BayFirst Financial Corp. (BAFN)

Executive Summary / Key Takeaways

• Strategic Amputation: BayFirst is surgically removing its historically core SBA 7(a) lending business—responsible for building its 12-branch network—after it "outgrew our community bank model" and generated operating losses, forcing a $7.3 million restructuring charge in Q3 2025 alone.

• Capital Crisis: The bank is not well-capitalized by regulatory standards, faces debt covenant violations on its subordinated notes, and carries $235.9 million in brokered deposits (20% of assets), creating a fragile liquidity position that limits strategic flexibility and invites regulatory scrutiny.

• Ambitious Turnaround Targets vs. Bleeding Operations: Management targets 40-70 basis points of ROA in 2026, implying a swing from Q3's -1.6% annualized ROA, yet Q3's $18.9 million net loss and 1.24% annualized net charge-off ratio suggest the credit pain is far from over.

• Competitive Disadvantage: BAFN trails all key Florida peers—Seacoast Banking Corporation , SouthState Corporation , Capital City Bank Group (CCBG), and Synovus Financial Corp. (SNV)—on every meaningful metric: profitability (negative 18% margins vs. peers' 24-35%), efficiency (negative ROE vs. peers' 6-14%), and asset quality (NPAs at 1.97% vs. peer averages below 1%).

• Priced for Failure: At $8.07, the stock trades at 0.45x book value and 0.50x sales, a 60-70% discount to peers, reflecting market skepticism that management can execute a community banking pivot while repairing a damaged balance sheet.

Setting the Scene: When Your Growth Engine Becomes a Liability

BayFirst Financial Corp., founded in 1999 and headquartered in Saint Petersburg, Florida, spent over a decade building a community banking franchise around a powerful growth engine: SBA 7(a) lending. This business didn't just contribute revenue—it funded the expansion of a 12-branch network across Tampa Bay and Sarasota, creating what management calls "tremendous franchise value." The model was straightforward: originate government-guaranteed loans, sell the guaranteed portions into the secondary market for immediate gains, and service the remaining unguaranteed balances for recurring income. For years, this generated reliable noninterest income and funded relationship banking expansion.

That same engine began misfiring in 2025. The SBA 7(a) portfolio had grown too large, too complex, and too risky for a $1.2 billion asset bank to manage effectively. Credit losses mounted, operational costs ballooned, and the business that built the franchise began destroying value. In May 2021, the company changed its name from First Home Bancorp to BayFirst Financial Corp., a rebranding that now seems prescient—the "First Home" mortgage business had been discontinued in 2022, and by Q3 2025, the SBA business faced the same fate.

The strategic review that began in early 2025 culminated in a radical decision: exit SBA lending entirely. On September 29, 2025, BayFirst signed a definitive agreement to sell $103 million of SBA 7(a) loans to Banesco USA at a 3% discount, with Banesco also acquiring servicing rights and offering positions to the majority of BayFirst's SBA staff. The transaction, originally expected to close in Q4 2025, has been delayed by the federal government shutdown—a risk that matters because every month of delay extends the period of uncertainty and potential credit deterioration on the remaining $167 million of unguaranteed balances BayFirst must still sell.

This pivot transforms BayFirst from a hybrid SBA lender/community bank into what CEO Tom Zernick calls a "true community bank" focused on Tampa Bay-based commercial and industrial lending, consumer loans, residential mortgages, and enhanced treasury management services. The question for investors is whether a bank can survive the amputation of its primary profit driver while simultaneously fighting a capital crisis and competitive headwinds.

Technology, Products, and Strategic Differentiation: Treasury Management as the New Battleground

With SBA gains on sale disappearing from noninterest income, BayFirst's product strategy hinges on a single, clear initiative: enhanced treasury management services. This isn't a minor product extension—it's the bank's primary differentiator in a market where larger competitors offer more branches, better digital platforms, and lower funding costs.

