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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended 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  x    No  o

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

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

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

x

Smaller reporting company

x

Emerging growth company

x

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 4,013,036 shares of common stock as of May 11, 2022.

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Part I - Financial Information
Item 1.			Financial Statements			3
			Consolidated Balance Sheets at March 31, 2022 (Unaudited) and December 31, 2021			3
			Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2022 and 2021			4
			Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2022 and 2021			5
			Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 2021			6
			Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021			7
			Notes to the Consolidated Financial Statements (Unaudited)			9
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			49
Item 4.			Controls and Procedures			49
Part II - Other Information
Item 1.			Legal Proceedings			51
Item 1A.			Risk Factors			51
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3.			Defaults Upon Senior Securities			52
Item 4.			Mine Safety Disclosures			52
Item 5.			Other Information			52
Item 6.			Exhibits			53
Signatures						54

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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
ALLL: Allowance for Loan Losses			FNBB: First National Bankers Bank
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			MMDA: Money Market Deposit Account
CARES Act: Coronavirus Aid, Relief, and Economic Security Act			NOW: Negotiable Order of Withdrawal
CBLR: Community Bank Leverage Ratio			NSPP: Non-Qualified Stock Purchase Plan
CECL: Current Expected Credit Losses			OFR: Florida Office of Financial Regulation
CET1: Common Equity Tier 1 Capital			OLC: Officer Loan Commitee
C&I: Commercial and Industrial			OREO: Other Real Estate Owned
CIK: Central Index Key			OTTI: Other-Than-Temporary Impairment
COVID-19: Coronavirus Disease 2019			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			PPPLF: Paycheck Protection Program Liquidity Facility
DRIP: Dividend Reinvestment Plan			QIB: Qualified Institutional Buyer
EGC: Emerging Growth Company			SBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Inventive Plan			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			USDA: United States Department of Agriculture
Exchange Act: Securities Exchange Act of 1934			USDA B&I: United States Department of Agriculture Buiness and Industry
FASB: Financial Accounting Standards Board			TDR: Troubled Debt Restructure
FBCA: Florida Business Corporation Act			iXBRL: Inline eXtensible Business Reporting Language

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

Part I - Financial Information

Item 1. Financial Statements

ASSETS
			March 31, 2022						December 31, 2021
			(Unaudited)
Cash and due from banks			$	3,141					$	2,869
Interest-bearing deposits in banks			118,960						106,858
Cash and cash equivalents			122,101						109,727
Time deposits in banks			3,881						2,381
Investment securities available for sale			41,656						30,893
Investment securities held to maturity			2						2
Restricted equity securities, at cost			2,520						2,827
Residential loans held for sale			75,022						114,131
Government guaranteed loans held for sale			1,445						1,460
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 $10,170 and $13,452			542,858						560,882
Accrued interest receivable			3,150						3,564
Premises and equipment, net			31,037						29,671
Loan servicing rights			7,601						6,619
Deferred income taxes			490						454
Right-of-use operating lease assets			4,166						4,543
Bank owned life insurance			24,698						24,547
Other assets			19,145						15,780
Total assets			$	888,541					$	917,095
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Noninterest-bearing deposits			$	92,680					$	83,638
Interest-bearing transaction accounts			180,815						163,495
Savings and money market deposits			464,847						423,864
Time deposits			31,787						50,688
Total deposits			770,129						721,685
Subordinated debentures			5,987						5,985
Notes payable			3,186						3,299
PPP Liquidity Facility			—						69,654
Accrued interest payable			86						326
Operating lease liabilities			4,377						4,747
Accrued expenses and other liabilities			9,897						15,109
Total liabilities			793,662						820,805
Shareholders’ equity:
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			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			52,252						51,496
Accumulated other comprehensive loss, net			(1,458)						(420)
Unearned compensation			(630)						(17)
Retained earnings			35,431						35,947
Total shareholders’ equity			94,879						96,290
Total liabilities and shareholders’ equity			$	888,541					$	917,095

See accompanying notes.

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

									Three Months Ended March 31,
															2022						2021
Interest income:
Loans, including fees															$	7,555					$	14,811
Interest-bearing deposits in banks and other															185						81
Total interest income															7,740						14,892
Interest expense:
Deposits															1,217						1,320
Borrowings															117						942
Total interest expense															1,334						2,262
Net interest income															6,406						12,630
Provision for loan losses															(2,400)						2,000
Net interest income after provision for loan losses															8,806						10,630
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 expense:
Salaries and benefits															13,697						13,167
Bonus, commissions, and incentives															4,606						11,873
Mortgage banking															1,002						1,695
Occupancy and equipment															1,421						1,332
Data processing															1,467						1,269
Marketing and business development															1,742						1,642
Professional services															1,307						924
Loan origination and collection															670						496
Employee recruiting and development															871						614
Regulatory assessments															69						102
Other noninterest expense															795						607
Total noninterest expense															27,647						33,721
Income before income taxes															27						10,068
Income tax expense															14						2,557
Net income															13						7,511
Preferred stock dividends															208						332
Net income (loss attributable to) available to common shareholders															$	(195)					$	7,179
Basic earnings (loss) per common share															$	(0.05)					$	2.05
Diluted earnings (loss) per common share															$	(0.05)					$	1.82

See accompanying notes.

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

									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.

