BayFirst Financial Corp. - Quarter Report: 2022 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended June 30, 2022
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 001-41068

BAYFIRST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


Florida			59-3665079
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

700 Central Avenue St. Petersburg, Florida			33701
(Address of Principal Executive Offices)			(Zip Code)

(727) 440-6848

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	BAFN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The registrant had outstanding 4,029,139 shares of common stock as of August 8, 2022.


		Page
Part I - Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at June 30 , 2022 (Unaudited) and December 31, 2021	3
	Consolidated Statements of Income (Unaudited) for the three and six months ended June 30 , 2022 and 2021	4
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30 , 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three and six months ended June 30 , 2022 and 2021	6
	Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30 , 2022 and 2021	8
	Notes to the Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	60

Part II - Other Information
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
Signatures		65

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Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.


AFS: Available for Sale			FDIC: Federal Deposit Insurance Corporation
ALCO: Asset-Liability Committee			FHLB: Federal Home Loan Bank
ALLL: Allowance for Loan Losses			FNBB: First National Bankers Bank
AOCI: Accumulated Other Comprehensive Income			FRB: Federal Reserve Bank
ASC: FASB Accounting Standards Codification			FVO: Fair Value Option
ASU: FASB Accounting Standards Update			GAAP: Generally Accepted Accounting Principles
BHCA: Bank Holding Company Act of 1956, as amended			IRA: Individual Retirement Account
BOLI: Bank Owned Life Insurance			JOBS Act: Jumpstart Our Business Startups Act of 2012
BSA: Bank Secrecy Act of 1970			LHFS: Loans Held for Sale
CAA: Consolidated Appropriations Act			MMDA: Money Market Deposit Account
CARES Act: Coronavirus Aid, Relief, and Economic Security Act			NOW: Negotiable Order of Withdrawal
CBLR: Community Bank Leverage Ratio			NSPP: Non-Qualified Stock Purchase Plan
CECL: Current Expected Credit Losses			OFR: Florida Office of Financial Regulation
CET1: Common Equity Tier 1 Capital			OLC: Officer Loan Committee
C&I: Commercial and Industrial			OREO: Other Real Estate Owned
CIK: Central Index Key			OTTI: Other-Than-Temporary Impairment
COVID-19: Coronavirus Disease 2019			PCAOB: Public Company Accounting Oversight Board
DCLC: Directors’ Credit and Loan Committee			PPP: Paycheck Protection Program
DEI: Diversity, Equity, and Inclusion			PPPLF: Paycheck Protection Program Liquidity Facility
DODD-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010			QIB: Qualified Institutional Buyer
DRIP: Dividend Reinvestment Plan			ROU: Right of Use
EGC: Emerging Growth Company			SBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Inventive Plan			SEC: U.S. Securities and Exchange Commission
EPS: Earnings per Share			SOFR: Secured Overnight Financing Rate
ESG: Environmental, Social, and Governance			U.S.: United States
ESOP: Employee Stock Ownership Plan			USDA: United States Department of Agriculture
ESPP: Employee Stock Purchase Plan			USDA B&I: United States Department of Agriculture Business and Industry
Exchange Act: Securities Exchange Act of 1934			TDR: Troubled Debt Restructure
FASB: Financial Accounting Standards Board			iXBRL: Inline eXtensible Business Reporting Language
FBCA: Florida Business Corporation Act

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BAYFIRST FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)

Part I - Financial Information

Item 1. Financial Statements


ASSETS
	June 30, 2022		December 31, 2021
	(Unaudited)
Cash and due from banks	$	2,944	$	2,869
Interest-bearing deposits in banks	64,992		106,858
Cash and cash equivalents	67,936		109,727
Time deposits in banks	4,881		2,381
Investment securities available for sale	45,283		30,893
Investment securities held to maturity	5,016		2
Restricted equity securities, at cost	3,274		2,827
Residential loans held for sale	74,708		114,131
Government guaranteed loans held for sale	—		1,460
SBA loans held for investment, at fair value	52,209		9,614
Loans held for investment, at amortized cost net of allowance for loan losses of $9,564 and $13,452	579,964		560,882
Accrued interest receivable	3,190		3,564
Premises and equipment, net	31,368		29,671
Loan servicing rights	7,952		6,619
Deferred income tax asset	1,345		454
Right-of-use operating lease assets	3,547		4,543
Bank owned life insurance	24,850		24,547
Other assets	15,854		15,780
Total assets	$	921,377	$	917,095
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits	$	103,613	$	83,638
Interest-bearing transaction accounts	195,386		163,495
Savings and money market deposits	432,369		423,864
Time deposits	34,038		50,688
Total deposits	765,406		721,685
FHLB and FRB borrowings	40,000		—
Subordinated debentures	5,989		5,985
Notes payable	3,072		3,299
PPP Liquidity Facility	—		69,654
Accrued interest payable	31		326
Operating lease liabilities	4,014		4,747

Accrued expenses and other liabilities	9,570		15,109
Total liabilities	828,082		820,805
Shareholders’ equity:
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at June 30, 2022 and December 31, 2021; aggregate liquidation preference of $6,395	6,161		6,161
Preferred stock, Series B; no par value, 20,000 shares authorized, 3,210 shares issued and outstanding at June 30, 2022 and December 31, 2021; aggregate liquidation preference of $3,210	3,123		3,123
Common stock and additional paid-in capital; no par value, 15,000,000 shares authorized, 4,019,023 and 3,981,117 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively	52,432		51,496
Accumulated other comprehensive loss, net	(2,574)		(420)
Unearned compensation	(467)		(17)
Retained earnings	34,620		35,947
Total shareholders’ equity	93,295		96,290
Total liabilities and shareholders’ equity	$	921,377	$	917,095

See accompanying notes.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars in thousands, except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Interest income:
Loans, including fees	$	8,211	$	14,846	$	15,766	$	29,657
Interest-bearing deposits in banks and other	415		151		600		232
Total interest income	8,626		14,997		16,366		29,889
Interest expense:
Deposits	1,060		1,194		2,277		2,514
Borrowings	112		899		229		1,841
Total interest expense	1,172		2,093		2,506		4,355
Net interest income	7,454		12,904		13,860		25,534
Provision for loan losses	250		—		(2,150)		2,000
Net interest income after provision for loan losses	7,204		12,904		16,010		23,534
Noninterest income:
Residential loan fee income	10,212		23,352		23,403		55,381
Loan servicing income, net	438		325		899		1,029
Gain on sale of government guaranteed loans, net	3,848		13,798		8,469		13,798
Service charges and fees	322		364		604		586
SBA loan fair value gain	2,708		7		2,511		79
Other noninterest income	371		366		881		498
Total noninterest income	17,899		38,212		36,767		71,371
Noninterest expense:
Salaries and benefits	11,416		12,948		25,113		26,115
Bonus, commissions, and incentives	4,995		9,218		9,601		21,091
Mortgage banking	677		1,572		1,679		3,267
Occupancy and equipment	1,382		1,297		2,803		2,629
Data processing	1,367		2,593		2,834		3,862
Marketing and business development	1,659		1,878		3,401		3,520
Professional services	1,075		843		2,382		1,767
Loan origination and collection	748		1,105		1,418		1,601
Employee recruiting and development	474		1,008		1,345		1,622
Regulatory assessments	120		100		189		202
Residential mortgage division restructuring expense	630		—		630		—
Other noninterest expense	1,133		1,106		1,928		1,713
Total noninterest expense	25,676		33,668		53,323		67,389
Income (loss) before income taxes	(573)		17,448		(546)		27,516
Income tax expense (benefit)	(291)		4,432		(277)		6,989
Net income (loss)	(282)		13,016		(269)		20,527
Preferred stock dividends	208		235		416		567
Net income available to (loss attributable to) common shareholders	$	(490)	$	12,781	$	(685)	$	19,960
Basic earnings (loss) per common share	$	(0.12)	$	3.34	$	(0.17)	$	5.44
Diluted earnings (loss) per common share	$	(0.12)	$	2.98	$	(0.17)	$	4.87

See accompanying notes.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income (loss)	$	(282)	$	13,016	$	(269)	$	20,527
Net unrealized (losses) on investment securities available for sale	(1,525)		(166)		(2,902)		(166)
Deferred income tax benefit	409		44		748		44
Other comprehensive (loss), net	(1,116)		(122)		(2,154)		(122)
Comprehensive income (loss)	$	(1,398)	$	12,894	$	(2,423)	$	20,405

See accompanying notes.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (Dollars in thousands, except per share data)


	Preferred Shares, Series A	Preferred Shares, Series B	Common Shares(1)	Preferred Stock, Series A		Preferred Stock, Series B		Common Stock and Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Unearned Compensation		Retained Earnings		Total
Balance at April 1, 2021	6,395	6,980	3,678,566	$	6,161	$	6,791	$	46,168	$	—	$	(35)	$	20,336	$	79,421
Net income	—	—	—	—		—		—		—		—		13,016		13,016
Issuance of common stock under:
Non-qualified stock purchase plan	—	—	14,044	—		—		237		—		—		—		237
Dividend reinvestment plan	—	—	7,295	—		—		177		—		—		—		177

Issuance of common stock, net	—	—	20,955	—		—		477		—		—		—		477



Stock-based awards - common stock:
Restricted stock expense, net of tax impact	—	—	(196)	—		—		(4)		—		6		—		2
Stock option expense	—	—	—	—		—		111		—		—		—		111
Conversion of Series B preferred stock to common stock	—	(2,400)	146,750	—		(2,335)		2,335		—		—		—		—
Other comprehensive loss, net	—	—	—	—		—		—		(122)		—		—		(122)
Dividends declared on:
Preferred stock	—	—	—	—		—		—		—		—		(236)		(236)
Common stock ($0.07 per share)	—	—	—	—		—		—		—		—		(270)		(270)
Balance at June 30, 2021	6,395	4,580	3,867,414	$	6,161	$	4,456	$	49,501	$	(122)	$	(29)	$	32,846	$	92,813

Balance at April 1, 2022	6,395	3,210	4,013,173	$	6,161	$	3,123	$	52,252	$	(1,458)	$	(630)	$	35,431	$	94,879
Net loss	—	—	—	—		—		—		—		—		(282)		(282)
Issuance of common stock under:
Non-qualified stock purchase plan	—	—	1,272	—		—		21		—		—		—		21
Dividend reinvestment plan	—	—	5,251	—		—		83		—		—		—		83



Exercise of stock options, net	—	—	324	—		—		5		—		—		—		5


Stock-based awards - common stock:
Restricted stock expense, net of tax impact	—	—	(997)	—		—		(22)		—		163		—		141
Stock option expense	—	—	—	—		—		93		—		—		—		93

Other comprehensive loss, net	—	—	—	—		—		—		(1,116)		—		—		(1,116)
Dividends declared on:
Preferred stock	—	—	—	—		—		—		—		—		(208)		(208)
Common stock ($0.08 per share)	—	—	—	—		—		—		—		—		(321)		(321)
Balance at June 30, 2022	6,395	3,210	4,019,023	$	6,161	$	3,123	$	52,432	$	(2,574)	$	(467)	$	34,620	$	93,295

See accompanying notes.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (Dollars in thousands, except per share data)


	Preferred Shares, Series A	Preferred Shares, Series B	Common Shares(1)	Preferred Stock, Series A		Preferred Stock, Series B		Common Stock and Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Unearned Compensation		Retained Earnings		Total
Balance at January 1, 2021	6,395	8,760	3,485,018	$	6,161	$	8,516	$	43,043	$	—	$	(41)	$	13,390	$	71,069
Net income	—	—	—	—		—		—		—		—		20,527		20,527
Issuance of common stock under:
Non-qualified stock purchase plan	—	—	27,186	—		—		444		—		—		—		444
Dividend reinvestment plan	—	—	13,634	—		—		284		—		—		—		284

Issuance of preferred stock, net	—	740	—	—		727		—		—		—		—		727
Issuance of common stock, net	—	—	35,426	—		—		701		—		—		—		701

Stock-based awards - common stock:
Restricted stock expense, net of tax impact	—	—	2,031	—		—		25		—		12		—		37
Stock option expense	—	—	—	—		—		217		—		—		—		217
Conversion of Series B preferred stock to common stock	—	(4,920)	304,119	—		(4,787)		4,787		—		—		—		—
Other comprehensive loss, net	—	—	—	—		—		—		(122)		—		—		(122)
Dividends declared on:
Preferred stock	—	—	—	—		—		—		—		—		(567)		(567)
Common stock ($0.137 per share)	—	—	—	—		—		—		—		—		(504)		(504)
Balance at June 30, 2021	6,395	4,580	3,867,414	$	6,161	$	4,456	$	49,501	$	(122)	$	(29)	$	32,846	$	92,813

Balance at January 1, 2022	6,395	3,210	3,981,117	$	6,161	$	3,123	$	51,496	$	(420)	$	(17)	$	35,947	$	96,290
Net loss	—	—	—	—		—		—		—		—		(269)		(269)
Issuance of common stock under:
Non-qualified stock purchase plan	—	—	1,272	—		—		21		—		—		—		21
Dividend reinvestment plan	—	—	5,251	—		—		83		—		—		—		83


Repurchase of common stock	—	—	(2,212)	—		—		(49)		—		—		—		(49)
Exercise of stock options,net	—	—	725	—		—		5		—		—		—		5
Issuance of common stock, net	—	—	750	—		—		13		—		—		—		13

Stock-based awards - common stock:
Restricted stock expense, net of tax impact	—	—	32,120	—		—		691		—		(450)		—		241
Stock option expense	—	—	—	—		—		172		—		—		—		172

Other comprehensive loss, net	—	—	—	—		—		—		(2,154)		—		—		(2,154)
Dividends declared on:
Preferred stock	—	—	—	—		—		—		—		—		(416)		(416)
Common stock ($0.16 per share)	—	—	—	—		—		—		—		—		(642)		(642)
Balance at June 30, 2022	6,395	3,210	4,019,023	$	6,161	$	3,123	$	52,432	$	(2,574)	$	(467)	$	34,620	$	93,295

(1) Common shares for all periods shown herein reflect the three-for-two stock split, effective on May 10, 2021.

