BAFN 10-Q Quarterly Report June 30, 2023 | Alphaminr
BayFirst Financial Corp.
ALPHAMINR

BAFN 10-Q Quarter ended June 30, 2023

Balance Sheet
Cash Flow
Income Statement
Debt
bafn-20230630
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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, 2023
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 o Accelerated filer o
Non-accelerated filer x Smaller reporting company x
Emerging growth company x
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o No ☒
The registrant had outstanding 4,103,834 shares of common stock as of August 7, 2023.


BayFirst Financial Corp.
Table of Contents
Page
Item 1A.
Item 4.

1

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.
ACL: Allowance for Credit Losses FDIA: Federal Deposit Insurance Act
AFS: Available for Sale FDIC: Federal Deposit Insurance Corporation
AIO: Architecture, Infrastructure, and Operations FFIEC: Federal Financial Institutions Examination Council
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
HFI: Held for Investment
BOLI: Bank Owned Life Insurance HTM: Held to Maturity
BSA: Bank Secrecy Act of 1970 IRA: Individual Retirement Account
CAA: Consolidated Appropriations Act JOBS Act: Jumpstart Our Business Startups Act of 2012
CARES Act: Coronavirus Aid, Relief, and Economic Security Act LGD: Loss Given Default
CBLR: Community Bank Leverage Ratio LHFS: Loans Held for Sale
CDARS: Certificate of Deposit Account Registry Services MMDA: Money Market Deposit Account
CECL: Current Expected Credit Losses NOW: Negotiable Order of Withdrawal
CEO: Chief Executive Officer NSPP: Non-Qualified Stock Purchase Plan
CET1: Common Equity Tier 1 Capital
OCC: Office of the Comptroller of the Currency
CFPB: Consumer Financial Protection Bureau 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 PD: Probability of Default
DEI: Diversity, Equity, and Inclusion PPP: Paycheck Protection Program
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 PPPLF: Paycheck Protection Program Liquidity Facility
DRIP: Dividend Reinvestment Plan QIB: Qualified Institutional Buyer
EGC: Emerging Growth Company ROU: Right of Use
EPS: Earnings per Share SBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Incentive Plan SEC: U.S. Securities and Exchange Commission
ESG: Environmental, Social, and Governance SOFR: Secured Overnight Financing Rate
ESOP: Employee Stock Ownership Plan U.S.: United States
ESPP: Employee Stock Purchase Plan USDA: United States Department of Agriculture
Exchange Act: Securities Exchange Act of 1934 USDA B&I: United States Department of Agriculture Business and Industry
FASB: Financial Accounting Standards Board WARM: Weighted Average Remaining Life
FBCA: Florida Business Corporation Act
2
BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
Part I - Financial Information
Item 1. Financial Statements
June 30, 2023 December 31, 2022
(Unaudited)
ASSETS
Cash and due from banks
$ 4,593 $ 3,649
Interest-bearing deposits in banks
99,114 62,397
Cash and cash equivalents
103,707 66,046
Time deposits in banks
4,881 4,881
Investment securities available for sale, at fair value (amortized cost: $ 45,713 and $ 47,374 at June 30, 2023 and December 31, 2022, respectively)
41,343 42,349
Investment securities held to maturity, at amortized cost, net of allowance for credit losses of $ 19 and $ 0 (fair value: $ 2,222 and $ 4,755 at June 30, 2023 and December 31, 2022, respectively)
2,483 5,002
Nonmarketable equity securities
5,332 4,037
Government guaranteed loans held for sale 1,247 —
Government guaranteed loans held for investment, at fair value
52,165 27,078
Loans held for investment, at amortized cost, net of allowance for credit losses of $ 12,598 and $ 9,046
771,941 692,528
Accrued interest receivable
5,929 4,452
Premises and equipment, net
40,052 35,440
Loan servicing rights
12,820 10,906
Deferred income tax asset
925 980
Right-of-use operating lease assets
2,804 3,177
Bank owned life insurance
25,469 25,159
Other assets
15,850 15,649
Assets from discontinued operations 451 1,211
Total assets
$ 1,087,399 $ 938,895
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits
$ 101,081 $ 93,235
Interest-bearing transaction accounts
253,112 202,656
Savings and money market deposits
401,941 363,053
Time deposits
188,648 136,126
Total deposits
944,782 795,070
FRB and FHLB borrowings 30,000 25,000
Subordinated debentures
5,945 5,992
Notes payable
2,617 2,844
Accrued interest payable
572 704
Operating lease liabilities
3,018 3,538
Accrued expenses and other liabilities
8,461 12,205
Liabilities from discontinued operations 939 1,658
Total liabilities
996,334 847,011
3
BAYFIRST FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS CONTINUED
(Dollars in thousands, except per share data)
June 30, 2023 December 31, 2022
(Unaudited)
Shareholders’ equity:
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at June 30, 2023 and December 31, 2022; 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, 2023 and December 31, 2022; 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, 4,103,834 and 4,042,474 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
54,384 53,023
Accumulated other comprehensive loss, net
( 3,239 ) ( 3,724 )
Unearned compensation
( 1,386 ) ( 178 )
Retained earnings
32,022 33,479
Total shareholders’ equity
91,065 91,884
Total liabilities and shareholders’ equity
$ 1,087,399 $ 938,895
See accompanying notes.
4
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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,
2023 2022 2023 2022
Interest income:
Loans, including fees
$ 16,372 $ 7,344 $ 29,443 $ 14,162
Interest-bearing deposits in banks and other
1,420 415 2,600 600
Total interest income
17,792 7,759 32,043 14,762
Interest expense:
Deposits
7,098 1,060 12,021 2,277
Borrowings
586 112 861 229
Total interest expense
7,684 1,172 12,882 2,506
Net interest income
10,108 6,587 19,161 12,256
Provision for credit losses
2,765 250 4,707 ( 2,150 )
Net interest income after provision for credit losses
7,343 6,337 14,454 14,406
Noninterest income:
Loan servicing income, net
649 433 1,389 888
Gain on sale of government guaranteed loans, net 6,028 3,848 10,437 8,469
Service charges and fees
379 322 758 604
Government guaranteed loans fair value gain
2,904 2,708 6,478 2,511
Other noninterest income
977 366 1,323 870
Total noninterest income
10,937 7,677 20,385 13,342
Noninterest expense:
Salaries and benefits
7,780 6,870 15,615 14,419
Bonus, commissions, and incentives
1,305 573 2,109 950
Occupancy and equipment
1,183 973 2,346 1,940
Data processing
1,316 1,084 2,663 2,239
Marketing and business development
1,102 749 1,767 1,438
Professional services
874 979 1,771 2,133
Loan origination and collection
1,221 748 2,716 1,418
Employee recruiting and development
556 532 1,124 1,135
Regulatory assessments
232 120 331 189
Other noninterest expense
833 1,062 1,372 1,700
Total noninterest expense
16,402 13,690 31,814 27,561
Income from continuing operations before income taxes
1,878 324 3,025 187
Income tax expense (benefit) from continuing operations
461 ( 68 ) 741 ( 95 )
Net income from continuing operations 1,417 392 2,284 282
Loss from discontinued operations before income taxes ( 43 ) ( 897 ) ( 213 ) ( 733 )
Income tax benefit from discontinued operations ( 11 ) ( 223 ) ( 53 ) ( 182 )
Net loss from discontinued operations ( 32 ) ( 674 ) ( 160 ) ( 551 )
Net income (loss)
1,385 ( 282 ) 2,124 ( 269 )
Preferred stock dividends
208 208 416 416
Net income available to (loss attributable to) common shareholders
$ 1,177 $ ( 490 ) $ 1,708 $ ( 685 )
5
BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) CONTINUED
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Basic earnings (loss) per common share:
Continuing operations $ 0.30 $ 0.05 $ 0.46 $ ( 0.03 )
Discontinued operations ( 0.01 ) ( 0.17 ) ( 0.04 ) ( 0.14 )
Total basic earnings (loss) per common share
$ 0.29 $ ( 0.12 ) $ 0.42 $ ( 0.17 )
Diluted earnings (loss) per common share:
Continuing operations $ 0.30 $ 0.05 $ 0.46 $ ( 0.03 )
Discontinued operations ( 0.01 ) ( 0.17 ) ( 0.04 ) ( 0.14 )
Total diluted earnings (loss) per common share
$ 0.29 $ ( 0.12 ) $ 0.42 $ ( 0.17 )
See accompanying notes.
6
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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,
2023 2022 2023 2022
Net income (loss)
$ 1,385 $ ( 282 ) $ 2,124 $ ( 269 )
Net unrealized gains (losses) on investment securities available for sale
( 77 ) ( 1,525 ) 655 ( 2,902 )
Deferred income tax (expense) benefit
20 409 ( 170 ) 748
Other comprehensive income (loss), net
( 57 ) ( 1,116 ) 485 ( 2,154 )
Comprehensive income (loss)
$ 1,328 $ ( 1,398 ) $ 2,609 $ ( 2,423 )
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
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, 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 — — — — — 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 4,018,699 $ 6,161 $ 3,123 $ 52,432 $ ( 2,574 ) $ ( 467 ) $ 34,620 $ 93,295
Balance at April 1, 2023
6,395 3,210 4,098,805 $ 6,161 $ 3,123 $ 54,003 $ ( 3,182 ) $ ( 940 ) $ 31,174 $ 90,339
Net income
— — — — — — — — 1,385 1,385
Issuance of common stock under:
Non-qualified stock purchase plan
— — 5,864 — — 102 — — — 102
Repurchase of common stock — — ( 750 ) — — ( 10 ) — — — ( 10 )
Unearned ESOP shares allocation — — — — — — — ( 329 ) — ( 329 )
Reclassification of unearned ESOP shares allocation — — — — — 315 — ( 315 ) — —
Stock-based awards - common stock:
Restricted stock expense, net of tax impact
— — ( 85 ) — — ( 50 ) — 198 — 148
Stock option expense
— — — — — 24 — — — 24
Other comprehensive loss, net
— — — — — — ( 57 ) — — ( 57 )
Dividends declared on:
Preferred stock
— — — — — — — — ( 208 ) ( 208 )
Common stock ($ 0.08 per share)
— — — — — — — — ( 329 ) ( 329 )
Balance at June 30, 2023
6,395 3,210 4,103,834 $ 6,161 $ 3,123 $ 54,384 $ ( 3,239 ) $ ( 1,386 ) $ 32,022 $ 91,065

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
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, 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 — — 401 — — 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 ($ 0.160 per share)
— — — — — — — — ( 642 ) ( 642 )
Balance at June 30, 2022
6,395 3,210 4,018,699 $ 6,161 $ 3,123 $ 52,432 $ ( 2,574 ) $ ( 467 ) $ 34,620 $ 93,295
Balance at January 1, 2023
6,395 3,210 4,042,474 $ 6,161 $ 3,123 $ 53,023 $ ( 3,724 ) $ ( 178 ) $ 33,479 $ 91,884
Net income
— — — — — — — — 2,124 2,124
Impact of ASC 326 Adoption — — — — — — — — ( 2,508 ) ( 2,508 )
Issuance of common stock under:
Non-qualified stock purchase plan
— — 10,844 — — 185 — — — 185
Dividend reinvestment plan
— — 4,953 — — 84 — — — 84
Repurchase of common stock — — ( 750 ) — — ( 10 ) — — — ( 10 )
Exercise of stock options, net — — 3,787 — — — — — — —
Unearned ESOP shares allocation — — — — — — — ( 329 ) — ( 329 )
Reclassification of unearned ESOP shares allocation — — — — — 315 — ( 315 ) — —
Stock-based awards - common stock:
Restricted stock expense, net of tax impact
— — 42,526 — — 729 — ( 564 ) — 165
Stock option expense
— — — — — 58 — — — 58
Other comprehensive income, net
— — — — — — 485 — — 485
Dividends declared on:
Preferred stock
— — — — — — — — ( 416 ) ( 416 )
Common stock ($ 0.16 per share)
— — — — — — — — ( 657 ) ( 657 )
Balance at June 30, 2023
6,395 3,210 4,103,834 $ 6,161 $ 3,123 $ 54,384 $ ( 3,239 ) $ ( 1,386 ) $ 32,022 $ 91,065