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BAYFIRST FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (Dollars in thousands, except per share data)

			Preferred Shares, Series A						Preferred Shares, Series B						Common Shares(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
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			—						—						—						—						—						—						—						—						7,511						7,511
Issuance of common stock under:
Non-qualified stock purchase plan			—						—						13,142						—						—						207						—						—						—						207
Dividend reinvestment plan			—						—						6,339						—						—						107						—						—						—						107
Issuance of common stock, net			—						—						14,471						—						—						224						—						—						—						224
Issuance of preferred stock, net			—						740						—						—						727						—						—						—						—						727
Stock-based awards - common stock:
Restricted stock expense, net of tax impact			—						—						2,227						—						—						29						—						6						—						35
Stock option expense			—						—						—						—						—						106						—						—						—						106
Conversion of Series B preferred stock to common stock			—						(2,520)						157,369						—						(2,452)						2,452						—						—						—						—
Dividends declared on:
Preferred stock			—						—						—						—						—						—						—						—						(331)						(331)
Common stock ($0.067 per share)			—						—						—						—						—						—						—						—						(234)						(234)
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 January  1, 2022			6,395						3,210						3,981,117						$	6,161					$	3,123					$	51,496					$	(420)					$	(17)					$	35,947					$	96,290
Net income			—						—						—						—						—						—						—						—						13						13
Exercise of stock warrants			—						—						750						—						—						13						—						—						—						13
Repurchase of common stock			—						—						(2,212)						—						—						(49)						—						—						—						(49)
Exercise of stock options, net			—						—						401						—						—						—						—						—						—						—
Stock-based awards - common stock:
Restricted stock expense, net of tax impact			—						—						33,117						—						—						713						—						(613)						—						100
Stock option expense			—						—						—						—						—						79						—						—						—						79
Other comprehensive income (loss), net			—						—						—						—						—						—						(1,038)						—						—						(1,038)
Dividends declared on:
Preferred stock			—						—						—						—						—						—						—						—						(208)						(208)
Common stock ($0.08 per share)			—						—						—						—						—						—						—						—						(321)						(321)
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.

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

			Three Months Ended March 31,
			2022						2021
Cash flows from operating activities:
Net income			$	13					$	7,511
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of fixed assets			495						414
Net securities premium amortization			40						—
Amortization of debt issuance costs			—						3
Amortization of discount on PPP loans purchased			(2)						(14)
Provision for loan losses			(2,400)						2,000
Accretion of discount on unguaranteed loans			(411)						(457)
Deferred tax expense (benefit)			303						(1,904)
Origination of SBA loans held for sale			(1,445)						—
Proceeds from sales of SBA loans held for sale			81,880						—
Net gains on sales of SBA loans			(4,621)						—
Origination of residential loans held for sale			(335,560)						(715,856)
Proceeds from sales of residential loans held for sale			380,999						739,409
Net gains on sales of residential loans held for sale			(9,070)						(28,944)
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			197						(72)
Amortization of loan servicing rights			707						716
Non-qualified stock purchase plan expense			25						19
Stock based compensation expense			154						141
Income from bank owned life insurance			(151)						(85)
Changes in:
Accrued interest receivable			414						(1,284)
Other assets			(2,988)						(4,016)
Accrued interest payable			(240)						(1,105)
Other liabilities			(5,582)						372
Net cash from operating activities			105,756						2,181
Cash flows from investing activities:
Purchase of investment securities available for sale			(12,820)						—
Principal payments on investment securities available for sale			640						—
Principal payments on investment securities held to maturity			—						10
Purchase (sale) of restricted equity securities			307						(357)
Purchase of time deposits from banks			(1,500)						—
Loan (originations) and payments, net			(56,260)						(160,813)
Purchase of premises and equipment			(1,861)						(602)
Net cash (used in) investing activities			(71,494)						(161,762)
Cash flows from financing activities:
Net change in deposits			48,444						48,480
Net increase of short-term fed funds purchased			—						40,000
Payments on notes payable			(113)						(113)
Net proceeds (repayments) of PPP Liquidity Facility borrowings			(69,654)						76,151
Proceeds from issuance of preferred stock, net			—						727
Proceeds from sale of common stock, net			13						519

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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 two 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 three month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 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, 2021 in the Company’s Annual Report filed on Form 10-K. There were no new accounting policies or changes to existing policies adopted during the first three months of 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 March 31, 2022. Although the ultimate outcome of all claims and lawsuits outstanding as of 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.

New Accounting Standards Not Yet Adopted:

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; 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 an implementation plan. The Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information to use in the CECL model.

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and is not expected to have a significant impact on our financial statement disclosures.

NOTE 2 – INVESTMENT SECURITIES

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

March 31, 2022			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
Investment securities available for sale:
Asset-backed securities			$	7,621					$	—					$	(50)					$	7,571
Mortgage-backed securities:
U.S. Government-sponsored enterprises			4,388						—						(323)						4,065
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises			23,721						—						(1,575)						22,146
Corporate bonds			7,874						—						—						7,874
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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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 after March 31, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at 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 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)																		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 one security classified as held to maturity at March 31, 2022 and December 31, 2021, which matures in August 2039. The security is a debt security to a government-sponsored enterprise and its amortized cost was $2 and the fair value was $2 at March 31, 2022 and December 31, 2021.

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

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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 March 31, 2022 and December 31, 2021 were as follows:

			March 31, 2022						December 31, 2021
Real estate:
Residential			$	102,897					$	87,235
Commercial			189,684						163,477
Construction and land			18,038						18,632
Commercial and industrial			180,163						217,155
Commercial and industrial - PPP			44,792						80,158
Consumer and other			13,502						3,581
Loans held for investment, at amortized cost, gross			549,076						570,238
Deferred loan costs, net			7,297						7,975
Discount on SBA 7(a) loans sold(1)			(3,335)						(3,866)
Discount on PPP loans purchased			(10)						(13)
Allowance for loan losses			(10,170)						(13,452)
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 4 - ALLOWANCE FOR LOAN LOSSES

