BayFirst Financial Corp.: Form 10-Q for the period ended Jun 30, 2025

The following discussion is an analysis of the results of operations for the three and six months ended June 30, 2025 and June 30, 2024 and financial condition as of June 30, 2025 and December 31, 2024. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.

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

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

Overview

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

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

Application of Critical Accounting Policies and Estimates

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

Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. At June 30, 2025, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing the consolidated financial statements were the policies related to the ACL, fair value measurement of government guaranteed loan servicing rights and government guaranteed loans HFI at fair value, which are discussed more fully in the December 31, 2024 Form 10-K.

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

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

Recent Developments

Bolt Loan Program. On August 4, 2025 the Company announced that as part of a comprehensive strategic review aimed at positioning the Company for long-term growth and enhanced shareholder value, the Bank has discontinued its Bolt loan program, effective immediately. The Bolt loan program was an SBA 7(a) loan designed to provide small balance loans to small businesses, typically used for working capital. Accordingly, a reduction in force of 26 Bolt positions and 25 positions in other areas of the Bank was executed, which will save $6 million in annual costs. Combined this represents 17% of the workforce.The Company expects to record a restructuring charge in the third quarter related to the exit of the Bolt loan program and will also seek offers to sell the Bolt loan balances and Bolt loan origination platform to an unaffiliated third party. To offset these impacts, the Board has suspended dividend payments, and Directors will forgo board fees.

Regulatory. The Bank has also agreed with its regulators to take certain actions designed to improve the Bank’s underwriting and credit administration, strategic planning, and capital preservation. In connection with that, the regulators are also requiring the Bank to achieve and maintain specific capital ratios.

Selected Financial Data - Unaudited

(Dollars in thousands, except for share data)

42

(Dollars in thousands, except for share data)

Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

The following presents the calculation of the non-GAAP financial measures:

Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share (Unaudited)

(Dollars in thousands, except for share data)

Results of Operations

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

The Company is dependent on noninterest income, which is derived primarily from net gain on the sales of the guaranteed portion of government guaranteed loans, as well as fair value adjustments for certain loans which management has elected the fair value option. While the Company retains some of its government guaranteed loans on the balance sheet, the Company may sell both the guaranteed balance of its government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans.

In the second quarter of 2022, the Bank discontinued its primary consumer direct residential mortgage business line. In the third quarter of 2022, management decided to discontinue the nationwide residential lending business. As a result of the discontinuance, the nationwide residential mortgage line of business was reclassified as a discontinued operation and reported in the financial statements as such.

Net Income

The Company had a net loss for the three months ended June 30, 2025 of $1.2 million, or $(0.39) per common share and diluted common share, compared to net income for the three months ended June 30, 2024 of $0.9 million, or $0.12 per common and diluted common share. The change from the second quarter of 2024 was due to an increase in provision for credit losses of $4.3 million and an increase in noninterest expense of $0.9 million, partially offset by an increase in net interest income of $3.2 million.

For the six months ended June 30, 2025, the Company had a net loss of $1.6 million, or $(0.57) per common share and diluted common share, a decrease from net income of $1.7 million, or $0.22 per common share and diluted common share, for the six months ended June 30, 2024. The change was primarily due to an increase in provision for credit losses of $4.6 million, a decrease in government guaranteed loan fair value gains of $4.8 million, and a decrease of government guaranteed loan packaging fees of $1.1 million. This was partially offset by an increase in net interest income of $5.4 million and a decrease in noninterest expense of $1.0 million.

Net Interest Income

Net interest income from continuing operations was $12.3 million for the three months ended June 30, 2025, an increase from $9.2 million during the three months ended June 30, 2024. The increase was mainly due to an increase in loan interest income, including fees, of $1.7 million, partially offset by an increase in interest expense from borrowings of $0.6 million.

Net interest margin was 4.06% for the second quarter of 2025, which represented an increase from 3.43% for the second quarter of 2024.

Net interest income from continuing operations was $23.3 million for the six months ended June 30, 2025, an increase from $17.9 million for the six months ended June 30, 2024. The increase was mainly due to an increase in loan interest income, including fees, of $3.6 million and a decrease in interest expense of $1.8 million.

Net interest margin increased to 3.92% for the six months ended June 30, 2025, compared to 3.43% for the six months ended June 30, 2024.

Average Balance Sheet and Analysis of Net Interest Income

The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of BayFirst from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB,

FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.

(Dollars in thousands)

46

(Dollars in thousands)

47

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.

(Dollars in thousands)

(Dollars in thousands)

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 June 30, 2025 of $7.3 million compared to a provision of $3.0 million for the three months ended June 30, 2024. During the three months ended June 30, 2025, $6.8 million of net charge offs in loans were recorded compared to $3.3 million during the three months ended June 30, 2024. Credit challenges for small businesses contributed to an increase in net charge-offs on Bolt SBA 7(a) loans compared to the prior quarter. Although our core SBA and conventional commercial loan portfolio performance remains strong, many of our SBA small business clients continue to struggle in a difficult environment even though many have shown some resilience in the face of inflation and persistent high interest rates.

The Company recorded a provision for credit losses for the six months ended June 30, 2025 of $11.7 million compared to a $7.1 million provision for the six months ended June 30, 2024. The increase of $4.6 million in the provision for credit losses expense was primarily due to higher than expected charge-offs primarily in the Bolt SBA 7(a) portfolio resulting in higher provision expense based on ACL model output. For the six months ended June 30, 2025, net loan charge offs totaled $10.1 million compared to $6.9 million for the six months ended June 30, 2024.

The ACL was $17.0 million at June 30, 2025 and $13.8 million at June 30, 2024.

Noninterest Income

The following table presents noninterest income from continuing operations for the three and six months ended June 30, 2025 and June 30, 2024.

(Dollars in thousands)

Noninterest income from continuing operations was $10.8 million during the three months ended June 30, 2025, a decrease from $11.7 million during the three months ended June 30, 2024. The decrease was the result of decreases in loan servicing income of $0.3 million, fair value gains on government guaranteed loans of $0.8 million, and government guaranteed loan packaging fees of $0.4 million, partially offset by an increase in gain on sale of government guaranteed loans of $0.5 million.

Noninterest income from continuing operations was $19.5 million for the six months ended June 30, 2025, a decrease from $25.9 million for the six months ended June 30, 2024. The decrease was primarily the result of a decrease in government guaranteed loan fair value gains of $4.8 million and a decrease in government guaranteed loan packaging fees of $1.1 million.

Noninterest Expense

The following table presents noninterest expense from continuing operations for the three and six months ended June 30, 2025 and June 30, 2024.

(Dollars in thousands)

Noninterest expense from continuing operations was $17.5 million during the three months ended June 30, 2025, an increase from $16.6 million during the three months ended June 30, 2024. The increase in the second quarter of 2025, as compared to the second quarter of 2024, was primarily due to higher loan origination and collection expenses of $0.6 million, occupancy expense of $0.3 million, and data processing expense of $0.4 million, partially offset by lower compensation expense of $0.1 million and marketing and business development expenses of $0.1 million.

Noninterest expense was $33.3 million for the six months ended June 30, 2025, a decrease from $34.4 million for the six months ended June 30, 2024. The decrease was the result of lower compensation expense of $1.6 million and professional service expense of $0.7 million, partially offset by higher occupancy and equipment expense of $0.8 million and data processing expense of $0.9 million.

Income Taxes

Income tax benefit from continuing operations was $412 thousand for the three months ended June 30, 2025, a decrease from income tax expense of $349 thousand for the three months ended June 30, 2024. There was no income tax expense from discontinued operations for the three months ended June 30, 2025, compared to an income tax benefit of $4 thousand for the three months ended June 30, 2024.

Income tax expense from continuing operations was $0.5 million for the six months ended June 30, 2025, a decrease from income tax expense of $0.6 million for the six months ended June 30, 2024. The decrease was primarily due to the decrease in pre-tax earnings from continuing operations. There was no income tax expense from discontinued operations for the six months ended June 30, 2025, compared to an income tax benefit of $23 thousand for the six months ended June 30, 2024.

At June 30, 2025, the Company had no federal net operating loss carryforward and $21 thousand of state net operating loss carryforward. At June 30, 2024, the Company had $1.6 million of federal net operating loss carryforward and $0.4 million of state net operating loss carryforward. The net operating loss carryforwards do not expire.

The effective income tax rate was 25.57% for the six months ended June 30, 2025 and 26.90% for the six months ended June 30, 2024.

Financial Condition

Investment Securities

The following table presents the fair value of the Company's investment securities portfolio classified as available for sale as of June 30, 2025 and December 31, 2024.

(Dollars in thousands)

The net unrealized loss on the investment securities AFS at June 30, 2025 and December 31, 2024, was $3.2 million and $4.0 million, respectively.

The following table presents the amortized cost of the Company's investment securities portfolio classified as held to maturity as of June 30, 2025 and December 31, 2024.

(Dollars in thousands)

There was a $9 thousand ACL on the corporate bonds HTM as of June 30, 2025 and $12 thousand at December 31, 2024. The net unrealized loss on the investment securities HTM at June 30, 2025, was $131 thousand compared with a net unrealized loss on investment securities HTM of $154 thousand at December 31, 2024.

No investment securities were pledged as of June 30, 2025 or December 31, 2024, and there were no sales of investment securities for the three or six months ended June 30, 2025 or three or six months ended June 30, 2024.

The investment securities available for sale presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2025 and December 31, 2024. 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.

(Dollars in thousands)

(Dollars in thousands)

The investment securities held to maturity presented in the following tables are reported at amortized cost and by contractual maturity as of June 30, 2025 and December 31, 2024. 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.

(Dollars in thousands)

52

(Dollars in thousands)

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 10% of the total portfolio. The following table sets forth the composition of its loan portfolio.

(Dollars in thousands)

For the six months ended June 30, 2025, the Bank originated $101.7 million in loans through conventional lending channels and $212.7 million in loans through its government guaranteed lending function. In addition, the Bank sold guaranteed loan balances of $139.3 million.

Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans at June 30, 2025. 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.

(Dollars in thousands)

The following table shows the loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at June 30, 2025.

(Dollars in thousands)

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. 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 June 30, 2025, the Company had $16.0 million in nonperforming assets, excluding government guaranteed loan balances. The ACL represented 1.65% of total loans HFI at amortized cost. At June 30, 2024, the Company had $11.0 million in nonperforming assets, excluding government guaranteed loan balances. The ACL represented 1.50% of total loans HFI at amortized cost. The increase in nonperforming assets was partially the result of a nonaccrual loan for $2.7 million that is fully secured and there was no ACL allocated. Total loans HFI at June 30, 2025 and June 30, 2024 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 1.85% at June 30, 2025, compared to 1.73% at June 30, 2024.

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.

(Dollars in thousands)

(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:

(Dollars in thousands)

The following table details net charge-offs to average loans outstanding by loan category for the three months ended June 30, 2025 and June 30, 2024.

(Dollars in thousands)

56

The following table details net charge-offs to average loans outstanding by loan category for the six months ended June 30, 2025 and June 30, 2024.

(Dollars in thousands)

The increase in commercial and industrial loan net charge-offs was the result of macro economic conditions including rapidly rising interest and inflation rates, as well as natural disasters including wildfires and hurricanes.

SBA and Other Government Guaranteed Loans

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

(Dollars in thousands)

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.

(Dollars in thousands)

57

Deposits

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

Deposits. Deposits are sourced principally from within its primary service area of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota Counties, Florida. The Bank offers a wide selection of deposit instruments including demand deposit accounts, NOW accounts, money market accounts, regular savings accounts, time deposit accounts, and retirement savings plans (such as IRA accounts).

Time deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the interest rate.

The Bank emphasizes commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits. Deposit interest rates are set by management at least monthly or more often if conditions require it, based on a review of loan demand, projected cash flows and a survey of rates among competitors.

Brokered deposits. At times, the Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering outside the market of the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank’s internal policy limits the use of brokered deposits as a funding source to no more than 20% of total assets. The Company's ability to accept or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well capitalized." At June 30, 2025 and December 31, 2024, the Company had $186.7 million and $112.1 million, respectively, of brokered deposits.

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

(Dollars in thousands)

At June 30, 2025, the Company held approximately $235.9 million of deposits that exceeded the FDIC insurance limit which was 20% of total deposits.

The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250 thousand as of June 30, 2025.

(Dollars in thousands)

Deposits increased $20.6 million or 1.80% for the six months ended June 30, 2025, with increases in noninterest-bearing deposit account balances, savings and money market deposit account balances, and time deposit balances, partially offset by a decrease in interest-bearing transaction account balances.

Other Borrowings

At June 30, 2025, the Company had $40,000 of borrowings at 4.57% from the FHLB and no borrowings from the FRB. There were no borrowings from the FHLB or FRB at December 31, 2024.

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 $370.6 million of real estate-related loans as of June 30, 2025. Based on this collateral and the Bank's holdings of FHLB stock, the Bank was eligible to borrow up to $155.5 million from the FHLB at June 30, 2025.

In addition, the Bank has a line of credit with the Federal Reserve Bank of Atlanta which was secured by $79.0 million of commercial loans as of June 30, 2025. 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 Bank was eligible to borrow up to $55.8 million from the FRB at June 30, 2025.

The Company has $6.0 million 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 $6.0 million at June 30, 2025 and December 31, 2024.

The Company has a term note with quarterly principal and interest payments with interest at Prime (7.50% at June 30, 2025). The note matures on March 10, 2029 and the balance of the note was $1.7 million and $1.9 million at June 30, 2025 and December 31, 2024, respectively. The note is secured by 100% of the stock of the Company and requires the Company to comply with certain loan covenants during the term of the note. As of June 30, 2025, the Company was in compliance with all financial debt covenants.

Capital Resources

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

Shareholders' equity was $108.2 million at June 30, 2025 as compared to $110.9 million at December 31, 2024. The decrease was primarily due to net loss of $1.6 million, common stock dividends of $0.7 million, and preferred stock dividends of $0.8 million, partially offset by the decrease in the accumulated other comprehensive loss of $0.6 million.

The Company strives to maintain an adequate capital base to support its activities in a safe and sound manner while at the same time maximizing shareholder value. Management assesses capital adequacy against the risk inherent in the balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

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

At June 30, 2025 and December 31, 2024, the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.

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

(Dollars in thousands)

(1) Minimum to be considered “adequately capitalized” under Basel III Capital Adequacy.

(2) Minimum to be considered “well capitalized” under Prompt Corrective Actions Provisions.

Off-Balance Sheet Arrangements

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

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

(Dollars in thousands)

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

Standby letters-of-credit are conditional lending commitments that the Bank issues to guarantee the performance of a customer to a third party and to support private borrowing arrangements. Essentially, letters of credit have expiration dates within one year of the issue date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit. The Bank may hold collateral supporting those commitments.

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

The Company maintains an ACL for its off-balance sheet loan commitments which is calculated by loan type using estimated line utilization rates based on historical usage. Loss rates for outstanding loans is applied to the estimated utilization rates to calculate the ACL for off-balance sheet loan commitments. At June 30, 2025 and December 31, 2024, ACL for off-balance sheet loan commitments totaled $554 thousand and $516 thousand, respectively.

Contractual Obligations

In the ordinary course of its operations, the Company enters into certain contractual obligations. Total contractual obligations at June 30, 2025 were $393.0 million, an increase from $341.7 million at December 31, 2024. The increase was primarily due to an increase in short-term borrowings of $40.0 million and an increase in time deposits of $12.6 million.

The following tables present our contractual obligations as of June 30, 2025 and December 31, 2024.

(Dollars in thousands)

Liquidity

Liquidity management is the process by which the Bank manages the flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of the operations, and capital expenditures. The Bank generally maintains a minimum liquidity ratio of liquid assets to total assets of at least 7.0%. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered investment securities available for sale. The on-balance sheet liquidity ratio at June 30, 2025 was 8.28%, as compared to 9.17% at December 31, 2024.

For the six months ended 2025, the Bank paid dividends of $3.30 million to BayFirst in order to meet liquidity needs to make interest payments on its debt obligations, dividends on shares of its preferred stock and common stock, and payment of operating expenses. As of June 30, 2025, BayFirst Financial Corp. held $937 thousand in cash and cash equivalents.

The Company expects that all the liquidity needs, including the contractual commitments can be met by currently available liquid assets and cash flows. In the event any unforeseen demand or commitments were to occur, the Company could access the borrowing capacity with the FHLB or FRB, or lines of credit with other financial institutions. The Company does not rely on investment securities as the main source of liquidity and does not foresee the need to sell investment securities for cash flow purposes. In addition, the Company has the ability to obtain wholesale deposits as another source of liquidity. The Company expects that the currently available liquid assets and the ability to borrow from the FHLB, FRB, and other financial institutions would be sufficient to satisfy the liquidity needs without any material adverse effect on the Company’s liquidity.

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

Market Risk and Interest Rate Sensitivity

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

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

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

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

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

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

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

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

The estimated impact on the net interest income as of June 30, 2025 and December 31, 2024, assuming immediate parallel moves in interest rates, is presented in the table below.

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

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

The table below presents the change in the economic value of equity as of June 30, 2025 and December 31, 2024, assuming immediate parallel shifts in interest rates.

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of June 30, 2025, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2025, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

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

In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended December 31, 2024. These factors could materially and adversely affect the Company's business, financial condition, liquidity, results of operations and capital position, and could cause its actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.