See accompanying notes.
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
(Dollars in thousands)
Six Months Ended June 30,
2023 2022
Cash flows from operating activities:
Net income from continuing operations $ 2,284 $ 282
Net loss from discontinued operations ( 160 ) ( 551 )
Net income (loss)
2,124 ( 269 )
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of fixed assets 1,127 809
Net securities premium amortization 41 40
Amortization of debt issuance costs 3 4
Amortization of premium (discount) on loans purchased, net 107 30
Provision for credit losses 4,707 ( 2,150 )
Accretion of discount on unguaranteed loans
( 1,794 ) ( 891 )
Deferred tax expense 717 ( 143 )
Origination of government guaranteed loans held for sale
( 2,421 ) ( 1,445 )
Proceeds from sales of government guaranteed loans held for sale
208,921 132,635
Net gains on sales of government guaranteed loans
( 10,437 ) ( 8,469 )
Change in fair value of government guaranteed loans held for investment, at fair value
( 6,478 ) ( 2,511 )
Amortization of loan servicing rights
1,933 1,470
Non-qualified stock purchase plan expense
14 45
Stock based compensation expense
223 368
Income from bank owned life insurance
( 310 ) ( 303 )
Changes in:
Accrued interest receivable
( 1,477 ) 360
Other assets
170 397
Accrued interest payable
( 132 ) ( 295 )
Other liabilities
( 4,598 ) ( 1,990 )
Net cash provided by operating activities of continuing operations 192,600 118,243
Net cash provided by (used in) operating activities of discontinued operations ( 119 ) 35,366
Net cash provided by operating activities 192,481 153,609
Cash flows from investing activities:
Purchase of investment securities available for sale
— ( 20,326 )
Principal payments on investment securities available for sale
1,620 1,494
Purchase of investment securities held to maturity
— ( 3,568 )
Principal payments on investment securities held to maturity
— 54
Call of investment securities held to maturity 2,500 —
Net purchase of nonmarketable equity securities
( 1,295 ) ( 447 )
Purchase of time deposits in banks — ( 2,500 )
Purchase of government guaranteed and consumer loans ( 99,551 ) ( 45,850 )
Loan (originations) and payments, net
( 205,633 ) ( 134,336 )
Purchase of premises and equipment
( 5,739 ) ( 2,776 )
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BAYFIRST FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
(Dollars in thousands)
Six Months Ended June 30,
2023 2022
Net cash used in investing activities ( 308,098 ) ( 208,255 )
Cash flows from financing activities:
Net change in deposits
149,712 43,721
Net increase in short-term borrowings 5,000 40,000
Payments on notes payable
( 227 ) ( 227 )
Net repayments of PPP Liquidity Facility borrowings
— ( 69,654 )
Repayment of subordinated debt
( 50 ) —
Proceeds from issuance of common stock for benefit plans, net
255 122
Common share buyback - redeemed stock ( 10 ) ( 49 )
Unearned ESOP shares ( 329 ) —
Dividends paid on common stock
( 657 ) ( 642 )
Dividends paid on preferred stock
( 416 ) ( 416 )
Net cash provided by financing activities
153,278 12,855
Net change in cash and cash equivalents
37,661 ( 41,791 )
Cash and cash equivalents, beginning of period
66,046 109,727
Cash and cash equivalents, end of period
$ 103,707 $ 67,936
Supplemental cash flow information
Interest paid
$ 13,014 $ 2,801
Income taxes paid
2 169
Supplemental noncash disclosures
Impact to retained earnings from adoption of ASC 326, net of tax 2,508 —
Net change in unrealized holding losses on investment securities available for sale, net of tax effect 485 ( 2,154 )
Transfer of available for sale debt securities to held to maturity securities at fair value — 1,500
Transfer of government guaranteed loans held for investment to loans held for sale 201,157 124,084
Transfer of loans held for investment to OREO — 53
See accompanying notes.
11
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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, 2022 has been derived from the audited consolidated financial statements of BayFirst Financial Corp. for that period.
The Company currently operates one business segment. In the third quarter of 2022, the Company discontinued the Bank’s nationwide residential mortgage loan segment. The operations of this segment are reported as discontinued operations.
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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2022 in the Company’s Annual Report filed on Form 10-K as well as changes to accounting policies which are described below. 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.
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 ACL, government guaranteed loan servicing rights, and fair value of government guaranteed loans.
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. The Company has elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements they file in the future for as long as the Company remains 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, 2023. Although the ultimate outcome of all claims and lawsuits outstanding as of June 30, 2023 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.
Adoption of New Accounting Standards :
On January 1, 2023, the Company adopted ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) along with its amendments, which replaces the incurred loss impairment methodology in past standards with the CECL methodology and requires consideration of a broader range of information to determine credit loss estimates. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data) (Unaudited)
securities and purchased financial assets with credit deterioration. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 and after are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $ 2,508 , net of tax, comprised of a $ 3,107 pretax increase in the ACL for loans and $ 18 for HTM securities combined with a $ 213 pretax increase in reserve on unfunded commitments, as of January 1, 2023 for the cumulative effect of adopting ASC 326.
The impact of the January 1, 2023 adoption is summarized in the table below:
January 1, 2023 December 31, 2022
Allowance for credit losses As Reported Under Pre-ASC 326 Impact of
ASC 326 Adoption ASC 326 Adoption
Assets
Investment securities HTM - corporate bonds $ 18 $ — $ 18
Loans HFI, at amortized cost
Real estate - residential 2,210 731 1,479
Real estate - commercial 1,569 956 613
Real estate - construction and land 309 28 281
Commercial and industrial 7,298 6,182 1,116
Consumer and other 767 1,090 ( 323 )
Unallocated — 59 ( 59 )
Loans HFI, at amortized cost total 12,153 9,046 3,107
Liabilities
Allowance for credit loss for unfunded commitments 724 511 213
Total $ 12,877 $ 9,557 $ 3,320
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. The amendments in this Update became effective for the Company on January 1, 2023 for all interim and annual periods. The adoption of the provisions in this Update are applied prospectively and have resulted in additional disclosures concerning modifications of loans to borrowers experiencing financial difficulty, as well as disaggregated disclosure of charge-offs on loans. Please also see Note 5 – Allowance for Credit Losses for added disclosure concerning modifications of loans to borrowers experiencing financial difficulty, as well as current period gross charge-offs on financing receivables by year of origination and class of financing receivable.
Allowance for Credit Losses-Investment Securities :
The ACL on held-to-maturity securities is a contra-asset valuation determined in accordance with ASC 326, which is deducted from the securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net amount expected to be collected. The allowance is measured on a pooled basis for securities with similar risk characteristics using historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts. Securities that are determined to be uncollectible are written off against the allowance.
For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. Under either of these scenarios above, the security's amortized cost is written down to fair value through a charge to previously recognized allowances or earnings, as applicable. For impaired securities that do not meet these conditions, we assess whether the decline in fair value was due to credit loss or other factors. This assessment considers,
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data) (Unaudited)
among other things: 1) the extent to which the fair value is less than amortized cost, 2) the financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss component. Any impairment due to non-credit-related factors that has not been recorded through an ACL is recognized in other comprehensive income (loss). The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.
The ACL on investment securities HTM is a contra-asset valuation that is deducted from the carrying amount of investment securities HTM to present the net amount expected to be collected. Investment securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Consolidated Statements of Income in provision for credit losses. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and consider historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these investment securities are issued by a U.S.government-sponsored entity and have an implicit or explicit government guarantee; therefore, no ACL has been recorded for these investment securities. With regard to corporate bonds HTM, we consider the issuer’s bond rating or the average expected default frequency of the similar investment securities based on company size and industry for those investment securities that are not rated. Historical loss rates associated with investment securities having similar grades as those in our portfolio have been insignificant.
Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in accrued interest receivable on the Consolidated Balance Sheets. Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest. We do not record an ACL for accrued interest receivable on investment securities, as the amounts are written-off when the investment is placed on non-accrual status. There were no non-accrual investment securities in any of the periods presented in the consolidated financial statements.
Allowance for Credit Losses - Loans Held for Investment and Unfunded Commitments :
The ACL is a valuation account that is deducted from the amortized cost basis of loans to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the fair value option. Loans are charged-off against the ACL when management believes the uncollectibility of a loan balance is confirmed.
The Company’s ACL on loans is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in unemployment rates. The ACL on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. The ACL on unfunded commitments is a liability account included in other liabilities. Management estimates these allowances quarterly.
The ACL is measured on a pooled basis when similar risk characteristics are present in the portfolio. The Company has identified portfolio segments based on loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes, with separate consideration for the government guaranteed loans. The ACL model utilizes a PD/LGD methodology to measure the expected credit losses on government guaranteed loans and a WARM methodology for the remaining loans. The PD/LGD method estimates losses by utilizing estimated PD, LGD, and individual loan level exposure at default. The WARM model contemplates expected losses at a pool-level, utilizing historical loss information. Portions of government guaranteed loans have a government guarantee for credit losses, therefore, no ACL has been recorded for those loan balances. In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. These qualitative adjustments include: changes in lending policies, procedures, and strategies; changes in nature and volume of portfolio; staff experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; trends in underlying collateral value; external factors such as competition, legal, regulatory; changes in quality of the loan review system; and economic conditions. Additionally, the Company uses reasonable and supportable forecasts utilizing data from the Federal Open Market Committee’s median forecasts of change in national GDP and of national unemployment.
14
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data) (Unaudited)
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan agreement.
Individually evaluated loans are evaluated for impairment and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral.
Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a modification will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date by the Company.
Past due status of loans is determined based on contractual terms. Commercial and residential loans are placed in nonaccrual status and interest accrual is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is impaired. Other consumer and personal loans continue to accrue interest and are typically charged off no later than 120 days past due.
When interest accrual is discontinued, all unpaid accrued interest is reversed. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although management believes that the processes in place for assessing the appropriate level of the ACL are robust, such policies and procedures have limitations, including judgment errors in management’s risk analysis, and may not prevent unexpected losses in the future. Moreover, the CECL methodology may create more volatility in the level of our ACL from quarter to quarter as changes in the level of ACL will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality. These factors could have a material adverse effect on the Company’s business, financial condition and results of operations.
NOTE 2 – DISCONTINUED OPERATIONS
During the third quarter of 2022, the Company discontinued the Bank’s nationwide residential mortgage loan production operations. The decision was based on a number of strategic priorities and other factors, including the precipitous decline in mortgage volumes and the uncertain outlook for mortgage lending over future periods. As a result of these actions, the Company classified the operations of the residential mortgage lending division as discontinued under ASC 205-20. The Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows present discontinued operations for the current period and retrospectively for prior periods.
The following is a summary of the assets and liabilities of the discontinued operations of the residential mortgage lending division at June 30, 2023 and December 31, 2022:
June 30, 2023 December 31, 2022
Assets
Loans held for sale, at fair value $ — $ 449
Loan servicing rights — 201
Right-of-use operating lease asset 451 559
Accrued interest receivable — 2
Total assets $ 451 $ 1,211
Liabilities
Operating lease liability $ 939 $ 1,189
Other liabilities — 469
Total liabilities $ 939 $ 1,658
15
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data) (Unaudited)
The following presents operating results of the discontinued operations of the residential mortgage lending division for the three and six months ended June 30, 2023 and June 30, 2022:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Interest income $ — $ 867 $ 1 $ 1,604
Noninterest income ( 2 ) 10,221 ( 2 ) 23,424
Total net revenue ( 2 ) 11,088 ( 1 ) 25,028
Noninterest expense 41 11,985 212 25,761
Loss from discontinued operations before income taxes ( 43 ) ( 897 ) ( 213 ) ( 733 )
Income tax benefit ( 11 ) ( 223 ) ( 53 ) ( 182 )
Net loss from discontinued operations $ ( 32 ) $ ( 674 ) $ ( 160 ) $ ( 551 )
NOTE 3 – 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, 2023 and December 31, 2022 as well as the ACL for investment securities held to maturity at June 30, 2023 are summarized as follows:
June 30, 2023 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
Investment securities available for sale:
Asset-backed securities
$ 9,143 $ — $ ( 243 ) $ 8,900
Mortgage-backed securities:
U.S. Government-sponsored enterprises
3,985 — ( 671 ) 3,314
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
21,250 — ( 3,460 ) 17,790
Corporate bonds 11,335 14 ( 10 ) 11,339
Total investment securities available for sale
$ 45,713 $ 14 $ ( 4,384 ) $ 41,343
June 30, 2023 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value 		ACL
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$ 2 $ — $ — $ 2 $ —
Corporate bonds 2,500 — ( 280 ) 2,220 19
Total investment securities held to maturity
$ 2,502 $ — $ ( 280 ) $ 2,222 $ 19
.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
December 31, 2022 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
Investment securities available for sale:
Asset-backed securities
$ 9,873 $ — $ ( 268 ) $ 9,605
Mortgage-backed securities:
U.S. Government-sponsored enterprises
4,133 — ( 693 ) 3,440
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
22,031 — ( 3,811 ) 18,220
Corporate bonds 11,337 — ( 253 ) 11,084
Total investment securities available for sale
$ 47,374 $ — $ ( 5,025 ) $ 42,349

