BayFirst Financial Corp. Q3 FY2025 earnings call

• Management and Board initiated comprehensive strategic review at start of year to derisk balance sheet and position for long-term growth. • Exited SBA 7(a) lending in September, signed agreement to sell large portion of portfolio to Banesco USA, majority of staff offered positions with Banesco USA. • Focus on community banking mission, delivering excellent service in Tampa Bay and Sarasota markets, building real relationships with local individuals, families, and small businesses. • Restructuring complete expected to return to profitability with goal of positive return on assets of 40 to 70 basis points in 2026. • Continue resolving nonperforming loans and improving credit quality. • Made decisions regarding staff levels, span of control, and legacy costs related to SBA 7(a) lending and technology platform. • Robin discussed asset quality efforts, strengthening credit administration, tightening credit underwriting, hiring consultants to review portfolio. • Robin also discussed leadership changes: Tom Qualley retiring, Samantha Hill succeeding him; Adam Curtis assuming additional roles; Brandi Jaber now Chief Administrative Officer.

The bank's SBA 7(a) business outgrew the community bank model, bringing material risk and operating losses. In September, BayFirst exited SBA 7(a) lending and signed an agreement to sell a large portion of its SBA 7(a) portfolio to Banesco USA. More than 84% of deposits are insured. Loans held for investment decreased during the quarter. Total deposit balances increased. Net loss was $18.9 million in Q3 compared to $1.2 million in Q2. Net interest margin was 3.61% in Q3, down 45 basis points. Noninterest income was negative $1 million in Q3. Noninterest expense increased due to restructuring charge. Provision for credit losses was $10.9 million in Q3.

• Expect to return to profitability with goal of positive return on assets of 40 to 70 basis points in 2026 with continued improvement in later years. • Continue resolving nonperforming loans and improving credit quality.

• Current federal government shutdown has generated delays in closing the SBA 7(a) portfolio sale transaction. • SBA 7(a) business outgrew community bank model and brought material risk leading to operating losses.

Q: How much of the SBA did you hold back and how are you servicing them and why not sell the whole thing?

A: Anticipation is that by end of December, post closing transaction, the bank would still have about $167 million of unguaranteed SBA 7(a) loan balances. Banesco will be the servicer for all loans in the portfolio, and a good chunk of the people servicing the portfolio will move over. The transaction announced was the amount Banesco USA wished to buy, and they continue to look for other parties to market and sell the remaining portfolio.

Q: 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 the last $167 million?

A: The portfolio sale previously announced was at a 3% discount (97%). The increase in allowance for credit loss reflects primarily related to unguaranteed balances going forward, and they are not anticipating adding additional ACL to the remaining balances at the end of this year or in the future.

Q: Are you still originating SBA loans and is SBA still a big part of the business model moving forward?

A: They are exiting SBA. They will continue to originate up until close with Banesco USA. Beyond the closing date, they will be a true community bank, making Tampa Bay-based commercial C&I loans, continuing with some consumer lending, residential mortgage lending, and offering a great deposit suite, enhancing treasury management services.

Q: Describe the treasury management product and if there are any off-balance sheet deposits?

A: They beefed up treasury software and services. Added lockbox services, rolled out new Jack Henry Treasury software. Have 4 folks serving treasury and likely to increase in 2026. No off-balance sheet activity.

Q: What percent of total loans were reviewed in the third quarter loan portfolio review?

A: They reviewed around $70 million of the portfolio with a third party, and focused on specific criteria like SBA watch list loans, conventional commercial watch list loans, etc., hitting about 8% to 10% of the total portfolio in a targeted way.

Q: Has the Board's compensation changed and are insiders restricted from buying?

A: The Board is still not being paid. Insiders' buying window: typically wait until 2 full trading days after releasing earnings before opening the window, and currently, it's to be determined as there are substantial changes, but no expectation of insiders jumping in immediately.