See accompanying notes.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	(269)	$	20,527
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation of fixed assets	995		853
Net securities premium amortization	40		14
Amortization of debt issuance costs	—		34
Amortization of premium/(discount) on loans purchased	34		(56)
Provision for loan losses	(2,150)		2,000
Accretion of discount on unguaranteed loans	(891)		(998)
Deferred tax expense (benefit)	(143)		1,261

Proceeds from sales of SBA loans held for sale	133,163		—
Net gains on sales of SBA loans	(8,469)		(13,798)
Origination of residential loans held for sale	(641,136)		(1,237,957)
Proceeds from sales of residential loans held for sale	689,854		1,367,238
Net gains on sales of residential loans held for sale	(13,307)		(51,843)
Change in fair value of residential loans held for sale	2,039		4,787
Change in fair value of SBA loans held for investment, at fair value	(2,511)		(79)
Amortization of loan servicing rights	1,490		1,546
Non-qualified stock purchase plan expense	45		38
Stock based compensation expense	368		254

Income from bank owned life insurance	(303)		(168)
Residential mortgage division fixed asset and lease impairment	380		—
Changes in:
Accrued interest receivable	374		261
Other assets	634		4,637
Accrued interest payable	(295)		(1,071)
Other liabilities	(6,272)		(3,124)
Net cash from operating activities	153,670		94,356
Cash flows from investing activities:
Purchase of investment securities available for sale	(20,326)		(22,976)
Principal payments on investment securities available for sale	1,494		119
Purchase of investment securities held to maturity	(3,568)		—
Principal payments on investment securities held to maturity	54		35
Net (sale) of restricted equity securities	(447)		(458)
Purchase of time deposits from banks	(2,500)		—
Proceeds from sales of SBA loans originally classified as held for investment	—		326,318
Loan (originations) and payments, net	(180,186)		19,376
Purchase of premises and equipment	(2,837)		(3,814)

Net cash from (used in) investing activities	(208,316)		318,600
Cash flows from financing activities:
Net change in deposits	43,721		73,538
Net increase of short-term borrowings	40,000		—
Proceeds from issuance of subordinated debt, net of costs	—		6,000
Payments on notes payable	(227)		(227)

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)


	Six Months Ended June 30,
	2022		2021
Net repayments of PPP Liquidity Facility borrowings	(69,654)		(437,356)
Proceeds from issuance of preferred stock, net	—		727
Redemption of subordinated debt	—		(6,000)
Proceeds from sale of common stock, net	122		1,391
Common share buyback - redeemed stock	(49)		—


Dividends paid on common stock	(642)		(504)
Dividends paid on preferred stock	(416)		(567)
Net cash from (used in) financing activities	12,855		(362,998)
Net change in cash and cash equivalents	(41,791)		49,958
Cash and cash equivalents, beginning of period	109,727		55,379
Cash and cash equivalents, end of period	$	67,936	$	105,337
Supplemental cash flow information
Interest paid	$	2,801	$	5,426
Income taxes paid	169		5,923
Supplemental noncash disclosures
Net change in unrealized holding gain on investment securities available for sale	(2,154)		(122)
Transfer of available for sale debt securities to held to maturity securities at fair value	1,500		—
Transfer of loans held for investment to loans held for sale	124,084		—
Transfer of loans held for investment to OREO	53		—
Recognition of right of use asset and operating lease liability	—		136
Conversion of Series B preferred stock to common stock	—		4,787

See accompanying notes.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include BayFirst Financial Corp. and its wholly owned subsidiary, BayFirst National Bank, together referred to as “the Company”.

These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles followed within the financial services industry for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements of BayFirst Financial Corp. for that period.

The Company principally operates in two business segments, Banking and Residential Mortgage Lending.

In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity, or cash flows.

Operating results for the six month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2021 in the Company’s Annual Report filed on Form 10-K. There were no new accounting policies or changes to existing policies adopted during the first six months of 2022 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Effective May 10, 2021, the Company affected a three-for-two stock split. All share amounts and per share financial data contained in these financial statements related to periods prior and subsequent to this stock split have been adjusted to reflect the split.

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The most significant estimates relate to the allowance for loan losses, SBA loan servicing rights, and fair value of residential loans held for sale and residential mortgage derivatives.

Emerging Growth Company Status: The Company is expected to remain an "emerging growth company," as defined in the JOBS Act, through December 31, 2026. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period when complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements we file in the future for as long as we remain an emerging growth company, will be subject to all new or revised accounting standards generally applicable to private companies.

Contingencies: Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of June 30, 2022. Although the ultimate outcome of all claims and lawsuits outstanding as of June 30, 2022 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.

New Accounting Standards Not Yet Adopted:

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance was issued to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the CECL model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e., loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

investments in certain leases recognized by a lessor. In addition, the amendments in ASU 2016-13 require credit losses on investment securities available for sale to be presented as a valuation allowance rather than as a direct write-down thereon. The amendments in this ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted; however, the Company has elected to adopt new or revised accounting standards using the delayed effective dates applicable to Emerging Growth Companies. Management is in the process of evaluating the impact of adoption of this ASU on its Consolidated Financial Statements, processes, and controls and is not currently able to reasonably estimate the impact of adoption on the Company’s consolidated financial position, results of operations; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the allowance for credit losses. It is possible that the impact will be material to the Company’s consolidated financial position and results of operations. To date, the Company has established a CECL steering committee and has an implementation plan. The Company has segmented the loan portfolio based on similar risk characteristics and reviewed and selected methodologies for estimating expected credit losses.

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and is not expected to have a significant impact on our financial statement disclosures.

NOTE 2 – INVESTMENT SECURITIES

The amortized costs, gross unrealized gains and losses, and estimated fair values of investment securities available for sale and investment securities held to maturity at June 30, 2022 and December 31, 2021 are summarized as follows:


June 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale:
Asset-backed securities	$	10,098	$	—	$	(189)	$	9,909
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,296		—		(522)		3,774
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	23,023		—		(2,470)		20,553
Corporate bonds	11,339		—		(292)		11,047
Total investment securities available for sale	$	48,756	$	—	$	(3,473)	$	45,283

Investment securities held to maturity:

Mortgage-backed securities:
U.S. Government-sponsored enterprises	$	2	$	—	$	—	$	2


Corporate bonds	5,014		—		(17)		4,997
Total investment securities held to maturity	$	5,016	$	—	$	(17)	$	4,999

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)


December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale:
Asset-backed securities	$	7,624	$	—	$	(89)	$	7,535
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,470		—		(76)		4,394
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	19,370		—		(406)		18,964
Total investment securities available for sale	$	31,464	$	—	$	(571)	$	30,893

Investment securities held to maturity:

Mortgage-backed securities:
U.S. Government-sponsored enterprises	$	2	$	—	$	—	$	2



Total investment securities held to maturity	$	2	$	—	$	—	$	2

The amortized cost and fair value of investment securities as of June 30, 2022 are shown in the table below by contractual maturity. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

One to five years	$	11,339	$	11,047	$	4,014	$	3,997
Five to ten years	—		—		1,000		1,000
Beyond ten years	37,417		34,236		2		2
Total	$	48,756	$	45,283	$	5,016	$	4,999

During the second quarter of 2022, the Company transferred a $1,500 previously designated available for sale investment security to a held to maturity designation at estimated fair value. The reclassification for the period ended June 30, 2022 is permitted as the Company has appropriately determined the ability and intent to hold the investment security as an investment until maturity or call. The investment security had no unrealized net gain or loss at the time of transfer since it was purchased near the end of the first quarter of 2022.

As of June 30, 2022, the Company's investment portfolio consisted of 22 securities, 18 of which were in an unrealized loss position. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2022.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The following table summarizes investment securities with unrealized losses at June 30, 2022 aggregated by security type and length of time in a continuous unrealized loss position:


	Less than 12 Months				12 Months or Longer				Total
June 30, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale:
Asset-backed securities	$	9,909	$	(189)	$	—	$	—	$	9,909	$	(189)
Mortgage-backed securities:
U.S. Government-sponsored enterprises	2,145		(236)		1,629		(286)		3,774		(522)
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	16,917		(2,015)		3,636		(455)		20,553		(2,470)
Corporate Bonds	11,047		(292)		—		—		11,047		(292)
Total investment securities held to maturity	$	40,018	$	(2,732)	$	5,265	$	(741)	$	45,283	$	(3,473)

Investment securities held to maturity:





Corporate Bonds	$	2,497	$	(17)	$	—	$	—	$	2,497	$	(17)
Total investment securities held to maturity	$	2,497	$	(17)	$	—	$	—	$	2,497	$	(17)

The following table summarizes investment securities with unrealized losses at December 31, 2021 aggregated by security type and length of time in a continuous unrealized loss position:


	Less than 12 Months				12 Months or Longer				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment securities available for sale:
Asset-backed securities	$	7,535	$	(89)	$	—	$	—	$	7,535	$	(89)
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,394		(76)		—		—		4,394		(76)
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	18,964		(406)		—		—		18,964		(406)

Total investment securities available for sale	$	30,893	$	(571)	$	—	$	—	$	30,893	$	(571)

No investment securities were pledged as of June 30, 2022 or December 31, 2021, and there were no sales of investment securities during the six months ended June 30, 2022 or December 31, 2021.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

NOTE 3 – LOANS

Loans held for investment, at amortized cost, at June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022		December 31, 2021
Real estate:
Residential	$	122,403	$	87,235
Commercial	216,067		163,477
Construction and land	9,686		18,632
Commercial and industrial	168,990		217,155
Commercial and industrial - PPP	31,430		80,158
Consumer and other	35,845		3,581
Loans held for investment, at amortized cost, gross	584,421		570,238
Deferred loan costs, net	7,629		7,975
Discount on SBA 7(a) loans sold(1)	(4,743)		(3,866)
Premium/(discount) on loans purchased	2,221		(13)
Allowance for loan losses	(9,564)		(13,452)
Loans held for investment, at amortized cost	$	579,964	$	560,882

(1) The Company allocates the retained portion of loans sold based on relative fair value of the retained portion and the sold portion, which results in a discount on the retained portion.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

The following schedule presents the activity in the allowance for loan losses by loan segment for the three and six months ended June 30, 2022 and June 30, 2021:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Balance, beginning of period	$	10,170		$	22,017		$	13,452		$	21,162
Charge-offs:
Real estate - commercial	(53)			—			(53)			—
Commercial and industrial	(939)			(1,453)			(1,970)			(2,590)
Consumer and other	(26)			(12)			(41)			(28)
Total charge-offs	(1,018)			(1,465)			(2,064)			(2,618)
Recoveries:
Real estate - commercial	53			—			61			—
Commercial and industrial	107			244			260			249
Consumer and other	2			1			5			4
Total recoveries	162			245			326			253
Net (charge-offs)	(856)			(1,220)			(1,738)			(2,365)
Provision for loan losses	250			—			(2,150)			2,000
Balance, end of period	$	9,564		$	20,797		$	9,564		$	20,797
Net (charge-offs) to total average loans held for investment	(0.57)		%	(0.42)		%	(0.59)		%	(0.38)		%

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at June 30, 2022. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.


	Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	949	$	—	$	—	$	—	$	949
Collectively evaluated for impairment	589		1,133		38		5,815		—		1,038		2		8,615
Total	$	589	$	1,133	$	38	$	6,764	$	—	$	1,038	$	2	$	9,564
Loans:
Individually evaluated for impairment	$	246	$	1,611	$	—	$	2,388	$	—	$	—	$	—	$	4,245
Collectively evaluated for impairment	122,157		214,456		9,686		166,602		31,430		35,845		—		580,176
Total	$	122,403	$	216,067	$	9,686	$	168,990	$	31,430	$	35,845	$	—	$	584,421

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at December 31, 2021. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.


	Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	91	$	—	$	902	$	—	$	—	$	—	$	993
Collectively evaluated for impairment	1,437		2,258		241		8,300		—		154		69		12,459
Total	$	1,437	$	2,349	$	241	$	9,202	$	—	$	154	$	69	$	13,452
Loans:
Individually evaluated for impairment	$	124	$	2,900	$	—	$	902	$	—	$	—	$	—	$	3,926
Collectively evaluated for impairment	87,111		160,577		18,632		216,253		80,158		3,581		—		566,312
Total	$	87,235	$	163,477	$	18,632	$	217,155	$	80,158	$	3,581	$	—	$	570,238

The following table presents information related to impaired loans by loan segment at and for the six months ended June 30, 2022:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Real estate - residential	$	246	$	246	$	—	$	165	$	—	$	—
Real estate - commercial	1,611		1,611		—		2,154		15		15



Subtotal	1,857		1,857		—		2,319		15		15
With an allowance recorded:

Real estate - commercial	—		—		—		102		—		—

Commercial and industrial	2,388		2,388		949		1,176		—		—

Subtotal	2,388		2,388		949		1,278		—		—
Total	$	4,245	$	4,245	$	949	$	3,597	$	15	$	15

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The following table presents information related to impaired loans by loan segment at and for the six months ended June 30, 2021:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:

Real estate - commercial	$	2,591	$	2,591	$	—	$	1,932	$	20	$	—



Subtotal	2,591		2,591		—		1,932		20		—
With an allowance recorded:

Real estate - commercial	89		89		37		583		—		—

Commercial and industrial	856		856		856		902		—		—

Subtotal	945		945		893		1,485		—		—
Total	$	3,536	$	3,536	$	893	$	3,417	$	20	$	—

The unpaid principal balance represents the outstanding contractual balance. For purposes of the impaired loans by loan segment tables above, the unpaid principal balance and recorded investment do not include the government guaranteed balance. The government guaranteed balances of impaired loans at June 30, 2022 and December 31, 2021 were $6,192 and $6,197, respectively.

Nonaccrual loans and loans past due over 89 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. The unguaranteed portions of government guaranteed loans that are under $100 are reserved in full. Impaired loans include commercial loans that are individually evaluated for impairment and deemed impaired as well as TDR for all loan portfolio segments. The sum of nonaccrual loans and loans past due over 89 days still on accrual will differ from the total impaired loan amount.

The following table presents the recorded investment in nonaccrual and loans past due over 89 days still on accrual by loan segment at June 30, 2022 and December 31, 2021. In the following table, the recorded investment does not include the government guaranteed balance.


	Nonaccrual				Loans Past Due Over 89 Days Still Accruing
	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Real estate - residential	$	246	$	124	$	—	$	126
Real estate - commercial	1,611		2,815		—		—
Commercial and industrial	2,388		902		92		—
Total	$	4,245	$	3,841	$	92	$	126

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The following table presents the aging of the recorded investment in past due loans at June 30, 2022 by loan segment:


	30-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due (1)		Total Loans
Real estate - residential	$	868	$	246	$	1,114	$	121,289	$	122,403
Real estate - commercial	1,157		609		1,766		214,301		216,067
Real estate - construction and land	—		—		—		9,686		9,686
Commercial and industrial	1,655		2,300		3,955		165,035		168,990
Commercial and industrial - PPP	—		—		—		31,430		31,430
Consumer and other	27		—		27		35,818		35,845
Total	$	3,707	$	3,155	$	6,862	$	577,559	$	584,421
(1) For the purposes of the table above, $6,678 of balances 30-89 days past due and $1,153 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guaranty. Of those loans, $15 of commercial and industrial PPP loans were delinquent as of June 30, 2022.