In late 2024, BayFirst added lockbox services. In February 2025, it rolled out Jack Henry (JKHY) Treasury software, designed for mid-market businesses requiring complex permissions and functionality. The treasury team expanded from one officer to four, with plans for further growth in 2026 based on successful customer onboarding. As President Robin Oliver noted, the company has "beefed up the software and the services" to be competitive.

Why does this matter? Treasury management services generate sticky, low-cost deposits and fee income that don't require taking credit risk. For a bank with 84% FDIC-insured deposits and a reliance on $235.9 million in brokered deposits, building a core deposit franchise through treasury services is critical to reducing funding costs and stabilizing the net interest margin. Every dollar of operating account balances gathered through treasury services replaces a dollar of high-cost brokered funding, directly improving the NIM that dipped to 3.61% in Q3 due to "one-time items."

The strategic implication is clear: BayFirst must become a relationship bank for local businesses that value personalized treasury services over the digital convenience offered by larger competitors. This is a defensible niche, but it's also a slow-growth strategy that won't replace the $16.5 million in gains on sale of government-guaranteed loans that BayFirst generated in the first nine months of 2025. The treasury pivot is necessary, but it's a multi-year build in a market where competitors like Seacoast Banking (SBCF) and SouthState (SSB) already offer sophisticated digital treasury platforms with broader branch networks.

Financial Performance: The Cost of Derisking

BayFirst's Q3 2025 results reveal the brutal math of strategic retreat. The bank reported a net loss of $18.9 million, a dramatic deterioration from the $1.2 million loss in Q2. This wasn't a gradual decline—it was a $17.7 million swing driven by $12.4 million in one-time charges, including the $7.3 million restructuring charge for exiting SBA lending. For the nine months ended September 30, 2025, the net loss reached $20.5 million, down from $2.8 million in net income in the prior year period.

The income statement tells a story of a bank tearing down its old business model before building a new one. Net interest income increased to $11.3 million in Q3, up from $9.4 million year-over-year, driven by a $2 million decrease in interest expense on deposits. The net interest margin improved to 3.61% from 3.34% in Q3 2024, and management insists the bank will approach its 4% target through lower deposit costs and appropriately priced loans. But this margin expansion is overshadowed by credit costs and the loss of fee income.

Noninterest income collapsed to negative $1.0 million in Q3 2025 from $12.3 million in the prior year's quarter—a $13.3 million swing. The components are telling: gains on sale of government-guaranteed loans fell $3.1 million, fair value gains dropped $4.3 million, and the bank took a $5.1 million unfavorable fair value adjustment on held-for-sale loans related to the Banesco transaction. Government-guaranteed loan packaging fees declined $0.5 million. This revenue stream, which historically provided the bulk of BayFirst's profitability, has vanished.

The provision for credit losses tells the other half of the derisking story. The bank recorded $10.9 million in provision expense in Q3, up from $2.8 million in Q2, driven by "higher than expected charge-offs, mainly in the SBA 7(a) portfolio, increases in nonperforming loans, and continued economic uncertainty." Net charge-offs were $3.3 million in Q3, down from $6.8 million in Q2, but the annualized net charge-off ratio remains elevated at 1.24%. Nonperforming assets reached 1.97% of total assets, up from 1.79% in Q2 and 1.38% year-over-year. Excluding government-guaranteed balances, NPAs are 1.21%—still more than double the levels of well-managed peers.

The allowance for credit losses jumped to 2.61% of total loans held for investment, up from 1.65% in Q2. This 96 basis point increase in a single quarter reflects management's "aggressive stance on recognizing all potential problem loans" after hiring consultants in Q3. While this front-loading of credit costs is prudent, it also reveals the extent of credit deterioration that had been building in the SBA portfolio. The $1.9 million in disallowed interest overpayments from the SBA recorded in Q3 further underscores the operational complexity and risk that led to the exit decision.

What does this imply? BayFirst is paying a massive price to derisk its balance sheet. The $7.3 million restructuring charge and $10.9 million provision represent approximately 1.5% of the bank's total assets. This is strategic amputation with a tourniquet, not a graceful pivot. The bank is bleeding capital at a time when it can least afford it.

