BayFirst Financial’s Q1 Loss Highlights Economic Headwinds Amid Strategic Shifts

BayFirst Financial Corp. (BF) reported its first-quarter 2025 results, revealing a net loss of $0.3 million ($0.17 per share), a stark contrast to the $9.8 million profit ($2.27 per share) in the prior quarter. While the loss was largely driven by the absence of a one-time $11.6 million gain from branch property sales in Q4 2024, the results underscore a broader struggle against deteriorating credit quality and macroeconomic pressures.

Core Strengths Amid Struggle
Despite the loss, BayFirst’s net interest margin (NIM) rose to 3.77% in Q1, up 35 basis points year-over-year, reflecting improved pricing discipline and asset mix. Total loans grew 1.7% quarter-over-quarter to $1.08 billion, with community bank loans (conventional commercial and consumer) surging 4%—a sign of progress in its strategic pivot away from volatile SBA lending. Deposits, however, declined 1.3% to $1.13 billion, driven by reductions in high-cost time deposits. This shift to lower-cost core deposits reduced interest expense by $1.2 million, a key tactical win.

Credit Quality Worsens
The most pressing concern remains credit quality. Nonperforming assets (NPAs) jumped to 2.08% of total assets, up from 1.50% in Q4 2024 and 0.97% a year earlier. Excluding government-guaranteed loans, NPAs still rose to 1.22%, highlighting strain in the conventional loan portfolio. Net charge-offs of $3.3 million (1.28% annualized) remain elevated, reflecting weak economic conditions. CEO Thomas Zernick noted inflation and high interest rates are squeezing small businesses, a key client base.

SBA Lending: A Mixed Picture
BayFirst’s SBA loan originations fell to $106.3 million in Q1, down from $130.6 million in 2024’s first quarter. Its high-volume Bolt program, focused on small-dollar SBA loans, originated $60.5 million in Q1, bringing the total since 2022 to $802 million. While this positions BayFirst as the 10th-largest SBA lender nationally by volume, management is now prioritizing risk mitigation. Plans include selling portions of its unguaranteed SBA loan portfolio and tightening underwriting standards—a necessary step to stabilize capital ratios, which dipped to 8.56% (from 9.12% a year ago).

Strategic Moves and Risks
BayFirst’s $2.0 million share repurchase program, with $335,000 executed in Q1, and a maintained $0.08 dividend signal confidence in liquidity. The bank’s on-balance sheet liquidity ratio of 8.04% remains healthy, supported by federal borrowing facilities. However, the declining capital ratios and rising credit costs could pressure valuation multiples if trends persist.

Conclusion: A Bank Betting on Resilience
BayFirst’s Q1 results are a mixed bag. While its core NIM and loan growth suggest operational discipline, credit deterioration and capital pressures hint at vulnerability in a prolonged downturn. The stock’s performance—likely to be volatile—will hinge on whether management can stabilize credit metrics and execute its shift toward conventional lending.

Investors should note two key positives:
1. Loan growth momentum: The 16% year-over-year loan expansion, driven by conventional lending, aligns with a strategy to reduce reliance on volatile SBA loans.
2. Deposit cost management: The $1.2 million savings from shifting to low-cost deposits could bolster net interest income as rates stabilize.

Yet risks loom large:
- The NPA ratio’s climb to 2.08% is a red flag, especially if economic conditions worsen.
- SBA lending’s declining originations raise questions about revenue sustainability in this segment.

For now, BayFirst remains a hold. The stock’s valuation—trading at 1.0x book value—reflects these crosscurrents. Investors should monitor Q2’s credit trends and NIM performance closely. If BayFirst can stabilize NPAs near current levels while growing conventional loans, it could regain momentum. Until then, patience is required.

In a sector where credit quality is king, BayFirst’s resilience will be tested—but its community banking roots and strategic shifts offer hope in an uncertain environment.