The following table presents the aging of the recorded investment in past due loans at December 31, 2021 by loan segment:


	30-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due (1)		Total Loans
Real estate - residential	$	57	$	250	$	307	$	86,928	$	87,235
Real estate - commercial	192		1,778		1,970		161,507		163,477
Real estate - construction and land	—		—		—		18,632		18,632
Commercial and industrial	991		424		1,415		215,740		217,155
Commercial and industrial - PPP	—		—		—		80,158		80,158
Consumer and other	—		—		—		3,581		3,581
Total	$	1,240	$	2,452	$	3,692	$	566,546	$	570,238
(1) For the purposes of the table above, $10,360 of balances 30-89 days past due and $2,807 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guaranty, and $11,089 of commercial and industrial PPP loans are primarily due to delinquencies from borrowers with only a PPP loan and no other Bank product. These borrowers were non-responsive to requests for forgiveness applications and payments, and applications were subsequently submitted to the SBA for their 100% guarantee purchase from the Bank.

Credit Quality Indicators

Internal risk-rating grades are assigned to loans by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This analysis is performed at least annually. The Bank uses the following definitions for its risk ratings:

Pass – Loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.

Special Mention – These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard”. They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the Bank.

Substandard – These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – These loans have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at June 30, 2022:


	Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate - residential	$	122,157	$	—	$	246	$	—	$	122,403
Real estate - commercial	214,383		73		1,611		—		216,067
Real estate - construction and land	9,686		—		—		—		9,686
Commercial and industrial	165,976		118		2,896		—		168,990
Commercial and industrial - PPP	31,430		—		—		—		31,430
Consumer and other	35,845		—		—		—		35,845
Loans held for investment, at amortized cost	$	579,477	$	191	$	4,753	$	—	$	584,421

The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2021:


	Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate - residential	$	87,233	$	—	$	2	$	—	$	87,235
Real estate - commercial	160,492		170		2,815		—		163,477
Real estate - construction and land	18,632		—		—		—		18,632
Commercial and industrial	212,544		1,850		2,761		—		217,155
Commercial and industrial - PPP	80,158		—		—		—		80,158
Consumer and other	3,581		—		—		—		3,581
Loans held for investment, at amortized cost	$	562,640	$	2,020	$	5,578	$	—	$	570,238

Troubled Debt Restructurings

The following table presents loans classified as TDR at June 30, 2022 and December 31, 2021:


	June 30, 2022				December 31, 2021
	Accruing		Nonaccruing		Accruing		Nonaccruing
Real estate - commercial	$	—	$	—	$	85	$	1,116

The Company had not committed to lend any additional amounts to the loans classified as TDR at June 30, 2022 and December 31, 2021. The Company estimated $38 of impaired loan loss reserves for these loans at December 31, 2021. There were no loans which were modified in the previous twelve months that defaulted during the six months ended June 30, 2022.

There were no new loans classified as TDR during the six months ended June 30, 2022.

The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDR and permitted any determination related thereto if (i) the loan modification was made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The CAA, signed into law on December 27, 2020, extended the applicable period to include modifications to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the date of the termination of the COVID-19 national emergency. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDR. The Company is applying this guidance to qualifying loan modifications.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

Loan modifications related to COVID-19 at June 30, 2022 and December 31, 2021 are presented in the table below:


	June 30, 2022			December 31, 2021
	Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded Investment
Real estate - residential	—	$	—	1	$	258


Commercial and industrial	11	459		23	1,113
Total loan modifications related to COVID-19	11	$	459	24	$	1,371

NOTE 5 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific investment securities, but rather by relying on the investment securities’ relationship to other benchmark quoted investment securities (Level 2). Management obtains the fair values of investment securities available for sale on a monthly basis from a third party pricing service.

Residential Loans Held for Sale: The Company has elected to account for residential loans held for sale at fair value. The fair value of loans held for sale is determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The gain (loss) on loans held for sale is included in residential fee income in the Consolidated Statements of Income.

SBA Loans Held for Investment, at Fair Value: The Company has elected to account for certain SBA loans held for investment at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.

Mortgage Banking Derivatives: Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts, best efforts forward sales contracts, and interest rate lock commitments. The fair value of mandatory forward sales contracts is measured using quoted market prices (Level 1), or in some cases when quoted market prices are not available, the pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company (Level 2). Interest rate lock commitments involve pricing derived from market observable inputs that are adjusted based on pull-through rates (anticipated loan funding probability). Pull-through rates are an unobservable input which are the Company’s estimate of the percentage of interest rate lock commitments expected to result in closed loans (Level 3). The fair value of best efforts forward sales contracts is measured using market observable inputs that are adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).

Impaired Loans: A loan is considered to be impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. In most cases, the Bank measures

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate and/or business or personal assets, including but not limited to equipment, inventory, and accounts receivable. The fair value of real estate collateral is determined based on third party appraisals by qualified licensed appraisers as well as internal estimates. The fair value of other business or personal assets is generally based on amounts reported on the financial statements of the customer or customer’s business. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the customer and the customer’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

SBA Loan Servicing Rights: On a quarterly basis, SBA loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. The fair value of SBA servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no SBA loan servicing rights carried at fair value at June 30, 2022 and December 31, 2021.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2022 are summarized below:


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets
Investment securities available for sale	$	—	$	45,283	$	—	$	45,283
Residential loans held for sale	14,750		59,958		—		74,708
SBA loans held for investment, at fair value	—		—		52,209		52,209
Interest rate lock commitments	—		—		1,164		1,164
Mandatory forward sales contracts	283		—		—		283
Best efforts forward sales contracts	—		—		83		83
Financial liabilities
Interest rate lock commitments	$	—	$	—	$	77	$	77
Mandatory forward sales contracts	445		—		—		445

Assets and liabilities measured at fair value on a recurring basis at December 31, 2021 are summarized below:


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets
Investment securities available for sale	$	—	$	30,893	$	—	$	30,893
Residential loans held for sale	43,837		70,294		—		114,131
SBA loans held for investment, at fair value	—		—		9,614		9,614
Interest rate lock commitments	—		—		1,435		1,435
Mandatory forward sales contracts	88		—		—		88
Best efforts forward sales contracts	—		—		27		27
Financial liabilities
Interest rate lock commitments	$	—	$	—	$	23	$	23
Mandatory forward sales contracts	166		—		—		166

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual at June 30, 2022 and December 31, 2021.

The aggregate fair value, contractual balance, and gain at June 30, 2022 and December 31, 2021 for residential loans held for sale were as follows:


	June 30, 2022		December 31, 2021
Aggregate fair value	$	74,708	$	114,131
Contractual balance	72,951		110,335
Gain	$	1,757	$	3,796

The total amount of losses from changes in fair value and interest income included in earnings for the six months ended June 30, 2022 and June 30, 2021 for residential loans held for sale were as follows:


	Six Months Ended June 30,
	2022		2021
Interest income	$	1,604	$	2,030
Change in fair value	(2,039)		(4,787)
Total (loss)	$	(435)	$	(2,757)

The Company also elected the fair value option for certain of its non-PPP SBA loans as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell SBA loans on a loan-by-loan basis. The portion of these loans guaranteed by the SBA are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans held for investment.

The aggregate fair value, contractual balance, and gain at June 30, 2022 and December 31, 2021 for SBA loans held for investment, at fair value, were as follows:


	June 30, 2022		December 31, 2021
Aggregate fair value	$	52,209	$	9,614
Contractual balance	49,517		9,433
Gain	$	2,692	$	181

The total amount of gains and losses from changes in fair value and interest income included in earnings for the six months ended June 30, 2022 and June 30, 2021 for SBA loans held for investment, at fair value, were as follows:


	Six Months Ended June 30,
	2022		2021
Interest income	$	341	$	288
Change in fair value	2,511		79
Total gain	$	2,852	$	367

Changes in fair value for SBA loans held for investment, at fair value, were included in SBA loan fair value gain on the Consolidated Statements of Income.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The table below presents a reconciliation of SBA loans held for investment, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the six months ended June 30, 2022 and June 30, 2021:


	Six Months Ended June 30,
	2022		2021
Balance of SBA loans held for investment at fair value, beginning of period	$	9,614	$	9,264
New SBA origination at fair value	41,745		—
Principal payments	(1,661)		(674)

Repurchase of guaranteed balances previously participated	—		1,401
Total gains during the period	2,511		79
Balance of SBA loans held for investment at fair value, end of period	$	52,209	$	10,070

The Company’s valuation of SBA loans held for investment, at fair value, was supported by an analysis prepared by an independent third party and approved by management. The approach to determine fair value involved several steps: 1) Identifying each loan’s unique characteristics, including balance, payment type, term, coupon, age, and principal and interest payment; 2) Projecting these loan level characteristics for the life of each loan; and 3) Performing discounted cash flow modeling.

The following table provides information about the valuation techniques and unobservable inputs used in the valuation of SBA loans held for investment, at fair value, interest rate lock commitments, and best efforts forward sales contracts falling within Level 3 of the fair value hierarchy at June 30, 2022 and December 31, 2021:

Fair Value

Valuation
Technique

Unobservable Inputs

Range (Weighted Average)

June 30, 2022

SBA loans held for

52,209

Discounted

Discount rate

4.00%-7.50% (4.81%)

investment, at fair value

cash flow

Conditional prepayment rate

8.58%-9.07% (8.76%)

Interest rate lock commitments

1,087

Quoted Market Prices

Pull-through expectations

24.00%-100.00% (84.23%)

Best efforts forward sales contracts

Quoted Market Prices

Pull-through expectations

24.00%-80.00% (75.65%)

December 31, 2021

SBA loans held for

9,614

Discounted

Discount rate

3.22%-6.72% (4.22%)

investment, at fair value

cash flow

Conditional prepayment rate

10.56%-10.56% (10.56%)

Interest rate lock commitments

1,412

Quoted Market Prices

Pull-through expectations

24.00%-100.00% (84.40%)

Best efforts forward sales contracts

Quoted Market Prices

Pull-through expectations

24.00%-80.00% (65.79%)

The significant unobservable inputs impacting the fair value measurement of SBA loans held for investment, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.

The significant unobservable inputs impacting the fair value measurement of interest rate lock commitments and best efforts sales contracts include pull-through rates. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments and best efforts forward sale contracts will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

Assets measured at fair value on a nonrecurring basis at June 30, 2022 are summarized below:

Fair Value

Valuation Technique(s)

Significant
Unobservable
Input(s)

Discount % Range/Amount

Impaired loans

1,768

Discounted appraisals, estimated net realizable value of collateral

Collateral discounts

10%

Assets measured at fair value on a nonrecurring basis at December 31, 2021 are summarized below:

Fair Value

Valuation Technique(s)

Significant
Unobservable
Input(s)

Discount % Range/Amount

Impaired loans

1,614

Discounted appraisals, estimated net realizable value of collateral

Collateral discounts

10%

Fair Value of Financial Instruments

The carrying values and estimated fair values of financial instruments not carried at fair value, at June 30, 2022 and December 31, 2021 are as follows:


		June 30, 2022				December 31, 2021
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	1	$	67,936	$	67,936	$	109,727	$	109,727
Time deposits in banks	2	4,881		4,773		2,381		2,437
Investment securities held to maturity	2	5,016		4,999		2		2
Restricted equity securities, at cost	2	3,274		3,274		2,827		2,827
Government guaranteed loans held for sale	2	—		—		1,460		1,460
Loans held for investment, at amortized cost	3	579,964		577,950		560,882		569,394
Accrued interest receivable	3	3,190		3,190		3,564		3,564
SBA loan servicing rights	3	7,760		9,112		6,407		8,050
Mortgage loan servicing rights	3	192		192		212		212
Liabilities:
Noninterest-bearing deposits	2	$	103,613	$	103,613	$	83,638	$	83,638
Interest-bearing transaction accounts	2	195,386		195,386		163,495		163,495
Savings and money market deposits	2	432,369		432,369		423,864		423,864
Time deposits	2	34,038		34,016		50,688		51,049
FHLB and FRB borrowings	2	40,000		40,000		—		—
Subordinated debentures	2	5,989		5,836		5,985		6,175
Notes payable	2	3,072		3,063		3,299		3,350
PPP Liquidity Facility	2	—		—		69,654		69,654
Accrued interest payable	2	31		31		326		326

NOTE 6 – SBA LOAN SERVICING ACTIVITIES

At June 30, 2022 and December 31, 2021, the principal balance of SBA loans, excluding PPP loans, retained by the Company was $290,387 and $300,415, respectively, of which $151,903 and $171,548 represented the guaranteed portion

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

of the loans. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of SBA loans serviced for others requiring recognition of a servicing asset were $522,050 and $459,670 at June 30, 2022 and December 31, 2021, respectively.

Activity for SBA loan servicing rights for the three and six months ended June 30, 2022 and June 30, 2021 follows:


	Three Months Ended				Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Beginning of period	$	7,399	$	7,445	$	6,407	$	8,160
Additions	1,134		—		2,823		—
Amortization	(773)		(831)		(1,470)		(1,546)
End of period	$	7,760	$	6,614	$	7,760	$	6,614

The fair value of SBA loan servicing rights was $9,112 and $8,050 at June 30, 2022 and December 31, 2021, respectively. Fair value was determined using a weighted average discount rate of 14.37% and a weighted average prepayment speed of 10.21% at June 30, 2022. Fair value was determined using a weighted average discount rate of 12.13% and a weighted average prepayment speed of 10.37% at December 31, 2021. The SBA loan servicing rights are amortized over the life of a loan on a loan-by-loan basis.

The following table presents the components of net gain on sale of SBA loans, excluding sale of PPP loans, for the three and six months ended June 30, 2022 and June 30, 2021:


	Three Months Ended				Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Gain on sale of guaranteed SBA loans	$	2,714	$	—	$	6,038	$	—
Loss on sale of unguaranteed SBA loans	—		—		(348)		—
Costs recognized on sale of SBA loans	—		—		(44)		—
Fair value of servicing rights created	1,134		—		2,823		—
Gain on sale of SBA loans, net	$	3,848	$	—	$	8,469	$	—

NOTE 7 - PREMISES AND EQUIPMENT

Premises and equipment at June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022		December 31, 2021
Land and improvements	$	4,194	$	4,194
Building and improvements	9,847		9,590
Leasehold improvements	2,624		2,433
Furniture, fixtures, and equipment	7,156		7,034
Fixed assets in process	13,965		12,247
Total premises and equipment	37,786		35,498
Accumulated depreciation and amortization	(6,418)		(5,827)
Net premises and equipment	$	31,368	$	29,671

Depreciation and amortization expense was $500 and $439 for the three months ended June 30, 2022 and June 30, 2021, respectively, and $995 and $853 for the six months ended June 30, 2022 and June 30, 2021, respectively.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

NOTE 8 – LEASES

For the three and six months ended June 30, 2022 and June 30, 2021, the components of total lease cost and supplemental information related to operating leases were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating lease cost	$	385	$	361	$	772	$	722
Short-term lease cost	137		179		273		374
Total lease cost, net	$	522	$	540	$	1,045	$	1,096


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating cash flows related to operating leases	$	388	$	362	$	768	$	709
Right-of-use assets obtained in exchange for new operating lease liabilities	—		—		—		136
	$	388	$	362	$	768	$	845

At June 30, 2022, the weighted average discount rate of operating leases was 2.17% and the weighted average remaining life of operating leases was 3.97 years.

The future minimum lease payments for operating leases, subsequent to June 30, 2022, as recorded on the balance sheet, are summarized as follows:


2022	$	711
2023	1,171
2024	1,087
2025	686
2026	593
Thereafter	301
Total undiscounted lease payments	$	4,549
Less: imputed interest	(535)
Net lease liabilities	$	4,014

Impairment of ROU Assets

ROU assets from operating leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, and are reviewed for impairment when indicators of impairment are present. ASC 360 requires three steps to identify, recognize and measure impairment. If indicators of impairment are present (Step 1), the Company performs a recoverability test (Step 2) comparing the sum of the estimated undiscounted cash flows attributable to the ROU asset in question to the carrying amount. If the undiscounted cash flows used in the recoverability test are less than the carrying amount, the Company estimates the fair value of the ROU asset and recognizes an impairment loss when the carrying amount exceeds the estimated fair value (Step 3).

During the current quarter, the Company closed leased mortgage lending offices as part of its residential mortgage division restructure initiative. The mortgage lending offices were evaluated as outlined above to determine whether the operating leases were impaired. As part of the recoverability test, the Company elected to exclude operating lease liabilities from the carrying amount of the asset group. The undiscounted future cash flows used in the recoverability test were based on assumptions made by the Company rather than market participant assumptions. Since an election was made to exclude operating lease liabilities from the asset or asset group, all future cash lease payments for the lease were also excluded. In addition, the Company elected to exclude operating lease liabilities from the estimated fair value, consistent with the recoverability test. When determining the fair value of the ROU asset, the Company estimated what market participants would pay to lease the assets assuming the highest and best use in the assets current forms.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

Based on the analysis, the Company concluded that the ROU assets for these offices were impaired, resulting in a remaining ROU carrying value of $493 and the recognition of a $235 impairment for the three and six months ended June 30, 2022. The impairment was recognized in Residential mortgage division restructuring expense on the Consolidated Statements of Income.

NOTE 9 – OTHER BORROWINGS

At June 30, 2022, FHLB and FRB borrowings totaled $40,000 consisting of $20,000 in FHLB borrowings and $20,000 in borrowings from the FRB. There were no borrowings from the FHLB or FRB at December 31, 2021.

The Bank is a member of the FHLB of Atlanta, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates set by the FHLB. The advances were secured by a blanket lien on $192,487 of real estate-related loans as of June 30, 2022. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional $109,776 from the FHLB at June 30, 2022.

In addition, the Bank has a secured line of credit with the Federal Reserve Bank of Atlanta which was secured by $34,813 of commercial loans as of June 30, 2022. FRB short-term borrowings bear interest at variable rates based on the Federal Open Market Committee's target range for the federal funds rate. Based on this collateral, the Company was eligible to borrow up to an additional $4,797 from the FRB at June 30, 2022.

In June 2021, the Company issued $6,000 of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial 5 years of term and carry interest at a floating rate for the final 5 years of term. Under the debt agreements, the floating rates are based on a SOFR benchmark plus 3.78% per annum. These Debentures were issued to redeem a $6,000 Subordinated Debenture which was issued in December 2018 and carried interest at a rate of 6.875% per annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5,989 and $5,985 at June 30, 2022 and December 31, 2021, respectively.

In March 2020, the Company renegotiated the terms of its outstanding senior debt and combined its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime (4.75% at June 30, 2022). The new note matures on March 10, 2029 and the balance of the note was $3,072 and $3,299 at June 30, 2022 and December 31, 2021, respectively. The note is secured by 100% of the stock of the Company and requires the Company to comply with certain loan covenants during the term of the note. As of June 30, 2022, the Company was in compliance with all financial debt covenants.

In April 2020, the Company entered into the Federal Reserve Bank’s PPPLF. Under the PPPLF, advances were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company repaid the advance plus accrued interest. The balance outstanding on this facility was $69,654 at December 31, 2021. In the first quarter of 2022, the Company repaid the remaining balance of the advance.

NOTE 10 – STOCK-BASED COMPENSATION

The Equity Plan governs the Company’s restricted stock and stock options. Total compensation cost charged against income related to the Equity Plan was $244 and $88 for the three months ended June 30, 2022 and June 30, 2021, respectively, and $423 and $229 for the six months ended June 30, 2022 and June 30, 2021, respectively.

Restricted Stock

The Company awarded shares of restricted common stock to certain employees for which compensation expense is recognized ratably over the vesting period of the awards based on the fair value of the stock at issue date.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

A summary of changes in the Company’s nonvested restricted shares for the six months ended June 30, 2022 follows:


	Shares	Weighted-Average Grant-Date Fair Value, per share
Nonvested at January 1, 2022	2,483	$	14.86
Granted	34,925	21.50
Vested	(3,921)	18.44
Forfeited	(1,725)	21.45
Nonvested at June 30, 2022	31,762	$	21.36

At June 30, 2022, there was $477 of total unrecognized compensation cost related to nonvested restricted shares granted under the Equity Plan that is expected to be recognized over a weighted average period of 2.9 years. The total fair value of shares vested during the six months ended June 30, 2022 and June 30, 2021 was $88 and $85, respectively.

Stock Options

The Equity Plan permits the grant of stock options to the Company’s employees and non-employee directors for up to 15% of the total number of shares of Company common stock issued and outstanding, up to 1,500,000 shares. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The market price of the Company’s common stock is the closing sales price of the Common Stock on such date on the securities exchange having the greatest volume of trading in the Common Stock during the 30-day period preceding the day the value is to be determined or, if there is no reported closing sales price on such date, the next preceding date on which there was a reported closing price. Those option awards generally have a vesting period of 5 years for employees and 3 years for non-employee directors and have 10-year contractual terms.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of peer financial institutions. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of the activity in the Equity Plan for the six months ended June 30, 2022 follows:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2022	450,278	$	15.64

Exercised	(2,545)	15.14
Forfeited	(11,370)	15.06

Outstanding at June 30, 2022	436,363	$	15.65	7.13	$	1,722
Vested and exercisable at June 30, 2022	273,325	$	15.95	6.70	$	997

There were no options granted during the three and six months ended June 30, 2022. The weighted average fair value of options granted during the six months ended June 30, 2021 was $3.70. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $408 at June 30, 2022. This cost is expected to be recognized over a weighted average period of 2.11 years.

NOTE 11 – OTHER BENEFIT PLANS

The Company has established a stock dividend reinvestment and other stock purchase plan. Under the DRIP, eligible shareholders can voluntarily purchase stock with their dividend or can make additional stock purchases. During the six months ended June 30, 2022, 5,251 shares were purchased at an average price of $15.85. During the six months ended June 30, 2021, 13,634 shares were purchased at an average price of $20.85. During the year ended December 31, 2021, 17,971 shares were purchased at an average price of $21.68 per share.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the six months ended June 30, 2022 and June 30, 2021 was $45 and $19, respectively.

The Company has a Salary Continuation Agreement, (the “Agreement”), with an executive officer. In accordance with the Agreement, the executive will receive an annual benefit of $25 for twenty years following separation of service. If early termination occurs before December 31, 2022, the executive will not receive any benefit under the Agreement. The liability recorded for the Agreement was $350 and $312 at June 30, 2022 and December 31, 2021, respectively, and the related expense for the six months ended June 30, 2022 and June 30, 2021 was $38 and $45, respectively.

The Company has a 401(k) plan that covers all employees subject to certain age and service requirements. The Company contributes 3% of each employee’s salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. Expense recognized in relation to the 401(k) plan was $999 and $786 for the six months ended June 30, 2022 and June 30, 2021, respectively.

The Company has an ESOP for eligible employees. Each year, the Company’s Board of Directors may approve a discretionary percentage of employees’ salaries to be contributed to the ESOP for eligible employees. The Board approved 1% of salaries for eligible employees in 2021. There was no expense related to the ESOP for the six months ended June 30, 2022. Expense related to the ESOP was $459 for the six months ended June 30, 2021.

NOTE 12 - INCOME TAXES

The Company and its subsidiaries are subject to U.S. federal income tax. In the ordinary course of business, we are routinely subject to audit by the Internal Revenue Service. Currently, the Company is subject to examination by taxing authorities for the 2018 tax return year and forward.

A reconciliation of expected income tax expense (benefit) using the federal statutory rate of 21% for the three and six months ended June 30, 2022 and June 30, 2021 and actual income tax expense (benefit) is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Federal tax based on federal corporate statutory rate	$	(120)	$	3,664	$	(115)	$	5,778
State tax, net of federal effect	(97)		1,307		(85)		1,420
Changes resulting from:
Other, net	(74)		(539)		(77)		(209)
Total income tax expense (benefit)	$	(291)	$	4,432	$	(277)	$	6,989

NOTE 13 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that the Bank met all capital adequacy requirements to which it was subject at June 30, 2022 and December 31, 2021.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s classification.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

Actual and required capital amounts and ratios for the Bank are presented below at June 30, 2022:


	Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital
(to Risk Weighted Assets)	$	107,716	16.37	%	$	52,625	8.00	%	$	65,782	10.00	%
Tier 1 Capital
(to Risk Weighted Assets)	$	99,461	15.12	%	$	39,469	6.00	%	$	52,625	8.00	%
Common Equity Tier 1 Capital
(to Risk Weighted Assets)	$	99,461	15.12	%	$	29,602	4.50	%	$	42,758	6.50	%
Tier 1 Capital
(to Average Assets)	$	99,461	11.37	%	$	34,998	4.00	%	$	43,747	5.00	%

Actual and required capital amounts and ratios for the Bank are presented below at December 31, 2021:


	Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital
(to Risk Weighted Assets)	$	106,002	21.25	%	$	39,909	8.00	%	$	49,886	10.00	%
Tier 1 Capital
(to Risk Weighted Assets)	$	99,656	19.98	%	$	29,932	6.00	%	$	39,909	8.00	%
Common Equity Tier 1 Capital
(to Risk Weighted Assets)	$	99,656	19.98	%	$	22,449	4.50	%	$	32,426	6.50	%
Tier 1 Capital
(to Average Assets)	$	99,656	12.22	%	$	32,619	4.00	%	$	40,774	5.00	%

Dividend Restrictions

Banking regulations limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits of the Bank for that year combined with the retained net profits for the preceding two years.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

NOTE 14 – MORTGAGE BANKING ACTIVITIES

The following table presents the components of residential loan fee income for the three and six months ended June 30, 2022 and June 30, 2021:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net gain realized on sale of residential loans held for sale	$	4,237	$	22,899	$	13,307	$	51,843
Net change in fair value recognized on residential loans held for sale	960		546		(2,039)		(4,787)
Net change in fair value recognized on interest rate lock commitments	1,064		487		(268)		(5,068)
Net change in fair value recognized on mandatory and best efforts forward sales contracts	2,629		(2,998)		9,574		7,864
Mortgage banking fees	1,322		2,418		2,829		5,529
Residential loan fee income	$	10,212	$	23,352	$	23,403	$	55,381

As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Interest rate lock commitments and mandatory commitments to deliver loans to investors are considered derivatives.

At June 30, 2022 and December 31, 2021, the Company had interest rate lock commitments of $79,698 and $108,122, mandatory forwards contracts of $90,500 and $142,500, and forward sales contracts of $11,659 and $7,375, respectively. The fair value of these mortgage banking derivatives was reflected by a total derivative asset of $1,530 and $1,550 and a total derivative liability of $522 and $189 at June 30, 2022 and December 31, 2021, respectively. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage banking derivatives are included in residential loan fee income in the Consolidated Statements of Income.

The net gains (losses) relating to free-standing derivative instruments used for risk management at June 30, 2022 and December 31, 2021 are summarized below:


	June 30, 2022		December 31, 2021
Mandatory forward sales contracts	$	(162)	$	(78)
Best efforts forward sales contracts	83		27
Interest rate lock commitments	1,087		1,412

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheets at June 30, 2022 and December 31, 2021:


	June 30, 2022				December 31, 2021
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Interest rate lock commitments	$	70,315	$	1,164	$	103,572	$	1,435
Mandatory forward sales contracts	40,000		283		60,000		88
Best efforts forward sales contracts	11,659		83		7,375		27
Included in other liabilities:
Interest rate lock commitments	9,383		77		4,550		23
Mandatory forward sales contracts	50,500		445		82,500		166

NOTE 15 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance sheet risk at June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022		December 31, 2021
Unfunded loan commitments	$	39,606	$	18,567
Unused lines of credit	127,735		52,076
Standby letters of credit	68		68

All unused lines of credit at June 30, 2022 and December 31, 2021 were variable rate lines of credit and the majority of unfunded loan commitments at June 30, 2022 and December 31, 2021 were commitments to fund variable rate loans. Unfunded loan commitments are generally entered into for periods of 90 days or less.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

NOTE 16 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Basic:
Net income (loss)	$	(282)	$	13,016	$	(269)	$	20,527
Less: Preferred stock dividends	208		235		416		567
Net income available to (loss attributable to) common shareholders	$	(490)	$	12,781	$	(685)	$	19,960
Weighted average common shares outstanding	4,014,445		3,821,993		4,009,002		3,666,418
Basic earnings (loss) per common share	$	(0.12)	$	3.34	$	(0.17)	$	5.44
Diluted:
Net income (loss)	$	(282)	$	13,016	$	(269)	$	20,527
Less: Preferred stock dividends	208		235		416		567
Add: Series B preferred stock dividends	—		92		—		279
Net income available to (loss attributable to) common shareholders	$	(490)	$	12,873	$	(685)	$	20,239
Weighted average common shares outstanding for basic earnings per common share	4,014,445		3,821,993		4,009,002		3,666,418
Add: Dilutive effects of conversion of Series B preferred stock to common stock	—		333,994		—		333,994
Add: Dilutive effects of assumed exercises of stock options/warrants	—		159,035		—		153,522
Average shares and dilutive potential common shares	4,014,445		4,315,022		4,009,002		4,153,934
Diluted earnings (loss) per common share	$	(0.12)	$	2.98	$	(0.17)	$	4.87

We use the treasury stock method to calculate the dilutive effect of outstanding equity awards in the denominator for diluted EPS to the extent the impact of such exchange would not be anti-dilutive. For the three and six months ended June 30, 2022, 318,961 and 333,704, respectively, of potential shares of common stock issuable upon the potential exercise of outstanding convertible Series B preferred stock, stock options and warrants were excluded from diluted loss per share because the effect would have been anti-dilutive. There were no common stock options excluded in computing diluted earnings per common share for the three and six months ended June 30, 2021.

NOTE 17 – OPERATING SEGMENTS

The Company has two reportable segments: Banking and Residential Mortgage Lending. The Banking segment provides a variety of traditional community banking services through its full-service banking centers located in St. Petersburg, Seminole, Pinellas Park, Clearwater, Sarasota, Tampa, and Belleair Bluffs, Florida, as well as SBA lending services throughout the nation. The Residential Mortgage Lending segment originates residential mortgage loans primarily for sale in the secondary market with offices throughout the nation. Loans and deposits provide revenue in the Banking segment and loan sales provide revenue in the Residential Lending segment.

Segment profit and loss is measured by net income after income tax. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process. Due to the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

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BAYFIRST FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited)

Information about reportable segments and reconciliation of such information to the Consolidated Financial Statements follows:


	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
	Residential Mortgage		Banking		Consolidated		Residential Mortgage		Banking		Consolidated
Interest income	$	867	$	7,759	$	8,626	$	811	$	14,186	$	14,997
Interest expense	561		611		1,172		553		1,540		2,093
Net interest income	306		7,148		7,454		258		12,646		12,904
Provision for loan losses	—		250		250		—		—		—
Residential loan fee income	10,212		—		10,212		23,352		—		23,352
Internal transfer for portfolio loans originated	280		(280)		—		97		(97)		—
Other noninterest income	5		7,682		7,687		15		14,845		14,860
Total noninterest income	10,497		7,402		17,899		23,464		14,748		38,212
Total noninterest expense	11,985		13,691		25,676		20,572		13,096		33,668
Income (loss) before income tax expense (benefit)	(1,182)		609		(573)		3,150		14,298		17,448
Income tax expense (benefit)	—		(291)		(291)		882		3,550		4,432
Net income (loss)	$	(1,182)	$	900	$	(282)	$	2,268	$	10,748	$	13,016
Period end assets	$	76,718	$	844,659	$	921,377	$	129,666	$	1,068,563	$	1,198,229


	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
	Residential Mortgage		Banking		Consolidated		Residential Mortgage		Banking		Consolidated
Interest income	$	1,604	$	14,762	$	16,366	$	2,029	$	27,860	$	29,889
Interest expense	1,092		1,414		2,506		1,343		3,012		4,355
Net interest income	512		13,348		13,860		686		24,848		25,534
Provision for loan losses	—		(2,150)		(2,150)		—		2,000		2,000
Residential loan fee income	23,403		—		23,403		55,381		—		55,381
Internal transfer for portfolio loans originated	410		(410)		—		166		(166)		—
Other noninterest income	11		13,353		13,364		27		15,963		15,990
Total noninterest income	23,824		12,943		36,767		55,574		15,797		71,371
Total noninterest expense	25,761		27,562		53,323		43,699		23,690		67,389
Income (loss) before income tax expense (benefit)	(1,425)		879		(546)		12,561		14,955		27,516
Income tax expense (benefit)	(68)		(209)		(277)		3,517		3,472		6,989
Net income (loss)	$	(1,357)	$	1,088	$	(269)	$	9,044	$	11,483	$	20,527
Period end assets	$	76,718	$	844,659	$	921,377	$	129,666	$	1,068,563	$	1,198,229

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion explains our financial condition and results of operations as of and for the three and six months ended June 30, 2022. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 30, 2022. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, global military hostilities, or climate changes, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with them; the ability of the Company to implement its strategy and expand its banking operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets or global military hostilities; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Overview

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level. The following discussion should be read in conjunction with our consolidated financial statements.

As a one-bank holding company, we generate most of our revenue from interest on loans and gain-on-sale income derived from the sale of loans into the secondary market. Our primary source of funding for our loans is deposits. We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. Our largest expenses are interest on those deposits and borrowings, professional fees, and salaries and commissions plus related employee benefits. We measure our performance through our net interest income after provision for loan losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Application of Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates.

Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. At June 30, 2022, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing our consolidated financial statements were the policies

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related to the allowance for loan losses, and fair value measurement of SBA servicing rights, residential loans held for sale, SBA loans held for investment at fair value, and residential derivatives, which are discussed more fully below.

Allowance for Loan Losses

The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses. Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates, including the loss content for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. In addition, management may include qualitative adjustments intended to capture the impact of other uncertainties in the lending environment such as underwriting standards, current economic and political conditions, and other factors affecting the credit quality. Changes to one or more of the estimates used could result in a different estimated allowance for loan losses.

Fair Value Measurements

Mortgage derivatives, loans held for sale, investments, and certain other loans are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans, other real estate, SBA servicing rights, and certain other assets and liabilities. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.

Changes in these estimates that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, could have a material impact on the Company’s financial position or results of operation.

Further, the Company is an emerging growth company. The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected to take advantage of this extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies do so. This may make the Company’s financial statements not comparable with those of public companies which are neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.

Recent Developments

Residential Mortgage Restructuring. On May 12, 2022, BayFirst Financial Corp announced that BayFirst National Bank completed a restructuring of its Residential Mortgage Division. The Bank discontinued its primary consumer direct residential mortgage business line. In doing so, residential loan production offices were closed in Overland Park, Kansas, New Albany, Ohio, and Tampa, Florida. The restructuring was undertaken by the Bank as a response to reduced volume due to a lack of refinance demand in the current rising rate environment which directly impacted the consumer direct business line. As a result of this restructuring, the Bank will focus resources on its traditional retail mortgage business supported by loan production offices across the nation. At the same time, the Bank has aligned its operational staffing in its Residential Mortgage Division to reflect the discontinuation of its consumer direct offices and overall production estimates across the platform. In doing so, the Bank incurred a one-time pre-tax restructuring charge of approximately $630 thousand in the second quarter of 2022, consisting of approximately $250 thousand of severance and related payments, $145 thousand of write-offs of fixed assets, and $235 thousand of valuation adjustments on the leased branch facilities.

Conversion to a National Bank. On May 16, 2022, BayFirst Financial Corp.’s wholly-owned subsidiary completed its conversion to a national bank. As part of this process, the Bank, formerly known as First Home Bank, changed its name to BayFirst National Bank.

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Third Quarter Common Stock Dividend. On July 26, 2022, BayFirst’s Board of Directors declared a third quarter 2022 cash dividend of $0.08 per common share. The dividend will be payable September 15, 2022 to common shareholders of record as of September 1, 2022. This dividend marks the 25th consecutive quarterly cash dividend paid since BayFirst initiated cash dividends in 2016.

Third Quarter Preferred Series A Stock Dividend. BayFirst’s Board of Directors declared a quarterly cash dividend of $22.50 on our Series A Preferred Stock. The dividend will be payable October 3, 2022 to shareholders of record as of July 16, 2022. The amount and timing of the dividend is in accordance with the terms of the Series A Preferred Stock.

Third Quarter Preferred Series B Stock Dividend. BayFirst’s Board of Directors declared a quarterly cash dividend of $20.00 on our Series B Convertible Preferred Stock. The dividend will be payable October 3, 2022 to shareholders of record as of July 16, 2022. The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock.

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Selected Financial Data - Unaudited


	As of and for the Three Months Ended									As of and for the Six Months Ended
(Dollars in thousands, except per share data)	6/30/2022			3/31/2022			6/30/2021			6/30/2022			6/30/2021
Income Statement Data:


Net interest income	$	7,454		$	6,406		$	12,904		13,860			25,534
Provision for loan losses	250			(2,400)			—			(2,150)			2,000
Noninterest income	17,899			18,868			38,212			36,767			71,371
Noninterest expense	25,676			27,647			33,668			53,323			67,389
Income tax expense (benefit)	(291)			14			4,432			(277)			6,989
Net income (loss)	(282)			13			13,016			(269)			20,527
Preferred stock dividends	208			208			235			416			567
Net income available to (loss attributable to) common shareholders	$	(490)		$	(195)		$	12,781		$	(685)		$	19,960
Balance Sheet Data:


Average loans held for investment, excluding PPP loans	561,455			520,559			445,893			541,120			456,467
Average total assets	879,868			872,311			1,541,230			876,110			1,588,465

Average common shareholders’ equity	83,235			83,990			68,525			83,611			63,248
Total loans held for investment	641,737			561,797			895,194			641,737			895,194
Total loans held for investment, excluding PPP loans	610,527			517,434			465,470			610,527			465,470

Total loans held for investment, excluding government guaranteed loan balances	458,624			374,353			314,438			458,624			314,438
Allowance for loan losses	9,564			10,170			20,797			9,564			20,797
Total assets	921,377			888,541			1,198,229			921,377			1,198,229

Common shareholders’ equity	83,690			85,274			81,838			83,690			81,838

Per Share Data:
Basic earnings (loss) per common share	$	(0.12)		$	(0.05)		$	3.34		$	(0.17)		$	5.44
Diluted earnings (loss) per common share	$	(0.12)		$	(0.05)		$	2.98		$	(0.17)		$	4.87
Dividends per common share	$	0.080		$	0.080		$	0.070		$	0.160		$	0.137
Book value per common share	$	20.82		$	21.25		$	21.16		$	20.82		$	21.16
Tangible book value per common share (1)	$	20.80		$	21.22		$	21.14		$	20.80		$	21.14




Performance Ratios:
Return on average assets	(0.13)		%	0.01		%	3.38		%	(0.06)		%	2.58		%
Return on average common equity	(2.35)		%	(0.93)		%	74.61		%	(1.64)		%	63.12		%


Net interest margin	3.73		%	3.25		%	3.46		%	3.49		%	3.34		%
Dividend payout ratio	(65.54)		%	(164.25)		%	2.09		%	(93.64)		%	2.52		%
Asset Quality Data:
Net charge-offs	$	856		$	882		$	1,220		$	1,738		$	2,365
Net charge-offs/average loans held for investment excluding PPP	0.61		%	0.68		%	1.09		%	0.64		%	1.04		%
Nonperforming loans	$	10,437		$	8,834		$	9,884		$	10,495		$	13,836

Nonperforming loans (excluding government guaranteed balance)	$	4,245		$	2,660		$	3,577		$	3,756		$	4,057

Nonperforming loans/total loans held for investment	1.63		%	1.57		%	1.10		%	1.63		%	1.10		%

Nonperforming loans (excluding gov’t guaranteed balance)/total loans held for investment	0.66		%	0.47		%	0.40		%	0.66		%	0.40		%

ALLL/Total loans held for investment at amortized cost	1.62		%	1.84		%	2.35		%	1.62		%	2.35		%

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	As of and for the Three Months Ended						As of and for the Six Months Ended
(Dollars in thousands, except per share data)	6/30/2022		3/31/2022		6/30/2021		6/30/2022		6/30/2021
ALLL/Total loans held for investment at amortized cost, excluding PPP loans	1.71	%	2.00	%	4.57	%	1.71	%	4.57	%
Other Data:
Full-time equivalent employees	485		575		671		485		671
Banking center offices	7		7		6		7		6
Loan production offices	19		20		26		19		26
(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.

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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in this report are not measures of financial condition or performance recognized by GAAP. These non-GAAP financial measures include tangible common shareholders' equity and tangible book value per common share. Our management uses these non-GAAP financial measures in its analysis of our performance, and we believe that providing this information to financial analysts and investors allows them to evaluate capital adequacy.

The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP:


Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
	As of
(Dollars in thousands, except per share data)	June 30, 2022		March 31, 2022		June 30, 2021
	(Unaudited)		(Unaudited)		(Unaudited)
Total shareholders’ equity	$	93,295	$	94,879	$	92,813
Less: Preferred stock liquidation preference	(9,605)		(9,605)		(10,975)
Total equity available to common shareholders	83,690		85,274		81,838
Less: Goodwill	(100)		(100)		(100)
Tangible common shareholders' equity	$	83,590	$	85,174	$	81,738

Common shares outstanding	4,019,023		4,013,173		3,867,414
Tangible book value per common share	$	20.80	$	21.22	$	21.14

Results of Operations

BayFirst’s operating results depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. Our interest rate spread is affected by regulatory, economic, and competitive factors which influence interest rates, loan demand, and deposit flows. In addition, our operating results can be affected by the level of nonperforming loans, as well as the level of our noninterest income, and our noninterest expenses, such as salaries and employee benefits, occupancy and equipment costs, and income taxes.

We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. We operate residential mortgage loan production offices in a number of states. We sell a substantial portion of the mortgage loans that we originate on the secondary market which generates gains on the sale of these loans. Additionally, while we retain some of our government guaranteed loans on our balance sheet, we sell both the guaranteed balance of our government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans. This activity generates gains on sale of the guaranteed portions of the loans.

Net Income (Loss)

We had net loss for the three months ended June 30, 2022 of $282 thousand, or $(0.12) per diluted common share, compared to net income for the three months ended June 30, 2021 of $13.0 million, or $2.98 per diluted common share. The decrease of $13.3 million was the result of the $13.8 million one-time gain on sale of PPP loans in 2021, lower PPP loan origination fee and interest income, and lower residential loan fee income, partially offset by an increase in held for investment SBA loan fair value gains, resulting primarily from election of the fair value option on $41.7 million of loans originated in the current quarter, as well as an $8.0 million decrease in noninterest expense, which resulted primarily from decreased human resource costs.

We had net loss for the six months ended June 30, 2022 of $269 thousand, of $(0.17) per diluted common share, compared to net income for the six months ended June 30, 2021 of $20.5 million or $4.87 per diluted common share. The decrease of $20.8 million in net income was due to a $32.0 million decrease in residential loan fee income, a $13.8 million gain on sale of PPP loans in 2021, and lower PPP loan origination fee and interest income . These items were partially offset by a $2.4 million increase related to held for investment SBA loan fair value gains, higher gains on non-PPP SBA guaranteed loan sales, a $14.1 million reduction, or 20.9%, in noninterest expense and a $4.2 million lower provision for loan losses.

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Net Interest Income

Net interest income was $7.5 million for the three months ended June 30, 2022, a decrease of $5.5 million or 42.2% compared to net interest income for the three months ended June 30, 2021 of $12.9 million. This decrease was primarily due to lower net PPP loan interest and origination fee income. The net interest margin for the three months ended June 30, 2022 was 3.73% compared to 3.46% for the three months ended June 30, 2021. With the recent interest rate increases enacted by the Federal Reserve, the Company anticipates further improvement in its net interest margin as its SBA loan portfolio rates are tied to prime with the vast majority resetting at the beginning of each quarter.

Net interest income was $13.9 million for the six months ended June 30, 2022, a decrease of $11.7 million or 45.7% compared to net interest income for the six months ended June 30, 2021 of $25.5 million. This decrease was mainly due to the decrease in net PPP loan interest and origination fee income. The net interest margin for the six months ended June 30, 2022 was 3.49% compared to 3.34% for the six months ended June 30, 2021. This increase was due to the same factors noted above.

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Average Balance Sheet and Analysis of Net Interest Income

The following tables set forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of BayFirst from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.


	Three Months Ended June 30,
	2022							2021
(Dollars in thousands)	Average Balance			Interest		Yield		Average Balance			Interest		Yield
Interest-earning assets:
Investment securities	$	46,366		$	229	1.98	%	$	14,155		$	47	1.33	%
Loans, excluding PPP (1)	635,170			7,915		5.00		550,222			6,752		4.92
PPP loans	35,867			296		3.31		724,860			8,094		4.48
Other	83,199			186		0.90		205,155			104		0.20
Total interest-earning assets	800,602			8,626		4.32		1,494,392			14,997		4.03
Noninterest-earning assets	79,266							46,838
Total assets	$	879,868						$	1,541,230
Interest-bearing liabilities:
NOW, MMDA and savings	$	644,286		$	974	0.61		$	491,289		$	980	0.80
Time deposits	26,463			86		1.30		98,863			214		0.87
PPPLF advances	—			—		—		749,824			655		0.35
Other borrowings	11,813			112		3.80		25,393			244		3.85
Total interest-bearing liabilities	682,562			1,172		0.69		1,365,369			2,093		0.61
Demand deposits	96,530							84,695
Noninterest-bearing liabilities	7,936							10,466
Shareholders’ equity	92,840							80,700
Total liabilities and shareholders’ equity	$	879,868						$	1,541,230
Net interest income				$	7,454						$	12,904
Interest rate spread						3.63							3.41
Net interest margin (2)						3.73							3.46
Ratio of average interest-earning assets to average interest-bearing liabilities	117.29		%					109.45		%

(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.

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	Six Months Ended June 30,
	2022							2021
(Dollars in thousands)	Average Balance			Interest		Yield		Average Balance			Interest		Yield
Interest earning-assets:
Investment securities	$	38,550		$	326	1.71	%	$	6,992		$	47	1.36	%
Loans, excluding PPP (1)	619,699			15,027		4.89		597,176			13,351		4.51
PPP loans	46,901			739		3.18		774,619			16,306		4.24
Other	94,771			274		0.58		164,880			185		0.23
Total interest-earning assets	799,921			16,366		4.13		1,543,667			29,889		3.90
Noninterest-earning assets	76,189							44,798
Total assets	$	876,110						$	1,588,465
Interest-bearing liabilities:
NOW, MMDA and savings	$	626,973		$	2,060	0.66		$	468,080		$	2,013	0.87
Time deposits	32,868			217		1.33		97,515			501		1.04
PPPLF advances	11,428			20		0.35		817,053			1,421		0.35
Other borrowings	10,529			209		4.00		41,472			420		2.04
Total interest-bearing liabilities	681,798			2,506		0.74		1,424,120			4,355		0.62
Demand deposits	97,045							76,642
Noninterest-bearing liabilities	4,051							10,837
Shareholders’ equity	93,216							76,866
Total liabilities and shareholders’ equity	$	876,110						$	1,588,465
Net interest income				$	13,860						$	25,534
Interest rate spread						3.38							3.29
Net interest margin (2)						3.49							3.34
Ratio of average interest-earning assets to average interest-bearing liabilities	117.33		%					108.39		%

(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The tables below present the effects of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous period’s average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.


(Dollars in thousands)	Rate		Volume		Total
Three Months Ended June 30, 2022 vs. June 30, 2021:
Interest-earning assets:
Investment securities	$	32	$	150	$	182
Loans, excluding PPP	106		1,057		1,163
PPP loans	(1,680)		(6,118)		(7,798)
Other interest-earning assets	175		(93)		82
Total interest-earning assets	(1,367)		(5,004)		(6,371)
Interest-bearing liabilities:
NOW, MMDA and savings	(270)		264		(6)
Time deposits	75		(203)		(128)
PPPLF	—		(655)		(655)
Other borrowings	(3)		(129)		(132)
Total interest-bearing liabilities	(198)		(723)		(921)
Net change in net interest income	$	(1,169)	$	(4,281)	$	(5,450)
Six Months Ended June 30, 2022 vs. June 30, 2021:
Interest-earning assets:
Investment securities	$	15	$	264	$	279
Loans, excluding PPP	1,159		517		1,676
PPP loans	(3,287)		(12,280)		(15,567)
Other interest-earning assets	194		(105)		89
Total interest-earning assets	(1,919)		(11,604)		(13,523)
Interest-bearing liabilities:
NOW, MMDA, and savings	(541)		588		47
Time deposits	114		(398)		(284)
PPPLF advances	—		(1,401)		(1,401)
Other borrowings	234		(445)		(211)
Total interest-bearing liabilities	(193)		(1,656)		(1,849)
Net change in net interest income	$	(1,726)	$	(9,948)	$	(11,674)

Provision for Loan Losses

The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors that may affect our ability to collect on the loans in our portfolio.

Asset quality remained stable in the second quarter of 2022. As the financial impact of the COVID-19 pandemic became more predictable throughout 2021, the Company began adjusting downward its allowance for loan losses from the historic high levels reached in 2020 at the onset of the pandemic. The Company recorded a provision for the three months ended June 30, 2022 of $250 thousand. This compared to no provision for the three months ended June 30, 2021. During the three

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months ended June 30, 2022, we charged off $856 thousand in loans compared to $1.2 million during the three months ended June 30, 2021. Our ALLL was $9.6 million at June 30, 2022 and $20.8 million at June 30, 2021.

We recorded a negative provision for loan losses for the six months ended June 30, 2022 of $2.2 million compared to a $2.0 million provision for the six months ended June 30, 2021. The decrease of $4.2 million in the provision for loan losses was primarily due to the same factors mentioned above. During the six months ended June 30, 2022, we charged off $1.7 million in loans compared to $2.4 million during the six months ended June 30, 2021.

Noninterest Income

The following table presents noninterest income for the three and six months ended June 30, 2022 and June 30, 2021.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022		2021
Noninterest income:
Residential loan fee income	$	10,212	$	23,352	$	23,403	$	55,381
Loan servicing income, net	438		325		899		1,029
Gain on sale of government guaranteed loans, net	3,848		13,798		8,469		13,798
Service charges and fees	322		364		604		586
SBA loan fair value gain	2,708		7		2,511		79
Other noninterest income	371		366		881		498
Total noninterest income	$	17,899	$	38,212	$	36,767	$	71,371

Noninterest income was $17.9 million during the three months ended June 30, 2022, a decrease of $20.3 million or 53.2% from $38.2 million during the three months ended June 30, 2021. The decrease was primarily due to the one-time $13.8 million gain on sale of PPP loans in 2021 and a decrease in residential loan fee income of $13.1 million or 56.3% as a result of a decrease in residential mortgage volume of $216.5 million, partially offset by an increase in gains on SBA loan sales and the resulting gain in SBA loan servicing income.

Noninterest income was $36.8 million during the six months ended June 30, 2022, a decrease of $34.6 million or 48.5% from $71.4 million during the six months ended June 30, 2021. The decrease was primarily due to a $32.0 million reduction in residential loan fee income and the $13.8 million gain on sale of PPP loans in 2021. These items were partially offset by higher gains on the sale of non-PPP SBA loans and a $2.4 million increase related to held for investment SBA loan fair value gains.

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Noninterest Expense

The following table presents noninterest expense for the three and six months ended June 30, 2022 and June 30, 2021.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022		2021
Noninterest expense:
Salaries and benefits	$	11,416	$	12,948	$	25,113	$	26,115
Bonus, commissions, and incentives	4,995		9,218		9,601		21,091
Mortgage banking	677		1,572		1,679		3,267
Occupancy and equipment	1,382		1,297		2,803		2,629
Data processing	1,367		2,593		2,834		3,862
Marketing and business development	1,659		1,878		3,401		3,520
Professional services	1,075		843		2,382		1,767
Loan origination and collection	748		1,105		1,418		1,601
Employee recruiting and development	474		1,008		1,345		1,622
Regulatory assessments	120		100		189		202
Residential mortgage division restructuring expense	630		—		630		—
Other noninterest expense	1,133		1,106		1,928		1,713
Total noninterest expense	$	25,676	$	33,668	$	53,323	$	67,389

Noninterest expense was $25.7 million during the three months ended June 30, 2022, a decrease of $8.0 million or 23.7% from $33.7 million during the three months ended June 30, 2021. The decline was primarily due to a decrease in commissions earned on residential mortgage loan originations, salaries and benefits, and data processing expense, partially offset by residential mortgage division restructuring expense. The residential mortgage division restructuring was undertaken by the Bank as a response to reduced volume due to a lack of refinance demand in the current rising rate environment which directly impacted the consumer direct business line. The Bank discontinued its primary consumer direct residential mortgage business line in the second quarter 2022. As a result, the Bank incurred a one-time pre-tax restructuring charge of approximately $630 thousand, consisting of approximately $250 thousand of severance and related payments, $145 thousand of write-offs of fixed assets, and $235 thousand of valuation adjustments on the leased branch facilities.

Noninterest expense was $53.3 million during the six months ended June 30, 2022, a decrease of $14.1 million or 20.9% from $67.4 million during the six months ended June 30, 2021. The decrease was primarily due to less commissions earned on residential mortgage loan originations.

Income Taxes

Income tax benefit was $291 thousand for the three months ended June 30, 2022, a decrease of $4.7 million from income tax expense of $4.4 million for the three months ended June 30, 2021. The decrease was primarily due to the decrease in pre-tax earnings.

Income tax benefit was $277 thousand for the six months ended June 30, 2022, a decrease of $7.3 million from income tax expense of $7.0 million for the six months ended June 30, 2021. The decrease was primarily due to the decrease in pre-tax earnings.

The effective income tax rate was 50.73% for the six months ended June 30, 2022 and 25.40% for the six months ended June 30, 2021.

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Financial Condition

Investment Securities

The following table presents the fair value of the Company's investment securities portfolio classified as available for sale as of June 30, 2022 and December 31, 2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Investment securities available for sale:
Asset-backed securities	$	9,909	$	7,535
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	3,774		4,394
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	20,553		18,964
Corporate bonds	11,047		—
Total investment securities available for sale	$	45,283	$	30,893

The following table presents the fair value of the Company's investment securities portfolio classified as held to maturity as of June 30, 2022 and December 31, 2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Investment securities held to maturity:

Mortgaged-backed securities:
U.S. Government-sponsored enterprises	$	2	$	2


Corporate bonds	4,997		—
Total investment securities held to maturity	$	4,999	$	2

No investment securities were pledged as of June 30, 2022 or December 31, 2021, and there were no sales of investment securities during the six months ended June 30, 2022 or the year ended December 31, 2021.

During the second quarter of 2022, the Company transferred a $1.5 million previously designated available for sale investment security to a held to maturity designation at estimated fair value. The reclassification for the period ended June 30, 2022 is permitted as the Company has appropriately determined the ability and intent to hold the investment security as an investment until maturity or call. The investment security had no unrealized net gain or loss at the time of transfer since it was purchased near the end of the first quarter of 2022.

The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2022 and December 31, 2021. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential

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mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.


	June 30, 2022
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Asset-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	10,098	2.34	%
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	—		—		—		—		—		—		4,296		1.51
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	—		—		—		—		—		—		23,023		1.81
Corporate bonds	—		—		11,339		1.62		—		—		—		—
Total investment securities available for sale	$	—	—	%	$	11,339	1.62	%	$	—	—	%	$	37,417	1.85	%


	December 31, 2021
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Asset-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	7,624	0.90	%
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	—		—		—		—		—		—		4,470		1.32
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	—		—		—		—		—		—		19,370		1.31

Total investment securities available for sale	$	—	—	%	$	—	—	%	$	—	—	%	$	31,464	1.21	%

The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2022 and December 31, 2021. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.


	June 30, 2022
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield

Mortgaged-backed securities:
U.S. Government-sponsored enterprises	$	—	—	%	$	—	—	%	$	—	—	%	$	2	0.77	%


Corporate bonds	—		—		4,014		3.40		1,000		4.38		—		—
Total investment securities held to maturity	$	—	—	%	$	4,014	3.40	%	$	1,000	4.38	%	$	2	3.60	%

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	December 31, 2021
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield

Mortgaged-backed securities:
U.S. Government-sponsored enterprises	$	—	—	%	$	—	—	%	$	—	—	%	$	2	0.80	%



Total investment securities held to maturity	$	—	—	%	$	—	—	%	$	—	—	%	$	2	0.80	%

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Loan Portfolio Composition

Through the efforts of our management and loan officers, strong loan production resulted from our ability to take advantage of the economic recovery and consolidation in our markets. Senior management and loan officers have continued to develop new sources of loan referrals, particularly among centers of local influence and real estate professionals, and have also enjoyed repeat business from loyal customers in the markets the Bank serves. We have no concentration of credit in any industry that represents 10% or more of our loan portfolio. The following table sets forth the composition of our loan portfolio, including LHFS as of the dates indicated.


	June 30, 2022				December 31, 2021
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Residential loans held for sale	$	74,708			$	114,131
Government guaranteed loans, held for sale	$	—			$	1,460
SBA loans held for investment, at fair value	$	52,209			$	9,614
Loans held for investment, at amortized cost:
Residential real estate	$	122,403	20.9	%	$	87,235	15.3	%
Commercial real estate	216,067		37.0		163,477		28.7
Construction and land	9,686		1.7		18,632		3.3
Commercial and industrial	168,990		28.9		217,155		38.0
Commercial and industrial – PPP	31,430		5.4		80,158		14.1
Consumer and other	35,845		6.1		3,581		0.6
Loans held for investment, at amortized cost, gross	584,421		100.0	%	570,238		100.0	%
Discount on SBA 7(a) loans sold	(4,743)				(3,866)
Premium/(discount) on loans purchased	2,221				(13)
Deferred loan costs, net	7,629				7,975
Allowance for loan losses	(9,564)				(13,452)
Loans held for investment, at amortized cost, net	$	579,964			$	560,882

In general, construction loans are originated as construction-to-permanent loans. Third party take-out financing, where applicable, is typically in the form of permanent first mortgage conforming loans.

During the six months ended June 30, 2022, we originated approximately $143.9 million in loans through conventional lending channels, $137.4 million in loans through CreditBench (our SBA lending function), and $641.1 million through the Residential Mortgage Lending Division. During the six months ended June 30, 2021, we originated approximately $47.5 million in loans through conventional lending channels, $62.9 million through CreditBench, exclusive of PPP loans, $329.0 million of PPP loans, and $1.24 billion through the Residential Mortgage Lending Division. During the six months ended June 30, 2022, the Company sold guaranteed balances of SBA loans of $118.2 million.

In 2021, we originated approximately $94.9 million in new loans through conventional lending channels, $169.5 million in loans through CreditBench, exclusive of PPP loans, $329.3 million of PPP loans, and $2.22 billion through the Residential Mortgage Lending Division.

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Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans at June 30, 2022. Loan balances in this table include loans held for investment at fair value, loans held for investment at amortized cost, discount on retained balances of loans sold, premium and discount on loans purchased, and deferred loan costs, net.


(Dollars in thousands)	Due in One Year or Less		Due After One Year to Five Years		Due After Five Years to 15 Years		Due After 15 Years		Total
Real estate:
Residential	$	3,419	$	1,428	$	4,393	$	113,556	$	122,796
Commercial	4,725		319		11,455		222,849		239,348
Construction and land	1,977		—		1,663		6,046		9,686
Commercial and industrial	12,500		968		181,046		8,040		202,554
Commercial and industrial - PPP	10,796		20,415		—		—		31,211
Consumer and other	1,694		18,696		15,042		710		36,142
Total loans held for investment	$	35,111	$	41,826	$	213,599	$	351,201	$	641,737

The following table shows our loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at June 30, 2022.


(Dollars in thousands)	Fixed Interest Rate		Adjustable Interest Rate
Real estate:
Residential	$	29,643	$	89,734
Commercial	6,728		227,895
Construction and land	761		6,948
Commercial and industrial	22,952		167,102
Commercial and industrial - PPP	20,415		—
Consumer and other	4,366		30,082
Total loans held for investment	$	84,865	$	521,761

Credit Risk

The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond our control. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about the economic environment that it believes impacts credit quality as of the balance sheet date that it believes to be reasonable, but which may or may not prove accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the ALLL, or that additional increases in the ALLL will not be required.

Allowance for Loan Losses. The Bank must maintain an adequate ALLL based on a comprehensive methodology that assesses the probable losses inherent in our loan portfolio. We maintain an ALLL based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, asset classifications, loan grades, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits and economic conditions. Provisions for loan losses are provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable. General valuation allowances are determined by a portfolio segmentation based on collateral type with a further evaluation of various quantitative and qualitative factors noted above.

We periodically review the assumptions and formulate methodologies by which additions are made to the specific and general valuation allowances for loan losses in an effort to refine such allowances in light of the current status of the factors described above. The methodology is presented to and approved by the Bank’s Board of Directors. Future additional provisions to the loan loss reserve may be made as appropriate as new loans are originated or as existing loans may deteriorate.

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All adversely classified loans are evaluated for impairment. If a loan is deemed impaired, it is evaluated for potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular basis thereafter (at least quarterly). This evaluation is documented in a status report relating to a specific loan or relationship. Specific allocation of reserves on impaired loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. We review the collateral value, cash flow, and tertiary support on each impaired credit. Any deficiency outlined by a real estate collateral evaluation analysis, or cash flow shortfall, is accounted for through a specific allocation for the loan.

For performing loans which are evaluated collectively, we perform a portfolio segmentation based on loan type. The government guaranteed loan balances are included in the collectively evaluated portfolio balances. The loss factors for each segment are calculated using actual loan loss history for each segment of loans over the most recent one to three years, depending on the segment and vintage year of the loans in the segment of government guaranteed loans. The Bank’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

These economic factors include consideration of the following: levels of, and trends in delinquencies and impaired loans; levels of, and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.

While management believes our ALLL is adequate as of June 30, 2022, future adjustments to our allowance may be necessary if economic conditions differ substantially from the assumptions used in making the determination.

Nonperforming Assets. At June 30, 2022, we had $4.3 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.62% of total loans held for investment at amortized cost. At June 30, 2021, we had $3.6 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.35% of total loans held for investment at amortized cost. Total loans held for investment at June 30, 2022 and June 30, 2021 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ALLL as a percentage of loans held for investment at amortized cost, not including government guaranteed loan balances, was 2.14% at June 30, 2022, compared to 6.67% at June 30, 2021.

At December 31, 2021, we had $4.0 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.34% of total loans held for investment, including PPP loans. Total loans at December 31, 2021 included government guaranteed loans and loans measured at fair value which had no reserves allocated to them. ALLL as a percentage of loans at amortized cost, not including government guaranteed loan balances was 4.07% at December 31, 2021.

The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.


(Dollars in thousands)	June 30, 2022			June 30, 2021			December 31, 2021
Nonperforming loans (government guaranteed balances)	$	6,192		$	6,307		$	7,942
Nonperforming loans (unguaranteed balances)	4,245			3,577			3,967
Total nonperforming loans	10,437			9,884			11,909
OREO	56			—			3
Total nonperforming assets	$	10,493		$	9,884		$	11,912
Nonperforming loans as a percentage of total loans held for investment	1.63		%	1.10		%	2.04		%
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment	0.66		%	0.40		%	0.68		%
Nonperforming assets as a percentage of total assets	1.14		%	0.82		%	1.30		%
Nonperforming assets (excluding government guaranteed balances) to total assets	0.46		%	0.30		%	0.43		%
ALLL to nonperforming loans	91.64		%	210.41		%	112.96		%
ALLL to nonperforming loans (excluding government guaranteed balances)	225.30		%	581.41		%	339.10		%

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The following table sets forth information with respect to activity in the ALLL for the periods shown:


(Dollars in thousands)	At and for the Three Months Ended June 30,						At and for the Six Months Ended June 30,
	2022			2021			2022			2021
Allowance at beginning of period	$	10,170		$	22,017		$	13,452		$	21,162
Charge-offs:

Commercial real estate	(53)			—			(53)			—
Commercial and industrial	(939)			(1,453)			(1,970)			(2,590)
Consumer and other	(26)			(12)			(41)			(28)
Total charge-offs	(1,018)			(1,465)			(2,064)			(2,618)
Recoveries:

Commercial real estate	53			—			61			—
Commercial and industrial	107			244			260			249
Consumer and other	2			1			5			4
Total recoveries	162			245			326			253
Net charge-offs	(856)			(1,220)			(1,738)			(2,365)
Provision for loan losses	250			—			(2,150)			2,000
Allowance at end of period	$	9,564		$	20,797		$	9,564		$	20,797
Net charge-offs to average loans held for investment	0.57		%	0.42		%	0.59		%	0.38		%
Allowance as a percent of total loans held for investment at amortized cost	1.62		%	2.35		%	1.62		%	2.35		%
Allowance as a percent of loans held for investment at amortized cost, not including government guaranteed loans	2.14		%	6.67		%	2.14		%	6.67		%
Allowance as a percent of nonperforming loans	91.64		%	210.41		%	91.64		%	210.41		%
Total loans held for investment	$	641,737		$	895,194		$	641,737		$	895,194
Average loans held for investment	$	597,322		$	1,170,753		$	588,021		$	1,231,086
Nonperforming loans (including government guaranteed balances)	$	10,437		$	9,884		$	10,437		$	9,884
Nonperforming loans (excluding government guaranteed balances)	$	4,245		$	3,577		$	4,245		$	3,577
Guaranteed balance of government guaranteed loans	$	183,113		$	580,756		$	183,113		$	580,756

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The following table details net charge-offs to average loans outstanding by loan category for the three months ended June 30, 2022 and June 30, 2021.


	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
(Dollars in thousands)	Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio		Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio
Residential real estate	$	—	$	98,440	—	%	$	—	$	61,650	—	%
Commercial real estate	—		245,769		—		—		167,284		—
Commercial and industrial	832		194,580		0.86		1,209		215,318		2.25
Commercial and industrial - PPP	—		35,867		—		—		724,860		—
Consumer and other	24		22,666		0.21		11		1,641		2.68
Total loans held for investment	$	856	$	597,322	0.29	%	$	1,220	$	1,170,753	0.42	%

The following table details net charge-offs to average loans outstanding by loan category for the six months ended June 30, 2022 and June 30, 2021.


	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
(Dollars in thousands)	Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio		Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio
Residential real estate	$	—	$	87,720	—	%	$	—	$	58,337	—	%
Commercial real estate	(8)		231,152		(0.01)		—		159,315		—
Commercial and industrial	1,710		208,366		1.64		2,341		237,215		1.97
Commercial and industrial - PPP	—		46,901		—		—		774,619		—
Consumer and other	36		13,882		0.52		24		1,600		3.00
Total loans held for investment	$	1,738	$	588,021	0.59	%	$	2,365	$	1,231,086	0.38	%

We recorded a provision of $250 thousand during the three months ended June 30, 2022, compared to no provision for the same period in 2021. We recorded a negative provision of $2.2 million during the six months ended June 30, 2022, compared to a provision of $2.0 million for the same period in 2021. For the year ended 2021, the provision for loan losses was $3.5 million. During 2020 and the first quarter of 2021, we increased the qualitative factors in the allowance for loan losses calculation to reflect the decline in economic indicators caused by the COVID-19 pandemic, resulting in significant provision expense in those periods. As asset quality has remained stable and as many of the Company’s SBA loans were bolstered by additional government support, the current year decrease in the allowance is deemed appropriate. Since 2016, the Company’s loan losses have been incurred primarily in its SBA unguaranteed loan portfolio, particularly loans originated under the SBA 7(a) Small Loan Program. The Small Loan Program represents loans of $350 thousand or less and such loans carry an SBA guarantee of 75% to 90% of the loan, depending on the original principal balance. The default rate on loans originated in the SBA 7(a) Small Loan Program is significantly higher than the Bank’s other SBA 7(a) loans, conventional commercial loans, or residential mortgage loans.

Nonperforming assets to total assets, excluding government guaranteed loan balances, were 0.46% as of June 30, 2022, as compared to 0.30% as of June 30, 2021. This percentage was 0.43% as of December 31, 2021. Since the majority of the Company’s loan portfolio consisted of SBA loans, most of which received from the SBA principal and interest payments under Section 1112 of the CARES Act during 2020 and 2021, asset quality trends may appear more favorable than they otherwise would without the SBA’s support under the CARES Act.

As of June 30, 2022, a total of 11 loans with principal balances of $459 thousand were under payment deferrals. Of those, all were government guaranteed loans with $342 thousand in outstanding unguaranteed balances. As expected, the level of SBA loans on deferral increased with the expiration of the Section 1112 payment support afforded under the CARES Act at

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which point certain borrowers requested payment deferrals. With the Economic Aid Act signed into law on December 27, 2020, Section 1112 CARES Act payments were extended, with some stipulations, which assisted the majority of our SBA borrowers for three months and, depending on the type of business, up to eight months of additional principal and interest payments with a cap of $9 thousand per month per borrower, beginning in February 2021. Although the Company’s asset quality trends indicate minimal stress on the portfolio, management incorporated a qualitative measure in the allowance for loan losses calculation.

SBA and Other Government Guaranteed Loans

The following table sets forth, for the periods indicated, information regarding our SBA and other government guaranteed lending activity, excluding PPP loans.


(Dollars in thousands)	At and for the Six Months Ended June 30,				At and for the Year Ended December 31,
Government Guaranteed, Excluding PPP	2022		2021		2021
Number of loans originated	293		159		374
Amount of loans originated	$	137,354	$	62,923	$	169,467
Average loan size originated	$	469	$	396	$	453
Government guaranteed loan balances sold	$	118,186	$	—	$	44,854
Government unguaranteed loan balances sold	$	4,351	$	—	5,034
Total government guaranteed loans	$	290,387	$	290,916	$	300,415
Government guaranteed loan balances	$	151,903	$	151,032	$	171,548
Government unguaranteed loan balances	$	138,484	$	139,884	$	128,867
Government guaranteed loans serviced for others	$	522,050	$	471,162	$	459,670

We make government guaranteed loans throughout the United States. The following table sets forth, at the dates indicated, information regarding the geographic disbursement of our SBA loan portfolio. The “All Other” category includes states with less than 5% in any period presented.


	June 30,								December 31,
	2022				2021				2021
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Florida	$	89,065	31	%	$	83,818	29	%	$	89,143	30	%
California	37,242		13		36,685		13		32,924		11
Texas	18,747		6		18,553		6		20,976		7
Tennessee	16,676		6		2,863		1		2,629		1
Georgia	13,068		5		15,114		5		13,894		5
All Other	115,589		39		133,883		46		140,849		46
Total government guaranteed loans, excluding PPP loans	$	290,387	100	%	$	290,916	100	%	$	300,415	100	%

Residential Mortgage Loans

The following table sets forth, for the periods indicated, information regarding our residential mortgage lending activity.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022		2021
Number of loans originated	859		1,753		1,910		4,125
Amount of loans originated	$	305,576	$	522,080	$	641,136	$	1,237,929
Average loan size originated	$	356	$	298	$	336	$	300
Loan balances sold	$	304,618	$	604,930	$	676,547	$	1,315,395

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Deposits

General. In addition to deposits, sources of funds available for lending and for other purposes include loan repayments and proceeds from the sales of loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and market conditions. Borrowings, as well as available lines of credit, may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels.

Deposits. Deposits are attracted principally from within our primary service area of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota Counties, Florida. We offer a wide selection of deposit instruments including demand deposit accounts, NOW accounts, money-market accounts, regular savings accounts, certificate of deposit accounts, and retirement savings plans (such as IRA accounts).

Certificate of deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. We emphasize commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits. Deposit interest rates are set by management at least monthly or more often if conditions require it, based on a review of loan demand, deposit flows for the previous period and a survey of rates among competitors and other financial institutions in Florida.

The amounts of each of the following categories of deposits, at the dates indicated, are as follows:


(Dollars in thousands)	June 30, 2022				December 31, 2021
Noninterest-bearing deposits	$	103,613	13.6	%	$	83,638	11.6	%
Interest-bearing transaction accounts	195,386		25.5		163,495		22.7
Money market accounts	414,008		54.1		408,257		56.5
Savings	18,361		2.4		15,607		2.2
Subtotal	731,368		95.6		670,997		93.0
Total time deposits	34,038		4.4		50,688		7.0
Total deposits	$	765,406	100.0	%	$	721,685	100.0	%

At June 30, 2022, we held approximately $303.7 million of deposits that exceeded the FDIC insurance limit.

The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250 thousand as of June 30, 2022.


(Dollars in thousands)
Three months or less	$	313
Over three months through six months	380
Over six months through 12 months	3,386
Over 12 months	3,941
Total	$	8,020

Other Borrowings

At June 30, 2022, FHLB and FRB borrowings totaled $40.0 million consisting of $20.0 million in FHLB borrowings and $20.0 million in borrowings from the FRB. There were no borrowings from the FHLB or FRB at December 31, 2021.

The Bank is a member of the FHLB of Atlanta, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rate set by the FHLB. The advances were secured by a blanket lien on $192.5 million of real estate-related loans as of June 30, 2022. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional $109.8 million from the FHLB at June 30, 2022.

In addition, the Bank has a secured line of credit with the Federal Reserve Bank and was secured by $34.8 million of commercial loans as of June 30, 2022. FRB short-term borrowings bear interest at variable rates based on the Federal Open

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Market Committee's target range for the federal funds rate. Based on this collateral, the Company was eligible to borrow up to an additional $4.8 million from the FRB at June 30, 2022.

In June 2021, the Company issued $6.0 million of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after five years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial five years of their term and carry interest at a floating rate for the final five years of their term. Under the terms of the Debentures, the floating rates are based on a SOFR benchmark plus 3.78% per annum. The Debentures were issued to redeem a $6.0 million Subordinated Debenture which was issued in December 2018 and which carried interest at a fixed rate of 6.875% per annum.

The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $6.0 million and $6.0 million at June 30, 2022 and December 31, 2021, respectively. In March 2020, the Company renegotiated the terms of its outstanding senior debt and combined its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime (4.75% at June 30, 2022). The new note matures on March 10, 2029 and the balance of the note was $3.1 million and $3.3 million at June 30, 2022 and December 31, 2021, respectively. The note is secured by 100% of the stock of the Company and requires the Company to comply with certain loan covenants during the term of the note.

