BayFirst (BAFN) Q4 2025: SBA 7A Runoff Shrinks $50M, Refocuses Bank on Core Deposit Growth
BayFirst’s deliberate retreat from SBA 7A lending and a $50 million reduction in unguaranteed loan balances mark a decisive pivot to core community banking in Tampa Bay. The bank’s operational reset—headcount reductions, expense discipline, and a sharpened focus on insured local deposits—has begun to stabilize margins and position the franchise for improved risk-adjusted returns. With legacy credit costs peaking and core deposit growth now outpacing runoff, BayFirst enters 2026 with a cleaner balance sheet and a clear mandate to compete as a premier regional bank.
Summary
- Legacy SBA 7A Exit Accelerates: $50 million drop in unguaranteed balances signals rapid risk runoff.
- Deposit Franchise Strengthens: Organic deposit growth and 85% FDIC insurance coverage highlight core franchise resilience.
- Margin and Cost Focus: Lower funding costs and expense discipline set up improved profitability in 2026.
Performance Analysis
BayFirst’s fourth quarter underscores a critical transition away from SBA 7A lending, with loans held for investment down 3.5% sequentially and a sharper 9.6% year-over-year decline as the bank sells down and winds off legacy exposures. The deposit base grew by $12.5 million in Q4, driven by time and interest-bearing transaction accounts, offsetting runoff in higher-cost money market and non-interest-bearing balances. Quarter-end deposits reached $1.18 billion, with a robust 85% insured ratio, reflecting franchise stability and local customer trust.
Net interest margin (NIM) held steady at 3.58%, declining only slightly from the prior quarter, as disciplined deposit pricing and a shift away from promotional rates began to lower cost of funds. Non-interest expense fell sharply, following the Q3 restructuring, with compensation and loan servicing costs materially lower. Credit costs remain elevated, with $4.1 million of Q4 net charge-offs tied to unguaranteed SBA 7A loans, but the provision expense dropped to $2 million as the legacy portfolio shrinks and coverage ratios remain conservative.
- Legacy Credit Drag: Net charge-offs rose to 1.95% of average loans, driven by SBA 7A runoff, but coverage ratios are robust at 2.43% of loans.
- Core Deposit Growth: Organic deposit inflows and treasury management revenues support core franchise health.
- Expense Reset: Headcount reduction and lower compensation expense drive improved efficiency post-restructuring.
While the headline net loss reflects residual SBA 7A impacts, the underlying community bank operations are now positioned for margin and earnings improvement as legacy risks abate.
Executive Commentary
"The results of these efforts are lower risk, more efficient operations, and a better position for sustainable growth and enhanced shareholder value. We are also pleased to report that we closed the year well capitalized, providing a strong foundation as we move forward."
Tom, Chief Executive Officer
"With the exit of the SBA 7A lending business, revenue from gains on the sale of government guaranteed loans will no longer impact non-interest income as it has in prior periods."
Scott McKim, Chief Financial Officer
Strategic Positioning
1. SBA 7A Exit and Risk Reduction
BayFirst’s complete exit from the SBA 7A lending business, including the sale of a substantial portion of unguaranteed loan balances, is the centerpiece of its risk reduction strategy. The remaining $171.6 million of unguaranteed loans is rapidly shrinking, down $50 million sequentially, with further sales expected to accelerate the runoff and reduce future charge-offs.
2. Core Community Banking Focus
The bank is doubling down on its Tampa Bay and Sarasota markets, emphasizing organic deposit growth and customer service. The deposit franchise is increasingly granular, built on family and small business relationships, and 85% FDIC insurance coverage provides a competitive edge in local trust and stability. Treasury management and merchant services are being leveraged to deepen business banking relationships and drive non-interest income.