December 31, 2022 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$ 2 $ — $ — $ 2
Corporate bonds 5,000 — ( 247 ) 4,753
Total investment securities held to maturity
$ 5,002 $ — $ ( 247 ) $ 4,755
The amortized cost and fair value of investment securities as of June 30, 2023 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 $ 11,335 $ 11,339 $ 1,500 $ 1,390
Five to ten years — — 1,000 830
Beyond ten years 34,378 30,004 2 2
Total $ 45,713 $ 41,343 $ 2,502 $ 2,222
No ACL for investment securities AFS was needed at June 30, 2023. Accrued interest receivable on securities AFS is excluded from the estimate of credit losses and is included in accrued interest receivable in the Consolidated Balance Sheets.
As of June 30, 2023, there were no past due principal and interest payments associated with the HTM securities. There was an ACL of $ 19 on corporate bonds HTM based on applying the long-term historical credit loss rate for similarly rated securities.
The following table presents the activity in the ACL for investment securities HTM by major security type for the three and six months ended June 30, 2023:
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
For the Three Months Ended
For the Six Months Ended
Corporate Bonds June 30, 2023
Balance at beginning of period $ 18 $ —
Impact of adopting ASC 326 — 18
Provision for credit losses 1 1
Investment securities charge-offs/recoveries — —
Investment securities recoveries — —
Balance at end of period $ 19 $ 19
The following table summarizes investment securities with unrealized losses at June 30, 2023 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, 2023 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Number of Securities
Investment securities available for sale:
Asset-backed securities $ — $ — $ 8,900 $ ( 243 ) $ 8,900 $ ( 243 ) 3
Mortgage-backed securities:
U.S. Government-sponsored enterprises — — 3,314 ( 671 ) 3,314 ( 671 ) 2
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises — — 15,685 ( 3,460 ) 15,685 ( 3,460 ) 7
Corporate bonds — — 2,450 ( 10 ) 2,450 ( 10 ) 1
Total investment securities available for sale $ — $ — $ 30,349 $ ( 4,384 ) $ 30,349 $ ( 4,384 ) 13
Investment securities held to maturity:
Corporate bonds $ 2,220 $ ( 280 ) $ — $ — $ 2,220 $ ( 280 ) 3
Total investment securities held to maturity $ 2,220 $ ( 280 ) $ — $ — $ 2,220 $ ( 280 ) 3
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table summarizes investment securities with unrealized losses at December 31, 2022 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, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Number of Securities
Investment securities available for sale:
Asset-backed securities $ 2,156 $ ( 103 ) $ 7,449 $ ( 165 ) $ 9,605 $ ( 268 ) 3
Mortgage-backed securities:
U.S. Government-sponsored enterprises — — 3,440 ( 693 ) 3,440 ( 693 ) 2
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises 4,188 ( 383 ) 14,103 ( 3,428 ) 18,291 ( 3,811 ) 7
Corporate bonds 11,085 ( 253 ) — — 11,085 ( 253 ) 5
Total investment securities available for sale $ 17,429 $ ( 739 ) $ 24,992 $ ( 4,286 ) $ 42,421 $ ( 5,025 ) 17
Investment securities held to maturity:
Corporate bonds $ 4,982 $ ( 247 ) $ — $ — $ 4,982 $ ( 247 ) 4
Total investment securities held to maturity $ 4,982 $ ( 247 ) $ — $ — $ 4,982 $ ( 247 ) 4
No investment securities were pledged as of June 30, 2023 or December 31, 2022, and there were no sales of investment securities during the three and six months ended June 30, 2023 or during the year ended December 31, 2022.
NOTE 4 – LOANS
Loans held for investment, at amortized cost, at June 30, 2023 and December 31, 2022 were as follows:
June 30,
2023 		December 31,
2022
Real estate:
Residential
$ 235,339 $ 202,329
Commercial
272,200 231,281
Construction and land
15,575 9,320
Commercial and industrial
198,639 194,643
Commercial and industrial - PPP
15,808 19,293
Consumer and other
38,103 37,288
Loans held for investment, at amortized cost, gross
775,664 694,154
Deferred loan costs, net
11,506 10,740
Discount on government guaranteed loans sold (1)
( 5,937 ) ( 5,621 )
Premium on loans purchased, net
3,306 2,301
Allowance for credit losses
( 12,598 ) ( 9,046 )
Loans held for investment, at amortized cost
$ 771,941 $ 692,528
(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.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 5 - ALLOWANCE FOR CREDIT LOSSES
On January 1, 2023, the Company adopted ASU 2016-13, or CECL, using the modified retrospective method for all of its loans measured at amortized cost. With the adoption of CECL, the Company elected to exclude accrued interest receivable from the amortized cost basis of loans.
The following schedules present the activity in the ACL by loan segment for the three and six months ended June 30, 2023 and June 30, 2022:
Three Months Ended Real Estate - Residential Real Estate - Commercial Real Estate - Construction and Land Commercial and Industrial Consumer and Other Unallocated Total
June 30, 2023
Beginning Balance $ 2,358 $ 1,695 $ 254 $ 7,216 $ 685 $ — $ 12,208
Charge-offs — — — ( 1,710 ) ( 674 ) — ( 2,384 )
Recoveries — — — 72 59 — 131
Provision 184 194 105 1,433 727 — 2,643
Ending Balance $ 2,542 $ 1,889 $ 359 $ 7,011 $ 797 $ — $ 12,598
June 30, 2022
Beginning Balance $ 668 $ 1,519 $ 124 $ 7,320 $ 429 $ 110 $ 10,170
Charge-offs — ( 53 ) — ( 939 ) ( 26 ) — ( 1,018 )
Recoveries — 53 — 107 2 — 162
Provision ( 79 ) ( 386 ) ( 86 ) 276 633 ( 108 ) 250
Ending Balance $ 589 $ 1,133 $ 38 $ 6,764 $ 1,038 $ 2 $ 9,564
Real Estate - Residential Real Estate - Commercial Real Estate - Construction and Land Commercial and Industrial Consumer and Other Unallocated Total
Six Months Ended
June 30, 2023
Beginning Balance $ 731 $ 956 $ 28 $ 6,182 $ 1,090 $ 59 $ 9,046
Impact of adopting ASC 326 1,479 613 281 1,116 ( 323 ) ( 59 ) 3,107
Charge-offs — — — ( 3,118 ) ( 1,339 ) — ( 4,457 )
Recoveries — 2 — 189 126 — 317
Provision 332 318 50 2,642 1,243 — 4,585
Ending Balance $ 2,542 $ 1,889 $ 359 $ 7,011 $ 797 $ — $ 12,598
June 30, 2022
Beginning Balance $ 1,437 $ 2,349 $ 241 $ 9,202 $ 154 $ 69 $ 13,452
Charge-offs — ( 53 ) — ( 1,970 ) ( 41 ) — ( 2,064 )
Recoveries — 61 — 260 5 — 326
Provision ( 848 ) ( 1,224 ) ( 203 ) ( 728 ) 920 ( 67 ) ( 2,150 )
Ending Balance $ 589 $ 1,133 $ 38 $ 6,764 $ 1,038 $ 2 $ 9,564
On January 1, 2023 the Company adopted CECL which significantly changed the credit losses estimation model for loans. The ACL represents management’s best estimate of future lifetime expected losses on its held for investment loan portfolio. The Company calculates its ACL by estimating expected credit losses on a collective basis for loans that share similar risk characteristics. Loans that do not share similar risk characteristics with other loans are evaluated for credit
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
losses on an individual basis. The Company uses a combination of modeled and non-modeled approaches that incorporates current and future economic conditions to estimate lifetime expected losses on a collective basis.
The Company’s ACL model utilizes a PD/LGD methodology to measure the expected credit losses on government guaranteed loans and a WARM methodology for the remaining loans. The PD/LGD method estimates losses by utilizing estimated PD, LGD, and individual loan level exposure at default. The WARM model contemplates expected losses at a pool-level, utilizing historical loss information. Portions of government guaranteed loans have a government guarantee for credit losses, therefore, no ACL has been recorded for those loan balances. In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. These qualitative adjustments include: changes in lending policies, procedures, and strategies; changes in nature and volume of portfolio; staff experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; trends in underlying collateral value; external factors such as competition, legal, regulatory; changes in quality of the loan review system; and economic conditions. In addition to this, the Company uses reasonable and supportable forecasts utilizing data from the Federal Open Market Committee’s median forecasts of change in national GDP and of national unemployment. The FOMC’s forecast for the remainder of the calendar year is used in conjunction with the most recent 4 quarters of historical data from FRED (Federal Reserve Economic Data) to determine changes in certain qualitative factors used in calculating loss rates.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan agreement.
Individually evaluated loans are evaluated for impairment and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral.
See Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ACL methodology.
The Company maintains a separate ACL for its off-balance sheet unfunded loan commitments. The ACL on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. As of June 30, 2023 and December 31, 2022, the ACL for unfunded commitments recorded in other liabilities was $ 844 and $ 511 , respectively.
The following table presents the activity in the ACL for unfunded commitments for the three and six months ended June 30, 2023:
For the Three Months Ended
For the Six Months Ended
June 30, 2023
Balance at beginning of period $ 798 $ 511
Impact of adopting ASC 326 — 213
Provision for credit losses 46 120
Unfunded commitments charge-offs — —
Unfunded commitments recoveries — —
Balance at end of period $ 844 $ 844
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days still on accrual by loan segment at June 30, 2023 and December 31, 2022. In the following tables, the recorded investment does not include the government guaranteed balance.
June 30, 2023 Nonaccrual with no ACL Nonaccrual with ACL Loans Past Due Over
89 Days Still Accruing
Real estate - residential
$ — $ 2,740 $ 320
Real estate - commercial
— 679 —
Commercial and industrial
— 2,597 —
Consumer and other
— — 254
Total
$ — $ 6,016 $ 574
December 31, 2022 Nonaccrual Loans Past Due Over
89 Days Still Accruing
Real estate - commercial
$ 1,563 $ —
Commercial and industrial
1,854 —
Consumer and other — 254
Total
$ 3,417 $ 254
A financial asset is considered collateral dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraised value. The following table presents the amortized cost basis of individually analyzed collateral dependent loans by loan portfolio segment as of June 30, 2023:

Type of Collateral ACL
Business Assets
Commercial and industrial $ 1,500 $ 206

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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table presents the aging of the recorded investment in past due gross loans HFI at amortized cost at June 30, 2023 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
$ 1,635 $ 3,061 $ 4,696 $ 230,643 $ 235,339
Real estate - commercial
763 639 1,402 270,798 272,200
Real estate - construction and land
— — — 15,575 15,575
Commercial and industrial
3,692 2,123 5,815 192,824 198,639
Commercial and industrial - PPP
— — — 15,808 15,808
Consumer and other
828 254 1,082 37,021 38,103
Total
$ 6,918 $ 6,077 $ 12,995 $ 762,669 $ 775,664
(1) $ 17,805 of balances 30-89 days past due and $ 2,404 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guarantee. Of those loans, $ 13,406 of commercial and industrial PPP loans were delinquent as of June 30, 2023.
The following table presents the aging of the recorded investment in past due gross loans HFI at amortized cost at December 31, 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
$ 719 $ — $ 719 $ 201,610 $ 202,329
Real estate - commercial
586 639 1,225 230,056 231,281
Real estate - construction and land
— — — 9,320 9,320
Commercial and industrial
2,157 1,760 3,917 190,726 194,643
Commercial and industrial - PPP
— — — 19,293 19,293
Consumer and other
669 254 923 36,365 37,288
Total
$ 4,131 $ 2,653 $ 6,784 $ 687,370 $ 694,154
(1) $ 1,904 of balances 30-89 days past due and $ 4,288 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guarantee, and $ 1,302 of commercial and industrial PPP loans were 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.
Modifications to Borrowers Experiencing Financial Difficulty
For the three and six months ended June 30, 2023 , there were no loan modifications to borrowers experiencing financial difficulty and no loan modifications that subsequently defaulted during the period.
Troubled Debt Restructurings
At December 31, 2022, the Company had no loans classified as a troubled debt restructuring. See Note 1 for additional discussion on TDRs.
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:
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Table of Contents
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Pass – Loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Special Mention – These credits have potential weaknesses that may, if not checked or corrected, weaken the asset, or inadequately protect the Company’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a “Substandard” classification.
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 liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

24
Table of Contents
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The table below sets forth credit exposure for the commercial loan portfolio disaggregated by loan segment based on internally assigned risk ratings at June 30, 2023:
Revolving Revolving
Loans Loans
Term Loans Amortized Cost Basis by Origination Year Amortized Converted
2023 2022 2021 Prior Cost Basis to Term Total
Real estate - commercial
Risk Rating
Pass $ 60,328 $ 82,544 $ 54,004 $ 70,184 $ 4,461 $ — $ 271,521
Special mention — — — — — — —
Substandard — — 74 605 — — 679
Doubtful — — — — — — —
Total real estate - commercial loans $ 60,328 $ 82,544 $ 54,078 $ 70,789 $ 4,461 $ — $ 272,200
Current period gross write offs $ — $ — $ — $ — $ — $ — $ —
Real estate - construction and land
Risk Rating
Pass $ 1,848 $ 9,609 $ 3,741 $ 377 $ — $ — $ 15,575
Special mention — — — — — — —
Substandard — — — — — — —
Doubtful — — — — — — —
Total real estate - construction and land loans $ 1,848 $ 9,609 $ 3,741 $ 377 $ — $ — $ 15,575
Current period gross write offs $ — $ — $ — $ — $ — $ — $ —
Commercial and industrial
Risk Rating
Pass $ 48,019 $ 51,654 $ 17,892 $ 68,110 $ 9,366 $ — $ 195,041
Special mention — — — 1,003 — — 1,003
Substandard — 591 14 1,953 — — 2,558
Doubtful — — — — 37 — 37
Total commercial and industrial loans $ 48,019 $ 52,245 $ 17,906 $ 71,066 $ 9,403 $ — $ 198,639
Current period gross write offs $ — $ 477 $ 120 $ 2,521 $ — $ — $ 3,118
Commercial and industrial - PPP
Risk Rating
Pass $ — $ 9 $ 222 $ 15,566 $ — $ — $ 15,797
Special mention — — — 11 — — 11
Substandard — — — — — — —
Doubtful — — — — — — —
Total commercial and industrial - PPP loans $ — $ 9 $ 222 $ 15,577 $ — $ — $ 15,808
Current period gross write offs $ — $ — $ — $ — $ — $ — $ —