Capital and Liquidity: The Regulatory Tightrope

BayFirst's capital position is the most critical risk factor and the primary constraint on its strategic options. As of September 30, 2025, the bank did not meet all regulatory capital requirements to be well-capitalized. This isn't a minor shortfall—it's a formal regulatory classification that triggers restrictions on activities, increases supervisory scrutiny, and limits access to certain funding sources.

The bank has requested a waiver from the FDIC to continue accessing brokered deposits, which totaled $235.9 million at quarter-end, up from $112.1 million at year-end 2024. Brokered deposits now represent approximately 20% of total assets, hitting the bank's internal policy limit. Why does this matter? Brokered deposits are typically more expensive and less stable than core deposits, and regulators view heavy reliance on them as a sign of funding weakness. If the FDIC denies the waiver, BayFirst could be forced to rapidly reduce these deposits, potentially creating a liquidity crunch.

The situation worsens on the liability side. The company was not in compliance with certain debt covenants for its subordinated notes and a term note as of September 30, 2025. Waivers have been requested but not yet received. Denial could trigger default interest rates or accelerate repayment, further straining capital. With shareholders' equity at just $89.7 million, down from $110.9 million at year-end, the bank has minimal cushion to absorb additional losses or regulatory penalties.

Liquidity metrics offer some comfort but also reveal vulnerabilities. The on-balance sheet liquidity ratio improved to 11.31% from 9.17% at year-end, and the bank holds $655,000 in cash and cash equivalents with access to FHLB and FRB borrowing capacity. However, total contractual obligations jumped to $455.4 million from $341.7 million, driven by a $50 million increase in short-term borrowings and a $65.7 million increase in time deposits. The bank is extending its liability structure while its equity base erodes.

The strategic implication is stark: BayFirst cannot afford to stumble. The 40-70 basis point ROA target for 2026 isn't just an earnings goal—it's a capital necessity. Every basis point of ROA translates directly to retained earnings that rebuild capital ratios. But achieving this target requires a near-perfect execution of the community banking pivot while credit losses normalize and deposit costs decline. Any slippage could force a dilutive equity raise at the current distressed valuation, wiping out remaining shareholder value.

Competitive Landscape: Outgunned in the Home Market

BayFirst's Tampa Bay and Sarasota footprint puts it in direct competition with four larger, better-capitalized, and more profitable regional banks: Seacoast Banking Corporation (SBCF), SouthState Corporation (SSB), Capital City Bank Group (CCBG), and Synovus Financial Corp. (SNV). The competitive comparison reveals why BayFirst's community banking pivot faces headwinds before it even begins.

Scale disadvantages are immediate and material. SBCF operates over 90 branches with $15 billion in assets. SSB has more than 100 Florida branches and $50 billion in assets. Even CCBG, the smallest direct peer, has 60 branches and $4 billion in assets. BayFirst's 12 branches and $1.2 billion asset base provide no bargaining power with vendors, limited marketing reach, and higher per-unit operating costs. This shows up in the efficiency ratio: while peers operate with 44-55% operating margins, BayFirst's negative margins reflect a cost structure that can't support its current scale.

Digital capabilities compound the disadvantage. SBCF and SSB have invested heavily in online platforms, mobile banking, and integrated treasury management systems that attract younger, tech-savvy customers. BayFirst's treasury management enhancements—while directionally correct—are playing catch-up against competitors with years of development and millions of customer interactions refining their platforms. In an industry where customer acquisition costs are rising and deposit loyalty is declining, being late to digital transformation means paying more to win less.

Credit quality comparisons are equally damning. BayFirst's 1.97% NPA ratio and 2.61% ACL ratio stand in stark contrast to peer averages below 1% and 1.5% respectively. This isn't a minor gap—it's a 100+ basis point disadvantage that reflects both the legacy SBA portfolio problems and potentially weaker underwriting standards in the remaining loan book. When competitors can provision less and charge off fewer loans, they can price more aggressively and generate higher returns.

