BayFirst Financial Corp

BAYFIRST FINANCIAL CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(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 consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements of BayFirst Financial Corp. for that period.

The Company currently operatesone 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 three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2023 in the Company’s Annual Report filed on Form 10-K. 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 HFI.

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 March 31, 2024. Although the ultimate outcome of all claims and lawsuits outstanding as of March 31, 2024 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.

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 periods and retrospectively for prior periods.

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

The following is a summary of the assets and liabilities of the discontinued operations of the residential mortgage lending division at March 31, 2024 and December 31, 2023:

The following presents operating results of the discontinued operations of the residential mortgage lending division for the three months ended March 31, 2024 and March 31, 2023:

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 March 31, 2024 and December 31, 2023 as well as the ACL for investment securities held to maturity at March 31, 2024 and December 31, 2023 are summarized as follows:

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

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The amortized cost and fair value of investment securities as of March 31, 2024 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.

No ACL for investment securities AFS was needed at March 31, 2024 or December 31, 2023. Declines in the fair value of the AFS investment portfolio are believed by management to be temporary in nature. When evaluating an investment for credit loss, management considers, among other things, the length of time and the extent to which the fair value has been in a loss position; the financial condition of the issuer through the review of credit ratings and, if necessary, corporate financial statements; adverse conditions specifically related to the security such as past due principal or interest; underlying assets that collateralize the debt security; other economic conditions and demographics; and the intent and ability of the Company to hold the investment until the loss position is recovered. Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. At March 31, 2024, the Company did not intend to sell and believed it was not likely to be required to sell the available for sale securities that were in a loss position prior to full recovery.

As of March 31, 2024, there were no past due principal and interest payments associated with the HTM securities. The Company monitors the credit quality of debt securities held to maturity quarterly through the use of credit ratings. However, the corporate bonds that are held to maturity have no credit rating and the corporate bonds in an unrealized loss position at March 31, 2024 are not material to the financial statements. There was an ACL of $14 and $17 on corporate bonds HTM at March 31, 2024 and December 31, 2023, respectively, which was calculated based on applying the long-term historical credit loss rate for similarly rated securities.

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

The following table presents the activity in the ACL for investment securities HTM by major security type for the three months ended March 31, 2024 and March 31, 2023:

The following table summarizes investment securities with unrealized losses at March 31, 2024 aggregated by security type and length of time in a continuous unrealized loss position:

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

The following table summarizes investment securities with unrealized losses at December 31, 2023 aggregated by security type and length of time in a continuous unrealized loss position:

No investment securities were pledged as of March 31, 2024 or December 31, 2023, and there were no sales of investment securities during the three months ended March 31, 2024 and the year ended December 31, 2023.

NOTE 4 –LOANS

Loans HFI, at amortized cost, at March 31, 2024 and December 31, 2023 were as follows:

(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.

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

NOTE 5 -ALLOWANCE FOR CREDIT LOSSES

The following schedules present the activity in the ACL by loan segment for the three months ended March 31, 2024 and March 31, 2023:

CECL significantly changed the credit losses estimation model for loans. The ACL represents management’s best estimate of future lifetime expected losses on its HFI 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 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. 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 adjusted for selling costs as appropriate if repayment is expected solely from the collateral.

The Company uses reasonable and supportable forecasts that are updated quarterly utilizing data from the FOMC’s median forecasts of change in national GDP and of national unemployment. The FOMC’s forecast of GDP and unemployment for the next 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.

See Note 1 and Note 5 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ACL methodology in the December 31, 2023 Form 10-K.

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 March 31, 2024 and December 31, 2023, the ACL for unfunded commitments recorded in other liabilities was $839.

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

The following table presents the activity in the ACL for unfunded commitments for the three months ended March 31, 2024 and March 31, 2023:

The following tables present the principal balance of nonaccrual loans and loans past due over 89 days still on accrual by loan segment at March 31, 2024 and December 31, 2023. In the following tables, the principal balance does not include the government guaranteed balance or loans measured at fair value.

(1) Excludes loans measured at fair value. See Note 6. Fair Value for additional information.

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. As of March 31, 2024 there were no loans individually evaluated. The following table presents the principal balance of individually analyzed collateral dependent loans by loan portfolio segment as of December 31, 2023:

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

The following table presents the aging of the principal balance of past due loans HFI at amortized cost at March 31, 2024 by loan segment:

The following table presents the aging of the principal balance of past due loans HFI at amortized cost at December 31, 2023 by loan segment:

Modifications to Borrowers Experiencing Financial Difficulty

For the three months ended March 31, 2024 and the year ended December 31, 2023, there were no loan modifications to borrowers experiencing financial difficulty and no loan modifications that subsequently defaulted during the period.