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

									Three Months Ended March 31,
															2022						2021
Balance, beginning of period															$	13,452					$	21,162
Charge-offs:
Commercial and industrial															(1,031)						(1,137)
Consumer and other															(15)						(16)
Total charge-offs															(1,046)						(1,153)
Recoveries:
Real estate - commercial															8						—
Commercial and industrial															153						5
Consumer and other															3						3
Total recoveries															164						8
Net (charge-offs)															(882)						(1,145)
Provision for loan losses															(2,400)						2,000
Balance, end of period															$	10,170					$	22,017
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 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
Allowance for loan losses:
Individually evaluated for impairment			$	—					$	126					$	—					$	239					$	—					$	—					$	—					$	365
Collectively evaluated for impairment			668						1,393						124						7,081						—						429						110						9,805
Total			$	668					$	1,519					$	124					$	7,320					$	—					$	429					$	110					$	10,170
Loans:
Individually evaluated for impairment			$	123					$	2,257					$	—					$	239					$	—					$	—					$	—					$	2,619
Collectively evaluated for impairment			102,774						187,427						18,038						179,924						44,792						13,502						—						546,457
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, 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
Allowance for loan losses:
Individually evaluated for impairment			$	—					$	91					$	—					$	902					$	—					$	—					$	—					$	993
Collectively evaluated for impairment			1,437						2,258						241						8,300						—						154						69						12,459
Total			$	1,437					$	2,349					$	241					$	9,202					$	—					$	154					$	69					$	13,452
Loans:
Individually evaluated for impairment			$	124					$	2,900					$	—					$	902					$	—					$	—					$	—					$	3,926
Collectively evaluated for impairment			87,111						160,577						18,632						216,253						80,158						3,581						—						566,312
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 three months ended 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 - commercial			2,193						2,193						—						1,732						20						—
Subtotal			2,193						2,193						—						1,732						20						—
With an allowance recorded:
Real estate - commercial			91						91						39						584						—						—
Commercial and industrial			856						856						856						902						—						—
Subtotal			947						947						895						1,486						—						—
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 March 31, 2022 and December 31, 2021 were $6,174 and $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 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 March 31, 2022 and December 31, 2021. In the following table, the recorded investment does not include the government guaranteed balance.

			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 March 31, 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
Real estate - residential			$	179					$	124					$	303					$	102,594					$	102,897
Real estate - commercial			1,239						1,181						2,420						187,264						189,684
Real estate - construction and land			—						—						—						18,038						18,038
Commercial and industrial			3,417						182						3,599						176,564						180,163
Commercial and industrial - PPP			—						—						—						44,792						44,792
Consumer and other			9						—						9						13,493						13,502
Total			$	4,844					$	1,487					$	6,331					$	542,745					$	549,076
(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.

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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, 2021:

			Pass						Special Mention						Substandard						Doubtful						Total Loans
Real estate - residential			$	87,233					$	—					$	2					$	—					$	87,235
Real estate - commercial			160,492						170						2,815						—						163,477
Real estate - construction and land			18,632						—						—						—						18,632
Commercial and industrial			212,544						1,850						2,761						—						217,155
Commercial and industrial - PPP			80,158						—						—						—						80,158
Consumer and other			3,581						—						—						—						3,581
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 March 31, 2022 and December 31, 2021:

			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 March 31, 2022 and December 31, 2021. The Company estimated $73 and $38 of impaired loan loss reserves for these loans at March 31, 2022 and December 31, 2021, respectively. There were no loans which were modified in the previous twelve months that defaulted during the three months ended March 31, 2022.

There were no new loans classified as TDR during the three months ended 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.

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

			March 31, 2022												December 31, 2021
			Number of Loans						Outstanding Recorded Investment						Number of Loans						Outstanding Recorded Investment
Real estate - residential			—						$	—					1						$	258
Commercial and industrial			13						676						23						1,113
Total loan modifications related to COVID-19			13						$	676					24						$	1,371

NOTE 5 – 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 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 (anticipated loan funding probability). Pull-through rates are an unobservable input which are the Company’s estimate of the percentage of interest rate lock 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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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 March 31, 2022 and December 31, 2021.

Assets and liabilities measured at fair value on a recurring basis at 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
Financial assets
Investment securities available for sale			$	—					$	30,893					$	—					$	30,893
Residential loans held for sale			43,837						70,294						—						114,131
SBA loans held for investment, at fair value			—						—						9,614						9,614
Interest rate lock commitments			—						—						1,435						1,435
Mandatory forward sales contracts			88						—						—						88
Best efforts forward sales contracts			—						—						27						27
Financial liabilities
Interest rate lock commitments			$	—					$	—					$	23					$	23
Mandatory forward sales contracts			166						—						—						166

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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 March 31, 2022 and December 31, 2021.

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

			March 31, 2022						December 31, 2021
Aggregate fair value			$	75,022					$	114,131
Contractual balance			74,225						110,335
Gain			$	797					$	3,796

The total amount of 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 residential loans held for sale were as follows:

			Three Months Ended March 31,
			2022						2021
Interest income			$	737					$	1,219
Change in fair value			(2,999)						(5,333)
Total (loss)			$	(2,262)					$	(4,114)

The Company also elected the fair value option for certain of its non-PPP SBA loans originated 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 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 three months ended March 31, 2022 and March 31, 2021:

			Three Months Ended March 31,
			2022						2021
Balance of SBA loans held for investment at fair value, beginning of period			$	9,614					$	9,264
Principal payments			(648)						(262)
Repurchase of guaranteed balances previously participated			—						1,401
Total gains during the period			(197)						72
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 March 31, 2022 and December 31, 2021:

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

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

75

Quoted Market Prices

Pull-through expectations

24.00%-100.00% (85.96%)

Best efforts forward sales contracts

30

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

cash flow

Conditional prepayment rate

10.56%-10.56% (10.56%)

Interest rate lock commitments

1,412

Quoted Market Prices

Pull-through expectations

24.00%-100.00% (84.40%)

Best efforts forward sales contracts

27

Quoted Market Prices

Pull-through expectations

24.00%-80.00% (65.79%)

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.

The significant unobservable inputs impacting the fair value 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 measurement 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 decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

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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 March 31, 2022 and December 31, 2021 are as follows:

									March 31, 2022												December 31, 2021
			Level						Carrying Value						Fair Value						Carrying Value						Fair Value
Assets:
Cash and cash equivalents			1						$	122,101					$	122,101					$	109,727					$	109,727
Time deposits in banks			2						3,881						3,874						2,381						2,437
Investment securities held to maturity			2						2						2						2						2
Restricted equity securities, at cost			2						2,520						2,520						2,827						2,827
Government guaranteed loans held for sale			2						1,445						1,539						1,460						1,460
Loans held for investment, at amortized cost			3						542,858						542,402						560,882						569,394
Accrued interest receivable			3						3,150						3,150						3,564						3,564
SBA loan servicing rights			3						7,399						8,891						6,407						8,050
Mortgage loan servicing rights			3						202						202						212						212
Liabilities:
Noninterest-bearing deposits			2						$	92,680					$	92,680					$	83,638					$	83,638
Interest-bearing transaction accounts			2						180,815						180,815						163,495						163,495
Savings and money market deposits			2						464,847						464,847						423,864						423,864
Time deposits			2						31,787						31,832						50,688						51,049
Subordinated debentures			2						5,987						6,040						5,985						6,175
Notes payable			2						3,186						3,308						3,299						3,350
PPP Liquidity Facility			2						—						—						69,654						69,654
Accrued interest payable			2						86						86						326						326

NOTE 6 – SBA LOAN SERVICING ACTIVITIES

At March 31, 2022 and December 31, 2021, the principal balance of SBA loans, excluding PPP loans, retained by the Company was $271,317 and $300,415, respectively, of which $143,081 and $171,548 represented the guaranteed portion of the loans. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid

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

principal balances of SBA loans serviced for others requiring recognition of a servicing asset were $507,986 and $459,670 at 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 13.25% and a weighted average prepayment speed of 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, 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 months ended March 31, 2022 and March 31, 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 7 – LEASES

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

									Three Months Ended March 31,
															2022						2021
Operating lease cost															$	387					$	361
Short-term lease cost															136						195
Total lease cost, net															$	523					$	556

									Three Months Ended March 31,
															2022						2021
Operating cash flows related to operating leases															$	380					$	347
Right-of-use assets obtained in exchange for new operating lease liabilities															—						136
															$	380					$	483

At March 31, 2022, the weighted average discount rate of operating leases was 2.06% and the weighted average remaining life of operating leases was 4.10 years.

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

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

2022			$	1,094
2023			1,172
2024			1,087
2025			685
2026			593
Thereafter			301
Total undiscounted lease payments			$	4,932
Less: imputed interest			(555)
Net lease liabilities			$	4,377

NOTE 8 – 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 balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5,987 and $5,985 at March 31, 2022 and December 31, 2021, respectively.

In March 2020, the Company renegotiated the terms of its outstanding senior debt and combined its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime (3.50% at March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was $3,186 and $3,299 at March 31, 2022 and December 31, 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 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 were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and 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 repaid the advance plus accrued interest. The balance outstanding on this facility was $69,654 at December 31, 2021. In the first quarter of 2022, the Company repaid the remaining balance of the advance.

NOTE 9 – 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 $179 and $141 for the three months ended March 31, 2022 and March 31, 2021, respectively.

Restricted Stock

The Company awarded shares of restricted common stock to certain employees for which compensation expense is recognized ratably over the vesting period of the awards based on the fair value of the stock at issue date.

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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 three months ended March 31, 2022 follows:

			Shares						Weighted-Average Grant-Date Fair Value, per share
Nonvested at January 1, 2022			2,483						$	14.86
Granted			34,925						21.50
Vested			(3,111)						19.99
Forfeited			(925)						21.45
Nonvested at March 31, 2022			33,372						$	21.15

At March 31, 2022 there was $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 2.8 years. The total fair value of shares vested during the three months ended March 31, 2022 and March 31, 2021 was $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 volatility is based on an average of historical volatility of peer financial institutions. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of the activity in the Equity Plan for the three months ended March 31, 2022 follows:

			Shares						Weighted Average Exercise Price						Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value
Outstanding at January 1, 2022			450,818						$	15.64
Granted			—						—
Exercised			1,195						14.75
Forfeited			(2,304)						14.99
Expired			—						—
Outstanding at March 31, 2022			449,709						$	15.64					7.44						$	3,963
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 three months ended March 31, 2021 was $3.51. Total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan was $515 at March 31, 2022. This cost is expected to be recognized over a weighted average period of 2.21 years.

NOTE 10 – 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 three months ended March 31, 2022, there were no shares purchased. During the three months ended March 31, 2021, 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 shares were purchased at an average price of $21.68 per share.

All employees and Directors are eligible to participate in the NSPP. Expense recognized in relation to the NSPP for the three months ended March 31, 2022 and March 31, 2021 was $25 and $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 $331 and $312 at March 31, 2022 and December 31, 2021, respectively, and the related expense for the three months ended March 31, 2022 and March 31, 2021 was $19 and $45, respectively.

The Company has a 401(k) plan that covers all employees subject to certain age and service requirements. The Company contributes 3% of each employee’s salary each pay period as a safe harbor contribution. The Company may also match employee contributions each year at the discretion of the Board of Directors. Expense recognized in relation to the 401(k) plan was $660 and $786 for the three months ended March 31, 2022 and March 31, 2021, 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. The Board approved 1% of salaries for eligible employees in 2021. Expense related to the ESOP was $192 and $459 for the three months ended March 31, 2022 and March 31, 2021, respectively, and was $490 for the year ended December 31, 2021. During the year ended December 31, 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 11 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that the Bank met all capital adequacy requirements to which it was subject at March 31, 2022 and December 31, 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 March 31, 2022 and December 31, 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 March 31, 2022:

			Actual												Required for Capital Adequacy Purposes												To be Well Capitalized Under Prompt Corrective Action Regulations
			Amount						Ratio						Amount						Ratio						Amount						Ratio
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)			$	99,247					18.19		%				$	32,742					6.00		%				$	43,656					8.00		%
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 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, 2021:

			Actual												Required for Capital Adequacy Purposes												To be Well Capitalized Under Prompt Corrective Action Regulations
			Amount						Ratio						Amount						Ratio						Amount						Ratio
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)			$	99,656					19.98		%				$	29,932					6.00		%				$	39,909					8.00		%
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 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.