The most telling metric is profitability. BayFirst's trailing twelve-month ROA of -0.83% and ROE of -11.14% compare to peer ROAs of 0.9-1.4% and ROEs of 6-14%. This performance gap isn't cyclical—it's structural. Larger competitors benefit from diversified revenue streams, lower funding costs, and economies of scale that BayFirst cannot replicate. The SBA exit, while necessary, eliminates the one business line that had generated outsized returns to offset these structural disadvantages.

What does this mean for the turnaround? BayFirst isn't just trying to improve operations—it's trying to reinvent its business model while fighting against competitors with superior resources, technology, and credit quality. The community banking strategy is sound in theory, but execution requires either taking market share from entrenched competitors or finding underserved niches. With its capital constraints and damaged profitability, BayFirst lacks the firepower for aggressive market share grabs.

Outlook and Guidance: The 40-70 Basis Point Challenge

Management's guidance for 2026 is clear and quantified: achieve a positive return on assets of 40 to 70 basis points, with continued improvement thereafter. This implies net income of $4.7 million to $8.2 million on current assets of $1.17 billion—a massive swing from the $20.5 million loss through Q3 2025.

The path to this target relies on three pillars: lower deposit costs, appropriately priced consumer and commercial loans, and reduced credit losses. Each pillar faces headwinds.

Deposit costs should benefit from Fed rate cuts, but BayFirst's reliance on brokered deposits and time deposits (which increased $53 million in Q3) means its cost of funds will likely decline slower than peers with stronger core deposit franchises. The treasury management initiative aims to shift this mix, but building a core deposit base takes years, not quarters.

Loan pricing power is limited by competition. With peers offering aggressive terms to quality borrowers, BayFirst must choose between growth and margin. Given its capital constraints, it cannot afford to chase low-margin loans. This suggests loan growth will be modest, relying on relationship-based pricing premiums in its local markets.

Credit loss normalization is the most critical and uncertain pillar. Management expects "lower net charge-offs following the reduction of unguaranteed SBA 7(a) loans" and believes the Q3 provision "front-loaded" recognition of problem loans. The $800,000 reduction in ACL related to the held-for-sale portfolio supports this view. However, the remaining $167 million of unguaranteed SBA balances and the $831 million of conventional loans still carry risk. If economic conditions deteriorate or the aggressive Q3 provisioning still proves insufficient, credit costs could remain elevated.

Robin Oliver, President and COO, stated the goal is "the continual reduction of nonperforming and classified credits to bring these balances closer in line to peers." This is a multi-year process. The bank ended Q3 with $19.7 million in nonperforming assets. Reducing this to peer-equivalent levels below $10 million requires both successful workouts and pristine new origination—a tall order during a strategic transition.

The federal government shutdown delaying the Banesco closing adds execution risk. Every month of delay extends the period of uncertainty, keeps SBA staff in limbo, and potentially exposes the bank to further credit deterioration on the held-for-sale portfolio. While management expects the deal to close, the delay consumes management attention and regulatory goodwill at a critical moment.

Valuation Context: Priced for a Turnaround That May Never Come

At $8.07 per share, BayFirst trades at a 55% discount to its September 30, 2025 book value per share of approximately $17.97 (based on $89.7 million equity and 5.0 million shares outstanding). The price-to-book ratio of 0.45x compares to peer multiples of 1.08x to 1.42x, reflecting a 60-70% valuation discount.

The market is pricing BayFirst as a distressed institution, not a value play. The valuation suggests investors assign negative value to the operating business, viewing it as a liability rather than an asset.

Price-to-sales of 0.50x versus peer averages of 3.10x to 5.47x tells the same story. Revenue quality has collapsed with the SBA exit, and the market doesn't believe the community banking franchise can generate sustainable earnings power.

For investors, the valuation creates an asymmetric risk-reward profile, but not necessarily a favorable one. The upside case requires perfect execution of the turnaround, rapid credit improvement, and capital ratio restoration. If successful, the stock could re-rate toward 0.8-1.0x book value, implying 80-120% upside. However, the downside case involves further credit deterioration, regulatory intervention, or a forced capital raise at distressed levels, potentially wiping out remaining shareholder value.