25
Table of Contents
BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The Company considers the performance of the loan portfolio to determine its impact on the ACL. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan by payment activity. The following table presents the amortized costs at June 30, 2023 in residential and consumer loans based on payment activity.
Revolving Revolving
Loans Loans
Term Loans Amortized Cost Basis by Origination Year Amortized Converted
2023 2022 2021 Prior Cost Basis to Term Total
Real estate - residential
Payment Performance
Performing $ 19,349 $ 86,736 $ 24,878 $ 21,055 $ 80,261 $ — $ 232,279
Nonperforming — 424 132 2,184 320 — 3,060
Total real estate - residential loans $ 19,349 $ 87,160 $ 25,010 $ 23,239 $ 80,581 $ — $ 235,339
Current period gross write offs $ — $ — $ — $ — $ — $ — $ —
Consumer and other
Payment Performance
Performing $ 9,454 $ 26,224 $ 1,347 $ 248 $ 576 $ — $ 37,849
Nonperforming — 228 26 — — — 254
Total consumer and other loans $ 9,454 $ 26,452 $ 1,373 $ 248 $ 576 $ — $ 38,103
Current period gross write offs $ 9 $ 1,318 $ 7 $ 5 $ — $ — $ 1,339
The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2022:
Pass Special
Mention
Substandard
Doubtful
Total
Loans
Real estate - residential
$ 202,275 $ — $ 54 $ — $ 202,329
Real estate - commercial
227,367 2,351 1,563 — 231,281
Real estate - construction and land
9,320 — — — 9,320
Commercial and industrial
192,226 100 2,317 — 194,643
Commercial and industrial - PPP
19,293 — — — 19,293
Consumer and other
37,288 — — — 37,288
Loans held for investment, at amortized cost $ 687,769 $ 2,451 $ 3,934 $ — $ 694,154
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the ALLL using incurred losses methodology. The following tables are disclosures related to loans in prior periods.
The following table presents the balance in the ALLL and the recorded investment in loans by loan segment and based on impairment method at December 31, 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
$ — $ 74 $ — $ 499 $ — $ — $ — $ 573
Collectively evaluated for impairment
731 882 28 5,683 — 1,090 59 8,473
Total
$ 731 $ 956 $ 28 $ 6,182 $ — $ 1,090 $ 59 $ 9,046
Loans:
Individually evaluated for impairment
$ — $ 1,563 $ — $ 1,854 $ — $ — $ — $ 3,417
Collectively evaluated for impairment
202,329 229,718 9,320 192,789 19,293 37,288 — 690,737
Total
$ 202,329 $ 231,281 $ 9,320 $ 194,643 $ 19,293 $ 37,288 $ — $ 694,154
For purposes of the impaired loans by loan segment table above, the unpaid principal balance and recorded investment do not include the government guaranteed balance. The government guaranteed balances of impaired loans at December 31, 2022 were $ 6,797 .
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 Credit
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
NOTE 6 – 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.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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 had elected to account for residential loans held for sale at fair value. The fair value of loans held for sale was 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 fair value gain (loss) on loans held for sale is included in discontinued operations in the Consolidated Statements of Income.
Government Guaranteed Loans Held for Investment, at Fair Value : The Company has elected to account for certain government guaranteed 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 consisted of best efforts forward sales contracts. The fair value of best efforts forward sales contracts was measured using market observable inputs that were adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).
Individually Evaluated Loans : Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the ACL. Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation.
Government Guaranteed Loan Servicing Rights : The fair value of government guaranteed 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 government guaranteed loan servicing rights carried at fair value at June 30, 2023 and December 31, 2022. On a quarterly basis, government guaranteed loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the cost. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value.
Assets measured at fair value on a recurring basis at June 30, 2023 are summarized below. There were no liabilities carried at fair value on a recurring basis at June 30, 2023.
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
$ — $ 41,343 $ — $ 41,343
Government guaranteed loans held for investment, at fair value
— — 52,165 52,165
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Assets measured at fair value on a recurring basis at December 31, 2022 are summarized below. There were no liabilities carried at fair value on a recurring basis at December 31, 2022.
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
$ — $ 42,349 $ — $ 42,349
Residential loans held for sale (1)
449 — — 449
Government guaranteed loans held for investment, at fair value
— — 27,078 27,078
(1) Classified as assets from discontinued operations or liabilities from discontinued operations on the consolidated balance sheet.
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 are classified as assets from discontinued operations on the consolidated balance sheet. The Company believes that the fair value is the best indicator of the resolution of these loans. Interest income from discontinued operations is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. There were no residential loans held for sale as of June 30, 2023. None of the loans were 90 days or more past due or on nonaccrual at December 31, 2022.
The aggregate fair value, contractual balance, and gain at December 31, 2022 for residential loans held for sale from discontinued operations were as follows:
December 31, 2022
Aggregate fair value
$ 449
Contractual balance
434
Gain
$ 15
The total amount of interest income from discontinued operations and losses from changes in fair value included in earnings for the six months ended June 30, 2023 and June 30, 2022 for residential loans held for sale from discontinued operations were as follows:
Six Months Ended June 30,
2023 2022
Interest income
$ 1 $ 1,604
Change in fair value
( 15 ) ( 2,039 )
Total loss
$ ( 14 ) $ ( 435 )
The Company also elected the fair value option for certain of its government guaranteed loans held for investment 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 government guaranteed loans on a loan-by-loan basis. The portion of these loans guaranteed by the government 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.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The aggregate fair value, contractual balance, and gain at June 30, 2023 and December 31, 2022 for government guaranteed loans held for investment, at fair value, were as follows:
June 30, 2023 December 31, 2022
Aggregate fair value
$ 52,165 $ 27,078
Contractual balance
49,640 26,201
Gain
$ 2,525 $ 877
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, 2023 and June 30, 2022 for government guaranteed loans held for investment, at fair value, were as follows:
Six Months Ended June 30,
2023 2022
Interest income $ 2,071 $ 382
Change in fair value 6,478 2,511
Total gain (loss)
$ 8,549 $ 2,893
Changes in fair value for government guaranteed loans held for investment, at fair value, were included in Government guaranteed loans fair value gain on the Consolidated Statements of Income.
The table below presents a reconciliation of government guaranteed 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, 2023 and June 30, 2022:
Six Months Ended June 30,
2023 2022
Balance of government guaranteed loans held for investment at fair value, beginning of period
$ 27,078 $ 9,614
New government guaranteed originations at fair value 84,151 41,745
Loans sold ( 59,694 ) —
Principal payments
( 5,695 ) ( 1,661 )
Charge-offs
( 153 ) —
Total gains during the period
6,478 2,511
Balance of government guaranteed loans held for investment at fair value, end of period
$ 52,165 $ 52,209
The Company’s valuation of government guaranteed 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.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of government guaranteed 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, 2023 and December 31, 2022:
Fair Value Valuation
Technique 		Unobservable Inputs Range (Weighted Average)
June 30, 2023
Government guaranteed loans held for investment,
$ 52,165 Discounted Discount rate
7.27 %- 10.77 % ( 8.55 %)
at fair value
cash flow Conditional prepayment rate
8.29 %- 9.85 % ( 8.74 %)
December 31, 2022
Government guaranteed loans held for investment,
$ 27,078 Discounted Discount rate
5.50 %- 10.00 % ( 8.00 %)
at fair value
cash flow Conditional prepayment rate
8.66 %- 10.15 % ( 8.95 %)
Best efforts forward sales contracts (1)
$ 0 Quoted market prices Pull-through expectations
100.00 % ( 100.00 %)
The significant unobservable inputs impacting the fair value measurement of government guaranteed 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.
Assets measured at fair value on a nonrecurring basis at June 30, 2023 are summarized below:
Fair Value Valuation Technique(s) Significant
Unobservable
Input(s) 		Discount % Amount
Individually evaluated loans
$ 1,294 Discounted appraisals, estimated net realizable value of collateral Collateral discounts 10 %
Assets measured at fair value on a nonrecurring basis at December 31, 2022 are summarized below:
Fair Value Valuation Technique(s) Significant
Unobservable
Input(s) 		Discount % Amount
Impaired loans
$ 1,355 Discounted appraisals, estimated net realizable value of collateral Collateral discounts
10 %
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments not carried at fair value, at June 30, 2023 and December 31, 2022 are as follows:
June 30, 2023 December 31, 2022
Level Carrying Value Fair Value Carrying Value Fair Value
Assets:
Cash and cash equivalents
1 $ 103,707 $ 103,707 $ 66,046 $ 66,046
Time deposits in banks
2 4,881 4,761 4,881 4,714
Investment securities held to maturity
2 2,483 2,222 5,002 4,755
Nonmarketable equity securities, at cost
2 5,332 5,332 5,537 5,537
Government guaranteed loans held for sale 2 1,247 1,376 — —
Loans held for investment, at amortized cost
3 771,941 760,773 692,528 687,365
Accrued interest receivable (1)
2 5,929 5,929 4,454 4,454
Government guaranteed loan servicing rights
3 12,820 14,337 10,906 13,051
Mortgage loan servicing rights (2)
3 — — 201 201
Liabilities:
Noninterest-bearing deposits
2 $ 101,081 $ 101,081 $ 93,235 $ 93,235
Interest-bearing transaction accounts
2 253,112 253,112 202,656 202,656
Savings and money market deposits
2 401,941 401,941 363,053 363,053
Time deposits
2 188,648 177,265 136,126 134,564
FRB and FHLB borrowings 2 30,000 30,000 25,000 25,000
Subordinated debentures
2 5,945 4,880 5,992 5,270
Notes payable
2 2,617 2,596 2,844 2,843
Accrued interest payable
2 572 572 704 704
(1) Includes balances of $ 2 classified as assets from discontinued operations on the consolidated balance sheet as of December 31, 2022.
(2) Classified as assets from discontinued operations on the consolidated balance sheet.
NOTE 7 – GOVERNMENT GUARANTEED LOAN SERVICING ACTIVITIES
At June 30, 2023 and December 31, 2022, the principal balance of government guaranteed loans, excluding PPP loans, retained by the Company was $ 364,030 and $ 300,219 , respectively, of which $ 182,868 and $ 139,587 represented the guaranteed portion of the loans. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of government guaranteed loans serviced for others requiring recognition of a servicing asset were $ 758,090 and $ 660,600 at June 30, 2023 and December 31, 2022, respectively.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Activity for government guaranteed loan servicing rights for the three and six months ended June 30, 2023 and June 30, 2022 follows:
Three Months Ended Six Months Ended
June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022
Beginning of period
$ 11,625 $ 7,399 $ 10,906 $ 6,407
Additions
2,250 1,134 3,847 2,823
Amortization
( 1,055 ) ( 773 ) ( 1,933 ) ( 1,470 )
End of period
$ 12,820 $ 7,760 $ 12,820 $ 7,760
The fair value of government guaranteed loan servicing rights was $ 14,337 and $ 13,051 at June 30, 2023 and December 31, 2022, respectively. Fair value was determined using a weighted average discount rate of 15.12 % and a weighted average prepayment speed of 9.73 % at June 30, 2023. Fair value was determined using a weighted average discount rate of 14.88 % and a weighted average prepayment speed of 9.93 % at December 31, 2022. The government guaranteed 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 government guaranteed loans, excluding sale of PPP loans, for the three and six months ended June 30, 2023 and June 30, 2022:
Three Months Ended Six Months Ended
June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022
Gain on sale of guaranteed government guaranteed loans
$ 4,590 $ 2,714 $ 7,402 $ 6,038
Loss on sale of unguaranteed government guaranteed loans ( 797 ) — ( 797 ) ( 348 )
Costs recognized on sale of government guaranteed loans
( 15 ) — ( 15 ) ( 44 )
Fair value of servicing rights created
2,250 1,134 3,847 2,823
Gain on sale of government guaranteed loans, net
$ 6,028 $ 3,848 $ 10,437 $ 8,469
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2023 and December 31, 2022 were as follows:
June 30, 2023 December 31, 2022
Land and improvements $ 5,352 $ 4,488
Building and improvements 17,979 13,131
Leasehold improvements 3,300 2,833
Furniture, fixtures, and equipment 7,535 6,520
Fixed assets in process 12,938 14,716
Total premises and equipment 47,104 41,688
Accumulated depreciation and amortization ( 7,052 ) ( 6,248 )
Net premises and equipment (1)
$ 40,052 $ 35,440
(1) There were no premises and equipment assets classified as assets from discontinued operations as of June 30, 2023 or December 31, 2022.
Depreciation and amortization expense including expense from discontinued operations was $ 593 and $ 500 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $ 1,127 and $ 995 for the six months ended June 30, 2023 and June 30, 2022, respectively .
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 9 – LEASES
For the three and six months ended June 30, 2023 and June 30, 2022, 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,
2023 2022 2023 2022
Operating lease cost
$ 246 $ 385 $ 588 $ 772
Short-term lease cost
20 137 20 273
Total lease cost, net (1)
$ 266 $ 522 $ 608 $ 1,045
(1) Includes lease costs reported as discontinued operations of $ 27 and $ 292 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $ 87 and $ 615 for the six months ended June 30, 2023 and June 30, 2022, respectively.
Three Months Ended
June 30, 		Six Months Ended
June 30,
2023 2022 2023 2022
Cash flows related to operating lease liabilities
$ 303 $ 388 $ 684 $ 768
Right-of-use assets obtained in exchange for new operating lease liabilities
— — — —
At June 30, 2023, the weighted average discount rate of operating leases was 2.31 % and the weighted average remaining life of operating leases was 3.47 years.
The future minimum lease payments for operating leases, subsequent to June 30, 2023, as recorded on the balance sheet, are summarized as follows:
2023 $ 630
2024 1,237
2025 1,029
2026 832
2027 413
Thereafter —
Total undiscounted lease payments
$ 4,141
Less: imputed interest
( 184 )
