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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 classTrading Symbol(s)Name of each exchange on which registered
Common stockBAFNThe 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 fileroAccelerated filero
Non-accelerated filer  xSmaller reporting companyx
Emerging growth companyx
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 LossesFDIA: Federal Deposit Insurance Act
AFS: Available for SaleFDIC: Federal Deposit Insurance Corporation
AIO: Architecture, Infrastructure, and OperationsFFIEC: Federal Financial Institutions Examination Council
ALCO: Asset-Liability CommitteeFHLB: Federal Home Loan Bank
ALLL: Allowance for Loan LossesFNBB: First National Bankers Bank
AOCI: Accumulated Other Comprehensive Income
FRB: Federal Reserve Bank
ASC: FASB Accounting Standards CodificationFVO: Fair Value Option
ASU: FASB Accounting Standards UpdateGAAP: Generally Accepted Accounting Principles
BHCA: Bank Holding Company Act of 1956, as amended
HFI: Held for Investment
BOLI: Bank Owned Life InsuranceHTM: Held to Maturity
BSA: Bank Secrecy Act of 1970IRA: Individual Retirement Account
CAA: Consolidated Appropriations ActJOBS Act: Jumpstart Our Business Startups Act of 2012
CARES Act: Coronavirus Aid, Relief, and Economic Security ActLGD: Loss Given Default
CBLR: Community Bank Leverage RatioLHFS: Loans Held for Sale
CDARS: Certificate of Deposit Account Registry ServicesMMDA: Money Market Deposit Account
CECL: Current Expected Credit LossesNOW: Negotiable Order of Withdrawal
CEO: Chief Executive OfficerNSPP: Non-Qualified Stock Purchase Plan
CET1: Common Equity Tier 1 Capital
OCC: Office of the Comptroller of the Currency
CFPB: Consumer Financial Protection BureauOLC: Officer Loan Committee
C&I: Commercial and IndustrialOREO: Other Real Estate Owned
CIK: Central Index KeyOTTI: Other-Than-Temporary Impairment
COVID-19: Coronavirus Disease 2019PCAOB: Public Company Accounting Oversight Board
DCLC: Directors’ Credit and Loan CommitteePD: Probability of Default
DEI: Diversity, Equity, and InclusionPPP: Paycheck Protection Program
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010PPPLF: Paycheck Protection Program Liquidity Facility
DRIP: Dividend Reinvestment PlanQIB: Qualified Institutional Buyer
EGC: Emerging Growth CompanyROU: Right of Use
EPS: Earnings per ShareSBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Incentive PlanSEC: U.S. Securities and Exchange Commission
ESG: Environmental, Social, and GovernanceSOFR: Secured Overnight Financing Rate
ESOP: Employee Stock Ownership PlanU.S.: United States
ESPP: Employee Stock Purchase PlanUSDA: United States Department of Agriculture
Exchange Act: Securities Exchange Act of 1934USDA B&I: United States Department of Agriculture Business and Industry
FASB: Financial Accounting Standards BoardWARM: 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, 2023December 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 sale1,247 — 
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 operations451 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 borrowings30,000 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 operations939 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, 2023December 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.
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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,
2023202220232022
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, net6,028 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 operations1,417 392 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,
2023202220232022
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.
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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,
2023202220232022
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,
20232022
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 assets1,127 809 
Net securities premium amortization41 40 
Amortization of debt issuance costs3 4 
Amortization of premium (discount) on loans purchased, net107 30 
Provision for credit losses4,707 (2,150)
Accretion of discount on unguaranteed loans
(1,794)(891)
Deferred tax expense717 (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 operations192,600 118,243 
Net cash provided by (used in) operating activities of discontinued operations(119)35,366 
Net cash provided by operating activities192,481 153,609 
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 maturity2,500 — 
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,
20232022
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 borrowings5,000 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 tax2,508 — 
Net change in unrealized holding losses on investment securities available for sale, net of tax effect485 (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 sale201,157 124,084 
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, 2023December 31, 2022
Allowance for credit lossesAs Reported UnderPre-ASC 326Impact of
ASC 326AdoptionASC 326 Adoption
Assets
Investment securities HTM - corporate bonds$18 $— $18 
Loans HFI, at amortized cost
Real estate - residential2,210 731 1,479 
Real estate - commercial1,569 956 613 
Real estate - construction and land309 28 281 
Commercial and industrial7,298 6,182 1,116 
Consumer and other767 1,090 (323)
Unallocated— 59 (59)
Loans HFI, at amortized cost total12,153 9,046 3,107 
Liabilities
Allowance for credit loss for unfunded commitments724 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.
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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, 2023December 31, 2022
Assets
Loans held for sale, at fair value$— $449 
Loan servicing rights— 201 
Right-of-use operating lease asset451 559 
Accrued interest receivable— 2 
Total assets$451 $1,211 
Liabilities
Operating lease liability$939 $1,189 
Other liabilities— 469 
Total liabilities$939 $1,658 
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BAYFIRST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data) (Unaudited)
The following presents operating results of the discontinued operations of the residential mortgage lending division for the three and six months ended June 30, 2023 and June 30, 2022:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Interest income$— $867 $1 $1,604 
Noninterest income(2)10,221 (2)23,424 
Total net revenue(2)11,088 (1)