The valuation context matters because it frames the investment decision: this is a special situations turnaround play, not a traditional bank value investment. The 40-70 basis point ROA target must be achieved for the valuation discount to narrow. Any slippage toward breakeven or continued losses will likely see the discount widen further.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis hinges on BayFirst's ability to stabilize and rebuild. Several material risks could break this narrative:

Capital Adequacy and Regulatory Intervention: The bank's failure to meet well-capitalized standards is not a technicality—it's a flashing red light. If credit losses exceed the Q3 provision or if the Banesco sale proceeds are less than expected, capital ratios could fall further. Regulatory intervention could take the form of a consent order, restrictions on growth, or even a forced recapitalization. The requested FDIC waiver for brokered deposits is a temporary reprieve, not a solution. Denial would force immediate deleveraging.

Remaining Credit Risk: While the SBA exit removes the guaranteed portion of the portfolio, BayFirst retains $167 million in unguaranteed balances plus $831 million in conventional loans. The 2.61% ACL ratio suggests management expects significant losses. If the Q3 provisioning proves insufficient or if the economy weakens, further provisions could erode the already thin capital cushion. The $1.9 million in disallowed SBA interest overpayments recorded in Q3 indicates operational issues that could surface additional losses.

Execution Risk on Community Banking Pivot: Building a relationship-based community bank requires time, talent, and capital. BayFirst has lost experienced SBA lenders and support staff to Banesco. Hiring and training new commercial bankers takes quarters, not months. During this transition, loan growth may stall, and deposit gathering may lag targets. The treasury management initiative is promising but small in scale relative to the $1.17 billion deposit base.

Competitive Erosion: Larger peers are not standing still. They continue investing in digital capabilities, expanding treasury services, and pricing aggressively for quality credits. BayFirst's damaged profitability and capital constraints prevent it from matching these investments. Market share in its home markets could erode before the turnaround gains traction.

Liquidity and Funding Pressure: The 20% reliance on brokered deposits creates a potential run risk if market conditions tighten or if the bank loses its waiver. Time deposits increased $53 million in Q3, suggesting the bank is paying up for sticky funding. If deposit costs don't decline as fast as asset yields, the NIM expansion story falters.

The asymmetry lies in the potential outcomes. Upside requires everything to go right: clean credit, successful sale of remaining SBA balances, regulatory forbearance, and flawless execution of the community banking strategy. Downside requires only one thing to go wrong: a major credit loss, regulatory action, or funding disruption. This skewed risk-reward profile makes the investment more speculation than calculated value.

Conclusion: A Turnaround Story with Too Many Moving Parts

BayFirst Financial is attempting one of the most difficult feats in banking: reinventing its business model while repairing a damaged balance sheet and fighting for survival against better-capitalized competitors. The decision to exit SBA lending was correct—the business had outgrown the community bank model and was generating operating losses—but the execution cost has been severe. Q3's $18.9 million loss, $7.3 million restructuring charge, and 2.61% ACL ratio reveal the depth of the problems management is addressing.

The 40-70 basis point ROA target for 2026 is achievable in theory but requires near-perfect execution on multiple fronts: credit normalization, deposit cost reduction, loan pricing discipline, and expense control. Each pillar faces headwinds from competition, capital constraints, or economic uncertainty. The bank's failure to meet well-capitalized standards and its reliance on brokered deposits create a fragile funding base that limits strategic flexibility.

Trading at 0.45x book value, the stock prices in a high probability of failure. The 60-70% discount to peers reflects legitimate concerns about capital adequacy, credit quality, and competitive positioning. For investors, the question isn't whether the stock is cheap—it's whether the bank can survive long enough to prove the market wrong.

The central thesis hinges on two variables: credit loss normalization and capital restoration. If the Q3 provision truly front-loaded all remaining problems and if the Banesco sale closes smoothly, the path to 40-70 basis points of ROA exists. But if credit losses persist or if regulators lose patience, the turnaround story could become a liquidation story. With too many moving parts and insufficient margin for error, BayFirst remains a show-me story best watched from the sidelines until tangible evidence of sustainable profitability emerges.