Net lease liabilities
$ 3,957
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. 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 2022, the Company closed leased mortgage lending offices as part of its discontinuance of the nationwide residential lending operation. 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)
Based on the analysis, the Company concluded that the ROU assets for these offices were impaired and had a remaining ROU carrying value of $ 451 as of June 30, 2023. The analyses resulted in no additional impairment for the six months ended June 30, 2023.
NOTE 10 – OTHER BORROWINGS
At June 30, 2023, the Company had a short-term FHLB borrowing of $ 30,000 at 5.07 % and no borrowings from the FRB. There were $ 25,000 of borrowings at 4.50 % from the FRB and no borrowings from the FHLB at December 31, 2022.
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 be ar interest at variable rates set by the FHLB. Any a dvances that the bank were to obtain would be secured by a blanket lien on $ 288,430 of real estate-related loans as of June 30, 2023. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to
$ 140,121 from the FHLB at June 30, 2023.
In addition, the Bank has a secured line of credit with the Federal Reserve Bank of Atlanta which was secured by $ 49,948 of commercial loans as of June 30, 2023. 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 $ 33,961 from the FRB at June 30, 2023.
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. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $ 5,945 and $ 5,992 at June 30, 2023 and December 31, 2022, respectively.
The Company has a term note with quarterly principal and interest payments with interest at Prime ( 8.25 % at June 30, 2023). The note matures on March 10, 2029 and the balance of the note was $ 2,617 and $ 2,844 at June 30, 2023 and December 31, 2022, respectively. The note is secured by 100 % of the stock of the Bank and requires the Company to comply with certain loan covenants during the term of the note. As of June 30, 2023, the Company was in compliance with all financial debt covenants.
NOTE 11 – STOCK-BASED COMPENSATION
The Equity Plan governs the Company’s restricted stock grants and stock options. Total compensation cost charged against income related to the Equity Plan was $ 172 and $ 244 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $ 319 and $ 423 for the six months ended June 30, 2023 and June 30, 2022, respectively.
Restricted Stock
The Company awarded shares of restricted common stock to certain employees and non-employee directors 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.
A summary of changes in the Company’s nonvested restricted shares for the six months ended June 30, 2023 follows:
Shares Weighted-Average
Grant-Date
Fair Value, per share
Nonvested at January 1, 2023
22,000 $ 21.52
Granted
46,175 18.30
Vested
( 13,935 ) 20.01
Forfeited
( 1,705 ) ( 19.37 )
Nonvested at June 30, 2023
52,535 $ 18.75
At June 30, 2023, there was $ 742 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 2.8 years. The total fair value of shares vested during the six months ended June 30, 2023 and June 30, 2022 was $ 252 and $ 88 , respectively.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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
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 Nasdaq on the date of the grant, 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, 2023 follows:
Shares Weighted
Average
Exercise
Price 		Weighted
Average
Remaining
Contractual
Term (in years) 		Aggregate
Intrinsic
Value
Outstanding at January 1, 2023
405,688 $ 15.67
Exercised
( 30,375 ) 15.71
Forfeited
( 7,575 ) 15.52
Outstanding at June 30, 2023
367,738 $ 15.67 6.20 $ —
Vested and exercisable at June 30, 2023
323,037 $ 15.78 6.06 $ —
There were no options granted during the three and six months ended June 30, 2023 or June 30, 2022. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $ 107 at June 30, 2023. This cost is expected to be recognized over a weighted average period of 1.67 years.
NOTE 12 – OTHER BENEFIT PLANS
The Company has established a stock dividend reinvestment and 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, 2023, 4,953 shares were purchased at an average price of $ 17.01 . During the six months ended June 30, 2022, 5,251 shares were purchased at an average price of $ 15.85 .
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, 2023 and June 30, 2022 was $ 14 and $ 45 , 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. The liability recorded for the Agreement was $ 343 and $ 336 at June 30, 2023 and December 31, 2022, respectively, and the related expense for the six months ended June 30, 2023 and June 30, 2022 was $ 8 and $ 38 , 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 $ 457 and $ 999 for the six months ended June 30, 2023 and June 30, 2022, respectively. The discontinuation of the nationwide residential lending division during 2022 triggered a partial plan termination and all affected employees were 100 % vested in the Company’s contributions into the plan.
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. In 2021, the ESOP trust acquired 14,154 shares of the Company’s stock. As this is a leveraged plan, unallocated shares are distributed to employees annually. There were 11,323 unallocated shares with a fair value of $ 153 remaining as of June 30, 2023. The ESOP trust’s outstanding loan, which is secured by the unallocated shares, bears a fixed interest rate equal to Prime Rate as of the note date, which was 3.25 %. The note requires an annual payment of principal and interest through December 2026.
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The Company’s ESOP, which is internally leveraged, does not report the loan receivable extended to the ESOP as an asset and does not report the ESOP debt due to the Company.
The discontinuation of the nationwide residential lending division during 2022 triggered a partial plan termination and all affected employees were 100 % vested in the Company’s contributions into the ESOP. As a result of the exit of affected participants from the plan, the plan acquired 23,383 shares of the Company’s stock. As this is a leveraged plan, unallocated shares are distributed to employees annually. There were 23,383 unallocated shares with a fair value of $ 316 remaining as of June 30, 2023. The ESOP trust was issued a five year loan bearing an interest rate equal to Prime Rate as of the note date, which was 8.25 % and adjusts annually as of the first day of each succeeding calendar year to reflect the Prime Rate as of the first business day of the calendar year. The note requires an annual payment of principal and interest through December 2027. The Company’s ESOP, which is internally leveraged, does not report the loan receivable extended to the ESOP as an asset and does not report the ESOP debt due to the Company.
The Board did not approve any contributions in 2022. There was no expense related to the ESOP for the six months ended June 30, 2023. Expense related to the ESOP was $ 0 for the six months ended June 30, 2022.
NOTE 13 - INCOME TAXES
The Company and its subsidiaries are subject to U.S. federal income tax. In the ordinary course of business, they are routinely subject to audit by the Internal Revenue Service. Currently, the Company is subject to examination by taxing authorities for the 2020 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, 2023 and June 30, 2022 and actual income tax expense (benefit) is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Federal tax based on federal corporate statutory rate $ 394 $ 68 $ 635 $ 39
State tax, net of federal effect 55 — 92 ( 1 )
Changes resulting from:
BOLI income ( 6 ) ( 6 ) ( 12 ) ( 12 )
Other, net 18 ( 130 ) 26 ( 121 )
Income tax expense (benefit) from continuing operations 461 ( 68 ) 741 ( 95 )
Income tax (benefit) expense from discontinued operations ( 11 ) ( 223 ) ( 53 ) ( 182 )
Total income tax expense (benefit) $ 450 $ ( 291 ) $ 688 $ ( 277 )
NOTE 14 – 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, 2023 and December 31, 2022.
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, 2023 and December 31, 2022, 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.
In February 2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
included a transition option that allows banking organizations to phase in, over a three year period, the day one adverse effects of adoption on their regulatory capital ratios (three year transition option). In connection with the adoption of ASC 326 on January 1, 2021, the Company recognized an after-tax cumulative effect reduction to retained earnings. The Company elected to adopt the three year transition option and the deferral has been applied in capital ratios presented below. Actual and required capital amounts and ratios for the Bank are presented below at June 30, 2023:
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)
$ 109,428 13.60 % $ 64,384 8.00 % $ 80,480 10.00 %
Tier 1 Capital
(to Risk Weighted Assets)
$ 99,348 12.34 % $ 48,288 6.00 % $ 64,384 8.00 %
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
$ 99,348 12.34 % $ 36,216 4.50 % $ 52,312 6.50 %
Tier 1 Capital
(to Average Assets)
$ 99,348 9.36 % $ 42,443 4.00 % $ 53,053 5.00 %
Actual and required capital amounts and ratios for the Bank are presented below at December 31, 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)
$ 108,307 15.00 % $ 57,767 8.00 % $ 72,209 10.00 %
Tier 1 Capital
(to Risk Weighted Assets)
$ 99,269 13.75 % $ 43,325 6.00 % $ 57,767 8.00 %
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
$ 99,269 13.75 % $ 32,494 4.50 % $ 46,936 6.50 %
Tier 1 Capital
(to Average Assets)
$ 99,269 10.79 % $ 36,816 4.00 % $ 46,020 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)
NOTE 15 – MORTGAGE BANKING ACTIVITIES - DISCONTINUED OPERATIONS
The following table presents the components of the residential loan fee income from discontinued operations for the three and six months June 30, 2023 and June 30, 2022:
Three Months Ended
June 30, 		Six Months Ended
June 30,
2023 2022 2023 2022
Net gain realized on sale of residential loans held for sale
$ ( 2 ) $ 4,237 $ 13 $ 13,307
Net change in fair value recognized on residential loans held for sale
— 960 ( 15 ) ( 2,039 )
Net change in fair value recognized on interest rate lock commitments
— 1,064 — ( 268 )
Net change in fair value recognized on mandatory and best efforts forward sales contracts
— 2,629 — 9,574
Mortgage banking fees
— 1,322 — 2,829
Residential loan fee income from discontinued operations
$ ( 2 ) $ 10,212 $ ( 2 ) $ 23,403
Prior to the discontinuance of the nation wide mortgage operations, the Company entered into interest rate lock commitments, which were commitments to originate loans where the interest rate on the loan was determined prior to funding and the clients had locked into that interest rate. The Company then locked in the loan and interest rate with an investor and committed to deliver the loan if settlement occurred (“best efforts”) or committed to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. It was the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments were 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 were considered derivatives.
There were no mortgage banking derivatives outstanding as of June 30, 2023. The following table reflects the amount and fair value of mortgage banking derivatives included in the assets and liabilities from discontinued operations on the Consolidated Balance Sheets at December 31, 2022:
December 31, 2022
Notional
Amount 		Fair
Value
Included in other assets from discontinued operations:
Best efforts forward sales contracts
$ 221 $ —
NOTE 16 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, and letters of credit, 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, 2023 and December 31, 2022 were as follows:
June 30, 2023 December 31, 2022
Unfunded loan commitments
$ 36,804 $ 23,512
Unused lines of credit
164,189 134,366
Standby letters of credit
237 244
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
All unused lines of credit at June 30, 2023 and December 31, 2022 were variable rate lines of credit and the majority of unfunded loan commitments at June 30, 2023 and December 31, 2022 were commitments to fund variable rate loans. Unfunded loan commitments are generally entered into for periods of 90 days or less.
The Company maintains an ACL for its off-balance sheet loan commitments which is calculated by loan type using estimated line utilization rates based on historical usage. Loss rates for outstanding loans is applied to the estimated utilization rates to calculate the ACL for off-balance sheet loan commitments. At June 30, 2023 and December 31, 2022, ACL for off-balance sheet loan commitments totaled $ 844 and $ 511 , respectively.
NOTE 17 – 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, 2023 and June 30, 2022:
Three Months Ended
June 30, 		Six Months Ended
June 30,
2023 2022 2023 2022
Basic:
Income from continuing operations
$ 1,417 $ 392 $ 2,284 $ 282
Loss from discontinued operations
( 32 ) ( 674 ) ( 160 ) ( 551 )
Net income (loss)
1,385 ( 282 ) 2,124 ( 269 )
Less: Preferred stock dividends
208 208 416 416
Net income available to (loss attributable to) common shareholders
$ 1,177 $ ( 490 ) $ 1,708 $ ( 685 )
Weighted average common shares outstanding
4,103,788 4,014,445 4,092,299 4,009,002
Basic earnings (loss) per common share:
Continuing operations
$ 0.30 $ 0.05 $ 0.46 $ ( 0.03 )
Discontinued operations
( 0.01 ) ( 0.17 ) ( 0.04 ) ( 0.14 )
Total
$ 0.29 $ ( 0.12 ) $ 0.42 $ ( 0.17 )
Diluted:
Income from continuing operations $ 1,417 $ 392 $ 2,284 $ 282
Loss from discontinued operations ( 32 ) ( 674 ) ( 160 ) ( 551 )
Net income (loss)
1,385 ( 282 ) 2,124 ( 269 )
Less: Preferred stock dividends
208 208 416 416
Add: Series B preferred stock dividends
64 — — —
Net income available to (loss attributable to) common shareholders
$ 1,241 $ ( 490 ) $ 1,708 $ ( 685 )
Weighted average common shares outstanding for basic earnings per common share
4,103,788 4,014,445 4,092,299 4,009,002
Add: Dilutive effects of conversion of Series B preferred stock to common stock
161,713 — — —
Add: Dilutive effects of assumed exercises of stock options and warrants
— — — —
Average shares and dilutive potential common shares
4,265,501 4,014,445 4,092,299 4,009,002
Diluted earnings (loss) per common share:
Continuing operations
$ 0.30 $ 0.05 $ 0.46 $ ( 0.03 )
Discontinued operations
( 0.01 ) ( 0.17 ) ( 0.04 ) ( 0.14 )
Total
$ 0.29 $ ( 0.12 ) $ 0.42 $ ( 0.17 )
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Diluted income (loss) per share is the same as basic income (loss) per share for the three and six months end June 30, 2022 presented as the effects of potentially dilutive items were anti-dilutive given the Company’s net loss attributable to common shareholders. Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding, plus potential outstanding common stock for the period. Potential outstanding common stock includes stock options and Series B preferred stock, but only to the extent that their inclusion is dilutive.
The following securities outstanding at June 30, 2023 and June 30, 2022 have been excluded from the calculation of weighted average shares outstanding as their effect on the calculation of earnings (loss) per share is antidilutive:

Three Months Ended
June 30, 		Six Months Ended
June 30,
2023 2022 2023 2022
Common stock options
368,955 463,363 378,534 463,363
Convertible Series B preferred stock 0 3,123 3,123 3,123

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is an analysis of the results of operations for the three and six months ended June 30, 2023 and June 30, 2022 and financial condition as of June 30, 2023 and December 31, 2022. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.
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 health crises, global military hostilities, or climate changes, including its effects on the economic environment, its customers and its 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 the Company does 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 the financial condition and results of operations on a consolidated basis. However, because the Company conducts all of its 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 the consolidated financial statements.
As a one-bank holding company, the Company generates most of its revenue from interest on loans and gain-on-sale income derived from the sale of loans into the secondary market. The primary source of funding for its loans is deposits. The Company is dependent on noninterest income, which is derived primarily from net gain on the sales of the guaranteed portion of government guaranteed loans. The largest expenses are interest on those deposits and borrowings, professional fees, and salaries and commissions plus related employee benefits. The Company measures its performance through its net interest income after provision for credit losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
41
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, 2023, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing the consolidated financial statements were the policies related to the ACL, and fair value measurement of investment securities, government guaranteed servicing rights and government guaranteed loans held for investment at fair value, which are discussed more fully below.
Allowance for Credit Losses
The ACL is calculated with the objective of maintaining a reserve sufficient to absorb estimated 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 for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. The Company’s ACL on loans is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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 ACL
Fair Value Measurements
Investments and certain government guaranteed 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, government guaranteed 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. The Company has 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.
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Recent Developments
Appointment of Chief Financial Officer and Chief Accounting Officer. On July 24, 2023, Scott J. McKim was appointed to the position of Executive Vice President and Chief Financial Officer of the Company and the Bank. In that capacity, Mr. McKim will serve as the Company’s Principal Financial Officer. Also effective on July 24, 2023, Rhonda S. Tudor became the Principal Accounting Officer. Robin L. Oliver will continue to serve as Chief Operating Officer of the Company and the Bank.
Third Quarter Common Stock Dividend. On July 25, 2023, BayFirst’s Board of Directors declared a third quarter 2023 cash dividend of $0.08 per common share, payable September 15, 2023 to common shareholders of record as of September 1, 2023. This dividend marks the 29 th 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 the Series A Preferred Stock. The dividend will be payable October 2, 2023 to shareholders of record as of July 17, 2023. 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 the Series B Convertible Preferred Stock. The dividend will be payable October 2, 2023 to shareholders of record as of July 17, 2023. The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock.
New Banking Center. On July 3, 2023, BayFirst opened a 10th banking center on Bee Ridge Road in Sarasota. This is the third banking center location serving the Sarasota-Bradenton market.
Selected Financial Data - Unaudited
As of and for the Three Months Ended
As of and for the Six Months Ended
(Dollars in thousands, except for share data) 6/30/2023 3/31/2023 6/30/2022 6/30/2023 6/30/2022
Income Statement Data:
Net interest income $ 10,108 $ 9,053 $ 6,587 $ 19,161 $ 12,256
Provision for credit losses (1)
2,765 1,942 250 4,707 (2,150)
Noninterest income 10,937 9,448 7,678 20,385 13,342
Noninterest expense 16,402 15,412 13,692 31,814 27,561
Income tax expense (benefit) 461 280 (68) 741 (95)
Net income from continuing operations 1,417 867 391 2,284 282
Net loss from discontinued operations (32) (128) (673) (160) (551)
Net income (loss) 1,385 739 (282) 2,124 (269)
Preferred stock dividends 208 208 208 416 416
Net income available to (loss attributable to) common shareholders $ 1,177 $ 531 $ (490) $ 1,708 $ (685)
Balance Sheet Data:
Average loans held for investment, excluding PPP loans $ 824,460 $ 747,417 $ 561,455 $ 786,223 $ 541,120
Average total assets 1,064,068 969,489 879,868 1,017,039 876,110
Average common shareholders’ equity 80,310 78,835 83,235 79,577 83,611
Total loans held for investment 836,704 792,777 641,737 836,704 641,737
Total loans held for investment, excluding PPP loans 821,016 774,467 610,527 821,016 610,527
Total loans held for investment, excluding government guaranteed loan balances 638,148 596,505 458,624 638,148 458,624
Allowance for credit losses (1)
12,598 12,208 9,564 12,598 9,564
Total assets 1,087,399 1,069,839 921,377 1,087,399 921,377
Common shareholders’ equity 81,460 80,734 83,690 81,460 83,690
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As of and for the Three Months Ended
As of and for the Six Months Ended
(Dollars in thousands, except for share data) 6/30/2023 3/31/2023 6/30/2022 6/30/2023 6/30/2022
Per Share Data:
Basic earnings (loss) per common share $ 0.29 $ 0.13 $ (0.12) $ 0.42 $ (0.17)
Diluted earnings (loss) per common share $ 0.29 $ 0.13 $ (0.12) $ 0.42 $ (0.17)
Dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.16 $ 0.16
Book value per common share $ 19.85 $ 19.70 $ 20.82 $ 19.85 $ 20.82
Tangible book value per common share (2)
$ 19.85 $ 19.70 $ 20.80 $ 19.85 $ 20.80
Performance Ratios:
Return on average assets (3)
0.52 % 0.30 % (0.13) % 0.42 % (0.06) %
Return on average common equity (3)
5.86 % 2.69 % (2.35) % 4.29 % (1.64) %
Net interest margin 4.18 % 4.17 % 3.73 % 4.18 % 3.49 %
Dividend payout ratio 27.89 % 61.48 % (65.54) % 38.34 % (93.64) %
Asset Quality Data:
Net charge-offs (3)
$ 2,253 $ 1,887 $ 856 $ 4,140 $ 1,738
Net charge-offs/average loans held for investment excluding PPP (3)
1.09 % 1.01 % 0.61 % 1.05 % 0.64 %
Nonperforming loans $ 8,606 $ 5,890 $ 10,437 $ 8,606 $ 10,437
Nonperforming loans (excluding government guaranteed balance) $ 6,590 $ 2,095 $ 4,245 $ 6,590 $ 4,245
Nonperforming loans/total loans held for investment 1.03 % 0.74 % 1.63 % 1.03 % 1.63 %
Nonperforming loans (excluding gov’t guaranteed balance)/total loans held for investment 0.79 % 0.26 % 0.66 % 0.79 % 0.66 %
ACL/Total loans held for investment at amortized cost (1)
1.61 % 1.69 % 1.62 % 1.61 % 1.62 %
ACL/Total loans held for investment at amortized cost, excluding PPP loans (1)
1.64 % 1.73 % 1.71 % 1.64 % 1.71 %
Other Data:
Full-time equivalent employees
302 300 485 302 485
Banking centers 9 9 7 9 7
Loan production offices (4)
1 1 19 1 19
(1) Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, credit losses are estimated using the CECL methodology.
(2) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.
(3) Annualized
(4) All out of market nationwide residential loan production offices have been closed.
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. The management team uses these non-GAAP financial measures in its analysis of its performance, and they 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:
44
Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
As of
(Dollars in thousands, except for share data) June 30, 2023 March 31, 2023 June 30, 2022
(Unaudited) (Unaudited) (Unaudited)
Total shareholders’ equity $ 91,065 $ 90,339 $ 93,295
Less: Preferred stock liquidation preference (9,605) (9,605) (9,605)
Total equity available to common shareholders 81,460 80,734 83,690
Less: Goodwill — — (100)
Tangible common shareholders' equity $ 81,460 $ 80,734 $ 83,590
Common shares outstanding 4,103,834 4,098,805 4,019,023
Tangible book value per common share $ 19.85 $ 19.70 $ 20.80
Results of Operations
BayFirst’s operating results depend on its 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. The interest rate spread is affected by regulatory, economic, and competitive factors which influence interest rates, loan demand, and deposit flows. In addition, its operating results can be affected by the level of nonperforming assets, as well as the level of the noninterest income and the noninterest expenses, such as salaries and employee benefits, and occupancy and equipment costs, as well as income taxes.
The Company is dependent on noninterest income, which is derived primarily from net gain on the sales of the guaranteed portion of government guaranteed loans, as well as fair value adjustments for certain loans which management has elected the fair value option. While the Company retains some of its government guaranteed loans on the balance sheet, we may sell both the guaranteed balance of its government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans.
In the second quarter of 2022, the Bank discontinued its primary consumer direct residential mortgage business line. In the third quarter of 2022, management decided to discontinue the nationwide residential lending business. As a result of the discontinuance, the nationwide residential line of business was reclassified as a discontinued operation and reported in the financial statements as such.
Net Income
The Company had net income for the three months ended June 30, 2023 of $1.4 million, or $0.29 per diluted common share, compared to net loss for the three months ended June 30, 2022 of $(0.3) million, or $(0.12) per diluted common share. The increase of $1.7 million was due to increases of $3.5 million in net interest income, an increase of $2.2 million in gain on sale of government guaranteed loans, and a decrease of $0.6 million in the loss on discontinued operations. This was partially offset by an increase of $2.5 million in provision for credit losses and an increase in noninterest expense of $2.7 million.
In the first six months of 2023, net income was $2.1 million, or $0.42 per diluted common share, an increase of $2.4 million from the net loss of $(0.3) million, or $(0.17) per diluted common share, for the first six months of 2022. The increase was primarily the result of higher interest income from continuing operations of $17.3 million, an increase of $2.0 million in gain on sale of government guaranteed loans, and an increase of $4.0 million in government guaranteed loan fair value gains. This was partially offset by an increase of $9.7 million in interest expense on deposits, an increase of $6.9 million in provision for credit losses, and an increase of $4.3 million in noninterest expense.
Net Interest Income
Net interest income from continuing operations was $10.1 million in the three months ended June 30, 2023 , an increase of $3.5 million or 53.5% from $6.6 million in the three months ended June 30, 2022 . The increase was mainly due to the
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increase in loan interest income, including fees, of $9.0 million, partially offset by higher interest expense on deposits of $6.0 million.
Net interest margin including discontinued operations improved to 4.18% for the second quarter of 2023, which represented an increase of 45 basis points over 3.73% for the second quarter of 2022.
Net interest income from continuing operations was $19.2 million for the six months ended 2023, an increase of $6.9 million or 56.3% from $12.3 million for the six months ended 2022. The increase was mainly due to an increase in loan interest income, including fees, of $15.3 million, partially offset by an increase in deposit interest expense of $9.7 million.
Net interest margin including discontinued operations improved to 4.18% for the six months ended 2023, compared to 3.49% for the six months ended 2022. This margin expansion is the result of our asset sensitive position of our balance sheet combined with our ability to grow loans and deposits in the current environment.
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Average Balance Sheet and Analysis of Net Interest Income
The following table sets 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,
2023 2022
(Dollars in thousands) Average  Balance Interest Yield Average  Balance Interest Yield
Interest-earning assets:
Investment securities
$ 44,707 $ 459 4.12 % $ 46,366 $ 229 1.98 %
Loans, excluding PPP (1) (2)
824,460 16,329 7.94 635,170 7,915 5.00
PPP loans
17,890 43 0.96 35,867 296 3.31
Other
82,271 961 4.69 83,199 186 0.90
Total interest-earning assets
969,328 17,792 7.36 800,602 8,626 4.32
Noninterest-earning assets
94,740 79,266
Total assets
$ 1,064,068 $ 879,868
Interest-bearing liabilities:
NOW, MMDA and savings
$ 624,559 $ 5,359 3.44 $ 644,286 $ 974 0.61
Time deposits
183,661 1,739 3.80 26,463 86 1.30
Other borrowings
50,206 586 4.68 11,813 112 3.80
Total interest-bearing liabilities
858,426 7,684 3.59 682,562 1,172 0.69
Demand deposits
103,447 96,530
Noninterest-bearing liabilities
12,280 7,936
Shareholders’ equity
89,915 92,480
Total liabilities and shareholders’ equity
$ 1,064,068 $ 879,508
Net interest income
$ 10,108 $ 7,454
Interest rate spread
3.77 3.63
Net interest margin (3)
4.18 3.73
Ratio of average interest-earning assets to average interest-bearing liabilities
112.92 % 117.29 %
(1) Includes nonaccrual loans.
(2) Includes no residential loans held for sale from discontinued operations as of June 30, 2023 and $73,715 at an average yield of 4.72% of residential loans held for sale from discontinued operations as of June 30, 2022.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.

