BayFirst Financial Corp

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.

Provision for Credit Losses

The provision for credit losses is charged to operations to adjust 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 for the three months ended September 30, 2024 of $3.1 million primarily due to net charge-offs and net loan growth. This compared to a provision of $3.0 million for the three months ended September 30, 2023. During the three months ended September 30, 2024, $2.8 million of net charge offs in loans were recorded compared to $2.2 million during the three months ended September 30, 2023.

The Company recorded a provision for credit losses for the nine months ended September 30, 2024 of $10.2 million compared to a $7.7 million provision for the nine months ended September 30, 2023. The increase of $2.5 million in the provision for credit losses expense was primarily due to higher than expected charge-offs resulting in higher provision expense based on ACL model output. During the nine months ended September 30, 2024, net loan charge offs totaled $9.7 million compared to $6.4 million during the nine months ended September 30, 2023.

The Bank developed an express modification program for SBA 7(a) borrowers to help those borrowers who are challenged with larger payments in the higher interest rate environment compared to interest rates at the time the loans were originated. Through September 30, 2024, approximately 400 SBA 7(a) borrowers have been offered loan modification options. These efforts have helped and are expected to continue to help reduce net charge-offs.

The ACL was $14.2 million at September 30, 2024 and $13.4 million at September 30, 2023.

Noninterest Income

The following table presents noninterest income from continuing operations for the three and nine months ended September 30, 2024 and September 30, 2023.

Noninterest income from continuing operations was $12.3 million during the three months ended September 30, 2024, a decrease from$14.7 million during the three months ended September 30, 2023. The decrease was primarily due to decreases in gain on sale of government guaranteed loans of $1.0 million, fair value gains on government guaranteed loans of $1.1 million, government guaranteed loan packaging fees of $0.3 million, and other noninterest income of $0.2 million.

Noninterest income from continuing operations was $38.2 million for the nine months ended September 30, 2024, anincrease from $35.1 million for the nine months ended September 30, 2023. The increase was primarily the result of increases in gain on sale of government guaranteed loans of $2.3 million and government guaranteed loan packaging fees of $1.3 million, partially offset by a decrease in fair value gains on government guaranteed loans of $1.1 million. As of September 30, 2024, the Company had $86.4 million of loans held at fair value compared to $84.2 million at September 30, 2023.

Noninterest Expense

The following table presents noninterest expense from continuing operations for the three and nine months ended September 30, 2024 and September 30, 2023.

Noninterest expense from continuing operations was $17.1 million during the three months ended September 30, 2024, a decrease from $17.4 million during the three months ended September 30, 2023. The decrease in the third quarter of 2024, as compared to the third quarter of 2023, was primarily due to lower compensation expense of $0.3 million and lower marketing and business development expenses of $0.4 million, partially offset by higher data processing expenses of $0.3 million.

Noninterest expense was $51.4 million during the nine months ended September 30, 2024, an increase from $49.2 million for the nine months ended September 30, 2023. The increase was the result of increases in data processing expense of $0.8 million, loan origination and collection expense of $0.9 million, professional services expenses of $0.5 million, and other noninterest expenses of $0.6 million. The increases were partially offset by a decrease in marketing and business development expenses of $1.0 million.

Income Taxes

Income tax expense from continuing operations was $398 thousand for the three months ended September 30, 2024, a decrease from income tax expense of $674 thousand for the three months ended September 30, 2023. There was no income tax expense from discontinued operations for the three months ended September 30, 2024, compared to income tax benefit of $15 thousand for the three months ended September 30, 2023.

Income tax expense from continuing operations was$1.0 million for the nine months ended September 30, 2024, a decrease from income tax expense of$1.4 million for the nine months ended September 30, 2023. The decrease was primarily due to the decrease in pre-tax earnings from continuing operations. Income tax benefit from discontinued operations was $23 thousand for the nine months ended September 30, 2024, from income tax benefit of $68 thousand for the nine months ended September 30, 2023.

At September 30, 2024, the Company had $1.4 million of federal net operating loss carryforward and $0.3 million of state net operating loss carryforward. The net operating loss carryforwards do not expire. At September 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 effective income tax rate was 26.51% for the nine months ended September 30, 2024 and 24.97% for the nine months ended September 30, 2023.

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 September 30, 2024 and December 31, 2023.

The net unrealized loss on the investment securities AFS at September 30, 2024, was $3.1 million compared with a net unrealized loss on investment securities AFS of $4.0 million at December 31, 2023. The change in unrealized loss on investment securities AFS from December 31, 2023 to September 30, 2024 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 September 30, 2024 and December 31, 2023.

There was a $13 thousand ACL on the corporate bonds HTM as of September 30, 2024 and a $17 thousand ACL on the corporate bonds HTM as of December 31, 2023. The net unrealized loss on the investment securities HTM at September 30, 2024, was $179 thousand compared with a net unrealized loss on investment securities HTM of $238 thousand at December 31, 2023.

No investment securities were pledged as of September 30, 2024 or December 31, 2023, and there were no sales of investment securities during the three or nine months ended September 30, 2024 or three or nine months ended September 30, 2023.

The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as of September 30, 2024 and December 31, 2023. 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.

The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as of September 30, 2024 and December 31, 2023. 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.

Loan Portfolio Composition

The Company offers a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of government guaranteed, commercial real estate, commercial business, 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. Additionally, the loan portfolio is well-diversified across major loan types with a low concentration of non owner-occupied commercial real estate loans which makes up 6% of the total portfolio. The following table sets forth the composition of its loan portfolio, including LHFS as of the dates indicated.

During the nine months ended September 30, 2024, the Bank originated approximately $218.8 million in loans through conventional lending channels and $323.6 million in loans through its government guaranteed lending function. In addition, the Bank sold guaranteed loan balances of $290.8 million.

Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans at September 30, 2024. Loan balances in this table include loans HFI at fair value, loans HFI at amortized cost, discount on retained balances of loans sold, premium and discount on loans purchased, and deferred loan costs, net.

The following table shows the loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at September 30, 2024.

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, thereserve on unfunded commitments increased $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 expected 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, change in volume and mix 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 that are developed with internal and external data. These are updated quarterly by management and utilize data from the FOMC’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.

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 other 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.

Nonperforming Assets. At September 30, 2024, the Company had $12.5 million in nonperforming assets, excluding government guaranteed loan balances, and the ACL represented 1.48% of total loans HFI at amortized cost. At September 30, 2023, the Company had $8.4 million in nonperforming assets, excluding government guaranteed loan balances, and their ACL represented 1.68% of total loans HFI at amortized cost. Total loans HFI at September 30, 2024 and September 30, 2023 included government guaranteed loans and loans measured at fair value, which had no reserves allocated to them. ACL as a percentage of loans HFI at amortized cost, not including government guaranteed loan balances, was 1.70% at September 30, 2024, compared to 2.03% at September 30, 2023.

The following table sets forth certain information on nonaccrual loans, loans 90 days or more past due, and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.

(1)Excludes loans measured at fair value

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

The following table details net charge-offs to average loans outstanding by loan category for thethree months ended September 30, 2024 and September 30, 2023.

The following table details net charge-offs to average loans outstanding by loan category for thenine months ended September 30, 2024 and September 30, 2023.

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.

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.