3. Margin and Cost Discipline
Deposit cost management is a top priority, with the bank moving away from high-cost promotional rates that were previously justified by high-yield SBA lending. As the asset mix normalizes, the bank is reducing reliance on brokered deposits and focusing on relationship-driven funding. Expense reductions, particularly in compensation and servicing, reflect a leaner operational model post-restructuring.
4. Conservative Credit Administration
Credit administration has been overhauled, with aggressive provisioning, portfolio “scrubbing,” and a focus on timely identification and resolution of problem loans. The majority of classified loans are now current and performing, with management targeting a reduction of non-performing assets to peer levels over the coming quarters.
5. Capital and Liquidity Strength
Liquidity ratios above 18% and a well-capitalized balance sheet provide flexibility to optimize funding costs and support competitive loan pricing as the bank pivots to growth in its core markets.
Key Considerations
The quarter marks a strategic inflection point, with BayFirst shifting from legacy SBA-driven risk and income volatility to a more predictable, lower-risk community banking model. Investors should weigh the following:
Key Considerations:
- SBA 7A Runoff Pace: Continued sales and charge-off absorption will determine how quickly BayFirst can fully normalize credit costs.
- Deposit Franchise Health: Organic growth and high insured ratios provide ballast, but the mix shift from promotional to relationship deposits is ongoing.
- Margin Resilience: Stable NIM and cost of funds improvement are critical as loan yields moderate post-SBA exit.
- Expense Control: Recent headcount and compensation reductions must be sustained to drive operating leverage in a lower-growth environment.
- Credit Quality Trajectory: The speed of resolution in the remaining classified and non-performing loan book will shape the earnings rebound.
Risks
The principal risk remains the legacy SBA 7A portfolio, where additional charge-offs are likely in the near term, though management expects a diminishing impact over time. Competitive deposit pricing and potential for runoff as promotional rates are reduced could pressure funding costs if not managed carefully. Regulatory scrutiny and peer benchmarking on asset quality and capital could also influence strategic flexibility as the bank transitions to a pure-play community model.
Forward Outlook
For Q1 2026, BayFirst expects:
- Continued reduction in unguaranteed SBA 7A balances through runoff and potential sales
- Ongoing organic deposit growth, with a focus on business relationships and treasury management
For full-year 2026, management maintained a focus on:
- Margin improvement through lower funding costs and disciplined loan pricing
- Asset quality normalization as classified and non-performing loans are resolved
Management emphasized that the strategic plan is anchored on balance sheet fortification and disciplined risk management, with expectations for improved profitability and sustainable growth as legacy risks subside.
- Legacy credit costs to diminish as the SBA 7A portfolio shrinks
- Deposit cost management and customer relationship deepening as top operational priorities
Takeaways
BayFirst’s earnings cycle has pivoted from legacy SBA 7A volatility to a more stable, community banking model, with early signs of core margin and deposit franchise strength emerging.
- Risk Reduction in Action: Rapid SBA 7A runoff and aggressive provisioning are compressing legacy exposures, setting the stage for normalized credit costs.
- Deposit-Driven Growth: Organic deposit inflows and high insured ratios reflect strong local franchise momentum, supporting future lending capacity.
- Watch for Margin Expansion: As cost of funds declines and expenses reset, margin improvement and normalized earnings should become more visible over 2026.
Conclusion
BayFirst’s Q4 results highlight a bank in strategic transition, with legacy risks being addressed head-on and core community banking operations gaining traction. The next phase will test management’s ability to sustain deposit growth, maintain expense discipline, and deliver on margin expansion as credit costs recede.
Industry Read-Through
BayFirst’s rapid exit from SBA 7A lending and focus on insured deposit growth provide a template for other regional banks facing legacy credit headwinds and funding cost pressures. The quarter underscores the importance of deposit franchise quality, disciplined expense management, and proactive credit administration in a rising-rate, post-stimulus environment. Banks with concentrated legacy exposures or promotional funding strategies may face similar inflection points, with franchise value increasingly tied to local relationship depth and capital flexibility as industry competition intensifies.