BayFirst Financial reports $18.9 million net loss in Q3 2025 as it exits SBA 7A lending, aims for profitability in 2026 amidst strategic restructuring.

Sam - (00:00:00)

It's Sam.

OPERATOR - (00:01:04)

Good morning ladies and gentlemen and welcome to the BayFirst Financial Q3 2025 conference call and webcast. At this time all lines are in a listen 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, October 31, 2025. I would now like to turn the conference over to CEO Tom Czernick. Please go ahead.

Tom Czernick - Chief Executive Officer - (00:01:34)

Thank you.

Joanna - (00:01:34)

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 two 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 de risk 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 7A 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 7A lending and that we had signed a definitive agreement to sell a large portion of our SBA7 portfolio to Benesco USA. Furthermore, the majority of our SBA7A staff would be offered positions with Benesco 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 Benesco 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 a goal of positive return on assets of 0.40% to 0.70% in 2026 with continued improvement in later years. Additionally, we will continue resolving non performing 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 SBA7 lending business and technology platform. I am confident our actions will allow us to create a stronger, more stable bay. First, 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 loans on the balance sheet. While our net interest margin dipped this quarter, the decrease was related to one time items. We will be closer to the 4% target which we mentioned previously which is a T 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 - Chief Financial Officer - (00:06:38)

Thank you Tom Good morning everyone. We are reporting a net loss of $18.9 million in the third quarter. This compares to the net loss of 1.2 million reported in the second quarter. During the third quarter we recorded a restructuring charge of $7.3 million plus the lower of cost or market adjustment on the loan portfolio being sold to the Benesco USA, an increase to our allowance for credit losses and a handful of other extraordinary items. The restructuring charge includes $2.9 million to write off assets and prepaid expenses related to the SBA 7A lending business. Also $3.9 million in personnel specific costs including the termination of the company's ESOP plan and about a half a million dollars of conversion in deal costs. We previously reported that the portfolio sale was priced at 97%. The discount on the final portfolio is $5.1 million including fair value adjustments, recognition of deferred costs and premium discounts, and of course the 3% stated discount. This impact is seen in non interest income for this quarter. I will also note that our allowance for credit losses reduced by $800,000 in recognizing that these loans are being moved to held for sale. While it is not part of the restructuring charge, we also recorded and accrued $1.9 million of disallowed interest overpayments from the S during the quarter. Loans held for investment therefore did decrease by $127.1 million or 11.3% during the third quarter of 2025 to end at $998.7 million and decreased $43.8 million or 4.2% over the past year. During the quarter, $97 million of loans were transferred to held for sale and subsequently marked the lower of cost or market. As I not moment ago, total deposit balances increased $7.7 million or 0.7% during the third quarter of 2025 and increased by $59.3 million or 5.3% over the past year to $1.17 billion. The increase in deposits during the quarter was primarily due to an increase in time deposits of $53 million and is partially offset by decreases in non interest bearing accounts of 3.8 million, interest bearing transaction account balances of 27.9 million and savings and money market account balances of $13.7 million. Furthermore, as Tom mentioned, more than 84% of the bank's deposits were insured by FDIC as of September 30, 2025. Shareholders equity at quarter end was $89.7 million and is $12.6 million lower than the end of the second quarter or the third quarter of 2024. Net accumulated other comprehensive loss decreased by $300,000 during the quarter ending at $2.1 million. Tangible book value decreased this quarter to $17.90 per share from $22.30 per share at the end of the second quarter quarter. As Tom mentioned, our net interest margin was down 45 basis points to 3.61% in the third quarter. Net interest income was $11.3 million in the third quarter, down $1 million compared to the second quarter and up $9.4 million from the year ago quarter. During this quarter the bank wrote off $400,000 of unamortized premiums related to one USDA guaranteed loan which was liquidated during the quarter. Furthermore, $600,000 of interest was reversed for loans moved to non accrual status during the quarter. Outside of these one time adjustments, net interest income would have been flat to the second quarter number. Non interest income was a negative $1 million for the third quarter of 2025, which is a decrease from $10.8 million in the second quarter and a decrease from $11.7 million in the third quarter of 2024. The third quarter decrease is primarily from the decrease of gains on the sale of SBA7A government guaranteed loans. Notably, with the exit of the SBA7A lending business, revenue from the gains on sale of government guaranteed loans will no longer impact non interest income as it has in prior periods. Tom alluded to this earlier Non interest expense was $25.2 million, an increase of $7.7 million compared to the second quarter. Nearly all of this increase is related to the $7.3 million, which is the restructuring charge that I spoke about a moment ago. Loan origination and collection expense was also $700,000 higher in the third quarter and that was offset by lower salaries and benefits, including commissions and incentives. Provision for credit losses was $10.9 million in the third quarter compared to 7.3 million in the second quarter and $3.1 million in the year ago quarter. Net charge offs Primarily from unguaranteed SBA7 balances were $3.3 million, which was down $3.5 million compared to the second quarter excluding the $800,000 reduction in the allowance for credit losses (ACL) for the loans that was transferred to held for sale and the remaining increase in provision is primarily for retained unguaranteed SBA 7 balances. Annualized net charge offs as a percentage of average loans held for investment at amortized cost were 1.24% in the third quarter. That was down from 2.6% in the second quarter and up just slightly from 1.16 in the third quarter of 2024. Non performing assets were 1.97% of total assets on September 30th compared to 1.79% at June 30th, 2025 and 1.38% at September 30th last year. Non performing assets, excluding government guaranteed loan balances were 1.21% of total assets as of September 30, 2025 compared to 1.12% as June 30, 2025 and 0.88% on September 30 of 2024. The ratio of allowance to credit losses to total loans held for investment at amortized cost was 2.61% at September 30, 2025. That compares to 1.65% as of June 30, 2025 and 1.7% on September 30 of last year. The ratio of allowance for credit losses (ACL) to total loans held for investment at amortized costs excluding government guaranteed loan balances was 2.78% September 30th of this year, 1.85% in June of this year and 1.70% in September 30th of last year. At this time I'll turn the call over to Robin to make some additional comments about staffing changes.