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For the Six Months Ended June 30,
2023 2022
(Dollars in thousands) Average  Balance Interest Yield Average  Balance Interest Yield
Interest earning-assets:
Investment securities
$ 45,653 $ 933 4.12 % $ 38,550 $ 326 1.71 %
Loans, excluding PPP (1) (2)
786,308 29,354 7.53 619,699 15,027 4.89
PPP loans
18,312 90 0.99 46,901 739 3.18
Other
74,815 1,667 4.49 94,771 274 0.58
Total interest-earning assets
925,088 32,044 6.99 799,921 16,366 4.13
Noninterest-earning assets
91,951 76,189
Total assets
$ 1,017,039 $ 876,110
Interest-bearing liabilities:
NOW, MMDA and savings
$ 613,416 $ 9,208 3.03 $ 626,973 $ 2,060 0.66
Time deposits
162,291 2,813 3.50 32,868 217 1.33
PPPLF advances
— — — 11,428 20 0.35
Other borrowings
37,752 861 4.60 10,529 209 4.00
Total interest-bearing liabilities
813,459 12,882 3.19 681,798 2,506 0.74
Demand deposits
102,131 97,045
Noninterest-bearing liabilities
12,267 4,051
Shareholders’ equity
89,182 93,216
Total liabilities and shareholders’ equity
$ 1,017,039 $ 876,110
Net interest income
$ 19,162 $ 13,860
Interest rate spread
3.80 3.39
Net interest margin (3)
4.18 3.49
Ratio of average interest-earning assets to average interest-bearing liabilities
113.72 % 117.33 %
(1) Includes nonaccrual loans.
(2) Includes $85 at an average yield of 2.02% and $78,579 at an average yield of 4.12% of residential loans held for sale from discontinued operations as of June 30, 2023 and June 30, 2022, respectively.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The table below presents 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.
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(Dollars in thousands) Rate Volume Total
Three Months Ended June 30, 2023 vs. June 30, 2022:
Interest-earning assets:
Investment securities
$ 238 $ (8) $ 230
Loans, excluding PPP
5,588 2,826 8,414
PPP loans
(148) (105) (253)
Other interest-earning assets
777 (2) 775
Total interest-earning assets
6,455 2,711 9,166
Interest-bearing liabilities:
NOW, MMDA and savings
4,416 (31) 4,385
Time deposits
403 1,250 1,653
Other borrowings
31 443 474
Total interest-bearing liabilities
4,850 1,662 6,512
Net change in net interest income
$ 1,605 $ 1,049 $ 2,654
(Dollars in thousands) Rate Volume Total
Six Months Ended June 30, 2023 vs. June 30, 2022:
Interest-earning assets:
Investment securities $ 537 $ 70 $ 607
Loans, excluding PPP (1)
9,562 4,765 14,327
PPP loans
(344) (305) (649)
Other interest-earning assets
1,462 (69) 1,393
Total interest-earning assets
11,217 4,461 15,678
Interest-bearing liabilities:
NOW, MMDA, and savings
7,194 (46) 7,148
Time deposits
758 1,838 2,596
PPPLF advances
— (20) (20)
Other borrowings
36 616 652
Total interest-bearing liabilities
7,988 2,388 10,376
Net change in net interest income
$ 3,229 $ 2,073 $ 5,302
(1) Includes $1 and $1,604 of interest income on residential loans held for sale from discontinued operations as of June 30, 2023 and June 30, 2022, respectively.
Provision for Credit Losses
The provision for credit 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 the Bank conducts, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to its market area, economic forecasts, and other factors that may affect the ability to collect on the loans in its portfolio.
The Company recorded a provision for credit losses on loans in the three months ended June 30, 2023 of $2.8 million. This compared to a provision of $0.3 million under the incurred loss methodology for the three months ended June 30, 2022. During the three months ended June 30, 2023, $2.3 million of net charge offs in loans were recorded compared to $0.9 million during the three months ended June 30, 2022.
T he Company recorded a provision for credit losses for the six months ended June 30, 2023 of $4.7 million compared to a $2.2 million negative provision under the incurred loss methodology for the six months ended June 30, 2022. The increase of $6.9 million in the provision for credit losses expense was primarily due to the loan growth, higher charge-offs, and the Company having reduced its ALLL from the historic high levels reached in 2020 at the onset of the COVID-19 pandemic.
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During the six months ended June 30, 2023, net loan charge offs totaled $4.1 million compared to $1.7 million during the six ended June 30, 2022.
The ACL was $12.6 million at June 30, 2023 and $9.6 million using the incurred losses methodology at June 30, 2022.
Noninterest Income
The following table presents noninterest income from continuing operations for the three and six months ended June 30, 2023 and June 30, 2022.
For the Three Months Ended June 30,
For the Six Months Ended June 30,
(Dollars in thousands) 2023 2022 2023 2022
Noninterest income:
Loan servicing income, net
$ 649 $ 433 $ 1,389 $ 888
Gain on sale of government guaranteed loans, net 6,028 3,848 10,437 8,469
Service charges and fees
379 322 758 604
Government guaranteed loan fair value gain (loss)
2,904 2,708 6,478 2,511
Other noninterest income
977 366 1,323 870
Total noninterest income
$ 10,937 $ 7,677 $ 20,385 $ 13,342
Noninterest income from continuing operations was $10.9 million during the three months ended June 30, 2023, an increase of $3.2 million or 42.5% , from $7.7 million during the three months ended June 30, 2022. The increase was the result of a $2.2 million increase in gain on sale of government guaranteed loans, net.
Noninterest income from continuing operations was $20.4 million for the six months ended June 30, 2023, an increase of $7.1 million or 52.8% from $13.3 million for the six months ended June 30, 2022. The increase was primarily due to higher gains on the sale of government guaranteed loans of $2.0 million and a $4.0 million increase in fair value gains related to held for investment government guaranteed loans.
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Noninterest Expense
The following table presents noninterest expense from continuing operations for the three and six months ended June 30, 2023 and June 30, 2022.
For the Three Months Ended June 30,
For the Six Months Ended June 30,
(Dollars in thousands) 2023 2022 2023 2022
Noninterest expense:
Salaries and benefits
$ 7,780 $ 6,870 $ 15,615 $ 14,419
Bonus, commissions, and incentives
1,305 573 2,109 950
Occupancy and equipment
1,183 973 2,346 1,940
Data processing
1,316 1,084 2,663 2,239
Marketing and business development
1,102 749 1,767 1,438
Professional services
874 979 1,771 2,133
Loan origination and collection
1,221 748 2,716 1,418
Employee recruiting and development
556 532 1,124 1,135
Regulatory assessments
232 120 331 189
Director compensation 150 253 291 336
Liability and fidelity bond insurance 133 120 256 230
ATM and interchange 110 83 206 160
Telecommunication 94 94 185 174
Other noninterest expense
346 512 434 800
Total noninterest expense
$ 16,402 $ 13,690 $ 31,814 $ 27,561
Noninterest expense from continuing operations was $16.4 million durin g the three months ended June 30, 2023, an increase of $2.7 million or 19.8% from $13.7 million during the three months ended June 30, 2022. The increase was primarily due to higher compensation costs of $1.6 million and higher loan origination expense of $0.5 million.
Noninterest expense was $31.8 million during the six months ended June 30, 2023, an increase of $4.3 million or 15.4% from $27.6 million for the six months ended June 30, 2022. The increase was primarily the result of higher compensation costs and loan origination and collection expense.
Discontinued Operations
Net loss on discontinued operations was $32 thousand in the three months ended June 30, 2023, which was a $642 thousand favorable change from net loss of $674 thousand in the three months ended June 30, 2022. The favorable change was primarily due to a decrease in noninterest expense of $11.9 million, partially offset by decreases in residential loan fee income of $10.2 million and interest income of $0.9 million.
Net loss from discontinued operations was $160 thousand for the six months ended 2023, which was a $391 thousand reduction from net loss of $551 thousand for the six months ended 2022. The majority of the discontinued loss in 2022 was recorded in the third quarter of 2022. As such, the discontinued loss for the first six months of 2022 represented more modest restructuring charges and the discontinued loss in the first six months of 2023 represents a modest amount of trailing expenses from the discontinuation.
Income Taxes
Income tax expense from continuing operations was $461 thousand for the three months ended June 30, 2023, an increase of $529 thousand from income tax benefit of $68 thousand for the three months ended June 30, 2022. The increase was primarily due to the increase in pre-tax earnings from continuing operations. Income tax benefit from discontinued operations was $11 thousand for the three months ended June 30, 2023, a change of $212 thousand from income tax benefit of $223 thousand for the three months ended June 30, 2022. The change was primarily due to the decrease in pre-tax earnings from discontinued operations.
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Income tax expense from continuing operations was $741 thousand for the six months ended June 30, 2023, an increase of $836 thousand from income tax benefit $95 thousand for the six months ended June 30, 2022. The increase was primarily due to the increase in pre-tax earnings from continuing operations. Income tax benefit from discontinued operations was $53 thousand for the six months ended June 30, 2023, a change of $129 thousand from income tax benefit of $182 thousand for the six ended June 30, 2022. The change was primarily due to the decrease in pre-tax earnings from discontinued operations.
At June 30, 2023, the Company had $2.7 million of federal net operating loss carryforward and $0.4 million of state net operating loss carryforward. The net operating loss carryforwards do not expire. At June 30, 2022, the Company had $1.7 million of federal net operating loss carryforward and $0.3 million of state net operating loss carryforward.
The effective income tax rate was 24.47% for the six months months ended June 30, 2023 and 50.73% for the six months ended June 30, 2022.
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, 2023 and December 31, 2022.
(Dollars in thousands) June 30, 2023 December 31, 2022
Investment securities available for sale:
Asset-backed securities
$ 8,900 $ 9,605
Mortgage-backed securities:
U.S. Government-sponsored enterprises
3,314 3,440
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
17,790 18,220
Corporate bonds
11,339 11,084
Total investment securities available for sale
$ 41,343 $ 42,349
The net unrealized loss on the investment securities AFS at June 30, 2023, was $4.4 million compared with a net unrealized loss on investment securities AFS of $5.0 million at December 31, 2022. The change in unrealized loss on investment securities AFS from December 31, 2022 to June 30, 2023 was primarily due to the change in the interest rate environment.
The following table presents the amortized cost of the Company's investment securities portfolio classified as held to maturity as of June 30, 2023 and December 31, 2022.
(Dollars in thousands) June 30, 2023 December 31, 2022
Investment securities held to maturity:
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$ 2 $ 2
Corporate bonds
2,500 5,000
Total investment securities held to maturity
$ 2,502 $ 5,002
There was a $19 thousand ACL on the corporate bonds HTM as of June 30, 2023 and no ACL as of December 31, 2022. The net unrealized loss on the investment securities HTM at June 30, 2023, was $280 thousand compared with a net unrealized loss on investment securities HTM of $247 thousand at December 31, 2022.
No investment securities were pledged as of June 30, 2023 or December 31, 2022, and there were no sales of investment securities during the three and six months ended June 30, 2023 or the year ended December 31, 2022.
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The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2023 and December 31, 2022. 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, 2023
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
$ — — % $ — — % $ — — % $ 9,143 6.15 %
Mortgage-backed securities:
U.S. Government-sponsored enterprises
— — — — — — 3,985 1.46
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises — — — — — — 21,250 1.90
Corporate bonds
— — 11,335 5.78 — — — —
Total investment securities available for sale
$ — — % $ 11,335 5.78 % $ — — % $ 34,378 2.98 %
December 31, 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
$ — — % $ — — % $ — — % $ 9,873 5.40 %
Mortgage-backed securities:
U.S. Government-sponsored enterprises
— — — — — — 4,133 1.55
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises — — — — — — 22,031 1.89
Corporate bonds
— — % 9,981 3.70 % 1,356 4.34 % — — %
Total investment securities available for sale
$ — — % $ 9,981 3.70 % $ 1,356 4.34 % $ 36,037 2.81 %
The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2023 and December 31, 2022. 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 receive monthly principal payments, which are not reflected below.
June 30, 2023
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
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$ — — % $ — — % $ — — % $ 2 2.54 %
Corporate bonds
— — 1,500 4.38 1,000 4.38 — —
Total investment securities held to maturity
$ — — % $ 1,500 4.38 % $ 1,000 4.38 % $ 2 2.54 %
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December 31, 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
Mortgage-backed securities:
U.S. Government-sponsored enterprises
$ — — % $ — — % $ — — % $ 2 2.65 %
Corporate bonds
— — % 4,000 5.79 % 1,000 4.38 % — — %
Total investment securities held to maturity
$ — — % $ 4,000 5.79 % $ 1,000 4.38 % $ 2 2.65 %
Loan Portfolio Composition
We offer a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of government guaranteed loans, real estate loans, commercial business loans, residential mortgage, and consumer loans. 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. The Bank has no concentration of credit in any industry that represents 10% or more of its loan portfolio. The following table sets forth the composition of its loan portfolio, including LHFS as of the dates indicated.
June 30, 2023 December 31, 2022
(Dollars in thousands) Amount % of Total Amount % of Total
Residential loans held for sale from discontinued operations
$ — $ 449
Government guaranteed loans, held for sale
$ 1,247 $ —
Government guaranteed loans held for investment, at fair value $ 52,165 $ 27,078
Loans held for investment, at amortized cost:
Residential real estate
$ 235,339 30.3 % $ 202,329 29.1 %
Commercial real estate
272,200 35.1 231,281 33.3
Construction and land
15,575 2.0 9,320 1.3
Commercial and industrial
198,639 25.6 194,643 28.0
Commercial and industrial – PPP
15,808 2.0 19,293 2.8
Consumer and other
38,103 5.0 37,288 5.5
Loans held for investment, at amortized cost, gross
775,664 100.0 % 694,154 100.0 %
Discount on government guaranteed loans sold (5,937) (5,621)
Premium on loans purchased, net
3,306 2,301
Deferred loan costs, net
11,506 10,740
Allowance for credit losses (1)
(12,598) (9,046)
Loans held for investment, at amortized cost, net
$ 771,941 $ 692,528
(1) Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, credit losses are estimated using the CECL methodology.
During the six months ended June 30, 2023, the Bank originated approximately $118.5 million in loans through conventional lending channels and $246.6 million in loans through CreditBench (its government guaranteed lending function). In addition, the Bank sold guaranteed balances of $184.4 million and unguaranteed balances of $10.9 million of government guaranteed loans. The Bank purchased $99.6 million of government guaranteed loans. Of the loans purchased during the year, $58.2 million have already sold or paid off during the year.
During the six months ended June 30, 2022, the Bank originated approximately $143.9 million in loans through conventional lending channels, $137.4 million through CreditBench, and $641.1 million through the Residential Mortgage Lending Division, which is a discontinued operation. Additionally, the Bank sold guaranteed balances of $118.2 million
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and unguaranteed balances of $4.4 million of government guaranteed loans. The Bank purchased $15.0 million of government guaranteed loans and $30.8 million of consumer loans.
Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans at June 30, 2023. 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
$ 2,755 $ 774 $ 13,753 $ 218,523 $ 235,805
Commercial
13,383 1,473 31,680 241,000 287,536
Construction and land
2,366 470 88 12,651 15,575
Commercial and industrial
10,438 18,425 204,835 8,968 242,666
Commercial and industrial - PPP
810 14,878 — — 15,688
Consumer and other
1,574 31,431 6,322 107 39,434
Total loans held for investment
$ 31,326 $ 67,451 $ 256,678 $ 481,249 $ 836,704
The following table shows the loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at June 30, 2023.
(Dollars in thousands)
Fixed
Interest Rate
Adjustable
Interest Rate
Real estate:
Residential
$ 55,732 $ 177,318
Commercial
12,732 261,421
Construction and land
210 12,999
Commercial and industrial
6,363 225,865
Commercial and industrial - PPP
14,878 —
Consumer and other
13,369 24,491
Total loans held for investment
$ 103,284 $ 702,094
Credit Risk
The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential credit losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond its control. The Bank has developed policies and procedures for evaluating the overall quality of its 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 ACL, or that additional increases in the ACL will not be required.
Allowance for Credit Losses. In accordance with changes in generally accepted accounting principles, the Company adopted the new credit loss accounting standard known as CECL on January 1, 2023. At the time of adoption, the ACL for loans increased by $3.1 million to 1.73% of loans, the reserve on unfunded commitments $213 thousand, and an $18 thousand reserve was established for held to maturity investment securities .These one-time increases resulted in an after tax decrease to capital of $2.5 million, with no impact to earnings. Under CECL, the ACL is based on projected credit losses rather than on incurred losses.
The Bank must maintain an adequate ACL based on a comprehensive methodology that assesses the probable losses inherent in its loan portfolio. The Bank maintains an ACL 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
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of loans, collateral value, historical loss experience, size and complexity of individual credits, and economic conditions. In addition to this, the Company uses reasonable and supportable forecasts utilizing data from the Federal Open Market Committee’s median forecasts of change in national GDP and of national unemployment. Provisions for credit losses are provided on both a specific and general basis. Specific allowances are provided for individual loans that do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. General valuation allowances are determined by loan pools with a further evaluation of various quantitative and qualitative factors noted above.
The Bank periodically reviews the assumptions and formulates methodologies by which changes are made to the specific and general valuation ACL 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.
All nonaccrual loans and modifications to loans for borrowers experiencing financial difficulty are reviewed to determine if the loans share the same risk characteristics as the pooled loans. If the loan does not share the same risk characteristics, the loan is evaluated individually for credit losses. Specific allocation of reserves for individually evaluated loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. The Bank reviews the collateral value, cash flow, and tertiary support on each individually evaluated 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.
Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses. Beginning with that date, the credit losses are estimated using the CECL methodology.
Nonperforming Assets . At June 30, 2023, the Company had $6.6 million in nonperforming assets, excluding government guaranteed loan balances, and their ACL represented 1.61% of total loans held for investment at amortized cost. At June 30, 2022, we had $4.3 million in nonperforming assets, excluding government guaranteed loan balances, and their ALLL represented 1.62% of total loans held for investment at amortized cost. Total loans held for investment at June 30, 2023 and June 30, 2022 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ACL as a percentage of loans held for investment at amortized cost, not including government guaranteed loan balances, was 2.04% under CECL at June 30, 2023, compared to 2.14% under the incurred loss method at June 30, 2022.
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,
2023 		June 30,
2022
Nonperforming loans (government guaranteed balances)
$ 2,016 $ 6,192
Nonperforming loans (unguaranteed balances)
6,590 4,245
Total nonperforming loans
8,606 10,437
OREO
3 56
Total nonperforming assets
$ 8,609 $ 10,493
Nonperforming loans as a percentage of total loans held for investment
1.03 % 1.63 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.79 % 0.66 %
Nonperforming assets as a percentage of total assets
0.79 % 1.14 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.61 % 0.46 %
ACL to nonperforming loans
146.39 % 91.64 %
ACL to nonperforming loans (excluding government guaranteed balances)
191.17 % 225.30 %
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The following table sets forth information with respect to activity in the ACL for loans 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,
2023 2022 2023 2022
Allowance at beginning of period
$ 12,208 $ 10,170 $ 9,046 $ 13,452
Impact of adopting ASC 326 — — 3,107 —
Charge-offs:
Commercial real estate
— (53) — (53)
Commercial and industrial
(1,710) (939) (3,118) (1,970)
Consumer and other
(674) (26) (1,339) (41)
Total charge-offs
(2,384) (1,018) (4,457) (2,064)
Recoveries:
Commercial real estate
— 53 2 61
Commercial and industrial
72 107 189 260
Consumer and other
59 2 126 5
Total recoveries
131 162 317 326
Net charge-offs
(2,253) (856) (4,140) (1,738)
Provision for credit losses
2,643 250 4,585 (2,150)
Allowance at end of period
$ 12,598 $ 9,564 $ 12,598 $ 9,564
Net charge-offs to average loans held for investment
1.07 % 0.57 % 1.03 % 0.59 %
Allowance as a percent of total loans held for investment at amortized cost
1.61 % 1.62 % 1.61 % 1.62 %
Allowance as a percent of loans held for investment at amortized cost, not including government guaranteed loans
2.04 % 2.14 % 2.04 % 2.14 %
Allowance as a percent of nonperforming loans
146.39 % 91.64 % 146.39 % 91.64 %
Total loans held for investment
$ 836,704 $ 641,737 $ 836,704 $ 641,737
Average loans held for investment
$ 842,350 $ 597,322 $ 804,535 $ 588,021
Nonperforming loans (including government guaranteed balances)
$ 8,606 $ 10,437 $ 8,606 $ 10,437
Nonperforming loans (excluding government guaranteed balances)
$ 6,590 $ 4,245 $ 6,590 $ 4,245
Guaranteed balance of government guaranteed loans
$ 198,556 $ 183,113 $ 198,556 $ 183,113
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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, 2023 and June 30, 2022.
Three Months Ended June 30, 2023 Three Months Ended June 30, 2022
(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
$ — $ 210,416 — % $ — $ 98,440 — %
Commercial real estate
— 300,314 — — 245,769 —
Commercial and industrial
1,638 278,410 2.35 832 194,580 1.71