Credit Quality Indicators

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

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

Special Mention –These credits 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

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

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.

The table below sets forth principal balance for the commercial loan portfolio disaggregated by loan segment based on internally assigned risk ratings at March 31, 2024 and gross write offs for the three months ended March 31, 2024:

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

The table below sets forth principal balance for the commercial loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, 2023 and gross write offs for the year ended December 31, 2023:

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

BAYFIRST FINANCIAL CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(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 principal balance at March 31, 2024 in residential and consumer loans based on payment activity as well as gross write offs for the three months ended March 31, 2024.

The following table presents the principal balance at December 31, 2023 in residential and consumer loans based on payment activity as well as gross write offs for the year ended December 31, 2023.

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

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.

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.

Government Guaranteed Loans HFI, at Fair Value: The Company has elected to account for certain government guaranteed loans HFI 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.

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 loan 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 March 31, 2024 and December 31, 2023. 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.

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

Assets measured at fair value on a recurring basis at March 31, 2024 are summarized below. There were no liabilities carried at fair value on a recurring basis at March 31, 2024.

Assets measured at fair value on a recurring basis at December 31, 2023 are summarized below. There were no liabilities carried at fair value on a recurring basis at December 31, 2023.

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 also elected the fair value option for certain of its government guaranteed loans HFI 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 HFI.

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

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of HFI government guaranteed loans measured at fair value at March 31, 2024 and December 31, 2023.

(1) The nonaccrual and 90 days or more past due loan balances do not include the portion of government guaranteed loan balances.

The total amount of gains and losses from changes in fair value and interest income included in earnings for the three months ended March 31, 2024 and March 31, 2023 for government guaranteed loans HFI, at fair value, were as follows:

Changes in fair value for government guaranteed loans HFI, at fair value, were included in Government guaranteed loans fair value gain on the Consolidated Statements of Income.

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

The table below presents a reconciliation of government guaranteed loans HFI, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the three months ended March 31, 2024 and March 31, 2023:

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

The following table provides information about the valuation techniques and unobservable inputs used in the valuation of government guaranteed loans HFI that fall within Level 3 of the fair value hierarchy at March 31, 2024 and December 31, 2023:

The significant unobservable inputs impacting the fair value measurement of government guaranteed loans HFI, 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 March 31, 2024 are summarized below:

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

Assets measured at fair value on a nonrecurring basis at December 31, 2023 are summarized below:

Fair Value of Financial Instruments

The carrying values and estimated fair values of financial instruments not carried at fair value, at March 31, 2024 and December 31, 2023 are as follows:

NOTE 7 –GOVERNMENT GUARANTEED LOAN SERVICING ACTIVITIES

At March 31, 2024 and December 31, 2023, the principal balance of government guaranteed loans, excluding PPP loans, retained by the Company was $375,431 and $395,877, respectively, of which $155,601 and $181,459 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 $950,793 and $855,756 at March 31, 2024 and December 31, 2023, respectively.

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

Activity for government guaranteed loan servicing rights for the three months ended March 31, 2024 and March 31, 2023 follows:

The fair value of government guaranteed loan servicing rights was $17,209 and $16,318 at March 31, 2024 and December 31, 2023, respectively. Fair value was determined using a weighted average discount rate of 14.63% and a weighted average prepayment speed of 12.11% at March 31, 2024. Fair value was determined using a weighted average discount rate of 14.50% and a weighted average prepayment speed of 11.42% at December 31, 2023. 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 for the three months ended March 31, 2024 and March 31, 2023:

NOTE 8 –LEASES

For thethree months ended March 31, 2024 and March 31, 2023, the components of total lease cost and supplemental information related to operating leases were as follows:

(1)Includes lease costs reported as discontinued operations of $71 and $61 for the three months ended March 31, 2024 and March 31, 2023, respectively.

At March 31, 2024, the weighted average discount rate of operating leases was 2.45% and the weighted average remaining life of operating leases was 3.14 years.

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

The future minimum lease payments for operating leases, subsequent to March 31, 2024, as recorded on the balance sheet, are summarized as follows:

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.

Based on the analysis, the Company concluded that the ROU assets for these offices were impaired. The ROU asset had a remaining ROU carrying value of $300 as of March 31, 2024. The was no additional impairment for the three months ended March 31, 2024.

NOTE 9 –OTHER BORROWINGS

At March 31, 2024, the Company had $15,000 of borrowings at 5.58% from the FHLB andno borrowings from the FRB. There were $10,000 of borrowings at 5.57% from the FHLB andno borrowings from the FRB at December 31, 2023.

