiency, BayFirst's CreditBench technology provides a specific counter-advantage in processing speed and cost per loan within its niche. This technological edge could allow BayFirst to capture additional market share in the SBA lending segment, potentially translating to higher revenue growth in that area. However, BayFirst's smaller scale generally results in higher overall operating costs compared to larger, more efficient institutions, which can pressure profitability margins. The company's strategic focus on expanding its community banking presence in the Tampa Bay region, emphasizing low-cost deposit growth and conventional loans, is a direct response to this competitive environment, aiming to build a stable funding base and diversify its loan portfolio.

Recent Performance: A Quarter of Transition and Pressure

BayFirst reported a net loss of $0.3 million, or $0.17 per diluted common share, for the first quarter of 2025. This contrasts with a net income of $0.8 million, or $0.11 per diluted common share, in the first quarter of 2024. The swing to a loss was primarily driven by a significant decrease in noninterest income, which fell to $8.8 million in Q1 2025 from $14.3 million in Q1 2024.

This decline in noninterest income was largely attributable to reduced gains on the sale of government-guaranteed loans ($7.3 million in Q1 2025 vs. $8.1 million in Q1 2024) and a substantial decrease in fair value gains on government-guaranteed loans held for investment ($0.8 million in Q1 2025 vs. $3.3 million in Q1 2024). Government-guaranteed loan packaging fees also decreased. These results underscore the company's stated goal of reducing reliance on these more volatile income sources.

Despite the pressure on noninterest income, BayFirst saw improvement in its core banking performance. Net interest income increased to $11.0 million in Q1 2025, up from $8.7 million in Q1 2024. This growth was mainly due to a decrease in interest expense on deposits, partially offset by a slight decrease in loan interest income. The net interest margin expanded to 3.77% in Q1 2025 from 3.42% in Q1 2024, reflecting a favorable shift in deposit mix with growth in noninterest-bearing accounts and a decline in higher-cost time deposits. Total noninterest expense decreased by $2.0 million year-over-year, driven by lower compensation, professional fees, and loan origination costs, partially offset by higher occupancy and data processing expenses.

Balance Sheet Dynamics and Credit Quality Headwinds

As of March 31, 2025, total assets stood at $1.29 billion, relatively stable compared to December 31, 2024. Total loans held for investment increased slightly to $1.08 billion from $1.07 billion at year-end 2024, representing 1.7% sequential growth and a more significant 16% increase year-over-year. This growth was seen across commercial real estate and consumer loan categories. Total deposits decreased by $15.0 million, or 1.31%, sequentially to $1.13 billion, with declines in savings and money market accounts and time deposits, partially offset by increases in noninterest-bearing and interest-bearing transaction accounts.

Credit quality showed some signs of pressure. Nonperforming assets increased to $26.9 million gross ($16.6 million excluding government guaranteed balances) at March 31, 2025, representing 2.08% of total assets, up from $11.1 million gross (0.97% of total assets) at March 31, 2024. Net charge-offs for the quarter were $3.3 million, slightly lower than the $3.7 million recorded in the prior-year quarter. The provision for credit losses was $4.4 million in Q1 2025, compared to $4.1 million in Q1 2024, reflecting net loan growth and higher charge-offs. Management noted that economic headwinds, including high interest rates and inflation, continue to pressure borrowers, contributing to these elevated credit costs. The allowance for credit losses stood at 1.61% of total loans HFI at amortized cost at March 31, 2025.

Liquidity, Capital, and Shareholder Returns

BayFirst maintains a focus on managing its liquidity and capital position. The Bank's liquidity ratio (liquid assets to total assets) was 8.04% at March 31, 2025. The company has access to borrowing capacity through the FHLB and FRB, as well as other financial institutions and wholesale deposits, to meet potential funding needs. Management believes current liquidity and borrowing capacity are sufficient.

The Bank remains "well capitalized" under regulatory guidelines, with a Common Equity Tier 1 Capital ratio of 10.47% and a Total Capital ratio of 11.73% at March 31, 2025, both well above minimum requirements. Shareholders' equity decreased slightly in Q1 2025 to $110.1 million, primarily due to the net loss and dividend payments. The company's board authorized a share repurchase program in January 2025, allowing for up to $2.0 million in buybacks through December 31, 2025. As of March 31, 2025, $0.3 million in common shares had been repurchased. BayFirst also continued its history of returning capital to shareholders by declaring a second-quarter 2025 common stock cash dividend of $0.08 per share.

Outlook and Strategic Focus

While specific quantitative guidance was not provided, management's commentary outlines the strategic direction and outlook. The focus remains on strengthening recurring revenues through core net interest income by expanding the community banking footprint in the Tampa Bay region. This involves driving low-cost deposit growth and originating conventional loans.

The company is also actively addressing the risks associated with its government-guaranteed loan portfolio. Management is exploring strategies to de-risk unguaranteed balances, including potential portfolio sales, and reinforcing underwriting discipline on new originations. The performance in Q1 2025, particularly the decline in noninterest income from this segment, reinforces the strategic importance of diversifying revenue streams and managing associated risks in the current economic climate.

Conclusion

BayFirst Financial is navigating a period of strategic transition, aiming to build a more stable and diversified revenue base rooted in core community banking while leveraging its technological edge in government-guaranteed lending. The first quarter of 2025 highlighted the pressures associated with this pivot and the challenging economic environment, resulting in a net loss driven by reduced noninterest income from loan sales and fair value adjustments.

Despite these headwinds and some softening in credit quality metrics, the company demonstrated progress in expanding its net interest income and controlling operating expenses. BayFirst's technological differentiation in its niche lending segment remains a key competitive strength. The investment thesis hinges on the successful execution of its strategy to grow core banking revenues, effectively manage credit and interest rate risks in the current environment, and potentially unlock value through its specialized lending capabilities. Investors should monitor the trajectory of net interest income growth, credit quality trends, and the impact of strategic initiatives to de-risk the balance sheet and diversify earnings.