Robin Oliver - President and Chief Operating Officer - (00:14:05)

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 problems loans. This effort did increase our non performing 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 non performing and classified credits to bring these balances closer in line to peer. 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 Bay first 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 Brandy Jaber's title is now Chief Administrative Officer. Previously, Brandy was focused on loan production operations, and with our restructuring efforts, she will now manage a few operational areas and importantly, the Benesco USA transition project. Brandy's historical knowledge of our SBA7 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.

Tom Czernick - Chief Executive Officer - (00:16:59)

Hey. 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.

OPERATOR - (00:17:28)

At this time, we'd like to turn it over for questions. Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one. On your touchtone phone you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Ross Haberman at RLH Investments. Please go ahead.

Ross Haberman - (00:18:05)

Good morning. Thank you for taking my call. 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 didn't you sell the whole thing?

Tom Czernick - Chief Executive Officer - (00:18:21)

Hey, Ross, good morning. I can answer that quickly for you. Our anticipation is, and I stress this is a forecast is that on the end of December, so this would be post closing the transaction, the bank would still have about $167 million of unguaranteed SBA7 loan balances. So the, you know, we are still working on selling the remainder of that portfolio. The transaction that we announced previously, that was the amount of balances that Benesco USA wished to buy. And we continue to look for other parties to continue to try to market and sell that portfolio down as far as servicing it. Ultimately, Benesco will be operating as the servicer for all of the loans that are in our SBA portfolio for us. And at that point, really it's the best part of that is that a good chunk of our people who have been servicing that portfolio on our behalf will move over. And so there really should be a good level of continuity between the two.

Ross Haberman - (00:19:27)

What? Refresh my memory. What kind of reserve or allowance did you sell the bulk of or cents on the dollar did you sell the bulk of the SBA portfolio? And we have to take a bigger reserve or allowance for this last 167.

Tom Czernick - Chief Executive Officer - (00:19:45)

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 of really primarily related to the unguaranteed balances going forward. We're not anticipating adding additional allowance for credit losses (ACL) to the allowance for credit losses (ACL) for those remaining balances at the end of this year or in the future.

Ross Haberman - (00:20:15)

Okay, thank you very much.

Tom Czernick - Chief Executive Officer - (00:20:18)

Thanks, Ross.

OPERATOR - (00:20:21)

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press Star one. The next question comes from Julianne Casarino at Sycamore Analytics. Please go ahead.

Julianne Casarino - (00:20:32)

Hi, good morning.

Joanna - (00:20:34)

Hi, Joanna.

Julianne Casarino - (00:20:35)

Good morning. Yes, eventful quarter. You know, you do what has to be done. So I applaud you on the, you know, definitive actions in the quarter. I was just wondering, are you still, you know, Tom, your background is in SBA loans. Are you still originating SBA loans even though they're not this, you know, kind of 7A or is SBA still going to be a big part of the business model moving forward?

Tom Czernick - Chief Executive Officer - (00:21:06)

Yeah, yeah, we are. First of all, I'm certainly a commercial banker. I do have a lot of expertise in SBA. But we are actually exiting SBA. We will continue to originate up until our close with Benesco USA. Beyond the closing date, we will be a true community bank and we will make Tampa Bay based commercial C&I loans. We will continue to focus on some consumer lending, residential mortgage lending, all in Tampa Bay. And we will continue to offer a great deposit suite. We've enhanced our treasury management services significantly and we'll continue to do all the right things as a real community bank now.

Julianne Casarino - (00:21:50)

Okay, so SBA really is the complete exit. And can you talk about the treasury management product you mentioned? It started in February, I believe, of this year. So it really seems to have gained traction. Can you just describe the products or products and if you have any off-balance-sheet deposits.