NOTE 12 – MORTGAGE BANKING ACTIVITIES

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

									Three Months Ended March 31,
															2022						2021
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															(2,999)						(5,333)
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															6,945						10,862
Mortgage banking fees															1,507						3,111
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 March 31, 2022 and December 31, 2021, the Company had interest rate lock commitments of $135,665 and $108,122, mandatory forwards contracts of $158,500 and $142,500, and forward sales contracts of $12,794 and $7,375, respectively. The fair value of these mortgage banking derivatives was reflected by a total derivative asset of $3,231 and $1,550 and a total derivative liability of $737 and $189 at March 31, 2022 and December 31, 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.

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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 March 31, 2022 and December 31, 2021:

			March 31, 2022												December 31, 2021
			Notional Amount						Fair Value						Notional Amount						Fair Value
Included in other assets:
Interest rate lock commitments			$	79,458					$	760					$	103,572					$	1,435
Mandatory forward sales contracts			146,500						2,441						60,000						88
Best efforts forward sales contracts			12,794						30						7,375						27
Included in other liabilities:
Interest rate lock commitments			56,207						685						4,550						23
Mandatory forward sales contracts			12,000						52						82,500						166

NOTE 13 – 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 March 31, 2022 and December 31, 2021 were as follows:

			March 31, 2022						December 31, 2021
Unfunded loan commitments			$	15,411					$	18,567
Unused lines of credit			62,470						52,076
Standby letters of credit			68						68

All unused lines of credit at March 31, 2022 and December 31, 2021 were variable rate lines of credit and the majority of unfunded loan commitments at March 31, 2022 and December 31, 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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NOTE 14 – EARNINGS PER COMMON SHARE

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

									Three Months Ended March 31,
															2022						2021
Basic:
Net income															$	13					$	7,511
Less: Preferred stock dividends															208						332
Net income (loss attributable to) available to common shareholders															$	(195)					$	7,179
Weighted average common shares outstanding															4,003,499						3,509,115
Basic earnings (loss) per common share															$	(0.05)					$	2.05
Diluted:
Net income															$	13					$	7,511
Less: Preferred stock dividends															208						332
Add: Series B preferred stock dividends															—						187
Net income (loss attributable to) available to common shareholders															$	(195)					$	7,366
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															—						447,523
Add: Dilutive effects of assumed exercises of stock options/warrants															—						82,349
Average shares and dilutive potential common shares															4,003,499						4,038,987
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 70,260 shares were excluded in computing diluted earnings per common share for the three months ended March 31, 2021, because they were anti-dilutive.

NOTE 15 – OPERATING SEGMENTS

The Company has two 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 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 March 31, 2022																		Three Months Ended March 31, 2021
			Residential Mortgage						Banking						Consolidated						Residential Mortgage						Banking						Consolidated
Interest income			$	737					$	7,003					$	7,740					$	1,218					$	13,674					$	14,892
Interest expense			531						803						1,334						790						1,472						2,262
Net interest income			206						6,200						6,406						428						12,202						12,630
Provision for loan losses			—						(2,400)						(2,400)						—						2,000						2,000
Residential loan fee income			13,191						—						13,191						32,029						—						32,029
Internal transfer for portfolio loans originated			130						(130)						—						69						(69)						—
Other noninterest income			6						5,671						5,677						12						1,118						1,130
Total noninterest income			13,327						5,541						18,868						32,110						1,049						33,159
Total noninterest expense			13,776						13,871						27,647						23,127						10,594						33,721
Income before income tax expense (benefit)			(243)						270						27						9,411						657						10,068
Income tax expense (benefit)			(68)						82						14						2,635						(78)						2,557
Net income (loss)			$	(175)					$	188					$	13					$	6,776					$	735					$	7,511
Period end assets			$	80,030					$	808,511					$	888,541					$	218,040					$	1,498,791					$	1,716,831

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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 months ended 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 Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on 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 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 elimination of LIBOR and the development of 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. At March 31, 2022, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing our consolidated financial statements were the policies

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related to the allowance for loan losses, and fair value measurement of SBA servicing rights, residential loans held for sale and residential 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 elected to take advantage of this extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies do so. This may make the Company’s financial statements not comparable with those of public companies which are neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.

Recent Developments

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.

Second Quarter Common Stock Dividend. On April 26, 2022, BayFirst’s Board of Directors declared a second quarter 2022 cash dividend of $0.08 per common share. The dividend 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 our Series A Preferred Stock. The dividend will be payable June 15, 2022 to shareholders of record as of June 1, 2022. The amount and timing of the dividend is in accordance with the terms of the Series A Preferred Stock.

Second Quarter Preferred Series B Stock Dividend. On April 26, 2022, BayFirst’s Board of Directors 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 shareholders of record as of June 1, 2022. The amount and timing of the dividend is in accordance with the terms of the Series B Convertible Preferred Stock.

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Selected Financial Data - Unaudited

						As of and for the Three Months Ended
(Dollars in thousands, except per share data)						3/31/2022						12/31/2021						3/31/2021
Income Statement Data:
Net interest income						$	6,406					$	6,693					$	12,630
Provision for loan losses						(2,400)						(2,500)						2,000
Noninterest income						18,868						24,214						33,159
Noninterest expense						27,647						30,224						33,721
Income tax expense						14						372						2,557
Net income						13						2,811						7,511
Preferred stock dividends						208						208						332
Net income (loss attributable to) available to common shareholders						$	(195)					$	2,603					$	7,179
Balance Sheet Data:
Average loans held for investment, excluding PPP loans						520,559						518,697						413,558
Average total assets						872,311						923,485						1,636,211
Average common shareholders’ equity						83,990						83,056						57,944
Total loans held for investment						561,797						583,948						1,388,533
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						365,584						323,363						288,960
Allowance for loan losses						10,170						13,452						22,017
Total assets						888,541						917,095						1,716,831
Common shareholders’ equity						85,274						86,685						66,046
Per Share Data: (2)
Basic earnings (loss) per common share						$	(0.05)					$	0.66					$	2.05
Diluted earnings (loss) per common share						$	(0.05)					$	0.61					$	1.82
Dividends per common share						$	0.080					$	0.070					$	0.067
Book value per common share						$	21.25					$	21.77					$	17.95
Tangible book value per common share (1)						$	21.22					$	21.75					$	17.93
Performance Ratios:
Return on average assets						0.01		%				1.22		%				1.84		%
Return on average common equity						(0.93)		%				12.54		%				49.56		%
Net interest margin						3.25		%				3.07		%				3.21		%
Dividend payout ratio						(164.25)		%				10.65		%				3.26		%
Asset Quality Data:
Net charge-offs						$	882					$	664					$	1,145
Net charge-offs/avg loans held for investment excl PPP						0.68		%				0.51		%				1.11		%
Nonperforming loans						$	8,834					$	11,909					$	9,741
Nonperforming loans (excluding gov't gtd balance)						$	2,660					$	3,967					$	3,242
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						0.47		%				0.68		%				0.57		%
ALLL/Total loans held for investment						1.81		%				2.30		%				1.59		%
ALLL/Total loans held for investment, excl PPP loans						1.97		%				2.67		%				5.23		%
Other Data:
Full-time equivalent employees						575						637						649
Banking center offices						7						7						6
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.
(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
						As of
(Dollars in thousands, except per share data)						March 31, 2022						December 31, 2021						March 31, 2021
						(Unaudited)						(Unaudited)						(Unaudited)
Total shareholders’ equity						$	94,879					$	96,290					$	79,421
Less: Preferred stock liquidation preference						(9,605)						(9,605)						(13,375)
Total equity available to common shareholders						85,274						86,685						66,046
Less: Goodwill						(100)						(100)						(100)
Tangible common shareholders' equity						$	85,174					$	86,585					$	65,946
Common shares outstanding						4,013,173						3,981,117						3,678,566
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 March 31, 2022 of $13 thousand, or $(0.05) per diluted common share, compared to net income for the three months ended March 31, 2021 of $7.51 million, or $1.82 per diluted common share. The decrease of $7.50 million in net income was the result of lower PPP income and residential loan fee income, partially offset by higher income from the sale of SBA loans, and lower noninterest expense.

Net Interest Income

Net interest income was $6.41 million for the three months ended March 31, 2022, a decrease of $6.22 million or 49.28% compared to net interest income for the three months ended March 31, 2021 of $12.63 million. This decrease was primarily due to lower net PPP loan interest and origination fee income. The net interest margin for the three months ended March 31, 2022 was 3.25% compared to 3.21% for the three months ended March 31, 2021. With the recent rate increase enacted by the Federal Reserve, the net interest margin in future periods could improve as the majority of our SBA loan portfolio rates are tied to Prime resetting quarterly at the beginning of each quarter with a lag in 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. 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 March 31,
			2022																		2021
(Dollars in thousands)			Average  Balance						Interest						Yield						Average  Balance						Interest						Yield
Interest-earning assets:
Investment securities			$	30,647					$	97					1.28		%				$	—					$	—					0.00		%
Loans, excluding PPP (1)			604,055						7,112						4.77		%				591,050						6,599						4.53		%
PPP loans			58,058						443						3.09		%				878,532						8,212						3.79		%
Other			106,472						88						0.34		%				123,907						81						0.27		%
Total interest-earning assets			799,232						7,740						3.93		%				1,593,489						14,892						3.79		%
Noninterest-earning assets			73,079																		42,722
Total assets			$	872,311																	$	1,636,211
Interest-bearing liabilities:
NOW, MMDA and savings			$	609,467					$	1,086					0.72		%				$	444,612					$	1,033					0.94		%
Time deposits			39,344						131						1.35		%				96,152						287						1.21		%
PPPLF advances			22,983						20						0.35		%				885,028						766						0.35		%
Other borrowings			9,258						97						4.25		%				57,732						176						1.24		%
Total interest-bearing liabilities			681,052						1,334						0.79		%				1,483,524						2,262						0.62		%
Demand deposits			95,457																		71,894
Noninterest-bearing liabilities			2,207																		7,804
Shareholders’ equity			93,595																		72,989
Total liabilities and shareholders’ equity			$	872,311																	$	1,636,211
Net interest income									$	6,406																	$	12,630
Interest rate spread															3.13		%																3.17		%
Net interest margin (2)															3.25		%																3.21		%
Ratio of average interest-earning assets to average interest-bearing liabilities			117.35		%																107.41		%
(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. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.

(Dollars in thousands)			Rate						Volume						Total
Three Months Ended March 31, 2022 vs. March 31, 2021:
Interest-earning assets:
Investment securities			$	—					$	97					$	97
Loans, excluding PPP			366						147						513
PPP loans			(1,277)						(6,492)						(7,769)
Other interest-earning assets			19						(12)						7
Total interest-earning assets			(892)						(6,260)						(7,152)
Interest-bearing liabilities:
NOW, MMDA, and savings			(275)						328						53
Time deposits			30						(186)						(156)
PPPLF advances			—						(746)						(746)
Other borrowings			161						(240)						(79)
Total interest-bearing liabilities			(84)						(844)						(928)
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 that may affect our ability to collect on the loans in our portfolio.

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 the three months ended March 31, 2022 of $2.40 million. This compared to a $2.00 million provision for the three months ended March 31, 2021. During 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 $22.02 million at March 31, 2021.

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Noninterest Income

The following table presents noninterest income for the three months ended March 31, 2022 and March 31, 2021.

			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 $18.87 million during the three months ended March 31, 2022, a decrease of $14.29 million or 43.10% from $33.16 million during the three months ended March 31, 2021. The decrease was primarily due to the decrease in residential loan fee income of $18.84 million or 58.82% as a result of a decrease in residential mortgage volume of $380.29 million partially offset by an increase in gains on SBA loan sales.

Noninterest Expense 

The following table presents noninterest expense for the three months ended March 31, 2022 and March 31, 2021.

			For the Three Months Ended March 31,
(Dollars in thousands)			2022						2021
Noninterest expense:
Salaries and benefits			$	13,697					$	13,167
Bonus, commissions, and incentives			4,606						11,873
Mortgage banking			1,002						1,695
Occupancy and equipment			1,421						1,332
Data processing			1,467						1,269
Marketing and business development			1,742						1,642
Professional services			1,307						924
Loan origination and collection			670						496
Employee recruiting and development			871						614
Regulatory assessments			69						102
Other noninterest expense			795						607
Total noninterest expense			$	27,647					$	33,721

Noninterest expense was $27.65 million during the three months ended March 31, 2022, a decrease of $6.07 million or 18.01% from $33.72 million during the three months ended March 31, 2021. The decrease was primarily due to lower residential mortgage commissions. Additionally, the Company reduced headcount in 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 adjust to the expectations for volume moving forward. The impact to expense from the reduction of the workforce in the first quarter 2022 will not provide a meaningful reduction of noninterest expenses until the second quarter of 2022 and beyond.

Income Taxes 

Income tax expense was $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 March 31, 2021. The decrease was primarily due to the

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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 following table presents the fair value of the Company's investment securities portfolio classified as available-for-sale as of March 31, 2022 and December 31, 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 March 31, 2022 and December 31, 2021, which matures in August 2039. The security is a debt security issued by a government-sponsored enterprise and its amortized cost and fair value was $2 thousand at March 31, 2022 and December 31, 2021.

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

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 the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.

			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, strong loan production resulted from our ability to 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.

			March 31, 2022												December 31, 2021
(Dollars in thousands)			Amount						% of Total						Amount						% of Total
Residential loans held for sale			$	75,022											$	114,131
Government guaranteed loans, held for sale			1,445												1,460
SBA loans held for investment, at fair value			8,769												9,614
Loans held for investment, at amortized cost:
Residential real estate			102,897						18.7		%				87,235						15.3		%
Commercial real estate			189,684						34.5		%				163,477						28.7		%
Construction and land			18,038						3.3		%				18,632						3.3		%
Commercial and industrial			180,163						32.8		%				217,155						38.0		%
Commercial and industrial – PPP			44,792						8.2		%				80,158						14.1		%
Consumer and other			13,502						2.5		%				3,581						0.6		%
Loans held for investment, at amortized cost, gross			549,076						100.0		%				570,238						100.0		%
Discount on SBA 7(a) loans sold			(3,335)												(3,866)
Discount on PPP loans purchased			(10)												(13)
Deferred loan costs (fees), net			7,297												7,975
Allowance for loan losses			(10,170)												(13,452)
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.

During the three months ended March 31, 2022, we originated approximately $63.59 million in loans through conventional lending channels, $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 $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 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.

(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:
Residential			$	4,362					$	326					$	8,669					$	89,512					$	102,869
Commercial			5,271						1,839						24,319						163,104						194,533
Construction and land			2,676						773						635						13,954						18,038
Commercial and industrial			6,947						9,578						165,307						6,565						188,397
Commercial and industrial - PPP			21,234						23,129						—						—						44,363
Consumer and other			585						9,317						3,136						559						13,597
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 March 31, 2022.

(Dollars in thousands)			Fixed Interest Rate						Adjustable Interest Rate
Real estate:
Residential			$	23,590					$	74,917
Commercial			2,428						186,834
Construction and land			5,596						9,766
Commercial and industrial			19,089						162,361
Commercial and industrial - PPP			23,129						—
Consumer and other			3,917						9,095
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 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 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 loan type. The government guaranteed loan balances are included in the collectively evaluated for 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 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 March 31, 2022, we had $2.66 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.81% of total loans. At March 31, 2021, we had $3.24 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.59% of total loans held for investment. Total loans at March 31, 2022 and March 31, 2021 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 2.71% at March 31, 2022, compared to 7.35% at March 31, 2021.

At December 31, 2021, we had $3.97 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.30% of total loans, including PPP loans. Total loans at December 31, 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 4.04% at December 31, 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)			March 31, 2022						March 31, 2021						December 31, 2021
Nonperforming loans (government guaranteed balances)			$	6,174					$	6,499					$	7,942
Nonperforming loans (unguaranteed balances)			2,660						3,242						3,967
Total nonperforming loans			8,834						9,741						11,909
OREO			3						—						3
Total nonperforming assets			$	8,837					$	9,741					$	11,912
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			0.47		%				0.23		%				0.68		%
Nonperforming assets as a percentage of total assets			0.99		%				0.57		%				1.30		%
Nonperforming assets (excluding government guaranteed balances) to total assets			0.30		%				0.19		%				0.43		%
ALLL to nonperforming loans			115.12		%				226.02		%				112.96		%
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)									At and for the Three Months Ended March 31,
															2022						2021
Allowance at beginning of period															$	13,452					$	21,162
Charge-offs:
Commercial and industrial															(1,031)						(1,137)
Consumer and other															(15)						(16)
Total charge-offs															(1,046)						(1,153)
Recoveries:
Commercial real estate															8						—
Commercial and industrial															153						5
Consumer and other															3						3
Total recoveries															164						8
Net charge-offs															(882)						(1,145)
Provision for loan losses															(2,400)						2,000
Allowance at end of period															$	10,170					$	22,017
Net charge-offs to average loans held for investment															0.61		%				0.35		%
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															2.71		%				7.35		%
Allowance as a percent of nonperforming loans															115.12		%				226.02		%
Total loans held for investment															$	563,242					$	1,388,533
Average loans held for investment															$	578,617					$	1,292,090
Nonperforming loans (including government guaranteed balances)															$	8,834					$	9,741
Nonperforming loans (excluding government guaranteed balances)															$	2,660					$	3,242
Guaranteed balance of all government guaranteed loans															$	187,444					$	1,089,098
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 $2.40 million during the three months ended March 31, 2022, compared to a provision of $2.00 million for the same period in 2021. For the year ended 2021, the provision for loan losses was $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 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 0.30%, as of March 31, 2022, as compared to 0.19% as of March 31, 2021. This percentage was 0.43% as of December 31, 2021. 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, asset quality trends may appear more favorable than they otherwise would without the SBA’s support under the CARES Act.

As of March 31, 2022, a total of 13 loans with principal balances of $676 thousand were under payment deferrals. Of those, all were government guaranteed loans with $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)						At and for the Three Months Ended March 31,												At and for the Year Ended December 31,
Government Guaranteed, Excluding PPP						2022						2021						2021
Number of loans originated						86						49						374
Amount of loans originated						$	47,332					$	15,520					$	169,467
Average loan size originated						$	550					$	317					$	453
Government guaranteed loan balances sold						$	71,345					$	—					$	44,854
Government unguaranteed loan balances sold						$	4,351					$	—					5,034
Total government guaranteed loans						$	271,317					$	261,502					$	300,415
Government guaranteed loan balances						$	143,081					$	121,824					$	171,548
Government unguaranteed loan balances						$	128,236					$	147,258					$	128,867
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. The “All Other” category includes states with less than 5% in any period presented.

			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.

						For the Three Months Ended March 31,
(Dollars in thousands)						2022						2021
Number of loans originated						1,051						2,372
Amount of loans originated						$	335,560					$	715,849
Average loan size originated						$	319					$	302
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, 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 by management at least monthly or more often if conditions require it, based on a review of loan demand, deposit flows for the previous 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)			March 31, 2022												December 31, 2021
Noninterest-bearing deposits			$	92,680					12.0		%				$	83,638					11.6		%
Interest-bearing transaction accounts			180,815						23.5		%				163,495						22.7		%
Money market accounts			447,837						58.2		%				408,257						56.5		%
Savings			17,010						2.2		%				15,607						2.2		%
Subtotal			738,342						95.9		%				670,997						93.0		%
Total time deposits			31,787						4.1		%				50,688						7.0		%
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 provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250,000 as of March 31, 2022.

(Dollars in thousands)
Three months or less			$	1,100
Over three months through six months			312
Over six months through 12 months			3,766
Over 12 months			979
Total			$	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 $5.99 million and $5.99 million at March 31, 2022 and December 31, 2021, respectively.

In March 2020, the Company renegotiated the terms of its outstanding senior debt and combined its line of credit and term note into one amortizing note with quarterly principal and interest payments with interest at Prime (3.50% at March 31, 2022). The new note matures on March 10, 2029 and the balance of the note was $3.19 million and $3.30 million at March 31, 2022 and December 31, 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 were secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrued interest at 0.35% per annum and matured at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, and 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 repaid the advance plus accrued interest. The balance outstanding on this facility was $69.65 million at December 31, 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 decreased $1.41 million to $94.88 million at March 31, 2022 as compared to $96.29 million at December 31, 2021. The decrease was the result of decreases of $1.04 million of accumulated other comprehensive income

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due to increases in net unrealized losses on available-for-sale securities, $208 thousand of dividends declared on our preferred stock, and $321 thousand of dividends declared on our common stock during the three months ended March 31, 2022.

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

The Bank is subject to regulatory capital requirements imposed by various regulatory 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 March 31, 2022 and December 31, 2021,the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory guidelines.

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

			Actual												Minimum(1)												Well Capitalized(2)
(Dollars in thousands)			Amount						Percent						Amount						Percent						Amount						Percent
As of March 31, 2022
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)			99,247						18.19		%				32,742						6.00		%				43,656						8.00		%
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)			99,247						11.75		%				33,774						4.00		%				42,218						5.00		%
As of December 31, 2021
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)			99,656						19.98		%				29,932						6.00		%				39,909						8.00		%
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)			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 March 31, 2022 were $45.89 million, a decrease of $89.08 million from $134.97 million at December 31, 2021. The decrease was primarily due to the payoff of $69.65 million in PPP Liquidity Facility and a decrease in time deposits of $18.90 million.

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The following tables present our contractual obligations as of March 31, 2022 and December 31, 2021.

			Contractual Obligations as of March 31, 2022
(Dollars in thousands)			Less than One Year						One to Three Years						Three to Five Years						Over Five Years						Total
Operating lease obligations			$	1,409					$	2,161					$	1,211					$	151					$	4,932
Long-term borrowings			—						—						—						3,186						3,186
Subordinated notes			—						—						—						5,987						5,987
Time deposits			25,097						5,773						917						—						31,787
Total			$	26,506					$	7,934					$	2,128					$	9,324					$	45,892
			Contractual Obligations as of December 31, 2021
(Dollars in thousands)			Less than One Year						One to Three Years						Three to Five Years						Over Five Years						Total
Operating lease obligations			$	1,454					$	2,249					$	1,279					$	301					$	5,283
Long-term borrowings			—						—						—						3,299						3,299
PPP Liquidity Facility			44,647						—						25,007						—						69,654
Subordinated notes			—						—						—						6,050						6,050
Time deposits			40,868						9,210						610						—						50,688
Total			$	86,969					$	11,459					$	26,896					$	9,650					$	134,974

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 of thousands)			March 31, 2022						December 31, 2021
Unfunded loan commitments			$	15,411					$	18,567
Unused lines of credit			62,470						52,076
Standby letters of credit			68						68
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 March 31, 2022 was 18.77%, as compared to 16.76% at December 31, 2021.

During the three months ended 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 $41.66 million at March 31, 2022.

During each of the 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 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 March 31, 2022, BayFirst held $1.51 million in cash and cash equivalents.

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

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 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. A sudden or substantial increase in interest rates may 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 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) maintain a stable core deposit base; and (iii) 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 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 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.

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

In addition to the risk factor discussed below and the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in the Company's Form 10-K for the year ended December 31, 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 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

None.

Issuer Purchases of Equity Securities

Share Buyback Program. On January 26, 2021, the Company’s Board of Directors authorized a stock repurchase program for the repurchase of up to $100,000 per calendar quarter of the company’s issued and outstanding common stock. On November 30, 2021, the Company announced that its Board of Directors amended its stock repurchase program 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, or October 1, 2022, or termination of the program by the Board of Directors. All common shares repurchased in the program will 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 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:			May 13, 2022
By:			/s/ Anthony N. Leo
			Anthony N. Leo
			Chief Executive Officer (principal executive officer)
Date:			May 13, 2022
By:			/s/ Robin L. Oliver
			Robin L. Oliver
			Chief Financial Officer and Chief Operating Officer (principal financial officer)

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