BayFirst Dumps $103M SBA Book at 3% Discount

BayFirst Financial Capitulates on SBA 7(a) Lending, Offloads $103M Portfolio to Banesco USA in Strategic Pivot

BayFirst Financial Corp. (NASDAQ: BAFN) is exiting the SBA 7(a) lending business, selling $103 million in loan balances and servicing rights to Banesco USA. This decision follows credit quality issues in its "Bolt" loan program.

The transaction, set to close in Q4 2025, highlights the risks of fast-paced small-dollar SBA lending. Banesco USA will acquire the loan portfolio at 97% of the unpaid principal balance and purchase the loan servicing rights at book value. Banesco will also take over servicing for all SBA loans BayFirst retains, marking a full operational transfer.

This strategic pivot results from BayFirst's management and board's earlier comprehensive review to "derisk" the balance sheet from volatile unguaranteed SBA loan exposure.

Key Deal Components and Strategic Implications:

• Portfolio Sale and Pricing Structure: Banesco USA is set to purchase the SBA 7(a) loans for 97 cents on the dollar of the unpaid principal balance. The purchase price also includes the book value of the loan servicing rights for the acquired portfolio, a critical component that ensures the transfer of future revenue streams. This pricing suggests a calculated move by Banesco to acquire seasoned assets at a discount, while BayFirst seeks a clean exit from a problematic portfolio.

• Operational and Talent Acquisition: The agreement is more than a simple asset sale; it represents a significant talent and operational lift-out. A majority of BayFirst's SBA lending staff and support teams will be offered positions with Banesco USA, effectively transferring the institutional knowledge and operational capacity required to manage the portfolio. This is a strategic win for Banesco, allowing it to absorb a proven origination and servicing engine without building it from the ground up.

• Servicing Rights Transfer: Banesco will not only service the loans it is acquiring but will also become the exclusive subservicer for BayFirst's "Retained Loans"—any SBA loans not included in the sale. A Lender Service Provider (LSP) Agreement codifies this relationship, providing Banesco with an additional, stable fee income source while allowing BayFirst to fully extricate itself from the operational burdens of SBA loan administration.

BayFirst's decision to exit the SBA market is due to the poor performance of its small-balance loan programs, especially the "Bolt" program. Launched in Q2 2022 to quickly provide working capital loans of $150,000 or less, the program initially succeeded, originating $869 million across 6,745 loans by mid-2025, but later became a major credit stress source.

BayFirst executives publicly acknowledged challenges, with CEO Thomas G. Zernick citing high inflation and interest rates affecting small business borrowers. The bank reported a $1.2 million net loss for Q2 2025 due to increased provision expenses and write-downs in its SBA portfolio. This pressure led to laying off 52 employees in August 2025 and discontinuing the Bolt program, signaling a full business line exit.

The bank's experience reflects a troubling trend in the SBA 7(a) market, with early loan defaults nationwide reaching their highest since 2012. This surge is linked to relaxed underwriting standards and fee reductions from 2022 to 2024, which unintentionally encouraged subprime lending and turned the program's net cash flow negative for the first time in 13 years. BayFirst, with many small-dollar loans, is at the center of this turbulence.

BayFirst will refocus on its core community banking in the Tampa Bay area, emphasizing stable funding and expanding conventional loans, after exiting the risky national SBA lending market. For Banesco USA, the deal offers a chance to scale its government-guaranteed lending by acquiring assets and an experienced team.

What happens to the borrowers?

BayFirst Financial's exit from SBA 7(a) loans means a change in loan servicer for small business owners, not a threat to their loans. Banesco USA, a Miami-based company, is acquiring a significant portion of BayFirst's portfolio and the servicing rights.

• For Borrowers in the $103M Portfolio: Business owners whose loans are part of the approximately $103 million portfolio being sold will have a new lender in Banesco USA. From a practical standpoint, this means their payments and any future loan inquiries will be directed to Banesco after the transaction closes in the fourth quarter of 2025. The terms of their original loans are not expected to change as a result of the sale.

• For Borrowers Whose Loans BayFirst Retains: Not all of BayFirst's SBA loans are being sold. Loans that fail to meet Banesco's specific criteria—such as those in default, with payments over 30 days past due, or with downgraded credit ratings—will be deemed "Excluded Loans" and retained by BayFirst. However, Banesco USA will still take over the servicing of these "Retained Loans" under a separate Lender Service Provider (LSP) Agreement. This means that even if BayFirst technically still owns the loan, the borrower's primary point of contact for payments and service will become Banesco.

• Notification and Transition: The asset purchase agreement stipulates a clear transition process. BayFirst and Banesco are required to jointly coordinate and deliver written notices to each loan obligor (borrower) within ten business days of the closing. This notice will formally advise them of the assignment of their loan to Banesco and provide new instructions on where to remit all future payments.

Comparative Default Rates and Industry Context

BayFirst's credit issues, particularly within its small-dollar SBA loan programs, are reflective of a broader, negative trend in the national SBA 7(a) market.

• National SBA Default Rates: The SBA's 7(a) loan program has experienced a dramatic increase in negative loan statuses, with default rates reaching 3.7% in 2024, the highest level since 2012. This surge in early defaults—loans that fail within the first 36 months—is particularly concerning as it points to potential flaws in original underwriting. The rate of these negative outcomes is "increasing far outpaces equivalent measures in the private sector".

• BayFirst's Position: BayFirst’s management acknowledged its high concentration of small-dollar loans placed it at the center of this industry-wide turbulence. For the second quarter of 2025, BayFirst reported annualized net charge-offs as a percentage of loans held for investment were 2.6%, a significant jump from 1.28% in the prior quarter and 1.45% in the same quarter of the previous year. Over 90% of the bank's historical credit losses have been from SBA loans, with the "vast majority" coming from its small loan program.

• Root Causes: This industry-wide decline in credit quality has been linked to several factors. The Biden administration's 2023 rule changes relaxed underwriting criteria and expanded the role of non-bank lenders. Furthermore, a decision to eliminate or reduce borrower and lender fees between fiscal years 2022 and 2024 deprived the program of over $460 million in upfront fees, contributing to the 7(a) program's first negative net cash flow in 13 years. BayFirst's President, Robin L. Oliver, noted that both older, pre-pandemic small loans and the more recent "Bolt" loans (originated in a higher-rate environment) were showing stress, indicating widespread economic pressure on small businesses.

Is Banesco Walking into a Trap at a 3% Discount?

While Banesco is acquiring a portfolio from a business line that its seller found unsustainable, the structure of the deal suggests a calculated strategy rather than a blind gamble. Banesco is not simply buying the loans; it is acquiring an entire operational infrastructure at what could be considered an opportune time and price.

Here's an analysis of the factors at play:

1. The Price Is Only Part of the Equation: Banesco is purchasing the $103 million loan portfolio at 97 cents on the dollar, a 3% discount on the aggregate unpaid principal balance. While a 3% discount may seem modest against a backdrop of rising defaults, the deal's value extends beyond the loan assets themselves. Banesco is also acquiring the associated loan servicing rights at book value and will become the exclusive subservicer for all of BayFirst's "Retained Loans"—those SBA loans not included in the sale. This provides Banesco with stable, recurring fee income from a much larger pool of loans than it is purchasing outright.

2. Acquiring a Turnkey Operation: A critical component of the agreement is the transfer of human capital. The majority of BayFirst’s SBA lending staff and support teams will be offered positions with Banesco USA. This "lift-out" of experienced personnel means Banesco is acquiring a fully functional origination and servicing engine without the time and expense of building one from the ground up. It gains institutional knowledge of the very portfolio it is acquiring, which is invaluable for risk management and servicing continuity. The deal also includes a license for Banesco to use BayFirst's proprietary origination and servicing materials, software, and processes, ensuring operational readiness from day one.

3. Risk Mitigation Through Selectivity: The asset purchase agreement gives Banesco USA significant power to curate the portfolio it acquires. The contract explicitly defines "Excluded Loans," allowing Banesco to reject any SBA loan that, as of the closing date, is in default, has a payment more than 30 days past due, has seen its credit risk rating downgraded, has incomplete documentation, or is subject to any other defect that would "adversely affect the value, enforceability, or collectability of such loan". This cherry-picking ability means Banesco is not obligated to take on BayFirst's most troubled assets. BayFirst will retain these higher-risk "Excluded Loans" on its own balance sheet, although Banesco will still service them for a fee.

4. Indemnification and Post-Closing Protections: The agreement includes specific protections for Banesco. For a one-year "Post-Closing Review Period," Banesco can identify any "Pre-Closing Issue"—such as a breach of BayFirst's representations that could cause the SBA to deny its guaranty—and require BayFirst to resolve it at its own expense. If the issue leads to the SBA failing to honor its guaranty on a purchased loan within two years of closing, it becomes an "Indemnifiable Pre-Closing Issue," making BayFirst liable for the damages. This clause contractually shifts much of the risk associated with underwriting flaws back to the seller.

In conclusion, while Banesco is entering a troubled market sector, it appears to be doing so with a clear-eyed strategy. The 3% discount is an upfront benefit, but the true value lies in the acquisition of a proven team, established operational infrastructure, and a curated portfolio with contractual protections against pre-existing defects. Rather than walking into a trap, Banesco is leveraging BayFirst’s strategic retreat to acquire a scalable, government-guaranteed lending business at a controlled cost and with mitigated risk.

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