Robin Oliver - President and Chief Operating Officer - (00:22:16)

Hi, this is Rob and Julian. Thanks for your question. We have always had treasury in our portfolio, but what we've tried to really do is beef up the software and the services that we have to make sure we are competitive in the marketplace. So for example, towards the end of last year we added lockbox services, which we did not have before, which if we're going to serve healthcare industry or the homeowners associations that we've talked about, that was something that they demand. In addition, earlier I think what you're speaking about, in February we did roll out a new software product from Jack Henry. It's Jack Henry Treasury, and it is We've always had Banno Business for our business customers, but the new Jack Henry Treasury is really designed for more mid-market type businesses that want more complex permissions and functionality in order to serve that market. So it's not something that all of our customers would be on. But we've worked to transition some of our larger business clients to that platform and now we can offer that as we work to enhance and improve our business services. So a little over two years ago, we had one treasury officer to give you an idea and we have now beefed our team up to really four professionals serving treasury and we will likely continue to increase that in 2026 because we have onboarded a lot of new treasury customers this year and are seeing a lot of success in that space. So hopefully that gives you a little flavor of what we're doing there.

Julianne Casarino - (00:24:07)

Yeah, sounds great. And there's no off-balance-sheet. We don't do sweep deposits.

Robin Oliver - President and Chief Operating Officer - (00:24:12)

Oh no, we do not have any off balance sheet activity. Sorry, I forgot to answer that part of your question.

Julianne Casarino - (00:24:16)

Okay. No, I just wanted to make sure and yeah, sounds really good. And I was just wondering about the loan portfolio review that was done in the third quarter that you were describing. What percentage of total loans were reviewed in that.

Robin Oliver - President and Chief Operating Officer - (00:24:35)

You know, we reviewed around $70 million of the portfolio, but it was from a third party. And then we also had another individual that we hired as a consultant that was reviewing a large number of units but smaller dollars because that has been where some of our credit concerns have been. So we were really, it was a targeted review focused on specific criteria that might indicate that there was a credit weakness in that particular credit. So we looked at different components of our data tape,, our watch-list loans, things of that nature to try to pinpoint those that could be problems that weren't recognized yet as needing a downgrade and to just make sure that we had our arms around the entire portfolio and that any problem loan possible was identified clearly here by the end of Q3. So bit of a targeted review there.

Julianne Casarino - (00:25:38)

So it's fair to say 70 million loans were reviewed by a third party, external third party and the rest of all the loans were internally reviewed by a new hire. Sounds like, is that.

Robin Oliver - President and Chief Operating Officer - (00:25:52)

Well, yeah, a contractor, not all other loans. Right. But we focused on our SBA watch-list loans, our conventional commercial watch list loans, our smaller bolt and flash-cap loans that had had prior express modifications and might, you know, still be having some struggle things of that nature. So you know, we probably hit about 10, you know, 8 to 10% of the total portfolio, but focused in a targeted way.

Julianne Casarino - (00:26:26)

Oh, okay, so 8 to 10%. Okay. Okay. And then the. Is the board currently Is the board getting paid now? I remember last quarter you said the board was you know, had halted their compensation. Has that changed?

Tom Czernick - Chief Executive Officer - (00:26:43)

No, that has not changed.

Julianne Casarino - (00:26:45)

Okay, so the board's still not being paid and the repurchases have been halted and now all of this news is out, I'm guessing nobody. Insiders are not restricted, right, from buying if they want.

Tom Czernick - Chief Executive Officer - (00:27:03)

Yeah, I'll take that one, Julianne. It's. I'll answer it this way. These were some pretty substantial changes, and this is something that really has kept insiders out of the market as far as when that window is back up for us. That's to be determined. I wouldn't expect to see anybody jumping in today by any measure, but we'll take that one day at a time going forward.

Julianne Casarino - (00:27:27)

So currently insiders are under Currently insiders continue to be under a lockdown. Lockup. But.

Tom Czernick - Chief Executive Officer - (00:27:34)

Well, we typically wait until, you know, two full trading days after we release earnings before we open that window.

Julianne Casarino - (00:27:43)

Right. But now there's no. No reason to not be under lockup. Right. Because there's. It's all. It's all out. Right. The. There's nothing else really pending. Right.

Tom Czernick - Chief Executive Officer - (00:27:57)

Yeah, it's. I appreciate the question, Joanne. I'm not going to go into additional details.

Julianne Casarino - (00:28:02)

Sure. Okay, great. Well, again, thank you. Thank you so much. Appreciate it.

Tom Czernick - Chief Executive Officer - (00:28:08)

Thank you.

OPERATOR - (00:28:10)

Thank you. The next question comes from Fred Earle at DTF Capital Management. Please go ahead.

Fred Earle - (00:28:18)

Good morning and happy Halloween. That earnings. My question is why is the best decision anything other than to go to the home improvement store and get one of those signs that goes in the windshield for sale call now. Ren.

Tom Czernick - Chief Executive Officer - (00:28:43)

Not exactly following your question. Okay, looks like you hung up, Joanna. Was there anyone else in the queue?

OPERATOR - (00:28:59)

Thank you. There are no further questions in the queue. So that does indeed conclude today's conference call. We do thank everyone for participating and at this time, you may disconnect your lines. Thank you.

UNKNOWN - (00:29:11)

Thank you. Thank you. Thank you.