In April 2020, the Company entered into the Federal Reserve Bank’s PPPLF. Under the PPPLF, advances were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company repaid the advance plus accrued interest. The balance outstanding on this facility was $69.7 million at December 31, 2021. In the first quarter of 2022, the Company repaid the remaining balance of the advance.

Capital Resources

Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale investment securities.

Shareholders' equity decreased $3.0 million to $93.3 million at June 30, 2022 as compared to $96.3 million at December 31, 2021. The decrease was the result of decreases of $2.2 million of accumulated other comprehensive income due to increases in net unrealized losses on available for sale investment securities, $416 thousand of dividends declared on our preferred stock, and $642 thousand of dividends declared on our common stock during the six months ended June 30, 2022.

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

The Bank is subject to regulatory capital requirements imposed by various regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by banking regulators that, if undertaken, could have a direct material effect on BayFirst’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

In 2020, the Federal banking regulatory agencies adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. This CBLR is calculated as the ratio of tangible equity capital divided by average total consolidated assets. CBLR tangible equity is defined as total equity capital, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than mortgage servicing assets). Under the proposal, a qualifying organization may elect to use the CBLR framework if its CBLR is greater than 9%. The Bank has elected not to use the CBLR framework.

At June 30, 2022 and December 31, 2021,the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.

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As of the dates indicated, the Bank met all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and percentages are as shown in the table below:


	Actual				Minimum(1)				Well Capitalized(2)
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
As of June 30, 2022
Total Capital (to risk-weighted assets)	$	107,716	16.37	%	$	52,625	8.00	%	$	65,782	10.00	%
Tier 1 Capital (to risk-weighted assets)	99,461		15.12		39,469		6.00		52,625		8.00
Common Equity Tier 1 Capital (to risk-weighted assets)	99,461		15.12		29,602		4.50		42,758		6.50
Tier 1 Capital (to total assets)	99,461		11.37		34,998		4.00		43,747		5.00
As of December 31, 2021
Total Capital (to risk-weighted assets)	106,002		21.25		39,909		8.00		49,886		10.00
Tier 1 Capital (to risk-weighted assets)	99,656		19.98		29,932		6.00		39,909		8.00
Common Equity Tier 1 Capital (to risk-weighted assets)	99,656		19.98		22,449		4.50		32,426		6.50
Tier 1 Capital (to total assets)	99,656		12.22		32,619		4.00		40,774		5.00

(1) To be considered “adequately capitalized” under the FDIC’s Prompt Corrective Action regulations.

(2) To be considered “well capitalized” under the FDIC’s Prompt Corrective Action regulations.

Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at June 30, 2022 were $87.6 million, a decrease of $47.3 million from $135.0 million at December 31, 2021. The decrease was primarily due to the payoff of $69.7 million in PPP Liquidity Facility and a decrease in time deposits of $16.7 million, partially offset by an increase in short-term FHLB and FRB borrowings of $40.0 million.

The following tables present our contractual obligations as of June 30, 2022 and December 31, 2021.


	Contractual Obligations as of June 30, 2022
(Dollars in thousands)	Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,312	$	2,050	$	1,187	$	—	$	4,549
Short-term borrowings	40,000		—		—		—		40,000
Long-term borrowings	—		—		—		3,072		3,072

Subordinated notes	50		—		—		5,939		5,989
Time deposits	20,530		12,703		805		—		34,038
Total	$	61,892	$	14,753	$	1,992	$	9,011	$	87,648

	Contractual Obligations as of December 31, 2021
(Dollars in thousands)	Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,454	$	2,249	$	1,279	$	301	$	5,283

Long-term borrowings	—		—		—		3,299		3,299
PPP Liquidity Facility	44,647		—		25,007		—		69,654
Subordinated notes	—		50		—		6,000		6,050
Time deposits	40,868		9,210		610		—		50,688
Total	$	86,969	$	11,459	$	26,896	$	9,650	$	134,974

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Off-Balance Sheet Arrangements

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include unfunded loan commitments, undisbursed loans in process, unfunded lines of credit, and standby letters of credit. The Bank uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not present unusual risks and management does not anticipate any accounting losses that would have a material effect on the Bank.

A summary of the amounts of the Bank’s financial instruments, with off-balance sheet risk as of the dates indicated, is as follows:


(Dollars in thousands)	June 30, 2022		December 31, 2021
Unfunded loan commitments	$	39,606	$	18,567
Unused lines of credit	127,735		52,076
Standby letters of credit	68		68
Total	$	167,409	$	70,711

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters-of-credit are conditional lending commitments that we issue to guarantee the performance of a customer to a third party and to support private borrowing arrangements. Essentially, letters of credit issued have expiration dates within one year of the issue date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit. The Bank may hold collateral supporting those commitments. Newly issued or modified guarantees that are not derivative contracts have been recorded on the Bank’s balance sheet at their fair value at inception.

In general, loan commitments and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. Each customer’s creditworthiness and the collateral required are evaluated on a case-by-case basis.

Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. The Bank generally maintains a liquidity ratio of liquid assets to total assets of at least 7.0%. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered investment securities available for sale. Our on-balance sheet liquidity ratio at June 30, 2022 was 13.26%, as compared to 16.76% at December 31, 2021.

During the six months ended June 30, 2022, the Bank purchased additional investment securities, some of which were classified as investment securities available for sale. The fair value of all of our investment securities available for sale totaled $45.3 million at June 30, 2022.

During each of the quarters of 2021 and 2022, the Bank paid a dividend of $250 thousand to BayFirst. Prior to that, the Bank retained its earnings to support its growth. Therefore, BayFirst’s liquidity had historically been dependent solely on funds received from the issuance and sale of debt and equity securities. BayFirst’s liquidity needs are to make interest payments on its debt obligations, dividends on shares of its Series A Preferred Stock, Series B Convertible Preferred Stock, and common stock, and payment of certain operating expenses. As of June 30, 2022, BayFirst Financial Corp. held $787 thousand in cash and cash equivalents.

A description of BayFirst’s and the Bank’s debt obligations is set forth above under the heading “Other Borrowings.”

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest-rate risk inherent in loan and deposit taking activities. To that end, we actively monitor and manage our interest-rate risk exposure. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, should also be considered.

Our objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk. A sudden or substantial increase in interest rates may impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same rate, to the same extent, or on the same basis.

We established a comprehensive interest rate risk management policy which is administered by management’s Asset-Liability Committee (“ALCO”). The policy establishes risk limits, which are quantitative measures of the percentage change in net interest income (net interest income at risk) and the fair value of equity capital (economic value of equity at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity with computer-generated simulation analysis. The simulation model is designed to capture call features and interest rate caps and floors embedded in investment and loan contracts. As with any method of analyzing interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we use. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from the assumptions that we use in our modeling. The methodology does not measure the impact that higher rates may have on variable and adjustable-rate loan borrowers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

To minimize the potential for adverse effects of changes in interest rates on the results of our operations, we monitor assets and liabilities to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. To do this, we (i) emphasize the origination of adjustable-rate and variable-rate loans to be held for investment; (ii) maintain a stable core deposit base; and (iii) maintain a significant portion of liquid assets (cash, interest-bearing deposits with other banks, and available for sale investment securities).

We regularly review our exposure to changes in interest rates. Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. ALCO reviews, on at least a quarterly basis, our interest rate risk position.

The interest rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.

Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

The estimated impact on our net interest income as of June 30, 2022 and December 31, 2021, assuming immediate parallel moves in interest rates is presented in the table below.

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	June 30, 2022				December 31, 2021
Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	8.7	%	14.4	%	26.1	%	33.5	%
+300 basis points	8.0		12.6		22.4		28.5
+200 basis points	4.2		7.0		13.1		16.8
+100 basis points	0.2		1.4		3.6		4.9
-100 basis points	(3.9)		(5.9)		(13.3)		(16.7)
-200 basis points	(9.6)		(13.8)		(26.4)		(32.3)

Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and investment securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

We use economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios.

The table below presents the change in our economic value of equity as of June 30, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates. Changes noted between the two periods reflect recent enhancements in our asset/liability modeling, including projected values for non-maturity deposits in changing interest rate environments.


Change in rates	June 30, 2022		December 31, 2021
+400 basis points	(6.3)	%	1.7	%
+300 basis points	(4.4)		1.9
+200 basis points	(3.7)		0.8
+100 basis points	(2.9)		(0.5)
-100 basis points	0.8		(3.5)
-200 basis points	1.0		(10.8)

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of June 30, 2022, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2022, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

We are not currently involved in any litigation that we believe may result in a material loss. From time-to-time, we are involved in litigation arising in the ordinary course of our business.

Item 1A. Risk Factors

In addition to the risk factor discussed below and the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended December 31, 2021. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.

Changes in local, national, or global economic and political conditions could adversely affect results of operations by affecting deposits and loan demand, credit quality and our relationships with vendors.

Our success depends to a significant extent upon local, national, and, to a lesser extent, global economic and political conditions. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, government budget deficits, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, military hostilities, terrorism, trade wars, economic sanctions, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment securities in our portfolio or available for purchase, demand for loans, the ability of our borrowers to repay their loans, the value of the collateral securing loans, and the ability of our vendors to perform according to contractual requirements. Recent political and military developments in Russia, Ukraine, and elsewhere may result in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in global oil production and supply in the Middle East and Russia, also affect the economy and stock prices in the U.S., which can affect our earnings, capital, the ability of our customers to repay loans, and other aspects of our operations.

Inflation could negatively impact our business and our profitability.

Significant or prolonged inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and executive and other employee compensation expense, and negatively impacting the demand for banking products and services. Additionally, inflation may lead to a decrease in client purchasing power and negatively affect the need or demand for loans or deposit accounts. If significant inflation continues, our business could also be negatively affected by, among other things, increased loan default and losses. If we experienced such effects of inflation, our results of operations could suffer.

ESG risks could adversely affect our reputation and shareholder, employee, client and third party relationships.

As a publicly traded company, we face increasing public scrutiny related to ESG activities. If we fail to act responsibly in areas, such as DEI, environmental stewardship, human capital management, support for our local communities, corporate governance, and transparency, or fail to consider ESG factors in our business operations, our reputation may be adversely affected. Furthermore, as a result of the diversity of our clients and business partners, we may face negative publicity because of the identity of our clients or business partners and the public’s view of those entities. Additionally, we may face pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth. If we, or our clients or business partners, become the subject of such negative publicity, our ability to attract and retain clients, employees, and business partners, may be negatively impacted, which could affect our results of operation or growth prospects.

Additionally, investors and shareholder advocates are increasing their emphasis on how corporations address ESG issues in their business strategies when making investment decisions and shareholder voting decisions recommendations.

An economic downturn could have a material adverse effect on our capital, financial condition, results of operations, and future growth.

We monitor market conditions and economic factors throughout, and beyond, our geographic markets. If economic conditions were to worsen nationally, regionally, or locally, we could experience a decline in credit quality and loan and deposit demand. Such declines could negatively affect our business and have a material adverse effect on our capital, financial condition, results of operations, and future growth. In addition, international economic and political uncertainty could impact the U.S. financial markets by potentially suppressing stock prices, including ours, and adding to overall

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market volatility, which could adversely affect our business. The effects of any economic downturn on our business could continue for many years after the downturn is considered to have ended.

We may incur losses if asset values decline, including due to changes in interest rates and prepayment speeds.

We have a large portfolio of financial instruments, including loans and loan commitments, debt securities, and certain other assets and liabilities that we measure at fair value that are subject to valuation and impairment assessments. We determine these values based on applicable accounting guidance. For financial instruments measured at fair value, this requires us to base fair value on exit price and to maximize the use of observable inputs and minimize the use of unobservable inputs in fair value measurements. The fair values of financial instruments include adjustments for market liquidity, credit quality, and other transaction-specific factors, if appropriate. Gains or losses on these instruments can have a direct impact on our results of operations. Increases in interest rates or changes in spreads may adversely impact the fair value of loans or debt securities and, accordingly, for debt securities classified as available for sale, may adversely affect accumulated other comprehensive income and, thus, capital levels. These market factors also may adversely impact the value of debt securities we hold to meet regulatory liquidity requirements. Decreases in interest rates may increase prepayments of certain assets, and, therefore, may adversely affect net interest income.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

Share Buyback Program. On January 26, 2021, the Company’s Board of Directors authorized a stock repurchase program for the repurchase of up to $100,000 per calendar quarter of the company’s issued and outstanding common stock. On November 30, 2021, the Company announced that its Board of Directors amended its stock repurchase program to allow the Company to repurchase up to $450,000 of the Company’s issued and outstanding common stock per quarter. The changes to the program were implemented immediately and will continue until the earlier of the date an aggregate of $1,000,000 of common stock has been repurchased or October 1, 2022, or termination of the program by the Board of Directors. All common shares repurchased in the program will be retired and held as unissued shares available for use and reissuance for purposes as and when determined by the Board.

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended June 30, 2022.


Period	Number of Shares (1)	Average Price Paid Per Share		Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
April 1-30, 2022	—	$	—	—	$	911,472
May 1-31, 2022	—	—		—	$	911,472
June 1-30, 2022	—	—		—	$	911,472
Total	—	$	—	—
(1) Reflects the repurchase of shares on Nasdaq, and their subsequent retirement, pursuant to the repurchase program.

Under applicable state law, Florida corporations are not permitted to retain treasury stock. As such, the price paid for the repurchased shares is recorded to common stock. As of June 30, 2022, the total shares repurchased in the amount of $88,528 were redeemed since the share buyback program was implemented. The repurchase shares remain authorized, unissued shares.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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ITEM 6. EXHIBITS

(a)Exhibits.


Exhibit Number						Exhibit Name
3.1						Amended and Restated Articles of Incorporation
3.2						Bylaws
3.3						Amendment to Bylaws, dated August 22, 2019
4.1						Form of common stock certificate
4.2						Form of Series A Preferred Stock certificate
4.3						Form of warrant certificate
4.4						Warrant Agreement with Continental Stock Transfer & Trust Company, dated November 14, 2019
4.5						Form of Series B Convertible Preferred Stock certificate
4.6						Amendment to Warrant Agreement, dated as of July 6, 2021
31.1						Principal Executive Officer’s Certification required by Rule 13(a)-14(a) - filed herewith
31.2						Principal Financial Officer’s Certification required by Rule 13(a)-14(a) - filed herewith
32.1						Principal Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith
32.2						Principal Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith
101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022, formatted in iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



BAYFIRST FINANCIAL CORP.

Date:			August 12, 2022

By:			/s/ Anthony N. Leo
			Anthony N. Leo
			Chief Executive Officer (principal executive officer)

Date:			August 12, 2022

By:			/s/ Robin L. Oliver
			Robin L. Oliver
			Chief Financial Officer and Chief Operating Officer (principal financial officer)