S-1 1 forms-1prospectusdrip.htm S-1 Document



Registration No. 333-[______]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

BAYFIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Florida602259-3665079
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
700 Central Avenue
St. Petersburg, Florida 33701
(727) 440-6848
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Anthony N. Leo
Chief Executive Officer
BayFirst Financial Corp.
700 Central Avenue
St. Petersburg, Florida 33701
(727) 440-6848
(Name, address, including zip code, and telephone number,
including area code of agent for service)

Copies of all communications, including copies of all communications
sent to agent for service, should be sent to:
Richard Pearlman, Esq.
Igler and Pearlman, P.A.
2457 Care Drive, Suite 203
Tallahassee, Florida 32308
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
        Large accelerated filer                Accelerated filer        
Non-accelerated filer                Smaller reporting company    
                            Emerging growth company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Amount to be Registered
Proposed Maximum
Aggregate Offering
Price Per Share*
Proposed Maximum Aggregate Offering Price*
Amount of
Registration Fee
Common Stock100,000$22.37$2,237,000.00$207.37
*Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) of the Securities Act. The registrant calculates the proposed maximum aggregate offering price in accordance with Rule 457(c), based on the average of the high and low trading prices on Nasdaq on January 14, 2022.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. The securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated January 20, 2022
logoa.jpg
BayFirst Financial Corp.

100,000 Shares of Common Stock

We are offering, through our Dividend Reinvestment and Stock Purchase Plan, to all holders of our common stock, the opportunity to automatically reinvest their cash dividends in shares of our common stock and to make optional cash purchases of common stock from $250 to $75,000 per quarter. The terms and provisions of the plan are set forth in this prospectus.

The prices to be paid for shares of common stock purchased through the Dividend Reinvestment and Stock Purchase Plan will be 100% of the market price, determined as provided in the plan.

This prospectus relates to 100,000 shares of common stock registered for purchase under the plan. Shares issued under the plan will be either newly issued shares or shares purchased for plan participants in the open market. Our common stock is traded on the Nasdaq Capital Market under the symbol “BAFN.” The last reported sales price of our common stock on January 14, 2022 was $22.50.

The plan does not represent a change in the dividend policy of BayFirst Financial Corp. Our dividend policy will continue to depend on our earnings, financial requirements, and other factors. Shareholders who do not wish to participate in the plan will continue to receive cash dividends, if and when declared, in the usual manner.

We are an “emerging growth company” as defined under the federal securities laws and, as such, we have elected to comply with reduced reporting requirements for this prospectus and may elect to do so in future filings. See “Implications of Being an Emerging Growth Company.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities regulator have approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.




January 20, 2022

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ABOUT THIS PROSPECTUS

This prospectus is a part of a registration statement on Form S-1 that we filed with the SEC using a continuous offering process. You should read this prospectus and any prospectus supplement before deciding to invest in our common stock.

The information contained in this prospectus, or any free writing prospectus prepared by us or on our behalf or to which we refer you, is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our assets, business, cash flows, financial condition, liquidity, prospects or results of operations may have changed since that date.

You should not interpret the contents of this prospectus, or any free writing prospectus prepared by us or on our behalf or to which we refer you, to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.

We have not authorized anyone to provide any information to you other than that contained in this prospectus or in any free writing prospectus prepared by us or on our behalf to which we refer you. We take no responsibility for, nor provide any assurance as to the reliability of, any other information that others may give you. Information contained on, or accessible through, our website is not part of this prospectus.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions. We are not making an offer of these securities in any jurisdiction where such offer is not permitted.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that” and similar expressions constitute “forward-looking statements.” Forward-looking statements involve risk and uncertainty and a variety of factors that could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or implied in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and the operations of our subsidiary, First Home Bank, include, but are not limited to, changes in:

market interest rates and general economic conditions,
legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government,
the quality and composition of the loan or investment portfolios,
demand for loan and deposit products,
competition, including competition for talent,
demand for financial services in our primary trade area,
litigation, tax and other regulatory matters,

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accounting principles and guidelines, and
other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing and services.

INDUSTRY AND MARKET DATA

Industry and market data used in this prospectus has been obtained from independent industry sources and publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for other purposes. We did not commission the preparation of any of the sources or publications referred to in this prospectus. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

The Jumpstart Our Business Startups Act (the “JOBS Act”), was enacted in April 2012 with the intention of encouraging capital formation in the United States and reducing the regulatory burden on newly-public companies that qualify as “emerging growth companies.” We are an “emerging growth company” within the meaning of the JOBS Act. As an emerging growth company, we intend to take advantage of certain exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements, and the requirement that we hold a non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to avail ourselves of this exemption from new or revised accounting standards. Accordingly, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the listing of our common stock on Nasdaq.

For certain risks related to our status as an emerging growth company, see the, sections titled “Risk Factors,” “Risks Related to Our Securities,” and “We are an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.”


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider in making your investment decision. You should carefully read the following summary together with the entire prospectus, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, before deciding to invest in our Common Stock. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Information.”

Throughout this prospectus the terms the “BayFirst,” “Company,” “we,” “our,” and “us” have been used. Unless otherwise indicated or unless the context requires otherwise, such references are meant to denote BayFirst Financial Corp. and our subsidiary, First Home Bank, on a consolidated basis.

Dividend Reinvestment and Stock Purchase Plan

This prospectus relates to the Company’s Dividend Reinvestment and Stock Purchase Plan (the “Plan”). Under the Plan, Company shareholders may reinvest their cash dividends into shares of Company common stock and make voluntary purchases of additional shares. Shares purchased by shareholders under the Plan may be purchased on Nasdaq or issued from the Company’s authorized but unissued shares.

BayFirst Financial Corp.

BayFirst was incorporated on June 23, 2000, and commenced operations as a registered bank holding company on September 1, 2000.

On April 22, 2021, we changed our name from First Home Bancorp, Inc. to BayFirst Financial Corp.

Our corporate offices are located at the First Home Executive Center, 700 Central Avenue, St. Petersburg, Florida 33701. Our primary source of income is from our wholly-owned subsidiary, First Home Bank (the “Bank”).

Stock Split

Effective May 10, 2021, BayFirst effected a three-for-two stock split. All share amounts and per share financial data contained in this prospectus have been adjusted for the split.

No Recommendation

This prospectus should not be considered as our recommendation or advice concerning an investment in BayFirst. No recommendation is being made by BayFirst as to whether you should purchase shares of our common stock.

First Home Bank

The Bank commenced business operations on February 12, 1999, and operates as a Florida state-chartered commercial bank and a member of the Federal Reserve System (“Federal Reserve”). On January 3, 2022, we filed an application with the Office of the Comptroller of the Currency to convert the Bank’s charter to that of a national bank.

The Bank’s main office is located at the First Home Executive Center. The Bank’s telephone number is (727) 440-6848, and the Bank’s website address is www.firsthomebank.com.

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We have structured the Bank into three Divisions: the Community Banking Division, CreditBench, and the Residential Mortgage Division. Together, we expect this structure to result in a high-performing institution, producing balance sheet and revenue growth, funded primarily by a local, growing deposit base.

The Community Banking Division has seven full-service banking centers in the Tampa Bay area: five in Pinellas County, one in Hillsborough County, and one in Sarasota County. Additionally, we have purchased properties in Sarasota, Bradenton, and Tampa where we intend to open additional full-service banking centers. The Community Banking Division was established to generate core deposits and loans from businesses, professionals, and consumers located within our primary service area.

We have branded our SBA Lending Division as CreditBench. CreditBench has a nationwide government guaranteed lending platform and operates as a preferred lender under the Small Business Administration’s (“SBA”) 7(a) Loan Program. In addition to SBA guaranteed loan programs, the Bank’s CreditBench lends under the United States Department of Agriculture’s (“USDA”) Business and Industry Loan Program (“B&I”). CreditBench has also been an active lender in the Paycheck Protection Program (“PPP”), and the Bank has used the Federal Reserve’s PPP Lending Facility (“PPPLF”) to fund a material portion of the PPP loans.

CreditBench’s lending efforts are targeted to a broad range of SBA and USDA eligible industries and geographies, with a focus on building holistic banking relationships with borrowers.

The Residential Mortgage Division operates from our seven full-service banking centers and 23 loan production offices. The Residential Mortgage Division provides revenue diversification, without requiring significant capital. The Residential Mortgage Division formally began operations at the beginning of 2017.

Risk Factor Summary

Prospective investors should consider all of the information discussed under “Risk Factors” beginning on page 8 before making a decision to purchase shares of our common stock. Those Risk Factors relate to:

Our ability to grow the size and geographic scope of our loan generation, loan sale, and deposit gathering business, and the infrastructure needed to support it;
Possible loan defaults, devaluation of collateral, adverse economic events, and competition;
Interest rates and available sources of liquidity;
Our ability to raise capital and the effects of doing so on our shareholders;
The potential that we are subject to fraud, incorrect judgments, or other bad acts of third parties;
Laws, regulations, rules, and standards to which we are subject and the government agencies with which we interact;
Retention and development of our key executives and other employees;
Dividend and other restrictions placed on us by our outstanding preferred stock, restrictions that may be imposed by future issuances of preferred stock, and our pledging of the stock in the Bank to secure a loan;
Rapidly developing technology;
Estimates used in certain valuations, including our allowance for loan losses (“ALLL”); and
Features of our stock, such as liquidity, dilution, the lack of preemptive rights, and the concentration of ownership among our insiders.

Our Corporate Information

Our principal executive offices are located at First Home Executive Center, 700 Central Avenue, St. Petersburg, Florida 33701 and our telephone number is (727) 440-6848. The Bank’s website address is www.firsthomebank.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.


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SUMMARY FINANCIAL DATA

The following tables summarize our financial data. The financial data has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following summary consolidated financial data and other data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary financial data is not all-inclusive and does not purport to contain all of the financial information that you may desire, or should consider, in determining whether to make an investment in BayFirst. BayFirst’s historical results are not necessarily indicative of results to be expected in future periods (Dollars in thousands, except per share amounts).

At or For the Nine Months Ended September 30,
At or For the Years
Ended December 31,
2021202020202019
Balance Sheet Data:
Total assets$943,743 $1,501,516 $1,544,691 $531,240 
Loans held for sale91,243 149,407 208,704 76,645 
Total loans held for investment, net639,678 1,247,840 1,207,160 303,192 
Total deposits675,034 510,142 558,784 448,594 
Total shareholders’ equity94,298 62,154 71,069 51,332 
Common shareholders’ equity83,593 50,439 55,914 43,437 
Income Statement Data:
Net interest income$33,550 $21,880 $33,452 $17,434 
Provision for loan losses(1,000)11,900 16,900 8,869 
Non-interest income93,363 66,318 97,695 53,124 
Non-interest expense98,618 67,995 98,469 55,392 
Income tax expense 7,488 1,206 3,075 1,813 
Net income
21,807 7,097 12,703 4,484 
Preferred stock dividends797 557 863 463 
Net income available to common shareholders$21,010 $6,540 $11,840 $4,021 
Per Share Data: (2)
Basic earnings per common share$5.60 $1.91 $3.45 $1.27 
Diluted earnings per common share$5.13 $1.78 $3.01 $1.27 
Dividends per common share
$0.207 $0.201 $0.268 $0.268 
Book value per common share $21.32 $14.60 $16.04 $12.80 
Tangible book value per common share(1)
$21.30 $14.57 $16.02 $12.77 
Common shares outstanding3,919,9773,455,1903,485,0183,393,788
Weighted average common shares outstanding, basic3,749,6923,419,6173,430,7163,171,061
Weighted average common shares outstanding, diluted4,169,2663,681,8604,001,3233,172,186
Performance Ratios:
Return on average assets2.05 %0.87 %1.06 %0.99 %
Return on average common equity40.26 %21.40 %25.50 %10.55 %
Net interest margin3.26 %2.76 %2.88 %4.08 %
Dividend payout ratio3.69 %10.51 %7.20 %21.05 %
Asset Quality Ratios:
ALLL to total loans held for investment2.53 %1.49 %1.72 %3.42 %
ALLL to nonperforming loans158.32 %136.68 %220.76 %127.52 %
ALLL to nonperforming loans (excluding government guaranteed balances)442.39 %466.18 %636.07 %242.10 %
Nonperforming loans to total loans held for investment1.60 %1.09 %0.78 %2.68 %
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At or For the Nine Months Ended September 30,
At or For the Years
Ended December 31,
2021202020202019
Nonperforming loans to total loans held for investment (excluding government guaranteed balances)0.57 %0.32 %0.27 %1.41 %
Nonperforming assets to total assets1.11 %0.92 %0.62 %1.59 %
Nonperforming assets to total assets (excluding government guaranteed balances)0.40 %0.27 %0.22 %0.84 %
Net charge-offs to average loans held for investment, annualized0.44 %0.62 %0.70 %1.44 %
Capital Ratios:
Total risk-based capital ratio (Bank)22.50 %16.75 %17.02 %17.84%
Tier 1 risk-based capital ratio (Bank)21.21 %15.33 %15.72 %16.26%
Tier 1 leverage capital ratio (Bank)12.64 %10.85 %11.75 %10.49%
Common equity Tier 1 capital ratio (Bank)21.21 %15.33 %15.72 %16.26%
Other Data:
Number of full-time equivalent employees651545596423
Number of full-service banking centers 6665
Number of loan production offices
22232921
(1) Non-GAAP financial measure calculated as total shareholders’ equity minus preferred stock liquidation preference minus goodwill, divided by common shares outstanding.
(2) Adjusted for the three-for-two stock split, effective May 10, 2021.
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RISK FACTORS

Investing in our securities involves significant risks, including the risks described below. You should carefully consider the following information about these risks, together with the other information contained in this prospectus before investing in this offering. The risks that we have highlighted here are not the only ones that we face. Additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. In addition, there are risks beyond our control. If any of these risks actually occur, our business, financial condition or results of operations could be negatively affected, and you could lose part or all of your investment.

Risk Factors Related to Our Business

We may be unable to continue to produce the volume of loans necessary to support our SBA and other government guaranteed lending business.

Our business strategy places a significant emphasis on SBA and other government guaranteed lending. In order to successfully implement this strategy, we must originate and fund a substantial dollar amount of loans. To do so, we must identify qualified and interested borrowers and have sufficient capital and liquidity to support and fund such loans. If we are not successful in implementing this strategy, our income and results of operations will be adversely affected.

The Bank’s PPP loans carry litigation risk, possible undesirable interest rate impact, and possible credit risk.

Through our online banking platform, we received a significant amount of PPP loan applications. For reasons such as our inability to determine an applicant’s eligibility, our suspicion of fraud, or other negative application characteristics, we declined to make certain PPP loans. Some of those applicants may pursue claims against the Bank based on fair lending, unfair and deceptive trade practices, or other grounds. In addition, we do not know how the SBA will manage borrowers’ forgiveness requests or our claims on SBA guarantees of PPP loans. If the SBA declines forgiveness requests or dishonors its guarantees of our PPP loans for any reason, we may suffer loan losses. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

In addition, PPP loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the loan forgiven. If PPP borrowers fail to apply or qualify for loan forgiveness, the Bank faces a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. While the PPP loans are guaranteed by the SBA, various regulatory requirements will apply to the Bank’s ability to seek recourse under the guarantees, and related procedures are currently subject to uncertainty.

The Bank also has credit risk on PPP loans if a loan is not forgiven and the SBA determines that the Bank did not originate, close, or service a loan in accordance with legal standards. In the event the SBA dishonors its guarantee for one of those reasons, the Bank may be forced to hold the loan and may incur a loss if the borrower does not perform as agreed.

We depend on the sale of both the guaranteed and unguaranteed portions of our government guaranteed loans, but also face risks relating to the retained portions of unguaranteed loans.

Our strategy historically has been, and may continue to be, to sell both the guaranteed balances of SBA and other government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans, within legally allowable limits. A material portion of our net income and profitability depended, and may continue to depend, on gains on sales of the guaranteed portions of the government guaranteed loans that we originate. We also from time to time pursue the sales of unguaranteed portions of such loans, which provide us with additional liquidity and capital capacity to permit us to make additional loans when needed. Our ability to sell both the guaranteed and unguaranteed portions of these loans is dependent upon our ability to identify purchasers with the demand and capacity to buy them, the attractiveness of the loans, our underwriting quality, and other factors. Our business strategy pertaining to SBA and other government guaranteed loans changed in late 2018, when we
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started to transition to holding an increased amount of the guaranteed portions of these loans. Our ability to continue to make new loans and hold them in our loan portfolio will be limited by our current capital and liquidity positions, and due to our change in business model, our income and results of operations may be adversely affected in the immediate near term. To the extent we retain the unguaranteed portion of these loans in our portfolio, we may be required to make significant provisions to our ALLL.

Our loan origination processes present heightened opportunities for borrower or referral fraud.

The loans we originate through our technology partners and referral sources are obtained primarily through an online application process. We do not generally meet with the borrowers in person. Our referral sources also are involved in assisting the borrowers’ with completing their loan applications. Therefore, it is difficult for us to definitively ascertain or confirm a borrower’s identity, structure, creditworthiness, or veracity in completing the loan application process. If a borrower or a referral source intentionally, or unintentionally, provides us with incorrect information that we rely on in underwriting a loan, we will be subject to increased credit risk for that loan. Such increased risk could result in increased loan losses or heightened provisions to our ALLL, either of which would adversely affect our credit quality and net income. We may also become subject to heightened regulatory scrutiny for making loans to such borrowers and may be required to dedicate time and other resources to addressing regulatory concerns.

Our loan referral sources operate independently from us and may take actions for which we may be held responsible.

Our referral sources for SBA and other government guaranteed loans operate independently from us and have the initial interactions with many loan applicants and borrowers. As part of those interactions, our referral sources may take actions which violate laws, regulations, or our policies. These may include, among other things, charging impermissible fees, failing to provide or properly complete required documentation or disclosures, making false or misleading statements, or encouraging an applicant to make misrepresentations. In certain instances, the Bank may be held responsible by an applicant or a government agency for such actions. If that were to happen, the Bank may be required to pay restitution or fines, be subject to regulatory enforcement actions, or lose certain statuses with the SBA or other government agencies.

We heavily rely on technology partners and other referral sources in our SBA loan origination process.

As part of our SBA lending strategy, we use the services of technology partners and other referral sources. These arrangements allow us to originate loans throughout the U.S. via the internet. We do not have an exclusivity arrangement with any referral source. Therefore, we cannot be assured that we will be able to originate and close or maintain any specific level of SBA loans through such sources in the future. In addition, our technology partners are subject to online commerce risks generally, including hacking and use of the site by persons using fraudulent credentials. Should we not continue to generate a substantial volume of loan business through our use of referral sources, or if they experience operational interruptions, or direct loans to other lenders, our SBA lending will be materially reduced, which would reduce our net income and our asset growth.

Our operations are growing at a rapid pace and our training programs and operational protocols may lag behind our growth.

Our branch network and mortgage and SBA lending operations are expanding at a rapid pace. As a result, we may not be able to provide comprehensive or timely training to new staff or employees who are promoted.

We may also not develop appropriate operational protocols as quickly as we expand our products and services. If we fail to do so, our employees may not have a set of standards and expectations pursuant to which they perform their assigned duties. If we are not able to fully and promptly provide training to our employees, or develop appropriate protocols, our employees may be susceptible to mistakes, fail to recognize fraud or other weaknesses in our operations, or fail to recognize or mitigate other risks.

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The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in closures of many businesses and the institution of social distancing requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect the implementation of our growth strategy. Furthermore, the pandemic could cause the recognition of loan losses or other impairments in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more clients draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the investment securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

The effects of future widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Widespread health emergencies, such as the global COVID-19 pandemic, can disrupt our operations through their impact on our employees, clients and their businesses, and the communities in which we operate. Disruptions to our clients could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

A shutdown of the Federal government would likely result in us being temporarily unable to make SBA and other government guaranteed loans.

If the Federal government experiences a shutdown, it is likely that the SBA, and other agencies which guaranty the types of loans we make, will be unable to process those loans. As a result, our ability to make those loans would be delayed. During such a delay, it is possible that prospective borrowers could obtain financing from other sources or elect not to borrow. Any delay in closing these types of loans, or losing the opportunity to make them, could result in decreased fee and interest income and adversely affect our financial performance.

The continued development of our mortgage lending business will depend on our ability to attract and retain effective loan origination officers and other sources of mortgage loan referrals.

The mortgage lending business is highly dependent on being able to successfully originate a consistent volume of loans. The primary ways we do this is through the personal sales efforts of our mortgage lending officers and our development of loan referral sources, such as real estate brokers. If we are unable to attract and retain a productive team of such officers or develop an effective network of referral sources, we will likely be unable to generate a volume of mortgage loans to produce sufficient revenue for this line of business to be profitable. If we cannot operate this line of business in a profitable manner, we will likely incur significant losses due to expenses associated with establishing the line of business.

Changes in interest rates can impact the value of our mortgage servicing rights and can result in revenue volatility, which can reduce earnings.

The Bank began selling residential mortgage loans originated in the Tampa Bay market with servicing retained in April 2021 and thus, has begun to build a portfolio of mortgage servicing rights, which are the right to service a mortgage loan for a fee, by collecting principal, interest, and escrow payments. The Bank initially carries such
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rights using a fair value measurement of the present value of the estimated future net servicing income, which includes assumptions about the likelihood of prepayment by borrowers. Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, prepayments tend to increase as borrowers refinance, and the fair value of mortgage servicing rights can decrease, which in turn reduces our earnings.

Changes in the laws or regulations governing our SBA and other government guaranteed lending activities and our mortgage lending business may adversely affect our ability to operate them profitably.

Our SBA and other government lending programs and our mortgage lending activities are subject to laws and regulations administered by government agencies such as the SBA, the United States Department of Housing and Urban Development, and the United States Department of Agriculture. If any of these laws or regulations change, or the policies and practices of these agencies change, such changes may impact our ability to offer such products in a profitable manner, or at all. If we are unable to profitably offer these products, our net income will likely decrease and our financial condition and performance will likely deteriorate.

We may not be able to retain or grow our core deposit base, which could adversely impact our funding costs.

We rely on client deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow our core deposit base. Our retention and acquisition of customer deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, client perceptions of our financial health and general reputation, or a loss of confidence by clients in us or the banking sector generally. Such factors could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current client deposits or attract additional deposits. Additionally, any such loss of funds could result in lower loan originations, which could have a material adverse effect on our business, financial condition and results of operations.

We have expanded into new markets with which we have less familiarity with than our historic markets.

We currently operate residential mortgage loan production offices in a number of states. We intend to continue to expand the geographic scope of our loan origination efforts when we identify attractive opportunities. Our senior management and Board of Directors have less familiarity with these markets than they do with our Florida markets. We are dependent on the expertise and actions of the bankers we have hired in those markets for us to be successful there. We are also subject to risks associated with home values and the economic conditions in those markets. If our bankers are not effective at implementing our business strategy, leave the Bank, or are otherwise not successful, or if economic conditions and home values deteriorate, we will likely incur losses as a result of expansion into their markets.

We are dependent on our management team and any of their departure or subsequent employment with a competitor could adversely affect our operations.

Our growth and development are particularly dependent upon the personal efforts and abilities of our executive officers and other qualified personnel. The loss or unavailability of such officers or employees could have a material adverse effect on our operations and prospects. Such adverse effect may be magnified if any such officer or employee were to become employed with a competitor of ours.

We have pledged the outstanding shares of the Bank to secure a loan, and if we cannot repay the loan when due, the lender may foreclose on the loan and take ownership of the Bank.

We have pledged 100% of the outstanding shares of the Bank’s capital stock to secure a term loan with another financial institution with a balance of $3.3 million as of December 31, 2021. If we do not have cash available at BayFirst or we are unable to fund dividends from the Bank to BayFirst, we may not be able to make principal or interest payments due on the loan. If we cannot repay or refinance the loan on or prior to maturity, the lender may foreclose on the pledged stock and take ownership of the Bank. In which case, we may not have any source of revenue and it would be unlikely that we would continue to operate. The loan currently matures on March 10, 2029.

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We engage in transactions with our directors and their related interests, which creates the potential for conflicts of interest.

We lease the office and branch space at our headquarters from a corporation of which our director George Apostolou is an officer and director. In addition, directors Mark S. Berset and Derek S. Berset are owners of an insurance agency from which the Bank purchases insurance. From time to time the Bank makes loans to, and accepts deposits from, officers and directors and their affiliates. Further, from time to time, in the ordinary course of business, the Company has entered into transactions with certain members of its Board of Directors for various professional services.

Such insider transactions present reputational and corporate governance risks to BayFirst and the Bank. Insider transactions often draw the scrutiny of regulators and shareholders. If they were to identify terms of the transactions, or aspects of the process through which we entered into them, that they deemed to be inappropriately unfavorable to BayFirst or the Bank, such regulators or shareholders might take enforcement or legal action against us. Similarly, insider transactions may present an opportunity for taking advantage of BayFirst or the Bank. If any such events were to occur, BayFirst and the Bank may incur expenses or become engaged in time consuming enforcement or legal processes that could negatively affect our performance.

We may not be able to collect on the guarantees of our SBA or other government guaranteed loans if borrowers default.

In order to collect on their guarantees, we must strictly comply with the standards set by the SBA or other government agencies. If our government guaranteed loans or our servicing and administration of them do not comply with such standards, we may not be able to collect on their guarantees in the event of default. In such case, our asset quality, earnings, and growth prospects will be adversely affected.

Our Internet-based systems and online commerce activities are subject to security threats that could adversely affect our business.

Third party, or internal, systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional events. Our operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, denial of service attacks, unauthorized access, and other unforeseen events. Undiscovered data corruption could render our customer information inaccurate. These events may obstruct our ability to provide services, underwrite loans, and process transactions. Any such incident could put customer confidential information at risk, which may result in significant liability to us, subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers, cause us to incur significant expense to remediate any damage and inhibit current and potential customers from using our online banking services, any or all of which could have a material adverse effect on our results of operations and financial condition.

The valuation of our SBA and USDA related servicing rights is based on estimates and subject to fluctuation based on market conditions and other factors that are beyond our control.

The fair value of our SBA and USDA servicing rights is estimated by a third party based upon projections of expected future cash flows generated by the loans we service, historical prepayment rates, future prepayment estimates, portfolio characteristics, interest rates based on interest rate yield curves, volatility, market demand for servicing rights, and other factors. While this evaluation process uses historical and other objective information, the valuation of our servicing rights is ultimately an estimate based on our experience, judgment, and expectations regarding our servicing portfolio and the broader market. This is an inherently uncertain process and the value of our servicing rights may be adversely impacted by factors that are beyond our control, which may in turn cause us to record valuation allowances which could have a material adverse effect on our business, results of operations, and financial condition.

Changes in business and economic conditions, in particular those of the Florida markets in which we operate, could lead to lower asset quality and decreased earnings.

Unlike larger national or regional banks that are more geographically diversified, our business and earnings are closely tied to general business and economic conditions in our market area. The local economy is heavily influenced by tourism, real estate, and other service-based industries. Factors that could affect the local
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economy include declines in tourism, higher energy costs, reduced consumer or corporate spending, natural disasters or adverse weather and a significant decline in real estate values. A sustained economic downturn could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenue and lower earnings.

Our credit quality may be less favorable than reported because of loan payment deferrals and certain loan payments made by the SBA.

The majority of our loan portfolio consists of SBA loans, most of which received from the SBA principal and interest payments under the CARES Act during 2020 and have received from the SBA at least three months of payments in 2021. In addition, we have granted many borrowers payment deferrals and may continue to do so. Because of these actions, our asset quality trends may appear more favorable than they otherwise would without such payments or deferrals. If our borrowers are unable to make their loan payments after the expiration of the SBA’s payment support or our deferrals, we may experience loan defaults or other deterioration in our credit quality. This may result in higher provisions to our loan loss reserve or loan defaults. Such events could lead to lower earnings or losses.

Most expansion activities require approval of our regulators, which we may not be able to obtain, or that may impose conditions that we find to be unacceptable.

Branch openings, and other expansion activities, generally require the approval of our regulators. We may not be able to obtain such approvals if our regulators do not believe we are financially or managerially strong enough to integrate or manage such activities. In addition, our regulators consider our capital, liquidity, profitability, regulatory compliance, including with the Community Reinvestment Act and the Bank Secrecy Act, and levels of goodwill and intangibles when considering acquisition and expansion proposals. Our regulators may also impose conditions in approvals that we find to be unacceptable, prohibitive, or otherwise undesirable. In any of those instances, we may be unable or unwilling to consummate a transaction or undertake an expansionary activity.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties and have negative effects on our business.

The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose obligations and nondiscriminatory lending requirements on financial institutions. The banking regulators and the U.S. Department of Justice are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on branch expansion, merger and acquisition activity, and restrictions on entering new business lines. Private parties may also have the ability to challenge our performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations, and future prospects.

We may be required to make increases in our ALLL and to charge off loans in the future, which could adversely affect our results of operations.

The determination of the appropriate level of the ALLL involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks, which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors within and outside of our control, may require an increase in the ALLL. In addition, our regulators periodically review our ALLL and may request an increase in the provision for loan losses or the recognition of loan charge-offs, based on judgments different than those of management. Furthermore, the Financial Accounting Standards Board has issued a current expected credit loss rule, which will change our accounting for losses by requiring us to record, at the time of origination, credit losses expected throughout the life of loans, held-to-maturity investment securities, and certain other assets and off-balance sheet credit exposures as opposed to the current practice of recording losses when it is probable that a loss event has occurred. We expect this new standard to be implemented on January 1, 2023, when we will recognize a one-time adjustment to the allowance. We have not yet determined the magnitude of such adjustment or the
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overall impact on financial results. Also, if charge-offs in future periods exceed the allowance, we will need additional provisions to increase the allowance, which would result in a decrease in net income and capital, and could have a material adverse effect on our financial condition and results of operations.

If real estate values in our markets decline, we could experience losses upon foreclosure of the loan or sale of the real estate.

A material portion of our loan portfolio consists of mortgages secured by real estate located in Pinellas, Hillsborough, Manatee, and Sarasota Counties, Florida. Real estate values in our market may decline due to changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature. If real estate values decline in our market, the value of the real estate collateral securing our loans will likely be reduced. Any reduction in the value of the collateral securing our loans could reduce the amount of money we could realize on the sale of any collateral and thereby adversely affect our financial performance.

Hurricanes or other adverse weather events, as well as climate change, could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business and results of operations.

Our market areas in Florida are susceptible to hurricanes, tropical storms, and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where we operate. Such weather events could result in a decline in loan originations, a decline in the value, or destruction of properties securing our loans and an increase in delinquencies, foreclosures, or loan losses. Our business and results of operations may be adversely affected by these and other negative effects of future hurricanes, tropical storms, related flooding and wind damage and other similar weather events. Climate change may be increasing the severity and frequency of adverse weather conditions, making the impact from these types of natural disasters on us or customers worse.

Further, concerns over the long-term impacts of climate change have led and may continue to lead to governmental efforts around the world to mitigate those impacts. Investors, consumers, and businesses also may change their behavior on their own as a result of these concerns. The State of Florida could be disproportionately impacted by long-term climate changes. We and our customers may face cost increases, asset value reductions, and changes in demand for products and services resulting from new laws, regulations, and changing consumer and investor preferences regarding responses to climate change.

Our loan portfolio includes a material amount of commercial real estate and commercial and industrial loans.

The credit risk associated with commercial real estate loans and commercial and industrial (“C&I”) loans is a result of several factors, including the concentration of principal in a limited number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic conditions on the demand for C&I products and services and income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Repayment of commercial real estate and C&I loans in some cases is dependent upon the successful operation of the related business or the development or sale of the related real estate. If the actual or potential cash flow from a business or property is reduced, the borrower’s ability to repay the loan may be impaired. As a result, repayment of these loans may, to a greater extent than other types of loans, be subject to adverse conditions in the real estate market or economy. In addition, if the Bank forecloses on the collateral securing C&I loans, the potential market for selling such collateral may be limited to persons already engaged in a similar business. That may result in the Bank recovering an amount for such collateral less than the amount of the loan or taking an extended time to liquidate such collateral.

Our use of appraisals in deciding whether to make a loan secured by real property or how to value the loan in the future may not accurately describe the net value of the collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is
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made, and, as real estate values may fluctuate over relatively short periods of time, especially in times of heightened economic uncertainty, this estimate might not accurately describe the net value of the collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. In addition, we rely on appraisals and other valuations to establish the value of foreclosed real estate and to determine certain loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our foreclosed upon real estate, and our ALLL may not accurately reflect loan impairments. Inaccurate valuations of properties could materially adversely affect our business, results of operations and financial condition.

We operate in a highly competitive industry and market area.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources than we do. Such competitors primarily include Internet banks and national, regional and community banks within the various markets we serve. We also face competition from many other types of financial institutions, including, without limitation, savings and loan institutions, credit unions, mortgage companies, other finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes, as well as continued consolidation. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Our success depends on our ability to compete successfully in our market area, and there is no guarantee that we will be able to do so.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. Actions by the Federal Home Loan Bank of Atlanta or the Board of Governors of the Federal Reserve System may reduce our borrowing capacity. Additionally, we may not be able to attract deposits at competitive rates. Our inability to raise funds through traditional deposits, brokered deposits, borrowings, the sale of investment securities or loans, and other sources could negatively affect our liquidity or result in increased funding costs. Liquidity may also be adversely impacted by bank supervisory and regulatory authorities mandating changes in the composition of our balance sheet to asset classes that are less liquid.

Changes in interest rates affect our profitability and assets.

Our profitability depends to a large extent on the Bank’s net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and expenses on interest- bearing liabilities, such as deposits and borrowings. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, economic recession, unemployment, money supply, domestic and international events, and changes in the United States and other financial markets.

At December 31, 2021, our one-year interest rate sensitivity position was asset sensitive, such that a gradual increase in interest rates during the next twelve months would have a positive impact on our net interest income. Our results of operations are affected by changes in interest rates and our ability to manage this risk. The difference between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market interest rates, changes in relationships between interest rate indices, and changes in the relationships between long-term and short-term market interest rates. Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining; or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising. In addition, the mix of assets and liabilities could change as varying levels of market interest rates might present our customer base with more attractive options.

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We face additional risks due to our increased mortgage banking activities that could negatively impact our net income and profitability.

We sell a substantial portion of the mortgage loans that we originate. The sale of these loans generates noninterest income and can be a source of liquidity for the Bank. Disruption in the secondary market for residential mortgage loans could result in our inability to sell mortgage loans, which could negatively impact our liquidity position and earnings. In addition, declines in real estate values or increases in interest rates could reduce the potential for robust mortgage originations, which also could negatively impact our earnings. As we do sell mortgage loans, we also face the risk that such loans may have been made in breach of our representations and warranties to the buyers, and we could be forced to repurchase such loans or pay other damages.

We may face risks with respect to future expansion.
    
We may consider and enter into new lines of business or offer new products or services. We may acquire all or parts of other institutions and we may engage in additional de novo branch expansion. Expansion involves a number of risks, including the costs associated with identifying and evaluating potential acquisitions and merger partners, inaccurate estimates and judgments regarding credit, operations, management and market risks of the target institution, our ability to finance expansion and possible dilution to our existing shareholders, the diversion of our management’s attention to the negotiation of a transaction, the integration of the operations and personnel of combining businesses, and the possibility of unknown or contingent liabilities.

We may need additional capital in the future, but such capital may not be available when needed or at all.

We may need to obtain additional debt or equity financing to fund future growth and meet our capital needs. We cannot guarantee that such financing will be available to us on acceptable terms or at all. If our financial performance is unsatisfactory or if negative economic events or disruptions in the capital markets occur, it may not be possible for us to find sources of sufficient capital for our business operations. If we are unable to obtain future financing, we may not have the resources available to fund our planned growth.

We are subject to government regulation and monetary policy that could constrain our growth and profitability.

We are subject to extensive federal government supervision and regulations that impose substantial limitations with respect to lending activities, purchases of investment securities, the payment of dividends, and many other aspects of our business. Many of these regulations are intended to protect depositors, the public, and the FDIC, but not our shareholders. The banking industry is heavily regulated. We are subject to examinations, supervision and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities. Banking regulations are primarily intended to protect the federal deposit insurance fund and depositors, not shareholders. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies. Federal economic and monetary policy may also affect our ability to attract deposits, make loans, and achieve our planned operating results.


Legislation and regulatory proposals enacted in response to market and economic conditions may materially adversely affect our business and results of operations.

Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for our competitors. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) in particular represented a significant overhaul of many aspects of the regulation of the financial services industry, some of which have yet to be implemented. In addition, because regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal or state regulation of financial institutions may change in the future and impact our operations. Recent and forthcoming changes to banking regulations may impact the profitability of our business activities, require changes to some of our business practices, or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with
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new statutory and regulatory requirements. It may also require us to hold higher levels of regulatory capital and/or liquidity and it may cause us to adjust our business strategy and limit our future business opportunities. We cannot predict the effects of future legislation and new or revised regulations on us, our competitors, or on the financial markets and economy, although they may significantly increase costs and impede the efficiency of our internal business processes.

Technological changes, including online and mobile banking, have the potential of disrupting our business model, and we may have fewer resources than many competitors to invest in technological improvements.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services, including mobile and online banking services. Changes in customer behaviors have increased the need to offer these options to our customers. In addition to serving clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to invest in and use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services in a timely manner in response to changes in customer behaviors, thus adversely impacting our operations. Many of our competitors have substantially greater resources to invest in technological improvements and banking regulators may permit emerging technology companies to engage in activities previously reserved to traditional commercial banks. Such competition could adversely affect our performance and results of operations.

Changes in accounting standards may affect our performance.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and statements of operations. Future changes in financial accounting and reporting standards could require us to apply a new or revised standard retroactively, which could result in a material adverse effect on our financial condition or could even require us to restate prior period financial statements.

We face risks related to our operational, technological, and organizational infrastructure.

Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while we expand. Similar to other financial institutions, our operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons, and exposure to external events. We are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems, which we use both to interface with our customers and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones depends on the functionality of our technology systems.

Risks Related to Our Securities

A vibrant public trading market for our common stock has not and may not develop, which may hinder your ability to sell the common stock and may lower the market price of the stock.

Our common stock is quoted and traded on Nasdaq under the symbol “BAFN.” we do not expect a substantially liquid market for our common stock to develop for an uncertain period of time, if at all. Accordingly, potential investors should consider the potential illiquid and long-term nature of an investment in our common stock. You may, therefore, be required to bear the risks of this investment for an indefinite period of time.

Investors may face dilution resulting from the issuance of common stock in the future.

We may issue common stock without shareholder approval, up to the number of authorized shares set forth in our Articles of Incorporation. Our Board may determine, from time to time, a need to obtain additional capital
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through the issuance of additional shares of common stock or other securities. There can be no assurance that such shares will be issued at prices or on terms better than or equal to the price or terms in this offering. The issuance of any additional shares of common stock by us in the future may result in a reduction of the book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock will reduce the proportionate ownership and voting power of our existing shareholders.

The price of our common stock could be volatile.

The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things: variations in our quarterly results of operations; recommendations by securities analysts; performance of other companies that investors deem comparable to us; economic factors unrelated to our performance; general market conditions; and changes in government regulations. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

An investment in our common stock is not an insured deposit.

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

Owning our stock will not give you the right to participate in any future offerings of our capital stock and your ownership could be diluted.

As a shareholder, you are not automatically entitled to purchase additional shares of common stock in future issuances of our common stock; therefore, you may not be able to maintain your current percentage of ownership in BayFirst. If we decide to issue additional shares of common stock or conduct an additional offering of stock, your ownership in BayFirst could be diluted and your potential share of future profits may be reduced.

Management has broad discretion concerning the use of our capital.

We use our capital to maintain liquidity and to continue to support the growth of the Bank. This growth may include the opening of branch offices, increasing the size and volume of loans, or other such activities that may require additional capital. The additional capital may also be used to service our outstanding debt. Our management may determine that it is in the best interest of the Company or the Bank to apply our capital in a manner that is inconsistent with a shareholder’s wishes. Failure to use such funds effectively might harm your investment.

If equity research analysts do not publish research or reports about our business, or if they do publish such reports but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.

The trading market for our common stock could be affected by whether and to what extent equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will cover us and our common stock or whether they will publish research and reports on us. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us. If any of the analysts who elect to cover us downgrade their recommendation with respect to our common stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

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Our Board of Directors owns a significant percentage of our shares and will be able to make decisions to which you may be opposed.

As of December 31, 2021, BayFirst’s directors and named executive officers as a group owned approximately 17.41% of our outstanding common stock. In addition, the directors and named executive officers have stock options and warrants to acquire shares of common stock, which, if fully exercised within sixty days of December 31, 2021, would have resulted in them owning approximately 21.14% of our outstanding common stock. Our directors and executive officers are expected to exert a significant influence on the election of Board members and on the direction of the Company. This influence could negatively affect the price of our shares or be inconsistent with other shareholders’ desires.

We have outstanding preferred stock and our Board may authorize the issuance of additional series of preferred stock.

We have 1,000,000 shares of authorized preferred stock, no par value. Of those, 10,000 shares have been designated as Series A Preferred Stock, of which 6,395 shares were outstanding as of December 31, 2021, with a $1,000 liquidation preference and a 9% (subject to increase to 11% if we have not redeemed the shares by the tenth anniversary of their issuance) per annum quarterly dividend. We also have 20,000 authorized shares of Series B Convertible Preferred Stock, of which 3,210 shares were outstanding as of December 31, 2021, with a $1,000 liquidation preference and an 8% per annum dividend (subject to increase to 9% if we have not redeemed the shares by the tenth anniversary of their issuance), which is otherwise on a parity with our Series A Preferred Stock as to priority of dividends and liquidation preference. Additionally, our Articles of Incorporation provide that our Board of Directors may authorize additional series of preferred stock without shareholder approval. Accordingly, the issuance of new shares of preferred stock may adversely affect the rights of the holders of shares of our common stock.

BayFirst has outstanding debt and either BayFirst or the Bank may incur additional debt.

BayFirst has outstanding debt and either BayFirst or the Bank may incur additional debt. At December 31, 2021, BayFirst had a $3.3 million term loan and $5.99 million in subordinated debt. BayFirst’s obligation to make payments on its debt will reduce the amount of cash available to BayFirst to pay dividends on its common stock. Either or both of BayFirst or the Bank may issue additional debt. Payments due on such debt will further reduce the amount of money available to BayFirst to pay dividends on its common stock.

We are restricted by law and government policy in our ability to pay dividends to our shareholders.

Holders of shares of our capital stock are only entitled to receive such dividends as our Board may declare out of funds legally available for such payments. Although we have recently declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Furthermore, the terms of our subordinated debt and the preferred stock will prohibit us from declaring or paying any dividends on any junior series of our capital stock, including our common stock, or from repurchasing, redeeming or acquiring such junior stock, unless we have declared and paid full dividends on our outstanding preferred stock for the most recently completed dividend period. The holders of our outstanding Series A Preferred Stock are entitled to receive quarterly cash dividends at 9% per annum (subject to increase to 11% if we have not redeemed the shares by the tenth anniversary of their issuance) and the holders of our Series B Convertible Preferred Stock are entitled to receive quarterly cash dividends at 8% per annum (subject to increase to 9% if we have not redeemed the shares by the tenth anniversary of their issuance). Additionally, our Articles of Incorporation provide that our Board of Directors may authorize and issue additional series of preferred stock without shareholder approval. Any preferred shares issued in the future may further restrict our ability to declare or pay dividends on any junior stock, including the common stock.

We are also subject to state and federal statutory and regulatory limitations on our ability to pay dividends on our capital stock. For example, it is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality and financial condition. Moreover, the
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Federal Reserve will closely scrutinize any dividend payout ratio exceeding 30% of after-tax net income. You should not purchase common stock in the offering if you will need or expect an investment that pays dividends.

We are an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. These include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until we are no longer an emerging growth company, which could be as long as five full fiscal years following the initial listing of our common stock on Nasdaq. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have not opted out of such extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies do so. This may make our 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.

We are a smaller reporting company and will be exempt from certain disclosure requirements, which could make our common stock less attractive to potential investors.

We are a smaller reporting company, as defined under the Exchange Act, and may continue to be so after we no longer qualify as an emerging growth company. As a smaller reporting company, we will: (i) not be required and may not include a Compensation Discussion and Analysis section in our proxy statements, (ii) provide only two years of financial statements; and (iii) not need to provide a table of selected financial data. We also will have other scaled disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies which could make our common stock less attractive to potential investors. We cannot predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Certain provisions of Florida and federal law may discourage or prevent a takeover of BayFirst and result in a lower market price for our common stock.

Florida and federal law contain anti-takeover provisions that apply to us. These provisions could discourage potential buyers from seeking to acquire us in the future, even if the proposed transaction would allow shareholders to realize a premium for their shares and even if a majority of our shareholders wish to participate in such a transaction. As a result, these provisions could also adversely affect the market price of our common stock.

Our fractional shares may be difficult to sell and you may be required to indefinitely hold a fractional share.

We have issued, and may continue to issue, fractional shares of our common stock. Although the owner of a fractional share will have all the rights of a shareholder, it may be difficult to sell a fractional share of BayFirst common stock. Established trading markets and exchanges, such as Nasdaq, do not permit the trading of fractional shares. Certain brokers do facilitate the trading of fractional shares, but we can offer no assurances as
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to whether any specific broker does. If you want to sell a fractional share and cannot identify a broker to facilitate such a trade, you will have to hold that fractional share until you identify a private buyer for it. If you cannot locate a private buyer, you will have to hold that fractional share indefinitely.

PLAN OF DISTRIBUTION AND PLAN INFORMATION

Description of the Plan
The Plan was adopted on December 30, 2021. The Plan will be in effect until amended, altered, or terminated. We have reserved 100,000 shares of our common stock for issuance and sale under the Plan pursuant to this prospectus. Details about the Plan are set forth below as a series of questions and answers explaining its significant aspects.
Purpose and Advantages
1.    What is the purpose of the Plan?

The purpose of the Plan is to provide participants with a simple and convenient method of reinvesting cash dividends paid on shares of our common stock and buying additional shares of our common stock without paying brokerage commissions. Also, the Plan provides us with a source of funds when shares of common stock are bought directly from us.
2.    What are the advantages of the Plan?

The Plan provides participants with the opportunity to reinvest cash dividends paid on their shares of our common stock in additional shares of our common stock (see Question 14). In addition, the Plan provides the following advantages:
    
The Plan provides eligible participants with the opportunity to make quarterly investments of optional cash amounts, subject to minimum and maximum amounts, for the purchase of additional shares of our common stock (see Questions 9-11).
No brokerage commissions are paid by participants in connection with any purchase of shares made under the Plan.
Cash dividends paid on participants’ shares can be fully invested in additional shares of our common stock because the Plan permits fractional shares to be credited to Plan accounts. Dividends on such fractional shares, as well as on whole shares, also will be reinvested in additional shares, which will be credited to Plan accounts.
Periodic statements reflecting all current activity, including share purchases and latest Plan account balance, simplify participants’ record keeping.
The Plan Administrator provides for the safekeeping of stock certificates for shares credited to each Plan account.

Plan Administration
3.    Who Administers the Plan?
Continental Stock Transfer and Trust, our stock transfer agent (the “Plan Administrator”), administers the Plan by maintaining records, sending account statements to participants, and performing other duties relating to the Plan. Shares of common stock purchased under the Plan are registered in the name of the Plan Administrator’s nominee and are credited to the accounts of the participants in the Plan. The Plan Administrator acts in the capacity as agent for participants in the Plan. We may replace the Plan Administrator at any time within our sole discretion.
The Plan Administrator can be contacted at Continental Stock Transfer and Trust Company, One State Street Plaza, 30th Floor, New York, NY 10004, online at www.continentalstock.com, by email at drp@continentalstock.com, or by calling (212) 509-4000.
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Participation
4.    Who is eligible to participate?
All holders of record of Company common stock are eligible to participate in the Plan. Beneficial owners of shares of common stock whose shares are registered in names other than their own name may participate by requesting their broker or nominee to transfer their shares into their own name or requesting that the broker or nominee enroll in the Plan on their behalf. The right to participate in the Plan is not transferable to another person apart from a transfer of a Participant’s shares of common stock. Shareholders who reside in jurisdictions in which it is unlawful for a shareholder to participate in the Plan are not eligible to participate in the Plan. Beneficial owners whose shares are registered in names other than their own (for example, in the name of a broker, bank or other nominee) and who wish to participate in the optional cash purchase feature of the Plan must become owners of record of at least one (1) share of Bayfirst Financial Corp. common stock.
5.    How does an eligible shareholder participate?
To participate in the Plan, a shareholder of record must complete an Enrollment Form and return it to the Plan Administrator. Copies of the Enrollment Form may be obtained at any time by request to the Plan Administrator.
6.    When may an eligible shareholder join the Plan?

An eligible shareholder of record may enroll in the Plan at any time. If the Enrollment Form is received by the Plan Administrator on or before the record date for a dividend payment, and the participant elects to reinvest the dividends in shares of our common stock, such reinvestment of dividends will begin with that dividend payment. Please note that the Plan does not represent any change in our dividend policy or a guarantee of the payment of any future dividends.

7.    What does the Enrollment Form provide?

The Enrollment Form allows participants to direct the reinvestment of all of their cash dividends on all shares of our common stock then or subsequently owned by participants, and also permits eligible participants to make optional cash payments for the purchase of additional shares of our common stock in accordance with the Plan.

The Enrollment Form also appoints the Plan Administrator as agent for each participant and directs the Plan Administrator to apply cash dividends and any optional cash payments an eligible participant might make to the purchase of shares of our common stock in accordance with the terms of the Plan.
8.    May a shareholder have dividends reinvested under the Plan with respect to less than all of the shares of common stock registered in the shareholder’s name?
No. Participants must reinvest all cash dividends as to all of their of the shares of our common stock registered in that shareholder’s name.
Optional Cash Payments
9.    How do optional cash payments work?
In order to be eligible to participate in the optional cash purchase feature of the Plan, a shareholder must be an owner of record of at least one share of Company common stock and the shareholder must participate in the dividend reinvestment feature of the Plan. If an eligible shareholder participant chooses to participate by optional cash payments, the Plan Administrator will apply any optional cash payment received by the Plan Administrator from the participant to the purchase of shares of our common stock for the participant’s account. Dividends payable on shares of our common stock purchased with optional cash payments will be automatically reinvested in shares of our common stock.

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10.    How are optional cash payments made?

An initial cash payment may be made by eligible participants when enrolling by enclosing a check for not less than $250 nor more than $75,000 with the Enrollment Form. Optional cash payments may be made by sending a personal check payable to the Plan Administrator and drawn on a U.S. bank in U.S. currency. Thereafter, optional cash payments may be made each quarter by sending to the Plan Administrator the participant’s check for not less than $250 nor more than $75,000, together with the account identification stub furnished by the Plan Administrator.

The election to make optional cash payments is available to each eligible participant at any time. Optional cash payments by eligible participants must be at least $250 per calendar quarter and cannot exceed a total of $75,000 in any quarter. The same amount of money need not be sent each quarter and there is no obligation to make an optional cash payment at any time.
11.    When will optional cash payments received by the Plan Administrator be invested?

Optional cash payments will be invested on the Investment Date as defined in Question 12 below. Since no interest will be paid by us or the Plan Administrator on optional cash payments, participants are urged to make optional cash payments shortly before the Investment Date. Optional cash payments must be received at least three business days before the Investment Date. Late arriving funds will be returned to the shareholder
Optional cash payments do not constitute deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation, the Deposit Insurance Fund or any other government agency.

Purchases
12.    How will purchases be made?

Shares of common stock needed to fund the Plan may be:

    acquired by the Plan Administrator on the open market;
    issued directly by the Company from authorized but unissued shares; or
    through a combination of the above, at the Company’s discretion.
Open market purchases under the Plan will be made during each calendar quarter on each “Investment Date,” which will be the same business day following a dividend payment date or as soon as practicable thereafter. Purchases of shares of common stock will be made at the direction of the Plan Administrator or its selected broker-dealer. Such purchases will be made in accordance with applicable state and federal securities laws and regulations. No interest or earnings will be paid by the Plan Administrator on dividend payments pending their investment in shares of our common stock.

To the extent we fund the Plan with shares of our common stock issued directly by us from authorized but unissued shares, the dividends payable to participants will be retained by us as a consideration for such shares.
In the event applicable law or the closing of securities markets requires temporary curtailment or suspension of open market purchases of the shares of our common stock, the Plan Administrator is not accountable for its inability to make purchases at such time.
13.    How many shares of common stock will be purchased for participants?
The number of shares that will be purchased for each participant on any dividend payment date will depend on the amount of the participant’s cash dividend (and any optional cash payment) and the purchase price of shares of our common stock. Each participant’s account will be credited with that number of shares (including fractional shares computed to five (5) decimal places) equal to the total amount to be invested, divided by the applicable purchase price (computed to two (2) decimal places).
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14.    What will be the price of shares of common stock purchased under the Plan?
In making purchases of shares of our common stock for a participant’s account associated with each Investment Date, the Plan Administrator will commingle the participant’s funds with those of other participants under the Plan. With respect to shares purchased on the open market, the prices of shares of our common stock purchased for participants under the Plan for each Investment Date will be equal to the average price of all shares of the common stock purchased on the Investment Date by the Plan Administrator on behalf of the Plan. With respect to shares purchased directly from the Company, the price of such shares will be the weighted average price paid for shares on the open market in such transaction. If no shares are acquired on the on market, the purchase price shall be the closing price on the open market on the day immediately preceding the date of issuance. The Plan Administrator shall have no responsibility with respect to the market value of the shares of our common stock acquired under the Plan for participant accounts. The Company will bear all costs of administering the Plan, except as described under Question 16 below.
15.    How are dividends on shares purchased through the Plan applied?
The purpose of the Plan is to provide the participant with a convenient method of purchasing shares of common stock and to have the dividends on those shares reinvested. Accordingly, dividends paid on shares held in the Plan will be automatically reinvested in additional shares of common stock unless and until the participant elects in writing to terminate participation in the Plan.
Cost to Participants
16.    Are there any expenses to participants in connection with purchases under the Plan?
No. Participants will make purchases of shares of common stock under the Plan without the payment of brokerage commissions, and we will pay all fees in connection with purchases of shares of our common stock under the Plan, except for costs associated with the actual purchase price of shares of common stock purchased on the Investment Date. There are no service charges to participants in connection with purchases of shares of common stock under the Plan. All costs of administration of the Plan are paid by us.
Reports to Participants
17.    How will participants be advised of their purchases of shares of common stock?
Each quarter, each participant will receive an account statement from the Plan Administrator. These statements are the participant’s continuing record of the purchase price of the shares of our common stock acquired and the number of shares acquired, and should be retained for tax purposes. Participants also will receive, from time to time, communications sent to all record holders of shares of our common stock.
Dividends
18.    Will participants be credited with dividends on shares held in their account under the Plan?
Yes. The participant’s account will be credited with dividends paid on whole shares and fractional shares credited to the participant’s account. The Plan Administrator will automatically reinvest the cash dividends received for the purchase of additional shares of our common stock.

Stock Ownership Records
19.    How will the Plan Administrator keep records of shares of common stock purchased?
The Plan Administrator will hold all shares of common stock purchased under the Plan in the name of its nominee. Certificates for shares of our common stock purchased under the Plan will not be issued to participants. The number of shares credited to an account under the Plan will be shown on the participant’s account statement.
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The participant may receive certificates for whole shares accumulated in his or her account under the Plan by sending a written request to the Plan Administrator. Participants may request periodic issuance of certificates for all full shares in the account. When certificates are issued to the participant, future dividends on such shares will be reinvested in additional shares of common stock. Any undistributed shares will continue to be reflected in the participant’s account. No certificates representing fractional shares will be issued.
The participant’s rights under the Plan and shares credited to the account of the participant under the Plan may not be pledged. A participant who wishes to pledge such shares must request that certificates for such shares be issued in his or her name.
Accounts under the Plan are maintained in the names in which certificates of participants were registered at the time they entered the Plan. Additional certificates for whole shares will be similarly registered when issued.
Sale of Shares from the Plan
20.    How does a participant sell shares from the Plan?
A participant may sell some or all of the shares held in the Plan by submitting sale instructions in writing to the Plan Administrator either by fax, mail, or scanned email. The Plan Administrator will, within five (5) business days of receiving such instructions, sell such shares and deliver the proceeds, less any brokerage commissions and any other cost of sale. Any full shares and fractional interests in shares may be aggregated and sold with those of other participants who have submitted a sale instruction; provided, that each sale instruction will be processed no later than five (5) business days after the date on which such sale instruction is received by the Plan Administrator. All sale instructions are final when the Plan Administrator receives them; sale instructions cannot be stopped or cancelled. There is a $15.00 fee to process all sale instructions.

Shares are purchased and sold for the Plan on specified dates or during specified periods. As a result, participants have no control over the price at which shares are purchased or sold and participants may pay a higher purchase price or receive a lower sales price then if a participant had purchased or sold the shares outside of the Plan. Participants bear the risk of fluctuations in the price of shares.

Withdrawals From the Plan
21.    How does a participant withdraw from the Plan?
A participant may withdraw from the Plan at any time by sending a written withdrawal notice to the Plan Administrator (see Question 3 for full name and address of Plan Administrator). Notice received after a particular dividend record date will be effective following the payment date of such dividend. When a participant withdraws from the Plan, certificates for whole shares credited to the participant’s account under the Plan will be issued and a cash payment will be made for any fraction of a share.
22.    What happens to a fraction of a share when a participant withdraws from the Plan?
When a participant withdraws from the Plan, a cash adjustment representing the value of any fraction of a share then credited to the participant’s account will be mailed by check directly to the participant. The cash adjustment will be based on the closing price of the shares of common stock on the date on which the termination is processed by the Plan Administrator. In no case will certificates representing a fractional share interest be issued.
Other Information
23.    What happens when a participant ceases to be a record owner of shares of common stock as of a dividend record date?
If a participant ceases to be a registered owner of at least one (1) share of Company common stock (including shares credited under the Plan), participation in the Plan terminates and optional cash purchases are not
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permitted. A cash payment will be made to the participant for any fractional shares and for any uninvested cash balance in the account, and the account will be terminated.
24.    What happens if the Company issues a stock dividend, declares a stock split, or conducts a rights offering?
Any shares representing stock dividends or stock splits will be added to each participant’s account. In the event the Company conducts a rights offering to holders of common stock, participants in the Plan will be notified in advance of the commencement of the offering and shall be permitted to participate in any such offering.

25.    How will participant’s shares held under the Plan be voted at meetings of shareholders?
The Plan Administrator will forward any proxy solicitation materials relating to the shares of common stock held by the Plan to the participating shareholder. Where no instructions are received from a participant with respect to a participant’s shares held under the Plan, or otherwise, such shares shall not be voted unless the participant votes such shares in person.

26.    What are the income tax consequences of participation in the Plan?
In general, a participant in the Plan has the same Federal and state income tax obligations with respect to dividends credited to his or her account under the Plan as other holders of shares of common stock who elect to receive cash dividends directly. A participant is treated for income tax purposes as having received, on the dividend date, a dividend in the amount equal to the fair market value of the shares of common stock credited to his or her account under the Plan, even though that amount was not actually received by the participant in cash, but, instead, was applied to the purchase of additional shares for his or her account. In addition, any brokerage commissions and service charges paid by the Company on behalf of the participant are deemed to constitute dividend income by the Internal Revenue Service. Such amounts, if any, will be included on any annual information return filed with the Internal Revenue Service, a copy of which will be sent to the participant.
The cost basis of each share of common stock credited to a participant’s account pursuant to the dividend reinvestment aspect of the Plan is the fair market value of the shares of our common stock on the Investment Date, and the holding period for such shares begins on the day following the Investment Date. Withdrawal from the Plan will not result in the recognition of taxable income. A participant will recognize a gain or a loss when shares are sold on behalf of the participant upon withdrawal from the Plan or when the participant sells shares after the participant’s withdrawal from the Plan.
All participants are advised to consult with their own tax advisors to determine the particular tax consequences that may result from their participation in the Plan and the subsequent sale by them of shares purchased pursuant to the Plan.

27.    What are the responsibilities of the Company under the Plan?
The Company and the Plan Administrator shall not be liable for any act, or any omission to act, in connection with the operation of the Plan including, without limitation, any claims for liability:

a.relating to the determination from time to time of the price and the times purchases of shares are made;
b.resulting from changes in the market price of shares or the prices at which Plan transactions are effected, including, but not limited to those occurring between a dividend reinvestment or optional cash purchase or a termination and a sale of shares held under the Plan
c.arising from a decision to participate in the Plan;
d.arising in connection with income taxes (together with any applicable interest and/or penalties) payable by Participants in connection with their participation in the Plan; or
e.arising out of actions taken as a result of inaccurate or incomplete information or instructions.

Participants should recognize that neither the Company nor the Plan Administrator can assure a profit or protection against a loss on the shares purchased under the Plan.
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28.    Who bears the risk of market price fluctuations in the shares of common stock?
A participant’s investment in shares acquired under the Plan is no different from direct investment in shares of our common stock. The participant bears the risk of loss and realizes the benefits of any gain from market price changes with respect to all such shares held in the Plan, or otherwise. Neither the Company nor the Plan Administrator makes any representations with respect to the future value of the shares of our common stock purchased under the Plan. The participant should recognize that the Company, the Plan Administrator, and related parties cannot assure the participant of realizing any profits or protect the participant against a loss related to investment in the shares of our common stock purchased or sold under the Plan. The shares of common stock purchased in accordance with the Plan do not constitute savings accounts or deposits issued by a bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

29.    May the Plan be changed or discontinued?
The Company reserves the right to amend, suspend, or terminate the Plan at any time, but such action shall have no retroactive effect that would prejudice the interest of the participants. In the event of suspension or termination of the Plan by the Company, no investment will be made by the Plan Administrator on the dividend payment date immediately following the effective date of such suspension or termination. Any dividend subject to the Plan and paid after the effective date of any such suspension or termination will be remitted by the Company to the participants in cash only, in the usual manner. The Company may remove the Plan Administrator at any time on not less than ninety (90) days prior notice to the Plan Administrator, and appoint another Plan Administrator. Similarly, the Plan Administrator may resign at any time on not less than ninety (90) days prior notice to the Company and upon delivery to the Company of all property and records held in connection with the Plan.

USE OF PROCEEDS

We will use any proceeds from the issuance and sale of shares under the Plan to pay our operating expenses or to contribute as capital to support the growth and operations of the Bank.


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information as of December 31, 2021, with respect to shares of common stock that may be issued under our equity compensation plans.

Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted average
exercise price of
outstanding options, warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders450,758 $15.64 104,731 
Equity compensation plans not approved by security holders— — — 
Total— $— — 


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DIVIDENDS

Since 2016, we have paid quarterly cash dividends on our common stock. The following table reflects dividends paid in 2019, 2020, and 2021 (as adjusted for the three-for-two stock split effective May 10, 2021).


Date Dividend Paid
Dividend Amount per Share
March 15, 2019$0.067
June 15, 2019$0.067
September 15, 2019$0.067
December 15, 2019$0.067
March 15, 2020$0.067
June 15, 2020$0.067
September 30, 2020$0.067
December 31, 2020$0.067
March 15, 2021$0.067
June 15, 2021$0.070
September 15, 2021$0.070
December 15, 2021$0.070

Prior to paying any dividends on our common stock, we must be current in the payment of dividends due on our Series A Preferred Stockand Series B Convertible Preferred Stock.

Holders of our outstanding Series A Preferred Stock are entitled to receive quarterly cash dividends at 9% per annum (unless we have not redeemed the shares by the tenth anniversary of their issuance, in which event the rate is subject to be increased to 11%). Holders of our outstanding Series B Convertible Preferred Stock are entitled to receive quarterly cash dividends at 8% per annum (unless we have not redeemed the shares by the tenth anniversary of their issuance, in which event the rate is subject to be increased to 9%).

Additionally, our Articles of Incorporation provide that our Board of Directors may authorize and issue additional series of preferred stock without shareholder approval. Any preferred shares issued in the future may further restrict our ability to declare or pay dividends on any junior stock, including the common stock.

Future dividends may be declared subject to the discretion of the Board. Our Board may consider, among other factors, debt service requirements of our debt both at the Bank and parent company levels, the dividend requirements of our outstanding preferred stock, our projected earnings, financial condition, and regulatory capital requirements, including applicable statutory and regulatory restrictions on the payment of dividends, in determining whether or not to declare a dividend.

BayFirst’s ability to pay dividends may also be dependent upon the Bank’s ability to pay dividends to BayFirst. The Bank is restricted in its ability to pay dividends under Florida law and by the regulations promulgated by the Florida Office of Financial Regulation (“OFR”). In particular, under Section 658.37, Florida Statutes, a Florida state-chartered bank may not pay dividends from its capital, but may only pay dividends from its earnings.

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BUSINESS

BayFirst Financial Corp.

BayFirst commenced its bank holding company operations on September 1, 2000, by acquiring all of the shares of the Bank. BayFirst’s primary source of income is from its wholly-owned subsidiary, the Bank. BayFirst’s corporate offices are located at the First Home Executive Center, 700 Central Avenue, St. Petersburg, Florida 33701.

First Home Bank

The Bank commenced operations on February 12, 1999, as a Florida state-chartered commercial bank. On January 3, 2022, we filed an application with the Office of the Comptroller of the Currency to convert the Bank’s charter to that of a national bank. The Bank currently operates out of its main office, six branch offices, and 23 residential mortgage loan production offices. The Bank’s main office is located at the First Home Executive Center. We do not engage in any foreign business activities. We have divided our banking operations into three Divisions: the Community Banking Division, the SBA Lending Division, or CreditBench, and the Residential Mortgage Division.

Community Banking Division

We have structured our community banking services and charges for such services in a manner designed to attract consumers, small and medium sized businesses, and professionals located primarily in Pinellas, Hillsborough, Sarasota, Manatee, and Pasco Counties. We focus on customers that are seeking the flexibility and personalized relationships that a community bank can provide. The Bank offers specialized services such as:

specialized business and personal checking accountsinternet banking and online bill payment
remote capture and depositcash management
wire transferssafety deposit boxes
courier servicesretail investment services
ACH Originations
    
The Bank also offers traditional commercial banking services such as the acceptance of time, demand and savings deposits, including NOW accounts and money market accounts, savings accounts, and fixed-rate certificates of deposits.

A wide range of loans are also offered, including commercial, consumer installment, and real estate loans. Our commercial lending efforts are directed principally toward businesses and professionals who otherwise do business with us, and include commercial real estate mortgages, construction and development loans, working capital loans, and business expansion loans. We offer personal lines of credit, auto, boat, and recreational vehicle loans, residential mortgages, and home equity lines of credit. We have been particularly successful in penetrating the small business community. We participate in interbank credit arrangements to permit us to take part in corporate or other business entity loans for amounts which are in excess of our lending limits.

The Community Banking Division has seven banking offices in the Tampa Bay area: five in Pinellas County, one in Hillsborough County, and one in Sarasota County. Additionally, we have purchased properties in Sarasota, Bradenton, and Tampa where we intend to open additional full-service banking centers.

The Bank’s staff maintains personalized customer contacts and relationships, which enable us to provide excellent customer service. While we only offer banking services that we believe to be profitable, we offer competitive rates for such services, thereby, we believe, motivating the businesses in our service area to avail themselves of our credit and non-credit services. On limited occasions, we may offer services that may not be as profitable, but only if the account relationship provides earnings or other benefits sufficient to offset the cost of the services provided.
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CreditBench

In early 2020, the Bank’s SBA Lending Division rebranded as CreditBench. CreditBench originates SBA loans through two distinct channels. One is its team of SBA lenders, known as the Core SBA Team. The other is through financial technology platforms, collectively known as FlashCap. CreditBench’s Core SBA Team makes government guaranteed loans throughout the U.S., with a particular emphasis on business acquisition financing. FlashCap employs an internal sales team and also uses national referral partners and financial technology companies to originate SBA loans. CreditBench also originates a significant volume of loans in the SBA 7(a) Small Loan Program. CreditBench’s loans are typically originated through an on-line application process and made throughout the U.S., with a heightened focus on originating loans in First Home’s primary and secondary market areas. Underwriting, quality control, and technology are centralized and scalable for potential increases in loan volume.

This Division’s lending efforts are targeted to a broad range of industries and geographies, with a focus on building relationships with borrowers. This diversification is intended to mitigate the Bank’s credit risk. Borrowers are also targeted for establishing deposit relationships.

Government guaranteed loans are designed to assist small businesses in obtaining financing. Such loans primarily finance working capital for the borrowers. CreditBench also offers USDA Business and Industry (“B&I”) loans to businesses that are located in qualifying areas. The federal government guarantees 75% to 90% of SBA loan balances and up to 80% of USDA B&I loan balances as an incentive for financial institutions to make loans to small businesses. Eligible uses of SBA and USDA B&I loans are for working capital, equipment financing, debt refinancing, purchase of inventory, new construction, building acquisitions, business acquisitions, and startup expenses. The program maximum limit for SBA loans is $5.0 million, and the program limit for USDA loans is $25.0 million. Both can be priced competitively relative to conventional financing.

In 2020, the SBA initiated the PPP. The Bank made the strategic decision to become an active PPP lender, using local marketing efforts and a nationwide, on-line application platform. The Bank used the Federal Reserve’s PPPLF to fund a significant portion of these loans.

The Bank manages its government guaranteed lending program through a staff experienced in business development, loan documentation and monitoring, and accounting. Emphasis is placed on proper loan documentation to ensure full guarantee repurchase in the event of defaults.

CreditBench’s revenues are primarily derived from three sources: interest income, loan servicing, and premiums from the sale of loans. The Bank may elect to hold the government guaranteed portion of a loan on its balance sheet to increase interest income. Alternatively, the Bank may sell that portion to realize a premium on the sale.

When the Bank sells the guaranteed portion of a government guaranteed loan, the premium is typically in excess of 10% of the principal. In addition, the Bank may also sell the unguaranteed portion of certain government guaranteed loans, depending on a loan’s terms, the offer price, the Bank’s liquidity and capital positions, and the perceived credit risk. Beginning in the third quarter of 2018, the Bank has initiated a gradual transition to retaining a larger portion of its government guaranteed loans in an effort to grow its assets and increase long term and more predictable earnings. By retaining a greater amount of such loans, the Bank is expected to become less dependent on gains on sales and more reliant upon interest income. This should permit the Bank to become better able to withstand the effects of a government shutdown and less subject to secondary market fluctuations. These factors result in the Bank having a more predictable income stream from its government guaranteed lending activities. The Bank’s participation in the PPP resulted in significant processing revenue, allowing the Bank to retain the majority of the guaranteed loan production in 2020, advancing our strategy of relying less on gain-on-sale income and becoming more reliant on interest income.

Residential Mortgage Division

Our Residential Mortgage Division operates from our seven banking centers in the Tampa Bay area and 23 loan production offices. It offers fixed and variable rate home mortgages for the purchase and refinance of residential properties. Since the inception of the Residential Mortgage Division in January 2017, the Bank has made
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significant investments in infrastructure and technology resulting in the efficient and profitable platform currently in place. We expect to continue to expand the geographic scope of the Bank’s residential loan origination efforts when we identify attractive opportunities.

We originate loans primarily for sale into the secondary market. From time to time, we also originate residential mortgage loans for the Bank’s loan portfolio. These are generally high quality, adjustable rate, non-conforming mortgages located in our primary service area where there is a greater opportunity to cross-sell other Bank products and services. The ability to fund such non-conforming loans provides the Bank a competitive advantage compared to non-bank mortgage lenders.

Our residential mortgages are originated, processed, underwritten, and closed to secondary market standards or Bank policy by the staff of the Residential Mortgage Division. The Bank does not currently fund loans originated by outside brokers, but may do so in the future. In connection with the origination of mortgage loans intended for sale, the Bank enters into loan commitments for fixed rate mortgage loans, generally lasting 30 to 45 days and at market rates when initiated. A commitment to fund a mortgage loan (i.e., an interest rate lock) to be sold into the secondary market or for the future delivery of a mortgage loan is accounted for as a free-standing derivative. The fair value of an interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. To deliver loans to the secondary market and to moderate the Bank’s interest rate risk prior to sale, the Bank typically enters into non-exchange traded mandatory delivery forward sales contracts and best efforts forward sales contracts, which are also considered derivative instruments. These contracts are entered into for amounts and terms offsetting the interest rate risk of loan commitment derivatives and loans held for sale, and both are carried at their fair value with changes included in earnings. The Bank considers the best efforts forward sales contracts that meet the net settlement requirement to be derivatives, as there are penalties to the Bank if it does not deliver the loan to the investor once the loan closes with the borrower.

The Bank engages a sub-servicer for residential mortgage loans that is currently servicing certain portfolio residential mortgage loans. The sub-servicer relationship also allows the Bank to retain servicing for loans to be sold in bulk, if we chose to do so. In April 2021, the Bank began selling loans with servicing retained in the Tampa Bay area in order to better take advantage of cross-selling opportunities with those loan customers.

Competition

All phases of our operations are highly competitive. Many of our commercial bank and thrift competitors have assets, capital, lending limits, and name recognition that are materially larger than ours. We compete with other financial service providers for loans and deposits. These competitors include:

large national and super-regional financial institutions that have well-established branches and significant market share in the communities we serve;
non-bank SBA lenders;
finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products;
credit unions, which can offer highly competitive rates on loans and deposits because they receive tax advantages not available to commercial banks;
other community banks that compete with us for clients desiring a high level of service;
technology-based financial institutions, including large national and super-regional banks offering on-line deposit, bill payment and mortgage loan application services; and
both local and out-of-state trust companies and trust service offices.

Some of the non-traditional financial institution competitors are not subject to the same degree of regulatory oversight to which the Bank is subject.

Among the advantages that our larger competitors have over the Bank are their ability to finance wide- ranging advertising campaigns and to allocate their investment assets to products with the highest yields and demands. A number of our competitors offer certain services, such as trust departments, that we do not offer. By virtue of their greater total capital, these financial service providers have substantially higher loan-to-one borrower limits than us (loans-to-one borrower limits apply to an individual customer’s total extension of credit as a percentage
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of a bank’s total capital accounts). These competitors may intensify their advertising and marketing activities to counter any efforts by us to attract new business.

To compete with the financial institutions in our primary service area, we capitalize upon the flexibility that our independent status allows, including making decisions locally. This includes solicitation of business, professional, and personal accounts through the personal efforts of our directors and officers. We believe that a locally-based bank is often perceived by the local business community as possessing a clearer understanding of local commerce and the needs of the community. Consequently, our customers expect that we will be able to make prudent lending decisions quicker and more equitably than larger competitors. We focus on the smaller commercial customer because this segment offers the greatest concentration of potential business and historically has tended to demonstrate a higher degree of loyalty in their banking relationships. We are able to respond quickly to changes in the interest rates paid on time and savings deposits and charged on loans, and to charges imposed on depository accounts, so as to remain competitive in the marketplace. If there are customers whose loan demands exceed our loan limits, we have the ability to arrange for such loans on a participation basis with other financial institutions.

Various legislative actions in recent years have led to increased competition among financial institutions. With the enactment of various laws and regulations affecting interstate banking expansion, it is easier for financial institutions located outside of Florida to enter the Florida market, including our target markets. In addition, recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers, through internet and telephone-based banking and similar services. There can be no assurance that the United States Congress, the Florida Legislature, or the applicable bank regulatory agencies will not enact legislation or promulgate laws and regulations that may further increase competitive pressures on the Bank.

Loan Underwriting and Approval

Historically, we believe we have made sound, high quality loans while recognizing that lending involves a degree of risk. Our centralized credit approval process and loan policies are designed to assist us in managing this risk. Our policies provide a general framework for loan origination, monitoring, and funding. The Bank’s loan approval process is characterized by centralized authority supported by a risk control environment that provides for prompt and thorough underwriting of loans. Our loan approval process begins with obtaining detailed financial and other information from our borrowers. We also rely on our loan and executive officers’ in-depth knowledge of our markets and borrowers.

For all loan requests, excluding residential loans originated for sale into the secondary market, the Bank’s Board of Directors has established a Dual Signature Credit Authority Matrix, as well as two committees: (i) the Officer Loan Committee (the “OLC”); and (ii) the Directors’ Credit and Loan Committee (the “DCLC”), which have individual and aggregated credit limits. The Board of Directors has delegated to the OLC lending authority up to $2.00 million per lending relationship. The Board has also delegated to the DCLC lending authority up to $20.00 million per lending relationship.

As part of the underwriting and approval process, the Bank’s Credit Underwriting Department prepares a credit memo and submits it for review and approval to officers on the Dual Signature Credit Authority Matrix, the OLC, or the DCLC, depending on the size of the loan request.

Regardless of the loan type or amount, no single individual has sole loan approval authority. The objective of our loan approval processes is to provide a disciplined, consistent, predictable, and collaborative approach to larger credits, while maintaining responsiveness to client needs. Commercial loan decisions are documented as to the borrower’s business, loan purpose, our evaluation of the repayment source and associated risks, our
evaluation of collateral, loan covenants, loan monitoring requirements, and the risk rating rationale. Our strategy for approving or disapproving loans is to follow conservative loan policies and consistent underwriting practices which include:

•    Granting credit on a sound basis with full knowledge of the purpose and source of repayment for such credit;

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•    Ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan;
•    Requiring documentation, including appraisals or valuations, sufficient to enable informed underwriting;
•    Developing and adhering to desired levels of diversification for our loan portfolio as a whole and for loans within each category; and
•    Ensuring that each loan is properly documented and that any insurance coverage requirements are satisfied.

Our loan policies generally include other underwriting guidelines for loans collateralized by real estate. These underwriting standards are designed to determine the maximum loan amount that a borrower has the capacity to repay based, in part, upon the borrower’s cash flow and income. The loan policies include maximum amortization schedules and loan terms for each category of loans. In addition, our loan policies provide guidelines for personal guarantees, appraisals and valuations, loan-to-value ratios, environmental review, loans to employees, executive officers, and directors, problem loan identification, maintenance of an adequate ALLL, and other matters relating to lending practices.

As discussed above, the Bank’s lending products and services are delivered through three divisions: (i) the Community Banking Division; (ii) CreditBench; and (iii) the Residential Mortgage Division:

The Community Banking Division originates both retail and commercial loans. Retail loans include loans to individuals for automobiles, boats, and other major consumer personal, family, or household purposes. They are underwritten on the credit quality of the individual borrower and may be secured or unsecured. Commercial lending products include a wide variety of credit facilities, such as owner occupied and non-owner occupied commercial real estate, multifamily real estate, construction, land acquisition, and commercial and industrial loans. In general, the Bank’s commercial lending strategy focuses on the financial strength and successful track record of commercial loan applicants more than the project or type of property that would serve as collateral for a loan. These loans are underwritten by an independent in-house Credit Underwriting Department in accordance with our credit policy.

CreditBench primarily originates loans through the SBA 7(a) program, and, to a lesser extent, through the USDA’s B&I program. Occasionally, CreditBench originates loans through the SBA’s 504 loan program, the International Trade Loan (“ITL”) loan program, and the SBA Express Loan program. CreditBench originates two distinct types of loans: complex loans and non-complex loans. The non-complex loans are originated pursuant to the SBA 7(a) Small Loan Program up to $350,000 and are underwritten through a streamlined underwriting and packaging process. Although the SBA 7(a) Small Loan Program permits broader underwriting and loan purpose parameters, non-complex CreditBench loans are limited to those underwritten via historical cash flow and exclude start-up and business acquisition financing.

Complex CreditBench loans require projection-based underwriting or have other complex characteristics, such as business acquisition financing, are underwritten subject to SBA or USDA B&I guidelines and contain a thorough underwriting analysis based on the credit quality of any guarantor as well as the historical and projected debt service coverage.

The Residential Mortgage Division underwrites its loans to meet secondary market standards so that it can sell such loans into the secondary market. In some cases, such loans are held for the Bank’s portfolio. Portfolio loans are primarily underwritten on the borrowers’ financial strength and cash flow, with conservative loan-to- value requirements.

Employees

As of December 31, 2021, BayFirst and the Bank had 617 full-time employees and 39 part-time employees. We believe that relations with our employees are good. We do not have a collective bargaining agreement with our employees.


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DESCRIPTION OF PROPERTIES

The following table contains information concerning the current and intended locations of our full-service banking centers. We also operate 23 loan production offices.

LocationUseOwn or LeaseYear First Operated
700 Central Avenue
St. Petersburg, FL 33701
Corporate and
Bank Headquarters
Lease2017
9190 Seminole Boulevard
Seminole, FL 33772
Banking CenterOwn1999
5250 Park Boulevard
Pinellas Park, FL 33781
Banking CenterOwn2006
2520 Countryside Boulevard
Clearwater, FL 33763
Banking CenterOwn2018
2033 Main Street, Suite 101
Sarasota, FL 34237
Banking CenterLease2018
3015 West Columbus Drive
Tampa, FL 33607
Banking CenterOwn2020
401 N. Indian Rocks Road
Belleair Bluffs, FL 33770
Banking CenterOwn2021

In addition, we have acquired, or have contracted to purchase, the following properties to be used as full-service banking centers.

LocationOwnership StatusYear Acquired
2075 S. Tamiami Trail
Sarasota, FL 34239
Own2019
2102 59th Street West
Bradenton, FL 34209
Own2021
16002 N. Dale Mabry Highway
Tampa, FL 33618
Own2021
5600 Bee Ridge Road
Sarasota, FL 34233
Own2021
8704 SR 70 East
Bradenton, FL 34202
Own2021


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


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. Our largest expenses are interest on those deposits and salaries plus related employee benefits. We measure our performance through our net interest income after provision for loan losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Application of Critical Accounting Policies and Estimates

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

Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

Determination of the allowance for loan losses;
Valuation of SBA loan servicing rights; and
Fair value of residential loans held for sale and residential mortgage derivatives.

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

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

Third Quarter Common Stock Dividend. On October 26, 2021, BayFirst’s Board of Directors declared a third quarter 2021 cash dividend of $0.07 per common share. The dividend was paid on December 15, 2021, to shareholders of record at the close of business on November 15, 2021.

Stock Repurchase Plan. On November 23, 2021, BayFirst’s 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 Board of Directors initially authorized the program on January 26, 2021 for the repurchase of up to $100,000 per quarter and amended the program on September 9, 2021 to increase the quarterly purchase limit to $400,000.

The changes to the program 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.

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

Application to Convert to a National Bank: On January 3, 2022, BayFirst Financial Corp.’s operating subsidiary, First Home Bank submitted an application to the Office of the Comptroller of the Currency to convert to a national banking association under the name BayFirst National Bank.

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Average Balance Sheet and Analysis of Net Interest Income

The following tables set forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of BayFirst from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities (dollars in thousands). 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.

Nine Months Ended September 30,
20212020
Average BalanceInterestYieldAverage BalanceInterestYield
Interest earning-assets:
Investment Securities
$12,500 $123 1.32 %$43 $— — %
Loans, excluding PPP (1)
582,352 21,243 4.88 428,898 18,329 5.71 
PPP loans
613,768 17,771 3.87 452,481 10,918 3.22 
Other
166,918 297 0.24 176,201 571 0.43 
Total interest-earning assets
1,375,538 39,434 3.83 %1,057,623 29,818 3.77 %
Non interest-earning assets
43,726 34,672 
Total assets
$1,419,264 $1,092,295 
Interest-bearing liabilities:
NOW, MMDA and savings
$484,985 $2,987 0.82 %$339,485 $3,307 1.30 %
Time deposits
82,422 679 1.10 171,516 2,804 2.18 
PPPLF advances
648,158 1,699 0.35 432,367 1,185 0.35 
Other borrowings
30,692 519 2.26 20,494 642 4.18 
Total interest-bearing liabilities
1,246,257 5,884 0.63 %963,862 7,938 1.10 %
Demand deposits
82,321 70,701 
Non interest-bearing liabilities
8,441 5,260 
Shareholders’ equity
82,245 52,472 
Total liabilities and shareholders’ equity
$1,419,264 $1,092,295 
Net interest income
$33,550 $21,880 
Interest rate spread
3.20 %2.67 %
Net interest margin (2)
3.26 %2.76 %
Ratio of average interest-earning assets to average interest-bearing liabilities
110.37 %109.73 %
(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.



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Year Ended December 31,
20202019
Average BalanceInterestYieldAverage BalanceInterestYield
Interest earning-assets:
Loans, excluding PPP (1)
$449,180 $24,012 5.35 %$368,615 $24,431 6.63 
PPP loans
556,232 19,077 3.43 %— — — 
Other
156,347 641 0.41 %58,200 1,270 2.18 %
Total interest-earning assets
1,161,759 43,730 3.76 %426,815 25,701 6.02 %
Non interest-earning assets
36,264 24,694 
Total assets
$1,198,023 $451,509 
Interest-bearing liabilities:
NOW, MMDA and savings
$350,000 $4,321 1.23 %$165,449 $3,072 1.86 %
Time deposits
147,169 3,169 2.15 %160,207 4,247 2.65 %
PPPLF advances
546,824 1,968 0.36 %— — — 
Other borrowings
20,992 820 3.91 %18,919 948 5.01 %
Total interest-bearing liabilities
1,064,986 10,278 0.97 %344,574 8,267 2.40 %
Demand deposits
69,542 56,684 
Non interest-bearing liabilities
7,403 7,590 
Shareholders’ equity
56,092 42,661 
Total liabilities and shareholders’ equity
$1,198,023 $561,509 
Net interest income
$33,452 $17,434 
Interest rate spread
2.80 %3.62 %
Net interest margin (2)
2.88 %4.08 %
Ratio of average interest-earning assets to average interest-bearing liabilities
109.09 %123.87 %
(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis

The tables below present the effects of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous period’s average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate (dollars in thousands). Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances.
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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.

RateVolumeTotal
Nine Months Ended September 30, 2021 vs. September 30, 2020:
Interest-earning assets:
Investment securities$123 $— $123 
Loans, excluding PPP
(2,948)5,862 2,914 
PPP loans
2,471 4,382 6,853 
Other interest-earning assets
(245)(29)(274)
Total interest-earning assets
(599)10,215 9,616 
Interest-bearing liabilities:
NOW, MMDA, and savings
(1,454)1,134 (320)
Time deposits
(1,038)(1,087)(2,125)
PPPLF advances
— 514 514 
Other borrowings
(366)243 (123)
Total interest-bearing liabilities
(3,971)1,917 (2,054)
Net change in net interest income
$3,373 $8,297 $11,670 
Year Ended December 31, 2020 vs. December 31, 2019:
Interest-earning assets:
Loans, excluding PPP
$(5,210)$4,791 $(419)
PPP loans
— 19,078 19,078 
Other interest-earning assets
(1,598)968 (630)
Total interest-earning assets
(6,808)24,837 18,029 
Interest-bearing liabilities:
NOW, MMDA, and savings
(1,294)2,544 1,250 
Time deposits
(753)(326)(1,079)
PPPLF advances
— 1,968 1,968 
Other borrowings
(224)96 (128)
Total interest-bearing liabilities
(2,271)4,282 2,011 
Net change in net interest income
$(4,537)$20,555 $16,018 


Liquidity and Capital Resources

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. The Bank generally maintains a liquidity ratio of liquid assets to total assets, excluding PPP loans pledged to the PPPLF, of at least 7.0%. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered investment securities available-for-sale. Our on-balance sheet liquidity ratio at September 30, 2021 was 17.66%, as compared to 8.37% at December 31, 2020.

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

During each of the three quarters through September 30, 2021, 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 soley dependent on funds received from the issuance and sale of debt and equity securities. BayFirst’s liquidity needs are to make interest payments on its debt obligations, dividends on shares of its Series A Preferred Stock, Series B Convertible Preferred Stock, and common stock, and payment of certain operating expenses. As of September 30, 2021, BayFirst held $3.24 million in cash and cash equivalents.

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

Investment Securities

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

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


The investment securities available for sale were purchased during the nine months ended September 30, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at September 30, 2021.
The Company held one security held to maturity at September 30, 2021 and December 31, 2020 which matures in August 2039. The security is a debt security to a government-sponsored enterprise and its amortized cost was $3 and $41, the unrecognized loss was $1 and $2, and the fair value was $2 and $39 at September 30, 2021 and December 31, 2020, respectively.
The security held to maturity had been in an unrealized loss position for longer than 12 months at September 30, 2021 and December 31, 2020. The unrealized loss has not been recognized into income because the issuer is of high credit quality as a government-sponsored enterprise, management does not intend to sell, and it is likely that management will not be required to sell the security prior to its anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuer continues to make timely principal and interest payments and the fair value is expected to recover as the bond approaches maturity.
No securities were pledged as of September 30, 2021 or December 31, 2020, and there were no sales of securities during the nine months ended September 30, 2021 or the year ended December 31, 2020.
All securities have contractual remaining maturities of more than 10 years. The weighted average market yield of all securities was 1.31%.
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Loan Portfolio Composition

Through the efforts of our management and loan officers, we have been able to achieve loan growth, by taking 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 loans held for sale (“LHFS”), as of the dates indicated (dollars in thousands).

As of September 30,As of December 31,
2021202020202019
Amount% of total loansAmount% of total loansAmount% of total loansAmount% of total loans
Residential real estate, held for sale$91,243 $149,407 $208,704 $76,416 
SBA guaranteed loans, held for sale— — — — 
SBA loans held for investment, at fair value9,805 9,554 9,264 10,341 
Loans held for investment, at amortized cost
Residential real estate79,889 12.4 %65,250 5.1 %64,724 5.3 %51,074 16.7%
Commercial real estate151,122 23.5 %108,917 8.5 %114,884 9.3 %75,550 24.8%
Construction and land17,848 2.8 %14,344 1.1 %15,113 1.2 %21,603 7.1%
Commercial and industrial232,416 36.1 %186,190 14.6 %193,927 15.8 %155,744 51.0%
Commercial and industrial – PPP156,783 24.4 %899,151 70.5 %838,847 68.2 %— 0.0%
Consumer and other4,910 0.8 %2,145 0.2 %2,896 0.2 %1,120 0.4 %
Loans held for investment, at amortized cost, gross
642,968 100.0 %1,275,997 100.0 %1,230,391 100.0 %305,091 100.0 %
Allowance for loan losses(16,616)(18,913)(21,162)(10,742)
Discount on retained balances of loans sold(3,753)(6,109)(5,417)(7,288)
Discount on PPP loans purchased(24)(107)(97)
Deferred loan (fees) costs, net7,298(12,580)(5,819)5,791
Loans held for investment, at amortized cost, net$629,873$1,238,286$1,197,896$292,851

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

During the nine months ended September 30, 2021, we originated approximately $70.65 million in loans through conventional lending channels, $110.19 million in loans through CreditBench (our SBA lending function), exclusive of PPP loans, $329.32 million of PPP loans, and $1.74 billion through the Residential Mortgage Lending Division. During the nine months ended September 30, 2020, we originated approximately $52.14 million in loans through conventional lending channels, $84.42 million through CreditBench, exclusive of PPP loans, $876.60 million of PPP loans, and $1.28 billion through the Residential Mortgage Lending Division.

The decrease in the PPP balances was due to forgiveness of loans by the SBA and the second quarter of 2021 sale of 3,833 PPP loans for consideration equal to the total unpaid principal balance of $326.32 million.
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By comparison in 2020, we originated approximately $79.50 million in new loans through conventional lending channels, $101.08 million in loans through CreditBench, exclusive of PPP loans, $876.96 million of PPP loans, and $1.92 billion through the Residential Mortgage Lending Division. In 2019, we originated approximately $35.94 million in new loans through the Community Banking Division, $316.16 million through CreditBench, and $762.80 million through the Residential Mortgage Division.

Loan Maturity/Rate Sensitivity

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

 Due in One Year
or Less
Due After One
Year to Five
Years
Due After Five
Years to 15 Years
Due After 15
Years
Total
Real estate:
Residential
$3,619 $1,002 $5,092 $70,222 $79,935 
Commercial
4,153 2,272 20,644 127,760 154,829 
Construction and land
2,722 889 1,620 12,618 17,849 
Commercial and industrial
7,051 6,219 217,122 12,729 243,121 
Commercial and industrial - PPP
96,064 59,581 — — 155,645 
Consumer and other
2,498 1,139 1,278 — 4,915 
Total loans
$116,107 $71,102 $245,756 $223,329 $656,294 

The following table shows our loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at September 30, 2021 (dollars in thousands).
Fixed
Interest Rate
Adjustable
Interest Rate
Real estate:
Residential
$21,636 $54,680 
Commercial
1,202 149,474 
Construction and land
5,720 9,407 
Commercial and industrial
2,073 233,997 
Commercial and industrial - PPP
59,581 — 
Consumer and other
2,246 171 
Total loans
$92,458 $447,729 


Credit Risk

The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond our control. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that it believes
39


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.
All adversely classified loans are evaluated for impairment. If a loan is deemed impaired, it is evaluated for potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular basis thereafter (at least quarterly). This evaluation is documented in a status report relating to a specific loan or relationship. Specific allocation of reserves on impaired loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. We review the collateral value, cash flow, and tertiary support on each impaired credit. Any deficiency outlined by a real estate collateral evaluation analysis, or cash flow shortfall, is accounted for through a specific allocation for the loan.
For performing loans which are evaluated collectively, we perform a portfolio segmentation based on collateral type and additionally, for SBA loans, by loan origination year.The government guaranteed loan balances are included in the collectively evaluated for impairment balances. The loss factors for each segment are calculated using actual loan loss history for each segment of loans over the most recent one to three years, depending on the segment and vintage year of the loans in the segment of SBA loans. The Bank’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
These economic factors include consideration of the following: levels of, and trends in delinquencies and impaired loans; levels of, and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
While management believes our ALLL is adequate as of September 30, 2021, future adjustments to our allowance may be necessary if economic conditions differ substantially from the assumptions used in making the determination.
Nonperforming Assets. At September 30, 2021, we had $3.76 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.53% of total loans. At September 30, 2020, we had $4.06 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.49% of total loans. Total loans at September 30, 2021 and 2020, include government guaranteed loans, as well as PPP loans which have no reserves allocated to them. ALLL as a percentage of loans, not including residential loans held for sale and government guaranteed loan balances, was 5.25% at September 30, 2021, compared to 6.63% at September 30, 2020.
At December 31, 2020, we had $3.33 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 1.72% of total loans, including PPP loans. At December 31, 2019, we had $4.44 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.75% of total loans. Total loans at December 31, 2020 and 2019, respectively include government
40


guaranteed loans which have no reserves allocated to them. ALLL as a percentage of loans, not including residential loans held for sale and government guaranteed loan balances, was 7.24% at December 31, 2020, compared to 4.20% at December 31, 2019.

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).

 September 30,
2021
September 30,
2020
December 31,
2020
December 31,
2019
Nonperforming loans (government guaranteed balances)
$6,739 $9,780 $6,259 $3,987 
Nonperforming loans (unguaranteed balances)
3,756 4,057 3,327 4,437 
Total nonperforming loans
10,495 13,837 9,586 8,424 
OREO
— — — 
Total nonperforming assets
$10,498 $13,837 $9,586 $8,424 
Nonperforming loans as a percentage of total loans held for investment
1.60 %1.09 %0.78 %2.68 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.57 %0.32 %0.27 %1.41 %
Nonperforming assets as a percentage of total assets
1.11 %0.92 %0.62 %1.59 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.40 %0.27 %0.22 %0.84 %
ALLL to nonperforming loans
158.32 %136.68 %220.76 %127.52 %
ALLL to nonperforming loans (excluding government guaranteed balances)
442.39 %466.18 %636.07 %242.10 %

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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 Nine Months Ended September 30,
At and for the Year Ended December 31
2021202020202019
Allowance at beginning of period
$21,162 $10,742 $10,742 $6,560 
Charge-offs:
Residential real estate
— — (7)— 
Commercial real estate
(173)(7)(427)(104)
Commercial and industrial
(4,090)(3,785)(6,336)(4,633)
Consumer and other
(48)(79)(98)(85)
Total charge-offs
(4,311)(3,871)(6,868)(4,822)
Recoveries:
Residential real estate
73 — — 14 
Commercial and industrial
688 131 311 116 
Consumer and other
11 77 
Total recoveries
765 142 388 135 
Net charge-offs
(3,546)(3,729)(6,480)(4,687)
Provision for loan losses
(1,000)11,900 16,900 8,869 
Allowance at end of period
$16,616 $18,913 $21,162 $10,742 
Net charge-offs to average loans held for investment
0.44 %0.62 %0.70 %1.44 %
Allowance as a percent of total loans held for investment
2.53 %1.49 %1.72 %1.49 %
Allowance as a percent of loans held for investment, not including government guaranteed loans
5.25 %6.63 %7.24 %6.63 %
Allowance as a percent of nonperforming loans
158.32 %136.68 %220.76 %136.68 %
Total loans held for investment
$656,294 $1,266,753 $1,228,322 $314,163 
Average loans held for investment
$1,070,879 $804,909 $920,478 $325,491 
Nonperforming loans (including government guaranteed balances)
$10,495 $13,837 $9,586 $8,424 
Nonperforming loans (excluding government guaranteed balances)
$3,756 $4,057 $3,327 $4,437 
Guaranteed balance of all government guaranteed loans
$339,766 $981,414 $935,998 $58,448 
Loans held for sale, residential
$91,243 $149,407 $208,704 $76,416 

We recorded a negative provision for loan losses of $1.00 million during the nine months ended September 30, 2021, compared to a provision of $11.90 million for the same period in 2020. In 2020, the provision for loan losses was $16.90 million, compared to $8.87 million in 2019. 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 remained stable during the second and third quarters of 2021 and as many of the Company’s SBA loans were bolstered by additional government support, additional provision for loan losses was not deemed necessary. Since 2016, the Company’s loan 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 85% 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.

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Nonperforming assets to total assets, excluding government guaranteed loan balances, were 0.40%, as of September 30, 2021, as compared to 0.27% as of September 30, 2020. This percentage was 0.22% as of December 31, 2020, a significant decrease from 0.84% as of December 31, 2019. 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 September 30, 2021, a total of 42 loans with principal balances of $3.95 million were under payment deferrals. Of those, 41 were government guaranteed loans with $1.99 million 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 Nine Months Ended September 30,
At and for the Year Ended December 31,
Government Guaranteed, Excluding PPP2021202020202019
Number of loans originated
2722643201,287
Amount of loans originated
$110,185 $84,420 $101,076 $316,157 
Average loan size originated
$405 $320 $316 $246 
Government guaranteed loan balances sold
$— $23,669 $23,713 $273,189 
Government unguaranteed loan balances sold
$5,034 $393 $393 2,000 
Total government guaranteed loans
$314,015 $248,567 $253,330 $201,392 
Government guaranteed loan balances
$184,119 $101,903 $110,196 $58,448 
Government unguaranteed loan balances
$129,896 $147,258 $143,134 $142,944 
Government guaranteed loans serviced for others
$443,764 $560,154 $524,910 $604,572 

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We make government guaranteed loans throughout the United States. The following table sets forth, at the dates indicated, information regarding the geographic disbursement of our SBA loan portfolio (dollars in thousands). The “All Other” category includes states with less than 5% in any period presented.
September 30,December 31,
2021202020202019
Amount% of  TotalAmount% of  TotalAmount% of  TotalAmount% of  Total
Florida
$87,563 28 %$58,854 24 %$60,861 24 %$56,831 28 %
California
40,795 13 %34,654 14 %32,891 13 %25,150 12 %
Texas
21,290 %18,290 %17,689 %13,059 %
Georgia
14,875 %13,566 %13,936 %10,273 %
All Other
149,492 47 %123,203 50 %127,953 50 %96,278 48 %
Total government guaranteed loans, excluding PPP
$314,015 100 %$248,567 100 %$253,330 100 %$201,591 100 %
As part of the Bank’s strategic decision to be an active local and national PPP lender, the Bank developed and used local marketing efforts and a nationwide, online application platform. As a result of these efforts, the Bank originated $329.32 million in PPP loans during the nine months ended September 30, 2021 and $876.96 million in 2020. The Bank used the Federal Reserve’s PPPLF to match fund the vast majority of those amounts. The following table reflects the Bank’s PPP lending activity for the periods indicated (dollars in thousands).

At and for the Nine Months Ended September 30,At and for the
year ended
December 31,
202120202020
Number of loans originated
3,8588,9308,948
Amount of loans originated
$329,315 $876,603 $876,960 
Average loan size originated
$85 $98 $98 
Amount of loans sold
$326,318 $— $— 
Amount of loans purchased
$— $22,404 $22,404 
Loan balance, net of deferred loan costs (fees) and discount on purchased loans
$155,647 $879,511 $825,802 
Loan origination fees, net recognized
$13,909 $8,175 $13,419 
Deferred loan origination fees, net, at period end
$1,112 $19,531 $12,948 

Residential Mortgage Loans

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

For the Nine Months Ended September 30,
For the Year
Ended December 31,
2021202020202019
Number of loans originated
5,7454,5466,7272,617
Amount of loans originated
$1,744,630 $1,278,784 $1,919,862 $762,794 
Average loan size originated
$304 $281 $285 $291 
Loan balances sold
$1,855,685 $1,209,063 $1,787,574 $710,191 

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Deposits and Other Sources of Funds

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 weekly by management, based on a review of loan demand, deposit flows for the previous week and a survey of rates among competitors and other financial institutions in Florida.

The amounts of each of the following categories of deposits, for the periods indicated, are as follows (dollars in thousands):

Deposit TypesSeptember 30, 2021September 30, 2020December 31, 2020December 31, 2019
Noninterest-bearing deposits
$87,625 13.0 %$70,115 13.7 %$62,650 11.2 %$51,025 11.4 %
Interest-bearing transaction accounts
157,304 23.3 %112,902 22.1 %140,265 25.1 %71,134 15.9 %
Money market accounts
362,476 53.7 %235,385 46.1 %274,421 49.1 %174,517 38.9 %
Savings
14,976 2.2 %12,323 2.4 %12,323 2.2 %10,875 2.4 %
Subtotal
622,381 92.2 %430,725 84.3 %489,659 87.6 %307,551 68.6 %
Total time deposits
52,653 7.8 %79,417 15.6 %69,125 12.4 %141,043 31.4 %
Total deposits
$675,034 100.0 %$510,142 100.0 %$558,784 100.0 %$448,594 100.0 %

The following table sets forth the remaining maturities of our time deposits of $100 thousand or greater by category as of September 30, 2021 (dollars in thousands).
Three months or less
$3,100 
Over three months through six months
18,118 
Over six months through 12 months
10,267 
Over 12 months
6,760 
Total
$38,245 
    
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.

45


The balance of Subordinated Debentures outstanding at the Company, net of offering costs, amounted to $5.98 million and $5.95 million at September 30, 2021 and December 31, 2020, 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 (3.25% at September 30, 2021). The new note matures on March 10, 2029 and the balance of the note was $3.41 million and $3.75 million at September 30, 2021 and December 31, 2020, 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 PPPLF. Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the PPP. The PPPLF accrues interest at 0.35% per annum and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 15, 2022 to August 27, 2025, and will be accelerated on and to the extent of any PPP loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. The balances outstanding on this facility were $144.60 million and $881.26 million at September 30, 2021 and December 31, 2020, respectively.

Regulatory Capital Requirements

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 community bank leverage ratio (“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.

46


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)
 AmountPercentAmountPercentAmountPercent
As of September 30, 2021
Total Capital (to risk-weighted assets)
$102,678 22.50 %$36,514 8.00 %$45,643 10.00 %
Tier 1 Capital (to risk-weighted assets)
96,808 21.21 %27,386 6.00 %36,514 8.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
96,808 21.21 %20,539 4.50 %29,668 6.50 %
Tier 1 Capital (to total assets)
96,808 12.64 %30,643 4.00 %38,304 5.00 %
As of September 30, 2020
Total Capital (to risk-weighted assets)
$70,179 16.75 %$33,528 8.00 %$41,910 10.00 %
Tier 1 Capital (to risk-weighted assets)
64,254 15.33 %25,146 6.00 %33,528 8.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
64,254 15.33 %18,860 4.50 %27,242 6.50 %
Tier 1 Capital (to total assets)
64,254 10.85 %23,687 4.00 %29,609 5.00 %
As of December 31, 2020
Total Capital (to risk-weighted assets)
78,824 17.02 %37,056 8.00 %46,320 10.00 %
Tier 1 Capital (to risk-weighted assets)
72,825 15.72 %27,792 6.00 %37,056 8.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
72,825 15.72 %20,844 4.50 %30,108 6.50 %
Tier 1 Capital (to total assets)
72,825 11.75 %24,799 4.00 %30,998 5.00 %
As of December 31, 2019
Total Capital (to risk-weighted assets)
57,548 17.84 %25,804 8.00 %32,256 10.00 %
Tier 1 Capital (to risk-weighted assets)
52,446 16.26 %19,353 6.00 %25,805 8.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
52,446 16.26 %14,515 4.50 %20,966 6.50 %
Tier 1 Capital (to total assets)
52,446 10.49 %19,994 4.00 %24,992 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.


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Off-Balance Sheet Arrangements

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include unfunded loan commitments, undisbursed loans in process, unfunded lines of credit, and standby letters of credit. The Bank uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent 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 for the periods indicated, are as follows (in thousands):

September 30,
2021
September 30,
2020
December 31,
2020
December 31,
2019
Unfunded loan commitments
$57,592 $27,555 $34,867 $37,715 
Unused lines of credit
43,263 32,223 34,063 12,611 
Standby letters of credit
68 68 68 193 
Total
$100,923 $59,846 $68,998 $50,519 


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, all letters-of-credit issued have expiration dates within one year. 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.

Market Risk

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. However, a sudden or substantial increase in interest rates may adversely impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same rate, to the same extent, or on the same basis.
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Asset/Liability Structure

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

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

Results of Operations, Generally

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.

Comparison of Results of Operations for the Periods Ended September 30, 2021 and 2020.

Net Income. Net income for the nine months ended September 30, 2021 of $21.81 million, or $5.13 per diluted common share, compared to net income for the nine months ended September 30, 2020 of $7.10 million, or $1.78 per diluted common share. The increase of $14.71 million in net income was due to a $13.80 million gain from the sale of PPP loans in the second quarter of 2021, an increase in residential loan fee income, an increase in PPP loan origination fees recognized, and a decrease in provision for loan loss expense, partially offset by an increase in noninterest expenses, particularly salaries and commission expenses.

Net Interest Income. Net interest income was $33.55 million for the nine months ended September 30, 2021, an increase of $11.67 million or 53.34% compared to net interest income for the nine months ended September 30, 2020 of $21.88 million. This increase was primarily due to an increase of $5.73 million in PPP origination fees
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recognized, partially due to the fact that PPP loan funding did not begin until the second quarter of 2020. Additional items that contributed to this increase in net interest income were an increase in PPP interest income, an increase in interest income on other loans, and a decrease in interest expense on deposits, partially offset by an increase in interest expense on PPPLF borrowings. The net interest margin for the nine months ended September 30, 2021 was 3.26% compared to 2.76% for the nine months ended September 30, 2020. This increase was due to the same factors noted above with respect to the increase in net interest income.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors which may affect our ability to collect on the loans in our portfolio. We recorded a negative provision for loan losses for the nine months ended September 30, 2021 of $1.00 million compared to an $11.90 million provision for the nine months ended September 30, 2020. The decrease of $12.90 million in the provision for loan losses was primarily due to the same factors mentioned in the quarterly analysis above. During the nine months ended September 30, 2021, we charged off $3.55 million in loans compared to $3.73 million during the nine months ended September 30, 2020.
Since the majority of the Company’s loan portfolio consisted of SBA loans, most of which received from the SBA principal and interest payments under Section 1112 of the CARES Act during 2020 and 2021, our asset quality trends may appear more favorable than they otherwise would without the CARES Act support. Although the Company’s asset quality trends indicate minimal stress on the portfolio, management believed it was prudent to be proactive in increasing the allowance for loan losses using qualitative measures throughout 2020 and 2021.

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

Noninterest Expense. Noninterest expense was $98.62 million during the nine months ended September 30, 2021, an increase of $30.62 million or 45.04% from $68.00 million during the nine months ended September 30, 2020. The increase was primarily due to increases in salaries and benefits and commissions, marketing and business development expense and data processing expense with the majority of the increase related to the above-mentioned strategic initiatives and planned growth strategy.

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

Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019.

Net Income. Net income for the year ended December 31, 2020, was $12.70 million, an increase of $8.22 million or 183.28% over net income for the year-ended December 31, 2019 of $4.48 million. The increase in net income in 2020 over 2019 was primarily due to an increase in residential loan fee income and the addition of PPP loan origination fee and interest income, offset by an increase in noninterest expenses, particularly salaries and commissions expenses, as well as an increase in provision for loan loss expense and a decline in gain on sale of SBA loans as the Company made the decision to hold the majority of guaranteed SBA balances originated in 2020.

Net Interest Income. Net interest income was $33.45 million for the year ended December 31, 2020, an increase of $16.02 million or 91.88% from 2019. The increase was primarily due to net PPP origination fee income of $13.42 million and PPP interest income of $5.68 million recognized in 2020, offset by declines in interest income on loans and interest-bearing deposits in other banks. The net interest margin for the year ended
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December 31, 2020 was 2.88%, down substantially from 4.08% realized in 2019. The primary reason for the decline is the significant amount of PPP loan balances during the majority of 2020 at a rate of 1.00%. Although the rate on PPP loans brings down the Company’s net interest margin, because these loans are pledged to the Federal Reserve’s PPPLF at a rate of 0.35%, their balance is allowed to be excluded from the Bank’s regulatory capital ratios and thus the net 65 basis points earned brings significant earnings to the Company without having to allocate capital against those assets.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors which may affect our ability to collect on the loans in our portfolio. We recorded a provision for loan losses for the years ended December 31, 2020, and December 31, 2019 of $16.90 million and $8.87 million, respectively. During 2020, we increased the qualitative factors in the allowance for loan loss calculation for the economic uncertainties caused by the COVID-19 pandemic resulting in the increased provision expense in 2020. In the year ended December 31, 2020, there were $6.48 million of net charge-offs, as compared to $4.69 million in 2019. The ALLL was $21.16 million at December 31, 2020, compared to $10.74 million at December 31, 2019.

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

Noninterest Income. Noninterest income for the year ended December 31, 2020 was $97.70 million, an increase of $44.57 million or 83.90% from $53.12 million during 2019. The increase was primarily due to an increase in residential loan fee income of $61.40 million or 196.3%, offset by a decline in gain on sale of SBA loans of $18.85 million or $91.94% to $1.65 million for 2020 as the Company made the decision to hold the majority of guaranteed SBA balances originated in 2020.

Noninterest Expense. Noninterest expense was $98.47 million for the year ended December 31, 2020, an increase of $43.08 million or 77.77% from $55.39 million during 2019. The increase was primarily due to increases in salaries and benefits, commissions, and bonuses and incentives as several loan production offices were added which increased the overall count of full-time employees and also increased commissions. In addition, in order to originate and service almost $900 million of PPP loans originated in 2020, significant overtime was incurred and temporary workers were utilized to handle the volume. Data processing costs also increased by $2.68 million during 2020 to $4.42 million for the year ended December 31, 2020, as software was added to originate and service PPP loans. Additionally, data conversion costs were incurred in the first quarter of 2020 with the conversion of the Company’s core processing system. Per loan costs on the residential lending platform also increased based on volume. Mortgage banking expense also increased proportionately with the increase in residential lending volume from $2.40 million during 2019 to $5.29 million during 2020, an increase of $2.89 million or 120.42%.

Income Taxes. Income tax expense was $3.07 million for the year ended December 31, 2020, an increase of $1.26 million or 69.61% from $1.81 million during 2019. The increase was primarily due to the increase in pre-tax earnings; however, the purchase of Bank Owned Life Insurance in June 2020 did add tax free income, and due to the CARES Act signed in March, the Company was able to carry back net operating losses created in 2018 to prior years where tax rates were higher than they were in 2020, which created a one-time tax benefit of $969,000. The effective income tax rate was 19.49% for 2020 compared to 28.79% for 2019 as a result.

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MANAGEMENT AND BOARD OF DIRECTORS

The Board of BayFirst is comprised of 13 individuals: George Apostolou, Derek S. Berset, Mark S. Berset, Dennis R. “Rep” DeLoach, III, Alexander Harris, Tarek Helal, Trifon Houvardas, Anthony N. Leo, Christos Politis, M.D., Anthony Saravanos, Bradly W. Spoor, Harold J. Winner, and Barbara Zipperian. Biographical information regarding each director is below.

BayFirst Directors

George Apostolou, age 71, founded the George Apostolou Construction Company in 1983. Since that time, it has built more than 200 commercial buildings, government services buildings, churches, office buildings, and retail centers. In 2009, he founded Global Ground Solutions, a sinkhole mitigation company performing services for several of the major engineering firms in West Central Florida. In addition to contracting, Mr. Apostolou has been involved in the development of many commercial projects and now owns numerous properties in the Tampa Bay area. He also serves on the Board of Directors of HCI Group, Inc., a New York Stock Exchange listed company. Mr. Apostolou joined the Board in 2013. We believe that Mr. Apostolou’s qualifications to serve on our Board include his executive leadership and management experience, public company Board experience, and financial expertise gained from the successful operations of his own businesses.

Derek S. Berset, age 44, is an owner of Comegys Insurance Agency, Inc., a family owned and operated retail insurance agency that has served the west coast of Florida for over 75 years. Mr. Berset is also the President of Franchise Alliance Network LLC, which provides franchises with accounting, insurance, bookkeeping and payroll services, and he serves as Vice President of SAN of Florida Inc., an insurance wholesaler to independent agencies within Florida. He is the Chairman of the Board for Arts Conservatory for Teens (ACT), a nonprofit organization that helps teens excel within the arts. Mr. Berset is a graduate of Florida State University. He joined the Board in 2020 and is the son of BayFirst director Mark S. Berset. We believe that Mr. Berset’s qualifications to serve on our Board include his management and financial experience.

Mark S. Berset, age 74, has served since 1987 as the Chief Executive Officer of Comegys Insurance, a family owned insurance agency located in St. Petersburg, Florida. Mr. Berset is also the founder of Alpha Insurance Management, Satellite Agency Network of Tampa Bay, and Association Insurance Specialists. Mr. Berset also serves as a director of Heritage Insurance Holdings, Inc., a New York Stock Exchange listed company. He is a former director of United Insurance Holdings Corp., former board member of Innovaro, Inc., a past board member of North Star Bank Holding Company, Tampa, Florida, and past President and Board member of Bayfront Hospital Foundation in St. Petersburg, Florida. He received a bachelor’s degree in Business Economics from St. Ambrose University and an MBA from Georgia State University. Mr. Berset joined the Board in 2014 is the father of BayFirst director Derek S. Berset. We believe that Mr. Berset’s qualifications to serve on our Board include his executive leadership and management experience, prior bank and public company Board experience, and financial expertise gained from the successful operations of his own businesses.

Dennis R. “Rep” DeLoach, III, age 47, is a partner at the law firm of DeLoach, Hofstra & Cavonis, P.A. in Seminole, Florida. Mr. DeLoach graduated from Mercer University in 1996 and Mercer University Law School in 1999. He is Board Certified by the Florida Bar in Elder Law. Mr. DeLoach is a frequent speaker on continuing legal education to other Florida attorneys. Mr. DeLoach joined the Board in 2020 and is the son of BayFirst director Dennis R. DeLoach, Jr. We believe that Mr. DeLoach’s qualifications to serve on our Board include his legal experience.

Alexander Harris, age 41, currently serves as Chief Executive Officer of the Arts Conservatory for Teens (“ACT”), a non-profit organization headquartered in St. Petersburg, Florida. He also currently serves as a Senior Executive Consultant and Creative Strategist for Three Oak Doors Enterprises, LLC, and he has previously served as a Lecturer, Creative Strategist, and Consultant for the University of South Florida. Dr. Harris received a Doctor of Education Degree from Nova Southeastern University with an emphasis in organizational l