Commercial and industrial - PPP
— 17,890 — — 35,867 —
Consumer and other
615 35,320 6.96 24 22,666 0.42
Total loans held for investment
$ 2,253 $ 842,350 1.07 % $ 856 $ 597,322 0.57 %
The following table details net charge-offs to average loans outstanding by loan category for the six months ended June 30, 2023 and June 30, 2022.
Six Months Ended June 30, 2023 Six Months Ended June 30, 2022
(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
$ — $ 200,478 — % $ — $ 87,720 — %
Commercial real estate
(2) 286,716 — (8) 231,152 (0.01)
Commercial and industrial
2,929 263,099 2.23 1,710 208,366 1.64
Commercial and industrial - PPP
— 18,312 — — 46,901 —
Consumer and other
1,213 35,930 6.75 36 13,882 0.52
Total loans held for investment
$ 4,140 $ 804,535 1.03 % $ 1,738 $ 588,021 0.59 %
Asset quality remained stable in the second quarter of 2023. T he Company recorded a provision for credit losses for the six months ended June 30, 2023 of $4.7 million compared to a $2.2 million negative provision under the incurred loss methodology for the six ended June 30, 2022. The increase of $6.9 million in the provision for credit losses expense was primarily due to the loan growth, higher charge-offs, and the Company reduced its ALLL from the historic high levels reached in 2020 at the onset of the pandemic.
Nonperforming assets to total assets, excluding government guaranteed loan balances, were 0.61% as of June 30, 2023, as compared to 0.46% as of June 30, 2022.
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SBA and Other Government Guaranteed Loans
The following table sets forth, for the periods indicated, information regarding the SBA and other government guaranteed lending activity, excluding PPP loans.
(Dollars in thousands)
At and for the Six Months Ended June 30,
Government Guaranteed, Excluding PPP 2023 2022
Number of loans originated
1,239 293
Amount of loans originated
$ 246,617 $ 137,354
Average loan size originated
$ 199 $ 469
Government guaranteed loan balances sold
$ 184,437 $ 118,186
Government unguaranteed loan balances sold
$ 10,937 $ 4,351
Total government guaranteed loans
$ 364,030 $ 290,387
Government guaranteed loan balances
$ 182,868 $ 151,903
Government unguaranteed loan balances
$ 181,162 $ 138,484
Government guaranteed loans serviced for others
$ 758,090 $ 522,050
The Bank makes government guaranteed loans throughout the United States. The following table sets forth, at the dates indicated, information regarding the geographic disbursement of its government guaranteed loan portfolio. The “All Other” category includes states with less than 5% in any period presented.
June 30,
2023 2022
(Dollars in thousands) Amount % of Total Amount % of Total
Florida
$ 134,704 37 % $ 89,065 31 %
California
42,836 12 37,242 13
Texas
22,071 6 18,747 6
Tennessee 27,250 7 16,676 6
All Other
137,169 38 128,657 44
Total government guaranteed loans, excluding PPP loans
$ 364,030 100 % $ 290,387 100 %
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 sourced principally from within its primary service area of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota Counties, Florida. The Bank offers 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. The Bank emphasizes 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, recent cash flows and a survey of rates among competitors.
Brokered deposits . At times, the Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering outside the market of the existing
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deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank’s internal policy limits the use of brokered deposits as a funding source to no more than 15% of total assets. The Company's ability to accept or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well capitalized." At June 30, 2023 and December 31, 2022, the Company had $40.1 million and $0.7 million, respectively, of brokered deposits.
The amount of each of the following categories of deposits, at the dates indicated, are as follows:
(Dollars in thousands) June 30, 2023 December 31, 2022
Noninterest-bearing deposits
$ 101,081 10.7 % $ 93,235 11.6 %
Interest-bearing transaction accounts
253,112 26.8 202,656 22.7
Money market accounts
384,718 40.7 345,200 56.5
Savings
17,223 1.8 17,853 2.2
Subtotal
756,134 80.0 658,944 93.0
Total time deposits
188,648 20.0 136,126 7.0
Total deposits
$ 944,782 100.0 % $ 795,070 100.0 %
At June 30, 2023, the Company held approximately $172.1 million of deposits that exceeded the FDIC insurance limit which was 18% of total deposits.
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, 2023.
(Dollars in thousands)
Three months or less
$ 11,151
Over three months through six months
26,868
Over six months through 12 months
20,475
Over 12 months
3,644
Total
$ 62,138
Deposits increased $149.7 million or 18.83% during the half of 2023, with growth in all categories of deposits. Transaction accounts increased $58.3 million or 19.7% during the quarter. Savings and money market account balances increased $38.9 million and time deposit balance increased $52.5 million during the six months ended June 30, 2023 The time deposit balance increase was partially due to a $12.8 million increase in short-term Certificate of Deposit Account Registry Service ("CDARS") and listing service balances.
Other Borrowings
At June 30, 2023, the Company had a short-term FHLB borrowing of $30.0 million at 5.07% and no borrowings from the FRB. There were $25.0 million of borrowings at 4.50% from the FRB and no borrowings from the FHLB at December 31, 2022.
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 be ar interest at variable rates set by the FHLB. Any a dvances that the bank were to obtain would be secured by a blanket lien on $288.4 million of real estate-related loans as of June 30, 2023. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to
$140.1 million from the FHLB at June 30, 2023.
In addition, the Bank has a secured line of credit with the Federal Reserve Bank of Atlanta which was secured by $49,948 of commercial loans as of June 30, 2023. 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 $34.0 million from the FRB at June 30, 2023.
In June 2021 , the Company issued $6.0 million 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. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5.9 million and $6.0 million at June 30, 2023 and December 31, 2022, respectively.
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The Company has a term note with quarterly principal and interest payments with interest at Prime (8.25% at June 30, 2023). The note matures on March 10, 2029 and the balance of the note was $2.6 million and $2,844 at June 30, 2023 and December 31, 2022, 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, 2023, the Company was in compliance with all financial debt covenants.
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 decrease d $0.8 million to $91.1 million at June 30, 2023 as compared to $91.9 million at December 31, 2022. The decrease was primarily due to the implementation of the new credit loss accounting standard. As a result of the accounting change, equity was reduced by $2.5 million. This was partially offset by net income of $2.1 million and a decrease of $0.5 million of accumulated other comprehensive loss due to decreases in net unrealized losses on available for sale investment securities during the six months ended June 30, 2023.
The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner while at the same time attempting to maximize shareholder value. Management assesses capital adequacy against the risk inherent in the 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, the Company must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The 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, 2023 and December 31, 2022, 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, 2023
Total Capital (to risk-weighted assets)
$ 109,428 13.60 % $ 64,384 8.00 % $ 80,480 10.00 %
Tier 1 Capital (to risk-weighted assets)
99,348 12.34 48,288 6.00 64,384 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
99,348 12.34 36,216 4.50 52,312 6.50
Tier 1 Capital (to total assets)
99,348 9.36 42,443 4.00 53,053 5.00
As of December 31, 2022
Total Capital (to risk-weighted assets)
108,307 15.00 57,767 8.00 72,209 10.00
Tier 1 Capital (to risk-weighted assets)
99,269 13.75 43,325 6.00 57,767 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
99,269 13.75 32,494 4.50 46,936 6.50
Tier 1 Capital (to total assets)
99,269 10.79 36,816 4.00 46,020 5.00
(1) Minimum to be considered “adequately capitalized” under Basel III Capital Adequacy.
(2) Minimum to be considered “well capitalized” under Prompt Corrective Actions Provisions.
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, 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,
2023 		December 31,
2022
Unfunded loan commitments
$ 36,804 $ 23,512
Unused lines of credit
164,189 134,366
Standby letters of credit
237 244
Total
$ 201,230 $ 158,122
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 the Bank issues to guarantee the performance of a customer to a third party and to support private borrowing arrangements. Essentially, letters of credit 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.
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The Company maintains an ACL for its off-balance sheet loan commitments which is calculated by loan type using estimated line utilization rates based on historical usage. Loss rates for outstanding loans is applied to the estimated utilization rates to calculate the ACL for off-balance sheet loan commitments. At June 30, 2023 and December 31, 2022, ACL for off-balance sheet loan commitments totaled $844 thousand and $511 thousand, respectively.
Contractual Obligations
In the ordinary course of its operations, the Company enters into certain contractual obligations. Total contractual obligations at June 30, 2023 were $231.4 million, an increase of $56.4 million from $174.9 million at December 31, 2022. The increase was primarily due to an increase in time deposits of $52.5 million of which $9.3 million came from short-term CDARS brokered deposits.
The following tables present our contractual obligations as of June 30, 2023 and December 31, 2022.
Contractual Obligations as of June 30, 2023
(Dollars in thousands) Less than One Year One to Three Years Three to Five Years Over Five Years Total
Operating lease obligations $ 1,252 $ 2,063 $ 826 $ — $ 4,141
Short-term borrowings 30,000 — — — 30,000
Long-term borrowings 456 912 912 337 2,617
Subordinated notes — — — 5,945 5,945
Time deposits 171,048 17,074 526 — 188,648
Total $ 202,756 $ 20,049 $ 2,264 $ 6,282 $ 231,351
Contractual Obligations as of December 31, 2022
(Dollars in thousands) Less than One Year One to Three Years Three to Five Years Over Five Years Total
Operating lease obligations $ 1,450 $ 2,267 $ 1,245 $ — $ 4,962
Short-term borrowings 25,000 — — — 25,000
Long-term borrowings 456 912 912 564 2,844
Subordinated notes 50 — — 5,942 5,992
Time deposits 120,240 15,587 299 — 136,126
Total $ 146,740 $ 17,854 $ 1,544 $ 8,786 $ 174,924
Liquidity
Liquidity management is the process by which the Bank manages the flow of funds necessary to meet its 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 the 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. The on-balance sheet liquidity ratio at June 30, 2023 was 14.02%, as compared to 12.58% at December 31, 2022.
During 2022, the Bank paid quarterly dividends totaling $1.75 million to BayFirst. During the two quarters of 2023, the Bank paid quarterly dividends totaling $1.75 million to BayFirst. Prior to 2021, the Bank retained its earnings to support its growth. BayFirst’s liquidity had historically been dependent solely on funds received from the issuance and sale of subordinated debt and preferred stock. 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, 2023, BayFirst Financial Corp. held $757 thousand in cash and cash equivalents.
The Company expects that all the liquidity needs, including the contractual commitments can be met by currently available liquid assets and cash flows. In the event any unforeseen demand or commitments were to occur, the Company would
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access the borrowing capacity with the FHLB, FRB, and lines of credit with other financial institutions. The Company does not rely on investment securities as the main source of liquidity and does not foresee the need to sell investment securities for cash flow purposes. In addition, the Company has the ability to obtain wholesale deposits as another source of liquidity. The Company expects that the currently available liquid assets and the ability to borrow from the FHLB, FRB, and other financial institutions would be sufficient to satisfy the liquidity needs without any material adverse effect on the Company’s liquidity.
A description of BayFirst’s and the Bank’s debt obligations is set forth above under the heading “Other Borrowings.”
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. Its market risk arises primarily from interest-rate risk inherent in loan and deposit taking activities. To that end, the Company actively monitors and manages its 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.
The objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on net interest income and capital, while adjusting the asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. A sudden or substantial increase in interest rates may impact its 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.
The Company established a comprehensive interest rate risk management policy which is administered by management’s Asset-Liability Committee. 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. Management measures the potential adverse impacts that changing interest rates may have on its 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 used. 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 used in modeling. The methodology does not measure the impact that higher rates may have on 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 the operations, we monitor assets and liabilities to better match the maturities and repricing terms of the interest-earning assets and interest-bearing liabilities. To do this, the Company (i) emphasizes the origination of adjustable-rate and variable-rate loans to be held for investment; (ii) maintains a stable core deposit base; and (iii) maintains a significant portion of liquid assets (cash, interest-bearing deposits with other banks, and available for sale investment securities).
Management regularly reviews its exposure to changes in interest rates. Among the factors they 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, its 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 captures 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 its 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 the overall sensitivity position is as of the most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of its equity.
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Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.
The estimated impact on the net interest income as of June 30, 2023 and December 31, 2022, assuming immediate parallel moves in interest rates, is presented in the table below.
June 30, 2023 December 31, 2022
Change in rates Following 12 months Following 24 months Following 12 months Following 24 months
+400 basis points 9.9 % 11.9 % 11.0 % 11.9 %
+300 basis points 8.9 10.7 9.4 10.5
+200 basis points 5.2 6.3 5.4 6.1
+100 basis points 1.4 2.0 1.3 1.8
-100 basis points (3.5) (4.3) (3.8) (4.4)
-200 basis points (7.0) (8.8) (8.3) (9.5)
Management strategies may impact future reporting periods, as the 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.
The Company uses 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 the economic value of equity as of June 30, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates. Changes noted between the two periods reflect recent enhancements in the asset/liability modeling, including projected values for non-maturity deposits in changing interest rate environments.
Change in rates June 30, 2023 December 31, 2022
+400 basis points (4.6) % (12.7) %
+300 basis points (2.7) (9.5)
+200 basis points (2.6) (7.0)
+100 basis points (2.5) (4.3)
-100 basis points (0.8) 2.6
-200 basis points (2.2) 5.0
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, 2023, 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, 2023, 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.
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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 period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II
Item 1. Legal Proceedings
In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits, none of which they expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to its business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), the Company, like all banking organizations, is subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which its property is the subject.
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, 2022. 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.
Loss of deposits or a change in deposit mix could increase our funding costs and adversely affect our performance.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits and as a result, the Company could lose deposits in the future, clients may shift their deposits into higher cost products, or the Company may need to raise interest rates to avoid deposit attrition. Funding costs may also increase if deposits lost are replaced with wholesale funding. Higher funding costs reduce our net interest margin, net interest income, and net income. In recent months, the environment for maintaining and growing deposits has become more challenging. This is partially attributable to the FRB reducing the size of its balance sheet through quantitative tightening and continues to increase interest rates giving depositors an incentive to move deposits to money market funds and other higher-yielding alternatives. In addition, recent unusually high levels of withdrawals from other, larger banks, which in some cases has resulted in bank failure, may result in similar withdrawal patterns at the Company. Should we experience any of these events, we may need to rely on higher cost wholesale funding, which would adversely affect our financial performance and net income.
The Florida property insurance market is in crises and the inability of our borrowers to obtain insurance on properties securing our loans may adversely affect the value of the collateral, the performance of our loan portfolio, and our ability to make loans secured by real estate.
Florida is susceptible to hurricanes, tropical storms and related flooding and wind damage and other similar weather events. Such events can disrupt operations, result in damage to properties and negatively affect the local economies in our markets. As a result of the potential for such weather events, many of our customers have incurred significantly higher insurance premiums, or been unable to secure insurance, on their properties. This may adversely affect real estate sales and values in our markets and leave our borrowers without funds to repay their loans in the event of destructive weather events. Such events could result in a decline in loan originations, a decline in the value or destruction of properties securing loans and a decrease in credit quality, negatively impacting our business and results of operations.
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 February 28, 2023, the Board of Directors approved the Company’s 2023 Stock Repurchase Program (“Repurchase Program”). The Repurchase Program permits the Company to repurchase up to $1,000,000 of the Company’s issued and outstanding common stock. The Repurchase Program will continue until the earlier of: (i) the date
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an aggregate of $1,000,000 of common stock has been repurchased; (ii) December 31, 2023; or (iii) the termination of the plan by the Board of Directors.
The Inflation Reduction Act of 2022 created a new nondeductible 1% excise tax on repurchases of corporate stock by certain publicly traded corporations or their specified affiliates after December 31, 2022. The tax is imposed on the fair value of the stock of a covered corporation that is repurchased in a given year, less the fair market value of any stock issued in that year. A “covered corporation” is any domestic corporation whose stock is traded on an established securities market, such as an OTC market. The excise tax applies to all of the stock of a covered corporation regardless of whether the corporation has profits or losses. The act contains several exceptions to the excise tax, including, but not limited to, any repurchase of stock: in which the total value of the repurchased stock in a given year does not exceed $1,000,000; that is contributed to an employer sponsored retirement plan or other similar stock compensation plan; that is taxed as a dividend. The impact of the Inflation Reduction Act of 2022 on our consolidated financial statements will be dependent on the extent of stock repurchases made in future periods.
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, 2023.
Period
Number of Shares
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, 2023 — $ — — $ 1,000,000
May 1-31, 2023 450 14.39 450 $ 993,525
June 1-30, 2023 300 14.40 750 $ 989,205
Total 750 $ 14.39 750
Under applicable state law, Florida corporations are not permitted to retain treasury stock. As such, the price paid for the repurchased shares reduces the amount of common stock on the consolidated balance sheet. As of June 30, 2023, total shares repurchased for $10,796 had been redeemed since the Repurchase Program was implemented. The repurchased shares remain authorized, unissued shares.
Item 3. Defaults Upon Senior Securities
None.
It em 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
3.2
3.3
4.1
4.2
4.3
31.1
31.2
32.1
32.2
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Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2023, 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.
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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 11, 2023
By: /s/ Anthony N. Leo
Anthony N. Leo
Chief Executive Officer
(principal executive officer)
Date: August 11, 2023
By: /s/ Scott J. McKim
Scott J. McKim
Chief Financial Officer
(principal financial officer)

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TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1 - Basis Of PresentationNote 2 Discontinued OperationsNote 3 Investment SecuritiesNote 4 LoansNote 5 - Allowance For Credit LossesNote 6 Fair ValueNote 7 Government Guaranteed Loan Servicing ActivitiesNote 8 - Premises and EquipmentNote 9 LeasesNote 10 Other BorrowingsNote 11 Stock-based CompensationNote 12 Other Benefit PlansNote 13 - Income TaxesNote 14 Regulatory MattersNote 15 Mortgage Banking Activities - Discontinued OperationsNote 16 Loan Commitments and Other Related ActivitiesNote 17 Earnings Per Common ShareItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

3.1 Amended and Restated Articles of Incorporation 3.2 Bylaws 3.3 Amendment to Bylaws, dated August22, 2019 4.1 Form of common stock certificate 4.2 Form of Series A Preferred Stock certificate 4.3 Form of Series B Convertible Preferred Stock certificate 31.1 Principal Executive Officers Certification required by Rule 13(a)-14(a) - filed herewith 31.2 Principal Financial Officers Certification required by Rule 13(a)-14(a) - filed herewith 32.1 Principal Executive Officers 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 Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith