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 ~~September 30, 2021~~March 31, 2022
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 001-41068

BAYFIRST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


Florida			59-3665079
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

700 Central Avenue St. Petersburg, Florida			33701
(Address of Principal Executive Offices)			(Zip Code)

(727) 440-6848

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	BAFN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ox No xo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The registrant had outstanding ~~3,974,067~~4,013,036 shares of common stock as of ~~December 8, 2021.~~May 11, 2022.


		Page
Part I - Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at ~~September 30, 2021~~March 31, 2022 (Unaudited) and December 31, ~~2020~~20 21	3
	Consolidated Statements of Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~20 21	4
	Consolidated Statements of Comprehensive Income (L oss) (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2021~~March 3 1 , 202 2 and ~~2020~~20 21	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2021~~March 3 1 , 202 2 and ~~2020~~20 2 1	6
	Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~ three months ended ~~September 30, 2021~~March 31 , 202 2 and ~~2020~~202 1	87
	Notes to the Consolidated Financial Statements (Unaudited)	89
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3330
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5549
Item 4.	Controls and Procedures	5549

Part II - Other Information		56
Item 1.	Legal Proceedings	5651
Item 1A.	Risk Factors	5651
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5651
Item 3.	Defaults Upon Senior Securities	5652
Item 4.	Mine Safety Disclosures	5652
Item 5.	Other Information	5652
Item 6.	Exhibits	5753
Signatures		5854

Table of Contents

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.


AFS: Available for Sale			FDIC: Federal Deposit Insurance Corporation
ALCO: Asset-Liability Committee			FHLB: Federal Home Loan Bank
~~ALCO: Asset-Liability Committee~~ALLL: Allowance for Loan Losses			FNBB: First National Bankers Bank
~~ALLL: Allowance for Loan Losses~~AOCI: Accumulated Other Comprehensive Income			FRB: Federal Reserve Bank
ASC: FASB Accounting Standards Codification			FVO: Fair Value Option
ASU: FASB Accounting Standards Update			GAAP: Generally Accepted Accounting Principles
BHCA: Bank Holding Company Act of 1956, as amended			IRA: Individual Retirement Account
BOLI: Bank Owned Life Insurance			JOBS Act: Jumpstart Our Business Startups Act of 2012
BSA: Bank Secrecy Act of 1970			LHFS: Loans Held for Sale
CAA: Consolidated Appropriations Act			~~IRA: Individual Retirement~~MMDA: Money Market Deposit Account
CARES Act: Coronavirus Aid, Relief, and Economic Security Act			~~JOBS Act: Jumpstart Our Business Startups Act~~NOW: Negotiable Order of ~~2012~~Withdrawal
CBLR: Community Bank Leverage Ratio			~~LHFS: Loans Held for Sale~~NSPP: Non-Qualified Stock Purchase Plan
CECL: Current Expected Credit Losses			~~MMDA: Money Market Deposit Account~~OFR: Florida Office of Financial Regulation
CET1: Common Equity Tier 1 Capital			OLC: Officer Loan Commitee
C&I: Commercial and Industrial			~~NOW: Negotiable Order of Withdrawal~~OREO: Other Real Estate Owned
CIK: Central Index Key			~~NSPP: Non-Qualified Stock Purchase Plan~~OTTI: Other-Than-Temporary Impairment
COVID-19: Coronavirus ~~disease~~Disease 2019			~~OREO: Other Real Estate Owned~~PCAOB: Public Company Accounting Oversight Board
DCLC: Directors’ Credit and Loan Committee			PPP: Paycheck Protection Program
DODD-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010			~~PPP:~~PPPLF: Paycheck Protection Program Liquidity Facility
DRIP: Dividend Reinvestment Plan			~~PPPLF: Paycheck Protection Program Liquidity Facility~~QIB: Qualified Institutional Buyer
EGC: Emerging Growth Company			SBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Inventive Plan			~~SBA: Small Business Administration~~SEC: U.S. Securities and Exchange Commission
ESG: Environmental, Social, and Governance			SOFR: Secured Overnight Financing Rate
ESOP: Employee Stock Ownership Plan			U.S.: United States
ESPP: Employee Stock Purchase Plan			~~SEC: U.S. Securities and Exchange Commission~~
~~ESOP: Employee Stock Ownership Plan~~			~~SOFR: Secured Overnight Financing Rate~~USDA: United States Department of Agriculture
Exchange Act: Securities Exchange Act of 1934			~~U.S.:~~USDA B&I: United States Department of Agriculture Buiness and Industry
FASB: Financial Accounting Standards Board			TDR: ~~Trouble~~Troubled Debt Restructure
~~FDIC: Federal Deposit Insurance~~FBCA: Florida Business Corporation Act			iXBRL: Inline eXtensible Business Reporting Language

Table of Contents


BAYFIRST FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (Dollars in ~~thousands)~~thousands, except per share data)

Part I - Financial Information

Item 1. Financial Statements


ASSETS	ASSETS					ASSETS
		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
		(Unaudited)					(Unaudited)
Cash and due from banks	Cash and due from banks	$	2,715	$	2,790	Cash and due from banks	$	3,141	$	2,869
Interest-bearing deposits in banks	Interest-bearing deposits in banks	104,382		52,589		Interest-bearing deposits in banks	118,960		106,858
Cash and cash equivalents	Cash and cash equivalents	107,097		55,379		Cash and cash equivalents	122,101		109,727
Time deposits in banks	Time deposits in banks	2,381		2,381		Time deposits in banks	3,881		2,381
Investment securities available for sale	Investment securities available for sale	32,535		—		Investment securities available for sale	41,656		30,893
Investment securities held to maturity	Investment securities held to maturity	3		41		Investment securities held to maturity	2		2
Restricted equity securities, at cost	Restricted equity securities, at cost	2,827		2,362		Restricted equity securities, at cost	2,520		2,827
Residential loans held for sale	Residential loans held for sale	91,243		208,704		Residential loans held for sale	75,022		114,131
Government guaranteed loans held for sale						Government guaranteed loans held for sale	1,445		1,460
SBA loans held for investment, at fair value	SBA loans held for investment, at fair value	9,805		9,264		SBA loans held for investment, at fair value	8,769		9,614
Loans held for investment, at amortized cost net of allowance for loan losses of $16,616 and $21,162		629,873		1,197,896
Loans held for investment, at amortized cost net of allowance for loan losses of $10,170 and $13,452						Loans held for investment, at amortized cost net of allowance for loan losses of $10,170 and $13,452	542,858		560,882
Accrued interest receivable	Accrued interest receivable	4,292		7,300		Accrued interest receivable	3,150		3,564
Premises and equipment, net	Premises and equipment, net	24,622		18,115		Premises and equipment, net	31,037		29,671
Loan servicing rights	Loan servicing rights	6,155		8,160		Loan servicing rights	7,601		6,619

Deferred income taxes						Deferred income taxes	490		454
Right-of-use operating lease assets	Right-of-use operating lease assets	4,345		3,737		Right-of-use operating lease assets	4,166		4,543
Bank owned life insurance	Bank owned life insurance	12,434		12,183		Bank owned life insurance	24,698		24,547
Other assets	Other assets	16,131		19,169		Other assets	19,145		15,780
Total assets	Total assets	$	943,743	$	1,544,691	Total assets	$	888,541	$	917,095
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:	Liabilities:					Liabilities:
Noninterest-bearing deposits	Noninterest-bearing deposits	$	87,625	$	62,650	Noninterest-bearing deposits	$	92,680	$	83,638
Interest-bearing transaction accounts	Interest-bearing transaction accounts	157,304		140,265		Interest-bearing transaction accounts	180,815		163,495
Savings and money market deposits	Savings and money market deposits	377,452		286,744		Savings and money market deposits	464,847		423,864
Time deposits	Time deposits	52,653		69,125		Time deposits	31,787		50,688
Total deposits	Total deposits	675,034		558,784		Total deposits	770,129		721,685
Subordinated debentures	Subordinated debentures	5,983		5,948		Subordinated debentures	5,987		5,985
Notes payable	Notes payable	3,413		3,754		Notes payable	3,186		3,299
PPP Liquidity Facility	PPP Liquidity Facility	144,601		881,262		PPP Liquidity Facility	—		69,654
Accrued interest payable	Accrued interest payable	562		1,999		Accrued interest payable	86		326
Operating lease liabilities	Operating lease liabilities	4,545		3,925		Operating lease liabilities	4,377		4,747
Accrued expenses and other liabilities	Accrued expenses and other liabilities	15,307		17,950		Accrued expenses and other liabilities	9,897		15,109
Total liabilities	Total liabilities	849,445		1,473,622		Total liabilities	793,662		820,805

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at September 30, 2021 and December 31, 2020; aggregate liquidation preference of $6,395		6,161		6,161
Preferred stock, Series B; no par value, 20,000 shares authorized, 4,310 and 8,760 shares issued and outstanding at September 30, 2021 and December 31, 2020; aggregate liquidation preference of $4,310 and $8,760, respectively		4,193		8,516
Common stock and additional paid-in capital; no par value, 15,000,000 shares authorized, 3,919,977 and 3,485,018 shares issued and outstanding at September 30, 2021 and December 31, 2020		50,546		43,043
Accumulated other comprehensive income (loss), net		(201)		—
Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at March 31, 2022 and December 31, 2021; aggregate liquidation preference of $6,395						Preferred stock, Series A; no par value, 10,000 shares authorized, 6,395 shares issued and outstanding at March 31, 2022 and December 31, 2021; 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 March 31, 2022 and December 31, 2021; aggregate liquidation preference of $3,210						Preferred stock, Series B; no par value, 20,000 shares authorized, 3,210 shares issued and outstanding at March 31, 2022 and December 31, 2021; 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, 4,013,173 and 3,981,117 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively						Common stock and additional paid-in capital; no par value, 15,000,000 shares authorized, 4,013,173 and 3,981,117 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	52,252		51,496
Accumulated other comprehensive loss, net						Accumulated other comprehensive loss, net	(1,458)		(420)
Unearned compensation	Unearned compensation	(23)		(41)		Unearned compensation	(630)		(17)
Retained earnings	Retained earnings	33,622		13,390		Retained earnings	35,431		35,947
Total shareholders’ equity	Total shareholders’ equity	94,298		71,069		Total shareholders’ equity	94,879		96,290
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	943,743	$	1,544,691	Total liabilities and shareholders’ equity	$	888,541	$	917,095

See accompanying notes.

Table of Contents


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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Interest income:	Interest income:									Interest income:
Loans, including fees	Loans, including fees	$	9,357	$	12,550	$	39,014	$	29,247	Loans, including fees		$	7,555	$	14,811
Interest-bearing deposits in banks and other	Interest-bearing deposits in banks and other	188		72		420		571		Interest-bearing deposits in banks and other		185		81
Total interest income	Total interest income	9,545		12,622		39,434		29,818		Total interest income		7,740		14,892
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	1,152		1,540		3,666		6,111		Deposits		1,217		1,320
Borrowings	Borrowings	377		998		2,218		1,827		Borrowings		117		942
Total interest expense	Total interest expense	1,529		2,538		5,884		7,938		Total interest expense		1,334		2,262
Net interest income	Net interest income	8,016		10,084		33,550		21,880		Net interest income		6,406		12,630
Provision for loan losses	Provision for loan losses	(3,000)		7,000		(1,000)		11,900		Provision for loan losses		(2,400)		2,000
Net interest income after provision for loan losses	Net interest income after provision for loan losses	11,016		3,084		34,550		9,980		Net interest income after provision for loan losses		8,806		10,630
Noninterest income:	Noninterest income:									Noninterest income:
Residential loan fee income	Residential loan fee income	21,323		31,226		76,704		61,888		Residential loan fee income		13,191		32,029
Loan servicing income, net	Loan servicing income, net	417		565		1,446		1,753		Loan servicing income, net		461		704
Gain (loss) on sale of SBA loans, net		(338)		—		13,460		1,732
Gain on sale of government guaranteed loans, net										Gain on sale of government guaranteed loans, net		4,621		—
Service charges and fees	Service charges and fees	261		205		730		664		Service charges and fees		282		222
SBA loan fair value gain		72		55		151		49
SBA loan fair value gain (loss)										SBA loan fair value gain (loss)		(197)		72
Other noninterest income	Other noninterest income	257		141		872		232		Other noninterest income		510		132
Total noninterest income	Total noninterest income	21,992		32,192		93,363		66,318		Total noninterest income		18,868		33,159
Noninterest expense:	Noninterest expense:									Noninterest expense:
Salaries and benefits	Salaries and benefits	12,851		8,876		38,966		24,497		Salaries and benefits		13,697		13,167
Bonus, commissions, and incentives	Bonus, commissions, and incentives	8,536		11,919		29,627		23,887		Bonus, commissions, and incentives		4,606		11,873
Mortgage banking	Mortgage banking	1,440		1,620		4,707		3,645		Mortgage banking		1,002		1,695
Occupancy and equipment	Occupancy and equipment	1,278		1,182		3,907		3,314		Occupancy and equipment		1,421		1,332
Data processing	Data processing	1,347		1,163		5,209		3,086		Data processing		1,467		1,269
Marketing and business development	Marketing and business development	1,924		717		5,444		2,250		Marketing and business development		1,742		1,642
Professional services	Professional services	1,428		878		3,195		2,343		Professional services		1,307		924
Loan origination and collection	Loan origination and collection	683		908		2,284		1,771		Loan origination and collection		670		496
Employee recruiting and development	Employee recruiting and development	809		245		2,431		1,135		Employee recruiting and development		871		614
Regulatory assessments	Regulatory assessments	138		144		340		418		Regulatory assessments		69		102
Other noninterest expense	Other noninterest expense	795		556		2,508		1,649		Other noninterest expense		795		607
Total noninterest expense	Total noninterest expense	31,229		28,208		98,618		67,995		Total noninterest expense		27,647		33,721
Income before income taxes	Income before income taxes	1,779		7,068		29,295		8,303		Income before income taxes		27		10,068
Income tax expense	Income tax expense	499		1,815		7,488		1,206		Income tax expense		14		2,557
Net income	Net income	1,280		5,253		21,807		7,097		Net income		13		7,511
Preferred stock dividends	Preferred stock dividends	230		202		797		557		Preferred stock dividends		208		332
Net income available to common shareholders		$	1,050	$	5,051	$	21,010	$	6,540
Basic earnings per common share		$	0.27	$	1.47	$	5.60	$	1.91
Diluted earnings per common share		$	0.26	$	1.37	$	5.13	$	1.78
Net income (loss attributable to) available to common shareholders										Net income (loss attributable to) available to common shareholders		$	(195)	$	7,179
Basic earnings (loss) per common share										Basic earnings (loss) per common share		$	(0.05)	$	2.05
Diluted earnings (loss) per common share										Diluted earnings (loss) per common share		$	(0.05)	$	1.82

See accompanying notes.

Table of Contents


BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollars in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net income $ 1,280 $ 5,253 $ 21,807 $ 7,097
Net unrealized gains (losses) on investment securities available for sale (108) — (274) —
Deferred income tax benefit 29 — 73 —
Other comprehensive income (loss), net (79) — (201) —
Comprehensive income $ 1,201 $ 5,253 $ 21,606 $ 7,097


	Three Months Ended March 31,
		2022		2021
Net income		$	13	$	7,511
Net unrealized (losses) on investment securities available for sale		(1,377)		—
Deferred income tax benefit		339		—
Other comprehensive (loss), net		(1,038)		—
Comprehensive income (loss)		$	(1,025)	$	7,511

See accompanying notes.

Table of Contents


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(1)	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			Preferred Shares, Series A	Preferred Shares, Series B	Common Shares(1)	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
Three months ended September 30,:
Balance at July 1, 2020		7,895	—	3,435,516	$	7,661	$	—	$	42,199	$	—	$	(53)	$	3,500	$	53,307
Balance at January 1, 2021																			Balance at January 1, 2021	6,395	8,760	3,485,018	$	6,161	$	8,516	$	43,043	$	—	$	(41)	$	13,390	$	71,069
Net income	Net income	—	—	—	—		—		—		—		—		5,253		5,253		Net income	—	—	—	—		—		—		—		—		7,511		7,511
Issuance of common stock under:	Issuance of common stock under:																		Issuance of common stock under:
Non-qualified stock purchase plan	Non-qualified stock purchase plan	—	—	12,357	—		—		107		—		—		—		107		Non-qualified stock purchase plan	—	—	13,142	—		—		207		—		—		—		207
Dividend reinvestment plan	Dividend reinvestment plan	—	—	7,317	—		—		98		—		—		—		98		Dividend reinvestment plan	—	—	6,339	—		—		107		—		—		—		107

Issuance of common stock, net																			Issuance of common stock, net	—	—	14,471	—		—		224		—		—		—		224

Issuance of preferred stock, net	Issuance of preferred stock, net	—	3,820	—	—		3,723		—		—		—		—		3,723		Issuance of preferred stock, net	—	740	—	—		727		—		—		—		—		727
Stock-based awards - common stock:	Stock-based awards - common stock:																		Stock-based awards - common stock:
Restricted stock expense, net of tax impact	Restricted stock expense, net of tax impact	—	—	—	—		—		—		—		6		—		6		Restricted stock expense, net of tax impact	—	—	2,227	—		—		29		—		6		—		35
Stock option expense	Stock option expense	—	—	—	—		—		92		—		—		—		92		Stock option expense	—	—	—	—		—		106		—		—		—		106
Conversion of Series B preferred stock to common stock																			Conversion of Series B preferred stock to common stock	—	(2,520)	157,369	—		(2,452)		2,452		—		—		—		—

Dividends declared on:	Dividends declared on:																		Dividends declared on:
Preferred stock	Preferred stock	—	—	—	—		—		—		—		—		(202)		(202)		Preferred stock	—	—	—	—		—		—		—		—		(331)		(331)
Common stock ($0.067 per share)	Common stock ($0.067 per share)	—	—	—	—		—		—		—		—		(230)		(230)		Common stock ($0.067 per share)	—	—	—	—		—		—		—		—		(234)		(234)
Balance at September 30, 2020		7,895	3,820	3,455,190	$	7,661	$	3,723	$	42,496	$	—	$	(47)	$	8,321	$	62,154
Balance at March 31, 2021																			Balance at March 31, 2021	6,395	6,980	3,678,566	$	6,161	$	6,791	$	46,168	$	—	$	(35)	$	20,336	$	79,421

Balance at July 1, 2021		6,395	4,580	3,867,415	$	6,161	$	4,456	$	49,501	$	(122)	$	(29)	$	32,846	$	92,813
Balance at January 1, 2022																			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 income	Net income	—	—	—	—		—		—		—		—		1,280		1,280		Net income	—	—	—	—		—		—		—		—		13		13
Issuance of common stock under:
Non-qualified stock purchase plan		—	—	8,247	—		—		218		—		—		—		218
Dividend reinvestment plan		—	—	4,337	—		—		105		—		—		—		105
Employee stock ownership plan		—	—	24,920	—		—		366		—		—		—		366

Exercise of stock warrants																			Exercise of stock warrants	—	—	750	—		—		13		—		—		—		13
Repurchase of common stock																			Repurchase of common stock	—	—	(2,212)	—		—		(49)		—		—		—		(49)
Exercise of stock options, net																			Exercise of stock options, net	—	—	401	—		—		—		—		—		—		—

Stock-based awards - common stock:	Stock-based awards - common stock:																		Stock-based awards - common stock:
Restricted stock expense, net of tax impact	Restricted stock expense, net of tax impact	—	—	—	—		—		—		—		6		—		6		Restricted stock expense, net of tax impact	—	—	33,117	—		—		713		—		(613)		—		100
Stock option expense	Stock option expense	—	—	—	—		—		93		—		—		—		93		Stock option expense	—	—	—	—		—		79		—		—		—		79
Conversion of Series B preferred stock to common stock		—	(270)	15,058	—		(263)		263		—		—		—		—

Other comprehensive income (loss), net	Other comprehensive income (loss), net	—	—	—	—		—		—		(79)		—		—		(79)		Other comprehensive income (loss), net	—	—	—	—		—		—		(1,038)		—		—		(1,038)
Dividends declared on:	Dividends declared on:																		Dividends declared on:
Preferred stock	Preferred stock	—	—	—	—		—		—		—		—		(230)		(230)		Preferred stock	—	—	—	—		—		—		—		—		(208)		(208)
Common stock ($0.07 per share)		—	—	—	—		—		—		—		—		(274)		(274)
Balance at September 30, 2021		6,395	4,310	3,919,977	$	6,161	$	4,193	$	50,546	$	(201)	$	(23)	$	33,622	$	94,298
Common stock ($0.08 per share)																			Common stock ($0.08 per share)	—	—	—	—		—		—		—		—		(321)		(321)
Balance at March 31, 2022																			Balance at March 31, 2022	6,395	3,210	4,013,173	$	6,161	$	3,123	$	52,252	$	(1,458)	$	(630)	$	35,431	$	94,879

(1) Common shares for all periods shown herein reflect the three-for-two stock split, effective on May 10, 2021.

See accompanying notes.

~~Table of Contents~~


~~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(1)
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
Nine months ended September 30,:
Balance at January 1, 2020 7,895 — 3,393,788 $ 7,661 $ — $ 41,362 $ — $ (156) $ 2,465 $ 51,332
Net income — — — — — — — — 7,097 7,097
Issuance of common stock under:
Non-qualified stock purchase plan — — 24,762 — — 303 — — — 303
Dividend reinvestment plan — — 28,141 — — 405 — — — 405
Employee stock ownership plan — — 17,552 — — 260 — — — 260
Issuance of preferred stock, net — 3,820 — — 3,723 — — — — 3,723
Stock-based awards - common stock:
Restricted stock expense, net of tax impact — — (9,053) — — (114) — 109 — (5)
Stock option expense — — — — — 280 — — — 280
Dividends declared on:
Preferred stock — — — — — — — — (557) (557)
Common stock ($0.201 per share) — — — — — — — — (684) (684)
Balance at September 30, 2020 7,895 3,820 3,455,190 $ 7,661 $ 3,723 $ 42,496 $ — $ (47) $ 8,321 $ 62,154
Balance at January 1, 2021 6,395 8,760 3,485,018 $ 6,161 $ 8,516 $ 43,043 $ — $ (41) $ 13,390 $ 71,069
Net income — — — — — — — — 21,807 21,807
Issuance of common stock under:
Non-qualified stock purchase plan — — 35,433 — — 662 — — — 662
Dividend reinvestment plan — — 17,971 — — 389 — — — 389
Employee stock ownership plan — — 24,920 — — 366 — — — 366
Issuance of preferred stock, net — 740 — — 727 — — — — 727
Issuance of common stock, net — — 35,426 — — 701 — — — 701
Stock-based awards - common stock:
Restricted stock expense, net of tax impact — — 2,031 — — 25 — 18 — 43
Stock option expense — — — — — 310 — — — 310
Conversion of Series B preferred stock to common stock — (5,190) 319,178 — (5,050) 5,050 — — — —
Other comprehensive income (loss), net — — — — — — (201) — — (201)
Dividends declared on:
Preferred stock — — — — — — — — (797) (797)
Common stock ($0.207 per share) — — — — — — — — (778) (778)
Balance at September 30, 2021 6,395 4,310 3,919,977 $ 6,161 $ 4,193 $ 50,546 $ (201) $ (23) $ 33,622 $ 94,298

~~(1)~~ ~~Common shares for all periods shown herein reflect the three-for-two stock split, effective on May 10, 2021.~~

~~See accompanying notes.~~

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	21,807	$	7,097	Net income	$	13	$	7,511
Adjustments to reconcile net income to net cash from operating activities:	Adjustments to reconcile net income to net cash from operating activities:					Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,304		567
Depreciation of fixed assets						Depreciation of fixed assets	495		414
Net securities premium amortization						Net securities premium amortization	40		—
Amortization of debt issuance costs						Amortization of debt issuance costs	—		3
Amortization of discount on PPP loans purchased						Amortization of discount on PPP loans purchased	(2)		(14)
Provision for loan losses	Provision for loan losses	(1,000)		11,900		Provision for loan losses	(2,400)		2,000
Accretion of discount on unguaranteed loans	Accretion of discount on unguaranteed loans	(1,523)		(1,705)		Accretion of discount on unguaranteed loans	(411)		(457)

Deferred tax expense (benefit)						Deferred tax expense (benefit)	303		(1,904)
Origination of SBA loans held for sale	Origination of SBA loans held for sale	—		(23,877)		Origination of SBA loans held for sale	(1,445)		—
Proceeds from sales of SBA loans held for sale	Proceeds from sales of SBA loans held for sale	—		25,228		Proceeds from sales of SBA loans held for sale	81,880		—
Net gains on sales of PPP and SBA loans		(13,460)		(1,732)
Net gains on sales of SBA loans						Net gains on sales of SBA loans	(4,621)		—
Origination of residential loans held for sale	Origination of residential loans held for sale	(1,744,630)		(1,278,784)		Origination of residential loans held for sale	(335,560)		(715,856)
Proceeds from sales of residential loans held for sale	Proceeds from sales of residential loans held for sale	1,930,527		1,268,391		Proceeds from sales of residential loans held for sale	380,999		739,409
Net gains on sales of residential loans held for sale	Net gains on sales of residential loans held for sale	(74,842)		(59,328)		Net gains on sales of residential loans held for sale	(9,070)		(28,944)
Change in fair value of residential loans held for sale	Change in fair value of residential loans held for sale	6,168		(3,190)		Change in fair value of residential loans held for sale	2,999		5,333
Change in fair value of SBA loans held for investment, at fair value	Change in fair value of SBA loans held for investment, at fair value	(151)		(49)		Change in fair value of SBA loans held for investment, at fair value	197		(72)
Amortization of loan servicing rights	Amortization of loan servicing rights	2,343		2,641		Amortization of loan servicing rights	707		716
Non-qualified stock purchase plan expense	Non-qualified stock purchase plan expense	56		30		Non-qualified stock purchase plan expense	25		19
Stock based compensation expense	Stock based compensation expense	359		275		Stock based compensation expense	154		141

Income from bank owned life insurance	Income from bank owned life insurance	(251)		(99)		Income from bank owned life insurance	(151)		(85)
Changes in:	Changes in:					Changes in:
Accrued interest receivable	Accrued interest receivable	3,008		(3,139)		Accrued interest receivable	414		(1,284)
Other assets	Other assets	2,430		(15,231)		Other assets	(2,988)		(4,016)
Accrued interest payable	Accrued interest payable	(1,437)		1,077		Accrued interest payable	(240)		(1,105)
Other liabilities	Other liabilities	(2,023)		7,761		Other liabilities	(5,582)		372
Net cash from operating activities	Net cash from operating activities	128,685		(62,167)		Net cash from operating activities	105,756		2,181
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of investment securities available for sale	Purchase of investment securities available for sale	(33,208)		—		Purchase of investment securities available for sale	(12,820)		—
Principal payments on investment securities available for sale	Principal payments on investment securities available for sale	361		—		Principal payments on investment securities available for sale	640		—
Principal payments on investment securities held to maturity	Principal payments on investment securities held to maturity	37		—		Principal payments on investment securities held to maturity	—		10
Purchase of restricted equity securities		(465)		(210)
Purchase of PPP loans		—		(22,404)
Proceeds from sales of PPP and SBA loans originally classified as held for investment		331,352		—
Purchase (sale) of restricted equity securities						Purchase (sale) of restricted equity securities	307		(357)
Purchase of time deposits from banks						Purchase of time deposits from banks	(1,500)		—

Loan (originations) and payments, net	Loan (originations) and payments, net	252,220		(932,390)		Loan (originations) and payments, net	(56,260)		(160,813)
Purchase of premises and equipment	Purchase of premises and equipment	(7,793)		(1,441)		Purchase of premises and equipment	(1,861)		(602)
Purchase of bank owned life insurance		—		(12,000)
Net cash from investing activities		542,504		(968,445)

Net cash (used in) investing activities						Net cash (used in) investing activities	(71,494)		(161,762)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net change in deposits	Net change in deposits	116,250		61,547		Net change in deposits	48,444		48,480
Proceeds from issuance of subordinated debt		6,000		—
Net increase of short-term fed funds purchased						Net increase of short-term fed funds purchased	—		40,000

Payments on notes payable	Payments on notes payable	(341)		(228)		Payments on notes payable	(113)		(113)
Net proceeds (repayments) of PPP Liquidity Facility borrowings	Net proceeds (repayments) of PPP Liquidity Facility borrowings	(736,661)		889,770		Net proceeds (repayments) of PPP Liquidity Facility borrowings	(69,654)		76,151
Proceeds from issuance of preferred stock, net	Proceeds from issuance of preferred stock, net	727		3,723		Proceeds from issuance of preferred stock, net	—		727
Redemption of subordinated debt		(6,000)		—

Proceeds from sale of common stock, net	Proceeds from sale of common stock, net	1,690		678		Proceeds from sale of common stock, net	13		519
ESOP contribution		366		260
Dividends paid on common stock		(778)		(684)
Dividends paid on preferred stock		(797)		(557)
Net cash from financing activities		(619,544)		954,509
Net change in cash and cash equivalents		51,645		(76,103)
Cash and cash equivalents, beginning of period		55,379		110,580
Cash and cash equivalents, end of period		$	107,024	$	34,477
Supplemental cash flow information
Interest paid		$	7,321	$	6,861
Income taxes paid		$	10,322	$	932
Supplemental noncash disclosures
Recognition of right of use asset and operating lease liability		$	136	$	1,717
Conversion of Series B preferred stock to common stock		$	5,050	$	—

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)


	Three Months Ended March 31,
	2022		2021
Share buyback - redeemed stock	(49)		—


Dividends paid on common stock	(321)		(234)
Dividends paid on preferred stock	(208)		(331)
Net cash from (used in) financing activities	(21,888)		165,199
Net change in cash and cash equivalents	12,374		5,618
Cash and cash equivalents, beginning of period	109,727		55,379
Cash and cash equivalents, end of period	$	122,101	$	60,997
Supplemental cash flow information
Interest paid	$	1,574	$	3,367
Income taxes paid	$	22	$	2
Supplemental noncash disclosures
Net change in unrealized holding gain on investment securities available for sale	$	(1,038)	$	—
Transfer of loans and leases held for investment to loans held for sale	$	77,747	$	—
Recognition of right of use asset and operating lease liability	$	—	$	136
Conversion of Series B preferred stock to common stock	$	—	$	2,452

See accompanying notes.

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

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include BayFirst Financial Corp. and its wholly owned subsidiary, First Home Bank d/b/a BayFirst 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, 2021 has been derived from the audited consolidated financial statements of BayFirst Financial Corp. for that period.

The Company principally operates in 2 business segments, Banking and Residential Mortgage Lending.

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 ~~nine~~three month period ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2020.~~2021.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, ~~2020~~2021 in the Company’s Annual Report filed on Form ~~S-1.~~10-K. There were no new accounting policies or changes to existing policies adopted during the first ~~nine~~three months of ~~2021~~2022 which had a significant effect on the Company’s results of operations or statement of financial condition. 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.

Effective May 10, 2021, the Company effected a three-for-two stock split. All share amounts and per share financial data contained in these financial statements related to periods prior and subsequent to this stock split have been adjusted to reflect the split.

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 allowance for loan losses, SBA loan servicing rights, and fair value of residential loans held for sale and residential mortgage derivatives.

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. We have elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements we file in the future for as long as we remain 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 ~~September 30, 2021.~~March 31, 2022. Although the ultimate outcome of all claims and lawsuits outstanding as of ~~September 30, 2021~~March 31, 2022 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.

~~Table of Contents~~


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

New Accounting Standards Not Yet Adopted:

~~Allowance for credit losses:~~

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance was issued to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the CECL model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (i.e., loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net

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

investments in certain leases recognized by a lessor. In addition, the amendments in ASU 2016-13 require credit losses on securities available for sale to be presented as a valuation allowance rather than as a direct write-down thereon. The amendments in this ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted; however, the Company has elected to adopt new or revised accounting standards using the delayed effective dates applicable to Emerging Growth Companies. Management is in the process of evaluating the impact of adoption of this ASU on its Consolidated Financial Statements, processes, and controls and is not currently able to reasonably estimate the impact of adoption on the Company’s consolidated financial position, results of ~~operations, or cash flows;~~operations; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the allowance for credit losses. It is possible that the impact will be material to the Company’s consolidated financial position and results of operations. To date, the Company has established a CECL steering committee and has ~~developed~~ an implementation ~~plan,~~plan. The Company is reviewing potential methodologies for estimating expected credit losses using reasonable and ~~is implementing software~~supportable forecast information to ~~house and maintain~~use in the CECL model.

~~NOTE 2 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)~~

~~Accounting principles generally require~~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 ~~recognized revenue, expenses, gains~~entities disclose current-period gross charge-offs by year of origination for loans and ~~losses be included in net income. Although certain changes in assets~~leases. ASU 2022-02 is effective January 1, 2023 and ~~liabilities are reported as~~is not expected to have a ~~separate component of shareholders’ equity, such items, along with net income, are components of comprehensive income.~~

~~The following table summarizes the change in Accumulated Other Comprehensive Income (Loss) for the nine months ended September 30, 2021:~~


	Unrealized Gains (Losses) on Investment Securities Available for Sale
~~Balance, January 1, 2021~~	$	—
~~Unrealized gain (losses) on investment securities~~	~~(274)~~
~~Deferred tax benefit~~	73
~~Balance, September 30, 2021~~	$	~~(201)~~

significant impact on our financial statement disclosures.

~~Table of Contents~~


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

NOTE 32 – INVESTMENT SECURITIES

The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale at ~~September 30,~~March 31, 2022 and December 31, 2021 are summarized as follows:


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2022										March 31, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale:	Investment securities available for sale:									Investment securities available for sale:
Asset-backed securities	Asset-backed securities	$	7,630	$	—	$	(24)	$	7,606	Asset-backed securities	$	7,621	$	—	$	(50)	$	7,571
Mortgage-backed securities:	Mortgage-backed securities:									Mortgage-backed securities:
U.S. Government-sponsored enterprises	U.S. Government-sponsored enterprises	5,083		—		(44)		5,039		U.S. Government-sponsored enterprises	4,388		—		(323)		4,065
Collateralized mortgage obligations:	Collateralized mortgage obligations:									Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	U.S. Government-sponsored enterprises	20,096		—		(206)		19,890		U.S. Government-sponsored enterprises	23,721		—		(1,575)		22,146
Corporate bonds										Corporate bonds	7,874		—		—		7,874
Total investment securities available for sale	Total investment securities available for sale	$	32,809	$	—	$	(274)	$	32,535	Total investment securities available for sale	$	43,604	$	—	$	(1,948)	$	41,656


December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Investment securities available for sale:
Asset-backed securities	$	7,624	$	—	$	(89)	$	7,535
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,470		—		(76)		4,394
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	19,370		—		(406)		18,964
Total investment securities available for sale	$	31,464	$	—	$	(571)	$	30,893

The amortized cost and fair value of securities are shown in the table below by contractual maturity. Actual timing may

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

differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2022
	Amortized Cost		Fair Value

One to five years	5,018		5,018
Five to ten years	2,856		2,856
Beyond ten years	35,730		33,782
Total	$	43,604	$	41,656

As of March 31, 2022, the Company's investment portfolio consisted of 14 securities, 9 of which were in an unrealized loss position. The investment securities available for sale were purchased ~~during the nine months ended September 30,~~after March 31, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at ~~September 30, 2021.The~~March 31, 2022. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at ~~September 30, 2021.~~March 31, 2022.

The following table summarizes securities with unrealized losses at March 31, 2022 and December 31, 2021 aggregated by security type and length of time in a continuous unrealized loss position:


	Less than 12 Months				12 Months or Longer				Total
March 31, 2022	Far Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Asset-backed securities	$	7,571	$	(50)	$	—	$	—	$	7,571	$	(50)
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,065		(323)		0		0		4,065		(323)
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	17,215		(1,575)		—		—		17,215		(1,575)

Total securities available for sale	$	28,851	$	(1,948)	$	—	$	—	$	28,851	$	(1,948)
December 31, 2021
Asset-backed securities	$	7,535	$	(89)	$	—	$	—	$	7,535	$	(89)
Mortgage-backed securities:
U.S. Government-sponsored enterprises	4,394		(76)		—		—		4,394		(76)
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	18,964		(406)		—		—		18,964		(406)

Total securities available for sale	$	30,893	$	(571)	$	—	$	—	$	30,893	$	(571)

The Company held 1 security classified as held to maturity at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, which matures in August 2039. The security is a debt security to a government-sponsored enterprise and its amortized cost was ~~$3 and $41, the unrecognized loss was $1 and~~ $2 and the fair value was $2 ~~and $39~~ at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, respectively.~~

The security held to maturity had been in an unrealized loss position for over 12 months at September 30, 2021 and December 31, 2020. The unrealized loss has not been recognized into income because the issuer is of high credit quality as a government-sponsored enterprise, management does not intend to sell and it is likely that management will not be required to sell the security prior to its anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments and the fair value is expected to recover as the bond approaches maturity.2021.

No securities were pledged as of ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020,~~2021, and there were no sales of investment securities during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~December 31, 2021.

~~All securities have contractual remaining maturities of more than 10 years. The weighted average market yield of all securities was 1.31%.~~

~~NOTE 4 – LOANS~~

The Company added a new loan segment in 2020, Commercial and industrial – PPP which consists of all loans originated under the CARES Act’s economic relief program and carry a 100% government guarantee. During the nine months ended September 30, 2021, the Company originated $329,315 and sold $326,318 in PPP loans. During the nine months ended September 30, 2020, the Company originated $876,603 and purchased $22,404 in PPP loans.

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

NOTE 3 – LOANS

Loans held for investment, at amortized cost, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Real estate:	Real estate:					Real estate:
Residential	Residential	$	79,889	$	64,724	Residential	$	102,897	$	87,235
Commercial	Commercial	151,122		114,884		Commercial	189,684		163,477
Construction and land	Construction and land	17,848		15,113		Construction and land	18,038		18,632
Commercial and industrial	Commercial and industrial	232,416		193,927		Commercial and industrial	180,163		217,155
Commercial and industrial - PPP	Commercial and industrial - PPP	156,783		838,847		Commercial and industrial - PPP	44,792		80,158
Consumer and other	Consumer and other	4,910		2,896		Consumer and other	13,502		3,581
Loans held for investment, at amortized cost, gross	Loans held for investment, at amortized cost, gross	642,968		1,230,391		Loans held for investment, at amortized cost, gross	549,076		570,238
Deferred loan costs (fees), net		7,298		(5,819)
Deferred loan costs, net						Deferred loan costs, net	7,297		7,975
Discount on SBA 7(a) loans sold(1)	Discount on SBA 7(a) loans sold(1)	(3,753)		(5,417)		Discount on SBA 7(a) loans sold(1)	(3,335)		(3,866)
Discount on PPP loans purchased	Discount on PPP loans purchased	(24)		(97)		Discount on PPP loans purchased	(10)		(13)
Allowance for loan losses	Allowance for loan losses	(16,616)		(21,162)		Allowance for loan losses	(10,170)		(13,452)
Loans held for investment, at amortized cost	Loans held for investment, at amortized cost	$	629,873	$	1,197,896	Loans held for investment, at amortized cost	$	542,858	$	560,882

(1) The Company allocates the retained portion of loans sold based on relative fair value of the retained portion and the sold portion, which results in a discount on the retained portion.

NOTE 54 - ALLOWANCE FOR LOAN LOSSES

The following schedule presents the activity in the allowance for loan losses by loan segment for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~March 31, 2021:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2021			2020			2021			2020					2022			2021
Balance, beginning of period	Balance, beginning of period	$	20,797		$	12,880		$	21,162		$	10,742		Balance, beginning of period		$	13,452		$	21,162
Charge-offs:	Charge-offs:													Charge-offs:
Real estate - commercial		(173)			(7)			(173)			(7)

Commercial and industrial	Commercial and industrial	(1,500)			(956)			(4,090)			(3,785)			Commercial and industrial		(1,031)			(1,137)
Consumer and other	Consumer and other	(20)			(17)			(48)			(79)			Consumer and other		(15)			(16)
Total charge-offs	Total charge-offs	(1,693)			(980)			(4,311)			(3,871)			Total charge-offs		(1,046)			(1,153)
Recoveries:	Recoveries:													Recoveries:
Real estate - commercial	Real estate - commercial	73			—			73			—			Real estate - commercial		8			—
Commercial and industrial	Commercial and industrial	439			12			688			131			Commercial and industrial		153			5
Consumer and other	Consumer and other	—			1			4			11			Consumer and other		3			3
Total recoveries	Total recoveries	512			13			765			142			Total recoveries		164			8
Net (charge-offs) recoveries		(1,181)			(967)			(3,546)			(3,729)
Net (charge-offs)														Net (charge-offs)		(882)			(1,145)
Provision for loan losses	Provision for loan losses	(3,000)			7,000			(1,000)			11,900			Provision for loan losses		(2,400)			2,000
Balance, end of period	Balance, end of period	$	16,616		$	18,913		$	16,616		$	18,913		Balance, end of period		$	10,170		$	22,017
Net (charge-offs) recoveries to total average loans held for investment		(0.63)		%	(0.35)		%	(0.44)		%	(0.62)		%
Net (charge-offs) to total average loans held for investment														Net (charge-offs) to total average loans held for investment		(0.61)		%	(0.35)		%

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

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at ~~September 30, 2021.~~March 31, 2022. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.


		Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total			Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total
Allowance for loan losses:	Allowance for loan losses:																	Allowance for loan losses:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	92	$	—	$	790	$	—	$	—	$	—	$	882	Individually evaluated for impairment	$	—	$	126	$	—	$	239	$	—	$	—	$	—	$	365
Collectively evaluated for impairment	Collectively evaluated for impairment	2,556		3,090		339		9,381		—		312		56		15,734		Collectively evaluated for impairment	668		1,393		124		7,081		—		429		110		9,805
Total	Total	$	2,556	$	3,182	$	339	$	10,171	$	—	$	312	$	56	$	16,616	Total	$	668	$	1,519	$	124	$	7,320	$	—	$	429	$	110	$	10,170
Loans:	Loans:																	Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	2,925	$	—	$	790	$	—	$	—	$	—	$	3,715	Individually evaluated for impairment	$	123	$	2,257	$	—	$	239	$	—	$	—	$	—	$	2,619
Collectively evaluated for impairment	Collectively evaluated for impairment	79,889		148,197		17,848		231,626		156,783		4,910		—		639,253		Collectively evaluated for impairment	102,774		187,427		18,038		179,924		44,792		13,502		—		546,457
Total	Total	$	79,889	$	151,122	$	17,848	$	232,416	$	156,783	$	4,910	$	—	$	642,968	Total	$	102,897	$	189,684	$	18,038	$	180,163	$	44,792	$	13,502	$	—	$	549,076

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by loan segment and based on impairment method at December 31, ~~2020.~~2021. The government guaranteed loan balances are included in the collectively evaluated for impairment balances.


		Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total			Real Estate- Residential		Real Estate- Commercial		Real Estate - Construction and Land		Commercial and Industrial		Commercial and Industrial - PPP		Consumer and Other		Unallocated		Total
Allowance for loan losses:	Allowance for loan losses:																	Allowance for loan losses:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	162	$	—	$	948	$	—	$	—	$	—	$	1,110	Individually evaluated for impairment	$	—	$	91	$	—	$	902	$	—	$	—	$	—	$	993
Collectively evaluated for impairment	Collectively evaluated for impairment	2,088		2,737		310		14,470		—		252		195		20,052		Collectively evaluated for impairment	1,437		2,258		241		8,300		—		154		69		12,459
Total	Total	$	2,088	$	2,899	$	310	$	15,418	$	—	$	252	$	195	$	21,162	Total	$	1,437	$	2,349	$	241	$	9,202	$	—	$	154	$	69	$	13,452
Loans:	Loans:																	Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	2,348	$	—	$	948	$	—	$	—	$	—	$	3,296	Individually evaluated for impairment	$	124	$	2,900	$	—	$	902	$	—	$	—	$	—	$	3,926
Collectively evaluated for impairment	Collectively evaluated for impairment	64,724		112,536		15,113		192,979		838,847		2,896		—		1,227,095		Collectively evaluated for impairment	87,111		160,577		18,632		216,253		80,158		3,581		—		566,312
Total	Total	$	64,724	$	114,884	$	15,113	$	193,927	$	838,847	$	2,896	$	—	$	1,230,391	Total	$	87,235	$	163,477	$	18,632	$	217,155	$	80,158	$	3,581	$	—	$	570,238

The following table presents information related to impaired loans by loan segment at and for the three months ended March 31, 2022:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Real estate - residential	$	123	$	123	$	—	$	62	$	—	$	—
Real estate - commercial	2,088		2,088		—		2,557		2		2



Subtotal	2,211		2,211		—		2,619		2		2
With an allowance recorded:

Real estate - commercial	169		169		126		134		—		—

Commercial and industrial	239		239		239		696		—		—

Subtotal	408		408		365		830		—		—
Total	$	2,619	$	2,619	$	365	$	3,449	$	2	$	2

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

The following table presents information related to impaired loans by loan segment at and for the ~~nine~~three months ended ~~September 30,~~March 31, 2021:

Unpaid
Principal
Balance Recorded
Investment
Allowance
for Loan
Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Recognized
With no related allowance recorded:
Real estate - residential $ — $ — $ — $ — $ — $ —
Real estate - commercial 2,786 2,786 — 2,216 6 6
Real estate - construction and land — — — — — —
Commercial and industrial — — — — — —
Consumer and other — — — — — —
Subtotal 2,786 2,786 — 2,216 6 6
With an allowance recorded:
Real estate - residential — — — — — —
Real estate - commercial 139 139 92 435 — —
Real estate - construction and land — — — — — —
Commercial and industrial 790 790 790 864 — —
Consumer and other — — — — — —
Subtotal 929 929 882 1,299 — —
Total $ 3,715 $ 3,715 $ 882 $ 3,515 $ 6 $ 6

~~The following table presents information related to impaired loans by loan segment at and for the nine months ended September 30, 2020:~~


		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized			Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:	With no related allowance recorded:													With no related allowance recorded:
Real estate - residential		$	—	$	—	$	—	$	15	$	—	$	—

Real estate - commercial	Real estate - commercial	605		605		—		612		24		28		Real estate - commercial	2,193		2,193		—		1,732		20		—
Real estate - construction and land		—		—		—		—		—		—
Commercial and industrial		65		65		—		102		—		—
Consumer and other		—		—		—		—		—		—

Subtotal	Subtotal	670		670		—		729		24		28		Subtotal	2,193		2,193		—		1,732		20		—
With an allowance recorded:	With an allowance recorded:													With an allowance recorded:
Real estate - residential		—		—		—		—		—		—

Real estate - commercial	Real estate - commercial	2,170		2,170		682		1,452		—		—		Real estate - commercial	91		91		39		584		—		—
Real estate - construction and land		—		—		—		—		—		—

Commercial and industrial	Commercial and industrial	1,447		1,447		1,382		2,190		—		—		Commercial and industrial	856		856		856		902		—		—
Consumer and other		—		—		—		—		—		—

Subtotal	Subtotal	3,617		3,617		2,064		3,642		—		—		Subtotal	947		947		895		1,486		—		—
Total	Total	$	4,287	$	4,287	$	2,064	$	4,371	$	24	$	28	Total	$	3,140	$	3,140	$	895	$	3,218	$	20	$	—

The unpaid principal balance represents the outstanding contractual balance. For purposes of the impaired loans by loan segment tables above, the unpaid principal balance and recorded investment do not include the government guaranteed balance. The government guaranteed balances of impaired loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were ~~$6,867~~$6,174 and ~~$6,259,~~$6,197, respectively.

Nonaccrual loans and loans past due over 89 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. The unguaranteed portions of government guaranteed loans that are under $100 are reserved in full. Impaired loans include commercial loans

~~Table of Contents~~


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

that are individually evaluated for impairment and deemed impaired as well as TDR for all loan portfolio segments. The sum of nonaccrual loans and loans past due over 89 days still on accrual will differ from the total impaired loan amount.

The following tables present the recorded investment in nonaccrual and loans past due over 89 days still on accrual by loan segment at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. In the following table, the recorded investment does not include the government guaranteed balance.

Nonaccrual Loans Past Due Over
89 Days Still Accruing
September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
Real estate - residential $ — $ — $ 127 $ 573
Real estate - commercial 2,839 1,806 — —
Commercial and industrial 790 948 — —
Total $ 3,629 $ 2,754 $ 127 $ 573

~~The following table presents the aging of the recorded investment in past due loans at September 30, 2021 by loan segment:~~

30-89 Days
Past Due Greater Than
89 Days
Past Due
Total
Past Due
Loans Not
Past Due (1)
Total
Loans
Real estate - residential $ 439 $ 127 $ 566 $ 79,323 $ 79,889
Real estate - commercial — 1,813 1,813 149,309 151,122
Real estate - construction and land — — — 17,848 17,848
Commercial and industrial 1,999 342 2,341 230,075 232,416
Commercial and industrial - PPP — — — 156,783 156,783
Consumer and other 2 — 2 4,908 4,910
Total $ 2,440 $ 2,282 $ 4,722 $ 638,246 $ 642,968
(1) There was $24,186 of government guaranteed loan balances 30-89 days past due and $1,285 of government guaranteed loan balances greater than 89 days past due reported as not past due.

The increase in the 30-89 days past due commercial and industrial - PPP loans was primarily due to delinquencies from borrowers with only a PPP loan and no other First Home Bank product. These borrowers were non-responsive to requests for forgiveness applications and payments, and applications were subsequently submitted to the SBA for their 100% guarantee purchase from the Bank.


	Nonaccrual				Loans Past Due Over 89 Days Still Accruing
	March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021
Real estate - residential	$	123	$	124	$	—	$	126
Real estate - commercial	2,175		2,815		124		—
Commercial and industrial	239		902		—		—
Total	$	2,537	$	3,841	$	124	$	126

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

The following table presents the aging of the recorded investment in past due loans at ~~December~~March 31, ~~2020~~2022 by loan segment:


		30-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due (1)		Total Loans			30-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due (1)		Total Loans
Real estate - residential	Real estate - residential	$	654	$	573	$	1,227	$	63,497	$	64,724	Real estate - residential	$	179	$	124	$	303	$	102,594	$	102,897
Real estate - commercial	Real estate - commercial	954		1,743		2,697		112,187		114,884		Real estate - commercial	1,239		1,181		2,420		187,264		189,684
Real estate - construction and land	Real estate - construction and land	—		—		—		15,113		15,113		Real estate - construction and land	—		—		—		18,038		18,038
Commercial and industrial	Commercial and industrial	1,613		—		1,613		192,314		193,927		Commercial and industrial	3,417		182		3,599		176,564		180,163
Commercial and industrial - PPP	Commercial and industrial - PPP	—		—		—		838,847		838,847		Commercial and industrial - PPP	—		—		—		44,792		44,792
Consumer and other	Consumer and other	4		—		4		2,892		2,896		Consumer and other	9		—		9		13,493		13,502
Total	Total	$	3,225	$	2,316	$	5,541	$	1,224,850	$	1,230,391	Total	$	4,844	$	1,487	$	6,331	$	542,745	$	549,076

(1) There was $252 of government guaranteed loan balances 30-89 days past due and $5,023 of government guaranteed loan balances greater than 89 days past due reported as not past due.
(1) For the purposes of the table above, $4,993 of balances 30-89 days past due and $1,539 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guaranty. None of commercial and industrial PPP loans were delinquent as of March 31, 2022.												(1) For the purposes of the table above, $4,993 of balances 30-89 days past due and $1,539 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guaranty. None of commercial and industrial PPP loans were delinquent as of March 31, 2022.

The following table presents the aging of the recorded investment in past due loans at December 31, 2021 by loan segment:


	30-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due (1)		Total Loans
Real estate - residential	$	57	$	250	$	307	$	86,928	$	87,235
Real estate - commercial	192		1,778		1,970		161,507		163,477
Real estate - construction and land	—		—		—		18,632		18,632
Commercial and industrial	991		424		1,415		215,740		217,155
Commercial and industrial - PPP	—		—		—		80,158		80,158
Consumer and other	—		—		—		3,581		3,581
Total	$	1,240	$	2,452	$	3,692	$	566,546	$	570,238
(1) For the purposes of the table above, $10,360 of balances 30-89 days past due and $2,807 of balances greater than 89 days past due are reported as Loans Not Past Due as a result of the government guaranty, and $11,089 of commercial and industrial PPP loans are primarily due to delinquencies from borrowers with only a PPP loan and no other First Home Bank product. These borrowers were non-responsive to requests for forgiveness applications and payments, and applications were subsequently submitted to the SBA for their 100% guarantee purchase from the Bank.

Credit Quality Indicators

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

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

Special Mention – These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard”. They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the Bank.

Substandard – These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – These loans have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

~~The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at September 30, 2021:~~

Pass Special
Mention Substandard Doubtful
Total
Loans
Real estate - residential $ 79,889 $ — $ — $ — $ 79,889
Real estate - commercial 148,110 226 2,786 — 151,122
Real estate - construction and land 17,848 — — — 17,848
Commercial and industrial 227,653 2,069 2,694 — 232,416
Commercial and industrial - PPP 156,783 — — — 156,783
Consumer and other 4,910 — — — 4,910
Loans held for investment, at amortized cost $ 635,193 $ 2,295 $ 5,480 $ — $ 642,968

1615

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

The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at March 31, 2022:


	Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate - residential	$	102,897	$	—	$	—	$	—	$	102,897
Real estate - commercial	187,230		280		2,174		—		189,684
Real estate - construction and land	18,038		—		—		—		18,038
Commercial and industrial	177,256		441		2,466		—		180,163
Commercial and industrial - PPP	44,792		—		—		—		44,792
Consumer and other	13,502		—		—		—		13,502
Loans held for investment, at amortized cost	$	543,715	$	721	$	4,640	$	—	$	549,076

The table below sets forth credit exposure for the loan portfolio disaggregated by loan segment based on internally assigned risk ratings at December 31, ~~2020:~~2021:


		Pass		Special Mention		Substandard		Doubtful		Total Loans			Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate - residential	Real estate - residential	$	64,593	$	—	$	131	$	—	$	64,724	Real estate - residential	$	87,233	$	—	$	2	$	—	$	87,235
Real estate - commercial	Real estate - commercial	112,260		431		2,193		—		114,884		Real estate - commercial	160,492		170		2,815		—		163,477
Real estate - construction and land	Real estate - construction and land	15,113		—		—		—		15,113		Real estate - construction and land	18,632		—		—		—		18,632
Commercial and industrial	Commercial and industrial	186,781		5,177		1,896		73		193,927		Commercial and industrial	212,544		1,850		2,761		—		217,155
Commercial and industrial - PPP	Commercial and industrial - PPP	838,847		—		—		—		838,847		Commercial and industrial - PPP	80,158		—		—		—		80,158
Consumer and other	Consumer and other	2,896		—		—		—		2,896		Consumer and other	3,581		—		—		—		3,581
Loans held for investment, at amortized cost	Loans held for investment, at amortized cost	$	1,220,490	$	5,608	$	4,220	$	73	$	1,230,391	Loans held for investment, at amortized cost	$	562,640	$	2,020	$	5,578	$	—	$	570,238

Troubled Debt Restructurings

The following table presents loans classified as TDR at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

September 30, 2021 December 31, 2020
Accruing Nonaccruing Accruing Nonaccruing
Real estate - commercial $ 86 $ 1,116 $ 542 $ 666


	March 31, 2022				December 31, 2021
	Accruing		Nonaccruing		Accruing		Nonaccruing
Real estate - commercial	$	34	$	532	$	85	$	1,116

The Company had not committed to lend any additional amounts to the loans classified as TDR at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The Company estimated ~~$39~~$73 and $0$38 of impaired loan loss reserves for these loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. There were no loans which were modified in the previous twelve months that defaulted during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

There were no new loans classified as TDR during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

The CARES Act was signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDR and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The CAA was signed into law on December 27, 2020, extends the applicable period to include modifications to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the date of the termination of the COVID-19 national emergency. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDR. The Company is applying this guidance to qualifying loan modifications.

1716

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

Loan modifications related to COVID-19 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are presented in the table below:


		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
		Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded Investment			Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded Investment
Real estate - residential	Real estate - residential	1	$	258	11	$	7,106	Real estate - residential	—	$	—	1	$	258
Real estate - commercial		1	514		4	1,849
Real estate - construction and land		—	—		2	1,424

Commercial and industrial	Commercial and industrial	40	3,174		220	9,624		Commercial and industrial	13	676		23	1,113
Total loan modifications related to COVID-19	Total loan modifications related to COVID-19	42	$	3,946	237	$	20,003	Total loan modifications related to COVID-19	13	$	676	24	$	1,371

NOTE 65 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities Available for Sale: The fair values of investment securities available for sale are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of securities available for sale on a monthly basis from a third party pricing service.

Residential Loans Held for Sale: The Company has elected to account for residential loans held for sale at fair value. The fair value of loans held for sale is determined using either actual quoted prices for the assets (Level 1) whenever possible or quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). The gain (loss) on loans held for sale is included in ~~mortgage banking~~residential fee income in the Consolidated Statements of Income.

SBA Loans Held for Investment, at Fair Value: The Company has elected to account for certain SBA loans held for investment at fair value. Fair value is calculated based on the present value of estimated future payments (Level 3). The valuation model uses interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future payments. Whenever available, the present value is validated against available market data.

Mortgage Banking Derivatives: Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts, best efforts forward sales contracts, and interest rate lock commitments. The fair value of mandatory forward sales contracts is measured using quoted market prices (Level 1), or in some cases when quoted market prices are not available, the pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company (Level 2). Interest rate lock commitments involve pricing derived from market observable inputs that are adjusted based on pull-through ~~rates.~~rates (anticipated loan funding probability). Pull-through rates ~~which typically range between 80-85%,~~ are an unobservable input which are the Company’s estimate of the percentage of interest rate lock

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

commitments expected to result in closed loans (Level 3). The fair value of best efforts forward sales contracts is measured using market observable inputs that are adjusted using unobservable inputs including duration, spread, and pull-through rates (Level 3).

Impaired Loans: A loan is considered to be impaired when it is probable the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. In most cases, the Bank measures fair value based on the value of the collateral securing the loan. Collateral may be in the form of real estate and/or business

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

or personal assets, including but not limited to equipment, inventory, and accounts receivable. The fair value of real estate collateral is determined based on third party appraisals by qualified licensed appraisers as well as internal estimates. The fair value of other business or personal assets is generally based on amounts reported on the financial statements of the customer or customer’s business. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the customer and the customer’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

SBA Loan Servicing Rights: On a quarterly basis, SBA loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. The fair value of SBA servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. There were no SBA loan servicing rights carried at fair value at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Assets and liabilities measured at fair value on a recurring basis at ~~September 30,~~March 31, 2022 are summarized below:


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets
Investment securities available for sale	$	—	$	41,656	$	—	$	41,656
Residential loans held for sale	8,515		66,507		—		75,022
SBA loans held for investment, at fair value	—		—		8,769		8,769
Interest rate lock commitments	—		—		760		760
Mandatory forward sales contracts	2,441		—		—		2,441
Best efforts forward sales contracts	—		—		30		30
Financial liabilities
Interest rate lock commitments	$	—	$	—	$	685	$	685
Mandatory forward sales contracts	52		—		—		52

Assets and liabilities measured at fair value on a recurring basis at December 31, 2021 are summarized below:


		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets	Financial assets									Financial assets
Investment securities available for sale	Investment securities available for sale	$	—	$	32,535	$	—	$	32,535	Investment securities available for sale	$	—	$	30,893	$	—	$	30,893
Residential loans held for sale	Residential loans held for sale	28,798		62,445		—		91,243		Residential loans held for sale	43,837		70,294		—		114,131
SBA loans held for investment, at fair value	SBA loans held for investment, at fair value	—		—		9,805		9,805		SBA loans held for investment, at fair value	—		—		9,614		9,614
Interest rate lock commitments	Interest rate lock commitments	—		—		1,579		1,579		Interest rate lock commitments	—		—		1,435		1,435
Mandatory forward sales contracts	Mandatory forward sales contracts	1,004		—		—		1,004		Mandatory forward sales contracts	88		—		—		88
Best efforts forward sales contracts	Best efforts forward sales contracts	—		—		30		30		Best efforts forward sales contracts	—		—		27		27
Financial liabilities	Financial liabilities									Financial liabilities
Interest rate lock commitments	Interest rate lock commitments	$	—	$	—	$	335	$	335	Interest rate lock commitments	$	—	$	—	$	23	$	23
Mandatory forward sales contracts	Mandatory forward sales contracts	44		—		—		44		Mandatory forward sales contracts	166		—		—		166

1918

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

~~Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below:~~

Quoted Prices in
Active Markets
for Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Financial assets
Residential loans held for sale $ 21,888 $ 186,816 $ — $ 208,704
SBA loans held for investment, at fair value — — 9,264 9,264
Interest rate lock commitments — — 7,565 7,565
Best efforts forward sales contracts — — 55 55
Financial liabilities
Interest rate lock commitments $ — $ — $ 12 $ 12
Mandatory forward sales contracts 4,455 — — 4,455

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the reported periods.

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for residential loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual term of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

The aggregate fair value, contractual balance, and gain at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 for residential loans held for sale were as follows:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Aggregate fair value	Aggregate fair value	$	91,243	$	208,704	Aggregate fair value	$	75,022	$	114,131
Contractual balance	Contractual balance	88,682		199,975		Contractual balance	74,225		110,335
Gain	Gain	$	2,561	$	8,729	Gain	$	797	$	3,796

The total amount of ~~gains and~~ losses from changes in fair value and interest income included in earnings for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and 2020~~ for residential loans held for sale were as follows:


		Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020			2022		2021
Interest income	Interest income	$	2,770	$	1,904	Interest income	$	737	$	1,219
Change in fair value	Change in fair value	(6,168)		3,190		Change in fair value	(2,999)		(5,333)
Total gain (loss)		$	(3,398)	$	5,094
Total (loss)						Total (loss)	$	(2,262)	$	(4,114)

The Company also elected the fair value option for certain of its non-PPP SBA loans originated ~~and fully funded during the year ended December 31,~~in 2018 as the Company believed that fair value was the best indicator of the resolution of those loans at that time. Depending on market conditions and liquidity needs of the Company, management determines whether it is advantageous to hold or sell SBA loans on a loan-by-loan basis. The portion of these loans guaranteed by the SBA are generally readily marketable in the secondary market and the portion of the loans that are not guaranteed may be sold periodically to other third party financial institutions. Interest income on these loans is recorded based on the contractual term of the loan and in accordance with the Company’s policy on other loans held for investment.

The aggregate fair value, contractual balance, and gain (loss) at March 31, 2022 and December 31, 2021 for SBA loans held for investment, at fair value, were as follows:


	March 31, 2022		December 31, 2021
Aggregate fair value	$	8,769	$	9,614
Contractual balance	8,785		9,433
Gain (loss)	$	(16)	$	181

The total amount of gains and losses from changes in fair value and interest income included in earnings for the three months ended March 31, 2022 and March 31, 2021 for SBA loans held for investment, at fair value, were as follows:


	Three Months Ended March 31,
	2022		2021
Interest income	$	85	$	132
Change in fair value	(197)		72
Total gain (loss)	$	(112)	$	204

Changes in fair value for SBA loans held for investment, at fair value, were included in SBA fair value gain (loss) on the Consolidated Statements of Income.

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

The ~~aggregate fair value, contractual balance, and gain (loss) at September 30, 2021 and December 31, 2020 for SBA loans held for investment, at fair value, were as follows:~~

September 30, 2021 December 31, 2020
Aggregate fair value $ 9,805 $ 9,264
Contractual balance 9,657 9,266
Gain (loss) $ 148 $ (2)

The total amount of gains and losses from changes in fair value and interest income included in earnings for the nine months ended September 30, 2021 and 2020 for SBA loans held for investment, at fair value, were as follows:

Nine Months Ended September 30,
2021 2020
Interest income $ 462 $ 465
Change in fair value 151 49
Total gain $ 613 $ 514

~~Changes in fair value for SBA loans held for investment, at fair value, were included in SBA fair value gain (loss) on the Consolidated Statements of Income.~~

~~The~~ table below presents a reconciliation of SBA loans held for investment, at fair value, which were valued on a recurring basis and used significant unobservable inputs (Level 3) for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~March 31, 2021:


		Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020			2022		2021
Balance of SBA loans held for investment at fair value, beginning of period	Balance of SBA loans held for investment at fair value, beginning of period	$	9,264	$	10,341	Balance of SBA loans held for investment at fair value, beginning of period	$	9,614	$	9,264
Principal payments	Principal payments	(1,003)		(771)		Principal payments	(648)		(262)
Charge-offs		(8)		(65)

Repurchase of guaranteed balances previously participated	Repurchase of guaranteed balances previously participated	1,401		—		Repurchase of guaranteed balances previously participated	—		1,401
Total gains during the period	Total gains during the period	151		49		Total gains during the period	(197)		72
Balance of SBA loans held for investment at fair value, end of period	Balance of SBA loans held for investment at fair value, end of period	$	9,805	$	9,554	Balance of SBA loans held for investment at fair value, end of period	$	8,769	$	10,475

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

The following table provides information about the valuation techniques and unobservable inputs used in the valuation of SBA loans held for investment, at fair value, interest rate lock commitments, and best efforts forward sales contracts falling within Level 3 of the fair value hierarchy at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Fair Value

Valuation
Technique

Unobservable Inputs

Range (Weighted Average)

~~September~~ March 31, 2022

SBA loans held for

8,769

Discounted

Discount rate

4.01%-7.51% (5.06%)

investment, at fair value

cash flow

Conditional prepayment rate

10.56%-10.56% (10.56%)

Interest rate lock commitments

Quoted Market Prices

Pull-through expectations

24.00%-100.00% (85.96%)

Best efforts forward sales contracts

Quoted Market Prices

Pull-through expectations

24.00%-80.00% (72.46%)

December 31, 2021

SBA loans held for

9,614

Discounted

Discount rate

3.22%-6.72% (4.22%)

investment, at fair value

~~9,805~~

~~Discounted~~ cash flow

~~Discount Rate~~

~~3.14%-6.63% (4.13%)~~

Conditional ~~Prepayment Rate~~prepayment rate

10.56%-10.56% (10.56%)

~~December 31, 2020~~

~~SBA loans held for investment, at fair value~~

$Interest rate lock commitments

~~9,264~~1,412

~~Discounted cash flow~~Quoted Market Prices

~~Discount Rate~~Pull-through expectations

~~3.24%-6.74% (4.37%~~24.00%-100.00% (84.40%)

Best efforts forward sales contracts

~~Conditional Prepayment Rate~~Quoted Market Prices

~~10.53%-10.56% (10.55%~~Pull-through expectations

24.00%-80.00% (65.79%)

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

The significant unobservable inputs impacting the fair value measurement of SBA loans held for investment, at fair value, include discount rates and conditional prepayment rates. Increases in discount rates or prepayment rates would result in a lower fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they generally move in opposite directions. The discount rates and conditional prepayment rates were weighted by the relative principal balance outstanding of these loans.

~~Assets measured at~~The significant unobservable inputs impacting the fair value ~~on a nonrecurring basis at September 30, 2021 are summarized below:~~

Fair Value Valuation Technique(s) Significant
Unobservable
Input(s) Discount % Range/Amount
Impaired loans $ 1,396 Discount appraisals, estimated net realizable value of collateral Collateral discounts 10%

~~Assets measured at~~measurement of interest rate lock commitments and best efforts sales contracts include pull-through rate. An increase in the pull-through rate utilized in the fair value onmeasurement of the interest rate lock commitments and best efforts forward sale contracts will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a ~~nonrecurring basis at December 31, 2020 are summarized below:~~

~~Fair Value~~decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

~~Valuation Technique(s)~~

Significant
Unobservable
Input(s)

~~Discount % Range/Amount~~

~~Impaired loans~~

~~1,583~~

~~Discount appraisals, estimated net realizable value of collateral~~

~~Collateral discounts~~

~~20-75%~~

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

Assets measured at fair value on a nonrecurring basis at March 31, 2022 are summarized below:

Fair Value

Valuation Technique(s)

Significant
Unobservable
Input(s)

Discount % Range/Amount

Impaired loans

987

Discount appraisals, estimated net realizable value of collateral

Collateral discounts

10%

Assets measured at fair value on a nonrecurring basis at December 31, 2021 are summarized below:

Fair Value

Valuation Technique(s)

Significant
Unobservable
Input(s)

Discount % Range/Amount

Impaired loans

1,614

Discount appraisals, estimated net realizable value of collateral

Collateral discounts

10%

Fair Value of Financial Instruments

The carrying values and estimated fair values of financial instruments not carried at fair value, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are as follows:


			September 30, 2021				December 31, 2020						March 31, 2022				December 31, 2021
		Level	Carrying Value		Fair Value		Carrying Value		Fair Value			Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:	Assets:										Assets:
Cash and cash equivalents	Cash and cash equivalents	1	$	107,097	$	107,097	$	55,379	$	55,379	Cash and cash equivalents	1	$	122,101	$	122,101	$	109,727	$	109,727
Time deposits in banks	Time deposits in banks	2	2,381		2,492		2,381		2,521		Time deposits in banks	2	3,881		3,874		2,381		2,437
Investment securities held to maturity	Investment securities held to maturity	2	3		2		41		39		Investment securities held to maturity	2	2		2		2		2
Restricted equity securities, at cost	Restricted equity securities, at cost	2	2,827		2,827		2,362		2,362		Restricted equity securities, at cost	2	2,520		2,520		2,827		2,827
Government guaranteed loans held for sale											Government guaranteed loans held for sale	2	1,445		1,539		1,460		1,460
Loans held for investment, at amortized cost	Loans held for investment, at amortized cost	3	629,873		638,060		1,197,896		1,213,967		Loans held for investment, at amortized cost	3	542,858		542,402		560,882		569,394
Accrued interest receivable	Accrued interest receivable	3	4,292		4,292		7,300		7,300		Accrued interest receivable	3	3,150		3,150		3,564		3,564
SBA loan servicing rights	SBA loan servicing rights	3	5,933		7,615		8,160		9,709		SBA loan servicing rights	3	7,399		8,891		6,407		8,050
Mortgage loan servicing rights	Mortgage loan servicing rights	3	222		222		—		—		Mortgage loan servicing rights	3	202		202		212		212
Liabilities:	Liabilities:										Liabilities:
Noninterest-bearing deposits	Noninterest-bearing deposits	2	$	87,625	$	87,625	$	62,650	$	62,650	Noninterest-bearing deposits	2	$	92,680	$	92,680	$	83,638	$	83,638
Interest-bearing transaction accounts	Interest-bearing transaction accounts	2	157,304		157,304		140,265		140,265		Interest-bearing transaction accounts	2	180,815		180,815		163,495		163,495
Savings and money market deposits	Savings and money market deposits	2	377,452		377,452		286,744		286,744		Savings and money market deposits	2	464,847		464,847		423,864		423,864
Time deposits	Time deposits	2	52,653		53,033		69,125		69,743		Time deposits	2	31,787		31,832		50,688		51,049
Subordinated debentures	Subordinated debentures	2	5,983		6,623		5,948		6,516		Subordinated debentures	2	5,987		6,040		5,985		6,175
Notes payable	Notes payable	2	3,413		3,413		3,754		3,754		Notes payable	2	3,186		3,308		3,299		3,350
PPP Liquidity Facility	PPP Liquidity Facility	3	144,601		144,601		881,262		881,262		PPP Liquidity Facility	2	—		—		69,654		69,654
Accrued interest payable	Accrued interest payable	3	562		562		1,999		1,999		Accrued interest payable	2	86		86		326		326

NOTE 76 – SBA LOAN SERVICING ACTIVITIES

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the principal balance of SBA loans, excluding PPP loans, retained by the Company was ~~$314,015~~$271,317 and ~~$253,330,~~$300,415, respectively, of which ~~$184,119~~$143,081 and ~~$110,196~~$171,548 represented the guaranteed portion of the loans. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid ~~principal balances of SBA loans serviced for others requiring recognition of a servicing asset were $443,764 and $524,910 at September 30, 2021 and December 31, 2020, respectively.~~

~~Activity for SBA loan servicing rights for the three and nine months ended September 30, 2021 and 2020 follows:~~

Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Beginning of period $ 6,614 $ 10,034 $ 8,160 $ 11,280
Additions 100 — 100 530
Amortization (781) (865) (2,327) (2,641)
End of period $ 5,933 $ 9,169 $ 5,933 $ 9,169

The fair value of SBA loan servicing rights was $7,615 and $9,709 at September 30, 2021 and December 31, 2020, respectively. Fair value was determined using a weighted average discount rate of 12.12% and a weighted average

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

~~prepayment speed~~principal balances of ~~10.52%~~SBA loans serviced for others requiring recognition of a servicing asset were $507,986 and $459,670 at ~~September 30, 2021.~~March 31, 2022 and December 31, 2021, respectively.

Activity for SBA loan servicing rights for the three months ended March 31, 2022 and March 31, 2021 follows:


	Three Months Ended
		March 31, 2022		March 31, 2021
Beginning of period		$	6,407	$	8,160
Additions		1,689		—
Amortization		(697)		(715)
End of period		$	7,399	$	7,445

The fair value of SBA loan servicing rights was $8,891 and $8,050 at March 31, 2022 and December 31, 2021, respectively. Fair value was determined using a weighted average discount rate of ~~11.75%~~13.25% and a weighted average prepayment speed of ~~10.34%~~10.26% at March 31, 2022. Fair value was determined using a weighted average discount rate of 12.13% and a weighted average prepayment speed of 10.37% at December 31, ~~2020.~~2021. The SBA loan servicing rights are amortized over the life of a loan on a loan-by-loan basis.

The following table presents the components of net gain (loss) on sale of SBA loans, excluding sale of PPP loans, for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~March 31, 2021:

Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Gain on sale of guaranteed SBA loans $ — $ — $ — $ 2,087
Loss on sale of unguaranteed SBA loans (406) — (406) —
Costs recognized on sale of SBA loans (51) — (51) (885)
Fair value of servicing rights created 100 — 100 530
Gain on sale of SBA loans, net $ (357) $ — $ (357) $ 1,732

~~The Company also sold PPP loans, servicing released, for a net gain of $19 and $13,817 for the three and nine months ended September 30, 2021.~~


	Three Months Ended
		March 31, 2022		March 31, 2021
Gain on sale of guaranteed SBA loans		$	3,236	$	—
Loss on sale of unguaranteed SBA loans		(348)		—
Costs recognized on sale of SBA loans		44		—
Fair value of servicing rights created		1,689		—
Gain on sale of SBA loans, net		$	4,621	$	—

NOTE 87 – LEASES

~~Lease Expense~~

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ the components of total lease cost and supplemental information related to operating leases were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Operating lease cost	Operating lease cost	$	355	$	307	$	1,077	$	890	Operating lease cost		$	387	$	361
Short-term lease cost	Short-term lease cost	173		212		547		485		Short-term lease cost		136		195
Total lease cost, net	Total lease cost, net	$	528	$	519	$	1,624	$	1,375	Total lease cost, net		$	523	$	556


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Operating cash flows related to operating leases	Operating cash flows related to operating leases	$	357	$	300	$	1,066	$	813	Operating cash flows related to operating leases		$	380	$	347
Right-of-use assets obtained in exchange for new operating lease liabilities	Right-of-use assets obtained in exchange for new operating lease liabilities	—		455		136		1,717		Right-of-use assets obtained in exchange for new operating lease liabilities		—		136
		$	357	$	755	$	1,202	$	2,530			$	380	$	483

At ~~September 30, 2021,~~March 31, 2022, the weighted average discount rate of operating leases was ~~2.15%~~2.06% and the weighted average remaining life of operating leases was ~~4.76~~4.10 years.

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

~~Lease Obligations~~

The future minimum lease payments for operating leases, subsequent to ~~September 30, 2021,~~March 31, 2022, as recorded on the balance sheet, are summarized as follows:


2021		$	304
2022	2022	1,121		2022	$	1,094
2023	2023	1,044		2023	1,172
2024	2024	1,051		2024	1,087
2025	2025	679		2025	685
2026				2026	593
Thereafter	Thereafter	895		Thereafter	301
Total undiscounted lease payments	Total undiscounted lease payments	$	5,094	Total undiscounted lease payments	$	4,932
Less: imputed interest	Less: imputed interest	(549)		Less: imputed interest	(555)
Net lease liabilities	Net lease liabilities	$	4,545	Net lease liabilities	$	4,377

NOTE 98 – OTHER BORROWINGS

In June 2021, the Company issued $6,000 of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after 5 years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial five years of term and carry interest at a floating rate for the final 5 years of term. Under the debt agreements, the floating rates are based on a SOFR benchmark plus 3.78% per annum. These Debentures were issued to redeem a $6,000 Subordinated Debenture which was issued in December 2018 and which carried interest at a rate of 6.875% per ~~annum.The~~annum. The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to ~~$5,983~~$5,987 and ~~$5,948~~$5,985 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

In March 2020, the Company renegotiated the terms of ~~their~~its outstanding senior debt and combined ~~the~~its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime ~~(3.25%~~(3.50% at ~~September 30, 2021)~~March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was ~~$3,413~~$3,186 and ~~$3,754~~$3,299 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The note is secured by 100% of the stock of the Bank and requires the Company to comply with certain loan covenants during the term of the note. As of ~~September 30, 2021,~~March 31, 2022, the Company was in compliance with all financial debt covenants.

In April 2020, the Company entered into the Federal Reserve Bank’s PPPLF. Under the PPPLF, advances ~~must be~~were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF ~~accrues~~accrued interest at 0.35% per annum and ~~matures~~matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ~~ranging from April 15, 2022 to August 27, 2025,~~ and ~~will be~~ accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company ~~shall repay~~repaid the advance plus accrued interest. The ~~balances~~balance outstanding on this facility ~~were $144,601 and $881,262~~was $69,654 at ~~September 30, 2021 and~~ December 31, ~~2020, respectively.~~2021. In the first quarter of 2022, the Company repaid the remaining balance of the advance.

NOTE 109 – STOCK-BASED COMPENSATION

The Equity Plan governs the Company’s restricted stock and stock options. Total compensation cost that was charged against income related to the Equity Plan was ~~$99~~$179 and ~~$98~~$141 for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020, respectively and $359 and $299 for the nine months ended September 30, 2021 and 2020,~~ respectively.

Restricted Stock

During the fourth quarter of 2020 and the first quarter of 2021, the Company awarded a total of 22,716 shares of restricted stock to Executive Officers representing a portion of their bonuses which vested immediately. Of those shares awarded, 8,083 shares were forfeited and used to pay the taxes on the shares vested, thus a net of 14,633 shares were issued. Prior to 2019, theThe Company awarded shares of restricted common stock to certain ~~officers~~employees for which compensation expense is recognized ratably over the ~~five-year~~ vesting period of the awards based on the fair value of the stock at issue date.

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

A summary of changes in the Company’s nonvested restricted shares for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 follows:


		Shares	Weighted-Average Grant-Date Fair Value, per share			Shares	Weighted-Average Grant-Date Fair Value, per share
Nonvested at January 1, 2021		4,130	$	14.63
Nonvested at January 1, 2022					Nonvested at January 1, 2022	2,483	$	14.86
Granted	Granted	4,008	13.33		Granted	34,925	21.50
Vested	Vested	(5,655)	13.61		Vested	(3,111)	19.99
Forfeited	Forfeited	—	—		Forfeited	(925)	21.45
Nonvested at September 30, 2021		2,483	$	14.86
Nonvested at March 31, 2022					Nonvested at March 31, 2022	33,372	$	21.15

At ~~September 30, 2021~~March 31, 2022 there was ~~$23~~$608 of total unrecognized compensation cost related to nonvested restricted shares granted under the Equity Plan that is expected to be recognized over a weighted average period of ~~1.2~~2.8 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and 2020~~ was ~~$85~~$70 and $71, respectively.

Stock Options

The Equity Plan permits the grant of stock options to the Company’s employees and non-employee directors for up to 15% of the total number of shares of Company common stock issued and outstanding, up to 1,500,000 shares. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The market price of the Company’s common stock is the closing sales price of the Common Stock on such date on the securities exchange having the greatest volume of trading in the Common Stock during the 30-day period preceding the day the value is to be determined or, if there is no reported closing sales price on such date, the next preceding date on which there was a reported closing price. Those option awards generally have a vesting period of 5 years for employees and 3 years for non-employee directors and have 10-year contractual terms.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected ~~volatilities are~~volatility is based on an average of historical ~~volatilities~~volatility of peer financial institutions. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

~~The fair value of options granted during the nine months ended September 30, 2021 were determined using the following weighted average assumptions as of grant date:~~


			~~September 30, 2021~~
~~Risk-free interest rate (%)~~			~~0.82~~
~~Expected term (years)~~			~~7.50~~
~~Expected stock price volatility (%)~~			~~29.57~~
~~Dividend yield (%)~~			~~1.82~~

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

A summary of the activity in the Equity Plan for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 follows:


		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value			Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2021		332,708	$	16.01
Outstanding at January 1, 2022								Outstanding at January 1, 2022	450,818	$	15.64
Granted	Granted	127,275	14.67					Granted	—	—
Exercised	Exercised	—	—					Exercised	1,195	14.75
Forfeited	Forfeited	(540)	15.11					Forfeited	(2,304)	14.99
Expired	Expired	(4,665)	16.52					Expired	—	—
Outstanding at September 30, 2021		454,778	$	15.63	7.96	$	2,436
Vested and exercisable at September 30, 2021		180,318	$	16.52	7.16	$	842
Outstanding at March 31, 2022								Outstanding at March 31, 2022	449,709	$	15.64	7.44	$	3,963
Vested and exercisable at March 31, 2022								Vested and exercisable at March 31, 2022	266,216	$	15.89	7.06	$	2,293

There were no options granted for during the three months ended March 31, 2022. The weighted average fair value of options granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 ~~and 2020~~ was ~~$3.70 and $3.51, respectively.~~$3.51. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was ~~$813~~$515 at ~~September 30, 2021.~~March 31, 2022. This cost is expected to be recognized over a weighted average period of ~~2.86~~2.21 years.

NOTE 1110 – OTHER BENEFIT PLANS

The Company has established a stock dividend reinvestment and other stock purchase plan. Under the DRIP, eligible shareholders can voluntarily purchase stock with their dividend or can make additional stock purchases. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, there were no shares purchased. During the three months ended March 31, 2021, ~~and 2020,~~6,339

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

shares were purchased at an average price of $16.83. During the year ended December 31, 2021, 17,971 ~~and 28,141~~ shares were purchased at an average price of $21.68 ~~and $14.38, respectively. During the year ended December 31, 2020, 34,737 shares were purchased at an average price of $14.67~~ per share.

~~The Company adopted an ESPP for all employees in 2015. During 2020, the ESPP was amended and restated in its entirety and was renamed the NSPP.~~ All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 was $25 and ~~2020 was $56 and $30,~~$19, respectively.

The Company has a Salary Continuation Agreement, (the “Agreement”), with an executive officer. In accordance with the Agreement, the executive will receive an annual benefit of $25 for twenty years following separation of service. If early termination occurs before December 31, 2022, the executive will not receive any benefit under the Agreement. The liability recorded for the Agreement was ~~$295~~$331 and ~~$241~~$312 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, and the related expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and 2020~~ was ~~$53~~$19 and $45, respectively.

The Company has a 401(k) plan that covers ~~substantially~~ all employees subject to certain age and service requirements. The Company contributes 3% of each employee’s salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. Expense recognized in relation to the 401(k) plan was ~~$1,932~~$660 and ~~$1,412~~$786 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020, respectively, and was $1,978 for the year ended December 31, 2020,~~ respectively.

In December 2018, the Company approved an ESOP for eligible employees as of January 1, 2018. Each year, the Company’s Board of Directors may approve a discretionary percentage of employees’ salaries to be contributed to the ESOP for eligible employees. ~~For 2021 and 2020, 2%~~The Board approved 1% of salaries for eligible employees ~~was approved for contribution.~~in 2021. Expense related to the ESOP was ~~$938~~$192 and ~~$275~~$459 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ respectively, and was ~~$395~~$490 for the year ended December 31, ~~2020.~~2021. During the year ended December 31, ~~2020, $260~~2021, $366 was contributed to the ESOP. The Company has contributed 57,620 common shares to the ESOP since its approval in December 2018.

NOTE 1211 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting

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

practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that the Bank met all capital adequacy requirements to which it was subject at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s classification.

Actual and required capital amounts and ratios for the Bank are presented below at ~~September 30, 2021:~~March 31, 2022:


		Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations					Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations
		Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital	Total Capital													Total Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	102,678	22.50	%	$	36,514	8.00	%	$	45,643	10.00	%	(to Risk Weighted Assets)	$	106,128	19.45	%	$	43,656	8.00	%	$	54,570	10.00	%
Tier I Capital
Tier 1 Capital														Tier 1 Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	96,808	21.21	%	$	27,386	6.00	%	$	36,514	8.00	%	(to Risk Weighted Assets)	$	99,247	18.19	%	$	32,742	6.00	%	$	43,656	8.00	%
Common Equity Tier I Capital
Common Equity Tier 1 Capital														Common Equity Tier 1 Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	96,808	21.21	%	$	20,539	4.50	%	$	29,668	6.50	%	(to Risk Weighted Assets)	$	99,247	18.19	%	$	24,556	4.50	%	$	35,470	6.50	%
Tier I Capital
Tier 1 Capital														Tier 1 Capital
(to Average Assets)	(to Average Assets)	$	96,808	12.64	%	$	30,643	4.00	%	$	38,304	5.00	%	(to Average Assets)	$	99,247	11.75	%	$	33,774	4.00	%	$	42,218	5.00	%

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

Actual and required capital amounts and ratios for the Bank are presented below at December 31, ~~2020:~~2021:


		Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations					Actual				Required for Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Regulations
		Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital	Total Capital													Total Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	78,824	17.02	%	$	37,056	8.00	%	$	46,320	10.00	%	(to Risk Weighted Assets)	$	106,002	21.25	%	$	39,909	8.00	%	$	49,886	10.00	%
Tier I Capital
Tier 1 Capital														Tier 1 Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	72,825	15.72	%	$	27,792	6.00	%	$	37,056	8.00	%	(to Risk Weighted Assets)	$	99,656	19.98	%	$	29,932	6.00	%	$	39,909	8.00	%
Common Equity Tier I Capital
Common Equity Tier 1 Capital														Common Equity Tier 1 Capital
(to Risk Weighted Assets)	(to Risk Weighted Assets)	$	72,825	15.72	%	$	20,844	4.50	%	$	30,108	6.50	%	(to Risk Weighted Assets)	$	99,656	19.98	%	$	22,449	4.50	%	$	32,426	6.50	%
Tier I Capital
Tier 1 Capital														Tier 1 Capital
(to Average Assets)	(to Average Assets)	$	72,825	11.75	%	$	24,799	4.00	%	$	30,998	5.00	%	(to Average Assets)	$	99,656	12.22	%	$	32,619	4.00	%	$	40,774	5.00	%

Dividend Restrictions

Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits of the Bank for that year combined with the retained net profits for the preceding two years.

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

NOTE 1312 – MORTGAGE BANKING ACTIVITIES

The following table presents the components of residential loan fee income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~March 31, 2021:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Net gain realized on sale of residential loans held for sale	Net gain realized on sale of residential loans held for sale	$	22,761	$	29,771	$	74,604	$	59,328	Net gain realized on sale of residential loans held for sale		$	9,070	$	28,944
Net change in fair value recognized on residential loans held for sale	Net change in fair value recognized on residential loans held for sale	(1,381)		1,300		(6,168)		3,190		Net change in fair value recognized on residential loans held for sale		(2,999)		(5,333)
Net change in fair value recognized on interest rate lock commitments	Net change in fair value recognized on interest rate lock commitments	(1,288)		1,149		(6,356)		4,788		Net change in fair value recognized on interest rate lock commitments		(1,332)		(5,555)
Net change in fair value recognized on mandatory and best efforts forward sales contracts	Net change in fair value recognized on mandatory and best efforts forward sales contracts	(1,017)		(3,717)		6,847		(11,167)		Net change in fair value recognized on mandatory and best efforts forward sales contracts		6,945		10,862
Mortgage banking fees	Mortgage banking fees	2,248		2,723		7,777		5,749		Mortgage banking fees		1,507		3,111
Residential loan fee income	Residential loan fee income	$	21,323	$	31,226	$	76,704	$	61,888	Residential loan fee income		$	13,191	$	32,029

As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Interest rate lock commitments and mandatory commitments to deliver loans to investors are considered derivatives.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had interest rate lock commitments of ~~$178,202~~$135,665 and ~~$398,722,~~$108,122, mandatory forwards contracts of ~~$204,500~~$158,500 and ~~$514,000,~~$142,500, and forward sales contracts of ~~$17,447~~$12,794 and ~~$19,803,~~$7,375, respectively. The fair value of these mortgage banking derivatives was reflected by a total derivative asset of ~~$2,613~~$3,231 and ~~$7,620~~$1,550 and a total derivative liability of ~~$379~~$737 and ~~$4,467~~$189 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage banking derivatives are included in residential loan fee income in the Consolidated Statements of Income.

~~The net gains (losses) relating to free-standing derivative instruments used for risk management at September 30, 2021 and December 31, 2020 are summarized below:~~

September 30, 2021 December 31, 2020
Mandatory forward sales contracts $ 960 $ (4,455)
Best efforts forward sales contracts 30 55
Interest rate lock commitments 1,244 7,553

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

The net gains (losses) relating to free-standing derivative instruments used for risk management at March 31, 2022 and December 31, 2021 are summarized below:


	March 31, 2022		December 31, 2021
Mandatory forward sales contracts	$	2,389	$	(78)
Best efforts forward sales contracts	30		27
Interest rate lock commitments	75		1,412

The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheets at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
		Notional Amount		Fair Value		Notional Amount		Fair Value			Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:	Included in other assets:									Included in other assets:
Interest rate lock commitments	Interest rate lock commitments	$	128,915	$	1,579	$	390,676	$	7,565	Interest rate lock commitments	$	79,458	$	760	$	103,572	$	1,435
Mandatory forward sales contracts	Mandatory forward sales contracts	181,000		1,004		—		—		Mandatory forward sales contracts	146,500		2,441		60,000		88
Best efforts forward sales contracts	Best efforts forward sales contracts	17,447		30		19,803		55		Best efforts forward sales contracts	12,794		30		7,375		27
Included in other liabilities:	Included in other liabilities:									Included in other liabilities:
Interest rate lock commitments	Interest rate lock commitments	49,287		335		8,046		12		Interest rate lock commitments	56,207		685		4,550		23
Mandatory forward sales contracts	Mandatory forward sales contracts	23,500		44		514,000		4,455		Mandatory forward sales contracts	12,000		52		82,500		166

NOTE 1413 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance sheet risk at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Unfunded loan commitments	Unfunded loan commitments	$	57,592	$	34,867	Unfunded loan commitments	$	15,411	$	18,567
Unused lines of credit	Unused lines of credit	43,263		34,063		Unused lines of credit	62,470		52,076
Standby letters of credit	Standby letters of credit	68		68		Standby letters of credit	68		68

All unused lines of credit at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were variable rate lines of credit and the majority of unfunded loan commitments at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were commitments to fund variable rate loans. Unfunded loan commitments are generally entered into for periods of 90 days or less.

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

NOTE 1514 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Basic:	Basic:									Basic:
Net income	Net income	$	1,280	$	5,253	$	21,807	$	7,097	Net income		$	13	$	7,511
Less: Preferred stock dividends	Less: Preferred stock dividends	230		202		797		557		Less: Preferred stock dividends		208		332
Net income available to common shareholders		$	1,050	$	5,051	$	21,010	$	6,540
Net income (loss attributable to) available to common shareholders										Net income (loss attributable to) available to common shareholders		$	(195)	$	7,179
Weighted average common shares outstanding	Weighted average common shares outstanding	3,913,523		3,443,999		3,749,692		3,419,617		Weighted average common shares outstanding		4,003,499		3,509,115
Basic earnings per common share		$	0.27	$	1.47	$	5.60	$	1.91
Basic earnings (loss) per common share										Basic earnings (loss) per common share		$	(0.05)	$	2.05
Diluted:	Diluted:									Diluted:
Net income	Net income	$	1,280	$	5,253	$	21,807	$	7,097	Net income		$	13	$	7,511
Less: Preferred stock dividends	Less: Preferred stock dividends	230		202		797		557		Less: Preferred stock dividends		208		332
Add: Series B preferred stock dividends	Add: Series B preferred stock dividends	86		24		365		24		Add: Series B preferred stock dividends		—		187
Net income available to common shareholders		$	1,136	$	5,075	$	21,375	$	6,564
Net income (loss attributable to) available to common shareholders										Net income (loss attributable to) available to common shareholders		$	(195)	$	7,366
Weighted average common shares outstanding for basic earnings per common share	Weighted average common shares outstanding for basic earnings per common share	3,913,523		3,443,999		3,749,692		3,419,617		Weighted average common shares outstanding for basic earnings per common share		4,003,499		3,509,115
Add: Dilutive effects of conversion of Series B preferred stock to common stock	Add: Dilutive effects of conversion of Series B preferred stock to common stock	321,318		262,243		321,318		262,243		Add: Dilutive effects of conversion of Series B preferred stock to common stock		—		447,523
Add: Dilutive effects of assumed exercises of stock options/warrants	Add: Dilutive effects of assumed exercises of stock options/warrants	171,498		—		98,256		—		Add: Dilutive effects of assumed exercises of stock options/warrants		—		82,349
Average shares and dilutive potential common shares	Average shares and dilutive potential common shares	4,406,339		3,706,242		4,169,266		3,681,860		Average shares and dilutive potential common shares		4,003,499		4,038,987
Diluted earnings per common share		$	0.26	$	1.37	$	5.13	$	1.78
Diluted earnings (loss) per common share										Diluted earnings (loss) per common share		$	(0.05)	$	1.82

As a result of incurring a net loss attributable to common shareholders for the three months ended March 31, 2022, potential convertible Series B preferred stock, stock options and warrants of 285,751 were excluded from diluted loss per share because the effect would have been anti-dilutive. Common stock options of ~~0 and 355,434~~70,260 shares were excluded in computing diluted earnings per common share for the three months ended ~~September 30,~~March 31, 2021, and 2020, respectively, because they were anti-dilutive. Common stock options for 0 and 355,434 were excluded in computing diluted earnings per common share for the nine months ended September 30, 2021 and 2020, respectively, because they were anti-dilutive.

NOTE 1615 – OPERATING SEGMENTS

The Company has 2 reportable segments: Banking and Residential Mortgage Lending. The Banking segment provides a variety of traditional community banking services through its full-service banking centers located in St. Petersburg, Seminole, Pinellas Park, Clearwater, Sarasota, Tampa, and ~~Tampa,~~Belleair Bluffs, Florida, as well as SBA lending services throughout the nation. The Residential Mortgage Lending segment originates residential mortgage loans primarily for sale in the secondary market with offices throughout the nation. Loans and deposits provide the revenues in the Banking segment and loan sales provide the revenues in the Residential Lending segment.

Segment profit and loss is measured by net income after income tax. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process. Due to the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

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

Information about reportable segments and reconciliation of such information to the Consolidated Financial Statements follows:


		Three Months Ended September 30, 2021						Three Months Ended September 30, 2020							Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
		Residential Mortgage		Banking		Consolidated		Residential Mortgage		Banking		Consolidated			Residential Mortgage		Banking		Consolidated		Residential Mortgage		Banking		Consolidated
Interest income	Interest income	$	741	$	8,804	$	9,545	$	679	$	11,943	$	12,622	Interest income	$	737	$	7,003	$	7,740	$	1,218	$	13,674	$	14,892
Interest expense	Interest expense	497		1,032		1,529		455		2,083		2,538		Interest expense	531		803		1,334		790		1,472		2,262
Net interest income	Net interest income	244		7,772		8,016		224		9,860		10,084		Net interest income	206		6,200		6,406		428		12,202		12,630
Provision for loan losses	Provision for loan losses	—		(3,000)		(3,000)		—		7,000		7,000		Provision for loan losses	—		(2,400)		(2,400)		—		2,000		2,000
Residential loan fee income	Residential loan fee income	21,323		—		21,323		31,226		—		31,226		Residential loan fee income	13,191		—		13,191		32,029		—		32,029
Internal transfer for portfolio loans originated	Internal transfer for portfolio loans originated	103		(103)		—		5		(5)		—		Internal transfer for portfolio loans originated	130		(130)		—		69		(69)		—
Other noninterest income	Other noninterest income	12		657		669		29		937		966		Other noninterest income	6		5,671		5,677		12		1,118		1,130
Total noninterest income	Total noninterest income	21,438		554		21,992		31,260		932		32,192		Total noninterest income	13,327		5,541		18,868		32,110		1,049		33,159
Total noninterest expense	Total noninterest expense	19,069		12,160		31,229		20,080		8,128		28,208		Total noninterest expense	13,776		13,871		27,647		23,127		10,594		33,721
Income before income tax expense		2,613		(834)		1,779		11,404		(4,336)		7,068
Income tax expense		732		(233)		499		3,193		(1,378)		1,815
Net income		$	1,881	$	(601)	$	1,280	$	8,211	$	(2,958)	$	5,253
Income before income tax expense (benefit)														Income before income tax expense (benefit)	(243)		270		27		9,411		657		10,068
Income tax expense (benefit)														Income tax expense (benefit)	(68)		82		14		2,635		(78)		2,557
Net income (loss)														Net income (loss)	$	(175)	$	188	$	13	$	6,776	$	735	$	7,511
Period end assets	Period end assets	$	94,083	$	849,660	$	943,743	$	155,806	$	1,345,710	$	1,501,516	Period end assets	$	80,030	$	808,511	$	888,541	$	218,040	$	1,498,791	$	1,716,831

Nine Months Ended
September 30, 2021 Nine Months Ended
September 30, 2020
Residential
Mortgage Banking Consolidated Residential
Mortgage Banking Consolidated
Interest income $ 2,770 $ 36,664 $ 39,434 $ 1,904 $ 27,914 $ 29,818
Interest expense 1,840 4,044 5,884 1,410 6,528 7,938
Net interest income 930 32,620 33,550 494 21,386 21,880
Provision for loan losses — (1,000) (1,000) — 11,900 11,900
Residential loan fee income 76,704 — 76,704 61,888 — 61,888
Internal transfer for portfolio loans originated 269 (269) — 35 (35) —
Other noninterest income 39 16,620 16,659 42 4,388 4,430
Total noninterest income 77,012 16,351 93,363 61,965 4,353 66,318
Total noninterest expense 62,768 35,850 98,618 44,512 23,483 67,995
Income before income tax expense 15,174 14,121 29,295 17,947 (9,644) 8,303
Income tax expense 4,249 3,239 7,488 5,025 (3,819) 1,206
Net income $ 10,925 $ 10,882 $ 21,807 $ 12,922 $ (5,825) $ 7,097
Period end assets $ 94,083 $ 849,660 $ 943,743 $ 155,806 $ 1,345,710 $ 1,501,516

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion explains our financial condition and results of operations as of and for the three ~~and nine~~ months ended ~~September 30, 2021.~~March 31, 2022. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our ~~Registration Statement~~Annual Report on Form ~~S-1~~10-K for the

year ended December 31, ~~2020,~~2021, filed with the SEC on ~~November 3, 2021.~~March 30, 2022. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

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 the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; the ability of the Company to implement its strategy and expand its lending operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial ~~markets;~~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, including the ~~expected~~ elimination of LIBOR and the development of ~~a substitute;~~substitutes; 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 we do 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 our financial condition and results of operations on a consolidated basis. However, because we conduct all of our 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 our consolidated financial statements.

As a one-bank holding company, we generate most of our revenue from interest on loans and gain-on-sale income derived from the sale of loans into the secondary market. Our primary source of funding for our loans is deposits. We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. Our largest expenses are interest on those deposits and salaries plus related employee benefits. We measure our performance through our net interest income after provision for loan 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.

•~~Determination~~ At March 31, 2022, the most critical of these significant accounting policies in understanding the ~~allowance for loan losses;~~

•~~Valuation of SBA loan servicing rights;~~estimates and assumptions involved in preparing our consolidated financial statements were the policies

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•~~Fair~~related to the allowance for loan losses, and fair value measurement of SBA servicing rights, residential loans held for sale and residential ~~mortgage derivatives.~~derivatives, which are discussed more fully below.

Allowance for Loan Losses

The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses. Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates, including the loss content for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. In addition, management may include qualitative adjustments intended to capture the impact of other uncertainties in the lending environment such as underwriting standards, current economic and political conditions, and other factors affecting the credit quality. Changes to one or more of the estimates used could result in a different estimated allowance for loan losses.

Fair Value Measurements

Mortgage derivatives, loans held for sale, investments, and certain other loans are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans, other real estate, SBA servicing rights, and certain other assets and liabilities. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.

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

Further, the Company is an emerging growth company. The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have ~~not opted out~~elected to take advantage of ~~such~~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

Final Approval to Convert to a National Bank - On April 19, 2022, the Bank received final approval from the Office of the Comptroller of the Currency to convert First Home Bank to BayFirst National Bank. The conversion is expected to take place on May 16, 2022.

~~Third~~Second Quarter Common Stock Dividend. On ~~October 29, 2021,~~April 26, 2022, BayFirst’s Board of Directors declared a ~~third~~second quarter ~~2021~~2022 cash dividend of ~~$0.07~~$0.08 per common share. The dividend ~~was~~will be payable June 15, 2022 to common shareholders of record as of June 1, 2022. This dividend marks the 24th consecutive quarterly cash dividend paid since BayFirst initiated cash dividends in 2016.

Second Quarter Preferred Series A Stock Dividend.On April 26, 2022, BayFirst’s Board of Directors declared a quarterly cash dividend of $22.50 on ~~December~~our Series A Preferred Stock. The dividend will be payable June 15, ~~2021,~~2022 to shareholders of record atas of June 1, 2022. The amount and timing of the ~~close~~dividend is in accordance with the terms of ~~business on November 15, 2021.~~the Series A Preferred Stock.

Second Quarter Preferred Series B Stock ~~Repurchase Plan.~~Dividend. On ~~November 30, 2021,~~April 26, 2022, BayFirst’s Board of Directors ~~amended its stock repurchase program~~ declared a quarterly cash dividend of $20.00 on our Series B Convertible Preferred Stock. The dividend will be payable June 15, 2022

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to ~~allow the Company to repurchase up to $450,000~~shareholders of record as of June 1, 2022. The amount and timing of the ~~Company’s issued and outstanding common stock per quarter. The Board of Directors initially authorized~~dividend is in accordance with the ~~program on January 26, 2021 for the repurchase of up to $100,000 per quarter and amended the program on September 9, 2021 to increase the quarterly purchase limit to $400,000.~~

~~The changes to the program will be implemented immediately and will continue until the earlier~~terms of the ~~date an aggregate~~

~~of $1,000,000 of common stock has been repurchased, with no more than $450,000 being bought back in one quarter, or~~

~~October 1, 2022, or termination of the program by the Board of Directors.~~

~~Listing on Nasdaq Capital Market.~~ ~~On November 30, 2021, BayFirst began trading on the Nasdaq Capital Market under the symbol “BAFN”.~~

Series B Convertible Preferred Stock.

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Selected Financial Data - Unaudited


		As of and for the Three Months Ended									As of and for the Nine Months Ended							As of and for the Three Months Ended
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	9/30/2021			6/30/2021			9/30/2020			9/30/2021			9/30/2020			(Dollars in thousands, except per share data)	3/31/2022			12/31/2021			3/31/2021
Income Statement Data:	Income Statement Data:																Income Statement Data:

Net interest income	Net interest income	8,016			12,904			10,084			33,550			21,880			Net interest income	$	6,406		$	6,693		$	12,630
Provision for loan losses	Provision for loan losses	(3,000)			—			7,000			(1,000)			11,900			Provision for loan losses	(2,400)			(2,500)			2,000
Noninterest income	Noninterest income	21,992			38,212			32,192			93,363			66,318			Noninterest income	18,868			24,214			33,159
Noninterest expense	Noninterest expense	31,229			33,668			28,208			98,618			67,995			Noninterest expense	27,647			30,224			33,721
Income tax expense	Income tax expense	499			4,432			1,815			7,488			1,206			Income tax expense	14			372			2,557
Net income	Net income	1,280			13,016			5,253			21,807			7,097			Net income	13			2,811			7,511
Preferred stock dividends	Preferred stock dividends	230			235			202			797			557			Preferred stock dividends	208			208			332
Net income available to common shareholders		$	1,050		$	12,781		$	5,051		$	21,010		$	6,540

Net income (loss attributable to) available to common shareholders																	Net income (loss attributable to) available to common shareholders	$	(195)		$	2,603		$	7,179
Balance Sheet Data:	Balance Sheet Data:																Balance Sheet Data:

Average loans held for investment, excluding PPP loans	Average loans held for investment, excluding PPP loans	467,283			481,424			353,620			457,111			352,428			Average loans held for investment, excluding PPP loans	520,559			518,697			413,558
Average total assets	Average total assets	1,086,377			1,541,287			1,457,997			1,419,264			1,092,295			Average total assets	872,311			923,485			1,636,211

Average common shareholders’ equity	Average common shareholders’ equity	81,989			68,525			44,025			69,574			40,757			Average common shareholders’ equity	83,990			83,056			57,944
Total loans held for investment	Total loans held for investment	656,294			895,194			1,266,753			656,294			1,266,753			Total loans held for investment	561,797			583,948			1,388,533
Total loans held for investment, excluding PPP loans	Total loans held for investment, excluding PPP loans	500,647			465,470			387,242			500,647			387,242			Total loans held for investment, excluding PPP loans	517,434			504,525			421,259

Total loans held for investment, excl gov’t gtd loan balances	Total loans held for investment, excl gov’t gtd loan balances	306,723			304,364			275,786			306,723			275,786			Total loans held for investment, excl gov’t gtd loan balances	365,584			323,363			288,960
Allowance for loan losses	Allowance for loan losses	16,616			20,797			18,913			16,616			18,913			Allowance for loan losses	10,170			13,452			22,017
Total assets	Total assets	943,743			1,198,229			1,501,516			943,743			1,501,516			Total assets	888,541			917,095			1,716,831

Common shareholders’ equity	Common shareholders’ equity	83,593			81,838			50,439			83,593			50,439			Common shareholders’ equity	85,274			86,685			66,046

Per Share Data: (2)	Per Share Data: (2)																Per Share Data: (2)
Basic earnings per common share		$	0.27		$	3.34		$	1.47		$	5.60		$	1.91
Diluted earnings per common share		$	0.26		$	2.98		$	1.37		$	5.13		$	1.78
Basic earnings (loss) per common share																	Basic earnings (loss) per common share	$	(0.05)		$	0.66		$	2.05
Diluted earnings (loss) per common share																	Diluted earnings (loss) per common share	$	(0.05)		$	0.61		$	1.82
Dividends per common share	Dividends per common share	$	0.070		$	0.070		$	0.067		$	0.207		$	0.201		Dividends per common share	$	0.080		$	0.070		$	0.067
Book value per common share	Book value per common share	$	21.32		$	21.16		$	14.60		$	21.32		$	14.60		Book value per common share	$	21.25		$	21.77		$	17.95
Tangible book value per common share (1)	Tangible book value per common share (1)	$	21.30		$	21.14		$	14.57		$	21.30		$	14.57		Tangible book value per common share (1)	$	21.22		$	21.75		$	17.93

Performance Ratios:	Performance Ratios:																Performance Ratios:
Return on average assets	Return on average assets	0.47		%	3.38		%	1.44		%	2.05		%	0.87		%	Return on average assets	0.01		%	1.22		%	1.84		%
Return on average common equity	Return on average common equity	5.12		%	74.61		%	45.89		%	40.26		%	21.40		%	Return on average common equity	(0.93)		%	12.54		%	49.56		%

Net interest margin	Net interest margin	3.04		%	3.46		%	2.84		%	3.26		%	2.76		%	Net interest margin	3.25		%	3.07		%	3.21		%
Dividend payout ratio	Dividend payout ratio	26.09		%	2.10		%	4.57		%	3.69		%	10.51		%	Dividend payout ratio	(164.25)		%	10.65		%	3.26		%

Asset Quality Data:	Asset Quality Data:																Asset Quality Data:
Net charge-offs	Net charge-offs	$	1,181		$	1,221		$	967		$	3,546		$	3,729		Net charge-offs	$	882		$	664		$	1,145
Net charge-offs/avg loans held for investment excl PPP	Net charge-offs/avg loans held for investment excl PPP	1.01		%	1.01		%	1.09		%	1.03		%	1.41		%	Net charge-offs/avg loans held for investment excl PPP	0.68		%	0.51		%	1.11		%
Nonperforming loans	Nonperforming loans	$	10,495		$	9,884		$	13,837		$	10,495		$	13,836		Nonperforming loans	$	8,834		$	11,909		$	9,741

Nonperforming loans (excluding gov't gtd balance)	Nonperforming loans (excluding gov't gtd balance)	$	3,756		$	3,576		$	4,057		$	3,756		$	4,057		Nonperforming loans (excluding gov't gtd balance)	$	2,660		$	3,967		$	3,242

Nonperforming loans/total loans held for investment	Nonperforming loans/total loans held for investment	1.60		%	0.97		%	1.09		%	1.60		%	1.09		%	Nonperforming loans/total loans held for investment	1.57		%	2.04		%	0.70		%

Nonperforming loans (excl gov’t gtd balance)/total loans held for investment	Nonperforming loans (excl gov’t gtd balance)/total loans held for investment	0.57		%	0.35		%	0.92		%	0.57		%	0.92		%	Nonperforming loans (excl gov’t gtd balance)/total loans held for investment	0.47		%	0.68		%	0.57		%

ALLL/Total loans held for investment	ALLL/Total loans held for investment	2.53		%	2.32		%	1.49		%	2.53		%	1.49		%	ALLL/Total loans held for investment	1.81		%	2.30		%	1.59		%
ALLL/Total loans held for investment, excl PPP loans	ALLL/Total loans held for investment, excl PPP loans	3.32		%	4.47		%	4.88		%	3.32		%	4.88		%	ALLL/Total loans held for investment, excl PPP loans	1.97		%	2.67		%	5.23		%

Other Data:	Other Data:																Other Data:
Full-time equivalent employees	Full-time equivalent employees	651			671			545			651			545			Full-time equivalent employees	575			637			649
Banking center offices	Banking center offices	6			6			6			6			6			Banking center offices	7			7			6
Loan production offices	Loan production offices	22			26			23			22			23			Loan production offices	20			23			22

(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.	(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.																(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.
(2) Adjusted for the three-for-two stock split, effective May 10, 2021.	(2) Adjusted for the three-for-two stock split, effective May 10, 2021.																(2) Adjusted for the three-for-two stock split, effective May 10, 2021.

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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP:


Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share	Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share							Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
		As of							As of
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	September 30, 2021		June 30, 2021		September 30, 2020		(Dollars in thousands, except per share data)	March 31, 2022		December 31, 2021		March 31, 2021
		(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)
Total shareholders’ equity	Total shareholders’ equity	$	94,298	$	92,813	$	62,154	Total shareholders’ equity	$	94,879	$	96,290	$	79,421
Less: Preferred stock liquidation preference	Less: Preferred stock liquidation preference	(10,705)		(10,975)		(11,715)		Less: Preferred stock liquidation preference	(9,605)		(9,605)		(13,375)
Total equity available to common shareholders	Total equity available to common shareholders	83,593		81,838		50,439		Total equity available to common shareholders	85,274		86,685		66,046
Less: Goodwill	Less: Goodwill	(100)		(100)		(100)		Less: Goodwill	(100)		(100)		(100)
Tangible common shareholders' equity	Tangible common shareholders' equity	$	83,493	$	81,738	$	50,339	Tangible common shareholders' equity	$	85,174	$	86,585	$	65,946

Common shares outstanding	Common shares outstanding	3,919,977		3,867,414		3,455,190		Common shares outstanding	4,013,173		3,981,117		3,678,566
Tangible book value per common share	Tangible book value per common share	$	21.30	$	21.14	$	14.57	Tangible book value per common share	$	21.22	$	21.75	$	17.93

Results of Operations

BayFirst’s operating results depend on our 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. Our interest rate spread is affected by regulatory, economic, and competitive factors which influence interest rates, loan demand, and deposit flows. In addition, our operating results can be affected by the level of nonperforming loans, as well as the level of our noninterest income, and our noninterest expenses, such as salaries and employee benefits, occupancy and equipment costs, and income taxes.

We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. We operate residential mortgage loan production offices in a number of states. We sell a substantial portion of the mortgage loans that we originate on the secondary market which generates gains on the sale of these loans. Additionally, while we retained some of our government guaranteed loans on our balance sheet, we sell both the guaranteed balance of our government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans. This activity generates gains on sales on the guaranteed portions of the loans.

Net Income

We had net income for the three months ended ~~September 30, 2021~~March 31, 2022 of ~~$1.28 million,~~$13 thousand, or ~~$0.26~~$(0.05) per diluted common share, compared to net income for the three months ended ~~September 30, 2020~~March 31, 2021 of ~~$5.25~~$7.51 million, or ~~$1.37~~$1.82 per diluted common share. The decrease of ~~$3.97~~$7.50 million in net income was ~~due to~~the result of lower ~~recognition of~~ PPP ~~loan origination fee~~ income ~~lower~~and residential loan fee income, ~~and an increase in noninterest expenses,~~ partially offset by ~~a decrease in provision for loan loss expense.~~

~~We had net~~higher income for the nine months ended September 30, 2021 of $21.81 million, of $5.13 per diluted common share, compared to net income for the nine months ended September 30, 2020 of $7.10 million or $1.78 per diluted common share. The increase of $14.71 million in net income was due to a $13.80 million gain from the sale of ~~PPP~~SBA loans, ~~in the second quarter of 2021, an increase in residential loan fee income, an increase in PPP loan origination fees recognized,~~ and

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~~a decrease in provision for loan loss expense, partially offset by an increase in~~ lower noninterest ~~expenses, particularly salaries and commission expenses.~~expense.

Net Interest Income

Net interest income was ~~$8.02~~$6.41 million for the three months ended ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$2.07~~$6.22 million or ~~20.51%~~49.28% compared to net interest income for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 of ~~$10.08~~$12.63 million. This decrease was primarily due to ~~a decrease of $2.64 million in~~lower net PPP loan interest and origination ~~fees recognized, partially offset by a decrease in interest expense on deposits and PPPLF borrowings.~~fee income. The net interest margin for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~3.04%~~3.25% compared to ~~2.84%~~3.21% for the three months ended ~~September 30, 2020.~~

~~Net interest income was $33.55 million for~~March 31, 2021. With the ~~nine months ended September 30, 2021, an~~recent rate increase ~~of $11.67 million or 53.34% compared to net interest income for~~enacted by the ~~nine months ended September 30, 2020 of $21.88 million. This increase was primarily due to an increase of $5.73 million in PPP origination fees recognized, partially due to~~Federal Reserve, the fact that PPP loan funding did not begin until the second quarter of 2020. Additional items that contributed to this increase in net interest income were an increase in PPP interest income, an increase in interest income on other loans, and a decrease in interest expense on deposits, partially offset by an increase in interest expense on PPPLF borrowings. The net interest margin ~~for~~in future periods could improve as the ~~nine months ended September 30, 2021 was 3.26% compared~~majority of our SBA loan portfolio rates are tied to ~~2.76% for~~Prime resetting quarterly at the ~~nine months ended September 30, 2020. This increase was due to the same factors noted above~~beginning of each quarter with ~~respect to the increase~~a lag in ~~net interest income.~~rate increases on deposit accounts.

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Average Balance Sheet and Analysis of Net Interest Income

The following tables set 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 (dollars in thousands).~~liabilities. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.


		Three Months Ended September 30,															Three Months Ended March 31,
		2021							2020								2022							2021
		Average Balance			Interest		Yield		Average Balance			Interest		Yield
(Dollars in thousands)																(Dollars in thousands)	Average Balance			Interest		Yield		Average Balance			Interest		Yield
Interest-earning assets:	Interest-earning assets:															Interest-earning assets:
Investment securities	Investment securities	$	23,055		$	75	1.29	%	$	—		$	—	0.00	%	Investment securities	$	30,647		$	97	1.28	%	$	—		$	—	0.00	%
Loans, excluding PPP (1)	Loans, excluding PPP (1)	562,095			7,891		5.57	%	457,949			6,678		5.80	%	Loans, excluding PPP (1)	604,055			7,112		4.77	%	591,050			6,599		4.53	%
PPP loans	PPP loans	288,406			1,466		2.02	%	859,786			5,872		2.72	%	PPP loans	58,058			443		3.09	%	878,532			8,212		3.79	%
Other	Other	171,208			113		0.26	%	96,356			72		0.30	%	Other	106,472			88		0.34	%	123,907			81		0.27	%
Total interest-earning assets	Total interest-earning assets	1,044,764			9,545		3.62	%	1,414,091			12,622		3.55	%	Total interest-earning assets	799,232			7,740		3.93	%	1,593,489			14,892		3.79	%
Non interest-earning assets		41,613							43,906
Noninterest-earning assets																Noninterest-earning assets	73,079							42,722
Total assets	Total assets	$	1,086,377						$	1,457,997						Total assets	$	872,311						$	1,636,211
Interest-bearing liabilities:	Interest-bearing liabilities:															Interest-bearing liabilities:
NOW, MMDA and savings	NOW, MMDA and savings	$	518,243		$	974	0.75	%	$	347,039		$	947	1.09	%	NOW, MMDA and savings	$	609,467		$	1,086	0.72	%	$	444,612		$	1,033	0.94	%
Time deposits	Time deposits	52,729			178		1.34	%	96,337			593		2.45	%	Time deposits	39,344			131		1.35	%	96,152			287		1.21	%
PPPLF advances	PPPLF advances	315,875			278		0.35	%	859,409			794		0.35	%	PPPLF advances	22,983			20		0.35	%	885,028			766		0.35	%
Other borrowings	Other borrowings	9,484			99		4.14	%	20,908			204		3.88	%	Other borrowings	9,258			97		4.25	%	57,732			176		1.24	%
Total interest-bearing liabilities	Total interest-bearing liabilities	896,331			1,529		0.68	%	1,323,693			2,538		0.76	%	Total interest-bearing liabilities	681,052			1,334		0.79	%	1,483,524			2,262		0.62	%
Demand deposits	Demand deposits	87,248							69,256							Demand deposits	95,457							71,894
Non interest-bearing liabilities		9,969							11,972
Noninterest-bearing liabilities																Noninterest-bearing liabilities	2,207							7,804
Shareholders’ equity	Shareholders’ equity	92,829							53,076							Shareholders’ equity	93,595							72,989
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,086,377						$	1,457,997						Total liabilities and shareholders’ equity	$	872,311						$	1,636,211
Net interest income	Net interest income				$	8,016						$	10,084			Net interest income				$	6,406						$	12,630
Interest rate spread	Interest rate spread						2.95	%						2.79	%	Interest rate spread						3.13	%						3.17	%
Net interest margin (2)	Net interest margin (2)						3.04	%						2.84	%	Net interest margin (2)						3.25	%						3.21	%
Ratio of average interest-earning assets to average interest-bearing liabilities	Ratio of average interest-earning assets to average interest-bearing liabilities	116.56		%					106.83		%					Ratio of average interest-earning assets to average interest-bearing liabilities	117.35		%					107.41		%

(1) Includes nonaccrual loans.	(1) Includes nonaccrual loans.															(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.	(2) Net interest margin represents net interest income divided by average total interest-earning assets.															(2) Net interest margin represents net interest income divided by average total interest-earning assets.

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Nine Months Ended September 30,
2021 2020
Average Balance Interest Yield Average Balance Interest Yield
Interest earning-assets:
Investment Securities $ 12,500 $ 123 1.32 % $ 43 $ — — %
Loans, excluding PPP (1)
582,352 21,243 4.88 % 428,898 18,329 5.71
PPP loans 613,768 17,771 3.87 % 452,481 10,918 3.22
Other 166,918 297 0.24 % 176,201 571 0.43 %
Total interest-earning assets 1,375,538 39,434 3.83 % 1,057,623 29,818 3.77 %
Non interest-earning assets 43,726 34,672
Total assets $ 1,419,264 $ 1,092,295
Interest-bearing liabilities:
NOW, MMDA and savings $ 484,985 $ 2,987 0.82 % $ 339,485 $ 3,307 1.30 %
Time deposits 82,422 679 1.10 % 171,516 2,804 2.18 %
PPPLF advances 648,158 1,699 0.35 % 432,367 1,185 0.35
Other borrowings 30,692 519 2.26 % 20,494 642 4.18 %
Total interest-bearing liabilities 1,246,257 5,884 0.63 % 963,862 7,938 1.10 %
Demand deposits 82,321 70,701
Non interest-bearing liabilities 8,441 5,260
Shareholders’ equity 82,245 52,472
Total liabilities and shareholders’ equity $ 1,419,264 $ 1,092,295
Net interest income $ 33,550 $ 21,880
Interest rate spread 3.20 % 2.67 %
Net interest margin (2)
3.26 % 2.76 %
Ratio of average interest-earning assets to average interest-bearing liabilities 110.37 % 109.73 %
(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The tables below present 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 (dollars in thousands).~~rate. Loans in nonaccrual status, for the ~~purposes~~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)	Rate		Volume		Total

		Rate		Volume		Total
Three Months Ended September 30, 2021 vs. September 30, 2020:
Interest-earning assets:
Investment securities		$	—	$	75	$	75
Loans, excluding PPP		(274)		1,487		1,213
PPP loans		(1,231)		(3,175)		(4,406)
Other interest-earning assets		(9)		50		41
Total interest-earning assets		260		(3,337)		(3,077)
Interest-bearing liabilities:
NOW, MMDA and savings		(353)		380		27
Time deposits		(208)		(207)		(415)
PPPLF		—		(516)		(516)
Other borrowings		13		(118)		(105)
Total interest-bearing liabilities		(261)		(748)		(1,009)
Net change in net interest income		$	521	$	(2,589)	$	(2,068)
Nine Months Ended September 30, 2021 vs. September 30, 2020:

Three Months Ended March 31, 2022 vs. March 31, 2021:								Three Months Ended March 31, 2022 vs. March 31, 2021:
Interest-earning assets:	Interest-earning assets:							Interest-earning assets:
Investment securities	Investment securities	$	123	$	—	$	123	Investment securities	$	—	$	97	$	97
Loans, excluding PPP	Loans, excluding PPP	(2,948)		5,862		2,914		Loans, excluding PPP	366		147		513
PPP loans	PPP loans	2,471		4,382		6,853		PPP loans	(1,277)		(6,492)		(7,769)
Other interest-earning assets	Other interest-earning assets	(245)		(29)		(274)		Other interest-earning assets	19		(12)		7
Total interest-earning assets	Total interest-earning assets	(599)		10,215		9,616		Total interest-earning assets	(892)		(6,260)		(7,152)
Interest-bearing liabilities:	Interest-bearing liabilities:							Interest-bearing liabilities:
NOW, MMDA, and savings	NOW, MMDA, and savings	(1,454)		1,134		(320)		NOW, MMDA, and savings	(275)		328		53
Time deposits	Time deposits	(1,038)		(1,087)		(2,125)		Time deposits	30		(186)		(156)
PPPLF advances	PPPLF advances	—		514		514		PPPLF advances	—		(746)		(746)
Other borrowings	Other borrowings	(366)		243		(123)		Other borrowings	161		(240)		(79)
Total interest-bearing liabilities	Total interest-bearing liabilities	(3,971)		1,917		(2,054)		Total interest-bearing liabilities	(84)		(844)		(928)
Net change in net interest income	Net change in net interest income	$	3,373	$	8,297	$	11,670	Net change in net interest income	$	(808)	$	(5,416)	$	(6,224)

Provision for Loan Losses

The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors ~~which~~that may affect our ability to collect on the loans in our portfolio.

~~We recorded~~As the financial impact of the COVID-19 pandemic became more predictable throughout 2021, the Company began adjusting its allowance for loan losses from the historic high levels reached in 2020 at the onset of the pandemic. The Company continued this trend in the first quarter of 2022 which resulted in a negative provision ~~for loan losses~~ for the three months ended ~~September 30, 2021~~March 31, 2022 of ~~$3.00 million~~$2.40 million. This compared to a ~~$7.00~~$2.00 million provision for the three months ended ~~September 30, 2020.~~March 31, 2021. During ~~2020~~the three months ended March 31, 2022, we charged off $882 thousand in loans compared to $1.15 million during the three months ended March 31, 2021. Our ALLL was $10.17 million at March 31, 2022 and the first quarter of 2021, we increased the qualitative factors in the allowance for loan losses calculation for the decline in economic indicators caused by the COVID-19 pandemic resulting in significant provision expense in those periods. As asset quality remained$22.02 million at March 31, 2021.

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stable during the second and third quarters of 2021 and as many of the Company’s SBA loans were bolstered by additional government support, additional provision for loan losses was not deemed necessary. During the three months ended September 30, 2021, we charged off $1.18 million in loans compared to $0.97 million during the three months ended September 30, 2020. Our ALLL was $16.62 million at September 30, 2021 and $18.91 million at September 30, 2020.

We recorded a negative provision for loan losses for the nine months ended September 30, 2021 of $1.00 million compared to an $11.90 million provision for the nine months ended September 30, 2020. The decrease of $12.90 million in the provision for loan losses was primarily due to the same factors mentioned in the quarterly analysis above. During the nine months ended September 30, 2021, we charged off $3.55 million in loans compared to $3.73 million during the nine months ended September 30, 2020.

Since the majority of the Company’s loan portfolio consisted of SBA loans, most of which received from the SBA principal and interest payments under Section 1112 of the CARES Act during 2020 and 2021, our asset quality trends may appear more favorable than they otherwise would without the CARES Act support. Although the Company’s asset quality trends indicate minimal stress on the portfolio, management believed it was prudent to be proactive in increasing the allowance for loan losses using qualitative measures throughout 2020 and 2021.

Noninterest Income

The following table presents noninterest income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~March 31, 2021.

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Noninterest income:
Residential loan fee income $ 21,323 $ 31,226 $ 76,704 $ 61,888
Loan servicing income, net 417 565 1,446 1,753
Gain (loss) on sale of SBA and PPP loans, net (338) — 13,460 1,732
Service charges and fees 261 205 730 664
SBA loan fair value gain 72 55 151 49
Other noninterest income 257 141 872 232
Total noninterest income $ 21,992 $ 32,192 $ 93,363 $ 66,318


	For the Three Months Ended March 31,
(Dollars in thousands)	2022		2021
Noninterest income:
Residential loan fee income	$	13,191	$	32,029
Loan servicing income, net	461		704
Gain on sale of government guaranteed loans, net	4,621		—
Service charges and fees	282		222
SBA loan fair value gain (loss)	(197)		72
Other noninterest income	510		132
Total noninterest income	$	18,868	$	33,159

Noninterest income was ~~$21.99~~$18.87 million during the three months ended ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$10.20~~$14.29 million or ~~31.68%~~43.10% from ~~$32.19~~$33.16 million during the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease was primarily due to the decrease in residential loan fee income of ~~$9.90~~$18.84 million or ~~31.71%~~58.82% as a result of a decrease in residential mortgage volume of ~~$91.71~~$380.29 million ~~and a decrease in gain on sale margin due to a tighter spread between primary and secondary mortgage rates.~~

Noninterest income was $93.36 million during the nine months ended September 30, 2021, an increase of $27.05 million or 40.78% from $66.32 million during the nine months ended September 30, 2020. The increase was primarily due to the $13.80 gain from the sale of PPP loans andpartially offset by an increase in ~~residential~~gains on SBA loan ~~fee income of $14.82 million or 23.94% primarily due to $646.62 million more loans sold during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.~~sales.

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Noninterest Expense

The following table presents noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~March 31, 2021.


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2021		2020		2021		2020
(Dollars in thousands)										(Dollars in thousands)	2022		2021
Noninterest expense:	Noninterest expense:									Noninterest expense:
Salaries and benefits	Salaries and benefits	$	12,851	$	8,876	$	38,966	$	24,497	Salaries and benefits	$	13,697	$	13,167
Bonus, commissions, and incentives	Bonus, commissions, and incentives	8,536		11,919		29,627		23,887		Bonus, commissions, and incentives	4,606		11,873
Mortgage banking	Mortgage banking	1,440		1,620		4,707		3,645		Mortgage banking	1,002		1,695
Occupancy and equipment	Occupancy and equipment	1,278		1,182		3,907		3,314		Occupancy and equipment	1,421		1,332
Data processing	Data processing	1,347		1,163		5,209		3,086		Data processing	1,467		1,269
Marketing and business development	Marketing and business development	1,924		717		5,444		2,250		Marketing and business development	1,742		1,642
Professional services	Professional services	1,428		878		3,195		2,343		Professional services	1,307		924
Loan origination and collection	Loan origination and collection	683		908		2,284		1,771		Loan origination and collection	670		496
Employee recruiting and development	Employee recruiting and development	809		245		2,431		1,135		Employee recruiting and development	871		614
Regulatory assessments	Regulatory assessments	138		144		340		418		Regulatory assessments	69		102
Other noninterest expense	Other noninterest expense	795		556		2,508		1,649		Other noninterest expense	795		607
Total noninterest expense	Total noninterest expense	$	31,229	$	28,208	$	98,618	$	67,995	Total noninterest expense	$	27,647	$	33,721

Noninterest expense was ~~$31.23~~$27.65 million during the three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$3.02~~$6.07 million or ~~10.71%~~18.01% from ~~$28.21~~$33.72 million during the three months ended ~~September 30, 2020.~~March 31, 2021. The ~~increase~~ decrease was primarily due to ~~increases in salaries and benefits and marketing and business development expense as~~lower residential mortgage commissions. Additionally, the Company ~~built infrastructure~~reduced headcount in ~~various functions~~the first quarter of 2022 by 65 with 62 of those from the Residential Mortgage Division. With a decline in production volume in the Residential Mortgage Division, the Company reduced its workforce to ~~support~~adjust to the ~~Company’s strategic initiatives and planned growth strategy.~~

~~Noninterest~~expectations for volume moving forward. The impact to expense ~~was $98.62 million during~~from the nine months ended September 30, 2021, an increase of $30.62 million or 45.04% from $68.00 million during the nine months ended September 30, 2020. The increase was primarily due to increases in salaries and benefits and commissions, marketing and business development expense and data processing expense with the majorityreduction of the ~~increase related to~~workforce in the ~~above-mentioned strategic initiatives~~first quarter 2022 will not provide a meaningful reduction of noninterest expenses until the second quarter of 2022 and ~~planned growth strategy.~~beyond.

Income Taxes

Income tax expense was ~~$0.50~~$14 thousand for the three months ended March 31, 2022, a decrease of $2.54 million from income tax expense of $2.56 million for the three months ended ~~September 30, 2021, a~~March 31, 2021. The decrease ~~of $1.32 million from income tax expense of $1.82 million for the three months ended September 30, 2020.~~

Income tax expense was $7.49 million for the nine months ended September 30, 2021, an increase of $6.28 million over income tax expense of $1.21 million for the nine months ended September 30, 2020. The increase was primarily due to the increase in pre-tax earnings, partially offset by a one-time tax benefit of $969 thousand in the first quarter of 2020 as a result of the CARES Act signed into law in March of 2020. The effective income tax rate was 25.56% for the nine months ended September 30, 2021 and 14.52% for the nine months ended September 30, 2020.

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decrease in pre-tax earnings. The effective income tax rate was 24.07% for the three months ended March 31, 2022 and 25.40% for the three months ended March 31, 2021.

Financial Condition

Investment Securities

The ~~amortized costs, gross unrealized gains and losses, and estimated~~following table presents the fair ~~values~~value of the Company's investment securities ~~available for sale at September 30, 2021 are summarized~~portfolio classified as ~~follows (dollars in thousands):~~available-for-sale as of March 31, 2022 and December 31, 2021.

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Investment securities:
Asset-backed securities $ 7,630 $ — $ (24) $ 7,606
Mortgaged-backed securities:
U.S. Government-sponsored enterprises 5,083 — (44) $ 5,039
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises 20,096 — (206) $ 19,890
Total investment securities available for sale $ 32,809 $ — $ (274) $ 32,535

The investment securities available for sale were purchased during the nine months ended September 30, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at September 30, 2021.


(Dollars in thousands)	March 31, 2022		December 31, 2021
Asset-backed securities	$	7,571	$	7,535
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	4,065		4,394
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	22,146		18,964
Corporate bonds	7,874		—
Total investment securities available for sale	$	41,656	$	30,893

The Company held one security held to maturity at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, which matures in August 2039. The security is a debt security toissued by a government-sponsored enterprise and its amortized cost ~~was $3~~ and ~~$41, the unrecognized loss was $1 and $2, and the~~ fair value was $2 ~~and $39~~thousand at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, respectively.~~

The security held to maturity had been in an unrealized loss position for longer than 12 months at September 30, 2021 and December 31, 2020. The unrealized loss has not been recognized into income because the issuer is of high credit quality as a government-sponsored enterprise, management does not intend to sell, and it is likely that management will not be required to sell the security prior to its anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments and the fair value is expected to recover as the bond approaches maturity.2021.

No securities were pledged as of ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020,~~2021, and there were no sales of securities during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or the year ended December 31, ~~2020.~~2021.

~~All~~The securities available-for-sale presented in the following tables are reported at amortized cost and by contractual maturity as of March 31, 2022 and December 31, 2021. Actual timing may differ from contractual maturities if borrowers have ~~contractual remaining maturities of more than 10 years. The weighted average market yield of all~~the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities ~~was 1.31%.~~and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.


	March 31, 2022
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Asset-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	7,621	1.80	%
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	—		—	%	—		—	%	—		—	%	4,388		1.53	%
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	—		—	%	—		—	%	—		—	%	23,721		1.64	%
Corporate bonds	—		—	%	5,018		1.18	%	2,856		2.98	%	—		—	%
Total investment securities available for sale	$	—	—	%	$	5,018	1.18	%	$	2,856	2.98	%	$	35,730	1.66	%

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	December 31, 2021
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Asset-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	7,624	0.90	%
Mortgaged-backed securities:
U.S. Government-sponsored enterprises	—		—	%	—		—	%	—		—	%	4,470		1.32	%
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises	—		—	%	—		—	%	—		—	%	19,370		1.31	%

Total investment securities available for sale	$	—	—	%	$	—	—	%	$	—	—	%	$	31,464	1.21	%

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Loan Portfolio Composition

Through the efforts of our management and loan officers, ~~we have been able~~strong loan production resulted from our ability to ~~achieve loan growth by taking~~take advantage of the economic recovery and consolidation in our markets. 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. We have no concentration of credit in any industry that represents 10% or more of our loan portfolio. The following table sets forth the composition of our loan portfolio, including LHFS as of the dates ~~indicated (dollars in thousands).~~indicated.


		September 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
		Amount		% of Total		Amount		% of Total
(Dollars in thousands)										(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Residential loans held for sale	Residential loans held for sale	$	91,243			$	208,704			Residential loans held for sale	$	75,022			$	114,131
Government guaranteed loans, held for sale	Government guaranteed loans, held for sale	—				—				Government guaranteed loans, held for sale	1,445				1,460
SBA loans held for investment, at fair value	SBA loans held for investment, at fair value	9,805				9,264				SBA loans held for investment, at fair value	8,769				9,614
Loans held for investment, at amortized cost:	Loans held for investment, at amortized cost:									Loans held for investment, at amortized cost:
Residential real estate	Residential real estate	79,889		12.4	%	64,724		5.3	%	Residential real estate	102,897		18.7	%	87,235		15.3	%
Commercial real estate	Commercial real estate	151,122		23.5	%	114,884		9.3	%	Commercial real estate	189,684		34.5	%	163,477		28.7	%
Construction and land	Construction and land	17,848		2.8	%	15,113		1.2	%	Construction and land	18,038		3.3	%	18,632		3.3	%
Commercial and industrial	Commercial and industrial	232,416		36.1	%	193,927		15.8	%	Commercial and industrial	180,163		32.8	%	217,155		38.0	%
Commercial and industrial – PPP	Commercial and industrial – PPP	156,783		24.4	%	838,847		68.2	%	Commercial and industrial – PPP	44,792		8.2	%	80,158		14.1	%
Consumer and other	Consumer and other	4,910		0.8	%	2,896		0.2	%	Consumer and other	13,502		2.5	%	3,581		0.6	%
Loans held for investment, at amortized cost, gross	Loans held for investment, at amortized cost, gross	642,968		100.0	%	1,230,391		100.0	%	Loans held for investment, at amortized cost, gross	549,076		100.0	%	570,238		100.0	%
Discount on SBA 7(a) loans sold	Discount on SBA 7(a) loans sold	(3,753)				(5,417)				Discount on SBA 7(a) loans sold	(3,335)				(3,866)
Discount on PPP loans purchased	Discount on PPP loans purchased	(24)				(97)				Discount on PPP loans purchased	(10)				(13)
Deferred loan costs (fees), net	Deferred loan costs (fees), net	7,298				(5,819)				Deferred loan costs (fees), net	7,297				7,975
Allowance for loan losses	Allowance for loan losses	(16,616)				(21,162)				Allowance for loan losses	(10,170)				(13,452)
Loans held for investment, at amortized cost, net	Loans held for investment, at amortized cost, net	$	629,873			$	1,197,896			Loans held for investment, at amortized cost, net	$	542,858			$	560,882

In general, construction loans are originated as construction-to-permanent loans. Third party take-out financing, where applicable, is typically in the form of permanent first mortgage conforming loans. ~~The increase in residential lending is primarily due to enhancements in the Bank’s personnel.~~

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we originated approximately ~~$70.65~~$63.59 million in loans through conventional lending channels, ~~$110.19~~$47.33 million in loans through CreditBench (our SBA lending function), and $335.56 million through the Residential Mortgage Lending Division. During the three months ended March 31, 2021, we originated approximately $20.56 million in loans through conventional lending channels, $15.52 million through CreditBench, exclusive of PPP loans, $285.84 million of PPP loans, and $715.85 million through the Residential Mortgage Lending Division.

In 2021, we originated approximately $94.90 million in new loans through conventional lending channels, $169.47 million in loans through CreditBench, exclusive of PPP loans, $329.32 million of PPP loans, and $1.74 billion through the Residential Mortgage Lending Division. During the nine months ended September 30, 2020, we originated approximately $52.14 million in loans through conventional lending channels, $84.42 million through CreditBench, exclusive of PPP loans, $876.60 million of PPP loans, and $1.28 billion through the Residential Mortgage Lending Division.

The decrease in the PPP balances was due to forgiveness of loans by the SBA and the second quarter of 2021 sale of 3,833 PPP loans for consideration equal to the total unpaid principal balance of $326.32 million.

By comparison in 2020, we originated approximately $79.50 million in new loans through conventional lending channels, $101.08 million in loans through CreditBench, exclusive of PPP loans, $876.96 million of PPP loans, and $1.92$2.22 billion through the Residential Mortgage Lending Division.

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Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans at ~~September 30, 2021 (dollars in thousands).~~March 31, 2022. Loan balances in this table include loans held for investment at fair value, loans held for investment at amortized cost, discount on retained balances of loans sold, discount on PPP loans purchased, and deferred loan costs, net.


		Due in One Year or Less		Due After One Year to Five Years		Due After Five Years to 15 Years		Due After 15 Years		Total
(Dollars in thousands)												(Dollars in thousands)	Due in One Year or Less		Due After One Year to Five Years		Due After Five Years to 15 Years		Due After 15 Years		Total
Real estate:	Real estate:											Real estate:
Residential	Residential	$	3,619	$	1,002	$	5,092	$	70,222	$	79,935	Residential	$	4,362	$	326	$	8,669	$	89,512	$	102,869
Commercial	Commercial	4,153		2,272		20,644		127,760		154,829		Commercial	5,271		1,839		24,319		163,104		194,533
Construction and land	Construction and land	2,722		889		1,620		12,618		17,849		Construction and land	2,676		773		635		13,954		18,038
Commercial and industrial	Commercial and industrial	7,051		6,219		217,122		12,729		243,121		Commercial and industrial	6,947		9,578		165,307		6,565		188,397
Commercial and industrial - PPP	Commercial and industrial - PPP	96,064		59,581		—		—		155,645		Commercial and industrial - PPP	21,234		23,129		—		—		44,363
Consumer and other	Consumer and other	2,498		1,139		1,278		—		4,915		Consumer and other	585		9,317		3,136		559		13,597
Total loans	Total loans	$	116,107	$	71,102	$	245,756	$	223,329	$	656,294	Total loans	$	41,075	$	44,962	$	202,066	$	273,694	$	561,797

The following table shows our loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at ~~September 30, 2021 (dollars in thousands).~~March 31, 2022.


		Fixed Interest Rate		Adjustable Interest Rate
(Dollars in thousands)						(Dollars in thousands)	Fixed Interest Rate		Adjustable Interest Rate
Real estate:	Real estate:					Real estate:
Residential	Residential	$	21,636	$	54,680	Residential	$	23,590	$	74,917
Commercial	Commercial	1,202		149,474		Commercial	2,428		186,834
Construction and land	Construction and land	5,720		9,407		Construction and land	5,596		9,766
Commercial and industrial	Commercial and industrial	2,073		233,997		Commercial and industrial	19,089		162,361
Commercial and industrial - PPP	Commercial and industrial - PPP	59,581		—		Commercial and industrial - PPP	23,129		—
Consumer and other	Consumer and other	2,246		171		Consumer and other	3,917		9,095
Total loans	Total loans	$	92,458	$	447,729	Total loans	$	77,749	$	442,973

Credit Risk

The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond our control. We have developed policies and procedures for evaluating the overall quality of our 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 ~~future events~~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 ALLL, or that additional increases in the ALLL will not be required.

Allowance for Loan Losses. The Bank must maintain an adequate ALLL based on a comprehensive methodology that assesses the probable losses inherent in our loan portfolio. We maintain an ALLL based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, asset classifications, loan grades, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits and economic conditions. Provisions for loan losses are provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable. General valuation allowances are determined by a portfolio segmentation based on collateral type with a further evaluation of various quantitative and qualitative factors noted above.

We periodically review the assumptions and formulate methodologies by which additions are made to the specific and general valuation allowances for loan losses in an effort to refine such allowances in light of the current status of the factors described above. The methodology is presented to and approved by the Bank’s Board of Directors. Future additional

~~Table of Contents~~

provisions to the loan loss reserve may be made as appropriate as new loans are originated or as existing loans may deteriorate.

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All adversely classified loans are evaluated for impairment. If a loan is deemed impaired, it is evaluated for potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular basis thereafter (at least quarterly). This evaluation is documented in a status report relating to a specific loan or relationship. Specific allocation of reserves on impaired loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. We review the collateral value, cash flow, and tertiary support on each impaired 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.

For performing loans which are evaluated collectively, we perform a portfolio segmentation based on ~~collateral type and additionally, for SBA loans, by~~ loan ~~origination year.The~~type. The government guaranteed loan balances are included in the collectively evaluated for ~~impairment~~portfolio balances. The loss factors for each segment are calculated using actual loan loss history for each segment of loans over the most recent one to three years, depending on the segment and vintage year of the loans in the segment of SBA loans. The Bank’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

These economic factors include consideration of the following: levels of, and trends in delinquencies and impaired loans; levels of, and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.

While management believes our ALLL is adequate as of ~~September 30, 2021,~~March 31, 2022, future adjustments to our allowance may be necessary if economic conditions differ substantially from the assumptions used in making the determination.

Nonperforming Assets. At ~~September 30, 2021,~~March 31, 2022, we had ~~$3.76~~$2.66 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented ~~2.53%~~1.81% of total loans. At ~~September 30, 2020,~~March 31, 2021, we had ~~$4.06~~$3.24 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented ~~1.49%~~1.59% of total ~~loans.~~loans held for investment. Total loans at ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and 2020,~~ include government guaranteed loans, as well as PPP loans, which have no reserves allocated to them. ALLL as a percentage of loans, not including residential loans held for sale and government guaranteed loan balances, was ~~5.25%~~2.71% at ~~September 30, 2021,~~March 31, 2022, compared to ~~6.63%~~7.35% at ~~September 30, 2020.~~March 31, 2021.

At December 31, ~~2020,~~2021, we had ~~$3.33~~$3.97 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented ~~1.72%~~2.30% of total loans, including PPP loans. Total loans at December 31, ~~2020~~2021 include government guaranteed loans which have no reserves allocated to them. ALLL as a percentage of loans, not including residential loans held for sale and government guaranteed loan balances, was ~~7.24%~~4.04% at December 31, ~~2020.~~

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2021.

The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related ~~information (dollars in thousands).~~information.


		September 30, 2021			September 30, 2020			December 31, 2020
(Dollars in thousands)											(Dollars in thousands)	March 31, 2022			March 31, 2021			December 31, 2021
Nonperforming loans (government guaranteed balances)	Nonperforming loans (government guaranteed balances)	$	6,739		$	9,780		$	6,259		Nonperforming loans (government guaranteed balances)	$	6,174		$	6,499		$	7,942
Nonperforming loans (unguaranteed balances)	Nonperforming loans (unguaranteed balances)	3,756			4,057			3,327			Nonperforming loans (unguaranteed balances)	2,660			3,242			3,967
Total nonperforming loans	Total nonperforming loans	10,495			13,837			9,586			Total nonperforming loans	8,834			9,741			11,909
OREO	OREO	3			—			—			OREO	3			—			3
Total nonperforming assets	Total nonperforming assets	$	10,498		$	13,837		$	9,586		Total nonperforming assets	$	8,837		$	9,741		$	11,912
Nonperforming loans as a percentage of total loans held for investment	Nonperforming loans as a percentage of total loans held for investment	1.60		%	1.09		%	0.78		%	Nonperforming loans as a percentage of total loans held for investment	1.57		%	0.70		%	2.04		%
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment	Nonperforming loans (excluding government guaranteed balances) to total loans held for investment	0.57		%	0.32		%	0.27		%	Nonperforming loans (excluding government guaranteed balances) to total loans held for investment	0.47		%	0.23		%	0.68		%
Nonperforming assets as a percentage of total assets	Nonperforming assets as a percentage of total assets	1.11		%	0.92		%	0.62		%	Nonperforming assets as a percentage of total assets	0.99		%	0.57		%	1.30		%
Nonperforming assets (excluding government guaranteed balances) to total assets	Nonperforming assets (excluding government guaranteed balances) to total assets	0.40		%	0.27		%	0.22		%	Nonperforming assets (excluding government guaranteed balances) to total assets	0.30		%	0.19		%	0.43		%
ALLL to nonperforming loans	ALLL to nonperforming loans	158.32		%	136.68		%	220.76		%	ALLL to nonperforming loans	115.12		%	226.02		%	112.96		%
ALLL to nonperforming loans (excluding government guaranteed balances)	ALLL to nonperforming loans (excluding government guaranteed balances)	442.39		%	466.18		%	636.07		%	ALLL to nonperforming loans (excluding government guaranteed balances)	382.33		%	679.12		%	339.10		%

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The following table sets forth information with respect to activity in the ALLL for the periods ~~shown (dollars in thousands):~~shown:


		At and for the Three Months Ended September 30,						At and for the Nine Months Ended September 30,
(Dollars in thousands)														(Dollars in thousands)	At and for the Three Months Ended March 31,
		2021			2020			2021			2020					2022			2021
Allowance at beginning of period	Allowance at beginning of period	$	20,797		$	12,880		$	21,162		$	10,742		Allowance at beginning of period		$	13,452		$	21,162
Charge-offs:	Charge-offs:													Charge-offs:
Residential real estate		—			—			—			—
Commercial real estate		(173)			(7)			(173)			(7)

Commercial and industrial	Commercial and industrial	(1,500)			(956)			(4,090)			(3,785)			Commercial and industrial		(1,031)			(1,137)
Consumer and other	Consumer and other	(20)			(17)			(48)			(79)			Consumer and other		(15)			(16)
Total charge-offs	Total charge-offs	(1,693)			(980)			(4,311)			(3,871)			Total charge-offs		(1,046)			(1,153)
Recoveries:	Recoveries:													Recoveries:
Residential real estate		73			—			73			—

Commercial real estate														Commercial real estate		8			—
Commercial and industrial	Commercial and industrial	439			12			688			131			Commercial and industrial		153			5
Consumer and other	Consumer and other	—			1			4			11			Consumer and other		3			3
Total recoveries	Total recoveries	512			13			765			142			Total recoveries		164			8
Net charge-offs	Net charge-offs	(1,181)			(967)			(3,546)			(3,729)			Net charge-offs		(882)			(1,145)
Provision for loan losses	Provision for loan losses	(3,000)			7,000			(1,000)			11,900			Provision for loan losses		(2,400)			2,000
Allowance at end of period	Allowance at end of period	$	16,616		$	18,913		$	16,616		$	18,913		Allowance at end of period		$	10,170		$	22,017
Net charge-offs to average loans held for investment	Net charge-offs to average loans held for investment	0.63		%	0.32		%	0.44		%	0.62		%	Net charge-offs to average loans held for investment		0.61		%	0.35		%
Allowance as a percent of total loans held for investment	Allowance as a percent of total loans held for investment	2.53		%	1.49		%	2.53		%	1.49		%	Allowance as a percent of total loans held for investment		1.81		%	1.59		%
Allowance as a percent of loans held for investment, not including government guaranteed loans	Allowance as a percent of loans held for investment, not including government guaranteed loans	5.25		%	6.63		%	5.25		%	6.63		%	Allowance as a percent of loans held for investment, not including government guaranteed loans		2.71		%	7.35		%
Allowance as a percent of nonperforming loans	Allowance as a percent of nonperforming loans	158.32		%	136.68		%	158.32		%	136.68		%	Allowance as a percent of nonperforming loans		115.12		%	226.02		%
Total loans held for investment	Total loans held for investment	$	656,294		$	1,266,753		$	656,294		$	1,266,753		Total loans held for investment		$	563,242		$	1,388,533
Average loans held for investment	Average loans held for investment	$	755,689		$	1,213,406		$	1,070,879		$	804,909		Average loans held for investment		$	578,617		$	1,292,090
Nonperforming loans (including government guaranteed balances)	Nonperforming loans (including government guaranteed balances)	$	10,495		$	13,837		$	10,495		$	13,837		Nonperforming loans (including government guaranteed balances)		$	8,834		$	9,741
Nonperforming loans (excluding government guaranteed balances)	Nonperforming loans (excluding government guaranteed balances)	$	3,756		$	4,057		$	3,756		$	4,057		Nonperforming loans (excluding government guaranteed balances)		$	2,660		$	3,242
Guaranteed balance of all government guaranteed loans	Guaranteed balance of all government guaranteed loans	$	339,766		$	981,414		$	339,766		$	981,414		Guaranteed balance of all government guaranteed loans		$	187,444		$	1,089,098
Loans held for sale, residential	Loans held for sale, residential	$	91,243		$	149,407		$	91,243		$	149,407		Loans held for sale, residential		$	75,022		$	208,762

The following table details net charge-offs to average loans outstanding by loan category for the years ended March 31:


	2022						2021
(Dollars in thousands)	Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio		Net Charge-off/(Recovery)		Average Loans HFI		Net Charge-off/(Recovery) Ratio
Residential real estate	$	—	$	76,881	—	%	$	—	$	54,987	—	%
Commercial real estate	(8)		216,373		(0.01)		—		151,259		—
Commercial and industrial	878		222,305		1.58		1,132		205,889		2.20
Commercial and industrial - PPP	—		58,058		—		—		878,532		—
Consumer and other	12		5,000		0.96		13		1,423		3.65
Total loans	$	882	$	578,617	0.61	%	$	1,145	$	1,292,090	0.35	%

We recorded a negative provision of ~~$3.00~~$2.40 million during the three months ended ~~September 30, 2021,~~March 31, 2022, compared to a provision of ~~$7.00~~$2.00 million for the same period in ~~2020. We recorded a negative provision for loan losses of $1.00 million during the nine months ended September 30, 2021, compared to a provision of $11.90 million for the same period in 2020.~~2021. For the year ended ~~2020,~~2021, the provision for loan losses was ~~$16.90~~$3.50 million. During 2020 and the first quarter of 2021, we increased the qualitative factors in the allowance for loan losses calculation for the decline in economic indicators caused by the COVID-19 pandemic resulting in significant provision expense in those periods. As asset quality has remained stable ~~during the second and third quarters of 2021~~ and as many of the Company’s SBA loans were bolstered by additional government support, additional provision for loan losses was not deemed necessary. Since 2016, the Company’s loan

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losses have been incurred primarily in its SBA unguaranteed loan portfolio, particularly loans originated under the SBA 7(a) Small Loan Program. The Small Loan Program represents loans of $350,000 or less and such loans carry an SBA guarantee of 75% to 90% of the loan, depending on the original principal balance. The default rate on loans originated in the SBA 7(a) Small Loan Program is significantly higher than the Bank’s other SBA 7(a) loans, conventional commercial loans, or residential mortgage loans.

Nonperforming assets to total assets, excluding government guaranteed loan balances, were ~~0.40%~~0.30%, as of ~~September 30, 2021,~~March 31, 2022, as compared to ~~0.27%~~0.19% as of ~~September 30, 2020.~~March 31, 2021. This percentage was ~~0.22%~~0.43% as of December 31, ~~2020.~~2021. Since the majority of the Company’s loan portfolio consisted of SBA loans, most of which received from the SBA principal and

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interest payments under Section 1112 of the CARES Act during 2020 and 2021, asset quality trends may appear more favorable than they otherwise would without the SBA’s support under the CARES Act.

As of ~~September 30, 2021,~~March 31, 2022, a total of 4213 loans with principal balances of ~~$3.95 million~~$676 thousand were under ~~payment~~payment deferrals. Of those, 41all were government guaranteed loans with ~~$1.99 million~~$358 thousand in outstanding unguaranteed balances. As expected, the level of SBA loans on deferral increased with the expiration of the Section 1112 payment support afforded under the CARES Act at which point certain borrowers requested payment deferrals. With the Economic Aid Act signed into law on December 27, 2020, Section 1112 CARES Act payments were extended, with some stipulations, which assisted the majority of our SBA borrowers for three months and, depending on the type of business, up to eight months of additional principal and interest payments with a cap of $9,000 per month per borrower, beginning in February 2021. Although the Company’s asset quality trends indicate minimal stress on the portfolio, management incorporated a qualitative measure in the allowance for loan losses calculation.

SBA and Other Government Guaranteed Loans

The following table sets forth, for the periods indicated, information regarding our SBA and other government guaranteed lending activity, excluding PPP ~~loans (dollars in thousands).~~loans.


		At and for the Nine Months Ended September 30,				At and for the Year Ended December 31,
(Dollars in thousands)								(Dollars in thousands)	At and for the Three Months Ended March 31,				At and for the Year Ended December 31,
Government Guaranteed, Excluding PPP	Government Guaranteed, Excluding PPP	2021		2020		2020		Government Guaranteed, Excluding PPP	2022		2021		2021
Number of loans originated	Number of loans originated	272		264		320		Number of loans originated	86		49		374
Amount of loans originated	Amount of loans originated	$	110,185	$	84,420	$	101,076	Amount of loans originated	$	47,332	$	15,520	$	169,467
Average loan size originated	Average loan size originated	$	405	$	320	$	316	Average loan size originated	$	550	$	317	$	453
Government guaranteed loan balances sold	Government guaranteed loan balances sold	$	—	$	23,669	$	23,713	Government guaranteed loan balances sold	$	71,345	$	—	$	44,854
Government unguaranteed loan balances sold	Government unguaranteed loan balances sold	$	5,034	$	393	393		Government unguaranteed loan balances sold	$	4,351	$	—	5,034
Total government guaranteed loans	Total government guaranteed loans	$	314,015	$	248,567	$	253,330	Total government guaranteed loans	$	271,317	$	261,502	$	300,415
Government guaranteed loan balances	Government guaranteed loan balances	$	184,119	$	101,903	$	110,196	Government guaranteed loan balances	$	143,081	$	121,824	$	171,548
Government unguaranteed loan balances	Government unguaranteed loan balances	$	129,896	$	147,258	$	143,134	Government unguaranteed loan balances	$	128,236	$	147,258	$	128,867
Government guaranteed loans serviced for others	Government guaranteed loans serviced for others	$	443,764	$	560,154	$	524,910	Government guaranteed loans serviced for others	$	507,986	$	505,289	$	459,670

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We make government guaranteed loans throughout the United States. The following table sets forth, at the dates indicated, information regarding the geographic disbursement of our SBA loan ~~portfolio (dollars in thousands).~~portfolio. The “All Other” category includes states with less than 5% in any period presented.

September 30, December 31,
2021 2020 2020
Amount % of Total Amount % of Total Amount % of Total
Florida $ 87,563 28 % $ 58,854 24 % $ 60,861 24 %
California 40,795 13 % 34,654 14 % 32,891 13 %
Texas 21,290 7 % 18,290 7 % 17,689 7 %
Georgia 14,875 5 % 13,566 5 % 13,936 6 %
All Other 149,492 47 % 123,203 50 % 127,953 50 %
Total government guaranteed loans, excluding PPP $ 314,015 100 % $ 248,567 100 % $ 253,330 100 %

As part of the Bank’s strategic decision to be an active local and national PPP lender, the Bank developed and used local marketing efforts and a nationwide, online application platform. As a result of these efforts, the Bank originated $329.32 million in PPP loans during the nine months ended September 30, 2021 and $876.96 million in 2020. The Bank used the

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~~Federal Reserve’s PPPLF to match fund the vast majority of those amounts. The following table reflects the Bank’s PPP lending activity for the periods indicated (dollars in thousands).~~

At and for the Three Months ended September 30, At and for the Nine Months Ended September 30, At and for the
year ended
December 31,
2021 2020 2021 2020 2020
Number of loans originated 2 2,558 3,858 8,930 8,948
Amount of loans originated $ 276 $ 64,888 $ 329,315 $ 876,603 $ 876,960
Average loan size originated $ 138 $ 25 $ 85 $ 98 $ 98
Amount of loans sold $ — $ — $ 326,318 $ — $ —
Amount of loans purchased $ — $ 7,362 $ — $ 22,404 $ 22,404
Loan balance, net of deferred loan costs (fees) and discount on purchased loans $ 155,647 $ 879,511 $ 155,647 $ 879,511 $ 825,802
Loan origination fees, net recognized $ 1,662 $ 4,302 $ 13,909 $ 8,175 $ 13,419
Deferred loan origination fees, net, at period end $ 1,112 $ 19,531 $ 1,112 $ 19,531 $ 12,948


	March 31,								December 31,
	2022				2021				2021
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total
Florida	$	83,129	31	%	$	65,622	25	%	$	89,143	30	%
California	29,967		11	%	34,163		13	%	32,924		11	%
Texas	17,835		7	%	17,992		7	%	20,976		7	%
Georgia	12,512		5	%	14,093		5	%	13,894		5	%
All Other	127,874		46	%	129,632		50	%	143,478		47	%
Total government guaranteed loans, excluding PPP loans	$	271,317	100	%	$	261,502	100	%	$	300,415	100	%

Residential Mortgage Loans

The following table sets forth, for the periods indicated, information regarding our residential mortgage lending ~~activity (dollars in thousands).~~activity.


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Year Ended December 31,			For the Three Months Ended March 31,
		2021		2020		2021		2020		2020
(Dollars in thousands)												(Dollars in thousands)	2022		2021
Number of loans originated	Number of loans originated	1,620		2,119		5,745		4,546		6,727		Number of loans originated	1,051		2,372
Amount of loans originated	Amount of loans originated	$	506,673	$	598,385	$	1,744,630	$	1,278,784	$	1,919,862	Amount of loans originated	$	335,560	$	715,849
Average loan size originated	Average loan size originated	$	313	$	282	$	304	$	281	$	285	Average loan size originated	$	319	$	302
Loan balances sold	Loan balances sold	$	540,684	$	544,857	$	1,855,685	$	1,209,063	$	1,787,574	Loan balances sold	$	371,929	$	710,465

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 attracted principally from within our primary service area of Pinellas, Hillsborough, Manatee, Pasco, and Sarasota Counties, Florida. We offer a wide selection of deposit instruments including demand deposit accounts, NOW accounts, money-market accounts, regular savings accounts, certificate of deposit ~~accounts;~~accounts, and retirement savings plans (such as IRA accounts).

Certificate of deposit rates are set to encourage longer maturities as cost and market conditions will allow. Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. We emphasize commercial banking relationships in an effort to increase demand deposits as a percentage of total deposits. Deposit interest rates are set ~~weekly~~ by management at least monthly or more often if conditions require it, based on a review of loan demand, deposit flows for the previous ~~week~~period and a survey of rates among competitors and other financial institutions in Florida.

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The amounts of each of the following categories of deposits, at the dates indicated, are as ~~follows (dollars in thousands):~~follows:


Deposit Types		September 30, 2021				September 30, 2020				December 31, 2020
(Dollars in thousands)														(Dollars in thousands)	March 31, 2022				December 31, 2021
Noninterest-bearing deposits	Noninterest-bearing deposits	$	87,625	13.0	%	$	70,115	13.7	%	$	62,650	11.2	%	Noninterest-bearing deposits	$	92,680	12.0	%	$	83,638	11.6	%
Interest-bearing transaction accounts	Interest-bearing transaction accounts	157,304		23.3	%	112,902		22.1	%	140,265		25.1	%	Interest-bearing transaction accounts	180,815		23.5	%	163,495		22.7	%
Money market accounts	Money market accounts	362,476		53.7	%	235,385		46.1	%	274,421		49.1	%	Money market accounts	447,837		58.2	%	408,257		56.5	%
Savings	Savings	14,976		2.2	%	12,323		2.4	%	12,323		2.2	%	Savings	17,010		2.2	%	15,607		2.2	%
Subtotal	Subtotal	622,381		92.2	%	430,725		84.3	%	489,659		87.6	%	Subtotal	738,342		95.9	%	670,997		93.0	%
Total time deposits	Total time deposits	52,653		7.8	%	79,417		15.6	%	69,125		12.4	%	Total time deposits	31,787		4.1	%	50,688		7.0	%
Total deposits	Total deposits	$	675,034	100.0	%	$	510,142	100.0	%	$	558,784	100.0	%	Total deposits	$	770,129	100.0	%	$	721,685	100.0	%

At March 31, 2022, we held approximately $322.05 million of deposits that exceeded the FDIC insurance limit.

The following table ~~sets forth~~provides information on the ~~remaining maturities~~maturity distribution of ~~our~~the time deposits exceeding the FDIC insurance limit of ~~$100 thousand or greater by category~~$250,000 as of ~~September 30, 2021 (dollars in thousands).~~March 31, 2022.


(Dollars in thousands)
Three months or less	$	~~3,100~~1,100
Over three months through six months	~~18,118~~312
Over six months through 12 months	~~10,267~~3,766
Over 12 months	~~6,760~~979
Total	$	~~38,245~~6,157

Other Borrowings

In June 2021, the Company issued $6.00 million of Subordinated Debentures (the “Debentures”) that mature June 30, 2031 and are redeemable after five years. The Debentures carry interest at a fixed rate of 4.50% per annum for the initial five years of their term and carry interest at a floating rate for the final five years of their term. Under the terms of the Debentures, the floating rates are based on a SOFR benchmark plus 3.78% per annum. The Debentures were issued to redeem a $6.00 million Subordinated Debenture which was issued in December 2018 and which carried interest at a fixed rate of 6.875% per annum.

The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to ~~$5.98~~$5.99 million and ~~$5.95~~$5.99 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

In March 2020, the Company renegotiated the terms of ~~the~~its outstanding senior debt and combined ~~the~~its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at ~~prime (3.25%~~Prime (3.50% at ~~September 30, 2021)~~March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was ~~$3.41~~$3.19 million and ~~$3.75~~$3.30 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The note is secured by 100% of the stock of the Bank and requires the Company to comply with certain loan covenants during the term of the note.

In April 2020, the Company entered into the Federal Reserve Bank’s PPPLF. Under the PPPLF, advances ~~must be~~were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF ~~accrues~~accrued interest at 0.35% per annum and ~~matures~~matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ~~ranging from April 15, 2022 to August 27, 2025,~~ and ~~will be~~ accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company ~~shall repay~~repaid the advance plus accrued interest. The ~~balances~~balance outstanding on this facility ~~were $144.60 million and $881.26~~was $69.65 million at ~~September 30, 2021 and~~ December 31, ~~2020, respectively.~~2021. In the first quarter of 2022, the Company repaid the remaining balance of the advance.

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 ~~increased $23.23~~decreased $1.41 million to ~~$94.30~~$94.88 million at ~~September 30, 2021~~March 31, 2022 as compared to ~~$71.07~~$96.29 million at December 31, ~~2020.~~2021. The ~~increase in shareholders' equity~~decrease was ~~primarily impacted by $21.81~~the result of decreases of $1.04 million of ~~net~~accumulated other comprehensive income ~~generated during the nine months ended September 30, 2021 and the issuance of common stock. The common stock was~~

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issued under the non-qualified stock purchase plan of $662 thousand, the dividend reinvestment plan of $389 thousand, and employee stock ownership plan of $366 thousand. Additionally, the bank issued preferred stock with net proceeds of $727 thousand and common stock with net proceeds of $701 thousand. These increases were partially offset by decreases of $201 thousand of accumulated other comprehensive income due to increases in net unrealized losses on available-for-sale securities, ~~$797~~$208 thousand of dividends declared on our preferred stock, and ~~$778~~$321 thousand of dividends declared on our common stock during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

~~The following table summarizes~~We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the ~~changes~~same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our ~~shareholders'~~balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity ~~for~~has the ~~periods indicated below:~~

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Balance at beginning of period $ 92,813 $ 53,307 $ 71,069 $ 51,332
Net income 1,280 5,253 21,807 7,097
Issuance of common stock under:
Non-qualified stock purchase plan 218 107 662 303
Dividend reinvestment plan 105 98 389 405
Employee stock ownership plan 366 — 366 260
Issuance of preferred stock, net — 3,723 727 3,723
Issuance of common stock, net — — 701 —
Stock-based compensation expense 6 6 43 (5)
Exercise of stock options 93 92 310 280
Other comprehensive income (loss) (79) — (201) —
Dividends declared on preferred stock (230) (202) (797) (557)
Dividends declared on common stock (274) (230) (778) (684)
Balance at end of period $ 94,298 $ 62,154 $ 94,298 $ 62,154
greatest capacity to absorb unexpected loss.

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

In 2020, the Federal banking regulatory agencies adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. This CBLR is calculated as the ratio of tangible equity capital divided by average total consolidated assets. CBLR tangible equity is defined as total equity capital, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than mortgage servicing assets). Under the proposal, a qualifying organization may elect to use the CBLR framework if its CBLR is greater than 9%. The Bank has elected not to use the CBLR framework.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~ 2021,the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.

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


		Actual				Minimum(1)				Well Capitalized(2)					Actual				Minimum(1)				Well Capitalized(2)
		Amount		Percent		Amount		Percent		Amount		Percent
As of September 30, 2021
(Dollars in thousands)														(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
As of March 31, 2022														As of March 31, 2022
Total Capital (to risk-weighted assets)	Total Capital (to risk-weighted assets)	$	102,678	22.50	%	$	36,514	8.00	%	$	45,643	10.00	%	Total Capital (to risk-weighted assets)	$	106,128	19.45	%	$	43,656	8.00	%	$	54,570	10.00	%
Tier 1 Capital (to risk-weighted assets)	Tier 1 Capital (to risk-weighted assets)	96,808		21.21	%	27,386		6.00	%	36,514		8.00	%	Tier 1 Capital (to risk-weighted assets)	99,247		18.19	%	32,742		6.00	%	43,656		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	Common Equity Tier 1 Capital (to risk-weighted assets)	96,808		21.21	%	20,539		4.50	%	29,668		6.50	%	Common Equity Tier 1 Capital (to risk-weighted assets)	99,247		18.19	%	24,556		4.50	%	35,470		6.50	%
Tier 1 Capital (to total assets)	Tier 1 Capital (to total assets)	96,808		12.64	%	30,643		4.00	%	38,304		5.00	%	Tier 1 Capital (to total assets)	99,247		11.75	%	33,774		4.00	%	42,218		5.00	%
As of December 31, 2020
As of December 31, 2021														As of December 31, 2021
Total Capital (to risk-weighted assets)	Total Capital (to risk-weighted assets)	78,824		17.02	%	37,056		8.00	%	46,320		10.00	%	Total Capital (to risk-weighted assets)	106,002		21.25	%	39,909		8.00	%	49,886		10.00	%
Tier 1 Capital (to risk-weighted assets)	Tier 1 Capital (to risk-weighted assets)	72,825		15.72	%	27,792		6.00	%	37,056		8.00	%	Tier 1 Capital (to risk-weighted assets)	99,656		19.98	%	29,932		6.00	%	39,909		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	Common Equity Tier 1 Capital (to risk-weighted assets)	72,825		15.72	%	20,844		4.50	%	30,108		6.50	%	Common Equity Tier 1 Capital (to risk-weighted assets)	99,656		19.98	%	22,449		4.50	%	32,426		6.50	%
Tier 1 Capital (to total assets)	Tier 1 Capital (to total assets)	72,825		11.75	%	24,799		4.00	%	30,998		5.00	%	Tier 1 Capital (to total assets)	99,656		12.22	%	32,619		4.00	%	40,774		5.00	%

____________

(1) To be considered “adequately capitalized” under the FDIC’s Prompt Corrective Action regulations.

(2) To be considered “well capitalized” under the FDIC’s Prompt Corrective Action regulations.

Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at ~~September 30, 2021~~March 31, 2022 were ~~$211.20~~$45.89 million, a decrease of ~~$752.82~~$89.08 million from ~~$964.01~~$134.97 million at December 31, ~~2020.~~2021. The decrease was primarily due to ~~a decrease~~the payoff of ~~$736.66~~$69.65 million in PPP Liquidity Facility asand a ~~result~~decrease in time deposits of ~~PPP loan forgiveness.~~$18.90 million.

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The following tables present our contractual obligations as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020 (dollars in thousands).~~2021.


		Contractual Obligations as of September 30, 2021											Contractual Obligations as of March 31, 2022
(Dollars in thousands)												(Dollars in thousands)	Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations												Operating lease obligations	$	1,409	$	2,161	$	1,211	$	151	$	4,932
		Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Long-term borrowings												Long-term borrowings	—		—		—		3,186		3,186

Subordinated notes												Subordinated notes	—		—		—		5,987		5,987
Time deposits												Time deposits	25,097		5,773		917		—		31,787
Total												Total	$	26,506	$	7,934	$	2,128	$	9,324	$	45,892

													Contractual Obligations as of December 31, 2021
(Dollars in thousands)												(Dollars in thousands)	Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	Operating lease obligations	$	1,098	$	1,930	$	1,167	$	350	$	4,545	Operating lease obligations	$	1,454	$	2,249	$	1,279	$	301	$	5,283

Long-term borrowings	Long-term borrowings	—		—		—		3,413		3,413		Long-term borrowings	—		—		—		3,299		3,299
PPP Liquidity Facility	PPP Liquidity Facility	105,941		—		38,660		—		144,601		PPP Liquidity Facility	44,647		—		25,007		—		69,654
Subordinated notes	Subordinated notes	—		—		—		5,983		5,983		Subordinated notes	—		—		—		6,050		6,050
Time deposits	Time deposits	43,778		8,054		821		—		52,653		Time deposits	40,868		9,210		610		—		50,688
Total	Total	$	150,817	$	9,984	$	40,648	$	9,746	$	211,195	Total	$	86,969	$	11,459	$	26,896	$	9,650	$	134,974

		Contractual Obligations as of December 31, 2020
		Less than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations		$	1,134	$	1,209	$	945	$	637	$	3,925

Long-term borrowings		—		—		—		3,754		3,754
PPP Liquidity Facility		—		791,778		89,484		—		881,262
Subordinated notes		—		—		—		5,948		5,948
Time deposits		27,909		39,817		1,399		—		69,125
Total		$	29,043	$	832,804	$	91,828	$	10,339	$	964,014

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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, undisbursed loans in process, unfunded lines of credit, and standby letters of credit. The Bank uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not present unusual risks and management does not anticipate any accounting losses that would have a material effect on the Bank.

A summary of the amounts of the Bank’s financial instruments, with off-balance sheet risk as of the dates indicated, is as ~~follows (dollars in thousands):~~follows:


		September 30, 2021		September 30, 2020		December 31, 2020
(Dollars of thousands)								(Dollars of thousands)	March 31, 2022		December 31, 2021
Unfunded loan commitments	Unfunded loan commitments	$	57,592	$	27,555	$	34,867	Unfunded loan commitments	$	15,411	$	18,567
Unused lines of credit	Unused lines of credit	43,263		32,223		34,063		Unused lines of credit	62,470		52,076
Standby letters of credit	Standby letters of credit	68		68		68		Standby letters of credit	68		68
Total	Total	$	100,923	$	59,846	$	68,998	Total	$	77,949	$	70,711

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

Standby letters-of-credit are conditional lending commitments that we issue to guarantee the performance of a customer to a third party and to support private borrowing arrangements. Essentially, letters of credit issued have expiration dates within one year of the issue date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit. The Bank may hold collateral supporting those commitments. Newly issued or modified guarantees that are not derivative contracts have been recorded on the Bank’s balance sheet at their fair value at inception.

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

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Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. The Bank generally maintains a liquidity ratio of liquid assets to total assets, excluding PPP loans pledged to the PPPLF, 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. Our on-balance sheet liquidity ratio at ~~September 30, 2021~~March 31, 2022 was ~~17.66%~~18.77%, as compared to ~~8.37%~~16.76% at December 31, ~~2020.~~2021.

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Bank purchased additional investment securities, all of which were classified as investment securities available for sale. The fair value of all of our investment securities available for sale totaled ~~$32.54~~$41.66 million at ~~September 30, 2021.~~March 31, 2022.

During each of the ~~three~~ quarters of 2021 and the first quarter of 2022,the Bank paid a dividend of $250 thousand to BayFirst. Prior to that, the Bank retained its earnings to support its growth. Therefore, BayFirst’s liquidity ~~has~~had historically been dependent soley on funds received from the issuance and sale of debt and equity securities. BayFirst’s liquidity needs are to make interest payments on its debt obligations, dividends on shares of its Series A Preferred Stock, Series B Convertible Preferred Stock, and common stock, and payment of certain operating expenses. As of ~~September 30, 2021,~~March 31, 2022, BayFirst held ~~$107.10~~$1.51 million in cash and cash equivalents.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest-rate risk inherent in loan and deposit taking activities. To that end, we actively monitor and manage our interest-rate risk exposure. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting ~~on-and~~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.

Our objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk. ~~However, a~~A sudden or substantial increase in interest rates may ~~adversely~~ impact our 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.

We established a comprehensive interest rate risk management policy which is administered by management’s Asset/Liability Committee (“ALCO”). 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. We measure the potential adverse impacts that changing interest rates may have on our 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 we use. 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 that we use in our modeling. The methodology does not measure the impact that higher rates may have on variable and adjustable-rate loan 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 ~~increases~~changes in interest rates on the results of our operations, we monitor assets and liabilities to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. To do this, we (i) emphasize the origination of adjustable-rate and variable-rate loans to be held for investment; (ii) ~~maintaining~~maintain a stable core deposit base; and (iii) ~~maintaining~~maintain a significant portion of liquid assets (cash, interest-bearing deposits with other banks, and available-for-sale investment securities).

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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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 ~~September 30, 2021,~~March 31, 2022, 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 ~~September 30, 2021,~~March 31, 2022, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control Over Financial Reporting

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

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Part II - Other Information

Item 1. Legal Proceedings

We are not currently involved in any litigation that we believe may result in a material loss. From time-to-time, we are involved in litigation arising in the ordinary course of our business.

Item 1A. Risk Factors

~~There have been no material changes from~~In addition to the risk factor discussed below and the other information set forth in this report, you should carefully consider the factors ~~previously disclosed~~discussed under "Part I--Item 1A--Risk Factors" in the ~~"Risk Factors" section included~~Company's Form 10-K for the year ended December 31, 2021. 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.

Changes in local, national, or global economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans, the quality of our security portfolio, and the value of the collateral securing our loans.

Our success depends to a significant extent upon local, national, and global economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, military hostilities, terrorism, trade wars, economic sanctions, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment securities in our ~~Registration Statement on Form S-1/A filed on November 3, 2021.~~

portfolio or available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans. Recent political and military developments in Russia, Ukraine, and elsewhere are likely to result in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in oil production and supply in the Middle East and Russia, also affect the economy and stock prices in the U.S., which can affect our earnings, capital, as well as the ability of our customers to repay loans.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

~~a) During the three-month period ended September 30, 2021, we sold the following shares~~None.

Issuer Purchases of ~~common stock:~~Equity Securities

Share Buyback Program.

Date of Sales Number of Shares Proceeds Class of Purchaser Exemption Claimed
July 1-31, 2021 15,058.56 $ — Accredited investors and QIBs Converting Outstanding Securities Rule 506(b) and Section 4(a)(2)
July 1-31, 2021 4,336.21 105 DRIP Participants Section 3(a)(11)
July 1-31, 2021 8,247.00 183 NSPP Participants Rule 701
July 1-31, 2021 24,919.57 384 ESOP Participants Rule 701
September 1-30, 2021 7,933.66 223 DRIP Participants Section 3(a)(11)

~~b) The Company received no proceeds from the offering described in the Company’s registration statement on Form S-1, as amended, declared effective on November 12, 2021.~~

~~c) The Company repurchased no equity securities during the three-month period ended September 30, 2021.~~

On January 26, 2021, the Company’s Board of Directors ~~adopted~~authorized a stock repurchase program for the repurchase of up to $100,000 per calendar quarter of the company’s issued and ~~subsequently amended it on September 9, 2021, and~~outstanding common stock. On November 30, ~~2021. The~~2021, the Company announced that its Board of Directors amended its stock repurchase program ~~permits~~to allow the Company to repurchase up to $450,000 of the Company’s issued and outstanding common stock per quarter. The changes to the program were implemented immediately and will continue until the earlier of the date an aggregate of $1,000,000 of common stock has been repurchased, with no more than $450,000 being bought back in one quarter, ~~with an annual aggregate limit~~or October 1, 2022, or termination of ~~$1 million. The~~the program by the Board of Directors. All common shares repurchased in the program will ~~expire on October 1,~~be retired and held as unissued shares available for use and reissuance for purposes as and when determined by the Board.

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The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended March 31, 2022.


Period	Number of Shares (1)	Average Price Paid Per Share		Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 1-31, 2022	2,212	$	22.27	2,212	911,472
February 1-28, 2022	—	—		2,212	911,472
March 1-31, 2022	—	—		2,212	911,472
Total	2,212	$	22.27	2,212
(1) Reflects the repurchase of shares on Nasdaq, and their subsequent retirement, pursuant to the repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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ITEM 6. EXHIBITS

(a)Exhibits.


Exhibit Number						Exhibit Name

3.1						Amended and Restated Articles of Incorporation

3.2						Bylaws

3.3						Amendment to Bylaws, dated August 22, 2019

4.1						Form of common stock certificate

4.2						Form of Series A Preferred Stock certificate

4.3						Form of warrant certificate

4.4						Warrant Agreement with Continental Stock Transfer & Trust Company, dated November 14, 2019

4.5						Form of Series B Convertible Preferred Stock certificate

4.6						Amendment to Warrant Agreement, dated as of July 6, 2021

31.1						Principal Executive Officer’s Certification required by Rule 13(a)-14(a) - filed herewith

31.2						Principal Financial Officer’s Certification required by Rule 13(a)-14(a) - filed herewith

32.1						Principal Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith

32.2						Principal Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith

101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~September 30, 2021,~~March 31, 2022, formatted in iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



BAYFIRST FINANCIAL CORP.

Date:			~~December 16, 2021~~May 13, 2022

By:			/s/ Anthony N. Leo
			Anthony N. Leo
			Chief Executive Officer (principal executive officer)

Date:			~~December 16, 2021~~May 13, 2022

By:			/s/ Robin L. Oliver
			Robin L. Oliver
			~~Executive Vice President~~Chief Financial Officer and Chief ~~Financial~~Operating Officer (principal financial officer)

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	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Beginning of period	$	6,614	$	10,034	$	8,160	$	11,280
Additions	100		—		100		530
Amortization	(781)		(865)		(2,327)		(2,641)
End of period	$	5,933	$	9,169	$	5,933	$	9,169


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Residential Mortgage		Banking		Consolidated		Residential Mortgage		Banking		Consolidated
Interest income	$	2,770	$	36,664	$	39,434	$	1,904	$	27,914	$	29,818
Interest expense	1,840		4,044		5,884		1,410		6,528		7,938
Net interest income	930		32,620		33,550		494		21,386		21,880
Provision for loan losses	—		(1,000)		(1,000)		—		11,900		11,900
Residential loan fee income	76,704		—		76,704		61,888		—		61,888
Internal transfer for portfolio loans originated	269		(269)		—		35		(35)		—
Other noninterest income	39		16,620		16,659		42		4,388		4,430
Total noninterest income	77,012		16,351		93,363		61,965		4,353		66,318
Total noninterest expense	62,768		35,850		98,618		44,512		23,483		67,995
Income before income tax expense	15,174		14,121		29,295		17,947		(9,644)		8,303
Income tax expense	4,249		3,239		7,488		5,025		(3,819)		1,206
Net income	$	10,925	$	10,882	$	21,807	$	12,922	$	(5,825)	$	7,097
Period end assets	$	94,083	$	849,660	$	943,743	$	155,806	$	1,345,710	$	1,501,516


	September 30,								December 31,
	2021				2020				2020
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Florida	$	87,563	28	%	$	58,854	24	%	$	60,861	24	%
California	40,795		13	%	34,654		14	%	32,891		13	%
Texas	21,290		7	%	18,290		7	%	17,689		7	%
Georgia	14,875		5	%	13,566		5	%	13,936		6	%
All Other	149,492		47	%	123,203		50	%	127,953		50	%
Total government guaranteed loans, excluding PPP	$	314,015	100	%	$	248,567	100	%	$	253,330	100	%


	At and for the Three Months ended September 30,				At and for the Nine Months Ended September 30,				At and for the year ended December 31,
	2021		2020		2021		2020		2020
Number of loans originated	2		2,558		3,858		8,930		8,948
Amount of loans originated	$	276	$	64,888	$	329,315	$	876,603	$	876,960
Average loan size originated	$	138	$	25	$	85	$	98	$	98
Amount of loans sold	$	—	$	—	$	326,318	$	—	$	—
Amount of loans purchased	$	—	$	7,362	$	—	$	22,404	$	22,404
Loan balance, net of deferred loan costs (fees) and discount on purchased loans	$	155,647	$	879,511	$	155,647	$	879,511	$	825,802
Loan origination fees, net recognized	$	1,662	$	4,302	$	13,909	$	8,175	$	13,419
Deferred loan origination fees, net, at period end	$	1,112	$	19,531	$	1,112	$	19,531	$	12,948