The Bank is a member of the FHLB of Atlanta, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates set by the FHLB. Any advances that the bank were to obtain would be secured by a blanket lien on $304,516 of real estate-related loans as of March 31, 2024. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to

$161,970 from the FHLB at March 31, 2024.

In addition, the Bank has a secured line of credit with the Federal Reserve Bank of Atlanta which was secured by $54,847 of commercial loans as of March 31, 2024. FRB short-term borrowings bear interest at variable rates based on the FOMC's target range for the federal funds rate. Based on this collateral, the Company was eligible to borrow up to $38,538 from the FRB at March 31, 2024.

The Company has $6,000 of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years which is June 30, 2026. 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 after June 30, 2026. 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 $5,950 and $5,949 at March 31, 2024 and December 31, 2023, respectively.

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

The Company has a term note with quarterly principal and interest payments with interest at Prime (8.50% at March 31, 2024). The note matures on March 10, 2029 and the balance of the note was $2,276 and $2,389 at March 31, 2024 and December 31, 2023, 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 March 31, 2024, the Company was in compliance with all financial debt covenants.

NOTE 10 –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 $62 and $147 for the three months ended March 31, 2024 and March 31, 2023, 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 three months ended March 31, 2024 and March 31, 2023 follows:

At March 31, 2024, there was $689 of total unrecognized compensation cost related to nonvested restricted shares granted under the Equity Plan that is expected to be recognized over a weighted average period of 2.9 years. The total fair value of shares vested during the three months ended March 31, 2024 and March 31, 2023 was $326 and $251, respectively.

Stock Options

The Equity Plan permits the grant of stock options to the Company’s employees and non-employee directors for up to 15% of the total number of shares of Company common stock issued and outstanding, up to 1,500,000 shares. Option awards are

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. 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

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

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 three months ended March 31, 2024 and March 31, 2023 follows:

There wereno options granted during the three months ended March 31, 2024 or March 31, 2023. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $41 at March 31, 2024. This cost is expected to be recognized over a weighted average period of 1.5 years.

NOTE 11 –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 three months ended March 31, 2024, there wereno shares purchased. During the three months ended March 31, 2023,4,953 shares were purchased at an average price of $17.01.

All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the three months ended March 31, 2024 and March 31, 2023 was $7 for both periods.

The Company has a Salary Continuation Agreement (the “Agreement”) with the Company’s retired CEO. In accordance with the Agreement, the executive will receive an annual benefit of $25 fortwenty years following separation of service. The liability recorded for the Agreement was $355 and $351 at March 31, 2024 and December 31, 2023, respectively, and the related expense for the three months ended March 31, 2024 and March 31, 2023 was $4 for both periods. Payments are expected to begin in July 2024 from the retirement of the CEO on December 31, 2023.

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. There was no match of contributions in 2023. Expense recognized in relation to the 401(k) plan was $345 and $240 for the three months ended March 31, 2024 and March 31, 2023, respectively.

The Company has an ESOP for eligible employees. Each year, the Company’s Board of Directors may approve a discretionary percentage of employees’ salaries to be contributed to the ESOP for eligible employees. 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 8,493 unallocated shares with a fair value of $110 and 14,154 unallocated shares with a fair value of $237 remaining as of March 31, 2024 and March 31, 2023, respectively. The ESOP trust’s outstanding loan, which is secured by the unallocated shares, bears a fixed interest rate equal to the Prime Rate as of the note date, which was

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

3.25%. The note requires an annual payment of principal and interest through December 2026. 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 18,706 unallocated shares with a fair value of $242 remaining as of March 31, 2024. The ESOP trust was issued afive year loan bearing an interest rate equal to the 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 2023. There was $136 of expense related to the ESOP for the three months ended March 31, 2024 andno expense for the three months ended March 31, 2023.

NOTE 12 –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 March 31, 2024 and December 31, 2023.

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 March 31, 2024 and December 31, 2023, 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 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, 2023, 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 March 31, 2024:

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

Actual and required capital amounts and ratios for the Bank are presented below at December 31, 2023:

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.

NOTE 13 –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 March 31, 2024 and December 31, 2023 were as follows:

All unused lines of credit at March 31, 2024 and December 31, 2023 were variable rate lines of credit and the majority of unfunded loan commitments at March 31, 2024 and December 31, 2023 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 March 31, 2024 and December 31, 2023, ACL for off-balance sheet loan commitments totaled $839 for both periods.

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

`NOTE 14 –EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2024 and March 31, 2023:

The following securities outstanding at March 31, 2024 and March 31, 2023 have been excluded from the calculation of weighted average shares outstanding as their effect on the calculation of earnings (loss) per share are antidilutive: