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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-41068
BAYFIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Florida
59-3665079
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
700 Central Avenue
St. Petersburg, Florida
33701
(Address of Principal Executive Offices)
(Zip Code)
(727) 440-6848
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockBAFNThe Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated fileroAccelerated filero
Non-accelerated filer  xSmaller reporting companyx
Emerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting f rm that prepared or issued its audit report. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes   o     No  x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the $23.42 per share selling price of the common stock on June 30, 2021 was $74,537,483.
The registrant had outstanding 4,013,173 shares of common stock as of March 23, 2022.


Table of Contents
Page
Part I
Part II
Part III
Part IV

1

Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Report on Form 10-K or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.
AFS: Available for SaleFDIC: Federal Deposit Insurance Corporation
ALCO: Asset-Liability Committee FHLB: Federal Home Loan Bank
ALLL: Allowance for Loan Losses FNBB: First National Bankers Bank
AOCI: Accumulated Other Comprehensive Income
FRB: Federal Reserve Bank
ASC: FASB Accounting Standards CodificationFVO: Fair Value Option
ASU: FASB Accounting Standards UpdateGAAP: Generally Accepted Accounting Principles
BHCA: Bank Holding Company Act of 1956, as amended
IRA: Individual Retirement Account
BOLI: Bank Owned Life InsuranceJOBS Act: Jumpstart Our Business Startups Act of 2012
BSA: Bank Secrecy Act of 1970LHFS: Loans Held for Sale
CAA: Consolidated Appropriations ActMMDA: Money Market Deposit Account
CARES Act: Coronavirus Aid, Relief, and Economic Security ActNOW: Negotiable Order of Withdrawal
CBLR: Community Bank Leverage RatioNSPP: Non-Qualified Stock Purchase Plan
CECL: Current Expected Credit LossesOFR: Florida Office of Financial Regulation
CET1: Common Equity Tier 1 Capital
OLC: Officer Loan Commitee
C&I: Commercial and IndustrialOREO: Other Real Estate Owned
CIK: Central Index Key
OTTI: Other-Than-Temporary Impairment
COVID-19: Coronavirus Disease 2019PCAOB: Public Company Accounting Oversight Board
DCLC: Directors’ Credit and Loan CommitteePPP: Paycheck Protection Program
DODD-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010PPPLF: Paycheck Protection Program Liquidity Facility
DRIP: Dividend Reinvestment PlanQIB: Qualified Institutional Buyer
EGC: Emerging Growth CompanySBA: Small Business Administration
Equity Plan: The Amended and Restated 2017 Equity Inventive PlanSEC: U.S. Securities and Exchange Commission
ESG: Environmental, Social, and GovernanceSOFR: Secured Overnight Financing Rate
ESOP: Employee Stock Ownership PlanU.S.: United States
ESPP: Employee Stock Purchase PlanUSDA: United States Department of Agriculture
Exchange Act: Securities Exchange Act of 1934USDA B&I: United States Department of Agriculture Buiness and Industry
FASB: Financial Accounting Standards BoardTDR: Troubled Debt Restructure
FBCA: Florida Business Corporation ActiXBRL: Inline eXtensible Business Reporting Language
FDIA: Federal Deposit Insurance Act

2

Part I - Financial Information
3

Item 1. Business 
BayFirst Financial Corp.
BayFirst Financial Corp. (“BayFirst” or the “Company”) is a bank holding company that operates through its wholly owned subsidiary, First Home Bank (the “Bank”). BayFirst commenced its bank holding company operations on September 1, 2000, by acquiring all shares of the Bank. BayFirst’s primary source of income is from the Bank, which serves a broad spectrum of individuals, families, and small businesses in Tampa Bay, supported by national business lines in residential and SBA lending and technology platform. As of December 31, 2021, BayFirst had consolidated total assets of $917.10 million, total loans of $583.95 million, total deposits of $721.69 million, and total shareholders’ equity of $96.29 million. 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, the Bank filed an application with the Office of the Comptroller of the Currency to convert its charter to that of a national bank. The Bank currently operates out of its main office and six additional banking centers located in the Tampa Bay area, and 23 residential mortgage loan production offices throughout the United States. The Bank’s main office is located at the First Home Executive Center. The Bank does not engage in any foreign business activities. The Bank offers its products and services through its Community Banking Division and its Residential Mortgage Division. The Bank, through its separately branded loan origination platform, CreditBench, is a prolific government guaranteed lender with specific expertise in originating Small Business Administration (“SBA”) 7(a) loans throughout the nation. The Bank has recently developed an advanced technology platform that has positioned it to be able to utilize, partner, and support technology-enabled banking products and services as well as various financial technology applications.
Community Banking
The Bank has structured its 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. The Bank focuses on customers that are seeking the flexibility and personalized relationships that a community bank can provide. The Bank offers specialized business and personal checking accounts, internet banking and online bill payment, remote capture and deposit, cash management, wire transfers, safety deposit boxes, courier services, retail investment services, and ACH originations, among other services.
The Bank also offers customary community bank deposit products, including interest-bearing and noninterest-bearing checking accounts, MMDAs, savings accounts, time deposits and IRAs. The consumer product offering also includes unique programs, including, among others: 1) the NuStart checking that assists customers in rebuilding their access to the banking system, 2) the TrendSetters Club which offers special benefits for those customers age 50+ years, and 3) the Cash Kids’ Club savings account that offers those age 12 and under special rates while teaching children basic financial skills through interactive and mobile application tools. The Bank’s business deposit products and related services include free and interest-bearing checking accounts, savings accounts, money market accounts, and access to business mobile and online banking, treasury management, cash management, merchant processing services, remote deposit capture, and nightdepository.
A wide range of loans are also offered, including commercial, consumer, 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 greater than our lending limits.
The Community Banking Division operates from our 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 County, Manatee County, and Hillsborough County 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 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
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services. On limited occasions, we may offer services that may not be profitable, but only if the account relationship provides earnings or other benefits sufficient to offset the cost of the services provided.
CreditBench
The Bank, through its separately branded loan origination platform CreditBench, originates government guaranteed loans on a nationwide basis, with a particular emphasis on SBA 7(a) loans. CreditBench originates 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 and branded as FlashCap. CreditBench’s Core SBA Team makes government guaranteed loans throughout the U.S., with a particular emphasis on business acquisition financing. The Core SBA Team is concentrated in the Tampa Bay area with an expanding national sales team. FlashCap employs an internal sales team and uses referral partners and financial technology companies to originate SBA loans nationwide. CreditBench also originates a significant volume of loans in the SBA 7(a) Small Loan Program. Underwriting, quality control, and technology are centralized and scalable for potential increases in loan volume.
CreditBench’s loan origination 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 finance working capital for the borrowers. CreditBench also originates USDA B&I loans for businesses 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 March of 2020, 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 performance in the event of payment defaults.
The revenues generated from CreditBench’s loan originations 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 greater than 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.
Residential Mortgage Division
Our Residential Mortgage Division operates from our seven banking centers in the Tampa Bay area and 23 loan production offices nationwide. 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 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
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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.
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. Several 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 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 with a better understanding of the market 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 can 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 can 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
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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.
Lending Philosophy and Credit Risk Management
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.
Regardless of the loan type or amount, no single individual has sole loan approval authority. The objective of our loan approval process 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 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;
•    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.
The Community Banking Division originates both consumer and commercial loans. Consumer 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 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.
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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.
Risk Management
We believe that effective risk management and control processes are critical to our safety and soundness, our ability to predict and manage the challenges that we face, and, ultimately, our long-term corporate success. Risk management refers to the activities by which we identify, measure, monitor, evaluate, and manage the risks we face in the course of our banking activities. These include liquidity, interest rate, credit, operational, compliance, regulatory, strategic, financial, and reputational risk exposures. Our boards of directors, both directly and through their committees, are responsible for overseeing our risk management processes, including quarterly enterprise risk management assessments and annual assessments in the following areas: (i) cyber; (ii) BSA/anti-money laundering; and (iii) third-party risk, with each of the committees of our board of directors assuming a different and important role in overseeing the management of the risks we face.
The Audit and Risk Management Committees of our board of directors is responsible for overseeing risks associated with financial matters (particularly financial reporting, accounting practices and policies, disclosure controls and procedures, and internal control over financial reporting) as well as other enterprise risk. The Compensation Committee of our board of directors has primary responsibility for risks and exposures associated with our compensation policies, plans, and practices regarding both executive compensation, board compensation, and our compensation structure generally. Our Compensation Committee, in conjunction with our Chief Executive Officer and other members of our management, as appropriate, reviews our incentive compensation arrangements to ensure these programs are consistent with applicable laws and regulations, including safety and soundness requirements, and do not encourage imprudent or excessive risk-taking by our employees. The Nominating Committee of our board of directors oversees risks associated with the independence of our board of directors and potential conflicts of interest.
Our senior management is responsible for implementing our risk management processes by assessing and managing the risks we face, including strategic, operational, regulatory, investment, and execution risks, on a day-to-day basis, and reporting to our board of directors regarding our risk management processes. Our senior management is also responsible for creating and recommending to our board of directors for approval of appropriate risk appetite metrics reflecting the aggregate levels and types of risk we are willing to accept in connection with the operation of our business and pursuit of our business objectives.
The role of our boards of directors in our risk oversight is consistent with our leadership structure, with our Chief Executive Officer and the other members of senior management having responsibility for assessing and managing our risk exposure, and our boards of directors and their committees providing oversight in connection with those efforts. We believe this division of risk management responsibilities presents a consistent, systemic, and effective approach for identifying, managing, and mitigating risks throughout our operations.
Information Technology Systems
We have made, and continue to make, significant investments in our information technology systems and staff for our banking and lending operations and treasury management activities. We believe this investment will support our continued growth and enable us to enhance our capabilities to offer new products, improve overall customer experience, improve profitability through efficiencies, maintain and improve cybersecurity, and provide scalability for future growth. We utilize nationally recognized software vendors and their cloud/hosted models, which allow us to outsource the processing of our data. Our internal network and e-mail systems are administered by a managed service provider specializing in financial institutions, and we maintain our production infrastructure in a data center facility near Tampa, Florida. This site provides for power and connectivity redundancy, and we maintain a disaster recovery program, including a cloud-based recovery environment.
The majority of our other systems, including our electronic funds transfer, transaction processing, and our online banking services are hosted by third-party service providers. The scalability of this infrastructure will support our growth strategy. In addition, the tested capability of these vendors to automatically switch over to standby systems should allow us to recover our systems and provide business continuity quickly in case of a disaster.
Privacy, Data Protection and Cybersecurity
The regulatory framework for data privacy and cybersecurity is rapidly evolving. Current federal law requires financial institutions to periodically disclose their privacy policies and practices related to sharing client information. Such laws
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allow consumer clients to opt out of having their information shared with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers. Current federal law also requires financial institutions to implement a comprehensive information security program. Such programs must include administrative, procedural, and physical safeguards to ensure the security and confidentiality of client records and personal information. These security and privacy policies and procedures are in effect across the Bank.
Federal banking agencies pay close attention to the cybersecurity practices of banks. Such agencies include a review of an institution’s information technology program and its ability to prevent cyberattacks in their examinations. The FFIEC released its Architecture, Infrastructure, and Operations (AIO) Booklet in June 2021. The AIO booklet calls for a layered security approach that incorporates administrative, procedural, and physical controls to include employee, vendor, and client awareness training. The Bank’s cybersecurity and information security practices incorporate preventative, detective, corrective, compensatory, and deterrent controls. Failing to have adequate cybersecurity safeguards in place, in accordance with AIO and other applicable regulations and laws, can result in supervisory criticism, monetary penalties and reputational harm.
In November 2021, the Federal Reserve, OCC, and FDIC adopted a new regulation. Among other things, this regulation requires a bank to notify its primary federal regulator within 36 hours after identifying a "computer-security incident" that the bank believes in good faith could: (i) materially disrupt or degrade its business or operations in a manner that would threaten the viability of its operations and result in clients being unable to access their deposit and other accounts; (ii) result in a material loss of revenue, earnings or franchise value; or (iii) pose a threat to the financial stability of the United States.
Data privacy and data protection are also areas of increasing regulatory and legislative focus. The Bank is subject to rules and regulations issued by the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including those related to data privacy and cybersecurity. Like other lenders, the Bank uses credit bureaus in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates identity theft prevention programs, reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Federal law further requires financial institutions to explain their information-sharing practices to their clients and to protect sensitive client information.
Human Capital
Since opening in 1999, First Home Bank has grown without losing sight of our commitment to making an impact in the communities we serve and being Here for What’s Next® in the lives of our customers, communities, employees, and investors. First Home Bank recognizes that our 656 employees (617 full-time and 39 part-time) are indeed our greatest asset. Providing a work environment that is inclusive, transparent, and comfortable for all is foundational to our core beliefs. We are an organization that values open communication and collaboration in a professional and challenging, yet informal, atmosphere.
Total Rewards
Our competitive compensation and benefits package helps attract and retain top talent throughout the US and demonstrates our belief that engaged and satisfied employees directly correlate to engaged and satisfied customers, generating long-term value for our shareholders and other stakeholders.
Our goal is to provide the most competitive compensation and benefit plans possible. In 2021, the Bank established a living minimum wage of $18 per hour. We have what we believe is a generous and competitive 401(k) plan, plus a discretionary profit-sharing contribution to the Employee Stock Ownership Plan. All employees are shareholders through their participation in the ESOP. Additionally, employees have the opportunity to grow their ownership through a discounted Employee Stock Purchase Plan.
First Home Bank offers a wide range of Health and Welfare plans designed to fit our diverse populations. We provide 100% employer-paid medical, dental, vision, disability, and life insurance for employee coverage. We offer an employee wellness program designed to support the whole employee which encompasses physical, mental, social, and financial wellness.
First Home Bank provides both paid maternity and paternity leave through our Parental Leave program. Our no-cost, short-term disability policy is administered and funded in-house and provides up to 12 weeks of medical leave at 100% pay. We recognize the burdensome expense of dependent care and provide a company match to employees’ dependent care FSA accounts. We provide paid volunteer time off to all employees building engagement and pride in our organization while encouraging teams to give back to their communities.
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Training and Development
As part of our commitment to being a top employer in our industry, First Home Bank offers a growing internal Learning and Development Center where employees not only learn compliance and regulation, but also have the opportunity to strengthen core competencies for career growth and personal development.
We offer both a Tuition Reimbursement and Student Loan Assistance program to all eligible employees. We offer these programs to nurture the professional development of our colleagues and ease the financial burden associated with continuing education.
Social Governance: Diversity, Equity, and Inclusion
Our cultural foundation of being current and comfortable for all drives our Diversity, Equity, and Inclusion efforts throughout the entire organization. Our diversity enhances our workforce, expands our markets and fosters a culture of belonging for our employees, customers and communities in which we serve.
As of December 31, 2021, our employee base is comprised of individuals from all walks of life, genders, ethnicities, races, ages and differing economic and social backgrounds. Females represent 53% of the Company’s employee base while minorities represent 24% of our population. Our officer base is 45% female and 21% minority.
In 2021, First Home Bank established a Diversity, Equity, and Inclusion Council with a purpose of ensuring First Home Bank reflects the values, respects the viewpoints, and acknowledges the differences of not only the community members it serves, but also the people it employs. Through its focus on these three core components, the Council seeks to build an environment where everyone belongs, everyone is heard, everyone is aware of what’s next, and everyone is given the opportunity to succeed. The Council actively advocates for the ongoing implementation and evaluation of internal and external programs, initiatives, and procedures to ensure the bank remains forward-thinking and aligned with the ever-evolving societal landscape. Through its focus on diversity, equity, and inclusion, the Council will fulfill its obligation to be the voice for all associated with First Home Bank, guiding it in its effort to become a true community bank.
Employee Engagement
At First Home Bank, employee engagement is truly an important part of how we try to distinguish ourselves from our competition. We recruit and retain highly qualified talent across the US. Highly talented, skilled and driven individuals join our organization and bring with them a diversity of quality ideas, strategies, procedures and thoughts.
We understand that harnessing this level of engagement is critical to our success and have developed several channels to do so. Our Bright Ideas Submission Portal allows any employee to submit their ideas for improvement or change of policies, procedures, benefits or any other item they believe will improve our organization. To ensure employees understand the commitment of listening to feedback, each Bright Idea Submission is sent to and reviewed by the CEO.
Our CEO also hosts a quarterly CEO’s Council where individuals from across the organization spend the day with the CEO and executive team, providing feedback and input on improvement opportunities. We also complete periodic Officer’s Surveys where each officer is asked to provide feedback on specific areas of the organization and our strategy.
One of our greatest engagement and communication tools is a the “What’s Next” call where employees are invited to a weekly video conference where ideas are exchanged, updates are provided, and business and individual recognitions are communicated.
Our efforts were recognized by our employees at the end of 2021 when they completed an anonymous employee survey which ranked the Bank in the top 15 of the Best Places to Work in Tampa Bay.
Environmental, Social, and Governance Policy
In 2021, BayFirst advanced its ESG initiatives by forming a board of directors’ level committee and developing a policy and policy statement. As a progressive institution, BayFirst is committed to the highest standards in all aspects of its operations. As both a Tampa Bay community bank and a nationwide lender, we believe it is our responsibility to take an important role in advancing the values we hold, including being an exemplary corporate citizen, providing fair and equitable access to the banking system, engaging with our communities, addressing climate change, providing full disclosure and transparency, providing a safe and secure banking experience, and offering our team the best possible workplace and opportunity for advancement. The main pillars of BayFirst’s ESG policy include 1) Fair and Equitable Access to Banking Services, 2) Environmental Sustainability, 3) Community Engagement, 4) Employee/Workforce Management and Well Being, and 5) Governance, Data Security, and Business Ethics.
Supervision and Regulation
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General
As a bank holding company, we are subject to an extensive body of state and federal banking laws and regulations that impose specific requirements and restrictions on virtually all aspects of our operations. We are affected by government monetary policy and by regulatory measures affecting the banking industry in general.
The following is a summary of some of the statutes, rules, and regulations that affect our operations. This summary is qualified in its entirety by reference to the particular statutory and regulatory provision referred to below, and is not intended to be an exhaustive description of the statutes or regulations applicable to our proposed business. Any change in applicable laws or regulations may have a material adverse effect on our business.
BayFirst Financial Corp.
BayFirst is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (“BHCA”). As such, we are required to file annual reports and other information with the Federal Reserve regarding our business operations and those of our subsidiary. We are also subject to the supervision of, and to periodic inspections by, the Federal Reserve.
The BHCA generally requires every bank holding company to obtain the prior approval of the Federal Reserve before:
acquiring all or substantially all of the assets of a bank;
acquiring direct or indirect ownership or control of 5% or more of the voting shares of any bank or bank holding company; or
merging or consolidating with another bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations promulgated by the Federal Reserve, require that, depending on the particular circumstances, either the Federal Reserve’s approval must be obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person or company, not a bank holding company, acquiring control of a bank holding company, subject to certain exemptions. Control is conclusively presumed to exist when an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the bank holding company has registered securities under Section 12 of the Exchange Act or no other person owns a greater percentage of that class of voting securities immediately after the transaction.
Additionally, the BHCA provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below. As a result of the USA PATRIOT Act, which is discussed below, the Federal Reserve is also required to consider the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities in its evaluation of bank holding company merger or acquisition transactions.
Except as authorized by the BHCA and Federal Reserve regulations or order, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of 5% or more of the voting shares of any company engaged in any business other than the business of banking or managing and controlling banks. The primary exception allows the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks that ownership of shares of that company is appropriate. Activities the Federal Reserve has determined by regulation to be proper incidents to the business of banking, and thus permissible for bank holding companies, include:
making or servicing loans and certain types of leases;
engaging in certain insurance and discount brokerage activities;
performing certain data processing services;
acting in certain circumstances as a fiduciary or investment or financial advisor;
providing management consulting services;
owning savings associations; and
making investments in corporations or projects designed primarily to promote community welfare.
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In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve’s policy, we may be required to provide financial support to our bank at a time when, absent such Federal Reserve policy, it might not be deemed advisable to provide such assistance. Under the BHCA, the Federal Reserve may also require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. A bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
The Federal Reserve also has authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices, or which constitute violations of laws or regulations. The Federal Reserve may impose civil money penalties for activities conducted by a bank holding company, its nonbanking subsidiaries, and officials of either on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Florida-State Chartered Banks
Florida state-chartered banks are subject to the supervision and regulation of the OFR and, as a member of the Federal Reserve System, the Federal Reserve. Deposits are insured by the FDIC for a maximum of $250,000 per account ownership. For this protection, banks must pay a quarterly statutory assessment and comply with the rules and regulations of the FDIC. The assessment levied on a bank for deposit insurance varies, depending on the capital position of each bank, and other supervisory factors.
The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of a bank, the claims of depositors of the bank, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the bank. If a bank fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors.
Areas regulated and monitored by the bank regulatory authorities include:
security devices and procedures;
adequacy of capitalization and loss reserves;
loans;
investments;
borrowings;
deposits;
mergers;
issuances of securities;
payment of dividends;
establishment of branches;
corporate reorganizations;
transactions with affiliates;
maintenance of books and records; and
adequacy of staff training to carry out safe lending and deposit gathering practices.
Restrictions on Transactions with Affiliates and Loans to Insiders
Sections 23A and 23B of the Federal Reserve Act restrict transactions by banks with their affiliates. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. Generally, Sections 23A and 23B: (1) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of that bank’s capital stock and surplus (i.e., tangible capital); and (2) require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to
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a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.
Section 23A also covers investment funds managed by an institution as an affiliate, as well as other procedural and substantive matters. In addition, Sections 23A and 23B include coverage of transactions with insiders relative to credit exposure arising from derivative transactions. An insured depository institution is also prohibited from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors.
A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities controlled by such persons, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
Anti-tying Restrictions
Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements
Banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC. Until a bank holding company’s assets reach $3 billion, the risk-based capital and leverage guidelines issued by the Federal Reserve are applied to bank holding companies on a nonconsolidated basis, unless the bank holding company is engaged in nonbank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. Instead, a bank holding company with less than $3 billion generally applies the risk-based capital and leverage capital guidelines on a bank only basis and must only meet a debt-to-equity ratio at the holding company level. The Federal Reserve risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off-balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks. Depending upon the riskiness of a particular asset, it is assigned to a risk category. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, risk weights from 0% to 250% are applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital is then classified into three categories, Common Equity Tier 1, Additional Tier 1, and Tier 2. Common Equity Tier 1 Capital (“CET1”) is the sum of common stock instruments and related surplus net of treasury stock, retained earnings, Accumulated Other Comprehensive Income (“AOCI”), and qualifying minority interests, less applicable regulatory adjustments and deductions that include AOCI (if an irrevocable option to neutralize AOCI is exercised). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to an aggregate of 15% of CET1 and 10% of CET1 individually. Additional Tier 1 Capital includes noncumulative perpetual preferred stock, Tier 1 minority interests, grandfathered trust preferred securities, and Troubled Asset Relief Program instruments, less applicable regulatory adjustments and deductions. Tier 2 Capital includes subordinated debt and preferred stock not included in Additional Tier 1 Capital, total capital minority interests not included in Tier 1, ALLL not exceeding 1.25% percent of risk-weighted assets, less applicable regulatory adjustments and deductions.
Smaller banks are subject to the following capital level threshold requirements: BCG formatting suggestion: show all capital ratios below with one decimal place.
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Capital Category
Threshold Ratios
Total
Risk-Based
Capital Ratio
Tier 1
Risk-Based
Capital Ratio
CET1
Risk-Based
Capital Ratio
Tier 1
Leverage
Capital Ratio
Well capitalized10.00%8%6.5%5%
Adequately Capitalized8%6%4.5%4%
Undercapitalized< 8%< 6%< 4.5%< 4%
Significantly Undercapitalized< 6%< 4%< 3%< 3%
Critically UndercapitalizedTangible Equity/Total Assets ≤ 2%
Community banks are subject to the following minimum capital requirements.
Minimum CET1 ratio4.5%
Capital conversion buffer2.50%
Minimum tier 1 capital6.0%
Minimum total capital8.0%
Federal banking regulators have adopted regulations revising the risk-based capital guidelines to further ensure that the guidelines take adequate account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank’s financial condition and is inherent to the business of banking. Under the regulations, when evaluating a bank’s capital adequacy, the revised capital standards now explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates. The exposure of a bank’s economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts.
Federal bank regulatory agencies possess broad powers to take prompt corrective action as deemed appropriate for an insured depository institution and its holding company, based on the institution’s capital levels. The extent of these powers depends upon whether the institution in question is considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly under-capitalized,” or “critically undercapitalized.” Generally, as an institution is deemed to be less well-capitalized, the scope and severity of the agencies’ powers increase, ultimately permitting the agency to appoint a receiver for the institution. Business activities may also be influenced by an institution’s capital classification. For instance, only a “well-capitalized” depository institution may accept brokered deposits without prior regulatory approval and can engage in various expansion activities with prior notice, rather than prior regulatory approval. However, rapid growth, poor loan portfolio performance or poor earnings performance, or a combination of these factors, could change the capital position of the bank in a relatively short period of time. Failure to meet these capital requirements could subject the bank to prompt corrective action provisions of the FDIA, which may include filing with the appropriate bank regulatory authorities a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, we would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless we could demonstrate a reasonable plan to meet the capital requirement within an acceptable period of time.
In 2019, the Federal banking regulatory agencies adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. The 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%.
Branching
National banks and state banks can establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. Florida law permits a state bank to establish a branch of the bank anywhere in the state. Accordingly, a bank with its headquarters outside the State of Florida may establish branches anywhere within Florida.
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Deposit Insurance Assessments
The deposits of a bank are insured by the FDIC up to the limits under applicable law, which currently is set at $250,000 for accounts under the same ownership. Banks are subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment system. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly. The FDIC has published guidelines on the adjustment of assessment rates for certain institutions. The assessment base on which a bank’s deposit insurance premiums is paid to the FDIC is now calculated based on its average consolidated total assets less its average equity.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. Deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against the institution, including federal funds and letters of credit, in the liquidation or other resolution of that institution by any receiver appointed by federal authorities. These priority creditors include the FDIC.
Dividends
BayFirst’s ability to pay cash dividends may depend almost entirely upon the aggregate amount of dividends that the Bank is able to pay and that the Bank is permitted to pay, by statutes or regulations, to us. Additionally, the FBCA provides that we may only pay dividends if the dividend payment would not render BayFirst insolvent, or unable to meet our obligations as they come due. These provisions could have the effect of limiting our ability to pay dividends.
A Florida state-chartered bank is subject to regulatory restrictions on the payment of dividends, including a prohibition of payment of dividends from the Bank’s capital under certain circumstances without the prior approval of the OFR and the Federal Reserve. Except with the prior approval of the OFR, dividends of any Florida bank may only be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. In addition, a Florida state-chartered bank is required to transfer at least 20% of its net income to surplus until their surplus equals the amount of paid-in capital.
Banks are also required to hold a capital conservation buffer of CET1 in excess of their minimum risk-based capital ratios to avoid limits on dividend payments and certain other bonus payments. Those requirements are reflected in the following table.
Capital Conservation Buffer
(as a percentage of risk weighted assets)
Maximum Payout
Ratio (as a % of
the Previous Four
Quarters of Net
Income)
Greater than 2.5%
No payout limitation
Less than or equal to 2.5% and greater than 1.875%60%
Less than or equal to 1.875% and greater than 1.25%40%
Less than or equal to 1.25% and greater than 0.625%20%
Less than or equal to 0.625%0%
Less than or equal to 0.625%
0%
The Federal Reserve expects bank holding companies to serve as a source of strength to their subsidiary bank(s), which may require them to retain capital for investment in their subsidiary bank(s), rather than pay dividends to shareholders. As stated previously, the Bank may not pay dividends to BayFirst, if, after paying those dividends, the bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Payment of dividends by the Bank may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe and/or unsound banking practice.
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Fiscal and Monetary Policies
The business and earnings of a bank may be significantly affected by the fiscal and monetary policies of the federal government and its agencies. Banks are particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve are: (i) conducting open market operations in United States government securities; (ii) changing the discount rates of borrowings of depository institutions; (iii) imposing or changing reserve requirements against depository institutions’ deposits; and (iv) imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve have a material effect on the earnings of banks.
Other Laws
State usury and credit laws limit the amount of interest and other charges collected or contracted by a bank on loans. Bank loans are subject to federal laws applicable to credit transactions, such as the:
Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
Community Reinvestment Act, which requires financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low and moderate-income borrowers;
Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed, or other prohibitive factors in extending credit;
Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
Fair Credit Reporting Act governing the collection of consumer debts by collection agencies; and
The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.
Bank operations are also subject to the:
Gramm-Leach-Bliley Act of 1999, which contains privacy provisions that requires us to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to our customers, and allow customers to “opt out” of having their financial service providers disclose their confidential financial information to nonaffiliated third parties, subject to certain exceptions;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of debit cards, automated teller machines, and other electronic banking services.
Anti-Money Laundering
Banks are subject to significant regulation and supervision relative to anti-money laundering:
such regulation is broad and includes the extraterritorial jurisdiction of the United States;
compliance and due diligence obligations are significant and may be costly;
banks may be compelled to produce documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States; and
banks enjoy a safe harbor from civil liability to customers for banks’ activities under anti-money laundering laws and regulation.
Treasury, in cooperation with the federal banking agencies, the SEC, the Commodity Futures Trading Commission, and the Department of Justice:
requires customer identification and verification;
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imposes the money-laundering program requirement to the major financial services sectors, including insurance and unregistered investment companies, such as hedge funds; and
facilitates and permits the sharing of information between law enforcement and financial institutions, as well as among financial institutions themselves.
Enforcement of the anti-money laundering laws and regulations is significant, on the part of both state and federal regulators.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act established a new framework of authority to conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the OCC, and the FDIC. The following items provide a brief description of certain key provisions of the Dodd-Frank Act that affect banks:
Limitation on debit card transaction fees. The amount a provider can charge for debit card transaction fees, commonly referred to as interchange fees, is now limited to $0.21 plus 0.05% of the price of the transaction (plus $0.01, if the provider has certain fraud prevention standards in place).
Mortgage loan origination and risk retention. Additional regulatory requirements have been put in place that may affect our operations and result in increased compliance costs. For example, new standards have been created for mortgage loan originations on all lenders, including banks and thrifts, in an effort to require steps to verify a borrower’s ability to repay. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues. These applicable rules generally require a sponsor of this type of transaction to retain an economic interest equal to at least 5% percent of the aggregate credit risk of the assets collateralizing an issuance.
Expanded FDIC resolution authority. While insured depository institutions have long been subject to the FDIC’s resolution process, the Dodd-Frank Act created a new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank and thrift holding companies and systemically significant nonbank financial companies.
Consumer Financial Protection Bureau. A new independent CFPB was created within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers.
Transactions with affiliates and insiders. The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions.”
Enhanced lending limits. The Dodd-Frank Act strengthened the limits on a depository institution’s credit exposure to one borrower.
COVID-19 Pandemic
The federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of guidance responding to the COVID-19 pandemic and have taken several unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Because of the need for social distancing measures, the agencies revamped the way they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews. Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its Discount Window for loans and intraday credit extended by its Reserve Banks to help households and businesses
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impacted by the pandemic and announced numerous funding facilities. The FDIC also has acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
Reference is made to “Item 1A. Risk Factors — COVID-19 Risks” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Impact of COVID-19 Pandemic” for information on the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), PPP program and the Federal Reserve’s lending facilities and for discussions of the economic impact of the COVID-19 pandemic. In addition, information as to selected topics, such as the impact on capital requirements, dividend payments, reserves and CRA, is contained in the relevant sections of this Supervision and Regulation discussion provided below.
Future Legislation
Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. The latest example was the passing of the Dodd-Frank Act. Future legislation regarding financial institutions may change banking statutes and the operating environment of the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Company. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time
Available Information
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website at www.firsthomebank.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.These documents are also available on the SEC’s website at www.sec.gov.
Item 1A. Risk Factors
Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control. The material risks and uncertainties that management believes affect the Company are described below. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment. Some statements in the following risk factors constitute forward-looking statements. Please refer to “Cautionary Note Regarding Forward-Looking Statements” in Item 7 of this report.
Risk Factor Summary
Our business is subject to uncertainties and risks and our risk factors can be broadly summarized by the following:
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 ALLL; and
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Features of our stock, such as liquidity, dilution, the lack of preemptive rights, and the concentration of ownership among our insiders.
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 may 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. 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. 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 ability to continue to make new loans and hold them in our loan portfolio will be limited by our current capital and liquidity positions. 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 could 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
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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 may be materially reduced, which could 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.
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 created labor shortages. 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 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.
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Changes in economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans and the value of the collateral securing our loans.
Our success depends to a significant extent upon local and national economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans. Recent political developments in Russia and Ukraine are likely to result in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in oil production and supply in the Middle East and Russia, also affect the economy and stock prices in the U.S., which can affect our earnings capital, as well as the ability of our customers to repay loans.
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 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
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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 $3.30 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.
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 could 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 confidential customer 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.
A failure or breach, including cyberattacks, of our computer systems or other technologies could disrupt our business, result in the disclosure of confidential information, and create significant financial and legal exposure.
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There is no assurance that our computer systems and other technologies will provide absolute security. In the case of a failure or breach of such systems, their functionality may be disabled. In addition, the confidentiality and integrity of our and our client’s information may be compromised. Further, to access our products and services, our clients may use computers and mobile devices that are beyond our security systems. Breaches in the security of their or our websites or other systems may be subject to attacks intended to obtain unauthorized access to confidential information, destroy data, or disable or sabotage services, often through the introduction of computer viruses or malware, cyberattacks, and other means.
Furthermore, the methods of cyberattacks change frequently and may not be recognized until or after launch. Therefore, we may not be able to anticipate or implement effective preventive measures against all possible security breaches. Any successful cyberattack or other security breach may result in the misappropriation, loss, or other unauthorized disclosure of confidential customer information. Such an event may also compromise our ability to function and could severely damage our reputation, erode confidence in the security of our systems, products, and services, expose us to the risk of litigation and liability, and disrupt our operations. Any successful cyberattack may subject us to regulatory investigations, litigation or enforcement, or require the payment of regulatory penalties or require us to undertake costly remediation efforts. All or any of these could adversely affect our business, financial condition, or results of operations and damage our reputation.
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 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.
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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 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 could 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.
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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 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 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
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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.
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.
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 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 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
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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.” However, we do not expect a substantially liquid market for our common stock to develop for an uncertain period of time, if at all. Accordingly, 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.
Shareholders 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 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 historical prices or terms. 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.
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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. 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.
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 21.35% of our outstanding common stock. Our directors and executive officers are expected to
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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 $3.30 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 Federal Reserve will closely scrutinize any dividend payout ratio exceeding 30% of after-tax net income. You should not purchase common stock 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
29

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 business entities or non-public business entities we, as an emerging growth company, can adopt the new or revised standard at the time non-public entities 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 are 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 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.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties 
The following table contains information concerning the current and intended locations of our full-service banking centers. We also operate 23 residential mortgage 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, 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
Item 3. Legal Proceedings
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or to which our property is the subject.
Item 4. Mine Safety Disclosures
Not applicable.
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Part II - Other Information
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 
Market Information
Our common stock began trading on the Nasdaq under the symbol “BAFN” on November 30, 2021. Prior to that, our common stock was traded on the OTC Markets Group Inc. (OTCQX) under the symbol “FHBI”.
Shareholders
As of March 2, 2022, the Company had 801 common stock shareholders of record and approximately 309 beneficial holders.
Unregistered Sales of Equity Securities
Since January 1, 2019, we sold the following unregistered securities:
Common Stock

Date
Number of Shares

Proceeds
Sales Agent

Commissions
Class of PurchaserExemption Claimed
2019293,446
(1)
$4,533,428Skyway Capital Markets, LLC$133,482Accredited investors and QIBsRule 506(b) and Section 4(a)(2)
202135,426700,783-— Accredited investors and QIBsRule 506(b) and Section 4(a)(2)
2019- 202145,085728,900None— DRIP ParticipantsSection 3(a)(11)
2019- 202143,299748,253None— NSPP ParticipantsRule 701
2019- 20216,339106,698None— 
ESOP
Participants
Rule 701
202152,034None— Accredited investors and QIBs converting outstanding preferred securitiesRule 506(b) and Section 4(a)(2)
(1) Warrants to purchase 43,044 shares of common stock were issued with certain shares for no additional consideration.
Series A Preferred Stock

Date
Number of Shares

Proceeds
Sales Agent

Commissions
Class of PurchaserExemption Claimed
20194,760$4,760,000Skyway Capital Markets, LLC$167,750Accredited Investors and QIBsRule 506(b) and Section 4(a)2
Series B Convertible Preferred Stock
32


Date
Number of Shares

Proceeds
Sales Agent

Commissions
Class of PurchaserExemption Claimed
20206,760$6,760,000Skyway Capital Markets, LLC$130,350Accredited Investors and QIBsRule 506(b) and Section 4(a)2
2021740$740,000Skyway Capital Markets, LLC$12,000Accredited Investors and QIBsRule 506(b) and Section 4(a)2
Issuer Purchases of Equity Securities
Share Buyback Program. On January 26, 2021, the Company’s Board of Directors authorized a stock repurchase program for the repurchase of up to $100,000 per calendar quarter of the company’s issued and outstanding common stock.
On November 30, 2021, the Company announced that its Board of Directors amended its stock repurchase program to allow the Company to repurchase up to $450,000 of the Company’s issued and outstanding common stock per quarter. The 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. All common shares repurchased in the program will be retired and held as unissued shares available for use and reissuance for purposes as and when determined by the Board.
The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended December 31, 2021.
Period
Number of Shares (1)
Average Price Paid Per ShareCumulative Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs
October 1-31, 2021— $— — $1,000,000 
November 1-30, 2021— — — 1,000,000 
December 1-31, 20211,694 23.18 1,694 960,733 
Total 1,694 $23.18 1,694 
(1) Reflects the repurchase of shares on Nasdaq, and their subsequent retirement, pursuant to the repurchase program.
Item 6. {Reserved}
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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of our results of operations for the fiscal years ended December 31, 2021 and 2020, and financial condition as of December 31, 2021 and 2020. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes.
In addition to the historical information contained herein, this Form 10-K includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; the ability of the Company to implement its strategy and expand its lending operations; changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in benchmark interest rates used to price loans and deposits, including changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
34

As of and for the Year Ended
(Dollars in thousands, except per share data)12/31/202112/31/202012/31/2019
Income Statement Data:
Net interest income$40,243 $33,452 $17,434 
Provision for loan losses(3,500)16,900 8,869 
Noninterest income117,577 97,695 53,124 
Noninterest expense128,842 98,469 55,392 
Income tax expense7,860 3,075 1,813 
Net income24,618 12,703 4,484 
Preferred stock dividends1,005 863 463 
Net income available to common shareholders$23,613 $11,840 $4,021 
Balance Sheet Data:
Average loans held for investment, excluding PPP loans421,936 364,159 325,491 
Average total assets1,294,287 1,198,023 451,509 
Average common shareholders’ equity72,955 46,421 34,766 
Total loans held for investment583,948 1,228,322 313,934 
Total loans held for investment, excluding PPP loans504,525 402,520 313,934 
Total loans held for investment, excl gov’t gtd loan balances323,363 283,060 245,145 
Allowance for loan losses13,452 21,162 10,742 
Total assets917,095 1,544,691 531,240 
Common shareholders’ equity86,685 55,914 43,437 
Per Share Data: (1)
Basic earnings per common share$6.21 $3.45 $1.27 
Diluted earnings per common share$5.74 $3.01 $1.27 
Dividends per common share$0.277 $0.268 $0.268 
Book value per common share$21.77 $16.04 $12.80 
Tangible book value per common share (2)
$21.75 $16.02 $12.77 
Performance Ratios:
Return on average assets1.90 %1.06 %0.99 %
Return on average common equity32.37 %25.51 %10.55 %
Net interest margin3.23 %2.88 %4.08 %
Dividend payout ratio4.46 %7.20 %21.05 %
Asset Quality Data:
Net charge-offs$4,210 $6,480 $4,687 
Net charge-offs/avg loans held for investment excl PPP 1.00 %1.78 %1.44 %
Nonperforming loans$11,909 $9,586 $8,424 
Nonperforming loans (excluding gov't gtd balance)$3,967 $3,327 $4,437 
Nonperforming loans/total loans held for investment2.04 %0.78 %2.68 %
Nonperforming loans (excl gov’t gtd balance)/total loans held for investment0.68 %0.27 %1.41 %
ALLL/Total loans held for investment2.30 %1.72 %3.42 %
ALLL/Total loans held for investment, excl PPP loans2.67 %5.26 %3.42 %
Other Data:
Full-time equivalent employees637596423
Banking center offices765
Loan production offices232921
(1) Adjusted for the three-for-two stock split, effective May 10, 2021.
(2) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below for a reconciliation to most comparable GAAP equivalent.
35

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in this report are not measures of financial condition or performance recognized by GAAP. These non-GAAP financial measures include tangible common shareholders' equity and tangible book value per common share. Our management uses these non-GAAP financial measures in its analysis of our performance, and we believe that providing this information to financial analysts and investors allows them to evaluate capital adequacy.
The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP:
Tangible Common Shareholders' Equity and Tangible Book Value Per Common Share
As of
(Dollars in thousands, except per share data)December 31, 2021December 31, 2020December 31, 2019
Total shareholders’ equity$96,290 $71,069 $51,332 
Less: Preferred stock liquidation preference(9,605)(15,155)(7,895)
Total equity available to common shareholders86,685 55,914 43,437 
Less: Goodwill(100)(100)(100)
Tangible common shareholders' equity$86,585 $55,814 $43,337 
Common shares outstanding3,981,117 3,485,018 3,393,788 
Tangible book value per common share$21.75 $16.02 $12.77 
Application of Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates.
Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. At December 31, 2021, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing our consolidated financial statements were the policies related to the allowance for loan losses, and fair value measurement of SBA servicing rights and residential loans held for sale and residential derivatives, which are discussed more fully below.
Allowance for Loan Losses
The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses. Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates, including the loss content for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. In addition, management may include qualitative adjustments intended to capture the impact of other uncertainties in the lending environment such as underwriting standards, current economic and political conditions, and other factors affecting the credit quality. Changes to one or more of the estimates used could result in a different estimated allowance for loan losses.
Fair Value Measurements
Mortgage derivatives, loans held for sale, investments, and certain other loans are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans, other real estate, SBA servicing rights, and certain other assets and liabilities. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer
36

a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.
Changes in these estimates that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, could have a material impact on the Company’s financial position or results of operation.
Further, the Company is an emerging growth company. The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected to take advantage of this extended transition period. This means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies do so. This may make the Company’s financial statements not comparable with those of public companies which are neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.
Overview
The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level. The following discussion should be read in conjunction with our consolidated financial statements.
As a one-bank holding company, we generate most of our revenue from interest on loans and gain-on-sale income derived from the sale of loans into the secondary market. Our primary source of funding for our loans is deposits. We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. Our largest expenses are interest on those deposits and salaries plus related employee benefits. We measure our performance through our net interest income after provision for loan losses, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
Recent Developments
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.
First Quarter Common Stock Dividend. On January 27, 2022, BayFirst’s Board of Directors declared a first quarter 2022 cash dividend of $0.08 per common share. The dividend was paid on March 15, 2022, to shareholders of record at the close of business on March 1, 2022.
NSPP Amendment. Effective January 25, 2022, BayFirst Financial Corp. amended and restated its Non-Qualified Stock Purchase Plan. All employees and Directors of the Company and its affiliates are eligible to participate in the NSPP. All employees are eligible to purchase shares of Company stock through payroll deduction, subject to a maximum of 10% of their pay, through the NSPP. Directors may purchase shares of common stock with deductions of any amount from their Directors’ board fees.
The Company will purchase shares on Nasdaq as soon as practicable after the end of each calendar quarter. If sufficient shares are not so acquired, the Company will issue shares from its authorized but unissued shares. In addition, each calendar year, the Board of Directors of the Company may authorize a discount up to 10% of the purchase price for shares purchased by employees during that year. Directors are not eligible for the discount.
Management Change. On February 1, 2022, the Company announced strategic promotions of two individuals who have played pivotal roles in the Company’s overall success to date. Tom Zernick has been promoted to President of First Home
37

Bank. Robin Oliver has been promoted to Chief Operating Officer of BayFirst while remaining the Company’s Chief Financial Officer.
New Board of Director. On February 10, 2022, the Company’s board of directors appointed Sheryl WuDunn as a director of the Company.
Board of Director Resignation. On March 4, 2022, Trifon Houvardas resigned from the Boards of Directors of BayFirst Financial Corp. and First Home Bank.
Impact of COVID-19 Pandemic. Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and could still impair their ability to fulfill their financial obligations to the Company. While employee availability has had no material impact on operations to date, a resurgence of COVID-19 has the potential to create widespread business continuity issues for the Company.
Our branch locations are currently open and operating during normal business hours. We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.
In addition, we have taken deliberate actions toward our goal of ensuring that we have the balance sheet strength to serve our clients and communities, including increasing our liquidity and manage our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the COVID-19 pandemic include the duration of any COVID-19 outbreaks and any related variants, the availability and effectiveness of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020. While the economy began to recover in 2021, uncertainty still exists, but we believe we are well-positioned to operate effectively through the present economic environment.
Results of Operations
BayFirst’s operating results depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, consisting primarily of deposits. Net interest income is determined by the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. Our interest rate spread is affected by regulatory, economic, and competitive factors which influence interest rates, loan demand, and deposit flows. In addition, our operating results can be affected by the level of nonperforming loans, as well as the level of our noninterest income, and our noninterest expenses, such as salaries and employee benefits, occupancy and equipment costs, and income taxes.
We are dependent on noninterest income, which is derived primarily from residential loan fee income and net gain on the sales of the guaranteed portion of government guaranteed loans. We operate residential mortgage loan production offices in a number of states. We sell a substantial portion of the mortgage loans that we originate on the secondary market which generates gains on the sale of these loans. Additionally, while we retained some of our government guaranteed loans on our balance sheet, we sell both the guaranteed balance of our government guaranteed loans, as well as a percentage of the unguaranteed portions of such loans. This activity generates gains on sales on the guaranteed portions of the loans.
Net Income
We had net income for the year ended December 31, 2021 of $24.62 million, or $5.74 per diluted common share, compared to net income for the year ended December 31, 2020 of $12.70 million or $3.01 per diluted common share. The increase of $11.92 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, and a decrease in provision for loan loss expense, partially offset by an increase in noninterest expenses, particularly salary and commission expenses.
Net Interest Income
Net interest income was $40.24 million for the year ended December 31, 2021, an increase of $6.79 million or 20.30% compared to net interest income for the year ended December 31, 2020 of $33.45 million. This increase was primarily due to an increase in interest income on loans which included an increase of $864 thousand in PPP origination fees recognized and a decrease in interest expense on deposits and PPPLF liquidity facility. The net interest margin for the year ended December 31, 2021 was 3.23% compared to 2.88% for the year ended December 31, 2020. This increase was due to the same factors noted above with respect to the increase in net interest income.
38

Average Balance Sheet and Analysis of Net Interest Income
The following tables set forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of BayFirst from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.
Year Ended December 31,
20212020
(Dollars in thousands)Average BalanceInterestYieldAverage BalanceInterestYield
Interest earning-assets:
Investment Securities
$17,404 $199 1.14 %$42 $2.38 %
Loans, excluding PPP (1)
545,889 27,681 5.07 449,180 24,012 5.35 
PPP loans
537,710 19,292 3.59 556,232 19,077 3.43 
Other
145,654 371 0.25 156,305 640 0.41 
Total interest-earning assets
1,246,657 47,543 3.81 %1,161,759 43,730 3.76 %
Non interest-earning assets
47,630 36,264 
Total assets
$1,294,287 $1,198,023 
Interest-bearing liabilities:
NOW, MMDA and savings
$501,701 $4,032 0.80 %$350,000 $4,321 1.23 %
Time deposits
74,749 853 1.14 147,169 3,169 2.15 
PPPLF liquidity facility
510,911 1,791 0.35 546,824 1,968 0.35 
Other borrowings
28,359 624 2.20 20,993 820 3.91 
Total interest-bearing liabilities
1,115,720 7,300 0.65 %1,064,986 10,278 0.97 %
Demand deposits
85,542 69,542 
Non interest-bearing liabilities
8,088 7,403 
Shareholders’ equity
84,937 56,092 
Total liabilities and shareholders’ equity
$1,294,287 $1,198,023 
Net interest income
$40,243 $33,452 
Interest rate spread
3.16 %2.80 %
Net interest margin (2)
3.23 %2.88 %
Ratio of average interest-earning assets to average interest-bearing liabilities
111.74 %109.09 %
(1) Includes nonaccrual loans.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
39

Rate/Volume Analysis
The tables below present the effects of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous period’s average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. Loans in nonaccrual status, for the purposes of the following computations, are included in the average loan balances. FRB, FHLB, and FNBB restricted equity holdings are included in other interest-earning assets. The Company did not have a significant amount of tax-exempt assets.
(Dollars in thousands)RateVolumeTotal
Year Ended December 31, 2021 vs. December 31, 2020:
Interest-earning assets:
Investment securities$198 $— $198 
Loans, excluding PPP
(1,286)4,955 3,669 
PPP loans
863 (648)215 
Other interest-earning assets
(228)(41)(269)
Total interest-earning assets
(454)4,267 3,813 
Interest-bearing liabilities:
NOW, MMDA, and savings
(1,800)1,511 (289)
Time deposits
(1,131)(1,185)(2,316)
PPPLF advances
— (177)(177)
Other borrowings
(428)232 (196)
Total interest-bearing liabilities
(3,447)469 (2,978)
Net change in net interest income
$2,994 $3,797 $6,791 
Provision for Loan Losses
The provision for loan losses is charged to operations to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending we conduct, industry standards, the amount of nonperforming loans, general economic conditions, particularly as they relate to our market area, and other factors that may affect our ability to collect on the loans in our portfolio.
We recorded a negative provision for loan losses for the year ended December 31, 2021 of $3.50 million compared to a $16.90 million provision for the year ended December 31, 2020. The decrease of $20.40 million in the provision for loan losses was primarily due to the changes in the economic factors in our ALLL model. 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, third, and fourth quarters of 2021 and as many of the Company’s SBA loans were bolstered by additional government support, additional provision for loan losses was not deemed necessary. During the year ended December 31, 2021, net loan charge-offs totaled $4.21 million compared to $6.48 million during the year ended December 31, 2020. Our ALLL was $13.45 million at December 31, 2021 and $21.16 million at December 31, 2020.
40

Noninterest Income
The following table presents noninterest income for the years ended December 31, 2021 and 2020.
For the Year Ended December 31,
(Dollars in thousands)20212020
Noninterest income:
Residential loan fee income
$95,543 $92,678 
Loan servicing income, net
1,875 2,024 
Gain (loss) on sale of government guaranteed and PPP loans, net
18,024 1,652 
Service charges and fees
1,028 933 
SBA loan fair value gain
184 
Other noninterest income
923 407 
Total noninterest income
$117,577 $97,695 
Noninterest income was $117.58 million during the year ended December 31, 2021, an increase of $19.88 million or 20.35% from $97.70 million during the year ended December 31, 2020. The increase was primarily due to the $13.80 million gain from the sale of PPP loans in the second quarter of 2021 and an increase in residential loan fee income of $2.87 million primarily due to $528.84 million more loans sold during the year ended December 31, 2021 compared to the year ended December 31, 2020.
Noninterest Expense 
The following table presents noninterest expense for the years ended December 31, 2021 and 2020.
For the Year Ended December 31,
(Dollars in thousands)20212020
Noninterest expense:
Salaries and benefits
$51,569 $36,403 
Bonus, commissions, and incentives
37,946 34,072 
Mortgage banking
5,731 5,292 
Occupancy and equipment
5,236 4,453 
Data processing
6,532 4,418 
Marketing and business development
7,620 3,553 
Professional services
4,688 3,533 
Loan origination and collection
2,452 2,040 
Employee recruiting and development
3,345 1,769 
Regulatory assessments
442 444 
Other noninterest expense
3,281 2,492 
Total noninterest expense
$128,842 $98,469 
Noninterest expense was $128.84 million during the year ended December 31, 2021, an increase of $30.37 million or 30.85% from $98.47 million during the year ended December 31, 2020. The increase was primarily due to increases in salaries, benefits and commissions, marketing and business development expense and data processing expense. The majority of the increase in these expenses was related to building the Company’s infrastructure in various functions to support strategic initiatives and planned growth strategies.
Income Taxes 
Income tax expense was $7.86 million for the year ended December 31, 2021, an increase of $4.79 million over income tax expense of $3.08 million for the year ended December 31, 2020. The increase was primarily due to the increase in pre-tax earnings and 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 24.20% for the year ended December 31, 2021 and 19.49% for the year ended December 31, 2020.
41

Refer to Note 12 - Income Taxes in the notes to the consolidated financial statements for a reconciliation between expected and actual income tax expense for the years ended December 31, 2021 and 2020.

Financial Condition
Investment Securities
The amortized costs, gross unrealized gains and losses, and estimated fair values of investment securities available for sale at December 31, 2021 are summarized as follows:
(Dollars in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Investment securities:
Asset-backed securities
$7,624 $— $(89)$7,535 
Mortgage-backed securities:
U.S. Government-sponsored enterprises
4,470 — (76)4,394 
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
19,370 — (406)18,964 
Total investment securities available for sale
$31,464 $— $(571)$30,893 
The Company had one security held to maturity at December 31, 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 $2 thousand and $41 thousand, the unrecognized loss was $0 and $2 thousand, and the fair value was $2 thousand and $39 thousand at December 31, 2021 and December 31, 2020, respectively.
The investment securities available for sale were purchased during the year ended December 31, 2021 and, therefore, had been in an unrealized loss position for less than 12 months at December 31, 2021. The unrealized loss has not been recognized into income because the issuers continue to make timely principal and interest payments and are of high credit quality. Additionally, 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. The decline in fair value is largely due to changes in interest rates and other market conditions. Therefore, the Company does not consider these investment securities to be other-than-temporarily impaired at December 31, 2021.
No securities were pledged as of December 31, 2021 and there were no sales of securities during the year ended December 31, 2021.
All securities have contractual remaining maturities of more than 10 years. Actual timing may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties.The weighted average market yield of all securities was 1.21%.
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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 LHFS as of the dates indicated.
December 31, 2021December 31, 2020
(Dollars in thousands)Amount% of TotalAmount% of Total
Residential loans held for sale
$114,131 $208,704 
Government guaranteed loans, held for sale
1,460 — 
SBA loans held for investment, at fair value9,614 9,264 
Loans held for investment, at amortized cost:
Residential real estate
87,235 15.3 %64,724 5.3 %
Commercial real estate
163,477 28.7 %114,884 9.3 %
Construction and land
18,632 3.3 %15,113 1.2 %
Commercial and industrial
217,155 38.0 %193,927 15.8 %
Commercial and industrial – PPP
80,158 14.1 %838,847 68.2 %
Consumer and other
3,581 0.6 %2,896 0.2 %
Loans held for investment, at amortized cost, gross
570,238 100.0 %1,230,391 100.0 %
Discount on SBA 7(a) loans sold(3,866)(5,417)
Discount on PPP loans purchased
(13)(97)
Deferred loan costs (fees), net
7,975 (5,819)
Allowance for loan losses
(13,452)(21,162)
Loans held for investment, at amortized cost, net
$560,882 $1,197,896 
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 decrease in the PPP balances was due to sale during the second quarter of 2021 of $326.32 million and forgiveness of loans by the SBA.
During the year ended December 31, 2021, we originated approximately $196.43 million in loans through conventional lending channels, $169.47 million in loans through CreditBench (our SBA lending platform), exclusive of PPP loans, $329.32 million of PPP loans, and $2.22 billion through the Residential Mortgage Lending Division. During the year ended December 31, 2020, we originated approximately $79.50 million in loans through conventional lending channels, $101.08 million through CreditBench, exclusive of PPP loans, $876.60 million of PPP loans, and $1.92 billion through the Residential Mortgage Lending Division. During the year ended December 31, 2021, the Company originated $329.32 million and sold $326.32 million in PPP loans. During the year ended December 31, 2020, the Company originated $876.60 million and purchased $22.40 million in PPP loans.
43

Loan Maturity/Rate Sensitivity
The following table shows the contractual maturities of our loans at December 31, 2021. 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.
(Dollars in thousands)Due in One Year
or Less
Due After One
Year to Five
Years
Due After Five
Years to 15 Years
Due After 15
Years
Total
Real estate:
Residential
$2,368 $2,342 $6,569 $75,981 $87,260 
Commercial
4,133 1,968 21,622 139,830 167,553 
Construction and land
3,923 1,055 763 12,892 18,633 
Commercial and industrial
9,519 8,663 200,267 9,044 227,493 
Commercial and industrial - PPP
37,589 41,834 — — 79,423 
Consumer and other
487 1,361 1,738 — 3,586 
Total loans
$58,019 $57,223 $230,959 $237,747 $583,948 
The following table shows our loans with contractual maturities of greater than one year that have fixed or adjustable interest rates at December 31, 2021.
(Dollars in thousands)
Fixed
Interest Rate
Adjustable
Interest Rate
Real estate:
Residential
$24,546 $60,346 
Commercial
1,818 161,602 
Construction and land
5,940 8,770 
Commercial and industrial
2,301 215,673 
Commercial and industrial - PPP
41,834 — 
Consumer and other
2,893 206 
Total loans
$79,332 $446,597 
Credit Risk
The Bank’s primary business is making commercial, consumer, and real estate loans. This activity inevitably has risks for potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers, which are beyond our control. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about the economic environment that it believes impacts credit quality as of the balance sheet date that it believes to be reasonable, but which may or may not prove accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the ALLL, or that additional increases in the ALLL will not be required.
Allowance for Loan Losses. The Bank must maintain an adequate ALLL based on a comprehensive methodology that assesses the probable losses inherent in our loan portfolio. We maintain an ALLL based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, asset classifications, loan grades, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits and economic conditions. Provisions for loan losses are provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable. General valuation allowances are determined by a portfolio segmentation based on collateral type with a further evaluation of various quantitative and qualitative factors noted above.
We periodically review the assumptions and formulate methodologies by which additions are made to the specific and general valuation allowances for loan losses in an effort to refine such allowances in light of the current status of the factors described above. The methodology is presented to and approved by the Bank’s Board of Directors. Future additional provisions to the loan loss reserve may be made as appropriate as new loans are originated or as existing loans may deteriorate.
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All adversely classified loans are evaluated for impairment. If a loan is deemed impaired, it is evaluated for potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular basis thereafter (at least quarterly). This evaluation is documented in a status report relating to a specific loan or relationship. Specific allocation of reserves on impaired loans considers the value of the collateral, the financial condition of the borrower, and industry and current economic trends. We review the collateral value, cash flow, and tertiary support on each impaired credit. Any deficiency outlined by a real estate collateral evaluation analysis, or cash flow shortfall, is accounted for through a specific allocation for the loan.
For performing loans which are evaluated collectively, we perform a portfolio segmentation based on loan type. The government guaranteed loan balances are included in the collectively evaluated for portfolio balances. The loss factors for each segment are calculated using actual loan loss history for each segment of loans over the most recent one to three years, depending on the segment and vintage year of the loans in the segment of SBA loans. The Bank’s actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
These economic factors include consideration of the following: levels of, and trends in delinquencies and impaired loans; levels of, and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
While management believes our ALLL is adequate as of December 31, 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 December 31, 2021, we had $3.97 million in nonperforming assets, excluding government guaranteed loan balances, and our ALLL represented 2.30% of total loans held for investment. 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 held for investment. Total loans at December 31, 2021 and December 31, 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 loans held for sale and government guaranteed loan balances, was 4.04% at December 31, 2021, compared to 7.24% at December 31, 2020.
The following table sets forth certain information on nonaccrual loans, 90 day past due accruing 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)December 31,
2021
December 31,
2020
Nonperforming loans (government guaranteed balances)
$7,942 $6,259 
Nonperforming loans (unguaranteed balances)
3,967 3,327 
Total nonperforming loans
11,909 9,586 
OREO
— 
Total nonperforming assets
$11,912 $9,586 
Nonperforming loans as a percentage of total loans held for investment
2.04 %0.78 %
Nonperforming loans (excluding government guaranteed balances) to total loans held for investment
0.68 %0.27 %
Nonperforming assets as a percentage of total assets
1.30 %0.62 %
Nonperforming assets (excluding government guaranteed balances) to total assets
0.43 %0.22 %
ALLL to nonperforming loans
112.96 %220.76 %
ALLL to nonperforming loans (excluding government guaranteed balances)
339.10 %636.07 %
45

The following table sets forth information with respect to activity in the ALLL for the periods shown:
At and for the Year Ended December 31,
(Dollars in thousands)20212020
Allowance at beginning of period
$21,162 $10,742 
Charge-offs:
Residential real estate
— (7)
Commercial real estate
(169)(427)
Commercial and industrial
(4,919)(6,336)
Consumer and other
(70)(98)
Total charge-offs
(5,158)(6,868)
Recoveries:
Commercial real estate
78 — 
Commercial and industrial
863 311 
Consumer and other
77 
Total recoveries
948 388 
Net charge-offs
(4,210)(6,480)
Provision for loan losses
(3,500)16,900 
Allowance at end of period
$13,452 $21,162 
Net charge-offs to average loans held for investment
0.44 %0.70 %
Allowance as a percent of total loans held for investment
2.30 %1.72 %
Allowance as a percent of loans held for investment, not including government guaranteed loans
4.04 %7.24 %
Allowance as a percent of nonperforming loans
112.96 %220.76 %
Total loans held for investment
$583,948 $1,228,322 
Average loans held for investment
$959,646 $920,391 
Nonperforming loans (including government guaranteed balances)
$11,909 $9,586 
Nonperforming loans (excluding government guaranteed balances)
$3,967 $3,327 
Guaranteed balance of all government guaranteed loans
$250,971 $935,998 
Loans held for sale, residential
$114,131 $208,704 
The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31:
20212020
(Dollars in thousands)Net Charge-off/(Recovery)Average Loans HFINet Charge-off/(Recovery) RatioNet Charge-off/(Recovery)Average Loans HFINet Charge-off/(Recovery) Ratio
Residential real estate
$— $62,110 — %$$57,147 0.01 %
Commercial real estate
91